cchhaapptteerr aa tthhhee o cccoorrrpppo …...including the acquisition of cpp companies, as well...

CCCHHHAAAPPPTTTEEERRR AAA

TTTHHHEEE CCCOOORRRPPPOOORRRAAATTTIIIOOONNN'''SSS OOOPPPEEERRRAAATTTIIIOOONNNSSS

Makhteshim-Agan Industries hereby submits its 2009 Annual Report. The Report includes four

complementary chapters and should be viewed as a single text (hereafter, the Report).

In the Report, the following terms will carry the meanings below:

MA Industries - Makhteshim-Agan Industries, Ltd.

The Company or the Group

or Makhteshim-Agan Group

- Makhteshim-Agan Industries, Ltd., including all its

consolidated subsidiaries, unless explicitly stated otherwise

Koor Industries - Koor Industries, Ltd.

Makhteshim - Makhteshim Chemical Works, Ltd.

Agan - Agan Chemical Manufacturers, Ltd.

Stock Exchange - Tel Aviv Stock Exchange (TASE)

Unless explicitly stated otherwise, all figures in the present report are denominated in $US.

Converting financial figures in various currencies to US dollars: Financial figures related to transactions

or other events on a particular and designated date reported herein have been converted to US dollars based

on the exchange rate current on that date.

Exchange rates: The exchange rates referred to in this chapter are annual.

Standardized financial figures: As of January 2008, the Company's financial reports are formulated

according to the International Financial Reporting Standards (IFRS).

Unless explicitly stated otherwise, the Company and its figures are herein described on a consolidated

basis. The Company's own data report is attached to the Board of Directors' Report of December 31,

2009.

Page A-2� out of 134�

2�

Part I: General Development of the Company's Operations


3�

1. THE COMPANY'S ACTIVITY AND GENERAL OPERATIONAL DEVELOPMENT

1.1 General

MA Industries and its subsidiaries (which, as aforementioned, will be jointly referred to as the

Company) specialize in chemical industries, and at the time of this Report have focused mainly on

agrochemistry. Within this framework, the Company's chief operations are developing, manufacturing and

marketing crop protection products (see Section 6 below). It also operates to a non-substantial extent (at the

time of this Report) in other business areas, based on its core agrochemical capabilities (see Subsection 1.2

below).

At the time of this Report, the Company's crop protection products are mainly generic, i.e., products similar

to patent-protected products in terms of their active ingredients (after the patents have expired), and its

products are usually not protected by patents but require registration. A significant part of the Company's

products in its additional activity areas are original products developed by the Company; as part of its

ongoing operations, the Company continually examines further options for developing or marketing original

products.

At the time of this Report and to the best of its knowledge, the Company ranks seventh in the world (in terms

of sales) among all crop protection companies (both original/research-based and generic) and is the largest

generic company in the world. At the time of this Report, the Company sells its products in over 100

countries, through some 50 subsidiaries worldwide, all as detailed below (see Section 31 for details about

Company objectives and strategy).

MA Industries was incorporated in Israel as a public company in December 1997, as part of a settlement for

changing the holdings structure in the Makhteshim-Agan Group (hereafter, the Settlement). According to this

Settlement, MA Industries was to fully own both Makhteshim and Agan – two crop protection companies

whose stocks had been traded in the Stock Exchange up to that time, founded in 1952 and 1945, respectively.

Up to the implementation of the Settlement, MA Industries was not an active company, apart for activities

related to the Settlement. As reported in a prospectus published by MA Industries, the Settlement was

concluded on April 2, 1998, and its stocks have been traded in the Stock Exchange as of May 15 of that year.

With the conclusion of this Settlement, Makhteshim and Agan's stocks were no longer traded in the Stock

Exchange.

The largest stock owner in MA Industries (in terms of number of shares) is Koor Industries of the IDB

Group. At the time of this Report, and after having completed a special acquisition offer on October 2009,

Koor Industries, together with other companies of the IDB Group, holds 48.38% of MA Industries' issued

and outstanding capital stock and 41.88% of its voting rights (i.e., not including dormant shares and shares

owned by company subsidiaries) (see Subsection 2.2 for further details on Koor Industries' acquisition offer

and its consequences). The rest of MA Industries' shares are held by the public and several stakeholders.

1.2 The Company's Activity Area


4�

Crop protection products (Agro). As mentioned above, the Company's main activity area includes the

development, manufacturing and marketing of generic crop protection products (hereafter, CPP area).

The company's main products in this activity area are: (1) herbicides, (2) fungicides, and (3) pesticides.

All are designed to protect agricultural and other crops, at various stages of their development, during

their growing season. As mentioned above, the Company is active in the generic product area. Generic

products have similar ingredients to products developed by third parties, whose intellectual property

rights protections have expired. In 2009, this area represented some 92.2% of Company sales. (See

Section 6 below for further description of this activity area; see also Section 31 below for more details

about the Company's business strategy, and particularly its plans and intentions to expand its operations

in its activity area and related areas).

Further activities. As part of the Company's core chemical industry capabilities, it is also active in

several other, non-CPP areas, which represented 7.8% of its sales in 2009. These include mainly the

manufacturing and marketing of nutritional additives and food-enriching ingredients, aromatic

products mainly for the detergent industry, industrial chemical production and other, non-substantial

activities. At this time, none of these activities, in and of itself, is material to the Company. (See

Section 18 below for a more detailed description of these company activities).


5�

1.3 Activity Structure1

1 This diagram does not present all the Company's subsidiaries, but only those material to its operations. See

Note 35 to the Company's financial reports for a complete list of the Company's subsidiaries and affiliates. See Section

31 below for details about the Company's strategy and its implications on its organizational structure as illustrated

above, including its main sales regions.


6�

100% 100% 100%

1.4 Structural Changes in the Group's Development: Material M&A's

MA INDUSTRIES

Further activities

Crop Protection

Products (CPP) Area

Additional activities

carried out, whether

directly or indirectly,

through the Agan and

Makhteshim

subsidiaries

Lycord Makhteshim Agan

Israeli and

global

subsidiaries

Israeli

subsidiaries

Israeli

subsidiaries

100%

Milenia

Agrociencias

Group S.A

Makhteshim

Agan of North

America Inc .

Marketing &

distribution

companies in

key European

countries

Australian

marketing &

distribution

company

Other global

marketing &

distribution

companies


7�

Agan and Makhteshim were founded separately by different groups of chemists in 1945 and 1952,

respectively. Until the 1970's their main activity was focused on establishing technical expertise in chemical

synthesis in order to create a broad portfolio of generic crop protection products. In those years, Makhteshim

and Agan were mainly active in developing and producing the same types of crop protection products. In the

1960's, Makhteshim was acquired by Koor Industries.

During the 1970's Makhteshim invested in Agan in return for 50% of its stocks. Following this investment,

the two began to collaborate, mainly in creating a joint international marketing network.

In the 1980's the two companies started investing in developing a comparative advantage and expertise in the

area of registering their products in various countries throughout the world. Following this, and after

additional generic companies also began registering their products in various countries, the two focused, over

the 1990's, on creating a network of multinational companies and partnerships in the countries in which they

had been active to ensure global deployment and presence so as to strengthen their position in those

countries. This included the acquisition of two large Brazilian companies in the CPP manufacturing and

marketing area. As part of the 1998 settlement, as reported in Subsection 1.1 above, the two companies have

become fully owned by MA Industries.

