sec document
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission file number 1-9178
KOOR INDUSTRIES LTD.
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(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
ISRAEL
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(Jurisdiction of incorporation or organization)
3 AZRIELI CENTER, TRIANGLE TOWER, 43RD FLOOR, TEL-AVIV 67023, ISRAEL
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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AMERICAN DEPOSITARY SHARES, EACH NEW YORK STOCK EXCHANGE
REPRESENTING 0.20 ORDINARY
SHARES, PAR VALUE NIS 0.001 PER SHARE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 16,582,869 ORDINARY SHARES, PAR VALUE NIS 0.001 PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes |_| No |X|
Note--checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |X| Non-accelerated filer |_|
Indicate by check mark which financial statements the registrant has elected to
follow:
Item 17 |X| Item 18 |_|
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
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PRELIMINARY NOTE
THIS ANNUAL REPORT CONTAINS HISTORICAL INFORMATION AND FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 WITH RESPECT TO KOOR'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND,"
"MAY," "PLAN," "PROJECT" AND "SHOULD" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO
KOOR OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS REFLECT THE CURRENT VIEWS AND ASSUMPTIONS OF KOOR WITH RESPECT
TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. MANY FACTORS COULD
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF KOOR TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT MAY BE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING, AMONG
OTHERS, CHANGES IN GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN CURRENCY
EXCHANGE RATES AND INTEREST RATES, INABILITY TO MEET EFFICIENCY AND COST
REDUCTION OBJECTIVES, CHANGES IN BUSINESS STRATEGY AND VARIOUS OTHER FACTORS,
BOTH REFERENCED AND NOT REFERENCED IN THIS ANNUAL REPORT. THESE RISKS ARE MORE
FULLY DESCRIBED UNDER ITEM 3, "KEY INFORMATION - RISK FACTORS" OF THIS ANNUAL
REPORT. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR
SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED,
EXPECTED, INTENDED, PLANNED OR PROJECTED. KOOR DOES NOT INTEND OR ASSUME ANY
OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "Koor," "we," "us," or "our" are to Koor
Industries Ltd., a company organized under the laws of the State of Israel, and
its consolidated subsidiaries.
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars and
all references to "NIS" are to New Israeli Shekels. Unless otherwise stated,
certain amounts reported in adjusted NIS on Koor's consolidated financial
statements for the year ended December 31, 2006 have been translated into U.S.
dollars for the convenience of the reader at the exchange rate of the dollar on
December 31, 2006 (NIS 4.225 = $1.00), as published by the Bank of Israel (see
Note 1B to our consolidated financial statements included elsewhere in this
annual report). Therefore, it is possible to compute the dollar equivalent of
any of the figures in adjusted NIS by dividing such NIS by the rate of exchange
at December 31, 2006.
In this annual report, unless otherwise specified or unless the context
otherwise requires, all financial information provided is based on generally
accepted accounting principles in Israel.
In this annual report, all references to Koor's percentage of equity
ownership in its subsidiaries are prior to having taken into account the
possible dilution that may be caused by the exercise of options granted to
executive officers of certain subsidiaries or of other convertible securities.
ii
TABLE OF CONTENTS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...............1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.............................1
ITEM 3. KEY INFORMATION.....................................................1
ITEM 4. INFORMATION ON THE COMPANY.........................................18
ITEM 4A. UNRESOLVED STAFF COMMENTS..........................................54
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................54
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................81
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................94
ITEM 8. FINANCIAL INFORMATION..............................................96
ITEM 9. THE OFFER AND LISTING.............................................101
ITEM 10. ADDITIONAL INFORMATION............................................103
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........121
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES............123
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................124
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS...................................................124
ITEM 15. CONTROLS AND PROCEDURES...........................................124
ITEM 15T. CONTROLS AND PROCEDURES...........................................124
ITEM 16. [RESERVED]........................................................125
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT..................................125
ITEM 16B. CODE OF ETHICS....................................................125
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................126
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES........127
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS........................................................127
PART III
ITEM 17. FINANCIAL STATEMENTS..............................................128
ITEM 18. FINANCIAL STATEMENTS..............................................128
ITEM 19. EXHIBITS..........................................................128
Index to Consolidated Financial Statements...................................F-1
Index to Consolidated Financial Statements of Makhteshim Agan
Industries Ltd.............................................................F-170
Index to Consolidated Financial Statements of ECI Telecom Ltd..............F-271
Index to Consolidated Financial Statements of Telrad Networks Ltd..........F-346
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not Applicable.
ITEM 3. KEY INFORMATION.
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 2005
and 2006 and for the years ended December 31, 2004, 2005 and 2006 have been
derived from our audited consolidated financial statements included in this
annual report. These financial statements have been prepared in accordance with
generally accepted accounting principles in Israel, or Israeli GAAP, which
differ in certain significant respects from generally accepted accounting
principles in the United States, or U.S. GAAP (see Note 29 to our consolidated
financial statements included elsewhere in this annual report), and audited by
KPMG Somekh Chaikin, independent registered public accountants. The consolidated
selected financial data as of December 31, 2002, 2003 and 2004 and for the years
ended December 31, 2002 and 2003 have been derived from other audited
consolidated financial statements not included in this annual report. The
selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to "Item 5, Operating and
Financial Review and Prospects" and the consolidated financial statements and
notes thereto and other financial information included elsewhere in this annual
report.
The financial data amounts are expressed in NIS, our reporting currency.
For the convenience of the reader, the 2006 data also contain translations of
NIS into dollars using an exchange rate of NIS 4.225 to $1.00, the NIS/dollar
exchange rate on December 31, 2006, as reported by the Bank of Israel. No
representation is made that NIS amounts have been, could have been or can be
converted into dollars at the prevailing rate on December 31, 2006, or at any
other rate. In accordance with amendments to Israeli GAAP published in October
2001 and December 2002, our financial statements for the years ended December
31, 2004, 2005 and 2006 are no longer adjusted to reflect the effects of
inflation. For all financial reporting periods until December 31, 2003, Israeli
GAAP required that our consolidated financial statements recognize the effects
of inflation. Consequently, all figures for prior periods have been adjusted to
reflect the increase in the Israeli Consumer Price Index, or CPI, and are
accordingly all expressed in terms of the purchasing power as of December 31,
2003, and not in the figures as originally reported.
1
For the Year Ended December 31,
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2002 2003 2004 2005 2006 2006
----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except share and per share data)
Adjusted NIS as of
December 31, 2003 NIS US Dollars
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OPERATING DATA:
ISRAELI GAAP:
Revenue and earnings
Revenue from sales and services .. 5,615,240 6,222,644 7,815,782 733,631 583,253 138,048
Group's equity in the operating
results of investee companies,
net (1)(2) ...................... (251,961) (116,729) (35,060) 359,362 (36,549) (8,650)
Other income, net ................ -- -- -- 223,622 104,206 24,664
----------- ----------- ----------- ----------- ----------- -----------
5,363,279 6,105,915 7,780,722 1,316,615 650,910 154,062
Costs and losses(3) ................ 5,958,047 5,753,334 6,956,893 988,969 749,801 177,468
Earnings before income tax ......... (594,768) 352,581 823,829 327,646 (98,891) (23,406)
Minority interest in consolidated
companies' results, net .......... (65,274) (209,945) (430,860) 10,175 (5,414) (1,281)
Net earnings (loss) from continuing
operations ....................... (799,844) 48,411 120,689 257,842 (113,674) (26,905)
Net earnings from discontinued
operations(4) .................... 33,483 (2,049) 24,301 52,809 10,474 2,479
Cumulative effect as of the
beginning of the year of change in
accounting method ................ -- -- -- (3,054)(5) 62,552(6) 14,805
Net earnings (loss) for the year ... (766,361) 46,362 144,990 307,597 (40,648) (9,621)
Basic earnings (loss) per share(7) . (50.55) 2.95 8.97 19.39 (1.96) (0.46)
Weighted average number of shares
used in computing basic earnings
(loss) per share(7) .............. 15,173,291 15,716,725 15,795,679 16,029,673 16,397,322 16,397,322
Diluted earnings (loss) per
share(7) ......................... (50.55) 2.95 6.58 16.65 (2.50) (0.59)
Weighted average number of shares
used in computing diluted earnings
(loss) per share(7) .............. 15,173,291 15,716,725 16,277,604 16,543,608 16,397,322 16,397,322
U.S. GAAP:
Net earnings (loss) ................ (762,511) (108,924) 109,325 350,701 (187,250) (44,320)
Basic earnings (loss) per ordinary
share ............................ (50.25) (7.04) 6.91 21.85 (10.58) (2.50)
Basic earnings (loss) per ADS ...... (10.05) (1.41) 1.38 4.37 (2.12) (0.50)
Diluted earnings (loss) per ordinary
share ............................ (50.65) (7.82) 4.75 19.77 (11.51) (2.72)
Diluted earnings (loss) per ADS .... (11.75) (1.56) (0.95) 3.95 (2.30) (0.54)
2
For the Year Ended December 31,
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2002 2003 2004 2005 2006 2006
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(In thousands, except share and per share data)
Adjusted NIS as of
December 31, 2003 NIS US Dollars
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BALANCE SHEET DATA:
ISRAELI GAAP:
Working capital..................... 722,725 804,294 778,267 542,658 885,364 209,554
Total assets (1)(2)................. 13,432,798 11,869,757 13,129,354 5,288,263 5,503,831 1,302,682
Short-term debt..................... 2,224,771 1,524,268 1,656,799 272,127 53,967 12,773
Long-term debt...................... 4,339,351 3,459,876 3,070,502 2,000,150 2,904,881 687,546
Shareholder's equity................ 1,727,169 1,740,393 1,876,467 2,478,434 2,189,188 518,151
U.S. GAAP:
Total assets (1)(2)................. 13,788,604 12,012,241 6,342,023 5,329,996 5,444,151 1,288,556
Shareholder's equity................ 1,626,469 1,582,122 1,767,850 2,466,988 2,054,742 486,329
NUMBER OF SHARES OUTSTANDING........ 15,173,377 15,741,160 15,824,185 16,146,668 16,567,070 16,567,070
3
(1) As a result of the sale of a portion of our interest in MA Industries in
February 2005, as described elsewhere in this annual report, we discontinued the
consolidation of MA Industries' results effective as of January 1, 2005.
Accordingly, MA Industries' financial statements are not consolidated in our
consolidated financial statements as of and for the years ended December 31,
2005 and 2006, but rather are recognized according to the equity method. See
Note 3B(2) to our consolidated financial statements included elsewhere in this
annual report.
(2) As a result of the sale of a portion of our interest in Telrad Networks to
Fortissimo in two stages, one in November 2004 and the other in June 2005, as
described elsewhere in this annual report, we proportionally consolidated Telrad
Networks' results from October 1, 2004 through June 30, 2005 and we discontinued
the consolidation of Telrad Networks' results effective as of July 1, 2005.
Accordingly, Telrad Networks' financial statements are not consolidated in our
consolidated financial statements as of and for the six month period ended
December 31, 2005 and for the year ended December 31, 2006, but rather are
recognized according to the equity method. See Note 3C(1) to our consolidated
financial statements included elsewhere in this annual report.
(3) Costs and losses includes cost of sales and services, selling and marketing
expenses, general and administrative expenses, other expenses, net and financing
expenses, net.
(4) The financial statements have been reclassified in respect of Elisra
Electronic Industries Ltd., Koor Trade Ltd. and Isram Wholesale Tours and Travel
Ltd. that have been presented as discontinued operations. See also Note 24 to
our consolidated financial statements included elsewhere in this annual report.
(5) Israel Accounting Standards Board (IASB) Accounting Standard No. 19 on
"Taxes on Income" became effective for periods beginning on January 1, 2005. We
adopted this standard as a cumulative effect of a change in accounting method.
The transition to this standard resulted in a one-time effect of a net decrease
in net earnings of NIS 3 million derived mainly from an increase in liabilities
for deferred taxes relating to property. See Note 2S to our consolidated
financial statements included elsewhere in this annual report.
(6) IASB Accounting Standard No. 22 on "Financial Instruments - Disclosure and
Presentation" became effective for periods beginning on January 1, 2006. We
adopted this standard as a cumulative effect of a change in accounting method.
The transition to this standard resulted in a one-time effect of a net increase
in net earnings of NIS 62 million due to the cancellation of provisions for
losses in respect of convertible securities in investee companies. See Note
2E(9) to our consolidated financial statements included elsewhere in this annual
report.
(7) Data relating to earnings per share were calculated in accordance with
Opinion No. 55 of the Institute of Certified Public Accountants in Israel for
the years 2002 and 2003 and in accordance with Standard No.21 of the Israeli
Accounting Standard Board for the years 2004, 2005 and 2006.
4
EXCHANGE RATE INFORMATION
The following table shows, for each of the months indicated the high and
low exchange rates between New Israeli Shekels and U.S. dollars, expressed as
shekels per U.S. dollar and based upon the daily representative rate of exchange
as reported by the Bank of Israel:
Month High (NIS) Low (NIS)
----- ---------- ---------
December 2006.............................. 4.234 4.176
January 2007............................... 4.260 4.187
February 2007.............................. 4.254 4.183
March 2007................................. 4.222 4.155
April 2007................................. 4.135 4.014
May 2007................................... 4.065 3.932
June 2007 (through June 11, 2007).......... 4.197 4.062
The following table shows, for periods indicated, the average exchange
rate between New Israeli Shekels and U.S. dollars, expressed as shekels per U.S.
dollar, calculated based on the average of the exchange rates on the last day of
each month during the relevant period as reported by the Bank of Israel:
Year Average (NIS)
---- -------------
2002.............................................. 4.738
2003.............................................. 4.530
2004.............................................. 4.482
2005.............................................. 4.488
2006.............................................. 4.455
On June 11, 2007, the exchange rate between New Israeli Shekels and U.S.
dollars, as reported by the Bank of Israel, was NIS 4.187 to U.S.$1.00.
The effect of exchange rate fluctuations on our business and operations is
discussed in "Item 5. Operating and Financial Review and Prospects."
DIVIDENDS
In determining whether to declare a dividend, our Board of Directors may
take into consideration, among other things, our profits, business and financial
condition, economic circumstances and other conditions, as deemed appropriate by
our Board of Directors.
We did not pay or declare any dividend for 2006, 2005, 2004, 2003 or 2002.
5
RISK FACTORS
RISKS RELATED TO KOOR
WE DEPEND ON OUR SUBSIDIARIES AND AFFILIATES FOR DISTRIBUTIONS AND MANAGEMENT
FEES.
We conduct our business primarily through our wholly and partially owned
subsidiaries and affiliates, and are partially dependent upon management fees
and cash distributions from our subsidiaries and affiliates as a source of cash
flow for funding our corporate level activities. We received management fees in
the amount of NIS 7 million and NIS 20 million in 2006 and 2005, respectively,
pursuant to management agreements between us and several of our subsidiaries and
affiliates. In addition, in 2006, we received NIS 114 million in dividend
distributions from subsidiaries and affiliates, of which NIS 97 million was
received from Makhteshim Agan Industries Ltd., or MA Industries. In 2005, we
received NIS 162 million in dividend distributions from subsidiaries and
affiliates, of which NIS 82 million was received from MA Industries and NIS 62
million was received as a final liquidating distribution in respect of our
wholly owned subsidiary, Tadiran Ltd., or Tadiran.
In recommending dividends and approving management fees, the directors and
applicable committees of each of our subsidiaries must take into consideration
the legal, tax, and financial effects of such dividends and management fees, as
well as the best interests of each such subsidiary. In addition, several of our
subsidiaries and affiliates are subject to dividend payment restrictions derived
from their organizational documents, credit agreements and tax considerations.
If we were to experience a substantial reduction in the level of payments of
dividends and management fees, there can be no assurance that alternative
sources of cash flow, including bank loans and asset sales, would be available
for us to carry out our investment plans, pay dividends on our capital stock and
service our debt.
In addition, all of our unsecured indebtedness is effectively subordinated
to all liabilities, including trade payables of our subsidiaries and affiliates.
Any right we have to receive assets of our subsidiaries and affiliates upon
their liquidation or reorganization (and the consequent right of the holders of
our indebtedness to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's or affiliate's creditors
(including trade creditors), except to the extent that we are recognized as a
creditor of such subsidiary or affiliate, in which case our claims would still
be subordinate to any security interests in the assets of such subsidiary or
affiliate and any indebtedness of such subsidiary or affiliate senior to that
held by us. Under Israeli law, certain indebtedness of a company under
liquidation, including certain indebtedness resulting from an employment
relationship or tenancy, and certain indebtedness resulting from governmental
and municipal tax liabilities, may rank senior to other unsecured indebtedness.
ECONOMIC INSTABILITY IN THE EMERGING MARKETS OF SOUTH AMERICA AND CENTRAL AND
EASTERN EUROPE POSES A RISK TO THE AGROCHEMICALS BUSINESS OF MA INDUSTRIES, ONE
OF OUR SIGNIFICANT AFFILIATES.
The activity of MA Industries in South America (mainly Brazil) and in
countries in Central and Eastern Europe, is exposed to risk resulting from the
possibility of economic instability in these countries such as exchange rate
fluctuations (customer accounts receivable are in local currency), high
inflation and interest rates, and changes in economic legislation. A portion of
the above mentioned risks are hedged by means of various instruments. The
relative share of MA Industries' agrochemicals activities in these markets is
decreasing over the years due to MA Industries' strategy to expand its
activities in economically-stable markets.
6
REDUCED DEMAND FOR MA INDUSTRIES' PRODUCTS AS A RESULT OF THE WORSENING
FINANCIAL CONDITION OF FARMERS IN EMERGING MARKETS AND A DECREASE IN THE PRICES
OF AGRICULTURAL COMMODITIES ALSO POSES A RISK TO MA INDUSTRIES' BUSINESS.
The activities of MA Industries in emerging markets, such as South America
(mainly in Brazil) and in Eastern European countries, are also exposed to risks
deriving from the worsening financial condition of farmers in those markets and
from a decrease in the prices of the agricultural commodities they sell, which
cause reduced demand for MA Industries' products, erosion in profitability and
collection difficulties.
DISRUPTION IN THE SUPPLY OF RAW MATERIALS AND/OR DISRUPTION IN TRANSPORTATION
SERVICES COULD HAVE A NEGATIVE IMPACT ON MA INDUSTRIES' AGROCHEMICALS BUSINESS.
MA Industries imports raw materials to its manufacturing facilities in
Israel, and exports products to its non-Israeli subsidiaries for manufacturing,
formulation and distribution through three Israeli ports. In the event that one
of these ports will be disrupted for an extended period of time, such as during
an employee strike, MA Industries may have significant difficulty obtaining raw
materials required for manufacture of its products, or obtaining them at
economically viable prices. Similarly, MA Industries may be unable to transport
its products to its non-Israeli subsidiaries for manufacturing, formulation and
distribution, or to transport them at reasonable costs. Therefore, extensive
disruptions at one of these ports could have a negative effect on MA Industries'
agrochemicals business.
CONCENTRATION OF MANUFACTURING IN A LIMITED NUMBER OF MANUFACTURING FACILITIES
COULD POSE A RISK FOR MA INDUSTRIES' AGROCHEMICALS BUSINESS.
A significant part of the manufacturing activities of MA Industries takes
place in a limited number of facilities. Significant damage to any of these
facilities due to natural disaster or other causes could have a significant
negative impact on MA Industries' agrochemicals business.
COMPETITION IN THE AGROCHEMICAL PRODUCTS MARKET COULD LEAD TO PRICE EROSION
MA Industries competes with large multi-national research-based companies
in all geographic markets. In 2006, the sales of the six leading multi-national
research-based companies constituted 70% of sales in the global agrochemical
products market. In addition to these companies, there are several smaller
research-based agrochemical products companies, against which MA Industries
competes in certain geographic markets.
MA Industries also competes with generic companies in many of its
geographic markets. Most of the other generic companies do not have global
distribution networks and they generally focus on specific geographic markets.
However, there are indications of the strengthening of several generic
competitors, which are expanding their array of products, markets and
distribution networks on a global basis and not just on a local or regional
basis.
7
Increased competition in the agrochemical products market could lead to
price erosion, which could have a material adverse effect on MA Industries'
business, financial condition and operating results and may result in lower
margins, loss of market share and other adverse factors and consequently, our
net earnings could be materially adversely affected.
MA INDUSTRIES' OPERATIONS ARE EXPOSED TO STRICTER ENVIRONMENTAL, HEALTH AND
SAFETY REGULATIONS AND STANDARDS
Companies in the plant protection products industry, such as several of MA
Industries' subsidiaries, purchase, manufacture, sell and distribute materials
that can be hazardous to the environment. Consequently, their activities are
subject to comprehensive regulation concerning the storage, handling,
manufacture, conveying, use and disposal of those products, their components and
their byproducts. Specifically, MA Industries' subsidiaries' manufacturing and
formulation facilities in Israel, Brazil, Colombia, Greece and Spain operate, in
each of those countries, in accordance with environmental standards for air
pollution, removal of effluents, the use and handling of hazardous materials,
methods for the removal of waste and the cleaning up of existing environmental
pollution. MA Industries and its subsidiaries may be subject to significant
civil or criminal liability (including high penalties) for deviation from and/or
violation of these environmental protection, health and safety laws and
regulations. In addition, some of the existing legislation could impose
liability on MA Industries and its subsidiaries regardless of malice or
negligence (absolute liability). Other environmental laws stipulate
responsibility for treating pollution, and therefore, could expose MA Industries
to expenses for cleaning and treating soil and/or water reservoirs (even after
the production of MA Industries on the land will end). Over the years, these
standards have become steadily stricter in their environmental requirements and
their enforcement in each of these countries, and the cost of compliance has
risen in parallel. Likewise, the growing pressure in recent years, from the law
enforcement agencies and from environmental protection organizations, on
companies and products that have potential to pollute the environment is also
expressed in the institution of legal proceedings - criminal, civil and
administrative. MA Industries' insurance policy does not cover gradual
environmental pollution - only accident events.
In addition to the current costs of compliance, MA Industries'
subsidiaries are required to bear a one-time expense for compliance. Since the
subsidiaries are unable to assess environmental issues with any certainty, the
funds they allocate or will allocate for projects for environmental improvement
can turn out to be insufficient. Both ongoing costs deriving from compliance
with these requirements and the one-time expenses can have an adverse effect on
their business, on their financial situation and on the results of their
operations.
MA Industries' subsidiaries hold various permits on environment-related
issues, which define the conditions for operating its various manufacturing
facilities. Expansion of production in its plants requires new or additional
permits. The terms of the permits can change or can be disqualified by the
relevant regulator. Stricter terms, disqualification or changes in permits or
their terms could have an adverse effect on the financial condition of MA
Industries and the results of its operations. For a discussion of material legal
proceedings related to environmental issues, in which MA Industries is involved,
please see "Item 8, Financial Information - Legal Proceedings."
8
MA INDUSTRIES MAY NOT BE SUCCESSFUL IN EFFECTIVELY INTEGRATING PAST AND FUTURE
ACQUISITIONS
MA Industries aspires to make intelligent acquisitions that will expand
its product portfolio and will deepen its presence in certain geographic
markets. During the last three years, MA Industries has acquired several
companies and dozens of products. The acquisition of companies, businesses and
products entail certain risks:
o MA Industries could be unsuccessful in integrating the acquisitions
in accordance with its business strategy;
o As a result of such acquisitions, MA Industries may lose major
customers or face exposure to unexpected liabilities;
o MA Industries may lose key employees and managers as a result of
such acquisitions and may not be able to hire skilled manpower to
replace them.
MA INDUSTRIES' AGROCHEMICALS BUSINESS MAY BE NEGATIVELY IMPACTED IN THE EVENT OF
SIGNIFICANT PRODUCT LIABILITY CLAIMS THAT EXCEED ITS INSURANCE COVERAGE.
The activities of MA Industries are exposed to risk relating to product
liability claims. MA Industries has insurance coverage for third party liability
and defective products of up to $300 million per annum. In the event that MA
Industries would be found liable in a lawsuit concerning product liability, its
insurance coverage may not apply or may not be sufficient to cover the damages,
and this may have a significant negative impact on our agrochemicals business.
Furthermore, publication of the existence of such a claim could have a negative
impact on the reputation of MA Industries, and this could have a negative impact
on its business.
IF THE SECTORS OF THE TELECOMMUNICATION EQUIPMENT MARKET TARGETED BY ECI TELECOM
LTD., ONE OF OUR AFFILIATES, DO NOT CONTINUE TO GROW, ITS RESULTS OF OPERATIONS,
AND CONSEQUENTLY, OUR NET EARNINGS, MAY BE MATERIALLY ADVERSELY AFFECTED.
For the year ended December 31, 2006, our equity in the loss of our
affiliated company ECI Telecom Ltd., or ECI, amounted to approximately 8% of our
consolidated net loss. For the year ended December 31, 2005, our equity in the
results of ECI accounted for approximately 17% of our consolidated net earnings.
As of December 31, 2006 and 2005, our investment in ECI accounted for
approximately 34% and 32%, respectively, of our total shareholders' equity.
ECI has targeted the optical networks sector of the telecommunication
equipment market, which has expanded in recent years and the broadband sector of
the telecommunication equipment market, which has contracted in 2006. The market
for optical networks products is being driven in particular by the increase in
demand for wireless backhaul. This demand is fueled by the significant increase
in the number of cellular subscribers in emerging markets, such as Russia,
Ukraine, India and the Philippines. In more developed countries, the primary
reason for this demand is the build-up of 3G (third generation) networks.
Recovery in the revenues of ECI's Broadband Access Division during 2007, from
the relatively low level it reached in the latter part of 2006, depends upon a
number of factors. These include the transition to new broadband technologies
and the pace of their adoption by ECI's customers, increased purchases by the
division's two major customers, sales to new customers in the emerging markets,
as well as possible sales to new European customers and the success of a new
strategic distribution partnership entered into with a major communications
equipment manufacturer.
9
If either the optical networks market or the broadband market fails to
grow, or if ECI is unable to respond adequately and take full advantage of the
growth, ECI's business and results of operations may be materially adversely
affected and consequently, our net earnings may be materially adversely
affected.
OUR AFFILIATED COMPANIES NEED TO DEVELOP AND INTRODUCE NEW PRODUCTS AND
PENETRATE NEW MARKETS IN THE TELECOMMUNICATION EQUIPMENT AND AGROCHEMICAL
BUSINESSES IN ORDER TO REMAIN COMPETITIVE IN THOSE INDUSTRIES. THESE AFFILIATED
COMPANIES ARE ALSO PARTIALLY DEPENDENT ON LICENSED TECHNOLOGY.
For the year ended December 31, 2006, our equity in the results of
affiliated companies, ECI, ECtel Ltd., or ECtel (which has been included in our
consolidated financial statements according to the equity method only as of the
third quarter of 2006), and Telrad Networks Ltd., or Telrad, which operate in
the telecommunication equipment business, contributed NIS 3 million, NIS 3
million and NIS 100 million, respectively to our consolidated net loss, while
our equity in the results of MA Industries, which operates in the agrochemical
business, contributed earnings of NIS 66 million, which partially offset our
consolidated net loss. For the year ended December 31, 2005, our equity in the
results of ECI and MA Industries contributed earnings of NIS 53 million and NIS
359 million, respectively, to our consolidated net earnings, while our equity in
the results of Telrad contributed a loss of NIS 90 million, which partially
offset our consolidated net earnings. In addition, as of December 31, 2006, our
investments in ECI, ECtel, Telrad and MA Industries together accounted for
approximately 142% of our total shareholders' equity and as of December 31,
2005, our investments in ECI, Telrad and MA Industries together accounted for
approximately 104%, of our total shareholders' equity. The business and market
in these segments are characterized by rapid technological and product
development. Consequently, the ability to anticipate changes in technology and
to develop and introduce new and enhanced products on a timely basis will be
significant factors in the ability of these businesses to grow and remain
competitive. We cannot assure you that our affiliated companies will be able to
develop new products and technologies on a timely basis in order to remain
competitive in the telecommunication equipment and agrochemical industries.
THE TELECOMMUNICATIONS EQUIPMENT MARKET IS VERY COMPETITIVE AND OUR AFFILIATED
COMPANIES THAT ARE ACTIVE IN THIS MARKET FACE INTENSE PRICE PRESSURE,
PARTICULARLY FROM CHINESE COMPETITORS. SUCH COMPETITION AND PRICE PRESSURE COULD
MATERIALLY ADVERSELY AFFECT THESE AFFILIATED COMPANIES' RESULTS OF OPERATIONS,
AND CONSEQUENTLY, OUR NET EARNINGS.
ECI, ECtel and Telrad, three of our affiliated companies, operate in the
telecommunications equipment and software market. As of December 31, 2006, our
investments in ECI, ECtel and Telrad accounted for approximately 36% of our
total shareholders' equity. As of December 31, 2005 our investments in ECI and
Telrad accounted for approximately 36% of our total shareholders' equity.
10
The telecommunications market is very competitive, and competition may
increase in the future, especially in the light of a number of mergers that have
recently taken place in this industry, creating potentially stronger
competitors. Current competitors include, primarily, the recently merged
Alcatel-Lucent, Ericsson (which has acquired both Marconi and Redback Networks),
the recently merged Nokia-Siemens, as well as Huawei, Nortel and Tellabs. All of
these are larger than our affiliates and may have greater name recognition,
broader product lines, larger customer bases and more extensive relationship
with customers, and accordingly may be better able to address an increasing
trend in the industry in which service providers seek an overall
telecommunication solution rather than to acquire separate products from
heterogeneous equipment providers. They may also have greater financial,
technical, research and development, manufacturing, marketing, sales,
distribution and other resources than those currently available to our
affiliates. In addition, ECI and Telrad may face particularly intensive price
pressure as a result of competition from Chinese vendors.
Increased competition and pricing pressure could have a material adverse
effect on our affiliated companies' business, financial condition and operating
results and may result in lower margins, loss of market share and other adverse
factors and consequently, our net earnings could be materially adversely
affected.
TELRAD, ONE OF OUR AFFILIATES, DEPENDS ON ONE KEY CUSTOMER.
Telrad, one of our affiliates, is substantially dependent upon its
relationship with Nortel as a key customer of Telrad's products. For the years
ended December 31, 2006 and 2005, approximately 67% and 78%, respectively, of
Telrad's sales were derived from sales to Nortel. Accordingly, Telrad's sales
volume is directly influenced by Nortel's sales forecasts and actual purchases.
Although we and Telrad believe that the relationship with Nortel is generally
good, if such relationship was to be terminated or diminished for any reason, it
could have a material adverse affect on Telrad's business, financial condition
or results of operation, which may have an adverse effect on our net earnings.
OUR INVESTMENTS IN HI-TECH COMPANIES INVOLVE A HIGH DEGREE OF RISK.
Our investment in hi-tech companies is conducted through Koor Corporate
Venture Capital, or Koor CVC. As at December 31, 2006, our Koor CVC hi-tech
portfolio comprised of 5 active companies, a limited partnership in Pitango
venture capital fund and a 22% interest in Scopus Network Technologies Ltd.
(which was sold on January 11, 2007), with a total book value of NIS 206
million.
Our investment in hi-tech and venture capital companies carries with it a
high level of risk. The main risk factors are:
o The uncertainty involved in advanced technological developments in
the fields of internet and telecommunications, and the lack of
certainty that a product will actually be developed or, if and when
it is developed, that a market will be found for it, as well as the
high marketing costs and intense competition in these fields;
11
o The uncertainty existing on the date of commencement of projects as
to the total investment required for developing a product and the
lack of certainty that funding will be found for the continued
development and marketing of products, if developed;
o The rapid technological changes that characterize the industries of
the companies in which we have invested could reduce or cancel
demand for products developed by such companies;
o The dependence of start-up companies, including those in which we
have invested, on their founders or on key personnel, especially in
the areas of management and development;
o The lack of certainty regarding the ability of the companies in
which we have invested to recruit appropriate personnel, in
particular when faced with increasing competition for quality
personnel;
o The lack of intellectual property protection for internet products
and increased competition in this area; and
o The lack of ability to control and manage a company in which we hold
a minority stake.
SEVERAL OF OUR AFFILIATES ARE EXPOSED TO FLUCTUATIONS IN PRICES OF RAW MATERIALS
AND COMMODITIES.
Several of our affiliates, primarily those in the agrochemical industry,
have exposure to risks stemming from fluctuations in prices of raw materials and
agricultural commodities. An increase in raw material prices or a decrease in
commodity prices (which could lower the selling prices of our products) could
lower the profitability of our business.
RISKS RELATED TO ISRAEL
EXCHANGE RATE FLUCTUATIONS AND INFLATION IN ISRAEL IMPACT OUR BUSINESS.
A significant portion of the sales of our major subsidiaries and
affiliates are made outside Israel in dollars or other non-Israeli currencies
while these companies incur significant portions of their expenses in NIS.
Alternatively, some subsidiaries and affiliates whose sales are principally in
NIS incur expenses in dollars or in other non-Israeli currencies. For example, a
significant portion of the sales of our telecommunication equipment and the
agrochemicals businesses are in dollars or other non-Israeli currencies, whereas
a significant portion of these businesses expenses are incurred in NIS and are
partially linked to the Israeli CPI. In addition, certain borrowings are linked
to the dollar or other non-Israeli currencies or to the CPI. During the calendar
years 2004, 2005 and 2006, the annual rate of inflation in Israel was
approximately 1.2%, 2.4% and -0.1%, respectively, while the NIS appreciated
against the dollar by approximately 1.6% in 2004, depreciated against the dollar
by approximately 6.8% in 2005 and appreciated against the dollar by
approximately 8.2% in 2006. Consequently, during the calendar years 2004, 2005
and 2006, the annual rate of inflation as adjusted for devaluation was
approximately 2.8%, -4.1% and 8.8%, respectively. Continued delay in or lack of
any devaluation of the NIS in relation to the dollar or other currencies may
have a material adverse effect on our results of operations and financial
condition.
12
To compensate for inflation in Israel and changes in the relative value of
Israeli currency compared to the dollar and other currencies, we and our major
subsidiaries and affiliates have adopted financial strategies, including
entering into foreign currency transactions with respect to certain specific
commitments and general hedging transactions with respect to monetary assets and
liabilities denominated in non-Israeli currencies (including Brazilian
currency). There can be no assurance, however, that such activities, or others
that we may undertake from time to time, will eliminate the negative financial
impact of such fluctuations.
CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS.
We and our principal subsidiaries and affiliates are incorporated under
the laws of the State of Israel, where our principal offices and a substantial
portion of our operations are located. Accordingly, our and our affiliated
companies' operations are directly influenced by the political, economic and
military conditions in Israel. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity, has led to
security and economic problems in Israel. Since October 2000, there has been a
marked increase in hostilities between Israel and the Palestinians, and in
January 2006, Hamas, an Islamist movement responsible for many attacks against
Israelis, won the majority of the seats in the Parliament of the Palestinian
Authority. In addition, in July and August 2006, significant fighting took place
between Israel and Hezbollah in Lebanon, which involved numerous missile strikes
and disrupted day-to-day civilian activity in northern Israel. Further, over the
last seven years and more significantly in April and May 2007, rockets have been
fired by Palestinians from the Gaza strip to the neighboring southern part of
Israel.
We cannot predict the effect on us and our affiliated companies of the
increase in the degree of violence by Palestinians against Israel or the effect
of military action elsewhere in the Middle East. Any armed conflicts or
political instability in the region could negatively affect local business
conditions and harm our and our affiliated companies' results of operations.
Furthermore, several countries restrict doing business with Israel and Israeli
companies, and additional companies may restrict doing business with Israel and
Israeli companies as a result of the increase in hostilities. These restrictive
laws and policies may harm our and our affiliated companies' operating results,
financial condition or business expansion.
CHANGES IN CAPITAL MARKETS IN ISRAEL AND GLOBALLY MAY AFFECT OUR BUSINESS.
A downturn in the capital markets in Israel and globally could have an
adverse effect on the prices of the marketable securities held by us and by our
subsidiaries and affiliates, which would impact the ability to generate capital
gains from the realization of those holdings, and impair the ability to execute
offerings on stock exchanges in Israel and globally. Moreover, a downturn in the
capital markets in Israel and globally could make it difficult to find the
financing sources required by us and our subsidiaries and affiliates to finance
day-to-day operations.
13
MANY OF OUR AND OUR SUBSIDIARIES' AND AFFILIATES' DIRECTORS, OFFICERS AND
EMPLOYEES ARE OBLIGATED TO PERFORM MILITARY RESERVE DUTY IN ISRAEL.
Most able-bodied male adult citizens and permanent residents of Israel,
including some of our directors, officers and employees, are obligated to
perform annual military reserve duty, which could accumulate annually from
several days to up to two months in special cases and circumstances. The length
of this reserve duty depends, among other factors, on an individual's age and
position in the military. Additionally, these residents may be called to active
duty at any time under emergency circumstances. Reserve duty may be increased as
a result of an increased level of violence with the Palestinians or military
conflict in the region. We have operated effectively under these requirements
since we began operations. No assessment can be made, however, as to the full
impact of these requirements on our workforce or business if conditions should
change and we cannot predict the effect on us of any expansion or reduction of
these obligations.
REGULATORY AND LEGISLATIVE CHANGES IN ISRAEL MAY AFFECT OUR OPERATIONS.
Legislative changes in Israel in various areas, such as restrictive
business practices, tender requirement laws, regulation of the telecommunication
market, laws related to price regulation of products and services and consumer
protection, environmental laws, planning and construction laws, etc., could
impact our and our subsidiaries and affiliates results. Likewise, changes in
policy adopted by the various authorities by virtue of these laws could have
influence.
Changes in the quota rates for goods and in the policies to protect
domestic output could also influence the results of some of our subsidiaries and
affiliates.
Some of our subsidiaries and affiliates operate overseas, or their
securities are traded on overseas stock exchanges. Changes in legislation and
regulatory policies in the relevant foreign countries could influence the
results of these companies. A change in accounting regulations could affect our
and our subsidiaries and affiliates business results, and the ability of our
subsidiaries and affiliates to distribute dividends.
CURRENT REGULATION OF BANKS IN ISRAEL MAY LIMIT OUR ABILITY TO OBTAIN FINANCING
FROM SUCH BANKS.
Pursuant to the change in control of Koor that took place in July 2006,
which is described elsewhere in this annual report, the banking system in Israel
considers us to be part of the IDB Group which is considered by several of the
major banks in Israel to be one of the six largest borrowers in Israel. There
are limitations in the "Proper Conduct of Banking Business Regulations" of the
Supervisor of Banks on the amounts that a bank in Israel is allowed to lend to
one "individual borrower," to one "group of borrowers" and to the six largest
borrowers and borrower groups in a banking corporation. These regulations and
any changes in the list of corporations that comprise the same group of
borrowers as Koor and in the balance of their debt to banks in Israel, as well
as changes in the equity of the banks themselves, could limit the ability of the
banking system in Israel to lend money to us and to some of our subsidiaries and
affiliates.
14
ISRAEL'S ECONOMY MAY BE DESTABILIZED.
Israel's economy has been subject to a number of destabilizing factors.
These include a period of severe inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Government of
Israel has intervened in different sectors of the economy. Such intervention has
included employing fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates.
The Israeli government has periodically changed its policies in all of these
areas. Changes in these policies may make it more difficult for us to operate
our business as we have in the past.
INCREASE IN MINIMUM WAGE AND STRIKES OR OTHER WORK STOPPAGES MAY AFFECT OUR
OPERATIONS.
A substantial increase in the minimum wage or other significant changes in
labor laws could adversely affect the operating results of our subsidiaries and
affiliates engaged mainly in the tourism and industrial sectors, and
consequently, also adversely affect our operating results. Additionally, strikes
or other work stoppages in our subsidiaries and affiliates and strikes or other
work stoppages affecting Israel's ports could severely impede our affiliated
companies' ability to export products to the majority of their customers, who
are outside Israel.
WE ARE SUBJECT TO THE RESTRICTIVE TRADE PRACTICES LAW THAT MAY AFFECT OUR
OPERATIONS.
We are subject to the provisions of the Restrictive Trade Practices Law,
with respect to our transactions or transactions of our subsidiaries and
affiliates that constitute a merger and/or inclusion in cartels, as these terms
are defined in the said law. Accordingly, certain transactions may require
approval of the General Director of the Antitrust Authority, which could prevent
the execution of transactions, as noted, or the Antitrust Authority could
condition its approval on restrictive terms. The terms included in the merger
permits that were or will be given by the General Director of the Antitrust
Authority, in connection with the acquisition of holdings in various companies
by the controlling shareholders of Koor and/or companies they control, could
limit our and our subsidiaries and affiliates operations and influence our
results.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS ON US AND OUR DIRECTORS AND OFFICERS
MAY BE DIFFICULT TO OBTAIN.
Service of process upon our directors and officers and the Israeli experts
named herein, all of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, since substantially all of our
assets, all of our directors and officers and the Israeli experts named in this
annual report, are located outside the United States, any judgment obtained in
the United States against us or these individuals or entities may not be
collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, or Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, in original actions
instituted in Israel. However, subject to certain time limitations and other
conditions, Israeli courts may enforce final judgments of United States courts
for liquidated amounts in civil matters, including judgments based upon the
civil liability provisions of the Securities Act and the Exchange Act.
15
RISKS RELATED TO OUR ORDINARY SHARES
OUR SHARE PRICE MAY BE VOLATILE AND MAY DECLINE.
Numerous factors, some of which are beyond our control, may cause the
market price of our ADSs or ordinary shares to fluctuate significantly. These
factors include, among other things, announcements of technological innovations,
earnings releases by us or our competitors, market conditions in the industry
and the general state of the securities markets (in particular the technology
and Israeli sectors of the securities markets).
OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS MAY FLUCTUATE SIGNIFICANTLY
AND MAY CAUSE OUR SHARE PRICE TO BE VOLATILE.
Our quarterly operating results may be subject to significant fluctuations
due to various factors, including divestitures of companies, competitive
pressures and general economic conditions. Because a significant portion of our
overhead consists of fixed costs, our quarterly results may be adversely
impacted if sales fall below management's expectations. As a result, our results
of operations for any quarter may not be indicative of results for any future
period. Due to all of the foregoing factors, in some future quarters our sales
or operating results may not meet the expectations of public market analysis or
investors. In such event, the market price of our ADSs and ordinary shares would
likely be materially adversely affected.
WE HAVE VOLUNTARILY DELISTED FROM THE NEW YORK STOCK EXCHANGE AND TERMINATED OUR
ADR PROGRAM, AND INTEND TO SEEK TO TERMINATE OUR EXCHANGE ACT REGISTRATION.
In view of the increasing significant and disproportionate costs to us of
maintaining a U.S. listing, an ADR program and a registration under the Exchange
Act, and because of the limited number of holders of record of our ADRs and the
low trading volume of our ADRs on the New York Stock Exchange, or NYSE, on May
14, 2007, we announced that we intend to voluntarily delist our ADRs from the
NYSE, terminate our ADR program with the Bank of New York, or BONY, as
depositary and terminate our Exchange Act registration. On June 8, 2007, we
filed a Form 25 with the SEC to effect the delisting, which we expect will take
place on June 18, 2007, and on June 20, 2007, we expect to terminate the deposit
agreement with BoNY relating to our ADR program. We intend to terminate the
Exchange Act registration of our ADRs and ordinary shares under the Exchange Act
as soon as circumstances permit, thereby terminating our obligation to file
annual and other reports with the SEC. We currently expect such deregistration
to take effect not earlier than the third quarter of 2007.
As a result of the termination of the deposit agreement for our ADR
program, our ADRs will no longer be transferable. However, until September 18,
2007, ADR holders are entitled to exchange their ADRs for the underlying
ordinary shares (subject to cancellation fees charged by the depositary),
failing which ADR holders will only be entitled to receive cash following the
disposal by the depositary of their underlying ordinary shares on the Tel Aviv
Stock Exchange. Remaining ADR holders may obtain the cash proceeds from the
sale, net of any applicable charges, expenses, taxes or governmental charges, by
returning their ADRs to the depositary after September 18, 2007. There can be no
assurance as to the price that the depositary will obtain upon such a sale.
16
The foregoing actions may have an adverse impact on the market price for
our ordinary shares.
If we are successful in terminating our Exchange Act registration, we will
no longer be obligated to file reports with or furnish reports to the SEC,
including annual reports on Form 20-F and current reports on Form 6-K. In
addition, we will not be required to disclose financial information in
accordance with U.S. GAAP. We will continue to provide information to our
shareholders in accordance with the requirements applicable to us in Israel.
17
ITEM 4. INFORMATION ON THE COMPANY.
We are a company limited by shares organized and existing under the laws
of the State of Israel. We were initially incorporated in 1944 and our full
legal and commercial name is Koor Industries Ltd.
The address of our registered office is 3 Azrieli Center, Triangle Tower,
43rd Floor, Tel-Aviv 67023, Israel, and our telephone number is +972-3-607-5106.
The address of our Internet website is: www.koor.com. Our ADSs are listed on the
New York Stock Exchange and our ordinary shares are listed on the Tel-Aviv Stock
Exchange, both under the ticker symbol KOR.
GENERAL
We are a diversified investment holding company. We are engaged, through
our direct and indirect, wholly and partially owned subsidiaries and affiliates,
in the following core businesses: agrochemicals, telecommunications equipment,
venture capital investments, tourism as well as in other businesses.
For the year ended December 31, 2006, we reported consolidated losses
before income tax of approximately NIS 99 million and consolidated net losses of
approximately NIS 41 million.
BUSINESS OVERVIEW
MAJOR SHAREHOLDERS
In October 1997, as a result of several transactions, the Claridge Group
(comprised of Claridge Israel Ltd. and affiliated entities) became our largest
shareholder. During January 1999, Claridge Israel Ltd. transferred its holdings
to Claridge Israel L.L.C. which, during December 2003, transferred half of its
holdings to Esarbee Investments Limited (which, together with Claridge Israel
L.L.C. and affiliated entities comprise the Claridge Group).
On May 1, 2006, Discount Investments Corporation Ltd., or Discount
Investments, a subsidiary of IDB Development Corporation Ltd., signed an
agreement to acquire from the Claridge Group, as well as from Anfield Ltd. (a
company registered in Israel and owned by Jonathan B. Kolber, our current
Chairman and our former Chief Executive Officer) and another company related to
the family of Jonathan B. Kolber, all of our shares held by those entities
totaling 5,753,207 shares, or approximately 34.9% of our outstanding shares, for
$445.8 million. All approvals, to which the transaction was subject, including
the approval of Israel's anti-trust commissioner, have been granted. On July 3,
2006, this transaction closed and 5,081,033 of our shares, or approximately
30.9% of our outstanding shares, were transferred to Discount Investments for
approximately $394 million. On September 28, 2006, Discount Investments
completed a special tender offer, whereby it purchased an additional 890,000
shares, or approximately 5.4% of our outstanding shares, from the public.
On December 28, 2006, Anfield Ltd. sold to Discount Investments its
remaining 672,174 shares for approximately $56 million. Furthermore, on December
27 and 28, 2006, Discount Investments purchased an additional 332,279 shares
from several of our former directors and employees, as well as several of our
present employees for approximately $26 million.
18
As a result of the above transactions, as of December 31, 2006, Discount
Investments held approximately 42.1% of our ordinary shares. In addition, as of
December 31, 2006, IDB Development Corporation Ltd., the parent of Discount
Investments, held approximately 9.9% of our ordinary shares.
STRATEGY
Our investment policy is based on identifying and exploiting investment
opportunities and striving to actively create value in our investments, while
focusing on export-oriented Israeli companies. We simultaneously examine our
existing investment portfolio with the aim of enhancing it and taking advantage
of opportunities to sell investments so as to generate value for our
shareholders. We generally focus on investments in which we have an influential
position and on investments of a significant size, which when enhanced, will
boost our investment portfolio. We have the financial ability and leveraging
potential that we believe allows us to expand our investment portfolio without
jeopardizing our financial strength and positioning.
On January 29, 2006, we signed an agreement to acquire 50% of Epsilon
Investment House, or Epsilon, for NIS 106 million. Epsilon is one of Israel's
fastest growing boutique money management firms. Through the acquisition we
sought to take advantage of the evolving local capital market following the
Bachar committee reforms. On April 11, 2006 we completed the transaction after
all the necessary approvals were received including that of Israel's Capital
Markets commissioner.
On April 25, 2006, we signed an agreement for the sale of our entire
holding in Koor Trade to a group of managers, including one of our senior
executives, for $8.3 million. This transaction was completed on May 28, 2006.
During 2006, we purchased 35,297,993 shares of MA Industries for an
aggregate amount of NIS 818 million. Furthermore, pursuant to a program adopted
by the board of directors of MA Industries in November 2005, MA Industries
repurchased 24,875,703 of its shares during the period from November 2005 to May
2006. As a result of the acquisition of shares by us and the share repurchases
by MA Industries, our holding in MA Industries increased to 39.6% as at December
31, 2006.
On November 27, 2006 we sold our interest (approximately 10%) in one of
Koor CVC's venture capital portfolio investments, Followap Inc. for
consideration of approximately $13 million of which $12 million was received in
January 2007.
On June 29, 2006, ECI distributed 2.9 million shares of ECtel to ECI's
shareholders. These shares constituted approximately 15.9% of ECtel's
outstanding shares. We received 815,660 ECtel shares in this distribution. These
shares, combined with ECtel shares distributed as dividend by ECI in May 2004
and ECtel shares purchased from an affiliate, Telrad Networks Ltd., in December
2005, provide us with significant influence over ECtel (an interest of 21.4%)
and accordingly our investment in ECtel is accounted for according to the equity
method as of the third quarter of 2006.
19
In August 2006, we committed for investment of $15 million in Indivision
India Partners, a private equity fund investing in businesses catering to
consumers in India. Our balance of this commitment at December 31, 2006 and at
June 15, 2007 was $13.5 million and $11.25 million, respectively.
On November 22, 2006, we entered into an agreement for the sale of the
majority of our investment in Elbit for total consideration of approximately $70
million, to be received in installments, bearing interest according to the LIBOR
rate. The first installment was received on November 27, 2006. On March 26,
2007, we received the second installment in an amount of $14 million, and agreed
to replace the three coming installments with one final installment due on
September 26, 2007. On December 5, 2006, we sold the remainder of our shares in
Elbit in a block trade for a total consideration of approximately NIS 112
million.
On December 17, 2006 we signed an agreement for the sale of our entire
holdings (56.5%) in Sheraton Moriah (Israel) Ltd., or Sheraton Moriah, to Azorim
Development and Construction Co. Ltd., or Azorim, for total consideration of
approximately $24 million. The sale is linked with the sale by a related party,
Clal Tourism Ltd., or Clal Tourism, to Azorim of its entire holdings (100%) in
its subsidiaries Accor-Clal Israel Hotels (1995) Ltd. and Accor-Clal Israel
Hotel Management Company Ltd., together with outstanding shareholders' loans
(amounting to approx. $16.7 million) and capital notes, for total consideration
of $44.2 million. Clal Tourism is wholly owned by IDB Development Corporation
Ltd., or IDBD, which is our ultimate parent, holding directly and through
Discount Investment Corporation Ltd. approximately 52% of our outstanding
shares. The transaction was completed on April 26, 2007, after receiving all
requisite approvals. The consideration due to us under the agreement is payable
in three installments: the first, in the amount of $6.3 million, was received on
December 21, 2006; the second, in the amount of approximately $8.6 million, was
received on the closing date; and the remainder, in the amount of approximately
$9.2 million, is to be paid on March 27, 2008. Upon the closing of the
transaction, we were released from guaranties that we provided to Israeli banks
to secure debt of Sheraton Moriah, in the amount of approximately $9.2 million.
On December 28, 2006, we sold our entire holding in Isram Wholesale Tours
and Travel Ltd., or Isram, for total consideration of $1.26 million. As a result
of the sale, Isram's operations have been presented in our consolidated
financial statements as discontinued operations. See Note 24(3) to our
consolidated financial statements included elsewhere in this annual report.
RECENT DEVELOPMENTS
On January 11, 2007 we sold our entire holdings (approximately 22%) in
Scopus Video Networks, one of Koor CVC's portfolio investments, for
consideration of approximately $16 million.
On May 8, 2007 we signed an agreement to sell 4.96% of Knafaim Holdings
Ltd., or Knafaim. The shares will be sold at a price per share of $10.47, for
total consideration of approximately $7.4 million. $1.5 million was paid upon
signing and the remainder will be paid upon the closing of the transaction. On
June 5, 2007, the purchaser notified us that it is exercising an option granted
to it to purchase the balance of our shareholding in Knafaim, representing
20
approximately 4.2% of Knafaim's share capital at the same purchase price, for
total additional consideration of approximately $6.3 million. The closing for
both the initial sale and the option exercise is currently expected to take
place by the end of the second quarter of 2007.
On May 14, 2007, we announced that we are currently considering a
possibility of purchasing an additional 5% to 10% of the outstanding share
capital of MA Industries by means of a tender offer. The timetable, volume and
terms of the possible offer have not yet been determined, and there is no
certainty that such an offer will take place.
On May 14, 2007, we announced our intention to voluntarily delist from the
New York Stock Exchange, or NYSE, and to terminate our American Depositary
Receipt, or ADR, program with the Bank of New York, or BoNY. On June 8, 2007, we
filed a Form 25 with the SEC to effect the delisting, which we expect will take
place on June 18, 2007, and on June 20, 2007, we expect to terminate the deposit
agreement with BoNY relating to our ADR program. Subsequent to the termination
of the deposit agreement, ADRs will no longer be transferable. Holders of ADRs
will, however, be entitled to return their ADRs to BoNY before September 18,
2007 and receive the appropriate number of underlying ordinary shares (each ADS
represents 0.20 of an ordinary share), subject to cancellation fees charged by
BoNY pursuant to the deposit agreement.
On May 14, 2007, we also announced that we intend to terminate the
registration of our ADRs and ordinary shares with the U.S. Securities and
Exchange Commission, or SEC, as soon as possible following the delisting from
the NYSE, thereby terminating our obligation to file annual and other reports
with the SEC. We currently expect such deregistration to take effect not earlier
than the third quarter of 2007.
Our decision to delist and deregister was made after careful consideration
by our board of directors of various factors, including (i) the limited number
of our U.S. holders of record, (ii) the low trading volume of our ADR's on the
NYSE compared to the trading volume of our ordinary shares on the Tel Aviv Stock
Exchange, or TASE, (iii) the ongoing costs of maintaining the NYSE listing and
ADR program, (iv) the significant costs associated with being a reporting
company under the U.S. securities laws, including costs arising from compliance
with the provisions of the Sarbanes-Oxley Act of 2002, (v) the continued trading
of our ordinary shares on the Tel Aviv Stock Exchange, or TASE, and (vi) our
continuing obligation to file public reports with the Israeli Securities
Authority and the TASE in accordance with the Israeli securities laws and
regulations.
OUR AGROCHEMICALS BUSINESS
Our affiliated company, Makhteshim Agan Industries Ltd., or MA Industries,
operates in the agrochemicals business through its direct and indirect
subsidiaries.
21
As of December 31, 2006, our principal affiliated companies in the
agrochemicals business were:
Percentage Of
Voting Rights(1) Principal Products and Services
---------------- ---------------------------------------------------------
Makhteshim Agan Industries Ltd.(2) 39.6%(3) Holding Company
Makhteshim Chemical Works Ltd. 100.0%(4) Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd. 100.0%(4) Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A. 100.0%(4) Formulation and distribution of crop protection chemicals
Lycored - Natural Products Industries Ltd. 98.0%(4)(5) Natural Products and Food Additives
(1) Represents the ownership percentage we use for accounting purposes, which
is based on voting rights.
(2) The ordinary shares of MA Industries are traded on the Tel Aviv Stock
Exchange, or TASE.
(3) Approximately 36.5% on a fully diluted basis taking into consideration the
exercise of outstanding stock options, the conversion of outstanding
convertible debentures and the reissuance of treasury stock.
(4) Indicates the percentage of direct ownership by MA Industries.
(5) In 2005, Lycored granted stock options to employees, which, if exercised,
will dilute MA Industries direct ownership in Lycored to approximately
91.84%.
MA Industries is the world's leading generic manufacturer of crop
protection products. After a long period of coordination and cooperation as
separate publicly-traded entities, Makhteshim and Agan formally merged in May
1998. The new MA Industries replaced its predecessors on the Tel Aviv Stock
Exchange and now has several wholly-owned subsidiaries which include Makhteshim
Chemical Works Ltd., or Makhteshim, Agan Chemical Manufacturers Ltd., or Agan,
and Milenia Agro Ciensias S.A., or Milenia, all of which are collectively
referred to as "the MA Group." These companies are leading international
suppliers of generic crop protection products. The MA Group produces a full
range of crop protection chemicals, including acaricides, insecticides,
fungicides, herbicides as well as plant growth regulators. The MA Group is also
engaged in the development, production and marketing of fine chemicals,
intermediates, specialty aroma chemicals, industrial chemicals, antioxidants and
nutraceuticals.
THE AGROCHEMICALS BUSINESS ENVIRONMENT IN 2006
After several years in which the agrochemicals market underwent
significant structural changes, recovery in the past years has been indicated by
increased demand for plant protection chemicals and improved business results of
most companies. In 2006, the agrochemical market decreased by 3.7%, mainly
because of adverse weather conditions and price erosion, reaching $30.4 billion,
compared with $31.3 billion in 2005.
The agrochemicals market has become more concentrated since the recent
years' trend of mergers of the multinational companies. At present, six large
companies hold approximately 71% of the conventional agrochemicals market. This
process of consolidation has led to large gaps between the two leading companies
- Syngenta and Bayer - and the rest of the companies. In the short-to-medium
term, the process has stabilized the market by reducing the number of
competitors and has tempered the falling prices.
22
CROP PROTECTION
Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patents by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus their
resources on developing new agrochemicals and supply of additional chemicals by
generic manufacturers, such as MA Industries, to supplement their capacity. In
the next few years, as a result of decreased resources committed to research and
development of new agrochemicals products and the expiration of existing
patents, a significant number of widely used agrochemicals are expected to lose
patent protection in many geographic regions (primarily South America),
substantially increasing the available market for sales by generic
manufacturers. The off patent component of the agrochemical industry grew in
recent years and is expected to continue to grow in the upcoming years. In
addition, the modernization of the agricultural industries of Eastern Europe and
other developing countries offers increasing sales opportunities for both
research-based and generic agrochemical manufacturers.
The major competitors in the international market for agrochemicals are
major international research-based chemical producers. These major international
chemical producers have significant influence on the prices of most of MA
Industries' products. In the Israeli market, MA Industries competes with
importers with respect to most of its products, and competes with both importers
and Israeli producers with respect to non-pesticide products.
The development of new generic products requires significant investment
for research, registration, establishment of production and marketing
facilities. The MA Group typically focuses on products that require a high
degree of sophistication in process development and production, and are,
therefore, less susceptible to extensive competition. Their prices, therefore,
tend to be relatively higher than sectors where competition is more prevalent.
For many of these products, the MA Group is the world's second largest
manufacturer, with the original research-based chemical company maintaining the
majority share. We believe that the MA Group's ability to compete with major
international research-based chemical companies and other generic chemical
manufacturers is based upon their flexible manufacturing facilities, advanced
research and development capabilities, fulfillment of stringent registration and
licensing requirements of various countries, compliance with environmental
regulations, material purity and worldwide marketing and cooperation with
certain multinational companies with respect to the production and marketing of
numerous products. An essential component of the MA Group's ability to maintain
its market share on the worldwide market is the successful introduction of new
generic products immediately after the expiration of the patents validity. In
1998, an amendment was passed to Israeli Patents Law 1967, which has certain
beneficial ramifications for the Israeli agrochemical industry. Under this
amendment, (i) subject to certain conditions, research activities on a patent
during the patent period for the purposes of production deployment after the
patent expiration will not constitute misuse of an invention, and (ii) the
period of patents in the agrochemical industry cannot be extended. These changes
should facilitate the introduction of new products by the MA Group.
23
The MA Group plans to develop, over the next several years additional
agrochemical products, including fungicides, insecticides and herbicides, based
primarily on a substantial number of patents held by other parties expiring
within the next few years. The MA Group purchased the right to manufacture and
market several agrochemical products from the developers of such products.
New research and developments in the field of trans-genetic plant species
that can tolerate insects and in plant species that are resistant to fungal
diseases may have an adverse impact on the demand for the MA Group products
during the next few years, depending upon the success of such developments.
The MA Group markets its crop protection chemicals primarily to national
distributors and foreign manufacturers, who use such chemicals in the
formulation of a wide range of products and sell the formulations to
distributors and end users. The MA Group manufactures over 90 different active
ingredients, which are sold as technical grade materials and as approximately
500 "ready" formulations. These technical grade materials are used in the
formulation of a wide range of herbicides, insecticides, fungicides and plant
growth regulators. The "ready" formulations are sold to distributors. Agan sells
its synthetic aroma chemicals principally to the detergent, soap and cosmetics
industries. No single product manufactured and sold by the MA Group accounted
for more than 10% of MA Industries' total sales in 2006 and 2005.
FOREIGN ACTIVITIES
As part of MA Industries' strategy to focus on its core businesses and
increase market penetration in the agrochemicals industry, it has continued to
expand its agrochemicals business abroad.
In October 2001, MA Industries and several of its subsidiaries entered
into a securitization transaction, pursuant to which the subsidiaries agreed to
sell all their accounts receivable to several foreign companies which were
established for this purpose, but which are not owned or controlled by MA
Industries or its subsidiaries. The acquisition of the accounts receivable by
these companies was financed by a United States affiliate of the Bank of America
Group. On September 28, 2004, MA Industries and certain subsidiaries signed an
agreement with Bank of America to terminate the securitization undertaking. On
that same date, they entered into a new agreement with Rabobank International
for the sale of trade receivables in a securitization transaction to replace the
previous agreement with Bank of America. The new agreement is similar in
principle to the prior agreement with several changes, including, among others,
that in the new agreement additional MA Industries subsidiaries are included in
the transaction. The volume expected to be at the disposal of the companies
purchasing the accounts receivable is approximately $250 million (compared with
$150 million in the previous securitization agreement), on a current basis, so
that the considerations received from the customers whose debts were sold will
be used to purchase new debts. Under the terms of the securitization agreements,
MA Industries will handle collection of the sold debts for these companies in
consideration of a fee, which is to be determined in accordance with such
agreements. The period in which the companies will sell their trade receivables
will be one year from the closing date of the transaction. This period may be
extended, with the consent of all the parties, for additional one-year periods,
up to a maximum of four extensions. Under the terms of the agreement, MA
Industries undertook to meet certain financial covenants, mainly a ratio of
liabilities to capital and profitability ratios, and as of December 31, 2006 and
March 31, 2007, MA Industries was in compliance with these covenants. As of
December 31, 2006, MA Industries received cash proceeds of approximately $176
million from this securitization transaction, and as of March 31, 2007, the MA
Industries received cash proceeds of $235 million.
24
ACQUISITION OF DISTRIBUTION AND MANUFACTURING COMPANIES
2004 TRANSACTIONS
During 2004, MA Industries, through wholly owned and controlled
subsidiaries, acquired distribution companies at a total cost of approximately
$108 million. Set forth below is a description of the primary transactions
during 2004.
In April 2004, MA Industries, through a wholly-owned subsidiary, signed
agreements to acquire ownership and control in the Farm Saver Group LLC, which
is engaged in the registration, import and marketing of agrochemicals in the
U.S. The total purchase price amounted to approximately $60 million in cash, as
well as shares of MA Industries valued at $7.5 million at that time.
In June 2004, MA Industries, through a wholly owned subsidiary, signed an
agreement for the acquisition of approximately 45% of Control Solutions Inc., or
CSI, a U.S. company engaged in the marketing of pesticides to the non-crop
market in the United States. The total purchase price amounted to approximately
$13.5 million. The non-crop market includes the extermination of weeds, disease
and pests in non-agricultural areas such as roadsides, forests, lawns, gardens,
timber and paint industries and residences. During 2005, the MA Industries
subsidiary exercised the option it had been granted by the agreement and
increased its stake in CSI to 60%. During 2006, the MA Industries subsidiary
purchased an additional 7.1% of CSI shares from a third party and now holds
67.1% of the shares of CSI. In addition, commencing in 2009, the remaining
shareholders of CSI have the right to require the MA Industries subsidiary to
acquire from the remaining shareholders of CSI, and the MA Industries subsidiary
has the right to require the remaining and shareholders of CSI to sell, the
balance of their shares in CSI.
In July 2004, MA Industries, through a wholly owned subsidiary, signed an
agreement for acquisition of all the shares and rights of Farmoz PTY Limited,
the fourth largest Australian company engaged in the marketing and distribution
of pesticides in Australia.
In September 2004, MA Industries, through a subsidiary, signed an
agreement for acquisition of 50.1% of the rights in RiceCo LLC, a U.S. company
engaged in the development and marketing of herbicides for rice. The purchase
price and scope of activities of RiceCo are not material, however this
acquisition was MA Industries' first entry into the field of rice crops which is
the third largest crop in terms of global sales, and therefore this acquisition
was a further step in MA Industries penetration into the U.S. market.
The total purchase price paid for CSI, Farmoz and RiceCo amounted to
approximately $41 million.
25
2005 TRANSACTIONS
During 2005, MA Industries, through wholly owned and controlled
subsidiaries, acquired distribution companies and entered into cooperation
agreements in the Benelux region, Scandinavia and Hungary at a total cost of
approximately $22.3 million. Set forth below is a description of the primary
transactions during 2005.
In February, 2005, MA Industries, through a wholly owned subsidiary,
signed a long term joint supply agreement with Bayer CropScience LP, or Bayer,
for the marketing of Tebuconazole in the U.S. Tebuconazole is a fungicide which
is intended to treat a wide variety of diseases in a large number of
economically important crops such as cereals, grapes, peanuts, fruit trees and
vegetables. Tebuconazole is sold in the U.S. under the name "Orius" which is the
brand name under which MA Industries sells Tebuconazole in many other parts of
the world.
In March 2005, MA Industries, through a wholly owned and fully controlled
subsidiary, completed the acquisition of 49% of the shares of Makhteshim Agan
Benelux & Nordic B.V., or MABENO, which acts as the exclusive distributor of
plant protection products in the Benelux region and Scandinavia. The Benelux
consists of Belgium, the Netherlands and Luxembourg and represents an economic
agreement among those countries. The MA Industries subsidiary was granted an
option, exercisable at any time, to increase its share in MABENO to 55%.
In April, 2005, MA Industries, through a wholly owned subsidiary, signed a
long term strategic supply agreement with Bayer relating to the insecticide
called Imidacloprid, which is protected in most countries around the world by
patents owned by Bayer. Under the agreement, Bayer is to provide the MA
Industries subsidiary with Imidacloprid in order for the subsidiary and other
companies in the MA Group to sell it to the MA Group's customers around the
world, in the area of agrochemicals and in other areas. The agreement affords
the MA Industries subsidiary the right to rely on the licensing data of
Imidacloprid, owned by Bayer, in various countries. Imidacloprid is an
insecticide with a broad range of uses on more than 140 different crops, and is
one of the most important insecticides currently sold around the world. The
product is sold in more than 100 countries.
In May 2005, MA Industries, through wholly owned and fully controlled
subsidiaries, acquired 70% of the shares of Biomark Tradinghouse Co., or
Biomark, which is engaged in the marketing of plant protection materials in
Hungary. During the first quarter of 2007, the MA Industries subsidiary
exercised the option it had been granted to purchase the balance of the shares
of Biomark and thereby increased its holdings to 100%.
In November 2005, MA Industries, through a subsidiary, acquired the assets
and business of Buckton Scott Nutrition, a subsidiary of Buckton Scott Group in
New Jersey. Buckton Scott Nutrition is engaged in the field of raw materials for
health food supplements.
2006 TRANSACTIONS
At the beginning of 2006, MA Industries established a representative
office in China for the purpose of coordinating MA Industries' purchasing
activities in China.
26
During 2006, MA Industries, through wholly owned and controlled
subsidiaries, acquired distribution companies and a manufacturing company in the
USA, Italy, Czech Republic and established a company in Russia at a total cost
of approximately $35.4 million. Set forth below is a description of the primary
transactions during 2006.
