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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, 2003
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)
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Israel
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(Jurisdiction of incorporation or organization)
14 Hamelacha Street, Rosh Ha'ayin 48091, 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
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Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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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:
15,993,135 Ordinary Shares, Par Value NIS 0.001 Per Share
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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
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Indicate by check mark which financial statements the registrant has elected
to follow:
Item 17 X Item 18
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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, 2003 have
been translated into U.S. dollars for the convenience of the reader at the
exchange rate of the dollar on December 31, 2003 (NIS 4.379 = $1.00), as
published by the Bank of Israel (see Note 2B(1) 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, 2003.
In this document, 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.
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TABLE OF CONTENTS
PART I
Page
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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...........................................................................13
Item 5. Operating and Financial Review and Prospects.........................................................47
Item 6. Directors, Senior Management and Employees...........................................................70
Item 7. Major Shareholders and Related Party Transactions....................................................82
Item 8. Financial Information................................................................................84
Item 9. The Offer and Listing................................................................................89
Item 10. Additional Information...............................................................................91
Item 11. Quantitative and Qualitative Disclosures About Market Risk..........................................105
Item 12. Description of Securities Other than Equity Securities..............................................107
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.....................................................108
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds........................108
Item 15. Controls and Procedures.............................................................................108
Item 16A. Audit Committee Financial Expert....................................................................108
Item 16B. Code of Ethics......................................................................................108
Item 16C. Principal Accountant Fees and Services..............................................................109
PART III
Item 17. Financial Statements................................................................................110
Item 18. Financial Statements................................................................................110
Item 19. Exhibits............................................................................................110
Index to Consolidated Financial Statements......................................................................F-1
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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,
2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003 has
been derived from our audited consolidated financial statements. These
financial statements have been prepared in accordance with generally accepted
accounting principles in Israel, or Israeli GAAP, which differ in certain
respects from U.S. GAAP (see Note 28 to our consolidated financial statements
included elsewhere in this annual report), and audited by KPMG Somekh Chaikin,
independent certified public accountants in Israel. The consolidated selected
financial data as of December 31, 1999, 2000 and 2001 and for the years ended
December 31, 1999 and 2000 have been derived from other audited consolidated
financial statements not included in this annual report and have also been
prepared in accordance with Israeli GAAP and audited by KPMG Somekh Chaikin.
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 adjusted NIS or in
dollars. For the convenience of the reader, the 2003 data contains translation
of NIS into dollars. 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, 2003, or at any other rate. All figures 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
Year Ended December, 31
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1999 2000 2001 2002 2003 2003
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(In thousands, except share and per share data)
Adjusted NIS as of December 31, 2003 US Dollars
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Operating Data:
Israeli GAAP:
Net sales........................... 9,784,752 8,292,026 7,463,419 7,099,790 7,690,430 1,756,207
Gross profit........................ 2,446,831 2,094,776 1,697,733 1,784,010 2,297,486 524,660
Operating earnings.................. 749,058 713,507 358,437 479,864 896,285 204,678
Financial expense, net.............. 335,915 323,051 432,437 408,437 228,200 52,112
Other income (expense), net......... 234,332 168,037 (622,660) 5,824 (219,721) (50,176)
Minority interest, net.............. (8,527) (54,102) 8,367 (60,049) (202,807) (46,314)
Net earnings (loss) from continuing
activities........................ 616,094 56,722 (2,621,648) (766,969) 46,362 10,587
Result of discontinued
activities, net................... (34,222) 226,928 (29,279) - - -
Net earnings (loss)................. 581,873 283,650 (2,650,927) (766,969) 46,362 10,587
Basic earnings (loss) per share..... 36.98 18.44 (174.54) (50.55) 2.95 0.67
Weighted average number of shares
used in computing basic earnings
(loss) per share.................. 15,737,564 15,384,206 15,188,463 15,173,291 15,716,725 15,716,725
Diluted earnings (loss) per share... 36.63 18.36 (174.54) (50.55) 2.95 0.67
Weighted average number of shares
used in computing diluted earnings
(loss) per share.................. 16,062,126 15,597,253 15,188,463 15,173,291 15,716,725 15,716,725
U.S. GAAP:
Income (loss) before extraordinary
item.............................. 564,182 265,647 (2,624,921) (761,561) (105,308) (24,048)
Net income (loss)................... 569,983 265,647 (2,624,921) (761,561) (105,308) (24,048)
Basic earnings (loss) per ordinary
share............................. 36.22 17.26 (172.81) (50.18) (6.81) (1.56)
Basic earnings (loss) per ADS....... 7.24 3.45 (34.56) (10.04) (1.36) (0.31)
Diluted earnings (loss) per ordinary
share............................. 35.87 17.19 (172.81) (50.18) (6.81) (1.56)
Diluted earnings (loss) per ADS..... 7.18 3.43 (34.56) (10.04) (1.36) (0.31)
Balance Sheet Data:
Israeli GAAP:
Working capital..................... 964,418 1,047,465 1,859,986 1,160,293 1,046,276 238,930
Total assets........................ 18,406,712 15,704,961 13,514,082 13,432,798 11,869,757 2,710,609
Short-term debt..................... 3,771,300 2,856,290 1,811,662 2,315,499 1,577,402 360,220
Long-term debt...................... 4,313,120 3,518,561 4,934,834 4,339,578 3,119,837 712,454
Shareholder's equity................ 4,646,250 4,563,106 2,195,834 1,727,169 1,740,393 397,441
U.S. GAAP:
Total assets........................ 18,608,143 15,868,340 14,015,442 14,024,235 11,975,442 2,734,744
Shareholder's equity................ 4,686,035 4,446,313 2,135,082 1,707,885 1,662,480 379,648
Number of shares outstanding........ 15,730,971 15,192,379 15,168,884 15,173,377 15,741,160 15,741,160
2
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)
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January 2004............................... 4.483 4.371
February 2004.............................. 4.493 4.437
March 2004................................. 4.535 4.483
April 2004................................. 4.599 4.515
May 2004................................... 4.634 4.555
June 2004.................................. 4.552 4.490
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)
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1999....................................................... 3.142
2000....................................................... 4.078
2001....................................................... 4.203
2002....................................................... 4.738
2003....................................................... 4.530
On July 13, 2004, the exchange rate was NIS 4.485 per U.S. dollar as
reported by the Bank of Israel.
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 2003, 2002 or 2001. We
paid final dividends of NIS4.10 per share in 2000.
3
Risk Factors
Risks Related to Koor
We depend on our subsidiaries and affiliates for dividends 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 25 million and NIS 36 million in 2003 and
2002, respectively, pursuant to management agreements between us and several
of our subsidiaries and affiliates. In addition, in 2003 and 2002 we received
NIS 23 million and NIS 31 million, respectively, in dividends from
subsidiaries, of which NIS 18 million and NIS 21 million, respectively, was
received from Makhteshim-Agan Industries Ltd., or MA Industries.
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.
Continuing adverse conditions in the telecommunications industry and in the
market for telecommunications equipment have led to decreased demand for our
products and have harmed and may continue to harm our business, financial
condition and results of operations.
For the years ended December 31, 2003 and 2002, our telecommunication
equipment business accounted for approximately 10.4% and 11.5%, respectively,
of our consolidated net sales. Our business in this industry is primarily
conducted through our consolidated subsidiary Telrad. We also own
approximately 31% of ECI Telecom Ltd., or ECI, a publicly traded company
engaged in the telecommunication equipment business, whose results are not
4
consolidated in our financial statements, but are accounted for based on the
equity method. Telrad's systems and ECI's systems are used by
telecommunications carriers and service providers. From 2001 through the first
half of 2003, many telecommunications carriers and service providers in
markets throughout the world experienced substantial declines in sales and
revenues and incurred significant operating losses. In addition, many carriers
and service providers stopped deploying new networks or ceased operations
completely and are no longer potential users of Telrad's products or ECI's
products. The general worldwide economic downturn has curtailed the ability of
existing and prospective carriers and service providers to finance purchases
of products such as Telrad's and ECI's, leading to a sharp decline in orders
for new telecommunications equipment. Although there are indications that the
downturn may be ending, we cannot predict whether the markets will fully
recover or the downturn will continue for a long period of time.
For these reasons, Telrad and to a lesser extent ECI, have
experienced severe declines in sales since the beginning of 2001 and were
forced to take substantial measures to reduce expenses during 2001, 2002 and
2003, including downsizing manpower, streamlining operations and divestiture
of non-core businesses. As a result of the losses incurred by ECI during 2001
and 2002, we wrote-down the book value of our investment in ECI below its
equity value to us and wrote-off the excess goodwill relating to that
investment. Following a valuation of ECI performed by an independent appraiser
in November 2003, we reversed the loss from decline in value of approximately
NIS 73 million. The reversal of this loss was charged against the capital
reserve from foreign currency translation adjustments (credit), which was
realized when the provision was created. Under U.S. GAAP, however, this loss
was not reversed As of December 31, 2003, the balance of our investment in ECI
was approximately NIS 726 million, reflecting our share in ECI's equity.
In the second half of 2003, we perceived an improvement in the
general market for telecommunications equipment. However, we are unable to
predict the duration of this trend or the extent of any impact that it may
have on our revenues or results of operations. Any return to a prolonged and
substantial curtailment of growth in the telecommunications industry will
likely have an adverse impact, which may be material, on our business,
financial condition and results of operations. In addition, market perception
that these conditions could have an impact upon us may harm the trading price
of our ordinary shares, whether or not our business or results of operations
are actually affected.
We need to develop and introduce new products in the telecommunication
equipment and defense electronics businesses in order to remain competitive in
those industries. We are also partially dependent on licensed technology.
For the years ended December 31, 2003 and 2002, our telecommunication
equipment and defense electronics businesses accounted for approximately 27.1%
and 35.2%, respectively, of our consolidated net sales, and 60.9% and 68.8%,
respectively, of our total consolidated research and development expenses. In
addition, for the years ended December 31, 2003 and 2002, our investment in
ECI accounted for 60.9% and 65.4%, respectively, of our total investments in
the telecommunications equipment industry. The businesses and markets in these
segments are characterized by rapid technological development. Consequently,
the ability to anticipate changes in technology and to develop and introduce
new and enhanced products incorporating
5
such new technologies on a timely basis will be significant factors in the
ability of these businesses to grow and remain competitive. We cannot assure
you that we will be able to develop new products and technologies on a timely
basis in order to remain competitive in the telecommunication equipment and
defense electronics industries. In addition, one of our objectives is to
continue to seek to apply several of the advanced technologies developed in our
defense electronic businesses to new commercial products. However, we cannot
assure you that such technologies will be successfully applied or that markets
will develop for such products.
Generally, our subsidiaries in these industries, including Telrad,
Elisra Electronic Systems Ltd., or Elisra, as well as ECI establish their own
research and development priorities and budgets. However, several of Telrad's
products have been based on technology licensed from Nortel Networks Ltd., or
Nortel. As a result, our ability to introduce new and enhanced products was
partially dependent on Nortel continuing to provide advanced technology to
Telrad. Following the establishment of Nortel Israel and the related change in
Telrad's business, however, such reliance has been substantially reduced.
Telrad, one of our significant subsidiaries, depends on one key customer.
Telrad, one of our significant subsidiaries, is substantially
dependent upon its relationship with Nortel as a key supplier of technology
and as a key customer of Telrad's products. For the years ended December 31,
2003 and 2002, approximately 8.5% and 8.6%, respectively, of our consolidated
net sales and 51.4% and 69.1%, 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 business as a whole.
We rely on the expiration of patents and depend on regulatory approval in the
agrochemicals industry.
For the years ended December 31, 2003 and 2002, our agrochemicals
business accounted for approximately 67.5% and 58.3%, respectively, of our
consolidated net sales. Several of our subsidiaries specialize in the
improvement and production of generic agrochemical products, which are
products that are based on expired patents. Development of new generic
products requires substantial expenditures for research and development,
product registration, construction of production lines and marketing in
support of new product introduction. An important component for the growth of
the agrochemicals business is the successful introduction of new generic
chemical products to the market in a timely manner (promptly after patents
expire). Reintroduction of any new legislation to extend the life of patents
on chemical products could adversely affect the ability of the agrochemicals
business to introduce new products.
Patent protection in Europe is valid for 20 years from the date of
application. During the beginning of any patent term, the companies that own
patents deal in licensing products in various countries. In February 1997,
offices of the European Authority approved an extension of the validity of
patents filed for registration since 1985. The extension of the patent term
for an additional period ensures patent owners an additional period of
exclusivity of 15 years from the
6
date of receipt of first license, provided that the addition may not be greater
than 5 years. In most countries, marketing of new products is conditional upon
obtaining licensing from the competent authority. The obtaining of licenses is
a lengthy process with substantial costs. A possible delay in the development
of new products or in obtaining requisite licenses could have a negative effect
on our results of operation and financial status.
Most countries require us to obtain regulatory approval prior to
selling newly introduced products, which is both time consuming and expensive.
Any delay in the development or introduction of new products or in obtaining
regulatory approval from the countries in which our agrochemicals business
markets its products may have a material adverse effect on our results of
operations and financial condition. In addition, new developments in the field
of trans-genetic plant species that are toxic to insects, and plant species
that are resistant to fungal disease, may have an adverse effect on our
agrochemicals business.
Our investments in hi-tech companies involve a high degree of risk.
Through Koor Corporate Venture Capital, or Koor CVC, we invest from
time to time in start-up companies and venture capital funds. As of December
31, 2003, we had invested, through Koor CVC, approximately $132 million in the
start-up companies and venture capital funds in Koor CVC's portfolio,
excluding Koor CVC's initial investment in Scopus Network Technologies
(originally Tadiran Scopus). In June 2003, Koor CVC sold most of its
commitment to its portfolio venture capital funds to a secondary venture
capital fund. As a result of this sale, Koor CVC's future commitment to invest
in these venture capital funds was reduced by $22 million to $14 million. As
of December 31, 2003, Koor CVC's commitment to invest in start-up companies
and venture capital funds further declined to approximately $9 million. This
amount may be drawn upon by the funds at any time over the next 1-5 years,
based upon their needs.
During 2003, through Koor CVC, we invested in and made loans to
startup companies and our portfolio venture capital funds in the amount of
approximately $4 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;
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;
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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.
Our operations are exposed to environmental risks and are subject to
environmental regulation.
The operations of several of our subsidiaries are exposed to the risk
of harming the environment, as they manufacture, use, transmit, store and sell
toxic and other materials. We believe that these subsidiaries are in
compliance with applicable environmental laws and regulations and we have born
considerable costs and investments in order to ensure such compliance. We
cannot estimate the size or impact of additional expenditures that may be
required in the event of amendments to applicable environmental laws or
adverse decisions of applicable regulatory authorities. In addition, the risks
of causing environmental damage are not insurable risks.
We are under investigation by the Israeli Office of Restrictive Trade
Practices.
During October 1997, following the publication of a newspaper article
containing details about alleged violations of the Law for Restrictive Trade
Practices, 1988 (Israeli Antitrust Law) regarding price coordination and lack
of competition between Tadiran Ltd., or Tadiran (our wholly-owned subsidiary),
Tadiran Telecommunication Ltd., or TTL (a former subsidiary of Tadiran which
merged with ECI in 1999), and Telrad, the Commissioner of Restrictive Trade
Practices (Israeli Antitrust Authority) conducted an investigation at the
offices of Tadiran, TTL and Telrad and at our offices, during which documents
were confiscated, employees were questioned and additional information was
requested and provided.
On December 13, 1998, the Investigations Department of the Israeli
Office of Restrictive Trade Practices (Israeli Antitrust Authority) announced
in a press release that it had concluded the investigation regarding
allegations of illegal restrictive arrangements between us, Tadiran, TTL,
Telrad, The Israel Telecommunications Corporation Limited, or Bezeq, and
Bezeqcall Communications Ltd. in the field of the supply of public switches
and in the Network Termination Point, or N.T.R, area. According to the press
release, the investigators recommended indicting some of the examinees as a
result of the investigation of several allegations, and the Legal Department
of the Israeli Antitrust Authority will decide if offenses were in fact
committed and if there is sufficient evidential basis for trial.
On March 4, 2002, Tadiran (which committed to indemnify ECI on any
damage resulting from the issues under review by the Israeli Antitrust
Authority), TTL and Telrad received notice from the Israeli Antitrust
Authority that the Israeli Antitrust Authority is considering the possibility
of bringing each of these companies to trial for offenses against the Israeli
Antitrust Law, as a result of the actions of these companies with regard to
the supply of public switches
8
between the years of 1993 and 1997. The Israeli Antitrust Authority's notice
states that the allegations against Telrad and Tadiran in the field of N.T.R.
are still being reviewed by the commissioner of the Israeli Antitrust
Authority. We are currently negotiating with the Israeli Antitrust Authority in
an effort to conclude the proceedings related to the Authority's
investigation.See also note 18A to our consolidated financial statements
included elsewhere in this annual report.
Under the Israeli Antitrust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may
be subject to civil penalties, if damages can be proven as a result of a
violation of the law. At this early stage, it is not possible to predict the
likelihood that any fines will be imposed on us or any civil lawsuits will be
filed against us, nor whether any such fines or lawsuits would have an adverse
effect on our business, financial condition or results of operations.
Several of our subsidiaries are exposed to fluctuations in prices of raw
materials and commodities.
Several of our subsidiaries, 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.
Reduction in worldwide spending for military products may adversely affect our
profit.
For the years ended December 31, 2003 and 2002, sales of military
products accounted for approximately 16.8% and 23.8%, respectively, of our
consolidated net sales. Around the world and in Israel demand for military
products has been generally declining during the past few years. This ongoing
trend has negatively affected the size and rate of receipt of orders and
resulted in a decrease in backlog to NIS 2.2 billion as of December 31, 2003
compared to NIS 3.0 billion as of December 31, 2002. In order to counter the
decrease in the Israeli budget, we are seeking to increase our position in
international markets by identifying additional potential avenues for growth;
however, we may not be successful in doing so. In the event that general
military expenditures continue to decline worldwide and are reduced in Israel
for systems or projects of the type we produce or perform, and are not offset
by greater foreign sales or other new systems or products, there will be a
reduction in the volume of contracts or subcontracts we are awarded. Such
reductions may result in a material adverse effect on our results of
operations and financial condition.
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, defense
electronics and the
9
agrochemicals businesses are in dollars, 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 2001, 2002 and
2003, the annual rate of inflation was approximately 1.4%, 6.5%, and -1.9%,
respectively, while the NIS depreciated against the dollar by approximately
9.3%, 7.3% in 2001 and 2002, respectively, and appreciated against the dollar
by approximately 7.6% in 2003. Consequently, during the calendar years 2001,
2002 and 2003, the annual rate of inflation as adjusted for devaluation was
approximately -7.9% and -0.8%, and 5.7%, respectively. Continued deflation in
Israel or a 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.
To compensate for inflation in Israel and changes in the relative
value of Israeli currency compared to the dollar and other currencies, we 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. We are directly influenced
by the political, economic and military conditions affecting Israel.
Accordingly, any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its present trading partners, a
significant increase in inflation or a significant downturn in the economic or
financial condition of Israel could have a material adverse effect on our
business, our results of operations and our financial condition. In addition,
there are a number of countries, particularly in the Middle East, which
restrict business with Israel or Israeli companies. There can be no assurance
that restrictive laws or policies directed toward Israel or Israeli businesses
will not have an adverse impact on the expansion of our business.
The increased hostilities in the West Bank and Gaza Strip affect tourism and
other businesses.
Since September 2000, there has been an escalation of violence in the
West Bank and Gaza Strip and increased terrorist activities within Israel,
causing a sharp decrease in tourism to Israel and a further deceleration in
all aspects of the Israeli economy. The areas of tourism and aviation have
been most affected by the increased hostilities, and the recession in the
Israeli real estate market has become more entrenched.
Many of our directors, officers and employees are obligated to perform
military reserve duty in Israel.
Generally, Israeli adult male citizens and permanent residents
through the age of 48 are obligated to perform up to 36 days of military
reserve duty annually. Some of our directors,
10
officers and employees are currently obligated to perform annual reserve duty.
Additionally, under emergency circumstances, all such persons are subject to
being called to active duty at any time. 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.
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.
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 prospectus, 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.
We depend on the availability of certain government benefits and programs.
We derive and expect to continue to derive benefits from various
programs and laws in Israel including tax benefits relating to our "approved
enterprise" programs and grants from the Office of the Chief Scientist, or
OCS, for research and development. For the years ended December 31, 2003 and
2002, our consolidated companies received government grants in the fields of
research and development of approximately NIS 21 million and NIS 25 million,
respectively. To be eligible for these grants, programs and tax benefits, we
must continue to meet certain conditions, including making certain specified
investments in fixed assets from our equity. From time to time, the Israeli
government has discussed reducing or eliminating the availability of these
grants, programs and benefits. A change in government policy in these areas
would likely have a negative affect on our results of operation and financial
condition.
11
Under this program, by virtue of the "approved enterprise" status
granted to several of our subsidiaries and several of the companies in which
we have invested, these companies are entitled to various tax benefits. The
income derived from these companies during a period of up to 10 years, from
the year in which these companies 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 ranging
from 0-25%. These companies with "approved enterprise" status are also
entitled to an accelerated amortization deduction over five years for fixed
assets serving these companies.
In the event that one of our subsidiaries or investee companies
distributes a dividend to shareholders out of income attributable to revenues
from an approved enterprise which has received a tax exemption, the company
that distributes the dividend is taxed at a rate of 25% of the profit
distributed. Deferred taxes in respect of income from approved enterprises
were not distributed as a dividend, since it is our policy not to initiate a
distribution of a dividend that involves an additional tax liability to us.
Benefits are conditional upon the fulfillment of terms set forth by
law or in deeds of approval. Non-fulfillment of such terms could cause
cancellation of the approved enterprise benefits, in whole or in part, and the
return of previously provided benefits plus interest and linkage
differentials. As of December 31, 2003, our subsidiaries and the companies in
which we have invested which have been granted "approved enterprise" status
have complied with the terms set forth above.
As security for the implementation of the approved projects and
compliance with the conditions of the approval, a charge has been registered
on the above subsidiaries' assets in favor of the State of Israel.
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.
12
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 14 Hamelacha Street, Rosh
Ha'ayin 48091, Israel, and our telephone number is +972-3-900-8333. 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.
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: telecommunication equipment,
defense electronics and agrochemicals as well as in other businesses. We are
also engaged in investment in new technologies in the telecom and life science
fields. For the years ended December 31, 2003 and 2002, international sales
represented approximately 86.7% and 78.2%, respectively, of our consolidated
net sales. A majority of our sales are derived from businesses in which we are
the leading producer or provider of such goods and services in Israel. For the
year ended December 31, 2003, we reported consolidated net sales of
approximately NIS 7,690 million ($1.8 billion), consolidated operating profit
of approximately NIS 896 million ($205 million) and a consolidated net income
of approximately NIS 46 million ($11 million).
Business Overview
Strategy
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. As of June 30, 2004, Claridge
Israel L.L.C. and Esarbee Investments Limited together held approximately 29.40%
of our outstanding ordinary shares (15.03% held by Claridge Israel L.L.C. and
14.37% held by Esarbee Investments Limited). Beginning in July 1998, we
initiated an extensive corporate restructuring program, designed to transform
Koor into a diversified investment holding company with controlling stakes in
leading high-growth, export-oriented Israeli companies. Based on these criteria,
we have made the strategic decision to focus on three businesses:
telecommunication equipment, defense electronics and agrochemicals. Despite the
downturn in the telecom industry, we still believe that our holdings in these
businesses have the potential to grow internally, as well as through mergers and
acquisitions.
We have implemented key elements of our strategy to date, including a
substantial capital reallocation process, in which proceeds from the sale of
low growth domestic businesses have been re-invested to increase our stakes in
our core businesses. In this regard during the years 1999 through 2001 we
divested ourselves of our non-core holdings, including our interests in Koor
Insurance Agency, Koor Finance, Contahal, Merhav, the Switching Division of
Tadiran
13
Telecommunications, Tekem, Tadiran Information Systems, Koor Metals, Phoenicia,
Yonah, Tadiran Com, Tadiran Telematics, Mashav, Merkavim Metal Works Ltd.,
Middle East Tube Co. Ltd. and the Q Group PLC. We also sold real estate assets
of Koor Properties for approximately NIS 47 million in 2001 and real estate
assets of Tadiran for approximately NIS 273 million in March 2002.
During 2003, we and our portfolio companies continued to take active
measures to adapt to the changing business climate and to continue to
implement our strategic plan. These measures include bringing in new strategic
partners; identifying new market opportunities; focusing on core competencies,
while divesting non-core assets; and streamlining group operations. During
2003, our portfolio companies took the following steps in implementing our
strategic plan:
o MA Industries built on its strategy for generating growth through
acquisitions and in-house development, while strengthening its
presence in European and North American markets. MA Industries
benefited from its acquisition in 2002 of 11 high margin products and
the licenses and distribution rights related to these products from
Bayer CropScience and Feinchemie Schwebda. In April 2003, a subsidiary
of MA Industries acquired the outstanding shares of Nutriblend Ltd.,
an English company engaged in the blending and marketing of vitamins,
for approximately 3 million euros.
o ECI continued to implement its strategic plan, which included:
focusing on its core optical networks, bandwidth management and
broadband access businesses; exiting non-core activities; streamlining
operations while improving the organizational structure; and
strengthening its financial position. As part of this plan, in April
2003, ECI sold most of the assets and liabilities of Innowave ECI
Wireless Systems Ltd., a subsidiary of ECI, to Alvarion Ltd. In May
2004, ECI distributed the majority of its shares in ECtel Ltd., or
ECtel, to its shareholders, reducing its holdings of ECtel's shares
from approximately 58.4% to approximately 16.0%. As a result of our
shareholdings in ECI, following this distribution, we hold a direct
12.9% interest in ECtel.
o Telrad completed a major reorganization plan initiated in 2002, which
included reducing expenses through staff reduction; merger of
businesses; and rescheduling of bank debt. Telrad also leveraged its
customer relationships and signed new agreements to supply products to
countries in Africa, South America and Asia Pacific. In 2003, Telrad
returned to profitability and recorded a significant improvement in
its balance sheet.
o The Elisra Group countered challenging international defense markets
and domestic budget cuts by initiating a comprehensive aggressive
sales and marketing effort. Elisra expanded of its international
customer base, and broadened its geographic sales mix.
o Koor CVC continued to work closely with its portfolio companies to
seek out new markets and attract new investors. Koor CVC further
prioritized its cash
14
commitments by selling most of its venture capital funds portfolio in
2003, freeing resources for direct investments in promising companies
within its portfolio. Our Telecommunication Equipment Business
Our telecommunication equipment business is conducted primarily
through ECI and Telrad.
Our telecommunication equipment business generated NIS 796 million
and NIS 814 million of sales in 2003 and 2002, respectively, representing
10.4% and 11.5%, respectively, of our consolidated net sales for such years.
International sales accounted for 90.7% and 89.2% of our telecommunication
equipment business' sales for 2003 and 2002, respectively.
Excluding sales of ECI, which are not consolidated in our results of
operations, a majority of the sales made by our telecommunication equipment
business are made to one principal customer: Nortel. In 2003 and 2002, sales
to Nortel represented 55% and 52%, respectively, of our telecommunication
equipment business' sales. As described below under "Relationship with
Nortel," in May 2000, we, Telrad and Nortel entered into an agreement to
establish a new company under the name Nortel Networks Israel (Sales and
Marketing) Ltd., or Nortel Israel. Nortel Israel acquired and operates
Telrad's public switching and TX1 Systems businesses, which currently comprise
the majority of Telrad's sales to Nortel. Prior to October 2003, we and Telrad
held a 28% stake in Nortel Israel; however, in October 2003, we and Telrad
exercised a put option and sold our entire holdings in Nortel Israel to
Nortel. As a result, as of December 31, 2003, we no longer held any shares of
Nortel Israel.
The principal companies in our telecommunication equipment business
are:
Percentage
Of Equity
Ownership Principal Products and Services
--------- ---------------------------------------
ECI Telecom Ltd. 30.61% Telecommunication equipment and systems
Telrad Networks Ltd. 100.00% Telecommunication equipment and systems
ECI Telecom Ltd. (ECI)
ECI is a provider of network and access solutions for digital
communications networks. ECI designs, develops, manufactures, markets and
supports digital telecommunications solutions for evolving new services and
converging networks. ECI's products and platforms are designed to create and
manage bandwidth, maximize revenues for network operators, reduce operating
expenses, expand capacity, improve performance and enable new
revenue-producing services. In doing so, they enhance the capabilities of
existing networks to support voice, data, video, multimedia services. ECI's
equipment supports traffic on more than 500 service networks in over 145
countries.
In December 2003, ECI entered into a strategic relationship agreement
with Nortel Networks. Under the agreement, ECI and Nortel agreed to deliver
broadband access networking solutions that will address the increasing global
demand for multimedia and triple play services (voice, video and data).
15
Since the beginning of 2003, ECI's core businesses have been operated
primarily through the following two divisions, although it has certain other
operations and interests:
o The Broadband Access Division (formerly known as the
Inovia(R)Broadband Access Division), which develops, manufactures,
markets and sells innovative access products that enable
telecommunications service providers to mass deploy broadband networks
and offer a variety of new advanced services. The division's primary
product is the Hi-FOCuS, a Multi-Service Access Gateway solution based
on a variety of transmission technologies and networking protocols.
Facilitating the demand for bandwidth and advanced services, Hi-FOCuS
supports interactive TV, or iTV, over digital subscriber lines, or
DSL; games over DSL; video broadcast; video on demand and teleworking
(including remote local area network, or LAN, access and video
conferencing); small office/home office, or SOHO, applications;
transmission of digital video over copper lines; and voice over DSL,
among other residential subscriber applications. The Broadband Access
Division's customers are principally incumbent local exchange carriers
and large operators and include Deutsche Telekom AG and France
Telecom.
o The Optical Networks Division (formerly known as the
Lightscape(TM)Optical Networks Division and includes the former Enavis
division), which provides telecommunications service providers with
metropolitan and regional intelligent and flexible multi-service
optical transmission solutions. Its products enable end-to-end
transport of voice and data circuits from the user's premises to
high-capacity optical backbones, support the process of streamlining
the use of optical networks and allow telecommunications service
providers to offer additional services with greater efficiency. Its
primary product is the XDM, a multi-service provisioning platform, or
MSPP. The XDM integrates, within a single shelf, the functions of
dense wavelength division multiplexing, or DWDM, a method of
multiplexing signals by transmitting them at different wavelengths
through the same optic fiber, intelligent optical networking
multiplexer, broadband, narrowband, wideband and digital cross
connects, IP L2 switching and asynchronous transport mode, or ATM,
switching as well as streaming support and synchronous digital
hierarchy, or SDH, add-drop multiplexers. This all-in-one optical
platform enables a significant savings in network deployment costs.
In addition, ECI operates in the areas of fraud prevention solutions
and in next generation telephony solutions via its minority interests in the
following companies:
o Veraz Networks Inc., or Veraz, a private company in which ECI holds a
43% interest, that designs, markets and sells carrier-class packet
telephony solutions. These solutions help telecommunications service
providers in establishing the carrier-class new voice infrastructure
necessary to provide toll quality, large scale, international and
national, IP telephony services (including voice, fax and voice band
data traffic). Its holding in Veraz enables us to maintain a foothold
in an important strategic market, while at the same time focusing
internal resources on our core businesses. In addition to its packet
telephony products, Veraz also operates in the DCME market of
bandwidth optimization solutions, with more than 11,000 traffic
compression systems
16
(DTXTM-600 and DTX-360) installed in 140 countries. 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., ECI invested $10
million in the new entity.
o ECtel Ltd., or ECtel (Nasdaq: ECTX), a publicly traded company in
which ECI held a 58.4% interest as of December 31, 2003. On May 10,
2004, ECI distributed the majority of its shares in ECtel to its
shareholders, including us, reducing its holdings in ECtel to
approximately 16.0% and resulting in our direct ownership of a
approximately 12.9% interest in ECtel. ECtel is a developer and global
provider of revenue assurance solutions for circuit-switched and
packet-switched wireline and wireless networks. Its revenue assurance
solutions equip telecommunications service providers with
comprehensive data gathering and analysis capabilities to improve
their operational efficiency and profitability by detecting and
preventing fraud, monitoring the quality of service over their
networks and supporting billing assurance/mediation functions or
interconnection arrangements. ECtel experienced a sharp decline in
revenues in 2003 and, in order to focus on its telecom business, sold
its government surveillance business to Verint Systems Inc. (Nasdaq:
VRNT) for $35.0 million in cash. The transaction was consummated on
March 31, 2004.
ECI's other operations include the remaining activities of the NGTS
manufacturing unit, following the transfer of the principal NGTS operations to
Veraz, primarily focus on the manufacturing of DCME systems for sale to Veraz,
which has exclusive, world-wide distribution rights for these systems.
In April 2003, ECI completed the sale to Alvarion Ltd. of the
operations of InnoWave ECI Wireless Systems Ltd. InnoWave provided fixed
wireless access solutions for the local subscriber loop. The transaction was
structured as a purchase of assets and liabilities. The value of the
transaction was approximately $20 million consisting of the cash consideration
paid to ECI by Alvarion of $9.1 million (of which $0.6 million was paid to
certain key employees of InnoWave being transferred to Alvarion) and the cash
balances of InnoWave at the date of closing, which were withdrawn by ECI. In
addition, ECI received warrants to acquire 200,000 shares in Alvarion over a
period of 5 years, at an exercise price of $3 per share. ECI had previously,
during 2002, announced its intention to sell the operations of InnoWave and
accordingly InnoWave's activities had been reclassified by ECI as discontinued
operations.
Under U.S. GAAP, for the year ended December 31, 2003, ECI reported
revenues of $421 million, a gross profit of $165 million, a loss from
continuing operations of $66 million and a net loss of $71 million. Under
Israeli GAAP, ECI's net loss for the year ended December 31, 2003 was $81
million. ECI is included in our financial statements on an equity basis only.
As of December 31, 2003, our equity interest in ECI was approximately 30.61%.
Some of ECI's current and future liabilities to banks are secured by
certain liens on certain assets and rights, as well as an unlimited negative
pledge on ECI's assets. As a condition
17
for further bank credit and in accordance with the terms of the negative
pledge, ECI undertook to comply with a certain financial ratios. In the end of
2002 and the beginning of 2003, ECI failed to comply with some of the financial
ratios agreed upon in a facility agreement with several banks. During the
second quarter of 2003, under the terms of an agreement signed with these
banks, ECI repaid debt of approximately $123 million, and new financial ratios
were prescribed, with which ECI is in compliance. Accordingly, the liabilities
to banks were included in long-term debt on ECI's balance sheet as of December
31, 2003.
For a discussion of material legal proceedings relating to ECI,
please see "Item 8, Financial Information - Legal Proceedings."
Telrad Networks Ltd. (Telrad)
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.
Telrad's operations are divided into the following four independent
market oriented divisions:
o Telrad Networks Solutions, or TNS, is the division responsible for
research and development as well as sales and support for Nortel
Networks in wireline, wireless and enterprise areaso . TNS develops
carrier-grade quality products with a rapid time-to-market deployment.
o Telrad Optical Networks, or TON, is the division responsible for
research and development as well as sales and support for Nortel
Networks in Optical Networks. TON develops carrier-grade quality
products with a rapid time-to-market deployment.
o Public Network Integrator, or PNI, provides end-to-end solutions for
telecom and service providers. PNI specializes in Telrad and Nortel
Networks technology and its operations include the planning, design
and development of switching products, project management and delivery
of turnkey telecommunications projects.
o Advanced Operations Solutions, or AOS, provides advanced operations
solutions and services, including NPI management, System House
Services and complete Supply Chain Management, or SCM, for companies.
o Start-ups and new subsidiaries offering various products and services,
which have been established as independent subsidiaries of Telrad.
These companies offer next generation solutions in the telecom
industry. Products include next generation integrated broadband access
solutions, feature rich telephony services over different networks,
and digital and Voice Over IP telecom solutions and applications.
18
Reorganization plans
Beginning in November 1998, Telrad's board of directors approved a
series of reorganization plans, including reorganizing Telrad's operations
into independent market-oriented divisions. The reorganization plan provided
for the release of employees which was completed without disturbances to labor
relations mainly through voluntary resignations and early retirement. In
connection with this program, Telrad wrote-off expenses for each year since
1998 and its work force has been reduced by more than 1,000 employees.
In 2002, Telrad's board of directors approved an additional
reorganization plan that included the additional release of employees which
again was accomplished through voluntary resignations and early retirements.
For 2002, 2001 and 2000, our financial statements include an expense of NIS
107 million, NIS 90 million and NIS 273 million, respectively, recorded under
the item "Other income (expenses), net. During 2003, Telrad completed the
reorganization as planned and approved by the board in 2002 and as a result,
Telrad reduced its workforce to be in line with its current sales volume and
requirements.
As part of Telrad's reorganization plan, in 1999 and 2000, Telrad
carried out the spin-off of several of its technology and development
divisions and formed them into separate start-up subsidiary companies, in
order to provide Telrad with new sources of proprietary technology-based
growth in the telecommunications fields.
Start-ups and new subsidiaries
During the period starting at the end of 1999 until mid-2000, Telrad
effected the spin-off and established several start-up companies.
Be Connected Ltd. Be Connected is a joint venture of Telrad Networks
Ltd. (87% share) and Cisco Systems Inc. (13%). Be Connected is involved in the
development and marketing of next generation integrated broadband access
solutions to support all types of services, including narrowband and
broadband, for the telecommunications market.
During 2000, Be Connected raised $15 million from Cisco Systems Inc.,
an international communications company, at a post-money value of $140
million.
During 2002, Be Connected concluded its initial commercial sales of
its products for a total of $2 million in revenues and during 2003, it also
generated $2 million in revenues from the sale of its products.
At the end of 2003, the board of directors of Be-Connected decided, due to the
company's difficult financial straits and inability to raise additional funds
for the continued development of its product, to sell its technology and IP to
another Israeli communications company in exchange for shares of that company,
which were transferred to Telrad in proportion to its ownership interest, while
at the same time making arrangements with that company for Telrad's continued
right and ability to market and sell this family of product as a part of its
overall telecommunications solutions which it offers to its customers. No
capital gain or loss was recorded as a result of this transaction.
19
Com-Match Ltd. Com-Match, a wholly-owned subsidiary of Telrad, is a
leading provider of Last-Mile over IP solutions for Telecom Operators, creator
of DUET Carrier Grade Voice over IP, or VoIP, Access Gateways. Com-Match is a
spin-off of Telrad Networks. The company's mission is to deliver carrier class
VoIP solutions enabling Multi-Service Operators and alternative carriers to
deliver reliable, high-quality and feature-rich telephony services over IP and
TDM networks.
The DUET family of products enables customers to seamlessly bridge
Legacy Public Switched Telephone Network, or PSTN, and Next Generation IP
networks via various alternative infrastructures, like Cable TV, xDSL, fixed
broadband wireless and more. The company's technology provides connectivity
and interoperability for Next Generation Access and Public Networks.
Com-Match's sales in 2003 and 2002 totaled $1.8 million and $2.0 million,
respectively.
Telrad Connegy Communications Inc. (Connegy) (formerly Telrad Tenecs
Ltd. (Tenecs)). In April 2001, Telrad effected a spin-off of its
"Digital-Keybox" line of products and established Tenecs, a developer and
manufacturer of advanced business communications solutions. Its main products
include the UNITe Family of Business Systems, and IP and LAN telephony
solutions, among them the advanced i.Picasso 6000 IP telephone, and the CNS
3200 Enhanced Hosted Communications Platform. The company provides enterprise
customers, carriers and others with the most comprehensive family of digital
and voice over IP telecommunication solutions and applications. The sale of
its products to the U.S. market is performed by its U.S. subsidiary, Telrad
Tenecs Inc.
On March 11, 2002, an agreement was signed between Telrad, Tenecs and
Congruency Inc., or Congruency, pursuant to which Tenecs merged with
Congruency, a company established in 1998 and which is engaged in the
development and manufacture of PABX telephony equipment, based on VOIP
technology. Following the closing of this transaction, Telrad held 52% of the
merged company, Telrad Connegy Communications Inc., or Connegy. In 2003 and
2002, Connegy's net sales were $21.0million and $24.7 million, respectively.
As part of its program to reduce costs, Telrad closed two of its
subsidiaries, Galaxtel and Aptonix, during 2001 and closed a third subsidiary,
Firebit, in 2002. In addition, in January 2001, Telrad sold Felix Telecom, its
subsidiary in Romania, for $1.8 million.
In the first quarter of 2004, Telrad purchased all of the IP assets
and the business activities of MediaGate Ltd., an Israeli company which
developed and sold its voice mail and unified messaging systems, for a
purchase price of $1 in cash and future royalty payments based on revenues
from future sales of these systems by Telrad until 2009. Telrad integrated
this business line into its PNI division.
Relationship with Nortel
In January 1995, Telrad entered into a cooperation agreement with
Nortel that enabled Telrad to market Nortel products in Israel and other
specified territories and to sell products developed by Telrad to Nortel. At
that time, Telrad held licenses to the know-how underlying the
20
digital switching and transmission systems utilized in its public and private
switches pursuant to agreements with Nortel.
In January 1997, Nortel exercised an option, granted in 1995, to
purchase 20% of Telrad's ordinary shares for $45 million. According to the
shareholders agreement, Nortel had a put option to sell its Telrad shares. In
January 1997, Telrad licensed the right to use certain existing and future
know-how from Nortel for a ten-year period, for which Telrad was
unconditionally required to pay Nortel NIS 61 million ($15 million).
In May 2000, we, Telrad and Nortel signed an agreement to establish
Nortel Israel. Nortel holds 72% of Nortel Israel, and we hold 28% together
with Telrad. Nortel Israel acquired from Telrad the sales, marketing and
support functions of its public switching and TX1 systems businesses and
Telrad's operations in these fields in Israel and in several export markets.
In addition, Nortel Israel represents all of Nortel's activities in Israel.
The transactions contemplated by the agreement closed on August 31, 2000 and
Telrad sold these businesses to Nortel Israel for approximately $90 million as
well as the value of the transferred assets. The business operations that
Telrad sold to Nortel Israel constituted about 40% of Telrad's business.
We invested approximately $5.6 million in the share capital of Nortel
Israel and we provided it with a shareholder's loan of $43 million bearing
interest at 6% per annum. In May 2003, Nortel Israel paid $50.4 million to
fully repay the loan. As consideration for early repayment of the loan, Koor
and Telrad waived part of the interest due on the loan.
In addition, we and Telrad were granted a put option to sell its
holdings in Nortel Israel to Nortel and in turn gave Nortel a call option to
buy Koor and Telrad's holdings in Nortel Israel. In October 2003, we and
Telrad exercised our put option and sold all of our shares in Nortel Israel to
Nortel for an aggregate purchase price of approximately $4 million. As a
result of this sale, we sustained a capital loss of approximately NIS 6.3
million.
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. Telrad and
Nortel are currently having discussions on unifying the agreements into one
master agreement which would apply to Telrad and Nortel worldwide.
Credit Risk Exposure
As part of the above mentioned agreement with Nortel, Telrad retained
the receivables from the related sales that typically include extended credit
terms to customers in countries that involve certain risks in light of their
political and economic conditions. These countries include Ethiopia, Papua New
Guinea, Myanmar, the Palestinian Authority, Chile, Bolivia and Georgia.
As of December 31, 2003 and 2002, Telrad's long-term credit risk
exposure from these agreements amounted to NIS 27 million and NIS 62 million,
respectively. During the first quarter of 2004, Telrad further reduced its
long-term credit risk exposure by collecting an additional NIS 18 million in
receivables.
21
Cost Reduction Plan
A major decline in the international communications industry began at
the end of the year 2000. Due to the decline, Nortel decided to reduce
significantly its purchases from Telrad.
As a result of the sharp decline in its sales, the management of
Telrad decided, at the beginning of 2001, and continued in 2002, to take
several steps to cut costs and minimize the affects of the telecom crisis. In
addition to the reorganization plan and retirement plans discussed above,
Telrad implemented cost reduction measures, including shutting down two
start-up subsidiaries and pausing all recruitment of new personnel, as well as
cutting costs in the areas of advertising, travel and exhibitions. This
process was completed in 2003.
Beginning in 2002, Telrad has not complied with some of the financial
ratios defined in a credit agreement with several banks. During 2002, Telrad
reached agreement in principle with the banks, although they have not yet
executed a definitive agreement, whereby the debt balance was to be
rescheduled, short-term credits were to be converted into long-term loans and
loans were to be repaid. The balance of Telrad's debt was stated in the
financial statements as at December 31, 2002 in accordance with this agreement
in principle with banks. Telrad intends to repay the balance of the debt
during 2004. Therefore, this debt was classified as current liabilities in the
financial statements as at December 31, 2003.
Other Telecommunication Equipment Business
In addition to ECI and Telrad, a small portion of our
telecommunication equipment business is conducted by Microwave Networks Inc.,
or MNI, in the United States. MNI is a consolidated subsidiary of Tadiran
Electronics Industries Inc., or TEI, our wholly-owned subsidiary. For the
years ended Decmeber 31, 2003 and 2002, MNI had sales of approximately $28.6
million (NIS 125 million) and $41.7 million (NIS 183 million), respectively.
Our Defense Electronics Business
Our defense electronics business is conducted through the Elisra
Defense Group, or Elisra Group, which, since 2000, combines all of our defense
electronics operations. The Elisra Group includes Elisra Electronic Systems
Ltd., or Elisra, Tadiran Electronic Systems Ltd., or Tadiran Electronic, and
Tadiran Spectralink Ltd., or Tadiran Spectralink. The Elisra Group designs,
develops, manufactures, integrates and supports advanced system solutions for
air, sea and land deployment in over 25 countries. Until November 2003, the
Elisa Group also included Elisra's interest in B.V.R Systems (1998) Ltd., or
BVR, a publicly traded corporation; however, Elisra sold all its shares in BVR
in November 2003.
For the years ended December 31, 2003 and 2002, our defense
electronics business had sales of NIS 1,286 million and NIS 1,687 million,
respectively, representing 16.7% and 23.8%, respectively, of our consolidated
net sales during these periods. In 2003 and 2002, the majority of sales of our
defense electronic business were made to defense-related customers.
In 2003, the Elisra Group's sales to the Israeli Ministry of Defense,
or IMDF represented approximately 23% of the Elisra Group's sales.
22
The principal companies in our defense electronics business are:
Percentage
Of Equity
Ownership Principal Products and Services
---------- --------------------------------
Elisra Electronic Systems Ltd. 70.0 Holding Company; Electronic
warfare, equipment and systems
Tadiran Electronic Systems Ltd. 100.0(1) Command, control, communications
and intelligence systems for
defense applications
Tadiran Spectralink Ltd. 100.0(1) Advanced data and video links
for military use
(1) Indicates the percentage of direct ownership by Elisra
Electronic Systems Ltd.
Elisra Group
The Elisra Defense Group, managed and controlled by Elisra,
principally is involved in the design, manufacture, distribution and support
of a wide range of advanced electronic systems, primarily for the modern
military. The Elisra Group's companies are ranked among the most sophisticated
defense suppliers of Electronic Warfare systems, or EW, Command, Control,
Communication and Computing Intelligence systems, or C4I, and training
simulators. The Elisra Group's companies are suppliers to the Israel Defense
Forces and are deployed by modern armed forces around the world. The Elisra
Group's companies focus on the development of new and innovative technologies
for a large range of platforms with a professional staff of experienced
engineers, software programmers and highly skilled technicians.
As of December 31, 2003, our defense electronics business had an
aggregate backlog of confirmed orders of NIS 2.2 billion ($513 million)
compared to NIS 3.0 billion ($626 million) as of December 31, 2002.
Elisra Electronic Systems Ltd. (Elisra)
Elisra designs, develops and produces electronic warfare and
surveillance systems for military purposes, as well as a range of electronic
and microwave components for the commercial market. Elisra offers a
diversified range of combat-proven electronic warfare systems, or EW,
including radar warning systems, active countermeasure systems, comprehensive
self-protection systems, electronic intelligence systems, or ELINT, and
sophisticated communication links, complemented by extremely light-weight
components. Elisra also develops a wide range of active and passive microwave
components. Microwave and Radio Frequency, or RF, components are essential to
nearly all intricate electronic equipment, as well as microwave
telecommunication and satellite systems.
In July 2002, Koor and Elisra entered into an agreement with Elta, a
wholly-owned subsidiary of Israel Aircraft Industries, to sell to Elta 30% of
Elisra's shares for $100 million. In addition, Koor granted to Elta an option
to increase its holdings in Elisra by up to an additional 8% in consideration
of a maximum sum of approximately $26 million. This option expired unexercised
on December 31, 2003.
In addition, Koor and Elisra entered into an agreement with Elta to
set out the structure of Elisra's board of directors and its decision making
process, and impose certain limitations on the
23
sale of Elisra's shares. Elisra and Elta also signed a cooperation agreement
regarding an agreed upon basket of products. The agreement contemplates
potential partnerships in the areas of marketing and research and development.
In November 2002, after receipt of the required approvals, the transaction was
completed.
From time to time, when Elisra enters into contracts or receives
advances it is required to provide performance guarantees or payment
guarantees from creditworthy institutions. To secure these guarantees, which
were issued by several banks, and a credit line (which as of the balance sheet
date was drawn down only for the short-term), Elisra undertook to maintain
certain financial ratios. Elisra also agreed to terms that restrict the
furnishing of guarantees to third parties by creating new liens, and to
restrict the sale and transfer of assets. During 2003, Elisra did not comply
with some of theses financial ratios. Elisra negotiated new financial ratios
with these banks during the first quarter of 2004 and is currently in
compliance with these new financial ratios.
Tadiran Electronic Systems Ltd. (Tadiran Electronic)
Tadiran Electronic is engaged in providing solutions for a variety of
customers in the field of C4I, electronic warfare COMINT systems and spectrum
management and control systems.
An array of electronic hardware and computer software is incorporated
into the C4I systems, which enable the collection, processing, analysis and
display of large quantities of information to facilitate effective
dissemination and accelerate decision making for better Battle Management
capabilities.