From then onward, the Company continued growing, both organically and through the acquisition of

companies active in its area and obtaining registration and distribution rights to existing and additional CPP

area products, all as detailed in the table below. As part of this trend, the company acted as follows. From

2000 to 2009, the Company expanded its operations in Western and Eastern Europe, the US and Australia,

including the acquisition of CPP companies, as well as obtaining registrations and distribution rights for a

large amount of products by agrochemical giants Bayer CropScience, Aventis and Syngenta. In addition, in

2007 it sold its holdings in Prizma Industries, Ltd. – a Polyester importer – as well as in RiceCo LLC which

developed and marketed CPP's for rice crops mainly in the US, for a total of some $18m. In 2009, a fully-

owned Company subsidiary completed the acquisition of 90% of Polish agrochemical company Rokita Agro

of the German PCC group, as well as the operations of the Serb agrochemical distributor Magan-Yu by

acquiring the entire capital stock of Serbian distributor Magan Agrochemicals d.o.o. Subotica. For further

details on these acquisitions, see the Company's immediate reports on December 11, 2008, RN 2008-01-

350880 and RN 2008-01-351261.

Moreover, in 2009 the Company also acquired the American CPP formulation company Bold Formulators

LLC (see Section 1.5 for further details about these acquisitions). Furthermore, in 2008-2009, the Company

began operating directly in the Indian market – a key emerging market in Asia – and created a local

marketing company for that purpose. It also started operating similarly in Canada.


8�

Finally, in September 2009 the Company signed a strategic collaboration agreement with Cibus Global

Limited (Cibus) for starting a joint venture for developing enhanced traits in five key crops (based, according

to the directive at the time of this Report, on natural enhancement rather on genetic seed engineering (non-

GMO)), with emphasis on the European market. The Company was granted several options that will enter

into affect gradually over a period of several years starting in 2014, for converting said investment into Cibus

shares and build up to holding 50.1% of Cibus (see Subsection 28.1 below for further details). At the time of

this Report, as part of the abovementioned strategic focus and objectives (as detailed in Section 31 below),

the Company continues to look into collaborations or acquisitions of firms, operations and various products

in its core operational area.

In 2007-2008, the Company restructured according to a plan adopted by its board on March 12, 2007 (see

immediate report on March 13, RN 2007-01-334826). The main objective of this restructuring plan was to

synergize Agan and Makhteshim's operational procedures.

In addition, after the balance date, on January 25, 2010, the Company has announced its management

decisions regarding changes in the roles and authorities of several Company executives, some of whom are

to be appointed, instead of their Company HQ positions, as managers of the Company's main global sales

areas, as detailed in the immediate report of that date (RN 2010-01-464086) (see Section 31 below for

further details on the Company's objectives and business strategy).


9�

1.5 Significant Acquisitions by the Company: 2005-2009

Date Country Acquired

Company

Acquired Company's

Operations % of Stock

Payment in

Cash*

Payment

in Stock* Strategic Objective

Oct.

2005 US

Control

Solutions Inc.

(CSI)

Marketing pesticides

for the American non-

crop sector

Exercising an option for

acquiring an additional 15% up

to a total of 60%

Immaterial

Jun-

06 US CSI " 7.1% more Immaterial

Increasing the Company's holdings to 67.1%.

Both the Company and the remaining

shareholders have the option to cause the

Company to acquire the remaining CSI stock

Jan.

2005 Holland Mabeno

Exclusive CPP

distributor in Benelux

and Scandinavia

49% Immaterial Expanding the Company's presence in Benelux

and Scandinavia

Jan.

2008 Holland Mabeno "

6% (following 49% in January

2005) Immaterial

Expanding the Company's presence in Benelux

and Scandinavia. At the time of this writing, the

Company's holdings in Mabeno total 55%

May-

05 Hungary

Biomark

Tradinghouse

Ltd. CPP company 70% Immaterial Deepening marketing in the Hungarian market

(Biomark)

Jan.

2007 Hungary Biomark " 30% Immaterial

Mar-

06 US Alligare LLC

Development,

marketing and sales of

herbicides for the non-

crop market

30% Immaterial Deepening marketing of herbicides used for

highway vegetation management in the US


10�

Jan.

2007 US Alligare LLC " 19% Immaterial

The company has the option to acquire a

controlling share as of 2008. As of 2010, both

the Company and the remaining shareholders

have the option to cause the Company to

acquire the remaining Alligare stock.

Feb.

2008 US Alligare LLC "

21% (Exercising an option for a

controlling share following 49%

during 2006, and 2007 &

onwards)

Immaterial Deepening marketing of herbicides used for

highway vegetation management in the US.

Feb.

2010 US Alligare LLC " 10% Immaterial

At the time of this Report, Company holdings

in Alligare total 80%

June Italy

Kollant Group

(Kollant) Italian non-crop leader 60% 12.5 Penetrating the European non-crop sector

2006

Oct.

2008 Italy Kollant " Completing 100% 15

Nov.

2006

Czech

Rep.

Agrovita SPOL

S.R.O Czech distributor 75% Immaterial

Another important step in realizing the

Company's Eastern European growth strategy

May-

09

Czech

Rep.

Agrovita SPOL

S.R.O " Completing 100% Immaterial "

Jan.

2007 Ecuador

Agroproteccion

S.A. +

Agromedio &

Cia Ltd.

CPP marketing &

distribution

100% (acquired by Proficol – a

subsidiary in which the

Company holds 57.5%)

Deepening marketing in Ecuador 6.1

Nov-

05 US

Buckton Scott

Nutrition

Group

Acquiring operations

in the raw materials

for nutritional

additives area

Acquiring all relevant assets &

operations Immaterial

May-

06 US

H. Reisman

Corporation

Acquiring

Pharmachem's vitamin

and mineral

production and

marketing operations

in the nutritional

additives area

Acquiring all said assets and

activities 15.7


11�

Sep-

08 Serbia Magan Yu

Agro-chemical

products distributor Acquiring operations

About 7.5. Most of this

sum hasn't yet

been paid and

will be paid in

installments

until 2013

Expanding marketing channels in Serbia

Dec-

08 Poland

Rotika Spolka

Agro Akcyjna

An agrochemical

company, member of

the Polish PCC Group

Some 90%. An additional 4%

were acquired after the

transaction had been concluded.

15

Adding an important herbicide (2,4-D) to the

Group's product offerings, as well as expanding

the Group's operations in Poland and Central

Europe

Sep-

09 US

Bold

Formulators

LLC

CPP formulation 100% (exercising the option to

buy the entire stock capital) Immaterial

Expanding the manufacturing and formulation

capacities in the US

* In millions of dollars. "Immaterial" payment is less than $5m in cash or its stock equivalent.


12�

2. OWN CAPITAL INVESTMENTS AND EQUITY TRANSACTIONS

2.1 To the best of the Company's knowledge, during 2008-2009, no transactions in Company stock have

been completed by non-stock exchange stakeholders.

Moreover, over 2008 and 2009 and up to the time of this writing, company employees exercised company

stock warrants at a total rate of 0.21 of the Company's issued and outstanding capital stock, of which 0.02%

of the Company's issued and outstanding capital stock were issued and converted during 2009 alone.