In April 2006, a wholly owned subsidiary of MA Industries signed an
agreement for the acquisition of 30% of the shares of Alligare LLC, a U.S.
company engaged in the development, marketing and sale of herbicides for the
non-crop market. In January 2007, the MA Industries subsidiary increased its
stake in Alligare to 49%. The MA Industries subsidiary has the option to acquire
control of Alligare commencing in 2008.
In May 2006, a wholly owned subsidiary of MA Industries signed an
agreement for the acquisition of 60% of Kollant Group, a leading company in
Italy in the non-crop market. Kollant develops, manufactures and markets a wide
range of products, including sanitation products, mainly for the non-crop
market.
In May 2006, a subsidiary of MA Industries signed an agreement for the
acquisition of the business of H. Reisman Corporation, a U.S. company engaged in
the manufacturing and marketing of vitamins and minerals in the food supplement
industry. The acquisition also included the purchase of a manufacturing patent
for natural products, which will enable MA Industries to expand the variety of
natural products that the MA Group manufactures.
During 2006, MA Industries also acquired 75% of the shares of a
distribution company in the Czech Republic, Agrovita SPOL. S.R.O., and completed
the establishment of a company in Russia. MA Industries also established a
liaison office in Hungary to coordinate its activities in Central and Eastern
Europe.
RECENT TRANSACTIONS
In January 2007, MA Industries, through a wholly owned and controlled
subsidiary, acquired a distribution company in Ecuador at a cost of
approximately $5.8 million.
ELECTRICITY AND STEAM SUPPLY AGREEMENT
In July 2006, a subsidiary of MA Industries signed an agreement with
Ashdod Energy Ltd., or Ashdod Energy, pursuant to which Ashdod Energy will
construct a power plant for production of electricity and steam and will supply
electricity and steam to the subsidiary from the power plant. At the same time,
the companies signed a sublease agreement whereby the subsidiary will lease land
to Ashdod Energy on an area measuring about 10,500 square meters for purposes of
construction of the power plant. The agreement for supply of electricity and
steam is for a period of 20 years from the power plant's operation date or a
period of 24 years and 11 months from the signing date of the land agreement,
whichever occurs first.
SHARE REPURCHASE PROGRAM; DIVIDEND POLICY
On November 14, 2005, MA Industries' board of directors decided to adopt a
policy according to which the MA Industries will repurchase its own shares in
the amount of $150 million. The shares acquired will become dormant shares as
long as they are held by MA Industries. As of December 31, 2006, MA Industries
had repurchased 24,875,703 of its own shares, constituting approximately 5.4% of
its total issued and paid-up share capital, pursuant to the repurchase program
for an aggregate repurchase price of approximately $134 million. In August 2006,
MA Industries' board of directors approved the termination of the repurchase
program.
27
On March 8, 2006, the board of directors of MA Industries resolved to
change its dividend policy so that, commencing with dividends to be paid in
respect of the year ended December 31, 2005, MA Industries will distribute
dividends amounting to up to 50% of net earnings for the period.
In May 2006, MA Industries' board of directors resolved to distribute a
dividend of NIS 135 million which was paid on August 31, 2006. Our share of the
dividend was NIS 42 million.
On March 12, 2007 the board of directors of MA Industries resolved to
rescind the abovementioned resolution regarding the dividend payment as a fixed
percentage of net earnings. Instead, MA Industries' board of directors will
examine the possibility of distributing dividends and the amount thereof from
time to time, in accordance with the investment policy and the needs of MA
Industries, and the existence of sufficient distributable earnings.
RECENT DEVELOPMENTS
As a result of intensified competition and the pace of price erosion that
accelerated in 2006 in the agrochemical products market, on March 12, 2007, the
board of directors of MA Industries approved the implementation of a
reorganization plan for MA Industries. The reorganization plan, which is based
on recommendations of internal teams assisted by the McKinsey research and
consulting company, is designed to create flexibility and faster response
capabilities to the market's demands, to save production costs and to create
synergy in operating processes. In the estimation of MA Industries' management,
the write-offs and costs, to the extent required, in connection with
implementation of the reorganization plan, will not be material.
The purpose of the reorganization plan is to achieve two main goals:
o Continued transformation of MA Industries into a multinational
company, with its main focus on marketing worldwide. To this end, in
accordance with the plan's recommendations, MA Industries intends to
consolidate more extensive authorities in the primary regional
operation management teams of MA Industries: Europe, North America,
South America, and the rest of the world, with the intention of
solidifying the MA Industries' marketing channels, in order to
better meet the changing needs of each region's customers; and
o Completion of the operational merger between Makhteshim and Agan,
which will include the merging of different functions in various
operational areas, including raw material purchases, sales and
finance, in order to streamline operations and create optimization
of the production facilities of MA Industries and the chain of
supply.
28
The recommendations of the plan to accomplish the above goals are to focus
on each of the following parameters:
o Creation of closer proximity of MA Industries to the target markets
and improve its ability to respond to the markets' needs, in order
to streamline the sales network and increase the sales volumes of MA
Industries;
o Improvement of the purchasing process and merging them in order to
reduce purchasing costs; and
o Increasing the efficiency and effectiveness of, and eliminating
duplication in, the areas of purchasing, finance and marketing in MA
Industries' companies operating in Israel.
The reorganization plan includes a series of actions to increase the
operating flexibility of MA Industries and to reduce costs, deriving from five
main areas: (1) merging and improving the purchasing activity of Makhteshim and
Agan; (2) merging the headquarters of Makhteshim, Agan and the MA Group's
existing headquarters; (3) improving the chain of supply; (4) streamlining the
production processes in the MA Group's plants; and (5) energy cost savings.
The board of directors instructed MA Industries' management to immediately
begin implementation of the plan, to be fully implemented by the end of 2008.
OUR TELECOMMUNICATION EQUIPMENT BUSINESS
As of December 31, 2006, our principal affiliated companies in the
telecommunication equipment business were:
Percentage Of
Voting Rights(1) Principal Products and Services
---------------- ------------------------------------------------
ECI Telecom Ltd.(2) 28.1% Telecommunication equipment and systems
ECtel Ltd.(3) 21.4% Fraud management and revenue protection software
Telrad Networks Ltd. 61.0% Telecommunication equipment and systems
(1) Represents the ownership percentage we use for accounting purposes, which
is based on voting rights.
(2) An entity controlled by our controlling shareholder holds approximately
13% of ECI Telecom.
(3) An entity controlled by our controlling shareholder holds approximately 9%
of ECtel.
29
ECI TELECOM LTD. (ECI)
ECI is a provider of scalable broadband access, transport and data
networking infrastructure platforms for optical and digital telecommunications
networks. ECI designs, develops, manufactures, markets and supports
telecommunications solutions for evolving services, including voice, data, video
and multimedia, and for building next generation converged networks. ECI's
products are designed to create and manage bandwidth, maximize revenues for
network operators, reduce operating expenses, expand capacity, improve
performance and enable new revenue-generating services. ECI markets its products
to wireline and wireless service providers, worldwide.
ECI now operates primarily through two divisions, although it has certain
other operations and interests:
THE TRANSPORT NETWORKING DIVISION, or TN Division, was formed in January
2007 as a result of the merger of the Optical Networks Division and the Data
Networking Division, which was known as Laurel Networks until its acquisition by
ECI in June 2005. The Data Networking Division offered high-performance edge
routers and developed new technologies intended to become integral primarily in
ECI's next generation transport solutions as they evolve to encompass Internet
Protocol, or IP, and packet capabilities.
The primary products of the TN Division are ECI's optical network systems,
which provide telecommunications service providers with intelligent and flexible
high-density, data-aware transport solutions for the metro access, metro-core
and regional networks. This product line enables end-to-end transport of voice
and data from the user's premises to high-capacity optical backbones, supports
the process of streamlining the use of optical networks and allows
telecommunications service providers to offer additional services with greater
efficiency. These transport systems are used by wireline and wireless service
providers, utilities and cable/multi service operators and in military and
government networks.
As part of ECI's strategy to expand and diversify its global development
resources and augment its product line, in April 2005, it acquired the optical
activities and technology of Eastern Communications Co. Inc. This acquisition
broadened its current Multi Service Provisioning Platform, product line, by
adding a compact, affordable optical access product. The acquired operations
were merged with Hangzhou ECI Telecommunications Co. Ltd., or HETC, its
subsidiary in China, increasing its interest to 72.4%. In February 2007, ECI
completed the purchase of the remaining 27.6% minority interest in HETC and ECI
now holds a 100% interest in HETC.
30
The TN Division also continues to offer bandwidth management solutions.
These consist of digital cross-connect products, which enable end-to-end
bandwidth management of global data and voice communications networks. Digital
cross-connections allow telecommunications service providers to enhance the
efficiency of bandwidth usage across their transport networks, converting the
raw bandwidth provided by optical equipment into differentiated
telecommunication services. The bandwidth management solutions product line is a
mature product set and does not contribute materially to ECI's long term income
expectations. Accordingly sales have been declining in recent years and are
expected to continue to decline.
The TN Division also sells routers that enable telecommunications carriers
and service providers to deliver IP-based data, voice, and video services.
Designed to meet carriers' scalability needs, the routers allow new services and
capabilities to be added to carrier networks, intended to be without incremental
cost, as the subscriber base grows.
The TN Division has a relatively wide customer base. The customers include
wireline and wireless service providers, utility companies, cable /multi service
operators, and government and military agencies. As of December 31, 2006, the
division had more than 200 customers worldwide, and the majority of them are in
emerging markets.
THE BROADBAND ACCESS DIVISION, or BBA Division, develops, manufactures,
markets and sells innovative access products that enable telecommunications
service providers to mass deploy broadband networks and offer a variety of
advanced services. The BBA Division's solutions enable telecommunications
service providers to enhance their existing local loop usage performance and
efficiency, increase line capacity and facilitate advanced services on existing
infrastructure, and to introduce fiber to the curb, node and premises (FTTx) as
well as similar solutions with even higher capacity. ECI's broadband access
solutions address the use of copper telephone wire and fiber to provide voice,
data, and video services at multi-megabits and gigabits per-second speeds.
Over the last several years, there has been a significant rise in demand
for advanced broadband services, driving the need for broadband access products.
This has also led to significant price declines, both in services offered as
well as the technologies enabling such services. Telecommunications service
providers around the world have viewed DSL technologies as a means for boosting
revenues while leveraging their existing investment in the copper infrastructure
and have viewed fiber technology as a means to compete with the cable-based
service providers. ECI believes its products in this category respond to these
needs by providing customers with the opportunity for increased revenues while
emphasizing the low cost of ownership inherent in its broadband access product
line. The BBA Division's customers are principally wireline service providers,
and include Deutsche Telekom AG and France Telecom.
In addition to these primary divisions, ECI operates in the areas of next
generation telephony solutions via its minority interests in Veraz Networks
Inc., or Veraz, a private company in which ECI held a 40.1% interest (see below
in respect to an initial public offering filed by Veraz). Veraz is a global
provider of voice over IP, or VoIP, softswitches, media gateways and digital
compression products to wireline, broadband and wireless service providers. Its
holding in Veraz enables ECI to maintain a foothold in an important strategic
market, while at the same time focusing internal resources on ECI's core
businesses. In addition to its packet telephony products, Veraz also operates in
the DCME market of bandwidth optimization solutions. DCME systems simultaneously
compress toll quality voice, fax, voice band data, native data, and signaling.
The system improves transmission media efficiency and helps achieve maximum
bandwidth utilization and guaranteed QoS provision of traffic payloads. Veraz
was formed in December 2002, by the combination of the principal activities of
ECI's NGTS operations with those of NexVerse Networks, Inc.
31
On April 4, 2007, an S-1 Registration Statement filed with the SEC by
Veraz in connection with an initial public offering was declared effective and
Veraz raised gross proceeds of $ 54 million, before underwriting discounts and
expenses, from the sale of 6.75 million shares at the public offering price of
$8 per share. In addition, ECI sold in the offering 2.25 million shares of Veraz
for a total gross consideration of $18 million. Following the offering, ECI's
holding in Veraz were reduced to 27.6% (on a non-diluted basis).
ECI's other operations include the remaining activities of its NGTS unit,
following the transfer of the principal NGTS operations to Veraz, which
primarily focuses on the supply of DCME systems to Veraz, which has exclusive,
world-wide distribution rights for these systems.
Under U.S. GAAP, for the year ended December 31, 2006, ECI reported
revenues of $656 million, gross profit of $268 million, operating income of
$19.2 million and net income of $22.1 million. Under Israeli GAAP, ECI's net
income for the year ended December 31, 2006 was $13.1 million. ECI is included
in our financial statements on an equity basis only. As of December 31, 2006,
our holding in ECI was approximately 28.1%.
For a discussion of material legal proceedings relating to ECI, please see
"Item 8, Financial Information - Legal Proceedings."
ECTEL LTD.
ECtel Ltd., or ECtel, is a global provider of Integrated Revenue
Management (IRM) solutions for wireline, wireless, converged and next-generation
operators. ECtel offers carrier-grade products that address rapidly evolving
telecom business and technological needs. ECtel leverages its dedicated IRM
focus, financial stability, and blue-chip customer base to provide a
comprehensive array of flexible, proven solutions with rapid return on
investment.
ECtel offers telecom operators premier Integrated Revenue Management.
ECtel is an expert in proactively monitoring networks and operations support
systems (OSSs) to minimize revenue leakage and maximize visibility of all
revenue streams.
Through ECtel's integrated modular offerings, operators enjoy the benefits
of lower hardware, integration and operating costs.
Founded in 1990, ECtel is a premier developer of real-time detection and
prevention technologies for triple-play applications. Underscored by its
deployment of the world's first 3G and VoIP fraud prevention systems, ECtel
delivers solutions that support state-of-the-art networks for both prepaid and
postpaid services. A flexible architecture for all of ECtel's products assures
operators a safe investment and smooth migration into the next generation.
32
On June 29, 2006, ECI distributed all of its remaining shares in ECtel
(approximately 15.9%) to ECI's shareholders of record. The distribution ratio
was approximately 0.025 ECtel shares for each share of ECI. Koor received
815,660 ECtel shares in this distribution. These shares, combined with ECtel
shares distributed as dividend by ECI in May 2004 and ECtel shares purchased
from our affiliate, Telrad Networks Ltd. in December 2005, provide us, as of
December 31, 2006 with a 21.4% interest in, and significant influence over,
ECtel and accordingly, our investment in ECtel is accounted for according to the
equity method as of the third quarter of 2006.
TELRAD NETWORKS LTD.
Telrad is an innovative developer and marketer of telecom products and
end-to-end solutions. Telrad has over 50 years of experience in both legacy
switching and next generation networking, and has a long-standing partnership
with Nortel Networks. Telrad provides reliable networking solutions to many
countries in Latin America, Africa, Eastern Europe and Asia Pacific and is
selling its products in West Europe and North America through channels like
Alcatel and Alvarion.
Telrad's operations are divided into the following two divisions:
TELRAD PRODUCT SOLUTION (TPS)
The TPS division specializes in the complete design, development and
delivery of optical fiber-optic switching systems, enterprise-class equipment
and switching and access systems, protocol convectors and media gateways
designing and developing cutting edge technologies for leading global
communication equipment providers.
INTEGRATED NETWORK SOLUTIONS (INS)
For service providers in developing & emerging markets who want to provide
quadruple-play, next generation, or other IP-based telecommunications services,
Telrad's Integrated Network Solutions (INS) division provides system integration
using best-of-breed reliable products.
As a system integrator, Telrad is focused on providing dedicated,
trustworthy and robust solutions and service to emerging markets and small and
mid-sized operators and service providers.
TELRAD REORGANIZATION PLAN
In 2004, Telrad's board of directors approved a reorganization plan that
included employee layoffs. For the years ended December 31, 2004 and 2005, we
recorded expenses in the amount of NIS 29 million and NIS 38 million,
respectively, under the item "other expenses" in our statement of operations. In
2006, Telrad's Board of Directors approved an additional reorganization program
which includes various efficiency measures including further employee layoffs.
For the year ended December 31, 2006, our share in these reorganization expenses
amounted to approximately NIS 38 million.
33
TELRAD SUBSIDIARIES
COMMATCH LTD., a wholly-owned subsidiary of Telrad, was a provider of
Last-Mile over IP solutions for telecommunications operators, creator of DUET
Carrier Grade VoIP (Voice over Internet Protocol), Gateways portfolio. The DUET
family of products enables customers to seamlessly bridge Legacy Public Switched
Telephone Network, or PSTN, and IP networks via various alternative
infrastructures, like Cable TV, xDSL, fixed broadband wireless, Gigabit Passive
Optical Networks (GPON) and more. The company's technology provides connectivity
and interoperability for Next Generation Access and Public Networks. comMATCH's
sales in 2005 and 2004 totaled $5.9 million and $3.9 million, respectively.
At the beginning of 2006, all the activities of comMATCH were merged into
Telrad's TPS division.
TELRAD CONNEGY COMMUNICATIONS INC. (CONNEGY)
Telrad held 52% of its U.S. based subsidiary, Connegy, whose main products
consist of the UNITe Family of Business Systems and IP and LAN telephony
solutions. Connegy provides enterprise customers, carriers and others with a
comprehensive family of digital and VoIP telecommunication solutions and
applications.
In February 2006, Telrad sold Connegy to a third party. Telrad's loss in
respect of the sale of Connegy amounted to approximately $10 million and was
included in Telrad's financial statements for the year ended December 31, 2005.
TELRAD UKRAINE LIMITED
During 2005, Telrad established a fully owned subsidiary in Ukraine. The
subsidiary is serving as a low cost development center serving Telrad's
development needs across all Telrad's divisions, Optical Solutions, IP/NGN and
Global Operations.
TELRAD'S RELATIONSHIP WITH NORTEL
On April 23, 2002, Nortel and Telrad signed license and distribution
agreements, allowing Telrad to sell products based on Nortel know-how and
technology to a defined list of carriers in countries in which Nortel does not
intend to conduct business and/or in which its activities are limited. During
2003, a number of distribution and license agreements were signed by the parties
covering three of the major areas of operation of Nortel. In February 2005,
Telrad and Nortel entered into a master reseller agreement, which unified the
parties' obligations under their previous distribution and license agreements.
34
OTHER TELECOMMUNICATION EQUIPMENT BUSINESS
In addition to ECI, ECtel and Telrad, a small portion of our
telecommunication equipment business is conducted by Dekolink Wireless Ltd., or
Dekolik, in Israel and by Microwave Networks Inc., or MNI, in the United States.
Dekolink offers solutions for expanded cellular coverage outdoors and in
buildings. MNI is a manufacturer of wireless broadband point to point
infrastructure. For the years ended December 31, 2006 and 2005, Dekolink and MNI
had sales of approximately NIS 246 million ($58 million) and NIS 275 million
($65 million), respectively.
OUR DEFENSE ELECTRONICS BUSINESS
As of December 31, 2006, our investment in the defense electronics
business was a 4.4% interest in Elbit Systems Ltd., or Elbit. Elbit Systems is a
holding company investing in companies in the fields of command, control,
communications and intelligence systems for defense applications and electronic
warfare, equipment and systems.
In November 2004, we acquired 33% of the shares of Tadiran Communications
Ltd., or Tadiran Communications, for approximately NIS 637 million
(approximately $144 million). On December 27, 2004, and July 6, 2005 we entered
into a series of agreements with Elbit and with Federmann Enterprises Ltd., or
Federmann. Under the terms of the agreements, we sold our entire holdings in
Tadiran Communications to Elbit for $146 million and recorded a capital gain of
NIS 72 million. Concurrently, we acquired 7.7% of Elbit's share capital from
Federmann for $77.7 million.
The abovementioned agreements granted us the right to appoint 20% of the
members of Elbit's board of directors. We announced that as long as we hold
Elbit shares we will not invoke our right to appoint 20% of the Elbit directors
and therefore our investment in Elbit was stated by the cost method.
Furthermore, the agreement stipulated that we would sell to Elbit all of our
holdings (70%) in Elisra Electronic Systems, Ltd., or Elisra, for $70 million
and for additional consideration contingent on future insurance receipts in
respect of a fire that occurred in the plants of Elisra's subsidiaries in 2001.
On November 30, 2005, after all the requisite approvals for closing the
sale were received, the transaction was completed. As a result of the sale of
Elisra, we recognized a capital gain of NIS 148 million in the fourth quarter of
2005. In addition, as a result of the sale, the operating results of Elisra were
reclassified in our consolidated financial statements as discontinued
operations.
On November 22, 2006, we entered into an agreement for the sale of the
majority of our investment in Elbit to Federmann for total consideration of
approximately $70 million, to be received in five equal quarterly installments,
bearing interest according to the LIBOR rate. The first installment was received
on November 27, 2006. We expect to record a capital gain of approximately $12
million as a result of this transaction, of which approximately $3 million was
recognized in 2006 and the remainder will be recognized in 2007. We did not
record the entire gain in 2006 since control over a portion of the transferred
shares had not been surrendered. The shareholders' agreement entered into on
December 27, 2004 and amended on July 6, 2005 between Koor and Federmann was
nullified upon receipt of the first payment. On March 26, 2007, we received the
second installment in an amount of $14 million, and agreed to replace the three
coming installments with one installment due on September 26, 2007.
35
On December 5, 2006, we sold the remainder of our shares in Elbit in a
block trade for a total consideration of approximately NIS 112 million. We
recorded capital gains of approximately NIS 24 million during the fourth quarter
of 2006 in respect of the block trade.
Elbit Systems' shares are traded on the NASDAQ under the symbol "ESLT" and
on the Tel-Aviv Stock Exchange (TASE).
Our investment in Elbit is presented in our consolidated financial
statements by the cost method for Israeli GAAP purposes, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore Elbit's
results are not included in our results of operations.
OUR VENTURE CAPITAL BUSINESS
In January 2000, we and a wholly-owned subsidiary established a registered
partnership called "Koor Corporate Venture Capital," or Koor CVC, within which
we concentrated our investment activities in venture capital funds and in
high-tech start up companies with growth potential. The action was taken to
implement our strategic decision to increase our investments in those areas.
Within this context, since January 2000, Koor CVC signed investment agreements
with various start-up companies.
During 2006, Koor CVC made approximately NIS 8 million ($1.9 million) in
follow-on investments in its portfolio start-up companies and its portfolio
venture capital funds.
As of December 31, 2006, Koor CVC's future commitment to invest in its
venture capital fund (Pitango) totaled approximately $1.2 million of which
approximately $0.8 million were invested in January 2007. The remaining amount
may be drawn upon by the fund at any time over the next 1-2 years, based upon
their needs. During 2006, Koor CVC sold its stake in the portfolio company
Mysticom to TranSwitch Corporation pursuant to a series of agreements signed in
the fourth quarter of 2005, in consideration of approximately 260 thousand
TranSwitch shares, which were subsequently sold in July 2006 for approximately
$0.4 million. According to the sale agreements, Koor CVC may receive, if certain
conditions are met, up to 30 thousand additional shares of TranSwitch.
On November 27, 2006, a merger took place between Followap Inc., a
portfolio company, and NeuStar Inc. As a result of the merger, Koor CVC received
consideration of approximately $12 million in January 2007 and recorded a gain
of approximately NIS 43 million.
As of December 31, 2006, the book value of Koor CVC's investments in its
start-up companies, a venture capital fund and Scopus Network Technologies,
totaled approximately NIS 206 million ($49 million).
36
RECENT DEVELOPMENTS
On January 11, 2007, Koor CVC sold its entire holding in Scopus Video
Networks for consideration of approximately $16 million. As a result of this
transaction, Koor CVC recorded a gain of approximately NIS 23 million in the
first quarter of 2007.
OUR TOURISM BUSINESSES
As of December 31, 2006, our tourism business is conducted through the
following companies:
PERCENTAGE OF
VOTING RIGHTS(1) PRINCIPAL PRODUCTS AND SERVICES
---------------- -------------------------------
Sheraton Moriah (Israel) Ltd. 56.5% Hotel chain
Knafaim Holdings Ltd. 9.2%(2) Aviation and tourism services
(1) Represents the ownership percentage we use for accounting purposes, which
is based on voting rights.
(2) Not consolidated in our financial statements and not included in our
business data. The ordinary shares of Knafaim are traded on the TASE. As
described above, on May 8, 2007 we signed an agreement to sell 4.96% of
Knafaim for consideration of approximately $7.4 million, and on June 5,
2007, the purchaser notified us that it is exercising an option granted to
it to purchase the balance of our shareholding in Knafaim, representing
approximately 4.2% of Knafaim for total additional consideration of
approximately $6.3 million.
As of December 31, 2006, our interests in Israel's tourism industry
included ownership and management of hotels and resorts, and other
tourism-related services, such as airlines. For the years ended December 31,
2006 and 2005, our tourism business had sales of NIS 313 million and NIS 271
million, respectively.
On December 28, 2006, we sold our entire holding in Isram Wholesale Tours
and Travel Ltd., or Isram, a group tour operator, located primarily in the
United States, with international operations, for total consideration of $1.26
million. As a result of the sale, Isram's operations have been presented in our
consolidated financial statements as discontinued operations. See Note 24(3) to
our consolidated financial statements included elsewhere in this annual report.
SHERATON MORIAH (ISRAEL) LTD. (SHERATON MORIAH)
The Sheraton Moriah hotel network consists of 2,194 rooms (1,395 under
100% ownership) in 8 owned or leased hotels in major tourist destinations in
Israel, operating mainly under the Sheraton brand name. The positive trend that
had been developed in the incoming tourism market since April 2003 was abruptly
cut off in July 2006 as a result of the war in Lebanon between Israel and
Hezbollah. After the end of the war a slow recovery in the incoming tourism
market was recorded. Nevertheless, tourist entries are still 30% lower than
2000. As a result of the environment, Sheraton Moriah's management has continued
its strict control on expenses while emphasizing revenue enhancement, including
focusing on direct sales via a local central reservations office, hard-sale
local web-site, and leverage of its international brand to increase the market
share in both the domestic tourism and incoming tourism markets.
37
During the first quarter of 2006, Sheraton completed the purchase of the
remaining 50% of the shares of Yehuda Hotels Ltd., for consideration of NIS 55
million.
On December 17, 2006, we signed an agreement for the sale of our entire
holding in Sheraton Moriah to Azorim Development and Construction Co. Ltd., or
Azorim, for total consideration of approximately $24 million. The sale is linked
with the sale by a related party, Clal Tourism Ltd., or Clal Tourism to Azorim
of its entire holdings (100%) in its subsidiaries Accor-Clal Israel Hotels
(1995) Ltd. and Accor-Clal Israel Hotel Management Company Ltd., together with
outstanding shareholders' loans (amounting to approximately $16.9 million) and
capital notes, for total consideration of $44.2 million. Clal Tourism is wholly
owned by IDB Development Corporation Ltd., or IDBD, which is our ultimate
parent, holding directly and through Discount Investment Corporation Ltd.
approximately 52% of our outstanding shares. The transaction was completed on
April 26, 2007, after receiving all requisite approvals.
The consideration due to us under the agreement is payable in three
installments: the first, in the amount of $6.3 million, was received on December
21, 2006 and is presented within other liabilities as at December 31, 2006; the
second, in the amount of approximately $8.6 million, was received on the closing
date; and the remainder, in the amount of approximately $9.2 million, is to be
paid on March 27, 2008.
Upon the closing of the transaction, we were released from guaranties that
we provided to Israeli Banks to secure debt of Sheraton Moriah, in the amount of
approximately $9.2 million. Pursuant to the sale, commencing from our financial
statements for the first quarter of 2007, Sheraton will be presented as a
discontinued operation.
KNAFAIM HOLDINGS LTD. (KNAFAIM)
On September 29, 2004, we signed two agreements to sell 16% of the shares
of Knafaim for approximately NIS 121 million, and a third agreement for the sale
of an additional 3% of the shares of Knafaim for approximately NIS 23 million.
As a result of these sales, our shareholding in Knafaim decreased from
approximately 28.3% to approximately 9.2%. Accordingly, for Israeli GAAP
purposes, the investment in Knafaim is presented in our consolidated financial
statements under the cost method, beginning from the date of the sale, and is
classified as available-for-sale under FAS 115 for U.S. GAAP purposes.
Pursuant to the requirements of Israel's anti-trust commissioner in
connection with the acquisition of our shares by Discount Investments Corp.
Ltd., we are required to reduce our holding in Knafaim to below 5% by July 2,
2007.
Knafaim was incorporated in 1980. Knafaim owns a variety of businesses in
the travel and tourism industry, primarily 39.4% of El-Al Israel Airlines Ltd.,
Israel's international airline. Knafaim also holds interests other companies
that supply various tourism services, both domestically and internationally and
companies that purchase and lease back aircraft.
38
On May 8, 2007 we signed an agreement to sell 4.96% of Knafaim Holdings
Ltd., or Knafaim. The shares will be sold at a price per share of $10.47, for
total consideration of approximately $7.4 million. $1.5 million was paid upon
signing and the remainder will be paid upon the closing of the transaction. On
June 5, 2007, the purchaser notified us that it is exercising an option granted
to it to purchase the balance of our shareholding in Knafaim, representing
approximately 4.2% of Knafaim's share capital at the same purchase price, for
total additional consideration of approximately $6.3 million. The closing for
both the initial sale and the option exercise is currently expected to take
place by the end of the second quarter of 2007.
OUR OTHER BUSINESSES
We have an interest in several service industries, mainly real estate and
financial services. In previous years, our "other businesses" segment also
included aviation, trading, construction and infrastructures, electrical
appliances, software, food, trading, consumer products and metal products, as
well as the production of batteries.
As of December 31, 2006, the principal companies in our other businesses
segment were:
Percentage Of
Voting Rights(1) Principal Products and Services
---------------- -------------------------------
Koor Properties Ltd. 100.0% Real estate
Epsilon Investment House Ltd. 50.0% Financial services
(1) Represents the ownership percentage we use for accounting purposes, which
is based on voting rights.
Until 2005, Koor Trade Ltd., or Koor Trade, was included in our other
businesses segment. Koor Trade, imports, exports and distributes a broad range
of industrial, agricultural and consumer products through its worldwide network
of offices, including offices in Europe, Asia, Latin America and Australia. In
2005, our Board of Directors granted our management the authority to sell our
entire holding in Koor Trade. Therefore the activities of Koor Trade were
classified in our financial statements for the year ended December 31, 2005 as
discontinued operations. On May 28, 2006, we sold of our entire holdings in Koor
Trade to a group of managers, including one of our former senior executives, for
$8.3 million. See Note 24(2) to our consolidated financial statements included
elsewhere in this annual report.
REAL ESTATE
TADIRAN'S REAL ESTATE
In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. In 2003, we sold most of the real estate assets to a group
of investors headed by Denisra International Ltd. and Ranitech Ltd for
consideration of approximately NIS 273 million, and we recognized a capital gain
of approximately NIS 29 million. As a result of the sale of this real estate, we
realized a tax reserve of approximately NIS 44 million, created in respect of
those assets, and we paid taxes of approximately NIS 40 million.
39
The remaining balance of the real estate assets we received from Tadiran,
amounts to approximately NIS 40 million as at December 31, 2006.
KOOR PROPERTIES LTD. (KOOR PROPERTIES)
Koor Properties, our wholly-owned subsidiary, owns and develops directly
and indirectly real estate in Israel. As of December 31, 2006, Koor Properties
owned directly and indirectly an aggregate of approximately 52 thousand square
meters of real estate property in different stages of development. Most of the
land is commercially developed.
FINANCIAL SERVICES
EPSILON INVESTMENT HOUSE LTD. (EPSILON)
On April 11, 2006 we completed the transaction of the acquisition of 50%
of Epsilon Investment House Ltd., or Epsilon. Epsilon is engaged in providing a
wide range of financial services, including portfolio management, mutual fund
management, underwriting, provident fund management and consulting in mergers
and acquisitions.
According to the agreement, we were issued new shares, and also purchased
shares from certain of the existing shareholders of Epsilon, for total
consideration of NIS 106 million.
Our investment in Epsilon is accounted for according to the equity method,
as there is no joint control agreement, as defined by Israeli accounting
standards, between all of Epsilon's shareholders.
SUPPLIERS
The companies engaged in our businesses purchase the materials and
components used in their products from numerous independent suppliers. These
materials and components are not normally purchased under long-term contracts.
Most of the items purchased by these businesses are obtainable from a variety of
suppliers, and such businesses normally maintain alternative sources for major
items. In some cases these companies have annual purchasing agreements with
their major suppliers, which establish prices, quality thresholds and delivery
schedules.
To date, our businesses have not experienced any significant difficulty in
obtaining timely delivery of supplies, and management believes these businesses
maintain adequate inventories of certain significant imported components.
However, with respect to certain components, there may be a lengthy period of
preparation for production and adaptation for our businesses' requirements.
Accordingly, short-term shortages may arise in the event that these companies
were required to change suppliers without advance planning. The unavailability
of such components during such change-over period could result in production
delays, which might adversely affect our business.
40
RESEARCH AND DEVELOPMENT
As of December 31, 2006, most of our research and development activities
are conducted by our subsidiaries and affiliated companies in our
telecommunication equipment, venture capital investment and agrochemicals
businesses. These companies are actively engaged in research and development
programs intended to develop new products, manufacturing processes, systems and
technologies and to enhance existing products and processes. Research and
development is funded by a combination of our own resources and grants from the
Israeli Government. We believe our research and development effort has been an
important factor in establishing and maintaining those companies competitive
position.
Our research and development efforts have resulted in an increase in the
sales of internally designed products. We believe that research and development
in high technology areas, such as our telecommunications equipment and
agrochemicals businesses, is important to our future growth, particularly with
respect to products targeted for export markets. Accordingly, we anticipate that
these businesses will account for a majority of our research and development
efforts in the future. As part of their research and development programs, our
subsidiaries and affiliates not only seek to develop new products, but also to
apply newly developed technologies to improve existing products.
In each of the last three fiscal years, our affiliates received grants
from the Government of Israel through the Office of the Chief Scientist, or OCS,
for the development of certain products. Our affiliates generally receive from
the OCS 20% to 66% of certain research and development expenditures for
particular projects. Under the terms of the Israeli Government participation, a
royalty of 2% to 5% of the net sales of products developed from a project funded
by the OCS is generally required to be paid, beginning with the commencement of
sales of products developed with grant funds and ending when 100% of the grant
is repaid including interests. Our affiliates have paid in the past, and
currently pay, royalties on sales of such products. The terms of the Israeli
Government participation also require that the research and development be
conducted by the applicant for the grant as specified in the grant application
and that the manufacturing of products developed with government grants be
performed in Israel, unless a special approval has been granted. Separate
Israeli Government consent is required to transfer to third parties technologies
developed through projects in which the government participates. Such
restrictions, however, do not apply to exports from Israel of products developed
with such technologies. From time to time the Government of Israel has revised
its policies regarding the availability of grants and participation, and there
can be no assurance that the Government's support of research and development
will continue in the future. In addition, in order to be eligible for the
governmental grants, programs and tax benefits, our affiliates must continue to
meet certain additional conditions, including making specified investments in
fixed assets. Should our affiliates fail to meet such conditions in the future,
they could be required to refund grants or tax benefits, together with interest
and inflation adjustments.
COMPETITION
In 2006, the majority of our sales from telecommunications equipment and
agrochemicals businesses were derived from international sales. The companies
comprising these businesses are focusing on developing new markets to increase
international sales. The worldwide marketing of products in each of these
41
businesses is highly competitive and certain competitors are substantially
larger and have substantially greater financial, production and research and
development resources, more extensive marketing and selling organizations,
greater name recognition and longer selling experience than us. Some of our
competitors are also able to provide their customers with more direct financing
or greater access to long-term, relatively low-cost government loans to finance
equipment purchases.
PATENTS AND INTELLECTUAL PROPERTY
Several of our subsidiaries and affiliates own and control a substantial
number of patents, trade secrets, confidential information, trademarks, trade
names and copyrights which, in the aggregate, are of material importance to our
business. We are of the opinion that our business, as a whole, is not materially
dependent upon any one of these assets or any related group of assets. We are
also licensed to use certain patents and technology owned and controlled by
others, and other companies are likewise licensed to use certain patents and
technology owned and controlled by us.
In certain limited circumstances, certain of our customers, including the
United States Government, may retain certain rights to technologies and
inventions resulting from our performance as a prime contractor or subcontractor
under certain contracts and may disclose such information to third parties, who
may be our competitors. When in certain limited circumstances, certain of our
customers, fund research and development, they usually acquire rights to data
and title to inventions and we may retain a non-exclusive license for such
inventions. In certain circumstances, some of our customers are entitled to
receive royalties in connection with the sale of products, the development of
which was financed by those entities. However, if one of our customers purchases
only the end product, we normally retain the principal rights to the technology.
REGULATION
Our diverse businesses are subject to significant statutory and
administrative regulation in the various jurisdictions in which we operate
throughout the world. Among the regulations, to which we are subject, are those
described below.
MONOPOLY AND PRICING REGULATIONS
We and our subsidiaries or affiliates may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions established
by the Controller or by the Restrictive Business Practices Court, or the Court,
in the event that our market share, or the market share of our subsidiaries or
affiliates, exceeds certain prescribed limits.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
GENERAL
We are subject to laws and regulations concerning environmental
conditions, product safety, health and safety matters and the regulation of
chemicals in countries where the MA Group manufactures and sells its products.
These requirements include regulation of the handling, manufacturing,
transporting and use and disposal of certain materials, as well as regulation
concerning the discharge of pollutants into the environment. In the normal
course of its businesses, the MA Group is exposed to risks relating to the
possible release of hazardous substances into the environment, which may cause
environmental or property damage or personal injuries. In Israel, where the MA
Group maintains its principal production facilities, losses and damages relating
to continuous environmental pollution are currently uninsurable.
42
COMPLIANCE WITH ENVIRONMENTAL LAWS
The production processes of MA Industries, as well as the products it
produces and markets, involve environmental risks that have impact on the
environment. Therefore, MA Industries, in Israel and in other countries in which
it has additional production sites, as well as in countries in which it sells
its products, is subject to comprehensive regulation relating to the production,
storage, handling, transport, use and evacuation of its products, their elements
and waste.
During recent years, there has been a significant increase in the severity
of the regulations imposed on the production processes and facilities of MA
Industries, and in the environmental regulation and the enforcement of
environmental standards in Israel and globally, and this trend is expected to
continue in the upcoming years. Accordingly, MA Industries is investing
extensive resources to assure fulfillment of the provisions of the environmental
laws to which it is subject, and wants to prevent or mitigate the environmental
risks that could occur during its activity.
The primary environmental laws relating to the activities of MA Industries
in Israel are the Abatement of Nuisances Law, 1961, the Hazardous Materials Law,
1963, the Business Licensing Law, 1968, the Law for Prevention of Sea Pollution
from Land Sources, 1988 and the Water Law, 1959.
Most of the environmental requirements relating to the production
facilities and processes of MA Industries in Israel are concentrated in the
special terms of its business licenses in Ramat Hovav, Beer Sheba and Ashdod.
These requirements deal mainly with the following subjects:
(a) Limitations on emissions in order to prevent air pollution;
(b) Limitations on the biological burden and the composition of
industrial waste and the manner of their treatment;
(c) Means necessary to prevent the spillage and penetration of
pollutants into the soil;
(d) Treatment of solid waste;
(e) Means required to prevent ecological accidents and fast and
effective treatment of ecological events.
A significant portion of the raw materials used by MA Industries, as well
as the products it produces, are considered hazardous materials, and MA
Industries must have permits to store them in its plants in Israel. MA
Industries has permits to store all of the hazardous materials it stores in
Israel. The permits stipulate, among other things, the conditions for storing
the hazardous materials and the maximum quantity of each that can be stored.
Pursuant to these environmental laws, MA Industries has appointed an official in
charge of hazardous materials in each of its plants.
43
The products of MA Industries that are produced in Israel or sold therein,
require a permit according to the Plant Protection Law, 1956 and the regulations
promulgated thereunder. An important objective of the licensing mechanism for
the products of MA Industries is to protect public health and the environment
from the influences of different materials contained in agrochemicals.
EMISSIONS
The business licenses of MA Industries prescribe significant limitations
on the volume and elements of its plants' emissions. In May 1998, MA Industries
voluntarily joined the Treaty to Implement Air Pollutant Emission Standards,
which is based mainly on the stringent German Standard Ta Luft (1986), which was
prepared by the Ministry of Environmental Protection and the Manufacturers
Association. After joining the Treaty, air emission standards were adopted,
which were stipulated as part of the special conditions in the business licenses
of MA Industries.
INDUSTRIAL WASTE
The production processes of MA Industries' products at all of its sites
create industrial waste that contains various pollutants. At each of MA
Industries' production sites, industrial waste is treated in different ways,
according to the conditions and circumstances of the site and the terms of the
relevant business permit.
SOLID WASTE
Most of the solid waste created from the operations of the plants of
Makhteshim and Agan is sent and removed to the toxic waste site in Ramat Hovav,
with the regulations regarding the manner of packaging and marking of the waste
often being updated and made more stringent, as well as the waste removal
tariffs.
STANDARD CERTIFICATES ON ENVIRONMENTAL MATTERS
Makhteshim, Agan and Millennia were certified with Standard ISO 14001 -
Environmental Management Systems. This is the international standard that was
adopted as the Israeli Standard by the Israel Standards Institute in February
1997. The general objective of this Standard is to support environmental
protection and prevent pollution, while maintaining a balance with social needs
and to prescribe management systems that take corrective actions that assure
continuous improvement.
Makhteshim and Agan were also certified for Standard OHSAS 18001, for
industrial safety and hygiene systems, which is similar in its format to the ISO
14001.
The board of directors of MA Industries established an ecology committee
during 2003, intended to supervise and direct environmental policy within the MA
Group. Specific environmental matters are dealt with by the operating
subsidiaries, since the issues vary from site to site and from country to
country.
44
During November 2004, MA Industries' board of directors approved a master
plan for investments in several specific areas related to the environment with
respect to the production facilities in Israel. Within the scope of the plan, an
overall investment of $60 million was approved, to be executed between the years
2005-2008. In addition to the aforesaid, from time to time, the board of
directors approves additional specific investments, based on MA Industries'
needs.
Total approved investments of the MA Group (which were and are expected to
be executed) for environmental matters are as follows:
------------------------------------------------------------------------------------------------------
2006 2007 2008 and thereafter
------------------------------------------------------------------------------------------------------
Total approximate investment in 28.8 34.3 31.0
$ millions
------------------------------------------------------------------------------------------------------
FACILITY IMPROVEMENTS
MAKHTESHIM FACILITY IN RAMAT HOVAV
In the past, the Ramat Hovav site was selected by the Israeli Government
as a center for the chemicals industry, based on the assessment that the layers
of chalk found above the aquifer, an underground layer of water-bearing
permeable rock or unconsolidated materials (gravel, sand, silt, or clay),
absolutely seal against possible seepage, and seal against possible pollution
deriving from the site's plants. Over the years, Makhteshim relocated most of
its production from its Beer Sheba facility to its plant in Ramat Hovav.
Accordingly, in 2000, Makhteshim halted the performance of production processes
that include chemical reactions in its plant in Beer Sheba.
The facilities in the Ramat Hovav plant were built with emphasis on the
ecological aspect. To this end, the following actions were taken:
(a) Systems were added for vacuuming dust and dust filtration, the
filtering areas were expanded and the quality of the filters was
improved.
(b) An emissions system was installed in the facilities' chimneys, in
addition to the environmental monitoring system built by the Ramat
Hovav Industrial Council.
(c) An acid refining system was built, which enables the sale of acid
instead of neutralizing it.
(d) A facility for carbon dioxide production was operated, which reduces
its emissions, and will reduce the "greenhouse effect" as a result
of its being washed in the facility's purification system.
(e) A new system was built for physico-chemical treatment of waste.
(f) The pipe carrying the waste was replaced and waste flows were
separated. The pipe was installed above the ground, in order to
enable fast discovery of leaks and to deal with them without the
waste seeping into the groundwater.
45
(g) A biological treatment facility was built for the plant.
(h) Commencing in 2010, plant vapor pools will be operated.
Within the scope of the report filed in December 1997 with the Ministry of
Environmental Protection and the Ramat Hovav Industrial Council, at their
request, by investigators from academic institutions, data were reported with
respect to underground pollution in the Ramat Hovav District. According to the
recommendations of the report's authors, actions should be taken to prevent
continued leaks from the active and inactive facilities in Ramat Hovav that
could be a source of groundwater pollution, and to prevent the spreading of the
pollutants along the slope and length of the Sachar River, and mainly to the
mountain aquifer located 500 meters below the Ramat Hovav site. In 1998, an
agreement was signed between the Ramat Hovav Council and the Ramat Hovav plants
and between university institutions, to finance research after which
recommendations would be made on the actions to be taken to halt continuation of
the pollution. The research began in 1998 and continued for 4 years, with a
total cost to the plants of $1.25 million. Makhteshim's share in the cost of the
research was $500 thousand. The research ended in early 2004, and its main
conclusion was that there was some improvement in the qualities of the upper
groundwater, and that there was no need to treat the underground pollution,
because this pollution would clean itself over the next 70 years if additional
pollution would stop in the future. As a result of the preventive actions, which
included removing a sewage line from the ground, sealing floors to upper flow of
sewage and flows, and construction of storage facilities for the chemicals, MA
Industries believes that additional actions will not be needed to clean the
pollution, and that there is no concern over continued pollution of the lower
groundwater. The Ramat Hovav Industrial Council has an agreement with the
researchers that have been monitoring groundwater for five years and are
continuing this activity.
In July 2004, an epidemiological survey, which had been conducted at the
request of the Ministry of Health, was published regarding the disease and
mortality rates from various diseases in the communities within a 20 kilometer
radius of the Ramat Hovav region, compared with similar communities outside this
radius. According to the survey, in most of the results, no causal connection
was found between the disease (such as: birth defects in the Bedouin population,
chronic respiratory diseases among children in the neighboring Kibbutzim) and
mortality indices and residing close to the Ramat Hovav site. In some of the
cases, a reverse ratio was found between disease and mortality and proximity to
the Ramat Hovav site. The survey states that it did not examine other factors
among the tested population that could be relevant for disease or mortality, as
noted. Therefore, it is unable to determine a causal connection between the
proximity to Ramat Hovav and disease and mortality. Moreover, the survey did not
examine the concentrations of chemical materials in the air in any of the
communities surveyed. Therefore it is not possible to determine any specific
finding, even apparent, about any of the Ramat Hovav plants. At the end of 2006,
the Head Researcher, Prof. Batya Saruv announced that the testing was
continuing, and that no causal connection was found between cases of breast
cancer among the women of Omer and the Ramat Hovav plant activity (the report
cited was not published). In the last year, the Ramat Hovav Industrial Council
installed five air quality monitoring stations outside the boundaries of the
council: in Beer Sheba, Yeruham, Segev Shalom, Shemen Hill, an area of
unrecognized Bedouin settlements and at the Negev Junction. To date, all of the
testing performed indicates that the level of pollutants measured is low, and
meets even the most stringent standards currently prevailing in other countries,
such as the environmental values practiced in Texas in the U.S., and even the
values that were recommended by the Almog Committee to the Ministries of
Environmental Protection and Health.
46
As a result of serious odor hazards in the areas of Ramat Hovav and Beer
Sheba, which rose from the vapor pools of the Ramat Hovav Industrial Council in
the summer of 2002 as a result of the anaerobic fermentation, due to the flow of
not-purified or partially-purified waste (the odor hazards were removed only
after a massive salting of the pools in 2003), the Ministry of Environmental
Protection decided to require the plants to prepare and carry out an innovative
process, in which the waste of every plant would be treated within the plant,
until they became solid, so that no industrial waste will flow outside the
bounds of the plant (a process called zero liquid discharge - ZLD). This process
is comprised of three stages (a) biological treatment of the sewage; (b)
vaporizing and formulation of the sewage; (c) formulation of the salt that will
remain after the vapor process and its conversion to a solid. Therefore, in
2004, the Ministry of Environmental Protection added additional conditions for
the business license of Makhteshim and other plants in Ramat Hovav, in order to
implement the ZLD process, and prescribed a timetable for performance of each
stage. The position of Makhteshim, based on the opinion of experts, was that a
significant part of the additional conditions are unreasonable from the
standpoint of technological, economic and operational feasibility.
On October 10, 2004, Makhteshim, together with the Israel Manufacturers
Association and Bromine Compounds Ltd., Asia Chemical Industries Ltd., Kofolk
(1949) Ltd., Chemagis Ltd., filed an administrative appeal in Beer Sheba
District Court against the Ministry of Environmental Protection - Southern
District and the Ramat Hovav Industrial Council, in which it petitioned the
Court to cancel the additional conditions that were prescribed in its business
license to implement the ZLD process.
After filing the administrative appeal, in November 2004, the Israeli
Government approved a plan regarding the reduction of air and water pollution
hazards deriving from the "Ramat Hovav" industrial area, including, among other
things, treatment of the plants' waste, rehabilitation of the existing vapor
pools by the Ramat Hovav Industrial Council and treatment of air pollution. The
plan adopts the additional conditions in the business license of the plants that
are the subject of the appeal.
The dispute underlying the administrative appeal was sent to arbitration
in 2004, before a team of arbitrators headed by Prof. Avishai Braverman (who at
that time served as an independent director of MA Industries). After arbitration
commenced, the Ministry of the Environment approached a Dutch consulting firm
(DHV), requesting its professional opinion on the conditions that were imposed
on the plants. At the initiative of the arbitration team, an objective
professional opinion was prepared by Prof. Itamar Willner. Both opinions found
that there is a great deal of doubt as to whether the manner of treating waste
in the ZLD process, as required by the Ministry of Environmental Protection, has
technological, economic and operational feasibility in Ramat Hovav. The opinion
supports the claims of the plants in the appeal. In view of the opinion, a
professional understanding was reached, whereby the solution for discharging
waste in Ramat Hovav will continue to be vapor pools, and that the terms of the
business license would be modified accordingly. Therefore, the arbitration
process dealt with communication regarding the precise manner in which the waste
would be discharged to the vapor pools, while determining interim goals over a
time line.
47
At the completion of the arbitration process, on December 14, 2006, an
agreement was signed between Makhteshim, the Manufacturers Association and other
plants in the Ramat Hovav industrial area (Bromine Compounds Ltd., Asia Chemical
Industries Ltd., Kofolk (1949) Ltd. and Chemagis Ltd.) and the Ministry of
Environmental Protection, the Ramat Hovav Industrial Council and the Negev Bar
Kayama Foundation, which agreement is referred to as the Ramat Hovav Arbitration
Agreement. The Ramat Hovav Arbitration Agreement anchors the new conditions for
a business license for Makhkteshim's plant in Ramat Hovav (and for the other
appealing plants). Ramat Hovav plants, which are parties to the arbitration
agreement (including Makhteshim) took upon themselves to make sizable
investments to prevent environmental hazards. The arbitration agreement received
the validity of a ruling on December 28, 2006. Prof. Braverman did not receive
salary or any other compensation for his services as arbitrator.
The highlights of the agreements achieved as a result of the arbitration,
which were incorporated in the terms of the business license of Makhteshim's
plant in Ramat Hovav are:
(a) Treatment of waste will be the sole responsibility of each and every
plant. Commencing January 1, 2008, waste will not be allowed to flow
to the central treatment system (in this context, it should be noted
that the Ramat Hovav plant halted the flow of its waste into the
main treatment system at the end of February 2007).
(b) Every plant will build a vapor and storage pool at its own expense
("independent discharge system"), which will be in operation by no
later than January 1, 2010.
(c) The conditions prescribed the quality standards for the purified
water that will flow into the vapor pools (until the end of 2009,
treated by the local council, and as from the end of 2010, the
plant's independent discharge system), including interim standards
that the plants must comply with according to the timetables
prescribed in the conditions.
(d) During the operating period of the independent discharge system, the
concentrate will remain in the independent discharge system without
additional treatment. In order to determine the rehabilitation
principle after the operation of the system ends, the plant
conducted and submitted a survey of risks to the Ministry, in view
of the principles of the European directives and in accordance with
the conditions of the location. If according to the survey, the
Ministry of Environmental Protection will be satisfied that there is
a reasonable basis to assume that the solids created in the process
will not cause environmental hazards, the Ministry will agree that
the solids in the independent discharge system will remain in the
system, without additional significant treatment. This consent of
the Ministry will be reevaluated before operation ends, if there are
concerns about environmental hazards, because of the nature of the
approved rehabilitation. The response of the Ministry of
Environmental Protection to the said survey submitted to it has not
yet been received.
48
(e) It was agreed to conduct accelerated discussions half a year after
signing the agreement, in which the parties will discuss the
Ministry's intention to change the existing conditions regarding
prevention of air pollution and odor hazards. The agreement
stipulated the matters to be discussed, including non-localized
emissions and improvements in equipment and systems, in order to
minimize emissions.
The plant's waste is treated in a physico-chemical facility located in the
plant's yard, to the level prescribed by the Ramat Hovav Industrial Council. The
treatment includes a gas washing system that is intended to significantly reduce
the odor problems. After treatment in the physico-chemical facility, the waste
is flowed to the biological treatment plant in the plant's yard, the
construction of which was completed several months ago (previously, the
biological treatment was done in the joint central facility of the Ramat Hovav
Council). The biological treatment facility was built at a cost of $17 million,
according to the know-how and design of the Japanese company, Kobota, which is
the world's leader in this technology. After treatment in the plant, the waste
is flowed into the balancing pool that was built by the Ramat Hovav Council,
which is used jointly by the plants of the region.
In recent years, MA Industries has adopted several initiatives in the
Ramat Hovav plant, in order to reduce the environmental impact of the plant's
emissions. These initiatives include construction of air emission purification
systems, such as: biological treatment systems, absorption facilities integrated
with the processes in the production facilities, a thermal liquidation system
for emissions from the chimneys of most of the plant's facilities.
During the year, Makhteshim performs independent testing of the chimneys'
emissions, as required by the terms of the business license. Their results are
sent to the Ministry of Environmental Protection and the Ramat Hovav Industrial
Council, in accordance with the terms of the business license imposed on plants
in the Ramat Hovav region. These tests are performed in addition to the numerous
unannounced tests conducted by the Ministry of Environmental Protection and the
Ramat Hovav Industrial Council. Within the scope of the arbitration proceeding
described above, it was agreed that a discussion would be held in the upcoming
months between Makhteshim and the Ministry of Environmental Protection and the
Ramat Hovav Industrial Council regarding additional conditions in the business
license of Makhteshim, which will deal with emissions into the air, based on the
European directive IPPC.
On April 1, 2007, the Israeli Government decided to assign the Ministry of
Defense and the IDF to build a cluster of training centers at the Negev Junction
("city of training centers"), located approximately10 kilometers from the Ramat
Hovav site.
The decision includes guidelines by the Ministry of Environmental
Protection and the Ramat Hovav Council intended to assure the quality of the air
in the region.
MA Industries is unable, at this stage, to assess the effects of the
Government's decision and its implementation on the activities of its Ramat
Hovav plant and on the total costs that will be involved in complying with the
resultant conditions that will be imposed on the plant.
49
MAKHTESHIM AGAN PLANT IN BEER SHEBA
In the past, the Beer Sheba plant was Makhteshim's main plant. After
construction of the Ramat Hovav plant (in 1977), Makhteshim began to transfer
its production facilities, in which chemical synthesis is performed, to Ramat
Hovav. Presently, the Beer Sheba plant is used only to produce formulations, for
packaging and for storage of materials and products.
Within the scope of the treatment to prevent ecological hazards, the
following facilities, inter alia, were built in Beer Sheba:
(a) Between the years 1986-1988, a 17-kilometer long pipe was installed,
in which the waste flows from Beer Sheba to Ramat Hovav;
(b) Systems to absorb gas and odor emitted by different sources in the
plant; and
(c) Facilities for storage and for prevention of emissions for the
agrochemical powders were improved, according to the demands of the
Ministry of Environmental Protection.
From time to time, Makhteshim is subject to inspections for waste that was
buried, remainders found in the area surrounding its plant or waste that seeped
underground. Makhteshim could be required to clean the relevant areas and/or
underground.
After construction of the pipe that carries the waste from the plant in
Beer Sheba to Ramat Hovav, the industrial waste of the Beer Sheba plant is
treated in Ramat Hovav.
AGAN PLANT IN ASHDOD
Agan regularly carries out activities and makes investments in
environmental matters, including, inter alia, the following activities:
Emissions and Odors - The plant in Ashdod operates according to the
special conditions of the business license on environmental matters. As part of
compliance with these conditions, Agan must use light-sulfur gasoline and
special additives. Additionally, construction was recently completed, at a cost
of $10 million, of a system for gathering gas emissions from the production
processes and oxidation by a special burning (thermal oxidizer) which will also
make it possible to use organic solvents that cannot be recycled as petroleum
material, which will reduce Agan's energy costs. This action also prevents the
emission of chemical materials inside and outside the plant.
Conversion to Natural Gas - The Agan plant is in the process of the
converting its facilities from the use of gasoline to naturally gas. Upon
completion of the process, the level of emissions into the air from its
facilities will be further reduced. Likewise, the shift from gasoline to natural
gas will reduce Agan's energy costs. MA Industries estimates that the change
from the use of gasoline to natural gas will be effective by March 2008.
Treatment of Industrial Waste - Since 1975, industrial waste created in
the Agan plant in Ashdod flow to the Mediterranean Sea through a pipe owned by
Paz Refining Ltd., or BZA, a distance of 1,100 meters from the shoreline. Agan
had a multi-year agreement with BZA to use the pipe. Although the termination
date stipulated in the agreement has passed, the parties continue to honor it,
and MA Industries has no basis for assuming that it will be terminated in a
50
manner that will cause it damage. The flowing of waste to the sea requires
obtaining a permit from the Committee for Issuing Permits to Flow Waste to the
Sea. At the Committee's meeting on September 28, 2006, the Committee decided to
give Agan a permit to flow waste to the sea until September 30, 2008. The formal
permit has not yet been issued, due to disputes between Agan and the Ministry of
Environmental Protection regarding the criteria that the Ministry wants to
impose on Agan, effective October 1, 2009. In the estimation of MA Industries,
the parties are close to agreement and the formal permit will be issued to it
within a short time. The permit is contingent on fulfillment of various
conditions, namely the obligation to significantly reduce the level of organic
and inorganic pollutants to flow to the sea. To this end, the Committee
stipulated that the issuance of the permits to flow to the sea criteria for an
interim period from October 1, 2008 through September 30, 2009, with the more
stringent criteria to go into effect on October 1, 2009 (about which the parties
are still in dispute as described above).
In order to assess the requisite criteria, it is necessary to treat the
waste in the biological treatment facility before it flows to sea. After Agan
successfully completed testing of its experimental facility, it began
construction of a biological treatment facility, at a cost of $25 million, on
land that was leased for this purpose from the Ashdod Municipality.
Agan undertook toward the Committee for Issuing Permits to Flow Waste to
the Sea to complete construction of the facility by March 31, 2008 and to
complete putting it into operation by October 1, 2008. MA Industries estimates
that it will meet the said timetables.
Agan is negotiating with BZA regarding partnership in the treatment
facility, so that the facility will treat both Agan's waste and BZA's waste. If
agreement is reached regarding partnership in the facility, Agan's construction
and operating costs in the facility will be reduced.
In order to comply with future criteria that the Ministry of Environmental
Protection will impose on waste that Agan will be permitted to flow to the sea,
commencing October 1, 2009, Agan will be required to carry out additional
treatments of the waste before they flow to the biological treatment facility.
MA Industries does not presently have an estimate of the costs that will be
required for the additional treatments. As described above, Agan is in
discussions with the Ministry of Environmental Protection regarding the criteria
that will be imposed on Agan and regarding the date they take effect. It is
Agan's position that as long as operation of the biological treatment facilities
has not ended, the composition and concentrations of the materials that flow
from it to the sea will not be known and it will not be possible to characterize
the preliminary treatments that will be necessary for the waste before they flow
to the biological treatment facility.
Agan sends all of the industrial waste created in its plant for treatment
at the national waste site in Ramat Hovav. Since local treatment is not possible
for solvents that cannot be recycled, the Environmental Services Company exports
these materials of Agan to facilities overseas. With the construction of the
system for treating gas emissions from the production facilities, Agan is
expected to use these solvents as fuel for oxidation and production of steam.
51
MILLENNIA PLANTS IN BRAZIL
Millennia has two major plants in Brazil. The larger plant is adjacent to
the city of Taquari in southern Brazil and the second is in the city of
Londrina. To the best of MA Industries' knowledge, Millennia meets the legal
environmental requirements and regulations applicable to it in Brazil.
During the period from1996 through 2004, Millennia invested $4 million in
safety and ecological facilities in its two plants in Brazil, as part of
Millennia's policy of improving ecological processes. Investments in the field
of ecology were expressed in the performance of underground tests and correction
of deficiencies that were found, changes in the production processes,
construction of waste treatment facilities and storage of by-product. Between
the years 2005-2008, Millennia is expected to invest an additional $5.5 million
in its plants in Brazil, in the areas of safety and ecology, with half of this
sum expected to be invested in improvements to existing facilities, and the
balance in new facilities.
The waste system in the plant in Taquari transports the waste, after
chemical and biological treatment, in accordance with the regulatory and general
requirements, to a river that flows near the plant.
In the plant in Londrina, technology is used that significantly reduces
the liquid waste. The liquid waste created in the process is treated in the
plant and recycled for internal use. The plant operates as a closed system,
without removing the waste from the plant's site. Solid waste is taken to an
outside site for burning.
An additional plant located in Cruz Alta in Brazil produces only organic
materials, which are not toxic. Therefore, no investment is required in an
ecological system.
For a discussion of material legal proceedings related to environmental
issues, in which MA Industries is involved, please see "Item 8, Financial
Information - Legal Proceedings."
52
ORGANIZATIONAL STRUCTURE
We are part of a group of companies controlled by Discount Investment
Corporation Ltd and by its parent, IDB Development Corporation Ltd., which is in
turn controlled by IDB Holding Corporation Ltd. For more information regarding
the ownership of these companies, see Item 7, "Major Shareholders and Related
Party Transactions."
The following is a list of all of our significant subsidiaries, affiliates
and other companies in which we have invested as of December 31, 2006, including
the name, country of incorporation or residence, proportion of ownership
interest and, if different, proportion of voting power held.
Country of Percentage
Incorporation or of ownership Percentage of voting
Name of Subsidiary/Affiliate residence interest rights(1)
-------------------------------- --------- -------- ---------
Koor Corporate Venture Capital Israel 100% 100%
Makhteshim Agan Industries Ltd. Israel 37.1% 39.6%
ECI Telecom Ltd. (2) Israel 27.7% 28.1%
Telrad Networks Ltd. Israel 61.0% 61.0%
ECtel Ltd. (3) Israel 18.8% 21.4%
Sheraton Moriah (Israel) Ltd. (4) Israel 56.5% 56.5%
Knafaim Holdings Ltd. (5) Israel 9.2% 9.2%
Epsilon Investment House Ltd. Israel 50% 50%
Dekolink Wireless Ltd. Israel 70% 70%
Scopus Video Networks Ltd. (6) Israel 22.2% 22.2%
A.K.A. Development Ltd. Israel 33.3% 33.3%
Microwave Networks Inc. United States 97.5% 97.5%
----------
(1) Represents the ownership percentage we use for accounting purposes, which
is based on voting rights.
(2) An entity controlled by our controlling shareholder holds approximately
13% of ECI Telecom.
(3) An entity controlled by our controlling shareholder holds approximately 9%
of ECtel.
(4) As described above, on December 17, 2006, we signed an agreement for the
sale of our entire holding in Sheraton-Moriah (Israel) Ltd. The
transaction was completed on April 26, 2007, after receiving all requisite
approvals.
(5) As described above, on May 8, 2007 we signed an agreement to sell 4.96% of
Knafaim for consideration of approximately $7.4 million, and on June 5,
2007, the purchaser notified us that it is exercising an option granted to
it to purchase the balance of our shareholding in Knafaim, representing
approximately 4.2% of Knafaim for total additional consideration of
approximately $6.3 million.
(6) As described above, on January 11, 2007 we sold our entire holdings in
Scopus Video Networks for consideration of approximately $16 million.
PROPERTY, PLANTS AND EQUIPMENT
Our headquarters are located in 4740 square feet of leased office space on
the 43rd floor of the Triangle Tower at 3 Azrieli Center, Tel-Aviv, Israel.
53
We own an aggregate of 18,000 square feet of office space in the Platinum
Building in Tel Aviv, Israel, where our headquarters were located in the past.
We purchased this facility in 1998 and since January 1, 2004, this property has
been sublet in its entirety. Furthermore, we own a 323,000 square foot plot of
land and a manufacturing facility in Holon, Israel, which was received as a
liquidating dividend from Tadiran in 2002 and is leased to a third party. We
also own a 107 square foot plot of land in Haifa, Israel that is leased to a
third party.
The manufacturing facilities of our subsidiaries and affiliates are
located throughout Israel. Major concentrations are in the Be'er Sheva/Ramat
Hovav area in the south of Israel and the Tel Aviv-Petach Tikva-Lod-Ashdod area
in the central part of Israel. Our subsidiaries and affiliates own their major
manufacturing plants, facilities, machinery and equipment. In addition, our
subsidiaries and affiliates lease certain manufacturing and office facilities.
Most of the industrial land utilized by us is under 49-year leases from
the Israel Lands Authority with options for an additional 49 years in a
significant number of cases. Land rent on uncapitalized leases is generally
equal to 4% of the value of the land per annum and is subject to revaluation
every seven years.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report. Our financial statements
have been prepared in accordance with Israeli GAAP, which differ in significant
respects from U.S. GAAP. See Note 29 to our consolidated financial statements,
included elsewhere in this annual report, for a description of the principal
differences between Israeli GAAP and U.S. GAAP as they relate to us. Unless
otherwise specified, all financial information presented in this Item 5 is based
on Israeli GAAP.
In accordance with amendments to Israeli GAAP published in October 2001
and December 2002, our financial statements for the years ended December 31,
2004, 2005 and 2006 are no longer adjusted to reflect the effects of inflation.
For all financial reporting periods until December 31, 2003, Israeli GAAP
required that our consolidated financial statements recognize the effects of
inflation. Consequently, financial data for all periods until December 31, 2003
in our consolidated financial statements and throughout this annual report,
except as otherwise noted, have been adjusted to reflect changes in the Israel
consumer price index, or CPI, and have been adjusted in NIS in terms of the
purchasing power as of December 31, 2003. The functional currency of certain of
our subsidiaries and affiliated companies (mainly MA Industries and ECI) is the
US dollar and their financial statements are prepared in US dollars, and are
translated into NIS using the exchange rate prevailing at the end of the period
for balance sheet items and the exchange rate prevailing on the transaction date
for income and expense items. See Notes 2B and 2D to our consolidated financial
statements included elsewhere in this annual report.
54
Transactions among our subsidiaries and affiliates and transactions
between our company and our subsidiaries and affiliates are entered into on an
arm's-length basis and, in management's opinion, generally on terms no less
favorable than those available from third parties.
The following discussion may contain forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause
future results to differ significantly from those projected in the
forward-looking statements include, but are not limited to, those discussed
below and elsewhere in this annual report, particularly those described above
under Item 3, "Key Information - Risk Factors."
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Israeli GAAP, which differ in
significant respects from U.S. GAAP. See Note 29 to our consolidated financial
statements, included elsewhere in this annual report, for a description of the
principal differences between Israeli GAAP and U.S. GAAP as they relate to us.
Pursuant to our application of Israeli GAAP, we have identified below
accounting policies critical to understanding the overall financial reporting of
Koor. A more complete discussion of the significant accounting policies which we
follow in preparing our financial statements is set forth in Note 2 to our
consolidated financial statements included elsewhere in this annual report.
In addition, the preparation of our consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On a regular basis, we
evaluate and may revise our estimates. We base our estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities, that are not readily
apparent. Some of those judgments can be complex, and consequently, actual
results may differ from those estimates. For any given individual estimate,
judgment or assumption made by us, there may be alternative estimates, judgments
or assumptions, which are also reasonable. The following discussion of our
critical accounting policies includes references to several critical accounting
policies that are impacted significantly by judgments, assumptions and estimates
used in the preparation of our consolidated financial statements.