Tadiran Electronic has developed a simulator for a Tactical Ballistic
Missile, or TBM, Defense Battle Management Center for the U.S. Ballistic
Missile Defense Organization, or BMDO, and the Israeli Ministry of Defense.
The simulator is currently operating and providing information for both
organizations.
In March 2001, a fire broke out at the plants of Tadiran Electronic
and Tadiran Spectralink, both of which are now wholly-owned by Elisra. The
management of these two companies estimate on the basis of, among other
things, the opinion of their legal advisers in this matter, that the indemnity
from the insurance companies would not be less than the book value of the
damaged property of approximately $35 million. During 2003, these two
companies filed a claim of $96 million to receive insurance payments for the
equipment, building, inventory and projects in progress damaged as a result of
the fire. As of December 31, 2003, we have received advances from the
insurance companies amounting to approximately $10 million. During the second
quarter of 2004, Tadiran Electronic and Tadiran Spectralink filed a motion
with the district court in Tel Aviv to issue a partial ruling of $33 million
(in addition to the $10 million in advances already paid by the insurance
company), supported by the admission by the insurance company and its
representatives of their liability deriving from the insurance event, while
the dispute focuses on the level of damages.
Tadiran Electronic is also a supplier of the Battle Management Center
of the Israeli Arrow Defense weapons system.
24
Tadiran Electronics' activities in the field of electronic warfare
systems involve the design, development and distribution of a broad range of
strategic and tactical electronic warfare systems for ground, naval and
airborne platforms. Passive electronic warfare systems analyze and display
incoming signals and weapons information, while active electronic warfare
systems render hostile communication ineffective through electronic
countermeasure techniques.
Based on electronic warfare technology, a new range of commercial
applications has evolved in the area of spectrum management control.
Integrated spectrum management and monitoring systems provide nationwide
solutions to various telecommunication administrations.
Tadiran Spectralink Ltd. (Tadiran Spectralink)
Tadiran Spectralink develops and manufactures data and video links
for a variety of applications, including unmanned aerial vehicles, guided
weapons and satellite systems for locating and rescuing downed pilots. Based
on these links, command and control systems for airborne and naval
applications are developed.
Our Agrochemicals Business
Our agrochemicals business is conducted primarily through the direct
and indirect subsidiaries of Makhteshim-Agan Industries Ltd., or MA
Industries. 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 pesticides, including acaricides, insecticides,
fungicides, herbicides as well as plant growth regulators. The company is also
engaged in the development, production and marketing of fine chemicals,
intermediates, specialty aroma chemicals, industrial chemicals, antioxidants
and nutraceuticals. For the years ended December 31, 2003 and 2002, our
agrochemicals business had sales of NIS 5,192 million ($1,186 million) and NIS
4,140 million ($945.5 million), respectively, representing 67.5% and 58.3%,
respectively, of our consolidated net sales during such periods. International
activities, primarily sales in Europe, North America and Latin America,
accounted for 92.6% and 90.6% of our agrochemicals business' sales in 2003 and
2002, respectively.
The principal companies in our agrochemicals business are:
Percentage
Of Equity
Ownership Principal Products and Services
------------- -------------------------------
Makhteshim-Agan Industries Ltd. 48.59 (1)(2) Holding Company
Makhteshim Chemical Works Ltd. 100.0 (3) Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd. 100.0 (3) Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A. 100.0 (3) Formulation and distribution of crop
protection chemicals
25
(1) The ordinary shares of MA Industries are traded on the Tel Aviv Stock
Exchange, or TASE.
(2) As a result of our sale of 27 million shares of MA Industries on January
14, 2004, our interest in MA Industries decreased to 41.29% and as a
result of the issuance of additional shares by MA Industries in June 2004
upon the conversion of convertible debentures, our interest in MA
Industries was further decreased to 39.9% as of June 30, 2004.
(3) Indicates the percentage of direct ownership by MA Industries.
MA Industries results were included in our consolidated financial
statements as of and for the year ended December 31, 2003 despite the decrease
in our ownership to below 50% since, in our management's opinion, given the
voting agreements we entered into with two other shareholders holding a total
of 3.87% of the voting rights in MA Industries as described below, we
continued to exercise effective control over MA Industries as of December 31,
2003.
The Agrochemicals Business Environment in 2003
The agrochemical industry has been undergoing both a structural
change and challenges in recent years, with initial signs of recovery in 2003.
Despite these initial signs of recovery, for the full year the world market
declined to approximately $24.6 billion, a decrease of approximately 1.6%
compared to 2002. The main factors affecting the agrochemicals market in 2003
were improved prices of agricultural commodities, good weather conditions in
North America and Asia, harsh weather conditions in Europe, increasing market
share of genetically-engineered seeds, the improving South American economy
(manly Brazil), and the strengthening of most currencies against the US
dollar. Although the growth in the market encompasses all geographical
regions, the most significant rise is in Western Europe, where market growth
was about 13.4% compared with last year. This was due almost entirely to the
strengthening euro and other European currencies against the dollar. The
weakening of the dollar against the various currencies in 2003 impacted
significantly on the size of the agrochemicals market in dollar terms.
Eliminating the effects of currency and inflation, the fluctuations in most
markets appear minor in real terms.
The agrochemicals market has become more concentrated since the
recent years' trend of mergers of the multinational companies. The
consolidation of the market continued in 2003, and at the end of 2003, Griffin
LLC was fully acquired by DuPont. Upon completion of the acquisition of
AventisCropScience, BayerCropScience became the leading corporation in the
industry.
At present, six large companies hold approximately 85% 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.
26
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 to approximately 65% as of December 31, 2003 and is expected to
reach approximately 70% of the agrochemical market by 2007. 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, licensing, 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.
The MA Group plans to develop, over the next several years additional
agrochemical products, including fungicides, insecticides, herbicides and
biotechnological products, based
27
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 new 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.
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. MA Group manufactures over 70 different active
ingredients, which are sold as technical grade materials and "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 MA Group accounted for
more than 10% of MA Industries' total sales in 2003 and 2002.
Foreign Activities
As part of our strategy to focus on our core businesses and increase
market penetration in the agrochemicals industry, we have continued to expand
our agrochemicals business abroad.
In December 1998, the MA Group acquired a 45% interest in Productos
Fitosanitarios Proficol El Carmen S.A., or Proficol, one of the leading
agrochemicals distribution companies in Colombia. In December 2000, the MA
Group acquired another 12.5% of Proficol (Colombia), achieving an aggregate
stake of 57.5%. MA Industries believe that Proficol constitutes a significant
anchor for the MA Group activities in the Paco-Andeau region (the northern
South American countries).
In the beginning of 1999, Milenia Particapacoes S.A., or Milenia, MA
Industries' majority-owned consolidated subsidiary in Brazil, established a
joint venture with Kasba S.A., a leading marketer of agricultural inputs
(including fertilizers, seeds and crop protection chemicals) in Paraguay.
In August 2000, MA Industries acquired the outstanding minority
interest (approximately 28.5%) in Milenia from its minority shareholders and,
thereby, obtained full ownership of Milenia. Pursuant to the acquisition
agreement, MA Industries paid approximately $22 million in cash and 12.4
million shares of MA Industries stock valued at $28 million, with respect to
8.9 million of which it granted a Put option to be exercised in January 2002,
as well as a future payment based on Milenia's profits in 2000 and 2001. In
December 2001, MA Industries negotiated and signed a supplementary agreement
with the minority shareholders in order to settle the continuing obligations
of MA industries under the original agreement. Pursuant to the supplementary
agreement, MA Industries purchased 5.9 million shares of its stock from
minority shareholders for approximately $15 million pursuant to an early
exercise of the Put option, with the remaining 3 million shares subject to the
Put option being waived by the minority shareholders. In addition, MA
Industries paid approximately $8.3 million to the minority
28
shareholders in cash in satisfaction of its payment obligations based on
Milenia's profits in 2000 and 2001. In August 2001, we sold 19,383,000 shares
of MA Industries for approximately NIS 181 million.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 Kitty Hawk Funding Corp., a United States corporation and an
affiliate of the Bank of America Group. The volume expected to be at the
disposal of the companies purchasing the accounts receivable is approximately
$150 million, 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 debts of customers of MA
Industries' South American subsidiaries were not sold under this securitization
transaction. As of December 31, 2003, MA industries received cash proceeds of
approximately $125 million from this securitization transaction.
In the fourth quarter of 2002, several of our wholly-owned foreign
and local subsidiaries signed a number of agreements with Bayer CropScience
AG, or Bayer, for the purchase of several of their businesses, licenses and
distribution rights for agrochemical products. The acquired businesses were
offered for sale by Bayer following a directive of the European Union
Commission, which made its approval for Bayer's acquisition of Aventis Crop
Science contingent upon the sale of several Bayer businesses, among them the
businesses acquired by MA Industries.
The acquisition of the products from Bayer constitutes an important
milestone in increasing MA Industries sales in low-risk regions such as
Europe, while expanding and enhancing its basket of products.
The agreements with Bayer include purchases of:
o Worldwide rights of the herbicide Goltix(R) (active ingredient:
Metamitron), intended mainly for sugar beet.
o Exclusive marketing and distribution rights in Germany and Belgium for
Herold(R), a mixture of Flufenacet and Diflufenican, a herbicide for
cereals, under patent until 2013.
o Exclusive marketing and distribution rights in Great Britain for
Baytan(R), a special mixture of Fuberidazole and Triadimenol, a
fungicide for the treatment of cereal seeds.
o Marketing and distribution rights in Germany for Folicur(R) (active
ingredient: Tebuconazole), one of the most effective fungicides for
cereals and for rapeseed.
o Marketing and distribution rights in Europe of the insecticide
Gusathion(R)(active ingredient: Azinphos Methyl).
29
o Exclusive marketing and distribution rights in Greece and Portugal for
the insecticide Thiodan(R)(active ingredient: Endosulfan).
o Marketing and distribution rights in Europe for Baythroid(R) (active
ingredient: Cyfluthrin), an insecticide from the pyrethroid family for
vegetables and field crops. The purchase includes mixtures with
Bayer's leading patented insecticide Imidacloprid.
o Exclusive marketing and distribution rights in Europe for Buldock(R)
(active ingredient: a-Cyfluthrin), an insecticide from the pyrethroid
family, for wheat, vines and rapeseed.
o Exclusive marketing and distribution rights in Europe for
Metasystox(R) (active ingredient: Oxydemeton-Methyl), an insecticide
for sucker pests, with a wide range of action for field crops,
orchards and vegetables.
o Marketing and distribution rights in Europe for Nemacur(R) (active
ingredient: Fenamiphos, a unique product in the group's portfolio in
vegetables, bananas, tobacco and flowers. The acquisition includes
mixtures with Imidacloprid.
o Worldwide marketing and distribution rights for Afalon(R) (active
ingredient: Linuron), an herbicide for potatoes and vegetables.
In addition, in 2002, MA Industries purchased from Syngenta the
herbicide Flurochloridone, for sunflowers, for which the main target market is
Western Europe.
The purchase of the new products is an additional stage in the
implementation of MA Industries business strategy to expand and bolster its
basket of products, while expanding activities in low-risk regions. As part of
this strategy, MA Industries acquired from Bayer the products described above,
and acquired, in April 2002 the German distribution company Feinchemie
Schwebda GmbH., or Feinchemie, which distributes mainly generic agrochemical
products. Feinchemie sales in 2001 were approximately 45 million euro, and it
is the ninth-largest company in Germany in crop protection, with sales mostly
in Germany and France. Feinchemie is well established in the herbicide market,
particularly for sugar beet. By acquiring this company, MA Industries expects
to be able to expand its operations into additional niches, by integrating the
newly acquired products into its marketing array.
In April 2003, a subsidiary of MA Industries acquired the outstanding
shares of Nutriblend Ltd., an English company engaged in the blending and
marketing of vitamins for approximately 3 million euros.
In June 2003, we sold 9,357,000 shares of MA Industries on the Tel
Aviv Stock Exchange, for total proceeds of approximately NIS 104 million, at a
capital gain of approximately NIS 17 million. As a result of the sale, our
ownership percentage in MA Industries declined to 49.79%. Following this
transaction, in the opinion of our management, based on its discussions with
legal counsel, in view of the fact that our shareholding percentage is about
one half of the voting rights in MA Industries and taking into account the
broad dispersal of the voting rights among the other shareholders, we
continued to be the controlling shareholder in MA Industries.
30
In August 2003, we signed non-temporary voting agreements with two
other shareholders in MA Industries that hold together 3.87% of the voting
rights in MA Industries, whereby these shareholders undertook to vote together
with us at any general meeting of shareholders of MA Industries. As a result
of this arrangement, we concluded that, as of December 31, 2003, we continued
to effectively control MA industries despite our ownership of less than 50% of
its voting shares and, accordingly, we to included the financial statements of
MA Industries in our consolidated financial statements as of and for the year
ended December 31, 2003. However, as discussed below, following our sale of
27,000,000 shares of MA Industries in January 2004, these voting agreements
were terminated in accordance with their terms, as a result of the decrease in
our ownership percentage.
As of December 31, 2003, our shareholding percentage in MA Industries
was 48.59%.
Recent Developments
On January 14, 2004, we sold 27,000,000 shares of MA Industries in
consideration for approximately NIS 418.5 million. The sale generated a
capital gain, before tax, of NIS 162 million in the first quarter of 2004, and
our percentage ownership in MA Industries decreased to 41.29%. As a result of
the sale, and in view of the proven utilization of carryforward losses, a tax
asset of NIS 59 million was recorded in 2003.
Following this transaction, the voting agreements we entered into
with two other MA Industries shareholders in August 2003 were terminated in
accordance with their terms due to the decrease in our ownership percentage in
MA Industries.
As a result of this transaction, and following the issuance by MA
Industries of additional shares upon the conversion of convertible securities
issued by MA Industries, including the convertible debentures described below,
our ownership percentage in MA Industries decreased to 39.9% as of June 30,
2004.
In the opinion of our management, the broad dispersal of voting
rights among the other shareholders of MA Industries, the low level of
shareholding by the other shareholders of MA Industries, the low likelihood of
the creation of a block of votes opposing our interests at shareholder
meetings and past experience related to the attendance at shareholder
meetings, as well as the voting percentages and opposition at the meetings
indicate that the economic substance that stood and continues to stand as the
basis of the relationship between us and MA Industries immediately before and
after the transactions described above demonstrates our effective control of
MA Industries, as measured by our ability to determine the financial and
operational policies of MA Industries. Therefore, as long as economic
circumstances that negate our ability to exercise effective control are not
created, MA Industries' financial statements continue to be included in our
consolidated financial statements. However, under U.S. GAAP, MA Industries'
financial statements will not be included in our consolidated financial
statements in 2004.
In March 2004, MA Industries issued non-marketable convertible
debentures in a private placement to institutional investors in the amount of
$145 million par value, in consideration for their par value. Under the terms
of the placement, the underwriters were given an option for an
31
additional placement of $5 million par value debentures at identical terms,
which option was fully exercised in April 2004. The debentures are for a 7-year
period and bear annual interest at the rate of 1.75%, to be paid annually, in
the month of March. The debentures may be converted into ordinary shares of the
company, of NIS 1.00 par value each, at a conversion rate of NIS 20.5 par
value, according to a fixed exchange rate of NIS 4.514 per $1.00. The ordinary
shares to be issued upon conversion of the debentures will be listed for
trading on the Tel Aviv Stock Exchange. On March 22, 2007, the holders will
have the right, by serving prior written notice to MA Industries (between 30
and 60 days prior to March 22, 2007), to demand redemption of the debentures
(principal and interest balance at such date). MA Industries will have the
right to force the conversion of the debentures, beginning March 22, 2007, as
long as the average share price of MA Industries in the period of 20 business
days preceding the notice of forced conversion, will be more than 30% higher
than the conversion price of the debentures.
Our Venture Capital Business
As part of our strategic plan, we are exploring new investment
opportunities in high growth potential businesses located in Israel and around
the world in the fields of telecommunications and wireless, semiconductors,
enterprise software, biotechnology and life sciences.
In January 2000, we and a wholly-owned subsidiary established a
registered partnership called "Koor Corporate Venture Capital," or Koor CVC,
within which we are concentrating our investment activities in venture capital
funds and in high-tech companies with growth potential. The action was taken
to implement our strategic decision to increase our investments in those
areas.
Within this context, Koor CVC, as a limited partner, committed to
invest up to a total of $73 million in, a number of external venture capital
funds. As a result of the reduction in the size of one of the funds, this
commitment declined to approximately $68 million in 2002. In June 2003, Koor
CVC sold most of its commitment to its portfolio venture capital funds to a
secondary venture capital fund. As a result of this sale, Koor CVC's future
commitment to invest in these venture capital funds was reduced by $22 million
to $14 million. As of December 31, 2003, Koor CVC's commitment to invest in
start-up companies and venture capital funds further declined to approximately
$9 million. This amount may be drawn upon by the funds at any time over the
next 1-5 years, based upon their needs.
Since January 2000, Koor CVC also signed investment agreements with
various start-up companies. These agreements included commitments to make both
new investments and follow on investments in portfolio companies. During 2003,
Koor CVC transferred approximately $4 million in follow-on investments in its
portfolio start-up companies and its portfolio venture capital funds.
During 2003, Koor CVC recorded $16 million of provisions for the
decline in value of several of its portfolio companies. These provisions were
as a result of depreciation in value for some of the companies.
32
As of December 31, 2003, we had invested, through Koor CVC,
approximately $132 million in the start-up companies and venture capital funds
in Koor CVC's portfolio, not including Koor CVC's initial investment in Scopus
Network Technologies (formerly Tadiran Scopus Ltd.), in which Koor CVC holds a
27% interest on a fully-diluted basis, which was acquired from Tadiran Ltd.
Our Other Businesses
We have an interest in several service industries, mainly tourism,
real estate, aviation and trading. In previous years, our "other businesses"
segment also included construction and infrastructures, electrical appliances,
software, food, consumer products and metal products, as well as the
production of batteries.
The principal companies in our other businesses are:
Percentage
Of Equity
Ownership Principal Products and Services
---------- -------------------------------
Sheraton Moriah (Israel) Ltd. 55.0 Hotel chain
Knafaim-Arkia Holdings Ltd. 28.3(1) Aviation and tourism services
Koor Properties Ltd. 100.0 Real estate
Koor Trade Ltd. 100.0 International trade
(1) Not consolidated in our financial statements and not included in our
business data. The ordinary shares of Knafaim are traded on the TASE.
Tourism
Our interests in Israel's tourism industry include ownership and
management of hotels and resorts, and other tourism-related services, such as
airlines. For the years ended December 31, 2003 and 2002, our tourism business
had sales of NIS 309 million ($71 million) and NIS 355 million ($81 million),
respectively.
Sheraton Moriah (Israel) Ltd. (Sheraton Moriah)
On January 24, 1999, we and Sheraton International Inc. won a public
tender for the purchase of a 100% interest in Sheraton Moriah. On April 12,
1999, the transaction was completed based on a value of NIS 283 million ($63.5
million). In October 1999, we completed the sale of a 20% interest in Sheraton
Moriah to a subsidiary of Bank Hapoalim. Currently, we have a 55% interest in
Sheraton Moriah.
On December 30, 1999, we merged our other hotel operations, including
our interest in Herod's Hotel in Eilat, into the Sheraton Moriah network.
The Sheraton Moriah hotel network consists of 2,258 rooms (1,771
under 100% ownership) in 8 owned or leased hotels in major tourist
destinations in Israel, operating under the following brand names: Sheraton
(six hotels), Luxury Collection (one hotel) and Sheraton Four Points (one
hotel).
33
Due the escalation of violence in Israel since October 2000, there
has been a significant decrease in incoming tourism to Israel, which has
caused a decrease in occupancy rates and revenues and the impairment of
operating results. As a result of the environment, Sheraton Moriah's
management implemented a series of measures to increase Sheraton Moriah's
position in the local market, while at the same time, taking active steps to
reduce its expenses. These steps included reducing the impact of troubled
ventures through sale or short-term lease, renegotiating and reducing the rent
on leased hotels, downsizing the staff, reducing vacation days, implementing a
voluntary reduction in salary, outsourcing several departments implementing
chain-wide purchasing agreements and introducing procedures to control energy
expenses due to rise as a result of a rise in electricity rates.
Knafaim-Arkia Holdings Ltd. (Knafaim)
We hold a 28.3% interest in Knafaim, which was incorporated in 1980.
Knafaim owns a variety of businesses in the travel and tourism industry,
including Arkia Israeli Airlines Ltd. (75%), Israel's largest domestic
airline. Arkia also purchases and leases back aircraft and operates charter
flights to Europe. Knafaim also holds other companies that supply various
tourism services, both domestically and internationally. During 2002, Knafaim
continued to enhance its position in the aircraft leasing industry by
acquiring, and leasing back, 9 aircraft. The contracts, signed with American
Airlines and Delta Airlines, are valued at $220 million, over the entire
lease. Knafaim has 10 leaseback agreements with Air Canada leasing them 10 of
its 12 Boeing 737-200 aircraft. The lease period ends December 31, 2005;
however, in September 2003, Knafaim gave Air Canada an early termination
option for the leases, exercisable in stages, starting September 30, 2004. In
May 2004, Air Canada notified Knafaim of its intent to exercise its right to
terminate the lease on two aircrafts in September 2004. Knafaim's Management
believes that it is probable that Air Canada will exercise its right for an
early termination of the lease on the remaining aircraft, by the end of 2004.
During 2003 and the first half of 2004, Knafaim acquired shares and
options of El Al Israel Airlines Ltd., or El Al, which was majority-owned by
the Israeli government. As of December 31 2003, Knafaim was not an interested
party in El-Al as it held less than 5% of El-Al's issued share capital.
However, at that date, it held options and had entered into voting agreements
that would enable Knafaim in the future to attain control of approximately
52.8% of the voting rights in El-Al on a fully diluted basis.
In January 2004, Knafaim approached the Israeli government to obtain
its consent and approval to increase its holdings to more than 5% of El Al's
share. In addition, Knafaim filed a merger notice on its holdings in El Al for
the approval of the Commissioner of Restrictive Trade Practices.
In March 2004, the board of directors of Knafaim resolved to exercise
some of the options, the exercise of which could raise Knafaim's shareholding
in El Al's issued share capital to 25.1%, subject to the required regulatory
approvals detailed above.
In order to finance the exercise of the options to purchase shares of
El Al, in March 2004, Knafaim issued, through a private placement, debentures
and options to purchase its shares for
34
total proceeds of approximately NIS 135 million. If all of these options to
purchase shares of Knafaim are exercised, our equity stake in Knafaim will be
reduced to 25.04%.
Following the exercise of the options that had an exercise date of no
later than June 3, 2004, Knafaim holds approximately 22% of the issued share
capital of El-Al and controls approximately 24.9% of the voting rights in El
Al. On a fully diluted basis, if Knafaim were to exercise all its remaining
options, its holdings could reach approximately 46.9% of El Al's share capital
with control of approximately 52.8% of the voting rights. To date, the total
cost of Knafaim's investment in El Al, including the purchases of shares and
options and the exercise of options, amounts to $44 million.
As a result of the transactions described above, the Israeli
government's holdings in El-Al have been reduced to 49.5%.
Histour Eltiv Ltd. (Histour)
On February 21, 2000, we completed the transfer of our holdings (51%)
in Histour which provides tourist services in Israel for the release of our
guarantees of the liabilities of Histour. In addition, we invested approximate
NIS 17 million in Histour in exchange for preferred shares in Histour. In May
2002, we sold all our preferred shares in Histour for approximately NIS 2
million.
Real Estate
Tadiran's Real Estate
In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. 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.
The remaining balance of the real estate assets we received from
Tadiran, in the amount of NIS 43 million, was recorded under "Assets
designated for sale" in our consolidated balance sheet as at December 31,
2003.
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, 2003, Koor
Properties owned directly and indirectly an aggregate of approximately 62
thousand square meters of real property in different stages of development.
Most of the land is commercially developed.
During 2001, Koor Properties, through a consolidated subsidiary, sold
a portion of its real estate assets for NIS 51 million (of which approximately
NIS 34 million was received in 2002). We did not record any profit or loss
from the sale.
35
During 2003, Koor Properties, through another consolidated
subsidiary, sold most of its remaining real estate assets for NIS 10 million.
We recorded a loss of NIS 1.3 million from this sale.
For the year ended December 31, 2003, the rental income related to
Koor Properties was NIS 0.9 million.
Trade
Koor Trade Ltd. (Koor Trade)
Koor Trade, our wholly-owned subsidiary, 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. For the years ended December 31, 2003 and 2002,
Koor Trade had sales of NIS 96 million and NIS 82 million, respectively. Koor
Trade owns a 49% equity interest in Balton C.P limited, an English
international trading company, which is engaged in trading activities in seven
countries in Africa relating to agricultural, telecommunications,
electromechanical and air-conditioning equipment, construction and other
projects.
Construction and Infrastructures (Discontinued Operations)
In 2001, our construction and infrastructures business discontinued
operations due to the discontinuation of activity of USM, which was
consolidated in the construction and infrastructures business. In 2000, our
construction and infrastructure business included Middle East Tubes Co. Ltd.
and Mashav Enterprise and Development Ltd., both of which were sold during
2000. In 1999, this business included Merhav Building Materials and Ceramics
Ltd., which was sold during 1999.
United Steel Mills Ltd. (USM)
On November 5, 2001, the Haifa District Court gave a liquidation
order for USM, under which Adv. Ilan Shavit was appointed as special manager
until a permanent liquidator is appointed. Previously, from March 16, 2000 to
July 30, 2001, the group was managed under a stay of proceedings order, and
from August 1, 2001, under a temporary liquidation order.
Due to the liquidation proceeding, which commenced on August 1, 2001,
the consolidation of USM in our financial statements was terminated at the
beginning of the third quarter of 2001. In 2001, the operations of USM
constituted the entire activity in the construction and infrastructure
business in our operations, following the sale of two other companies in this
business. In our consolidated statement of operations, including the earnings
(loss) per share for the year ended December 31, 2001, operations in the
construction and infrastructure business are presented as a business whose
operations were discontinued. In addition, our consolidated statements of
operations for previous years were restated in order to reflect the
discontinuation of operations in this business.
During 2001, in the period when USM was managed under the stay of
proceedings order, we made available, ex gratia and without committing to it,
a special line of credit of
36
approximately NIS 30 million, which was given concurrently with credit
arrangements given ex gratia by the banks, and was intended to finance the
expenses relating to the workers' retirement arrangements, as well as the sale
of USM plants.
Since we were not a guarantor for the debts of USM to third parties,
we had no share in USM's loss for the first six months of 2001 beyond the
amount set forth above.
Mashav Enterprise and Development Ltd. (Mashav)
In January 2000, we sold our entire 50% holding in Mashav to Clal
Industries and Investments Ltd. for approximately NIS 944 million ($203
million). We also received 47.5% of the share capital of Mashal Alumina
Industries Ltd., or Mashal Alumina, a former subsidiary of Mashav, whose
business is the development of a process for producing Alumina, an aluminum
compound. Our net capital gain in respect to this transaction amounted to
approximately NIS 247 million (after the allocation of NIS 137 million
deferred taxes). Prior to the sale, on December 30, 1999, we received
dividends from Mashav in the amount of NIS 376 million. On May 24, 2004, the
board of directors of Mashal Alumina decided to discontinue the activities of
Mashal Alumina and to work to sell all its assets.
Other Divestitures
Koor Insurance Agency
In January 2001, we sold all our holdings in Koor Insurance Agency
for consideration of approximately NIS 5 million. The profit we received from
the transaction was approximately NIS 3 million.
Other Investments
Electric Fuel Corporation Ltd. (EFC)
On March 15, 2000, we entered into an agreement with Electric Fuel
Corporation Ltd., or EFC, a public company whose shares are traded on the
Nasdaq pursuant to which EFC would acquire Tadiran Batteries from Tadiran and
we would invest $10.5 million in EFC in exchange for an allotment of
approximately 14% of EFC common stock to us and Tadiran. In May 2000, the sale
of Tadiran Batteries was cancelled by mutual consent. In May 2000, we invested
$10 million in the share capital of EFC. On June 15, 2000, Tadiran entered
into an agreement to sell its interest in Tadiran Batteries to EFC for a total
consideration of approximately $33 million.
Our investment in EFC shares is presented in our consolidated balance
sheets as of December 31, 2003, as a current investment in listed securities
in the amount of approximately NIS 6.6 million, or approximately 1.9% of EFC's
share capital.
Nice-Systems Ltd. (Nice)
In 2000, we purchased 648,769 ordinary shares of Nice (or
approximately 5.0%) through open market purchases for approximately $10
million. This investment is presented in our consolidated balance sheets as of
December 31, 2002 as a current investment in listed securities
37
in the amount of approximately $5 million. In June 2003, we sold all of our
holdings in Nice through open market sales for consideration of approximately
$10 million.
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.
Research and Development
The companies in our telecommunication equipment, defense
electronics, venture capital investment and in the agrochemicals businesses
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 conducted through
our subsidiaries and affiliates, and 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 our competitive position.
The following table sets forth the percentage of gross research and
development expenditures incurred by our principal businesses in 2002 and 2003
as a percentage of the total sales of these businesses:
2002 2003
------- --------
Telecommunications Equipment 14.3% 10.2%
Defense Electronics 3.9% 5.5%
Agrochemicals 1.8% 1.7%
Our updated 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, defense electronics 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 our research and development
38
programs, we not only seek to develop new products, but also to apply newly
developed technologies to improve our existing products.
In each of the last three fiscal years, we received grants from the
Government of Israel through the Office of the Chief Scientist, or OCS, for
the development of certain products. We 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% to 150% of the grant
is repaid. We 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, we must continue to meet certain additional conditions,
including making specified investments in fixed assets. Should we fail to meet
such conditions in the future, we could be required to refund grants or tax
benefits, together with interest and inflation adjustments.
The following table shows, for each of the periods indicated, our
gross research and development expenses, the portion of such expenses that
were funded by the Israeli Government (primarily through the OCS) and the net
cost to us of our research and development expenses:
Year ended December 31,
------------------------------------------------------
2001 2002 2003 2003
---------- ----------- ------------ -----------
($ in
(Adjusted NIS in thousands) thousands)
Gross research and development expenses 291,073 257,101 219,391 50,100
Portion funded by the Israeli Government(1) 12,403 788 (1,952) (446)
Net research and development expenses 278,670 256,313 221,343 50,546
__________________
(1) Net of royalties.
Competition
In 2003, the majority of our sales from telecommunications equipment,
defense electronics 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 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
39
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.
The IMDF retains (and, in certain limited circumstances, certain of
our other 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, including other defense
contractors who may be our competitors. When the IMDF and, in certain limited
circumstances, certain of our other 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, the
IMDF and some of our other customers are entitled to receive royalties in
connection with the sale of products, the development of which was financed by
those entities. However, if the IMDF or one of our other 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 we manufacture and sell our 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 our
40
businesses, we are 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 we maintain our
principal production facilities, losses and damages relating to continuous
environmental pollution are currently uninsurable.
It is our policy to comply with environmental, health, product safety
and other safety requirements, and to provide workplaces for our employees
that are safe and environmentally sound, and that will not adversely affect
the health or environment of the communities in which we operate. From time to
time, our facilities may be subject to environmental compliance actions and
the resolution of such matters has in the past involved the establishment of
certain compliance programs. Israeli legislation enacted in 1997 amended
certain environmental laws by authorizing the relevant administrative and
regulatory agencies to impose sanctions on non-complying parties, including
issuing an order against any person that violates environmental laws to remove
the environmental hazard. In addition, these laws impose criminal liability on
the officers and directors of a corporation that violates
environmental-related laws, and increases the monetary sanctions that such
officers, directors and corporations may be ordered to pay as a result of such
violations. We have established worker safety programs and procedures in our
plants, which we believe are reasonable under the circumstances. We believe
that our experience relating to worker accidents is generally consistent with
industry-wide experience. Furthermore, we believe that we are not currently
subject to material liabilities for non-compliance with applicable
environmental, health and safety laws, although there is a risk that
legislation enacted in the future could create liabilities for past activities
undertaken in compliance with then-current laws or regulations. In addition,
we may be held liable for environmental damage of which we are not presently
aware.
In addition to the specific matters described below, at a number of
locations at which certain of the businesses have conducted manufacturing
operations for many years, it is possible that contamination may exist as a
result of on-site waste disposal, spills, use of wastewater treatment ponds,
or other historical practices. While in recent years, industrial solid wastes
generally have been disposed of at a central State-authorized disposal
facility in Ramat Hovav, this central facility was not available to Israeli
industry during earlier periods of our operations. It is unclear whether any
existing conditions on any property owned by us will require significant
redemption or cleanup in the future, and we cannot speculate about the timing
or potential costs associated with any such cleanup. It is possible, however,
that material expenditures could be required with respect to these past
practices.
In recent years, the operations of our businesses have become subject
to increasingly stringent legislation and regulation related to occupational
safety and health, product registration and environmental protection. Such
legislation and regulations are complex and constantly changing, and there can
be no assurance that such regulatory changes in the future will not require us
to make significant capital expenditures to modify, supplement or replace
equipment, or to change methods of disposal or discharge, or the manner in
which we manufacture products or operate our businesses. In Israel, in
particular, we anticipate that increasingly stringent requirements will result
in substantial expenditures, particularly for improvements of environmental
controls at older facilities. We have generally adopted, or intend to adopt in
our newer facilities, environmental control standards comparable to those set
by the German Technische Anleitung Luft air emission regulations. These
regulations set forth strict controls on
41
air emissions from industrial facilities. The Israeli government has looked to
these standards as a basis for upgrading its air pollution requirements and has
applied the standards to some, but not all, facilities in Israel.
We regularly incur capital expenditures and operating costs to comply
with various environmental, health and safety laws and regulations. The costs
related to environmental matters may increase significantly in the future if
the implementation of new environmental standards in Israel is more rapid or
stringent than currently anticipated by us, or if contemplated pollution
control measures do not achieve the desired results.
Agrochemical Industry
The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the agrochemicals
business, are regulated in most parts of the world, and require extensive
testing, quality control and compliance with registration procedures. The
strictest standards are applied in the United States, where the Environmental
Protection Agency, or EPA, is the leading regulator, and in Japan and Western
Europe. The granting of a registration involves consideration of health,
safety and environmental issues, as well as the performance and benefits of
the product. The registration for an agricultural chemical product in the U.S.
and in Western Europe is often subject to data call-in or process. Usually,
updating the registration necessitates the submission of additional data by
the MA Group, our agrochemical division. Re-registrations, which permit the
continued sales of pesticides for an additional period, are frequently granted
as a matter of course, subject to compliance during the term of the
registration period. While the MA Group is not aware of any immediate intent
to cancel any of its registrations, there can be no assurance that the MA
Group will not face a revocation process or encounter difficulties in renewing
the registrations for its products for additional periods.
From time to time, some of the MA Group's agrochemical products are
subject to legislative or other initiatives to curtail or regulate their use
due to environmental, health or safety concerns.
Registration expenditures for the MA Group in 2003 were $12 million
compared to $33 million in 2002. The registration expenditures decreased as
compared to the registration expenditures in 2002 as a result of MA
Industries' purchase of several business licenses and distribution rights for
agrochemical products from Bayer during 2002. The MA Group believes that its
registration expenditures in the future will increase, based on the stricter
standards that are expected to be applied in countries where the MA Group
sells its products and the likelihood that MA Group will purchase additional
products from competitor's on the agrochemical industry. As a result of the
foregoing developments and obligations, virtually all of the MA Group's
businesses in recent years have spent significant amounts on operation and
maintenance, as well as under capital programs to address increasingly
stringent requirements with respect to environmental, safety, and health
protection concerns.
Most of the manufacturing activities of the MA Group take place at
the two production facilities in Israel. The board of directors of MA
Industries appointed an Ecology Committee to receive regular reports from all
the subsidiaries where manufacturing takes place (Israel, Brazil,
42
Colombia, Greece and Spain). The subsidiaries control the environmental issues
pertinent to their particular products, which differ from site to site and from
country to country. The investment in meeting environmental standards amounted
to about $16 million in 2001, $19 million in 2002 and $23 million in 2003, and
it is estimated that the annual investment will be between $18 and $22 million
in the coming years, except for one-time expenditures as described below.
Makhteshim Agan's plants are located in the Ramat Hovav industrial
zone. The industrial council of Ramat Hovav has been required to take
intensive action to prevent odor nuisances, the source of which is the
evaporation ponds in the Ramat Hovav industrial zone.
The industrial wastes of the plants, after pre-treatment at the
plants, are transferred to the responsibility of and for further treatment by,
the industrial council. This arrangement has been in effect since the
industrial zone in Ramat Hovav was built at the end of the 1970s. In 1998-99
the council erected and operated a biological installation for industrial
wastes, to reduce the biological load of industrial wastes before piping them
to the evaporation ponds.
The industrial council was recently directed by the Ministry of the
Environment to make arrangements to end the piping of the industrial wastes to
the evaporation ponds, starting January 1, 2005. In addition, the Ministry of
the Environment stated that on that date, the quality of the wastes must meet
a minimum level of Total Organic Carbons, Carbon Oxygen Demand and Biological
Oxygen Demand, or TOC, COD and BOD, respectively. The industrial council
adopted a significant resolution in principle to change its operations so that
each plant in the industrial zone is required to treat its own wastes in order
to reduce the biological load and attain new required standards. Furthermore,
the plants are required to reduce the plant BOD levels by July 1, 2003.
Makhteshim Ramat Hovav makes preparations to treat its own wastes. In
order to comply with the TOC, COD and BOD standards, a biological treatment
installation will have to be built, as well as additional upstream
pre-treatment installations. MA Industries has hired the professional services
of entities of proven experience in the chemicals industry in Germany and
Switzerland, and believes it can achieve the correct technological solutions
for a one-time expense of between $30 million and $35 million and a multi-year
investment of approximately $20 million per year. The short-term requirements
for BOD are currently being clarified and the options discussed, between the
plant, the industrial council and the Ministry for the Environment.
During recent years, the MA Group has invested consistently and
regularly in all its plants, in Israel and abroad, to improve standards
relating to the quality of the environment, and its plants have been awarded
the President's Prize as well as commendations from the Ministry for the
Environment in the last few years. MA Industries is in compliance with
ISO-9001 and ISOP-14,001 (environment) and with OHSAS 18,000 (safety). The
production sites at Ramat Hovav and Ashdod in Israel have been operating in
compliance with ISO 14.001 since that standard was approved by the Israel
Institute of Standards in 1997. Compliance with the standard requires the
senior management to formulate an environment policy and develop a program for
its implementation. In addition, in 1998 the MA Group also adopted the German
standard Ta Luft (air pollution) at its Ramat Hovav and Ashdod sites.
43
In 1998, an agreement was signed between the Ramat Hovav Council, the
plants and university institutions, to finance research that would provide a
basis for recommendations as to the action to be taken to halt any further
pollution. In 2003, the research was concluded and its results were submitted
to MA Industries. As of December 31, 2003, MA Industries' management did not
expect a significant impact with respect to MA Industries from implementation
of the report's recommendations, and, therefore, no provision has been
included in the financial statements.
In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2002, there were measurements
at MA Industries' Ramat Hovav plant of chimney emissions of materials at
prohibited concentrations, and that such emissions created strong air
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 and 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. Therefore, the financial statements did not include a
provision in respect of the proceedings.
Defense and Government Contracts
Our businesses which sell products to military and governmental
markets are subject to various statutes, regulations and administrative rules
governing defense and government contracts and the manufacture and sale of
defense products in the United States, Israel and other countries throughout
the world.
Defense electronics subsidiaries export a number of military systems
and products in accordance with the military export policy of the State of
Israel. Current Israeli policy encourages exports to approved customers of
military systems and products similar to those manufactured by us, provided
that such exports do not run counter to Israeli Government policy, including
national security considerations. A permit is required to initiate a sale
proposal and an export license is necessary for the actual sale transaction.
To date, we have not encountered significant difficulties in obtaining or
retaining the necessary permits or licenses, but no assurance can be given
that we will continue to be able to obtain or retain such permits or licenses
or that one or more permits or licenses will not be revoked, or that
governmental policy with respect to military exports will not be altered.
Difficulties in obtaining or retaining such permits or licenses, if
encountered in the future, could have a material adverse effect upon our
business.
In addition, the revocation of a required permit or license, after
having been granted, would likely preclude us from fulfilling our contractual
obligations. In such a case, we might be unable to assert the defense of force
majeure (or a similar defense) relating to any resulting breach of contract
claim and might therefore be held liable for damages, or subject to other
penalties. Substantial damages arising from such a claim could have a material
adverse effect upon our results of operations and financial condition. In
addition, suspension or disbarment of us as a government contractor is among
the possible penalties that could be imposed for defaulting on a contractual
obligation due to the revocation of a license.
44
Joint Ventures, Subcontracting and Teaming Arrangements
Several of our military projects are conducted through joint
ventures, subcontracting and other "teaming" arrangements pursuant to which we
are responsible for a portion, but less than all, of a project. In certain
instances, we are not permitted to participate, or even assist, in portions of
projects for which we are not responsible. Notwithstanding the foregoing, in
the event of a termination of, or a default under, certain prime contracts or
subcontracts (whether or not we are a party to such prime contract or
subcontract), including a termination for cause or convenience or a default on
the part of a joint venture partner, prime contractor, subcontractor or
"teaming" partner (for which termination or default neither we nor such other
person is responsible and which termination or default may be beyond our
control and such other person's control), we might be held liable for damages,
or subject to other penalties, which could be very substantial and might have
a material adverse effect on our results of operations and financial
condition. Moreover, certain joint ventures, subcontracting or other "teaming"
agreements to which we are a party, deny or limit the right of the
non-defaulting party to seek damages or indemnification from the defaulting
party in such circumstances.
Contract Financing
There are various types of financing terms applicable to defense
contracts (and in some cases, large telecommunications contracts). In some
cases, we receive progress or milestone payments according to the percentage
of progress in our performance or the achievement of specific milestones. In
certain cases, work is performed prior to receipt of any payment, which means
that we finance the project. In other cases, we receive advance payments prior
to incurring the costs of fulfilling a contract, which creates a positive
project cash flow. In this latter case, the customer normally requires
financial guarantees against advance payments. We often receive substantial
advances from our customers. In the event that a contract under which an
advance has been paid is canceled, we may be required to return all or a
portion of such advances to the customer.
Fixed Price Contracts
Approximately 90%-95% of our defense contracts are made on a fixed
price basis. Such contracts are subject to the risk that actual costs may
exceed those anticipated at the time the contracts are executed, particularly
when the products to be sold pursuant to the contracts require a substantial
amount of development.
Organizational Structure
The following is a list of all of our significant subsidiaries and
affiliates as of December 31, 2003, including the name, country of
incorporation or residence, proportion of ownership interest and, if
different, proportion of voting power held.
45
Country of Percentage Percentage of voting
Incorporation or of ownership power (if different
Name of Subsidiary/Affiliate residence interest from ownership)
-------------------------------- ---------------- ------------ ---------------------
Koor Corporate Venture Capital Israel 100% N/A
Elisra Electronic Systems Ltd. Israel 70% N/A
Makhteshim-Agan Industries Ltd. Israel 48.6%(1) N/A
ECI Telecom Ltd. Israel 30.6% N/A
Telrad Networks Ltd. Israel 100% N/A
Sheraton Moriah (Israel) Hotels Ltd. Israel 55.0% N/A
Knafaim-Arkia Holdings Ltd. Israel 28.3% N/A
Koor Trade Ltd. Israel 100% N/A
______________________
(1) On January 14, 2004, we sold 27 million shares in MA Industries for
approximately NIS 418.5 million, or approximately NIS 15.5 per share. As
a result of this transaction our ownership interest in MA Industries was
reduced to 41.3%. In addition, as a result of the issuance of additional
shares by MA Industries in June 2004 upon the conversion of convertible
debentures, our interest in MA Industries was further decreased to 39.9%
as of June 30, 2004.
Property, Plants and Equipment
Our headquarters are located in 2,785 square feet of leased office
space on the top floor of the Telrad building at 14 Hamelacha Street, Rosh
Ha'ayin, Israel.
We own an aggregate of 18,000 square feet of office space in the
Platinum Building in Tel Aviv, where our headquarters were previously located.
We purchased this facility in 1998 and since Janualy 1, 2004, this property
has been sub let in its entirety.
The manufacturing facilities of our subsidiaries and affiliates are
located throughout Israel. Major concentrations are in the Beersheva/Ramat
Hovav area in the south of Israel and the Tel Aviv-Petach Tikva-Lod-Ashdod
area in the central part of Israel. We own our major manufacturing plants,
facilities, machinery and equipment. In addition, we 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.
46
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 28 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.
For all financial reporting periods until December 31, 2003, Israeli
GAAP requires that our consolidated financial statements recognize the effects
of inflation. Consequently, financial data for all periods 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 restated in NIS in terms of the purchasing power
as of December 31, 2003 The financial statements of the MA Group, the Elisra
Group, Knafaim and ECI are prepared in dollars, the functional currency of
these companies, which are then translated into NIS at the rate of exchange
prevailing at the end of the period. See Note 2B to our consolidated financial
statements included elsewhere in this annual report. For comparative purposes,
financial data of prior periods for these companies are adjusted to reflect
changes in the CPI between the prior periods and the most recent reported
period. During periods when the rate of inflation in Israel differs
significantly from the rate of devaluation of the NIS in relation to the
dollar, application of inflation accounting to our financial statements
creates distortions between the comparative financial data of subsidiaries
whose functional currency is the dollar, as reported in the financial
statements of those companies and as reflected in our financial statements.
Transactions between our subsidiaries 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 contains 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 28 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
47
statements is set forth in Note 2 to our financial statements included
elsewhere in this annual report.
In addition, the preparation of our 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.
Adjusted Financial Statements
In accordance with Israeli GAAP, all NIS amounts in our financial
statements included elsewhere in this annual report have been restated 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 Israeli Consumer Price
Index, or CPI. The adjustments to our financial statements were made in
accordance with the opinions of the Institute of Certified Public Accountants
in Israel, or ICPAI and are based on the accounting records which are kept in
nominal NIS or in other functional currencies. The amounts of non-monetary
assets do not necessarily represent their realizable or current economic
value, but rather the original historical cost of those assets in terms of
adjusted NIS.
Non-monetary items have been adjusted on the basis of the changes in
the CPI, from the CPI published for the month in which the related transaction
was effected to the CPI published for the balance sheet month. Monetary items
are included in the adjusted balance sheet as of December 31, 2003, at their
historical amounts. The components of the statement of operations (except for
financing), relating to transactions carried out during the year have been
adjusted according to the CPI at the time the related transactions were
effected. The components of the statement of operations relating to provisions
included in the balance sheet are based on the changes in the balances of the
related balance sheet items after their related cash flows were taken into
account. The financing item, which is derived from the other items of the
financial statements, reflects real financing income and expenses, as well as
the erosion of monetary balances during the year, the earnings and losses from
the realization of marketable securities and the earnings and losses from
derivative financial instruments. Investments in investee companies and the
equity in their results of operations, as well as the minority interest in
subsidiaries and the share in their results, are based on the adjusted
financial statements of those companies.
In addition, the financial statements of our subsidiaries and
affiliates that use dollars as their functional currency are adjusted on the
basis of the exchange rate of the dollar, in
48
accordance with Section 29 of Opinion 36 of the ICPAI. For these companies, at
each balance sheet date, the figures of the balance sheet for the year then
ended are translated into shekels at the exchange rate for the dollar
prevailing at the end of the year. The statements of operations for each year
are translated into shekels at the exchange rate for the dollar prevailing at
the end of each quarter. Balance sheet items as at the beginning of the year,
and changes in capital during the year, are translated according to the
exchange rate of NIS to dollars at the beginning of the year or at the date of
the change, respectively, and are then adjusted for the changes in the CPI
through December 31, 2003. Differences arising from the translation are
included in a separate item of shareholders' equity under "Cumulative foreign
currency translation adjustments, net."
As discussed below under "Recently issued accounting pronouncements
in Israel," in accordance with Israel Accounting Standard No. 12 issued by the
Israeli Accounting Standards Board, or IASB, which became effective as of
January 1, 2004, we no longer adjust our financial statements for the
inflationary effects of changes in the general purchasing power of the shekel.
Instead, the inflation-adjusted amounts as of December 31, 2003 will serve as
the basis for the nominal-historical financial reporting in the following
periods.
Sale of trade receivables:
The Company recognizes the sale of trade receivables as a sale only
when the control and the risks of the financial asset are transferred to the
purchaser.
Revenue Recognition
Our revenue recognition policy is significant because our revenue is
a key component of our results of operations. We follow very specific and
detailed guidelines, several of which are discussed below, in measuring
revenue. However, such guidelines may require the exercise of certain
judgments, estimates and assumptions.
Revenues from product sales and services rendered are recognized upon
delivery of the products and/or when the economic risk of loss passes to the
customer, or upon performance of the services. In special contracts, revenues
from product sales are recognized after performing the work and passing
acceptance tests, as provided in the applicable product delivery contract.
Revenues and costs related to "projects in progress" under long-term
contracts are recognized under the "percentage of completion" method
(including revenues and costs in respect of partial deliveries) if we are
capable of reliably estimating the revenues and costs required till
completion. For contracts involving significant technological uncertainties,
revenues are recognized on the basis of the "completed contracts" method.
Revenues and costs relating to contracts on a "cost plus" basis (i.e. cost
with the addition of profit at a fixed rate) are recognized when the costs are
incurred. Periodic reporting on revenues and costs from projects in progress
covers all cycle periods, including those where it is not possible to estimate
anticipated profits at the reporting stage. However, if the refund of costs
already incurred is anticipated, all costs incurred are attributed to the
statement of operations as offsetting revenues in the amount of such costs.
49
In the event that we anticipate a loss on a particular contract, such
anticipated loss is provided for in full.