2.2 On August 17, 2009, Koor Industries offered to acquire, by way of special acquisition offer, up to

22,000,000 standard 1-NIS denominated value shares which represented, at the time of announcing the

special acquisition offer, 5.06% of the Company's issued and outstanding stock and 5.11% of its voting

rights, for 16.20 NIS a share; on October 12, 2009, the offer was raised to 18 NIS per share. This special

acquisition offer was fully accepted on October 22, 2009. At the time of this Report, after completing the

special acquisition offer, Koor Industries holds, together with other members of the IDB Group, 48.38% of

MA Industries' issued and outstanding capital stock (i.e. without dormant shares and shares owned by

Company subsidiaries) and 48.88% of its voting rights. (For further details about the special acquisition offer

and the Company's board opinion thereof, see immediate reports on August 17 and September 3, 2009 – RN

2009-01-200103 & 2009-01-223131, respectively).2

2.3 Own Stock Acquisition

At the time of this Report, the Company holds 39,882,486 shares, or 8.4% of the Company's issued

capital stock, bought by the Company pursuant to its own stock acquisition plans undertaken in 2005 and

2008, as detailed below. Moreover, a company subsidiary holds 4,415,569 shares, or 1.02% of the

Company's issued and outstanding capital stock, bought prior to the adoption of these plans.

These shares were bought pursuant to the Company's board's own stock acquisition plans, both in 2005, to an

extent of no more than a total of USD150m – a plan fully completed over 2006 at an aggregate cost of

USD134m; and on March 11, 2008, to an extent of no more than a total of USD100m. These own stock

acquisition plans call for their completion either by the Company itself or through a controlled subsidiary

according to market conditions and circumstances at that time. Pursuant to the plan adopted by the board in

2008 and according to parameters determined by a board-appointed committee, the Company completed

acquisitions according to the plan at an aggregate cost of some USD100m. For further details, see the

Company's immediate reports on November 14, 2005 (RN 2005-01-087121) and on March 12, 2008 (RN

2008-01-069663).

2 See also Koor Industries' immediate reports on August 17, September 8 & 30, October 12, 22 & 26, 2009; RN

2009-01-200040, 2009-01-226506, 2009-01-243468, 2009-01252843, 2009-01-262920 & 2009-01-65662, respectively.


13�

2.4 Rights Issue

On Match 9, 2010, after the balance date, the Company's board decided to issue stocks by way of

rights to the Company's shareholders, pursuant to the Company's shelf prospectus of May 27, 2008, to the

extent of USD100-150m. The rights issue is subject to obtaining the legally required approvals (including the

general meeting's approval for excluding foreign shareholders as detailed below) and to the board's final

resolution concerning the issue and its terms. Moreover, the Company's board decided to summon an

extraordinary general meeting to discuss approval for excluding Company securities holders who had they

been included, the offering would have required a prospectus in a foreign country, subject to the provisions

of the Israeli Securities Regulations (Offering Securities to the Public), 5767-2007.

In the board's opinion, raising capital by way of rights issue is required in order to expand and strengthen the

Company's capital base, and in order to insure that the Company meets its financial stipulations (see

Subsection 23.4 below for further details about the Company's financial stipulations).

3. DIVIDENDS

In March 2007, following changes in the Company's governance and board composition, it was

decided that the board will occasionally consider, at its exclusive discretion, the possibility of allocating

dividends and determine their extent, according to the Company's requirements as they may be from time to

time, its cash flow and anticipated investment plan, all subject to the existence of allocatable profits and

applicable legal provision. (For further details, see the Company's immediate report of March 13, 2007, RN

2007-01-334826).

On March 11, 2008, it was decided to distribute a total of $120m as dividends to the Company's shareholders

based on the fact that according to its financial reports for the period ending on December 31, 2007, the

Company met the profit test as provided for in Paragraph 302 of the Companies Law and that, after

discussing the matter, to the best of the board members' knowledge, in view of company requirements and

expected cash flow, there was no reasonable fear that distributing those dividends would prevent the

Company from meeting its current and expected liabilities, as they mature. For further details, see the

Company's immediate reports of March 12, 2008 (RN 2008-01-069675 & 2008-01-070485).

Cash dividends announced and distributed in 2008-2009

Year Total

2008 170,000,000

2009 70,000,000


14�

For further details about dividends distributed by the Company in 2008-2009 and the board's respective

decisions, see immediate reports of March 12, November 5, December 1 and December 4, 2008, August 12

and September 29, 2009 (RN 2008-01-070485, 2008-01-305238, 2008-01-340695, 2008-01-344160, 2009-

01-195360 & 2009-01-243120, respectively). For details about one-time profit withdrawal of profits from the

Group's members abroad subject to Amendment 169 to Income Tax Ordinance (New Version), 5721-1961,

see Section 24 below).

The balance of the allocatable profits according to the Company's financial reports of December 31, 2009,

totals USD732,401,000 (See Section 24 below for details about taxation aspects applicable to the allocation

of part of these profits).

Following the trading registration of Company bonds (Series B, C & D) in May of 2008, the Company's

obligation not to distribute dividends if its financial debt, according to its own financial reports, exceeds

200% of its own capital, has expired. For further details, see Subsections 23.3 and 23.4 below.

According to the Amendment to the Securitization Agreement of January 2010 (as specified below in

Subsection 23.4), so long as the ratio of the Company's interest-bearing financial obligations to EBITDA

exceeds 3.3, the Company will not distribute to its shareholders, and will cause its subsidiaries and affiliates

not to distribute to its shareholders any dividend or other allocation, and will also pay no management fees,

apart for those related to its normal business practices and under market conditions.


15�

Part II: Further Information

4. FINANCIAL DATA

As detailed above, at the time of this Report, the Company is active in one core area. For financial

information about the Company's operations see its consolidated financial reports of December 31, 2009,

attached herein. The following table reports the Company's segmented consolidated incomes from its core

activity area and additional operations (in a format identical to the segmentation in its financial reports and

without adjustments to the consolidated report)3 over the three years prior to the abovementioned report.

2009 (in thousands USD)

Activity

Area Incomes Costs4

Regular

Operational

Profit

Attributed to

Parent Company

owners

Regular

Operational Profit

Attributed to non-

voting rights

Regular

Operational

Profit Share

Total

Assets

Total

Liabilities

CPP 2,042,170 1,944,859 95,427 1,884 4.8% 2,605,245 543,556

Other

Activities 172,446 150,027 22,280 139 13% 215,692 20,508

Total 2,214,616 2,094,886 117,707 2,023 5.4% 564,064

2008 (in thousands USD)

Activity

Area Incomes Costs

Regular

Operational

Profit

Attributed to

Parent Company

owners

Regular

Operational Profit

Attributed to non-

voting rights

Regular

Operational

Profit Share

Total

Assets

Total

Liabilities

CPP 2,334,517 1,996,496 336,208 1,813 14.5% 2,632,469 507,218

Other

Activities 200,987 171,758 29,124 105 14.5% 222,806 33,944

Total 2,535,504 2,168,254 365,332 1,918 14.5% 541,162

2007* (in thousands USD)

Activity

Area Incomes Costs

Regular

Operational

Profit

Attributed to

Parent Company

owners

Regular

Operational Profit

Attributed to non-

voting rights

Regular

Operational

Profit Share

Total

Assets

Total

Liabilities

CPP 1,879,435 1,631,678 240,559 7,198 13.2% 2,088,111 464,223 Other

Activities 186,090 165,817 20,148 125 10.9% 210,102 28,481

Total 2,065,525 1,797,495 260,707 7,323 13.0% 492,704

* 2007 data have been reformulated and adjusted as comparative figures based on IFRS.