PRINCIPLES OF ACCOUNTING FOR HOLDINGS IN GROUP COMPANIES
The various holdings that we have in our group companies are accounted for
under several methods, based upon, among other things, our level of ownership
and the type and form of our holdings in our group companies, as described
below.
55
CONSOLIDATION. Group companies in which we own over 50% of the voting securities
and which we control are accounted for under the consolidation method of
accounting. Under Israeli GAAP, control of a company for purposes of
consolidation may also depend on an evaluation of several factors which require
management to make judgments.
Under the consolidation method, a controlled company's assets and
liabilities are included within our consolidated balance sheet and its income
and expense items are included within our consolidated statements of operations.
The share of other shareholders in the net assets and in the net income or
losses of a consolidated company is reflected in minority interest in our
consolidated balance sheet and in our consolidated statements of operations,
respectively. The minority interest amount adjusts our consolidated net income
(loss) to reflect only our share in the earnings or losses of any consolidated
company.
EQUITY METHOD. Group companies which we do not control, but over which we
exercise significant influence over the operating and financial policies and in
which we hold equity securities are accounted for under the equity method of
accounting. Significant influence is usually assumed when we hold 20% or more of
a group company's voting securities, however, whether or not we exercise
significant influence with respect to a group company also depends on an
evaluation of several additional factors, including, among others, our
representation on the board of directors, agreements with other shareholders,
our participation in policy making processes, the existence of material
intercompany transactions and technological dependency, the extent of ownership
by an investor in relation to the concentration of other shareholdings, and
other factors which may require management to make certain judgmental decisions
regarding significant influence.
Under the equity method of accounting, a group company's assets and
liabilities are not included within our consolidated balance sheet and their
results of operations are not reflected within our consolidated statements of
operations. However, our share in the net income or losses of the group company
is reflected as an equity income (loss) in our consolidated statements of
operations. Our share of income or losses is based upon our ownership level of
the outstanding share capital of the group company.
COST METHOD. Our holdings in group companies that we do not account for
under either the consolidation or the equity method of accounting are accounted
for under Israeli GAAP according to the cost method. Under this method, our
share in the income or losses of these entities is not included in our
consolidated statements of operations. Under US GAAP, if these holdings are
marketable securities they are classified as available-for-sale and are
presented at fair market value and the effect of any unrealized change in market
value is reflected in other comprehensive income (loss). When realized, gain or
loss is included in our results of operations.
GOODWILL AND EXCESS COST ARISING FROM BUSINESS COMBINATIONS
From January 1, 2004 until December 31, 2005, we applied Israel Accounting
Standards Board, or IASB, Accounting Standard No. 20, "Goodwill amortization,"
according to which goodwill arising from the acquisition of equity in an
affiliate was generally amortized at equal annual rates over a period of 10 to
20 years commencing from acquisition date. Since January 1, 2006, we have
implemented IASB Accounting Standard No. 20 (Revised), "The Accounting Treatment
of Goodwill and Intangible Assets resulting from the acquisition of an Investee
Company," or Standard No. 20. In accordance with Standard No. 20:
56
(a) The excess cost created upon the acquisition of an investment in an
investee company over the fair value of its identified assets (including
intangible assets) less the fair value of its identified liabilities (after
allocation of the tax deriving from temporary differences) on the acquisition
date, is charged to goodwill;
(b) Goodwill is not amortized systematically. Instead, goodwill is tested
for impairment at least once a year, or more frequently, should circumstances
arise indicating that impairment may have occurred. The excess cost allocated to
assets and liabilities is charged to the appropriate balance sheet items.
Goodwill is presented in the balance sheet under the caption "intangible assets
and deferred tax assets;"
(c) The excess book value over the cost of the investment is deducted
first from intangible assets. Negative excess cost remaining after the
allocation to intangible assets is deducted from non-monetary assets on a pro
rata basis to the fair value of these assets, based on our proportionate share
of the investee. The balance of the negative excess cost, after the above
allocation, is negative goodwill and is immediately recognized as a gain on the
date of the acquisition.
Estimating the fair value of assets acquired and liabilities assumed is
judgmental in nature and often involves the use of significant estimates and
assumptions, mainly with respect to intangible assets. While there are a number
of different methods for estimating the value of intangibles acquired, the
primary method we use is the discounted cash flow approach. Some of the more
significant estimates and assumptions inherent in the discounted cash flow
approach include projected future cash flows, including their timing, a discount
rate reflecting the risk inherent in the future cash flows and a terminal growth
rate. Another area which requires judgment that can impact our results of
operations is estimating the expected useful lives of the intangible assets. To
the extent intangible assets are ascribed with longer useful lives, there may be
less amortization expenses recorded in any given period. As we and our group
companies operate in industries which are rapidly evolving and extremely
competitive, the value of the intangible assets, including goodwill, as well as
excess cost allocated to intangible assets of our affiliated companies and their
respective useful lives is exposed to future adverse changes which can result in
a charge to our results of operations.
IMPAIRMENT IN VALUE OF INVESTMENTS
From time to time we review our investments in our affiliates to identify
whether there has been a decrease in the value of such investments which is not
of a temporary nature. We would conduct such reviews when there are signs that
the value of permanent investments has been harmed, including a drop in stock
market prices, the affiliate's sequential losses, the segment in which the
affiliate operates, the value of the goodwill aggregated in the investment and
other parameters. Following management's assessment of all the relevant factors
that are not of a temporary nature, we make provisions, if appropriate, for the
adjustment of the value of these investments, which would be reflected in our
consolidated statement of operations.
57
Since January 1, 2003, we have applied IASB Accounting Standard No. 15,
"Impairment In value of Assets," or Standard No. 15, to ensure that our assets
in the consolidated balance sheet are not stated at an amount exceeding their
recoverable value, which is the higher of the net sales price and the usage
value, which is the present value of the estimated future cash flows expected to
derive from the use and realization of the asset. Standard No. 15, which is
based on International Accounting Standard No. 36, applies to all of our assets
in the consolidated balance sheet, except for tax assets and monetary assets.
Likewise, Standard No.15 prescribes the presentation and disclosure principles
for assets that have declined in value. When the carrying value of an asset in
the consolidated balance sheet exceeds its recoverable amount, we recognize an
impairment loss equal to the difference between the book value of the asset and
its recoverable value. A loss recognized in this manner will be reversed only if
changes have occurred in the estimates used in determining the recoverable value
of the asset, from the date on which the last impairment loss was recognized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS IN ISRAEL
In February 2006, the IASB published Accounting Standard No. 16,
"Investment Property," or Standard No. 16. Standard No. 16 prescribes rules for
recognition, measurement and disposition of investment property and for the
disclosure required in respect thereto. Standard No. 16 stipulates, among other
things, that the initial measurement of investment property be according to
cost, including transaction costs. Furthermore Standard No. 16 stipulates that
in subsequent periods the entity should choose to measure all of its investment
property, either according to cost, after deduction of accumulated depreciation
and impairment losses, or according to fair value, in which case adjustments to
fair value shall be recorded in the statement of operations. Standard No. 16
will apply to financial statements for periods beginning on or after January 1,
2007. An entity that on January 1, 2007 chooses for the first time to use the
fair value model for measuring its investment property, must record the
difference between the fair value of the investment property and its book value
as an adjustment to the opening balance of retained earnings. An entity that
chooses the cost model must apply the rules of Standard No. 16 retroactively.
Furthermore, an entity that chooses the cost model and intends to adopt one or
more of the reliefs set forth in IFRS 1, "Initial adoption of International
Financial Reporting Standards concerning investment property," may adopt the
relief in its financial statements for periods beginning on or after January 1,
2007. We elected to apply the fair value model for measuring our investment
property. Therefore, in accordance with the transition requirements of Standard
No. 16, on January 1, 2007 we will record an increase in the balance of our
investment property in the amount of NIS 20 million and an increase in our
investments in affiliates in the amount of NIS 32 million, resulting in a total
adjustment to the opening balance of retained earnings as of January 1, 2007 of
NIS 52 million.
In July 2006, the IASB published Accounting Standard No. 29, "Adoption of
International Financial Reporting Standards," or Standard No. 29. Standard No.
29 provides that entities that are subject to the Israeli Securities Law, 1968
and that are required to report in accordance with this Law's provisions, shall
prepare their financial statements pursuant to International Financial Reporting
Standards, or IFRS, for periods commencing on or after January 1, 2008. Standard
No. 29 permits early adoption beginning with financial statements published
after July 31, 2006. Initial adoption of IFRS is to be effected by means of
application of the provisions of IFRS 1, "First-Time Application of IFRS" for
purposes of the transition. In accordance with Standard No. 29, we are required
to include in a note to our annual financial statements as of and for the year
ended December 31, 2007, after they have undergone application of the
recognition, measurement and presentation rules of IFRS. We are in the process
of examining the effect of Standard No. 29 on our financial statements and do
not intend to implement Standard No. 29 earlier than required.
58
In August 2006, the IASB published Accounting Standard No. 26,
"Inventory," or Standard No. 26. Standard No. 26 stipulates guidelines for
determining the cost of inventory and its subsequent recognition as an expense
as well as for determining impairment in value of inventory to its net
realizable value. According to Standard No. 26, inventory should be presented
according to the lower of cost or net realizable value. Standard No. 26 also
provides guidelines regarding cost formulas used to allocate costs to various
types of inventory. Standard No. 26 will apply to financial statements for
periods beginning on or after January 1, 2007. Standard No. 26 must be applied
retroactively by restating comparative amounts in respect of prior periods. The
implementation of Standard No. 26 will not have a material impact on our
financial position or results of operations.
In September 2006, the IASB published Accounting Standard No. 27, "Fixed
Assets," or Standard No. 27. Standard No. 27 prescribes rules for the
presentation, measurement and disposition of fixed assets and for the disclosure
required in respect thereto. Standard No. 27 stipulates, among other things,
that upon the initial recognition of a fixed asset, the entity shall include in
the cost of the item all the costs it will incur in respect of a liability to
dismantle and remove the item and to restore the site on which it was located.
Furthermore, Standard No. 27 stipulates that a group of similar fixed asset
items must be measured at cost, net of accumulated depreciation, and less
impairment losses, or alternatively, at its revalued amount less accumulated
depreciation, whereas an increase in the value of the asset to above its initial
cost as a result of the revaluation will be directly included the shareholders'
equity under a revaluation reserve. Any part of a fixed asset item with a cost
that is significant in relation to the total cost of the item must be
depreciated separately, including the costs of significant periodic
examinations. Standard No. 27 also stipulates that a fixed asset that was
purchased in consideration for another non-monetary item in a transaction of
commercial substance must be measured at fair value. Standard No. 27 will apply
to financial statements for periods beginning on or after January 1, 2007. An
entity that on January 1, 2007 chooses for the first time to use the revaluation
method for measuring fixed assets must on this date recognize a revaluation
reserve in the amount of the difference between the revalued amount of the asset
on that date and its book value. Furthermore, an entity that in the past, upon
the initial recognition of a fixed asset, had not included in its cost the
initial estimate of costs for dismantling and removing the asset and for
restoring the site on which it is located, will measure the following:
(a) Liabilities incurred in connection with the dismantling and removal of
assets as at January 1, 2007 should be measured in accordance with GAAP;
(b) The amount that would have been included in the cost of the relevant
asset on the date on which the liability was initially incurred should be
measured according to the present value of the amount of the liability mentioned
in item (a) above on the date on which the liability was initially incurred,
which we refer to as the capitalized amount;
59
(c) The accumulated depreciation on the capitalized amount as at January
1, 2007 should be measured on the basis of the useful life of the asset as at
that date; and
(d) The difference between the amount to be charged to the asset in
accordance with items (b) and (c) above, and the amount of the liability in
accordance with item (a) above, shall be included in retained earnings.
Except as described above, Standard No. 27 will be adopted on a
retrospective basis.
We elected to measure the fixed asset item at cost less accumulated
depreciation. The application of Standard No. 27 will not have a material effect
on our financial statements.
In December 2006, the IASB published Accounting Standard No. 23,
"Accounting for Transactions Between an Entity and its Controlling Shareholder,"
or Standard No. 23. Standard No. 23 effectively supersedes the main provisions
of Israeli Securities Regulations (Presentation of Transactions Between a
Company and its Controlling Shareholder), and provides that assets (excluding
intangible assets that do not have an active market) and liabilities in respect
of which a transaction has taken place between the entity and its controlling
shareholder will be measured according to fair value on the transaction date and
the difference between the fair value and the consideration received in the
transaction will be recorded within shareholders' equity. A debit amount is
essentially a dividend and will therefore be recorded as a reduction of retained
earnings. A credit amount is essentially an investment by the shareholder and
will therefore be recorded as a separate item within shareholders' equity under
the caption "Capital reserve from transactions between the entity and its
controlling shareholder." Standard No. 23 addresses three issues pertaining to
transactions between an entity and its controlling shareholder: (i) transfer of
an asset from the controlling shareholder to the entity or transfer of an asset
from the entity to the controlling shareholder; (ii) assumption, fully or
partially, by the controlling shareholder of a liability that the entity has to
a third party, indemnification from the controlling shareholder to the entity in
respect of an expense, concession, fully or partially, by the controlling
shareholder of an amount owed to him by the entity; and (iii) loans granted to
or by the controlling shareholder. Furthermore, Standard No. 23 provides the
disclosure required in financial statements pertaining to transactions between
the entity and its controlling shareholder during the period. Standard No. 23
will apply to transactions between an entity and its controlling shareholder
occurring on or after January 1, 2007, as well as to loans granted prior to the
inception of Standard No. 23 to or by the controlling shareholder, as of the
date of its inception. The application of Standard No. 23 will not have a
material impact on our financial position or results of operations.
60
IMPACT OF DEVALUATION, INFLATION AND CURRENCY FLUCTUATIONS ON RESULTS OF
OPERATIONS AND ON MONETARY ASSETS AND LIABILITIES
The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the rate of
devaluation of the NIS in relation to the dollar and the rate of inflation in
Israel adjusted for the NIS-dollar devaluation:
Closing Exchange Annual Annual Inflation
Year Ended Israeli Consumer Israeli Inflation Rate of the Devaluation Rate Adjusted for
December 31, Price Index (1) Price Rate(2) Dollar (3) (4) Devaluation (5)
------------ ---------------- ----------------- ---------------- ---------------- ----------------
2002 182.01 6.5 NIS 4.737 7.3 (0.7)
2003 178.58 (1.9) NIS 4.379 (7.6) 6.2
2004 180.74 1.2 NIS 4.308 (1.6) 2.8
2005 185.05 2.4 NIS 4.603 6.8 (4.2)
2006 184.87 (0.1) NIS 4.225 (8.2) 8.8
----------
(1) For purposes of this table, the CPI figures use 1993 as the base equal to
100. These figures are based on reports of the Israel Central Statistics
Bureau.
(2) Annual inflation is the percentage change in the CPI in Israel between
December of the year indicated and December of the preceding year.
(3) Closing exchange rate is the rate of exchange between the NIS and the
dollar as of December 31 of the year indicated, as reported by the Bank of
Israel.
(4) Annual devaluation is the percentage increase in the value of the dollar
in relation to the NIS during the year indicated.
(5) Annual inflation adjusted for devaluation is obtained by dividing the
Israeli inflation rate (column 2 plus 1) by the annual devaluation rate
(column 4 plus 1), minus 1.
Since most of our operations are based in Israel, we incur significant
expenses in NIS, which expenses are usually linked, wholly or partially, to
changes in the CPI.
The relationship between our monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects our financial results. In the event of a devaluation of the NIS in
relation to the dollar, we would report a financial expense to the extent that
our dollar-denominated or dollar-linked monetary liabilities exceed our
dollar-denominated or dollar-linked monetary assets or, conversely, we would
report financial income if our dollar-denominated or dollar-linked monetary
assets exceeded our dollar-denominated or dollar-linked monetary liabilities. On
December 31, 2006, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 59 million (the majority of which was dollar-denominated or
dollar-linked).
In addition, certain of our subsidiaries and affiliates have entered into
financial agreements with major Israeli banks and other financial institutions
in order to reduce the overall exposure of assets and liabilities denominated in
foreign currencies, and commitments for the purchase of raw materials and the
sale of goods in currencies other than the dollar arising from foreign currency
exchange rates. Such agreements may include forward sales, purchase contracts,
sale options and swap transactions.
61
RESULTS OF OPERATIONS
The following tables summarize certain recent financial information relating to
each of our businesses. The tables are prepared on the same basis as that
utilized in our consolidated financial statements included elsewhere in this
annual report.
Translation
2005/2004 into 2006/2005
NIS Changes NIS Dollars Changes
------------------------------------------------------- ---------- ------------------------- ---------- ----------
2004 % 2005 % % 2006 % 2006 %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands) (In thousands) (In thousands) (In thousands)
REVENUES FROM
SALES AND
SERVICES
Telecommunications 671,531 8.59 452,433 61.67 (32.63) 260,384 44.64 61,629 (42.45)
Agro-chemicals ... 6,895,238 88.22 -- -- N/A -- -- -- --
Tourism .......... 238,449 3.05 271,443 37.00 13.84 312,801 53.63 74,036 15.24
Others ........... 10,564 0.14 9,755 1.33 (7.66) 10,068 1.73 2,383 3.21
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............ 7,815,782 100.00 733,631 100.00 (90.61) 583,253 100.00 138,048 (20.50)
========== ========== ========== ========== ========== ========== ========== ========== ==========
EQUITY IN THE
RESULTS OF
INVESTEE
COMPANIES, NET
Telecommunications (15,919) 45.41 27,050 7.53 N/A (106,781) 292.16 (25,274) N/A
Defense
electronics ...... (20,000) 57.05 (23,288) (6.48) 16.44 -- -- -- N/A
Agro-chemicals ... -- -- 359,200 99.95 N/A 65,925 (180.37) 15,604 N/A
Venture capital
investments ...... (329) 0.94 (755) (0.21) 129.48 (4,739) 12.97 (1,122) 527.68
Tourism .......... (907) 2.59 (1,769) (0.49) 95.04 1,006 (2.75) 238 N/A
Others ........... 2,095 (5.99) (1,076) (0.30) N/A 8,040 (22.01) 1,903 N/A
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............ (35,060) 100.00 359,362 100.00 N/A (36,549) 100.00 (8,651) N/A
EARNINGS BEFORE
INCOME TAX
Telecommunications (110,617) (9.85) (33,517) (6.02) (69.70) (121,613) (1,073.18) (28,784) 262.84
Defense
electronics ...... (20,000) (1.78) 56,180 10.09 N/A -- -- -- N/A
Agro-chemicals ... 1,263,541 112.57 557,824 100.23 (55.85) 65,925 581.76 15,604 (88.18)
Venture capital
investments ...... (43,327) (3.86) (41,472) (7.45) (4.28) 39,585 349.32 9,369 N/A
Tourism .......... 36,298 3.23 22,520 4.05 (37.96) 27,581 243.39 6,528 22.47
Others ........... (3,414) (0.31) (5,006) (0.90) 46.63 11,816 (1.29) (35) (97.08)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............ 1,122,481 100.00 556,529 100.00 (50.42) 23,294 100.00 2,682 (97.96)
Joint general
income
(expenses), net .. (26,697) (46,862) 75.53 (8,250) 879 N/A
Financing
Expenses, net .... (271,955) (182,021) (33.07) (113,935) (26,967) (37.41)
---------- ---------- ---------- ---------- ---------- ----------
Earnings before
income tax ....... 823,829 327,646 (60.23) (98,891) (23,406) N/A
========== ========== ========== ========== ========== ==========
CAPITAL
EXPENDITURES
Telecommunications 21,825 2.57 7,529 28.76 (65.50) 3,365 3.81 796 (55.31)
Agro-chemicals ... 816,287 95.94 -- -- N/A -- -- -- --
Tourism .......... 12,614 1.48 18,410 70.33 45.95 85,049 96.19 20,130 361.97
Other ............ 148 0.01 239 0.91 61.49 -- -- -- N/A
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............ 850,874 100.00 26,178 100.00 (96.92) 88,414 100.00 20,926 237.74
CORPORATE ASSETS . 423 177 (58.16) 200 47 12.99
---------- ---------- ---------- ---------- ---------- ----------
851,297 26,355 (96.90) 88,614 20,973 236.23
========== ========== ========== ========== ========== ==========
62
REVENUES FROM
SALES AND
SERVICES BY
DESTINATION (1)
North America .... 1,302,993 16.67 333,202 45.42 (74.43) 200,634 34.40 47,487 (39.79)
Europe ........... 3,018,700 38.62 51,473 7.02 (98.29) 10,306 1.77 2,439 (79.98)
South America .... 1,945,241 24.89 10,558 1.44 (99.46) 23,670 4.06 5,603 124.19
Asia and
Australia ........ 566,408 7.25 17,486 2.38 (96.91) 5,481 0.94 1,297 (68.65)
Africa ........... 216,853 2.77 15,134 2.06 (93.02) 13,583 2.33 3,215 (10.25)
Israel ........... 765,587 9.80 305,778 41.68 (60.06) 329,579 56.50 78,007 7.78
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............ 7,815,782 100.00 733,631 100.00 (90.61) 583,253 100.00 138,048 (20.50)
========== ========== ========== ========== ========== ========== ========== ========== ==========
(1) Destination to which shipment is made.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
In June 2005, we completed the sale of a portion of our investment in
Telrad. As a result, we ceased to control Telrad, which has resulted in its
deconsolidation during the second half of 2005. Telrad is now included in our
consolidated financial statements according to the equity method since July 1,
2005. As a result of the deconsolidation of Telrad our results of operations for
the years ended December 31, 2005 and 2006 are not comparable, on a line by line
basis, to previous years; however, net earnings is comparable to the prior
periods.
The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.
REVENUES FROM SALES AND SERVICES. Revenues from sales and services
decreased by 20.5% to NIS 583 million in 2006 compared to NIS 734 million in
2005. Revenues for 2005 included NIS 178 million for the first half of 2005 in
respect of Telrad, which was not consolidated during 2006. Our other
subsidiaries showed increased revenues, mainly an increase of NIS 42 million in
Sheraton Moriah's revenues.
Export and international operations, representing 43.5% of our revenues
from sales and services in 2006, decreased by 35% in 2006 compared to 2005, of
which NIS 160 million was related to the impact of the deconsolidation of Telrad
in 2005.
GROUP'S EQUITY IN THE OPERATING RESULTS OF AFFILIATES, NET. Our equity in
the operating results of affiliates, net in 2006 was a loss of NIS 37 million
compared to a profit of NIS 359 million in 2005. Our equity in the operating
results of affiliates, net for 2006 included profit of NIS 66 million in respect
of MA Industries, in comparison with a profit of NIS 359 million in 2005 in
respect of MA Industries. Our equity in the operating results of affiliates, net
for 2006 also included a loss of NIS 100 million in respect of Telrad, which was
consolidated during the first half of 2005. For the second half of 2005 our
equity share in the net loss of Telrad was NIS 26 million. Also included in this
item in 2006 is our equity share in the net loss of ECI in the amount of NIS 3
million, as well as our equity share in the net loss of ECtel in the amount of
NIS 3 million, which is accounted for under the equity method since the third
quarter of 2006. In 2005, our equity share in the net profit of ECI was NIS 53
million. Also included in this item in 2005 is our equity share in the net loss
of Tadiran Communications in the amount of NIS 23 million.
63
OTHER INCOME (EXPENSES), NET. Other income, net, amounted to NIS 104
million in 2006 compared to other income, net of NIS 224 million in 2005. In
2005, we recorded other expenses due to impairment in the value of investments
and assets of Koor CVC in the amount of NIS 69 million and also recorded a
provision for severance compensation of NIS 39 million at Telrad. In 2006, these
items were insignificant. Other income, net, in 2006 included:
o Capital gains of NIS 80 million from sale of investments, mainly the
sale of part of our investment in Elbit and the sale of Followap by
Koor CVC. In 2005, we recorded capital gains of NIS 308 million from
sale of investments, mainly the sale of approximately 10% of our
equity interest in MA Industries and the sale of our equity interest
in Tadiran Communication (33%);
o Management services to affiliated companies of NIS 8 million,
primarily to MA Industries compared to NIS 14 million in 2005; and
o Dividends of NIS 7 million, mainly from Elbit, compared to dividends
of NIS 10 million in 2005.
COST OF SALES AND SERVICES. Cost of sales and services decreased by 24.7%
to NIS 438 million in 2006 compared to NIS 582 million in 2005. Cost of sales
and services for 2005 included NIS 168 million for the first half of 2005 in
respect of Telrad, which was not consolidated during 2006. Our other
subsidiaries' cost of sales and services increased by 5.8%, mainly due to an
increase of NIS 28 million in Sheraton Moriah's cost of sales and services that
was partially setoff by a decrease of NIS 6 million in the cost of sales and
services of Dekolink.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
by 23.8% to NIS 64 million in 2006 compared to NIS 84 million in 2005. Selling
and marketing expenses for 2005 included NIS 19 million for the first half of
2005 in respect of Telrad, which was not consolidated during 2006. Other
subsidiaries' selling and marketing expenses decreased by 1.6%, mainly due to a
decrease of NIS 2 million in MNI's selling and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by 4.3% to NIS 135 million in 2006 compared to NIS 141 million in
2005. General and administrative expenses for 2005 included NIS 14 million for
the first half of 2005 in respect of Telrad, which was not consolidated during
2006. Excluding the impact of the deconsolidation of Telrad in 2006, general and
administrative expenses increased by 6.3%, mainly due to an increase of NIS 7
million in compensation expenses and professional fees at the parent company
level, and an increase of NIS 4 million in the general and administrative
expenses of Sheraton Moriah.
FINANCING EXPENSES, NET. Financing expenses, net were NIS 114 million in
2006 compared to NIS 182 million in 2005, a decrease of 37.4%. Financing
expenses, net for 2005 included NIS 5 million for the first half of 2005 in
respect of Telrad, which was not consolidated during 2006. Excluding the impact
of the deconsolidation of Telrad in 2006, financing expenses, net decreased by
35.6% in 2006, mainly due to a decrease of NIS 21 million at Sheraton Moriah and
64
a decrease of NIS 93 million at the parent company level (including its wholly
owned subsidiaries). Financing expenses decreased in 2006 compared to 2005 due
to the impact of the decrease in the CPI on our CPI-linked long-term loans
(-0.1% in 2006 compared to 2.4% in 2005), and due to the impact of the changes
in the US dollar exchange rate on our dollar-linked loans (a decrease of 8.2% in
2006 compared to an increase of 6.8% in 2005).
INCOME TAX. Income tax recorded in 2006 amounted to NIS 9 million compared
to NIS 80 million in 2005. Income tax expense for 2006 is net of tax income of
NIS 11 million due to final tax assessments received by Tadiran. Income tax for
2005 included NIS 4 million for the first half of 2005 in respect of Telrad,
which was not consolidated during 2006. Excluding the impact of the
deconsolidation of Telrad, income tax in 2005 amounted to NIS 76 million. Taxes
on income as a percentage of revenues in 2006 and 2005 were 1.4% and 6.1%,
respectively.
MINORITY INTEREST IN CONSOLIDATED COMPANIES' RESULTS, NET. Minority
interest in consolidated companies' results, net amounted to expenses of NIS 5
million in 2006 compared to income of NIS 10 million in 2005. The transition
from income in 2005 to expenses in 2006 was mainly due to the decrease in the
minority interest in the losses of Sheraton Moriah as a result of the
improvement in Sheraton Moriah's results of operations.
NET EARNINGS FROM DISCONTINUED OPERATIONS. Net earnings from discontinued
operations (including capital gains from the sale of the discontinued
operations) amounted to NIS 10 million in 2006 compared to NIS 53 million in
2005. Net earnings from discontinued operations in 2006 were comprised of NIS 8
million in respect of Koor Trade and NIS 2 million in respect of Isram. In 2005,
net earnings from discontinued operations were comprised of earnings of NIS 100
million and NIS 2 million in respect of Elisra and Isram, respectively, and net
of losses of NIS 49 million in respect of Koor Trade.
CUMULATIVE EFFECT AS OF THE BEGINNING OF THE YEAR OF CHANGE IN ACCOUNTING
METHOD. Cumulative effect as of the beginning of the year of change in
accounting method amounted to earnings of NIS 63 million in 2006 compared to
losses of NIS 3 million in 2005. In 2006, the cumulative effect resulted from
the transition to Standard No. 22 due to the reversal of provisions for losses
in respect of convertible securities in affiliates (NIS 37 million and NIS 25
million in respect of ECI and MA Industries, respectively). In 2005, the
cumulative effect resulted from the transition to Accounting Standard No. 19,
"Taxes on Income" mainly due to an increase in liabilities for deferred taxes
relating to property.
NET EARNINGS (LOSS). For the reasons mentioned above, we reported net
losses of NIS 41 million in 2006, compared to net earnings of NIS 308 million in
2005.
AGROCHEMICALS BUSINESS
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Earnings before financing expenses.......... 557,824 65,925 15,604
65
Earnings before financing expenses from our agrochemicals business were
NIS 66 million compared to NIS 558 million in 2005. The decrease was primarily
due to the decrease in MA Industries net income for the year. MA Industries'
gross and operating margins decreased in 2006 compared to 2005, due to price
erosion, increase in the prices of raw materials and weakening of its primary
trading currencies. MA Industries' net income was also affected by one-time
accounting adjustments and provisions in the amount of NIS 234 million relating
to legal claims (NIS 89 million), employee termination costs (NIS 68 million),
impairment of intangible assets (NIS 72 million), provision for doubtful debts
and inventory losses (NIS 58 million), which were partially offset by deferred
taxes (NIS 53 million). Earnings before financing expenses from our
agrochemicals business for 2005 included NIS 199 million in capital gains from
the sale of shares in MA Industries in February 2005.
TELECOMMUNICATIONS EQUIPMENT BUSINESS
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 452,433 260,384 61,629
Losses before financing expenses............ (33,517) (121,613) (28,784)
Revenues from sales and services from our telecommunication equipment
business decreased by 42.4% in 2006 to NIS 260 million from NIS 452 million in
2005. The decrease was primarily due to the deconsolidation of Telrad during the
second half of 2005.
Telecommunication equipment business exports amounted to NIS 254 million
in 2006 compared to NIS 427 million in 2005. This decrease was also primarily
due to the deconsolidation of Telrad during the second half of 2005.
Losses before financing expenses from our telecommunication equipment
business were NIS 122 million in 2006 compared to NIS 34 million in 2005. The
increase was primarily due to the increase of NIS 11 million in our equity share
in Telrad's losses, an increase of NIS 10 million in MNI's losses, a decrease of
NIS 59 million in our equity share of ECI's earnings, and a decrease of NIS 1
million in our equity share of Dekolink earnings.
VENTURE CAPITAL BUSINESS
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Earnings (losses) before financing expenses. (41,472) 39,585 9,369
66
As of December 31, 2006, the book value of Koor CVC's investments totaled
approximately NIS 206 million. Earnings (losses) before financing expenses from
our venture capital business improved to earnings of NIS 40 million in 2006
compared to losses of NIS 41 million in 2005. The improvement was primarily due
to a NIS 43 million capital gain recorded by Koor CVC in 2006 following the sale
of its portfolio company Followap Inc. compared to NIS 69 million of provisions
recorded by Koor CVC in 2005 as a result of the decline in value of several of
its portfolio companies, and a capital gain of NIS 31 million as a result of the
initial public offering of its portfolio company Scopus Video Networks Ltd.
(which was sold on January 11, 2007).
TOURISM
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 271,443 312,801 74,036
Earnings before financing expenses.......... 22,520 27,581 6,528
Revenues from sales and services from our tourism business increased 15.2%
to NIS 313 million in 2006 from NIS 271 million in 2005. This increase was
primarily attributable to the increase in sales of Sheraton Moriah as a result
of the increase in tourism to Israel.
Earnings before financing expenses from tourism business were NIS 28
million in 2006, compared to NIS 23 million in 2005.
On December 28, 2006 we sold our entire holding in Isram for total
consideration of $1.26 million. We recorded a capital gain of approximately NIS
8 million in respect of the sale. Pursuant to the sale, Isram's operations have
been presented as a discontinued operation. See Note 24(3) to our consolidated
financial statements included elsewhere in this annual report.
On December 17, 2006 we signed an agreement for the sale of our entire
holding in Sheraton Moriah to Azorim Development and Construction Co. Ltd., for
total consideration of approximately $24 million. The transaction was completed
on April 26, 2007, after receiving all requisite approvals. Out of the total
consideration, we received the first installment in the amount of approximately
$6.3 million on December 21, 2006 and the second installment in the amount of
approximately $8.6 million on the closing date. The remaining outstanding amount
of approximately $9.2 million will be received no later than March 27, 2008.
As of the completion of the transaction, Sheraton Moriah will be presented
as a discontinued operation. See Note 3E(2) to our consolidated financial
statements included elsewhere in this annual report.
67
OTHER BUSINESSES
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 9,755 10,068 2,383
Earnings (losses) before financing expenses. (5,006) 11,816 2,797
Revenues from sales and services from our other businesses increased 3.2%
to slightly more than NIS 10 million in 2006 from slightly less than NIS 10
million in 2005.
In 2006, our other businesses generated earnings before financing expenses
of NIS 12 million compared to losses before financing expenses of NIS 5 million
in 2005. Our newly acquired investment in Epsilon Investment House contributed
NIS 7 million to this segment's earnings for 2006.
DEFENSE ELECTRONICS BUSINESS
Year Ended December 31,
------------------------------------------------
2005 2006 2006
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Earnings (losses) before financing expenses. 56,180 -- --
Earnings before financing expenses from our defense electronics business
amounted to NIS 56 million in 2005 and included capital gains of NIS 72 million
from the sale of Tadiran Communications in November 2005.
Our defense electronics business Elisra was reclassified as a discontinued
operation as a result of the sale in November 2005, as described above. See Note
24(1) to our consolidated financial statements included elsewhere in this annual
report.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
During 2005, we sold part of our investments in MA Industries and Telrad.
As a result, we ceased to control these companies at that time, which resulted
in their deconsolidation during 2005. These companies are now included in our
consolidated financial statements according to the equity method. As a result of
the deconsolidation of these companies and to reflect the nature of our
activities as a holding company, we have classified our statement of operations
in a single-stage format (comparative figures have been reclassified on a
consistent basis). Total revenues and income, including our equity in the
results of affiliates, are presented within revenues. As a result of the
deconsolidation of MA Industries and Telrad, our results of operations for the
year ended December 31, 2005 are not comparable, on a line by line basis, to
previous years; however, net earnings are comparable to the prior periods.
68
The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.
REVENUES FROM SALES AND SERVICES. Revenues from sales and services
decreased 90.6% to NIS 734 million in 2005 compared to NIS 7,816 million in
2004. Revenues for 2004 included NIS 6,895 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 195 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries showed increased revenues, mainly an increase of
NIS 63 million in Dekolink's revenues and an increase of NIS 33 million in the
revenues of Sheraton Moriah.
Export and international operations, representing 58.3% of our revenues
from sales and services in 2005, decreased by 93.9% in 2005 compared to 2004, of
which NIS 6,583 million was related to the impact of the deconsolidation of MA
Industries and Telrad in 2005.
GROUP'S EQUITY IN THE OPERATING RESULTS OF AFFILIATES, NET. Our equity in
the operating results of affiliates, net in 2005 was a profit of NIS 359 million
compared to a loss of NIS 35 million in 2004. Our equity in the operating
results of affiliates, net for 2005 included profit of NIS 356 million in
respect of MA Industries, which was consolidated in 2004, and loss of NIS 26
million for the second half of 2005 in respect of Telrad, which was consolidated
during the same period in 2004. Also included in this item in 2005 are our
equity share in the net profit of ECI in the amount of NIS 53 million and our
equity share in the net loss of Tadiran Communications in the amount of NIS 23
million. In 2004, our equity share in the net loss of ECI was NIS 15 million and
our equity share in the net loss of Tadiran Communications was NIS 20 million,
which was primarily due to the writeoff of part of the purchase price of Tadiran
Communications allocated to in-process research and development.
OTHER INCOME (EXPENSES), NET. Other income, net, amounted to NIS 224
million in 2005 compared to other expenses, net of NIS 72 million in 2004. Other
income, net, in 2005 included:
o Capital gains of NIS 308 million from sale of investments, mainly
the sale of approximately 10% of our equity interest in MA
Industries and the sale of our equity interest in Tadiran
Communication (33%). In 2004, we recorded capital gains of NIS 223
million from the sale of investments, mainly from the sale of 7% of
our equity interest in MA Industries, and the sale of 19% of our
equity interest in Knafaim;
o Impairment in the value of investments and assets of Koor CVC in the
amount of NIS 69 million. In 2004, we recorded an impairment in the
value of investments and assets of NIS 73 million, including a NIS
58 million impairment of Koor CVC's investments;
o Provision for severance compensation of NIS 39 million at Telrad,
compared to NIS 45 million in 2004;
o Management services to affiliated companies of NIS 14 million,
primarily to MA Industries; and
o Goodwill amortization and write-off of NIS 0.5 million, compared to
NIS 132 million in 2004, of which NIS 131 million was at MA
Industries.
69
COST OF SALES AND SERVICES. Cost of sales and services decreased by 88.6%
to NIS 582 million in 2005 compared to NIS 5,111 million in 2004. Cost of sales
and services for 2004 included NIS 4,331 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 204 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries' cost of sales and services increased by 19.3%,
mainly due to an increase of NIS 38 million in Dekolink's cost of sales and
services and an increase of NIS 14 million in the cost of sales and services of
Sheraton Moriah.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
by 92.1% to NIS 84 million in 2005 compared to NIS 1,062 million in 2004.
Selling and marketing expenses for 2004 included NIS 965 million in respect of
MA Industries, which was not consolidated in 2005, and NIS 19 million for the
second half of 2004 in respect of Telrad, which was not consolidated during the
second half of 2005. Other subsidiaries' selling and marketing expenses
increased 38.3%, mainly due to an increase of NIS 13 million in Dekolink's
selling and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by 67.9% to NIS 141 million in 2005 compared to NIS 439 million in
2004. General and administrative expenses for 2004 included NIS 299 million in
respect of MA Industries, which was not consolidated in 2005, and NIS 21 million
for the second half of 2004 in respect of Telrad, which was not consolidated
during the second half of 2005. Excluding the impact of the deconsolidation of
MA Industries and Telrad in 2005, general and administrative expenses increased
38.9%, mainly due to an increase of NIS 12 million in compensation expenses and
professional fees at the corporate level, and an increase NIS 3 million in the
general and administrative expenses of Sheraton Moriah.
FINANCING EXPENSES, NET. Financing expenses, net were NIS 182 million in
2005 compared to NIS 272 million in 2004, a decrease of 33.1%. Financing
expenses, net for 2004 included NIS 134 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 0.6 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Financing expenses, net in respect of companies that were consolidated
both in 2004 and 2005, increased by 29% in 2005, mainly due to an increase of
NIS 16 million at Sheraton Moriah and an increase of NIS 34 million at the
parent company level. Despite the decrease in our net debt at the parent company
level, financing expenses increased in 2005 compared to 2004 due to the impact
of the increase in the CPI on our CPI-linked long-term loans (2.4% in 2005
compared to 1.2% in 2004), and due to the impact of the changes in the US dollar
exchange rate on our dollar-linked loans (an increase of 6.8% in 2005 compared
to a decrease of 1.6% in 2004).
INCOME TAX. Tax expenses recorded in 2005 amounted to NIS 80 million
compared to NIS 272 million in 2004. Tax expenses for 2004 included NIS 234
million in respect of MA Industries, which was not consolidated in 2005, and NIS
49 million for the second half of 2004 in respect of Telrad, which was not
consolidated during the second half of 2005. Excluding the impact of the
deconsolidation of MA Industries and Telrad, income tax in 2004 amounted to
expenses of NIS 17 million. Tax expenses at the parent company level increased
by NIS 96 million, mainly due to the realization of a deferred tax asset,
created in 2004, in connection with the sale of shares of MA Industries in 2005.
Taxes on income as a percentage of revenues in 2005 and 2004 were 10.9% and
3.5%, respectively.
70
MINORITY INTEREST IN CONSOLIDATED COMPANIES' RESULTS, NET. Minority
interest in consolidated companies' results, net amounted to income of NIS 10
million in 2005 compared to expenses of NIS 431 million in 2004. Minority
interest in consolidated companies' results, net for 2004 included NIS 447
million in respect of MA Industries, which was not consolidated in 2005.
Minority interest in consolidated companies' results, excluding MA Industries,
in 2004 amounted to income of NIS 16 million. The decrease in 2005 compared to
2004 was mainly due to the decrease in the minority interest in the losses of
Sheraton Moriah, due to the improvement in Sheraton Moriah's results of
operations.
NET EARNINGS FROM DISCONTINUED OPERATIONS. Net earnings from discontinued
operations (including capital gains from the sale of the discontinued
operations) amounted to NIS 53 million in 2005 compared to NIS 24 million in
2004. In 2005, net earnings from discontinued operations were comprised of
earnings of NIS 100 million and NIS 2 million in respect of Elisra and Isram,
respectively, and net of losses of NIS 49 million in respect of Koor Trade. In
2004, net earnings from discontinued operations were comprised of earnings of
NIS 5 million and NIS 19 million in respect of Elisra and Koor Trade,
respectively. The earnings of Isram in 2004 were de minimis.
CUMULATIVE EFFECT AS OF THE BEGINNING OF THE YEAR OF CHANGE IN ACCOUNTING
METHOD. Cumulative effect as of the beginning of the year of change in
accounting method amounted to losses of NIS 3 million in 2005. The cumulative
effect resulted from the transition to Accounting Standard No. 19, "Taxes on
Income" mainly due to an increase in liabilities for deferred taxes relating to
property.
NET EARNINGS (LOSS). For the reasons mentioned above, we reported net
earnings of NIS 308 million in 2005, compared to NIS 145 million in 2004.
AGROCHEMICALS BUSINESS
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 6,895,238 -- --
Earnings before financing expenses.......... 1,263,541 557,824 132,029
Net earnings 271,820 356,146 84,295
As of January 1, 2005, MA Industries ceased to be consolidated in our
financial statements, and is accounted for according to the equity method. See
Note 3B(2) to the consolidated financial statements included elsewhere in this
annual report.
Earnings before financing expenses from our agrochemicals business were
NIS 558 million compared to NIS 1,264 million in 2004. The decrease was
primarily due to the deconsolidation of MA Industries as of January 1, 2005.
Earnings before financing expenses from our agrochemicals business for 2005 and
2004 include NIS 199 million in capital gains from the sale of shares in MA
Industries in February 2005 and NIS 159 million in capital gains from the sale
of shares in MA Industries in January 2004, respectively.
71
Net earnings from our agrochemicals business were NIS 356 million in 2005
compared to NIS 272 million in 2004. The increase in MA Industries' revenues was
due to the increase in the global agrochemicals market generally, and
particularly in North America and Europe, due to increased sales related to
subsidiaries acquired in 2004 and 2005, as well as the introduction of new
products. Furthermore, MA Industries gross and operating margins increased in
2005 compared to 2004, due to the abovementioned increase in sales, the impact
of the newly-acquired subsidiaries and the strengthening of the primary trading
currencies.
TELECOMMUNICATIONS EQUIPMENT BUSINESS
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 671,531 452,433 107,085
Losses before financing expenses............ (110,617) (33,517) (7,933)
Revenues from sales and services from our telecommunication equipment
business decreased by 32.6% in 2005 to NIS 452 million from NIS 672 million in
2004. The decrease was primarily due to the deconsolidation of Telrad during the
second half of 2005, partially offset by an increase of NIS 63 million in sales
of Dekolink, due to the introduction of new products and expansion of Dekolink's
customer base.
Telecommunication equipment business exports amounted to NIS 427 million
in 2005 compared to NIS 570 million in 2004.
Losses before financing expenses from our telecommunication equipment
business were NIS 34 million in 2005 compared to NIS 111 million in 2004. The
decrease was primarily due to the increase of NIS 68 million in our equity share
in ECI's earnings.
DEFENSE ELECTRONICS BUSINESS
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Earnings (losses) before financing expenses. (20,000) 56,180 13,297
Earnings before financing expenses from our defense electronics business
amounted to NIS 56 million compared to loss before financing expenses of NIS 20
million in 2004. The loss in 2004 resulted primarily from the writeoff of NIS 20
million of the purchase price of Tadiran Communications allocated to in-process
research and development. Earnings before financing expenses from our defense
electronics business include capital gains of NIS 72 million from the sale of
Tadiran Communications in November 2005. See Note 3D to the consolidated
financial statements included elsewhere in this annual report.
72
Our defense electronics business Elisra was reclassified as a discontinued
operation as a result of the sale in November 2005, as described above. See Note
24(1) to the consolidated financial statements included elsewhere in this annual
report. Elisra's revenues from sales and services decreased by 12.6% to NIS 969
million in 2005 compared to NIS 1,109 million in 2004 as a result of the
continued reduction in new orders and further reduction in the Israeli defense
budget. The earnings before financing expenses of the discontinued defense
electronics operation amounted to NIS 75 million in 2005, compared to NIS 16
million in 2004. Earnings before financing expenses of the discontinued defense
electronics operation included capital gains of NIS 148 million from the sale of
Elisra in November 2005. See Note 3D to the consolidated financial statements
included elsewhere in this annual report.
VENTURE CAPITAL BUSINESS
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Losses before financing expenses............ (43,327) (41,472) (9,816)
As of December 31, 2005, the book value of Koor CVC's investments totaled
approximately NIS 166 million. These investments include publicly traded Scopus
Video Networks, or Scopus, in which Koor CVC held an 18% interest on a
fully-diluted basis. During 2005, Koor CVC recorded NIS 69 million of provisions
for the decline in value of several of its portfolio companies. Furthermore, in
2005 Koor CVC recorded NIS 31 million capital gain following the initial public
offering of portfolio company Scopus. The net result of the above was recorded
in our consolidated financial statements under the caption "Other income
(expenses), net".
In 2004, Koor CVC recorded NIS 58 million of provisions for the decline in
value of several of its portfolio companies, net of a NIS 17 million capital
gain following the sale of its entire holdings in its portfolio companies
Riverhead Networks and Envara under the caption "Other income (expenses), net".
TOURISM
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 238,449 271,443 64,247
Earnings before financing expenses.......... 36,298 22,520 5,330
Revenues from sales and services from our tourism business increased by
13.9% to NIS 271 million in 2005 from NIS 238 million in 2004. This increase was
attributable to the increase in sales of Sheraton Moriah as a result of the
increase in tourism to Israel.
73
Earnings before financing expenses from tourism business were NIS 23
million in 2005, compared to NIS 36 million in 2004. Earnings before financing
expenses for 2004 include a capital gain of NIS 51 million from the sale of 19%
of Knafaim.
OTHER BUSINESSES
Year Ended December 31,
------------------------------------------------
2004 2005 2005
--------- --------- ---------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 10,564 9,755 2,309
Losses before financing expenses............ (3,414) (5,006) (1,185)
Revenues from sales and services from our other businesses decreased 7.7%
to slightly less than NIS 10 million in 2005 from slightly more than NIS 10
million in 2004.
In 2005, our other businesses generated losses before financing expenses
of NIS 5 million compared to NIS 3 million in 2004.
QUARTERLY RESULTS
The following table presents unaudited quarterly financial information for
each of the four quarters of the year ended December 31, 2006. Such information
has been prepared on the same basis as our consolidated financial statements.
Quarter Ended Year Ended
------------------------------------------------------ ----------
March June September December December
31, 2006 30, 2006 30, 2006 31, 2006 31, 2006
-------- -------- -------- -------- ----------
(in millions of NIS)
Revenues and earnings .................. 212 153 188 97 650
Earnings (losses) before income tax .... 40 (80) 11 (70) (99)
Net earnings (losses) from
continuing operations .................. 42 (101) 6 (61) (114)
Net earnings (losses) from
discontinued operations ................ (2) 7 1 4 10
Net earnings (losses) .................. 102 (94) 7 (55) (41)
Our operating results may be subject to significant fluctuations in future
periods. Our operating results for any particular quarter are not necessarily
indicative of any future results. Our quarterly operating results may be subject
to significant fluctuations due to various factors, including changes in our
investment portfolio and factors affecting our various segments such as the
length of the sale cycles, the timing and size of orders and shipments to
customers, variations in distribution channels, mix of products, new product
introductions, competitive pressures, agriculture season, and general economic
conditions.
74
RECENT DEVELOPMENTS
On January 11, 2007, we sold all shares held by us and Koor CVC in Scopus
Video Networks Ltd. Our total proceeds from the transaction amounted to
approximately $16 million in cash. As a result of this transaction, we expect to
record a capital gain of approximately NIS 23 million in the first quarter of
2007.
On March 12, 2007 the board of directors of MA Industries resolved to
rescind a former resolution regarding the payment of dividends as a fixed
percentage of net earnings. Instead, the board of directors will examine the
possibility of distributing dividends and the amount thereof from time to time,
in accordance with the investment policy and the needs of MA Industries, and the
existence of sufficient distributable earnings.
On March 12, 2007, the board of directors of MA Industries approved the
commencement of a reorganization plan for MA Industries, based on
recommendations of internal teams assisted by the McKinsey research and
consulting company. In the estimation of MA Industries' management, the
write-offs and costs, to the extent required, in connection with implementation
of the reorganization plan, will not be material. For a more detailed
description of the reorganization plan, see "Item 4 - Information on the Company
- Business Overview - Our Agrochemicals Business - Recent Developments."
On April 26, 2007 we completed the sale of our entire 56.5% shareholding
in Sheraton Moriah to Azorim Tourism Ltd. for total consideration of
approximately $24 million. The first installment in the amount of $6.3 million
was received on December 21, 2006, the second in the amount of approximately
$8.6 million was received on the date of the closing. The remaining amount of
approximately $9.2 million, guaranteed by Azorim, will be received no later than
March 27, 2008. Following the closing of the transaction we were released from
guaranties provided to banks to secure bank debt of Sheraton Moriah in the
amount of approximately $9.2 million. We will record a gain as a result of the
transaction of approximately NIS 14 million in the second quarter of 2007.
On May 8, 2007 we signed an agreement to sell 4.96% of Knafaim Holdings
Ltd., or Knafaim. The shares will be sold at a price per share of $10.47, for
total consideration of approximately $7.4 million. $1.5 million was paid upon
signing and the remainder will be paid upon the closing of the transaction. On
June 5, 2007, the purchaser notified us that it is exercising an option granted
to it to purchase the balance of our shareholding in Knafaim, representing
approximately 4.2% of Knafaim's share capital at the same purchase price, for
total additional consideration of approximately $6.3 million. The closing for
both the initial sale and the option exercise is currently expected to take
place by the end of the second quarter of 2007.
On May 14, 2007 we announced that we are currently considering a
possibility of purchasing an additional 5% to 10% of the outstanding share
capital of MA Industries by means of a tender offer. The timetable, volume and
terms of the possible offer have not yet been determined, and there is no
certainty that such an offer will take place.
75
On May 14, 2007, we announced our intention to voluntarily delist from the
New York Stock Exchange, or NYSE, and to terminate our American Depositary
Receipt, or ADR, program with the Bank of New York, or BoNY. On June 8, 2007, we
filed a Form 25 with the SEC to effect the delisting, which we expect will take
place on June 18, 2007, and on June 20, 2007, we expect to terminate the deposit
agreement with BoNY relating to our ADR program. Subsequent to the termination
of the deposit agreement, ADRs will no longer be transferable. Holders of ADRs
will, however, be entitled to return their ADRs to BoNY before September 18,
2007 and receive the appropriate number of underlying ordinary shares (each ADS
represents 0.20 of an ordinary share), subject to cancellation fees charged by
BoNY pursuant to the deposit agreement.
On May 14, 2007, we also announced that we intend to terminate the
registration of our ADRs and ordinary shares with the U.S. Securities and
Exchange Commission, or SEC, as soon as possible following the delisting from
the NYSE, thereby terminating our obligation to file annual and other reports
with the SEC. We currently expect such deregistration to take effect not earlier
than the third quarter of 2007.
Our decision to delist and deregister was made after careful consideration
by our board of directors of various factors, including (i) the limited number
of our U.S. holders of record, (ii) the low trading volume of our ADR's on the
NYSE compared to the trading volume of our ordinary shares on the Tel Aviv Stock
Exchange, or TASE, (iii) the ongoing costs of maintaining the NYSE listing and
ADR program, (iv) the significant costs associated with being a reporting
company under the U.S. securities laws, including costs arising from compliance
with the provisions of the Sarbanes-Oxley Act of 2002, (v) the continued trading
of our ordinary shares on the TASE and (vi) our continuing obligation to file
public reports with the Israeli Securities Authority and the TASE in accordance
with the Israeli securities laws and regulations.
EFFECTIVE CORPORATE TAX RATE
We do not file a consolidated tax return with our subsidiaries, and we are
taxed only on our own income. Most of our subsidiaries file their own tax
returns, based on their own taxable income. Our income tax obligations and our
Israeli subsidiaries' income tax obligations are based on profits determined in
nominal NIS for Israeli statutory purposes, adjusted for tax purposes, in terms
of end-of-year Israeli currency, in accordance with changes in the CPI. The tax
provision in our financial statements does not directly relate to income shown
on such statements. See Note 16H (2) to our consolidated financial statements
included elsewhere in this annual report for the reconciliation between the
theoretical and actual tax expense. Non-Israeli subsidiaries are taxed based
upon tax laws in their respective countries of residence. The effective
corporate tax rate is affected mainly by tax benefits arising from reduced tax
rates applied to approved enterprises, utilization of tax loss carry forwards
for which no deferred taxes were recorded, the effect of the Inflationary
Adjustment Law on Israeli companies, whose functional currency is the dollar,
and the disallowance of provisions for anticipated losses from the sale of
assets. In 2006, we had a loss before taxes of NIS 99 million. See Note 16H to
our consolidated financial statements included elsewhere in this annual report.
76
LIQUIDITY AND CAPITAL RESOURCES
We finance our corporate level activities principally through the proceeds
from divestitures, management fees and dividends we receive from our
subsidiaries and affiliates and through debt financing. In 2006 and 2005, we
received management fees in the amount of NIS 7 million and NIS 20 million,
respectively. In addition, in each of 2006 and 2005 we received NIS 114 million
and NIS 162 million, respectively, in distributions from subsidiaries and
affiliates, of which NIS 97 million in 2006 and NIS 82 million in 2005 was
received from MA Industries. Of the NIS 276 million in distributions we received
in 2005 and 2006 combined, NIS 62 million was received as a liquidating
distribution in respect of our wholly-owned subsidiary, Tadiran Ltd.
Our shareholders' equity at December 31, 2006 decreased by 11.7% to NIS
2,189 million, compared to NIS 2,478 million at December 31, 2005. The decrease
in 2006 was primarily due to the decrease in our net earnings and in the
cumulative foreign currency translation adjustments.
Working capital at December 31, 2006 was NIS 885 million compared to NIS
543 million at December 31, 2005. The increase in 2006 was primarily due to the
increase in working capital at the parent company level that stemmed from, among
other things, the refinancing of the short-term bank debt.
Long-term debt totaled NIS 2,905 million at December 31, 2006, or 52.8% of
total assets on that date, compared to NIS 2,000 million at December 31, 2005,
or 37.8% of total assets on that date.
Total debt at December 31, 2006 was NIS 2,959 million, or 53.8% of total
assets, compared to NIS 2,272 million, or 43.0% of total assets, at December 31,
2005.
In accordance with several of our financing agreements, we and several of
our subsidiaries and affiliates undertook to maintain certain financial
covenants, including minimum shareholders' equity and debt capital, ratio of
shareholders' equity to debt capital, and a ban on creating pledges without the
advance consent of the banks providing the financing. We also undertook to use
the proceeds from the sale of certain assets in certain circumstances to repay a
portion of our existing debt. As of December 31, 2006 and March 31, 2007, we and
our relevant subsidiaries and affiliates are in compliance with the above
covenants.
RECENT DEVELOPMENTS
On May 10, 2007, we completed an offering to institutional investors in
Israel of additional Series H debentures (the same series of debentures we
issued in August 2006) with a par value of approximately NIS 595 million. The
debentures are linked to the Israeli CPI and bear annual interest of 5.1%. The
debentures will be repaid in five equal installments on September 1 of each year
from 2012 through 2016. The interest is payable on the outstanding balance of
the debentures, on September 1 of each year from 2007 through 2016. The Israeli
Securities Authority and the Tel Aviv Stock Exchange approved the listing of the
debentures for trading on the Tel Aviv Stock Exchange. The sale of the
debentures by the institutional investors will be subject to lock-up
arrangements provided under the Israeli Securities Law, 1968 and its
regulations. In connection with this debenture issuance, we received aggregate
proceeds of approximately NIS 640 million, including a premium of approximately
NIS 23 million and an advance payment of approximately NIS 22 million in respect
of the cumulative interest to be paid on the debentures for the period from
August 20, 2006 through the issuance date. As a result of the premium we
received in connection with this offering, the debentures have an implied
effective annual interest rate of 4.05%, linked to the Israeli CPI.
77
SUMMARY OF OUR CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
For purposes of presenting the approximate cash flows that will be
required to meet our and our subsidiaries' respective material contractual
obligations, the following table presents a summary of those obligations, as of
December 31, 2006:
Payments Due by Period
----------------------------------------------------------------
(in millions of NIS)
Less Than 2-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------------- ------ --------- ----- ----- -------
Debt to Banks(1)........................ 2,768 147 821 1,356 444
Debentures(1)........................... 1,311 47 92 480 692
Operating Lease Obligations............. 110 19 30 25 36
Other Obligations(2).................... 48 1 16 2 29
TOTAL CONTRACTUAL CASH OBLIGATIONS...... 4,233 215 946 1,864 1,208
(1) Includes future interest payments in accordance with applicable interest
rates and linkage bases detailed in Note 15 to our financial statements
included elsewhere in this annual report. The Israeli CPI is assumed to
increase 2% per annum, LIBOR interest rate and Prime interest rate
published by the Israeli central bank are assumed to be 5.3% and 6.0%,
respectively and dollar exchange rate is assumed to remain as at December
31, 2006.
(2) Includes mainly loans from shareholders in subsidiaries and receipts from
time-sharing units at Sheraton-Moriah.
For purposes of presenting the approximate cash flows that will be
required to meet our and our subsidiaries' respective other commercial
commitments, the following table presents a summary of those commitments, as of
December 31, 2006:
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------
(in millions of NIS)
Total Less Than 2-3 4-5 After
Other Commercial Commitments Commitment 1 Year Years Years 5 Years
-------------------------------------- ---------- --------- ----- ----- -------
Guarantees(1)......................... 141 1 - 140
Commitments for investment in Venture
Capital Funds(2)...................... 5 3 2 - -
Commitments for investment in
Indivision(3) 57 25 32 - -
TOTAL COMMERCIAL COMMITMENTS.......... 203 29 34 - 140
78
(1) Includes: (i) a guarantee Bezeq (Israeli Telecommunications Company)
received from Koor in the amount of NIS 133 million; and (ii) guarantees
by us for affiliates and other non-consolidated companies in the amount of
approximately NIS 8 million.
Excludes: guarantees in the amount of NIS 1,117 million granted to banks
in respect of loans of subsidiaries consolidated in these financial
statements, of which NIS 1,028 million relates to a wholly-owned
subsidiary.
See Note 22C to our consolidated financial statements included elsewhere
in this annual report.
(2) This amount represents Koor CVC's remaining obligation for investment in
its portfolio funds, which may be drawn upon by the funds over the next 2
years, based on their needs. See Note 18B4 to our consolidated financial
statements included elsewhere in this annual report.
(3) This amount represents Koor's remaining obligation for investment in
Indivision India Partners (Indivision), which may be drawn upon by
Indivision over the next 4 years, based on their needs. See Note 18B5 to
our consolidated financial statements included elsewhere in this annual
report.
CASH FLOWS
Cash and cash equivalents decreased by NIS 32 million in 2006 compared to
2005.
Cash flows generated by operating activities in 2006 were NIS 7 million,
compared to cash flows used in operating activities of NIS 175 million in 2005.
The increase in cash flows from operating activities stems mainly from cash
generated by discontinued operations of NIS 24 million in 2006 compared to cash
used in discontinued operations of NIS 168 million in 2005, minority interest in
earnings of subsidiaries of NIS 5 million in 2006 compared to minority interest
in losses of subsidiaries of NIS 10 million in 2005; equity losses in operating
results of affiliates net of dividends of NIS 138 million in 2006 compared to
equity earnings of NIS 268 million in 2005, and zero net capital gain from the
sale of investments in formerly consolidated subsidiaries in 2006 compared to
NIS 205 million in 2005. The increase in cash flows from operating activities
was partially offset by the following: changes in deferred taxes of NIS 15
million in 2006 compared to NIS 71 million in 2005, inflationary appreciation of
principal of long-term loans and other liabilities of NIS 26 million in 2006
compared to inflationary erosion of NIS 36 million in 2005, a reserve in value
of assets and investments on NIS 2 million in 2006 compared to an impairment of
NIS 69 million in 2005, a cumulative effect as at the beginning of the year of
change in accounting method of NIS 63 million compared with NIS 3 million in
2005, a decrease in trade receivables and other receivables of NIS 31 million
compared with an increase of NIS 29 million in 2005, and a decrease in trade
payables and other payables of NIS 39 million in 2006, compared to an increase
of NIS 69 million in 2005. Net cash inflow generated by discontinued operating
activities (mainly Isram) was NIS 24 million in 2006, compared to cash used in
discontinued operating activities of NIS 168 million in 2005 (mainly Elisra).
Cash flows used in investing activities in 2006 were NIS 802 million,
compared to cash generated by investing activities of NIS 419 million in 2005.
Cash used for the investments in affiliates (mainly MA Industries) was NIS 925
million in 2006, compared to no such investments in 2005. There were no proceeds
from realization of investments in formerly consolidated subsidiaries in 2006,
compared to proceeds of NIS 200 million in 2005 (from the sale of shares in MA
Industries). Proceeds from sales of subsidiaries and affiliated companies and
others were NIS 182 million (mainly the sale of shares of Elbit Systems),
79
compared to NIS 645 million in 2005 (mainly the sale of shares of Tadiran
Communications). On the other hand, proceeds from a decrease in other
investments were NIS 2 million, compared to investment in other investments of
NIS 352 million in 2005 (mainly Elbit Systems). Furthermore, in 2006, cash
generated by the decrease in short-term deposits and investments amounted to NIS
2 million, compared to cash used to increase short-term deposits and investments
of NIS 167 million in 2005. Net cash outflow used in investing activities of
discontinued operations (mainly Isram) was NIS 15 million in 2006, compared to
cash generated by investing activities of discontinued operations of NIS 144
million in 2005 (mainly Elisra).
Financing activities during 2006 generated NIS 727 million, compared to
cash used in financing activities of NIS 553 million during 2005. Proceeds from
issuance of debentures generated NIS 594 million in 2006, compared to NIS 376
million in 2005. Long-term loans received in 2006 amounted to NIS 199 million,
compared to NIS 1,338 million in 2005. The loans were received mainly at the
parent company level. Repayment of long-term loans in 2006 amounted to NIS 67
million compared to NIS 1,886 million in 2005. Loans were repaid mainly at the
parent company level. Short-term credit, net, decreased by NIS 13 million in
2006, compared to a decrease of NIS 475 million in 2005. Net cash outflow used
in financing activities of discontinued operations (mainly Koor Trade) was NIS 2
million in 2006, compared to cash generated by financing activities of
discontinued operations of NIS 15 million in 2005 (mainly Elisra).
TREND INFORMATION
Our financial condition and results of operation may be subject to
significant fluctuations in future periods. Our past financial condition and
results of operation are not necessarily indicative of any future results. Our
future financial condition and results of operation may be subject to
significant fluctuations due to various factors, including changes in our
investment portfolio due to the acquisition or divestiture of subsidiaries or
other companies, and factors affecting our various segments such as the length
of the sale cycles, the timing and size of orders and shipments to customers,
variations in distribution channels, mix of products, new product introductions,
competitive pressures and general economic conditions.
OFF-BALANCE SHEET ARRANGEMENTS
The only off-balance sheet arrangements we have that are reasonably likely
to have a material effect on our financial condition, operating results,
liquidity or capital resources are the guarantees and commitments described
above under "Liquidity and Capital Resources -- Summary of our Contractual
Obligations and Commercial Commitments."
80
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth, as of March 31, 2007, the name, age and
position of each of our directors and executive officers:
Jonathan B. Kolber 45 Chairman of the Board of Directors
Nochi Dankner 52 Director
Avraham (Avi) Fischer 51 Director
Isaac Manor 66 Director
Zvi Livnat 53 Director
Ami Erel 60 Director
Marc Schimmel 43 Director
Rafi Bisker 55 Director
Gideon Lahav(1) 77 Director
Dr. Ayelet Ben Ezer(1) (2) (3) 43 Director
Shlomo Risman(1)(2)(4) 72 Director
Avraham Asheri(1) 69 Director
Raanan Cohen 39 Chief Executive Officer
David (Didi) Paz 36 Executive Vice President
Shlomo Heller 64 General Counsel and Corporate
Secretary
Michal Yageel 37 Corporate Controller
----------
(1) Member of the Audit Committee.
(2) External director. Under the Israeli Companies Law, 1999, publicly held
companies in Israel are required to appoint at least two "external
directors" who serve for three-year terms, as described below. Our
external directors were appointed in September 2006.
(3) Serves on the Audit Committee as the "Director with Professional
Expertise" as defined by Israeli Companies Law.
(4) Serves on the Audit Committee as the "Director with Financial and
Accounting Expertise" as defined by Israeli Companies Law and as the
"audit committee financial expert" as defined in Item 16A of Form 20-F
under the Exchange Act.
Set forth below is a biographical summary of each of our above-named
directors and executive officers.
JONATHAN B. KOLBER has served as Chairman of the Board of Koor since
August 1, 2006. From July 1, 1998 until July 27, 2006, Mr. Kolber served as
Chief Executive Officer of Koor. Mr. Kolber serves as a director of several
Israeli companies, including ECI Telecom Ltd., Makhteshim Agan Industries Ltd,
Telrad Networks Ltd. and Epsilon Investment House Ltd. Mr. Kolber has a B.A. in
Near Eastern Languages and Civilizations from Harvard University and a
Certificate on Advanced Arabic from the American University of Cairo.
81
NOCHI DANKNER serves as Chairman of IDB Holding Corporation Ltd., IDB
Development Corporation Ltd., Discount Investment Corporation Ltd., Clal
Industries and Investments Ltd., Ganden Holdings Ltd., Ganden Investments I.D.B.
Ltd., Ganden Holdings in Real Estate (2000) Ltd. and Ganden Investments 2000
Ltd. Mr. Dankner serves as Co-Chairman of Ganden Tourism and Aviation Ltd.,
Ganden Holdings in Tourism Ltd. and Israir Airlines and Tourism Ltd. Mr. Dankner
also serves as a member of the board of directors of the following companies:
Clal Insurance Enterprises Holdings Ltd., Clal Insurance Company Ltd., Super-Sol
Ltd., Cellcom Israel Ltd., Mashav Initiating & Development Ltd., Nesher Israeli
Cement Enterprises Ltd., Property and Building Corporation Ltd., American
Israeli Paper Mills Ltd., Elron Electronic Industries Ltd., Makhteshim Agan
Industries Ltd., Arei Barcelona (1997) Management Ltd., Open-Sky Ltd., Tomahawk
Investments Ltd., Yobert Investments Ltd., Peleg Dan Investments Ltd., Oshir
Holdings Ltd., Ronud Holdings (1992) Ltd. and Luck Time Ltd. Mr. Dankner holds a
Bachelor's degree in Law and Political Science from Tel Aviv University.