Inventories
Inventories are stated at the lower of cost or market value. Cost for
raw materials, auxiliary materials and spare parts is determined at average
cost or by the "first-in, first-out" method. Cost for finished goods and goods
in process is determined primarily on the basis of direct manufacturing costs
and, in part, on the basis of average manufacturing costs with the addition of
indirect manufacturing costs. Cost for merchandise is determined by the
"first-in, first-out" method or by the "moving average method." In determining
inventory value, we make assumptions as to the market value of inventory. If
there is a sudden and significant decrease in demand for our products or there
is a higher risk of inventory obsolescence because of a rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.
Investments in Non-consolidated Subsidiaries and Affiliates
Our investments in our non-consolidated subsidiaries and affiliates
are presented using the equity method. Goodwill arising from the acquisition
of equity in a non-consolidated subsidiary or affiliate is generally amortized
at equal annual rates over a 10-year period, commencing from acquisition date.
However, there are instances in which goodwill in a subsidiary is amortized
over a 20-year period, based on our assessment that the circumstances in those
instances justifies the longer amortization period.
From time to time we review our investments in our non-consolidated
subsidiaries and 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
subsidiary's or affiliate's sequential loss, the segment in which the
subsidiary or 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 may make appropriate
provisions for the adjustment of the value of these investments, which would
be reflected in our consolidated statement of operations.
Since January 1, 2003, we have applied IASB Accounting Standard No.
15 - "Impairment In value of Assets," 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. This Standard, 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, this 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, we
recognize an impairment loss equal to the difference between the book value of
the asset and its recoverable value. A loss in recognized in this manner will
be reversed only if changes have
50
occurred in the estimates used in determining the recoverable value of the
asset, from the date on which the last impairment loss was recognized.
Intangible Assets and Deferred Expenses
Intangible assets are amortized over the estimated period of the
economic benefit provided by the particular asset. We assess the
recoverability of these intangible assets periodically by determining whether
unamortized capitalized costs do not exceed the net realizable value of the
particular asset. Licensing of products and acquisition of know-how are stated
at cost and are mostly amortized over 8 years. Marketing rights are stated at
cost and amortized over periods of 5 to 10 years. Intangible assets in the
purchase of products are stated at cost and are mainly amortized over 20
years. Goodwill deriving from acquisitions or investments is amortized over
the period of economic benefit at equal annual rates over 10 to 20 years
commencing from the acquisition date. Non-compete and confidentiality
agreements are mostly amortized over 5 years.
Deferred expenses relating to debenture issuance costs are amortized
using the straight-line method over the life of the debentures, which is
usually six years.
Recently Issued Accounting Pronouncements in Israel
In July 2001, the Israeli Accounting Standards Board, or IASB, issued
Israel Accounting Standard No. 12 - "Discontinuance of Adjusting Financial
Statements for Inflation," which provided for the discontinuance of adjusting
financial statements for the effects of changes in the general purchasing
power of the shekel, as of January 1, 2003. In December 2002, Accounting
Standard No. 17 was issued that postponed the date from which Accounting
Standard No. 12 is to be applied until January 1, 2004. Until December 31,
2003, we have continued to prepare adjusted financial statements in accordance
with Opinion No. 36 of the Institute of Certified Public Accountants in
Israel, or ICPAI. The inflation-adjusted amounts as of December 31, 2003 will
serve as the basis for the nominal-historical financial reporting in the
following periods. Upon implementation of Standard No. 12, Clarifications Nos.
8 and 9 to Opinion 36 of the ICPAI will be canceled and will be replaced with
effect from January 1, 2004 by Israel Accounting Standard No. 13 - "The
Effects of Changes in Foreign Exchange Rates," which was issued at the same
time as Standard No. 12. Most of the provisions of Standard No. 13 correspond
to the provisions which appeared in Clarifications Nos. 8 and 9 to Opinion 36
of the ICPAI. The adoption of Standard No. 12 could have a material effect on
our results of operations. The extent of the effect is dependent on the rate
of inflation and the composition of our assets and sources of financing.
In March 2004, the IASB issued Israel Accounting Standard No. 20 -
"Goodwill Amortization," which is effective for financial statements for
reporting periods commencing on or after January 1, 2004. This Standard
provides that goodwill must be amortized methodically over its useful life and
that the amortization period must reflect the best estimate of the period in
which the entity expects to derive future economic benefit from the goodwill.
This Standard also provides that the amortization period may not exceed 20
years from the first date of recognition. The change in the amortization
period of goodwill balances as of January 1, 2004 will be treated as a
prospective change in estimates. Goodwill balances will be amortized
methodically, over
51
the balance of the period remaining until the end of the prescribed
amortization period. We are currently evaluating the implications of the new
Standard, and at this stage, we are unable to estimate the effect of this
Standard on our financial statements.
Impact of Devaluation 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 December Israeli Consumer Israeli Inflation Rate of the Devaluation Rate Adjusted for
31, Price Index (1) Price Rate(2) Dollar (3) (4) Devaluation (5)
------------------ ---------------- ----------------- ---------------- ---------------- ----------------
1999 168.53 1.3 NIS 4.153 (0.2) 1.5
2000 168.53 0.0 NIS 4.041 (2.7) 2.7
2001 170.91 1.4 NIS 4.416 9.3 (7.9)
2002 182.01 6.5 NIS 4.737 7.3 (0.8)
2003 178.58 (1.9) NIS 4.379 (7.6) 5.7
__________________
(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, 2003, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 2,078 million (the majority of which was dollar-denominated or
dollar-linked).
In addition, we and certain of our subsidiaries 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 include forward sales, purchase
contracts, sale options and swap transactions. For more details regarding the
balance of our hedging
52
agreements as of December 31, 2003, see note 21 to our consolidated financial
statements included elsewhere in this annual report. The caption "Financial
expenses, net" in our consolidated financial statements includes the impact of
these factors on monetary assets and liabilities, as well as regular interest
expense.
53
Results of Operation
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
002/2001 CPI - into 003/2002
CPI - adjusted NIS Changes adjusted NIS Dollars Changes
--------------------------------------------------------------------------------------
2001 % 2002 % % 2003 % 2003 %
--------------------------------------------------------------------------------------
(In (In (In (In
thousands) thousands) thousands) thousands)
REVENUES FROM SALES
Telecommunication equipment 1,217,399 16.31 814,108 11.47 (33.13) 796,059 10.35 181,790 (2.22)
Defense electronics 1,412,425 18.93 1,687,551 23.77 19.48 1,286,432 16.73 293,773 (23.77)
Agrochemicals 4,101,360 54.95 4,140,471 58.32 0.95 5,191,913 67.51 1,185,639 25.39
Venture capital
investments
Other 732,235 9.81 457,660 6.44 (37.50) 416,026 5.41 95,005 (9.10)
--------------------------------------------------------------------------------------
Total 7,463,419 100 7,099,790 100 (4.87) 7,690,430 100 1,756,207 8.32
======================================================================================
OPERATING EARNINGS:
Telecommunication equipment (212,742) (55.73) (178,623)(34.43) (16.04) 3,158 0.34 721 (101.77)
Defense electronics 56,187 14.72 78,853 15.2 40.34 (4,294) (0.46) (980) (105.45)
Agrochemicals 587,050 153.79 658,507 126.93 12.17 949,290 102.61 216,782 44.16
Venture capital investments (8,293) (2.17) (7,894) (1.52) (4.81) (1,445) (0.16) (330) (81.69)
Other (40,490) (10.61) (32,062) (6.18) (20.82) (21,536) (2.33) (4,918) (32.83)
--------------------------------------------------------------------------------------
Total 381,712 100 518,781 100 35.91 925,173 100 211,275 78.34
Joint general expenses (23,275) (38,917) 67.21 (28,888) (6,597) (25.77)
Total operating earnings 358,437 479,864 33.88 896,285 204,678 86.78
=================================== ===================== ============================
CAPITAL EXPENDITURES:
Telecommunication equipment 59,685 6.13 15,554 1.19 (73.94) 7,173 2.25 1,638 (53.88)
Defense electronics 53,187 5.46 45,753 3.48 (13.98) 28,210 8.85 6,442 (38.34)
Agrochemicals 821,754 84.37 1,241,091 94.53 51.03 277,195 86.94 63,301 (77.67)
Venture capital investments 2,928 0.3
Other 36,487 3.74 10,464 0.8 (71.32) 6,262 1.96 1,430 (40.16)
----------------------------------- --------------------- ----------------------------
Total 974,041 100 1,312,862 100 34.79 318,840 100 72,811 (75.71)
=================================== ===================== ============================
DISCONTINUED ACTIVITY 194 -- -- -- -- --
CORPORATE ASSETS 386 108 (72.02) 392 90 263
----------------------------------- --------------------- ----------------------------
974,621 1,312,970 (34.72) 319,232 72,901 (75.69)
----------------------------------- --------------------- ----------------------------
EXPORTS OF KOOR PRODUCTS BY
BUSINESSES (1)
Telecommunication equipment 1,038,444 19.42 695,962 13.49 (32.98) 721,957 12.23 164,868 3.74
Defense electronics 875,014 16.36 1,056,968 20.49 20.79 760,964 12.89 173,776 (28.00)
Agrochemicals 3,354,813 62.73 3,404,650 66.02 1.49 4,419,795 74.88 1,009,316 29.81
Venture capital investments 79,631 1.49 (100)
Other
Total 5,347,902 100 5,157,580 100 (3.56) 5,902,716 100 1,347,960 14.45
=================================== ===================== ============================
DESTINATIONS (2)
North America 1,225,494 16.42 1,125,925 15.86 (8.12) 1,152,009 14.98 263,076 2.32
Europe 1,906,611 25.55 1,864,012 26.26 (2.23) 2,473,635 32.17 564,886 32.70
South America 1,663,223 22.28 1,213,485 17.09 (27.04) 1,670,256 21.72 381,424 37.64
Asia and Australia 923,134 12.37 1,123,387 15.82 21.69 1,050,873 13.66 239,980 (6.45)
Africa 228,127 3.06 228,632 3.22 0.22 323,206 4.20 73,808 41.37
1,516,830 20.32 1,544,349 21.75 1.81 1,020,451 13.27 233,033 (33.92)
Total 7,463,419 100 7,099,790 100 (4.87) 7,690,430 100 1,756,207 8.32
=================================== ===================== ============================
---------------------
(1) Including foreign industrial operations.
(2) Destination to which shipment
is made.
54
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
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.
Net sales. Net sales increased 8.3% to NIS 7,690 million in 2003 from
NIS 7,100 million in 2002. The increase consists of a NIS 1,051 million increase
in MA Industries' revenues and a NIS 42 million increase in Telrad's revenues,
which were partially offset by decreases in the revenues of the Elisra Group
(NIS 401 million), Tadiran Electronic (NIS 68 million) and Sheraton Moriah (NIS
27 million).
Export and international operations, representing 77% of of our net
sales, increased 14.5% in 2003 compared to 2002, primarily as a result of a NIS
1,015 million increase in MA Industries' exports due to improved prices of
agricultural commodities, good weather conditions in North America and Asia and
the improving South American economy (manly Brazil), which were partially offset
by harsh weather conditions in Europe, the increasing market share of
genetically-engineered seeds and the strengthening of most currencies against
the dollar. The increase in exports was also partially offset by a NIS 296
million decline in Elisra's exports.
Gross profit. Gross Profit increased 28.8% to NIS 2,297 million in 2003
from NIS 1,784 million in 2002. The increase in gross profit is primarily
attributable to improved profits at MA Industries (NIS 450 million) and Telrad
(NIS 180 million), which were partially offset by a decline in the gross profit
of Elisra (NIS 109 million). As a percentage of net sales, gross profit
increased from 25.1% in 2002 to 30.0% in 2003.
Operating earnings. Operating earnings increased 86.8% to NIS 896
million in 2003 from NIS 480 million in 2002. The increase in operating earnings
is mainly due to an increase in the operating earnings of MA Industries (NIS 291
million) and Telrad (NIS 166 million), partially offset by a decline in the
operating earnings of Elisra (NIS 77 million). As a percentage of net sales,
operating earnings increased from 6.8% in 2002 to 12.0% in 2003.
Finance expenses, net. Finance expenses, net decreased 44.1% to NIS 228
million in 2003 from NIS 408 million in 2002. The decrease in finance expenses
in 2003 is primarily attributable to the repayment of debt, primarily at the
parent company level, the depreciation of the dollar against the NIS and a
negative CPI.
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is
offset on a lagging basis) by a devaluation of the NIS in against the dollar.
During 2003, the shekel was strengthened against the dollar by 7.6% while the
CPI decreased by 1.9%, compared to 2002, during which there had been a
devaluation of 7.3% of the shekel against the dollar while the CPI increased by
6.5%.
Other income (expenses), net. Other expenses, net, amounted to NIS 220
million in 2003 compared to other income, net of NIS 6 million in 2002. Other
expenses, net, in 2003 included:
o An NIS 33 million capital gain following the sale of investments,
mainly at Telrad and our sale of 2.6% of our equity interest in
MA Industries. In 2002 we recorded a
55
primarily resulting from the sale of 30% of Elisra's shares to
Elta and the partial sale of Tadiran's real-estate;
o A NIS 107 million write-down of investments and assets, which
includes an NIS 72 million write down of Koor CVC's investments.
In 2002, we recorded an NIS 165 million write-down in the value
of investments and assets, including a NIS 93 million write-down
of Koor CVC's investments and an NIS 35 million charge following
the write down of BVR Systems' goodwill;
o A NIS 28 million provision for severance compensation, primarily
at MA Industries (NIS 9 million) and Elisra (NIS 9 million),
compared to a NIS 127 million provision in 2002; and
o A NIS 119 million goodwill amortization and write-off, primarily
at MA Industries (NIS 112 million) and Elisra (NIS 4 million),
compared to a NIS 91 million write-off in 2002.
Transfer to statement of income of translation differences of
autonomous investee in voluntary liquidation. As a result of the liquidation of
Tadiran in March 2002, we recorded an expense of approximately NIS 391 million
due to the recognition of the cumulative foreign currency translation
adjustments to the value of our investment in Tadiran. We recorded this expense,
which was previously reflected as a decrease in shareholders' equity, in
accordance with Israeli GAAP, which provides that changes in the value of
investments in subsidiaries as a result of foreign currency adjustments are not
recognized until the sale or liquidation of the subsidiary. This accounting
entry did not have any effect on our net equity.
Taxes on income. Taxes on income decreased 40% to NIS 85 million in
2003 from NIS 141 million in 2002. The decrease is primarily attributable to a
NIS 58 million decline in Telrad's tax expense, a NIS 53 million decline in our
tax expense at the corporate parent level due to deferred tax from the sale of
shares of MA Industries, and a NIS 31 million decline in Elisra's tax expense.
These declines were partially offset by a NIS 60 million increase in MA
Industries' tax expense. Taxes on income as a percentage of sales in 2003 and
2002 were 1.1% and 2.1%, respectively.
Equity in the operating results of affiliates, net. Equity in the
losses of affiliates, net in 2003 totaled NIS 114 million compared with NIS 252
million in 2002. This item includes mainly our equity share in the net loss of
ECI, in the amount of NIS 101 million (partially offset by a reversal of a NIS
73 million write-down of our investment in ECI), compared with NIS 246 million
in 2002 (including a NIS 25 million write-down of our investment in ECI), as
well as our equity share in the losses of Knafaim, in the amount of NIS 11
million in 2003, compared with insignificant amount in 2002.
Minority interest in subsidiaries, net. Minority interest in
subsidiaries, net amounted to a gain of NIS 203 million in 2003 compared with a
gain of NIS 60 million in 2002. The increase in minority interest in 2003
derives mainly from MA Industries (NIS 122 million), Elisra (NIS 13 million) and
Sheraton Moriah (NIS 12 million).
56
Net income (loss). As a result of the above factors, we reported a net
income of NIS 46 million in 2003, compared to a net loss of NIS 767 million in
2002.
Telecommunications Equipment Business
Year Ended December 31,
-----------------------------------------------------
2002 2003 2003
-----------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 814,108 796,059 181,790
Operating earnings (loss)................... (178,623) 3,158 721
Sales from our telecommunication equipment business decreased 2.2% in
2003 to NIS 796 million from NIS 814 million in 2002. The decrease was primarily
due to a decrease in sales of MNI, a subsidiary of TEI, by approximately $13.1
million (NIS 57 million) in 2003 compared to 2002, primarily as a result of
decreased demand for its products, which was only partially offset by an
increase in Telrad's sales by NIS 42 million in 2003 compared to 2002, primarily
as a result of a sale of $30 million in South America.
Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 440 million in 2003
compared to NIS 423 million in 2002, or 55% compared to 52% of total
telecommunication equipment business sales in 2003 and 2002, respectively.
Telecommunication equipment business exports amounted to NIS 722
million in 2003 compared to NIS 696 million in 2002. The increase in export
sales resulted primarily in Telrad for the reasons discussed above.
Operating earnings (loss) in our telecommunication equipment business
improved from a NIS 179 million operating loss in 2002 to operating earnings of
NIS 3 million in 2003. The improvement resulted from the increase in sales at
Telrad combined with its significant cost reductions following its successful
reorganization.
Defense Electronics Business
Year Ended December 31,
-----------------------------------------------------
2002 2003 2003
-----------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 1,687,551 1,286,432 293,773
Operating earnings (loss) 78,853 (4,294) (981)
Sales from our defense electronics business decreased 23.8% to NIS
1,286 million in 2003 from NIS 1,688 million in 2002 primarily as a result of a
major reduction in the Israeli defense budget. Sales from our defense
electronics business were also affected by BVR whose results were not
consolidated since June 2003 and were consolidated for the entire year in 2002,
and which accounted for approximately NIS 123 million in sales in 2002.
57
Operating earnings (loss) from our defense electronics business
decreased to operating losses of NIS 4 million in 2003 from operating earnings
of NIS 79 million in 2002 primarily as a result of decrease in sales.
Agrochemicals Business
Year Ended December 31,
------------------------------------------------
2002 2003 2003
(Adjusted NIS in thousands) ($ in thousands)
Sales........................ 4,140,471 5,191,913 1,185,639
Operating earnings........... 658,507 949,290 216,782
Sales from our agrochemicals business increased 25.4% to NIS 5,192
million in 2003 from NIS 4,140 million in 2002, primarily as a result of
increased sales of the MA group (see below). Approximately 92.7% and 90.9% of
the sales in 2003 and 2002, respectively, were made outside of Israel, and
approximately 26.2% and 27.9% of total sales in 2003 and 2002, respectively,
were to South America.
The increase in the MA group's sales was primarily attributable to
sales of new products, and increases in sales of existing products, as well as
improved prices of agricultural commodities, good weather conditions in North
America and Asia and the improving South American economy (manly Brazil). These
positive effects were partially offset by harsh weather conditions in Europe,
the increasing market share of genetically-engineered seeds and the
strengthening of most currencies against the dollar.
Operating earnings for our agrochemicals business increased 44.2% to
NIS 949 million in 2003 from NIS 659 million in 2002 as a result of increased
sales and the reduction of manufacturing expenses as a result of internal
restructuring and a decrease in raw material costs.
Venture Capital Business
Year Ended December 31,
------------------------------------------------
2002 2003 2003
-----------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales........................... -- -- --
Operating earnings (loss)....... (7,894) (1,445) (330)
This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2003, we had invested, through Koor CVC, approximately $132 million
in venture capital funds and start-up companies, excluding Koor CVC's initial
investment in Scopus Network Technologies (formerly Tadiran Scopus). We do not
consolidate any of the portfolio companies in Koor CVC. The decrease in
operating loss in our venture capital business in 2003 compared to 2002 resulted
primarily from a reduction in Koor CVC's operating expenses.
58
Other Businesses
Year Ended December 31,
---------------------------------------------
2002 2003 2003
---------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales............................. 457,660 416,026 95,005
Operating earnings (loss)......... (32,062) (21,536) (4,918)
Sales from our other businesses decreased 9.1% to NIS 416 million in
2003 from NIS 478 million in 2002. This decrease was primarily attributable to
the decline in sales of Sheraton Moriah as a result of the sharp decline of
tourism in Israel due to increased hostilities in with the West Bank and Gaza.
Operating loss of our other businesses was NIS 22 million in 2003
compared to NIS 32 million in 2002, primarily due to the decrease in sales of
Sheraton Moriah.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
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.
Net sales. Net sales decreased 4.87% to NIS 7,100 million in 2002 from
NIS 7,463 million in 2001. Exports and international operations, representing
80.4% of our net sales, decreased 5.0% in 2002 compared to 2001, primarily
attributable to a decrease of approximately NIS 319 million in Telrad's sales as
a result of the major decline in the international telecommunications market.
Net sales were also affected by holdings whose results were not consolidated
during 2002 and were consolidated in 2001, which amounted to approximately NIS
87 million. These decreases were partially offset by an increase in the sales of
Elisra and of MA industries, by NIS 275 million and NIS 39 million,
respectively, in 2002 compared to 2001.
Sales in our telecommunication equipment business decreased by 33.3% in
2002 compared to 2001 while sales in our agrochemicals, defense electronics
businesses increased by 19.5%, 1%, respectively, over the same period. Our
venture capital business did not record any sales in 2002 due to the
deconsolidation of some companies.
Gross profit. Gross Profit increased 5.1% to NIS 1,784 million in 2002
from NIS 1,698 million in 2001. The increase in gross profit is primarily
attributable to improved profits at MA Industries (NIS 119 million), Elisra (NIS
50 million) and Telrad (NIS 31 million), which were partially offset by a
decline in the gross profit of Tadiran Electronic (NIS 42 million) and Koor
Trade (NIS 14 million). The increase in the gross profit was partially offset by
holdings whose results were not consolidated during 2002 and were consolidated
in 2001, which amounted to approximately NIS 26 million. As a percentage of net
sales, gross profit increased from 22.7% in 2001 to 25.1% in 2002.
Operating earnings. Operating earnings increased 33.8% to NIS 480
million in 2002 from NIS 358 million in 2001. The increase in operating earnings
is mainly due to a substantial drop in the operating loss of Telrad (NIS 78
million), paired with an increase in the operating earnings of MA Industries
(NIS 71 million), Elisra (NIS 19 million), Sheraton Moriah and Isram,
59
partially offset by a decline in the operating earnings of TEI (NIS 44 million),
Tadiran (NIS 14 million) and Koor Trade. As a percentage of net sales, operating
earnings increased from 4.8% in 2001 to 6.8% in 2002.
Finance expenses, net. Finance expenses, net decreased 5.6% to NIS 408
million in 2002 from NIS 432 million in 2001. The decrease in finance expenses
in 2002 is primarily attributable to a decline in the finance expenses of MA
Industries (NIS 26 million), Tadiran (NIS 25 million) and Sheraton Moriah (NIS
14 million), due to the repayment of financial liabilities. These decreases were
partially offset by an increase in the finance expenses of Telrad (NIS 23
million).
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is
offset on a lagging basis) by a devaluation of the shekel in relation to the
dollar. During 2002, the shekel was devalued against the dollar by 7.3% while
the CPI increased by 6.5%, compared to 2001, during which there had been a
devaluation of 9.3% of the shekel against the dollar while the CPI increased by
1.4%.
Other income (expenses), net. Other income, net amounted to NIS 6
million in 2002 compared to other expenses, net of NIS 623 million in 2001.
Other income, net in 2002 included: NIS 342 million capital gain, which included
NIS 339 million from the sale of 30% of Elisra's shares to Elta, NIS 29 million
from the sale of Tadiran's real estate, and a one-time gain from Koor Trade of
NIS 35 million in connection with its receipt of a payment with respect to debt
that was previously written-off as bad debt, compared to a NIS 60 million
capital loss in 2001;
o NIS 165 million write-down of investments and assets, which
included a NIS 93 million write down of Koor CVC investments, a
NIS 51 million expense recorded by MA Industries relating to the
ongoing economic crisis in Argentina, a NIS 35 million loss
representing Elisra's share in the write off of BVR Systems
goodwill and a NIS 16 million expense relating to termination of
the Elad hotel management agreement. During 2001, we recorded an
NIS 396 million provision for the decline in value of investments
and assets.
o NIS 127 million provision for severance compensation, primarily
at Telrad (NIS 98 million), MA Industries (NIS 15 million), and
Elisra (NIS 14 million), compared to NIS 82 million in 2001.
o NIS 91 million goodwill amortization and write-off, primarily at
MA Industries (NIS 78 million) and Elisra (NIS 13 million),
compared to an NIS 83 million write off in 2001.
Transfer to statement of income of translation differences of
autonomous investee in voluntary liquidation. As a result of the liquidation of
Tadiran in March 2002, we recorded an expense of approximately NIS 390 million
due to the recognition of the cumulative foreign currency translation
adjustments to the value of our investment in Tadiran. We recorded this expense,
which was previously reflected as a decrease in shareholders' equity, in
accordance with Israeli GAAP, which provides that changes in the value of
investments in subsidiaries as a result of foreign currency adjustments are not
recognized until the sale or liquidation of the subsidiary. This accounting
entry did not have any effect on our net equity.
60
Taxes on income. Taxes on income increased 262% to NIS 141 million in
2002 from NIS 39 million in 2001. The increase is primarily attributable to
Telrad (NIS 125 million, NIS 68 million of which were during the reporting
period as a result of writing off a tax asset compared to a tax gain of NIS 52
million recorded in the same period last year), MA Industries (NIS 22 million),
Elisra (NIS 13 million) and Koor Trade ( NIS 6 million). These expenses were
partially offset by a decline in tax expenses at Tadiran (NIS 20 million), TEI
(NIS 19 million) Koor, and Koor Properties. The increase in tax expenses also
derives from Koor following the exercise of a deferred tax asset relating to
Elisra, following the sale of 30% of Elisra (NIS 116 million). Taxes on income
as a percentage of sales in 2002 and 2001 were 2.2% and 0.5%, respectively.
Equity in the operating results of affiliates, net. Equity in the
losses of affiliates, net in 2002 totaled NIS 252 million compared with NIS
1,895 million in 2001. This item includes mainly our equity share in the net
loss of ECI, in the amount of NIS 246 million (including a NIS 25 million
write-down of our investment in ECI), compared with NIS 1,881 million in 2001
(including a NIS 1,116 million write-down of our investment in ECI).
Minority interest in subsidiaries, net Minority interest in
subsidiaries, net amounted to a loss of NIS 60 million in 2002 compared with a
gain of NIS 9 million in 2001. The increase in minority interest in 2002 derives
mainly from MA Industries (NIS 65 million), Telrad's subsidiary Be-Connected
(NIS 9 million), and Sheraton Moriah (NIS 9 million). This was offset by a
decline in the minority interest for the full year of 2002 of BVR Systems (NIS 3
million), and Elisra (NIS 13 million).
Results of discontinued activities, net. Our operations in the
construction and infrastructures segment effectively ended with the termination
of the consolidation of United Steel Mills in 2001, and therefore the results of
the segment were reclassified and stated in this item. The loss from
discontinued operations in 2001 amounted to NIS 29 million.
Net income (loss). As a result of the above factors, we reported a net
loss of NIS 767 million in 2002, compared to a net loss of NIS 2,651 million in
2001.
Telecommunications Equipment Business
Year Ended December 31,
----------------------------------------------------------
2001 2002 2002
----------------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 1,217,399 814,108 171,862
Operating earnings (loss)................... (212,742) (178,623) (37,708)
Sales from our telecommunication equipment business decreased 33.1% in
2002 to NIS 814 million from NIS 1,217 million in 2001. Telrad's sales decreased
by NIS 320 million in 2002 primarily as a result of the declining
telecommunications market.
Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 561 million in 2002
compared to NIS 669
61
million in 2001, or 69% compared to 54% of total telecommunication equipment
business sales in 2002 and 2001, respectively.
Telecommunication equipment business exports amounted to NIS 696
million in 2002 compared to NIS 1,038 million in 2001. The decrease of export
sales resulted primarily in Telrad for the reasons discussed above.
Operating Loss decreased in our telecommunication equipment business
from a NIS (213) million operating loss in 2001 to a NIS (179) million operating
loss in 2002. The decrease resulted from a sharp decrease in sales at Telrad.
Defense Electronics Business
Year Ended December 31,
----------------------------------------------------------
2001 2002 2002
----------------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 1,412,425 1,687,551 356,249
Operating earnings 56,187 78,853 16,646
Sales from our defense electronics business increased 19.5% to NIS
1,688 million in 2002 from NIS 1,412 million in 2001 primarily as a result of
the increased demand for high tech military equipment and products as many
countries have focused on improving their existing military equipment with new
technology and investing in new high-tech military products and equipment.
Operating earnings from our defense electronics business increased
40.3% in 2002 to NIS 78.9 million from NIS 56.2 million in 2001.
Agrochemicals Business
Year Ended December 31,
----------------------------------------------------------
2001 2002 2002
----------------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 4101,360 4,140,471 874,070
Operating earnings.......................... 587,050 658,507 139,014
Sales from our agrochemicals business increased 1% to NIS 4,140 million
in 2002 from NIS 4,101 million in 2001, primarily as a result of increased sales
of the MA group (see below). Approximately 90.9% and 90.6% of the sales in 2002
and 2001, respectively, were made outside of Israel, and approximately 27.9% and
36.4% of total sales in 2002 and 2001, respectively, were to South America.
The increase in the MA group's sales was primarily attributable to
sales of new products, increases in sales of existing products and the reduction
of manufacturing expenses as a result of internal restructuring and a decrease
in raw material costs. These positive effects were partially
62
offset by the reduction in sales to South America, a decrease in sales prices
and the devaluation of the Brazilian Real and the Euro.
Operating earnings for our agrochemicals business increased 12.2% to
NIS 658 million in 2002 from NIS 587 million in 2001 as a result of increased
sales and savings in production costs.
Venture Capital Business
Year Ended December 31,
--------------------------------------------------------
2001 2002 2002
--------------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... -- -- --
Operating earnings (loss)................... (8,293) (7,894) (1,666)
This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2002, we had invested, through Koor CVC, approximately $147 million
in venture capital funds and start-up companies. The consolidated companies in
our venture capital business did not have any sales in 2002, as a result of the
termination of the consolidation of Tadiran Scopus Ltd., which accounted for all
the sales of the consolidated companies in our venture capital business in 2001.
Other Businesses
Year Ended December 31,
--------------------------------------------------------
2001 2002 2002
--------------------------------------------------------
(Adjusted NIS in thousands) ($ in thousands)
Sales....................................... 732,235 457,660 96,614
Operating earnings (loss)................... (40,490) (32,062) (6,768)
Sales from our other businesses decreased 37.5% to NIS 458 million in
2002 from NIS 732 million in 2001. This decrease was primarily attributable to
the decline in sales of Sheraton Moriah and Isram as a result of the sharp
decline of tourism in Israel due to increased hostilities in with the West Bank
and Gaza.
Operating loss of our other businesses was NIS 32 million in 2002
compared to NIS 41 million in 2001, primarily due to the decrease in sales of
Sheraton Moriah and Isram.
Quarterly Results
The following table presents unaudited quarterly financial information
for each of the four quarters of the year ended December 31, 2003. Such
information has been prepared on the same basis as our consolidated financial
statements.
63
Quarter Ended Year Ended
---------------------------------------------------------------------------
March June September December December
31, 2003 30, 2003 30, 2003 31, 2003 31, 2003
---------------------------- ------------- --------------------------------
(in millions of U.S. dollars)
Net sales........................... 464 429 418 445 1,756
Gross profit........................ 131 129 129 136 525
Research and development, net....... 60 47 54 60 221
Operating income (loss)............. 49 50 52 54 205
Net income (loss)................... 2 4 1 4 11
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 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.
Recent Developments
On January 14, 2004, we sold 27 million shares in MA Industries for
approximately NIS 418 million, or approximately NIS 15.5 per share. The capital
gain of NIS 160 million (before tax) is included in "other income". As a result
of this transaction our ownership interest in MA Industries was reduced to
41.3%. A tax asset of NIS 59 million which had been created in 2003, because of
the expectation that the brought forward tax losses would be utilized, will be
realized as a result of this sale.
During 2003 and the first half of 2004, Knafaim acquired shares and
options of El Al Israel Airlines Ltd., or El Al, which was majority-owned by the
Israeli government. As of December 31 2003, Knafaim was not an interested party
in El-Al as it held less than 5% of El-Al's issued share capital. However, at
that date, it held options and had entered into voting agreements that would
enable Knafaim in the future to attain control of approximately 52.8% of the
voting rights in El-Al on a fully diluted basis. In January 2004, Knafaim
approached the Israeli government to obtain its consent and approval to increase
its holdings to more than 5% of El Al's issued share capital. In addition,
Knafaim filed a merger notice on its holdings in El Al for the approval of the
Commissioner of Restrictive Trade Practices. In March 2004, the board of
directors of Knafaim resolved to exercise some of the options, the exercise of
which could raise Knafaim's shareholding in El Al's issued share capital to
25.1%, subject to the approvals detailed above. Following the exercise of the
options that had an exercise date of no later than June 3, 2004, Knafaim holds
approximately 22% of the issued share capital of El Al and controls
approximately 24.9% of the voting rights in El Al. On a fully diluted basis, if
Knafaim were to exercise all its remaining options, its holdings could reach
approximately 46.9% of El Al's share capital with control of approximately 52.8%
of the voting rights. To date, the total cost of Knafaim's investment in El Al,
including the purchases of shares and options and the exercise of options,
amounts to $44 million.
In order to finance the exercise of the options to purchase shares of
El Al, in March 2004, Knafaim issued, through a private placement, debentures
and options to purchase its shares for
64
total proceeds of approximately NIS 135 million. If all of these options to
purchase shares of Knafaim are exercised, our equity stake in Knafaim will be
reduced to 25.04%
In March 2004, MA Industries issued non-marketable convertible
debentures in a private placement to institutional investors in the amount of
$145 million par value, in consideration for their par value. Under the terms of
the placement, the underwriters were given an option for an additional placement
of $5 million par value debentures at identical terms, which option was fully
exercised. The debentures are for a 7-year period and bear annual interest at
the rate of 1.75%, to be paid annually, in the month of March. The debentures
may be converted into ordinary shares of the company, of NIS 1.00 par value
each, at a conversion rate of NIS 20.5 par value, according to a fixed exchange
rate of NIS 4.514 per $1.00. The ordinary shares to be issued as a result of the
conversion of the debentures will be listed for trading on the Tel Aviv Stock
Exchange. On March 22, 2007, the holders will have the right, by serving prior
written notice to MA Industries (between 30 and 60 days prior to March 22,
2007), to demand redemption of the debentures (principal and interest balance at
such date). MA Industries will have the right to force the conversion of the
debentures, beginning March 22, 2007, as long as the average share price of MA
Industries in the period of 20 business days preceding the notice of forced
conversion, will be more than 30% higher than the conversion price of the
debentures.
In April 2004, MA Industries, through a wholly-owned and controlled
subsidiary, signed an agreement to acquire full ownership and control of a group
of three companies: Farm Saver.Com LLC, Vegetation Management LLC, and Nations
Ag II LLC, which are engaged in the registration, importing, and marketing of
agrochemicals in the U.S. In consideration for the acquisition, the subsidiary
will pay $36.5 million in cash, and will transfer 1,908,000 shares of MA
Industries (having a market value on the Tel Aviv Stock Exchange on the
execution date of the agreement of approximately $7.5 million). The subsidiary
might have to pay in 2006 in respect of this acquisition, an additional amount
of up to $20 million, depending on the profitability of the acquired companies
in the years 2004-2005.
In April 2004, Cisco Systems purchased all the shares of Riverhead Inc.
from its shareholders for 39 million dollars. The share of Koor CVC in the
proceeds is $7 million. The gain to Koor CVC is NIS 18 million, before tax.
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, 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
65
the sale of assets. In 2003, we had a profit before taxes of NIS 448 million.
See Note 16A to our consolidated financial statements included elsewhere in this
annual report.
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 2003 and 2002, we
received management fees in the amount of NIS 25 million and of NIS 36 million,
respectively, and dividends in the amount of NIS 19 million and NIS 28 million,
respectively.
Our shareholders' equity at December 31, 2003 increased 0.8% to NIS
1,740 million, compared to NIS 1,727 million at December 31, 2002. The increase
in 2003 was primarily due to the increase in our net income, our sale during
2003 of a siginificant portion of our shares to Hermes Investment Management
Ltd. and our reversal of a NIS 74 million write-down in ECI we raised the value
of ECI.
Working capital at December 31, 2003 was NIS 1,046 million compared to
NIS 1,160 million at December 31, 2002 and NIS 1,859 million at December 31,
2001.
Long-term debt totaled NIS 3,460 million at December 31, 2003, or 29.1%
of total assets on that date, compared to NIS 4,340 million at December 31,
2002, or 32.3% of total assets on that date. The decrease in the balance of
long-term debt is attributed mainly to the repyment of long-term debt amounting
to NIS 1,892 million. See note 15C(1) to our consolidated financial statements
included elsewhere in this annual report.
Total debt at December 31, 2003 decreased 24.3% to NIS 5,038 million,
or 42.4% of total assets, compared to NIS 6,655 million, or 49.5% of total
assets, at December 31, 2002.
66
Summary of our Contractual Obligations and Commercial Commitments
For purposes of presenting the approximate cash flows that will be
required to meet our material contractual obligations, the following table
presents a summary of those obligations, as of December 31, 2003:
Payments Due by Period
---------------------------------------------------------------------------
(in millions of NIS)
Less Than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------------------------------------------------
Debt From Banks......................... 4,582 1,576 2,276 534 196
Debentures.............................. 340 -- -- 340 --
Operating Lease Obligations............. 152 47 73 16 16
Other Obligations....................... 115 1 22 10 82
Total Contractual Cash Obligations...... 5,189 1,624 2,371 900 294
For purposes of presenting the approximate cash flows that will be
required to meet our other commercial commitments, the following table presents
a summary of those commitments, as of December 31, 2003:
Amount of Commitment Expiration Per Period
-----------------------------------------------------------------------------
(in millions of NIS)
Total
Amounts Less Than 1-3 4-5 After
Other Commercial Commitments Committed 1 Year Years Years 5 Years
-----------------------------------------------------------------------------------------------------------------------
Guarantees(1)......................... 792 -- 302 -- 490
Commitments for the Purchase of Fixed
Assets(2)............................. 50 15 35 -- --
Commitments for Investments in Venture
Capital Funds(3)...................... 40 22 13 5 --
Total Commercial Commitments.......... 882 37 350 5 490
(1) Includes: (i) a guarantee Bezeq (Israeli telecommunications company)
received from Koor in the amount of NIS 115 million; (ii) a guarantees
totaling NIS 251 million issued by Telrad, one of our consolidated
subsidiaries, to financial institutions for credit that its customers
received; and (iii) guarantees by us for affiliates and other
non-consolidated companies in the amount of approximately NIS 200 million.
See note 22D to our consolidated financial statements included elsewhere in
this annual report.
(2) In 2001, several of our consolidated subsidiaries enter into long-term
supply contracts with multi-national companies for a five-year period (2001
- 2006), pursuant to which the multinational company pays for a portion of
the manufacturing costs.
(3) 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 1-5
years, based on their needs.
67
Cash Flows
Cash and cash equivalents decreased by NIS 197 million in 2003 compared
to 2002.
Cash flows from operating activities in 2003 were NIS 775 million,
compared to NIS 427 million in 2002. The increase in the cash flow from
operating activities stems mainly from net earnings of NIS 46 million in 2003
compared to a net loss of NIS 767 million in 2002.
Cash flows generated in investment activities in 2003 utilized NIS 267
million of cash, compared to NIS 257 million used in 2002. The investment in
fixed assets, net after deduction of an investment grant, amounted to NIS 185
million, compared to NIS 253 million in the same period last year. The principal
investments in fixed assets in the reporting period were in MA Industries and
Elisra. Investment in intangible assets amounted to NIS 313 million in 2003,
compared with NIS 811 million in 2002, mainly as a result of investments by MA
Industries. Investments in venture capital companies amounted to NIS 14 million,
compared to NIS 47 million in the corresponding period last year. Proceeds from
divestitures and disposal of fixed assets contributed NIS 31 million to the cash
flow generated in investment activities, compared to NIS 314 million in the
corresponding period last year.
The net proceeds from sale of investments contributed NIS 124 million
to cash flows generated from investment activities in 2003, compared to NIS 484
million generated in 2002.
In 2003, investment in affiliated companies, net, totaled NIS 6 million
compared to NIS 14 million in 2002.
The investment in consolidated subsidiaries totaled NIS 1 million in
2003 compared to NIS 3 million in 2002.
Finance activities during 2003 consumed NIS 1,210 million, compared to
NIS 224 million during 2002. Long-term loans received during the reporting
period amounted to NIS 949 million, compared to NIS 1,551 million in the
corresponding period in 2002. The loans were received at Koor (the parent
company) and at MA Industries. Repayment of long-term loans in the reporting
period amounted to NIS 1,892 million (including the refinancing activities at
Koor (the parent company) compared to NIS 1,875 million in the same period last
year. Loans were repaid mainly at Koor (the parent company), MA Industries, and
Telrad.
Short-term credit, net, decreased by NIS 284 million in 2003, compared
to a NIS 16 million increase in the same period last year. Most of the decrease
was at MA Industries, Koor and Telrad.
Impact of Inflation and Currency Fluctuations
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is
offset on a lagging basis) by a devaluation of the NIS in relation to the
dollar. The inflation rate in Israel was -1.9% in 2003 as compared to 6.5% in
2002. At the same time, the appreciation of the NIS against the dollar was 7.6%
in 2003 as compared to the depreciation of the NIS against the dollar by 7.3% in
2002.
68
The increase in the dollar cost of our operations in Israel relates primarily to
the cost of salaries in Israel, which are paid in NIS, and constitutes a
substantial portion of our expenses.
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 the divestiture of
subsidiaries or other companies, 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."
69
Item 6. Directors, Senior Management and Employees.
Directors and Senior Management
The following table sets forth, as of June 20, 2004, the name, age and
position of each of our directors and executive officers:
Charles R. Bronfman 74 Chairman of the Board of Directors
Rolando Eisen(1)(2) 63 Director
Paulette Eitan(1)(2) 59 Director
Ron Feinstein(1) 67 Director
Andrew Hauptman 36 Director
Eli Hurwitz 73 Director
Chemi Peres 47 Director
Dan Propper 63 Director
David Rubner 65 Director
Prof. Gabriela Shalev(1) 63 Director
Jonathan B. Kolber 43 Chief Executive Officer
Danny Biran 62 President
Yuval Yanai 53 Senior Vice President and Chief
Financial Officer
Aaron Zuker 59 Vice President
Shlomo Heller 62 General Counsel and Corporate
Secretary
___________________________
(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. Our External Directors were appointed in
June 2002 and pursuant to the Companies Law, their terms will expire in
June 2005.
Set forth below is a biographical summary of each of our above-named
directors and executive officers.
Charles R. Bronfman has been Chairman of the Board of Directors of Koor
since November 1997. Mr. Bronfman is Chairman of the Board of Directors of
Claridge Israel L.L.C., Chairman of Andrea and Charles Bronfman Philanthropies
Inc., Co-Chairman of Birthright Israel International and Co-Chairman of the
Board of Trustees, McGill Institute For the Study of Canada. Mr. Bronfman is a
former Co-Chairman of the Seagram Company Ltd. and a former Chairman of the
United Jewish Communities.
Rolando Eisen has been an External Director of Koor since June 2002.
Mr. Eisen serves as a board member in several companies, including Mercantile
Discount Bank Ltd., Elite Industries Ltd. (External Director until July 2002),
Merchav Building Materials Ltd., I.D.B. Holdings Ltd. (External Director) and
Amidar Ltd. Mr. Eisen is the founder and Chairman of the
70
Board of Green Market, a company in the area of direct delivery of grocery and
other food products and is a shareholder ("interested") and director in
Healthcare Technologies Ltd. which is traded on NASDAQ. Mr. Eisen has a B.Sc. in
Industrial Management from Carnegie Mellon University. Mr. Eisen is an Israeli
citizen.
Paulette Eitan has been an External Director of Koor since June 2002.
Mrs. Eitan is the Managing Director of Paulette Eitan, Business Planning
Services Ltd., a management consulting firm focusing on business strategy,
performance, monitoring and management incentive programs, mostly for Israeli
high-tech and multinational companies. Mrs. Eitan serves as a board member in
several companies, including Silicom Ltd., Pitkit Ltd. and A.On Line Capital
Ltd. Mrs. Eitan has an MBA in Business from Tel Aviv University and a B.Sc. in
Economics and Business from HEC-Paris. Mrs. Eitan is an Israeli citizen.
Ron Feinstein has been a director of Koor since October 1991. Since
1999, Mr. Feinstein has served as a Chairman of the Board of Directors of
Sheraton Moriah Israel and Tadiran. From 1996 until 1998, Mr. Feinstein served
as a Chairman of the Board of Radisson Moriah Hotels Ltd. Since 1992, Mr.
Feinstein has also served as the Chairman of the Board of Tourist Industry
Development Corporation Ltd. Mr. Feinstein was a partner in the law firm of
Glass, Feinstein and Bar-Sela from 1981 through March 1997 and since then he is
a senior partner in the law office and notary of Feinstein and Feinstein.
Andrew Hauptman has been a director of Koor since November 1997.
During the past five years, Mr. Hauptman was a Director of Business Development
and Strategic Planning at Universal Studios Holdings (UK) Ltd. and at present he
is the President of Andell Inc. Mr. Hauptman holds an MBA degree from Harvard
University. Mr. Hauptman is the son-in-law of Charles R. Bronfman, our Chairman
of the Board.
Eli Hurwitz has been a director of Koor since November 1997. Mr.
Hurwitz is the President and Chief Executive Officer of Teva Pharmaceutical
Industries Ltd. Mr. Hurwitz serves as a director of Teva Pharmaceutical
Industries Ltd. and Vishay Intertechnology Inc.
Chemi Peres has been a director of Koor since June 2000. He is a
Managing Director and Founder of Pitango Venture Capital (formerly Polaris
Venture Capital originating in Israel), a venture capital fund. Mr. Peres is one
of the pioneers of the venture capital industry in Israel. In 1992 he founded
and managed Mofet Israel Technology Fund, an Israeli venture capital fund. Mr.
Peres is the Chairman of the Board of WebGlide, and serves as a director in
Orckit Communications Ltd., Aladdin Knowledge Systems Ltd and several other
companies. Mr. Peres holds a B.Sc. in industrial engineering and management and
a M.B.A. from Tel Aviv University.
Dan Propper is the Managing Director and Chief Executive Officer of the
Osem Group of Companies, one of Israel's leading food manufacturers and a public
company traded on the Tel Aviv Stock Exchange. Mr. Proper is a member of the
boards of various industrial companies as well as the Technion, Israel Institute
of Technology, the Weizman Institute of Science and Ben-Gurion University. Mr.
Propper graduated summa cum laude from the Technion with a degree in chemical
engineering and food technology. In 1999, he received an honorary doctorate from
the Technion for his contribution to Israeli industry and economy.
71
David Rubner has been a director of Koor since June 2000. Mr. Rubner
is Chairman and CEO of Rubner Technology Ventures Ltd. Mr. Rubner was employed
with ECI from 1970 and was its President and CEO from 1991 to October 1999 and
February 2000, respectively. Since November 1999, he has served as Vice Chairman
of the Board of Directors of ECI. He serves as Chairman of the Board of Ectel
Ltd., and as a director of VPS Ltd., Chekpoint Software Ltd., Efcon Ltd., Gigami
Inc. and MKID Inc. Mr. Rubner holds a B.Sc. (Hons) in Engineering from Queen
Mary College, University of London and a M.S. from Carnegie Mellon University.
He is a member of the Presidium of the Israel Manufacturers Association and was
a recipient of the Industry Prize for 1995.
Prof. Gabriela Shalev has been a director of Koor since February 1999.
Prof. Shalev is a Contracts Law Professor in the Hebrew University in Jerusalem.
Prof. Shalev also serves as a director of several other companies including
Van-Lir Institute and Hadassah Hospital.
Jonathan B. Kolber has been Chief Executive Officer of Koor since July
1, 1998. Mr. Kolber served as the Vice Chairman of the Board of Directors of
Koor since November 1997 and resigned from the Board on March 26, 2003. Mr.
Kolber served as President of Claridge Israel Ltd. from 1989 to 2001 and as Vice
President of Claridge Inc. from 1986 to 1990. Mr. Kolber was associated with
Cemp Investments from 1985 to 1987. Mr. Kolber is Chairman of the Board of
Telrad Networks Ltd and serves as a director of several Israeli companies,
including ECI Telecom Ltd., Makhteshim-Agan Industries Ltd., Knafaim-Arkia Ltd.
and R.M. Sheraton-Moriah Israel Ltd. Mr. Kolber has a Bachelor degree in Near
Eastern Languages and Civilizations from Harvard University and a Certificate on
Advanced Arabic from the American University of Cairo.
Danny Biran has been President of Koor since July 1, 1998. Mr. Biran
currently serves as Chairman of the Board and Chief Executive Officer of Elisra
Electronic Systems Ltd. and as Chairman of the Board of Makhteshim-Agan
Industries Ltd., Isrex (94) Ltd., Koor Properties Ltd., Koor Trade Ltd., R.M.
Renaissance Management (1993) Ltd., Tadiran Electronic Systems Ltd., Tadiran
Spectralink Ltd. and Dekolink Wireless Ltd. Mr. Biran is also a director of ECI
Telecom Ltd., Knafaim-Arkia Ltd., Telrad Networks Ltd. and Sheraton-Moriah
Israel Ltd. Mr. Biran is a graduate of the Law faculty of the Tel Aviv
University and a member of the Israeli Bar.
Yuval Yanai has been Senior Vice President and Chief Financial Officer
of Koor since October 1, 2000. He served as Senior Vice President and Chief
Financial Officer of NICE Systems Ltd. from April 1998 to September 2000. From
1991 to April 1998, he was the Vice President, Finance and Chief Financial
Officer of Elscint Ltd. and director of several of Elscint's subsidiaries, as
well as a director of certain public and private companies. He joined Elscint in
1985 and served as Corporate Controller and Corporate Treasurer through 1991.
Mr. Yanai is a director of Makhteshim-Agan Industries and Telrad Networks Ltd.
Mr. Yanai holds a Bachelor degree in Accounting and Economics from the Tel Aviv
University.