3 At the time of this Report, income and profit from inter-subsidiary sales within the Group are negligible, both

in absolute and relative terms. 4 At the time of this Report, the Company management believes that segmenting the core activity area's costs

into fixed and variable costs (as required by the Securities Regulations (Prospectus Details and Prospectus Draft –

Structure and Format), 5739-1969, as revised in January 2010) is irrelevant to the Company's operations; therefore, the

management does not analyze these data and they are unavailable.


16�

For further explanation of developments in the figures quoted in our financial reports, see the Company's

Board Report attached herein. In addition, on July 2, 2009, the Company published a presentation about its

operations and results (RN 2009-01-160209), which is referred to herein.


17�

5. ECONOMIC ENVIRONMENT AND EXTERNAL FACTORS AFFECTING COMPANY OPERATIONS

The following is a description of trends, events and key developments in the Company's macro-

economic environment that have or may be expected to have, to the best of the Company's knowledge and

estimate, material impact on its business results or developments. The factors listed below affect the

Company and its various products differentially in various geographic areas. Since the Company's product

range is comparatively broad and it is active throughout the world, the aggregate effect of changes in the

conditions detailed below, at any given year, is far from uniform and may sometimes even be mitigated by

the effects of other factors in a particular area or time of year.

The company's estimates presented in this section and in the rest of this report are based, among other things,

on data published by (1) Phillips McDougall (http://www.phillipsmcdougall.com) – an independent

consultation and research firm specializing in agriculture, crop protection and biotechnology; (2) Cropnosis –

crop protection and biotechnology market research and consultation firm (http://www.cropnosis.com); and

(3) the US Department of Agriculture (USDA) website (http://www.usda.gov/wps/portal/usdahome).

Note, however, that the figures below have not been independently assessed by the Company.

5.1 Global Factors

Demographic changes, economic growth and rising standards of living. Global economic growth, the

population explosion, urbanization and rising standards of living in various regions, particularly in

emerging economies, have led to an increase in food consumption, particularly animal-derived food

consumption. Accordingly, there has been a clear trend of rising demand for agricultural crops to meet

this rising consumption, particularly for crops containing vegetable proteins used by the food industry

(cereals, mainly corn and soybean). This demand fuelled the growth of the agricultural sector, with

expanding planting areas (whose global maximal area is limited), reduction of the arable land areas

(among other things due to the demand for such areas to build new cities), and at the same time led to

increased steps to maximize crops production per unit land area and enhance crop quality. On top of

that, rising standards of living in emerging markets are expected to increase demand for beef products

(and consequently for grain fodder).

Agricultural commodity prices. In 2009, agricultural commodity prices remained high in a multi-

annual comparison, despite the effect of the global economic crisis and their significant decrease as of

the last third of 2008. Affected by rising world population and living standards, together with resulting

changes in consumption habits, particularly in emerging markets such as China and India, the demand

for food in general and animal food in particular increased. At the same time, we note relative stability

in the size of global planting areas, which requires steps to increase the production of available lands.

Consequently, and to meet the increased demand for agricultural commodities, we observe a multi-

annual trend of increased demand for Company CPP's. Moreover, the higher the commodity prices, the

greater their value to the farmers, making it more worthwhile for them to increase crop protection. The

Company estimates that in the long run, these factors will increase demand for Company CPP's.

http://www.phillipsmcdougall.com/

http://www.cropnosis.com/

http://www.usda.gov/wps/portal/usdahome


18�

Significant fluctuations in global oil prices. Starting from the third quarter of 2008, the prices of oil

and oil derivatives dropped sharply. This brought about a reduction in operating costs and raw material

prices, but its effect on Company results was limited due to large raw material inventories bought at a

comparatively higher price and due to the reduction in Company sales. During 2009, oil prices rose

compared to 2008, but the annual average barrel price in 2009 was significantly lower than in 2008,

and remained stable recently. The Company estimates that after consuming its existing inventories,

falling oil prices – relative to their 2008 average – will enable it to gradually save costs and

counterbalance some of the reduction in its gross profits registered in 2009. By December 31, 2009, the

Company has sold most of its expensive inventory.

The price of oil has two main accumulative effects in the world market for the Company's core

products: (1) About 75% of the sales costs of these products are due to the purchase of raw materials –

chemicals usually produced as third- or fourth-order oil derivatives. This means that although extreme

changes in global oil prices do lead to concomitant changes in the price of these chemicals (affecting

the Company's sales costs), the effect is indirect and partial due to the distant derivation. Moreover, it

is evident in the Company's result usually after a delay of several months. (2) In addition, oil is used

by the companies in our core area of operations as an energy source for operating production facilities

and overland and oversea transportation of their products. Global oil price fluctuations thus affect

energy costs directly, fully and immediately. Nevertheless, the level of these costs is relatively lower

than those resulting from first main effect.

Development of the geneticallymodified seeds market. Over the past decade, genetically modified

organisms (GMO) technology developed through crop seed enhancement, leading to increased

demands in the agrochemical market. This stimulated the development of advanced agriculture

wherein farmers make informed use of various inputs, leading to increased usage of CPP's in order to

maximize per unit output. After an adjustment period with rising sales of modified seed, we've

evidenced a consistent rise in demand for CPP's, including genetically modified seed protection

products. This factor has thus affected demand for company products and may be expected to do so in

the future, particularly if the Company does not manage to adjust its product range to the various types

of demand. The company is currently in the process of readjusting its product range, including the

marketing of herbicides adapted to GMO crops. Pursuant to this, the company invested in 2009 in a

joint venture to develop enhanced traits in agricultural crops through specific modifications of the cell's

genetic sequence, without affecting the rest of its genomic structure, without injecting foreign genetic

material to the genome and without leaving traces of foreign genetic material in the plant. (See

Subsections 6.4 and 28.1 below for further details).


19�

Patent expiry and growing generic product sales. The company estimates that over recent years, the

market shares of patent-protected source products in the CPP area has been consistently shrinking due

to patent expiry and the reduced amount of new source products. This means growth potential for

companies active in developing new generic products replacing source products whose patents have

expired. Nevertheless, this potential is expected to lead to increased competition over market shares,

including on the part of ethical companies, which may even erode product prices. (See Subsection 7.3

below for further details).

The global financial crisis which reached its climax in the last third of 2008 and the first half of 2009

(hereafter, Global Crisis), mitigated the trend of improved standards of living, as detailed above. The

Global Crisis affected some of the macroeconomic factors in the Company's business environment and

activity area as detailed herein. It affected companies active in the CPP area, including the Company.

Among other things, it led to a significant drop in Company sales (both in terms of volume and in

terms of value), to a drop in agricultural commodity prices (although these remained high in multi-

annual terms), as well as to credit constraints on the part of farmers (mainly in developing areas such

as South America, Asia, Eastern Europe and Africa) which led to reduced demand for CPP's and to

transition to buying nearer to consumption time and to extended customer credit periods. In addition,

the Global Crisis led to revaluation of the dollar relative to the other currencies used by the Company

over the report period, which has reduced the dollar value of company sales in its dollar-denominated

financial reports. Conversely, as described above, the drop in oil prices following the crisis may reduce

the Company's sales costs over the medium and long term. See above for further details on the effect of

oil price fluctuations on company results.