AVRAHAM (AVI) FISCHER serves as Executive Vice President of IDB Holding
Corporation Ltd., the Deputy Chairman of IDB Development Corporation Ltd. and
Co-Chief Executive Officer of Clal Industries & Investments Ltd. In addition,
Mr. Fischer is a partner of the law firm of Fischer Behar Chen Well Orion & Co.,
of Tel Aviv, Israel. Mr. Fischer is also the co-founder and Vice-Chairman of
Ganden Holdings Ltd. and the co-founder and Co-Chairman of Ganden Tourism and
Aviation Ltd. Mr. Fischer serves as a member of the board of directors of the
following companies: IDB Development Corporation Ltd., ECI Telecom Ltd.,
Discount Investment Corporation Ltd., Elron Electronic Industries Ltd., American
Israeli Paper Mills Ltd., Makhteshim Agan Industries Ltd., GVT (Holdings) N.V.,
Ganden Holdings in Tourism Ltd., Ganden Investment in IDB Ltd., Ganden Holdings
(2000) Ltd., Vyyo Inc. and other, privately held, corporations. Mr. Fischer is a
co-chairman of "Matan - Your Way to Give", a non-profit organization. Mr.
Fischer holds a law degree from Tel Aviv University, and is a member of the
Israel Bar Association.
ISAAC MANOR serves as Chairman of David Lubinski Ltd. and several of its
affiliates and as Co-Chairman of IDB Holding Corporation Ltd. Mr. Manor serves
as a member of the board of many companies, including: Discount Investment
Corporation Ltd., IDB Development Corporation Ltd., Makhteshim Agan Industries
Ltd., Supersol Ltd., Cellcom Israel Ltd., Mashav Initiating and Development
Ltd., Nesher Israel Cement Enterprises Ltd., American Israeli Paper Mills Ltd.,
Property and Building Corporation Ltd., Clal Industries and Investments Ltd.,
Clal Insurance Enterprises Holdings Ltd. and Union Bank Ltd. Mr. Manor holds a
Master's degree in Business Administration from The Hebrew University in
Jerusalem.
ZVI LIVNAT serves as Co-Chief Executive Officer of Clal Industries and
Investments Ltd., as Deputy Chairman of IDB Development Corporation Ltd., as a
member of the board of directors and Executive Vice President of IDB Holding
Corporation Ltd., as Chairman of Nesher Israel Cement Enterprises Ltd., as
Chairman of Mashav Initiating and Development Ltd., as Chairman of American
Israeli Paper Mills Ltd. and as Chairman of Golf & Co. Ltd. Mr. Livnat also
serves as a member of the board of directors of the following companies: IDB
Development Corporation Ltd., Discount Investment Corporation Ltd., Taavura
Holdings Ltd., Taavura Cement Containers Ltd., Supersol Ltd., Kitan Industries
LTD., Makhteshim Agan Industries Ltd., Jaf-Ora Ltd. and other companies held by
IDB Group, Taavura Group and Avraham Livnat Group. Mr. Livnat holds a HND
Business Studies & Transport (CIT) from Dorset Institute of Higher Education,
Bournemouth, United Kingdom.
82
AMI EREL serves as President and Chief Executive Officer of Discount
Investment Corporation Ltd. and of NetVision Ltd. Mr. Erel also serves as
Chairman of Cellcom Israel Ltd. and as a director of Elron Electronic Industries
Ltd., Property and Building Corporation Ltd., Super-Sol Ltd. and Makhteshim Agan
Industries Ltd. Mr. Erel also serves as Chairman or a member of the board of
directors of other companies in the Discount Investment and Elron groups. In the
past, Mr. Erel served as a director of Elbit Systems Ltd. (1999-2004), as
Chairman and Chief Executive Officer of Elron Electronic Industries (1999-2001)
and as President and Chief Executive Officer of Bezeq, The Israel
Telecommunications Corp. Ltd. (1997-1999). Mr. Erel also serves as Chairman of
the Executive Committee of Manufacturers Association of Israel (since January
2005) while prior to that (from 2000 to 2004), he served as Chairman of the
Board of Israel Association of Electronics and Information Industries. Mr. Erel
holds a Bachelor of Science degree in electronic engineering from the Technion,
the Israel Institute of Technology, in Haifa.
MARC SCHIMMEL serves as a Director of UKI Investments, the Schimmel
family's investment arm. After graduating from University in 1985, Marc entered
the Schimmel family's real-estate business, one of the largest private
real-estate groups in the United Kingdom. Marc, along with his brother Jacob
Schimmel, are responsible for the family's substantial interests in real estate,
financial services, technology, aviation, tourism and telecommunications. The
family's business interests are centred in the United Kingdom, France and
Israel, but with growing involvement in Eastern Europe and the United States.
Mr. Schimmel serves as a member of the board of directors of Property and
Building Corporation Ltd., Bayside Land Corporation Ltd. and Clal Industries and
Investments Ltd. In addition, Mr. Schimmel is actively involved in communal
affairs in London and sits on the board of various bodies involved in Education
and Social Affairs. Mr. Schimmel holds a Bachelor's degree in business
administration from the State University of New York.
RAFI BISKER serves as Chairman of Property and Building Corporation Ltd.,
Bayside Land Corporation Ltd. and Hadarim Properties Ltd. In addition, Mr.
Bisker serves as a member of the board of directors of the following companies:
Ganden Holdings Ltd. and other companies in the Ganden group, IDB Holding
Corporation Ltd., IDB Development Corporation Ltd., Discount Investment
Corporation Ltd., Clal Industries and Investments Ltd., Supersol Ltd., Cellcom
Israel Ltd., Ispro the Israeli Properties Rental Corporation Ltd., Mehadrin
Ltd., Property and Building International Investments (2005) Ltd. and other
companies in the IDB group. Mr. Bisker previously served as Chief Executive
Officer of Ganden Holdings Ltd., Chairman of Azorim Properties Ltd. and Chief
Executive Officer of Dankner Investments Ltd. Mr. Bisker holds a B.Sc. in civil
engineering from the technion Israel Institute of Technology, Haifa.
GIDEON LAHAV serves as a director and Chairman of the Audit Committee of
Discount Investment Corporation Ltd. Mr. Lahav also serves as a member of the
board of directors of Paz Oil Company Ltd. and First International Bank of
Israel Ltd. Mr. Lahav holds a Bachelor's degree in Economics from The Hebrew
University in Jerusalem.
83
DR. AYELET BEN EZER holds a Ph. D. in Law from the Tel Aviv University Law
Faculty. Over the last few years, Dr. Ben Ezer has been a faculty member and
lecturer primarily in the area of Private International Law, Law of Torts and in
Corporate Law in several leading Israeli academic institutions including the Tel
Aviv University, University of Haifa, the Interdisciplinary Center Herzeliya and
the University of Administration. Dr. Ben Ezer has also published a book and
articles in several areas relating to Private International Law and the Law of
Torts in Israeli and international publications. Dr. Ben Ezer currently serves
as Vice President for Special Projects in the Interdisciplinary Center
Herzeliya.
SHLOMO RISMAN serves as General Director of the Farmers Federation of
Israel and is a member of the managements of Amir Ltd. and Nahal Farmers
Accounts Management Ltd. Mr. Risman has also served as a director and member of
the finance committees of some of Israel's largest industrial corporations. Mr.
Risman is a member of the Board of Governors of the Technion Israel Institute
for Technology, a member of the Counsel of Israel's National Insurance, also
serving as Chairman of the building and finance committees. Mr. Risman also
serves as a member of the CEO Committee of Israel's Economic Organizations
Coordination Chamber and a member of many Israeli public non-profit
organizations. In the past, Mr. Risman served many years as a director of the
Israel Electric Corporation, and served, in this capacity, as Chairman of the
Board-designated Organization and Manpower committee. Mr. Risman also served as
a director on the board of directors of several Israeli insurance companies and
a member of the board of directors of Bank Leumi's Provident Funds.
AVRAHAM ASHERI is an economic and financial advisor. Mr. Asheri is a
member of the boards of directors of Discount Mortgage Bank Ltd., Africa Israel
Investments Ltd., Elron Electronics Industries Ltd., Micronet Ltd. and Elbit
Systems Ltd. Mr. Asheri was the President and Chief Executive Officer of Israel
Discount Bank from November 1991 until July 1998. Prior to joining Israel
Discount Bank in 1983 as Senior Executive Vice President and a member of its
management committee, Mr. Asheri held the position of Director General of the
Ministry of Industry and Trade. During his 23 years at the Ministry of Industry
and Trade and at the Ministry of Finance, Mr. Asheri held several key offices in
Israel and abroad, including Managing Director of the Investment Center in
Israel, and Trade Commissioner of Israel to the United States. Mr. Asheri holds
a bachelors degree in economics and political science from the Hebrew University
in Jerusalem.
RAANAN COHEN was appointed Chief Executive Officer of Koor in July 2006.
He also serves asVice President of Discount Investments Corporation Ltd., or
DIC, Koor's controlling shareholder, since August 2001 and previously served as
Executive Assistant to the Chief Executive Officer of DIC from 1999. Mr. Cohen
served as President and Chief Executive Officer of Scailex Corporation Ltd.
(formerly Scitex) from 2004 to July 2006. Prior to joining DIC, Mr. Cohen was an
associate with McKinsey & Company, Inc. in London from 1997. Mr. Cohen is a
lawyer, admitted to the Israel Bar. Mr. Cohen is a member of the board of
directors of a number of companies in the IDB group, including Makhteshim Agan
Industries Ltd., ECI Telecom Ltd., Cellcom Israel Ltd. and Property & Building
Corporation Ltd. Mr. Cohen holds bachelor's degrees in law and in economics from
Tel Aviv University and a masters degree in management from J.L. Kellogg
Graduate School of Management at Northwestern University.
84
DAVID PAZ was appointed Executive Vice President of Koor in September
2006. He also serves as Managing Director of Koor CVC. Previously, Mr. Paz
served as Executive Assistant to the Senior Deputy Chief Executive Officer of
IDB Development Corporation Ltd. from 2003 and as Executive Assistant to the
Chief Executive Officer of Ganden Tourism and Aviation Ltd. from 2000. Mr. Paz
is a lawyer, admitted to the Israel Bar, and from 1998 to 2000 he served as an
attorney with M. Seligman & Co., an Israeli law firm. He is the Chairman of the
Board of Directors of The Third Millennium - Tourism and Recreation Holdings
Ltd. Mr. Paz is also a member of the board of directors of Simbionix USA Corp.,
Omsys Communications and Signal Processing Ltd., NSC - Natural Speech
Recognition Ltd., Diesenhaus-Unitours Ltd. and its subsidiaries, Open Sky Ltd.
and its subsidiaries, AVIAREPS AG and additional companies within the Clal
Tourism and Ganden Tourism Groups. Mr. Paz holds bachelor's degrees in law and
in economics from Tel Aviv University.
SHLOMO HELLER has been General Counsel and Corporate Secretary of Koor
since August 1997. From 1990 to 1997, Mr. Heller served as the General Counsel
of United Mizrahi Bank Ltd. Mr. Heller also serves as a director of several
other companies within Koor. Mr. Heller holds a bachelor's degree in law from
Bar Ilan University.
MICHAL YAGEEL has served as Corporate Controller of Koor since August
2004. From December 1999 to July 2004, she served as Corporate Controller and
Deputy Chief Financial Officer of Super-Sol Ltd. From 1998 through 1999 she was
an audit manager at KPMG Somekh Chaikin, having joined Somekh Chaikin in 1992.
Ms Yageel is a qualified CPA and holds an MBA from the Tel Aviv University and a
BA in Accounting and Economics from the Hebrew University in Jerusalem.
COMPENSATION
The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (28 persons, including compensation
to our former directors, Chief Executive Officer, President and three Vice
Presidents) during 2006 consisted of approximately $11.2 million (of which
approximately $9.3 million relates to the above office holders), in salaries,
fees, bonuses, severance payments, commissions and directors' fees, excluding
expenses (including business travel, professional and business association dues
and expenses) reimbursed to officers and other fringe benefits commonly
reimbursed or paid to such officers and directors by companies in Israel.
All of our directors received compensation identical to that received by
our external directors as described below.
Compensation and reimbursement for external directors (as described below)
is statutorily determined pursuant to a formula stated by the Israeli Companies
Law, 1999, which became effective on February 1, 2000, and which we refer to in
this annual report as the Companies Law, and we adopted the highest compensation
payable pursuant to the formula. Compensation and reimbursement of all other
directors who do not serve as officers are the same as the statutory rates paid
to external directors pursuant to a decision of our shareholders at our annual
general meeting. For additional information concerning the compensation of
directors, see Note 26B to our consolidated financial statements included
elsewhere in this annual report.
85
In addition, according to decisions of our shareholders at the annual
general meetings of shareholders held on July 23, 2003, and September 12, 2004,
eight former directors (including former external directors), have each been
granted 50,000 options under the 2003 Stock Option Plan which is described
below. All those directors have since resigned.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
BOARD PRACTICES
COMPOSITION OF BOARD; ELECTION OF DIRECTORS
Pursuant to our articles of association, the number of directors serving
on the board is required to be not less than five. The appointment of members to
the board of directors, their replacement and removal, and the appointment of
the chairman of the board of directors requires approval by our shareholders by
ordinary resolution. Each member of the board of directors remains in office
until his/her office is vacated due to any one of the following events: death,
legal incompetence, bankruptcy, resignation or removal at a shareholders
meeting. Our chief executive officer is appointed by the board of directors. Our
executive officers serve at the discretion of our chief executive officer
pursuant to powers delegated to him by our board of directors.
The board may appoint committees of the board and delegate to such
committees the powers of the board as it deems appropriate, unless the Companies
Law restricts it. Notwithstanding the foregoing, the board may, from time to
time, revoke the delegation made to a committee of its powers and authorities or
a portion thereof. The board has appointed an Audit Committee.
EXTERNAL DIRECTORS; INDEPENDENT DIRECTORS
ISRAELI COMPANIES LAW REQUIREMENTS
Under the Companies Law, companies incorporated under the laws of Israel
whose shares have been offered to the public inside or outside of Israel are
required to appoint at least two "external directors". The Companies' Law
provides that a person may not be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve as an
external director, or had during the two years preceding that date, any
affiliation with us or any entity controlling, controlled by or under common
control with us. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular
basis;
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o control; and
o service as an office holder.
No person may serve as an external director if the person's position or
other business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or may otherwise interfere
with the person's ability to serve as an external director.
Under a recent amendment to the Companies Law, at least one of the
external directors is required to have "financial and accounting expertise" and
the other external directors are required to have "professional expertise." The
terms "financial and accounting expertise" and "professional expertise" have
been defined by regulations adopted according to the Companies Law.
External directors are to be elected by majority vote at a shareholders'
meeting, provided that either:
(1) The majority of shares voted at the meeting, including at least
one-third of the shares of the non-controlling shareholders voted at the
meeting, vote in favor of election of the director; or
(2) The total number of shares of non-controlling shareholders voted
against the election of the director does not exceed one percent of the
aggregate voting rights.
The initial term of an external director is three years and may be
extended for an additional three years. Both of our external directors are
members of our audit committee.
An external director is entitled to compensation as provided in the
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an external director.
NEW YORK STOCK EXCHANGE REQUIREMENTS
Our ADSs are listed on the New York Stock Exchange, or NYSE, and we are
subject to the rules of the NYSE applicable to listed companies (for information
regarding our recently announced intention to delist from the NYSE, cancel our
ADR program and terminate our registration under the Exchange Act, see Item 9,
"The Offer and Listing - Trading in our ADSs - Recent Developments"). Under the
current NYSE rules, we are required to have an audit committee consisting of at
least three directors, all of who must be independent. The independence standard
under the NYSE rules generally excludes (1) any person who is an employee of a
company or its affiliates or any person who is an immediate family member of an
executive officer of a company or its affiliates, until the lapse of three years
from the termination of such employment, (2) any person who is a partner,
controlling shareholder or executive officer of an organization that has a
business relationship with a company or who has a direct business relationship
with a company, unless the board of directors of the company determines that the
business relationship does not interfere with such person's independent
judgment, or unless three years have lapsed from the termination of such
relationship or his status as a partner, controlling shareholder or executive
officer, and (3) any person who is employed as an executive of another
corporation where any of the company's executives serves on that corporation's
compensation committee. See "Audit Committee - New York Stock Exchange
Requirements" for a description of the NYSE rules that became effective with
respect to Koor on July 31, 2005.
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AUDIT COMMITTEE
ISRAELI COMPANIES LAW REQUIREMENTS
The Companies Law requires public companies to appoint an audit committee.
The responsibilities of the audit committee under the Companies Law include
identifying irregularities in the management of our business and approving
related party transactions as required by law. The audit committee is also
responsible for recommending to our shareholders the appointment of our external
auditors, for approval of the amounts to be paid to our external auditors and
for assisting our board of directors in overseeing the work of our external
auditors. The audit committee has also adopted procedures for handling
complaints regarding accounting and auditing matters, including anonymous and
confidential methods for addressing concerns raised by employees. Under the
Companies Law, an audit committee must consist of at least three directors,
including at least two external directors. The chairman of the board of
directors, any director employed by or otherwise providing services to us, and a
controlling shareholder or any relative of a controlling shareholder, may not be
a member of the audit committee.
NEW YORK STOCK EXCHANGE REQUIREMENTS
Under the current NYSE rules, we are required to maintain an audit
committee consisting of independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise. Our audit committee complies with these requirements. The
responsibilities of the audit committee under the NYSE rules include evaluating
the independence of a company's outside auditors.
Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission, or SEC, issued new rules which, among other things, require the NYSE
to impose independence requirements on each member of the audit committees of
listed companies. The NYSE adopted rules that comply with the SEC's requirements
and became effective with respect to Koor on July 31, 2005.
The requirements implement two basic criteria for determining
independence: (i) audit committee members would be barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members of an issuer
that is not an investment company may not be an "affiliated person" of the
issuer or any subsidiary of the issuer apart from his or her capacity as a
member of the board and any board committee.
The SEC has defined "affiliate" for non-investment companies as "a person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified." The term
"control" is intended to be consistent with the other definitions of this term
under the Securities Exchange Act of 1934, as "the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise." A safe harbor has been adopted by the SEC, under which
a person who is not an executive officer, director or 10% shareholder of the
issuer would be deemed not to have control of the issuer. The SEC has also
provided certain limited exceptions for an audit committee member, who also sits
on the board of directors of an affiliate to a listed issuer, so long as, except
for being a director on such board of directors, the audit committee member
otherwise meets the independence requirements for each entity.
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The role of the audit committee for NYSE purposes includes assisting our
board of directors in fulfilling its responsibility for oversight of the quality
and integrity of our accounting, auditing and reporting practices.
INTERNAL AUDITOR
Under the Companies Law, the board of directors must appoint an internal
auditor, nominated by the audit committee. The role of the internal auditor is
to examine, among other matters, whether our actions comply with the law and
with orderly business procedure. Under the Companies Law, the internal auditor
may be an employee of ours but not an office holder, or an affiliate, or a
relative of an office holder or affiliate, and may not be our independent
accountant or its representative. We have appointed Mr. Ezra Yehuda, CPA, who is
not an employee of ours, as our internal auditor in accordance with the
requirements of the Companies Law and his reports are submitted to and reviewed
by the Chairman of our board of directors and the audit committee. The audit
committee follows up on the implementation of the recommendations of the
internal auditor.
SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN KOOR'S CORPORATE GOVERNANCE PRACTICES
AND THOSE REQUIRED OF U.S. COMPANIES UNDER NYSE LISTING STANDARDS
Section 303A.11 of the NYSE's Listed Company Manual, or LCM, requires that
listed foreign private issuers, such as Koor, must disclose any significant ways
in which their corporate governance practices differ from those followed by U.S.
domestic companies under NYSE listing standards.
Our corporate governance practices are governed by our Articles of
Association, by the corporate governance provisions set forth in the Companies
Law and by applicable U.S. securities laws, including the Sarbanes-Oxley Act of
2002, to the extent they apply to foreign private issuers. We are also subject
to the NYSE corporate governance rules to the extent they apply to foreign
private issuers. Except for those specific rules, foreign private issuers are
permitted to follow home country practice in lieu of the provisions of Section
303A of the LCM.
In order to comply with Section 303A.11 of the LCM, the following is a
summary of significant ways in which our corporate governance practices differ
from those required to be followed by U.S. domestic companies under the NYSE's
listing standards.
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MAJORITY OF INDEPENDENT DIRECTORS: Under Section 303A.01 of the LCM, U.S.
domestic listed companies must have a majority of independent directors. We do
not have a similar requirement under Israeli practice or the Companies Law.
SEPARATE MEETINGS OF NON-MANAGEMENT DIRECTORS: Under Section 303A.03 of
the LCM, the non-management directors of each U.S. domestic listed company must
meet at regularly scheduled executive sessions without management. We do not
have a similar requirement under Israeli practice or the Israeli Companies Law,
and our independent directors do not meet separately from directors who are not
independent.
NOMINATING/CORPORATE GOVERNANCE COMMITTEE: Under Section 303A.04 of the
LCM, a U.S. domestic listed company must have a nominating/corporate governance
committee composed entirely of independent directors. We are not required to
have such a committee under the Companies Law.
COMPENSATION COMMITTEE: Under Section 303A.05 of the LCM, a U.S. domestic
listed company must have a compensation committee composed entirely of
independent directors. There is no requirement for a compensation committee
under Israeli practice or the Companies Law.
AUDIT COMMITTEE: Under Section 303A.06 of the LCM, domestic listed
companies are required to have an audit committee that complies with the
requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule
10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any
registered public accounting firm engaged for the purpose of preparing or
issuing an audit report or performing other audit, review, or attest services,
and that each such firm must report directly to the audit committee. Among other
exceptions, Rule 10A-3 provides an exception to such standards for foreign
private issuers where applicable home country law (i) requires or permits
shareholders to appoint the auditors or (ii) prohibits or limits the delegation
of responsibility to the issuer's audit committee.
Pursuant to the Companies Law, our auditors are appointed by the
shareholders at the annual meeting of shareholders. Our audit committee is
responsible for recommending to the shareholders the appointment of our auditors
and to recommend the amounts to be paid to our auditors. In addition, pursuant
to the Companies Law, our financial statements must be approved by our board of
directors. Our audit committee is responsible for assisting the board of
directors in overseeing the work of our auditors.
EQUITY COMPENSATION PLANS: Under Section 303A.08 of the LCM, shareholders
must be given the opportunity to vote on all equity-compensation plans and
material revisions thereto, with certain limited exemptions as described in the
Rule. We intend to follow the requirements of the Companies Law under which
requirement for shareholder approval is generally limited to cases where our
directors would be entitled to receive equity under the equity-compensation
plan.
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CORPORATE GOVERNANCE GUIDELINES: Under Section 303A.09 of the LCM,
domestic listed companies must adopt and disclose their corporate governance
guidelines. We do not have a similar requirement under Israeli practice or the
Companies Law.
EMPLOYEES
At December 31, 2006, we and our subsidiaries had 1,456 employees
worldwide, which represented a decrease of 37% from year-end 2005. The decrease
in the number of employees is due, mainly, to the deconsolidation of Telrad,
Isram and Koor Trade described elsewhere in this annual report.
The table below sets forth the number of our employees on a consolidated
basis and a break down of their geographic location at the end of each of the
last three fiscal years:
Latin
Israel America USA Europe Others Total
2004 4,732 965 369 373 120 6,559
2005 1,838 14 251 121 94 2,318
2006 1,309 -- 145 1 -- 1,456
Our future success will depend in part upon our ability to attract and
retain highly skilled and qualified personnel. Although competition for such
personnel in Israel is generally intense, we believe that adequate personnel
resources are currently available in Israel to meet our requirements.
Israeli law generally requires the payment by employers of severance upon
the death of an employee, his retirement or upon termination of employment by
the employer without due cause. We currently fund our ongoing severance
obligations by making monthly payments to approved severance funds or insurance
policies. In addition, according to the National Insurance Law, Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, an organization similar to the United States Social
Security Administration. These contributions entitle the employees to benefits
in periods of unemployment, work injury, maternity leave, disability, reserve
military service and bankruptcy or winding-up of the employer. Since January 1,
1995, employees are required to pay additional payments to the National
Insurance Institute for national health insurance. The payments to the National
Insurance Institute are equal to approximately 16.4% of an employee's wages
limited to a specified amount, of which the employee contributes approximately
67% and the employer contributes approximately 33%.
We are subject to various Israeli labor laws, collective bargaining
agreements at our affiliates, Israeli labor practices, as well as orders
extending certain provisions of collective bargaining agreements between the
Histadrut (currently the largest labor organization in Israel) and the
Coordinating Bureau of Economic Organizations (the federation of employers'
organizations). Such laws, agreements and orders have a wide scope, including
minimum employment standards (including, among other things, working hours,
minimum wages, vacation and severance pay), and special issues, such as equal
pay for equal work, equal opportunity in employment, and employment of women,
youth and army veterans. According to the National Insurance Law, Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, an organization similar to the United States Social
Security Administration. These contributions entitle the employees to benefits
during periods of unemployment, work injury, maternity leave, disability,
reserve military service, and bankruptcy or the winding-up of the employer, in
addition to health insurance. The National Health Insurance Law 1994 imposes a
health tax at a rate of approximately 4.8% of an employee's base wage.
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The collective bargaining agreements of certain of our affiliates cover a
term of one to three years, or are for an indefinite period. Upon expiration of
the term of an agreement, and pending negotiations for extension, the provisions
of the agreement remain in force unless one of the parties gives a notice of
termination or a new collective agreement is entered into which explicitly
terminates the previous collective agreements. Management believes that, upon
expiration of such existing agreements, such companies will be able to
negotiate, without material disruptions to our businesses, satisfactory new
agreements. However, there can be no guarantee that satisfactory agreements will
be reached in each company or that the negotiation of such agreements will not
generate material disruptions to our businesses.
In 2006, our total labor costs amounted to approximately NIS 151 million,
which represented approximately 26% of our total revenues from sales and
services, compared to NIS 187 million in 2005. The decrease in labor costs is
due to the deconsolidation of Telrad. Labor costs of our discontinued
operations, Isram and Koor Trade amounted to approximately NIS 295 million in
2006, or 7% of the net sales of the discontinued operations. In 2005, labor
costs of our discontinued operations, Isram , Koor Trade and Elisra amounted to
NIS 1,381 million. The majority of our labor costs is denominated in NIS and is
affected by the periodic changes in the inflation rate in Israel.
SHARE OWNERSHIP
Our directors who are deemed to have beneficial ownership of more than 1%
of our outstanding ordinary shares are Mr. Nochi Dankner, Mr. Isaac Manor and
Mr. Zvi Livnat . Mr. Dankner, Mr. Manor and Mr. Livnat are affiliated with IDB
Development Corporation Ltd, our controlling shareholder. For details of their
shareholdings, please see "Item 7. Major Shareholders and Related Party
Transactions" and the related footnotes.
As of April 30, 2007, none of our executive officers holds ordinary shares
or options under our stock option plans.
THE 2003 STOCK BASED COMPENSATION PLAN
On July 27, 2003, at our annual general meeting of shareholders, our
shareholders approved the 2003 Stock-Based Compensation Plan, which had been
previously approved by our audit committee and by our board of directors, on May
25, 2003 and June 5, 2003, respectively. A framework was approved for the
allotment of up to 1,200,000 stock options exercisable for up to 1,200,000 of
our ordinary shares, out of which 1,112,903 options have been granted.
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Under the terms of the 2003 plan, each stock option is theoretically
exercisable for one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted the full quantity of
shares underlying each option, but only shares which reflect the amount of the
monetary bonus inherent in their option, computed on the date of exercise.
Accordingly, the exercise price of each stock option is intended only for
computation of the bonus component. The exercise price of each outstanding
option as of April 30, 2007 is presented in the following table. Those exercise
prices are linked to the Israeli Consumer Price Index.
The options are designated for directors and employees who are not related
parties and will not become related parties as a result of allotment of the
stock options. In any event, the total number of offerees under the 2003 plan
will not exceed 35 offerees, excluding our directors and chief executive
officer.
As of April 30, 2007, 105,610 options to purchase our ordinary shares were
outstanding, as follows:
Balance of
stock options Exercise Expiration
Not exercised Price date
------------- -------- ----------
NIS
--------
59,278 97.57 12/2010
13,000 179.36 12/2010
20,000 204.49 12/2010
10,000 230.05 12/2010
3,332 214.39 12/2010
---------
105,610
OPTION PLANS OF CERTAIN AFFILIATE
In April 2001, the board of directors of MA Industries decided to
distribute options to employees of MA Industries and its consolidated companies.
According to this plan, during 2002 and 2003, 17,400,000 options were allocated,
each of which is exercisable into one ordinary share of MA Industries. Following
the exercise of options, as of March 31, 2007, 600,486 options to purchase
shares of MA Industries were outstanding under this plan.
In April 2003, the board of directors of MA Industries approved a
framework for the allotment of 17,000,000 stock options, each of which is
exercisable into one ordinary share of MA Industries. Out of the framework,
3,400,000 options were allotted to the Chief Executive Officer and to directors
of MA Industries, and following the exercise of options, 940,176 options
remained outstanding as of March 31, 2007.
In March 2005, the board of directors of MA Industries resolved to adopt a
new option plan for its officers and employees and those of its subsidiaries.
Under the terms of the plan, 14,900,000 stock options were allotted, exercisable
for up to 14,900,000 ordinary shares of MA Industries. Of these, 2,500,000
options were deposited with a trustee for future distribution. In March 2006,
the board of directors of MA Industries resolved to issue the balance of these
options to employees. The fair value of these 2,500,000 stock options granted is
approximately $3.7 million. As of March 31, 2007, 14,540,000 options to purchase
shares of MA Industries were outstanding under this plan.
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In November and December 2006, MA Industries' Board of Directors decided
to issue an aggregate of 3,551,500 options to its new Chief Executive Officer,
certain of its officers and an external director. The cost of the benefit
embedded in the options issued, based on the fair value as at their issuance
date amounted to a total of $5.4 million.
All the options of MA Industries will be exercised for shares in a
quantity reflecting the amount of the financial benefit inherent in the options,
according to the Bonus Component Method.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
MAJOR SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of May 31 2007 with respect to
each person known to us to be the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our major shareholders has any different
voting rights than any other shareholder.
Number of Percentage of
Ordinary Outstanding Ordinary
Shares Shares
Name Beneficially Owned (1)
---- ------------------ --------------------
Discount Investment Corporation Ltd. (2)...................... 6,992,270 42.12%
IDB Development Corporation Ltd. (3) ......................... 1,638,189 9.86%
----------
(1) Based upon 16,601,283 ordinary shares issued and outstanding on May
21, 2007. The respective numbers of ordinary shares listed as
beneficially owned in the table above, and the percentage of
outstanding ordinary shares represented thereby, do not give effect
to ordinary shares issuable upon exercise of options granted
pursuant to the 2003 plan, which are exercisable within 60 days of
this annual report. See "Item 6. Directors, Senior Management and
Employees," and Note 20 to our consolidated financial statements
included elsewhere in this annual report.
(2) Discount Investment Corporation Ltd or DIC, a subsidiary of IDB
Development Corporation Ltd. (see note 3 below), is a public Israeli
company whose shares are traded on the Tel Aviv Stock Exchange.
(3) IDB Development Corporation Ltd., or IDBD, is controlled (66%) by
IDB Holding Corporation Ltd., or IDBH. Both IDBD and IDBH are public
Israeli companies whose shares are traded on the Tel Aviv Stock
Exchange. As of April 15, 2007, IDBH was controlled as follows: (i)
Ganden Holdings Ltd., or Ganden, a private Israeli company
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controlled by Nochi Dankner and his sister Shelly Bergman, holds,
directly and through a wholly-owned subsidiary, approximately 44.88%
of the outstanding shares of IDBH; (ii) Shelly Bergman, through a
wholly-owned company, holds approximately 7.23% of the outstanding
shares of IDBH; (iii) Avraham Livnat Ltd., or Livnat, a private
Israeli company controlled by Avraham Livnat, holds, directly and
through a wholly-owned subsidiary, approximately 10.38% of the
outstanding shares of IDBH; and (iv) Manor Holdings B.A. Ltd., or
Manor, a private company controlled by Ruth Manor, holds, directly
and through a majority-owned subsidiary, approximately 10.37% of the
outstanding shares of IDBH. Subsidiaries of Ganden, Livnat and Manor
have entered into a shareholders agreement with respect to shares of
IDBH constituting approximately 31.02%, 10.34% and 10.34%,
respectively, or an aggregate of approximately 51.7%, of the
outstanding shares of IDBH for the purpose of maintaining and
exercising control of IDBH as a group. Their additional shares of
IDBH are not subject to the shareholders agreement. The term of the
shareholders agreement expires in May 2023.
Based on the foregoing, IDBH (by reason of its control of IDBD, and
by reason of IDBD's control of DIC), Ganden, Manor and Livnat (by
reason of their control of IDBH) and Nochi Dankner, Shelly Bergman,
Ruth Manor, and Avraham Livnat (by reason of their control of
Ganden, Manor and Livnat, respectively) may be deemed to share with
DIC and IDBD the power to vote and dispose of the Company's ordinary
shares held by DIC and IDBD.
Most of the foregoing shares of IDBH have been pledged to certain
financial institutions as collateral for loans borrowed to finance
part of the purchase of such shares of IDBH. Upon certain events of
default, these financial institutions may foreclose on the loans and
assume ownership of or sell the shares.
Nochi Dankner is the Chairman of IDBH, IDBD and DIC and a director
of the Company. Zehava Dankner (the mother of Nochi Dankner) is a
director of IDBH, IDBD and DIC. Zvi Livnat (a son of Avraham Livnat)
and Isaac Manor (the husband of Ruth Manor) are directors of IDBH,
IDBD, DIC and the Company. Dori Manor (the son of Isaac and Ruth
Manor) is a director of IDBH, IDBD, DIC.
As of December 31, 2006, we had 68 ADS holders of record in the United
States, holding ADSs representing approximately 7.2% of our outstanding ordinary
shares, as reported by The Bank of New York, the depositary for our ADSs. To our
knowledge, there are no arrangements, the operation of which may at a subsequent
date result in a change in control of our company.
RELATED PARTY TRANSACTIONS
For details regarding transactions and loans between us and related
parties, please see Note 26 to our consolidated financial statements included
elsewhere in this annual report.
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ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 17. Financial Statements" and pages F-1 through F-169.
LEGAL PROCEEDINGS
RESTRICTIVE TRADE PRACTICES
On September 21, 2004, a suit was filed against Koor, Bezeq - the Israel
Telecommunications Company Ltd., or Bezeq, Tadiran Ltd. (a subsidiary of Koor),
Tadiran Telecommunications Ltd. (a former subsidiary of Koor which was merged
with ECI), Tadiran Public Switching Ltd., (a former subsidiary of Telrad
Telecommunications Ltd.), and Telrad alleging that during the previous decade,
the defendants had engaged in activities prohibited by the Israeli Anti-Trust
Law that resulted in damages to Bezeq's customers. A motion for recognition of
the suit as a class action was filed together with the suit in accordance with
the Israeli Anti-Trust Law. The plaintiff is seeking damages for the group that
he is seeking to represent in the amount of NIS 1.7 billion.
On March 10, 2005, Koor and the other defendants submitted to the District
Court an objection to the plaintiff's request to certify the claim as a class
action, and the plaintiff has filed its response to the objection. As of the
date of this annual report, a date has not yet been set for the start of the
court proceedings.
Based on advice from our legal counsel, we believe the chances for the
suit and for the action to be recognized as a class action are remote.
In connection with the sale of shares of Telrad, Koor committed to
indemnify the purchasers in the event that a court ruling will increase the
amount of expenses to be paid by Telrad to an amount exceeding that stated in
the share purchase agreement.
On June 1, 2005, an indictment was filed with the Jerusalem District Court
prosecuting Koor, and seven other companies that are not members of the Koor
Group (including two companies that had been owned by Koor on the relevant dates
and were later sold to third parties) and nine executives (including two who had
been salaried employees of Koor on the relevant dates) for violations of the
Anti-Trust Law. The indictment was the outcome of an investigation that had been
opened by the Anti-Trust Commission in other companies during 2001, with respect
to price fixing and collusion, and the lack of competition in the frozen and
canned vegetable industry. The Anti-Trust Authority claimed that two companies
that belonged to the Koor Group in the past had colluded with other companies in
the years 1992-1998. On June 18, 2006, the Jerusalem District Court issued a
verdict imposing a penalty of NIS 400,000 on Koor, which was paid.
ENVIRONMENTAL
In May 2004, a subsidiary of MA Industries and other factories in the
Ramat Hovav area received a notification from the Ministry of Environmental
Protection of the imposition of additional terms to their business licenses,
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dealing with the treatment and discharge of waste produced as a result of their
activities. Pursuant to the notification, the factories were requested to
discontinue flowing their waste into the central treatment system, which
consists of the evaporation pools and waste treatment facilities of the Ramat
Hovav Industrial Council, and to treat the factories waste in an independent
manner by means of construction of an appropriate waste treatment facility and
separate evaporation pools for each factory.
In October 2004, the subsidiary of MA Industries, together with the
Israeli Union of Industrialists and other companies, filed an administrative
petition in the District Court of Be'er Sheva against the Ministry of
Environmental Protection requesting the District Court to declare that the
additional terms to the business licenses null and void.
In March 2005, the District Court approved the parties' consent to settle
the dispute through "out of court" mediation. The mediation was concluded and
the parties reached agreement regarding the terms of the new business licenses.
On December 28, 2006, the agreement was given the force of a court
judgment. The highlights of the agreement are as follows:
(1) Commencing from January 1, 2008, flowing of waste into the central
treatment system operated by the Ramat Hovav Industrial Council will no
longer be permitted and each factory will be required to treat its own
waste based on certain parameters. In 2006, the subsidiary of MA
Industries completed construction of a biological waste treatment facility
as required by the agreement.
(2) The waste of the factories will be removed to the evaporation pools and
basins of the Ramat Hovav Industrial Council by January 1, 2010. After
this date, each factory will remove its waste to evaporation pools built
and operated by it, by means of an independent flow and discharge system
that will also be built and operated by it.
(3) At the end of the usage period of the evaporation pools, the waste will be
left for final burial in those pools, if the Ministry of Environmental
Protection determines, in accordance with risks' study to be conducted in
2007, that such burial will not cause any environmental damage. At the end
of the operation period of the evaporation pools, the Ministry of
Environmental Protection will re-examine the possibility of damage being
caused as a result of the burial in the pools with no additional
significant treatment.
(4) Regarding air quality, it was agreed that the European standards will
constitute the basis for negotiations to be held for purposes of setting
the permissible emissions parameters that will also comply with
environmental parameters beyond the factories' borders. For purposes of
implementing these demands, construction of a thermal oxidizing facility
was commenced by the subsidiary of MA Industries (at an estimated cost of
$10 million).
In 2003, a private criminal complaint was filed against a subsidiary of MA
Industries and one of its directors by Man, Nature and Law Foundation (an
Israeli association for protection of the environment). The complainant alleges
that on several occasions during the years 1999 through 2003, emissions of
materials at prohibited concentrations were measured in the chimneys of it's the
subsidiary's Ramat Hovav plant, creating severe pollution. MA Industries
believes the charges in the complaint are without merit and intends to defend
itself against such charges. In the opinion of MA Industries' management, based
on advice from its legal counsel, due to the early stage of the proceedings, it
is not possible to estimate the outcome of the complaint and/or the resultant
exposure. However, based on current levels of penalties imposed in similar
criminal cases, MA Industries believes it is highly likely that even in the
event of an adverse determination in this complaint, the penalty will not have a
material adverse effect on MA Industries and therefore, no provision was
included in the financial statements.
97
CLAIMS FILED AGAINST MA INDUSTRIES AND ITS FOREIGN SUBSIDIARIES
In 1995, an action was filed in Brazil against Millenia, a subsidiary of
MA Industries, by a group that acquired the rights of two banks that went into
bankruptcy. The group sued Millenia as a guarantor for the debts of agricultural
cooperatives, which were its former shareholders and was seeking payment of such
debts, which as of December 31, 2006, amounted to approximately US$ 56.6 million
(including interest and linkage differentials). On March 9, 2007, a settlement
was reached between Millenia and the plaintiffs, for the dismissal of all of the
plaintiffs' claims in consideration of the payment by Millenia of approximately
$12 million. This amount was provided in full in the financial statements for
2006.
A number of administrative proceedings and fiscal claims are pending
against Millenia in Brazil, all of which deal with demands for payment of
various taxes, totaling approximately US$ 73 million (including interest and
linkage differences) as of December 31, 2006. On the basis of the opinion of its
legal advisors, Millenia believes its chances of prevailing in all these pending
proceedings and fiscal claims against it are good.
In 2002, an action was filed against Millenia by a private environmental
protection organization, claiming that Millenia's plant in Londrina pollutes the
environment and causes damage to its vicinity and neighbors. The plaintiff
demanded that Milenia prepare an environmental impact study, examinations for
Millenia's employees and neighbors, and cessation of the production activity at
the plant. The lower court instructed that an environmental impact study be
conducted, but the court of appeals granted a stay of implementation of the
decision pending a decision by the court of appeals (expected within two years).
The plaintiff's request for examination of the Company's employees and neighbors
was denied. Millenia believes, based on advice from its legal counsel, that it
has good defenses against the claim and, therefore, no provisions were included
in the financial statements in respect of this action.
In 2004, six identical actions were filed against a U.S. subsidiary of MA
Industries and six other agrochemical companies in the State of Illinios, by a
local water supplier. In these actions, the plaintiff seeks to represent all the
water suppliers in the State of Illinois. The water supplier claims that the
product "atrazine", which is sold by the defendant companies, pollutes its water
source, and that water having an atrazine content is a health hazard. The
plaintiff does not indicate the concentration of atrazine in the water or that
the quantity of atrazine in its water exceeds the amount permitted by the
Federal Water Standard, but claims that atrazine is a health hazard even at
concentrations below the Federal Standard. One of the principal contentions in
the claim is that the subsidiary of MA Industries (as well as the other
defendants) was aware of the danger of atrazine to human beings, and was
concealing this information from the authorities and the public. The subsidiary
contends that it received its license for atrazine pursuant to U.S. law by means
of referring to studies submitted by the original license holder without it
having been permitted to review such studies. In addition, the subsidiary
contends that it did not conduct its own independent studies and it is not aware
of studies indicating that atrazine at the concentration permitted by the
Federal Water Standard is hazardous to human health.
98
Additional causes of action claimed by the plaintiff are encroachment,
nuisance, negligence and violation of the environmental protection and water
pollution laws. Among the remedies the plaintiff is seeking are: obligating the
defendants to prepare and implement a plan for cleaning the plaintiff's water,
compensation of the plaintiff for decline in value of its properties as a result
of the presence of atrazine in the water and damage to its reputation. As is
customary for claims of this type in the United States, the claim does not state
the amount of the damages sought or the compensation requested. The claim is in
the very preliminary stages, the stage of certification of the claim as a class
action has not yet started nor has the document discovery stage gotten underway.
The cumulative share of the subsidiary of MA Industries in sales of atrazine in
Illinois is low in relation to the other defendants.
Taking into account the fact that the plaintiff does not state that the
concentration of atrazine in the water exceeds that permitted by the Federal
Water Standard, and the MA Industries subsidiary's belief that the chances are
remote that it will be found responsible for concealing information, the MA
Industries subsidiary estimates, based on the opinion of its legal advisors,
that the likelihood that the claim will prevail is low, and therefore, no
provision has been included in the financial statements in respect of this
claim.
In 2005, arbitration proceedings were started in the United States between
a multi-national company and a subsidiary of MA Industries to determine the
amount the subsidiary is required to pay to the multi-national company for use
of its studies in order for the subsidiary to obtain a license for the
Pendimetlin product. The arbitration is mandatory arbitration under the Federal
law, which governs the area of licensing for crop protection products. In
December 2006, the arbitrators handed down a draft arbitration decision pursuant
to which the subsidiary was held liable to pay the multi-national company an
amount ranging between $9 million and $10 million for use of the studies. In
February 2007, the draft arbitration decision became a final arbitration
decision and the subsidiary was held liable to pay the multi-national company
the amount of $9.3 million. MA Industries has recorded a full provision for this
amount at December 31, 2006.
CLAIMS FILED AGAINST ECI
In January 2005, ECI was named one of the defendants in a purported class
action complaint filed in the United States against ECtel, certain directors and
officers of ECtel, and against ECI. The complaint alleges violations of U.S.
Federal Securities laws by ECtel and breach of fiduciary duties by the
individual defendants, in connection with disclosure of ECtel's financial
results, between April 2001 and April 2003. It also alleges that ECI was the
controlling shareholder of ECtel during this period and, as such, influenced and
controlled the purported actions by its subsidiary. Damages claimed by the
plaintiff were not quantified. In July 2006, the United States District Court
for the District of Maryland granted ECI's and ECtel's motions to dismiss the
securities class action lawsuit. In August 2006, the plaintiff filed a motion
for reconsideration, alleging new evidence against ECtel. On March 6, 2007 the
Court denied the plaintiffs' motion. The Plaintiffs has appealed the dismissal.
No liability has been recorded in respect of this matter.
99
OTHER CLAIMS
On February 20, 2007, a suit was filed with the Tel Aviv District Court
against Koor and several directors and officers of Koor and of United Steel
Mills Ltd., or Steel Mills, a former subsidiary of Koor, and various other
parties. A motion for recognition of the suit as a class action was filed
together with the suit. The suit relates to convertible bonds issued by Steel
Mills by means of a prospectus to the public in February 1993. The bonds were to
be repaid in three installments on January 31, 1999, 2000 and 2001. The first
installment was repaid by Steel Mills, but the other two installments have not
been repaid. In March 2000, Steel Mills began to be managed under a stay of
proceedings order by the Haifa District Court, which was later altered to a
liquidation order. The convertible bonds were unsecured obligations of Steel
Mills and its assets were insufficient to repay the bonds, therefore, the last
two installments of the bonds were not repaid. In the suit, the plaintiff
alleges that the defendants are responsible for false representations made by
Koor and Steel Mills in quarterly financial reports and relevant immediate
reports. The plaintiff claims that on the basis of these representations, he
purchased bonds of Steel Mills on December 28, 1999, and that these
representations implied that Koor is obligated to repay the bonds. In the event
that the suit will be recognized as a class action, the plaintiff is seeking
damages for the group that he is seeking to represent in the amount of NIS 25
million. Our directors' and officers' insurance carrier has been informed of the
matter. Due to the preliminary stage of the proceedings, we are unable to assess
the outcome of the suit and the request for recognition as a class action,
therefore no provision has been made in our financial statements in respect of
this matter.
A number of claims, in the total amount of NIS 39.4 million, have been
filed against us and certain investees concerning various matters arising in the
normal course of business, including litigation with tax, customs and VAT
authorities, which are in various legal proceedings. In the estimation of the
managements of these companies, based on the opinions of their legal counsel,
the provisions for these claims included in their financial statements, are
adequate in light of the circumstances.
100
ITEM 9. THE OFFER AND LISTING.
TRADING IN OUR ADSS
In the United States, our American Depositary Shares, or ADSs, have been
traded on the NYSE since our initial public offering in October 1995 under the
symbol "KOR" and are evidenced by ADRs. Each ADS represents 0.20 fully paid
ordinary shares. The following table sets forth, for the periods indicated, the
high and low last reported sale prices for our ADSs.
ADSs
----------------------
High Low
--------- --------
$ $
ANNUAL
2002....................................... 7.2700 2.1000
2003....................................... 7.9600 2.0500
2004....................................... 10.5600 7.0500
2005....................................... 13.1800 9.8000
2006....................................... 12.7000 9.2700
QUARTERLY 2005
First Quarter.............................. 12.2900 9.9100
Second Quarter............................. 13.1800 10.5400
Third Quarter.............................. 11.8500 10.0500
Fourth Quarter............................. 11.4200 9.8000
QUARTERLY 2006
First Quarter.............................. 10.9700 9.3400
Second Quarter............................. 12.7000 10.1600
Third Quarter.............................. 10.9000 9.2700
Fourth Quarter............................. 10.8300 9.2700
MONTHLY 2006 - 2007
December................................... 10.6000 10.1800
January.................................... 11.3500 10.7400
February................................... 11.3900 10.6700
March...................................... 11.2500 10.3000
April...................................... 13.0100 11.2400
May........................................ 13.8500 12.4900
June (through June 11, 2007)............... 12.6500 12.3500
On June 11, 2007, the closing price of our ADSs on the NYSE was $ 12.6300
per ADS.
The ADSs are issued pursuant to a Deposit Agreement entered into between
us and the Bank of New York, as depository. The Bank of New York's address is
101 Barclay Street, New York, New York 10286.
101
RECENT DEVELOPMENTS
On May 14, 2007, we announced our intention to voluntarily delist from the
New York Stock Exchange, or NYSE, and to terminate our American Depositary
Receipt, or ADR, program with the Bank of New York, or BoNY. On June 8, 2007, we
filed a Form 25 with the SEC to effect the delisting, which we expect will take
place on June 18, 2007, and on June 20, 2007, we expect to terminate the deposit
agreement with BoNY relating to our ADR program. Subsequent to the termination
of the deposit agreement, ADRs will no longer be transferable. Holders of ADRs
will, however, be entitled to return their ADRs to BoNY before September 18,
2007 and receive the appropriate number of underlying ordinary shares (each ADS
represents 0.20 of an ordinary share), subject to cancellation fees charged by
BoNY pursuant to the deposit agreement.
On May 14, 2007, we also announced that we intend to terminate the
registration of our ADRs and ordinary shares with the U.S. Securities and
Exchange Commission, or SEC, as soon as possible following the delisting from
the NYSE, thereby terminating our obligation to file annual and other reports
with the SEC. We currently expect such deregistration to take effect not earlier
than the third quarter of 2007.
Our decision to delist and deregister was made after careful consideration
by our board of directors of various factors, including (i) the limited number
of our U.S. holders of record, (ii) the low trading volume of our ADR's on the
NYSE compared to the trading volume of our ordinary shares on the Tel Aviv Stock
Exchange, or TASE, (iii) the ongoing costs of maintaining the NYSE listing and
ADR program, (iv) the significant costs associated with being a reporting
company under the U.S. securities laws, including costs arising from compliance
with the provisions of the Sarbanes-Oxley Act of 2002, (v) the continue trading
of our ordinary shares on the TASE and (vi) our continuing obligation to file
public reports with the Israeli Securities Authority and the TASE in accordance
with the Israeli securities laws and regulations.
TRADING IN OUR ORDINARY SHARES
Our securities have been listed on the Tel Aviv Stock Exchange, or TASE,
since 1956. Our ordinary shares have been listed on the TASE since 1991. The
ordinary shares are not listed on any other stock exchange and have not been
publicly traded outside of Israel (other than through ADSs as noted above). The
table below sets forth the high and low last reported prices of our ordinary
shares (in NIS and dollars) on the TASE. The translation into dollars is based
on the average period rate of exchange published by the Bank of Israel.
102
Ordinary Shares
-----------------------------------
High Low
--------------- ---------------
NIS $ NIS $
------ ------ ------ ------
ANNUAL
2002............................ 166.60 36.92 48.60 10.26
2003............................ 171.00 39.05 49.80 11.37
2004............................ 224.90 52.21 165.30 38.37
2005............................ 287.20 64.00 216.60 48.26
2006............................ 292.80 65.70 200.30 44.95
QUARTERLY 2005
First Quarter................... 261.90 60.08 216.60 49.69
Second Quarter.................. 287.20 65.12 229.30 52.00
Third Quarter................... 268.20 59.13 230.70 50.86
Fourth Quarter.................. 263.50 56.72 233.30 50.22
QUARTERLY 2006
First Quarter................... 258.00 55.24 220.10 47.13
Second Quarter.................. 292.80 64.94 227.40 50.44
Third Quarter................... 241.90 55.12 203.60 46.40
Fourth Quarter.................. 231.70 54.41 200.30 47.04
MONTHLY 2006 - 2007
December........................ 226.80 53.98 212.70 50.62
January......................... 240.60 56.90 226.30 53.52
February........................ 243.40 57.71 229.20 54.34
March........................... 236.30 56.26 216.80 51.62
April........................... 265.70 65.30 236.30 58.07
May............................. 276.40 69.08 254.50 63.61
June (through June 11, 2007).... 265.80 64.56 252.40 61.31
On June 11, 2007, the closing price of our ordinary shares on the TASE was
NIS 265.80 (or $64.56) per share.
ITEM 10. ADDITIONAL INFORMATION.
MEMORANDUM AND ARTICLES OF ASSOCIATION
ORGANIZATION AND REGISTER
We are a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State of
Israel and we have been assigned company number 52-001414-3.
OBJECTS AND PURPOSES
Our objects and purposes include a wide variety of business purposes,
including many types of investments, borrowing and lending, owning and
transacting in real estate, and are set forth in detail in Section 2 of our
memorandum of association.
103
DIRECTORS
Pursuant to our articles of association, the number of directors serving
on the board is required to be not less than five. The appointment of members to
the Board of Directors, their replacement and removal, and the appointment of
the Chairman of the Board of Directors require approval by our shareholders by
ordinary resolution. Each member of the Board of Directors remains in office
until his/her office is vacated due to any one of the following events: death,
legal incompetence, bankruptcy or resignation or upon removal at a shareholders
meeting. Our chief executive officer is appointed by the Board of Directors. Our
executive officers serve at the discretion of our chief executive officer
pursuant to powers delegated to him by our Board of Directors. The board is
authorized to appoint additional directors (whether to fill a vacancy or create
new directorship) to serve until the next annual shareholders meeting, provided
that the total number of directors does not exceed the maximum set by the
general meeting. Compensation of the Board of Directors is fixed by the general
meeting and directors are not required to hold qualifying shares.
A meeting of the board may be called at the request of each director. The
quorum required for a meeting of the board consists of a majority of directors
holding office, for the time being, and entitled under any law to attend and
vote at such meeting, provided that the quorum is not less than three. In lieu
of a board meeting a resolution may be adopted by written consent.
The board may appoint a committee of the board and delegate to such
committee all or any of the powers of the board, as it deems appropriate.
Notwithstanding the foregoing, the board may, from time to time, revoke the
delegation made to a committee of its powers and authorities or portion thereof.
The board has appointed an audit committee which has four members.
The board has borrowing powers that may be exercised in accordance with
our articles of association. Our articles of association are silent with regards
to the retirement age of directors.
APPROVAL OF CERTAIN TRANSACTIONS
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
loyalty includes avoiding any conflict of interest between the office holder's
position in Koor and his personal affairs, avoiding any competition with Koor,
avoiding exploiting any business opportunity of Koor in order to receive
personal advantage for himself or others, and revealing to Koor any information
or documents relating to Koor's affairs which the office holder has received due
to his position as an office holder. Under the Companies Law, all arrangements
as to compensation of office holders who are not directors require approval of
the board of directors. Arrangements regarding the compensation of directors
also require audit committee and shareholder approval.
The Companies Law requires that an office holder of Koor promptly disclose
any personal interest (including any interest of the office holder's spouse,
siblings, parents, grandparents, descendants, spouse's descendants and the
spouses of any of the foregoing) that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by Koor. In addition, if the transaction is an
extraordinary transaction as defined under Israeli law, the transaction must to
be approved by the audit committee and afterwards by the board. In addition, the
office holder must also disclose any interest held by any corporation in which
the office holder is a 5% or greater shareholder, director or general manager or
in which he or she has the right to appoint at least one director or the general
manager. An extraordinary transaction is defined as a transaction other than in
the ordinary course of business, otherwise than on market terms, or that is
likely to have a material impact on Koor's profitability, assets or liabilities.
104
In the case of a transaction which is not an extraordinary transaction,
after the office holder complies with the above disclosure requirement, only
board approval is required unless our articles of association provide otherwise.
The transaction must not be adverse to our interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by our audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of our shareholders. An office holder who has a personal interest
in a matter that is considered at a meeting of the board of directors or the
audit committee may not be present at this meeting or vote on this matter.
The Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in Koor. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and our
shareholders. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are present,
in person or by proxy, at the meeting or, alternatively the total shareholdings
of those who have no personal interest in the transaction who vote against the
transaction must not represent more than one percent of the voting rights in
Koor.
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of our
outstanding share capital (assuming the exercise or conversion of all securities
held by such person that are exercisable for or convertible into shares) or that
will cause any person to become, as a result of the issuance, a holder of more
than five percent of our outstanding share capital, requires approval by the
board of directors and our shareholders.
Certain types of resolutions, called special or extraordinary resolution,
such as resolutions amending a company's articles of association and regarding
changes in capitalization, mergers, consolidations, windings up, or authorizing
a class of shares with special rights, require approval of the holders of 75% of
the shares represented at the meeting and voting thereon. Under the provisions
of the Companies Law, the shareholders of a company may decide to amend such
company's articles of association to reduce the percentage required for a
special resolution to as low as a simple majority or eliminate the distinction
between ordinary and special resolutions completely; such an amendment must be
adopted by a 75% majority.
105
Under the Companies Law, our shareholders have a duty to act in good faith
towards us and our shareholders and to refrain from abusing his or her power in
Koor including, among other things, while voting in a general meeting of
shareholders on the following matters:
o Any amendment to the articles of association;
o An increase of our authorized share capital;
o A merger; and
o Approval of interested party transactions which require shareholders
approval.
In addition, any controlling shareholder, any shareholder who knows that
it possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in Koor, is under a duty to act with fairness towards us. The Companies
Law does not describe the substance of this duty.
INSURANCE, EXEMPTION AND INDEMNITY OF OFFICE HOLDERS
Under the Companies Law and pursuant to our articles of association as
amended by a special resolution of the shareholders meetings held on June 1,
2003 and on September 28, 2006 we may, from time to time enter into a contract
to insure any office holder including directors, in full or in part, for
liability resulting from an obligation imposed on him or her as a result of an
action performed in his or her capacity as an office holder in Koor, for each of
the following:
(1) A breach of a duty of care towards the company or towards another
person.
(2) A breach of a duty of trust towards the company, provided that the
office holder acted in good faith and had reasonable grounds to presume that his
or her action would not harm the interests of the company.
(3) A financial obligation imposed on him in favor of another person.
In addition, Under the Companies Law and pursuant to our articles of
association as amended, we may, from time to time, indemnify an office holder,
in full or in part, for an obligation or expense imposed on him or her as a
result of an action performed in his or her capacity as an office holder in
Koor, with respect to: (1) any financial obligation imposed on him or her in
favor of another person pursuant to a judgment, including a judgment given in a
settlement or arbitration decision approved by the court; and (2) any reasonable
litigation expenses, including lawyer's fees, expended by the office holder due
to an investigation or proceeding against him by an authority competent to
conduct an investigation or proceeding, and which ended without an indictment
being filed against him and without any financial obligation being imposed upon
him as an alternative to a criminal proceeding, or which ended without an
indictment being filed against him but with a financial obligation being imposed
upon him as an alternative to a criminal proceeding in an offense which does not
require proof of criminal intent; and (3) any reasonable litigation expenses,
including lawyers' fees, requited by the office holder or imposed on him by a
court, in a proceeding submitted against him by Koor or in its name or by
another person, or in a criminal indictment of which he was acquitted, or a
criminal indictment in which he was convicted of an offense not requiring proof
of criminal intent; and (4) any other obligation or expense imposed upon him or
which he expended, due to an action he performed in his capacity as an office
holder, which can be indemnified pursuant to the provisions of any law.
106
We may give an advance undertaking to: (1) indemnify an office holder,
provided that the commitment to indemnify is limited to events which the board
of directors deems foreseeable in view of the actual activities of Koor at the
time of making the commitment to indemnify, and to an amount or to criteria
which the board of directors has determined to be reasonable in the
circumstances, and that the commitment to indemnify notes the events which the
board of directors believes are foreseeable in light of the actual activities of
Koor at the time of making the commitment to indemnify, and the amount or
criteria which the board of directors has determined is a reasonable amount in
the circumstances; and (2) indemnify an office holder retroactively.
REQUIRED APPROVALS
In addition, under the Companies Law, indemnification of, and procurement
of insurance coverage for, our office holders must be approved by our audit
committee and board of directors and, in specified circumstances, by our
shareholders.
In accordance with a resolution by the general meeting of Koor's
shareholders, Koor resolved to indemnify its directors and officers against
various events that are not covered by insurance, and in monetary amounts
exceeding the insured amounts.
DESCRIPTION OF KOOR'S DEFERRED SHARES
As of May 31, 2007, we had 15,156,533 Deferred Shares, par value NIS 0.001
per share, outstanding. Holders of Deferred Shares are only entitled to receive
the nominal paid-up value of the Deferred Shares in the event of the winding up
of Koor, subject to prior payment of the nominal paid-up value of the ordinary
shares to the holders of ordinary shares. The holders of the Deferred Shares do
not have any voting rights and they are not entitled to participate in the
distribution of dividend of any kind. As of May 31, 2007, one of our
wholly-owned subsidiaries held 14,491,494 (95.6%) of our Deferred Shares.
DESCRIPTION OF KOOR'S ORDINARY SHARES
The par value of our ordinary shares is NIS 0.001 per share, and all
issued and outstanding ordinary shares are fully paid and non-assessable.
Holders of paid-up ordinary shares are entitled to participate equally in the
payment of dividends and other distributions and, in the event of liquidation,
in all distributions after the discharge of liabilities to creditors. Our
shareholders do not have preferential rights to purchase new shares in Koor.
As of May 31, 2007, one of our wholly-owned subsidiaries held 15,799 of
our ordinary shares.
107
Voting is on the basis of one vote per share. An ordinary resolution (for
example, resolutions for the approval of final dividends or the appointment of
auditors) requires the affirmative vote of a majority of shares voting in person
or by proxy. A special resolution (for example, resolutions amending the
articles of association or authorizing changes in capitalization or in the
rights of shareholders) requires the affirmative vote of at least 75% of the
shares voting in person or by proxy.
Under the articles of association, if at anytime the share capital is
divided into various classes, we may, by way of special resolution consented to
in writing by the holders of three quarters of our issued shares or a special
resolution passed at an extraordinary meeting, alter the previous benefits
restrictions and provisions applicable to that class. We shall also be entitled,
by special resolution, to amend our share capitalization.
The Board of Directors has the power to set aside our cash profits to pay
a final dividend after making appropriations for capital reserves; such a
dividend must be approved at a general meeting. No dividend shall be declared at
a general meeting which is greater than that recommended by the Board of
Directors. The Board of Directors is also entitled to pay shareholders an
interim divided if it is justified in light of our financial position. All
ordinary shares represented by ADRs will be issued in registered form only.
Ordinary shares do not entitle their holders to preemptive rights.
MEETINGS OF SHAREHOLDERS
Under the Companies Law, we are required to hold an annual meeting every
year no later than fifteen months after the previous annual meeting. In
addition, under the Companies Law, we are required to hold a special meeting in
the following circumstances:
o At the direction of the Board of Directors;
o If so requested by two directors or 1/4 of the serving directors; or
o Upon the request of one or more shareholder who have at least 5% of
the issued share capital and at least 1% of the voting rights or
more shareholders who have at least 5% of the voting rights.
If the Board of Directors receives a demand to convene a special meeting,
it must publicly announce the scheduling of the meeting within 21 days after the
demand is delivered. The meeting must then be held no later than 35 days after
notice was made public.
Under the Companies Law, the agenda at an annual meting is determined by
the Board of Directors. The agenda must also include the proposals for which the
convening of a special meeting was called, as well as any proposal requested by
one or more shareholder who holds no less than 1% of the voting rights, as long
as the proposal is one suitable for discussion at an annual meeting.
Under the Companies Law, a notice of an annual meeting must be made public
(and delivered to every shareholder registered in the shareholders register,
unless it is stated otherwise in the articles of the company as it is with Koor)
at least 21 days before the meeting is convened. The shareholders entitled to
participate and vote at the meeting are the shareholders as of the record date
set at the time of the decision to convene the meeting, provided that the record
date is not more than 40 days, and not less than four days, before the date of
the meeting.
108
A quorum is represented by at least two holders of ordinary shares
personally, or by proxy, who together hold at least 1/3 of the voting rights of
Koor. If such quorum is not present, the meeting stands adjourned until the same
day of the following week. At the adjourned meeting, two members, irrespective
of their percentage holding of voting rights, shall constitute a quorum.
Under the Companies Law, a shareholder who intends to vote at a meeting
must demonstrate that he owns shares in accordance with the regulations. Under
these regulations, a shareholder whose shares are registered with a member of a
stock exchange (such as NYSE or the TASE) must provide us with an authorization
from such member regarding his ownership as of the record date.
RIGHT OF NON-ISRAELI SHAREHOLDERS TO VOTE
Our memorandum of association, the articles of association, and the laws
of the State of Israel do not restrict in any way the ownership or voting of our
ordinary shares by nonresidents or persons who are not citizens of Israel,
except with respect to citizens or residents of countries that are in a state of
war with Israel.
CHANGE OF CONTROL
The Companies Law allows mergers, provided that each party to the
transaction obtains the approval of its board of directors and shareholders. For
purposes of the shareholder vote of each party, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares not held by
the other party (or by any person who holds 25% or more of the shares or the
right to appoint 25% or more of the directors of the other party) have voted
against the merger. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of that party. Finally, a
merger may not be completed unless (i) at least 50 days have passed from the
time that the requisite proposals for approval of the merger have been filed
with the Israeli Registrar of Companies and (ii) 30 days have passed since the
merger was approved by the shareholders of each of the parties.
Provisions of the Companies Law that deal with "arrangements" between a
company and its shareholders may be used to effect squeeze-out transactions in
which the target company becomes a wholly-owned subsidiary of the acquirer.
These provisions generally require that the merger be approved by a majority of
the participating shareholders holding at least 75% of the shares voted on the
matter. In addition to shareholder approval, court approval of the transaction
is required. The Companies Law also provides for a merger between companies,
after completion of the above procedure for an "arrangement" transaction and
court approval of the merger.
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The Companies Law also provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company, unless
there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser
would become a 45% shareholder of the company, unless there is already a 45%
shareholder of the company. This requirement does not apply if the acquisition
(i) occurs in the context of a private placement by the company that received
shareholder approval, (ii) was from a 25% shareholder of the company and
resulted in the acquirer becoming a 25% shareholder of the company or (iii) was
from a 45% shareholder of the company and resulted in the acquirer becoming a
45% shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
company's outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
company's outstanding shares will be acquired by the offeror and (ii) the number
of shares tendered in the offer exceeds the number of shares whose holders
objected to the offer. In any event, if as a result of an acquisition of shares
the acquirer will hold more than 90% of a company's shares, the acquisition must
be made by means of a tender offer for all of the shares. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be transferred to it. The law provides for the
appraisal rights if a shareholder files a request in court within three months
of a full tender offer.
MATERIAL CONTRACTS
On December 27, 2004, we entered into a series of agreements with Elbit
Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or Federmann. Under
the terms of a share transfer deed with Elbit, we agreed to sell our entire
holdings in Tadiran Communications (approximately 33%) to Elbit for
approximately $146 million. Concurrently, pursuant to a share transfer deed with
Federmann, we agreed to acquire approximately 9.8% of Elbit's share capital from
Federmann for approximately $99 million. In connection with each of these
transactions we entered into a shareholders agreement with the other party
relating to, among other things, the voting of shares in the election of
directors and rights of one party in connection with certain dispositions of
shares by the other party. According to the shareholders' agreement, Federmann
has undertaken to support the appointment and vote for the election of directors
to Elbit's Board who are nominated by us, in a number equal to the greater of:
(a) two directors or (b) 20% of the number of Elbit's directors, and we have
undertaken to vote for the election of all the candidates nominated by Federmann
for the offices of the other directors of Elbit. We announced that as long as we
hold Elbit shares we will not invoke our right to appoint 20% of Elbit's
directors. Furthermore, we have undertaken to vote, in every matter and proposed
resolution submitted for approval to a general shareholders' meeting of Elbit's
shareholders, in accordance with instructions given to us by Federmann, subject
to certain exceptions.
The two sales were interconnected and would be completed in two stages,
the first of which closed on April 18, 2005. For a more detailed description of
these transactions, see "Item 4 - Information on the Company - Business Overview
- Our Defense Electronics Business."