Aaron Zuker has been a Vice President of Koor since January 1999. He
serves as Managing Director of R.M. Renaissance Management (1993) Ltd. Mr. Zuker
is a director of Makhteshim-Agan Industries, the Elisra Group (and its
companies) and Telrad Networks. Mr. Zuker is also a director of Isrex (94) Ltd.,
Clalcom Ltd.and Barak ITC (1995). Between the years
72
1990 - 1995, Mr. Zuker served as Chief Financial Officer and then Chief
Executive Officer of The Jerusalem Report Publication.
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.
Compensation
The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (15 persons) during 2003 consisted
of approximately $2.3 million, in salaries, fees, bonuses, commissions and
directors' fees and $1.3 million in amounts set aside or accrued to provide
pension, retirement or similar benefits, 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.
The directors associated with Claridge Israel L.L.C. (3 directors in
2003) assigned their directors' compensation to Claridge Israel L.L.C. These
directors received compensation identical to that received by our other
directors. 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, 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 25C to
our consolidated financial statements included elsewhere in this annual report.
In addition, according to a decision of the General Meeting of
Shareholders held on July 23, 2003, 7 directors (including the external
directors) who are not associated with Claridge Israel L.L.C. and not related to
the controlling shareholders, have been granted, each, 50,000 options under 2003
Stock Option Plan as described below.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
Board Practices
Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than 5. 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 incompetency, 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
73
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
Under the Companies Law, which became effective on February 1, 2000,
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. This 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;
o control; and
o service as an office holder.
These directors must be residents of Israel. 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.
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. Each committee of our board of directors
is required to include at least one external director.
74
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.
Audit Committee
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 the appointment, compensation and oversight 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. We believe Mrs. Paulette Eitan, an External
Director, qualifies as an "audit committee financial expert." See "Item
16A.Audit Committee Financial Expert."
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 an internal auditor, who is
not an employee of ours, in accordance with the requirements of the Companies
Law and his reports are submitted to and reviewed by the Chairman and to the
audit committee. The audit committee follows up on the implementation of the
recommendations of the internal auditor.
Employees
At December 31, 2003, we had approximately 6,328 employees worldwide,
which represented a decrease of 8% from year-end 2002.
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
2001 5,447 1,247 336 203 64 7,297
2002 5,201 1,020 344 257 77 6,899
2003 4,605 993 311 329 90 6,328
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,
75
we believe that adequate personnel resources are currently available in to meet
our requirements.
The collective bargaining agreements of our subsidiaries 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. Management believes
that, upon expiration of such existing agreements, its subsidiaries will be able
to negotiate, without material disruptions to our business, satisfactory new
agreements. However, there can be no guarantee that satisfactory agreements will
be reached in each subsidiary or that the negotiation of such agreements will
not generate material disruptions to our business. In addition, we are subject
to certain labor related statutes, and to certain provisions of the collective
bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordinating Bureau of Economic Organizations (including the
Industrialists' Association of Israel) that are applicable to our Israeli
employees by order of the Israeli Ministry of Labor and Welfare. These statutes
and provisions principally concern the length of the workday and the workweek,
minimum wages for workers, contributions to a pension fund, insurance for
work-related accidents, determination of severance pay and other conditions of
employment. Furthermore, pursuant to such provisions, the wages of most of our
employees are automatically adjusted based on changes in the Israeli consumer
price index, or CPI. The amount and frequency of these adjustments are modified
from time to time.
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, such amount also includes payments for national health insurance. The
payments to the National Insurance Institute are equal to approximately 15.63%
of an employee's wages limited to a specified amount (according to a temporary
order in effect from July 1, 2002 through June 30, 2003 the amount limit was
temporarily suspended), of which the employee contributes approximately 62% and
the employer contributes approximately 38%.
Labor Relations
We are subject to various Israeli labor laws, collective bargaining
agreements, 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.
Currently, most of our employees have individual employment agreements with us.
76
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 4.8% of an employee's base wage.
The collective bargaining agreements of our subsidiaries 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. Management believes
that, upon expiration of such existing agreements, its subsidiaries 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 subsidiary or that the negotiation of such agreements
will not generate material disruptions to our businesses.
Several of our subsidiaries have collective retirement agreements.
These agreements are due to expire in 2006. Unlike the collective bargaining
agreements, the provisions of these agreements will not remain in force in the
period between the expiration and the signing of an alternative agreement.
In 2003, our total labor costs (including temporary employees)
amounted to approximately NIS 1,345 million, which represented approximately
17.5% of our total net sales, as compared to NIS 1,461 million in 2002. The
majority of our labor costs are denominated in NIS and are affected by the
periodic changes in the inflation rate in Israel.
Our future success will depend significantly upon our ability to
attract and retain highly skilled and qualified personnel. Although competition
for such personnel is generally intense, we believe adequate personnel
resources are currently available in Israel.
SHARE OWNERSHIP
Our directors and executive officers who are deemed to have beneficial
ownership of more than 1% of our outstanding ordinary shares are Mr. Charles R.
Bronfman, Mr. Andrew Hauptman and Mr. Jonathan Kolber. Mr. Charles R. Bronfman
and Mr. Andrew Hauptman are affiliated with Claridge Israel L.L.C., our major
shareholder, and Mr. Kolber is affiliated with Anfield Ltd. For details of
their shareholdings, please see "Item 7. Major Shareholders and Related Party
Transactions" and the related footnotes.
As of June 20, 2004, our executive officers, in the aggregate, held
options under our stock option plans to purchase up to 514,718 ordinary shares.
The exercise price for these options is NIS 101.38 for 93,593 options and NIS
95 for 421,125 options per share and expire on December 31, 2010.
77
Employee Benefit Plans
As of June 20, 2004, options granted, or approved for grant, to all
our directors and employees to purchase up to 1,023,195 ordinary shares were
outstanding.
The 1997 Stock-Based Compensation Plan
On May 27, 1997, 5,039 stock options were allotted under this plan,
and on November 6, 1997 another 31,282 stock options were allotted and after
exercise of some options, 13,519 options remained outstanding for exercise as
of June 20, 2004.
On March 22, 2000, our Board of Directors resolved to amend the plan
so that for an employee who resigned and who held stock options for which the
date of entitlement to exercise arrived before his resignation, their exercise
period would be until the end of the five years from the date of the inception
of the plan.
On August 6, 2000, our Board of Directors resolved that for our
employees who are not interested parties and who did not resign before the end
of 2000, the exercise period of each stock option would be extended to the end
of 5 years from the date of its entitlement.
On November 15, 2001, our Board of Directors resolved that for our
employees on the date of the resolution who are not interested parties, the
exercise price of their stock options would be amended to NIS 101.38 per share.
Our Board of Directors also resolved that the technical method of exercise
would be the "Bonus Component Method" (see "The 1998 Stock-Based Compensation
Plan" below).
As of June 20, 2004, 13,519 options were outstanding under the 1997
plan, 2,519 of which have an exercise price of NIS 101.38 and an expiration
date of May 24, 2005 and 11,000 of which have an exercise price of NIS 101.38
and an expiration date of December 31, 2010.
The 1998 Stock-Based Compensation Plan
On August 30, 1998, at an extraordinary general meeting of
shareholders, our shareholders approved a private placement of 400,000 stock
options, free of charge, to our employees. The options are exercisable for up
to 400,000 of our ordinary shares. All stock options under the 1998 plan were
allotted on different dates, and after expiration of some options and exercise
of others, 54,726 options remained outstanding for exercise as of June 20,
2004.
Under the terms of the 1998 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 (above and hereafter - the "Bonus Component
Method").
On March 22, 2000, our Board of Directors approved, with reference to
stock option holders, under the 1998 plan, who are not interested parties, the
amendment of the exercise period for employees who resign. Our Board of
Directors also resolved that for these option
78
holders, the exercise price would be adjusted in respect to the distribution of
a dividend for all the options, even if the date of entitlement to exercise
fell before the entitlement to the dividend.
On October 6, 2000, our Board of Directors approved the amendment of
extension of the exercise period for our employees who are not interested
parties and who did not retire before the end of 2000.
On November 15, 2001 our Board of Directors approved the amendment of
the exercise price to NIS 101.38 per share for our employees on the date of the
resolution and who are not interested parties.
As of June 20, 2004, 54,726 options to purchase our ordinary shares
were outstanding under the 1998 plan, 2,133 of which have an exercise price of
NIS 101.38 and an expiration date of July 16, 2006 and 52,593 of which have an
exercise price of NIS 101.38 and an expiration date of December 31, 2010.
The 2000 Stock Based Compensation Plan
On August 6, 2000, our Board of Directors approved the 2000 stock
options plan, which was previously approved on August 6, 2000 by the Audit
Committee of our Board of Directors. A framework was approved for the allotment
of 400,000 stock options exercisable for up to 400,000 of our ordinary shares,
out of which only 165,000 options have been allotted, and after expiration of
some options and exercise of others, 36,667 options remained outstanding for
exercise as of June 20, 2004.
The main points of the plan are as follows:
The options will be exercised for shares in a quantity reflecting the
amount of the monetary bonus inherent in the options, according to the Bonus
Component Method.
The exercise price of each stock option pursuant to the amendment by
our Board of Directors on November 15, 2001, will be NIS 101.38 per share.
The options are designated for our employees who are not interested
parties and will not become interested parties as a result of allotment of the
stock options.
As of June 20, 2004, 36,667 options to purchase our ordinary shares
were outstanding under the 2000 plan, 6,667 of which have an exercise price of
NIS 101.38 and an expiration date of June 14, 2007 and 30,000 of which have an
exercise price of NIS 101.38 and an expiration date of December 31, 2010.
The 2003 Stock Based Compensation Plan
On July 27 2003, our General Meeting of shareholders approved Stock
Option Plan 2003, which had been approved previously by the Audit Committee of
the Board of Directors and by the Board of Directors, on May 25, 2003 and June
5, 2003, respectively. A framework was approved for the allotment of 1,200,000
stock options exercisable for up to 1,200,000 of our
79
ordinary shares, out of which 992,125 options have been allotted, and after
exercise of some options, 918,283 options remained outstanding for exercise as
of June 20, 2004.
The key points of the Plan are as follows:
The options 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.
The exercise price of each stock option will be NIS 96 per share,
linked to the CPI.
The options are designated for directors and 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, including the
Company's directors and the CEO.
The vesting of each offeree, to exercise the options for shares, will
be graduated, over a three-year period from the record date, whereby at the end
of each calendar half-year, one-sixth of the total number of options issued to
the trustee on his behalf will vest.
Options not exercised by December 31, 2010 will expire.
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. And on the other hand, the
Company will be unable to claim any tax deduction for the expense.
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.
As of June 20, 2004, 918,283 options to purchase our ordinary shares
were outstanding under the 2003 plan, which have an exercise price of NIS 94.7
and an expiration date of December 31, 2010.
Option Plans of Certain Subsidiaries
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 9,583,526 options, as of June 20, 2004,
7,816,474 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 have been allotted to the Chief
80
Executive Officer and to directors of MA Industries, and following the exercise
of some options, 3,397,146 options remained outstanding as of June 20, 2004.
81
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 June 30, 2004 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
BENEFICIALLY OWNED BENEFICIALLY OWNED (1) (2)
NAME
----- --------------------- ---------------------------
Claridge Israel L.L.C. (3) 2,375,835 15.03%
Esarbee Investments Limited (4)................................ 2,271,167 14.37%
Hermes Investment Management Ltd. (5) ......................... 1,568,000 9.93%
All officers and directors as a group (15 persons) (6)......... 1,006,208 6.37%
_______________________
(1) Based upon 15,804,607 ordinary shares issued and outstanding on
June 30, 2004, which amount excludes 193,229 ordinary shares
held by us as treasury stock purchased in the open market during
2000 and 2001 (See Note 20B to our consolidated financial
statements included elsewhere in this annual report) and
according to Companies Law do not confer voting or distribution
rights while held directly by us. 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 1997, 1998, 2000 and
2003 plans, 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) As of June 30, 2004, one of our wholly-owned subsidiaries held
an aggregate of 15,799 of our ordinary shares and 12,950,864 of
our Deferred Shares, par value NIS 0.001 per share. 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
our company, 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.
(3) Claridge Israel L.L.C., a Delaware limited liability company, is
mainly (99%) owned by The Charles Bronfman Trust. The Charles
Bronfman Trust is a trust established under the laws of the U.S.
primarily for the benefit of Ellen J. Bronfman Hauptman and her
issue. Mr. Andrew Hauptman, one of our directors is the husband
82
of Mrs. Ellen J. Bronfman Hauptman, the daughter of Charles R.
Bronfman, our Chairman of the Board.
The holdings of the Claridge Israel L.L.C. in our shares were
pledged in favor of Bank Hapoalim as a guarantee for a loan that
was given to Claridge Israel L.L.C. by Bank Hapoalim.
(4) Esarbee Investments Limited, a company registered in Canada, is
owned by The Charles Rosner Bronfman Family Trust. The Charles
Rosner Bronfman Family Trust is a trust established under the
laws of Canada primarily for the benefit of Stephen R. Bronfman
and his issue. Mr. Stephen R. Bronfman is the son of Charles R.
Bronfman, our Chairman of the Board.
The holdings of the Esarbee Investments Limited in our shares
were pledged in favor of Bank Hapoalim as a guarantee for a loan
that was given to Esarbee Investments Limited by Bank Hapoalim.
(5) Hermes Investment Management Ltd., one of the largest fund
managers in the United Kingdom, acquired these shares on behalf
of Britel Fund Nominees Ltd. (1,043,000 shares) and Possfund
Nominees Ltd. (525,000 shares), two well-known pension funds in
the United Kingdom which are managed and controlled by Hermes
Investment Management Ltd.
(6) Includes options to purchase ordinary shares held by certain
officers, exercisable within 60 days of the date of this Annual
Report, 7,757 shares held by two directors and 547,902 shares,
representing 3.47% of our outstanding shares, held by Anfield,
Ltd., a company registered in Israel and owned by Jonathan B.
Kolber, our Chief Executive Officer. The holdings of Anfield in
our shares were pledged in favor of Bank Hapoalim as a guarantee
for a loan that was given to Anfield by Bank Hapoalim. Does not
include the ordinary shares held by Claridge Israel L.L.C., which
may be deemed beneficially owned by Ellen J. Bronfman Hauptman
and Andrew Hauptman as described in footnote 3 above, or the
ordinary shares held by Esarbee Investments Limited or the
ordinary shares held by Anfield Ltd., which may be deemed
beneficially owned by Jonathan B. Kolber as described in footnote
4 above.
As of December 31, 2003, we had 68 ADS holders of record in the United
States, holding approximately 2.1% of our outstanding ordinary shares, as
reported by The Bank of New York, the depositary for our ADSs.
To our knowledge, (A) we are not directly or indirectly owned or
controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date
result in a change in control of our company.
83
RELATED PARTY TRANSACTIONS
For details regarding transactions and loans between us and related
parties, please see Note 25 to our consolidated financial statements included
elsewhere in this annual report.
ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 17. Financial Statements" and pages F-1 through F-139.
LEGAL PROCEEDINGS
CLAIMS AGAINST TELRAD
In October 1994, a claim was filed by the Engineers Union against
Telrad, for an unspecified amount. The claim pertains to the recognition and
applicability to Telrad engineers of the salary tables included in the general
collective bargaining agreements, which were signed in 1994 and 1995 between
the Engineers Union and the employers in the public service sector.
On January 31, 1996, a ruling was handed down by the Tel-Aviv District
Labor Court completely rejecting the claims of the Engineers Union.
The Engineers Union has appealed the decision to the National Labor
Court. At the opening of the hearing of the appeal, the Histadrut submitted a
petition that we be added as a party to the proceedings. We contested the
petition. On November 6, 2000, the National Labor Court handed down its
decision whereby our petition was granted and we were not added as a party to
the proceedings. However, the claim of the Engineers Union against Telrad was
accepted.
Telrad has filed a petition to the High Court of Justice asking for
rescission of the judgment of the National Labor Court.
On January 29, 2002, Telrad's appeal was dismissed, and the next stage
in the proceedings is the evidential hearing before the Labor Court.
In 1999, a claim was filed against Telrad by our employees who are
members of our workers' committee. They are suing for accounts so that the
plaintiffs can examine the calculation of the distribution of profits to
employees. They are also suing for a declaratory judgment which will determine
that Telrad is obliged to draw up new accounts for the distribution of profits.
In addition, a motion was filed to recognize the plaintiffs as the
representatives of all of Telrad's workers and employees. The court dismissed
the motion for a class action. A statement of brief has been filed.
84
RESTRICTIVE TRADE PRACTICES
TTL/Telrad/Tadiran
During October 1997, following the publication of a newspaper article
containing details about alleged violations of the Law for Restrictive Trade
Practices, 1988 (Israeli Antitrust Law) regarding price coordination and lack
of competition between Tadiran, TTL (a former subsidiary of Tadiran which
merged with ECI in 1999) and Telrad, the Israeli Antitrust Commissioner
conducted an investigation at the offices of Tadiran, TTL and Telrad and at our
offices during which documents were confiscated, employees were questioned and
additional information was requested and provided.
On December 13, 1998, the Investigations Department of the Israeli
Office of Restrictive Trade Practices (Israeli Antitrust Authority) announced
in a press release that it had concluded the investigation regarding
allegations of illegal restrictive arrangements between us, Tadiran, TTL,
Telrad, The Israel Telecommunications Corporation Limited, or Bezeq, and
Bezeqcall Communications Ltd. in the field of the supply of public switches and
in the Network Termination Point, or N.T.R, area.
On March 4, 2002, Tadiran (which committed to indemnify ECI on any
damage resulting from the issues under review by the Israeli Antitrust
Authority), TTL and Telrad received notice from the Israeli Antitrust Authority
that it is considering the possibility of bringing each of these companies to
trial for offenses against the Israeli Antitrust Law, as a result of the
actions of these companies with regard to the supply of public switches between
the years of 1993 and 1997. The Israeli Antitrust Authority's notice states
that the allegations against Telrad and Tadiran in the field of N.T.R. are
still being reviewed by the commissioner of the Israeli Antitrust Authority. We
are currently negotiating with the Israeli Antitrust Authority in an effort to
conclude the proceedings related to the Authority's investigation. See also
note 18A to our consolidated financial statements included elsewhere in this
annual report.
Under the Israeli Antitrust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may be
subject to civil penalties, if damages can be proven as a result of a violation
of the law. At this early stage, it is not possible to predict the likelihood
that any fines will be imposed on us or any civil lawsuits will be filed
against us, nor whether any such fines or lawsuits would have an adverse effect
on our business, financial condition or results of operations.
ENVIRONMENTAL
One of MA Industries' plants is located in Ramat Hovav, along with
other chemical plants, since the Government decided that the geological layers
in that particular area are completely impenetrable to liquid or pollution. The
Ministry of the Environment conducted examinations, which determined that there
is data indicating subterranean pollution in Ramat Hovav. The examiners
recommended the taking of measures to prevent the continuation of leakages from
active and inactive plants, which are liable to constitute a source of
pollution of the water table, in the area. In 1998, an agreement was signed
between the Ramat Hovav
85
Council, the plants and university institutions, to finance research that would
provide a basis for recommendations as to the action to be taken to halt any
further pollution. In 2003, the research was concluded and its results were
submitted to MA Industries. As of December 31, 2003, MA Industries' management
did not expect a significant impact with respect to MA Industries from
implementation of the report's recommendations, and, therefore, no provision
has been included in the financial statements. At this stage, MA Industries
cannot estimate the costs involved of implementing a solution, if, as a result
of the research that will be carried out, a solution will be found.
Furthermore, the local Municipality at Ramat Hovav is continuing to take
rehabilitation steps relating to past incidents.
In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2002, there were measurements at
MA Industries' Ramat Hovav plant of chimney emissions of materials at
prohibited concentrations, and that such emissions created strong air
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 and 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.
CLAIMS FILED AGAINST TADIRAN AND ITS SUBSIDIARIES
In October 1999, Bezeq filed a claim against Tadiran asserting various
losses incurred by Bezeq due to delays in the performance of works which were
ordered under development and application contracts originally entered into
between Bezeq and TTL in the amount of approximately $8.6 million.
Alternatively, Bezeq is suing for the balance of arrearage penalties
to which it alleges is entitled pursuant to the same contracts, and which were
not paid in full, in the amount of approximately $1.7 million.
In an arbitration judgment entered on February 17, 2000, all of
Bezeq's arguments regarding TTL's liability for the principal claim were
dismissed. The arbitration judgment determined that pursuant to the engagement
contracts between the parties, Bezeq is entitled to compensation within the
framework of arrearage penalties only. The negotiations between the parties for
a settlement were unsuccessful and on February 15, 2003, the matter was
returned to the arbitrator for his decision. In the opinion of management of
Tadiran, based on the opinions of its legal counsel, Tadiran will not bear
additional substantial expenses over and above the allocations contained in the
financial statements. The negotiations between the parties for a settlement
were unsuccessful, and the matter has been returned to the arbitrator who
issued his ruling on February 26, 2004. In his ruling, the arbitrator affirmed
Tadiran's position and ruled, in accordance with the parameters for calculating
the damages that Tadiran is meant to pay to Bezeq. In the estimation of
Tadiran's management, based on the opinion of its legal counsel, Tadiran will
not bear additional material expenses, beyond the provision included in the
financial statements.
86
CLAIMS FILED AGAINST MA INDUSTRIES AND ITS FOREIGN SUBSIDIARIES
A claim was filed against one of MA Industries' subsidiaries in
Brazil, alleging that the subsidiary copied a certain process, which is a
protected trade secret that is owned by the claimant. Accordingly, the
subsidiary is being sued to indemnify the claimant for unfair competition, in
the amount of $9 million (based on a calculation involving the amount of
materials used). In addition, the claimant has requested that a fine of $25 per
day be levied against the subsidiary for the unlawful exploitation of trade
secrets. MA Industries' management estimates that the claim has no validity
and, therefore, no provision has been included in the financial statements in
respect thereto.
A claim was filed against several parties including a MA Industries
subsidiary in Brazil, for an aggregate amount of $31 million, by a group that
acquired the rights to two banks that had declared bankruptcy. With respect to
the balance of the claim, the subsidiary has been sued as the guarantor of
debts of agricultural cooperatives, which were its former shareholders.
The subsidiary's management estimates that there is a reasonable
likelihood that its defense against the claim will be accepted and, therefore,
no provision has been included in the financial statements in respect thereto.
Claims and other monetary demands have been filed against MA
Industries' subsidiary in Brazil, in the aggregate amount of $18 million. Based
on the opinion of its legal counsel, the subsidiary's management estimates that
the chances of the consolidated company's success in the proceedings and its
defense against the above claims and demands are high. The consolidated company
believes that the provisions recorded in its financial statements are adequate
to cover any possible damage which may result from these claims.
CLAIMS FILED AGAINST KNAFAIM
On September 30, 1999, Knafaim, an affiliate, and the Ze'evi Group
jointly signed an agreement with the government of Bulgaria and the Bulgarian
Privatization Authority, to acquire 75% of the share of Balkan-Bulgarian
Airlines, as part of the privatization process of the Bulgarian government
(hereinafter - "privatization agreement"). On October 17, 1999, an agreement
was signed between Knafaim and the Ze'evi Group, pursuant to which Knafaim
transferred to the Ze'evi Group all of its rights and obligations pursuant to
the privatization agreement (hereinafter - "the agreement"), and the Ze'evi
Group undertook to obtain the consent of the Bulgarian government and the
Bulgarian Privatization Authority to release Knafaim from its obligations
toward them pursuant to the privatization agreement. The Ze'evi Group also
undertook, pursuant to the agreement, that as long as the above consent is not
obtained, the Ze'evi Group would discharge, at its expense, any claim lodged
against Knafaim resulting from the privatization agreement, and would indemnify
Knafaim for any direct damage it sustains as a result of the privatization
agreement. the Bulgarian government and the Bulgarian Privatization Authority
have not as yet given their consent to release Knafaim from its obligations
toward it pursuant to the privatization agreement.
The government of Bulgarian has financial claims against Knafaim and
the Ze'evi Group in respect of alleged breach of the privatization agreement.
As of February 10, 2004, when the last letter of demand was received from the
Bulgarian government, the total financial demands
87
by the Bulgarian government from Knafaim and the Ze'evi Group in respect of the
years 2000-2002 reach 20.6 million dollars. Knafaim sent a letter of response
to the Bulgarian government on March 11, 2004, in which it denies outright its
liability for the alleged damages, and gave its consent to the appointment of
an arbitrator, agreed by Knafaim and the Ze'evi Group, without any admission of
the allegations whatsoever. In the estimation of Knafaim's management, Knafaim
and the Ze'evi Group have worthy defense arguments against the demands by the
Bulgarian government, based on factors including the opinion of the Ze'evi
Group's Bulgarian attorneys.
Likewise, the Ze'evi Group filed a claim against the Bulgarian
government, which now stands at 70 million dollars, which is being heard as
part of the international arbitration being held in Paris.
CLAIMS AGAINST SHERATON MORIAH
The financial statements of Herods Spa and Resort Hotels Ltd., or
Herods, a company proportionately consolidated by Sheraton Moriah, were
approved and signed by Sheraton Moriah's representatives on the board of
directors of Herods (representing 50% of Herods' directors), but were not
approved by the representatives of the other shareholders (representing the
remaining 50% of Herods' directors). The representatives of the other Herods
shareholders refuse to sign the financial statements given the dispute between
the parties, as described below.
Sheraton Moriah's management, and its representatives on Herods' board
of directors estimate that the financial exposure to Herods, or to Sheraton
Moriah, if any, in relation to claims or demands on the part of the other
shareholders, or their representatives on Herods' board of directors, is not
material.
The other shareholders of Herods filed, with the Tel Aviv District
Court, a "Request for the approval of a claim as a derivative action" against
Sheraton Moriah and Sheraton Israel Ltd., a wholly-owned subsidiary of Sheraton
Moriah that manages its hotels. The derivative action, for which they are
seeking approval, is for the cancellation of the management agreement between
Herods and Sheraton Israel as part of the arbitration process, to which the
claim has been referred. The claim itself deals with the plaintiffs arguments
regarding breaches in the management and image agreement. In the opinion of
Sheraton Moriah and its legal counsel, at this initial stage, at which the
claim has not yet been approved to be filed as a derivative action, it is not
possible to estimate the outcome of these proceedings and/or the resultant
exposure.
OTHER CLAIMS
A number of claims have been filed against certain other companies
concerning various matters arising in the normal course of business, including
taxes, customs and VAT liabilities. The management of these companies believes,
based on the opinion of the legal counsel handling the claims, that appropriate
provisions in light of the circumstances have been included in the financial
statements.
88
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
1999.................................... $24.0805 $15.4596
2000.................................... 22.0625 13.0000
2001.................................... 13.9375 4.1400
2002.................................... 7.2700 2.1000
2003.................................... 7.9600 2.0500
QUARTERLY 2002
First Quarter........................... 7.2700 4.4500
Second Quarter.......................... 5.3300 4.2000
Third Quarter........................... 5.3200 3.5900
Fourth Quarter.......................... 3.5200 3.1000
QUARTERLY 2003
First Quarter........................... 2.8000 2.0500
Second Quarter.......................... 4.4000 2.6000
Third Quarter........................... 4.2200 3.2400
Fourth Quarter.......................... 7.9600 4.2000
MONTHLY 2004
January................................. 8.5700 7.3200
February................................ 8.3000 7.2500
March................................... 8.2900 7.4000
April................................... 8.0000 7.5000
May..................................... 7.7500 7.0500
June.................................... 9.4500 7.3800
On July 13, 2004, the last reported sale price of our ADSs was $8.90
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.
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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.
ORDINARY SHARES
---------------------------- --------------------------
HIGH LOW
---------------------------- --------------------------
NIS $ NIS $
------------ ------------- ----------- -------------
ANNUAL
1999.............................. 504.00 121.00 348.00 83.55
2000.............................. 455.00 111.85 255.50 62.81
2001.............................. 281.20 67.08 89.80 20.34
2002.............................. 166.60 36.92 48.60 10.26
2003.............................. 171.00 39.05 49.80 11.37
QUARTERLY 2002
First Quarter..................... 166.60 36.92 104.40 22.21
Second Quarter.................... 130.40 26.20 101.30 20.70
Third Quarter..................... 128.40 27.55 88.40 18.15
Fourth Quarter.................... 87.30 17.96 48.60 10.26
QUARTERLY 2003
First Quarter..................... 68.00 14.51 49.80 10.63
Second Quarter.................... 93.00 21.57 63.90 14.82
Third Quarter..................... 95.20 21.44 70.70 15.92
Fourth Quarter.................... 171.00 39.05 91.90 20.99
MONTHLY 2004
January........................... 186.10 41.51 171.00 38.14
February.......................... 184.00 41.03 167.20 37.28
March............................. 188.30 41.59 168.80 37.28
April............................. 183.70 40.04 168.90 36.81
May............................... 180.10 39.54 167.40 36.75
June.............................. 208.50 46.86 174.40 38.40
As of July 13, 2004, the last reported price of our ordinary shares on
the TASE was NIS 199.60 (or $44.50) per share.
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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.
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 incompetency, 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 and directors' involvement in
matters to which they are materially interested.
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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 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 office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents,
grandparents, descendants, spouse's descendants and the spouses of any of the
foregoing. 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.
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.
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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.
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,
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 meeting held on June 1,
2003, 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.
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(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 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 in which
he was acquitted, or a criminal indictment in which he was convicted of an
offense not requiring proof of criminal intent.
We may give an advance undertaking to: (1) indemnify an office holder,
provided that the undertaking is limited to types of events which, in the
opinion of the board of directors, are foreseeable in advance at the time the
undertaking to indemnify is given, and in an amount which the board of
directors has determined is a reasonable amount under the circumstances, on
condition that the amount paid for one set of events shall not exceed 25% of
our equity according to the latest financial statements - annual or quarterly -
as published near the date of payment of the indemnification; 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.
DESCRIPTION OF KOOR'S DEFERRED SHARES
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. One of our wholly-owned subsidiaries held, as of June
20, 2004, an aggregate of 15,799 of our ordinary shares and 12,950,864 of our
Deferred Shares, par value NIS 0.001 per share.
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.
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
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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.
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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
Under the Companies Law, a merger requires approval by the Board of
Directors and by the shareholders of each of the merging companies. In
approving a merger, the Board of Directors must determine that there is no
reasonable expectation that, as a result of a merger, the merged company will
not be able to meet its obligations to its creditors. Creditors may also seek a
court order to enjoin or delay the merger if there is such an expectation that
the merged company will not be able to meet its obligations to its creditors. A
court may also issue other instructions for the protection of the creditors'
rights in connection with a merger.
Under the Companies Law, a control share acquisition of a public
company is prohibited unless a special purchase offer is made to all
shareholders. Such a special purchase offer requires, among other things, that
the Board of Directors either recommend that shareholders participate in the
purchase offer or state why it cannot do so.
MATERIAL CONTRACTS
Elisra Share Purchase Agreement
On July 2, 2002, we entered into a purchase agreement with Elta and
Elisra pursuant to which we sold 35,013,00 ordinary shares of Elisra to Elta
for an aggregate consideration of $100 million. As of the date of the agreement
the number of shares purchased by Elta constituted 30% of the issued share
capital of Elisra.
In addition,we granted to Elta a non-transferable option to purchase an
additional 9,336,000 ordinary shares of Elisra, which constituted 8% of the
issued capital of Elisra as of the date of the agreement, at an aggregate
exercise price of $26.4 million. Under the terms of the agreement, the option
will be exercisable by Elta in two exercise periods. During each exercise
period, the options are exercisable in full and one time only, as follows: (i)
the option with
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respect to 3,5012,300 shares may be exercised at any time until the earlier of
December 31, 2003 or 14 days prior to the expected closing date of an initial
public offering of shares of Elisra; and (ii) the option with respect to
5,835,500 shares may be exercised at any time until the earlier of December 31,
2003 or 30 days after the closing date of an initial public offering of shares
of Elisra. During the option periods, we must maintain the option shares free
from any pledge, lien or third party right and/or claim. On December 31, 2003,
this option expired unexercised.
Under the terms of the agreement, we will indemnify Elta with respect
to any losses, in excess of $2 million, sustained as a result of any
incorrectness or infringement of any representation or declaration by us or
Elisra.
Elisra Shareholders' Agreement
On November 2, 2002, we entered into a shareholders' agreement with
Elta and Elisra in order to govern the relationship between us and Elta as the
sole owners of Elisra. The shareholders' agreement includes provisions with
regard to the composition of the board of directors of Elisra, which will
consist of 10 members in addition to any outside directors as may be required.
Under the terms of the agreement, we and Elta will be able to nominate a number
of directors on a pro rata basis based on the number of shares held at such
time by us and Elta. If outside directors are required by law or stock exchange
rules, we will consult with Elta to determine which outside directors are to be
recommended by the board of directors. We and Elta may each oppose the
appointment of an outside director proposed by the board of director for
reasonable cause only and must provided reasoned notice within 4 business days
from the date on which the board of directors gives notice of its proposed
candidates. We have agreed with Elta to vote all of our shares for the
candidates proposed by each of us pursuant to the agreement and to vote all of
our shares for the outside director candidates nominated by the board of
directors and to vote against the removal of a member of the board whose
nomination was proposed by us or Elta unless we or Elta receive prior written
consent permitting us to vote for removal of the director. These provisions
remain in effect as long as each party owns at least 20% of the issued share
capital of Elisra or in the instance when one party fails to hold 20%, the
other party notifies the party that no longer holds 20% that the provisions
remain in effect.
Under the terms of the agreement, as long as we and Elta each hold 20%
or more of the issued share capital of Elisra, the resolutions adopted on
several subjects listed in the agreement will be adopted by a majority vote of
the board of directors or general meeting of Elisra, provided that at least one
board of director appointed by each of us and Elta voted for the resolution,
and at the general meeting, we and Elta voted for the resolution. This clause
will expire on the closing date of an initial public offering of shares of
Elisra.
The shareholders' agreement restricts our and Elta's ability to sell
shares of Elisra. In addition, the shareholders' agreement contains a right of
first offer which requires us or Elta, whoever wished to sell shares of Elisra,
to provide written notice of its wish to negotiate with the other party for the
sale of the shares. We and Elta have 15 days from the date of delivery of the
written notice to negotiate for the sale of the shares. The right of first offer
contains a right of first refusal when either we or Elta, whoever is offered to
purchase the shares, submits a bid for such shares that exceeds $2.8275, but we
do not reach an agreement within the 15 days. In addition, if we sell all of our
shares of Elisra to a third party, we have a drag-along right to
97
require Elta to sell all of its shares to the third party at a price to be
determined in accordance with the agreement. The drag-along provision will
expire on the closing date of an initial public offering of shares of Elisra.
Under the terms of the agreement, we may sell part of our holdings in
Elisra in an initial public offering and if we elect to do so, then Elta has
the right to sell shares in the initial public offering with us on a pro rata
basis. Pursuant to the agreement, Elisra is required to announce dividends of
25% of its net profits for that year, subject to a limitation for tax
liability. This provision will expire on the closing date of an initial public
offering of shares of Elisra.
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.
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.
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ISRAELI TAX CONSIDERATIONS
The following discussion represents 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.
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.
The Tax Reform, aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income, 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 both
individuals and corporations. 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%; and
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;
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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
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 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 Tax Reform, generally, capital gains tax is imposed at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale
of shares in companies (i) publicly traded on the TASE or; (ii) Israeli
companies publicly traded on the New York Stock Exchange. This tax rate does
not apply to: (i) dealers in securities; (ii) shareholders that report in
accordance with the Inflationary Adjustment Law; or (iii) shareholders who
acquired their shares prior to an initial public offering (that are subject to
a different tax arrangement). 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.
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, and are
exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange
outside of Israel, such as the NYSE, 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. In addition,
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.
In any event, the provisions of the Tax Reform will not effect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.
In some instances where our 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
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
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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.
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. On distributions of
dividends by us other than bonus shares (stock dividends), income tax at the
rate of 25% is generally withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholder's country of residence.
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. income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax
credits.
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;
101
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) 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:
(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.
102
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.
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.
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, for any taxable year in which 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 includes
dividends, interest, royalties, rents, annuities and the excess of gain 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,
103
o the amount allocated to each year during which we are considered
a PFIC other than the year of the dividend payment or disposition
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 gain recognized upon the disposition of ADSs would be taxable as
ordinary income 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.
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 2003, we
believe that we were not a PFIC for that year, nor do we 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
104
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 Securities and Exchange Act of 1934, as amended. We, as a "foreign private
issuer" are exempt from the rules and regulations under the Securities 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
Securities 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 Securities and Exchange Commission as frequently or as promptly as U.S.
companies whose securities are registered under the Securities Exchange Act.
However, we will file with the Securities and Exchange Commission 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.
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. We do not believe that it is exposed to any material
market risk with regard to market risk sensitive instruments.
MARKET RISK RELATED TO FOREIGN CURRENCY EXCHANGE RATES
As of December 31, 2003, we have financial liabilities denominated in
various currencies (primarily dollars). A fluctuation in currency prices is
liable to affect our financing expenses.
We have consolidated foreign currency-linked financial liabilities of
NIS 4,809 million, of which NIS 3,645 million is dollar-linked and the rest,
NIS 1,164 million, is linked to other currencies (mainly the Brazilian Real).
105
As of December 31, 2003, our net financial liabilities in foreign
currency totaled NIS 2,078 million, of which total dollar-linked financial
liabilities are NIS 2,082 million, and net financial assets linked to other
foreign currencies (mainly the Brazilian real) amount to NIS 4 million. A
portion of the currency exposure also stems from the export sales included in
our consolidated statements, which include NIS 6,669 million, representing
approximately 86% of our total consolidated sales, while a considerable portion
of the expenses included in the consolidated statements are stated in Israeli
currency.
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, 2003 include
transactions with financial instruments that serve mainly as a hedge against
currency exposure for the subsidiary companies.
During 2003, we bought dollars in exchange for other currencies in
forwards, call options put options, and swaps, totaling NIS 325 million , NIS
808 million, NIS 510 million and NIS 158 million, respectively. At the same
time, we had consolidated sales of dollars in exchange for other currencies
through forward contracts, call options, put options, and swaps totaling NIS 85
million, NIS 275 million, NIS 692 million and NIS 266 million, respectively.
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 liable 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.
As of December 31, 2003, our consolidated balance sheet contained
loans and other liabilities in foreign currency (mainly in U.S. dollars)
totaling NIS 4,809 million, and non-index linked shekel loans totaling NIS 994
million. As of such date, our consolidated balance sheets contained financial
assets in foreign currency (mainly in U.S. dollars) totaling NIS 2,731 million
and non-index linked shekel assets totaling NIS 565 million. Our net financial
liabilities exposed to LIBOR interest rate fluctuations reached NIS 2,363
million as of December 31, 2003, while our net financial assets exposed to
interest rate fluctuations in Israel amounted to NIS 42 million as of such
date.
We engage in hedge transactions against interest rate fluctuations
from time to time. As of December 31, 2003, these transactions totaled NIS 237
million.
As of December 31, 2003, our net liabilities exposed to fluctuations
in the LIBOR interest rate amount to NIS 2,363 million. Should the LIBOR
interest rate rise by 1%, our financing expenses would increase by NIS 24
million.
As of December 31, 2003, the net total of our loans exposed to
fluctuations in the interest rate in Israel is NIS 42 million. Should the
interest rate in Israel rise by 2%, our financing expenses would increase by
NIS 0.4 million.
106
We believe that a 1% increase in the LIBOR interest rate and in the
shekel 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 equity marketable short-term securities at December 31, 2003 of
approximately NIS 277 million. 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 28 million.
In addition, we have long-term equity holdings in several subsidiaries
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.
107
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
Disclosure Controls and Procedures. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of December 31, 2003. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to us (including our
consolidated subsidiaries) required to be included in our reports files or
submitted under the Securities Exchange Act of 1934, as amended.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have determined Mrs. Paulette Eitan, an External Director and a
member of the audit committee of our board of directors, meets the requisite
qualifications of an "audit committee financial expert" (as defined in Item 16A
of Form 20-F) and we expect our board of directors to make the same
determination at its next meeting.
Item 16B. Code of Ethics
We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Chief Financial Officer 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.
Telrad Building
14 Hamelacha Street
Park Afek
Rosh Ha'ayin 48091, Israel
Attn: Yuval Yanai, Senior Vice President and CFO
Telephone: +011-972-3-900-8333
108
Item 16C. Principal Accountant Fees and Services
Audit Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $2,064,000 for fiscal year 2003 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 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 2002, KPMG and its affiliates billed us and our consolidated subsidiaries
an aggregate of approximately $1,628,000 for these services.
Audit-Related Fees: KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $59,000 in fiscal year
2003 for assurance and related services reasonably related to the performance of
our audit. In fiscal year 2002, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $35,000 for
audit-related services. These fees relate mainly to the issuance of comfort
letters and special confirmations.
Tax Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $115,000 in fiscal year 2003 for tax
compliance, tax advice and tax planning. KPMG and its affiliates billed us and
our consolidated subsidiaries an aggregate of approximately $132,000 for
tax-related services in fiscal year 2002.
All Other Fees: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $23,000 in fiscal year 2003 for
products and services other than those comprising audit fees, audit-related fees
and tax fees. These fees mainly relate to consultations regarding internal
control documents. In fiscal year 2002, KPMG and its affiliates charged us and
our consolidated subsidiaries an aggregate of approximately $68,000 for products
and services in this category.
Audit Committee Pre-Approval Policy and Procedures
Our audit committee is responsible, among other things, for the
appointment, compensation and oversight of our external auditors. To assure the
independence of 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 2003, 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.
109
PART III
ITEM 17. FINANCIAL STATEMENTS.
See pages F-1 through F-139, 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.***
2.1 Form of Ordinary Share Certificate.*
2.2 Form of Deposit Agreement including Form of American
Depositary Receipt.**
4.1 Purchase Agreement, dated July 2, 2002, by and among Koor
Industries Ltd., Elta Systems Ltd. and Elisra Electronic
Systems Ltd. ***
4.2 Shareholders Agreement, dated November 2, 2002, by and
among Koor Industries Ltd., Elta Systems Ltd. and Elisra
Electronic Systems Ltd. ***
8.1 List of significant subsidiaries.****
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.****
______________________
* 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.
**** Filed herewith.
110
Koor Industries Ltd. (an Israeli Corporation)
Financial Statements as at December 31, 2003
-------------------------------------------------------------------------------
Contents
Page
Auditors' Report F-2
Financial Statements
Consolidated Balance Sheets F-4
Company Balance Sheets F-6
Consolidated Statements of Operations F-8
Company Statements of Operations F-9
Statement of Shareholders' Equity F-10
Consolidated Statements of Cash Flows F-13
Company Statements of Cash Flows F-19
Notes to the Financial Statements F-21
F-1
Auditors' Report to the Shareholders of
Koor Industries Ltd.
We have audited the accompanying balance sheets of Koor Industries Ltd.
(hereinafter - the "Company" or Koor) and the consolidated balance sheets of
the Company and its subsidiaries as at December 31, 2003 and 2002, and the
related statements of operations, shareholders' equity and cash flows, for
each of the three years, the last of which ended December 31, 2003. 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, whose assets
constitute 20% and 15% of the total consolidated assets as at December 31,
2003 and 2002 respectively, and whose revenues constitute 19%, 20% and 48% of
the total consolidated revenues for the years ended December 31, 2003, 2002
and 2001, respectively. Furthermore, we did not audit the financial statement
of certain affiliates, whose company's investments constitute NIS 218,081
thousand and NIS 231,815thousand, as at December 31, 2003 and 2002,
respectively, and its equity in losses constitute NIS 12,875 thousand, NIS
6,748 thousand and NIS 9,438 thousand for the years ended December 31, 2003,
2002 and 2001, respectively. The financial statements of those subsidiaries
and affiliates were audited by other auditors whose reports thereon were
furnished to us. Our opinion, insofar as it relates to amounts emanating from
the financial statements of such investee companies, is based solely on the
said 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 the above-mentioned
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 of
December 31, 2003 and 2002 and the results of their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the
last of which ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel.
F-2
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States (US
GAAP). The implementation of US GAAP has an effect on the consolidated balance
sheets as at December 31, 2003 and 2002, and on the statements of operations and
statements of shareholder's equity for each of the three years the last of which
ended December 31, 2003, as described in Note 28 of the financial statements.
As explained in Note 2B, the above-mentioned financial statements are
presented in values adjusted for the changes in the general purchasing power
of the Israeli currency, in accordance with Opinions of the Institute of
Certified Public Accountants in Israel.
As discussed in Note 18A(1) to the financial statements, there is an
investigation which is being conducted by the Restrictive Trade Practices
Authority, concerning the alleged coordination of operations within The Koor
Group with respect to the products of its subsidiaries - Tadiran Ltd. and
Telrad Networks Ltd.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
March 30, 2004
F-3
Consolidated Balance Sheets as at December 31
-------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
-------------
December 31 December 31
--------------------------- ---------------
2003 2002 2003
---------- ----------- ---------------
Note NIS thousands US $ thousands
--------- --------------------------- ----------------
Assets
Current assets
Cash and cash equivalents 593,403 790,099 135,511
Short-term deposits and investments 4 366,809 1,038,483 83,765
Trade receivables 5 2,052,461 1,986,877 468,705
Other receivables 6 452,170 452,900 103,259
Assets designated for sale 3B(2) 42,525 43,192 9,711
Inventories and projects in progress, net
of customer advances 7 1,885,751 1,971,733 430,636
----------- ------------ -----------
Total current assets 5,393,119 6,283,284 1,231,587
----------- ------------ -----------
Investments and long-term
receivables
Investments in affiliates 8 943,764 1,041,296 215,520
Other investments and receivables 9 483,384 571,539 110,387
---------- ----------- -----------
1,427,148 1,612,835 325,907
---------- ----------- -----------
Fixed assets 10 2,928,407 3,139,862 668,738
---------- ----------- -----------
Intangible assets deferred tax assets and
deferred expenses 11 2,121,083 2,396,817 484,376
---------- ----------- -----------
---------- ----------- -----------
11,869,757 13,432,798 2,710,609
========== ========== =========
F-4
Koor Industries Ltd. (An Israeli Corporation)
-------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
December 31 December 31
----------------------------- --------------
2003 2002 2003
----------------------------- ---------------
Note NIS thousands US $ thousands
----------- ----------------------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 1,577,402 2,315,499 360,220
Trade payables 13 1,342,783 1,183,183 306,641
Other payables 14 1,270,217 1,394,455 290,070
Customer advances, net of project
in progress 7 156,441 229,854 35,725
---------- ---------- ---------
Total current liabilities 4,346,843 5,122,991 992,656
---------- ---------- ---------
Long-term liabilities
Net of current maturities: 15,21
Bank loans 3,006,343 3,837,369 686,536
Other loans 113,494 104,705 25,918
Convertible debentures - 397,504 -
Customer advances 194,094 262,897 44,324
Deferred taxes 16F 199,787 195,449 45,624
Liability for employee severance benefits, net 17 192,002 256,304 43,846
---------- ---------- ---------
Total long-term liabilities 3,705,720 5,054,228 846,248
---------- ---------- ---------
Contingent liabilities and commitments 18
Convertible debentures of subsidiary 340,270 - 77,705
---------- ---------- ---------
Minority Interest 1,736,531 1,528,410 396,559
---------- ---------- ---------
Shareholders' Equity 20 1,740,393 1,727,169 397,441
---------- ---------- ---------
---------- ---------- ---------
11,869,757 13,432,798 2,710,609
========== ========== =========
------------------------------ ---------------------------------
March 30, 2004 Jonathan Kolber Prof. Gabriela Shalev
Chief Executive Officer Member of the Board of Directors
The accompanying notes are an integral part of the financial statements.
F-5
Company Balance Sheets as at December 31
--------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
December 31 --------------
--------------------------- December 31
2003 2002 2003
---------- ----------- --------------
Note NIS thousands US $ thousands
---------- --------------------------- --------------
Assets
Current assets
Cash and cash equivalents 9,205 24,791 2,102
Short-term deposits and investments 4 310,806 860,719 70,976
Short-term loans and current maturities
of loans to investee companies 16,480 98,966 3,763
Receivables:
Investee companies 28,650 21,436 6,543
Others 6 67,774 49,159 15,477
Assets designated for sale 3B(2) 42,525 43,192 9,711
---------- ---------- --------
Total current assets 475,440 1,098,263 108,572
---------- ---------- --------
Investments and long-term receivables
Investments in investees 8 3,453,066 3,646,594 788,551
Other investments and receivables 9 33,177 56,030 7,577
---------- ---------- --------
3,486,243 3,702,624 796,128
---------- ---------- --------
Fixed assets, net 10 23,323 36,108 5,326
---------- ---------- --------
---------- ---------- --------
3,985,006 4,836,995 910,026
========== ========== ========
F-6
Koor Industries Ltd. (An Israeli Corporation)
--------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
December 31 --------------
----------------------------- December 31
2003 2002 2003
----------- ------------ --------------
Note NIS thousands US $ thousands
----------- ----------------------------- --------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 588,535 785,866 134,399
Trade payables 13 503 1,258 115
Other payables:
Investee companies 57 164,390 13
Others 14 43,266 78,062 9,880
---------- ---------- ----------
Total current liabilities 632,361 1,029,576 144,407
---------- ---------- ----------
Long-term liabilities
Net of current maturities: 15, 21
Loans from banks and others 1,610,768 2,071,868 367,839
Liability for employee severance
benefits, net 17 1,484 8,382 339
---------- ---------- ----------
Total long-term liabilities 1,612,252 2,080,250 368,178
---------- ---------- ----------
Contingent liabilities and commitments 18
Shareholders' equity 20 1,740,393 1,727,169 397,441
---------- ---------- ----------
---------- ---------- ----------
3,985,006 4,836,995 910,026
========== ========== ==========
---------------------------- ------------------------------------
March 30, 2004 Jonathan Kolber Prof. Gabriela Shalev
Chief Executive Officer Member of the Board of Directors
The accompanying notes are an integral part of the financial statements.