The Global Crisis also impacted financial markets leading to increased capital costs due to reduced

availability of funding sources. Nevertheless, in Q1 2009 the Company managed to raise a total of

1,201,176,000 NIS (before tax) thanks to the expansion of its public bond series C & D according to a

self offering report, as detailed in Subsection 23.3 below. See attached Board Report for details on the

effect of the Global Crisis on the Company's results over the Report period.

The company estimates that the effects of the Global Crisis on Company results will gradually wane

during 2010. Nevertheless, should the pace of recovery slow down or be characterized by volatility,

the continued trend of financial market instability (particularly in emerging markets where a

significant part of the Company's operations are concentrated), might significantly affect company

operations, leading, among other things, to weakening the trend of multi-annual Company growth as

well as to destabilizing the other factors affecting Company results.


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5.2 Localized Factors

The agricultural market and difficult weather conditions. The global market at which the Company's

crop protection products are directed is mainly the agricultural market. Weather conditions during the

growing season in each country where the Company is active impact directly on the demand for its

products. The company estimates that extreme weather conditions, as well as natural disasters (floods,

drought, frost) affect the demand in the CPP area, either positively or negatively, as the case may be,

and thus its financial results.

Regulatory changes:

o Environmental protection. The company's core activity area is subject to strict and rigorous

regulatory requirements in the environmental protection area, applicable both to the Company's

production processes and to its production environments. Moreover, these vary with the policies

of each country where it operates. In addition, use of company products is subject to registration

by health, environmental protection and agriculture agencies in the various countries. Recent

years have seen a consistent trend of growing strictness and rigor in these regulatory

environmental requirements in various countries, including Israel, which led to increased

company investments and ongoing costs in this area. The company makes material investments in

product development and registration as well as in upgrading its production facilities, among other

things, in order to meet such regulatory requirements. (See Section 25 below for more details).

o Registration. The company's core activity area is subject to product registration requirements,

based on the policy in each of the countries it is active in. Moreover, the Company is required,

from time to time, to renew its registrations by conducting new tests and studies as well as in

order to meet new requirements. Any intensification or alleviation of registration requirements

respectively increases or decreases costs for companies interesting in registering their products.

Moreover, intensified registration requirements make it difficult for new players to penetrate

markets thus strengthening the position of licensed operators already established in these markets,

and vice versa. The company thus estimates that in countries where it already enjoys a

competitive edge, intensifying registration requirements could only increase this edge, since it

would make it difficult for its competitors to penetrate that market, while in countries where it has

a relatively small market share, if any, such a move could make it more difficult for it to penetrate

the market in question. Finally, changes in registration requirements or changes in customer

preferences in Western countries limiting the use of raw materials bought by the Company in

emerging economies will require redeployment of the Company's procurement organization,

which might reduce its profitability for a certain period of time.


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Government policies. Governments often use subsidies and/or other types of assistance as incentives to

increase and/or reduce the extent of land intensification. The nature of government policies and

resulting extent of arable lands in a given country affect the demand for and prices of company

products. Up to the time of this report, however, no government policy had any significant effect,

whether positive or negative, on company results.

Since the Company operates globally, its export and import activities are subject, among other things,

to a variety of national requirements and standards related to registration. Moreover, customs and port

clearance is invariably depended on registration. Extreme intensification of such requirements and

standards might make it difficult for the Company to import raw materials and export its products, and

even compromise its profitability.

World ports. Imports and exports of products and raw materials by multinationals in the Company's

activity area depend mainly on worldwide port services. Strikes and stoppages, heavy traffic, bad

weather conditions or substandard infrastructure in world ports might delay the supply of company

products and make the raw materials it requires unavailable, compromising the Company's ability to

meet deadlines and its obligations to its customers in general and consequently its reliability and

reputation. Importantly, the recent slowdown in world trade following the Global Crisis reduces the

potential impact of the aforementioned factors. Be that as it may, in order to minimize such risks, the

Company occasionally readjusts its inventory volumes, and sometimes makes use of air transport.

5.3 Monetary Policy and the Financial Market

Foreign exchange volatility. The company denominates its consolidated financial reports in USD (its

functional currency), while its operations, sales and raw material purchases are made in a variety of

currencies (mainly USD, Euro, NIS and Brazilian real, as well as pound sterling, Australian dollar,

Polish zloty, South-African rand and others). Therefore, fluctuations in the exchange rates of buying

and selling currencies, whether positive or negative, as the case may be, affect company results, mainly

due to two key factors: (1) the rising dollar exchange rate relative to other currencies used by the

Company reduces the Company's dollar-denominated sales volume; and (2) the high volatility of other

currencies increases the costs of currency hedging transactions, thus increasing the Company's funding

costs.

At the time of this Report, the Company consolidates its currency exposure resulting from such

volatility on an ongoing basis and takes steps to hedge the maximum material net exposure to a certain

currency using derivative financial instruments (foreign exchange futures and/or currency options

and/or other hedges). Nevertheless, since these steps enable the Company to hedge against most of its

balance-sheet exposure but only part of its economic exposure, extreme fluctuations in the exchange

rates of the abovementioned currencies might affect company results and profitability either positively

or negatively, as the case may be.


22�

Consumer price index (CPI) volatility. The company finances its business operations also by CPI-

linked NIS-denominated loans, such as Israeli government bonds. Therefore, increased CPI rates, as

well as changes in the NIS exchange rate, may have material impact on its funding costs. At the time of

this writing, company policy is to hedge most of the said risk using derivative financial instruments,

such as swap, forward and index transactions. The company's board may, however, revise this policy

as circumstances change or subject to its discretion. During 2009, the Israeli CPI rose by 3.9%.

Recommendations of the Committee for Establishing Parameters for Institutional Bodies'

Investments in Nongovernmental Bonds. In May 2009, the Commissioner of the Capital Market,

Insurance and Savings Division in the Ministry of Finance (Commissioner) nominated the said

committee, chaired by Mr. David Hodek (Hodek Committee).

In September 2009, the Hodek Committee published an Interim Report for Public Comments, which

includes recommendations regarding the Commissioner's involvement in completing internal

processes in the institutional body prior to investment in bonds, contractual stipulation such bodies

would have to make sure are included in the bond terms prior to investing in them, and the information

required for such bodies in order to assess and follow up on bond investments. On that same month,

the Commissioner published a draft memorandum about adopting the Committee's recommendations.

In February 2010, the Hodek Committee submitted its final report. Its final recommendations include

several extenuations compared to the interim report, and state that the institutional body's investment

commit may be allowed to disregard some of the recommendations under certain circumstances.

At the time of this Report, we cannot know for certain the exact nature of the Committee's final

recommendations, and which will be adopted, if any. However, the Company estimates that in general,

adopting these recommendations may affect opportunities to raise capital from institutional bodies

using bond offerings.

Note: The Company's business activity and results may be affected by the abovementioned factors, either

positively or negatively, also in the future. The extent of such effects depends, among other things, on

the intensity of said events, their duration and the Company's ability to cope with them. (For further

details on risk factors relevant to the Company's operations see Section 34 below).

The company's assessments regarding the rising standards of living, commodity and raw material

prices, legal developments and the effects of these factors on company results relies on information

from proprietary company data, studies and other publications as detailed below, as well as on the

Company's own estimates at the time of this writing of the effects of market trends on supply and

demand for its products. This information is inherently uncertain as it depends, among other things,

on additional factors beyond the Company's control, including activities by potential competitors,

global and national regulatory processes and economic conditions. Company estimates might thus

prove incorrect should it become apparent that said data were wrong or should other factors, either

unnamed or beyond the Company's control, affected supply and demand as mentioned above.