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On July 6, 2005 we signed an amendment to these agreements, pursuant to
which we would sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we would sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale would be conducted in
two parts, and we and Elbit would share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications was contingent on the execution of
our sale of our holdings in Elisra to Elbit. Elbit's acquisition of Elisra was
subject to the approvals of Elbit's shareholders at general meeting to be held
within sixty days and Israel's Anti-Trust Commissioner. In addition, under the
amended terms of the transactions, contrary to the terms of the original
agreement, we would acquire only an additional 2.45% of Elbit from Federmann for
$25 million, regardless of whether the sale of Elisra is approved by the Israeli
Anti-Trust Commissioner. Following the completion of all the stages of these
transactions, we held approximately 7.7% of Elbit.
The transaction closed on November 30, 2005.
On November 22, 2006, we entered into an agreement for the sale of the
majority of our investment in Elbit to Federmann for total consideration of
approximately $70 million, to be received in five equal quarterly installments,
bearing interest according to the LIBOR rate. The first installment was received
on November 27, 2006. On March 26, 2007, we received the second installment in
an amount of $14 million, and agreed to replace the three coming installments
with one final installment due on September 26, 2007.
The shareholders' agreement entered into on December 27, 2004 and amended
on July 6, 2005 between us and Federmann was nullified upon receipt of the first
payment.
EXCHANGE CONTROLS
Holders of ADSs are able to convert dividends and liquidation
distributions into freely repairable non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation, pursuant to a general permit
issued by the Controller of Foreign Exchange at the Bank of Israel, or
Controller, under the Currency Control Law, 1978, or Currency Control Law, as
modified by certain reforms in May 1998, provided that Israeli income tax has
been withheld by us with respect to such amounts.
Our ADSs may be freely held and traded pursuant to the General Permit and
the Currency Control Law. The ownership or voting of ADSs by non-residents of
Israel, except with respect to citizens of countries that are in a state of war
with Israel, are not restricted in any way by our memorandum of association or
articles of association or by the laws of the State of Israel.
Pursuant to the reforms, the Bank of Israel has issued a new "general
permit." Under such general permit, foreign currency transactions are generally
permitted, except for transactions described in the permit that are specifically
restricted. Among these restricted transactions are foreign currency
transactions by institutional investors, including investments outside of Israel
by pension funds and insurers, as well as futures contracts by foreign residents
for periods of more than one month. All foreign currency transactions must be
reported to the Bank of Israel under the new general permit.
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Certain changes in Israeli tax legislation are expected as a result of the
reforms. No assurance can be given that such legislative changes will be
forthcoming in any particular time frame, or at all.
TAXATION
The following is a discussion of Israeli and United States tax
consequences material to our United States shareholders. The discussion is not
intended, and should not be construed, as legal or professional tax advice and
does not exhaust all possible tax considerations.
Holders of our ADSs should consult their own tax advisors as to the United
States, Israeli or other tax consequences of the purchase, ownership and
disposition of our ADSs, including, in particular, the effect of any foreign,
state or local taxes.
ISRAELI TAX CONSIDERATIONS
The following discussion describes the current corporate tax structure
applicable to companies in Israel, as well as a summary of certain Israeli tax
laws affecting U.S. and other non-Israeli shareholders, for general information
only and is not intended to substitute for careful or specific tax planning. To
the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed
herein will accord with any such interpretation in the future. This discussion
is not intended, and should not be construed, as legal or professional tax
advice, and does not cover all possible tax considerations. Each investor should
consult his or her own tax advisor as to the particular tax consequences of an
investment in the ordinary shares including the effects of applicable Israeli or
foreign or other tax laws and possible changes in the tax laws.
GENERAL CORPORATE TAX STRUCTURE
Israeli companies are generally subject to corporate tax on taxable income
at the rate of 31% for the 2006 tax year, 29% for the 2007 tax year, 27% for the
2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter and are subject to capital gains tax at a rate of 25% for real
capital gains (other than gains deriving from the sale of listed securities)
derived after January 1, 2003. For capital gains derived from assets acquired
prior to January 1, 2003, the tax rate will be proportionate, based upon the
corresponding periods. See also Item 3- "Risks Related to Israel" for a
discussion of tax benefits under the Encouragement of Capital Investments Law.
SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985, which we refer to in
this annual report as the "Inflationary Adjustments Law", represents an attempt
to overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is complex. Among
other features, there is a special tax adjustment for the preservation of equity
as follows:
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Where a company's equity exceeds the depreciated cost of fixed assets, as
calculated under the Inflationary Adjustments Law, a deduction from taxable
income is permitted equal to the excess multiplied by the applicable annual rate
of inflation. The maximum deduction permitted in any single tax year is 70% of
taxable income, with the unused portion permitted to be carried forward, linked
to the increase in the Israeli Consumer Price Index, or CPI;
Where a company's depreciated cost of fixed assets exceeds its equity,
then the excess multiplied by the applicable annual rate of inflation is added
to taxable income;
Subject to specified limitations, depreciation deductions on fixed assets
and losses carried forward are adjusted for inflation based on the increase in
the CPI.
Furthermore, capital gains and losses from the sale of fixed assets and
securities are calculated on a real basis.
RECENT ISRAELI TAX REFORMS
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 2002, known as the Tax Reform, came into effect, which
significantly changed the taxation basis of corporate and individual taxpayers
from a territorial basis to a worldwide basis.
The Tax Reform is aimed at broadening the categories of taxable income and
reducing the tax rates imposed on employment income.
In January 2006, the Law for Amendment of the Income tax Ordinance
(Amendment No. 147), known as Amendment 147, came into effect. The main purpose
of the Amendment is to continue the trend of reducing the corporate tax rate and
the rate of salary taxes, and to unify and simplify the taxation of capital
income.
The Tax Reform and Amendment 147 introduced the following, among other
things:
o Reduction of the tax rate levied on real capital gains (other than
gains deriving from the sale of listed securities) derived after
January 1, 2003, to a general rate of 25% for corporations. Capital
gains derived from the sale of listed securities by corporations
that are subject to the provisions of the Inflationary Adjustments
Law or the provisions of Article 130a of the Income Tax Ordinance,
will be subject to ordinary tax rates.
o Reduction to 20% of the tax rate applicable to real capital gains
derived by individuals as of January 1, 2003. Nevertheless, real
capital gains from the sale of securities by individuals will be
taxed at 25% if the individual is a significant shareholder in an
entity whose shares are sold on the same date, or in the preceding
twelve months, or if the individual is claiming deduction of
financing expenses from the capital gain on the sale of the
securities. The term "significant shareholder" is defined as one who
holds, directly or indirectly, 10% or more of the voting power in
the entity whose securities are being sold.
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o In general, regarding assets acquired prior to January 1, 2003, the
reduced tax rate will apply to a proportionate part of the gain, in
accordance with the holding periods of the asset, before or after
January 1, 2003, on a linear basis;
o Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial source
of income, including income derived from passive sources such as
interest, dividends and royalties;
o Introduction of controlled foreign corporation rules into the
Israeli tax structure. Generally, under such rules, an Israeli
resident who holds, directly or indirectly, 10% or more of the
rights in a foreign corporation which has 70% or more of its shares
not publicly traded, and in which more than 50% of the rights are
held directly or indirectly by Israeli residents, and a majority of
whose income in a tax year is considered passive income, will be
liable for tax on the portion of such income attributed to his
holdings in such corporation, as if such income were distributed to
him as a dividend, provided that the tax imposed by the foreign
country on the passive income is equal to or less than 20%;
o Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of
publicly traded companies (such gain was previously exempt from
capital gains tax in Israel). For information with respect to the
applicability of Israeli capital gains taxes on the sale of ordinary
shares, see "Capital Gains and Income Taxes Applicable to
Non-Israeli Shareholders" below; and
o Introduction of a new regime for the taxation of shares and options
issued to employees and officers (including directors).
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares of publicly traded Israeli companies
(listed in Israel or listed outside of Israel), provided however that such
capital gains are not derived from a permanent establishment in Israel and
provided that such shareholders did not acquire their shares prior to an initial
public offering, unless the holder is subject to the Inflationary Adjustments
Law. However, non-Israeli corporations will not be entitled to the exemption
with respect to gains derived from the sale of shares of Israeli companies
publicly traded, if an Israeli resident (i) has a controlling interest of 25% or
more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled
to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly.
Under the convention between the United States and Israel concerning taxes
on income (See "U.S.-Israel Tax Treaty" below), Israeli capital gains tax will
not apply to the sale, exchange or disposition of ordinary shares by a person
who qualifies as a resident of the United States (within the meaning of the
U.S.-Israel tax treaty) and is entitled to claim the benefits available to the
person by such treaty, except under certain circumstances, when a US resident
holds 10% or more of an Israeli entity, and the US resident is not eligible for
tax exemption according to the Israeli law, as described below.
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In the event that the conditions for tax exemption described above are not
met, or if capital gains are not tax exempt according to the tax treaty between
Israel and the shareholder's country of residence, the following shall apply:
Israeli law generally imposes a capital gains tax on the sale of capital
assets located in Israel including shares in Israeli companies by both residents
and non-residents of Israel, unless a specific exemption is available or unless
a tax treaty between Israel and the shareholder's country if residence provides
otherwise. The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain that is equivalent
to the increase of the relevant asset's purchase price that is attributable to
the increase in the Israeli consumer price index (or, in certain cases, to the
increase in the currency in which they purchased shares) between the date of
purchase and the date of sale. The real gain is the excess of the total capital
gain over the inflationary surplus.
Pursuant to the Amendment 147, generally, real capital gains derived after
January 1, 2003 from the sale of shares are subject to a capital tax rate of 20%
if derived by individuals, and a 25% tax rate if derived by corporations. The
abovementioned tax rate does not apply to (1) dealers in securities who are
subject to ordinary tax rates (i.e. corporate tax rates for corporations and
marginal tax rates for individuals) regarding income derived from the sale of
shares; (2) corporations that report in accordance with the Inflationary
Adjustments Law or in accordance with Article 130a of the Income Tax Ordinance
that are subject to ordinary corporate tax rates on capital gains derived from
the sale of marketable securities; shareholders who acquired their shares prior
to an initial public offering (that are subject to a different tax arrangement);
(4) individuals that are significant shareholders in the corporation whose
shares are being sold at the date of the sale or during the preceding twelve
month period. Such shareholders will be subject to a 25% tax rate on capital
gains from the disposal of their shares; and (5) individuals who deduct
financing expenses for tax purposes from their gains from the disposal of
securities, who will be subject to a 25% tax rate until regulations will be
published by the Ministry of Finance, limiting the deduction of financing
expenses against capital gains from disposal of securities.
In the case of taxpayers that are no subject to the provisions of the
Inflationary Adjustments Law, the tax basis of shares acquired prior to January
1, 2003 will be determined in accordance with the average closing share price in
the three trading days preceding January 1, 2003. However, in some cases, the
actual adjusted cost of the shares will be considered as the tax basis if it is
higher than such average price. In such cases, the capital loss accrued by the
taxpayer amounting to the decrease in the value of the share from the purchase
date until January 1, 2003 will not be recognized for tax purposes.
Generally, in some instances where our foreign shareholders may be liable
to Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.
However, if the shares are held through an Israeli financial institution and the
foreign resident has filed the proper forms, there will be no withholding tax
deduction.
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Non residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest paid by an Israeli resident, and non
passive income if the services were rendered in Israel or if a business is
operated in Israel. On distributions of dividends by us other than bonus shares
(stock dividends), income tax at the rate of 20% (15% in the case of dividend
distributed from the earnings of an approved enterprise) is generally withheld
at source, unless a different rate is provided in a treaty between Israel and
the shareholder's country of residence.
However, a foreign resident who is a significant shareholder is liable for
25% tax on dividends paid by an Israeli corporation, that are not derived from
the earnings of an approved enterprise. The withholding tax rate is 20%,
accordingly, a foreign resident may be required to file a tax return in Israel
and pay the tax.
U.S.-ISRAEL TAX TREATY
Pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended
(the "U.S.-Israel Tax Treaty"), which became effective as of January 1, 1995,
the sale, exchange or disposition of ADSs or ordinary shares by a person who
qualifies as a resident of the United States within the meaning of the
U.S.-Israel Tax Treaty and who is entitled to claim the benefits afforded to
such resident by the U.S.-Israel Tax Treaty ("Treaty U.S. Resident") will
generally not be subject to Israeli capital gains tax unless such Treaty U.S.
Resident held, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale,
exchange or disposition, subject to certain conditions. A sale, exchange or
disposition of ADSs or ordinary shares by a Treaty U.S. Resident who held,
directly or indirectly, shares representing 10% or more of our voting power at
any time during such preceding 12-month period would be subject to such Israeli
tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such
Treaty U.S. Resident would be permitted to claim a credit for such taxes against
the U.S. Federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax
credits. On distributions of dividends other than bonus shares or stock
dividends, income tax is generally withheld at the source at the rate of 20%, or
15% for dividends of income generated by an approved enterprise, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence.
Under the U.S.-Israel tax treaty, the maximum Israeli tax on dividends
paid to a holder of ordinary shares who is a U.S. resident (as defined in the
treaty) is 25% and if such shareholder is a U.S. corporation holding at least
10% of our issued voting power during the part of the tax year which precedes
the date the dividend is distributed as well as throughout the previous tax year
and the company distributing the dividend in not an "investment company" as
defined in the tax treaty, the maximum Israeli tax on dividends paid to such
corporation is 12.5%, or 15% for dividends derived from income generated from an
approved enterprise.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. Federal income tax
consequences of the purchase, ownership and disposition of our ADSs to U.S.
Holders. This summary is based on U.S. Federal income tax laws, regulations,
rulings and decisions in effect as of the date of this annual report, all of
which are subject to change at any time, possibly with retroactive effect. This
summary does not address all tax considerations that may be may be relevant to
any particular U.S. holder in light of the holder's individual circumstances. In
particular, this summary does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to U.S.
holders that are subject to special treatment, including U.S. holders that:
o Are broker-dealers or insurance companies;
o Are financial institutions or financial services entities;
o Are tax-exempt organizations or retirement plans;
o Own directly, indirectly or by attribution 10% or more of our voting
shares;
o Hold ADSs as part of a straddle or a hedging or conversion
transaction;
o Hold their ADSs through partnerships or other pass through entities;
o Have elected mark-to-market accounting; and
o Have a functional currency that is not the dollar.
This summary does not address the effect of any U.S. Federal taxation
other than U.S. Federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States Federal, state and local tax considerations of purchasing, holding
or disposing of our ADSs.
For purposes of this summary, a U.S. Holder is:
o An individual who is a citizen or, for U.S. Federal income tax
purposes, a resident of the United States;
o A corporation (or other entity taxable as a corporation for U.S.
Federal income tax purposes) created or organized in or under the
laws of the United States or any political subdivision thereof;
o An estate whose income is subject to U.S. Federal income tax
regardless of its source; or
o A trust if:
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(a) a court within the United States is able to exercise primary
supervision over administration of the trust; and
(b) one or more United States persons have the authority to
control all substantial decisions of the trust.
TAXATION OF DIVIDENDS
Subject to the discussion below under "Passive Foreign Investment
Companies," the gross amount of any distributions that you receive with respect
to ADSs, including the amount of any Israeli taxes withheld from these
distributions, will constitute dividends for U.S. Federal income tax purposes,
to the extent the distribution is paid out of our current or accumulated
earnings and profits, as determined for U.S. Federal income tax principles. You
will be required to include this amount of dividends in gross income as ordinary
income on the date such dividend is actually or constructively received.
Distributions in excess of our earnings and profits will be treated as a
non-taxable return of capital to the extent of your tax basis in the ADSs and,
to the extent in excess of your tax basis, will be treated as capital gain. See
"--Dispositions of ADSs" below for the discussion on the taxation of capital
gains. Dividends generally will not qualify for the dividends-received deduction
available to corporations.
Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld from these dividends, will be includible as income to you in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
such dividends are distributed. If you convert dividends paid in NIS into U.S.
Dollars on the day the dividends are distributed, you generally should not be
required to recognize foreign currency gain or loss with respect to such
conversion. Any gain or loss resulting from a subsequent exchange of such NIS
generally will be treated as U.S. source ordinary income or loss.
Further, and subject to the discussion below under "Passive Foreign
Investment Companies," noncorporate U.S. Holders may be eligible for reduced
rates of U.S. federal income tax (currently a maximum federal tax rate of 15%)
in respect of dividends received with respect to ADSs in taxable years beginning
before January 1, 2011, provided the holders satisfy certain holding period
requirements. Please note that certain restrictions apply to the ability of an
individual U.S. Holder to benefit from the lower rates. For example, the lower
rates are only available to such an individual if such individual (i) holds
stock for more than 60 days during the 121-day period beginning on the date that
is 60 days before the date on which the share becomes ex-dividend (disregarding
any period during which the U.S. Holder has diminished the risk of loss with
respect to such stock (for example, by holding an option to sell such stock)),
and (ii) is not under an obligation to make related payments with respect to
positions in substantially similar or related property. Subject to certain
conditions and limitations, you may elect to claim a credit against your U.S.
Federal income tax liability for Israeli tax withheld from dividends received in
respect of the ADSs. Dividends generally will be treated as foreign-source
passive income or financial services income for United States foreign tax credit
purposes. The rules relating to the determination of the foreign tax credit are
complex, and you should consult your personal tax advisors to determine whether
and to what extent you would be entitled to this credit. Alternatively, you may
elect to claim a U.S. tax deduction, instead of a foreign tax credit, for such
Israeli tax, but only for a year in which you elect to do so with respect to all
foreign income taxes.
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DISPOSITIONS OF ADSS
If you sell or otherwise dispose of your ADSs, you will recognize gain or
loss for U.S. Federal income tax purposes in an amount equal to the difference
between the amount realized on the sale or other disposition and your adjusted
tax basis in your ADSs. Subject to the discussion below under the heading
"Passive Foreign Investment Companies,"' such gain or loss generally will be
capital gain or loss and will be long-term capital gain or loss if you had held
the ADSs for more than one year at the time of the sale or other disposition.
Long-term capital gains realized by individual U.S. Holders generally are
subject to a lower marginal U.S. federal income tax rate than ordinary income.
Under most circumstances, any gain that you recognize on the sale or other
disposition of ADSs will be U.S.-source for purposes of the foreign tax credit
limitation; and losses recognized will be allocated against U.S. source income.
PASSIVE FOREIGN INVESTMENT COMPANIES
For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, if in any taxable year either 75% or more
of our gross income is passive income, or at least 50% of the average value of
all of our assets for the taxable year produce or are held for the production of
passive income. For this purpose, passive income generally includes dividends,
interest, royalties, rents, annuities and the excess of gains over losses from
the disposition of assets which produce passive income. If we were determined to
be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply
to U.S. Holders owning ADSs. Accordingly, you are urged to consult your tax
advisors regarding the application of such rules.
If we are treated as a PFIC for any taxable year,
o you would be required to allocate income recognized upon receiving
certain dividends or gain recognized upon the disposition of ADSs
ratably over your holding period for such ADSs,
o the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which we were a PFIC, would
be taxed as ordinary income and would not be "qualified dividend
income,"
o the amount allocated to each of the other taxable years would be
subject to tax at the highest individual or corporate tax rate, as
the case may be, and an interest charge would be imposed with
respect to the resulting tax liability allocated to each such year,
o noncorporate holders will not be eligible for the reduced rate on
dividends received with respect to ADSs and
o you would be required to make an annual return on IRS Form 8621
regarding distributions received with respect to ADSs and any gain
realized on your ADSs.
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One method to avoid the aforementioned treatment is to make a timely
mark-to-market election in respect of your ADSs. If you elect to mark-to-market
your ADSs, you will generally include in income any excess of the fair market
value of the ADSs at the close of each tax year over your adjusted basis in the
ADSs. If the fair market value of the ADSs had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ADSs over its fair market value at that time. However,
such deductions generally would be limited to the net mark-to-market gains, if
any, that you included in income with respect to ADSs in prior years. Income
recognized and deductions allowed under the mark-to-market provisions, as well
as any gain or loss on the disposition of ADSs with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.
Based on our income, assets and activities for the year 2006, we believe
that we were not a PFIC for that year, and we do not expect to become a PFIC in
the foreseeable future. However, there can be no assurances that we will not be
treated as a PFIC for that year or any taxable year. If we are or become a PFIC
for any taxable year included in your holding period, we generally will remain a
PFIC for all subsequent taxable years with respect to your holding of our ADSs.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE POSSIBILITY OF US
BEING CLASSIFIED AS A PFIC AND THE POTENTIAL TAX CONSEQUENCES ARISING FROM THE
OWNERSHIP AND DISPOSITION (DIRECTLY OR INDIRECTLY) OF AN INTEREST IN A PFIC.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividend payments made with respect to ADSs and proceeds received in
connection with the sale or other disposition of ADSs may be subject to
information reporting to the U.S. Internal Revenue Service (the "IRS") and
backup withholding. Backup withholding will not apply, however, if a U.S. Holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates such fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable backup withholding rules. Persons required to
establish their exempt status generally must provide such certification on IRS
Form W-9 or Form W-8BEN (as applicable). Amounts held as backup withholding may
be credited against a U.S. Holder's U.S. federal income tax liability, and a
U.S. Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS and
furnishing any required information.
DOCUMENTS ON DISPLAY
We are subject to certain of the information reporting requirements of the
U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We, as a
"foreign private issuer" are exempt from the rules and regulations under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act, with respect to their purchase and sale of our shares. In addition, we are
not required to file reports and financial statements with the U.S. Securities
and Exchange Commission, or SEC, as frequently or as promptly as U.S. companies
whose securities are registered under the Exchange Act. However, we will file
with the SEC an annual report on Form 20-F containing financial statements
audited by an independent accounting firm. We will also furnish quarterly
reports on Form 6-K containing unaudited financial information after the end of
each of the first three quarters.
120
You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of this web site is
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERAL
Our market risk represents the risk of changes in the value of financial
instruments caused by fluctuations in foreign exchange rates, interest rates and
equity prices. From time to time, we enter into hedging arrangements to reduce
our overall exposure to market risk; however, as a matter of policy, we do not
enter into transactions of a speculative or trading nature. Foreign currency
exchange rate and interest rate exposures are monitored by tracking actual and
projected commitments and through the use of sensitivity analysis.
MARKET RISK RELATED TO FOREIGN CURRENCY EXCHANGE RATES
We have financial liabilities denominated in various foreign currencies
(primarily dollars). Fluctuations in foreign currency exchange rates are likely
to affect our financing expenses.
As of December 31, 2006, we had consolidated foreign currency-linked
financial liabilities of approximately NIS 355 million, of which NIS 307 million
were dollar-linked.
As of December 31, 2005, our net financial liabilities in foreign currency
totaled approximately NIS 321 million, of which NIS 183 million were
dollar-linked. Should the US dollar exchange rate rise by 2%, our financing
expenses would increase by approximately NIS 4 million.
A portion of the currency exposure is derived from the export sales
included in our consolidated financial statements. For the year ended December
31, 2006, revenues from these export sales, which are denominated in foreign
currencies, amounted to approximately NIS 276 million, representing
approximately 47% of our total consolidated revenues from sales and services for
that period, while the portion of the expenses included in the consolidated
financial statements that is denominated in foreign currencies is approximately
33%.
121
Our policy regarding hedging against exposure to fluctuations in currency
prices is that each subsidiary will hedge according to the needs and markets in
which it operates; there is no policy of engaging in currency hedging over the
entire consolidated balance sheet.
Our consolidated statements as of December 31, 2006 include transactions
with financial instruments that serve mainly as a hedge against foreign currency
exchange rate exposure for our subsidiary companies.
During 2006, we bought and sold dollars in exchange for other currencies
in forward contracts, call options, put options and swaps. As of December 31,
2006 there were no open foreign exchange transactions. For a detailed
description of transactions with financial instruments, see Note 21 to our
consolidated financial statements included elsewhere in this annual report.
MARKET RISK RELATED TO INFLATION RATES
Some of our financial loans are linked to the Israeli Consumer Price
Index, or CPI. In accordance with Israeli GAAP, until December 31, 2003 our
financial statements were presented in terms of NIS of identical purchasing
power as of December 31, 2003 to account for the effects of inflation based upon
changes in the CPI. As a result, the CPI linkage component of our financing
expenses was neutralized. Subsequent to the discontinuation of the adjustment of
financial statements for inflation as of January 1, 2004, our financing expenses
are now exposed to fluctuations in the CPI.
As of December 31, 2006, our consolidated balance sheet contained
CPI-linked loans and other liabilities totaling approximately NIS 2,466 million.
As of such date, our consolidated balance sheets contained CPI-linked financial
assets totaling approximately NIS 217 million.
Our net financial liabilities exposed to CPI-linkage amounted to
approximately NIS 2,249 million as of December 31, 2006. Should the CPI rise by
2%, our financing expenses would increase by approximately NIS 45 million.
We believe that a 2% increase in the CPI constitutes a reasonable increase
for examining the impact of exposure to interest rates on our financing
expenses, in view of the changes that have occurred in recent years and those
that are forecast for the coming year.
We have entered into forward transactions at the parent company level, in
order to reduce the overall exposure to our CPI-linked debt. As at December 31,
2006, we had open CPI-NIS forward contracts for an aggregate notional amount of
NIS 1,200 million. For a detailed description of transactions with financial
instruments, see Note 21 to our consolidated financial statements included
elsewhere in this annual report.
MARKET RISK RELATED TO INTEREST RATES
Some of our financial loans are denominated in variable interest rates
that are likely to fluctuate from time to time. Our policy regarding exposure to
interest rates is that each company in our consolidated group manages its own
exposure.
122
We engage in hedging transactions against interest rate fluctuations from
time to time. As of December 31, 2006 there were no open interest rate
transactions.
As of December 31, 2006, our net financial liabilities exposed to
fluctuations in the LIBOR interest rate amounted to approximately NIS 240
million. Should the LIBOR interest rate rise by 1%, our financing expenses would
increase by approximately NIS 2 million.
As of December 31, 2006, our net financial liabilities exposed to
fluctuations in the interest rate in Israel are approximately NIS 216 million.
Should the interest rate in Israel rise by 2%, our financing expenses would
increase by approximately NIS 4 million.
We believe that a 1% increase in the LIBOR interest rate and 2% in the
interest rate in Israel constitutes a reasonable increase for examining the
impact of exposure to interest rates on our financing expenses, in view of the
changes that have occurred in recent years and those that are forecast for the
coming year.
MARKET RISK RELATED TO EQUITY PRICES
We had marketable short-term securities at December 31, 2006 of
approximately NIS 471 million (excluding our investment in Elbit which is not
subject to market risk since the shares we hold have been sold to a third party,
as described above, and we have retained possession of such shares only until
and to the extent we receive the final installment of the consideration for the
shares). Market risk was estimated as the potential hypothetical decrease of 10%
in the prices of these securities. Assuming such a decrease, the fair value of
the equity marketable securities would decrease by approximately NIS 47 million.
In addition, we have long-term equity holdings in several affiliates whose
securities are traded on the Tel Aviv Stock Exchange and NASDAQ. Ordinary
fluctuations in the prices of these subsidiaries' securities would not affect
our financial statements; however, significant fluctuations may have an adverse
affect on our financial statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable.
123
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES.
See Item 15T below.
ITEM 15T. CONTROLS AND PROCEDURES.
(A) DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Corporate Controller have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2006. Based
on this evaluation, our Chief Executive Officer and Corporate Controller have
concluded that, as of such date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and Corporate Controller, to allow timely decisions
regarding required disclosure.
(B) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over
financial reporting is designed to provide reasonable assurance to our
management and the board of directors regarding the reliability of financial
reporting and the preparation and fair presentation of published financial
statements for external purposes in accordance with generally accepted
accounting principles in Israel and in the United States. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurances with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may decline.
Our management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework and criteria
established in Internal Control -- Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, our management assessed the effectiveness of our internal control
over financial reporting for year ended December 31, 2006 and concluded that
such internal control over financial reporting was effective as of December 31,
2006.
124
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management's report in this annual report.
(C) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
that occurred during the year ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Shlomo Risman, an external
director and a member of the audit committee of our board of directors, is an
"audit committee financial expert" as defined in Item 16A of Form 20-F. Mr.
Risman is "independent" under the rules of the New York Stock Exchange.
ITEM 16B. CODE OF ETHICS
We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Corporate Controller and all of our other executive
officers.
You may request a copy of our code of ethics, at no cost, by writing to or
telephoning us as follows:
Koor Industries Ltd.
3 Azrieli Center
Triangle Tower, 43rd Floor
Tel Aviv 67023, Israel
Attn: Shlomo Heller, General Counsel
Telephone: +011-972-3-607-5107
125
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $519,000 for fiscal year 2006 in
connection with the professional services rendered for the audit of our annual
consolidated financial statements and our consolidated subsidiaries' annual
financial statements, review of our statutory quarterly consolidated financial
statements and services normally provided by them relating to statutory and
regulatory filings or engagements, including review of documents filed with the
SEC. For fiscal year 2005, KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $602,000 for these
services.
AUDIT-RELATED FEES: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $31,000 in fiscal year 2006 for
assurance and related services reasonably related to the performance of our
audit. In fiscal year 2005, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $14,000 for
audit-related services. These fees relate mainly to the issuance of special
reports.
TAX FEES: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $14,000 in fiscal year 2006 mainly
for tax compliance. KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $77,000 for tax-related services in
fiscal year 2005.
ALL OTHER FEES: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $287,000 in fiscal year 2006 for
products and services other than those comprising audit fees, audit-related fees
and tax fees. These fees mainly relate to assistance to the companies regarding
documentation of internal control over financial reporting. In fiscal year 2005,
KPMG and its affiliates charged us and our consolidated subsidiaries an
aggregate of approximately $211,000 for products and services in this category.
AUDIT COMMITTEE PRE-APPROVAL POLICY AND PROCEDURES
Our audit committee is responsible, among other things, for recommending
to our shareholders the appointment of our external auditors, for approval of
the amounts to be paid to our external auditors and for assisting our board of
directors in overseeing the work of our external auditors. To assure compliance
with independence requirements applicable to our independent auditors, our audit
committee pre-approves annually a catalog of specific audit and non-audit
services in the categories Audit Services, Audit-Related Services, Tax-Related
Services, and Other Services that may be performed by our auditors, as well as
the budgeted fee levels for each of these categories. All other permitted
services must receive a specific approval from our audit committee. Our external
auditor periodically provides a report to our audit committee in order for our
audit committee to review the services that our external auditor is providing,
as well as the status and cost of those services.
During 2006, none of the services provided to us by our external auditors
were provided pursuant to the DE MINIMIS exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
126
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
127
PART III
ITEM 17. FINANCIAL STATEMENTS.
See pages F-1 through F-169, incorporated herein by reference.
ITEM 18. FINANCIAL STATEMENTS.
Not Applicable.
ITEM 19. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Memorandum of Association of Koor Industries Ltd.*
1.2 Articles of Association of Koor Industries Ltd.*
1.3 Amendments to Articles of Association of Koor Industries Ltd.
Pursuant to a General Meeting of Shareholders held on June 1,
2003.***
1.4 Amendment to Articles of Association of Koor Industries Ltd.
Pursuant to a General Meeting of Shareholders held on June 11,
2007.*****
2.1 Form of Ordinary Share Certificate.*
2.2 Form of Deposit Agreement including Form of American Depositary
Receipt.**
4.1 Share Transfer Deed, dated December 27, 2004, and amended July 6,
2005, between Koor Industries Ltd. and Elbit Systems Ltd. ****
4.2 Shareholders' Agreement, dated December 27, 2004, and amended
July 6, 2005, between Koor Industries Ltd. and Elbit Systems Ltd.
****
4.3 Share Transfer Deed, dated December 27, 2004, and amended July 6,
2005, between Koor Industries Ltd. and Federmann Enterprises Ltd.
****
4.4 Shareholders' Agreement, dated December 27, 2004, and amended
July 6, 2005, among Koor Industries Ltd., Federmann Enterprises
Ltd. and Heris Aktiengesellschaft. ****
4.5 Purchase Agreement, dated November 22, 2006, between Koor
Industries Ltd. and Federmann Enterprises Ltd. *****
8.1 List of significant subsidiaries and affiliates.*****
12.1 Certification of the Principal Executive Officer of Koor
Industries Ltd. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*****
12.2 Certification of the Principal Financial Officer of Koor
Industries Ltd. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*****
13.1 Certification of the Principal Executive and Financial Officers
of Koor Industries Ltd. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*****
14.1 Consent of KPMG Somekh Chaikin to the incorporation by reference
into the effective registration statement on Form S-8 of Koor
Industries Ltd. under the Securities Act of 1933 of their report
with respect to the consolidated financial statements of Koor
Industries Ltd., which appears in this Annual Report on Form
20-F.*****
128
----------
* Incorporated herein by reference to Koor Industries Ltd.'s Registration
Statement on Form F-1 (Registration No. 333-97732) filed with the
Securities and Exchange Commission on October 3, 1995.
** Incorporated herein by reference to Koor Industries Ltd.'s Registration
Statement on Form F-6 (Registration No. 333-97758) filed with the
Securities and Exchange Commission on October 4, 1995.
*** Incorporated by reference to Koor Industries Ltd.'s Annual Report on Form
20-F for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on July 15, 2003.
**** Incorporated by reference to Koor Industries Ltd.'s Annual Report on Form
20-F for the year ended December 31, 2004 filed with the Securities and
Exchange Commission on July 15, 2005.
***** Filed herewith.
129
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tel Aviv,
State of Israel, on the 13th day of June, 2007.
KOOR INDUSTRIES LTD.
By: /s/ Raanan Cohen
------------------------------
Raanan Cohen
CHIEF EXECUTIVE OFFICER
Koor Industries Ltd. (an Israeli Corporation)
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2006
--------------------------------------------------------------------------------
Contents Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets..................................................F-3
Company Balance Sheets.......................................................F-5
Consolidated Statements of Operations........................................F-7
Company Statements of Operations.............................................F-8
Statement of Changes in Shareholders' Equity................................F- 9
`
Consolidated Statements of Cash Flows.......................................F-10
Company Statements of Cash Flows............................................F-17
Notes to the Financial Statements...........................................F-19
Annexes to the Financial Statements........................................F-134
F-1
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF KOOR INDUSTRIES LTD.
We have audited the accompanying balance sheets of Koor Industries Ltd.
(hereinafter - "the Company") as at December 31, 2006 and 2005 and the
consolidated balance sheets of the Company and its subsidiaries (hereinafter -
"the consolidated") as at December 31, 2006 and 2005, and the related statements
of operations, changes in shareholders' equity and cash flows, for each of the
years in the three-year period ended December 31, 2006. These financial
statements are the responsibility of the Company's Board of Directors and of its
Management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain subsidiaries, including those consolidated by the proportionate
consolidation method. The financial statements of these subsidiaries reflect
total assets constituting 9% and 13% of the total consolidated assets as at
December 31, 2006 and 2005, respectively, and total revenues and earnings
constituting 45%, 13% and 10% of the total continuing consolidated revenues and
earnings for the years ended December 31, 2006, 2005 and 2004, respectively, and
40% and 34% of the total discontinuing consolidated revenues and earnings for
the years ended December 31, 2005 and 2004, respectively. Furthermore, we did
not audit the financial statements of certain affiliates, whose company's
investments constitute NIS 134,593 thousand and NIS 66,107 thousand, as at
December 31, 2006 and 2005, respectively, and its equity in earnings (losses)
constitute NIS 9,315 thousand, NIS (5,469) thousand and NIS 7,336 thousand for
the years ended December 31, 2006, 2005 and 2004, respectively. The financial
statements of those subsidiaries and affiliates were audited by other auditors
whose reports thereon were furnished to us, and our opinion, insofar as it
relates to amounts included for such subsidiaries and affiliates, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, and reports of the other auditors, provide a reasonable basis for our
opinion.
In our opinion, based on our audits and on the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company and the consolidated financial position of
the Company and its subsidiaries as at December 31, 2006 and 2005 and their
results of operations, changes in shareholders' equity and cash flows - Company
and consolidated - for each of the years in the three-year period ended December
31, 2006, in conformity with accounting principles generally accepted in Israel.
Furthermore, in our opinion, these statements are prepared in accordance with
the Securities Regulations (Preparation of Annual Financial Statements), 1993.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 29 of the financial statement.
As explained in Note 2(B) to the financial statements, these financial
statements are stated in reported amounts, in accordance with the accounting
standards of the Israel Accounting Standards Board.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
June 12, 2007
Tel Aviv, Israel
F-2
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2006
-------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 277,197 309,666 65,609
Short-term deposits and investments 4 695,931 530,829 ** 164,717
Trade receivables 5 82,041 78,557 19,418
Other receivables 6 82,456 79,467 19,516
Inventories 7 65,728 90,909 15,557
-------------- -------------- --------------
1,203,353 1,089,428 284,817
-------------- -------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES
Investments in affiliates 8 3,324,220 2,664,020 * 786,798
Other investments and receivables 9 202,672 556,127 ** 47,970
-------------- -------------- --------------
3,526,892 3,220,147 834,768
-------------- -------------- --------------
FIXED ASSETS, NET 10 755,478 725,050 178,811
-------------- -------------- --------------
INTANGIBLE ASSETS, DEFERRED EXPENSES AND DEFERRED
TAX ASSETS 11 18,108 15,816 4,286
-------------- -------------- --------------
ASSETS RELATING TO DISCONTINUED OPERATIONS 24 -- 237,822 --
-------------- -------------- --------------
5,503,831 5,288,263 1,302,682
============== ============== ==============
* Restated - See Note 2R(4).
** Reclassified
F-3
Koor Industries Ltd. (An Israeli Corporation)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2006
-------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Credit from banks and others 12 53,967 272,127 12,773
Trade payables 13 67,845 71,090 16,058
Other payables 14 191,135 197,988 45,239
Customer advances 5,042 5,565 1,193
-------------- -------------- --------------
317,989 546,770 75,263
-------------- -------------- --------------
LONG-TERM LIABILITIES
Long-term bank loans 15 1,868,932 1,555,149 442,351
Other long-term loans 15 47,467 54,147 11,235
Debentures 15B 988,482 390,854 233,960
Deferred taxes 16G 11,011 78 2,606
Liability for employee severance benefits, net 17 6,239 3,634 1,477
-------------- -------------- --------------
2,922,131 2,003,862 691,629
-------------- -------------- --------------
LIABILITIES RELATING TO DISCONTINUED OPERATIONS 24 -- 201,290 --
-------------- -------------- --------------
CONTINGENT LIABILITIES AND COMMITMENTS 18
MINORITY INTEREST 74,523 57,907 17,639
-------------- -------------- --------------
SHAREHOLDERS' EQUITY 20 2,189,188 2,478,434 * 518,151
-------------- -------------- --------------
5,503,831 5,288,263 1,302,682
============== ============== ==============
/s/ Jonathan Kolber /s/ Raanan Cohen /s/ Michal Yageel
---------------------------------- ---------------------------------- ----------------------------------
Jonathan Kolber Raanan Cohen Michal Yageel
Chairman of the Board of Directors Chief Executive Officer Corporate Controller
June 12, 2007
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-4
COMPANY BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2006
-------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 238,207 266,962 56,380
Short-term deposits and investments 4 657,285 485,143 ** 155,570
Short-term loans and current maturities of loans
to investee companies 39,308 37,212 9,304
Receivables:
Investee companies 1,114 2,606 264
Others 6 2,510 16,095 594
-------------- -------------- --------------
938,424 808,018 222,112
-------------- -------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES
Investments in investees 8 2,579,219 2,962,192 * 610,466
Other investments and receivables 9 62,799 366,994 ** 14,864
-------------- -------------- --------------
2,642,018 3,329,186 625,330
-------------- -------------- --------------
FIXED ASSETS, NET 10 60,143 62,367 14,235
-------------- -------------- --------------
3,640,585 4,199,571 861,677
============== ============== ==============
* Restated - See Note 2R(4).
** Reclassified.
F-5
Koor Industries Ltd. (An Israeli Corporation)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2006
-------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Credit from banks and others 12 -- 204,715 --
Trade payables 13 1,346 1,223 319
Others 14 95,888 48,007 ** 22,695
-------------- -------------- --------------
97,234 253,945 23,014
-------------- -------------- --------------
LONG-TERM LIABILITIES
Loans from banks and others 15 306,961 1,028,758 72,654
Debentures 15B 988,482 390,854 233,960
Liability for employee severance benefits, net 17 2,137 -- 506
Excess of accumulated losses over investments in
subsidiaries 56,583 47,580 ** 13,392
-------------- -------------- --------------
1,354,163 1,467,192 320,512
-------------- -------------- --------------
CONTINGENT LIABILITIES AND COMMITMENTS 18
SHAREHOLDERS' EQUITY 20 2,189,188 2,478,434 * 518,151
-------------- -------------- --------------
3,640,585 4,199,571 861,677
============== ============== ==============
* Restated - See Note 2R(4).
** Reclassified.
/s/ Jonathan Kolber /s/ Raanan Cohen /s/ Michal Yageel
---------------------------------- ---------------------------------- ----------------------------------
Jonathan Kolber Raanan Cohen Michal Yageel
Chairman of the Board of Directors Chief Executive Officer Corporate Controller
June 12, 2007
The accompanying notes are an integral part of the financial statements.
F-6
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- -------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------------------------- --------------
REVENUES AND EARNINGS
Revenue from sales and services 23A 583,253 733,631 7,815,782 138,048
Group's equity in the operating results
of investee companies, net 23G (36,549) 359,362 (*) (35,060) (8,650)
Other income, net 23F 104,206 223,622 -- 24,664
-------------- -------------- -------------- --------------
650,910 1,316,615 (*) 7,780,722 154,062
-------------- -------------- -------------- --------------
COSTS AND LOSSES
Cost of sales and services 23B 437,719 582,158 5,111,356 103,602
Selling and marketing expenses 23C 63,546 84,150 1,062,367 15,041
General and administrative expenses 23D 134,601 140,640 (*) 438,823 31,858
Other expenses, net 23F -- -- 72,392 --
Financing expenses, net 23E 113,935 182,021 271,955 26,967
-------------- -------------- -------------- --------------
749,801 988,969 (*) 6,956,893 177,468
-------------- -------------- -------------- --------------
EARNINGS (LOSSES) BEFORE INCOME TAX (98,891) 327,646 (*) 823,829 (23,406)
Income tax 16H (9,369) (79,979) (272,280) (2,218)
-------------- -------------- -------------- --------------
(108,260) 247,667 (*) 551,549 (25,624)
Minority interest in consolidated
companies' results, net (5,414) 10,175 (430,860) (1,281)
-------------- -------------- -------------- --------------
NET EARNINGS (LOSSES) FROM CONTINUING
OPERATIONS (113,674) 257,842 (*) 120,689 (26,905)
NET EARNINGS FROM DISCONTINUED OPERATIONS 24 10,474 52,809 24,301 2,479
CUMULATIVE EFFECT AS OF THE BEGINNING OF
THE YEAR OF CHANGE IN ACCOUNTING METHOD
(SEE NOTE 2E(9)) 62,552 (3,054) -- 14,805
-------------- -------------- -------------- --------------
NET EARNINGS (LOSSES) FOR THE YEAR (40,648) 307,597 (*) 144,990 (9,621)
============== ============== ============== ==============
NIS NIS(*)(**) NIS(**) US$
-------------- -------------- -------------- --------------
BASIC EARNINGS (LOSS) PER ORDINARY SHARE: 27
From continuing operations (6.413) 16.286 7.436 (1.518)
From discontinued operations 0.639 3.294 1.538 0.151
From cumulative effect of change in
accounting method 3.815 (0.191) -- 0.903
-------------- -------------- -------------- --------------
Net earnings (loss) for the year (1.959) 19.389 8.974 (0.464)
============== ============== ============== ==============
DILUTED EARNINGS (LOSS) PER ORDINARY
SHARE: 27
From continuing operations (6.951) 13.647 5.090 (1.645)
From discontinued operations 0.639 3.192 1.493 0.151
From cumulative effect of change in
accounting method 3.815 (0.185) -- 0.903
-------------- -------------- -------------- --------------
Net earnings (loss) for the year (2.497) 16.654 6.583 (0.591)
============== ============== ============== ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(*) Restated - See Note 2R(4).
(**) Restated - See Note 2W.
The accompanying notes are an integral part of the financial statements.
F-7
Koor Industries Ltd. (An Israeli Corporation)
COMPANY STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
--------------
(Note 1B)
--------------
2006 2005 2004 2006
-------------- -------------- -------------- --------------
Note NIS thousands US $ thousands
-------- ---------------------------------------------------- --------------
REVENUES AND EARNINGS
Management services from subsidiaries 7,499 20,024 22,334 1,775
Koor's equity in the operating results of
investee companies, net 23G 7,094 130,443 * 26,200 1,679
Other income, net 23F 61,914 438,133 234,959 14,654
-------------- -------------- -------------- --------------
76,507 588,600 * 283,493 18,108
-------------- -------------- -------------- --------------
COSTS AND LOSSES
General and administrative expenses 23D 65,773 58,684 * 46,648 15,568
Financing expenses, net 23E 51,382 144,836 110,806 12,161
-------------- -------------- -------------- --------------
117,155 203,520 * 157,454 27,729
-------------- -------------- -------------- --------------
EARNINGS (LOSS) BEFORE INCOME TAX (40,648) 385,080 * 126,039 (9,621)
Income tax -- (77,483) 18,951 --
-------------- -------------- -------------- --------------
NET EARNINGS (LOSSES) FOR THE YEAR (40,648) 307,597 * 144,990 (9,621)
============== ============== ============== ==============
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-8
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Company Cumulative
Amounts shares held foreign
Number of received in by the currency
ordinary Capital respect of Company and translation Accumulated
shares (1) Share capital reserves stock options subsidiaries adjustments losses Total
------------ ------------- ------------ ------------- ------------ ------------ ----------- -------------
NIS thousands NIS thousands
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 15,741,160 564,515 2,564,099 -- (80,321) (196,758) (1,111,142) 1,740,393
CHANGES DURING 2004:
Net earnings for the year -- -- -- -- -- 144,990 144,990
Exercise of stock options granted to employees 83,025 -- -- -- -- -- --
Cumulative foreign currency translation
adjustments, net -- -- -- -- -- (8,916) -- (8,916)
------------ ------------- ------------ ------------- ------------ ------------ ----------- -------------
BALANCE AS DECEMBER 31, 2004 15,824,185 564,515 2,564,099 -- (80,321) (205,674) (966,152) 1,876,467
CHANGES DURING 2005:
Net earnings for the year -- -- -- -- -- -- 307,597 * 307,597 *
Stock-based compensation expense -- -- 1,389 * -- -- -- -- 1,389 *
Issuance of treasury stock (Note 20B) 193,229 -- -- -- 74,250 -- (24,641) 49,609
Issuance of stock options (Note 20D) -- -- -- 21,715 -- -- -- 21,715
Exercise of stock options granted to employees 129,254 -- -- -- -- -- -- --
Cumulative foreign currency translation
adjustments, net -- -- -- -- -- 221,657 -- 221,657
------------ ------------- ------------ ------------- ------------ ------------ ----------- -------------
BALANCE AS DECEMBER 31, 2005 16,146,668 564,515 2,565,488* 21,715 (6,071) 15,983 (683,196) * 2,478,434 *
CHANGES DURING 2006:
Net loss for the year -- -- -- -- -- -- (40,648) (40,648)
Stock-based compensation expense -- -- 1,236 -- -- -- -- 1,236
Exercise of stock options granted to employees 420,402 -- -- -- -- -- -- --
Cumulative foreign currency translation
adjustments, net -- -- -- -- -- (249,834) -- (249,834)
------------ ------------- ------------ ------------- ------------ ------------ ----------- -------------
BALANCE AS DECEMBER 31, 2006 16,567,070 564,515 2,566,724 21,715 (6,071) (233,851) (723,844) 2,189,188
============ ============= ============ ============= ============ ============ =========== =============
(1) Net of the Company holdings and its subsidiaries' holdings.
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-9
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
CONVENIENCE TRANSLATION INTO $ (NOTE 1B)
Company Cumulative
Amounts shares held foreign
received in by the currency
Capital respect of Company and translation Accumulated
Share capital reserves stock options subsidiaries adjustments losses Total
------------- ------------ ------------- ------------ ------------ ----------- -------------
US$ thousands US$ thousands
---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 133,613 607,216 * 5,140 (1,437) 3,783 (161,703) * 586,612 *
CHANGES DURING 2006
Net loss for the year -- -- -- -- -- (9,621) (9,621)
Stock-based compensation expense -- 293 -- -- -- -- 293
Cumulative foreign currency translation adjustments, net -- -- -- -- (59,133) -- (59,133)
------------- ------------ ------------- ------------ ------------ ----------- -------------
BALANCE AS DECEMBER 31, 2006 133,613 607,509 5,140 (1,437) (55,350) (171,324) 518,151
============= ============ ============= ============ ============ =========== =============
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-10
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
--------------
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES
Net earnings (loss) for the year (40,648) 307,597 * 144,990 (9,621)
Adjustments to reconcile net earnings (loss) to net
cash flows generated by operating activities (A) 24,031 (314,733) * 703,293 5,688
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by continuing
operating activities (16,617) (7,136) 848,283 (3,933)
Net cash inflow (outflow) generated by discontinued
operating activities 23,798 (167,915) 46,123 5,633
-------------- ------------- ------------- --------------
Net cash flows from operating activities 7,181 (175,051) 894,406 1,700
-------------- ------------- ------------- --------------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Purchase of fixed assets (29,776) (23,233) (211,306) (7,048)
Investment grants in respect of fixed assets -- 2,226 6,908 --
Amounts charged to intangible assets and deferred
expenses -- (1,351) (153,206) --
Acquisition of subsidiaries (B) -- -- (293,781) --
Investments in affiliates (924,501) -- (646,672) (218,817)
Loans to affiliates -- -- (1,680) --
Repayment of loans from affiliates 7,042 -- -- 1,668
Proceeds from realization of investments in
formerly consolidated subsidiaries, net of cash
in those subsidiaries at the time they ceased
being consolidated (C) -- 199,953 -- --
Acquisition of control in proportionately
consolidated subsidiary (F) (45,019) -- -- (10,656)
Repayment of liability in respect of purchase of
subsidiary in prior years -- -- (28,309) --
Proceeds from realization of investment in
proportionately consolidated subsidiary at the
time it ceased being proportionately consolidated
(E) -- (14,122) -- --
Acquisition of minority in subsidiaries -- -- (4,762) --
Proceeds from disposal of investments in investee
companies and others 182,161 644,850 636,286 43,116
Receipts on account of sale of subsidiary 26,321 -- -- 6,230
Proceeds from sale of fixed assets and intangible
assets 936 1,272 7,195 222
Investment in venture capital companies (7,417) (15,426) (34,928) (1,756)
Decrease (increase) in other investments, net 1,649 (351,901) (5,195) 390
Decrease (increase) in short-term deposits and
investments, net 1,708 (167,297) 16,910 404
Proceeds from realization of subsidiary's shares
that became proportionately consolidated (D) -- -- 38,239 --
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by continuing
investing activities (786,896) 274,971 (674,301) (186,247)
Net cash inflow (outflow) generated by discontinued
investing activities (14,945) 143,959 (48,538) (3,538)
-------------- ------------- ------------- --------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (801,841) 418,930 (722,839) (189,785)
-------------- ------------- ------------- --------------
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-11
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
CASH FLOWS GENERATED BY FINANCING ACTIVITIES
Proceeds from issuance of debentures, net 593,988 375,535 -- 140,589
Proceeds from issuance of stock options -- 21,715 -- --
Proceeds from issuance of treasury stock -- 49,609 -- --
Issuance of shares to minority interest in
subsidiaries 17,133 7,938 14,466 4,055
Acquisition of stock options by subsidiary (1,138) -- -- (269)
Dividend paid to minority interest in subsidiaries -- -- (107,006) --
Issuance of convertible debentures in subsidiary -- -- 665,982 --
Receipt of long-term loans and other long-term
liabilities 198,988 1,337,485 971,671 47,098
Repayment of long-term loans, debentures and
other long-term liabilities (66,597) (1,885,820) (1,781,048) (15,763)
Increase (decrease) in credit from banks and
others, net (13,367) (475,089) 14,701 (3,164)
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by continuing
financing activities 729,007 (568,627) (221,234) 172,546
Net cash inflow (outflow) generated by
discontinued financing activities (2,067) 15,638 93,165 (489)
-------------- ------------- ------------- --------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 726,940 (552,989) (128,069) 172,057
-------------- ------------- ------------- --------------
TRANSLATION DIFFERENCES IN RESPECT OF CASH
BALANCES OF AUTONOMOUS FOREIGN INVESTEE
COMPANIES IN CONTINUING OPERATIONS (657) 3,672 (8,654) (156)
TRANSLATION DIFFERENCES IN RESPECT OF CASH
BALANCES OF AUTONOMOUS FOREIGN INVESTEE
COMPANIES IN DISCONTINUED OPERATIONS 74 18,881 (7,205) 18
-------------- ------------- ------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (68,303) (286,557) 27,639 (16,166)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM DISCONTINUED OPERATIONS 35,834* 309,512 * (83,545) 8,481*
-------------- ------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS (32,469) 22,955 (55,906) (7,685)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 309,666 286,711 342,617 73,294
-------------- ------------- ------------- --------------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 277,197 309,666 286,711 65,609
============== ============= ============= ==============
* Including proceeds received from realization of subsidiaries classified as
discontinued operations in the amount of NIS 42,694 thousand (2005 - NIS
320,074 thousand).
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-12
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
A. ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH FLOWS GENERATED BY
OPERATING ACTIVITIES:
Income and expenses not involving cash flows:
Earnings from discontinued operations (10,474) (52,809) (24,301) (2,479)
Minority interest in earnings (losses) of
subsidiaries, net 5,414 (10,175) 430,860 1,281
Group's equity in operating results of affiliates,
net 138,444 (268,209) 36,493 32,768
Depreciation and amortization 34,637 42,175 430,086 8,198
Deferred taxes, net 14,840 71,034 40,887 3,512
Increase in liabilities in respect of employee
severance benefits, net 2,345 25,250 29,842 555
Net capital losses (gains) from realization of:
Fixed assets and intangible assets 313 (254) 16,574 74
Investments in formerly consolidated subsidiaries -- (204,619) -- --
Investments in investee companies (79,308) (76,653) (227,477) (18,771)
Linkage of debentures and amortization of bond
discount 3,640 15,318 -- 862
Inflationary erosion (linkage) of principal of
long-term loans and other liabilities (25,545) 35,645 7,572 (6,046)
Inflationary erosion (linkage) of value of
investments, deposits and loans receivable (8,350) (14,299) 16,534 (1,976)
Impairment (reserve) in value of assets and
investments (primarily venture capital
investments) (1,504) 68,786 58,131 (356)
Amortization of stock based compensation 1,633 1,389 -- 386
Cumulative effect as at the beginning of the year
of change in accounting method (62,552) 3,054 -- (14,805)
-------------- ------------- ------------- --------------
13,533 (364,367) 815,201 3,203
-------------- ------------- ------------- --------------
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-13
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
A. ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH FLOWS GENERATED BY
OPERATING ACTIVITIES (CONT'D):
Changes in operating asset and liability items:
Decrease (increase) in trade receivables and other
receivables (after taking into account
non-current receivables) 30,960 (29,082) (128,141) 7,328
Decrease (increase) in inventories (including
long-term customer advances and deposits) 18,704 9,610 (291,989) 4,427
Increase (decrease) in trade payables and other
payables (39,166) 69,106 308,222 (9,270)
-------------- ------------- ------------- --------------
10,498 49,634 (111,908) 2,485
-------------- ------------- ------------- --------------
24,031 (314,733) 703,293 5,688
============== ============= ============= ==============
B. ACQUISITION OF SUBSIDIARIES
Assets and liabilities of the subsidiaries at date
of acquisition:
Working capital, excluding cash and cash
equivalents -- -- (38,239) --
Issuance of shares by investee company -- -- 34,238 --
Fixed assets and investments, net -- -- (286,907) --
Long-term liabilities -- -- 187,019 --
Goodwill -- -- (189,892) --
-------------- ------------- ------------- --------------
-- -- (293,781) --
============== ============= ============= ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-14
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
C. PROCEEDS FROM REALIZATION OF INVESTMENTS IN
FORMERLY CONSOLIDATED SUBSIDIARIES, NET OF CASH
IN THOSE SUBSIDIARIES AT THE TIME THEY CEASED
BEING CONSOLIDATED
Assets and liabilities of the formerly consolidated
subsidiaries at the time they ceased being
consolidated:
Working capital surplus (deficit), excluding cash
and cash equivalents -- 1,031,023 -- --
Fixed assets and investments -- 1,971,804 -- --
Intangible assets -- 2,316,290 -- --
Long-term liabilities -- (1,601,477) -- --
Investments in affiliated companies, net -- (1,315,995) -- --
Realization of foreign currency translation
adjustments of financial statements of
autonomous investees -- 18,141 -- --
Capital gain (loss) on sale of investments in
subsidiaries -- 200,987 -- --
Minority interest -- (2,420,820) -- --
-------------- ------------- ------------- --------------
-- 199,953 -- --
============== ============= ============= ==============
D. PROCEEDS FROM REALIZATION OF SUBSIDIARY'S
SHARES THAT BECAME PROPORTIONATELY
CONSOLIDATED
Working capital surplus excluding cash and cash
equivalents -- -- 23,057 --
Fixed assets, investments and intangible assets -- -- 40,851 --
Realization proceeds receivable -- -- (25,544) --
Capital loss -- -- (125) --
-------------- ------------- ------------- --------------
-- -- 38,239 --
============== ============= ============= ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-15
Koor Industries Ltd. (An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004(1) 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
E. PROCEEDS FROM REALIZATION OF INVESTMENT IN
PROPORTIONATELY CONSOLIDATED SUBSIDIARY AT THE
TIME IT CEASED BEING PROPORTIONATELY CONSOLIDATED
Assets and liabilities of formerly proportionately
consolidated subsidiary, at the time it ceased
being proportionately consolidated:
Working capital surplus, excluding cash and cash
equivalents -- 36,900 -- --
Fixed assets and investments -- 129,917 -- --
Long-term liabilities -- (62,023) -- --
Investments in affiliated companies, net -- (117,623) -- --
Capital gain -- 3,632 -- --
Minority interest -- (4,925) -- --
-------------- ------------- ------------- --------------
-- (14,122) -- --
============== ============= ============= ==============
F. ACQUISITION OF CONTROL IN PROPORTIONATELY
CONSOLIDATED SUBSIDIARY
Assets and liabilities of formerly
proportionately consolidated subsidiary, at
the date of acquisition:
Working capital surplus, excluding cash and cash
equivalents 3,801 -- -- 900
Fixed assets, net (42,118) -- -- (9,969)
Goodwill (17,215) -- -- (4,075)
Long-term liabilities 10,513 -- -- 2,488
-------------- ------------- ------------- --------------
(45,019) -- -- (10,656)
============== ============= ============= ==============
G. NON-CASH TRANSACTIONS
Purchase of fixed assets by credit -- 4,712 9,172 --
============== ============= ============= ==============
Purchase of other assets by credit -- -- 28,178 --
============== ============= ============= ==============
Sale of venture capital investments, net 56,159 -- -- 13,292
============== ============= ============= ==============
Proposed dividend to minority shareholders by
subsidiaries -- -- 29,614 --
============== ============= ============= ==============
Dividend in kind from affiliated company 10,470 -- 33,363 --
============== ============= ============= ==============
Loans converted into shareholders' equity of
subsidiary -- 13,419 14,042 --
============== ============= ============= ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-16
Koor Industries Ltd. (An Israeli Corporation)
COMPANY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the year (40,648) 307,597 * 144,990 (9,621)
Adjustments to reconcile net earnings (loss) to
net cash flows generated by operating activities
(A) (6,708) (427,072) * (136,907) (1,588)
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by operating
activities (47,356) (119,475) 8,083 (11,209)
-------------- ------------- ------------- --------------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Investee companies:
Acquisition of shares (938,545) (23,442) (667,779) (222,141)
Loans granted, capital notes and non-current
accounts 40,404 40,631 34,950 9,563
Purchase of fixed assets (200) (176) (423) (47)
Decrease (increase) in investments and other
receivables, net 177,186 (351,631) -- 41,938
Proceeds from sale of fixed assets 66 8 -- 16
Receipts on account of sale of subsidiary 26,321 -- -- 6,230
Proceeds from realization of investments in
investee companies 42,694 1,372,044 562,177 10,105
Investment in short-term deposits and investments,
net (9,826) (143,307) 63,412 (2,326)
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by investing
activities (661,900) 894,127 (7,663) (156,662)
-------------- ------------- ------------- --------------
CASH FLOWS GENERATED BY FINANCING ACTIVITIES:
Proceeds from issuance of debentures 593,988 375,535 -- 140,589
Proceeds from issuance of stock options -- 21,715 -- --
Proceeds from issuance of treasury stock -- 49,609 -- --
Receipt of long-term loans and other long-term
liabilities 142,897 1,007,119 637,000 33,821
Payments of long-term loans and other long-term
liabilities (49,094) (1,812,366) (628,703) (11,620)
Credit from banks and others, net (7,290) (178,967) 11,743 (1,725)
-------------- ------------- ------------- --------------
Net cash inflow (outflow) generated by financing
activities 680,501 (537,355) 20,040 161,065
-------------- ------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,755) 237,297 20,460 (6,806)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 266,962 29,665 9,205 63,186
-------------- ------------- ------------- --------------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 238,207 266,962 29,665 56,380
============== ============= ============= ==============
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-17
Koor Industries Ltd. (An Israeli Corporation)
COMPANY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------
Convenience
translation
(Note 1B)
--------------
2006 2005 2004 2006
-------------- ------------- ------------- --------------
NIS thousands US $ thousands
-------------------------------------------------- --------------
A. ADJUSTMENTS TO RECONCILE NET EARNINGS TO CASH
FLOWS GENERATED BY OPERATING ACTIVITIES
Income and expenses not involving cash flows:
Equity in operating results of investee
companies, net of dividend received therefrom (2,785) (109,173) * 47,879 (659)
Depreciation and amortization 1,905 2,043 2,022 451
Deferred taxes, net -- 77,483 (18,580) --
Increase (decrease) in liability in respect of
employee severance benefits, net 2,137 (1,917) 3,491 506
Net capital losses (gains) from realization of:
Fixed assets 453 7 -- 107
Investment in investee companies (41,655) (424,261) (213,249) (9,860)
Increase in value of deposits and other erosions,
net (8,084) (13,611) (6,623) (1,913)
Exchange rate differences and erosion of
long-term loans and other liabilities 5,116 49,006 6,077 1,210
Amortization of stock-based compensation 1,236 1,389 * -- 293
Changes in value of investments and assets 1,128 (377) -- 267
-------------- ------------- ------------- --------------
(40,549) (419,411) (178,983) (9,598)
-------------- ------------- ------------- --------------
Changes in operating assets and liability items:
Decrease (increase) in current accounts of
investee companies, net (1,427) 2,103 36,543 (338)
Decrease (increase) in receivables 13,585 (9,535) (213) 3,216
Increase (decrease) in trade payables and other
payables 21,683 (229) 5,746 5,132
-------------- ------------- ------------- --------------
33,841 (7,661) 42,076 8,010
-------------- ------------- ------------- --------------
(6,708) (427,072) (136,907) (1,588)
============== ============= ============= ==============
B. SIGNIFICANT NON-CASH TRANSACTIONS
Dividend from subsidiary 534,861 -- -- 126,594
============== ============= ============= ==============
Loans converted into shareholders' equity of
subsidiary 638,706 46,588 6,837 151,173
============== ============= ============= ==============
Assignment of long-term liabilities 1,014,170 -- -- 240,040
============== ============= ============= ==============
* Restated - See Note 2R(4).
The accompanying notes are an integral part of the financial statements.
F-18
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 1 - GENERAL
A. Koor Industries Ltd. is a holding company, engaged mainly in the fields of
agro-chemicals, telecommunications, tourism and venture capital
investments, through its subsidiaries, proportionately consolidated
companies and affiliates (the "Koor Group" or the "Group").
The Company's shares are traded both on the Tel Aviv Stock Exchange and on
the New York Stock Exchange.
B. The financial statements in reported amounts as at December 31, 2006 and
for the year ended have been translated into U.S. dollars using the
representative exchange rate at that date ($1 = NIS 4.225). The
translation was made solely for the convenience of the reader.
The amounts presented in these financial statements should not be
construed to represent amounts receivable or payable in dollars or
convertible into dollars, unless otherwise indicated in these financial
statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with the Securities'
Regulations (Presentation of Annual Financial Reports) - 1993 and in accordance
with accounting principles generally accepted in Israel.
The significant accounting policies, which were applied on a consistent basis,
are as follows:
A. DEFINITIONS
In these financial statements:
1. The Company - Koor Industries Ltd. ("Koor" or
"the Company").
2. The Group - Koor Industries Ltd. and its
investees
3. Subsidiaries - companies, including partnerships,
whose statements are fully
consolidated, directly or with
those of the Company.
4. Proportionately - jointly controlled companies,
consolidated Companies which are proportionately
consolidated, directly or
indirectly, in Koor's consolidated
financial statements.
5. Affiliates - companies in which voting rights
grant the Company significant
influence over the operating and
financial policies of these
companies, and which are not
subsidiaries or proportionately
consolidated companies. Such
companies are included on the
equity basis.
F-19
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
A. DEFINITIONS (CONT'D)
6. Investees - subsidiaries, proportionately
consolidated companies or
affiliates.
7. Other companies - companies in which the investment
does not confer significant
influence, and are accounted for
by the cost method.
8. Interested parties - as defined in Paragraph (1) of the
definition of "interested parties"
in Section 1 of the Israeli
Securities Law - 1968.
9. Related parties - as defined in Opinion No. 29 of
the Institute of Certified Public
Accountants in Israel ("ICPAI").
10. Controlling shareholders - as defined in the Israeli
Securities Regulations (Financial
Statement Presentation of
Transactions between a Company and
its Controlling Shareholder) -
1996.
11. Venture capital - an investment in a company that
investments meets two conditions:
(a) The Company is engaged
primarily in research,
development or marketing of
innovative and intellectual
property intensive products
or processes; and
(b) At least 90% of the company's
financing stems from
shareholder equity (including
shareholder loans and
shareholder guaranteed
credit), support of State
authorities or research
grants.
12. Consumer Price Index - the Israeli Consumer Price Index
(CPI) published by the
Central Bureau of Statistics.
13. Dollar - U.S. dollar.
14. Adjusted amount - the historical nominal amount
adjusted to the CPI for December
2003 in conformity with the
provisions of Opinions 23 and 36
of the ICPAI.
15. Reported amount - the adjusted amount as at the
transition date (December 31,
2003), with the addition of
amounts in nominal values that
were added after the transition
date and less amounts eliminated
after the transition date.
16. NIS - New Israeli Shekels
17. IASB - Israel Accounting Standards Board
B. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
1. In October 2001, the Israel Accounting Standards Board published
Accounting Standard No. 12 on "Discontinuation of Adjustment of
Financial Statements". According to this standard, and in accordance
with Accounting Standard No. 17 published in December 2002, the
adjustment of financial statements for the effect of changes in the
general purchasing power of the shekel was discontinued, commencing
January 1, 2004. Until December 31, 2003, the Group continued to
prepare financial statements adjusted for in accordance with Opinion
No. 36 of the ICPAI. The Group has applied the provisions of the
Standard and, accordingly, the adjustment was discontinued,
commencing January 1, 2004.
F-20
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
B. FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT'D)
2. In the past, the Company prepared its financial statements on the
basis of historical cost, adjusted to the CPI. The adjusted amounts
included in the financial statements as at December 31, 2003, served
as the starting point for the nominal financial reporting as of
January 1, 2004. Additions made during the period were included in
nominal values.
3. The non-monetary asset amounts do not necessarily represent their
realizable or current economic value, but only the reported amounts
of such assets.
4. In the financial statements, the term "cost" means cost in reported
amount.
5. The financial statements of certain companies classified as
autonomous units are stated based on the changes in the exchange
rates of their relevant functional currencies - see 2D below.
C. REPORTING PRINCIPLES
1. Balance sheets:
a. The equity value of investments in investees was determined
based on the reported or translated from foreign currency
financial statements of these companies.
b. Non-monetary items (mainly - fixed assets, inventory,
investments stated at cost and equity items) are stated in
reported amounts.
c. Monetary items are stated in the balance sheet at historical
nominal values as at the balance sheet date.