F-7
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
----------------------------------------------- December 31
2003 2002 2001 2003
------------ ----------- ----------- ---------------
Note NIS thousands US $ thousands
------------ ----------------------------------------------- ---------------
Revenue from sales
and services 23A 7,690,430 7,099,790 7,463,419 1,756,207
Cost of sales and services 23B 5,392,944 5,315,780 5,765,686 1,231,547
---------- ---------- ---------- ----------
Gross profit 2,297,486 1,784,010 1,697,733 524,660
Selling and marketing expenses 23C 940,457 814,777 815,101 214,765
General and administrative
expenses 23D 460,744 489,369 524,195 105,217
---------- ---------- ---------- ----------
Operating earnings 896,285 479,864 358,437 204,678
Financing expenses, net 23E 228,200 408,437 432,437 52,112
---------- ---------- ---------- ----------
668,085 71,427 (74,000) 152,566
Other income (expenses), net 23F (219,721) 5,824 (622,660) (50,176)
Transfer to statement of income
of translation differences of
autonomous investee in voluntary
liquidation 3B(1) - (390,901) - -
---------- ---------- ---------- ----------
Earnings (loss) before income tax 448,364 (313,650) (696,660) 102,390
Income tax 16G 85,372 141,179 38,830 19,496
---------- ---------- ---------- ----------
362,992 (454,829) (735,490) 82,894
Group's equity in the operating
results of affiliates, net 23G (113,823) (252,091) (1,894,525) (25,993)
---------- ---------- ---------- ----------
249,169 (706,920) (2,630,015) 56,901
Minority interest in
subsidiaries, net (202,807) (60,049) 8,367 46,314
---------- ---------- ---------- ----------
Net earnings (loss) from
continuing activities 46,362 (766,969) (2,621,648) 10,587
Result of discontinued
activities, net 23H - - (29,279) -
---------- ---------- ------------ ----------
Net earnings (loss) for the year 46,362 (766,969) (2,650,927) 10,587
========== ========== ============ ==========
NIS NIS NIS US$
---------- ---------- ------------ -----------
Basic earnings (loss) per NIS 1
par value of ordinary shares: 26
Continuing activities 2.950 (50.547) (172.608) 0.674
Discontinued activities - - (1.928) -
---------- ---------- ---------- ----------
2.950 (50.547) (174.536) 0.674
========== ========== ============ ==========
The accompanying notes are an integral part of the financial statements.
F-8
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Operations
-------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
--------------
Year ended December 31 Year ended
------------------------------------------------- December 31
2003 2002 2001 2003
----------- ---------- ----------- --------------
Note NIS thousands US $ thousands
--------- ------------------------------------------------- --------------
Income
Management services
from subsidiaries 25,006 35,573 34,161 5,710
Others, net 23F 5,691 365,431 - 1,300
----------- ---------- ---------- ---------
Total income 30,697 401,004 34,161 7,010
----------- ---------- ---------- ---------
Expenses
General and administrative
expenses 23D 41,164 48,136 42,065 9,400
Others, net 23F - - 51,902 -
Financing, net 23E 35,108 199,808 198,448 8,018
----------- ---------- ---------- ---------
Total expenses 76,272 247,944 292,415 17,418
----------- ---------- ---------- ---------
Earnings (loss) before
income tax (45,575) 153,060 (258,254) (10,408)
Income tax 55,667 3,722 - 12,712
----------- ---------- ---------- ---------
Earnings (loss) after
income tax 10,092 156,782 (258,254) 2,304
Koor's equity in the
operating results of
investee companies, net 23G 36,270 (923,751) (2,363,394) 8,283
Results of discontinued
activities, net 23H - - (29,279) -
----------- ---------- ---------- ---------
Net earnings (loss) for the
year 46,362 (766,969) (2,650,927) 10,587
=========== =========== ============ ==========
NIS NIS NIS US$
----------- ---------- ---------- ---------
Basic earnings (loss )
per NIS 1 par value of
ordinary shares: 26
Continuing activities 2.950 (50.547) (172.608) 0.674
Discontinued activities - - (1.928) -
----------- ---------- ---------- ---------
2.950 (50.547) (174.536) 0.674
=========== =========== ============ ==========
The accompanying notes are an integral part of the financial statements.
F-9
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity
--------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Number Share Capital Company Cumulative Retained Total
of capital reserves shares held foreign earnings
ordinary by the company currency (deficit)
shares (1) and translation
subsidiaries adjustments
------------- --------- ----------- -------------- ------------ ---------- ------------
NIS thousands
--------------------------------------------------------------------------------
Balance at January 1, 2001 15,192,379 564,515 2,563,952 (272,458) (702,507) 2,409,518 4,563,020
Changes during 2001:
Net loss - - - - - (2,650,927) (2,650,927)
Exercise of stock options
granted to Israeli banks - - 147 - - - 147
Expiring options granted to
Israeli Banks (23,495) - - - - - -
Cumulative foreign currency
translation adjustments, net - - - - 283,584 283,584
---------- ------- --------- ---------- --------- --------= ---------
Balance at December 31, 2001 15,168,884 564,515 2,564,099 (272,458) (418,923) (241,409) 2,195,824
========== ======== ========== ========== ========= ========= =========
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-10
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity
--------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Number Share Capital Company Cumulative Retained Total
of capital reserves shares held foreign earnings
ordinary by the company currency (deficit)
shares (1) and translation
subsidiaries adjustments
------------- ---------- --------- -------------- ----------- ---------- -----------
NIS thousands
-----------------------------------------------------------------------------------
Balance at December 31,
2001 15,168,884 564,515 2,564,099 (272,458) (418,923) (241,409) 2,195,824
Changes during 2002:
Net loss - - - - - (766,969) (766,969)
Exercise of stock options
to employees 4,493 *- - - - - -
Cumulative foreign currency
translation adjustments, net - - - - 12,538 - 12,538
Provision for decline in
value of autonomous investee
(see Note 3A(1)) - - - - (105,125) - (105,125)
Transfer to statement of
income of translation
differences of autonomous
investee in voluntary
liquidation
(see Note 3B(1)) - - - - 390,901 - 390,901
------------- ---------- ----------- ----------- ---------- ------------ ----------
Balance at 31 December,
2002 15,173,377 564,515 2,564,099 (272,458) (120,609) (1,008,378) 1,727,169
Changes during 2003:
Net earnings - - - - - 46,362 46,362
Exercise of stock options
to employees 67,783 *- - - - - -
Issuance of "treasury
stock" (see Note 20B) 500,000 - - 192,137 - (149,126) 43,011
Cancellation of provision
for decline in value of
autonomous investee
(see Note 3A(1)) - - - - 73,401 - 73,401
Cumulative foreign currency
translation adjustments - - - - (149,550) - (149,550)
------------- ---------- ----------- ----------- ---------- ------------ ----------
Balance at December 31,
2003 15,741,160 564,515 2,564,099 (80,321) (196,758) (1,111,142) 1,740,393
============= ========== =========== =========== ========== ============ ==========
* Represents an amount lower than NIS 1,000.
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-11
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------
Convenience translation into US Dollars (Note 2B)
Number Share Capital Company Cumulative Retained Total
of capital reserves shares held foreign earnings
ordinary by the company currency (deficit)
shares (1) and translation
subsidiaries adjustments
------------- -------- ---------- -------------- ------------ ------------ --------
NIS thousands
-------------------------------------------------------------------------------
Balance at January 1,
2003 15,173,377 128,914 585,544 (62,219) (27,542) (230,276) 394,421
Changes during 2003:
Net earnings - - - - - 10,587 10,587
Exercise of stock
options to employees 67,783 *- - - - - -
Issuance of "Treasury stock" 500,000 - - 43,877 - (34,055) 9,822
Provision for decline in
value of autonomous investee - - - - 16,762 - 16,762
Cumulative foreign currency
translation adjustments - - - - (34,152) - (34,152)
----------- --------- --------- --------- ---------- ---------- ---------
Balance at 31 December,
2003 15,741,160 128,914 585,544 (18,342) (44,932) (253,744) 397,440
=========== ========= ========= ========= ========== ========== =========
* Represents an amount lower than US$ 1,000.
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-12
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ----------------- -------------- ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
Cash flows generated by operating activities:
Net earnings (loss) for the year 46,362 (766,969) (2,650,927) 10,587
Adjustments to reconcile net earnings to net
cash flows generated by operating activities (A) 728,413 1,194,420 3,095,960 166,342
------------- ------------ ------------- -----------
Net cash inflow generated by operating
activities 774,775 427,451 445,033 176,929
------------- ------------ ------------- -----------
Cash flows generated by investing activities:
Purchase of fixed assets (193,424) (260,119) (460,916) (44,171)
Investment grants in respect of fixed assets 8,482 7,583 41,573 1,937
Amounts charged to intangible assets
and deferred expenses (313,125) (810,649) (575,560) (71,506)
Additional investments in subsidiaries (600) (2,802) (67,084) (137)
Acquisition of subsidiaries (B) (14,372) (92,746) - (3,282)
Investments in affiliates (6,316) (13,652) (46,269) (1,442)
Investments in loans to affiliates (1,616) (1,405) (1,507) (369)
Repayment of loans from affiliates and others 226,765 4 320 51,785
Proceeds from realization of investments
in formerly consolidated subsidiaries,
net of cash in those subsidiaries at the
time they ceased being consolidated I (14,182) - (142,112) (3,239)
Proceeds from realization of activity of
prior year - 11,849 28,466 -
Purchase of consolidated companies'
shares by their consolidated companies - - (68,936) -
Proceeds from realization of activities (D) - - 35,378 -
Proceeds from disposal of investments
in investee companies and others 123,742 484,355 177,395 28,258
Proceeds from sale of fixed assets and
intangible assets 30,998 314,396 81,231 7,079
Investment in venture capital companies (13,580) (47,025) (153,633) (3,101)
Decrease (increase) in other investments 7,465 (58,406) 16,330 1,705
Decrease in short-term deposits and
investments, net 426,348 210,804 52,219 97,362
------------- ------------ ------------- -----------
Net cash inflow (outflow) generated by
investing activities 266,585 (257,813) (1,083,105) 60,879
------------- ------------ ------------- -----------
The accompanying notes are an integral part of the financial statements.
F-13
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ ------------- ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
Cash flows generated by financing activities:
Proceeds from exercise of stock options
granted to Israeli banks - - 147 -
Issuance of equity 43,011 - - 9,822
Issuance of shares to minority interest in
subsidiaries 14,137 2,928 57,742 3,228
Issue of preferred shares to minority
interest of subsidiary - - 60,829 -
Dividend paid to minority interest
in subsidiaries (56,529) (27,104) (21,923) (12,909)
Payment of suppliers credit received
for the purchase of fixed assets - (13,014) - -
Purchase of convertible debentures of
subsidiary by its subsidiary in the market - (15,137) - -
Issuance of convertible debentures in subsidiary - 136,210 257,457 -
Proceeds from principal of long-term
loans and other long-term liabilities 949,392 1,551,258 2,679,189 216,806
Repayment of long-term loans, debentures
and other long-term liabilities (1,891,766) (1,875,023) (1,921,119) (432,008)
Increase (decrease) in credit from banks
and others, net (268,028) 16,162 (716,446) (61,208)
--------------- -------------- ------------ ----------
Net cash (outflow) inflow generated by
financing activities (1,209,783) (223,720) 395,876 (276,269)
--------------- -------------- ------------ ----------
Translation differences in respect of cash
balances of autonomous foreign investee
companies (28,273) 3,056 56,512 (6,457)
--------------- -------------- ------------ ----------
Decrease in cash and cash equivalents (196,696) (51,026) (185,684) (44,918)
Balance of cash and cash equivalents
at beginning of year 790,099 841,125 1,026,809 180,429
--------------- -------------- ------------ ----------
Balance of cash and cash equivalents
at end of year 593,403 790,099 841,125 135,511
=============== ============== ============ ==========
The accompanying notes are an integral part of the financial statements.
F-14
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
---------- ----------- ------------- ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
A. Adjustments to reconcile net earnings
(loss) to cash flows generated by
operating activities:
Income and expenses not involving cash flows:
Minority interest in subsidiaries, net 202,807 60,049 (9,081) 46,314
Equity in operating results of affiliates, net 113,823 252,091 1,894,525 25,993
Depreciation and amortization 440,856 423,580 417,244 100,675
Deferred taxes, net (45,206) 64,479 (37,231) (10,323)
Increase (decrease) in liabilities in respect of
employee severance benefits, net (49,822) 52,138 (111,449) (11,378)
Net capital losses (gains) from realization:
Fixed assets and intangible assets 22,863 (23,079) 6,085 5,221
Investments in formerly consolidated
subsidiaries (16,428) - 5,789 (3,751)
Realization of activities - - 27,663 -
Investments in investee companies (4,852) (342,343) 53,611 (1,109)
Translation differences of autonomous
investee in voluntary liquidation - 390,901 - -
Inflationary erosion (linkage) of principal of
long-term loans and other liabilities (77,510) 56,490 133,511 (17,700)
Inflationary erosion (linkage) of principal of
credit from banks and others (10,565) (11,010) 7,491 (2,413)
Inflationary erosion of value of investments,
deposits and loans receivable 32,540 (19,749) (32,520) 7,431
Changes in value of assets and investments 70,503 143,400 179,375 16,100
--------- ----------- ----------- ---------
679,009 1,046,947 2,535,013 155,060
--------- ----------- ----------- ---------
The accompanying notes are an integral part of the financial statements
F-15
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
---------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
--------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ ------------ ---------------
NIS thousands US $ thousands
--------------------------------------------- ---------------
A. Adjustments to reconcile net
earnings to 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) (218,826) 300,164 672,167 (49,972)
Decrease (increase) in inventories, projects in
progress and customer advances (including
long-term customer advances and deposits) (116,927) 52,251 (32,407) (26,702)
Increase (decrease) in trade payables
and other payables 385,157 (204,942) (78,813) 87,956
----------- ------------ ----------- ----------
49,404 147,473 560,947 11,282
----------- ------------ ----------- ----------
728,413 1,194,420 3,095,960 166,342
=========== ============ =========== ==========
B. Acquisition of subsidiaries
Assets and liabilities of the subsidiaries
at date of acquisition:
Working capital deficit (surplus),
excluding cash and cash equivalents (12,160) 6,516 - (2,777)
Fixed assets and investments (2,404) (36,434) - (549)
Long-term liabilities 192 10,280 - 44
Contingent liability - 18,516 - -
Goodwill - (91,624) - -
----------- ------------ ----------- ----------
(14,372) (92,746) - (3,282)
=========== ============ =========== ==========
The accompanying notes are an integral part of the financial statements
F-16
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
---------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ -------------- ---------------
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 deficit, excluding cash
and cash equivalents (47,105) - (253,532) (10,757)
Fixed assets and investments 8,765 - 27,687 2,002
Intangible assets 15,440 - - 3,526
Long-term liabilities (3,463) - (53,869) (791)
Minority interest in the subsidiary as at date
of the sale - - (59,516) -
Investments in affiliated companies, net 12,971 - (2,303) 2,962
Consideration not yet received from
consolidation of companies - - (12,767) -
Deficiency in capital of subsidiary without
guarantee - - 217,977 -
Capital loss on sale of investments in
subsidiaries (790) - (5,789) (181)
------------ ---------- ------------ ---------
(14,182) - (142,112) (3,239)
============ ========== ============ =========
D. Proceeds from realization of activities
Working capital surplus excluding cash and
cash equivalents - - 3,639 -
Fixed assets - - 68,163 -
Realization proceeds receivable - - (8,761) -
Capital loss from realization of activities - - (27,663) -
------------ ---------- ------------ ---------
- - 35,378 -
============ ========== ============ =========
F-17
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ ----------- ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
E. Non-cash transactions:
Purchase of fixed assets by credit 24,514 10,680 25,081 5,598
=========== ========= =========== ===========
Purchase of other assets by credit 6,639 245,924 - 1,516
=========== ========= =========== ===========
Proceeds from sale of fixed assets, formerly
consolidated subsidiaries and realization
of activities 15,145 - 47,989 3,459
=========== ========= =========== ===========
Proposed dividend to minority shareholders
by subsidiaries 15,446 - 5,695 3,527
=========== ========= =========== ===========
Investment in subsidiaries - - 2,783 -
=========== ========= =========== ===========
Purchase of fixed and other assets and inventory
in consideration of issuance subsidiary shares
to minority - 28,683 - -
=========== ========= =========== ===========
Contingent liability from consolidated
subsidiary - 18,516 - -
=========== ========= =========== ===========
Conversion of investment to loan in an
affiliates 470 - - 107
=========== ========= =========== ===========
The accompanying notes are an integral part of the financial statements.
F-18
Koor Industries Ltd. (An Israeli Corporation)
------------------------------------------------------------------------------------------------------------------------------
Company Statements of Cash Flows
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ ------------ ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
Cash flows generated by operating activities:
Net income (loss) for the year 46,362 (766,969) (2,650,927) 10,587
Adjustments to reconcile net income to net cash
flows generated by operating activities (A) (163,429) 310,315 2,366,039 (37,321)
------------- ------------- ------------- ----------
Net cash outflow generated by operating
activities (117,067) (456,654) (284,888) (26,734)
------------- ------------- ------------- ----------
Cash flows generated by investing activities:
Investee companies - acquisition of shares,
payments on account of shares, loans
granted\received and non-current accounts 287,237 6,251 (187,973) 65,594
Purchase of fixed assets (392) (108) (386) (90)
Decrease (increase) in investments and
other receivables, net (31,428) (54,106) 10,601 (7,177)
Proceeds from sale of fixed assets 30 272,776 123 7
Proceeds from realization of investments
in investee companies, net 102,875 454,752 177,652 23,493
Investment in short-term deposits and
investments, net 460,818 197,446 (4,143) 105,234
------------- ------------- ------------- ----------
Net cash inflow (outflow) generated by
investing activities 819,140 877,011 (4,126) 187,061
------------- ------------- ------------- ----------
Cash flows generated by financing activities:
Proceeds from exercise of stock options - - 147 -
Equity issuance 43,011 - - 9,822
Receipt of long-term loans and other
long-term liabilities 360,213 574,422 1,716,801 82,259
Payments of long-term loans and
other long-term liabilities (1,107,283) (883,190) (1,415,064) (252,862)
Credit from banks and others, net (13,600) (148,154) 24,405 (3,105)
------------- ------------- ------------- ----------
Net cash (outflow) inflow generated by
financing activities (717,659) (456,922) 326,289 (163,886)
------------- ------------- ------------- ----------
Increase (decrease) in cash and cash
equivalents (15,586) (36,565) 37,275 3,559
Balance of cash and cash equivalents at
beginning of year 24,791 61,356 24,081 5,661
------------- ------------- ------------- ----------
Balance of cash and cash equivalents at
end of year 9,205 24,791 61,356 2,102
============= ============= ============= ==========
The accompanying notes are an integral part of the financial statements.
F-19
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Cash Flows (cont'd)
----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 2003
Convenience
translation
(Note 2B)
---------------
Year ended December 31 Year ended
---------------------------------------------- December 31
2003 2002 2001 2003
----------- ------------ ------------ ---------------
NIS thousands US $ thousands
---------------------------------------------- ---------------
(A) Adjustments to reconcile net earnings
(losses) to cash flows generated by
operating activities:
Income and expenses not involving cash flows:
Equity in operating results of investee
companies in addition, net of dividend
received therefrom (17,120) 952,414 2,369,847 (3,909)
Depreciation and amortization 13,718 2,899 2,321 3,133
Deferred taxes, net (58,903) (43,798) - (13,451)
Increase (decrease) in liability in respect of
employee severance benefits, net (6,898) 5,643 (765) (1,575)
Net capital losses (gains) from realization:
Fixed assets 96 (29,189) (2) 22
Investment in investee companies (11,635) (336,621) 53,725 (2,657)
Increase in value of deposits and other
erosions, net (11,260) (10,880) (20,658) (2,573)
Exchange rate differences and erosion of
long-term loans and other liabilities (24,865) 29,083 110,711 (5,678)
Erosion (linkage) of loans from banks
and others (10,526) 5,056 10,856 (2,404)
Changes in value of investments and assets 673 10,037 - 154
------------- ------------- ------------- ----------
(126,720) 584,644 2,526,035 (28,938)
------------- ------------- ------------- ----------
Changes in operating assets and liability items:
Increase in current accounts of
investee companies, net (43,975) (270,044) (142,569) (10,042)
Decrease (increase) in receivables 42,817 (18,118) 8,882 9,778
Increase (decrease) in trade payables
and other payables (35,551) 13,833 (26,309) (8,119)
------------- ------------- ------------- ----------
(36,709) (274,329) (159,996) (8,383)
------------- ------------- ------------- ----------
(163,429) 310,315 2,366,039 (37,321)
============= ============= ============= ==========
(B) Significant non-cash transactions:
Dividend in kind from investee company - 244,067 - -
============= ============= ============= ==========
Proceeds from realization of affiliated
company in capital note - 27,373 - -
============= ============= ============= ==========
Investments in investee companies against
current account of investee company,
dividend and capital note - - 1,003,998 -
============= ============= ============= ==========
Purchase of company shares from investee
company - - 23,574 -
============= ============= ============= ==========
The accompanying notes are an integral part of the financial statements.
F-20
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 1 - General
Koor Industries Ltd. is a holding company, which operates in the
fields of telecommunications, defense electronics, agro-chemicals and
other chemicals and venture capital investment, through its
subsidiaries, proportionately consolidated companies and affiliates
(hereinafter - 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.
Note 2 - Significant Accounting Policies
The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Israel, which
differ in certain respects from those followed in the United States,
as described in Note 28.
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. (hereinafter - "Koor" or
the "Company").
2. Subsidiaries - companies, including partnerships, whose
statements are fully consolidated, directly or indirectly,
with those of the Company.
3. Proportionately consolidated companies - jointly controlled
companies, which are consolidated by the proportionate
consolidation method, directly or indirectly, in Koor's
financial statements.
4. Affiliates - companies in which Koor has voting rights which
give it 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.
5. Investees - subsidiaries, proportionately consolidated
companies or affiliates.
6. Other companies - companies, the investment in which does not
give significant influence, which are accounted for by the
cost method.
7. Interested parties - as defined in Paragraph (1) to the
definition of "related parties" in Section 1 of the Israeli
Securities Law, including related parties as defined in
Opinion 29 of the Institute of Certified Public Accountants
in Israel (hereinafter - "ICPAI").
F-21
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
A. Definitions (cont'd):
8. Controlling shareholders - as defined in the Israeli
Securities Regulations (Financial Statement Presentation of
Transactions between a Company and its Controlling
Shareholder), 1996.
9. Venture capital fund - as defined in Standard No. 1 of the
Israel Accounting Standards Board ("IASB").
10. Venture capital investments - an investment in a company
that meets the following two conditions:
(a) The company is engaged primarily in research,
development or marketing of innovative,
high-technology products or processes.
(b) At least 90% of the company's financing stems from
owners' capital (including shareholder loans and
owner-guaranteed credit), with the support of state
authorities or research grants.
11. Consumer Price Index - the Israeli Consumer Price Index
published by the Central Bureau of Statistics.
12. Dollar - United States Dollar.
B. Adjusted financial statements:
1. a) The Company prepared its financial statements on the
basis of historical cost, adjusted for changes in
the general purchasing power of the shekel.
b) The financial statements of the Koor Group are
adjusted in accordance with the opinions of the
ICPAI and are based on accounting records that are
maintained in nominal NIS or in other functional
currencies.
c) The non-monetary asset amounts do not necessarily
represent their realizable or current economic
value, but rather the historical cost of those
assets adjusted for the changes in the general
purchasing power of the NIS. The term "cost" in
these financial statements means cost in adjusted
NIS.
d) All comparative data for earlier periods (including
monetary item amounts) are stated adjusted to the
CPI of the end of the present report period.
F-22
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
B. Adjusted financial statements: (cont'd)
2. The following principles of adjustment relate to those Koor
Group companies whose financial statements were adjusted on
the basis of the changes in the CPI:
a) Non-monetary items (mainly fixed assets,
inventories and projects in progress and the
related customer advances, intangible assets and
deferred expenses and shareholders' equity items)
have been adjusted on the basis of the changes in
the CPI, from the CPI published for the month in
which the transaction was effected to the CPI
published for the balance sheet month.
b) Investments in investees and the equity in the
results of their operations for the current year,
as well as the minority interest in subsidiaries
and the share in the results of their operations
for the current year, are based on the adjusted
financial statements of those companies.
c) Monetary items (items whose balance sheet amounts
reflect current or realizable values at balance
sheet date) are included in the adjusted balance
sheet as at balance sheet date at their nominal
value at that date.
d) The components of the statement of operations
(except for financing), relating to transactions
effected during the year - sales, purchases, labor
costs, etc., have been adjusted according to the
CPI in respect of the months in which the related
transactions were effected. The erosion of monetary
balances relating to the aforesaid transactions has
been included in the financing item.
e) The statement of operations components deriving
from non-monetary items (such as depreciation and
amortization, changes in inventories, prepaid
expenses and prepaid income), and components
relating to the provisions included in the balance
sheet (such as provision for severance pay and
provision for vacation pay), were determined
according to the changes in the balances of the
relevant balance sheet items after taking into
account the respective cash flows.
f) The financing item, derived from the other
financial statement items, reflects real financing
income and expenses, as well as the erosion of
monetary balances during the year, earnings and
losses from the realization of marketable
securities, and earnings and losses from derivative
financial instruments (see also item 2U as
follows).
g) Income tax:
Current taxes consist of payments on account during
the year in addition to amounts payable on the
balance sheet date (or less amounts refundable as
at the balance sheet date). Payments on account
were adjusted according to the CPI prevailing on
the date of payment, while the amounts payable (or
being claimed as a refund) were included without
adjustment.
Therefore, current taxes also include the expense
deriving from the erosion of the tax payments, from
the date of payment until the end of the year.
F-23
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
B. Adjusted financial statements (cont'd):
h) A dividend declared and actually paid in the report
year was adjusted on the basis of the CPI
prevailing at the time of its actual payment; a
dividend declared/proposed in the report year and
not yet paid by the balance sheet date, is included
without adjustment.
The amount shown as "erosion of a dividend declared
in the preceding year" reflects the erosion in the
real value of the dividend that was
declared/proposed in the preceding year and
actually paid in the current year.
3. Adjustment of financial statements of investees whose
functional currency is the Dollar:
a. The financial statements of certain investees are
adjusted on the basis of the exchange rate of the
Dollar, in accordance with Section 29 of Opinion 36
of the ICPAI.
According to the provisions of Clarifications 8 to
Opinion 36 of the ICPAI, year-end balance sheet
balances were translated to Israeli currency at the
exchange rate of the foreign currency, in which the
financial statements of these companies are
prepared, prevailing at the balance sheet date. The
results of operations for the year were translated
to Israeli currency at the exchange rate of the
foreign currency, in which the financial statements
of these companies were prepared, prevailing at the
end of each quarter. Balance sheet balances at the
beginning of the report year, as well as capital
changes during the year, were translated at the
relevant exchange rate to the NIS prevailing at the
beginning of the year, or on the date of change,
respectively, and later, were adjusted for changes
in the CPI until the balance sheet month. This
accounting treatment is relevant for autonomous
overseas companies and for Israeli companies whose
functional currency is the dollar.
Differences arising from the translation were
included in a separate item of shareholders' equity
under "Cumulative foreign currency translation
adjustments".
b. The financial statements of investees operating
overseas which are "integrated units" of the Group,
in accordance with the tests prescribed in the
opinions of the ICPAI, are translated from foreign
currency to NIS: non-monetary items are translated
according to historical exchange rates and adjusted
for the changes in the CPI, and monetary items are
translated according to the exchange rate
prevailing on the balance sheet date. Statement of
operations items are translated according to
average exchange rates and are adjusted for changes
in the CPI. The differences resulting from the
translation are charged to the financing item.
F-24
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
C. Principles of consolidation:
1. The consolidated financial statements include the financial
statements of Koor and of all the companies in which the
Company has control. Jointly controlled companies are
included by the proportionate consolidation method.
2. Goodwill deriving from the acquisition of an investment,
which represents the excess of acquisition cost or the
investment in subsidiaries over the fair value of
identifiable assets less the fair value of identifiable
liabilities upon acquisition is amortized over the period of
economic benefit at equal annual rates over 10 years to 20
years commencing from the acquisition date. The amortization
of goodwill is included in "other expenses" item.
Differences resulting from changes in shareholding rates are
charged to the statement of operations when they occur,
except for changes deriving from the exchange of similar
assets, which are debited/credited to goodwill and are
charged to the statement of operations, for the benefit
period, as above said.
3. Excess cost allocated to assets and liabilities is charged
to the relevant balance sheet items.
4. Material inter-company transactions and balances items are
eliminated upon consolidation. Likewise, material
intercompany sales not yet realized outside the Group are
eliminated.
5. Koor's shares, which were purchased by the Company and
subsidiaries, are accounted for as treasury stock.
6. To the extent that the sale and/or exercise of convertible
securities issued by investee companies is probable
(including stock options to employees), in accordance with
the criteria set forth in Opinions 48 and 53 of the ICPAI,
and if the shareholding percentage of the holding company is
expected to decrease upon their conversion or exercise,
generating a loss to the holding company, an appropriate
provision is included for such an anticipated loss.
7. For the purpose of the consolidation, the amounts included
in the financial statements of the consolidated companies
were included after adjustments necessitated by the
application of the uniform accounting principles adopted by
Koor's Group.
D. Use of estimates:
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to use estimates
and assessments that influence the reported amounts of assets and
liabilities and the disclosure relating to contingent assets and
liabilities, as well as to the revenues and expenses in the report
period.
It should be clarified that actual results may differ from such
estimates.
E. 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 and which are not restricted.
F-25
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
F. Marketable Securities:
(1) Marketable securities
Investments in marketable securities held for the short term
as a current investment are stated at stock market value as
at the balance sheet date. Investments in marketable
securities, which are permanent investments, are stated at
cost (debentures - including accrued interest), as long as
there has not been a decrease in value, which is not of a
temporary nature (see also section (3) below).
The changes in the value of the securities are charged in
full to the statement of operations.
(2) Non-marketable securities
Stated at cost (debentures - including accrued interest),
which, in management's opinion is not higher than
realization value (see also section (3) below).
(3) Decrease in value of investments
From time to time, the Company reviews its permanent
investments in other companies to identify if there has been
a non-temporary decrease in their value. Such a review is
carried out where there are indications of the possibility
that the value of permanent investments has been impaired,
including a drop in stock market prices, the investee's
business, the industry in which the investee operates and
other parameters. The write-down in the value of these
investments, which management believes is based on an
evaluation of all the relevant aspects and gives appropriate
weight to them, and is not temporary, is charged to the
statement of operations.
G. Allowance for doubtful accounts:
The financial statements include allowances for doubtful accounts,
which Management believes fairly reflect the loss inherent in
accounts whose collection is doubtful. Among the factors on which
management bases its determination of the fairness of the allowances,
is an assessment of risk, based on information it has on the
financial status of the debtors, the volume of their activity and a
valuation of the collateral received from them.
The allowance is in respect of specific accounts whose collection is
doubtful.
In addition, the financial statements also include such specific
allowances for doubtful accounts in respect of trade receivables
included in the subordinated capital note received as part of the
securitization transaction.
H. Inventories:
Inventories are included at the lower of cost or market value. Cost
is determined as follows: Raw materials, auxiliary materials and
spare parts - at "moving average" or by the "first-in, first-out"
method. Finished goods and goods in process - mainly on the basis of
direct manufacturing costs and, in part, on the basis of average
manufacturing costs with the addition of indirect manufacturing
costs. Merchandise - by the "first-in, first-out" method or by the
"moving average" method.
F-26
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
I. Projects in progress:
Projects in progress in long-term contracts are stated at cost net of
amounts included in the statement of operations, by the percentage of
completion method. Projects in progress are valued at direct
production cost plus the related portion of indirect expenses,
including capitalized financing costs, in accordance with the
provisions of Accounting Standard No. 3. According to this Standard,
financing costs for the production or construction of assets, for
which the period of production or construction is a lengthy period of
time, are capitalized to the asset, until the date revenues can be
recognized from the asset.
The excess of the investment in inventories and projects in progress
over related advances received is included in current assets, while
the excess of advances received over investment in projects in
progress is included in current liabilities.
Projects in progress and customer advances in respect of long-term
contracts include amounts in respect of contracts to be executed over
a period exceeding one year. Where a loss is anticipated from the
project, a provision is made for the entire loss anticipated until
completion of the project.
J. Venture capital investments:
The holdings of venture capital funds in venture capital investments
are stated at cost, net of provisions for decline in value, if a
non-temporary decline occurs. Gains from venture capital investments
are charged to the statement of operations when the investment is
realized.
K. Investments in investees:
The investments in investees are presented by the equity method.
Goodwill arising from the acquisition of investments is amortized at
equal annual rates over a 10-year period, commencing from acquisition
date, other than goodwill in certain companies, which is amortized
over 20 years, in light of the Company's assessment that the
circumstances in those cases justifies such amortization.
From time to time the Company reviews its investments to identify if
there has been a non-temporary decrease in their value. Such a review
is conducted when there are signs that the value of permanent
investments has been impaired, including a drop in stock market
prices, the investee's continuous losses, the industry in which the
investee operates, the value of the goodwill included in the
investment and other parameters. The write-down in the value of this
investment, which management believes is based on an evaluation of
all the relevant aspects, giving appropriate weight to them, and is
not temporary, is charged to the statement of operations.
See also Note 2Z.
A list of investee companies is presented as an appendix to the
financial statements.
F-27
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
L. Long-term receivables and liabilities:
Long-term receivables and liabilities bearing interest rates lower
than the prevailing market rates at date of inception, are recorded
at their present values.
M. Fixed assets:
1. The assets are stated at cost, after deduction of related
investment grants.
2. Cost includes interest capitalized during the set-up period,
which was calculated according to the interest rates
applicable to the sources used to finance the investment.
3. Improvements are charged to the cost of assets and are
amortized over the economic life of the asset. Repair and
maintenance expenses are charged to the statement of
operations as incurred,
4. Depreciation is computed using the straight-line method, on
the basis of the estimated useful lives of the assets.
The annual depreciation rates used are as follows:
%
-------
Buildings and leasehold rights 1.2-10 mainly 2%)
Machinery, equipment and
installations 5-20 mainly 10%)
Vehicles and forklifts 10-20 mainly 15%)
Office furniture and equipment 6-33 mainly 6% and 25%)
Computers and auxiliary equipment 20-33
N. Intangible assets and deferred expenses:
1. Licensing of products and acquisition of know-how are stated
at cost and are mostly amortized over eight years.
2. Marketing rights are stated at cost and amortized over
periods of five to ten years.
3. Intangible assets in the purchase of products are stated at
cost and are mainly amortized over 20 years.
4. Deferred expenses - debenture issuance costs:
These costs are amortized by the straight-line method over
the life of the debentures - mainly six years.
5. See Note 2C(2) regarding goodwill deriving from the
acquisition of companies.
6. Non-compete and confidentiality agreements are mostly
amortized over 5 years.
The amortization period is reevaluated periodically, based
on the estimated period of economic benefit.
F-28
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
O. Convertible securities:
1. Debentures, the conversion of which is not probable, are
included at their liability value as at the balance sheet
date, in accordance with the provisions of Opinion 53 of the
ICPAI, and are stated under long term liabilities.
Debentures, the conversion of which is probable, are
included between the long-term liabilities item and the
shareholders' equity item, according to the liability value
or the capital value, whichever is the higher.
2. In accordance with Opinions 48 and 53 of the ICPAI, the
provision for loss on a decline in the shareholding
percentage in investee companies is included in the item
"Minority interest" in the consolidated balance sheet, and
in the item "Investment in investees" in the Company balance
sheet.
P. Deferred taxes:
1. Deferred taxes are calculated in respect of temporary
differences between the amounts included in the adjusted
financial statements and the amount taken into account for
tax purposes. Such deferred taxes are allocated for
differences related to assets, the consumption or
depreciation of which are deductible for tax purposes. As
for the main components in respect of which deferred taxes
have been created - see Note 16F.
2. Deferred tax balances are computed by the liability
approach, at the tax rate expected to be in effect at the
time these taxes will be charged to the statement of
operations as these are known proximate to the approval date
of the financial statements.
The deferred taxes balance in the statement of operation
expresses the change in these balances during the year.
3. Taxes that would be imposed in the event of realization of
investments in investees, the sale of which is not expected
in the foreseeable future, are not included in deferred
taxes.
Deferred taxes were not created for taxes to be imposed on
profits distributed by subsidiaries, as it is the Company'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.
Q. Revenue recognition:
1. Projects in progress:
Revenues and costs related to projects in progress under
long-term contracts are recognized by the percentage of
completion method (the ratio between accrued costs and
projected costs) if the Company is capable of reliably
estimating the revenues and costs required until completion.
For contracts involving technological uncertainties,
revenues are recognized on the basis of the "completed
contracts" method.
Revenues and costs relating to contracts using a "cost plus"
basis (i.e. cost plus profit at a fixed rate) are recognized
when the costs are incurred.
F-29
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
Q. Revenue recognition: (cont'd)
1. Projects in progress: (cont'd)
Periodic reporting on revenues and costs from projects in
progress covers all cycle periods, including those where it
is not possible to estimate anticipated profits at the
reporting stage, although it can be determined that the
recovery of costs already incurred is anticipated. In such
circumstances, all the costs incurred are charged to the
statement of operations against an equal amount of revenues
("Zero margin presentation").
Full provision is made for anticipated losses.
2. Sale of products and rendering of services:
Revenues from sales and services are recognized upon
delivery of the products and transfer of the main risks and
rewards involved in ownership of the products, or upon
performance of the services. In special contracts, sales are
recognized after the work is performed and acceptance tests
are passed, as prescribed in the product supply contract.
R. Sale of trade receivables:
The Company recognizes the sale of trade receivables as a sale only
when the control and the risks of the financial asset are transferred
to the purchaser.
S. Research and development:
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 in progress.
T. Presentation of transactions between the Company and the
controlling shareholder:
Transactions between the Company and its controlling shareholder are
included in accordance with the Securities Regulations (Financial
Statement Presentation of Transactions between a Company and its
Controlling Shareholder), 1996. Accordingly, the difference between
the price paid to the controlling shareholder on the sale of an asset
and the book value of the asset to the controlling shareholder, is
included in the shareholders' equity.
In addition, the amount of the erosion of an interest-free unlinked
loan having no maturity date received from the controlling shareholder,
and that the parties do not intend to repay, is included in share-
holders' equity.
F-30
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
U. Derivative financial instruments:
Koor and its subsidiaries enter into different kinds of option
contracts and forward trades that are intended to reduce the
financial risks (i.e. commitments for the import of raw materials,
export of goods, liabilities linked to the CPI or foreign currency)
involved in the exposure to fluctuations in inter-currency exchange
rates, interest rates and changes in the CPI.
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 at fair value.
Changes in the fair value are included in the statement of operation
in the period they occurred.
The fair value of derivative financial instruments is determined
according to their market values or quotes by financial institutions,
and when such do not exist, according to a valuation model.
V. Earnings per share:
Earnings per share data are computed in accordance with Opinion 55 of
the ICPAI. Taken into account in the computation of basic earnings
per share are convertible securities issued by the Company, if their
conversion or exercise is probable, based on tests prescribed in the
opinion. Taken into account in the computation of fully-diluted
earnings per share are convertible securities issued by the Company
and its investees, which were not included in the computation of
basic earnings per share, and their conversion or exercise does not
increase earnings per share.
W. Segment reporting:
Segment reporting is presented in accordance with Accounting Standard
No. 11, which requires the inclusion of information in respect of
business and geographical segments, as well as detailed guidelines
for identification of the business and geographical segments.
X. 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 depreciation in accordance with the depreciation
policies practiced by the Group.
F-31
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
Y. Data regarding the CPI and the Dollar exchange rate:
Israeli Exchange rate
CPI* of one Dollar
------------- ----------------
Points NIS
------------- ----------------
For the year ended:
December 2003 178.58 4.379
December 2002 182.01 4.737
December 2001 170.91 4.416
% %
------------- ----------------
Changes during:
2003 (1.9) (7.6)
2002 6.5 7.3
2001 1.4 9.3
%
-------------
Real rate of decrease in the CPI
relative to the exchange
rate of the
Dollar during the year:
2003 (5.7)
2002 (0.8)
2001 (7.9)
(*) 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 for the balance sheet date, as published by Bank of
Israel.
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.
F-32
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
Z. Impairment of assets
The Company applies Accounting Standard No. 15 - Impairment of Assets
(hereafter - "the Standard") to ensure that its assets in the
consolidated balance sheet (which are subject to the Standard) are
not stated at an amount exceeding their recoverable value, which is
the higher of the net sales price and the usage value (the present
value of the estimated future cash flows expected to derive from the
use and realization of the asset).
The Standard applies to all of the assets in the consolidated balance
sheet, except for tax assets 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 Company 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, from the date on which the last
impairment loss was recognized.
AA. Influence of new accounting standards prior to their
application
1. In July 2001, the Israel Accounting Standards Board ("IASB")
published the following two new standards:
a. Accounting Standard No. 12 - "Discontinuation of
adjustment of financial statements for inflation".
According to this standard, the adjustment of
financial statements for the effects of changes in
the general purchasing power of the shekel will be
discontinued, commencing January 1, 2003.
In December 2002, the IASB published Standard No.
17, which prescribes that the implementation of
Standard No. 12 will be postponed to January 1,
2004. Accordingly, the adjustment of the financial
statements will be discontinued starting January 1,
2004. Until December 31, 2003, the Company will
continue to prepare adjusted financial statements
in accordance with Opinion No. 36 of the ICPAI. The
adjusted amounts included in the financial
statements as at December 31, 2003 will serve as
the starting point for nominal financial reporting
starting from January 1, 2004. The application of
Accounting Standard No. 12 could have a material
effect on the reported business results of the
Company. The extent depends on the rate of
inflation, the composition of the Company's assets
and its financing resources.
F-33
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AA. Influence of new accounting standards prior to their
application (cont'd)
1. In July 2001, the Israel Accounting Standards Board ("IASB")
published the following two new standards: (cont'd)
b. Accounting Standard No. 13 - "The effect of changes
in foreign currency exchange rates". The Standard
deals with the translation of foreign currency
transactions and the translation of financial
statements of overseas operations, for their
inclusion in the financial statements of the
reporting corporation. The Standard supercedes the
provisions in Clarifications 8 and 9 to Opinion No.
36 which are nullified upon Accounting Standard No.
12 coming into effect, as mentioned above, and will
take effect on January 1, 2004.
The Standard prescribes principles for classifying
overseas activities as an autonomous overseas unit
or as an integrated unit, based on indications
listed in the Standard and on judgment, as well as
the way the financial statements of the autonomous
units are to be translated.
The balance of goodwill created upon the
acquisition of an autonomous overseas investee will
be treated as an asset of that autonomous overseas
investee, and will be translated at the closing
rate, which differs from the principles presently
applied, whereby goodwill is translated at the
exchange rate prevailing at the time the
transaction was effected.
The statements of operations of an autonomous
overseas investee will be translated using the
exchange rate prevailing at the time the
transaction was effected, or for practical reasons,
at the average exchange rate during the period,
which differs from the principles presently
applied, whereby the financial statements are
translated at the closing rate, at the end of every
quarter.
The write-down in value of an investment in an
overseas autonomous investee does not constitute
partial realization. Therefore, no part of the
translation differences will be charged to the
statement of operations when the value is
written-down.
The application of Standard No. 13 could have a
material effect on the reported operating results
and shareholders' equity of the Company. The extent
of the effect depends on the percentage of the
increase in the inter-currency exchange rates in
respect of the Company's autonomous investees.
F-34
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AA. Influence of new accounting standards prior to their
application (cont'd)
2. In March 2004, the Israel Accounting Standards Board (IASB)
published Accounting Standard No. 20 on the goodwill
Amortization Period (hereinafter - "the Standard"). The
Standard provides that goodwill will be amortized
methodically, over its useful life. The amortization period
must reflect the best estimate of the period in which the
entity expects to derive future economic benefit from the
goodwill. The amortization period shall not exceed 20 years
from the first date of recognition.
The Standard will apply to financial statements for periods
beginning on or after January 1, 2004.
The change in the amortization period of goodwill balances
as of January 1, 2004 will be treated as a prospective
change in estimate. Goodwill balances will be amortized
methodically, over the balance of the period remaining until
the end of the prescribed amortization period.
The Company is evaluating the implications of the new
Standard, but is unable, at this stage, to estimate the
effect of the Standard on the financial statements.
Note 3 - Information Regarding Certain Investees
A. ECI Telecom Ltd. ("ECI") - an affiliate
1. During 2001, indications were received of a change in ECI's
fair value. These indications included valuations made by an
independent appraiser for ECI.
In view of these indications, Koor's management decided, in
2001, to reduce the book value of the investment in ECI in
respect of a non-temporary decrease in value in the amount
of the balance of the goodwill, that had been allocated to
the investment, of about NIS 1,106 million, placing the
value of the investment at NIS 1,073 million as at December
31, 2001.
In the preparations of the financial statements for periods
ended March 31 and June 30, 2002, the Company reviewed the
need to write down the book value of the investment in ECI,
in respect of a non-temporary decrease in value. This review
is required by generally accepted accounting principles and
in accordance with the guidelines published by the Israeli
Securities Authority in November 2001, which lists eleven
warning signs, the occurrence of which requires this review.
F-35
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
A. ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)
In view of the existence of two warning signs, the stock
market price and the raising of capital at values below book
value, the Company reviewed the investment, as described
above. The review made by the Company, as part of its
preparations of the financial statements as at June 30,
2002, was based on a valuation performed by an independent
appraiser in March 2002 and on the development of ECI's
business results from the valuation date until the date of
the above financial statements.
The Company's management believes that the circumstances
prevailing during these periods did not require the
write-down of the investment as presented in the Company's
financial statements at March 31 or June 30, 2002.
In November 2002, another valuation of ECI was performed by
an independent appraiser. The appraisal estimated the value
of ECI's shares, as at September 30, 2002, in a range between
4.6 dollars and 5.2 dollars per share. Based on this
valuation, the Company's management decided to write-down the
book value of the investment in ECI below its equity value to
the Company. This write-down was charged in part against a
capital reserve from foreign currency translation adjustments
created in Koor in respect of its investment in ECI. As at
December 31, 2002, the balance of the investment in ECI was
approximately NIS 809 million. Reviews performed by the
Company showed that since the valuation, and until June 30,
2003, there were no cumulative events in ECI indicating clear
changes that could have a material adverse effect on the
total value of the company as reflected in the valuation.
In November 2003, another valuation of ECI was performed by
the same independent appraiser, for the purpose of
evaluation the recoverable value of Koor's investment in
ECI. According to this appraisal, the value of ECI's shares,
as at September 30, 2003, was in the range of 5.5 dollars to
6.35 dollars per share. Taking into account the stock
options that ECI had issued to its employees, the value of
ECI's shares ranged between 4.95 dollars and 5.7 dollars per
share. In view of the results of the valuation, the
investment in ECI, as at September 30, 2003, is stated by
the equity method (5.26 dollars per share).
Accordingly, the Company reversed the loss from decline in
value of approximately NIS 73 million. The reversal of this
loss was charged against the capital reserve from foreign
currency translation adjustments (credit), which was
realized when the provision was created.
As at December 31, 2003, the balance of the investment in ECI
is about NIS 726 million.
At the request of the appraiser (who agreed that the Company
would make use of the valuation), the Company undertook to
indemnify him against any expense or financial damage he
will sustain with respect to any claim to be filed by any
third party against the appraiser, the cause of action of
which is the valuation.
F-36
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
A. ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)
2. In its financial statements as of December 31, 2003, ECI
reported on a retroactive restatement of its financial
statements for 2002, relating to a decrease in its
investment in an affiliate (received in exchange for the
transfer of certain assets), having an effect on the Company
of about 2 million dollars.
The amount of the restatement was taken into account by the
Company, when it included in the third quarter of 2002 a
provision for decline in value of its investment in ECI,
based on a valuation obtained from an independent appraiser,
as discussed in section A(1) above. Therefore, this
restatement in the financial statements of ECI has no effect
on the financial statements of the Company in 2002.
3. During 2002, ECI's Board of Directors decided to focus ECI's
activities on its core businesses: access networks (Inovia)
and transmission systems and optical networks (Enavis,
Lightscape). Consequently, it was decided to divest Innowave.
In April 2003, an agreement was signed between ECI and
Alvarion, pursuant to which ECI sold to Alvarion the
business operations and most of the assets and liabilities
of Innowave Systems Ltd. (a subsidiary of ECI) for total
consideration of about 20 million dollars. In addition, ECI
received an option to purchase 200 thousand shares of
Alvarion at a price of 3 dollars per share, for a five-year
period.
Likewise, in 2002, ECI signed an agreement with unrelated
investors to spin-off NGTS' operations into a new company,
in which ECI would hold 43%. ECI invested 10 million dollars
in the new company.
4. In 2003, ECI's books of account included an allowance for
doubtful accounts of 6.6 million dollars (2002 - 34 million
dollars) in respect of a long-term receivable, the
collection of which is in doubt. The balance of the
receivables, as at December 31, 2003, before the allowance,
is 133 million dollars. In addition, ECI recorded a
provision of 3.4 million dollars (2002 - 18 million dollars)
for the decline in value of its investments in the
convertible bonds of the parent company of this customer.
5. On December 6, 2001, a private placement agreement was
signed between ECI and a group of investors, whereby 12.5%
of ECI's share capital was allotted to those investors in
consideration of approximately 49 million dollars. The
transaction was closed in February 2002, after which Koor's
holding in ECI decreased by 4.3%. Koor recorded a loss of
approximately NIS 71 million in its financial statements for
2001 in respect of this allotment
F-37
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
A. ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)
6. During December 2002, pursuant to the Company's decision to
concentrate its public holdings, Koor sold 3 million ECI
shares to a wholly-owned subsidiary at the stock exchange
price. The transaction was treated in accordance with the
Israeli Securities Regulations (Financial Statement
Presentation of Transactions between a Corporation and its
Controlling Shareholder) - 1996. Likewise, in January 2003,
the Company transferred the balance of the ECI shares (about
30 million shares) to the subsidiary, under Section 104.A of
the Income Tax Ordinance, in consideration for an allotment
of shares in the subsidiary.