23�

Part III: Core Operations

6. CROP PROTECTION PRODUCTS (AGROCHEMISTRY)

6.1 Background Information

The company's crop protection product (CPP) area includes research, development, production and

marketing of products which enhance crop quantity and quality by protecting against damages caused by a

variety of herbs, pests and fungi. Accordingly, the Company's product range includes three main product

families: (1) herbicides; (2) pesticides; and (3) fungicides. In addition, the Company markets (mostly directly

and otherwise through external distributors and agents) the products it develops and produces, as well as

other crop protection products it buys from third parties.

CPP's in the global market are divided into (1) patent-protected source products originally developed by

leading companies in the field (research-based companies, as described below); and (2) generic products,

such as the Company's products, which are similar to patent-expired source products (in terms of

composition and modus operandi) and are produced by generic companies.

The company sells CPP's in over 100 countries and at the time of this report, is the global leader in generic

CPP manufacturing and distribution.

CPP's are used mainly by the agricultural sector, but some of it are designed for non-crop uses as protection

against herbs, pests and fungi in roadsides, forests, lawns, parks, institutions, the wood and paint industry,

and private facilities and gardens.

6.2 Legal and Regulatory Restrictions and Special Constraints in the CPP Area

Company operations are subject to legal restriction and constraints related to registration and

environmental protection issues and requirements for registrations and permits from government agencies

such as the Ministry of Health, the Ministry of Agriculture and the Ministry of Environmental Protection or

their counterparts in each country. See Sections 16 and 26 below for more information about these aspects of

the Company's operations and details on the various restrictions.


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6.3 Trends in the CPP Area Activity Volume and Profitability

According to data reported by the Phillips McDougall independent consultancy group,5 the Company

estimates that over 70% of the world CPP market are controlled by six giant multinational research-based

companies, or RBCs, which develop and produce the original (ethical) products and patent the research

rights in most world countries (hereafter, source companies). In addition, since the patents on some of the

source companies' products have expired, they also sell patent-expired products (which represent, at the time

of this Report, a significant share of the products soled by those companies).

The years 1995-2002 saw a significant consolidation process among source companies, reducing the number

of the leading players from 12 to six. According to the Company's estimate, this M&A process is designed to

ensure economies of size on a global scale by streamlining operations and increasing R&D investment.

Importantly, many of the companies listed below, particularly the bigger ones, are active in a variety of

business areas (in many cases, overshadowing their CPP operations). For example, Bayer, Dow and DuPont

have significant operations in the industrial chemicals area. Other companies, such as Monsanto, DuPont and

Syngenta are significantly active in the seed area, as detailed in the following subsection.

As part of the M&A trend in the area and the expansion of its main players into related areas, Nufarm – a

company whose activity area and volume are similar to those of the Company – announced that it had signed

a memorandum of understanding to the effect that the Japanese Sumitomo Chemical Company Ltd. will buy

20% of its shares and collaborate with it in the manufacturing, distribution and product development areas.

The company, which, as already mentioned, mainly produces and markets generic products which compete

with patent-expired products of source companies, ranks seventh worldwide in terms of its sales turnover,

with an annual sales volume of USD2,214m in 2009, making it the largest generic company in its area.6

Nevertheless, it is worthy of note that a significant part of source company sales as detailed below represent

sales of products whose patent has expired but are still sold by those companies.

According to advance estimates provided by Phillips McDougal in March 2010 the sale turnovers of the

leading CPP companies for both the crop- and non-crop markets totaled about USD43,740m in 2009.

*

The Company estimates that the turnovers above also include sales among the companies in question as well as, for

some of the companies, sales in non-CPP areas. The Company's data are based on its own financial reports.

5 Source: Phillips McDougall – Industry Overview; data provided in March 2010. 6 This figure is based on the Company's financial reports attached herein, while the figures in the table below

are based on advance estimates submitted to the Company by Phillips McDougall in March 2010.

Sales Turnover

(in $ millions)* Name of Company

8,491 Syngenta

8,343 Bayer (excluding seed)

5,064 BASF

3,907 Dow AgroSciences***

3,534 Monsanto**

2,385 DuPont

2,042 Makhteshim Agan


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** This company's financial year ends in August.

*** Including modified seed sales.

In order to deal with the improved competitive position of source companies following the consolidation

process described above, medium-sized companies began consolidated their own positions by acquiring local

distribution companies or cooperating with other medium-sized companies to streamline and reduce the costs

of registration processes and new market penetration efforts. Moreover, in view of this consolidation process

and thanks to the large market shares now controlled by merging companies, anti-monopoly authorities in the

various countries have sometimes required the sale or abandonment of certain production lines in the

merging companies' product range as conditions for approving mergers. Sometimes, these companies even

agreed to give up on strategically important products. These developments enabled other companies active in

the CPP area, including the Company, to buy such products and expand their own product range.

The CPP area is affected by a variety of external factors, as detailed above, particularly those which

materially affect the global agricultural market, and especially in countries where the Company is active. In

addition, the global agricultural market is affected by weather conditions. The Company is active in various

countries in both hemispheres – the Northern Hemisphere (mainly Europe and North America), where the

growing season starts in the first quarter, and the Southern Hemisphere where the season starts in the third

quarter. This serves to moderate the effects of external localized factors on Company results.

Over the last decade, the global agricultural sector experienced impressive growth, leading to expanded

planting areas (despite their limited availability overall) and increased crop volumes to meet the growing

demand for agricultural products. All this resulted in increased demand for CPP's.

According to the Company's estimate, two main factors fuel this agricultural growth: (1) Exploding

populations and rising standards of living, particularly in emerging economies such as China and India,

increasing the demand for food in general, and animal-derived food in particular. This resulted in growing

demand for crops consumed in the food industry and which constitute protein sources for animal fodder

(such as wheat, corn, and soybean). (2) Growing global demand for oil product substitutes derived from

sugarcane and maize crops. Together with the limited planting areas worldwide, these factors have led to

growing demand for agricultural commodities and rising prices of commodities such as cotton, soybean, corn

and wheat. This led to increased demand for CPP's – the company's core operational area.

This trend, and the higher prices of agricultural commodities, made crops all the more valuable to farmers

seeking to meet the demand for agricultural commodities and maximize their crop yields. The farmers thus

required larger amounts of CPP's throughout the growing stages in order to maximize crop protection.

Following the Global Crisis, beginning in the last third of 2008 and during 2009, the Company's business

environment changed considerably. The sharp growth which characterized its operations grounded to a halt

in 2009.


26�

Below are 2009 figures submitted to the Company by Phillips McDougal shortly before this publication on

the market distribution and growth rates in the crop-CPP area alone, according to regions (in current prices,

in sales to distributor terms):

North

America

Latin

America

Europe

Asia

1. Africa & Middle-East Total Nominal Year-to-

Year Change (Total)

$M 7,930 7,700 11,480 9,245 1,505 37,860

- 6.5% % 20.9% 20.3% 30.3% 24.4% 4% 100%


27�

As seen in the figures above, year-to-year changes in the volume of sales in the global CPP area are not

significant, due to the fact that the total global planting area does not change considerably, while the annual

rate of population increase and rise in standards of living is relatively moderate.