2. Statements of operations:
a. The equity in the results of operations of investees and the
minority interest in the results of subsidiaries were
determined based on the reported or translated from foreign
currency financial statements of such companies.
b. Revenues and expenses deriving from non-monetary items (such
as: depreciation and amortization, changes in inventory,
prepaid expenses and income, etc.) or from provisions included
in the balance sheet, are derived from the change between the
reported amounts of the opening balance and the reported
amount of the closing balance.
c. The remaining statement of operations items (such as: sales,
purchases, current manufacturing costs, etc.) are stated at
nominal values.
3. Statement of changes in shareholders' equity:
A dividend declared in the reporting period is stated in nominal
values.
F-21
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
D. EFFECTS OF THE CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
The Company has applied Accounting Standard No. 13 "Effect of Changes in
Exchange Rates of Foreign Currency" since January 1, 2004. The Standard
discusses the translation of foreign currency transactions and the
translation of financial statements of foreign operations for their
inclusion in the financial statements of the reporting entity. The
Standard provides rules for classifying foreign operations as an
autonomous foreign investee or as an integrated investee, based on
indications described in the Standard and the use of judgment, as well as
the method for translating the financial statements of autonomous foreign
investees.
FOREIGN CURRENCY TRANSACTIONS
Transactions denominated in foreign currency are initially recorded at the
exchange rate prevailing on the transaction date. Exchange rate
differences arising upon the settlement of monetary items, or upon
reporting of the Group's monetary items at exchange rates that are
different than those used for initial recognition during the period, or
from those reported in prior financial statements, are charged to the
statement of operations.
FOREIGN OPERATIONS CLASSIFIED AS AN AUTONOMOUS INVESTEE
Certain investees domiciled in Israel earn revenues and purchase the raw
materials and fixed assets primarily in dollars. The dollar is also the
primary currency of the economic environment in which such investees
operate. In accordance with the principles prescribed in Section 29(a) of
Opinion No. 36 of the ICPAI the dollar constitutes the measurement and
reporting currency in their financial statements.
The financial statements of investees operating in foreign countries as an
"autonomous investee", and companies incorporated in Israel for which the
measurement and reporting currency is the dollar are translated to Israeli
currency as follows:
1. The assets and liabilities, both monetary and non-monetary of an
autonomous foreign investee were translated according to the closing
rate. Goodwill is also translated at the closing rate, beginning
January 1, 2004.
2. Income and expense items are translated at the exchange rate
prevailing on the transaction date.
3. All exchange rate differences created are classified as a separate
item in shareholders' equity until the investee is disposed of.
Impairment in the value of an investment in an autonomous foreign investee
does not constitute a partial disposal and therefore, no part of the
translation differences is charged to the statement of operations at the
time of the impairment.
FOREIGN OPERATIONS CLASSIFIED AS INTEGRATED INVESTEE
The financial statements of investees operating oversees that are an
"integrated investee" of the Group, in accordance with the tests
prescribed in Standard No. 13 of the IASB, are translated from foreign
currency to Israeli currency - with non-monetary items translated at the
historical exchange rate prevailing on the transaction date and monetary
items translated at the exchange rate prevailing on the balance sheet
date. Statement of operations items are translated at the average exchange
rate, except for revenues and expenses related to non-monetary items that
were translated at the historical exchange rates at which the related
non-monetary items were translated. Differences resulting from the
translation are charged to financing expenses.
F-22
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
E. CONSOLIDATION OF FINANCIAL STATEMENTS
1. The consolidated financial statements include the financial
statements of the Company and of all the companies in which the
Company has control. Jointly controlled companies are included in
the consolidated financial statements by the proportionate
consolidation method. A jointly controlled entity is an entity in
which all the shareholders, by way of contractual arrangement,
jointly control the significant operating policies thereof.
2. The list of companies whose financial statements are included in the
consolidated financial statements and the Company's holding
percentage in their voting rights and equity rights is provided in
Annex 1 to the financial statements. Furthermore, the list of
unconsolidated companies is provided in Annex 2 to the financial
statements. Regarding companies that were consolidated in the past
and are not included in the consolidation in the reporting year -
see Note 3B(2) and Note 3C(1).
3. For the purpose of the consolidation, the amounts included in the
financial statements of the consolidated companies were included
after the adjustments necessitated by the application of the uniform
accounting principles adopted by the Group.
4. The consolidated financial statements include the pro rata share of
asset, liability, income and expense items of proportionately
consolidated companies, based on the holding percentages in these
companies.
5. As to the financial statements of subsidiaries that are adjusted
according to changes in foreign currency exchange rates - see Note
2D above.
6. As from January 1, 2006, the Company implements Accounting Standard
No. 20 (Revised), "The Accounting Treatment of Goodwill and
Intangible Assets resulting from the acquisition of an Investee
Company" (hereinafter - the Standard) of the IASB. In accordance
with the Standard:
a. The excess cost created upon the acquisition of an investment
in an investee company over the fair value of its identified
assets (including intangible assets) less the fair value of
the identified liabilities (after allocation of the tax
deriving from temporary differences) on acquisition date, is
charged to goodwill.
b. Goodwill is not amortized systematically. Instead, goodwill is
tested for impairment at least once a year, or more
frequently, should circumstances arise indicating that
impairment may have occurred. The excess cost allocated to
assets and liabilities is charged to the appropriate balance
sheet items. Goodwill is presented in the balance sheet under
the caption " intangible assets and deferred tax assets".
c. The excess book value over the cost of the investment is
deducted first from intangible assets. Negative excess cost
remaining after the allocation to intangible assets is
deducted from non-monetary assets on a pro rata basis to the
fair value of these assets, based on the Company's share. The
balance of the negative excess cost, after the said
allocation, is negative goodwill and is immediately recognized
as a gain on the date of acquisition.
F-23
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
E. CONSOLIDATION OF FINANCIAL STATEMENTS (CONT'D)
d. IMPACT OF THE INITIAL IMPLEMENTATION OF THE STANDARD:
The amount of the systematic amortization of goodwill which
ceased to be amortized beginning January 1, 2006 following the
adoption of the Standard was approximately NIS 26 million and
approximately NIS 45 million in the years ended December 31,
2005 and 2004, respectively. The financial statements for the
periods prior to the inception of the Standard were not
restated. Until December 31, 2005 goodwill was systematically
amortized over its estimated useful life (mainly over a period
of 10 to 20 years).
7. All intercompany balances and transactions between Group companies
were eliminated for consolidation purposes. Likewise, all unrealized
income from intercompany sales not yet realized outside the Group
were eliminated.
8. The Company's shares that were acquired by the Company and
subsidiaries are recorded as treasury stock.
9. Until December 31, 2005, according to the criteria prescribed in
Opinions 48 and 53 of the IACPA, when the sale and/or exercise of
convertible securities that were issued by investees (including
employee options) was probable, and a decline in the shareholding
percentage was expected upon conversion or exercise, as a result of
which the holder will sustain a loss, an appropriate provision is
included in respect of the anticipated loss.
As from January 1, 2006, the Company implements Accounting Standard
No. 22, "Financial Instruments: Disclosure and Presentation"
(hereinafter - the Standard) of the IASB. The Standard supersedes
Opinion No. 53, "The Accounting Treatment of Convertible
Liabilities", and Opinion No. 48, "The Accounting Treatment of
Options".
In accordance with the Standard, the provision for loss that was
included in the financial statements for December 31, 2005, in
respect of a loss anticipated from a decline in rate of holding
following the exercise of stock options or the conversion of
convertible liabilities in investee companies, was cancelled when
the Standard came into effect and accounted for as a cumulative
effect of change in accounting policy. The comparative figures
relating to prior periods were not restated.
The transition to the Standard amounted to an increase in net
earnings during the first quarter of 2006 in the amount of NIS
62,552 thousand due to the cancellation of provisions for losses in
respect of convertible securities in investee companies.
During 2006, the Company recorded losses in respect of the
conversion of convertible securities in investee companies in the
amount of NIS 50,828 thousand.
Therefore, the net impact of the initial implementation of the
Standard on the Company in 2006 amounted to income of NIS 11,724
thousand.
F. USE OF ESTIMATES
Preparation of the financial statements in conformity with generally accepted
accounting principles requires management to use estimates and assessments in
determining the reported amounts of assets, liabilities, revenues, expenses and
the disclosure relating to contingent assets and liabilities. Actual results may
differ from such estimates.
F-24
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term bank deposits and short-term
government loans traded in banks, with an original maturity of three months or
less, on the date of investment, and which are not restricted.
H. MARKETABLE SECURITIES
1. MARKETABLE SECURITIES
Investments in marketable securities held for the short-term as
current investments are stated according to the stock market price
as at the balance sheet date. The changes in the fair value of the
securities are recorded in the statement of operations in each
reporting period.
Investments in marketable securities, which are permanent
investments (held to maturity), are stated at cost (debentures -
including accrued interest), net of a provision for decrease in
value that is not of a temporary nature (see also section (3)
below).
2. NON-MARKETABLE SECURITIES
Non-marketable securities are stated at cost (debentures - including
accrued interest), which, in management's opinion does not exceed
realization value (see also section (3) below).
3. DECREASE IN VALUE OF INVESTMENTS
From time to time, the Group evaluates whether there has been a
non-temporary decrease in value in its permanent investments in
other companies. Such a review is carried out where there are
indications of the possibility that the value of such investments
has been impaired, including a decline in stock market prices, the
investee's businesses, the industry in which the investee operates
and other parameters. Any impairment in value of these investments,
which is considered to be other than temporary, and which management
bases on an evaluation of all the relevant aspects after giving
appropriate weight to each of them, is charged to the statement of
operations.
I. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The financial statements include allowances for doubtful accounts, which
management believe that fairly reflect the loss inherent in accounts whose
collection is doubtful. Management determines the allowances on information it
has on the financial status of debtors, the volume of their activity and a
valuation of the collateral received from them. The allowance is determined
specifically for accounts whose collection is doubtful.
J. SALE OF TRADE RECEIVABLES
The sale of financial assets is recognized as a sale when full control over the
asset has been transferred to the extent that the risks and rewards related to
the asset are transferred in full to an independent third party. See Note 3B(6).
F-25
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
K. INVENTORIES
Inventories are valued at the lower of cost or market value. Cost is determined
as follows: Raw materials, ancillary materials and spare parts - at "moving
average" or by the "first-in, first-out" method. Finished goods and goods in
process-based on manufacturing costs (including materials, labor and
subcontractor costs) plus allocated indirect manufacturing and other expenses.
Merchandise - by the "first-in, first-out" or the "moving average" method.
L. PROJECTS IN PROGRESS
Work in progress under long-term contracts is stated at cost less amounts
charged to cost of revenues in the statement of operations and associated with
revenue recognized on the basis of the "percentage of completion" method. Cost
includes direct costs of materials, labor, subcontractor and other direct costs
and allocated indirect manufacturing costs (see Note 2T(2) below).
M. HOLDINGS OF A VENTURE CAPITAL FUND IN VENTURE CAPITAL INVESTMENTS
1. The holdings of a venture capital fund in venture capital
investments are stated at cost (at their reported amounts), net of
impairment provisions, if a non-temporary decline in their value
occurs. Gains from venture capital investments are charged to the
statement of operations when the investment is realized. Also see
Note 2H(3) above.
2. Venture capital investments that management intends to realize in
the short-term are included in current assets on the basis of cost,
net of impairment provision, which does not exceed the market value
of the investment.
N. INVESTMENTS IN AFFILIATES
1. The investments in affiliates are presented by the equity method. In
determining the net asset value of such investments, the amounts
taken into consideration are the amounts appearing in the financial
statements of those companies.
2. Regarding goodwill- see Note 2E(6) above.
3. Regarding the decline in value of investments in affiliates - see
Note 2AB.
4. Regarding provision for loss due to the expected conversion of
convertible securities issued by affiliates - see Note 2E(9) above.
5. An affiliate incurred losses exceeding its shareholders' equity. The
Company records its share in the affiliate's loss up to the
Company's investment in the affiliate, including guarantees or
subordinated loans granted to the affiliate.
F-26
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
O. MONETARY BALANCES STATED AT PRESENT VALUE
Monetary balances - long-term debts and liabilities - that are interest free or
bear interest at below-market rates, are stated at their present value, computed
using the interest rate prevailing in the market on the date created.
P. FIXED ASSETS, NET
1. Fixed assets are stated at cost.
2. Financing expenses on loans and credit used to finance the
construction or purchase of fixed assets, and other costs related to
the purchase or construction of the fixed assets, are capitalized to
the cost of these assets, in accordance with Accounting Standard No.
3 on the Capitalization of Finance Costs.
3. The cost of assets for which an investment grant was received is
stated net of the grant amount.
4. Improvements and renovations are charged to the cost of assets,
whereas repair and maintenance expenses are charged to the statement
of operations as incurred.
5. The annual depreciation rates used are as follows:
%
-----
Buildings and leasehold rights 2-10 (mainly 2%)
Machinery and equipment 5-20 (mainly 10%)
Vehicles 10-20 (mainly 15%)
Office furniture and equipment 6-33 (mainly 6% and 25%)
Computers and auxiliary equipment 20-33
Leasehold improvements 10*
* or the lease period, whichever is lower.
Q. INTANGIBLE ASSETS AND DEFERRED EXPENSES
Deferred expenses are amortized on a straight-line basis over the expected
period of benefit therefrom. The remaining expected benefit period is examined
each year. See Note 2E(6) regarding goodwill deriving from the acquisition of
companies that were consolidated.
R. ISSUANCE OF SECURITIES
1. ISSUANCE OF BUNDLED SECURITIES -
Proceeds in respect of the issuance of bundled securities were
allocated to the component securities according to their relative
fair values. Issue costs were allocated to the securities according
to the relative fair values of the securities issued.
F-27
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
R. ISSUANCE OF SECURITIES (CONT'D)
2. ISSUANCE OF STOCK OPTIONS -
Amounts received in respect of stock options that grant the option
holder the right to purchase a fixed number of shares of the Company
in consideration for a fixed amount in cash, are presented within
shareholders' equity. Until December 31, 2007, consideration that is
linked to the CPI is deemed to be fixed, based on Standard 22.
3. DEBENTURE ISSUE COSTS -
Debenture issue costs are presented as an offset from the debentures
and are amortized in accordance with the effective interest rate
method during the debenture period. Issue costs allocated to the
equity component of bundled securities are offset from the equity
component.
4. SHARE-BASED PAYMENTS -
As from January 1, 2006, the Company implements Accounting Standard
No. 24, "Share-Based Payments" (hereinafter - the Standard) of the
IASB. In accordance with the provisions of the Standard, the Company
recognizes share-based payment transactions in the financial
statements, including transactions with employees or other parties
that are settled by equity instruments, cash or other assets.
Share-based payment transactions in which goods or services are
received are recognized at their fair value.
With respect to transactions settled by equity instruments, the
Standard applies to grants executed after March 15, 2005 that had
not yet vested by January 1, 2006. Similarly, the Standard applies
to changes in the terms of share-based payment transactions being
settled by means of equity instruments that were executed after
March 15, 2005, even if the changes in terms relate to grants that
were executed before that date. In the financial statements of 2006,
comparative data for 2005 are restated in order to reflect therein
the compensation expenses relating to the said grants.
The Company records compensation expenses, with a corresponding
increase in shareholders' equity in respect of stock options granted
to employees and directors over the vesting period of the stock
options. The compensation expenses were calculated according to the
Black & Scholes model on the grant date. The compensation expenses
are recorded over the vesting period of the options, in accordance
with the Company's estimation of the number of options expected to
vest.
As a result of the first-time implementation of the provisions of
the Standard, the Company adjusted by means of a restatement of the
financial statements for the year ended December 31, 2005, in order
to retroactively reflect therein the effect of the change in the
accounting treatment of share-based payment transactions with
employees and directors that are to be settled with equity
instruments of the Company and of investee companies and that were
granted after March 15, 2005, and which had not yet vested by
December 31, 2005, or which were granted prior to March 15, 2005 and
in respect of which there was a change in the terms of their grant,
as well as in the respect of options granted to employees and
directors settled in cash.
F-28
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
R. ISSUANCE OF SECURITIES (CONT'D)
4. SHARE-BASED PAYMENTS (cont'd)
Set forth below is the effect of the changes on the financial
statements:
As at December 31, 2005
---------------------------------------------------
As presented in
As previously the financial
reported Changes statements
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
Investment in affiliates 2,668,193 (4,173) 2,664,020
Shareholders' equity 2,482,607 (4,173) 2,478,434
For the year ended December 31, 2005
---------------------------------------------------
As presented in
As previously the financial
reported Changes statements
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
Group's equity in the operating results of
investee companies, net 363,535 (4,173) 359,362
Administrative and general expenses *139,251 1,389 140,640
Net earnings 313,159 (5,562) 307,597
* After reclassification due to discontinued operations.
S. DEFERRED TAXES
As of January 1, 2005 the Company applies Accounting Standard No. 19, "Taxes on
Income" ("the Standard"). The Standard was adopted as a cumulative effect of a
change in accounting method. The transition to Accounting Standard No. 19
resulted in a one-time effect of a net decrease in net earnings of NIS 3 million
derived mainly from an increase in liabilities for deferred taxes relating to
property.
The Group companies create deferred taxes in respect of temporary differences.
The temporary differences are differences in the value of assets and liabilities
for tax purposes and for financial reporting purposes. Allocation of the taxes,
as stated, is executed with respect to the differences relating to assets, the
amortization of which is deductible for tax purposes.
The deferred tax balances (asset or liability) are calculated according to the
liability approach, i.e., the tax rates expected to be in force when the
deferred tax liability is utilized, or when the deferred tax asset is realized,
as they are known on the date of the financial statements.
In calculating deferred taxes, no account was taken of the taxes, which would
apply in a case of sale of the investments in the investee companies, since it
is the intention of the Company to hold these investments and not to sell them.
Deferred taxes were not created for taxes to be imposed on earnings distributed
by subsidiaries, as it is the Group's policy not to distribute taxable dividends
in the foreseeable future.
Likewise, tax benefits are not included in respect of temporary differences, the
realization of which is doubtful.
F-29
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
T. REVENUE RECOGNITION
1. SALE OF PRODUCTS AND PROVIDING SERVICES
Revenues from sales and services are recognized upon delivery or
shipment of the products and transfer of the risks and rewards
involved in ownership of the products, or upon performance of the
services.
Revenue from the sale of products that require customer acceptance
are recognized after the work is performed and acceptance tests are
passed, as prescribed in the product supply contract.
Revenues from sales of products to distributors are recorded at the
time it is probable that the products will be sold to end users,
subject to the conditions detailed in Section 1, above.
2. REVENUES FROM LONG-TERM CONTRACTS
The revenues and costs from projects in progress under long-term
contracts are recognized in accordance with Accounting Standard No.
4 ("Standard 4") published by the IASB, as follows:
a. Revenues and costs from projects in progress under long-term
contracts are recognized according to the "percentage of
completion" method, if all of the following conditions are
fulfilled: the revenues are known or can be reliably
estimated, the collection of the revenues is expected, the
costs involved with execution of the work are known or capable
of being reliably estimated, there is no material uncertainty
regarding the ability to complete the work and comply with the
contractual terms with the customer and the percentage of
completion can be reliably estimated.
As long as all of the above conditions are not met, income is
recognized at the level of the costs incurred and their
recovery is probable ("zero margin").
b. The percentage of completion is measured on the basis of cost
(the ratio of the costs incurred to the total estimated costs)
or on the basis of supply of the products, in accordance with
the nature of the agreement.
c. Anticipated losses on contracts are provided for in full when
determined to be expected.
d. Estimated profit or loss from long-term contracts may change
due to changes in estimates resulting from differences between
actual performance and original forecast. The effects of such
changes in estimates are recognized in the statement of
operations at the time they are identified.
3. INTEREST AND DIVIDEND INCOME
Interest income in respect of debentures and loans is recorded in
the statement of operations on an accrual basis according to the
effective interest method. Dividend income is recorded in the
statement of operations on the date the Company is eligible for the
dividend.
4. SALES WITH DEFERRED PAYMENT CONDITIONS
Sales with deferred payment conditions that include a financing
transaction are recorded according to their present value, and the
difference between the present value of the transaction and the
proceeds is recorded in the statement of operations as financing
income, according to the effective interest method.
F-30
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
T. REVENUE RECOGNITION (CONT'D)
5. REPORTING OF REVENUES ON A GROSS BASIS OR A NET BASIS
The Company implements Clarification 8 of the IASB, "Reporting of
Revenues on a Gross Basis or on a Net Basis" in determining whether
to report revenues on a gross basis (as a primary vendor) or on a
net basis (as an agent). According to Clarification 8, an entity
that acts as an agent without bearing the risks and rewards of the
transaction is required to present its revenues on a net basis. An
entity that acts as a primary vendor and bears the risks and rewards
of the transaction is required to present its revenues on a gross
basis. Clarification 8 prescribes a number of indicators that the
Company considers in determining whether to present its revenues on
a gross basis or a net basis.
U. RESEARCH AND DEVELOPMENT EXPENSES:
1. Research and development costs
Research and development costs, net of participations (mainly from
the Government of Israel), are charged to the statement of
operations as incurred. Research and development costs financed by
the customer are charged to the cost of projects in progress, and
are included in the statement of operations as part of the
recognition of results from such projects.
2. IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
In a business acquisition, in-process research and development
expenses are charged to the statement of operations immediately.
V. DERIVATIVE FINANCIAL INSTRUMENTS:
The Group companies enter into option and forward contracts that are
intended to reduce the financial risks (i.e. commitments for the import of
raw materials, export of products, liabilities linked to the CPI or
foreign currency) from the exposure to fluctuations in inter-currency
exchange rates, interest rates and changes in the CPI.
The results of financial derivatives held to hedge existing assets and
liabilities are recorded in the statement of operations concurrently with
the recording of the results of the hedged assets and liabilities.
Financial derivatives that are not held for hedging are stated in the
balance sheet at fair value. Changes in the fair value are included in the
statement of operations in the period they occur.
The fair value of derivative financial instruments is determined according
to their market values, stated quotes from financial institutions, and in
the absence of such, fair value is determined based on valuation models.
W. EARNINGS PER SHARE:
As from January 1, 2006, the Company implements Accounting Standard No.
21, "Earnings per Share" (hereinafter - the Standard) of the IASB. In
accordance with the provisions of the Standard, the Company calculates
basic earnings per share with respect to earnings or loss, and basic
earnings per share with respect to earnings or loss from continuing
operations, which is attributable to the ordinary shareholders. The basic
earning per share is calculated by dividing the earnings or loss
attributable to the ordinary shareholders with the weighted average number
of ordinary shares outstanding during the period. In order to calculate
F-31
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
W. EARNINGS PER SHARE (CONT'D)
the diluted earnings per share the Company adjusts the earnings or loss
attributable to the ordinary shareholders, and the weighted average number
of outstanding ordinary shares, in respect of the effects of all the
dilutive potential ordinary shares. The Company's share in the earnings of
investee companies was calculated according to its share in the earnings
per share of such investee companies multiplied by the number of shares
held by the Company.
In accordance with the transitional provisions of the Standard, the
comparative data regarding the earnings (loss) per share for prior periods
were restated.
The effects of the initial implementation of the Standard (including the
effect of Standard No. 24 - see Note 2R(4)) amounted to increases in the
basic earnings per share of NIS 0.473 and NIS 0.123 for the years ended
December 31, 2005 and 2004, respectively, and decreases in the diluted net
earnings per share in the amounts of NIS 2.262 and NIS 2.268 for the year
ended December 31, 2005 and 2004 respectively.
X. DIVIDEND DECLARED SUBSEQUENT TO BALANCE SHEET DATE
In accordance with Accounting Standard No. 7 on "Subsequent Events", the
liability related to a dividend proposed or declared subsequent to the
balance sheet date is expressed in the accounts only in the period in
which it was declared. However, separate disclosure is provided in the
statement of changes in shareholders' equity of the dividend amount to be
distributed against a reduction in the retained earnings balance.
Y. SEGMENT REPORTING
Segment reporting is presented in accordance with Accounting Standard No.
11. See also Note 25.
Z. DISCONTINUED OPERATIONS
Discontinued operations are presented in accordance with Accounting
Standard No. 8, whereby discontinued operations are presented separately
from the data relating to continuing operations.
AA. ENVIRONMENTAL COSTS
The current operating and maintenance costs of facilities to prevent
environmental pollution and provisions for expected costs related to the
rehabilitation of the environment deriving from current or past
activities, are charged to the statement of operations. Construction costs
of facilities for prevention of environmental pollution, which increase
the economic life or efficiency of the facility or reduce or prevent
environmental pollution, are charged to the cost of the fixed assets and
are depreciated in accordance with the depreciation policies practiced by
the Group.
AB. IMPAIRMENT OF ASSETS
The Group applies Accounting Standard No. 15 - Impairment of Assets ("the
Standard"), which prescribes procedures that the Group must implement in
order to assure that its assets in the consolidated balance sheet are not
stated at an amount exceeding their recoverable value, which is the higher
of the net sales price or the usage value (the present value of the
estimated future cash flows expected to derive from the use and
realization of the asset).
F-32
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AB. IMPAIRMENT OF ASSETS (CONT'D)
The Standard applies to all of the assets in the consolidated balance
sheet, except for tax assets, construction contracts and monetary assets
(aside from monetary assets that are investments in investees that are not
subsidiaries). Likewise, the Standard prescribes the presentation and
disclosure principles for assets that have declined in value. When the
carrying value of an asset in the consolidated balance sheet exceeds its
recoverable amount, the Group recognizes an impairment loss equal to the
difference between the book value of the asset and its recoverable value.
A loss so recognized will be reversed only if changes have occurred in the
estimates used in determining the recoverable value of the asset since the
date on which the last impairment loss was recognized.
In September 2003 the IASB published Clarification 1 regarding the
accounting treatment of an impairment in the value of an affiliate.
Clarification 1 stipulates that in reporting periods subsequent to the
period in which the impairment was initially recorded, the investment in
the affiliate will be presented according to the lower of its recoverable
value and the equity basis thereof. The recoverable value is calculated
during each period in which there are indications that a change has taken
place in the recoverable value. Impairment losses recorded or reversed
during the period are presented as the Company's equity in operating
results of investee companies, net.
In February 2005 the IASB published Clarification 6 regarding the
accounting treatment of an impairment in the value of an affiliate.
Clarification 6 stipulates that the recoverable value be calculated in
respect of each cash-generating unit or in respect of the identified
assets of the affiliate, in respect of which there are indications that an
impairment has occurred or that an impairment recorded in prior years has
been reduced or no longer exists. The impairment or reversal thereof is
determined from the perspective of the holding company.
F-33
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AC. DATA REGARDING THE CPI AND THE DOLLAR EXCHANGE RATE:
Exchange rate
Israeli CPI* of one Dollar
------------ -------------
Points NIS
------------ -------------
FOR THE YEAR ENDED: December 2006 184.87 4.225
December 2005 185.05 4.603
December 2004 180.74 4.308
% %
------------ -------------
CHANGES DURING: 2006 (0.1) (8.2)
2005 2.4 6.8
2004 1.2 (1.6)
(*) According to the CPI for the month of the balance sheet date (1993 average
basis = 100).
Assets and liabilities in foreign currency or linked thereto are included in the
financial statements according to the representative exchange rate published by
the Bank of Israel on the balance sheet date.
Assets and liabilities linked to the CPI are included in the financial
statements according to the CPI of the balance sheet month, or the previous
month, as relevant.
AD. IMPACT OF NEW ACCOUNTING STANDARDS PRIOR TO THEIR APPLICATION
1. ACCOUNTING STANDARD NO. 29, "ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)"
In July 2006, the IASB published Accounting Standard No. 29,
"Adoption of International Financial Reporting Standards (IFRS)
(hereinafter - "the Standard")". The Standard provides that entities
that are subject to the Israeli Securities Law, 1968 and that are
required to report in accordance with this Law's provisions, shall
prepare their financial statements pursuant to IFRS Standards for
periods commencing January 1, 2008. The Standard permits early
adoption beginning with financial statements published after July
31, 2006.
Initial adoption of IFRS Standards is to be effected by means of
application of the provisions of IFRS 1, "First-Time Application of
IFRS Standards", for purposes of the transition.
In accordance with the Standard, the Company is required to include
in a note to the annual financial statements as at December 31, 2007
the balance-sheet data as at December 31, 2007 and the
income-statement data for the year then ended, after they have
undergone application of the recognition, measurement and
presentation rules of IFRS Standards.
The Company is examining the effect of the Standard on its financial
statements and does not intend to implement the Standard earlier
than required.
F-34
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AD. IMPACT OF NEW ACCOUNTING STANDARDS PRIOR TO THEIR APPLICATION (CONT'D)
2. ACCOUNTING STANDARD NO. 27, "FIXED ASSETS"
In September 2006 the IASB published Accounting Standard No. 27,
"Fixed Assets" (hereinafter - the Standard). The Standard prescribes
rules for the presentation, measurement and disposition of fixed
assets and for the disclosure required in respect thereto. The
Standard stipulates, inter alia, that upon the initial recognition
of a fixed asset, the entity shall include in the cost of the item
all the costs it will incur in respect of a liability to dismantle
and remove the item and to restore the site on which it was located.
Furthermore, the Standard stipulates that a group of similar fixed
asset items shall be measured at cost net of accumulated
depreciation, and less impairment losses, or alternatively, at its
revalued amount less accumulated depreciation, whereas an increase
in the value of the asset to above its initial cost as a result of
the revaluation will be directly included the shareholders' equity
under a revaluation reserve. Any part of a fixed asset item with a
cost that is significant in relation to the total cost of the item
shall be depreciated separately, including the costs of significant
periodic examinations. The Standard also stipulates that a fixed
asset that was purchased in consideration for another non-monetary
item in a transaction of commercial substance shall be measured at
fair value.
The Standard shall apply to financial statements for periods
beginning on January 1, 2007. An entity that on January 1, 2007
chooses for the first time to use the revaluation method for
measuring fixed assets shall on this date recognize a revaluation
reserve in the amount of the difference between the revalued amount
of the asset on that date and its book value. Furthermore, an entity
that in the past, upon the initial recognition of a fixed asset, had
not included in its cost the initial estimate of costs for
dismantling and removing the asset and for restoring the site on
which it is located, will measure the following:
(a) The aforementioned liabilities as at January 1, 2007 should be
measured in accordance with generally accepted accounting
principles;
(b) The amount that would have been included in the cost of the
relevant asset on the date on which the liability was
initially incurred should be measured according to the present
value of the amount of the liability mentioned in item (a)
above on the date on which the liability was initially
incurred (hereinafter - the capitalized amount);
(c) The accumulated depreciation on the capitalized amount as at
January 1, 2007 should be measured on the basis of the useful
life of the asset as at that date;
(d) The difference between the amount to be charged to the asset
in accordance with items (b) and (c) above, and the amount of
the liability in accordance with item (a) above, shall be
included in retained earnings.
Other than the aforementioned, the Standard will be adopted on a
retrospective basis.
The Company elected to measure the fixed asset item at cost less
accumulated depreciation. Implementation of the Standard will not
have a material impact on the Company's financial position or
results of operations.
3. ACCOUNTING STANDARD NO. 26, "INVENTORY"
In August 2006 the IASB published Accounting Standard No. 26,
"Inventory" (hereinafter - the Standard). The Standard stipulates
guidelines for determining the cost of inventory and its subsequent
recognition as an expense as well as for determining impairment in
value of inventory to its net realizable value. According to the
Standard, inventory should be presented according to the lower of
cost or net realizable value. The Standard also provides guidelines
regarding cost formulas used to allocate costs to various types of
F-35
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AD. IMPACT OF NEW ACCOUNTING STANDARDS PRIOR TO THEIR APPLICATION (CONT'D)
3. ACCOUNTING STANDARD NO. 26, "INVENTORY" (CONT'D)
inventory. The Standard will apply to financial statements for
periods beginning on January 1, 2007 or thereafter. The Standard
shall be applied retroactively by restating comparative amounts in
respect of prior periods.
Implementation of the Standard will not have a material impact on
the Company's financial position or results of operations.
4. ACCOUNTING STANDARD NO. 23, "ACCOUNTING FOR TRANSACTIONS BETWEEN AN
ENTITY AND ITS CONTROLLING SHAREHOLDER"
In December 2006 the IASB published Accounting Standard No. 23,
"Accounting for Transactions Between an Entity and its Controlling
Shareholder" (hereinafter - the Standard). The Standard effectively
supersedes the main provisions of Israeli Securities Regulations
(Presentation of Transactions Between a Company and its Controlling
Shareholder), and provides that assets (excluding intangible assets
that do not have an active market) and liabilities in respect of
which a transaction has taken place between the entity and its
controlling shareholder will be measured according to fair value on
the transaction date and the difference between the fair value and
the consideration received in the transaction will be recorded
within shareholders' equity. A debit amount is essentially a
dividend and will therefore be recorded as a reduction of retained
earnings. A credit amount is essentially an investment by the
shareholder and will therefore be recorded as a separate item within
shareholders' equity, "Capital reserve from transactions between the
entity and its controlling shareholder".
The Standard addresses three issues pertaining to transactions
between an entity and its controlling shareholder: transfer of an
asset from the controlling shareholder to the entity or transfer of
an asset from the entity to the controlling shareholder; assumption,
fully or partially, by the controlling shareholder of a liability
that the entity has to a third party, indemnification from the
controlling shareholder to the entity in respect of an expense,
concession, fully or partially, by the controlling shareholder of an
amount owed to him by the entity; and loans granted to or by the
controlling shareholder. Furthermore, the Standard provides the
disclosure required in financial statements pertaining to
transactions between the entity and its controlling shareholder
during the period.
The Standard will apply to transactions between an entity and its
controlling shareholder occurring as of January 1, 2007 or
thereafter, as well as to loans granted prior to the inception of
the Standard to or by the controlling shareholder, as of the date of
its inception.
The impact of the Standard will be reflected in future reporting
periods. Implementation of the Standard will not have a material
impact on the Company's financial position or results of operations.
5. ACCOUNTING STANDARD NO. 16, "INVESTMENT PROPERTY"
In February 2006, the IASB published Accounting Standard No. 16,
"Investment Property" (hereinafter - the Standard). The Standard
prescribes rules for recognition, measurement and disposition of
investment property and for the disclosure required in respect
thereto.
The Standard stipulates, inter-alia, that the initial measurement of
investment property be according to cost, including transaction
costs. Furthermore the Standard stipulates that in subsequent
periods the entity should choose to measure all of its investment
property, either according to cost, after deduction of accumulated
depreciation and impairment losses, or according to fair value, in
which case adjustments to fair value shall be recorded in the
statement of operations.
F-36
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AD. IMPACT OF NEW ACCOUNTING STANDARDS PRIOR TO THEIR APPLICATION (CONT'D)
5. ACCOUNTING STANDARD NO. 16, "INVESTMENT PROPERTY" (CONT'D)
The Standard shall apply to financial statements for periods
beginning on January 1, 2007.
An entity that on January 1, 2007 chooses for the first time to use
the fair value model for measuring its investment property, shall
record the difference between the fair value of the investment
property and its book value as an adjustment to the opening balance
of retained earnings.
An entity that chooses the cost model shall apply the rules of the
Standard retroactively. Furthermore, an entity that chooses the cost
model and intends to adopt one or more of the reliefs set forth in
IFRS 1, "Initial adoption of International Financial Reporting
Standards concerning investment property", may adopt the relief in
its financial statements for periods beginning on January 1, 2007.
The Company elected to apply the fair value model for measuring its
investment property. Therefore, in accordance with the transition
requirements of the Standard, on January 1, 2007 the Company will
record an increase in the balance of its investment property in the
amount of NIS 20 million and an increase in investments in
affiliates in the amount of NIS 32 million. The Company will record
an adjustment to the opening balance of retained earnings as of
January 1, 2007 of NIS 52 million in respect of the above.
6. ACCOUNTING STANDARD NO. 30, "INTANGIBLE ASSETS"
In March 2007, the IASB published Accounting Standard No. 30,
"Intangible Assets" (hereinafter - the Standard). The Standard
prescribes the accounting treatment for intangible assets and
defines how to measure the book value of these assets, and provides
the disclosure requirements.
In accordance with the Standard's transition rules, the Standard
shall be applied retroactively, except as set forth hereinafter.
With regard to business acquisitions, the Standard shall be applied
to business acquisitions that take place from January 1, 2007 and
thereafter, whereas with regard to in-process research and
development projects acquired within the framework of a business
acquisition that occurred prior to January 1, 2007 and that meets
the definition of an intangible asset on the acquisition date and
that was recorded as an expense on the acquisition date, on January
1, 2007 the acquiring company shall recognize the in-process
research and development project as an asset, as well as applicable
deferred taxes. The in-process research and development asset shall
be recorded at the amount estimated on the acquisition date, less
the amortization that would have accrued from the acquisition date
until December 31, 2006 according to the useful life of the asset
and less impairment losses. This amount shall be recorded as an
adjustment to the opening balance of retained earnings as of January
1, 2007.
The Company recorded an expense of NIS 2,443 thousand in respect of
in-process research and development projects acquired within the
framework of a business acquisition that occurred prior to January
1, 2007. The projects meet the definition of an intangible asset on
the acquisition date and therefore on January 1, 2007 the Company
will recognized the in-process research and development projects as
assets in the amount of NIS 1,728 thousand (after recognition of
applicable deferred taxes) against an adjustment to the opening
balance of retained earnings as of January 1, 2007.
F-37
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES
A. ECI TELECOM LTD. ("ECI") - AN AFFILIATE
1. Due to the fact that the financial statements of an affiliated
company are not made available to ECI on a timely basis that would
enable ECI to apply the equity method of accounting, starting from
the second quarter of 2006, the proportionate share of the results
of operations of this investee company are included in ECI's
consolidated financial statements with a three month lag.
Under Israeli GAAP a change in accounting principle is treated by
presenting the cumulative effect of the accounting change as of the
beginning of the year, however as the change in accounting principle
did not have a material impact on Koor's financial position or
results of operations, Koor has not presented the cumulative effect
as of the beginning of the year and has recorded the impact thereof
in the amount of $ 0.4 million in the second quarter of 2006.
On March 1, 2007, the affiliated company filed a third amendment to
its S-1 Registration Statement with the SEC relating to its proposed
initial public offering in which ECI may also sell shares. The
affiliated company originally filed its S-1 Registration Statement
with the SEC on October 20, 2006. The number of shares to be offered
and the price range for the offering have not yet been determined.
The registration statement has been filed with the SEC but has not
yet become effective.
2. In February 2005, ECI entered into a preliminary agreement with ABN
Amro Bank ("ABN") to sell the balance of long-term receivables for
the sum of $96 million in cash, plus potentially a further amount of
approximately $3.3 million. In April 2005, all the approvals for the
sale were obtained and the receivables were sold to ABN. As a
result, during the second quarter of 2005, ECI recognized a net gain
of $10.4 million (excluding the contingent amount). The Company's
share in this gain is approximately NIS 14 million.
3. On June 3, 2005, ECI acquired 100% of Laurel Networks Inc., a
company incorporated and operating in the U.S., for a cash payment
of $88 million.
4. Pursuant to a resolution of ECI's Board of Directors approved in
June 2006, ECI distributed 2.9 million shares of ECtel Ltd.
("ECtel") to ECI's shareholders of record as of June 29, 2006. These
shares constituted approximately 15.9% of ECtel's outstanding
shares. Koor received 815,660 ECtel shares in this distribution.
These shares, combined with ECtel shares distributed as dividend by
ECI in May 2004 and ECtel shares purchased from an affiliate, Telrad
Networks Ltd., in December 2005, provide the Company with
significant influence over ECtel and accordingly the Company's
investment in ECtel is accounted for according to the equity method
as of the third quarter of 2006.
F-38
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
A. ECI TELECOM LTD. ("ECI") - AN AFFILIATE (CONT'D)
5. ECI prepares its financial statements in conformity with U.S.
generally accepted accounting principles. Below is the adjustment of
the net earnings of ECI as reported in accordance with U.S. GAAP to
net earnings (loss) in accordance with Israeli GAAP:
For the year ended December 31
------------------------------------
2006 2005 2004
------ ------ ------
US$ thousands
------------------------------------
Net earnings of ECI as reported in conformity with U.S.
GAAP 22,095 39,864 10,153
Adjustment:
Share-based payments expenses 786 (2,195) * --
ECI's equity in results of affiliate (See Note 3A(1)) (1,704) -- --
Financing income (expenses) from derivative financial
instruments (5,745) 19,226 (8,303)
Tax expenses -- -- (1,529)
Amortization and realization of excess cost allocated to
intangible assets 55 (2,726) (1,233)
Gain (loss) on marketable securities 19 (212) (1,282)
Distribution of available-for-sale securities as
dividend-in-kind (4,075) -- --
Cumulative effect as of the beginning of the year of
change in accounting method (See Note 3A(1)) 1,704 -- --
Impairment in value of assets -- -- 968
------ ------ ------
Net earnings (loss) of ECI in conformity with Israeli GAAP 13,135 53,957 (1,226)
====== ====== ======
* Restated - See Note 2R(4)
F-39
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
B. MAKHTESHIM AGAN INDUSTRIES LTD. ("M-A INDUSTRIES") - AN AFFILIATE
1. In January 2004, Koor sold 27 million shares of M-A Industries for
approximately NIS 418 million. The resulting gain of NIS 160 million
(before tax) is included in "other income (expenses), net".
Additionally, as a result of this sale, Koor realized a tax asset of
NIS 59 million which had been created in 2003, because of the
expectation that carryforward tax losses would be utilized in the
aforesaid sale.
As a result of this sale, and after the realization and conversion
of convertible securities that were issued to the public and to
employees, Koor's holding percentage in the voting rights of M-A
Industries at December 31, 2004 was 38.6%.
Following the sale of the shares in January 2004, as a result of
which Koor's holding percentage in the shares of M-A Industries fell
below 50%, Koor evaluated the existence of effective control in M-A
Industries and the resultant continuation of the consolidation of
M-A Industries in the financial statements of Koor, beginning from
the first quarter of 2004.
In the opinion of Koor's management, the range of circumstances that
weight Koor's shareholding percentage in M-A Industries, the broad
dispersal of voting rights among the other shareholders, the low
level of shareholding by the other shareholders, the slim
probability of the creation of a block of votes opposing Koor at
shareholder meetings and past experience related to the attendance
at shareholder meetings, as well as the voting percentages and
opposition at the meetings - showed that the economic substance that
stood and continued to stand at the basis of the relationship
between the Company and M-A Industries immediately before and after
the said transactions demonstrated effective control, i.e., Koor had
the ability to set the financial and operational policies of M-A
Industries.
2. In February 2005, Koor sold 15.9 million shares of M-A Industries
for NIS 374 million. As a result of the sale, Koor's holding
percentage in M-A Industries fell to 34.6% (fully diluted -28.6%)
and Koor recorded a capital gain amounted to NIS 201 million (before
tax), which is included in the item "other income (expenses), net".
Likewise, a tax asset of NIS 69 million which had been created in
2004, because of the expectation that carryforward tax losses would
be utilized, was realized as a result of this sale.
Following the sale of shares in February 2005, Koor's management
reevaluated whether to continue to consolidate M-A Industries in the
financial statements of Koor beginning from the first quarter of
2005.
As a result of the evaluation of the range of existing circumstances
created as a result of the sale, Koor's management decided that
continuing the consolidation of M-A Industries is not consistent
with the economic substance.
Therefore, beginning from the first quarter of 2005, the
consolidation of M-A Industries' financial statements in Koor's
financial statements was ceased, and the investment is stated by the
equity method.
PRESENTED BELOW ARE OPERATING RESULTS DATA OF M-A INDUSTRIES:
For the year ended December 31, 2004
------------------------------------
NIS thousands
------------------------------------
Revenues 6,895,238
Operating costs and expenses 5,594,734
F-40
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
B. MAKHTESHIM AGAN INDUSTRIES LTD. ("M-A INDUSTRIES") - AN AFFILIATE (CONT'D)
3. On November 14, 2005, the board of directors of M-A Industries
resolved to adopt a policy, whereby M-A Industries will act to buy
back its shares in the amount of up to $150 million.
The shares to be purchased will become dormant shares for as long as
they will be held by M-A Industries.
As at the balance sheet date, M-A Industries holds 24,875,703 par
value of its shares, representing approximately 5.4% of its total
issued and paid-up share capital, in the amount of $134 million. In
August 2006, the board of directors of M-A Industries approved the
termination of the buy-back policy, due to its completion.
4. During 2006, Koor purchased 35,297,993 shares of M-A Industries for
an aggregate amount of NIS 818 million. Koor's holding in the voting
rights of M-A Industries at December 31, 2006 was 39.6%.
5. Subsequent to the acquisition of shares of M-A Industries by Koor
and by M-A Industries described in Note 3B(4) and Note 3B(3),
respectively, ("the acquisition period") Koor's stake in M-A
Industries has increased by 10.1% as follows: fourth quarter of 2005
- 0.8%; first quarter of 2006 - 0.7%; second quarter of 2006 - 1.9%;
third quarter of 2006 - 6.7%.
Pursuant to the acquisition of shares, excess cost over book value
in the amount of approximately $113 million was derived ("excess
cost"). The Company retained an independent valuation expert to
prepare a valuation of M-A Industries for purposes of allocating the
said excess cost in accordance with Accounting Standard No. 20. In
order to allocate the excess cost derived on various dates, the
Company received valuations of the tangible assets and liabilities,
as well as the intangible assets of M-A Industries as of January 1,
2006, June 30, 2006 and August 18, 2006.
The independent valuation expert valued the tangible assets and
liabilities, as well as the intangible assets of M-A Industries, as
follows:
January 1, 2006 June 30, 2006 August 18, 2006
--------------- ------------- ---------------
US $ million
-----------------------------------------------------------
CURRENT ASSETS 1,184.6 1,320.6 1,305.3
Investments 22.7 26.6 42.0
Fixed assets and other assets, net 465.1 491.7 498.3
Short-term and long-term liabilities (994.6) (1,177.2) (1,172.1)
INTANGIBLE ASSETS
Product registration 310.5 320.0 315.6
Customer relationship 513.6 513.3 460.3
Trademark 224.2 229.9 228.6
Product portfolio 94.7 94.4 89.3
In-process research and development 5.2 5.5 5.5
--------------- ------------- ---------------
1,826.0 1,824.8 1,772.8
=============== ============= ===============
F-41
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
B. MAKHTESHIM AGAN INDUSTRIES LTD. ("M-A INDUSTRIES") - AN AFFILIATE (CONT'D)
According to the purchase price allocation, the Company has
allocated the excess cost to M-A Industries' tangible and intangible
assets, as follows:
US $ Amortization
million Amortization method period
------- ------------------------------------------- ------------
Inventory 7.4 6 months
Intangible assets:
Product registration 8.8 Over the period of future economic benefits 7 years
Customer relationship 29.2 Over the period of future economic benefits 15 years
Trademark 23.1 Over the period of future economic benefits 5 years
Product portfolio 9.2 Over the period of future economic benefits 15 years
In-process research and 0.5 Upon acquisition
development
Deferred taxes (12.5) According to the amortization of the related
assets
Goodwill 47.1
-------
112.8
=======
In accordance with the abovementioned allocation of the excess cost,
during 2006, the Company recorded amortization expenses in respect
of the excess cost of NIS 34.3 million.
6. On September 28, 2004, M-A Industries entered into an agreement with
Rabobank International for the sale of trade receivables in a
securitization transaction. Under the terms of the securitization
agreement, companies from M-A Industries Group sold their trade
receivables to a foreign company established for this purpose and
which is neither owned nor controlled by the M-A Industries Group
("the Purchasing Company"). The purchase of the trade receivables by
the Purchasing Company is financed by an American company of the
Rabobank International Group. This agreement replaces a previous
agreement with Bank of America from 2001, which was similar in
principle to the current agreement.
The maximum amount of financial resources expected to be made
available to the Purchasing Company to purchase the trade
receivables of the companies is $250 million on a current basis, so
that the proceeds received from the customers whose receivables have
been sold will be used to purchase new trade receivables. Subsequent
to the balance sheet date, the aforesaid maximum expected volume is
$275 million.
The period in which the companies will sell their trade receivables
to the Purchasing Company will be one year from the closing date of
the transaction. This period may be extended, with the consent of
all the parties, for additional one-year periods, up to a maximum of
four extensions.
On the date of purchasing the debt, the Purchasing Company will pay
in cash the major part of the debt price. The balance of the debt
price will be included in a subordinated capital note to be paid
after the debt is collected. M-A Industries will bear all the losses
sustained by the Purchasing Company as a result of the non payment
of the trade receivables included in the securitization transaction
up to the total balance of the subordinated note.
F-42
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
B. MAKHTESHIM AGAN INDUSTRIES LTD. ("M-A INDUSTRIES") - AN AFFILIATE (CONT'D)
The accounting treatment of the sale of trade receivables in a
securitization transaction is the recognition of the sale of the
trade receivables only for that part for which the control and risks
were transferred finally and absolutely to the purchaser.
Accordingly, the trade receivable balances included in the
securitization transaction, for which the consideration of cash
and/or non recourse liabilities was received, were written off. For
the part of the trade receivables included in the securitization
transaction which was not recognized as a sale, a subordinated note
was recorded.
A loss from the sale of trade receivables is charged at the time of
sale to the statement of operations.
Under the terms of the agreement, M-A Industries undertook to meet
certain financial covenants, mainly a ratio of liabilities to
capital and profitability ratios. As at the balance sheet date, M-A
Industries is in compliance with the covenants.
The balance of trade receivables sold for cash as at the balance
sheet date amounted to $176 million (December 31, 2005 - $147
million). The balance of the subordinated note as at the balance
sheet date amounted to $65 million (December 31,2005 - $55 million).
7. On March 8, 2006, the board of directors of M-A Industries resolved
to change its dividend policy such as beginning in the fourth
quarter of 2005, M-A Industries will distribute dividends amounting
to up to 50% of net earnings for the period.
In May 2006, M-A Industries' board of directors resolved to
distribute a dividend of $ 28.8 million that was paid on August 31,
2006. The Company's share of the dividend was NIS 42 million.
On March 12, 2007 the board of directors of M-A Industries resolved
to rescind the abovementioned resolution regarding the dividend
payment as a fixed percentage of net earnings. The board of
directors will examine the possibility of distributing dividends and
the amount thereof from time to time, in accordance with the
investment policy and the needs of M-A Industries, and the existence
of sufficient distributable earnings.
8. Acquisition of companies:
a. During 2006, M-A Industries, through wholly owned and
controlled subsidiaries, acquired distribution companies and a
manufacturing company at a total cost of approximately $35.4
million.
The excess cost created as at acquisition date amounted to
approximately $14 million, of which approximately $2.8 million
was allocated to tangible and intangible assets and the
remainder of approximately $11.2 million was allocated to
goodwill.
b. During 2005, M-A Industries, through wholly owned and
controlled subsidiaries, acquired distribution companies at a
total cost of approximately $22.3 million.
The excess cost created as at acquisition date amounted to
approximately $14.7 million, of which approximately $9 million
was allocated to intangible assets, approximately $0.5 million
was allocated to inventory and the remainder of approximately
$5.2 million was allocated to goodwill.
c. During 2004, M-A Industries, through wholly owned and
controlled subsidiaries, acquired distribution companies at a
total cost of approximately $108 million.
The excess cost created as at acquisition date amounted to
approximately $82.5 million, of which approximately $43.4
million was allocated to intangible assets, approximately $4
million was allocated to deferred tax liabilities,
approximately $1.3 million was allocated to inventory and the
remainder of approximately $41.8 million was allocated to
goodwill.
F-43
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
B. MAKHTESHIM AGAN INDUSTRIES LTD. ("M-A INDUSTRIES") - AN AFFILIATE (CONT'D)
9. On March 8, 2005, the board of directors of M-A Industries resolved
to adopt a new option plan for its officers and employees and those
of its subsidiaries. Under the terms of the plan, on March 14, 2005,
14,900 thousand stock options were allotted, exercisable for up to
14,900 thousand ordinary shares of par value NIS 1 of M-A
Industries. Of these, 2,500 thousand options were deposited with a
trustee for future distribution. On March 8, 2006, the board of
directors of M-A Industries resolved to issue the balance of the
abovementioned options to employees. The fair value of the stock
options granted is approximately $3.7 million.
In November and December 2006, M-A Industries' Board of Directors
decided to issue 3,551,500 options to its new CEO, certain of its
officers and an external director. The cost of the benefit embedded
in the options issued, based on the fair value as at their issuance
date amounted to a total of $5.4 million.
10. SEASONALITY
Sales of crop protection products are directly dependent on the
agricultural seasons and the cycle of crop production. Therefore,
M-A Industries' revenues are not distributed evenly throughout the
year. Countries in the Northern Hemisphere are characterized by
similar timing of the agricultural seasons and the highest sales to
these countries usually take place during the months February-April.
The seasonality in the Southern Hemisphere is opposite and most of
the sales take place during the months August-November, with the
exception of Australia where most of the sales take place in
April-July. M-A Industries' worldwide activities are conducive to
balancing the seasonality impact even though M-A Industries has
higher sales in the Northern Hemisphere.
11. REORGANIZATION PLAN
On March 12, 2007, the Board of Directors of M-A Industries approved
commencement of a reorganization plan for M-A Industries, based on
recommendations of internal teams assisted by the McKinsey research
and consulting company. In the estimation of M-A Industries'
management, the write-offs and costs, to the extent required, in
connection with implementation of the reorganization plan, will not
be material.
C. TELRAD NETWORKS LTD. ("TELRAD") - AN AFFILIATE
1. In September 2004, Koor and Telrad Holdings Ltd., a wholly-owned
subsidiary of Koor ("the Koor group"), entered into an agreement for
the sale of 39% of the shares of Telrad to Fortissimo Capital Fund
GP L.P. ("Fortissimo").
This sale was executed in two stages.
In the first stage, which was completed in November 2004, the Koor
group transferred 19.5% of Telrad's shares to Fortissimo for $10.5
million. According to the sale agreement, Telrad's board of
directors shall be comprised of three directors nominated by Koor,
three directors nominated by Fortissimo and an external expert
nominated by mutual agreement of the parties.
F-44
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
C. TELRAD NETWORKS LTD. ("TELRAD") - AN AFFILIATE (CONT'D)
The agreement includes a number of matters, the approval of which
requires mutual agreement of the Koor group and Fortissimo ("joint
control rights"). The agreement included the granting of Fortissimo
with joint control rights, as Fortissimo is a strategic investor who
will assist the Koor Group with the active management of Telrad and
bring about its recovery. The joint control rights were granted upon
completion of the first stage of the transaction as from the outset,
the intention of the parties was the sale of 39% of Telrad's shares,
and the agreement stipulated that the second closing would take
place within a relatively short period from the first closing (180
days). These matters include: approval of Telrad's budget, election
of Telrad's executive officers and the remuneration thereof and the
distribution of dividends. These rights grant Fortissimo (the
minority shareholder) the right to participate actively in
significant decisions relating to Telrad's ordinary course of
business and therefore prevent the Koor group, the majority
shareholder, from having control of Telrad, and require mutual
agreement of Koor and Fortissimo in decisions crucial to Telrad's
operations.
Therefore, as of the fourth quarter of 2004 and through the end of
the second quarter of 2005, Telrad was proportionately consolidated
in Koor's financial statements according to a shareholding of 80.5%.
On June 22, 2005 ("the completion date") the Company completed the
second stage of the sale of 19.5% of Telrad's shares, after certain
changes were made to the original agreement. According to the
amendment to the original agreement, the international investment
fund HarbourVest and the Israeli investment fund Poalim Ventures
joined Fortissimo and together purchased 19.5% of Telrad's shares
for $6.25 million. Furthermore, in the amendment to the agreement,
Koor's obligation to extend an additional loan to Telrad was
cancelled, and Koor was released from certain of the
indemnifications granted to Fortissimo under the original agreement.
Subsequent to the sale, the Koor group's shareholding in Telrad
decreased to 61% and a capital gain of approximately NIS 4 million
was recorded.
The rights granted to Fortissimo under the original agreement
described above, whereby mutual agreement of the Koor group and
Fortissimo is required on significant matters relating to Telrad's
ordinary course of business, are still in effect. However, due to
the presence of two additional shareholders who are not party to
these rights, the proportionate consolidation of Telrad has been
discontinued as of the completion date. Beginning the end of the
second quarter of 2005, Koor's investment in Telrad is presented
according to the equity method.
Below are the operating results data of Telrad as included in Koor's
financial statements:
For the six months For the year ended
ended June 30, 2005 December 31, 2004
------------------- -----------------
NIS thousands
------------------------------------------------
(Audited)
------------------------------------------------
Revenues 177,631 470,252
Operating costs and expenses 201,179 531,369
F-45
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
C. TELRAD NETWORKS LTD. ("TELRAD") - AN AFFILIATE (CONT'D)
2. During 2004, Telrad recorded a valuation allowance in the amount of
NIS 67 million due to changes in the management's estimation
relating to the probability of the realization of carry forward
losses for tax purposes.
3. In 2004, Telrad's board of directors approved a reorganization plan
that included employee layoffs. In the 2005 financial statements,
expenses in the amount of NIS 38 million were recorded under the
item "other income (expenses), net" (in 2004 - NIS 29 million).
In 2006, Telrad's Board of Directors approved a reorganization
program which includes various efficiency measures including, inter
alia, the retirement of employees. The financial statements for 2006
include Koor's share in these employee retirement expenses in the
amount of NIS 38 million.
4. In November 2005, the board of directors of Telrad resolved to sell
the subsidiary Telrad Connegy Communication Inc. Therefore, Telrad
Connegy was classified as a discontinued operation in Telrad's
financial statements and Telrad recorded a loss in the amount of NIS
58 million. Koor's share in this loss was NIS 35 million included in
"Group's equity in the operating results of investee companies,
net".
D. DEFENSE ELECTRONICS SEGMENT
1. In November 2004, the Company acquired 33% of the shares of Tadiran
Communications Ltd. ("Tadiran Communications") for approximately NIS
637 million (approximately $144 million). On December 27, 2004, and
July 6, 2005 Koor entered into a series of agreements with Elbit
Systems Ltd. ("Elbit") and with Federmann Enterprises Ltd.
("Federmann"). Under the terms of the agreements, Koor sold its
entire holdings in Tadiran Communications to Elbit for $146 million
and recorded a capital gain of NIS 72 million. Concurrently, Koor
acquired 7.7% of Elbit's share capital from Federmann for $77.7
million.
The abovementioned agreements granted Koor the right to appoint 20%
of the members of Elbit's board of directors. Koor announced that as
long as it holds Elbit shares it will not invoke its right to
appoint 20% of the Elbit directors and therefore Koor's investment
in Elbit was stated by the cost method.
Furthermore, the agreement stipulated that Koor would sell to Elbit
all of its holdings in Elisra (70%) for $70 million and for
additional consideration contingent on future insurance receipts in
respect of a fire that occurred in the plants of Elisra's
subsidiaries in 2001.
On November 30, 2005, after all the requisite approvals for closing
the sale were received, the transaction was completed. The said sale
generated a capital gain to Koor of NIS 148 million in respect of
the sale of Elisra, which was recorded in the statement of
operations in the fourth quarter of 2005. Moreover, as a result of
the sale, the financial statements were reclassified, such that the
operating results of Elisra and the capital gains generated from its
sale were reported as discontinued operations.
F-46
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
D. DEFENSE ELECTRONICS SEGMENT (CONT'D)
2. On November 22, 2006, the Company entered into an agreement for the
sale of the majority of its investment in Elbit to Federmann for
total consideration of approximately $70 million, to be received in
five equal quarterly installments, bearing interest according to the
LIBOR rate. The first installment was received on November 27, 2006.
The Company expects to record a capital gain of approximately $12
million as a result of the transaction of which approximately $3
million were recorded in 2006 and the remainder will be recorded in
2007. The Company did not record the entire gain in 2006 since the
control over part of the transferred shares has not been
surrendered.
The shareholders' agreement entered into on December 27, 2004 and
amended on July 6, 2005 between the Company and Federmann was
nullified upon receipt of the first payment.
On December 5, 2006 the Company sold the remainder of its shares in
Elbit Systems Ltd. in a block trade for total consideration of
approximately NIS 112 million. The Company recorded capital gains of
approximately NIS 24 million during the fourth quarter of 2006 in
respect of the block trade.
E. TOURISM SEGMENT
1. KNAFAIM HOLDINGS LTD. ("KNAFAIM") - FORMER AFFILIATE
During the third and fourth quarters of 2004, the Company sold 19%
of the shares of Knafaim for approximately NIS 144 million. As a
result of the sale, the Company's shareholding in Knafaim decreased
from approximately 28.3% to approximately 9% and the Company
recorded a gain of approximately NIS 51 million. Accordingly, the
investment in Knafaim is stated by the cost method, beginning from
the date of the sale.
Pursuant to the requirements of Israel's anti-trust commissioner in
connection with the acquisition of the Company's shares by Discount
Investments Corp. Ltd. (see Note 26A), the Company is required to
reduce its holding in Knafaim to 5% by July 2, 2007.
See also Note 28(4) relating to events subsequent to the balance
sheet date.
2. SHERATON-MORIAH (ISRAEL) LTD. ("SHERATON-MORIAH") - A FORMER
SUBSIDIARY
On December 17, 2006 the Company signed an agreement for the sale of
its entire holding in Sheraton-Moriah to Azorim Development and
Construction Co. Ltd. ("Azorim"), for total consideration of $23.8
million. The sale is linked with the sale by a related party, Clal
Tourism Ltd. ("Clal Tourism") to Azorim of its entire holdings
(100%) in its subsidiaries Accor-Clal Israel Hotels (1995) Ltd. and
Accor-Clal Israel Hotel Management Company Ltd., together with
outstanding shareholders' loans (amounting to approx. $16.7 million)
and capital notes, for total consideration of $44.2 million. Clal
Tourism is wholly owned by IDB Development Corporation Ltd.
("IDBD"), which is the Company's ultimate parent, holding directly
and through Discount Investment Corporation Ltd. approximately 52%
of the Company's outstanding shares.
The closing date of the transaction is scheduled for April 9, 2007
(subject to each party's right to postpone this date by up to 90
days) and it is subject to several conditions precedent, inter alia,
the receipt of all requisite corporate approvals of the parties
(including the approval of the Company's shareholders, by the
requisite majority applicable under law to a transaction in which a
controlling shareholder has an interest) and the approvals of the
Israel Antitrust Authority; the Investment Center at the Ministry of
Industry, Trade and Labor; the Ministry of Tourism and the Israel
Land Administration, if and as required.
F-47
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
E. TOURISM SEGMENT (CONT'D)
The board of directors of Azorim approved the transaction on
December 19, 2006 and on February 14 and February 28, 2007 the
transaction was approved by the shareholders' meeting of the IDBD
and of the Company, respectively. The approval of the Israel
Antitrust Authority has also been received.
Furthermore, the closing of the transaction is subject to the
approvals of the other shareholders of Sheraton Moriah as per the
existing agreements among them; to the right of first offer of
Starwood Hotels and Resorts Worldwide, Inc., a shareholder of
Sheraton Moriah, with respect to the transaction; and provided there
will not be a material adverse change in the terms under which
credit is provided by financial institutions to the sold companies.
Azorim is also obligated to purchase Bank Hapoalim Ltd.'s holdings
in Sheraton Moriah under the same conditions, mutatis mutandis, if
Bank Hapoalim Ltd. exercises its tag along right with respect to the
transaction. Subsequent to the balance sheet date, Bank Hapolaim
exercised its tag along right and Starwood reached an agreement with
Azorim for the sale of its holdings in Sheraton-Moriah to Azorim.
The consideration due to the Company is payable in three
installments: the first, in the amount of $6.3 million, was received
on December 21, 2006 and is presented within other liabilities; the
second, in the amount of $8.4 million, to be received by the closing
date; and the remainder, in the amount of $9.1 million, by March 27,
2008. In the event that the transaction will not be consummated by
the closing date due to a breach of the agreement by Azorim, Koor
will be entitled to retain the first installment as damages.
Upon the closing of the transaction, Koor will be released from
guaranties that it provided to Sheraton Moriah, in the amount of
approximately $9.2 million.
See also Note 28(3) relating to events subsequent to the balance
sheet date.
3. ISRAM WHOLESALE TOURS AND TRAVEL LTD. ("ISRAM")
Isram is a group tour operator, located primarily in the US, with
international operations.
On December 28, 2006 the Company sold its entire holding in Isram
for total consideration of $1.26 million. The Company recorded a
capital gain of approximately NIS 8 million in respect of the sale.
Pursuant to the sale, Isram's operations have been presented as a
discontinued operation. See Note 24(3).
F. KOOR CORPORATE VENTURE CAPITAL ("KOOR CVC") - A CONSOLIDATED PARTNERSHIP
1. In June 2004, Cisco Systems purchased all the shares of Riverhead
Inc. from its shareholders for consideration of $39 million. As a
result, in 2004 Koor CVC recorded a gain of approximately NIS 17
million.
2. Koor CVC's management recorded impairment provisions in 2005 and
2004 of NIS 69 million and NIS 58 million, respectively.
F-48
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 3 - INFORMATION REGARDING CERTAIN INVESTEES (CONT'D)
F. KOOR CORPORATE VENTURE CAPITAL ("KOOR CVC") - A CONSOLIDATED PARTNERSHIP
(CONT'D)
3. In December 2005, one of Koor CVC's portfolio investments, Scopus,
Video Networks Ltd. raised approximately $31 million in an IPO. As a
result, Koor CVC recorded a gain of approximately NIS 31 million.
See also Note 28 - Events Subsequent to the Balance Sheet Date.
4. On November 27, 2006 a merger took place between one of Koor CVC's
portfolio companies, Followap Inc. and NeuStar Inc. As a result of
the merger, Koor CVC received consideration of approximately $12
million in January 2007 and recorded a gain of approximately NIS 43
million.
G. EPSILON INVESTMENT HOUSE LTD. - AN AFFILIATE
In January 2006, Koor signed an agreement for the acquisition of 50%
of the issued and paid share capital, of Epsilon Investment House
Ltd. ("Epsilon"). Epsilon is engaged in providing a wide range of
financial services including portfolio management, mutual funds'
management, underwriting, provident fund management and consulting
in mergers and acquisitions.
The transaction was completed on April 11, 2006 after receipt of
approvals under all applicable laws, including the approval of the
Israeli capital market commissioner.
According to the agreement, Koor was allocated new shares, and also
purchased shares from certain of the existing shareholders of
Epsilon, for total consideration of NIS 106 million.
Subsequent to the acquisition of Epsilon's shares, excess cost in
the amount of NIS 75 million was derived. Of the excess cost of the
investment, NIS 10 million was allocated to intangible assets
(trademark and customer base, product portfolio) and NIS 65 million
was allocated to goodwill.
The Company's investment in Epsilon is accounted for according to
the equity method, as there is no joint control agreement, as
defined by Israeli accounting standards, between all of Epsilon's
shareholders.
NOTE 4 - SHORT-TERM DEPOSITS AND INVESTMENTS
Consolidated Company
---------------------- ---------------------
December 31 December 31
---------------------- ---------------------
2006 2005 2006 2005
------- ------- ------- -------
NIS thousands
--------------------------------------------------
Marketable securities (1):
Linked debentures and treasury notes 190,964 198,123 * 178,015 179,269 *
Unlinked debentures and treasury notes 167,385 124,320 167,385 119,528
Shares and options 313,402 155,789 311,885 153,948
------- ------- ------- -------
671,751 478,232 657,285 452,745
Deposits in banks and financial institutions 24,180 52,564 -- 32,398
Short-term loans and current maturities of long-term loans -- 33 -- --
------- ------- ------- -------
695,931 530,829 657,285 485,143
======= ======= ======= =======
(1) Presented at market value, except for shares in investees in the
amount of NIS 201,159 thousand that are presented according to the
historical cost method (2005 - NIS 56,609 thousand).
* Reclassified.