7. Some of ECI's present and future liabilities to banks are
secured by liens on certain assets and rights, as well as an
unlimited negative pledge on ECI's assets. As a condition for
further bank credit and in accordance with the terms of the
negative pledge, ECI undertook to comply with a certain
financial ratios. Since October 1, 2002, ECI has failed to
comply with some of these financial ratios and, therefore,
the banks are entitled to demand the immediate repayment of
all the loans. Accordingly, long-term loans were reclassified
as current liabilities. During the second quarter of 2003,
under the terms of the agreement signed with the banks, ECI
repaid debt of about 123 million dollars, and new financial
ratios were prescribed, with which ECI is in compliance, such
as the ratio of equity to liabilities, current assets, and,
beginning in 2004, certain ratios with respect to operating
income. Accordingly, the liabilities to banks were included
in long-term debt.
8. ECI prepares its financial statements in accordance with
generally accepted accounting principles in the U.S. For
adjustment of ECI's net loss as reported in accordance with
U.S. generally accepted accounting principles (US GAAP) to
the net loss according to Israeli accounting principles -
see Note 28A(19).
B. Tadiran Ltd. (in voluntary liquidation) ("Tadiran") - a
subsidiary
1. On March 7, 2002, Tadiran's Board of Directors adopted a
resolution for the voluntary liquidation of Tadiran and the
appointment of a liquidator. Following the liquidation, the
debit balance of the capital reserve from foreign currency
translation adjustments at Koor in respect of its investment
in Tadiran, of approximately NIS 391 million, was
transferred to the statement of operations.
2. In March 2002, Tadiran's real estate was transferred to Koor
as a liquidating dividend. Most of the real estate assets
were sold to a group of investors headed by Denisra
International Ltd. and Ranitech Ltd. The consideration
amounted to approximately NIS 273 million, and the capital
gain was about NIS 29 million.
As a result of the sale of the real estate, a tax reserve of
about NIS 44 million, created in respect of those assets,
was realized, and taxes of approximately NIS 40 million were
paid.
F-38
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. ("M-A Industries") - a
subsidiary
1. In October 2001, M-A Industries and some of its subsidiaries
("the Selling Companies") entered into a securitization
arrangement, for the sale of all their trade receivables,
without right of restitution (except for commercial
disputes), to foreign companies established for that purpose
and which are neither owned nor controlled by M-A Industries
("the Purchasing Companies"). Purchase of the receivables was
financed by an American company from the Bank of America
Group, including through the issuance of commercial papers.
The amount expected to be at the disposal of the Purchasing
Companies is approximately 150 million dollars on a current
basis, so that the consideration received from the customers
whose receivables were sold will be used to purchase new
receivables. The selling companies will handle the collection
of the sold receivables for the Purchasing Companies. Under
the securitization agreement, the receivables of customers
from South American countries were not sold. The cash balance
of trade receivables sold as at the balance sheet date
amounted to approximately 125.3 million dollars (December 31,
2002 - 101.8 million dollars).
On the purchase date of the receivables, the Purchasing
Companies will pay most of the price of the receivables in
cash, and the balance in a deferred liability that will be
paid after collection of the sold receivables.
Under the securitization agreement, M-A Industries undertook
to maintain certain financial criteria relating mainly to
the liabilities to capital ratio, liquidity and
profitability ratios. As at the balance sheet date, M-A
Industries complies with these terms.
2. During 2001, subsidiaries of M-A Industries acquired four new
agrochemical products, as well as the marketing and
distribution rights for a package of products in Scandinavian
countries, from Aventis and Syngenta. The acquisition cost
was approximately 105 million dollars, and is included under
the item "Intangible assets and deferred expenses".
Approximately 20 million dollars was allocated to
registration and license costs and is amortized over 20
years, while 2.5 million dollars was allocated to the
acquisition of agreements with third parties and is amortized
over 10 years. The amortization is included under the item
"Selling and marketing expenses". The consideration for
acquisition of marketing and distribution rights amounted to
approximately 5 million dollars and will be amortized over 9
years. The balance of the cost is allocated to "Purchase of a
Product as a Going Concern", which includes intellectual
property rights, trademark, brand, technological know-how,
customer information, raw material suppliers, etc. which is
amortized over 20 years in the item "Other income (expenses),
net". Under the terms of the agreements, if sales of some of
the products will increase by certain percentages in the
three years following execution of the agreements, additional
consideration will be paid, which could reach approximately
8.3 million dollars. As at the approval date of the financial
statements, M-A Industries estimates that the additional
consideration will not be paid, since the turnover did not
reach the required amount.
In April 2002, a subsidiary purchased a new herbicide from
Syngenta, for consideration of approximately 10 million
dollars.
F-39
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. ("M-A Industries") - a
subsidiary (cont'd)
3. In December 2001 an agreement signed in August 2000 between
an M-A Industries Group company and the minority shareholder
of an M-A Industries' subsidiary in Brazil ("Millenia"), for
the acquisition of all their shares, which represented about
28.5% of the shares of Millenia, was completed. Following
the acquisition, M-A Industries has full ownership and
control of Millenia.
The acquisition consideration is approximately 45.2 million
dollars and 1.5 million shares of M-A Industries Ltd.
The excess cost created by the acquisition amounts to about
32 million dollars, which was allocated to goodwill and is
amortized over 20 years.
4. In December 2001, a sudden deterioration in the economic and
political situation in Argentina led to the paralysis of the
country's political and economic systems, along with almost
complete uncertainty about the future. In February 2002, the
government of Argentina announced a devaluation of 29%, as a
result of which the assets of the subsidiary in Argentina
(mainly trade receivables and other accounts receivable)
eroded in 2001 by approximately 15 million dollars. In
addition, due to the economic and political situation in
Argentina, M-A industries included a one-time allowance of
approximately 8 million dollars in 2001, mainly on account
of bad accounts.
The recession in Argentina continued in 2002 and the peso
was devalued further by approximately 98%.
In July 2002, the government of Argentina published
regulations setting the various exchange rates for the
linkage of trade receivables to the dollar, so that trade
receivables deriving from the sale of agricultural inputs
denominated in dollars would be paid at the dollar exchange
rate applicable on the date of payment, less discounts
ranging from 25% to 60%, which were determined according to
the products for which the agricultural inputs were used, as
defined in those regulations.
Due to the ongoing devaluation and economic crisis in
Argentina, and in view of the experience gained in the
implementation of the regulations published by its
government, M-A Industries included an allowance of about
10.8 million dollars in 2002 in respect of bad accounts and
a provision in respect of erosion of the subsidiary's assets
in Argentina.
The management of M-A Industries assesses that no further
material effect is expected on the operating results and
financial position of the subsidiary in Argentina. M-A
Industries and its subsidiaries are guarantors for the
subsidiary's liabilities to the banks in Argentina totaling
about 13 million dollars.
F-40
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. ("M-A Industries") - a
subsidiary (cont'd)
5. In April 2002, a subsidiary of M-A Industries acquired the
entire share capital of a German company that markets
pesticides - Feinchemie Schwebda GmbH ("Feinchemie"). The
acquisition cost was approximately 20.4 million dollars, and
the consolidated company may be required to pay an
additional sum of up to 5 million euro, based on
Feinchemie's sales in 2002 and 2003. Based on the actual
sales turnover during those years, the sum of 5 million
euros was paid subsequent to the balance sheet date.
Excess cost created on the acquisition date totaling
approximately 20 million dollars (including 4 million
dollars created against a contingent liability taking into
account management's estimate with regard to the profits of
Feinchemie, as aforesaid), was allocated to goodwill and
amortized over a 20-year period, in accordance with the
circumstances and characteristics, which, in the opinion of
the management of M-A Industries, justify amortization over
this period.
6. In October and November 2002, foreign and domestic
subsidiaries of M-A Industries ("the Purchasing Companies")
signed a number of agreements with Bayer Crop Science AG,
one of the largest agrochemical companies in the world, for
the purchase of several agrochemical products, licenses and
distribution rights, for 185.3 million dollars
(approximately 131 million dollars was paid in cash in 2002
and the balance was paid in cash in 2003) and will be
allocated as follows:
Approximately 34.6 million dollars to the purchase of the
registrations and licenses and is amortized over a 20-year
period.
Approximately 144.1 million dollars to the purchase
of products as a going concern, is amortized over a 20-year
period.
Approximately 6.6 million dollars was allocated to marketing
and distribution rights and is amortized over periods of 6-8
years.
The agreement took effect upon approval by the
representative of the European Union, some of which were
received in February 2003.
7. In April 2003, a subsidiary of M-A Industries signed an
agreement to acquire the share capital and shareholder loans
of an English company engaged in the blending and marketing
of vitamins - Nutriblend Ltd. ("Nutriblend"), in
consideration for approximately 3 million euros. The effect
of the first-time consolidation of Nutriblend is immaterial.
8. In April 2001, the board of directors of M-A Industries
decided to adopt a dividend policy of distributing 15%-30%
of annual net earnings, subject to the existence of
distributable earnings and to specific resolutions by the
board of directors.
In accordance with this policy, in 2003, a dividend was
declared and paid, in the amount of 26.1 million dollars. A
dividend of 7 million dollars was declared in December 2003
and paid during January 2004.
As of the balance sheet date, another dividend was declared
in respect of the earnings of 2003, in the amount of 7.2
million dollars.
F-41
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. ("M-A Industries") - a
subsidiary (cont'd)
9. In June 2003, Koor sold 9,357 thousand shares of M-A
Industries on the stock market, for total proceeds of
approximately NIS 104 million, at a gain of about NIS 17
million. As a result of the sale, Koor's holding percentage
in voting rights fell to 49.79%.
In the opinion of the Company's management, based on its
legal counsel, in view of the fact that Koor's shareholding
percentage is about one half of the voting rights in M-A
Industries, taking into account the broad dispersal of the
voting rights among the other shareholders, Koor continued
to be the controlling shareholder in M-A Industries.
In August 2003, Koor signed non-temporary voting agreements
with two of the shareholders in M-A Industries that hold
3.87% of the voting rights in M-A Industries, whereby the
above shareholders undertake to vote together with Koor, and
in accordance with its vote, in any resolution to be
discussed, or to vote together with Koor at any general
meeting of shareholders of M-A Industries.
Accordingly, Koor continues to include the financial
statements of M-A Industries in its consolidated financial
statements.
The Company's shareholding percentage in M-A Industries as
at December 31, 2003 is 48.59%.
Assuming conversion and exercise of all the convertible
securities issued and allotted by M-A Industries, the
Company's shareholding percentage in M-A Industries fell
to 42.11%.
10. On January 14, 2004, Koor sold 27,000 thousand shares of M-A
Industries in consideration for approximately NIS 418.5
million. The sale will generate a capital gain to the
Company in the first quarter of 2004 of 37 million dollars,
and the Company's percentage in the voting rights of M-A
Industries will fall by 7.3%.
As a result of the sale, and in view of the proven
utilization of carryforward losses, a tax asset of NIS 59
million was recorded in 2003.
D. Telrad Networks Ltd. ("Telrad") - a subsidiary
1. In 2000, Koor and Telrad invested 5.6 million dollars in the
share capital of Nortel Israel, for 28% of the rights to
earnings, without voting rights. Koor and Telrad also made
available shareholder loans in favor of Nortel Israel in the
amount of 43 million dollars, bearing interest of 6% per
annum.
During 2003, Koor and Telrad exercised an option given to
them in 2000 for the sale of their investment in Nortel
Israel to Nortel Networks, for consideration of
approximately NIS 17.6 million. In addition, loans were
repaid by Nortel. As a result, the Company sustained a
capital loss of about NIS 6.3 million.
F-42
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
D. Telrad Networks Ltd. ("Telrad") - a subsidiary (cont'd)
2. In 2001 a contract was signed between Telrad and Ectel (a
public company and ECI's subsidiary), whereby Telrad sold
all its holdings (100%) in Net-Eye Ltd. to Ectel, which
issued shares and options to Telrad in consideration of the
acquisition.
The transaction was treated in Koor's financial statements
in accordance with the accounting principles for an exchange
of similar assets, and accordingly, no profit or loss was
recorded from the transaction.
In March 2003, Telrad sold about one-half of the shares in
Ectel. Therefore, the financial statements include a gain of
approximately NIS 15 million.
3. In May 2002, Telrad signed a share exchange and merger plan
agreement with Connegy Inc., whereby a wholly-owned Telrad
subsidiary merged with Connegy Inc. After the merger, Telrad
holds 52% of the share capital of Telrad Connegy
Communications Inc. (formerly Connegy Inc.).
The transaction was treated in the financial statements in
accordance with the accounting principles for an exchange of
similar assets, and therefore, no loss or gain was recorded
from the transaction.
4. In 2002, Telrad's board of directors approved a
reorganization plan that includes additional employee
layoffs beyond the early retirement plans of 2000 and 2001.
The financial statements for 2002 included in the item
"other income (expenses), net" an expense of NIS 107 million
(cost of reorganization plan in 2001 totaled NIS 90 million
and in 2000 totaled NIS 273 million).
5. Beginning from 2002, Telrad does not comply with some of the
financial ratios defined in an agreement with the banks.
During 2002, Telrad reached agreement in principle with the
banks, not yet put down in writing, whereby the debt balance
was rescheduled, short-term credit were converted into
long-term loans and loans were repaid. The balance of
Telrad's debt was stated in the financial statements as at
December 31, 2002 in accordance with the agreement with
banks, as above.
Telrad intends to repay the balance of the debt during 2004.
Therefore, this debt was classified as current liabilities
in the financial statements as at December 31, 2003.
F-43
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
E. Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary
1. On March 17, 2001, a fire broke out at the plants of
Elisra's subsidiaries - Tadiran Systems Ltd. and Tadiran
Spectralink Ltd. (hereinafter - "the Companies"). The fire
caused damage to equipment, building, inventories and
projects in progress. The book value of the equipment,
inventories and identified costs in projects in progress
that were damaged in the fire, together with the costs or
restoration of the building, are estimated at approximately
35 million dollars, where as of the balance sheet date,
advances had been received from the insurance company of
approximately 10 million dollars. Elisra classifies the
minimum receipts that Elisra's management estimates it will
receive from the insurance companies as long-term
receivables. On July 10, 2003, Elisra and its subsidiaries
lodged a 96 million dollar claim in Tel Aviv District Court
against the insurer and its representatives, based on the
market value of the damaged assets, their repair or
replacement.
In the estimation of the subsidiaries, based on factors
including opinions from their legal counsel, it is difficult
to estimate at this stage what the chances are that the
companies will receive the full amount of the claim,
although they are assessed as solid. Nonetheless, the
managements of the companies, based, as aforesaid, on the
opinions of their counsel on this matter, estimate that the
chances are good that indemnification will be received from
the insurance company at an amount exceeding the balance of
the debt recorded in the financial statements.
2. In July 2002, the Company, Elisra and Elta Electronic
Industries Ltd. ("Elta" or "the Buyer") signed an agreement
("the Purchase Agreement"), whereby Koor sold 30% of
Elisra's shares to Elta for 100 million dollars. The sale
was closed in November 2002. As a result of the agreement,
Koor recorded in 2002 a capital gain of approximately NIS
339 million, under the item "Other income, net".
In addition, Koor granted options to Elta, exercisable until
December 31, 2003, to increase its holdings in Elisra by up
to an additional 8% in consideration of a maximum sum of
approximately 26 million dollars. This option expired and
was not exercised by Elta. Under the Purchase Agreement,
Koor agreed to indemnify Elta if certain conditions, set out
in the Agreement, are fulfilled. Also see Note 18.A(2).
As part of the agreement between Koor and Elta, a
cooperation agreement was signed, to which Elisra is a
party, setting forth the structure of Elisra's board of
directors and the decision-making process, as well as
certain limitations with respect to the sale of Elisra's
shares. In addition, a cooperation agreement was signed
between Elisra and Elta, with regard to activities between
the companies, including a proposal for an agreed range of
products and the principles for selecting a project leader
from time to time.
3. In the fourth quarter of 2003, Elisra's management decided
to accept the tender offer made by a group of investors to
all of the shareholders, to purchase the shares of BVR
Systems (1998) Ltd., a subsidiary, and realized its holdings
in the shares of BVR for total proceeds of approximately 1
million dollars. As a result of the transaction, a capital
gain of approximately 2.8 million dollars was recorded in
the fourth quarter of 2003.
F-44
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
E. Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary
(cont'd)
4. To secure guarantees issued by the banks, and a credit line
(which as of the balance sheet date was drawn down only for
the short-term), Elisra undertook to maintain financial
criteria related to shareholders' equity, the ratio of
equity to assets, current ratio and profitability. Elisra
also agreed to terms that restrict the furnishing of
guarantees to third parties by creating new liens, and to
restrict the sale and transfer of assets.
During the year, Elisra did not comply with certain
financial criteria.
In the estimation of Elisra's management, based on
negotiations underway with the banks, Elisra will comply
with the new financial criteria prescribed with the banks by
the end of the first quarter of 2004.
F. Koor Corporate Venture Capital ("Koor CVC") - a consolidated
partnership
1. Regarding commitments to invest and other investments as at
the balance sheet date, see Note 18.B(5).
2. During the report period, Koor CVC's management estimated
that the value of the portfolio investments was lower than
their cost, and therefore decided to write-down the value of
the investment by approximately NIS 72 million (in 2002 and
2001 - NIS 93 million and NIS 189 million, respectively).
3. In July 2003, a sales agreement signed upon in January 2003
between Koor CVC and a secondary venture capital fund (the
"Acquiring fund"), regarding the assignment of its
investments in venture capital funds (hereinafter - "the
Sold Funds"), was closed. The agreement stipulated that,
henceforth, the balance of Koor CVC's commitment in the Sold
Funds would be transferred to the Acquiring fund.
Under the terms of the agreement, future sums to be
distributed from the Sold Funds will be transferred to the
Acquiring fund, up to the amount of its investment in the
funds. Any excess will be distributed between Koor CVC and
the Acquiring fund, according to the distribution ratio
provided in the agreement.
In view of the aforesaid, the 2002 financial statements
included a provision for decline in value of the Sold funds.
F-45
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
G. Knafayim Holdings Arkia ("Knafayim") - affiliate
1. During 2003, Knafayim acquired shares, which did not confer
the status of related party, and various types of options of
El Al Israel airlines Ltd. ("El Al"). If all the options are
exercised, the holding percentage might go up to 51.9% of
the shares in El Al.
In January 2004, Knafayim approached the State with a
request to obtain its consent and approval to increase its
holdings in the shares in El Al above 5%. In addition,
Knafayim filed notice of a merger related to its holdings in
El Al with the Commissioner of Restrictive Trade Practices
for his approval.
2. In March 2004, the Knafayim's Board of Directors of resolved
to exercise some of the options, might raise Knafayim's
shareholding percentage in El Al to 22.7%, subject to the
approvals discussed previously.
In March 2004, Knafayim issued, through a private placement,
debentures and options totaling NIS 135 million. Part of the
proceeds will be earmarked to finance the exercise of the
above mentioned options.
As of December 31, 2003, Koor holds 28.3% of the shares in
Knafayim. Assuming the full exercise of the convertible
securities, Koor will hold 25.25% of the shares in Knafayim.
Note 4 - Short-Term Deposits and Investments
Consolidated Company
----------------------------- --------------------------
December 31 December 31
----------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- ---------
NIS thousands NIS thousands
----------------------------- --------------------------
Marketable securities (1):
Debentures 141,221 146,330 132,218 125,155
Short-term Treasury notes 74,628 161,808 74,628 126,890
Shares and options 56,010 52,286 48,753 48,862
Mutual fund participation
certificates 5,618 4,587 - -
------------ ------------ ----------- ---------
277,477 365,011 255,599 300,907
Deposits in banks and financial
institutions 89,161 442,927 55,207 387,105
Short-term loans and current
maturities of long-term loans 171 230,545 - 172,707
------------ ------------ ----------- ---------
366,809 1,038,483 310,806 860,719
============ ============ =========== =========
(1) Presented at market value.
F-46
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------------------------
Note 5 - Trade Receivables
Consolidated:
December 31
-----------------------------
2003 2002
---------- -----------
NIS thousands
-----------------------------
Open accounts 1,732,827 1,511,546
Deferred promissory note and receivables from sale
of customers' debts* 250,492 376,167
Post dated checks receivable and credit card
companies 43,561 50,589
Current maturities of long-term trade receivables 25,581 48,575
------------ -----------
2,052,461 1,986,877
============ ===========
Including:
Net of allowance for doubtful accounts 106,305 94,503
============ ===========
* According to the accounting principles relating to sale of
customer debts (Note 2R), the balance of the customer debts, which
were sold in the securitization transaction, and whose associated
control and risks have been completely transferred to the
purchaser, was impaired. For the share in customer debt included
in the securitization transaction, and which were not recognized
as a sale, a deferred promissory note was recorded (December 31,
2003 - NIS 292,342 thousand, December 31, 2002 - NIS 350,732
thousand), see Note 3C(1).
Note 6 - Other Receivables
Consolidated Company
------------------------- --------------------------
December 31 December 31
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- --------- ----------
NIS thousands NIS thousands
------------------------- --------------------------
Government agencies 126,043 131,890 7 710
Deferred taxes, see Note 16F 156,030 75,865 58,903 -
Accrued income 31,289 39,758 717 2,359
Prepaid expenses 45,712 44,701 - -
Employees 8,855 9,930 - -
Affiliates - current accounts 2,867 3,141 489 -
Others 81,374 147,615 7,658 46,090
---------- ---------- --------- ----------
452,170 452,900 67,774 49,159
========== ========== ========= ==========
F-47
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
Note 7 - Inventories and Work in Progress
Consolidated:
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
A. Inventories and work in progress, net
of customer advances
Presented as current assets:
Industrial inventory:
Raw and auxiliary materials 570,455 584,998
Goods and work in progress 199,748 256,952
Finished goods 1,024,181 1,061,646
Advances in respect of materials 4,562 3,374
Inventories for trading operations - merchandise,
including advance payments 91,591 72,883
------------- -------------
1,890,537 1,979,853
Less - customer advances 4,786 8,120
------------- -------------
1,885,751 1,971,733
============= =============
B. Customer advances, net of work in progress
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Presented as current liabilities:
Customer advances in respect of work in progress(1)(2) 156,831 230,039
Less - inventory and work in progress 390 185
------------- -------------
156,441 229,854
============= =============
(1) Not including long-term advances
(2) See Note 22 regarding guarantees provided for
securing the gross amounts of customer advances
(including long-term advances).
F-48
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
Note 8 - Investments in Investee companies
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
A. Consolidated balance sheet - affiliates
Net asset value of the investments (1)(2) 902,343 994,877
------------- -------------
Goodwill and original difference (2):
Original amount 66,465 66,465
Accumulated amortization (51,395) (45,621)
------------- -------------
15,070 20,844
------------- -------------
Long-term loans (3) 26,351 25,575
------------- -------------
943,764 1,041,296
============= =============
(1) As follows:
Net asset value of investments as at December 31, 1991 277,159 277,159
Changes from January 1, 1992:
Cost of shares acquired or received 1,266,706 1,259,920
Accumulated losses, net (708,007) (599,933)
Changes in capital reserves and
Foreign currency translation adjustments (11,648) (20,402)
Initially consolidated subsidiaries, net 465,193 465,193
Disposals, net (387,060) (387,060)
------------- -------------
902,377 994,854
============= =============
(2) Including investments in companies traded on the Stock
Exchange in Tel Aviv or abroad, in NIS millions:
Carrying value 862 963
============= =============
Market value as at balance date 985 422
============= =============
(3) Linkage terms and interest rates relating to long-term loans:
Linked to the CPI - bearing interest at the rate of 5.5% 20,470 19,151
Linked to the Dollar - bearing interest at the rate of
LIBOR * + 1%. 5,881 6,424
------------- -------------
26,351 25,575
============= =============
* On December 31, 2003, the LIBOR rate is 1.47%).
F-49
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Shares:
Net asset value of the investments 1,940,588 2,088,327
------------- -------------
Goodwill and original differences: 158,187 151,128
Original amount, net
Accumulated amortization (90,179) (74,747)
------------- -------------
68,008 76,381
------------- -------------
Book value (1) 2,008,596 2,164,708
Payments on account of shares (1) 60,927 60,927
Long-term loans and capital notes (2) 1,379,561 1,417,906
Non-current inter-company accounts (3) 3,982 3,053
------------- -------------
3,453,066 3,646,594
============= =============
(1) As follows:
Cost of shares including accumulated
earnings as at December 31, 1991 2,032,681 2,032,681
Changes from January 1, 1992:
Cost of acquired shares 7,055,603 7,038,115
Accumulated losses, net (4,432,466) (4,445,697)
Changes in capital reserves and erosion of
capital notes, net 14,648 116,212
Disposals (2,600,943) (2,515,676)
------------- -------------
Book value, including payments on
account of shares (4) 2,069,523 2,225,635
============= =============
F-50
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
(2) Long-term loans and capital notes:
Long-term loans (a) 65,633 120,558
Capital notes - unlinked and not bearing
interest (b) 1,316,457 1,377,756
------------- -------------
1,382,090 1,498,314
Less - current maturities of long-term loans 2,529 80,408
------------- -------------
1,379,561 1,417,906
============= =============
(a) Long-term loans classified by linkage terms and interest rates:
Interest rate
at December 31 December 31
-------------- --------------------------------
2002 2003 2002
-------------- ------------- -------------
% NIS thousands
-------------- --------------------------------
Linked to the Dollar 2.8 - 3.1 12,184 5,809
Linked to the CPI 2.0-2.8 43,205 71,736
Linked to the CPI No interest 10,244 43,013
------------- -------------
65,633 120,558
============= =============
(b) 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
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Linked to the Dollar 569 139
Unlinked-bears interest at the rate of
the increase in the CPI 3,413 2,914
------------- -------------
3,982 3,053
============= =============
F-51
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
(4) Including investments in marketable
shares traded on theTel Aviv Stock
Exchange or abroad in NIS millions:
Carrying value 498 1,319
============= =============
Market value as at balance date 867 796
============= =============
Note 9 - Other Investments and Receivables
A. Composition:
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Deposits in banks and in
financial institutions 49,180 76,289 32,028 54,166
Non-current trade receivables 9,362 25,974 - -
Long-term loans receivable
from others 73,498 50,512 - -
------------- ------------- ------------- -------------
132,040 152,775 32,028 54,166
Marketable securities 1,625 1,484 - -
Venture capital investment 230,390 284,283 - -
Indemnification receivable
for fire Damages (1) 113,346 108,064 - -
Non-marketable shares and
payments on account 1,036 1,713 1,036 1,713
Others 4,947 23,220 113 151
------------- ------------- ------------- -------------
483,384 571,539 33,177 56,030
============= ============= ============= =============
(1) See Note 3E(1)
F-52
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
---------------------------------------------------------------------------------------------------------
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 from others:
Consolidated:
Average
interest rates at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
Linked to the CPI Mainly 5.7 39,028 60,872
Linked to the foreign currency
(mainly to the Dollar) 0 - 10 93,012 89,264
Unlinked - - 2,639
------------- -------------
132,040 152,775
============= =============
Company:
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Linked to the CPI 5.7 32,028 54,166
============= =============
C. Repayment schedule of deposits, non-current customers balances and long-term loans
from others, in the consolidated balance sheet:
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Amounts collectible in the:
Second year 50,094 99,242 - 54,166
Third year 45,958 19,331 32,028 -
Fourth year 8,230 8,597 - -
Fifth year 3,909 5,336 - -
Thereafter and without a
specific maturity date 23,849 20,269 - -
------------- ------------ ---------------- -------------
132,040 152,775 32,028 54,166
============= ============ ================ =============
F-53
Koor Industries Ltd. (an Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------------
Note 10 - Fixed Assets
A. Consolidated
Installations
under
Land Buildings Machinery, Vehicles Office Tools construction Total
(including equipment and furniture and and payments
leasehold and forklifts and instruments on account of
land) installations equipment acquisitionn
of assets
---------- ---------- ------------- ---------- --------- ----------- ------------- --------
NIS thousands
----------------------------------------------------------------------------------------------------
Cost as at January 1, 2003 125,056 1,735,986 4,063,998 62,157 204,338 3,195 1,473 6,196,203
Additions during the year 754 21,378 152,977 5,888 18,392 - (613) 198,776
Disposals during the year 4,251 25,028 245,099 24,485 9,725 - - 308,588
Adjustments resulting from
foreign currency
translation differences* (5,908) (25,938) (181,784) (3,992) (10,299) - (38) (227,959)
Formerly consolidated
subsidiaries, net - (1,104) (39,076) (113) (200) (28) - (40,521)
---------- ---------- ------------- ---------- --------- ----------- ----------- ----------
Balance as at
December 31, 2003 115,651 1,705,294 3,751,016 39,455 202,506 3,167 822 5,817,911
========== ========== ============- ========== ========= =========== =========== ==========
Accumulated depreciation
as at January 1, 2003 1,226 632,273 2,269,866 30,586 122,390 - - 3,056,341
Additions during the year 56 43,155 167,440 6,556 20,336 - - 237,543
Disposals during the year - 10,649 236,533 13,357 8,018 - - 268,557
Adjustments resulting from
foreign currency
translation differences* (49) (12,192) (92,862) (2,722) (4,052) - - (111,877)
Formerly consolidated
subsidiaries, net - (469) (35,112) (34) (38) - - (35,653)
---------- ---------- ------------- ---------- --------- ----------- ----------- ----------
Balance as at
December 31, 2003 1,233 652,118 2,072,799 21,029 130,618 - - 2,877,797
========== ========== ============- ========== ========= =========== =========== ==========
Write down for decline
in value - 11,707 - - - - - 11,707
---------- ---------- ------------- ---------- --------- ----------- ----------- ----------
Net book value as at
December 31, 2003 114,418 1,041,469 1,678,217 18,426 71,888 3,167 822 2,928,407
========== ========== ============- ========== ========= =========== =========== ==========
Net book value as at
December 31, 2002 123,830 1,103,713 1,794,132 31,571 81,948 3,195 1,473 3,139,862
========== ========== ============- ========== ========= =========== =========== ==========
* See Note 2B(3)
F-54
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 10 - Fixed Assets (cont'd)
A. Consolidated (cont'd)
(1) Some of the real estate properties have not yet been
registered in the Land Registry Office in the name of the
subsidiaries, in some cases because of the absence of formal
parceling of the area.
Leasehold rights are for a period of 49 years, ended in the
year 2003 and thereafter. Certain leases provide an option
for extension for another 49 years.
The cost of leasehold real estate as at December 31, 2003,
is approximately NIS 755 million, of which approximately NIS
437 million is under a capitalized lease.
(2) 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, amounting to NIS
181 million, adjusted, and NIS 195 million, adjusted, as at
December 31, 2003 and 2002, respectively (see also Note
16A).
(3) Includes capitalized interest amounting to about NIS 141
million adjusted, and about NIS 92 million adjusted to
December 31, 2003 and 2002, respectively.
(4) As for amounts charged to cost of fixed assets, see Notes
23B and E.
(5) Including fully depreciated assets amounting to NIS 797
million, adjusted to December 31, 2003.
(6) See Note 22 regarding liens.
F-55
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 10 - Fixed Assets (cont'd)
B. Company
Composition of the assets and accumulated depreciation, according to
major groups, and changes therein during the current year, are as
follows:
Offices Office
and land(*) equipment Total
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Cost as at January 1, 2003 36,008 6,245 42,253
Additions during the year 267 125 392
Disposals during the year - 1,000 1,000
------------- ------------- -------------
Balance as at December 31, 2003 36,275 5,370 41,645
------------- ------------- -------------
Accumulated depreciation as at
January 1, 2003 3,423 2,722 6,145
Additions during the year 829 515 1,344
Disposals during the year - 874 874
------------- ------------- -------------
Balance as at December 31, 2003 4,252 2,363 6,615
------------- ------------- -------------
Write down for decline in value 11,707 - 11,707
------------- ------------- -------------
Net book value as at
December 31, 2003 20,316 3,007 23,323
============= ============= =============
Net book value as at
December 31, 2002 32,585 3,523 36,108
============= ============= =============
(*) Represents the ownership of two stories in an office
building in Tel Aviv and leasehold rights to land in Dimona,
in an area of 27 dunams, not yet registered in the Company's
name.
These offices have not as yet been registered in the name of
the Company at the Land Registry Office.
The offices are on land leased under a capital lease for a
period of 49 years ending in 2044.
F-56
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 11 - Intangible Assets, Deferred Tax Assets and Deferred Expenses
A. Consolidated balance sheet
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Intangible assets-goodwill:
Original amounts 714,841 886,629
Accumulated amortization 298,430 354,033
------------- -------------
416,411 532,596
------------- -------------
Licensing of products abroad:
Original amounts 783,206 700,412
Accumulated amortization 413,741 348,364
------------- -------------
369,465 352,048
------------- -------------
Intangible assets in the purchase of products:(1)
Original amounts 1,231,476 1,321,404
Accumulated amortization 100,993 47,652
------------- -------------
1,130,483 1,273,752
------------- -------------
Marketing rights and others:
Original amounts 189,757 209,218
Accumulated amortization 52,654 53,283
------------- -------------
137,103 155,935
------------- -------------
Deferred expenses:
Debentures issuance costs:
Original amount 10,799 13,310
Accumulated amortization 3,715 2,356
------------- -------------
7,084 10,954
------------- -------------
Deferred taxes receivable (see Note 16(F)) 60,537 71,532
------------- -------------
2,121,083 2,396,817
============= =============
(1) Including intellectual property rights, trade mark, technological know-how, etc.
F-57
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 12 - Credit from Banks and Others
A. Composition:
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
From banks 914,260 1,305,019 169,709 193,830
Current maturities of
long-term loans
and debentures 663,142 1,010,480 418,826 592,036
------------- ------------- ------------- -------------
1,577,402 2,315,499 588,535 785,866
============= ============= ============= =============
See also Note 15A
B. Classification by linkage terms and interest rates:
Consolidated
Average --------------------------------
interest rates at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
Linked to foreign currency
(mainly to the Dollar) 2.0-20.5 647,098 978,277
(mainly 1.8-7.0)
Unlinked 6.9-11.4
(mainly 10.6-11.4) 267,162 326,742
------------- -------------
914,260 1,305,019
============= =============
Company
Average --------------------------------
interest rates at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
Linked to the Dollar 2.4-3.2 169,704 176,148
Unlinked 8.7 5 17,682
------------- -------------
169,709 193,830
============= =============
C. See Note 22 regarding liens to secure credit.
F-58
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 13 - Trade Payables
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Open debts 1,337,442 1,159,151 484 1,054
Cheques and notes payable 5,341 24,032 19 204
------------- ------------- ------------- -------------
1,342,783 1,183,183 503 1,258
============= ============= ============= =============
Note 14 - Other Payables
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Employees and
withholdings remitted 162,035 135,552 291 22
Provision for vacation pay
and vacation expense
allowance 100,006 109,931 3,353 2,895
Expenses to be paid 233,656 276,032 21,341 29,846
Government agencies
(including taxes) 192,770 141,236 2,143 1,538
Provision for warranty
and repairs 52,844 33,739 - -
Payables for purchase
of assets - 220,794 - -
Severance pay payable and
current portion of early
retirement pensions
(see Note 17) 87,438 147,631 134 150
Reserve for internal insurance 3,226 15,099 3,226 7,723
Dividend proposed
to the minority 15,231 - - -
Deferred income 43,148 14,275 - -
Liability in respect
of securities that
were sold short 67,515 71,096 - -
Liabilities regarding
forward transaction 57,061 37,922 9,457 34,090
Others 255,287 191,148 3,321 1,798
------------- ------------- ------------- -------------
1,270,217 1,394,455 43,266 78,062
============= ============= ============= =============
Includes interested parties 1,544 493
============= =============
F-59
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities
A. Loans
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands NIS thousands NIS thousands
------------- ------------- ------------- -------------
1. Loans from banks 3,668,341 4,808,310 1,875,279 2,533,417
Less - current maturities 661,998 970,941 320,200 461,549
------------- ------------- ------------- -------------
3,006,343 3,837,369 1,555,079 2,071,868
------------- ------------- ------------- -------------
2. Loans from others:
Shareholders in
subsidiaries
and in proportionately
consolidated companies 52,386 38,461 - -
Investees - - 154,315 92,033
Receipts from
time-sharing units 33,765 34,617 - -
Deferred income 9,945 4,159 - -
Others and long-term
accrued expenses 18,542 28,553 - -
------------- ------------- ------------- -------------
114,638 105,790 154,315 92,033
Less - current maturities 1,144 1,085 98,626 92,033
------------- ------------- ------------- -------------
113,494 104,705 55,689 -
------------- ------------- ------------- -------------
3,119,837 3,942,074 1,610,768 2,071,868
============= ============= ============= =============
3. Classification by linkage terms and interest rates:
The consolidated balance sheet:
Interest rate at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
Linked to the foreign currency
(mainly Dollar) 1.7-8.1 2,147,952 2,857,810
Linked to the CPI 3.7-6.9 1,581,728 2,006,603
Linked to the CPI No interest 46,227 42,025
Unlinked 6.6-7.9 7,072 7,662
------------- -------------
3,782,979 4,914,100
Less - current maturities 663,142 972,026
------------- -------------
3,119,837 3,942,074
============= =============
F-60
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
A. Loans (cont'd)
The Company balance sheet:
Interest rate at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
a. From banks
Linked to the CPI 5.8-6.9 1,502,011 1,915,832
Linked to the Dollar 2.7-7.7 373,268 617,585
------------- -------------
1,875,279 2,533,417
Less - current maturities 320,200 461,549
------------- -------------
1,555,079 2,071,868
============= =============
Interest rate at December 31
December 31 --------------------------------
2003 2003 2002
------------------ ------------- -------------
% NIS thousands
------------------ --------------------------------
b. From investees:
Capital note - 8,125 -
Linked to the CPI 3.3-4 98,626 92,033
Linked to the CPI - 47,564 -
------------- -------------
154,315 92,033
Less - current maturities 98,626 92,033
------------- -------------
55,689 -
============= =============
B. Debentures
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Debentures convertible into
Shares at Series F issued
By Koor (1): - 38,454 - 38,454
Debentures convertible
into shares of subsidiary(2): 340,270 397,504 - -
------------- ------------- ------------- -------------
340,270 435,958 - 38,454
Less - current maturities - 38,454 - 38,454
------------- ------------- ------------- -------------
340,270 397,504 - -
============= ============= ============= =============
(1) In the current period, debentures of a par value of NIS 23,435 thousand
(Series F) were repaid.
F-61
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
B. Debentures (cont'd)
(2) a. In November 2001 M-A Industries issued, under a prospectus,
convertible debentures and options for a net consideration of
approximately NIS 276 million.
M-A Industries recorded the options at their fair value in
accordance with the Black & Scholes option pricing model
(about NIS 19 million). The balance of the proceeds
(approximately NIS 257 million) was allocated to the fair
value of the convertible debentures.
M-A Industries issued NIS 270,000 thousand par value of
debentures (Series A) listed on the Tel Aviv Stock Exchange,
bearing interest at 2.5% p.a. and linked (principal and
interest) to the representative exchange rate of the Dollar.
The debentures are repayable in one payment in November 2007
if not converted before then into shares. The debentures are
convertible into ordinary shares of NIS 1 par value each of
M-A Industries at the rate of NIS 10.36 (following
distribution of a dividend) par value of debentures per one
ordinary share.
b. In January 2002 M-A Industries issued NIS 133,980 thousand par
value of debentures (Series A) in a private placement. The
terms of the debentures are the same as the terms of the
debentures (Series A) issued by M-A Industries as above.
c. In June 2002 a consolidated company of M-A Industries
purchased approximately NIS 16,684 thousand par value of
debentures (Series A) in consideration of approximately 3.2
million dollars.
During June 2003, all of the above debentures were sold for
4.3 million dollars.
d. In the current year, NIS 57,660,575 par value of debentures
(Series A) were converted into 5,565,649 ordinary shares, NIS
1 par value, most at an exercise price of NIS 10.36 par value
of debenture per ordinary, NIS 1 par value, share. M-A
Industries total share capital issued as a result of the
conversion is 1,270 thousand dollars, at a premium of 11,331
thousand dollars. Subsequent to the balance sheet date and
proximate to the approval date of the financial statements,
NIS 29,188 thousand par value of debentures (Series A) was
converted into 2,833 thousand ordinary shares, NIS 1 par
value.
The debentures are secured by a symbolic fixed senior lien on
a deposit of NIS1 in favor of the trustee for the
debenture-holders.
Beginning from 2003, conversion of the debentures became
probable. Accordingly, the balance of the debentures is stated
in a separate item between long-term liabilities and
shareholders' equity.
F-62
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
C. Liabilities (net of current maturities) that will mature in the
following years subsequent to balance sheet date are as follows:
1. Consolidated
Loans from banks Loans from others Debentures Total
----------------------- ---------------------- ---------------------- -------------------------
December 31 December 31 December 31 December 31
----------------------- ---------------------- --------------------- -------------------------
2003 2002 2003 2002 2003 2002 2003 2002
---------- ----------- ----------- --------- ---------- --------- ----------- ------------
NIS thousands
-----------------------------------------------------------------------------------------------------
Second year 626,983 899,477 7,929 24,614 - - 634,912 924,091
Third year 1,649,252 380,990 13,622 6,880 - - 1,662,874 387,870
Fourth year 308,944 1,995,683 5,150 4,887 340,270 - 314,094 2,000,570
Fifth year 224,854 269,571 4,832 4,321 - 397,504 569,956 671,396
Sixth year 43,029 88,993 1,000 4,219 - - 44,029 93,212
Subsequent years 153,281 202,655 80,961 59,784 - - 234,242 262,439
---------- ----------- ----------- --------- ---------- --------- ----------- ------------
3,006,343 3,837,369 113,494 104,705 340,270 397,504 3,460,107 4,339,578
========== ========== ========== ========= ========== ========= =========== ============
2. The Company
Loans and capital note
Loans from banks from investees Total
----------------------- ---------------------- -------------------------
December 31 December 31 December 31
----------------------- ---------------------- -------------------------
2003 2002 2003 2002 2003 2002
---------- ----------- ----------- --------- ----------- -----------
NIS thousands
------------------------------------------------------------------------------
Second year 314,174 355,895 47,564 - 361,738 355,895
Third year 1,232,086 - - - 1,232,086 -
Fourth year - 1,706,613 - - - 1,706,613
Fifth year - - - - - -
Sixth year - - - - - -
Subsequent years 8,819 9,360 8,125 - 16,944 9,360
---------- ----------- ----------- --------- ---------- -----------
1,555,079 2,071,868 55,689 - 1,610,768 2,071,868
========== =========== =========== ========= =========== ===========
D. See Note 22 for details of security pledged to secure loans.
F-63
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
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 up 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 preferential rate of 25% during the
remaining benefits period.
For fixed assets serving the approved enterprise, investees are
entitled to an accelerated amortization deduction over five years.
In the event that an investee distributes a dividend to shareholders
out of income attributable to revenues from an approved enterprise
which received a tax exemption, the company that distributes the
dividend would be liable to tax at 25% of the earnings distributed.
Deferred taxes in respect of income from approved enterprises were
not provided, since it is the Subsidiaries policy not to initiate a
distribution of dividend that involves 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 Income Tax (Inflationary Adjustments) Law, 1985 (hereinafter -
"the Adjustments Law") which has been in effect since the 1985 tax
year, instituted the measurement of results for tax purposes on a
real basis. The various adjustments required under the Adjustments
Law are meant to bring about taxation of income on a real basis.
However, the adjustment of nominal income under the tax laws is not
always identical to the inflationary adjustment according to the
Opinions of the ICPAI. Consequently, differences are created between
adjusted incomes according to the financial statements adjusted
income for tax purposes.
F-64
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
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 in fact claimed, accelerated rates of depreciation.
Likewise, certain subsidiaries are entitled to file consolidated tax
returns with the tax authorities.
D. Tax rates applicable to income from other sources:
Income not eligible to "approved enterprise" benefits, mentioned in
item A. above, is liable to tax at the regular rate of 36% (or if the
investee is registered and operates outside of Israel, at the tax
rate prescribed for that territory).
E. Losses for tax purposes carried forward to future years and tax
assessments:
1. The consolidated balance of tax loss as at December 31, 2003
carryforwards to next years amounted to approximately NIS 3,181
million as at balance sheet date, out of which NIS 1,607 million
relates to Koor. Carryforward tax losses are linked to the CPI.
2. The Company has received final assessments until 1998 tax year.
3. MA Industries subsidiaries in Israel received, for 1999, tax
assessments to the best of judgment, according to which they have
been required to pay an additional 2.2 million dollars. These
consolidated companies appealed against the demand. After the balance
sheet date, tax assessments to the best of judgment were also
received for the years 2000 and 2001. The total demand for payment
for these years is 7.8 million dollars. The consolidated companies
believe that the provisions made in the financial statements suffice.
F-65
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
F. Deferred taxes:
1. Deferred taxes are presented in the consolidated balance sheet as follows:
December 31
--------------------------------
2003 2002
------------- -------------
NIS thousands
--------------------------------
Within current assets in respect of:
Provision for vacation pay and severance benefits 28,185 23,475
Operating loss and capital loss carried forwards 92,327 16,820
Inventory, net of customer advances 3,757 (6,905)
Timing differences in respect of recognition of income and expenses 31,761 42,475
------------- -------------
Total in current assets 156,030 75,865
============= =============
Within long-term assets in respect of:
Depreciation (33,256) (41,183)
Operating loss and capital loss carried forwards 908,425 *972,351
Liability in respect of employee severance benefits 28,680 78,772
Other 3,709 4,902
------------- -------------
Balance not expected to be realized (1) (847,021) *(943,310)
------------- -------------
Total in other long-term assets 60,537 71,532
============= =============
Within short-term liabilities in respect of:
Provision for vacation pay and severance benefits 71 -
Timing differences in respect of recognition of income and expenses (5,054) -
------------- -------------
Total in other payables (4,983) -
============= =============
Within long-term liabilities in respect of:
Depreciation (364,906) (359,538)
Operating loss and capital loss carried forwards 135,387 142,893
Liability in respect of employee severance benefits 41,842 38,595
Other (2,615) (7,528)
------------- -------------
(190,292) (185,578)
Balance not expected to be realized (1) (9,495) (9,871)
------------- -------------
Total in long-term liabilities (199,787) (195,449)
============= =============
(1) The Company and certain subsidiaries have deferred tax assets, that are
not expected to be realized, because of accumulated tax loss
carryforwards and other timing differences. Companies Management's
believes that it is not likely that these balances will be realized
and, accordingly, no deferred taxes were created in respect
thereof.
(2) The Company's balance - see Note 3C(10).
* Reclassified
F-66
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
F. Deferred taxes (cont'd):
2. Balances and movement of deferred taxes in the consolidated balance sheet:
Timing
differences in
respect of
Depreciable Inventories Provisions Losses and recognition
fixed net of for deductions of income
assets customer employee carried and
advances rights forward expenses Total
----------- ----------- ---------- ---------- ----------- -----------
NIS thousands
---------------------------------------------------------------------------------------------
Balance as at
January 1, 2002 (354,863) (4,309) 100,402 249,147 28,446 18,823
Translation
differences in
subsidiaries (2,351) (48) 439 140 929 (891)
Amounts charged
to statement of
operations (37,645) (2,077) 40,001 (71,191) 6,433 (64,479)
Other changes,
net* (5,862) (471) - 787 4,041 (1,505)
----------- ----------- ---------- ---------- ----------- -----------
Balance as at
December 31,
2002 (400,721) (6,905) 140,842 178,883 39,849 (48,052)
Translation
differences in
subsidiaries 21,304 1,386 (7,627) (9,026) 8,606 14,643
Amounts charged
to statement of
operations (18,745) 9,276 (34,437) 109,766 (20,654) 45,206
----------- ----------- ---------- ---------- ----------- -----------
Balance as at
December 31,
2003 (398,162) 3,757 98,778 279,623 27,801 11,797
=========== =========== ========== ========== =========== ===========
* Mainly subsidiaries that were sold/acquired, net.
Deferred taxes were computed at tax rates of 25% - 36%.
F-67
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Taxes on income included in consolidated statements of operations:
1. Composition:
Year ended December 31
--------------------------------------------------
2003 2002 2001
----------- ------------ -----------
NIS thousands
--------------------------------------------------
Earnings (losses) before income tax:
In Israel 41,868 (451,190) (697,289)
Abroad 406,496 137,540 629
----------- ------------ -----------
448,364 (313,650) (696,660)
=========== ============ ============
For the current year:
Current taxes:
In Israel 51,470 67,444 66,700
Abroad 60,440 17,392 11,246
Deferred taxes:
In Israel (66,565) 18,942 (3,252)
Abroad 21,359 45,537 (33,979)
In respect of previous years:
In Israel (9,189) (8,369) (6,134)
Abroad 27,857 233 4,249
----------- ------------ -----------
85,372 141,179 38,830
=========== ============ ============
F-68
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Taxes on income included in the consolidated statements of operations (cont'd):
2. Below is the adjustment between the theoretical tax amount which
would have been applicable if all the income of Koor Group and the
consolidated companies were taxable at 36%, and the tax amount
charged in the statement of income.