In 2009, the planting areas and level of CPP consumption remained stable compared to 2008. However, the

high level of inventories in marketing channels (particularly in Brazil) and increased caution by distributors

and farmers who tended to purchase company products nearer to consumption time, led to reduced Company

sales and reduced CPP sales prices overall, affecting the sales of manufacturers in the area (including the

Company) and the Company's CPP profitability, particularly in the last two quarters of 2009. Most price

drops occurred in Brazil, as well as in relation the Glyphosate nonselective herbicide.

In addition, the Company's 2009 results were affected by weather conditions in its activity areas, including a

dry winter in Northern Europe (reducing, among other things, demand for fungicides) and heavy rains in

Northern America. Company results were also affected by credit constraints, particularly in developing areas,

which led to reduced demand for CPP's and the aforementioned tendency to buy Company products nearer to

consumption date, as well as to a valuation of the dollar, reducing the dollar-denominated value of Company

sales and its global profitability.

The general tendency to rely on existing inventories bought at high costs and sold at market prices lower

than those available last year, led to a significant drop in the Company's gross 2009 profit (mainly in the last

two quarters of the year).

The Company estimates that the aggregate effect of these trends, which began to be felt in the first half of

2009 and increasingly so in its latter half (particularly in Q4), despite their partly transient nature, will

continue. On the other hand, the Company estimates that the drop in raw material prices compared to their

average values in 2008 is expected to reduce costs and gradually offset some of the abovementioned drop in

gross profits during 2010.

Year-to-Year Growth

NAFTA 4.7%-

Latin America 8.4%-

Europe 10.7%-

Asia 1.2%-

Rest of the world 2.0%-

TOTAL 6.5%-


28�

Company estimates regarding 2010 are based on several aspects in which a gradual improvement was

already felt in its first quarter, including mainly (1) reduced inventories in marketing channels which is

expected to gradually increase the Company's sales volumes; (2) an overall trend of market stabilization; and

(3) expanded credit to farmers in developing countries. Other characteristics which the Company estimates

may lead to a gradual rise in demand for its CPP's and hence on its results are (1) continued rise in standards

of living along with restricted planting areas and the high multi-annual values of agricultural commodity

prices, promoting optimal crop protection; (2) stabilization of multi-annual raw material prices (although

they will be low compared to 2009); and (3) steps taken by the company in relation to expanding its activity

and investments in development, registration, and manufacturing capacity, including through the acquisition

of products and companies (as detailed in Section 1.5 above). Accordingly, assuming no unusual or

significant one-time events do not occur, and in view of the fact that the Company has expanded its

operations and investments as well as its positive cash flow, the Company estimates that it will return to its

growth track and improve its profitability gradually during 2010, although these developments are expected

to be felt in full only after the first quarter of the year.

See the Board Report attached herein for further details on the 2009 emerging trends, including the effect of

the Global Crisis and their impact on company results.

The abovementioned company assessments of long- and short-term developments in the CPP area constitute

hypothetical and forward-looking statements as defined in the 1968-5728 Securities Act, relying on

subjective Company estimates of uncertain validity based on its executives' experience and 2009 market

trends. Since most of these factors are beyond the company's control, its estimates remain uncertain, among

other things due to its inability to foresee one-time, unusual or significant events, or due to the

materialization of any of the risk factors detailed in Section 34 below, or the effects of extraneous factors

beyond the Company's control.

Factors affecting supply and demand in the CPP area. Apart for the factors detailed in Sections 5 and 6.3

above, the recent years have been characterized by patent expiry at a higher rate than that of the entry of new

patents. Therefore, growth in the generic product market in which the Company is active has been more

rapid compared to the parallel source product market.

In addition, rising standards of living in the Western world led to increased demand for non-crop CPP's.

As already mentioned, the strategy adopted by the Company in recent years was to grow and expand by,

among other things, buying companies and product lines as detailed in Subsection 1.4 above. These

acquisitions enhanced the Company's marketing capabilities thanks to its improved geographical

deployment, enabling it to respond more quickly, shorten its supply chain, reduce its dependence on

independent distributors and cut mediation costs. In addition, this strategy expanded the Company's product

range and improved its ability to provide a variety of solutions for a variety of needs.


29�

6.4 Technological Changes Liable to Affect the CPP Area

The development of genetically modified organisms (GMOs) encouraged the development of selective

herbicides designed to destroy weeds of a certain kind (and no other), which therefore do not damage the

very crop they are designed to protect. In order to deal with the shortcomings of the nonselective herbicides

which destroy all existing weed types at a single stroke (and also threaten the crop itself), Monsanto – one of

the leading nonselective product manufacturer – acquired during the 1980s controlling interests in seed

developing companies, in order to pursue R&D activities and find genetic engineering solutions that will

make crops resistant to the chemicals involved.

To the best of the Company's knowledge, genetic seed engineering includes two main product families: (1)

Input traits: products implanted with properties which benefit the farmers by, among other things, protecting

their crops against nonselective substances, thus saving farmers the costs of buying several selective CPP's;

and (2) Output traits: products implanted with properties which improve the crop's quality and nutritional

composition. Towards the late nineties, genetically modified seeds sold on the market to farmers enabled the

use of a single, nonselective herbicide – Glyphosate – require them to by less selective herbicides. Moreover,

at the same time, a genetically modified seed was developed for certain crops with a toxin released by the

crop itself and acts as an herbicide, making the use of some herbicides completely redundant.

At the time of this Report, GMOs are sold mainly in the US, Brazil and Argentina, and recently also in

China. Importantly, EC countries have recently backtracked on their decision to prohibit the use of GMOs.

Note that Company sales to EC members represent some 40% of its total turnover.

Upon identifying the demand for Glyphosate, the Company contracted a long-term agreement with

Monsanto to market its nonselective herbicide in Brazil, Europe and other regions. The Company also buys

Glyphosate from other suppliers. Finally, the Company produces and markets other complementary CPP's for

genetically modified seeds. (See Subsection 7.5 below for further details on Glyphosate marketing).

This technological innovation and the growing consumption of Glyphosate led to increased Glyphosate sales

by the Company. However, at the same time, particularly in specific markets such as Brazil and Argentina, a

certain drop in demand for the Company's selective products has been noted (particularly for crops such as

soybean, cotton and corn).


30�

Despite the falling demand noted above, the Company estimates that this technological innovation offers

new opportunities for companies producing selective products, mainly for the following reasons: (1) using

the nonselective products creates new problems for farmers which may be solved by company products; (2)

some of the weeds the product is used against are resistant to it while others may become so with time; (3)

the more weeds originate in genetically modified seeds planted in the past in the farmer's lands (such as a

different crop left over from the previous season), the more resistant they are to the product; and (4) seeds

resistant to additional agrochemical products are continually developed by leading seed companies. For

example, in the following years we expect the launching of seeds resistant to the 2,4-D herbicide, a fact

which played a part in the Company's decision to acquire Rokita Agro which produces said herbicide.

Nevertheless, should the Company not properly adjust its product range to these technological changes, this

might affect the demand for its products.

In addition, the Company estimates that continued R&D in the genetically modified seeds area will focus

mainly on output traits, making crops more valuable to farmers. This trend also represents a potential for

increased demand for company products designed to protect those same crops.

The abovementioned company assessments of the effects of recent technological developments, new business

opportunities for companies manufacturing selective products and foreseeable GMO trends constitute

hypothetical and forward-looking statements as defined in the 1968-5728 Securities Act, relying on

subjective Company estimates of uncertain validity and various publications, as well as on the Company's

estimate regarding the potential implications of the development of GMOs and the extent of Glyphosate

consumption. The validity of these estimates in uncertain, among other things due to the materialization of

risk factors or the effects of extraneous factors(such as changed trends in the CPP area or the GMO area)

beyond the Company's control.