F-49
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 5 - TRADE RECEIVABLES
Consolidated:
December 31
-------------------------
2006 2005
------ ------
NIS thousands
-------------------------
Open accounts 76,318 73,298
Post-dated checks received and credit card companies 4,799 3,974
Current maturities of long-term trade receivables 924 1,285
------ ------
82,041 78,557
====== ======
Net of allowance for doubtful accounts 4,106 3,517
====== ======
NOTE 6 - OTHER RECEIVABLES
Consolidated Company
------------------------- -------------------------
December 31 December 31
------------------------- -------------------------
2006 2005 2006 2005
------ ------ ------ ------
NIS thousands
---------------------------------------------------------------
Receivable in respect of sold investments * 56,235 -- -- --
Government agencies 3,650 3,722 1,046 748
Deferred taxes 241 129 -- --
Accrued income 2,929 10,704 246 1,190
Prepaid expenses 6,200 10,993 -- 3,263
Employees 60 43 -- --
Affiliates - current accounts 6,173 35,960 ** 572 4,714
Others 6,968 17,916 ** 646 6,180
------ ------ ------ ------
82,456 79,467 2,510 16,095
====== ====== ====== ======
* See Note 3F(4).
** Reclassified.
NOTE 7 - INVENTORIES
Consolidated:
December 31
-------------------------
2006 2005
------ ------
NIS thousands
-------------------------
Raw and auxiliary materials 50,793 66,169
Goods and work in progress 7,445 4,497
Finished goods 7,490 20,243
------ ------
65,728 90,909
====== ======
F-50
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 8 - INVESTMENTS IN INVESTEE COMPANIES
A. CONSOLIDATED BALANCE SHEET - AFFILIATES
December 31
---------------------------
2006 2005
--------- ---------
NIS thousands
---------------------------
Net asset value of the investments (1)(2) 2,700,520 2,516,674 *
--------- ---------
Goodwill and original differences:
Original amount 658,203 153,997
Less - accumulated amortization (117,212) (88,496)
--------- ---------
540,991 65,501
--------- ---------
Total investment in share capital 3,241,511 2,582,175
Long-term loans (3) 82,709 81,845
--------- ---------
3,324,220 2,664,020
========= =========
(1) As follows:
Net asset value of investments as at January 1 2,516,674 839,741
Changes during the year:
Companies that ceased being consolidated -- 1,499,387
Net asset value acquired 458,906 34,821
Accumulated earnings (losses), net (52,788) 317,807 *
Changes in capital reserves and foreign currency translation adjustments (215,495) 176,600
Disposals, net (6,777) (351,682)
--------- ---------
2,700,520 2,516,674
========= =========
(2) Including investments in companies traded on the Stock Exchange in
Tel Aviv or abroad, in NIS millions:
Carrying value in the balance sheet 3,173 2,526
========= =========
Market value as at balance sheet date 5,372 4,851
========= =========
* Restated - See Note 2R(4).
Interest rate as December 31
at December 31 -----------------------
2006 2006 2005
---------------- ------ ------
% NIS thousands
---------------- -----------------------
(3) Linkage terms and interest rates relating
to long-term loans:
Linked to the CPI - without maturity date 5.5 26,707 24,792
Linked to the Dollar ** LIBOR* + 2 56,002 57,053
------ ------
82,709 81,845
====== ======
* As of December 31, 2006, the LIBOR rate is 5.3%.
** The loan is to be repaid by 2029.
F-51
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 8 - INVESTMENTS IN INVESTEE COMPANIES (CONT'D)
B. COMPANY BALANCE SHEET - INVESTEES
December 31
-------------------------------
2006 2005
--------- ---------
NIS thousands
-------------------------------
Presented as:
Investments in investees 2,579,219 2,962,192
Excess of accumulated losses over investments in subsidiaries (56,583) (47,580)
--------- ---------
2,522,636 2,914,612
========= =========
Net asset value of the investments 1,983,869 1,601,299 (*) (**)
--------- ---------
Goodwill and original differences:
Original amount, net 467,316 12,834
Less - accumulated amortization (26,078) (3,546)
--------- ---------
441,238 9,288
--------- ---------
Book value (1) 2,425,107 1,610,587
Payments on account of shares (1) 58,830 60,927
Long-term loans and capital notes (2) 36,477 1,240,583
Non-current accounts (3) 2,222 2,515
--------- ---------
2,522,636 2,914,612
========= =========
(1) As follows:
December 31
-------------------------------
2006 2005
--------- ---------
NIS thousands
-------------------------------
Cost of shares including accumulated earnings as at January 1 1,671,514 2,289,547
Changes during the year:
Cost of acquired shares 1,628,617 70,028
Accumulated earnings (losses), net (550,813) 95,035 (*)
Changes in capital reserves and foreign currency
translation adjustments (235,386) 208,657
Disposals (29,995) (991,753)
--------- ---------
Book value, including payments on account of shares (4) 2,483,937 1,671,514
========= =========
(*) Restated - See Note 2R(4).
(**) Reclassified.
F-52
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 8 - INVESTMENTS IN INVESTEE COMPANIES (CONT'D)
B. COMPANY BALANCE SHEET - INVESTEES (CONT'D)
(2) Long-term loans and capital notes:
December 31
-------------------------------
2006 2005
--------- ---------
NIS thousands
-------------------------------
Long-term loans (a) (b) 21,177 52,854
Capital notes - unlinked and not bearing interest (c) 15,300 1,187,729
--------- ---------
36,477 1,240,583
========= =========
(a) Long-term loans classified by linkage terms and interest
rates:
Interest
rate at
December 31 December 31 December 31
----------- ----------- -----------
2006 2006 2005
----------- ----------- -----------
% NIS thousands
----------- --------------------------------
Linked to the Dollar -- 13,952 --
Linked to the CPI 2 -- 43,707
Linked to the CPI -- 7,225 9,147
----------- -----------
21,177 52,854
=========== ===========
(b) The loans mature in the years subsequent to the balance sheet
date (excluding current maturities) as follows:
December 31 December 31
----------- -----------
2006 2005
----------- -----------
NIS thousands
--------------------------------
Sixth year or thereafter 21,177 52,854
----------- -----------
21,177 52,854
=========== ===========
(c) Capital notes are not presented at their present value, since
their repayment date has not yet been fixed by the parties.
(3) Non-current inter-company accounts:
December 31
-------------------------------
2006 2005
--------- ---------
NIS thousands
-------------------------------
Linked to the Dollar 154 640
Unlinked-bears interest at the rate of the increase in the CPI 2,068 1,875
----------- -----------
2,222 2,515
=========== ===========
F-53
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 8 - INVESTMENTS IN INVESTEE COMPANIES (CONT'D)
B. COMPANY BALANCE SHEET - INVESTEES (CONT'D)
(4) Including investments in marketable shares traded on the Tel Aviv
Stock Exchange or abroad in NIS millions:
December 31
-------------------------------
2006 2005
--------- ---------
NIS millions
-------------------------------
Carrying value in balance sheet 748 --
=========== ===========
Market value as at balance date 833 --
=========== ===========
NOTE 9 - OTHER INVESTMENTS AND RECEIVABLES
A. COMPOSITION:
Consolidated Company
------------------------ -----------------------
December 31 December 31
------------------------ -----------------------
2006 2005 2006 2005
-------- -------- -------- --------
NIS thousands
-------------------------------------------------------
Debentures held-to-maturity 9,213 10,330 * 9,213 10,330 *
Deposits in banks and in financial institutions 7,706 13,459 -- --
Non-current trade receivables 6,449 3,802 -- --
Long-term loans receivable 16,734 23,745 -- --
-------- -------- -------- --------
Total (see B and C below) 40,102 51,336 9,213 10,330
Other companies - marketable securities (1) 46,927 386,364 46,927 353,001
Venture capital investments (2) 108,984 114,764 -- --
Excess of amounts funded over amounts accrued for
severance pay (see Note 17) -- 3,449 -- 3,449
Others 6,659 214 6,659 214
-------- -------- -------- --------
202,672 556,127 62,799 366,994
======== ======== ======== ========
(1) Market value as at balance sheet date 42,385 411,472 42,385 364,197
======== ======== ======== ========
(2) The fair value is similar to the book value.
* Reclassified.
F-54
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 9 - OTHER INVESTMENTS AND RECEIVABLES (CONT'D)
B. CLASSIFICATION BY LINKAGE TERMS AND INTEREST RATES OF DEPOSITS, NON -
CURRENT DEBTS OF CUSTOMERS AND LONG - TERM LOANS RECEIVABLE:
CONSOLIDATED:
Interest rates at December 31
December 31 -----------------------------
2006 2006 2005
----------------- -------- --------
% NIS thousands
----------------- -----------------------------
Linked to the CPI Mainly 5.4 6,419 3,802
Linked to foreign currency (mainly to the dollar) No interest -- 6,790 *
Linked to dollar, interest bearing 5.3 - 8.5 33,683 40,744 *
-------- --------
40,102 51,336
======== ========
* Reclassified
C. REPAYMENT SCHEDULE OF DEPOSITS, NON-CURRENT CUSTOMER BALANCES AND
LONG-TERM LOANS RECEIVABLE IN THE YEARS SUBSEQUENT TO THE BALANCE SHEET
DATE:
Consolidated Company
------------------------ -----------------------
December 31 December 31
------------------------ -----------------------
2006 2005 2006 2005
-------- -------- -------- --------
NIS thousands
-------------------------------------------------------
Second year 5,315 12,743 -- --
Third year 13,638 7,920 -- --
Fourth year 16,884 2,929 -- --
Fifth year and thereafter 4,265 27,744 -- --
-------- -------- -------- --------
40,102 51,336 -- --
======== ======== ======== ========
F-55
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 10 - FIXED ASSETS
A. CONSOLIDATED
Office
Land (including Machinery and furniture and Tools and
leasehold land) Buildings equipment Vehicles equipment instruments Total
--------------- ----------- ------------- ---------- ------------- ------------- ---------
NIS thousands NIS thousands
------------------------------------------------------------------------------------------------------------------
Cost as at January 1, 2006 31,224 1,028,779 381,342 629 15,224 3,167 1,460,365
Additions -- 11,943 15,635 417 1,411 -- 29,406
Disposals -- (5,294) (94) (580) (2,111) -- (8,079)
Adjustments resulting from foreign currency translation
differences* -- (507) (1,914) (798) -- (3,219)
Newly consolidated companies -- 92,281 35,953 -- -- -- 128,234
--------------- ----------- ------------- ---------- ------------- ------------- ---------
BALANCE AS AT DECEMBER 31, 2006 31,224 1,127,202 430,922 466 13,726 3,167 1,606,707
--------------- ----------- ------------- ---------- ------------- ------------- ---------
Accumulated depreciation as at January 1, 2006 -- 405,822 305,848 629 11,309 -- 723,608
Additions -- 16,650 16,679 -- 1,154 -- 34,483
Disposals -- (267) -- (257) (1,592) -- (2,116)
Adjustments resulting from foreign currency translation
differences* -- (478) (1,418) -- (673) -- (2,569)
Newly consolidated companies -- 53,141 32,975 -- 86,116
--------------- ----------- ------------- ---------- ------------- ------------- ---------
BALANCE AS AT DECEMBER 31, 2006 -- 474,868 354,084 372 10,198 -- 839,522
--------------- ----------- ------------- ---------- ------------- ------------- ---------
WRITE DOWN FOR DECLINE IN VALUE -- (11,707) -- -- -- -- (11,707)
--------------- ----------- ------------- ---------- ------------- ------------- ---------
NET BOOK VALUE AS AT DECEMBER 31, 2006 31,224 640,627 76,838 94 3,528 3,167 755,478
=============== =========== ============= ========== ============= ============= =========
Net book value as at December 31, 2005 31,224 611,250 75,494 -- 3,915 3,167 725,050
=============== =========== ============= ========== ============= ============= =========
* See Note 2D.
F-56
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 10 - FIXED ASSETS (CONT'D)
A. CONSOLIDATED (CONT'D)
1. Certain of the real estate properties have not yet been registered
in the Land Registry Office in the name of the Group's subsidiaries,
primarily due to the absence of formal parceling in the areas in
which the properties are located.
Leasehold rights are generally for a period of 49 years. Certain
leases provide an option for extension for another 49 years.
The cost of leasehold real estate as at December 31, 2006 is
approximately NIS 547 million.
2. Fixed assets are presented after deduction of investment grants (net
of depreciation), which have been received from the State of Israel
by certain subsidiaries under the terms of the Law for the
Encouragement of Capital Investments, 1959. These grants amount to
NIS 115 million as at December 31, 2006 (see also Note 16A).
3. Includes capitalized interest amounting to NIS 55 million at
December 31, 2006 and 2005.
4. As for amounts charged to cost of fixed assets, see Notes 23B and
23E.
5. See Note 22 regarding liens.
B. COMPANY
Offices and land Office Equipment Total
---------------- ---------------- -------------
NIS thousands
-----------------------------------------------------------
Cost as at January 1, 2006 80,004 * 5,947 85,951
Additions 83 117 200
Disposals (267) (2,111) (2,378)
---------------- ---------------- --------------
BALANCE AS AT DECEMBER 31, 2006 79,820 3,953 83,773
---------------- ---------------- --------------
Accumulated depreciation as at January 1, 2006 8,421 3,456 11,877
Additions 1,453 452 1,905
Disposals (267) (1,592) (1,859)
---------------- ---------------- --------------
BALANCE AS AT DECEMBER 31, 2006 9,607 2,316 11,923
---------------- ---------------- --------------
WRITE DOWN FOR DECLINE IN VALUE (11,707) -- (11,707)
---------------- ---------------- --------------
NET BOOK VALUE AS AT DECEMBER 31, 2006 58,506 1,637 60,143
================ ================ ==============
NET BOOK VALUE AS AT DECEMBER 31, 2005 59,876 2,491 62,367
================ ================ ==============
* Represents the ownership of two stories in an office building in Tel
Aviv and well as a plot of land and manufacturing facility in Holon.
The properties have not yet been registered in the name of the
Company at the Land Registry Office. The offices are on land leased
for a period of 49 years ending in 2044.
F-57
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 11 - INTANGIBLE ASSETS, DEFERRED EXPENSES AND DEFERRED TAX ASSETS
CONSOLIDATED
December 31
-------------------------------
2006 2005
--------- ---------
NIS thousands
-------------------------------
GOODWILL:
Original amounts 17,735 566
Less - accumulated amortization 50 55
--------- ---------
17,685 511
--------- ---------
DEFERRED EXPENSES:
Original amounts 16,865 16,940
Less - accumulated amortization 16,442 16,153
--------- ---------
423 787
--------- ---------
Deferred tax assets (see Note 16G) -- 14,518
--------- ---------
18,108 15,816
========= =========
NOTE 12 - CREDIT FROM BANKS AND OTHERS
A. COMPOSITION:
Consolidated Company
------------------------ -----------------------
December 31 December 31
------------------------ -----------------------
2006 2005 2006 2005
-------- -------- -------- --------
NIS thousands
-------------------------------------------------------
Credit from banks (B) 35,996 51,862 -- 7,290
Current maturities of long-term loans and
debentures (Note 15) 17,971 220,265 -- 197,425
-------- -------- -------- --------
53,967 272,127 -- 204,715
======== ======== ======== ========
F-58
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 12 - CREDIT FROM BANKS AND OTHERS (CONT'D)
B. CREDIT FROM BANKS CLASSIFIED BY LINKAGE TERMS AND INTEREST RATES:
Consolidated
Interest -------------------------
rates at December 31
December 31 -------------------------
2006 2006 2005
----------- ------ ------
% NIS thousands
----------- -------------------------
Linked to foreign currency (mainly to the Dollar) LIBOR + 1.5 29,575 27,618
Linked to foreign currency 6-7.5 6,421 24,244
------ ------
35,996 51,862
====== ======
Company
Interest -------------------------
rates at December 31
December 31 -------------------------
2005 2006 2005
----------- ------ ------
% NIS thousands
----------- -------------------------
Linked to foreign currency 5.5 -- 7,290
------ ------
-- 7,290
====== ======
C. See Note 22 regarding liens to secure credit.
NOTE 13 - TRADE PAYABLES
Consolidated Company
------------------------- -------------------------
December 31 December 31
------------------------- -------------------------
2006 2005 2006 2005
------ ------ ------ ------
NIS thousands
--------------------------------------------------------------
Open debts 61,179 59,875 266 558
Cheques and notes payable 6,666 11,215 1,080 665
------ ------ ------ ------
67,845 71,090 1,346 1,223
====== ====== ====== ======
F-59
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 14 - OTHER PAYABLES
Consolidated Company
------------------------- -------------------------
December 31 December 31
------------------------- -------------------------
2006 2005 2006 2005
------ ------ ------ ------
NIS thousands
--------------------------------------------------------------
Employees and withholdings payable 16,711 20,529 2,314 9,403
Provision for vacation pay and vacation expense
allowance 5,884 10,695 544 5,099
Accrued expenses 24,734 35,546 7,902 9,748 **
Government agencies (including taxes) 31,233 49,600 253 2,077 **
Provision for warranty and repairs and provision
for losses in respect of long-term contracts 1,073 921 --
Severance pay payable and current portion of early
retirement pensions (Note 17) 11,875 364 11,875 364
Deferred income 4,777 24,427 --
Affiliated company 2,197 12,349 21 --
Accrued interest 21,233 5,588 17,266 5,100 **
Liabilities regarding forward transactions 17,404 1,001 17,404 1,001
Advance on account of sale of subsidiary * 26,321 -- 26,321 --
Others 27,693 36,968 11,988 15,215 **
------- ------- ------ ------
191,135 197,988 95,888 48,007 **
======= ======= ====== ======
* See Note 3E(2).
** Reclassified
F-60
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 15 - LONG TERM LIABILITIES
A. LOANS
Consolidated Company
--------------------------- ---------------------------
December 31 December 31
--------------------------- ---------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
NIS thousands
---------------------------------------------------------------
1. Loans from banks 1,885,903 1,774,414 300,579 1,219,470
Less - current maturities 16,971 219,265 -- 197,425
--------- --------- --------- ---------
1,868,932 1,555,149 300,579 1,022,045
--------- --------- --------- ---------
2. Loans and liabilities from others:
Shareholders in subsidiaries 7,669 7,691 -- --
Investees -- -- 6,382 6,713
Receipts from
time-sharing units 33,193 34,107 -- --
Others 7,605 13,349 -- --
--------- --------- --------- ---------
48,467 55,147 6,382 6,713
Less - current maturities 1,000 1,000 -- --
--------- --------- --------- ---------
47,467 54,147 6,382 6,713
--------- --------- --------- ---------
1,916,399 1,609,296 306,961 1,028,758
========= ========= ========= =========
3. Loans classified by linkage terms and interest rates:
CONSOLIDATED:
December 31
Interest rate at December 31 ---------------------------
2006 2006 2005
----------------------------------- --------- ---------
% NIS thousands
----------------------------------- ---------------------------
Linked to the foreign currency
(mainly Dollar) Mainly LIBOR + 1.75% - LIBOR +2.15% 259,947 253,996
Linked to the CPI 3.6-6.2 (mainly 4.4-4.8) 1,458,423 1,359,565
Unlinked Prime* + 0.25% -Prime* + 0.5% 216,000 216,000
--------- ---------
1,934,370 1,829,561
Less - current maturities 17,971 220,265
--------- ---------
1,916,399 1,609,296
========= =========
* Prime interest rate at December 31, 2006 - 6%
F-61
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 15 - LONG TERM LIABILITIES (CONT'D)
A. LOANS (CONT'D)
3. Loans classified by linkage terms and interest rates (cont'd)
COMPANY:
Interest rates at December 31
December 31 -----------------------------
2006 2006 2005
---------------- --------- ---------
% NIS thousands
---------------- -----------------------------
a. From banks:
Linked to the CPI 4.8 292,070 1,210,200
Linked to the Dollar 7.65 8,509 9,270
--------- ---------
300,579 1,219,470
Less - current maturities -- 197,425
--------- ---------
300,579 1,022,045
========= =========
December 31
-----------------------------
2006 2005
--------- ---------
NIS thousands
-----------------------------
b. From investees: 6,382 6,713
--------- ---------
Unlinked capital note, non-interest bearing 6,382 6,713
========= =========
B. DEBENTURES
PRESENTED AS LONG-TERM LIABILITIES:
Consolidated Company
------------------------- --------------------------
December 31 December 31
------------------------- --------------------------
2006 2005 2006 2005
------- ------- ------- -------
NIS thousands
--------------------------------------------------------------
Debentures (1)(2) 988,482 390,854 988,482 390,854
======= ======= ======= =======
(1) On April 10, 2005, as part of a private placement to Israeli
institutional investors, the Company issued NIS 400 million par
value in debentures, as well as 800,000 options (see Note 20D) for
NIS 400 million in cash.
The debentures bear annual interest of 3.75%, linked to the CPI,
which is paid on April 30 and October 31 of each year. The
debentures are linked to the CPI and will be repaid in a balloon
payment on April 30, 2010. The issue proceeds were allocated to the
components of the package according to the fair value of the
securities issued. Accordingly, the discount in respect of the
debentures amounted to approximately NIS 22 million which is being
amortized as finance expenses over the life of the debentures. The
debentures are presented net of the discount and deferred issue
costs of approximately NIS 16 million.
F-62
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 15 - LONG TERM LIABILITIES (CONT'D)
B. DEBENTURES (CONT'D)
(2) On August 20, 2006, pursuant to completion of a public offering in
Israel the Company issued debentures with a par value of NIS 600
million. The debentures are linked to the Israeli CPI and bear
annual interest of 5.1%. The debentures will be repaid in five equal
installments on September 1 of each year from 2012 through 2016. The
interest is payable on the outstanding balance of the debentures, on
September 1 of each year from 2007 through 2016.
The debentures are presented net of deferred issue costs of
approximately NIS 6 million which are amortized based on the
effective interest rate method.
The Israeli Securities Authority and the Tel Aviv Stock Exchange
approved the listing of the debentures for trading on the Tel Aviv
Stock Exchange.
The debentures have not been and will not be registered under the US
Securities Act of 1933, as amended, and may not be offered or sold
in the United States or to U.S. persons, absent registration or an
applicable exemption from registration requirements.
C. See Note 18A3 regarding the Koor's commitment to comply with financial
covenants. See Note 22 regarding liens provided in connection with
liabilities.
F-63
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 15 - LONG TERM LIABILITIES (CONT'D)
D. 1. CONSOLIDATED LIABILITIES - (NET OF CURRENT MATURITIES) THAT WILL MATURE
IN THE FOLLOWING YEARS SUBSEQUENT TO BALANCE SHEET DATE ARE AS FOLLOWS:
Loans from banks Loans from others
------------------------- ----------------------
December 31 December 31
------------------------- ----------------------
2006 2005 2006 2005
--------- --------- ------ ------
NIS thousands
----------------------------------------------------------
Second year 418,273 17,061 4,955 6,000
Third year 253,327 224,902 12,169 14,691
Fourth year 836,051 124,065 1,150 3,000
Fifth year 22,122 831,965 1,000 1,349
Sixth year 22,122 19,190 1,000 1,000
Subsequent years 317,037 337,966 27,193 28,107
--------- --------- ------ ------
1,868,932 1,555,149 47,467 54,147
========= ========= ====== ======
Debentures Total
------------------------- ---------------------------
December 31 December 31
------------------------- ---------------------------
2006 2005 2006 2005
------- ------- --------- ---------
NIS thousands
-----------------------------------------------------------
Second year -- -- 423,228 23,061
Third year -- -- 265,496 239,593
Fourth year 394,278 -- 1,231,479 127,065
Fifth year -- 390,854 23,122 1,224,168
Sixth year 594,204 -- 617,326 20,190
Subsequent years -- -- 344,230 366,073
------- ------- --------- ---------
988,482 390,854 2,904,881 2,000,150
======= ======= ========= =========
2. THE COMPANY LIABILITIES - (NET OF CURRENT MATURITIES) THAT WILL
MATURE IN THE FOLLOWING YEARS SUBSEQUENT TO BALANCE SHEET DATE ARE
AS FOLLOWS:
Loans and capital
Loans from banks notes from investees
------------------------- ----------------------
December 31 December 31
------------------------- ----------------------
2006 2005 2006 2005
--------- --------- ------ ------
NIS thousands
----------------------------------------------------------
Second year 179,182 -- -- --
Third year 121,397 100,000 -- --
Fourth year -- 109,270 -- --
Fifth year -- 812,775 -- --
Sixth year -- -- -- --
Subsequent years -- -- 6,382 6,713
--------- --------- ------ ------
300,579 1,022,045 6,382 6,713
========= ========= ====== ======
Debentures Total
------------------------- ---------------------------
December 31 December 31
------------------------- ---------------------------
2006 2005 2006 2005
------- ------- --------- ---------
NIS thousands
-----------------------------------------------------------
Second year -- -- 179,182 --
Third year -- -- 121,397 100,000
Fourth year 394,278 -- 394,278 109,270
Fifth year -- 390,854 -- 1,203,629
Sixth year 594,204 -- 594,204 --
Subsequent years -- -- 6,382 6,713
------- ------- --------- ---------
988,482 390,854 1,295,443 1,419,612
======= ======= ========= =========
3. See Note 22 for details of security pledged to secure loans.
F-64
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME
A. TAX BENEFITS UNDER THE LAW FOR ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
Under this law, by virtue of the "approved enterprise" status granted to
certain enterprises of several investees, these companies are entitled to
various tax benefits. The income derived from these enterprises during a
period of 7 to 10 years, from the year in which these enterprises first
had taxable income (limited to 12 years from commencement of production or
14 years from the date of the approval, whichever is earlier), is subject
to a corporate tax rate of 0 - 25%.
According to the alternative track, some of the plants of subsidiaries
were granted a tax exemption for a two to four year period and are taxed
at the reduced rate of 25% during the remaining benefits period.
Fixed assets owned by investees who are approved enterprises are entitled
to an accelerated amortization deduction.
In the event that an investee distributes a dividend to shareholders out
of income attributable to revenues which received the approved enterprise
tax exemption, the distributing investee will be required to pay the
company tax (25%) it had saved in the period of the benefits.
Deferred taxes in respect of income from approved enterprises were not
provided, since it is the Group's policy not to initiate a distribution of
dividends from its subsidiaries that would result in an additional tax
liability to the Group.
Benefits are conditional upon the fulfillment of terms set out in law or
in deeds of approval. Non-fulfillment of terms could cause cancellation of
the benefit, in whole or in part, and the return of benefit sums, plus
interest and linkage differentials. The investees met all terms set out as
above as at the dates of the financial reports.
As security for the implementation of the approved projects and compliance
with the conditions of the approval, a pledge has been registered on the
above subsidiaries' assets in favor of the State of Israel.
B. MEASUREMENT OF RESULTS FOR TAX PURPOSES IN ACCORDANCE WITH THE INCOME TAX
(INFLATIONARY ADJUSTMENTS) LAW, 1985 (HEREINAFTER - "THE ADJUSTMENTS LAW")
The Company and its subsidiaries in Israel are subject to the Income Tax
Law (Inflationary Adjustments), 1985. Under this Law, the results for tax
purposes are adjusted principally for the changes in the Consumer Price
Index. However, the adjusted income under the tax laws is not always
identical to the reported income according to the accounting standards of
the IASB. As a result, there are differences between the earnings reported
according to financial statements and the adjusted income for tax
purposes.
See Note 2S and Note 16G regarding deferred taxes on such differences.
C. LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION), 1969
Certain companies qualify as "industrial companies" under the above law.
By virtue of this status and certain regulations published under the
inflationary adjustments law, the companies are entitled to claim, and
have claimed, accelerated rates of depreciation.
D. TAX RATES APPLICABLE TO INCOME FROM OTHER SOURCES
Income not eligible for "approved enterprise" benefits, is subject to tax
at the statutory tax rate of 31% (or if the investee is registered and
operates outside of Israel, at the tax rate prescribed for that
territory).
F-65
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
E. LOSSES FOR TAX PURPOSES CARRIED FORWARD TO FUTURE YEARS AND TAX
ASSESSMENTS
1. The consolidated balance of carryforward tax losses at December 31,
2006 amounted to approximately NIS 2,250 million, of which NIS 1,734
million relates to Koor.
Carryforward tax losses of the Israeli companies are linked to the
CPI, according to the Adjustments Law and there is no statute of
limitations as to their utilization.
2. The Company has received final assessments up to and including the
year ended 2002.
F. AMENDMENT TO THE INCOME TAX ORDINANCE
1. On June 29, 2004, the Knesset passed the "Law for the Amendment of
the Income Tax Ordinance (No. 147 and Temporary Order) - 2004
(hereinafter - the Amendment)". The amendment provides for a gradual
reduction in the company tax rate from 36% to 30% in the following
manner: in 2004 the tax rate will be 35%, in 2005 the tax rate will
be 34%, in 2006 the tax rate will be 32% and from 2007 onward the
tax rate will be 30%.
Current taxes and deferred tax balances as at December 31, 2004 were
calculated based on the new tax rates prescribed in the Amendment.
The effect of the change in the consolidated financial statements as
at the beginning of 2004 is a decrease in income tax expenses of NIS
5 million.
2. On July 25, 2005 the Israeli Knesset passed the Law for the
Amendment of the Income Tax Ordinance (No.147 and Temporary Order) -
2005 (hereinafter - the Amendment). The Amendment provides for a
gradual reduction in the statutory company tax rate in the following
manner: in 2006 the tax rate will be 31%, in 2007 the tax rate will
be 29%, in 2008 the tax rate will be 27%, in 2009 the tax rate will
be 26% and from 2010 onward the tax rate will be 25%. Furthermore,
as from 2010, upon reduction of the company tax rate to 25%, real
capital gains will be subject to tax of 25%.
The current taxes and deferred tax balances at December 31, 2005
were calculated in accordance with the new tax rates specified in
the Amendment. The effect of the change in the new tax rate on the
Company's equity as at December 31, 2005 was approximately NIS 8
million.
F-66
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
G. DEFERRED TAXES:
1. Deferred taxes are presented in the consolidated balance sheet as
follows:
December 31
----------------------------
2006 2005
-------- --------
NIS thousands
----------------------------
WITHIN CURRENT ASSETS:
Provision for vacation pay and severance benefits 232 161
Inventory, net of customer advances -- (74)
Timing differences in respect of recognition of income and expenses, net 8 42
-------- --------
240 129
======== ========
WITHIN LONG-TERM ASSETS:
Depreciation -- (16,085)
Operating loss and capital loss carried forwards 577,316 531,154
Liability in respect of employee severance benefits -- 1,837
Timing differences in respect of recognition of income and expenses, net -- 2,274
-------- --------
577,316 519,180
Balance not expected to be realized (1) (577,316) (504,662)
-------- --------
-- 14,518
======== ========
WITHIN LONG-TERM LIABILITIES:
Depreciation (26,691) (78)
Operating loss and capital loss carried forwards 10,063 --
Liability in respect of employee severance benefits 2,055 --
Timing differences in respect of recognition of income and expenses, net 3,562 --
-------- --------
(11,011) (78)
======== ========
(1) The Company and certain subsidiaries have deferred tax assets, that
management of the companies believe are not likely to be realized,
arising from accumulated tax loss carryforwards and other timing
differences and, accordingly, no deferred taxes were recorded in
respect thereof.
F-67
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
G. DEFERRED TAXES (CONT'D)
2. Balances and movement of deferred taxes in the consolidated balance
sheet:
Timing
differences
Inventories Provisions Losses and in respect of
net of for deductions recognition
Depreciable customer employee carried of income and
fixed assets advances rights forward expenses Total
------------ ------------ ---------- ----------- ------------- ---------
NIS thousands
------------------------------------------------------------------------------------
BALANCE AS AT DECEMBER
31, 2004 (389,483) 75,928 51,099 189,883 (2,310) (74,883)
Translation
differences in
subsidiaries 131 -- (6) 308 64 497
Amounts charged to
statement of
operations 4,579 (117) 305 (76,615) 248 (71,600)
Other differences, net * 368,610 (75,885) (49,400) (87,084) 4,314 160,555
------------ ------------ ---------- ----------- ------------- ---------
BALANCES AS AT
DECEMBER 31, 2005 (16,163) (74) 1,998 26,492 2,316 14,569
Translation
differences in
subsidiaries 31 6 (15) (84) (195) (257)
Amounts charged to
statement of
operations (609) 68 304 (16,345) 1,449 (15,133)
Other differences, net * (9,950) -- -- -- -- (9,950)
------------ ------------ ---------- ----------- ------------- ---------
BALANCES AS AT
DECEMBER 31, 2006 (26,691) -- 2,287 10,063 3,570 (10,771)
============ ============ ========== =========== ============= =========
* Mainly subsidiaries that were sold/acquired, net.
Deferred taxes were computed at tax rates of 22% - 35%.
F-68
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
H. TAXES ON INCOME INCLUDED IN CONSOLIDATED STATEMENTS OF OPERATIONS
1. Composition of income tax on continuing operations:
Year ended December 31
-------------------------------------------
2006 2005 2004
------- ------- -------
NIS thousands
-------------------------------------------
Current taxes 5,152 5,322 236,088
Deferred taxes 15,133 71,600 40,665
In respect of previous years, net (10,916)* 3,057 (4,473)
------- ------- -------
9,369 79,979 272,280
======= ======= =======
* Primarily relating to final tax assessments received by a
subsidiary.
2. Below is the adjustment between the theoretical tax amount which
would have been applicable if income from continuing operations of
Koor Group and the consolidated companies were taxable at the
statutory tax rate effective in Israel at that time, and the tax
amount charged in the statement of income.
Year ended December 31
-------------------------------------------
2006 2005 2004
------- ------- -------
NIS thousands
-------------------------------------------
Earnings (loss) from continuing operations before taxes on
income (98,891) 327,646 823,829
======= ======= =======
Statutory tax rate 31% 34% 35%
======= ======= =======
Theoretical tax expense (income) (30,656) 111,400 288,340
Decrease in taxes resulting from the following factors -
the tax effect:
Tax relating to Koor's equity in operating results of
investee companies 11,330 (122,183) 12,271
Tax benefits under various encouragement laws (5,643) (6,344) (49,676)
Non-deductible expenses for tax purposes, net of tax-free
income 65 282 15,724
Losses for which deferred taxes were not recorded 57,529 145,023 114,564
Utilization of tax loss carry forwards and temporary
differences from prior years for which deferred taxes
were not created and which were utilized during the
current year (26,812) (61,531) (18,534)
Deferred taxes in respect of prior years and which were
written-off at the reporting year 14,305 9,951 75,601
Tax losses from prior years, for which deferred taxes were
recorded this year -- -- (77,483)
Differences between the measurement basis according to the
financial statement to measurement basis for tax purposes -- -- 11,460
Taxes in respect of prior years (10,916) 3,057 (4,473)
Effect of foreign subsidiaries * (308) -- (92,839)
Others ** 475 324 (2,675)
------- ------- -------
Total taxes on income 9,369 79,979 272,280
======= ======= =======
* Relates to territories of operations in which the statutory
tax rate is lower than that used in Israel.
** Including influence of changes in tax rate.
F-69
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 17 - LIABILITIES FOR EMPLOYEE SEVERANCE BENEFITS, NET
A. PENSION, SEVERANCE PAY AND RETIREMENT GRANTS
Under current labor laws and existing labor agreements, the companies in
the Group are required to make severance payments, to employees who are
dismissed or who retire, computed on the basis of their latest salary.
In respect of these liabilities, regular deposits are made by Group
companies with pension and severance pay funds. The balance sheet amount
represents the unfunded balance of the liabilities. As the funds deposited
are not under the control and management of the Group companies, the
funded amounts are not reflected in the balance sheets. These deposits and
the amount stated in the balance sheet fully cover the Group's liability
for employee severance benefits.
Investees in which irregular severance has been planned or agreed upon
have recorded provisions to record their liability for the supplementary
amounts.
B. FUNDS FOR SEVERANCE PAY AND RETIREMENT GRANTS
The funds for severance pay and retirement include accrued CPI adjustments
and interest, and they are deposited in severance pay funds in banks and
insurance companies. Withdrawals of the funded amount is permitted on
fulfillment of the provisions of the Severance Pay Law.
C. EARLY RETIREMENT PENSION
Under agreements with certain employees who retired from service, Koor
Group companies have undertaken to make pension payments until they reach
retirement age. The entire liability for such pensions is included in the
accounts on the basis of the present value of future pension payments,
computed at a monthly discount rate of 0.3%-0.4% per month (3.6% - 5% per
annum).
D. Subsequent to the change in control of the Company described in Note 26A
and the ensuing managerial changes, the Company recorded a provision for
retirement of employees in the second quarter of 2006 in the amount of NIS
26 million.
E. LIABILITIES FOR SEVERANCE BENEFITS, WHICH ARE PRESENTED IN THE BALANCE
SHEET, AND THE AMOUNT FUNDED IN SEVERANCE PAY FUNDS, ARE AS FOLLOWS:
Consolidated Company
--------------------------- -----------------------
December 31 December 31
--------------------------- -----------------------
2006 2005 2006 2005
------ ------ ------ ------
NIS thousands
---------------------------------------------------------------
Severance pay and retirement grants 8,876 10,354 4,045 6,030
Amount accrued for early retirement 1,448 1,602 1,448 1,602
------ ------ ------ ------
10,324 11,956 5,493 7,632
Less - amount funded 4,085 11,771 3,356 11,081
6,239 185 2,137 (3,449)
Classification of excess of amount funded
over amount accrued (see Note 9) -- 3,449 -- 3,449
6,239 3,634 2,137 --
====== ====== ====== ======
F-70
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS
A. CONTINGENT LIABILITIES
1. THE COMPANY
a. On September 21, 2004 a suit was filed with the Tel Aviv
District Court against the Company, Bezeq - the Israel
Telecommunications Company Ltd. ("Bezeq"), Tadiran Ltd. (a
subsidiary of Koor - "Tadiran"), Tadiran Telecommunications
Ltd. (a former subsidiary of Koor which was merged with ECI -
"Telecommunications"), Tadiran Public Switching Ltd., (a
former subsidiary in Telecommunications), and Telrad Networks
Ltd. (an affiliate of Koor - "Telrad Networks") in connection
with the public switches. A motion for recognition of the suit
as a class action was filed together with the suit in
accordance with the Anti-Trust Law, 1988 ("the Anti-Trust
Law"), and according to Civil Procedure regulations. In the
Statement of Claim, the plaintiff alleges that during the
previous decade, the defendants had engaged in activities
prohibited by the Anti-Trust Law that resulted in damages to
Bezeq's customers. In respect of the actions alleged by the
Plaintiff, the Plaintiff is asking for damages for the group
that he is seeking to represent in the amount of NIS 1.7
billion.
On March 10, 2005, the Company and the other defendants
submitted to the District Court their clarified objection to
the request of the plaintiff to certify the claim as a class
action. On December 5, 2005 the Plaintiff filed his response
to the said objection.
In the opinion of the management which is based on the opinion
of its legal counsel, the chances of the claim and of the
certification of the claim as a class action are remote.
Further to the sale of shares of Telrad Networks (as described
in Note 3C(1)), Koor committed to indemnify the purchasers in
the event that a court ruling will increase the amount of
expenses to be paid by Telrad Networks to an amount exceeding
that stated in the share purchase agreement.
b. On June 1, 2005, an indictment was filed with the Jerusalem
District Court prosecuting Koor, and seven other companies
that are not members of the Koor Group (including two
companies that had been owned by Koor on the relevant dates
and were later sold to third parties) and nine executives
(including two who had been salaried employees of Koor on the
relevant dates) for violations of the Anti-Trust Law. The
indictment is the outcome of an investigation that had been
opened by the Anti-Trust Commission in other companies during
2001, with respect to price fixing and collusion, and the lack
of competition in the frozen and canned vegetable industry.
The Anti-Trust Authority claimed that two companies that
belonged to the Koor Group in the past had colluded with other
companies in the years 1992-1998.
On June 18, 2006, the Jerusalem District Court issued a
verdict imposing a penalty of NIS 400,000 on Koor, which was
paid during 2006.
c. On February 20, 2007 a suit was filed with the Tel Aviv
District Court against the Company and several directors and
officers of the Company and of United Steel Mills Ltd. (in
liquidation) ("Steel Mills"), a former subsidiary of the
Company, and various other parties. A motion for recognition
of the suit as a class action was filed together with the
suit.
Steel Mills issued convertible bonds by means of a prospectus
to the public in February 1993. The bonds were to be repaid in
three installments on January 31, 1999, 2000 and 2001. The
first installment was repaid by Steel Mills, but the other two
installments have not been repaid. In March 2000 Steel Mills
began to be managed under a stay of proceedings order by the
Haifa District Court, which was later altered to a liquidation
order. The convertible bonds were unsecured and the assets of
the company were insufficient, thus the last two installments
of the bonds were not repaid.
F-71
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
A. CONTINGENT LIABILITIES (CONT'D)
1. THE COMPANY (cont'd)
In the Statement of Claim, the plaintiff alleges that the
defendants are responsible for false representations made by
Koor and Steel Mills in quarterly financial reports and
relevant immediate reports. The plaintiff claims that on the
basis of these representations, he purchased bonds of Steel
Mills on December 28, 1999, and that these representations
imply that Koor is committed to repay the bonds.
In the event that the suit will be recognized as a class
action, the Plaintiff is asking for damages for the group that
he is seeking to represent in the amount of NIS 25 million.
The Company's directors' and officers' insurance carrier has
been informed of the matter. Due to the preliminary stage of
the proceedings, the Company is unable to assess the chances
of the claim and the request for recognition as a class
action, therefore no provision has been made in the financial
statements in respect of this matter.
2. INDEMNIFICATION IN CONNECTION WITH THE AGREEMENT FOR THE SALE OF 30%
OF THE COMPANY'S HOLDINGS IN ELISRA IN 2002
As part of the agreement for the sale of 30% of Koor's holdings in
Elisra to Elta Electronic Industries Ltd. ("Elta") in 2002, Koor
undertook to indemnify Elta in connection with the insurance
indemnity rights to which the Elisra Group is entitled relating to
the fire that occurred at Elisra's subsidiaries' plants. Koor shall
indemnify Elta for 30% of a certain amount should there be a
discrepancy between actual insurance proceeds received by Elisra and
the receivable recorded in Elisra's financial statements for 2001
and provided such discrepancy exceeds a certain amount. Elta's right
to demand payment of the indemnity in this matter carries no time
limit.
3. Pursuant to agreements with the banks, Koor undertook to maintain
certain financial covenants, including a minimum equity and maximum
debt of Koor and certain affiliates, a ratio of shareholders' equity
to debt capital, prohibition against creating liens without prior
consent of the banks and limitations stipulated in the agreement.
Additionally, Koor undertook, under certain circumstances to repay
part of the existing debt by using the proceeds to be received from
the divestiture of certain assets, if sold.
As at balance sheet date, Koor is in compliance with these
conditions.
4. M-A INDUSTRIES AND ITS INVESTEES
(1) The operations of M-A Industries and of its investee companies
are exposed to risks related to environmental contamination,
since they produce, store and sell chemicals. M-A Industries
invests substantial sums in order to comply with environmental
laws and regulations, and M-A Industries' management believes
that the M-A Industries Group companies are in compliance with
those laws. In accordance with the estimate of M-A Industries'
insurance advisors, M-A Industries' insurance policies cover
any sudden, unexpected environmental contamination caused in
Israel and the rest of the world, subject to the conditions of
the relevant policies. As at balance sheet date, M-A
Industries did not have any coverage against ongoing
environmental contamination. Such insurance is difficult to
obtain, and in cases when it can be obtained, M-A Industries'
Management believes that the terms of the policy, including
the amount of the insurance coverage, do not presently justify
obtaining such a policy.
F-72
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
A. CONTINGENT LIABILITIES (CONT'D)
4. M-A INDUSTRIES AND ITS INVESTEES (cont'd)
(2) In May 2004, a subsidiary of M-A Industries and other
factories in the Ramat Hovav area received a notification from
the Ministry of Environmental Protection of an addition of
terms to the business license (hereinafter - "the Additional
Terms"), dealing with the treatment and discharge of waste
produced as a result of their activities.
Pursuant to the notification, the factories were requested to
discontinue flowing their waste into the central treatment
system - the evaporation pools and waste treatment facilities
of the Ramat Hovav Council, and to treat the factory's waste
in an independent manner by means of construction of an
appropriate waste treatment facility and separate evaporation
pools for each factory.
In October 2004, the subsidiary of M-A Industries, together
with the Israeli Union of Industrialists and other companies,
filed an administrative petition against the Ministry of
Environmental Protection wherein the District Court was
requested to declare that the additional terms to the business
license are null and void.
In March 2005, the Court approved the Parties' consent to
settle the dispute through "out of court" mediation. The
mediation was concluded and the Parties reached agreement
regarding the terms of the new business license.
On December 28, 2006, the agreement was given the force of a
court judgment.
The highlights of the agreement are as follows:
(1) Commencing from January 1, 2008, flowing of waste into
the central treatment system operated by the Ramat Hovav
Council will no longer be permitted and each factory
will be required to treat its own waste based on certain
parameters determined (commencing from 2007 interim
parameters were determined for the waste treatment and
commencing from 2010 an improvement of 30% was
determined as the fixed parameter).
In 2006, the subsidiary of M-A Industries completed
construction of the biological waste treatment facility
as required by the agreement.
(2) The waste of the factories will be removed to the
evaporation pools and basins of the Ramat Hovav Council
by January 1, 2010. After this date, each factory will
remove its waste to evaporation pools built and operated
by it, by means of an independent flow and discharge
system that will also be built and operated by it.
(3) At the end of the usage period of the pools, the mud
will be left for final burial in those pools, if it is
found by the Ministry of Environmental Protection, in
accordance with risks' study to be conducted in 2007,
that the burial will not cause any environmental damage
whatsoever. At the end of the operation period of the
evaporation pools (estimated by the Company to be in
2025), the Ministry of Environmental Protection will
re-examine the possibility of damage being caused as a
result of the burial in the pools with no additional
significant treatment.
(4) Regarding the air quality it was agreed that the
generally accepted principles in the European standards
shall constitute the basis for negotiations to be held
for purposes of setting the permissible emissions'
parameters that will also comply with environmental
parameters beyond the factory's borders. For purposes of
implementing these demands, construction of a thermal
oxidizing facility was begun (at an estimated cost of
$10 million).
F-73
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
A. CONTINGENT LIABILITIES (CONT'D)
4. M-A INDUSTRIES AND ITS INVESTEES (cont'd)
(3) In 1995, an action amounting to approximately US$ 56.6
million, as of the date of balance sheet (including interest
and linkage differentials), was filed in Brazil against
Millenia, a subsidiary of M-A Industries, by a group that
acquired the rights of two banks that went into bankruptcy.
Millenia was sued as a guarantor for the debts of agricultural
cooperatives, which were its former shareholders. On March 9,
2007 a settlement was reached between Millenia and the
plaintiffs, for the dismissal of all of the plaintiffs' claims
in consideration for payment of approximately $12 million.
This amount was provided in full in the financial statements
for 2006.
(4) Administrative proceedings and fiscal claims are pending
against Millenia in Brazil, all of which deal with demands for
payment of various taxes, totaling some US$ 73 million
(including interest and linkage differences as at the balance
sheet date). On the basis of the opinion of its legal
advisors, Millenia estimates that its chances of prevailing in
all the proceedings and fiscal claims pending against it are
good.
(5) In 2002, an action was filed against Millenia by a private
environmental protection organization, claiming that
Millenia's plant in Londrina pollutes the environment and
causes damage to its vicinity and neighbors. The plaintiff
demands that Milenia prepare an environmental impact study,
examinations for Millenia's employees and neighbors, and
cessation of the production activity at the plant. The lower
court instructed that an environmental impact study be
conducted, but the court of appeals granted a stay of
implementation of the decision pending a decision by the court
of appeals (expected within two years). The plaintiff's
request for examination of the Company's employees and
neighbors was denied. The proceeding is at a preliminary
stage. Millenia's legal advisors estimate that Millenia has
good defenses against the claim and, therefore, no provisions
were included in the books in respect of this action.
(6) In 2004, six identical actions were filed against a subsidiary
of M-A Industries in the United States and against six other
agrochemical companies in the State of Illinios, USA, by a
local water supplier (hereinafter - "the Plaintiff"). In these
actions, the Plaintiff seeks to represent all the water
suppliers in the State of Illinois. The water supplier claims
that the product "atrazine", which is sold by the defendant
companies, pollutes its water source, and that water having an
atrazine content is a health hazard. The Plaintiff does not
indicate the concentration of atrazine in the water or that
the quantity of atrazine in its water exceeds the amount
permitted by the Federal Water Standard, but claims that
atrazine is a health hazard even at concentrations below the
Federal Standard.
One of the principal contentions in the claim is that the
subsidiary of M-A Industries (as well as the other defendants)
is aware of the danger of atrazine to human beings, and is
concealing this information from the authorities and the
public. The subsidiary contends that it received its license
for atrazine pursuant to U.S. law by means of referring to
studies submitted by the original license holder without it
having been permitted to review such studies. In addition, the
subsidiary contends that it did not conduct its own
independent studies and it is not aware of studies indicating
that atrazine at the concentration permitted by the Federal
Water Standard is hazardous to human health.
In light of that stated above the subsidiary of M-A Industries
estimates, based on the opinion of its legal advisors, that
the chances that it will be found responsible for concealing
information are remote.
Additional causes of action claimed by the Plaintiff are
encroachment, nuisance, negligence and violation of the
environmental protection and water pollution laws.
F-74
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
A. CONTINGENT LIABILITIES (CONT'D)
4. M-A INDUSTRIES AND ITS INVESTEES (cont'd)
Among the remedies the Plaintiff is requesting are: obligating
the defendants to prepare and implement a plan for cleaning
the Plaintiff's water, compensation of the Plaintiff for
decline in value of its properties as a result of the presence
of atrazine in the water and damage to its reputation. As is
customary for claims of this type in the United States, the
claim does not state the amount of the damages sought or the
compensation requested.
The claim is in the very preliminary stages, the stage of
certification of the claim as a class action has not yet
started nor has the document discovery stage gotten underway.
The cumulative share of the subsidiary of M-A Industries in
sales of atrazine in Illinois is low in relation to the other
defendants.
Taking into account the fact that the Plaintiff does not state
that the concentration of atrazine in the water exceeds that
permitted by the Federal Water Standard, and the fact that the
chances are remote that M-A Industries subsidiary will be
found responsible for concealing information (as described
above), M-A Industries the subsidiary estimates, based on the
opinion of its legal advisors, that the chances that the claim
will be rejected are higher than the chances it will prevail.
No provision has been included in the financial statements in
respect of this claim.
(7) In 2005, arbitration proceedings were started in the United
States between a multi-national company and a subsidiary of
M-A Industries for determining the amount the subsidiary is
required to pay to the multi-national company for use of its
studies in order for the subsidiary to obtain a license for
the Pendimetlin product. The arbitration is mandatory
arbitration under the Federal law, which governs the area of
licensing for crop protection products. In December 2006, the
arbitrators handed down a draft arbitration decision pursuant
to which the subsidiary was held liable to pay the
multi-national company an amount ranging between $9 million
and $10 million for use of the studies. In February 2007, the
draft arbitration decision became a final arbitration decision
and the subsidiary was held liable to pay the multi-national
company the amount of $9.3 million. M-A Industries has
recorded a full provision for this amount.
(8) On the matter of undertakings in securitization transactions
and financial covenants in respect of those transaction, see
Note 3B6.
5. ECI TELECOM LTD. ("ECI")
In January 2005, ECI was named one of the defendants in a purported
class action complaint filed in the United States against ECtel,
certain directors and officers of ECtel, and against ECI. The
complaint alleges violations of U.S. Federal Securities laws by
ECtel and breach of fiduciary duties by the individual defendants,
in connection with disclosure of ECtel's financial results, between
April 2001 and April 2003. It also alleges that ECI was the
controlling shareholder of ECtel during this period and, as such,
influenced and controlled the purported actions by its subsidiary.
Damages claimed by the plaintiff were not quantified. In July 2006,
the United States District Court for the District of Maryland
granted ECI's and ECtel's motions to dismiss the securities class
action lawsuit. In August 2006, the plaintiff filed a motion for
reconsideration, alleging new evidence against ECtel. On March 6,
2007 the Court denied the plaintiff's motion. The plaintiff has
appealed the dismissal. No liability has been recorded in respect of
this matter.
F-75
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
A. CONTINGENT LIABILITIES (CONT'D)
6. A number of claims, in the total amount of NIS 39.4 millions, have
been filed against the Company and certain investees concerning
various matters arising in the normal course of business, including
litigation with tax, customs and VAT authorities, which are in
various legal proceedings. In the estimation of the managements of
these companies, based on the opinions of their legal counsel, the
provisions for these claims included in their financial statements,
are adequate in light of the circumstances.
7. On fulfillment of conditions relating to an investment grant - see
Note 16A.
8. On the indemnity granted to Claridge as advisor - see Note 26B(5).
9. The liability of directors and officers in the Company and in
investee companies is insured by Clal Insurance Company Ltd., a
member of the IDB Group, which is an interested party, in directors
and officers (D&O) insurance, subject to the terms of the insurance
policy.
Additionally, in accordance with a resolution by the general meeting
of the Company's shareholders, the Company resolved to indemnify its
directors and officers against various events that the insurance
does not cover, and in monetary amounts exceeding the insured
amounts, all as provided in the said resolution.
10. With respect to liens and guarantees - see Note 22.
B. COMMITMENTS
1. Certain companies in the Group have research and development
contracts with the Government of Israel. Under these contracts, the
companies are required to pay royalties to the Government of Israel
if they generated income from such research (at rates of 2% - 5% of
sales proceeds from products resulting from the research and
development), in amounts not exceeding 100% - 150% of the amounts of
the grants, linked to the dollar, received by the companies as
participation in the research and development projects.
Royalty expenses paid to the Government of Israel in respect of
these research and development contracts, were as follows:
In the year ended December 31, 2005 - NIS 2,919 thousand.
In the year ended December 31, 2004 - NIS 29,758 thousand (mainly
M-A Industries).
2. At December 31, 2006 and 2005, the Company and subsidiaries were not
committed for the purchase of fixed assets.
3. Certain companies in the Group lease and rent industrial and office
premises under long-term contracts. The lease contracts are
non-cancelable and in most cases include renewal options. The
expenses of these companies were NIS 14 million in 2006, (NIS 11
million in 2005, NIS 43 million in 2004).
F-76
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
B. COMMITMENTS (CONT'D)
Future minimum payments under the non-cancelable operating leases and
rental fees for the years subsequent to balance sheet date, are as
follows:
December 31, 2006
-----------------
(NIS thousands)
-----------------
First year 18,910
Second year 16,510
Third year 13,704
Fourth year 13,121
Fifth year and thereafter 47,775
-----------------
110,020
=================
4. Koor Corporate Venture Capital's commitment for additional
investments in venture capital funds as at December 31, 2006 is
approximately $1.2 million. Subsequent to the balance sheet date,
approximately $0.8 million were invested in respect of this
commitment.
5. The Company's commitment for additional investments in Indivision
India Partners, a private equity fund investing in businesses
catering to consumers in India, as at December 31, 2006 is $13.5
million.
6. Pursuant to the transaction for the sale of Sheraton-Moriah
described in Note 3E(2), the Company is obliged to facilitate the
repayment of a loan in the amount of NIS 17 million granted by
Sheraton-Moriah to another subsidiary of the Company, in which the
Company holds 55%, no later than March 27, 2008.
7. In connection with the valuation of M-A Industries described in Note
3B(5), the Company undertook to indemnify the valuation expert
against any expense or financial damage he may sustain, with respect
to any claim filed against him by any third party, in respect of the
said valuation.
NOTE 19 - CONVERTIBLE SECURITIES OF INVESTEE COMPANIES
OPTION WARRANTS TO EMPLOYEES
Certain investees issued options to their employees. Employee entitlement to
such options is usually accrued over a number of years from their date of issue,
subject to continued employment. The exercise term of the options varies
according to the terms of the different plans.
CONVERTIBLE DEBENTURES AND OPTIONS
Certain investees issued convertible debentures on the Tel-Aviv Stock Exchange
or in a private placement to institutional investors. See Note 2E(9).
F-77
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 20 - SHARE CAPITAL AND STOCK OPTIONS
A. SHARE CAPITAL IS COMPOSED AS FOLLOWS:
December 31, 2006 December 31, 2005
------------------------------ -----------------------------
Issued and Issued and
Authorized Outstanding Authorized outstanding
---------- ----------- ---------- -----------
Number of shares:
Ordinary shares, par value of NIS 0.001 (1) (3) (4)
83,932,787 16,582,869 83,932,757 16,162,467
========== =========== ========== ===========
Deferred shares, par value of NIS 0.001 (2)
15,792,243 15,156,533 15,792,243 15,156,533
========== =========== ========== ===========
Amount in nominal NIS:
Ordinary shares, par value of NIS 0.001 83,933 16,583 83,933 16,162
========== =========== ========== ===========
Deferred shares, par value of NIS 0.001 15,792 15,157 15,792 15,157
========== =========== ========== ===========
(1) These shares are listed on the Tel Aviv Stock Exchange (TASE). On
December 31, 2006, the share price on the TASE was NIS 220.
The ADS (American Depository Shares) of the Company, each of which
represents 0.2 ordinary shares, par value of NIS 0.001 ("Ordinary
Shares"), are traded on the New York Stock Exchange (NYSE). The ADS
price on the NYSE on December 29, 2006 was $10.39.
(2) The holders of the deferred shares are entitled to recovery of paid
up capital upon liquidation in its nominal amount, after payment of
the nominal amount to the holders of the Ordinary Shares. The
holders of the deferred shares do not have voting rights, and they
are not entitled to participate in a dividend distribution of any
kind.
(3) On the balance sheet date, a subsidiary held 15,799 Ordinary Shares
of Koor.
(4) During 2006 options in the employee stock option plans (See C below)
were exercised for 420,402 ordinary shares.
(5) On the balance sheet date, a subsidiary holds 14,491,494 deferred
shares of Koor.
B. BUY-BACK OF COMPANY SHARES
In 2000, the Company purchased 538,592 ordinary shares (approximately 3.4%
of the ordinary share capital), at a cost of approximately NIS 219
million. This amount was deducted from the shareholders' equity of the
Company.
On December 31, 2001, the Company purchased 154,637 of its ordinary shares
from a subsidiary. On May 27, 2003, a foreign institutional investor
(hereinafter - "the Buyer") purchased 500,000 of the aforementioned
Company shares. The Purchaser declared that the sale was concluded without
his requesting or receiving any information from the Company, and
undertook not to trade the shares to be purchased within a specified
period. The sale was concluded on that day in an off-market transaction,
at the market price, for total consideration of approximately NIS 43
million.
On April 15, 2005, the Company sold to the foreign institutional investor
193,229 shares of the Company it had held, in an off-market transaction
for consideration of approximately NIS 50 million.
As at the balance sheet date, the Company had sold all of its holdings in
its shares. The total holdings of subsidiaries in Koor's shares is 15,799
ordinary shares, and the amount deducted from shareholders' equity for the
shares held is NIS 6,071 thousand.
F-78
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 20 - SHARE CAPITAL AND STOCK OPTIONS (CONT'D)
C. STOCK OPTIONS TO SENIOR EMPLOYEES
1. 1998 AND 2000 PLANS
During 1998 and 2000 stock option plans were approved with the
following main points:
1. A total framework was approved for the allotment of 800,000
stock options theoretically exercisable for up to 800,000
ordinary shares of the Company.
2. The options are designated for Company employees who are not
related parties in the Company and will not become related
parties in the Company as a result of allotment of the stock
options.
3. All of the options allotted under these plans were exercised
by the balance sheet date.
2. 2003 PLAN
On July 27, 2003, a general meeting of shareholders approved Stock
Option Plan 2003, which had been approved previously by the Audit
Committee and by the Board of Directors, on May 25, 2003 and June 5,
2003, respectively. The key points of the Plan are:
1) A total framework was approved for the allotment of 1,200,000
stock options, theoretically exercisable for up to 1,200,000
ordinary shares of the Company, i.e. about 6.8% of the
ordinary shares (fully diluted) of the Company.
2) The options allotted to the trustee will be exercised for
shares in a quantity reflecting the amount of the financial
benefit inherent in the options, according to the Benefit
Component Method. Under the terms of the Plan, each stock
option is theoretically exercisable for one share, subject to
adjustments. However, in practice, offerees who exercise the
options will not be allotted the full quantity of shares
underlying each option, but only shares which reflect the
amount of the financial benefit inherent in their option,
computed on the date of exercise. Accordingly, the exercise
price of each stock option is intended only for computation of
the benefit component ("benefit component method").
3) The exercise price of every option will be NIS 96 linked to
the CPI, unless the Company decides to prescribe a higher
exercise price for options that will be allotted on dates
subsequent to the approval date of the plan.
4) The options are designated for Company employees who are not
related parties in the Company and will not become related
parties in the Company as a result of allotment of the stock
options. In any event, the total number of offerees under Plan
2003 will not exceed 35 offerees.
5) The right of every offeree to exercise the options for shares
will vest in six stages during the three-year period from the
record date, whereby at the end of every calendar half-year,
one-sixth of the number of options allotted to the trustee on
his behalf will vest.
6) Options not exercised by December 31, 2010 will expire.
7) The Plan will be taxed under the Capital Gains Track, under
the provisions of Section 102 of the Income Tax Ordinance and
the regulations promulgated hereunder. Any tax to be imposed
in respect of the exercise of the options will be borne solely
by the offerees. The Company will be unable to claim any tax
deduction for the expense.
F-79
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 20 - SHARE CAPITAL AND STOCK OPTIONS (CONT'D)
C. STOCK OPTIONS TO SENIOR EMPLOYEES (CONT'D)
2. 2003 PLAN (cont'd)
8) Also approved within the framework of the approval of Plan
2003 was the granting of 350,000 options out of the total
number, to seven directors (except for two directors who are
controlling shareholders in the Company, directly or
indirectly), divided equally, as well as 175,000 options to
the Company's CEO. The balance of the options is intended for
other employees and officers of the Koor Group.
9) The balance of options outstanding as at December 31, 2006:
Balance of stock option not exercised Exercise price Exercise date
------------------------------------- -------------- -------------
NIS
--------------
72,278 96.00 12/2010
40,000 200.00 12/2010
10,000 209.69 12/2010
10,000 225.00 12/2010
-------------------------------------
132,278
=====================================
3. Changes in the options in respect of all stock option plans during
2006:
1998 Plan 2000 Plan 2003 Plan Total
------------------------------------- --------- --------- --------- ---------
Balance as at beginning of year 670 1,734 852,648 855,052
Granted -- -- -- --
Exercised (670) (1,734) (720,370) (722,774)*
--------- --------- --------- ---------
Balance as at end of the year -- -- 132,278 132,278
========= ========= ========= =========
* Due to the benefit component method, a total of 420,402
ordinary shares of the Company were issued.
4. During 2005 the Company granted a total of 60,000 employee stock
options in respect of which the Company applies the provisions of
Standard 24 pertaining to recognition of compensation expenses based
on fair value on the grant date. The total compensation expense in
respect of these stock options amounted to NIS 2,773 thousand, of
which NIS 2,625 thousand have been recorded as compensation expenses
through December 31, 2006, and the remaining NIS 148 thousand will
be recorded as compensation expenses in 2007.
The weighted-average of the balance of the contract life of the
outstanding options as at December 31, 2006, is 4 years.
The fair value of the options granted, as stated, was estimated
through use of the Black and Scholes Model for pricing options. The
parameters used in application of the Model are as follows:
Risk-free interest rate - 2.6% to 2.7% based on the yield to
maturity of CPI linked government bonds;
Volatility - 33% to 35% based on the historical fluctuations in
prices of the Company's shares; Expected life of the options - 2.75
to 4 years.
F-80
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 20 - SHARE CAPITAL AND STOCK OPTIONS (CONT'D)
D. OPTION WARRANTS TO INSTITUTIONAL INVESTORS
In the framework of a private placement to Israeli institutional investors, as
described in Note 15B(1), 800,000 option warrants were issued on April 10, 2005.
Each option warrant is exercisable until April 30, 2010 into one share of the
Company of a par value of NIS 0.001 for an exercise price of NIS 300 linked to
the CPI. The Company intends to register the underlying shares for trading on
the Tel Aviv Stock Exchange.
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES
A. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into forward transactions, in order to reduce the
overall exposure of its CPI-linked debt. As at December 31, 2006 the
Company had open CPI-NIS forward contracts in the amount of NIS 1.2
billion, which are intended to hedge exposure with respect to debt linked
to the CPI, as described below:
Average expiration date Amount receivable Amount payable Fair value Book value
----------------------- ----------------- -------------- ---------- ----------
NIS thousands
October 5, 2007 1,191,127 1,208,531 (19,983) (17,404)
B. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, short-term investments,
trade receivables, other accounts receivable, credits from banks and
others, trade payables and other accounts payable and other financial
instruments is approximate or similar to at their fair value. With respect
to the market value of certain affiliated and other companies whose shares
are traded on the stock exchange, see Notes 8A(2) and 9.
The fair value of the long-term loans and debentures, and the market
interest rates for computation of the fair values as at December 31, 2006
are as follows:
Consolidated Company
---------------------- ----------------------
Market
interest rate Fair value Book value Fair value Book value
------------- ---------- ---------- ---------- ----------
% NIS millions
LONG - TERM FINANCIAL LIABILITIES:
Long-term bank loans, including current maturities mainly 4.9 1,843 1,886 301 301
Other long-term loans, including current maturities mainly 6 38 48 -- --
Debentures 4.85 1,001 988 1,001 988
F-81
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES (CONT'D)
C. CREDIT RISK OF TRADE RECEIVABLES:
NIS millions
------------
Condensed data of credit risk of trade receivables as at December 31, 2006:
Receivables insured by credit risk companies 8,405
Receivables - Government authorities 517
Other receivables 79,568
------------
Total (including non-current receivables) 88,490
============
In Management's opinion, the financial statements include suitable
provisions in respect of exposure to doubtful debts.
The exposure to credit risks relating to trade receivables is limited, due
to the relatively large number of customers.
F-82
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES (CONT'D)
D. LINKAGE TERMS OF MONETARY BALANCES:
(1) CONSOLIDATED
December 31, 2006 December 31, 2005
------------------------------------------------------ -----------------------------------------------------
In foreign
In foreign currency or
currency or Linked to linked Linked to
linked thereto the CPI Unlinked Total thereto the CPI Unlinked Total
-------------- --------- -------- --------- ----------- --------- -------- ----------
NIS thousands NIS thousands
------------------------------------------------------ -----------------------------------------------------
ASSETS
Cash and cash equivalents 83,182 -- 194,015 277,197 24,685 -- 284,981 309,666
Short-term deposits and investments 23,832 177,765 180,932 382,529 91,549 186,931 106,890 385,370
Trade receivables 42,537 924 38,580 82,041 37,350 1,285 39,922 78,557
Other accounts receivable 56,425 1,075 18,515 76,015 32,467 275 35,603 68,345
Other investments and receivables 89,685 33,126 -- 122,811 94,371 28,594 100 123,065
-------------- --------- -------- --------- ----------- --------- -------- ---------
295,661 212,890 432,042 940,593 280,422 217,085 467,496 965,003
============== ========= ======== ========= =========== ========= ======== =========
LIABILITIES
Credits from banks and others (not including
current maturities of long-term liabilities) 35,996 -- -- 35,996 27,618 -- 24,244 51,862
Trade payables 31,999 -- 35,846 67,845 28,704 -- 42,386 71,090
Other accounts payable 26,582 19,295 140,481 186,358 49,435 7,672 116,965 174,072
Long-term loans and debentures (including current
maturities) 259,947 2,446,905 216,000 2,922,852 215,645 1,788,770 216,000 2,220,415
-------------- --------- -------- --------- ----------- --------- -------- ---------
354,524 2,466,200 392,327 3,213,051 321,402 1,796,442 399,595 2,517,439
============== ========= ======== ========= =========== ========= ======== =========
F-83
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES (CONT'D)
D. LINKAGE TERMS OF MONETARY BALANCES (CONT'D):
(2) COMPANY
December 31, 2006 December 31, 2005
------------------------------------------------------ -----------------------------------------------------
In foreign
In foreign currency or
currency or Linked to linked Linked to
linked thereto the CPI Unlinked Total thereto the CPI Unlinked Total
-------------- --------- -------- --------- ----------- --------- -------- ----------
NIS thousands NIS thousands
------------------------------------------------------ -----------------------------------------------------
ASSETS
Cash and cash equivalents 72,847 -- 165,360 238,207 740 -- 266,222 266,962
Short-term deposits and investments 5,269 172,746 167,385 345,400 69,665 179,358 82,172 331,195
Other receivables 115 -- 3,509 3,624 2,865 -- 12,573 15,438
Short term loans to investee companies -- 39,307 -- 39,307 -- 37,212 -- 37,212
Other investments and receivables 9,213 -- -- 9,213 10,444 -- -- 10,444
Investments and other long-term receivables:
Investee companies (including current maturities of
loans) 13,952 9,447 15,300 38,699 640 52,854 1,189,604 1,243,098
-------------- --------- -------- --------- ----------- --------- --------- ----------
101,396 221,500 351,554 674,450 84,354 269,424 1,550,571 1,904,349
============== ========= ======== ========= =========== ========= ========= ==========
LIABILITIES
Credits from banks and others (not including
current maturities of long-term liabilities) -- -- -- -- -- -- 7,290 7,290
Trade payables -- -- 1,346 1,346 10 -- 1,213 1,223
Other accounts payable 4,359 18,163 73,366 95,888 7,159 5,955 34,893 48,007
Long-term liabilities (including current maturities
of loans) 8,509 1,280,552 6,382 1,295,443 9,270 1,601,054 6,713 1,617,037
-------------- --------- -------- --------- ----------- --------- --------- ----------
12,868 1,298,715 81,094 1,392,677 16,439 1,607,009 50,109 1,673,557
============== ========= ======== ========= =========== ========= ========= ==========
F-84
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES (CONT'D)
E. INTEREST RATE RISK:
The Company's interest rate risk results mainly from long-term
liabilities.