Year ended December 31
--------------------------------------------------
2003 2002 2001
----------- ------------ -----------
NIS thousands
--------------------------------------------------
Earnings (losses) before taxes on income, as
reported in the statement of operations 448,364 (313,650) (696,660)
============ ============ ===========
Statutory tax rate 36% 36% 36%
============ ============ ===========
Theoretical tax expenses in respect of these
earnings (losses) 161,411 (112,914) (250,798)
Increase (decrease) in taxes resulting from
the following factors - the tax effect:
Tax benefits under various encouragement laws (32,790) (58,461) (42,591)
Non-deductible expenses for tax purposes 22,650 144,711 59,523
Losses for which deferred taxes were
not recorded 40,470 194,757 165,618
Capital gains (losses) from sale of
investments and assets, net - (91) 43,628
Provisions for anticipated losses from the
sale of assets, net 25,748 43,699 85,251
Tax loss carried forwards from prior years
for which deferred taxes were not
created and which were utilized
during the current year - (60,132) (1,473)
Tax losses from prior years, for which
deferred taxes were recorded this year (58,903) - -
Effect of the Inflationary Adjustments Law
in respect of companies whose functional
currency is the Dollar (25,660) 24,032 29,311
Taxes in respect of prior years 18,668 (8,136) (1,885)
Effect of foreign subsidiaries * (63,328) (28,862) (47,085)
Others (2,894) 2,576 (669)
-----------= ------------ -----------
Total taxes on income 85,372 141,179 38,830
============ ============ ===========
* Relates to territories of operations in which the statutory tax rate
is lower than that used in Israel.
F-69
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
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. 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. Were 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 Company's
liability for employee severance benefits. Employees dismissed before
reaching retirement age are entitled to severance pay, computed on
the basis of their latest salary. Where amounts accumulated in the
pension funds are insufficient to cover such severance pay, the
company and its subsidiaries will make up the amount of the shortfall
at the time of payment.
In certain subsidiaries, past experience has shown that the vast
majority of employees continue to work until they reach retirement
age, and these companies were not asked, in the past, to make up
significant shortfalls for employees who chose early retirement.
Accordingly, the managements of these companies believe that there is
a low probability that such shortfalls will be paid. Therefore, the
financial statements of these companies do not include a provision.
Therefore, the financial statements of the other Group companies
include a suitable provision, based on management's estimate of the
salary components used to compute the pension for full coverage of
the said obligation. In Management's opinion, an appropriate
provision, based on the salary components used in the computation of
severance pay, has been included in the financial statements to fully
cover this liability.
Regarding companies in which enhanced severance has been planned or
agreed upon for the employees, appropriate provisions have been made
for the supplementary amounts.
In early 2003, the Knesset passed a law, which changed the
regulations for pension funds, and retirement age will be raised
gradually from 65 to 67 for men and from 60 to 62 for women. On the
other hand, the Minister of Finance deposited a letter with the
Chairman of the Knesset Finance Committee, whereby an annual fund
will be set up, to compensate those harmed by the application of the
law, including employers. The Company's and investee's company
managements assess that the above law will not have a material effect
on the Group's obligations for early retirement in respect of its
employees.
B. 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).
F-70
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------
Note 17 - Liabilities for Employee Severance Benefits, Net (cont'd)
C. Compensation for unutilized sick leave:
A provision for unutilized sick leave, according to agreements, is included in the
accounts in respect of those employees who have reached the age of 55. Due to the
uncertainty as to whether employees who have not reached that age will be entitled to such
compensation (as a result of utilization of sick leave or early retirement), no provision
has been made. The provision is computed on the basis of the latest salary for 8 working
days in respect of each year during which the sick leave was not utilized.
D. 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
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Severance pay and retirement grants 259,455 315,600 3,227 9,657
Amount accrued for early
retirement 186,059 154,172 548 643
Amount accrued in respect of
unutilized sick leave 11,853 11,188 314 317
------------- ------------- ------------- -------------
457,367 480,960 4,089 10,617
Less - amount funded (1) 265,365 224,656 2,605 2,235
------------- ------------- ------------- -------------
192,002 256,304 1,484 8,382
============= ============- ============= =============
(1) The amounts funded can be withdrawn, subject to the fulfillment of the
provisions of the Severance Pay Law.
F-71
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments
A. Contingent liabilities
1. Commissioner of Restrictive Trade Practices:
During October 1997, proximate to the date of the
publication of a newspaper article containing details about
alleged violations of the Law for Restrictive Trade
Practices, 1988 (hereinafter - "the Law"), regarding alleged
price-fixing and lack of competition between Tadiran Ltd.
(subsidiary of Koor - "Tadiran") and Tadiran
Telecommunications Ltd. (formerly a Koor subsidiary)
(hereinafter - "TTL") and between Telrad Networks Ltd.
(subsidiary of Koor - "Telrad"), the Commissioner of
Restrictive Trade Practices (hereinafter - "the
Commissioner") conducted an investigation at the offices of
Tadiran, TTL, Telrad and the Company, during which certain
documents were gathered, certain employees were questioned
and additional information was submitted as requested.
On December 13, 1998, the Commissioner issued a press
release, in which he announced that the Investigations
Department of the Restrictive Trade Practices Authority
(hereinafter - "the Authority") had concluded the
investigation regarding suspicions about restrictive
arrangements between the Company, Tadiran, TTL, Telrad,
Bezeq and BezeqCall, in the supply of switchboards for the
commercial market and in the Network Termination Point
segment.
On March 4, 2002, Tadiran and Telrad received notice from
the Authority that it is considering the possibility of
bringing each of them to trial for violations of the Law, in
the matter of the actions the Authority alleges that each of
them took, relating to the supply of switchboards for the
commercial market in the years 1993 to 1997. The Authority's
notice states that the allegations against Telrad and
Tadiran in the Network Termination Point segment are still
being reviewed by the Commissioner.
Under the Law, penalties may be imposed against an entity
that has violated the Law. There is also the possibility of
repercussions at the civil level, if damage should be proven
as a result of a violation of the law.
Contacts are underway with the Restrictive Trade Practices
Authority, in an effort to conclude the proceedings related
to the Authority's investigation.
The Company is unable to estimate, at this stage, the
significance and implications of the Authority's notice, and
accordingly, no provision has been made in the financial
statements in respect of this matter. See Note 18A5(a) for
information on Tadiran's indemnification of ECI.
F-72
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
2. Elisra
As part of the agreement for the sale of part of the
Company's holdings in Elisra to Elta, as described in Note
3E(3), Koor undertook to indemnify Elta for damages, as
defined in the agreement, which will incur as a result of
violation of representations made to Elta in the agreement.
The main points of the indemnification undertaking are
these:
(a) Damages exceeding 2 million dollars, incurred as a
result of the violation of most of the
representations, as well as any damages sustained
as a result of violation of the representation
concerning the fairness of the provisions in the
financial statements of Elisra for the year 2001 in
respect of obligations to employees; provided that
the demand for payment of the indemnity is
submitted by Elta not later than 30 days after the
date of presentation of Elisra's financial
statements for 2003.
(b) Any amount of damages incurred as a result of
violation of the representation concerning the
insurance indemnity rights to which the Elisra
Group is entitled, relating to the fire that
occurred at the Group's plants, see Note 3E(1).
Elta's right to demand payment of the indemnity in
this matter carries no time limit.
(c) Any amount of damages incurred as a result of tax
payments for which Elisra will be liable, in
respect of the tax year 2001, and that are at least
4 million dollars higher than all the provisions
for taxes included in Elisra's financial statements
for 2001; provided that the demand for payment of
indemnity is submitted by Elisra not later than 30
days after the date on which the self-assessment in
respect of that tax year becomes final.
(d) As a condition for the continued availability - see
Note 3E(4).
3. According to the terms of agreements with banks, Koor
undertook, among other things, to maintain minimum
shareholders equity, and to partially repay the current debt
out of proceeds to be received from the divestitures of
specific assets, in the event that the assets are sold.
As at balance sheet date, Koor is complying with these
conditions.
4. Telrad
A. In October 1994, a claim in an unspecified amount was
filed by the Engineers Union against Telrad. The
claim pertains to the recognition of applicability to
Telrad engineers of the salary tables included in the
general collective bargaining agreements, which were
signed in 1995 and 1994 between the Engineers Union
and employers in the public service sector.
On January 31, 1996, a ruling was handed down by the
Tel Aviv District Labor Court, which dismissed
outright the claims of the Engineers Union. The
Engineers Union appealed the ruling to the Labor
Court, which ruled that the agreement is a collective
agreement governing the relations between Telrad, the
Union and the Telrad employees. An appeal was filed
in the Supreme Court by Telrad.
F-73
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
4. Telrad (cont'd)
On January 29, 2002, a ruling was issued dismissing
Telrad's appeal. Consequently, the next stage is a
hearing of evidence by the Labor Court concerning the
applicability of public service sector to salaries in
Telrad.
In April 1996, a similar claim was filed by the Lod
Workers' Council and the Workers' Committee
concerning the applicability of the salary tables of
the public service sector to employees of Telrad.
B. In 1999 a claim was filed against Telrad by company
employees who are members of Telrad's workers'
committee. They are suing to be given accounts so
that the plaintiffs can examine the calculation of
the distribution of earnings to employees. They are
also suing for a declaratory judgment which will rule
that Telrad is obliged to draw up new accounts for
the distribution of earnings. In addition, a motion
was filed to recognize the plaintiffs as
representatives of all of Telrad's workers and
employees. The court dismissed the motion for a class
action. A defense brief has been filed by Telrad.
Telrad recorded an appropriate provision in respect of the
above claims.
C. As a condition for the continued availability of bank
credit lines given to Telrad see Note 3D(5).
5. Tadiran and its investees
A. In the 1999 merger agreement between ECI and Tadiran
Telecommunications Ltd., Tadiran undertook to
indemnify ECI for any loss ECI sustains as a result
of matters under investigation by the Restraint of
Trade authority.
This indemnity will remain valid for a period of
seven years from the date of the merger and may be
extended for an additional period, as long as these
matters are under investigation by the
Commissioner.
B. Employees of a Tadiran plant that closed during
1990 filed actions against the Tadiran, alleging
that they sustained injuries or certain
work-related illnesses that they allege resulted
from exposure to certain substances during their
employment.
Tadiran has insurance policies which, relying on
legal opinion, cover possible damages resulting
from these claims, and consequently, no provisions
have been made in respect of those claims. Tadiran
recorded provisions in respect of possible damages
which had been covered by an insurance company
currently in liquidation.
F-74
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
5. Tadiran and its investees (cont'd)
C. In October 1999, Bezeq, The Israel
Telecommunication Corp. Ltd. (hereinafter -
"Bezeq") lodged a claim against Tadiran Ltd. whose
main cause is various losses sustained by Bezeq due
to delays in the performance of projects ordered in
development and application contracts originally
signed between Bezeq and TTL, in the amount of
approximately 8.6 million dollars (hereinafter -
"main claim"). Alternatively, Bezeq is suing for
the balance of arrearage penalties to which it
alleges it is entitled pursuant to those contracts,
and which were not paid in full, in the amount of
approximately 1.7 million dollars (hereinafter -
"alternative claim").
In an arbitration judgment issued on February 17,
2000, all of Bezeq's arguments regarding Tadiran's
liability for the main claim were dismissed. The
arbitration judgment rules that pursuant to the
engagement contracts between the parties, Bezeq is
entitled to compensation within the framework of
arrearage penalties only. The negotiations between
the parties for a settlement were unsuccessful, and
the matter has been returned to the arbitrator for
his decision. In February 2003, a supplementary
arbitration agreement was signed. The parties
submitted their written arguments and the
arbitrator issued his ruling on February 26, 2004.
In his ruling, the arbitrator affirmed Tadiran's
position and ruled, in accordance with the
parameters for calculating the damages that Tadiran
is meant to pay to Bezeq. In the estimation of
Tadiran's management, based on the opinion of its
legal counsel, Tadiran will not bear additional
material expenses, beyond the provision included in
the financial statements.
6. M-A Industries and its overseas investees
a. Quality of the environment
The activities of M-A Industries are exposed to the
risk of harming the environment, since it
manufactures, stores and sells chemicals. M-A
Industries invests significant amounts in order to
comply with the provisions of environmental laws
and regulations, and in the opinion of the
management it does comply therewith. According to
M-A Industries' insurance experts, the insurance
policies provide coverage in the event of a sudden
unexpected crisis of environmental pollution in
Israel and worldwide, subject to the relevant terms
of the policy. As at balance sheet date, M-A
Industries does not have insurance coverage for
continuous environmental pollution.
Such insurance is difficult to obtain, and even
where it can be obtained, the company believes that
the terms of the insurance, including the sum
insured, do not at present justify taking out such
insurance.
One of the plants of M-A Industries subsidiary is
located in Ramat Hovav, along with other chemical
plants, since the Government decided that the
geological layers in that particular area are
completely impermeable to seepage or pollution. The
Ministry of the Environment conducted tests, which
determined that there are indications of
subterranean pollution in Ramat Hovav. The
investigators recommended that steps be taken to
prevent the continuation of leakages from active
and inactive plants, which could constitute a
source of pollution of the water table in the area.
F-75
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
6. M-A Industries and its overseas investees (cont'd)
In 1998 an agreement was signed between the Ramat
Hovav Council, the plants and university
institutions, to finance research that would
provide a basis for recommendations as to the
action to be taken to halt any further pollution.
In 2003, the research was concluded and its results
were submitted to M-A Industries. As at the date of
the financial statements, M-A Industries management
does not expect significant impact with respect to
M-A Industries from implementation of the report's
recommendations, and, therefore, no provision has
been included in the financial statements in
respect thereto.
Against M-A Industries and one of its officers, a
criminal complaint was filed by the Man, Nature and
Law Foundation. The complaint accuses M-A
Industries that in several instances during
1999-2002, there were measurements at its Ramat
Hovav plant of chimney emissions of materials at
prohibited concentrations, which created strong air
pollution.
M-A Industries does not admit to the charges in the
complaint.
In the opinion of M-A Industries and its legal
counsel, because of the early stage of the
proceedings, it is not possible to estimate the
outcome of the complaint and/or the resultant
exposure. Therefore, the financial statements did
not include a provision in respect thereof.
b. A claim was filed against a subsidiary in Brazil,
alleging that the subsidiary copied a certain
process, which is a protected trade secret owned by
the claimant. Accordingly, the subsidiary is being
sued to indemnify the claimant for unfair
competition, in the amount of approximately 9 million
dollars (based on a calculation involving the amount
of materials used). In addition, the claimant
requested that a fine of 25 dollars per day be levied
against the subsidiary for the unlawful exploitation
of trade secrets. Based on the opinion of its legal
counsel, the subsidiary's management estimates that
the claim has no validity and therefore, no provision
has been included in the financial statements in
respect thereto.
c. In addition a claim was filed against a subsidiary
in Brazil and others, totaling approximately 31
million dollars, by a group that acquired the
rights of two banks, which had declared bankruptcy,
as the guarantor of debts of agricultural
cooperatives that were its former shareholders.
Based on the opinion of its legal counsel, the
subsidiary's management estimates that there is a
good chance that its defense against the claim will
be accepted and, therefore, no provision has been
included in the financial statements in respect
thereto.
F-76
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
6. M-A Industries and its overseas investees (cont'd)
d. Administrative proceedings, civil actions and other
monetary claims of approximately 18 million dollars
have been filed against a subsidiary of M-A
Industries. Based on the opinion of its legal
counsel, the subsidiary's management estimates that
the chances of the subsidiary's success in the
proceedings and its defense against the above
claims and demands are high. The subsidiary
believes that the provisions recorded in its
financial statements are adequate to cover any
possible damage which may result from these claims.
e. On the matter of compliance with financial criteria,
see Note 3C(1).
f. On the matter of undertakings in securitization
transactions, see Note 3C(1).
7. On September 30, 1999, Knafayim, an affiliate, and the Ze'evi
Group jointly signed an agreement with the government of
Bulgaria and the Bulgarian Privatization Authority, to acquire
75% of the share of Balkan-Bulgarian Airlines, as part of the
privatization process of the Bulgarian government (hereinafter
- "privatization agreement"). On October 17, 1999, an
agreement was signed between Knafayim and the Ze'evi Group,
pursuant to which Knafayim transferred to the Ze'evi Group all
of its rights and obligations pursuant to the privatization
agreement (hereinafter - "the agreement"), and the Ze'evi
Group undertook to obtain the consent of the Bulgarian
government and the Bulgarian Privatization Authority to
release Knafayim from its obligations toward them pursuant to
the privatization agreement. The Ze'evi Group also undertook,
pursuant to the agreement, that as long as the above consent
is not obtained, the Ze'evi Group would discharge, at its
expense, any claim lodged against Knafayim resulting from the
privatization agreement, and would indemnify Knafayim for any
direct damage it sustains as a result of the privatization
agreement. the Bulgarian government and the Bulgarian
Privatization Authority have not as yet given their consent to
release Knafayim from its obligations toward it pursuant to
the privatization agreement.
The government of Bulgarian has financial claims against
Knafayim and the Ze'evi Group in respect of alleged breach
of the privatization agreement. As of February 10, 2004,
when the last letter of demand was received from the
Bulgarian government, the total financial demands by the
Bulgarian government from Knafayim and the Ze'evi Group in
respect of the years 2000-2002 reach 20.6 million dollars.
Knafayim sent a letter of response to the Bulgarian
government on March 11, 2004, in which it denies outright
its liability for the alleged damages, and gave its consent
to the appointment of an arbitrator, agreed by Knafayim and
the Ze'evi Group, without any admission of the allegations
whatsoever. In the estimation of Knafayim's management,
Knafayim and the Ze'evi Group have worthy defense arguments
against the demands by the Bulgarian government, based on
factors including the opinion of the Ze'evi Group's
Bulgarian attorneys.
Likewise, the Ze'evi Group filed a claim against the
Bulgarian government, which now stands at 70 million
dollars, which was heard as part of the international
arbitration being held in Paris.
F-77
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
8. a. The financial statements of Herods, a company
proportionately consolidated by Sheraton
Moriah Ltd. (hereinafter: "Sheraton"), a consolidated
company of Koor, were approved and signed by Sheraton's
representatives on Herods Board of Directors
(representing 50% of all Herods directors), but were
not approved by the representatives of the other
shareholders (also representing 50% of all Herods
directors). Therefore Herods financial statements are
not seen as approved by law. The representatives of the
other Herods shareholders refuse to sign the financial
statements given the dispute between the parties,
detailed in Note 18A8(b).
Sheraton's management, and its Herods Board
representatives estimate that the maximum financial
exposure to Herods, or to Sheraton, for Herods, could
be, if any, in relation to claims or demands on the
part of the other shareholders, or their
representatives in Herods board, is immaterial.
b. The other Herods shareholders (hereinafter: "the
plaintiffs") filed, with the Tel Aviv District Court, a
"Request for the approval of a claim as a derivative
action" against Sheraton and a consolidated company.
The derivative action, for which they are seeking
approval, is for the cancellation of the management
agreement between Herods and a consolidated company,
and this as part of the arbitration process, to which
the claim has been referred. The claim itself deals
with the plaintiffs arguments regarding breaches in the
management and image agreement. At this initial stage,
(whereby the claim has not yet been approved to be
filed as a derivative action), the Sheraton's legal
counsels are unable to assess the chances of the claim.
9. In addition, a number of claims have been filed against
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. The managements of these companies believe,
based on the opinions of their legal counsel that adequate
provisions for those claims have been made in their
financial statements, in light of the circumstances.
10. On fulfillment of conditions relating to an investment grant
- see Note 10A(2).
11. The business activities of the Koor Group are based
primarily on high-technology. The accelerated pace of
technological development and innovation in the fields in
which the Group operates requires the investment of
substantial financial resources in research and development,
in order to assure the Group's position in its operating
segments and in its constant competition with both Israeli
and global entities. Consequently, the Group may be exposed
to the loss of its position in certain segments, as well as
to substantial research and development costs, which, in
turn, may have an adverse effect on the Group's operating
results.
12. On the indemnity granted to Claridge as advisor - see Note
25C(2).
13. In connection with the indemnification of the appraiser who
conducted an evaluation for ECI, see Note 3A(1).
F-78
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
B. Commitments
1. Some 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 generate 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 linked amounts of
the grants received by the companies as participation in the
research and development projects.
Royalties paid to the Government of Israel in respect of the
aforementioned research and development contracts, are as
follows:
In the year ended December 31, 2003 - NIS 22,902 thousand.
In the year ended December 31, 2002 - NIS 24,662 thousand.
In the year ended December 31, 2001 - NIS 27,024 thousand.
Negotiations have been held between a subsidiary and the
Government of Israel (the Office of the Chief Scientist -
"OCS") to re-examine the royalties paid to the OCS during a
period exceeding seven years. The management of the
subsidiary estimates that the proceedings will have no
material effect, and accordingly, no provision was made in
the financial statements.
2. Certain subsidiaries undertook to pay royalties at the rate
of 3% per year in respect of the incremental export sales,
up to the amount financed by the Fund for the Encouragement
of Marketing Abroad. Such amounts are linked to the exchange
rate of the dollar.
3. Commitments for the purchase of fixed assets: December 31,
2003 - NIS 50; December 31, 2002 - NIS 23 million.
4. 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 50
million in 2003, NIS 60 million in 2002 and NIS 33 million
in 2001.
Future minimum payments under the non-cancelable operating
leases and rental payment, for the years subsequent to
balance sheet date, are as follows:
December 31
2003
---------------
(NIS thousands)
---------------
First year 46,379
Second year 41,441
Third year 31,854
Fourth year 16,028
Fifth year and thereafter 15,913
---------------
151,615
===============
5. Koor Corporate Venture Capital's commitment for additional
investments in venture capital funds, and in start-up
companies as at the signing date of the financial statements
is approximately 9 million dollars.
F-79
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
B. Commitments (cont'd)
6. During 2002, subsidiaries of M-A Industries signed long-term
supply contracts for a period of five years with
international companies for 17.3 million dollars per year.
Note 19 - Convertible Securities of Investee Companies
Option warrants to employees:
Certain investees issued options to their employees until 2003
inclusive. Employee entitlement to such options is usually being
determined 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.
The exercise price was, in most cases, identical to the market price
of the shares of subsidiary companies on the issuance date of the
option warrants.
At each reporting period, Koor reviews the probability that the
Options will be exercised. If a loss, as a result of dilution,
following the option exercise, is expected, the Company records the
loss.
Convertible debentures
See Note 15B(2).
Note 20 - Share Capital and Stock Options
A. Share capital is composed as follows:
December 31, 2003 December 31, 2002
Authorized Issued and Authorized Issued and
Outstanding outstanding
----------- ------------ ------------ ------------
Number of shares:
Ordinary shares, par value
of NIS 0.001 (1)(3)(4)(5) 83,932,757 15,950,188 84,557,334 16,506,982
========== ========== =========== ===========
Deferred shares, par value
of NIS 0.001 (2)(3)(4) 15,792,243 15,156,533 15,167,666 14,531,956
========== ========== =========== ===========
Amount in nominal NIS:
Ordinary shares, par value
of NIS 0.001 83,933 15,950 84,557 16,507
========== ========== =========== ===========
Deferred shares, par value
of NIS 0.001 15,792 15,157 15,168 14,532
========== ========== =========== ===========
F-80
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options
A. Share capital is composed as follows:
(1) These shares are listed on the Tel Aviv Stock Exchange (TASE).
On December 31, 2003, the share price on the TASE was NIS
171.00.
The ADS, each of which represents 0.2 ordinary shares, par
value of NIS 0.001 (hereinafter - Ordinary Shares), are
traded on the New York Stock Exchange (NYSE). The ADS price
on the NYSE on December 31, 2003 was 7.74 dollars.
(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, subsidiaries hold 15,799 Ordinary
Shares and 13,575,441 deferred shares. The amount deducted
from the shareholders' equity as at the balance sheet date
is adjusted NIS 277,692 thousand.
(4) A subsidiary of Koor - Koor Trusts (1995) Ltd. (in voluntary
liquidation) - holds 624,577 Ordinary Shares of Koor which
were issued to it as part of the implementation of the
Company's 1995 and 1997 options plans. These shares are held
by the subsidiary only for the purpose of granting them to
the Company's employees, subject to receipt of the requisite
approvals. Until they are granted, the subsidiary undertook
that it would not have, in respect of those shares, a right
to participate or vote in the general meeting of the
shareholders of the Company, or a right to receive a
dividend in respect of those shares. If the shares are not
used for granting to Company employees as aforesaid until a
reasonable time after November 2002, the Company undertook
to convert them into deferred shares. On June 1, 2003, a
general meeting of the shareholders of Koor resolved to
convert the Ordinary shares to deferred shares.
(5) During 2003, the options in the employee stock option plans
(See Note 20C) were exercised for 67,783 ordinary shares.
F-81
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
B. Buy-back of Company shares
On April 7, 2000, Koor's Board of Directors resolved to approve a
framework of 50 million dollars for buying back ordinary shares of
Koor. In the framework, which was fully utilized in 2000, 538,592
ordinary shares were purchased (approximately 3.4% of the ordinary
share capital), at a cost of approximately NIS 219 million. This
amount is deducted from the shareholders' equity of the Company.
On December 31, 2001, the Company purchased 154,637 of its ordinary
shares from a subsidiary at the market price. The transaction was
treated according to the Israeli Securities Regulations (Financial
Statement Presentation of Transactions between a Corporation and its
Controlling Shareholders), 1996.
On May 27, 2003, a foreign institutional investor (hereinafter -
"the Buyer") purchased 500,000 of the aforementioned Company's
shares. The Purchaser declared that the sale was effected 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 effected on that day in an off-market
transaction, at the market price, for total consideration of NIS
43.2 million.
After the sale was effected, in accordance with notice received from
the Buyer, the Buyer holds 8.7% of the voting rights in the Company.
The Company holds a total of 193,229 of its shares. The amount
deducted from shareholders' equity at the balance sheet date in
respect of the shares held by the Company and subsidiaries is
adjusted NIS 80,321 thousand.
C. Stock options to senior employees
1. 1997 plan:
In 1997, 188,968 stock options were allotted under this plan.
On March 22, 2000, Koor's Board of Directors resolved to
amend the plan so that for an employee who resigned and who
holds stock options that vested before his resignation,
their exercise period would be until the end of the five
years from the inception date of the plan (hereinafter -
"Amendment of the exercise period for employees who resign").
On August 6, 2000, Koor's Board of Directors resolved that
for Company employees who are not related parties in the
Company and who did not resign before the end of 2000, the
exercise period of each stock option would be extended to
the end of 5 years from the vesting date (hereinafter -
"Amendment of extension of the exercise period").
On November 15, 2001, Koor's Board of Directors resolved
that for Company employees on the date of resolution and who
are not related parties in the Company the exercise price of
their stock options would be amended to NIS 101.38 per
share. The Board of Directors also resolved that the
technical method of exercise would be the "Bonus Component
Method" (see below, in sub-section 2).
F-82
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees
1. 1997 plan: (cont'd)
On June 5, 2003, the Company's Board of Directors resolved to
extend the exercise period of the options of Koor Group
employees on the date of the resolution, to December 31, 2010.
Balance of
stock option Exercise Exercise
not exercised price date
------------- ---------- --------
5,039 NIS 101.38 05/2005
21,000 NIS 101.38 12/2010
------------
26,039
------------
2. 1998 plan:
On August 30, 1998, an extraordinary general meeting of the
shareholders of the Company approved a private placement of
400,000 stock options, free of charge, to Company employees.
The options are exercisable for up to 400,000 ordinary
shares of a par value of NIS 0.001 each (hereinafter - "the
Plan"). All the stock options under the Plan were allotted
on different dates, and after their expiry, as a result of
the retirement and the end of the exercise period, and
exercise, 244,158 options remained for exercise as at
December 31, 2002.
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 (above and hereafter - "the Benefit
Component Method").
On March 22, 2000, the Board of Directors approved an
amendment of extension of the exercise period for employees
who resign, applicable to option holders under the Plan who
are not related parties (see Note 20C(1)). The Board of
Directors also resolved that for these option holders, the
exercise price would be adjusted in respect of distribution
of a dividend for all the options, even if the vesting date
preceded the entitlement to the dividend.
On October 6, 2000, the Board of Directors approved the
amendment of extension of the exercise period for Company
employees who are not related parties in the Company and who
did not retire before the end of 2000.
On November 15, 2001, the Board of Directors approved the
amendment of the exercise price to NIS 101.38 per share for
Company employees on the resolution date who are not related
parties in the Company.
F-83
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees
2. 1998 plan: (cont'd)
On June 5, 2003, the Company's Board of Directors resolved
to extend the exercise period of the options for Koor Group
employees on the resolution date to December 31, 2010.
Balance of
stock option Exercise Exercise
not exercised price date
-------------- ---------- ----------
3,333 NIS 101.38 07/2006
62,593 NIS 101.38 12/2010
-------------
65,926
-------------
3. 2000 Plan:
On August 6, 2000, the Board of Directors of the Company
approved the 2000 stock options plan, which was previously
approved on June 14, 2000 by the Executive Committee of the
Board of Directors. The main points of the plan are these:
1) A total framework was approved for the allotment of
400,000 stock options theoretically exercisable for
up to 400,000 ordinary shares of the Company, i.e.
about 2.5% of the ordinary issued share capital of
the Company.
2) The options 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.
3) The exercise price of each stock option, pursuant
to the amendment by the Board of Directors of the
Company on November 15, 2001, will be NIS 101.38
per share.
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.
5) The stock options will vest in accordance with a
division of the options into three batches, so that
at the end of the first year from the record date
(June 14, 2000) or from the date on which the
employee started work in the Company (whichever is
the later), one third of the quantity allotted will
vest, and the remaining two thirds of the quantity
will vest at the end of each of the two subsequent
years. The exercise period of each vested option is
5 years from the vesting date.
6) On October 5, 2000, the total quantity of 400,000
stock options was allotted to a trustee.
F-84
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees
7) On June 5, 2003, the Company's Board of Directors
resolved to extend the exercise period of the
options of Koor Group employees on the date of the
resolution to December 31, 2010.
Balance of
stock option Exercise Exercise
not exercised price date
------------- ----------- ---------
61,667 NIS 101.38 12/2010
============= ===========
4. 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 of the Company's Board of Directors
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.
3) The exercise price of each stock option will be
NIS 96 per share, linked to the CPI.
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, including the
Company's directors and the CEO.
5) The vesting of each offeree, to exercise the
options for shares, will be graduated, over a
three-year period from the record date, whereby at
the end of each calendar half-year, one-sixth of
the total number of options issued 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. And on the other
hand, the Company will be unable to claim any tax
deduction for the expense.
F-85
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
4. 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 remaining as at December 31,
2003 is 951,789 options.
Changes in the options during 2003:
1997 Plan 1998 Plan 2000 Plan 2003 Plan Total
----------- ----------- ------------ ----------- -----------
Balance as at
beginning of year 36,321 244,158 161,667 - 442,146
Granted - - - 982,125 982,125
Exercised (10,282) (101,071) (53,333) (30,336) *(195,022)
Expired - (77,161) (46,667) - (123,828)
----------- ----------- ------------ ----------- -----------
Balance as at end
of year 26,039 65,926 61,667 951,789 1,105,421
=========== =========== ============ =========== ===========
* Because of the "Benefit Component Method", a total of 67,783 ordinary
shares of the Company were issued.
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances
A. General:
The Company and certain subsidiaries have entered into forward
transactions and option contracts, in order to hedge assets and
liabilities denominated in foreign currency and in order to reduce
the overall exposure of commitments for the purchase of raw materials
and the sale of goods, in currencies other than the function
currency. Those subsidiaries neither hold nor issue financial
instruments for trading purposes.
F-86
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
B. Details of the open foreign exchange transactions made to
hedge the company's and subsidiaries' assets and liabilities
in foreign currency as at December 31, 2003:
Forward Call Put Swap
Transaction options options transactions
----------- ---------- --------- ------------
NIS thousands
---------------------------------------------------------------
Purchase of Dollars in exchange for:
NIS 6,569 223,387 332,804 157,644
European currencies 169,467 585,034 177,078 -
Brazilian Real 135,749 - - -
Japanese Yen 13,137 - - -
----------- ---------- --------- ------------
324,922 808,421 509,882 157,644
=========== ========== ========= ============
Sale of Dollars in exchange for:
NIS 45,980 175,160 - 157,644
European currencies 39,849 99,570 692,320 -
Brazilian Real - - - 108,161
----------- ---------- --------- ------------
85,829 274,730 692,320 265,805
=========== ========== ========= ============
Sale of Euro in exchange
for Swiss franc 13,137 - - -
=========== ========== ========= ============
C. The company entered into interest swap agreements (IRS)
totaling 50 million dollars, in order to reduce exposure to
fluctuations in interest rates. In the transaction, a
variable-interest was exchanged for a fixed-interest.
D. Fair value of financial instruments:
Condensed data of monetary assets and liabilities, whose fair value
as at December 31, 2003, based on their market value, is
significantly different from those presented in the financial
statements, is as follows:
Carrying Fair
amount value
--------- -------
NIS millions
----------------------------
Investments in affiliates 870 985
F-87
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
D. Fair value of financial instruments: (cont'd)
The carrying amounts of cash and cash equivalents, short-term
investment, trade receivables, other accounts receivable, credits
from banks and others, trade payables and other accounts payable,
debentures and convertible debentures and other financial instruments
is approximate or similar to at their fair value.
E. Credit risk of trade receivables:
NIS millions
------------
Condensed data of credit risk of trade receivables
as at December 31, 2003:
Receivables insured by credit card companies 553
Receivables insured by foreign trade risk insurance 18
Receivables - Government authorities and Bezeq 43
Other receivables, including checks and credit card companies 1,447
----------
Total, including non-current receivables 2,061
==========
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-88
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances:
(1) Consolidated
December 31, 2003 December 31, 2002
------------------------------------------------ -----------------------------------------------------
In foreign Linked Unlinked Total In foreign Linked Unlinked Total
currency or to the currency or to the
linked thereto CPI linked thereto CPI
-------------- -------- -------- --------- -------------- --------- --------- ---------
NIS thousands NIS thousands
------------------------------------------------ -----------------------------------------------------
Assets
Current assets:
Cash and cash equivalents 491,889 - 101,514 593,403 694,700 - 95,399 790,099
Short-term deposits
and investments 87,534 150,495 128,780 366,809 356,437 457,799 224,247 1,038,483
Trade receivables 1,794,141 11,945 246,375 2,052,461 1,617,799 24,665 344,413 1,986,877
Other accounts receivable 139,050 25,770 85,608 250,428 205,932 24,558 101,844 332,334
Investments and other
long-term receivables 217,970 59,565 2,823 280,358 225,441 80,080 5,418 310,939
--------- --------- ----- --------- --------- --------- ----- ---------
2,730,584 247,775 565,100 3,543,459 3,100,309 587,102 771,321 4,458,732
========= ========= ======= ========= ========= ========= ========= =========
Liabilities
Current liabilities:
Credits from banks
and others (not
including current
maturities of
long-term liabilities) 647,098 - 267,162 914,260 978,277 - 326,742 1,305,019
Trade payables 1,030,693 - 312,090 1,342,783 892,449 - 290,734 1,183,183
Other accounts payable 642,646 171,487 407,953 1,222,086 665,569 151,790 562,821 1,380,180
Long-term loans and
debentures (including
current maturities) 2,488,222 1,627,955 7,072 4,123,249 3,255,314 2,087,082 7,662 5,350,058
--------- --------- ----- --------- --------- --------- ----- ---------
4,808,659 1,799,442 994,277 7,602,378 5,791,609 2,238,872 1,187,959 9,218,440
========= ========= ======= ========= ========= ========= ========= =========
F-89
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances (cont'd):
(2) Company
December 31, 2003 December 31, 2002
------------------------------------------------ -----------------------------------------------------
In foreign Linked Unlinked Total In foreign Linked Unlinked Total
currency or to the currency or to the
linked thereto CPI linked thereto CPI
-------------- -------- -------- --------- -------------- --------- --------- ---------
NIS thousands NIS thousands
------------------------------------------------ -----------------------------------------------------
Assets
Cash and cash equivalents 4,066 - 5,139 9,205 14,484 - 10,307 24,791
Short-term deposits
and investments 57,202 144,133 109,471 310,806 252,253 453,356 155,110 860,719
Other receivables 11,074 - 23,598 34,672 18,600 - 30,559 49,159
Short term loans to
investees companies - 13,951 - 13,951 - 18,558 - 18,558
Other investments
and receivables 109 32,028 4 32,141 116 54,166 34 54,316
Investments and other
long-term receivables:
Investees companies
(including current
maturities of loans) 12,753 53,449 1,319,870 1,386,072 5,948 114,749 1,380,670 1,501,367
--------- --------- --------- --------- --------- --------- ---------- ---------
85,204 243,561 1,458,082 1,786,847 291,402 640,828 1,576,680 2,508,910
========= ========= ========= ========= ========= ========= ========== =========
Liabilities
Current liabilities:
Credits from banks and
others (not including
current maturities
of long-term liabilities) 169,704 - 5 169,709 176,148 - 17,682 193,830
Trade payables 85 - 418 503 67 - 1,191 1,258
Other accounts payable 4,408 12,057 26,858 43,323 7,547 14,908 55,607 78,062
Long-term liabilities
(including current
maturities of loans) 373,268 1,648,201 8,125 2,029,594 617,585 2,046,319 - 2,663,904
--------- --------- --------- --------- --------- --------- ---------- ---------
547,465 1,660,258 35,406 2,243,129 801,347 2,061,227 74,480 2,937,054
========= ========= ========= ========= ========= ========= ========== =========
F-90
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
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. They also pledged a
portion of their shares in investee companies.
Regarding the pledge in respect to an investment grant - see
Note 10A(2).
B. The balances of secured liabilities are as follows:
Consolidated
-----------------------------
December 31
-----------------------------
2003 2002
------------ ------------
NIS thousands
-----------------------------
Credit from banks 392,341 431,165
Loans from banks and others and
debentures (including current
maturities), see Note 15, and
also C and D below 1,288,411 1,797,463
------------ ------------
1,680,752 2,228,628
============ ============
C. The convertible debentures, which were issued by M-A
Industries, are guaranteed by first level fixed symbolic
lien with a deposit to the amount of NIS 1 for the Trustee
of the convertible debenture holders (see Note 15B)
D. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees in favor of:
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NIS thousands NIS thousands
-------------------------------- --------------------------------
Subsidiaries - - 314,125 289,526
Affiliates 340 6,831 340 6,831
Others 67,723 110,033 154 15,136
------------- ------------- ------------- -------------
68,063 116,864 314,619 311,493
============= ============= ============= =============
F-91
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 22 - Liens and Guarantees (cont'd)
D. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees: (cont'd)
1) In certain cases when advances from customers are received,
a subsidiaries provides its customers with bank guarantees
to secure the advances. Guarantees in excess of the amount
of advance payments stated as liabilities in the balance
sheet, amounted to NIS 302,782 thousand, and NIS 426,898
thousand, as at the years ending December 31, 2003 and 2002,
respectively.
2) In connection with the Bezeq agreement to transfer ownership
of public switching, Bezeq received from Koor a guarantee in
the amount of NIS 115 million. See also Note 18A(5).
3) A consolidated company signed a guarantee for a major
customer to pay any amounts up to 40 million dollars in
relation to an indemnification, that the consolidated
company signed for the same customer, on account of breaches
of contracts to Bezeq, the Israeli Communication Company.
The guarantee is at least till 2015.
4) A consolidated company and its subsidiary in Brazil are,
under certain conditions, a guarantor to financial
institutions for credit that its customers received in
relation to commercial sales of the consolidated company to
those customers. The balance of guarantees, as at the
balance sheet date, was approximately 85 million dollars.
(December 31, 2002 approximately 63 million dollars).
5) Tadiran Com. was sold to the purchasing company in a
transaction of representations.
According to the terms of the transaction, if it transpires
that the condition of Tadiran Com. is materially different
from the representation made, the purchaser will be entitled
to compensation from Tadiran. Under the terms of the sale,
the commitment with respect to the accuracy of a large part
of the material representations was limited in time, and has
expired. Koor is a guarantor to the commitments of Tadiran.
6) There are also guarantees, in an unlimited amount, to ensure
due performance of work and customer agreements, product
warranty, advance payments received and guarantees on behalf
of liabilities to customs and excise authorities.
7) As a condition for the continued availability, see Notes 3 and 18.
F-92
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------
Note 23 - Data concerning Items in Statements of Operations
A. Revenues from sales and services - net (1) (2) (3):
Consolidated:
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Local:
Industrial operations 757,759 899,768 914,356
Trading operations 262,692 *644,591 *602,474
Abroad:
Industrial operations - export and
international operations 5,902,716 5,157,580 5,347,902
Trading operations 767,263 *397,851 *598,687
----------- ----------- -----------
7,690,430 7,099,790 7,463,419
=========== =========== ===========
(1) Not including agency sales 386,491 315,124 357,755
=========== =========== ===========
(2) Including sales to major customer 753,863 415,442 668,629
=========== =========== ===========
(3) Including sales under long-term credit
arrangements (see also Note 2Q) - - 756
=========== =========== ===========
(4) Revenues and expenses relating to work
performed under long-term contracts:
Revenues 979,950 1,359,621 1,091,090
Costs (793,260) (949,898) (896,849)
----------- ----------- -----------
186,690 409,723 194,241
=========== =========== ===========
* Reclassified
F-93
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
B. Cost of sales and services - consolidated:
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Industrial operations:
Materials 2,757,523 2,766,122 2,951,420
Labor 775,567 906,158 968,353
Subcontracted work 49,725 68,009 49,110
Depreciation and amortization 180,228 189,720 191,801
Research and development expenses, net (*) 221,343 256,313 278,670
Other manufacturing expenses 533,736 493,684 450,324
----------- ----------- -----------
4,518,122 4,680,006 4,889,678
Less - expenses charged to cost of fixed assets 8,027 10,350 9,976
----------- ----------- -----------
4,510,095 4,669,656 4,879,702
Decrease in inventory of goods and
work in process 43,428 13,057 23,129
----------- ----------- -----------
4,553,523 4,682,713 4,902,831
Increase in inventory of finished goods (18,778) (208,753) (27,769)
----------- ----------- -----------
4,534,745 4,473,960 4,875,062
----------- ----------- -----------
Trading operations:
Merchandise 537,512 533,532 515,786
Labor 93,235 69,319 101,485
Depreciation 26,873 29,160 33,593
Others 200,579 209,809 239,760
----------- ----------- -----------
858,199 841,820 890,624
----------- ----------- -----------
5,392,944 5,315,780 5,765,686
=========== =========== ===========
(*) Net of grants and participations that were
received and royalties that were paid, net (1,952) 788 12,403
=========== =========== ===========
C. Selling and marketing expenses - consolidated:
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Salaries 258,260 251,372 255,025
Commissions 142,256 97,030 109,196
Advertising expenses 30,384 45,584 45,069
Depreciation and amortization 97,086 78,843 65,544
Other 412,471 341,948 340,267
----------- ----------- -----------
940,457 814,777 815,101
=========== =========== ===========
F-94
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
D. General and administrative expenses:
Consolidated Company
--------------------------------------- ---------------------------------------
Year ended December 31 Year ended December 31
--------------------------------------- ---------------------------------------
2003 2002 2001 2003 2002 2001
-------- ------------ ------------- --------- ------------ ------------
NIS thousands NIS thousands
--------------------------------------- ---------------------------------------
Salaries 217,525 234,098 235,199 17,325 24,342 17,284
Bad and doubtful
debts 36,903 33,933 29,983 - - -
Depreciation and
amortization 24,070 30,797 28,996 1,342 1,665 1,749
Other 182,246 190,541 230,017 22,497 22,129 23,032
--------- ------------ ------------ -------- ----------- -----------
460,744 489,369 524,195 41,164 48,136 42,065
========= ============ ============ ======== =========== ===========
E. Financing expenses (income), net:
Consolidated Company
--------------------------------------- ---------------------------------------
Year ended December 31 Year ended December 31
--------------------------------------- ---------------------------------------
2003 2002 2001 2003 2002 2001
-------- ------------ ------------- --------- ------------ ------------
NIS thousands NIS thousands
--------------------------------------- ---------------------------------------
In respect of
convertible
debentures 15,319 17,825 6,576 612 1,139 5,607
In respect of
debentures - 651 2,301 - - -
In respect of
long-term loans 141,078 240,713 364,845 94,641 170,283 239,501
In respect of
short-term loans
and credit 182,868 168,478 214,512 (2,458) 15,024 43,316
Amortization of
capital raising
expenses 2,106 2,250 739 - - 573
Losses (gains)
from marketable
securities, net (72,681) 44,112 (52,392) (61,974) 35,691 (45,066)
Interest
capitalized to
fixed assets and
work in process (371) (14,860) (15,176) - - -
Expenses (income)
from investees, net - - - (1,251) 6,479 (5,296)
Expenses (income)
from deposits and
others, net (40,119) (50,732) (88,968) 5,538 (28,808) (40,187)
---------- ------------ ------------ --------- ----------- -----------
228,200 408,437 432,437 35,108 199,808 198,448
========== ============ ============ ========= =========== ===========
F-95
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
F. Other income (expenses), net
1. Consolidated
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Sale of investments and activities in investees
(including changes in rates of holding) 32,916 342,343 (59,401)
Expenses relating to the termination,
sale of activities and sale and write down
of assets, net (107,306) (164,401) (402,067)
Supplemental severance pay and pensions (28,279) (126,997) (82,723)
Management services affiliated companies 2,272 2,674 2,290
Joint ventures, net - - 1,499
Compensation for damages 5,580 37,957 920
Amortization of goodwill (118,736) (91,085) (83,567)
Miscellaneous, net (6,168) 5,333 389
----------- ----------- -----------
(219,721) 5,824 (622,660)
=========== =========== ===========
2. Company
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Profit (loss) from sale of investments in
investee companies 7,039 336,621 (53,725)
Net changes in value of long-term assets (12,382) (10,036) -
Rental income, net* 7,216 9,219 -
Capital gain from sale of fixed assets (96) 29,189 2
Miscellaneous, net 3,914 438 1,821
----------- ----------- -----------
5,691 365,431 (51,902)
=========== =========== ===========
* Depreciation included in the Item 668 1,235 -
=========== =========== ===========
F-96
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
G. Equity of the Koor Group in the operating results of affiliates, net
1. Consolidated
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Affiliate companies, net (1) 108,049 245,703 682,779
Amortization of goodwill (2) 5,774 6,388 1,211,746
----------- ----------- -----------
113,823 252,091 1,894,525
=========== =========== ===========
(1) Including loss from a discontinued operation
in an affiliate - 110,911 98,363
=========== =========== ===========
(2) Including write-off of goodwill in an affiliate - - 1,114,931
=========== =========== ===========
2. Company
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
NIS thousands
------------------------------------------------
Equity of Koor in operating results for the year (1) 64,790 (900,592) (1,148,606)
Amortization of goodwill (2) (28,520) (23,159) (1,214,788)
----------- ----------- -----------
36,270 (923,751) (2,363,394)
=========== =========== ===========
Dividend received\proposed 23,043 28,663 858,702
=========== =========== ===========
(1) Including loss from a discontinued operation
in an affiliate - 110,911 98,363
=========== =========== ===========
(2) Including write-off of goodwill in investee companies - - 1,114,931
=========== =========== ===========
H. Results of discontinued operations
Year ended
December 31
2001
-----------
NIS thousands
-----------
Pre-tax loss on income (29,992)
Effect of tax -
Minority share 713
-----------
(29,279)
===========
F-97
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------------------------------------------------------
Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)
I. Income (expenses) from investee companies and their participation in expenses - Company
Year ended December 31
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------ ---------------------------- ----------------------------------------
Companies
whose
Consolidated Affiliated Consolidated Affiliated Consolidated Affiliated activity was
companies companies companies companies companies companies discontinued
------------ ---------- ------------ ------------- ------------ ---------- ------------
NIS thousands
---------------------------------------------------------------------------------------------------
Income:
Management services 25,006 - 35,573 - 34,161 - -
============ ========== ============ ============= ============ ========== ============
Administrative expenses -
Salary and other
administrative expenses 1,679 - 9,002 - 7,991 - -
============ ========== ============ ============= ============ ========== ============
Financing income
(expenses), net 2,828 5 (6,480) 2 5,940 6 (650)
============ ========== ============ ============= ============ ========== ============
Rental income, net - - 654 - - - -
============ ========== ============ ============= ============ ========== ============
F-98
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 24 - Business Segments
A. The Koor Group operates in the following business segments:
The Company's telecommunication activities are focused in
two companies - Telrad Networks Ltd., which develops and
markets telecom products and provides end-user solutions,
and ECI Telecom Ltd., an affiliate company, that provides
solutions for access networks (Inovia) and transmission
systems and optical networks (Enavis, Lightscape).
The Company's agrochemical activities are carried out
through Makhteshim Agan, considered a world's foremost
manufacturer of generic crop protection solutions.
Makhteshim Agan produces a full range of products, including
insecticides, fungicides and herbicides, as well as plant
growth regulators. In addition, the Company is engaged in
specialty aroma chemicals and other different kinds of
chemicals.
Activities in the defense space are carried out mainly by
the Elisra Electronics Industries Ltd. Group, a leader in
the planning, development and manufacturing of solutions for
electronic warfare and defense, wireless communication
systems, command and control systems, pilot rescue systems
and advanced communications systems.
Activities in venture capital investments space 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 Company's remaining business activities are in tourism,
through Sheraton Moriah, which holds the Sheraton Hotel
chain in Israel and the affiliated company Knafayim-Arkia,
which holds 74% of the Arkia airline company which provides
aviation and holiday services and leases aircrafts to other
companies. Additional activities include international trade
through several companies.
In 2001 the construction and infrastructures segment
discontinued operations due to the discontinuation of
activity of USM (which was consolidated in the construction
and infrastructures segment. See Note 23H.
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 charged on a
proportionate basis, expenses that benefit more than one
segment. Expenses and revenue presented in the statements of
operations after operating earnings are not taken in account
in the determination of operating earnings or loss.
Identifiable assets by industry segments are those assets
that are used by Koor in its activities in each segment.
F-99
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group:
Year ended December 31
----------------------------------------------------------------------------------------
2003 2002 2001
------------------------- ----------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- --------- ------------- ---------- ------------- -----------
Revenues from
sales and services:
Segments:
Telecommunication 796,059 10.35 814,108 11.47 1,217,399 16.31
Defense electronics 1,286,432 16.73 1,687,551 23.77 1,412,425 18.93
Agro-chemicals and
other chemicals 5,191,913 67.51 4,140,471 58.32 4,101,360 54.95
Others 416,026 5.41 457,660 6.44 732,235 9.81
------------- --------- ------------- ---------- ----------- ----------
Total segments 7,690,430 100.00 7,099,790 100.00 7,463,419 100.00
============= ========= ============= ========== =========== ==========
Year ended December 31
----------------------------------------------------------------------------------------
2003 2002 2001
------------------------- ----------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- --------- ------------- ---------- ----------- ----------
Pre-tax earnings
(losses):
Operating earnings
(loss) according
to segments:
Telecommunication 3,158 0.34 (178,623) (34.43) (212,742) (55.73)
Defense electronics (4,294) (0.46) 78,853 15.20 56,187 14.72
Agro-chemicals
and other chemicals 949,290 102.61 658,507 126.93 587,050 153.79
Venture capital
investments (1,445) (0.16) (7,894) (1.52) (8,293) (2.17)
Others (21,536) (2.33) (32,062) (6.18) (40,490) (10.61)
----------- --------- ------------ ----------- ----------- ----------
Total segments 925,173 100.00 518,781 100.00 381,712 100.00
=========== ========= ============ =========== =========== ==========
Joint general
expenses (28,888) (38,917) (23,275)
----------- ------------ -----------
Total operating
earnings 896,285 479,864 358,437
Financing
expenses, net (228,200) (408,437) (432,437)
Other income
(expenses), net (219,721) 5,824 (622,660)
Transfer to
statement of income
of translation
differences of
autonomous
investee in
voluntary liquidation - (390,901) -
----------- ------------ -----------
Pre-tax
earnings (losses) 448,364 (313,650) (696,660)
=========== ============ ===========
F-100
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
The Koor Group's equity in the excess of losses over earnings of
affiliates, net, is as follows:
Year ended December 31
------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- -----------------------------
NIS thousands % NIS thousands % NIS thousands %
---------------- -------- ---------------- ------ --------------- -------
Telecommunications (101,795) 89.43 (246,998) 97.98 (1,884,621) 99.48
Defense
electronics (130) 0.11 (172) 0.07 (1,093) 0.06
Venture capital
investments (329) 0.30 (329) 0.13 (82) 0.00
Others (11,569) 10.16 (4,592) 1.82 (8,729) 0.46
-------------- --------- ------------- --------- ------------- ---------
(113,823) 100.00 (252,091) 100.00 (1,894,525) 100.00
============== ========= ============= ========= ============= =========
December 31
---------------------------------------------------------
2003 *2002
---------------------------------------------------------
NIS thousands % NIS thousands %
--------------- -------- --------------- ----------
Identifiable assets:
Segments:
Telecommunications 778,182 7.50 923,686 8.15
Defense electronics 1,104,515 10.66 1,379,797 12.17
Agro-chemicals and other chemicals 7,329,815 70.69 7,640,956 67.41
Venture capital investments 223,733 2.16 284,283 2.51
Others 932,586 8.99 1,105,797 9.76
------------- --------- ------------ ---------
Total segments 10,368,831 100.00 11,334,519 100.00
========= =========
Corporate assets 557,162 1,056,983
Affiliates** 943,764 1,041,296
------------- ------------
11,869,757 13,432,798
============= ============
** Including an investment in ECI as at December 31, 2003 and 2002 in the amount of NIS 726
million and NIS 810 million respectively, which operates in the telecommunications segment.
F-101
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
December 31
-----------------------------------------------------
2003 2002
------------------------- --------------------------
NIS thousands % NIS thousands %
--------------- ------- -------------- ---------
Identifiable liabilities
Segments:
Telecommunications 263,873 9.12 395,125 13.21
Defense electronics 728,443 25.16 912,345 30.51
Agro-chemicals and other chemicals 1,733,760 59.89 1,469,201 49.13
Venture capital investments 8,930 0.31 - -
Others 159,870 5.52 213,876 7.15
------------ ---------- ----------- -----------
Total segments 2,894,876 100.00 2,990,547 100.00
========== ===========
Corporate liabilities 63,676 79,841
------------ -----------
2,958,552 3,070,388
=========== ===========
Year ended December 31
-----------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ --------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- --------- -------------- --------- ------------- -----------
Capital
investments:
Segments:
Telecommunications 7,173 2.25 15,554 1.19 59,685 6.13
Defense
electronics 28,210 8.85 45,753 3.48 53,187 5.46
Agro-chemicals
and other
chemicals 277,195 86.94 1,241,091 94.53 821,754 84.37
Venture capital
investments - - - - 2,928 0.30
Others 6,262 1.96 10,464 0.80 36,487 3.74
------------ --------- ------------- ---------- ----------- ---------
Total segments 318,840 100.00 1,312,862 100.00 974,041 100.00
========= =========
Discontinued
activity - - 194
Corporate assets 392 108 386
---------- ----------- ----------
319,232 1,312,970 974,621
========== =========== ==========
F-102
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
Year ended December 31
-----------------------------------------------------------------------------
2003 2002 2001
------------------------ ----------------------- -------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------- -------------- -------- ------------- ---------
Depreciation and
amortization:
Segments:
Telecommunications 44,696 10.17 57,664 13.67 62,547 15.55
Defense electronics 39,297 8.94 49,825 11.81 50,718 12.61
Agro-chemicals
and other
chemicals 318,492 72.47 278,482 66.03 238,712 59.34
Venture capital
investments - - - 1,859 0.46
Others 37,029 8.42 35,792 8.49 48,436 12.04
------------ --------- ------------- ---------- ----------- ---------
Total segments 439,514 100.00 421,763 100.00 402,272 100.00
========= ========== ==========
Discontinued
activity - - 12,228
Corporate assets 13,050 1,817 2,744
------------ ------------- -----------
452,564 423,580 417,244
============ ============= ===========
D. Revenues from sales and services by geographic location
Year ended December 31
--------------------------------------------------
2003 2002 2001
---------- ---------- ----------
NIS thousands
--------------------------------------------------
North America 1,152,009 1,125,925 1,225,494
Europe 2,473,635 1,864,012 1,906,611
South America 1,670,256 1,213,485 1,663,223
Asia and Australia 1,050,873 1,123,387 923,134
Africa 323,206 228,632 228,127
Israel 1,020,451 1,544,349 1,516,830
--------- --------- ---------
7,690,430 7,099,790 7,463,419
========= ========= =========
F-103
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
E. Assets by geographic location of manufacturing operation
December 31
--------------------------------
2003 2002
------------- --------------
NIS thousands NIS thousands
------------- --------------
Israel 8,636,399 11,371,319
South America 1,530,178 1,502,393
Europe 1,495,176 297,074
United States 167,808 177,698
Others 40,196 84,314
------------- --------------
11,869,757 13,432,798
============= ==============
F. Capital investments in assets by geographic location
December 31
--------------------------------
2003 2002
------------- --------------
NIS thousands NIS thousands
------------- --------------
Israel 248,131 1,239,314
Brazil 40,725 56,581
United States 2,719 9,463
Others 27,657 7,612
------------- --------------
319,232 1,312,970
============= ==============
F-104
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 25 - Transactions and Balances with Interested Parties
A. The following are details of interested parties in Koor
resulting from their holdings of Koor's ordinary shares:
1. Claridge Group (Claridge).
2. Anfield Ltd.
B. On October 15, 2002 the Board of Directors of Bank Hapoalim
B.M. decided, on the distribution of a dividend in kind of
all its holdings in the Company. On November 27, 2002, the
date of actual distribution, Bank Hapoalim B.M. ceased to be
an interested party in the Company.
During the period when Bank Hapoalim B.M. was an interested
party, Koor and its consolidated companies also made
transactions with Bank Hapoalim. These transactions, which
were mainly for receipt of banking services, were made in
the normal course of business, and therefore, no separation
is made with regard to the management and the recording of
the transactions.
C. Benefits to interested parties - Company
1. Directors (*)
Year ended December 31
---------------------------------
2003 2002 2001
--------- ---------- ---------
NIS thousands
---------------------------------
Directors not employed by the Company:
Annual compensation and participation
in meetings:
Claridge Group 115 245 157
========= ========== =========
Number of directors 3 3 3
========= ========== =========
Poalim Assets (Shares) Ltd. - 95 130
========= ========== =========
Number of directors - 2 2
========= ========== =========
Other directors 442 533 482
========= ========== =========
Number of directors 8 10 9
========= ========== =========
(*) Including directors who have been replaced during the year.
F-105
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------
Note 25 - Transactions and Balances with Interested Parties (cont'd)
C. Benefits to interested parties (cont'd)
2. Consultancy services
Year ended December 31
------------------------------
2003 2002 2001
------- -------- ---------
NIS thousands
------------------------------
Claridge 1,789 1,871 1,800
======= ======= =======
Poalim Capital Markets and Investment Ltd. - 1,433 1,800
======= ======= =======
The Company has agreements with interested parties - Poalim
Capital Markets and Investments Ltd. (Poalim) (at the time
when Bank Hapoalim B.M. was an interested party) and
Claridge for the receipt of consultancy services. These
services include, inter alia, advice in respect of
investment strategies, monetary policies, international
activities, strategic partnerships and company structuring.
The agreements include instructions regarding the
indemnification of the consultants (Claridge/Poalim) 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 has agreed
to pay an annual sum which will not exceed 400,000 dollars
to each of the consultants. The agreements are for the
period of one year and are automatically renewable each
year, unless one of the parties gives 60 days' prior notice
of the termination of the agreement.
On the date on which Bank Hapoalim ceased to be an
interested party in Koor, the agreement with Poalim expired.
Note 26 - Earnings (Loss) Per Share
A. Adjusted net earnings (loss) used in the computation of
earnings per NIS 1 par value of the share capital:
Year ended December 31
--------------------------------------
2003 2002 2001
--------- ---------- ------------
NIS thousands
--------------------------------------
Net earnings (loss) used in the computation
of earnings (loss) per NIS 1 par value of shares 46,362 (766,969) (2,650,927)
========= ========== ===========
F-106
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------
Note 26 - Earnings (Loss) Per Share (cont'd)
B. Weighted number of ordinary shares of NIS 0.001 used in the
computation of net earnings (loss) per NIS 1 par value of
the share capital:
Number of ordinary shares
-------------------------------------------
2003 2002 2001
--------- -------- ----------
Total share capital used in the computation of
Earnings (loss) per share 15,716,725 15,173,291 15,188,463
========== ========== ==========
C. To examine that the conversion or exercise of convertible
securities is reasonable, the present value of these
securities was computed according to a discount rate of 4%
(December 31, 2002 - 6%, December 31, 2001 - 4%) for
securities linked to the CPI.
Note 27 - Events Subsequent to the Balance Sheet Date
1. In March 2004, the Board of directors of ECI resolved to
distribute 7.6 million shares of ECtel as a dividend to the
shareholders of ECI. After this distribution, which is
subject, inter alia, to the approval of the Court, ECI will
hold about 16% of the shares in ECtel, and Koor will hold
about 13% of these shares.
2. Subsequent to the balance sheet date, Cisco decided to
purchase all of the shares of Riverhead Inc. from its
shareholders, in consideration for 39 million dollars. The
share of Koor CVC in the consideration amounts to
approximately 7 million dollars. The projected pre-tax gain
to Koor is about 4 million dollars.
3. With respect to the sale of 7.3% of the shares of M-A
Industries, see Note 3.C(10).
4. With respect to the issuance of convertible securities to
Knafayim shares, see Note 3.F(2).
F-107
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements
A. Koor's consolidated financial statements conform with
Israeli generally accepted accounting principles ("Israeli
GAAP"), which differ in certain respects from those
generally accepted in the United States of America ("US
GAAP") as described below:
1. Effect of inflation
In accordance with Israeli GAAP:
The consolidated financial statements of Koor are expressed
in terms of a uniform monetary unit - the Israeli shekel
inflation-adjusted which follows adjustment in respect to
the changes in the Consumer Price Index (CPI). (See Note 2B).
In accordance with US GAAP:
The financial statements should be expressed in current
nominal historical monetary terms.
Measuring on the basis of the change in the CPI, which
reflects the effect of changes in the general price level in
the Israeli economy, provides a very valid picture of the
financial position, results of operations and the cash flows
of the Koor Group for both Israeli and US accounting
purposes.
In view of the above, no data on the effect of the
differences between measurements on the basis of cost
adjusted to the CPI or on the basis of historical cost, were
included.
2. ECI and TTL - merger
In accordance with Israeli GAAP:
The merger between ECI and TTL in 1999 was recorded in
Koor's financial statement at book values and treated based
on the accounting principles in exchange of similar asset
transactions. Pursuant to the merger agreement, shares of
TTL held by Tadiran were exchanged for ECI shares at an
exchange rate determined in the merger agreement.
In accordance with US GAAP:
According to EITF 98-3 the merger of ECI and TTL is not
considered as an exchange of similar assets in respect of
Koor and Tadiran and therefore a capital gain from the
realization of TTL is recorded and an original differential
is recorded on behalf of ECI and allocated to goodwill.
In 2001 Koor's management decided to reduce the book value
of the investment in ECI in respect of decrease in value of
an other than temporary nature. Therefore, the Company
wrote-off the balance of the goodwill in the amount of NIS
164 million.
In 2001 Tadiran sold its shareholding in ECI to Koor.
Therefore, the deferred taxes which were created during the
merger were realized and an income tax expense in the amount
of NIS 133 million was recorded.
F-108
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
3. Debt arrangement within the framework of an overall
financial arrangement
In accordance with Israeli GAAP:
Koor reported an extraordinary gain in 1991 as a result of
restructuring part of its debts.
In accordance with US GAAP:
In accordance with FAS No. 15 - "Accounting by Debtors and
Creditors for doubtful Debt Restructuring" future interest
payments must be deducted from the restructuring of an old
debt. The recognition of non-realized earnings (which
represents deferred interest) is affected by payments of
interest over the period from the date of the restructuring
of the debt up to its repayment date. As at December 31,
2002, the entire balance of the deferred interest was fully
amortized.
4. Deferred taxes
a) Deferred taxes in respect to inflation adjustment
differences
In accordance with Israeli GAAP:
Koor does not provide deferred taxes in respect to
adjustment differences to the CPI for assets
defined as "immune assets" in the Law for Taxation
Under Inflationary Conditions and for which the
depreciation period is at least 20 years.
In accordance with US GAAP:
Under FAS No. 109, a provision for deferred taxes
should be made for all temporary differences,
without relation to the period of amortization of
the assets.
b) Deferred taxes in companies which adjust their
financial statements for inflation on the basis of
changes in the US dollar exchange rate.
In accordance with Israeli GAAP:
Certain companies, which adjust their financial
statements on the basis of changes in the Dollar
exchange rate, create deferred taxes in respect to
all the differences between the amounts of assets
(mainly in respect to fixed assets and inventory)
as stated in the financial statements and the
amounts for tax purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109,
deferred taxes should not be provided in respect to
differences, the source of which is in the
difference of assets and liabilities for accounting
purposes and their amounts for tax purposes, where
the source of the tax difference stems from
different measuring bases for accounting purposes
and for tax purposes.
F-109
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
4. Deferred taxes (cont'd)
c) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of
Capital Investments, 1959, a 25% tax rate is
applicable on the profits, when an "approved
enterprise" is going the grant track, during the
benefits period.
Dividends paid to shareholders from the earnings of
an "approved enterprise" are subject to income tax
at a rate of 15%. A company that received such a
dividend is entitled to a 15% tax credit, if and
when this dividend is paid to its shareholders.
An "approved enterprise" which chooses the
"alternative benefits" track is exempted from
income tax on undistributed profits.
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 be subject to a 25% tax
on the distributed earnings. Furthermore, the
shareholders will be liable to tax at the rate of
15%. However, if the shareholder is a company, that
shareholder will be entitled to a 15% tax credit,
if and when such dividend out of "approved
enterprise" earnings is distributed to its
shareholders.
In accordance with Israeli GAAP:
Deferred tax should not be provided in respect to the
undistributed tax-exempt earnings of an "approved
enterprise" of subsidiaries, whose earnings have been
reinvested and will not be distributed to the company
shareholders.
Koor has not provided deferred tax in respect to
undistributed tax-exempt earnings attributed to the
"approved enterprise" of subsidiaries, which may be
distributed, since it is the Group's policy not to initiate
such a dividend distribution.
In accordance with US GAAP:
A reserve for deferred tax should be provided on the
undistributed tax-exempt earnings of local subsidiaries
established subsequent to December 15, 1992, as their
distribution results an additional tax.
5. Handling of "benefit component" in respect of
options issued to employees
In accordance with Israeli GAAP:
The overall "benefit component", in respect to options
granted to employees of Koor, is not charged as an expense
in the statement of operations.
F-110
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
5. Handling of "benefit component" in respect of
options issued to employees (cont'd)
In accordance with US GAAP:
a) Fixed Option Plan:
Under US GAAP (APB-25), the "benefit component" is
measured as the difference between the share market
price and the exercise price of the option, at the
date of grant. The benefit is charged as a salary
expense during the period in which the employee
performs the services for which the benefit was
granted.
b) Variable Option Plans:
In the event that the options have been issued to
employees for the future performance of work or
services, the benefit is charged to salary expense
in the statement of operations. The "benefit
component" is measured as the difference between
the share market price and the exercise price of
the option at the end of each reporting period, and
the proportional part of the period which has
passed, in relation to amounts previously recorded
at the beginning of that reporting period.
6. The accounting treatment of quoted securities:
In accordance with Israeli GAAP:
Quoted securities which constitute a short-term investment
(see Note 2F) are stated at market value. Quoted securities
which constitute a permanent investment is 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.
In accordance with US GAAP:
FAS No. 115 divides quoted securities, into three types:
securities held for a short period and traded at a high
frequency (trading securities), available for sale
securities and held to maturity securities.
A change in the value of trading securities, including
unrealized earnings, is charged to the statement of
operations, while unrealized earnings after tax, if any, of
the available for sale type is reported as a separate item
within shareholders' equity.
Most of the securities held by the Company are
available-for-sale securities.
F-111
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
7. Allocation of proceeds from an issuance to
debentures, when securities are issued as a package
(issuance by Koor in 1994):
According to the accounting policy at this issuance:
The proceeds from an issuance of debentures and stock
warrants, as a package, are allocated to debentures
according to their face value while the remainder of the
proceeds is attributed to the share warrants.
In accordance with US GAAP:
The proceeds from an issuance of share options and
convertible debentures, as a package, are split based on the
relative fair value, of these securities at the date of
issuance. This will sometimes result in the recording of a
discount in respect of the convertible debentures that is to
be amortized as interest expense over the term of
debentures.
As at December 31, 2003, the entire balance of the deferred
interest was amortized in full.
8. Convertible securities of investee companies
In accordance with Israeli GAAP:
According to Opinion No. 48 and 53 of the ICPAI, a parent
company is required to create a provision for losses, which
it may incur from the dilution of its holdings in investee
companies, when it is probable that the share options will
be exercised or the debentures will be converted.
In accordance with US GAAP:
A loss in the parent company resulting from the dilution of
its holdings, because of share options being exercised or
debentures being converted, is recorded only at the time of
exercise or conversion.
F-112
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
9. Employee severance benefits as a part of an
efficiency program (up to and including 2002):
In accordance with Israeli GAAP:
Employee severance benefits, as part of future anticipated
dismissals, are recorded when management decides on the
dismissals, and/or when management intended on the
dismissals.
In accordance with US GAAP:
According to the provisions of EITF 94-3, which was in
effect until December 31, 2002, employee severance benefits,
when dismissal is part of an efficiency program, are charged
as an expense in the financial statements only when all the
following conditions exist:
a) Management has the appropriate authority to dismiss
employees and the efficiency program includes all
employee severance benefits.
b) Management notified employees of its intention to
dismiss them, while supplying them with full
details regarding employee severance benefits.
c) The plan for dismissals states specifically the
names of the dismissed employees, their positions
and their duties.
d) The period of time for completion of the program of
dismissals indicates that a significant change in
the plan is not likely to occur.
10. Earnings per share:
In accordance with Israeli GAAP:
In accordance with Opinion No. 55, the dilutive effect of
share options and convertible debentures is included in the
computation of basic earnings per share only if their
exercise or conversion is considered to be probable.
Calculation of the probability is based on the ratio between
the market price of the shares and the present value of the
price of exercising the stock options into shares or the
present value of the payments for conversion of the
debentures into shares.
In accordance with US GAAP:
In accordance with FAS 128 "earnings per share" - basic
earnings per share are computed on the basis of the weighted
average number of shares outstanding during the year.
Diluted earnings per share is computed on the basis of the
weighted average number of shares outstanding during the
year, plus the dilutive potential effect of ordinary share
options considered outstanding during the year.
F-113
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
11. Acquiring an Investment in stages:
In accordance with Israeli GAAP:
Opinion 68 determines that when acquiring an investment in
stages, it is necessary to calculate the original
differentials and record the investment according to the
equity method from the date when the holding constitutes an
initial material influence onwards.
In accordance with US GAAP:
When acquiring an investment in stages, it is necessary to
calculate post factum for each acquisition the original
differentials created by the acquisition, on the date an
initial influence becomes material, even if on that date the
Company did not yet have a material influence, and to
implement the equity method retroactively.
12. Venture capital investments:
In accordance with Israeli GAAP:
Venture capital fund investments in venture capital
investments will be represented according to their cost less
a provision for devaluation in the event of a permanent
devaluation.
In accordance with US GAAP:
Venture capital fund investments will be represented
according to their fair value.
13. Revenue recognition - SAB 101:
In accordance with US GAAP:
During the fourth quarter of 2000, the US SEC published
Staff Accounting Bulletin No. 101 (hereinafter - "SAB 101"),
which provides criteria for revenue recognition which is
stricter with the revenue recognition rules, which are to be
implemented retroactively to the beginning of 2000, by way
of cumulative effect to the beginning of the year and
presentation of the previous quarters once again.
ECI implemented these guidelines in its statements, which
are prepared in accordance with US GAAP.
The cumulative effect of the sales cancelled upon initial
adoption of SAB 101, was spread over the years 2000 through
2003. Commencing with 2004, there will be no additional
effect deriving from the cancellation of these revenues.
In accordance with Israeli GAAP:
The provision does not apply in Israel, although it is
possible to adopt the principles set out in the rule, if
management estimates that the method of revenue recognition
prescribed in SAB 101 is appropriate for economic and
commerce conditions presently existing in its area of
business.
This rule was adopted as of the fourth quarter of 2000,
without implementing cumulative effect to the beginning of
2000 and without presenting data, which has already been
published in the past. Therefore, cumulative effect has been
recorded in the adjustment note in 2000 in the sum of NIS
39,456 thousand.
F-114
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
14. Exchange of assets:
In accordance with Israeli GAAP:
In 2001 NetEye shares were transferred from Telrad to ECtel,
as described in Note 3D(2), the transaction treated based on
the accounting principles in Exchange of Similar Assets
transactions and therefore neither a profit nor a loss was
recorded.
In accordance with US GAAP:
According to EITF 98/3 this transaction is not seen as an
Exchange of Similar Assets transaction and therefore a
profit of NIS 29,166 thousand was recorded.
During 2003 Telrad sold portions of ECtel's shares, the
profit recorded under US GAAP was lower than the one
recorded under Israeli GAAP as their book value was lower in
accordance with Israeli GAAP.
In 2001 Millenia shares previously held by the minority
shareholders, were purchased in exchange for M-A Industries'
shares (as described in Note 3C(3). This transaction was
also treated as an Exchange of Similar Assets under the
Israel GAAP. According to the US GAAP this transaction was
not seen as an exchange of similar assets and therefore a
profit of NIS 6,439 thousand was recorded.
In 2002 a consolidated company of Telrad was merged with
another company. According to Israeli GAAP, this transaction
is treated as an Exchange of Similar Assets, and therefore
no profit is recognized. According to US GAAP, the
transaction is not an Exchange of Similar Assets and
therefore a profit of NIS 15,105 thousand was recorded.
15. Financial Derivatives
In accordance with Israeli GAAP:
The Company applied FAS 52, FAS 80 and EITF 90-17 to its
financial derivatives.
In accordance with US GAAP:
As of 2001, the Company applied FAS 133 to the derivatives
based on the cumulative effect at the beginning of the year
(NIS 2,718 thousand).
According to US GAAP, the financial derivatives of the
Company are stated at fair value and changes in the fair
value are charged to the statement of operations in the
period they occurred.
F-115
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
16. Securitization agreement of M-A Industries and its
consolidated companies
In accordance with Israeli GAAP:
This transaction was treated as a sales transaction, only in
relation to the sale of customer debts which were included
in the securitization transaction, and whose associated
control and risks have been completely transferred to the
purchaser, and the proceeds were received in cash or with an
undeferred liability.
In accordance with US GAAP:
Until 2002, the transaction did not meet the criteria set
out in FAS 140 for the classification as a sales
transaction. Therefore, the transaction was treated as a
secured borrowing, and the balance of customers in 2002
increased by 101.8 million dollars and by 95.5 million
dollars in 2001, against a similar increase in short-term
credit.
As of July 2003, the transaction meets the criteria set out
in FAS 140 and is classified as a sale transaction.
17. Impairment of Assets
In accordance with Israeli GAAP:
The Company applied Standard No. 15 under which the Company
needs to test the recoverable amount of the assets, which is
the higher of the net sales price and usage value. A loss
from impairment will be reversed only if changes have
occurred in the estimates used in determining the
recoverable value of the asset, from the date of which the
last impairment was recognized.
In accordance with US GAAP:
The Company applied FAS 144 with respect to long-lived
assets and APB 18 with respect to equity method investees.
Under FAS 144 an impairment of long-lived asset is recorded
only if the undiscounted cash flows of the related asset
does not cover its book value.
Under APB 18 a loss is recorded only when the impairment
investees is other than temporary.
Both under FAS 144 and under APB 18 reversals of impairments
are not allowed, unless the assets are held for sales.
ECI's Impairment:
In accordance with Israeli GAAP, on September 30, 2002 the
Company wrote down its investment in ECI by NIS 130 million
(see Note 3A(1)). Of the NIS 130 million write down, the
Company realized a capital reserve from foreign currency
translation adjustments generated by Koor in relation to its
investment in ECI, in the amount of NIS 105 million. The
balance of NIS 25 million was charged to the statement of
income.
F-116
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
17. Impairment of Assets (cont'd)
ECI's Impairment: (cont'd)
In November 2003, the Company reversed the impairment in the
amount of NIS 73 million. The cancellation was recorded
against the capital reserve from translation differences
(credit) which was realized when the provision was recorded.
In accordance with US GAAP, under FAS 52, a capital fund
from translation differences will be realized upon
realization of the investment or liquidation of the investee
company. Accordingly, an expense in respect to impairment in
value was charged to the statement of operations.
In addition, the excess of Koor's share in ECI's
shareholders equity over its investment in ECI was
attributed to ECI's non-current assets.
Due to the fact that Koor's share in ECI's shareholders'
equity is higher than its investment in ECI, the excess of
Koor's share in the equity over the investment was
attributed to ECI's non-current assets.
According to US GAAP the impairment was not reversed.
18. Goodwill and Other assets:
In accordance with Israeli GAAP:
Goodwill is amortized over its economic life but no more
than 20 years. Goodwill is monitored for a decrease in value
where there are indications indicating a permanent decrease
in the value of the goodwill.
In accordance with US GAAP:
Starting on January 1, 2002, goodwill balances will not be
amortized systematically but will be monitored by means of
an impairment test to be carried out at least once a year on
a fixed date in accordance with the directives in FAS 142,
where in the first year of implementation the impairment
test will be on January 1, 2002. Amortization of goodwill
caused following the first implementation of the impairment
test on January 1, 2002, will be recorded as a cumulative
effect in respect of a change in the accounting method.
Accordingly, a cumulative effect of NIS 806 thousand was
recorded in the adjustment note in 2002.
F-117
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
19. Adjustment on net loss of ECI as being reported
according to the US GAAP to the net loss as being
reported according to the Israeli GAAP:
Year ended
December 31
2003
--------------
US$ thousands
--------------
Net loss of ECI based on its reported profit according to US GAAP (71,040)
Adjustments:
Timing differentials for revenue recognition for implementation of SAB 101 (5,905)
Finance income - FAS 133 (4,843)
Tax expenses (956)
Write-down of excess cost attributed to intangible assets (1,556)
Profit from marketable securities 1,282
Decline in value of assets 2,452
-------------
Net loss of ECI according to Israeli GAAP (80,566)
=============
F-118
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements
1. Statements of operations:
Year ended December 31
-----------------------------------------
2003 2002 2001
---------- ---------- ------------
NIS thousands
-----------------------------------------
a) Net earnings (loss) as reported, according to
Israeli GAAP 46,362 (766,969) (2,650,927)
---------- ---------- -----------
Amortization of deferred interest in respect of
the restructuring of debts - 4,812 6,726
Deferred taxes (67,144) 5,906 55,689
Salary expenses in respect of share options
issued to employees (185,276) 486 (18,725)
Loss (gain) from marketable securities, net (58,319) 54,145 (13,633)
Provisions for anticipated losses from realization
of convertible securities in investee companies 50,729 (515) (8,092)
Amortization of discount in respect of
convertible debentures (18) (338) (1,067)
Severance pay arising from an efficiency program (10,181) 7,130 2,408
Capital gain from a decline in holding in
consolidated company - 6,199 -
Acquiring an investment in stage - - 4,652
Venture capital investments 15,790 (16,327) 769
Amortization of goodwill in accordance
with a merger of ECI and TTL - - (164,175)
Temporary differences resulting from recognition
of revenue arising from application of SAB 101 7,949 2,230 36,060
Profit from exchange of assets - 15,105 35,605
Discontinuing activities - 835 -
Impairment in value (4,983) 5,858
Differences from investee due to impairment
previously recorded (10,583) (14,342) -
Foreign currency translation due to impairment (9,093) (105,124) -
Amortization of goodwill and other assets 29,533 87,234 -
Derivatives (FAS 133) (34,002) (27,005) (1,467)
Other 1,078 (4,669) -
---------- ---------- -----------
(274,520) 21,620 (65,250)
Income taxes 1,287 (937) 128,681
Minority interests in respect of the above differences 121,563 (14,469) (40,143)
---------- ---------- -----------
(151,670) 6,214 23,288
Cumulative effect as beginning of the year - (806) 2,718
---------- ---------- -----------
(151,670) 5,408 26,006
---------- ---------- -----------
Loss according to US GAAP (105,308) (761,561) (2,624,921)
========== ========== ===========
F-119
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on the
Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US GAAP on the financial
statements (cont'd)
1. Statements of operations (cont'd):
b) Earnings (loss) per ordinary share
Year ended December 31
------------------------------------------------
2003 2002 2001
----------- ------------ ------------
NIS
------------------------------------------------
Basic and diluted earnings per ordinary share:
As reported according to Israeli GAAP 3.19 (50.55) (174.54)
=========== ============ ============
As reported according to US GAAP (6.81) (50.18) (172.81)
=========== ============ ===========
Weighted average of number of shares
and share equivalents according to
US GAAP 15,474,614 15,173,291 15,188,463
=========== ============ ===========
Share equivalents are not reflected in US GAAP due to the fact that they are anti-dilutive.
F-120
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on the
Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US GAAP on the financial s
tatements (cont'd)
2. Balance sheet:
December 31
-----------------------------------------------------------------------------------------------
2003 2002
---------------------------------------------- ----------------------------------------------
As reported Adjustments US GAAP As reported Adjustment US GAAP
--------------- ------------- ------------ -------------- ------------ -----------
NIS thousands
-----------------------------------------------------------------------------------------------
Investments in
affiliates 943,764 (60,839) 882,925 1,041,296 (28,296) 1,013,000
Customers (7) 2,052,461 10,847 2,063,308 2,002,680 462,629 2,465,309
Investments
and other
receivables 483,384 24,865 508,249 571,539 34,627 606,166
Fixed assets, net 2,928,407 11,455 2,939,862
Intangible assets
after
amortization (8) 2,121,083 119,357 2,240,440 2,396,817 109,463 2,506,280
Total assets 11,869,757 105,685 11,975,442 13,445,813 578,422 14,024,235
Other payables (6) 1,270,217 75,551 1,345,768 1,394,455 (2,432) 1,392,023
Short-term
liabilities (7) 1,577,402 - 1,577,402 2,315,499 473,137 2,788,636
Convertible
debentures (3) 340,270 - 340,270 397,504 (18) 397,486
Deferred taxes (2) 199,787 69,681 269,468 208,464 90,568 299,032
Minority 1,736,531 38,363 1,774,894 1,528,410 36,452 1,564,862
interests (5)
Capital reserve
for "available
for sale"
securities(1) - (30,074) (30,074) - (62,646) (62,646)
Capital
reserves(3)(4)(9) 2,367,341 224,217 2,591,558 2,443,490 163,748 2,607,238
Retained
losses(5) (1,111,142) (272,056) (1,383,198) (1,008,379) (120,386) (1,128,765)
Total
shareholders'
equity 1,740,393 (77,913) 1,662,480 1,727,169 (19,284) 1,707,885
(1) Adjustment of value of investment securities to market value.
(2) Change in deferred taxes.
(3) Debentures issued with stock options.
(4) Share options issued to employees.
(5) Effects of the reconciliation to US GAAP.
(6) Provision for employee severance benefits resulting from an efficiency program,
financial derivatives.
(7) Securitization agreement, customers revaluation.
(8) Original differentials arising from the exchange of shares in the merger,
and increasing the holdings in a consolidated company, reversal of
systematic provisions related to goodwill and intangible assets.
(9) Cumulative foreign currency translation adjustments, cancellation of provision for
decline in value of autonomous investee.
F-121
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements (cont'd)
3. Comprehensive loss
"Comprehensive earnings (loss)" consists of the change, during the
current period, in Company's shareholder equity that does not derive
from shareholders' investments or from the distribution of earnings
to shareholders.
Comprehensive earnings (loss) include two components - net earnings
and other comprehensive earnings. Net earnings are the earnings
stated in the statement of operations and other comprehensive
earnings include the amounts that are recorded directly in
shareholders' equity and that do not derive from transactions with
shareholders.
Year ended December 31
----------------------------------------------
2003 2002 2001
------------- ------------- --------------
NIS thousands
----------------------------------------------
Net loss according to US GAAP (105,308) (761,561) (2,624,921)
------------- ------------- --------------
Other comprehensive earnings, after tax:
Adjustments from translation of
financial statements of
investee companies (149,231) 395,432 283,583
Unrealized gains (loss) from securities 32,572 (54,145) 13,633
------------- ------------- --------------
Total other comprehensive earnings (loss) (116,659) 341,287 297,216
------------- ------------- --------------
Total comprehensive loss (221,967) (420,274) (2,327,705)
============= ============= ==============
F-122
[Letterhead of Brightman Almagor, a Member Firm of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF
SCOPUS NETWORK TECHNOLOGIES LTD.
We have audited the accompanying balance sheets of Scopus Network Technologies
Ltd. ("the Company") as of December 31, 2003 and 2002 and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows, for each of the three years, in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 Company's management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as
of December 31, 2003 and 2002, and the consolidated results of its operations,
changes in its shareholders' equity and its cash flows for the three years, in
the period ended December 31, 2003, in conformity with generally accepted
accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain respects
from accounting principles generally accepted in the United States of America.
As stated in Note 2Q, for purposes of these financial statements, the
application of the latter would not have materially effected the Company's net
income for each of the three years in the period ended December 31, 2003, its
shareholders' equity and its financial position as of December 31, 2003 and
2002 as reported in these financial statements.
As explained in Note 2A, the financial statements are presented in U.S.
dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
March 17, 2004
F-123
[Letterhead of Kost Forer Gabbay & Kasierer]
Auditors' Report to the Partners of
Koor Venture Capital
We have audited the accompanying balance sheets of Koor Venture
Capital (hereinafter - "the Partnership") as at December 31, 2003 and 2002,
the results of its operations, changes in partners' equity and cash flows, for
each of the three years, the last of which ended December 31, 2003. These
financial statements are the responsibility of the Partnership's partners 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 the affiliate, the
investment in which, at equity, amounted to NIS 7,313 thousands and NIS 1,974
thousands as of December 31, 2003 and 2002, respectively, and the Company's
equity in it's losses amounted to NIS 329 thousands, NIS 329 thousands and NIS
8,570 thousands for the years ended December 31, 2003, 2002 and 2001,
respectively. The financial statements of this company was audited by another
auditor, which report has been furnished to us, and our opinion, insofar as it
relates to amounts included for this company, is based on the report of the
another auditor.
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 management as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of another
auditor, the financial statements referred to above present fairly, in all
material respects, the financial position of the Partnership as of December
31, 2003 and 2002 and the results of its operations, changes in partners'
equity and its cash flows for each of the three years, the last of which ended
December 31, 2003, in conformity with accounting principles generally accepted
in Israel.
Accounting principles generally accepted in Israel vary in certain
significant respects from accounting principles generally accepted in the
United States. In these financial statements there is a difference between the
two GAAP methods for each reported year. The material differences between
Israeli and U.S. GAAP as presented in the financial statements are stated in
Note 9 to the financial statements.
As explained in Note 2, the above-mentioned financial statements are
stated in values adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with opinions of the Institute of
Certified Public Accountants in Israel.
/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 23, 2004 A Member of Ernst & Young Global
F-124
[Letterhead of Kost Forer Gabbay & Kasierer]
AUDITORS' REPORT
To the shareholders of
KOOR TRADE LTD.
We have audited the accompanying balance sheets of Koor Trade Ltd.
("the Company") as at December 31, 2003 and 2002, and the related statements
of operations, changes in shareholder's equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 2003 not presented
separately herein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of a certain companies the
investment in which at equity, amounted to NIS 34.1 million and NIS 13.9
million as of December 31, 2003 and 2002, respectively, and the Company's
equity in their income (losses) amounted to NIS 5.6 million, NIS 6.5 million
and NIS (5.1) million for the years ended December 31, 2003, 2002 and 2001,
respectively. Those financial statements which part of them presented in
accordance with accounting principles generally stipulated by International
Financial Reporting Standards and part of them presented in accordance with
accounting principles generally accepted in the United States, were audited by
other auditors whose reports as of years ended December 31, 2003 and 2002,
have been furnished to us, and our opinion, insofar as it relates to the
amounts utilized by Company's management (before reconciliation to accounting
principles generally accepted in Israel and in United States) of and for the
three years in the period ended December 31, 2003, 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) and with auditing
standards generally accepted in Israel. 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 (including the
Company's reconciliation of the financial statements of the aforementioned
certain subsidiary to accounting principles generally accepted in Israel and
in United States) and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2003 and 2002, and the results of its operations and its cash flows for each
of the three years in the period ended of December 31, 2003, in conformity
with accounting principles generally accepted in Israel which differ in
certain respects from those followed in the United States, as described in
Note 11 to the financial statements.
F-125
[Letterhead of Kost Forer Gabbay & Kasierer]
Without qualifying our opinion, we wish to draw attention that the
Company has restated its financial statements for the year ended December 31,
2003 and 2002 in order to retroactively reflect the effect of the operating
results of an investee whose investment in the financial statements for
December 31, 2003 and 2002 did not include its operating results for 2003 and
2002, respectively.
/s/ KOST, FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
May 28, 2004 A Member of Ernst & Young Global
F-126
[Letterhead of Brightman Almagor, a Member Firm of Deloitte & Touche]
Independent Auditors' Report
To the Shareholders of
Sheraton Moriah (Israel) Ltd.
We have audited the accompanying balance sheets of Sheraton Moriah (Israel)
Ltd. (the "Company") as at December 31, 2003 and 2002, and the consolidated
balance sheets of the Company and its subsidiaries as at such dates, and the
related statements of operations, shareholders' equity, and cash flows, for
each of the three years, in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's 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, whose assets
constitute 2% and 5.5% of the total consolidated assets as at December 31,
2003 and 2002 respectively, and whose revenues constitute 12%, 18.1% and 19%
of the total consolidated revenues for the years ended December 31, 2003,
2002, and 2001 respectively. The financial statements of those subsidiaries
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,
is based solely on the reports of the other auditors. Furthermore, the data
included in the financial statements relating to the equity investment of the
Company in affiliates and to its share in their operating results is based on
the financial statements of such affiliates, some of which were audited by
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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, and the reports of the other auditors, provide a reasonable basis for
our opinion.
In our opinion, based on our audits and on the reports of the 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 of December 31, 2003 and 2002
and the results of their operations, their changes in shareholders' equity and
their cash flows - of the Company and on a consolidated basis - for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the financial position
and results of operations as of the December 31, 2003 and for the year 2003 is
summarized in Note 28.
As explained in Note 2, the above-mentioned financial statements are stated in
values adjusted for the changes in the general purchasing power of the Israeli
currency, in accordance with Opinions of the Institute of Certified Public
Accountants in Israel.
As described in Note 6D(1)(b) of the financial statements, there is a
disagreement between the shareholders of a proportionately consolidated
subsidiary; the implications on the financial statements are also described in
that note.
/s/ Brightman Almagor & Co. /s/ Lion, Orlitzky & Co.
Brightman Almagor & Co. Lion, Orlitzky & Co.
Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tomatsu
Tel Aviv, March 29, 2004
F-127
[Letterhead of Brightman Almagor, a Member Firm of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
KNAFAIM - ARKIA HOLDINGS LIMITED
We have audited the accompanying balance sheets of Knafaim - Arkia Holdings
Limited ("the Company") as of December 31, 2003 and 2002, and the consolidated
balance sheet as of that date, and the related statements of operations,
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for the years then ended. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
The comparative figures as of December 31, 2001 and for the year then ended were
audited by other auditors, who issued an unqualified opinion thereon dated March
18, 2002.
We did not audit the financial statements of subsidiaries whose assets included
in consolidation constitute 0.8% and 0.8% of total consolidated assets at
December 31, 2003 and 2002, respectively, and whose revenues included in
consolidation constitute 7.1% and 9.3% of total consolidated revenues for the
years then ended, respectively. We also did not audit the financial statements
of affiliates, the investment in which was $12,223 thousand and $15,929 thousand
at December 31, 2003 and 2002, respectively, and the Company's equity in their
losses for the years then ended was $574 thousand and $2,021 thousand,
respectively. The financial statements of those companies were audited by other
auditors whose reports were furnished to us, and our opinion, insofar as it
relates to the amounts included for those companies, is based on the reports of
the other auditors.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position - of the Company and on a consolidated basis - as of
December 31, 2003 and 2002, and the results of operations, shareholders' equity
and cash flows - of the Company and on a consolidated basis - for the years then
ended, in conformity with generally accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information pertaining to the nature and effect of such differences is
presented in an supplementary document dated July 8, 2004.
As described in Note 2A, the Company prepares its primary financial statements
in values adjusted for changes in the general purchasing power of Israeli
currency as measured by the changes in the US dollar exchange rate in relation
to the Israeli shekel, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel. The accompanying financial statements
are a translation of the primary financial statements into U.S. dollars, as
described in Note 2A.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, July 8, 2004
F-128
[Letterhead of Kost Forer Gabbay & Kasierer]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
TELRAD CONNEGY COMMUNICATIONS INC.
We have audited the accompanying consolidated balance sheet of Telrad
Connegy Communications Inc. ("the Company") and its subsidiaries as of
December 31, 2003 and 2002 and the related consolidated statements of
operations, changes in shareholders' equity (deficiency) and the consolidated
cash flows for each of the two years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
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 management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2003, and 2002
and the consolidated results of their operations and cash flows for each of
the two years in the period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles, which differ in certain respects
from those followed in Israel, as described in Note 13 to the consolidated
financial statements.
/s/ Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
February 4, 2004 A Member of Ernst & Young Global
F-129
[Letterhead of BDO Seidman, LLP]
Independent Auditors' Report
Telrad Tenecs, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Telrad Tenecs,
Inc. (formerly Telrad Networks, Inc.) ( a wholly-owned subsidiary of Telrad
Tenecs Ltd.) and Subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of income and retained earnings, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 also 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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telrad
Tenecs, Inc. at December 31, 2001 and 2000 and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
January 25, 2002
F-130
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
INDEPENDENT AUDITORS' REPORT
To The Stockholder and Board of Directors
Tadiran Electronic Industries, Inc.
We have audited the accompanying consolidated balance sheets of Tadiran
Electronic Industries, Inc. and Subsidiary as of December 31, 2003 and 2002,
and the consolidated statements of operations, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Tadiran Electronic Industries, Inc. and Subsidiary as of December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional information
on pages 14 through 17 is presented for the purpose of additional analysis
rather than to present the financial position and results of operations of the
individual companies, and is not a required part of the basic consolidated
financial statements. This additional information is the responsibility of the
Company's management. Such information has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects when
consolidated in relation to the basic consolidated financial statements taken
as a whole.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
a material effect on the results of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2003.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA's, P.C.
January 23, 2004
F-131
[Letterhead of Brightman Almagor, a Member Firm of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF
TADIRAN SPECTRALINK LTD.
We have audited the accompanying balance sheets of Tadiran Spectralink Ltd.
("the Company") as of December 31, 2003 and 2002 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2003 and 2002, and the results of its operations, changes in its
shareholders' equity and its cash flows for the three years, in the period
ended December 31, 2003, in conformity with generally accepted accounting
principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 17 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S.
dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 15, 2004
F-132
[Letterhead of Brightman Almagor, a Member Firm of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF TADIRAN ELECTRONIC SYSTEMS LTD.
We have audited the accompanying balance sheets of Tadiran Electronic Systems
Ltd ("the Company") as of December 31, 2003 and 2002 and the related
statements of operations, changes in shareholders' equity (deficiency) and
cash flows for each of the three years, in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with 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 management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2003 and 2002, and the results of its operations, changes in its
shareholders' equity (deficiency) and its cash flows for each of the three
years, in the period ended December 31, 2003, in conformity with generally
accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 16 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S.
dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 15, 2004
F-133
[Letterhead of Kost Forer Gabbay & Kasierer]
AUDITORS' REPORT
To the shareholders of
LUXEMBURG PHARMACEUTICAL LTD.
We have audited the accompanying consolidated balance sheet of
Luxemburg Pharmaceutical Ltd. ("the Company") and its subsidiaries as at
December 31, 2003, and the related statement of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 2003 (not
presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States) and with auditing
standards generally accepted in Israel. 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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2003, and the consolidated results of their operations and its
cash flows for the year ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
those followed in the United States, as described in Note 23 to the
consolidated financial statements.
As explained in Note 2, the aforementioned financial statements are
stated in dollar adjusted for the changes at the rate of exchange of the
dollar, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
/s/ Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY and KASIERER
March 2, 2004 A Member of Ernst & Young Global
F-134
[Letterhead of Kost Forer Gabbay & Kasierer]
AUDITORS' REPORT
To the shareholders of
LYCORED NATURAL PRODUCTS INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of
Lycored natural products industries Ltd. ("the Company") and its subsidiaries
as of December 31, 2003 and 2002, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2003 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of a certain subsidiary,
whose assets included in consolidation constitute approximately 16% of total
consolidated assets as of December 31, 2003, and whose revenues included in
consolidation constitute approximately 35% of total consolidated revenues for
the year then ended. Those financial statements, presented in accordance with
accounting principles generally accepted in the United Kingdom, were audited
by other auditors whose reports as of and for the year ended December 31,
2003, have been furnished to us, and our opinion, insofar as it relates to the
amounts utilized by Company's management (before reconciliation to accounting
principles generally accepted in Israel) of and for the year ended December
31, 2003, 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) and in Israel. 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 (including the Company's reconciliation of the
financial statements of the aforementioned certain subsidiary to accounting
principles generally accepted in Israel) and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
those followed in the United States, as described in Note 21 to the
consolidated financial statements.
/s/ Kost, Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY and KASIERER
February 24, 2004 A Member of Ernst & Young Global
F-135
[Letterhead of Blick Rothenberg]
Independent Auditors' Report
To the Shareholders of Balton CP Limited
We have audited the accompanying consolidated balance sheets of Bolton CP
Limited ("the group") at December 1, 2003 and 2001, and the related
consolidated statements of income, retained earnings and cash flows for each
of the years in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the company's
Board of Directors and management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, based upon our audit, the aforementioned consolidated
financial statements present fairly in all material respects, the financial
position of the group as at December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Blick Rothenberg
Blick Rothenberg
Chartered Accountants and Registered Auditors
London, England
28 May 2004
F-136
[Letterhead of Goodman Jones]
AUDITORS' REPORT
To the shareholders of
Nutriblend LTD.
We have audited the accompanying balance sheet of Nutriblend Ltd.
("the Company") as of December 31, 2003, and the related statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 2003 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States) and in United
Kingdom. 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit the financial statements referred
to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2003, and the results of its operations and
cash flows for the year ended December 31, 2003, in conformity with accounting
principles generally accepted in United Kingdom, which differ in certain
respects from those followed in the Untied States, as described in Note 24 to
the financial statements.
/s/ Goodman Jones
London Goodman Jones
February 24, 2004 Chartered Accountants Registered Auditor
F-137
[Letterhead of Kost Forer Gabbay & Kasierer]
REPORT OF INDEPENDENT AUDITORS
To the venturers of the
Joint Venture - Sheraton City Tower
We have audited the balance sheet of the Joint Venture- Sheraton City
Tower ("the Joint Venture") as of December 31, 2003 ,and the related statements
of operations, changes in venturers' deficiency and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of the Joint Venture as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting principles
in Israel.
/s/ Kost Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 15, 2004 A Member of Ernst & Young Global
F-138
[Letterhead of Luboshitz Kasierer]
REPORT OF INDEPENDENT AUDITORS
To the venturers of the
Joint Venture - Sheraton City Tower
We have audited the balance sheet of the Joint Venture- Sheraton City
Tower ("the Joint Venture") as of December 31, 2002 ,and the related statements
of operations, changes in venturers' deficiency and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of the Joint Venture as
of December 31, 2002, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting principles
in Israel.
/s/ Luboshitz Kasierer
Tel-Aviv, Israel LUBOSHITZ KASIERER
February 6, 2003 A Member of Ernst & Young Global
F-139
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 Rosh
Ha'ayin, State of Israel, on the 13th day of July, 2004.
KOOR INDUSTRIES LTD.
By: /s/ Jonathan B. Kolber
______________________________
Chief Executive Officer