The following table presents the book values of the Company's financial
instruments that are exposed to fair value risk and/or cash flow risk due
to interest rates, according to the earlier of the payment dates or the
date of renegotiation of the terms:
CONSOLIDATED:
December 31, 2006
--------------------------------------------------------------------------------------------------------
Average
effective Up to Over
Note interest Total 1 year 2 years 3 years 4 years 5 years 5 years
------ --------- ------- -------- --------- --------- --------- --------- ---------
% NIS thousands
--------------------------------------------------------------------------------
FIXED INTEREST:
Long-term deposits,
loans, receivables
and debentures
held-to-maturity 9
Dollar-linked 6.71 33,988 -- 4,391 12,713 16,884 -- --
CPI-linked 5.40 6,937 924 924 925 -- 4,164 --
Loans from banks 15
Dollar-linked 7.65 8,509 -- -- 8,509 -- -- --
CPI-linked 4.87 1,408,018 5,159 286,083 219,789 820,791 6,902 69,294
Unlinked 7.34 9,500 -- 9,500 -- -- -- --
Loans from others 15
CPI-linked -- 33,193 1,000 1,000 1,000 1,000 1,000 28,193
Unlinked -- 15,274 -- 3,955 11,169 150 -- --
Debentures issued 15 5.06 988,482 -- -- -- 394,278 -- 594,204
VARIABLE INTEREST:
Cash and cash
equivalents
Dollar-linked 5.01 8,238 8,238 -- -- -- -- --
Unlinked 4.45 268,959 268,959 -- -- -- -- --
Marketable securities,
debentures and treasury
notes 4 354,923 354,923 -- -- -- --
Long-term deposits 9 5.10 101 -- -- -- -- 101 --
Credit from banks 12
Dollar-linked 6.86 29,575 29,575 -- -- -- -- --
Foreign currency -
unlinked 6.00 6,421 6,421 -- -- -- -- --
Loans from banks 15
Dollar-linked 7.38 203,532 7,777 111,378 13,719 3,949 3,912 62,797
Unlinked 6.36 216,000 -- 7,269 7,269 7,269 7,269 186,924
Other 3.46 40,340 4,034 4,034 4,034 4,034 4,034 20,170
F-85
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 21 - FINANCIAL INSTRUMENTS AND LINKAGE TERMS OF MONETARY BALANCES (CONT'D)
E. INTEREST RATE RISK (CONT'D)
COMPANY:
December 31, 2006
--------------------------------------------------------------------------------------------------------
Average
effective Up to Over
Note interest Total 1 year 2 years 3 years 4 years 5 years 5 years
------ --------- ------- -------- --------- --------- --------- --------- ---------
% NIS thousands
--------------------------------------------------------------------------------
FIXED INTEREST:
Short-term loans to
investee companies 5.82 39,307 39,307 -- -- -- -- --
Debentures
held-to-maturity 9 8.25 9,213 -- -- 9,213 -- -- --
Loans from banks 15
Dollar-linked 7.65 8,509 -- -- 8,509 -- -- --
CPI-linked 4.95 292,070 -- 179,182 112,888 -- -- --
Debentures issued 15 5.06 988,482 -- -- -- 394,278 -- 594,204
VARIABLE INTEREST:
Cash and cash
equivalents 4.50 238,207 238,207 -- -- -- -- --
Marketable securities
- debentures and
treasury notes 4 345,400 345,400 -- -- -- -- --
F. SENSITIVITY ANALYSIS
As part of management of the interest and currency risks, the Company and
its subsidiaries strive to reduce the impact of interest and currency
fluctuations on their results of operations.
As at December 31, 2006, the Company estimates that an increase of 1% in
the interest rate will give rise to a pre-tax increase in the fair value
of its assets and liabilities in the amount of NIS 96.3 million for the
year ended December 31, 2006.
In addition, as at December 31, 2006, the Company estimates that an
increase of one percent in the exchange rate of the US dollar will not
have a material impact on the fair value of its assets and liabilities for
the year ended December 31, 2006.
NOTE 22 - LIENS AND GUARANTEES
A. In order to secure some liabilities, certain subsidiaries have mortgaged
their real estate and have placed fixed charges on plant, equipment and
bank deposits, as well as floating charges on all of their assets. In
addition, pledged a portion of their shares in investee companies.
For additional information regarding assets pledged relating to fixed
asset investment grants, see Note 10A(2).
F-86
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 22 - LIENS AND GUARANTEES (CONT'D)
B. The balances of secured liabilities are as follows:
Consolidated
--------------------------
December 31
--------------------------
2006 2005
------- -------
NIS thousands
--------------------------
Credit from banks 6,422 16,433
Loans from banks and others and debentures (including current maturities), see
Note 15, and also C below 550,311 539,034
------- -------
556,733 555,467
======= =======
C. Guarantees to banks and others for loans and for assuring credit lines and
other guarantees given by the Company in favor of:
Consolidated Company
------------------------- ---------------------------
December 31 December 31
------------------------- ---------------------------
2006 2005 2006 2005
------- ------- --------- -------
NIS thousands
---------------------------------------------------------------
Subsidiaries (1) 135,729 * 153,130 1,252,834 260,794
Others 5,200 12,893 40 40
------- ------- --------- -------
140,929 166,023 1,252,874 260,834
======= ======= ========= =======
(1) Includes NIS 133 million (NIS 132 million in 2005) that Koor granted
to Bezeq in connection with Bezeq's agreement to transfer ownership
of the public switching activities to a third party. (See Note
18A(1)(a))
* Excluding guarantees in the amount of NIS 1,117 million granted to
banks in respect of loans of subsidiaries consolidated in these
financial statements, of which NIS 1,028 million relates to a
wholly-owned subisidiary.
F-87
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 23 - DATA CONCERNING ITEMS IN STATEMENTS OF OPERATIONS
A. REVENUES FROM SALES AND SERVICES, NET - CONSOLIDATED:
Year ended December 31
--------------------------------------------
2006 2005 2004
------- ------- -------
NIS thousands
--------------------------------------------
LOCAL:
Industrial operations 6,710 24,580 266,785
Trading operations 322,869 281,198 498,802
ABROAD:
Industrial operations - export and international operations 253,674 427,853 6,446,300
Trading operations -- -- 603,895
------- ------- ---------
Total 583,253 733,631 7,815,782
======= ======= =========
B. COST OF SALES AND SERVICES - CONSOLIDATED:
Year ended December 31
---------------------------------------------
2006 2005 2004
------- ------- ---------
NIS thousands
---------------------------------------------
INDUSTRIAL OPERATIONS:
Materials 123,958 240,726 * 3,333,428 *
Labor 29,481 65,334 * 458,294 *
Subcontracted work -- 7,146 41,640
Depreciation and amortization 2,611 11,908 146,204
Research and development expenses, net (*) 30,944 52,294 * 159,769 *
Other 14,702 17,281 * 539,128 *
------- ------- ---------
201,696 394,689 4,678,463
Less - expenses charged to fixed assets -- -- (3,949)
------- ------- ---------
201,696 394,689 4,674,514
(Decrease) increase in inventory of goods and work in process (3,335) (2,660) (16,506)
------- ------- ---------
198,361 392,029 4,658,008
Increase in inventory of finished goods 11,736 (13,335) (175,467)
------- ------- ---------
210,097 378,694 4,482,541
------- ------- ---------
TRADING OPERATIONS:
Merchandise 31,355 26,362 438,594
Labor 73,849 63,311 55,394
Depreciation 27,995 25,365 26,155
Others 94,423 88,426 108,672
------- ------- ---------
227,622 203,464 628,815
------- ------- ---------
437,719 582,158 5,111,356
======= ======= =========
(*) Net of grants and participations that were received
and royalties that were paid -- 924 8,219
======= ======= =========
* Reclassified.
F-88
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 23 - DATA CONCERNING ITEMS IN STATEMENTS OF OPERATIONS (CONT'D)
C. SELLING AND MARKETING EXPENSES - CONSOLIDATED:
Year ended December 31
--------------------------------------------
2006 2005 2004
------ ------ ---------
NIS thousands
--------------------------------------------
Salaries 29,990 34,218 282,044
Commissions 5,839 16,462 149,584
Advertising expenses 9,666 9,707 36,135
Depreciation and amortization 216 596 112,093
Other 17,835 23,167 482,511
------ ------ ---------
63,546 84,150 1,062,367
====== ====== =========
D. GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated Company
-------------------------------------- ------------------------------------
Year ended December 31 Year ended December 31
-------------------------------------- ------------------------------------
2006 2005 2004 2006 2005 2004
------- ------- ------- ------ ------ ------
NIS thousands
----------------------------------------------------------------------------------
Salaries (1) 74,068 57,916 * 177,750 44,116 28,576 * 22,399
Bad and doubtful debts 4,428 3,733 54,766 -- -- --
Depreciation and
amortization 3,314 3,895 21,578 1,145 1,283 1,262
Other 52,791 75,096 184,729 20,512 28,825 22,987
------- ------- ------- ------ ------ ------
134,601 140,640 * 438,823 65,773 58,684 * 46,648
======= ======= ======= ====== ====== ======
* Restated - See Note 2R(4).
(1) Subsequent to the transfer of shares and the ensuing managerial
changes described in Note 26A, the Company recorded a provision for
retirement of employees in the second quarter of 2006 in the amount
of NIS 26 million.
F-89
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 23 - DATA CONCERNING ITEMS IN STATEMENTS OF OPERATIONS (CONT'D)
E. FINANCING EXPENSES, NET:
Consolidated Company
-------------------------------------- ------------------------------------
Year ended December 31 Year ended December 31
-------------------------------------- ------------------------------------
2006 2005 2004 2006 2005 2004
------- ------- ------- ------ ------ ------
NIS thousands
----------------------------------------------------------------------------------
In respect of convertible
debentures -- -- 18,942 -- -- --
In respect of debentures 30,279 26,512 -- 30,279 26,512 --
In respect of long-term
loans 50,082 155,387 199,326 27,129 122,391 111,396
In respect of short-term
loans and credit 6,690 36,783 77,267 2,483 23,800 10,756
In respect of derivative
financial instruments 21,291 11,551 1,967 21,291 10,558 4,491
Amortization of capital
raising expenses -- -- 4,334 -- -- --
Gains from marketable
securities, net (20,632) (27,549) (22,393) (18,275) (25,540) (18,568)
Expenses (income) from
deposits and others, net 26,225 (20,663) (7,488) (11,525) (12,885) 2,731
------- ------- ------- ------ ------- -------
113,935 182,021 271,955 51,382 144,836 110,806
======= ======= ======= ====== ======= =======
F-90
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 23 - DATA CONCERNING ITEMS IN STATEMENTS OF OPERATIONS (CONT'D)
F. OTHER INCOME (EXPENSES), NET
Year ended December 31
--------------------------------------------
2006 2005 2004
------ ------ ---------
NIS thousands
--------------------------------------------
1. CONSOLIDATED:
Sale of investments and activities in investees
(including changes in rates of holding) 80,136 308,025 223,095
Income (expenses) relating to the termination of
activities and sale and write-down of assets, net 1,504 (68,392) (73,523)
Supplemental severance pay and pensions -- (38,531) (45,356)
Management services - affiliated companies 6,751 13,820 455
Securitization costs (see Note 3B(4)) -- -- (27,783)
Compensation for damages 4,510 -- --
Amortization of intangible assets -- (507) (131,934)
Dividend 6,509 10,389 4,701
Miscellaneous, net 4,796 (1,182) (22,047)
------- ------- -------
104,206 223,622 (72,392)
======= ======= =======
2. COMPANY:
Profit from sale of investments in investee companies 48,745 424,261 212,024
Write-down in value of long-term assets -- -- --
Rental income, net* 7,515 7,202 8,135
Loss from sale of fixed assets (453) (7) --
Dividend 6,921 10,389 4,701
Miscellaneous, net (814) (3,712) 10,099
------- ------- -------
61,914 438,133 234,959
======= ======= =======
* Depreciation included in the item 760 760 760
======= ======= =======
G. KOOR'S EQUITY IN THE OPERATING RESULTS OF INVESTEE COMPANIES, NET
1. CONSOLIDATED:
Year ended December 31
--------------------------------------------
2006 2005 2004
------ ------ ---------
NIS thousands
--------------------------------------------
Affiliated companies, net 3,459 426,319 * (10,779)
Amortization of excess cost (40,008) (66,957) (24,281)
------- ------- -------
(36,549) 359,362 (35,060)
======= ======= =======
* Restated - see Note 2R(4).
F-91
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 23 - DATA CONCERNING ITEMS IN STATEMENTS OF OPERATIONS (CONT'D)
G. KOOR'S EQUITY IN THE OPERATING RESULTS OF INVESTEE COMPANIES, NET (CONT'D)
2. COMPANY:
Year ended December 31
--------------------------------------------
2006 2005 2004
------ ------ ---------
NIS thousands
--------------------------------------------
Equity of Koor in operating results 35,417 190,942 57,192
Amortization of excess cost (28,323) (60,499) (30,992)
------- ------- -------
Total (1) 7,094 130,443 26,200
======= ======= =======
(1) COMPOSITION:
Year ended December 31
--------------------------------------------
2006 2005 2004
------ ------ ---------
NIS thousands
--------------------------------------------
Subsidiaries (19,411) (152,995) * 122,172
Proportionately consolidated companies 1,082 (75,199) (61,114)
Affiliates 25,423 358,637 * (34,858)
------- ------- -------
7,094 130,443 * 26,200
======= ======= =======
* Reclassified
F-92
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 24 - DISCONTINUED OPERATIONS
1. ELISRA ELECTRONIC SYSTEMS LTD. ("ELISRA")
On November 30, 2005 the closing of the transactions for the sale of
Elisra to Elbit took place, in accordance with the agreements from July 6,
2005. See Note 3D.
Following are the results of operations of the discontinued operation, as
included in the financial statements for the year ended December 31:
2005 2004
--------- ---------
NIS thousands
-------------------------------------
REVENUES AND EARNINGS
Revenue from sales and services 969,235 1,109,524
Other income, net 142,734 --
--------- ---------
1,111,969 1,109,524
COSTS AND LOSSES
Cost of sales and services 894,249 940,111
Selling and marketing expenses 91,817 85,454
General and administrative expenses 50,996 55,795
Finance expenses, net 3,271 (675)
Finance expenses, net -- 12,265
--------- ---------
1,040,333 1,092,950
--------- ---------
EARNINGS BEFORE INCOME TAX 71,636 16,574
Income tax (15,874) (9,485)
--------- ---------
55,762 7,089
Minority interest in subsidiaries' results, net 44,116 (1,821)
--------- ---------
NET EARNINGS FOR THE YEAR 99,878 5,268
========= =========
2. KOOR TRADE LTD.
During August 2005, a valuation was conducted in respect of an affiliated
company of Koor Trade Ltd., in order to examine the necessity of writing
down the value of the affiliated company in the financial statements of
Koor Trade Ltd. as prescribed by the Israel Accounting Standards Board
Accounting Standard No. 15. The valuation was performed by an independent
external expert and as a result, Koor Trade Ltd. included a loss from
write down of value of approximately NIS 44 million in 2005. In 2005, the
Board of Directors of the Group granted the Group's management the
authority to sell the Group's entire holding in Koor Trade Ltd. The
Company recorded a provision in the amount of approximately NIS 20 million
for impairment in value of its investment in Koor Trade, based on
indicators relating to the fair value of the investment, including a
valuation by an external valuation expert.
On April 25, 2006, the Company signed an agreement for the sale of its
entire holdings in Koor Trade, including shareholder loans, to a group of
managers, including one of the Company's senior executives, for $8.3
million. The transaction was completed in the second quarter of 2006, and
the entire cash proceeds of $8.3 million were received.
In the event that the buyers sell their holding in Koor Trade or a certain
affiliated company of Koor Trade during a period stipulated in the
agreement, at a price that exceeds the sale price (or the price fixed in
the agreement of the value of the aforesaid affiliated company), the sale
price will be increased by an increment amount.
F-93
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 24 - DISCONTINUED OPERATIONS (CONT'D)
2. KOOR TRADE LTD. (CONT'D)
Following the resolution of the Company's Board of Directors from 2005 to
sell Koor Trade, Koor Trade has been presented as a discontinued operation
commencing from the Company's financial statements for the year ended
December 31, 2005.
The sale of Koor Trade did not have a significant impact on the Company's
financial results. Following are the assets and liabilities relating to
the discontinued operation as at December 31:
2005*
-------------
NIS thousands
-------------
ASSETS RELATED TO DISCONTINUED OPERATION
Cash and cash equivalents 30,379
Short-term deposits and investments 4,713
Trade receivables 59,769
Other accounts receivable 13,732
Inventories 19,567
Investments in affiliates 18,530
Other long-term investments and receivables 37,575
Fixed assets, net 6,989
Intangible assets, deferred tax assets and deferred expenses, net 7,562
-------------
198,816
=============
LIABILITIES RELATED TO DISCONTINUED OPERATION
Credit from banks and others 9,629
Other long-term liabilities 120,096
Other loans, net of current maturities 27,999
Liability for employee severance benefits, net 1,645
Minority interest 679
-------------
160,048
=============
* Reclassified.
F-94
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 24 - DISCONTINUED OPERATIONS (CONT'D)
2. KOOR TRADE LTD. (CONT'D)
Following are the results of operations of the discontinued operation, as
included in the financial statements, for the year ended December 31:
2006 2005 2004
------ ------- -------
NIS thousands
-----------------------------------------
REVENUES AND EARNINGS
Revenue from sales and services 41,203 157,171 111,536
Group's equity in the operating results of affiliates, net -- (33,674) 7,373
Other income 4,599 -- 5,898
------ ------- -------
45,802 123,497 124,807
------ ------- -------
COSTS AND LOSSES
Cost of sales and services 27,309 110,160 69,953
Selling and marketing expenses 7,431 28,827 20,686
General and administrative expenses 4,495 11,524 9,864
Other expenses 2,840 18,068 --
Finance expenses, net (318) 1,409 (47)
------ ------- -------
41,757 169,988 100,456
------ ------- -------
EARNINGS BEFORE INCOME TAX 4,045 (46,491) 24,351
Income tax (1,459) (2,855) (5,285)
------ ------- -------
2,586 (49,346) 19,066
Minority interest in subsidiaries' results, net (253) (151) (146)
------ ------- -------
NET EARNINGS (LOSS) FOR THE YEAR 2,333 (49,497) 18,920
====== ======= =======
F-95
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 24 - DISCONTINUED OPERATIONS (CONT'D)
3. ISRAM WHOLESALE TOURS AND TRAVEL LTD.
On December 28, 2006 the Company sold its entire holding in Isram
Wholesale Tours and Travel Ltd. ("Isram") for total consideration of $1.26
million. The Company recorded a capital gain of approximately NIS 8
million in respect of the sale.
Pursuant to the sale, Isram has been presented as a discontinued
operation.
Following are the assets and liabilities relating to the discontinued
operation as at December 31:
2005
-------------
NIS thousands
-------------
ASSETS RELATED TO DISCONTINUED OPERATION:
Cash and cash equivalents 9,132
Trade receivables 14,987
Other accounts receivable 8,470
Other long-term investments and receivables 1,216
Fixed assets, net 1,556
Intangible assets, deferred tax assets and deferred expenses, net 3,645
-------------
39,006
=============
LIABILITIES RELATED TO DISCONTINUED OPERATION:
Trade and other payables 20,516
Customer advances 16,377
Other loans, net of current maturities 5,301
Liability for employee severance benefits, net 226
Minority interest (1,178)
Deferred tax liabilities --
-------------
41,242
=============
F-96
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 24 - DISCONTINUED OPERATIONS (CONT'D)
3. ISRAM WHOLESALE TOURS AND TRAVEL LTD. (CONT'D)
Following are the results of operations of the discontinued operation, as
included in the financial statements, for the year ended December 31:
2006 2005 2004
------- ------- -------
NIS thousands
--------------------------------------------
REVENUES AND EARNINGS
Revenue from sales and services 253,473 254,751 191,831
Other income 8,001 -- --
------- ------- -------
261,474 254,751 191,831
------- ------- -------
COSTS AND LOSSES
Cost of sales and services 219,573 219,499 166,259
Selling and marketing expenses 5,143 4,996 3,697
General and administrative expenses 23,413 24,713 21,522
Other expenses -- 417 --
Finance expenses, net (262) 936 129
------- ------- -------
247,867 250,561 191,607
------- ------- -------
EARNINGS BEFORE INCOME TAX 13,607 4,190 224
Income tax (5,240) (722) (50)
------- ------- -------
8,367 3,468 174
Minority interest in subsidiaries' results, net (226) (1,040) (61)
------- ------- -------
NET EARNINGS FOR THE YEAR 8,141 2,428 113
======= ======= =======
NOTE 25 - BUSINESS SEGMENTS
A. THE KOOR GROUP OPERATES IN THE FOLLOWING BUSINESS SEGMENTS:
The Group's agrochemical activities are carried out through M-A
Industries considered one of the world's foremost manufacturer of generic
crop protection solutions. M-A Industries produces a full range of
products, including insecticides, fungicides and herbicides, as well as
plant growth regulators. In addition, M-A Industries is engaged in
specialty aroma chemicals and other different kinds of chemicals. As of
2005, M-A Industries is included in the financial statements according to
the equity method.
Most of the Group's telecommunication activities are focused in three
companies - ECI Telecom Ltd., an affiliated company, that provides
solutions for broadband access networks and transmission optical
networks, ECtel Ltd., an affiliated company as of the third quarter of
2006 that provides solutions for revenue management and fraud prevention
at telecom providers, and Telrad Networks Ltd., which develops and
markets telecom products and provides end-user solutions and appears as
an affiliated company as of the end of the second quarter of 2005. In
addition, the telecommunications segment includes a number of
subsidiaries that develop and market equipment in the fields of microwave
and cellular communications.
F-97
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 25 - BUSINESS SEGMENTS (CONT'D)
A. THE KOOR GROUP OPERATES IN THE FOLLOWING BUSINESS SEGMENTS (CONT'D)
Activities in venture capital investments are carried out through the Koor
Corporate Venture Capital partnership, which invests in high-tech
companies and venture capital funds with high growth potential. Most of
the investments are in the fields of communication and life sciences.
The Group's tourism activities are conducted primarily by Sheraton Moriah,
which holds the Sheraton Hotel chain in Israel, and Knafayim (an
affiliated company until the third quarter of 2004) which holds 40% of the
EL-AL airline company and provides aviation and holiday services and
leases aircrafts to other companies. See also Note 3E(2) regarding the
expected sale of Sheraton-Moriah.
B. Segment sales include products sold and services rendered to unrelated
customers, which are not part of the group. Inter-industry segment sales
are immaterial and are based primarily on prices determined in the
ordinary course of business. Accordingly, these sales are not presented
separately.
Segment operating earnings include all costs and expenses directly related
to the relevant segment and for those that benefit more than one segment,
are charged on a proportionate basis. Identifiable assets and liabilities
by industry segments are those that are used by Koor in its activities in
each segment.
C. DATA REGARDING BUSINESS SEGMENTS OF THE KOOR GROUP - CONSOLIDATED:
Year ended December 31
---------------------------------------------------------
2006 2005 2004
-------- -------- ---------
NIS thousands
---------------------------------------------------------
REVENUES FROM SALES AND SERVICES
Telecommunications * 260,384 452,433 671,531
Agro-chemicals -- -- 6,895,238
Tourism 312,801 271,443 238,449
Others 10,068 9,755 10,564
Total 583,253 733,631 7,815,782
======== ======== =========
* Including sales to major customer 141,866 180,130 586,114
======== ======== =========
EARNINGS (LOSSES) BEFORE INCOME TAX
Telecommunications (121,613) (33,517)* (110,617)
Defense electronics -- 56,180 (20,000)
Agro-chemicals 65,925 557,824* 1,263,541
Venture capital investments 39,585 (41,472) (43,327)
Tourism 27,581 22,520 36,298
Others 11,816 (5,006) (3,414)
-------- -------- ---------
Earnings before joint general and financing
expenses and income tax 23,294 556,529 1,122,481
Joint general income (expenses), net (8,250) (46,862) * (26,697)
Financing expenses, net (113,935) (182,021) (271,955)
-------- -------- ---------
Earnings (losses) before income tax (98,891) 327,646 823,829
======== ======== =========
* Restated - see Note 2R(4).
F-98
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 25 - BUSINESS SEGMENTS (CONT'D)
C. DATA REGARDING BUSINESS SEGMENTS OF THE KOOR GROUP - CONSOLIDATED (CONT'D)
THE KOOR GROUP'S EQUITY IN THE RESULTS OF INVESTEE COMPANIES, NET:
Year ended December 31
---------------------------------------------------------
2006 2005 2004
-------- -------- ---------
NIS thousands
---------------------------------------------------------
Telecommunications (106,781) 27,050 * (15,919)
Defense electronics -- (23,288) (20,000)
Agro-chemicals 65,925 359,200 * --
Venture capital investments (4,739) (755) (329)
Tourism 1,006 (1,769) (907)
Others 8,040 (1,076) 2,095
-------- -------- ---------
(36,549) 359,362 (35,060)
======== ======== =========
* Restated - see Note 2R(4).
Year ended December 31
----------------------------------------
2006 2005
--------- ---------
NIS thousands
----------------------------------------
IDENTIFIABLE ASSETS
Telecommunications 124,830 175,618
Venture capital investments 169,831 121,444
Tourism 812,319 766,675
Others 10,758 110,508
--------- ---------
Total 1,117,738 1,174,245
Joint assets 1,061,873 1,212,176
Affiliated companies (1) 3,324,220 2,664,020 *
Assets relating to discontinued operations -- 237,822
--------- ---------
5,503,831 5,288,263
========= =========
(1) Investments in affiliated companies are as follows:
Telecommunications 801,975 903,333*
Venture capital investments 37,547 44,964
Agro-chemicals 2,348,103 1,689,128*
Tourism and others 136,595 26,595
--------- ---------
3,324,220 2,664,020
========= =========
* Restated - see Note 2R(4).
F-99
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 25 - BUSINESS SEGMENTS (CONT'D)
C. DATA REGARDING BUSINESS SEGMENTS OF THE KOOR GROUP - CONSOLIDATED (CONT'D)
Year ended December 31
----------------------------------------
2006 2005
--------- ---------
NIS thousands
----------------------------------------
IDENTIFIABLE LIABILITIES
Telecommunications 58,400 91,124
Venture capital investments 1,056 --
Tourism 60,542 74,417
Others 9,174 10,363
--------- ---------
Total segments 129,172 175,904
Joint liabilities 102,846 54,908
Financing commitments 2,958,848 2,272,277
Others 49,254 47,543
Liabilities relating to discontinued operations -- 201,290
--------- ---------
3,240,120 2,751,922
========= =========
Year ended December 31
-----------------------------------------------------
2006 2005 2004
------ ------ -------
NIS thousands
-----------------------------------------------------
CAPITAL INVESTMENTS
Telecommunications 3,365 7,529 21,825
Agro-chemicals -- -- 816,287
Tourism 85,049 18,410 12,614
Others -- 239 148
------ ------ -------
Total segments 88,414 26,178 850,874
Corporate assets 200 177 423
------ ------ -------
88,614 26,355 851,297
====== ====== =======
DEPRECIATION AND AMORTIZATION
Telecommunications 3,723 13,243 32,281
Agro-chemicals -- -- 364,995
Tourism 29,879 26,978 27,489
Others -- -- 17
------ ------ -------
Total segments 33,602 40,221 424,782
Corporate assets 1,035 1,954 1,183
------ ------ -------
34,637 42,175 425,965
====== ====== =======
F-100
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 25 - BUSINESS SEGMENTS (CONT'D)
D. REVENUES FROM SALES AND SERVICES BY GEOGRAPHIC DESTINATIONS ACCORDING TO
CUSTOMER LOCATION
Year ended December 31
------------------------------------------------------
2006 2005 2004
------- ------- ---------
NIS thousands
------------------------------------------------------
North America 200,634 333,202 1,302,993
Europe 10,306 51,473 3,018,700
South America 23,670 10,558 1,945,241
Asia and Australia 5,481 17,486 566,408
Africa 13,583 15,134 216,853
Israel 329,579 305,778 765,587
------- ------- ---------
583,253 733,631 7,815,782
======= ======= =========
NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES
A. CHANGE IN CONTROLLING SHAREHOLDERS OF THE COMPANY
On May 1, 2006, Discount Investments Corp. Ltd., a subsidiary of IDB
Development Corporation Ltd., signed an agreement to acquire from the
Claridge Group ("Claridge"), as well as from Anfield Ltd. (a company
registered in Israel and owned by Jonathan B. Kolber, Koor's former Chief
Executive Officer ("CEO") and current Chairman of the Board of Directors)
and another company related to the family of Jonathan B. Kolber, all of
Koor's shares held by those entities totaling 5,753,207 shares, or
approximately 34.9% of Koor's outstanding shares, for $445.8 million. All
approvals, to which the transaction was subject, including Israel's
anti-trust commissioner, have been granted. On July 3, 2006, this
transaction closed and 5,081,033 of Koor's shares, or approximately 30.9%
of Koor's outstanding shares, were transferred to Discount Investments
Corp. for approximately $394 million, and a put option, exercisable
during December 2006, was granted to Anfield Ltd. in respect of the
remaining 672,174 shares. Subsequent to the transfer of shares, all of
Koor's directors resigned from the Board of Directors and new directors
were nominated. Furthermore, Koor's CEO resigned and a new CEO was
appointed. Discount Investments is held 74.2% by IDB Development, which
also directly holds 10% of Koor's outstanding ordinary shares.
On September 28, 2006 Discount Investments completed a special tender
offer, whereby it purchased an additional 890,000 shares, or
approximately 5.4% of Koor's outstanding shares, from the public.
On December 27-28, 2006 Discount Investments purchased an additional
1,004,453 shares, or approximately 6.1% of Koor's outstanding shares,
from Jonathan B. Kolber and former directors and employees, as well as
certain present employees.
As of December 31, 2006 the Company's ultimate parent company, IDB
Development Corp. Ltd., holds 52% of the Company's shares, directly and
indirectly through Discount Investments. IDB Development Corp. Ltd. is
Israel's major investment holding company, with a diversified investment
portfolio spanning a large number of entities throughout the Israeli
economy ("IDB Group"). Subsequent to the change in control, companies in
the IDB Group are related parties of the Company.
F-101
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES (CONT'D)
B. DESCRIPTION OF TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES
1. INCONSEQUENTIAL TRANSACTIONS THAT ARE NOT UNUSUAL
(1) To the best of the Company's knowledge, the Company and its
subsidiaries have conducted inconsequential transactions,
that are not unusual, with interested parties, and have
committed to conduct such transactions, of the following
types and with the following characteristics: transactions
between the Company or its subsidiaries and banks and
financial institutions that are interested parties as set
forth in (2) below; insurance policies issued by Clal
Insurance Company Ltd. ("Clal Insurance") or subsidiary
thereof; transactions for the purchase of goods and
services (such as communications and food products)
conducted by interested parties within the ordinary course
of business with companies in the IDB Group that are
engaged in the sale of said goods and services; purchase of
shopping vouchers; transactions for the purchase of travel
services from companies that are interested parties;
financial advisory transactions; financial management by
Clal Finances Mutual and Provident Fund Ltd. of funds
deposited by employers and employees in mutual funds and
provident funds.
(2) Banks may be considered to be interested parties as well as
related parties of the Company and companies within the
Koor Group. Epsilon Investment House Ltd. ("Epsilon")' Clal
Finances Betucha Investment Management Ltd. ("Clal Finances
Betucha") and Clal Insurance Business Holdings Ltd are
considered interested parties of companies within the Koor
Group and related parties of the Company and of companies
within the Koor Group. The Company and companies within the
Koor Group, as well as interested parties in the Company,
receive financial services from the abovementioned banks
and financial institutions, and companies owned by them.
Furthermore, the Company and companies in the Koor Group,
occasionally hold investment trust units managed by related
parties, and manage securities accounts with Clal Finances
Batucha.
2. ARRANGEMENTS BETWEEN THE COMPANY AND ITS CONTROLLING SHAREHOLDERS
On September 1, 2006 the Company relocated its premises to
premises that accommodate other companies within the IDB Group, in
the Triangular Tower at the Azrieli Center in Tel-Aviv. In
accordance with the agreement for the allocation of the costs of
the office premises according to which all the IDB Group companies
that are located in the Azrieli Center operate, IDB Development
Ltd. (the Company's controlling shareholder in accordance with
Section 268 of the Companies Ordinance - 1999), leases all the
office premises at the Azrieli Center as the primary lessee of the
IDB Group in respect of the entire group, engages the management
and administration services of the Azrieli property management
company in respect of the entire group, and bears all the general
expenses in respect of other services to all of the companies in
the group ("the leasing and management services"). According to
this arrangement, each of the companies in the IDB Group that are
located in the Azrieli Center participate in IDB Development
Ltd.'s expenses in respect of the leasing and management services,
in accordance with each company's relative part, as determined by
the number of its employees relative to the total number of
employees of the companies in the IDB Group that are located in
the Azrieli Center. The participation in the expenses is based on
the expenses borne by IDB Development Ltd. without a profit
markup.
The Company's participation in this arrangement was approved by
the Audit Committee of the Company's Board of Directors, by the
Company's Board of Directors and by the extraordinary general
shareholders' meeting of the Company.
F-102
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES (CONT'D)
B. DESCRIPTION OF TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES
3. DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION AND EXEMPTION
OF LIABILITY FOR OFFICERS (CONT'D)
(1) In 2006 the liability of officers of the Company and its
subsidiaries was insured by Clal Insurance, a company
controlled by the Company's controlling shareholders. The
total insurance premium paid in 2006 by the Company and its
subsidiaries covered by the policy amounted to approximately
$700 thousand. The transaction was approved by an
extraordinary general meeting of the Company's shareholders as
required by law.
(2) The Company resolved in the past to indemnify its officers
(including previous officers) and its representatives on the
boards of directors of its investee companies, under certain
circumstances, in respect of any amount that they may be
charged within the framework of any legal proceeding filed
against them in connection with their actions or omissions in
fulfilling their duties as officers. The Company issued such
letters of indemnification to certain of its officers (as well
as previous directors).
Subsequent to the Companies Ordinance (Amendment 3) - 2005,
the Company updated its articles of association in accordance
with this amendment. On December 28, 2006, following the
approval of the Company's Audit Committee and Board of
Directors, the Company's general shareholders' meeting
approved the issuance of new letters of indemnification to the
directors and officers of the Company (including controlling
shareholders serving as directors or officers of the Company).
Subsequent to the approval, the Company issued new letters of
indemnification whereby the Company committed to indemnify
them in respect of any liability or expense set forth in the
letter of indemnification (including financial liability
towards a third party in accordance with a court ruling as
well as legal expenses, as set forth in the letter of
indemnification) that they may be charged with or that they
may incur due to their actions in fulfilling their duties as
officers of the Company and/or due to their fulfilling, at the
Company's request, the roles of officers in another company,
related to events set forth in the appendix to the letter of
indemnification.
According to the letters of indemnification, the maximum
amount of the indemnification that the Company may pay (in
addition to amounts that may be received from insurers under
the insurance purchased by the Company) in respect of all the
officers of the Company for a particular event, shall not
exceed 25% of the Company's shareholders' equity according to
its most recent annual or quarterly financial statements,
prior to the payment of the indemnification amounts.
The liability of the Company's officers in fulfilling their
duties is partially insured by insurance policies, including
policies described in item 3(1) above.
4. COMPENSATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER
(1) On August 1, 2006 Mr. Jonathan Kolber ceased to serve as the
Company's Chief Executive Officer and began to serve as its active
and full-time Chairman. On December 28, 2006, following the approval
of the Company's Audit Committee on November 20, 2006 and Board of
Directors on November 22, 2006, the Company's general shareholders'
meeting approved Mr. Kolber's compensation package, which includes a
monthly salary of NIS 120 thousand linked to the Israeli CPI, in
respect of which the Company will deposit an additional 23.3% in
executive insurance policies or other pension arrangements and
provident funds in respect of social benefits. Mr. Kolber will also
have at his disposal a company car and telephone, and the Company
will bear the related taxes in respect thereof. The arrangement may
be terminated by Mr. Kolber or by the Company at any time, subject
to a three month advance notification period. Mr. Kolber will be
entitled to an annual bonus to be decided upon by the
F-103
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
(2) NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES (CONT'D)
B. DESCRIPTION OF TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES
(CONT'D)
4. COMPENSATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF
EXECUTIVE OFFICER (CONT'D)
Board of Directors, of no less than six and no more than twelve
monthly salaries. This arrangement replaces the previous employment
contract that was in effect since April 2003, and under which Mr.
Kolber was granted a special retirement bonus of approximately NIS
8.4 million upon cessation of his employment as the Company's Chief
Executive Officer.
(2) On August 1, 2006 Mr. Ra'anan Cohen was appointed as the
Company's CEO. Mr. Cohen is employed by Discount Investments.
The Company and Discount Investments have agreed that the
Company will bear 80% of the compensation expenses incurred by
Discount Investments in respect of Mr. Cohen. These financial
statements include a provision of NIS 866 thousand in respect
of the Company's said participation in the compensation
expenses for Mr. Cohen. This participation arrangement has
been approved by the Company's Audit Committee and Board of
Directors and shall be presented for approval of the Company's
general shareholders' meeting.
(3) See Note 20C regarding options granted to interested parties.
5. GENERAL AND ADMINISTRATIVE EXPENSES
Until the end of June 2006 the Company had agreements with Claridge
for the receipt of consultancy services. These services included,
inter alia, advice in respect of investment strategies, monetary
policies, international activities, strategic partnerships and
company structuring. The agreements included instructions regarding
the indemnification of the consultants in respect of claims
connected to the consultancy, except for cases of gross negligence
and/or intentional damage. In consideration for the consultancy the
Company paid an annual sum not exceeding $400,000.
6. MANAGEMENT SERVICES TO SUBSIDIARIES AND AFFILIATES
The Company has agreements with certain of its subsidiaries and
affiliates, whereby the Company receives management fees in respect
of consultancy services provided to these companies. Telrad Networks
and Dekolink pay the Company annual management fees of 1% and 0.8%
of sales, respectively. Furthermore, Makhteshim-Agan paid the
Company an annual management fee of $2.5 million in accordance with
a management fee agreement that ended in May 2006. The new
management fee agreement between the Company and Makhteshim-Agan has
not yet been approved by Makhteshim-Agan Board of Directors or
general shareholders' meeting.
7. TRANSACTION IN WHICH RELATED PARTY HAS AN INTEREST
See Note 3E(2) in connection with the sale of Sheraton-Moriah, that
is linked with a sale by a company in the IDB Group.
F-104
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES (CONT'D)
C. BALANCES WITH RELATED PARTIES AND INTERESTED PARTIES
Consolidated Company
----------------------- ----------------------
Year ended December 31,
--------------------------------------------------------
2006 2005 2006 2005
------- ------ ------ ---------
NIS thousands
--------------------------------------------------------
Receivables 6,173 35,960 1,686 7,320
Short-term loans to investee companies -- -- 39,308 37,212
Long-term loans, capital notes and non-current
accounts with investee companies 103,607 98,910 38,699 1,243,098
Payables 2,197 13,481 21 --
Capital note payable to subsidiary -- -- 6,382 6,713
Highest balance of long-term loans, capital with
notes and non-current accounts with investee
companies during the year -- -- 1,243,098 1,243,098
D. SUMMARY OF TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES
1. CONSOLIDATED:
December 31,
-----------------------------------------
2006 2005 2004
------- ------ -------
NIS thousands
-----------------------------------------
INCOME
Revenues 7,218 29,312 24,289
Management and directors' fees from investee companies 8,267 18,957 6,826
Interest 2,494 4,548 1,488
Rental -- 7,200 --
EXPENSES
Selling and marketing expenses 4,584 5,998 8,026
Interest 840 -- 800
Portfolio management commissions 3,266 -- --
Office rental expenses 1,630 366 --
Directors' and officers' insurance 3,263 2,326 --
Management fees to interested parties 649 1,830 1,788
Compensation of an interested party employed by the
Company 15,617 4,764 3,870
Compensation of an interested party not employed by the
Company 866 -- --
Directors' fees 1,158 1,259 1,221
OTHER TRANSACTIONS
Deferred debenture issue costs 793 -- --
Capitalized commissions in respect of securities
purchased 355 -- --
Number of directors: in 2006 - 20 *; in 2005 - 9; in 2004 - 10 *.
* including directors replaced during the year.
F-105
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 26 - RELATED PARTIES AND INTERESTED PARTIES (CONT'D)
D. SUMMARY OF TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES
(CONT'D)
2. COMPANY:
December 31,
----------------------------------------
2006 2005 2004
------ ------ ------
NIS thousands
----------------------------------------
INCOME
Management and directors' fees from investee companies 7,767 20,367 22,800
Interest 3,025 3,735 3,098
Rental -- 7,200 --
EXPENSES
Interest 66 3,777 4,530
Portfolio management commissions 3,266 -- --
Office rental expenses 1,630 732 714
Insurance (including directors' and officers' insurance
from 2005) 3,772 3,042 817
Management fees to interested parties 649 1,830 1,788
Compensation of an interested party employed by the
Company 15,617 4,764 3,870
Compensation of an interested party not employed by the
Company 866 -- --
Directors' fees 572 665 632
OTHER TRANSACTIONS
Deferred debenture issue costs 793 -- --
Capitalized commissions in respect of securities
purchased 355 -- --
Number of directors: in 2006 - 20 *; in 2005 - 9; in 2004 - 10 *.
* including directors replaced during the year.
F-106
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 27 - EARNINGS PER SHARE
1. BASIC EARNINGS PER SHARE:
The basic earnings (loss) per share are calculated according to the
earnings (loss) for the year, divided by the weighted average number of
ordinary shares outstanding during the year.
For the year ended December 31
------------------------------------------
2006 2005 2004
--------- ------- -------
NET EARNINGS (LOSS) FOR THE YEAR:
From continuing operations (113,674) 257,842 120,689
Adjustment in respect of equity in operating results of affiliates 8,521 3,214 (3,231)
--------- ------- -------
(105,153) 261,056 117,458
From discontinued operations 10,474 52,809 24,301
From cumulative effect of change in accounting method 62,522 (3,054) --
--------- ------- -------
(32,127) 310,811 141,759
========= ======= =======
December 31,
------------------------------------------
2006 2005 2004
--------- ------- -------
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES:
As at January 1 16,146,668 15,824,185 15,741,160
Shares resulting from exercise of stock options 250,654 84,720 54,519
Shares issued during the year -- 120,768 --
---------- ---------- ----------
Weighted average number of ordinary shares for the calculation of
basic earnings (loss) per share as at December 31 16,397,322 16,029,673 15,795,679
========== ========== ==========
2. DILUTED EARNINGS PER SHARE:
The diluted earnings (loss) per share are calculated according to the
earnings (loss) for the year, divided by the weighted average number of
ordinary shares outstanding, as well as all potentially dilutive ordinary
shares.
For the year ended December 31
------------------------------------------
2006 2005 2004
--------- ------- -------
NET EARNINGS (LOSS) FOR THE YEAR:
From continuing operations (113,674) 257,842 120,689
Adjustment in respect of equity in operating results of affiliates (301) (32,066) (37,842)
-------- ------- -------
(113,975) 225,776 82,847
From discontinued operations 10,474 52,809 24,301
From cumulative effect of change in accounting method 62,552 (3,054) --
-------- ------- -------
(40,949) 275,531 107,148
======== ======= =======
F-107
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 27 - EARNINGS PER SHARE (CONT'D)
2. DILUTED EARNINGS PER SHARE (CONT'D)
December 31
------------------------------------------
2006 2005 2004
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES:
Weighted average number of ordinary shares for the calculation of
basic earnings (loss) per share 16,397,322 16,029,673 15,795,679
Impact of stock options -- 513,935 481,925
---------- ---------- ----------
Weighted average number of ordinary shares for the calculation of
diluted earnings (loss) per share 16,397,322 16,543,608 16,277,604
========== ========== ==========
NOTE 28 - EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
1. On January 11, 2007, the Company sold all shares held by Koor and
Koor Corporate Venture Capital in Scopus Video Networks Ltd. The
Company's total proceeds from the transaction amounted to
approximately $16 million in cash. As a result of this transaction,
the Company will record a gain of approximately NIS 23 million in
the first quarter of 2007.
2. On April 4, 2007, an S-1 Registration Statement filed with the SEC
by Veraz in connection with an initial public offering was declared
effective and Veraz raised gross proceeds of $ 54 million, before
underwriting discounts and expenses, from the sale of 6.75 million
shares at the public offering price of $8 per share. In addition,
ECI sold in the offering 2.25 million shares of Veraz for a total
gross consideration of $18 million. Following the offering, ECI's
holding in Veraz were reduced to 27.6% (on a non-diluted basis).
3. On April 26, 2007 the Company completed the sale of its entire 56.5%
shareholding in Sheraton-Moriah to Azorim for total consideration of
approximately $24.0 million.
The first installment in the amount of $6.3 million was received on
December 21, 2006, the second in the amount of approximately $8.6
million was received on the date of the closing. The remaining
amount of $9.1 million, guaranteed by Azorim, will be received no
later than March 27, 2008, as follows: (a) One half of the said
amount shall be paid in NIS (in accordance with the last
representative dollar exchange rate known on the date of payment);
and (b) The other half shall be paid in NIS (in accordance with the
representative dollar exchange rate known on the date of execution
of the agreement), linked to the rate of change of the Israeli
Consumer Price Index (CPI) known on March 27, 2008 relative to the
CPI known on the date of execution of the agreement (Basic Index),
and such that the said amount shall, in no event, be lower than the
amount calculated according to the Basic Index.
Following the closing of the transaction the Company was released
from guaranties provided to banks to secure bank debt of Sheraton
Moriah in the amount of approximately $9.2 million. The Company will
record a gain as a result of the transaction of approximately NIS 14
million in the second quarter of 2007. Pursuant to the sale,
Sheraton will be presented as a discontinued operation, commencing
from the financial statements for the first quarter of 2007.
F-108
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 28 - EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (CONT'D)
4. On May 8, 2007 the Company signed an agreement to sell 4.96% of
Knafaim Holdings Ltd. ("Knafaim"). The shares will be sold at a
price per share of $10.47 ("purchase price"), for total
consideration of approximately $7.4 million. $1.5 million was paid
upon signing and the remainder will be paid upon the closing of the
transaction.
On June 5, 2007, the purchaser notified the Company that it is
exercising an option granted to it to purchase the balance of the
Company's shareholding in Knafaim, representing approximately 4.2%
of Knafaim's share capital at the same purchase price, for total
additional consideration of approximately $6.3 million. The closing
for both the initial sale and the option exercise is currently
expected to take place by the end of the third quarter of 2007.
However, the closing of the transaction is subject to the approval
of Israel's antitrust commissioner, and, at this stage, there is no
certainty that the transaction will be completed.
5. On May 10, 2007, pursuant to completion of an offering to
institutional investors in Israel the Company issued debentures with
a par value of approximately NIS 595 million, for consideration of
approximately NIS 640 million, implying an effective interest rate
of 4.05%, linked to the Israeli CPI. The debentures will be
considered part of the Series H debentures issued on August 20, 2006
by the Company to the public in Israel pursuant to the prospectus
dated August 13, 2006 and the terms of the debentures are identical
to the terms of the Series H debentures issued under the prospectus.
The debentures are linked to the Israeli CPI and bear annual
interest of 5.1%. The debentures will be repaid in five equal
installments on September 1 of each year from 2012 through 2016. The
interest is payable on the outstanding balance of the debentures, on
September 1 of each year from 2007 through 2016.
The debenture issue is subject to receipt of the approval for the
listing of the debentures for trading on the Tel-Aviv Stock
Exchange. The sale of the debentures by the institutional investors
will be subject to lock-up arrangements provided under the Israeli
Securities Law, 1968 and its regulations.
The debentures have not been and will not be registered under the US
Securities Act of 1933, as amended, and may not be offered or sold
in the United States or to U.S. persons, absent registration or an
applicable exemption from registration requirements.
F-109
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP
As discussed in Note 2, the accompanying consolidated financial statements
were prepared in accordance with Israeli generally accepted accounting
principles ("Israeli GAAP"), which differ in certain significant respects
from those generally accepted in the United States of America ("US GAAP").
Information related to the nature and effect of such differences is
presented below.
1. EFFECT OF INFLATION
In accordance with Israeli GAAP, until December 31, 2003, when the
adjustment of financial statements for the effects of inflation in
Israel was discontinued, the group comprehensively included the
effect of the changes in the general purchasing power of Israeli
currency in its financial statements, as described in Note 2B above.
In view of the inflation in Israel, this was considered a more
meaningful presentation than financial reporting based on nominal
amounts.
As explained in Note 2B, the amounts adjusted for the effects of
inflation in Israel, presented in the financial statements as of
December 31, 2003 (hereafter - "the transition date"), were used as
the opening balances for the nominal financial reporting in the
following periods. As a result, amounts reported in periods
subsequent to the transition date, for non-monetary and capital
items that originated before the transition date are based on their
adjusted December 2003 NIS balance.
As allowed by the US Securities and Exchange Commission, the
adjustments to reflect the changes in the general purchasing power
of Israeli currency, including adjustments that are included in the
carrying amounts of non-monetary and capital items, have not been
reversed in the reconciliation of Israeli GAAP to U.S. GAAP.
2. DEFERRED TAXES
a) Measurement differences
In accordance with Israeli GAAP:
Deferred taxes are recognized in respect of differences
related to assets and liabilities that are translated from the
local currency into the functional currency using historical
exchange rates that prevailed at the time the asset or
liability were first recorded and that result from (1) changes
in exchange rates or (2) indexing for tax purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109, deferred tax
liabilities or assets are not provided for differences related
to assets and liabilities that are remeasured from the local
currency into the functional currency and that result from (1)
changes in exchange rates or (2) indexing for tax purposes.
F-110
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
2. DEFERRED TAXES (CONT'D)
b) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of Capital
Investments, 1959, a 25% tax rate is generally applicable on
the profits of an "approved enterprise" that received
investment grants, usually during a period of seven years.
An "approved enterprise" which chooses the "alternative
benefits" track is generally eligible for tax benefits during
the benefit period (seven or ten years, depending on the
geographical location of the approved enterprise) as follows:
tax exemption on undistributed profits during a period of two
to ten years and a reduced tax rate of 25% for the remainder
of the benefit period.
In the event that a dividend is distributed out of tax-exempt
earnings of the "approved enterprise" under the "alternative
benefits" track, the distributing company will generally be
subject to a 25% tax on the distributed earnings.
Dividends paid to shareholders from the earnings of an
"approved enterprise" are subject to withholding tax at a rate
of 15%. However, if the shareholder is a company, that
shareholder will generally be entitled to a tax credit, upon
payment of any such dividend.
In accordance with Israeli GAAP:
Deferred taxes are not provided in respect of the
undistributed tax-exempt earnings attributed to the "approved
enterprise" of subsidiaries, if such earnings have been
reinvested and are not intended to be distributed to their
shareholders.
In accordance with US GAAP:
Deferred taxes are provided in respect of the undistributed
tax-exempt earnings of approved enterprises of subsidiaries
established subsequent to December 15, 1992, as their
distribution results in additional tax.
3. SHARE-BASED PAYMENT
In accordance with Israeli GAAP:
No expense was recorded with respect to stock options granted to
employees through December 31, 2005. In September 2005 the IASB
published Accounting Standard No. 24, "Share- Based Payments" ("the
Standard"). The Standard, which is in effect and was implemented by
the Company beginning as from January 1, 2006, requires that
share-based payment transactions, including transactions with
employees or other parties that are to be settled by equity
instruments, cash or other assets, be recognized in the financial
statements. In accordance with the Standard, share-based payment
transactions in which goods or services are received will be
recognized at their fair value. The Standard's provisions should be
applied to each share-based payment transaction executed after March
15, 2005 that did not vest by the effective date of the Standard.
Furthermore, as required by the Standard, comparative data relating
to periods after March 15, 2005 were restated (see Note 2R(4)). With
respect to share-based payments classified as liabilities (such as
phantom plans) that exist on the effective date of the Standard, the
Standard is to be implemented retroactively and the comparative data
is to be restated.
F-111
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
3. SHARE-BASED PAYMENT (CONT'D)
In accordance with US GAAP:
a) Through December 31, 2005:
1) Fixed Option Awards
Under APB-25, total compensation cost is measured as the
difference between the share market price and the
exercise price of the option, at the date of grant.
Compensation cost so determined is charged to expense
over the vesting period.
2) Variable Option Awards
Under APB-25 total compensation cost is measured as the
difference between the share market price and the
exercise price of the option at the end of each
reporting period. Compensation cost so determined is
charged to expense over the vesting period.
b) From January 1, 2006:
Commencing January 1, 2006, the Company and its investees
apply FAS No. 123R, which requires entities to measure the
cost of employee services received in exchange for an equity
award based on the grant-date fair value of the award and
recognize the cost over the period during which an employee is
required to provide service in exchange for the equity award.
In accordance with the provisions of FAS No. 123R, employee
stock options that have an exercise price linked to the
Israeli CPI, are accounted for as liability awards. A
liability award is remeasured at each reporting date until the
date of settlement, based on the fair value of the award. Such
awards are considered equity awards under Israeli GAAP.
Furthermore, as a result of the transition to FAS No. 123R,
the Company recognized such liability at its fair value (or
portion thereof, if the requisite service has not been
rendered) by deducting previously recognized cost from
shareholders' equity and by recognizing the difference in the
income statement, net of any related tax effect, as the
cumulative effect of a change in accounting principle. The
cumulative effect of a change in accounting principle recorded
in 2006 was NIS 15,463 thousands.
F-112
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
4. THE ACCOUNTING TREATMENT OF MARKETABLE SECURITIES
In accordance with Israeli GAAP:
Marketable securities which constitute a short-term investment are
stated at market value. Changes to the market value are recorded as
profits or losses.
Marketable securities which constitute a permanent investment are
stated at cost (regarding debentures, including accumulated
interest), except where market value is lower, and the decline in
value is not considered to be temporary. (See Note 2H).
In accordance with US GAAP:
FAS No. 115 differentiates between three categories of marketable
securities: trading securities, available for sale securities and
held-to-maturity securities.
Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost, except where market value
is lower, and the decline in value is not considered to be
temporary.
Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains
and losses included in earnings. Debt and equity securities not
classified as either held-to-maturity securities or trading
securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders'
equity.
Most of the short-term marketable securities held by the Group are
available-for-sale securities.
F-113
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
5. PROVISIONS FOR ANTICIPATED LOSSES FROM REALIZATION OF CONVERTIBLE
SECURITIES OF INVESTEE COMPANIES
In accordance with Israeli GAAP:
Through December 31, 2005, according to Opinions No. 48 and 53 of
the ICPAI, a parent company was required to record a provision for
losses, which it may incur from the potential dilution of its
holdings in investee companies, when it is probable that share
options will be exercised or debentures will be converted. In July
2005 the IASB published Accounting Standard No. 22, "Financial
Instruments: Disclosure and Presentation" ("the Standard"). The new
standard applies to financial statements for periods beginning on or
after January 1, 2006. The Standard determines that a provision for
loss as described above that was included in the financial
statements as at December 31, 2005, will be reversed on January 1,
2006 and recorded as cumulative effect of change in accounting
policy. See also Note 2E(9).
In accordance with US GAAP:
A loss in the parent company resulting from the dilution of its
holdings, due to exercise of share options or conversion of
debentures, is recorded only at the time of exercise or conversion.
As a result of the above, the amount of NIS 62,552 thousand which
was recorded under Israeli GAAP as a cumulative effect of change in
accounting policy in 2006 is reversed in the adjustments to US GAAP.
6. ONE-TIME TERMINATION BENEFITS
In accordance with Israeli GAAP:
Under Israeli GAAP, one-time termination benefits are recorded only
when an obligation to the employees exists.
In accordance with US GAAP:
One-time termination benefits are benefits provided to current
employees that are involuntarily terminated under the terms of a
one-time benefit arrangement. A one-time benefit arrangement is an
arrangement established by a plan of termination that applies for a
specified termination event or for a specified future period.
A one-time benefit arrangement exists at the date the plan of
termination meets all of the following criteria and has been
communicated to employees (hereinafter referred to as the
communication date):
a. Management, having the authority to approve the action,
commits to a plan of termination.
b. The plan identifies the number of employees to be terminated,
their job classifications or functions and their locations,
and the expected completion date.
c. The plan establishes the terms of the benefit arrangement,
including the benefits that employees will receive upon
termination (including but not limited to cash payments) in
sufficient detail to enable employees to determine the type
and amount of benefits they will receive if they are
involuntarily terminated.
F-114
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
6. ONE-TIME TERMINATION BENEFITS (CONT'D)
d. Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or
that the plan will be withdrawn.
The difference between Israeli GAAP and US GAAP pertaining to
employee severance benefits as part of an efficiency program
is essentially a timing difference.
7. EARNINGS PER SHARE
In January 2006, the IASB published Accounting Standard No. 21,
"Earnings per Share ("the Standard"). The Standard applies to
financial statements for periods beginning on or after January 1,
2006 and the provisions of the Standard are to be implemented
retroactively for comparative earnings per share data for prior
periods. See also Note 2W. There are no material differences between
the provisions of the Standard and the provisions of FAS No. 128
"Earnings Per Share".
8. VENTURE CAPITAL FUND INVESTMENTS:
In accordance with Israeli GAAP:
Investments in venture capital funds are reported at cost less a
provision for impairment in the event that there has been an
"other-than-temporary" decline in their value.
In accordance with US GAAP:
Venture capital fund investments are reported at fair value. Changes
in fair value are recognized as profits and losses.
9. DERIVATIVES
In accordance with Israeli GAAP:
The results of financial derivatives held to hedge assets and
liabilities are recorded in the statement of operations concurrently
with the recording of the changes in the hedged assets and
liabilities. Financial derivatives that are not held for hedging are
stated in the balance sheet at fair value and changes in the fair
value of such instruments are recognized in the statement of
operations in the period they occur.
In accordance with US GAAP:
The Company applied FAS No. 133 to account for its derivatives. Most
derivatives in the consolidated group do not meet the hedging
criteria prescribed by FAS No. 133, therefore they are stated at
fair value and changes in the fair value are charged to the
statement of operations in the period they occur.
For certain derivatives, the Group meets the criteria for cash-flow
hedging under FAS No. 133. These derivatives are recorded at fair
value, with changes in fair value recorded within shareholders'
equity as a component of accumulated other comprehensive income.
F-115
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
10. IMPAIRMENT OF LONG-LIVED ASSETS TO BE HELD AND USED
In accordance with Israeli GAAP:
The Company applies Standard No. 15 under which the Company is
required to test for impairment indicators and if there are such
indicators, the Company is required to calculate the recoverable
amount of the assets, which is the higher of the net sales price and
the value in use (the present value of the estimated future cash
flows expected to be derived from the use and realization of the
asset). A loss from impairment is reversed only if changes occur in
the estimates used to determine the recoverable value of the asset.
In accordance with US GAAP:
The Company applies FAS No. 144 under which a long-lived asset to be
held and used is assessed for impairment using a two-step impairment
test. Under step one of the test, the carrying amount of the
long-lived asset is compared to the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of
the asset. If the carrying amount exceeds the amount calculated, an
impairment loss is measured as the amount by which the carrying
amount exceeds its fair value. Reversals of impairment losses are
not allowed under US GAAP.
11. GOODWILL
In accordance with Israeli GAAP:
Through December 31, 2005 goodwill was amortized over its economic
life, which may not exceed 20 years. Goodwill was tested for an
impairment in value only when there were indications of possible
impairment in the value of the goodwill.
In January 2006, the IASB published an amendment to Accounting
Standard No. 20, "The Accounting Treatment of Goodwill and
Intangible Assets when Purchasing an Investee" ("the Standard"),
effective beginning January 1, 2006. In accordance with the
Standard, goodwill and intangible assets with an unlimited useful
life, which were identified at the time of purchasing an investee,
are not to be amortized. Instead, an examination of impairment in
value should be performed once a year or more frequently if events
or changes in circumstances indicate that there may have been
impairment in the value of goodwill or of an intangible asset with
an unlimited useful life. The financial statements for periods in
which this Standard was not implemented are not to be restated. See
also Note 2E(6).
In accordance with US GAAP:
Effective January 1, 2002, goodwill is not amortized but instead is
evaluated for recoverability by means of an impairment test which is
performed at least once a year in accordance with FAS No. 142. No
further impairments have been required subsequent to the initial
implementation.
F-116
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
12. CONSOLIDATION OF M-A INDUSTRIES
As a result of the sale of shares of M-A Industries at the beginning
of 2004, Koor's share ownership in M-A Industries decreased to below
50%.
In accordance with Israeli GAAP:
The position of the Israeli Securities Authority is that when a
company has been consolidated in the financial statements of the
holding company and there has been a decrease in the voting rights
to below 50%, provided that the overall economic circumstances have
not essentially changed, the consolidation of the investee company
should be continued because of the importance of continuity and
consistency of the accounting reports. Therefore and as explained in
Note 3B(1), as of December 31, 2004, Koor continued to consolidate
M-A Industries' financial statements. Following an additional sale
of the Company's holding in M-A Industries in February 2005, and
based on evaluation of the new circumstances, Koor ceased to
consolidate M-A Industries as from January 1, 2005.
In accordance with US GAAP:
A controlling financial interest, generally determined by the
ownership by one company, directly or indirectly, of over fifty
percent of the outstanding voting shares of another company, is a
prerequisite for consolidation. Therefore, Koor discontinued the
consolidation of M-A Industries and began accounting for the
investment in M-A Industries by the equity method for US GAAP
purposes, beginning in 2004.
13. CAPITALIZATION OF LICENSING COSTS
In accordance with Israeli GAAP:
Certain costs incurred by an affiliated company in connection with
the registration process to obtain licenses to sell products in
various jurisdictions are capitalized.
The capitalized licensing costs are amortized over the expected
benefit period.
In accordance with U.S. GAAP:
The costs incurred by the affiliated company in connection with the
registration process to obtain licenses to sell products in various
jurisdictions are deemed to be development costs under US GAAP and
are expensed as incurred.
Due to the differences in the capitalization of licensing costs,
impairment performed on such assets may differ under Israeli GAAP
and US GAAP.
F-117
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
14. CHANGE IN ACCOUNTING FOR THE INVESTMENT IN INVESTEE (ECTEL)
In accordance with Israeli GAAP:
As described in Note 3A(4), as a result of an increase in the
percentage of holdings in ECtel, the Company began to account for
the investment in ECtel according to the equity method as of the
third quarter of 2006. Previously this investment was accounted for
under the cost method.
In accordance with US GAAP:
In accordance with US GAAP, the Company previously accounted for
this investment as available-for-sale securities. In accordance with
the provisions of APB No. 18, when an investment qualifies for use
of the equity method due to an increase in the level of ownership,
the investment, results of operations (current and prior periods
presented), and retained earnings of the investor should be adjusted
retroactively in a manner consistent with the accounting for a
step-by-step acquisition of a subsidiary. Therefore, the Company
restated its accounts to account for this change in accordance with
US GAAP, as follows:
Year ended December 31
-------------------------
2005 2004
------- -------
NIS thousands
-------------------------
Net earnings according to US GAAP - as reported 351,459 111,572
Restatement (758) (2,247)
------- -------
Net earnings according to US GAAP -restated 350,701 109,325
======= =======
Basic earnings (loss) per ordinary share according to US GAAP for
the year ended December 31, 2004:
As previously
reported Change Restated
------------- ------------- -------------
NIS
--------------------------------------------------
From continuing operations 5.25 (0.14) 5.11
From discontinued operations 1.80 -- 1.80
------------- ------------- -------------
Net earnings 7.05 (0.14) 6.91
============= ============= =============
Fully diluted earnings (loss) per ordinary share according to
US GAAP for the year ended December 31, 2004:
As previously
reported Change Restated
------------- ------------- -------------
NIS
--------------------------------------------------
From continuing operations 3.14 (0.14) 3.00
From discontinued operations 1.75 -- 1.75
------------- ------------- -------------
Net earnings 4.89 (0.14) 4.75
============= ============= =============
The impact of the above restatement on 2005 earning per share
is immaterial.
F-118
Koor Industries Ltd. (An Israeli Corporation)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006
--------------------------------------------------------------------------------
NOTE 29 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT'D)
14. CHANGE IN ACCOUNTING FOR THE INVESTMENT IN ECTEL (CONT'D)
December 31, 2005
--------------------------------------------------
As previously
reported Change Restated
------------- ------------- -------------
NIS thousands
--------------------------------------------------
Other investments and receivables 623,530 (54,708) 568,822
Investments in affiliates 2,595,385 38,584 2,633,969
Additional paid-in capital
for "available-for-sale" securities 27,945 (13,813) 14,132
Retained earnings (deficit) *(1,056,445) (3,005) (1,059,450)
Cumulative foreign currency translation
adjustments *(17,008) 694 (16,134)
Total shareholders' equity 2,483,112 (16,124) 2,466,988
* Reclassified
15. GAINS (LOSSES) FROM DECLINE IN HOLDINGS IN CONSOLIDATED AND
AFFILIATED COMPANIES
Various GAAP differences affecting shareholders' equity of
consolidated or affiliated companies result in differences in the
book value of the investments under Israeli and US GAAP. Therefore
the amounts of the gain or loss resulting from the sale of interests
or other changes in holdings in such consolidated subsidiaries or
affiliates differs under Israeli and US GAAP.
16. IMPAIRMENT OF INVESTMENT IN ECI
In accordance with Israeli GAAP:
The Company applied Standard No. 15 under which the Company is
required to test the recoverable amount of the investment, which is
the higher of the net selling price and value in use (the present
value of the estimated future cash flows expected to be derived from
the use and realization of the asset). A loss from impairment is
reversed only if changes occur in the estimates used to determine
the recoverable value of the investment.
In accordance with US GAAP:
The Company applied APB No. 18 in testing for impairment of its
investment in ECI. Under APB No. 18, a loss is recorded only when
the impairment of the investee is other than temporary and reversals
of impairments are not allowed.
F-119