6.5 Success Factors Critical to Company Operations

The company estimates that the following factors are critical to its successful CPP operations:

General:

I Accumulated reputation and knowledge in the CPP area in the various countries and among

customers and suppliers

II Financial strength and robustness combined with stable growth, allowing the Company to

promote an M&A strategy and provide immediate response to attractive business opportunities to

expand its product range and operations

III Access to funding sources and reasonable funding conditions allowing the Company to make

investments and ensure positive ROI


31�

Generic development:

IV Successful development of generic CPP's requires dedicated knowledge and technologies, funding

and investment in skilled human resources. Moreover, it requires the obtainment of registrations

required to develop and market the designated product.

V Successful completion of generic product development with demonstrable effectiveness and

quality of the developed product compared to the source product, as well as timely market entry

VI Consistent and continued development of additional products based on the Company's

accumulated technological expertise

Raw material procurement:

VII Successful procurement, raw material availability and supply chain efficiency

VIII Appropriate raw material costs, prices, quality and quantities, and operational responsiveness

to actual demand

Production:

IX Obtaining regulatory approvals and permits for the product's commercial production and

marketing in relevant markets

X The company's extensive technological expertise accumulated over years of industrial production

of its products, particularly in chemical synthesis and formulation, which ensures its products are

high quality, effective and safe

XI Ownership of or access to appropriate dedicated manufacturing facilities and efficient and well-

controlled production operations, at minimal health risks to company employees and in strict

accordance with quality and safety standards

Commercial marketing:

XII An efficient and broad-ranging marketing organization, allowing the Company to distribute its

products to a maximal number of prospective clients, as well as contract commercial agreements

for production and marketing of products at competitive terms, while relying, among other things

on the Company's subsidiaries to tighten local relationships and develop new marketing niches in

their countries and others

XIII A worldwide marketing and distribution network, offering an advantage over generic

competitors active in only some of the Company's markets and covering both hemispheres,

enabling the Company to sell its products year round


32�

XIV Inhouse marketing and management knowledge, expertise and experience allowing the

Company to enter markets right on time and secure a competitive edge

XV Stable and continued relationships with strategic clients building trust in the quality of the

Company's products and their dependable supply, which also allow the Company to accurately

forecast its future sales volumes

XVI Broad product range for every agricultural season, providing global response to farmer

requirements

XVII Expertise in registering its products in various countries, speeding up the process of

introducing a new product into markets and providing the Company with a marketing edge.

6.6 Activity Area Entry and Exit Barriers

The company estimates that entities active in the CPP area require, first and foremost, own capital and

financial strengths to start their operations and make the required investments in production facilities.

Expertise, experience and good reputation are also paramount.

The CPP market is characterized by high entry barriers which include, among other things, high development

costs (particularly for companies developing patent-protected source products) as well as registration

expenses, knowledge and expertise requirements, and particularly extensive technological knowhow in

industrial production of chemical syntheses and formulations, relying on professional and skilled human

resources or external consultants, high marketing and distribution costs, strict registration requirements,

significant investments in building and maintaining production facilities and typically high customer loyalty.

(For details about developments in the generic CPP market, see Section 7.3 below).

Nevertheless, in markets where relatively lenient registration requirements expedite the process and reduce

its costs, the entry barriers are lower and, together with options for outsourcing production, this could allow

smaller companies to start limited CPP operations.

The company estimates that there are no significant exit barriers in the CPP market, apart for those related to

future uses of capital assets and the dedicated facilities used by companies active in this area, among other

things since it is not characterized by long-term customer relationships.


33�

6.7 Substitutes for company products

To the best of the Company's knowledge, no other service or products may be deemed as bona fide

substitutes for its products designed to protect plants against herbs, pests and fungi that are not of the same

type of products produced by the Company or related source products. Nevertheless, some view genetically

modified seeds and nonselective herbicides such as Glyphosate as products which may partially substitute

for the Company's selective products in certain locales and in relation to certain crops. Moreover, despite its

negligible extent, organic crops (which largely avoid CPP's) represent a substitute for company products.

6.8 Competition in the Company's Activity Area

See Section 13 below regarding competition in the Company's activity area and changes therein.


34�

7. COMPANY PRODUCTS

7.1 Crop protection products (CPP's)

As mentioned above, the Company manufactures and sells a broad range of CPP's, of three main

categories (based on their active ingredient): (1) herbicides, (2) pesticides and (3) fungicides.

(1) Herbicides

In the crop growing process, crops are exposed to various herbs which grow in their environment

and compete it for water, light and nutrients. Herbicides are designed to prevent the development of

such herbs or delay their growth in order to allow the designated crop to develop optimally.

Herbicides are used on different stages of the crop growing process, but mainly prior to planting,

before germination and over the crops early stages of development. As already mentioned, the

herbicides marketed by the Company are both selective and nonselective, as detailed in Subsection 6.4

above. According to the Company's estimate, the best-selling herbicides are designed to protect

soybean, corn, cereal, rice and cotton crops.

(2) Pesticides

During the crop growing process, crops are often exposed to various insects and other pests which

damage their quality and even threaten their future development. The pesticides produced by the

Company are designed to destroy various types of such insects selectively, that is, without damaging

or destroying the crop itself, but by specifically removing a certain insect or pest which threatens the

designated crop. As mentioned above, the market currently offers genetically modified seeds capable

of releasing toxins which remove damaging insects in a way that makes usage of some company

products pretty much redundant. However, at the time of this report, they are used to a limited extent,

mostly in non-edible crops. The company estimates that the best-selling pesticides are designed to

protect fruit and vegetable, corn, cotton and soybean crops. At the time of this writing, the Company's

gross profit from pesticide sales is higher than its gross profit from herbicide sales.

(3) Fungicides

In the course of the growing process, crops may be threatened by various diseases and types of

parasitical fungi affecting crop quantity and quality. The fungicides produced and marketed by the

Company are designed to combat such diseases and allow the crop to continue developing normally.

For example, demand for pesticides grew dramatically when rust attacked Brazilian soybean crops in

2004. On the other hand, when weather conditions in the growing season are dry, crop diseases are

much rarer, which reduces demand for such products. The company estimates that at the time of this

report, the crops in which fungicides are used most frequently are cereals, fruits, vegetables, soybean

and rice. Finally, gross profits from fungicide sales are higher than those from herbicide sales.


35�

In November 2009, the Company contracted a long-term agreement with Syngenta, according to

which the latter will supply it with the azoxystrobin fungicide. The product's active agent was

developed by Syngenta and sold worldwide thanks to its extensive effect on a variety of fungi. The

product is approved for marketing and usage for some 120 different crops in about 100 countries.

The Company estimates that azoxystrobin is a product with a broad range of potential uses, and that

its availability significantly enhances its product range, allowing it – through its marketing network –

to launch a variety of mixtures and unique solutions for a broad range of crops grown by its customers

worldwide, particularly mixtures with the Company's existing range of fungicides. At the time of this

writing, the Company has already begun developing and selling azoxystrobin-based products. (See the

Company's immediate report of November 19, 2009, RN 2009-01-289104).

CPP World Market Distribution in 2008 (excl. non-crop)

% ($m)

48.5% 19,625 Herbicides

22.8% 9,235 Insecticides

25.6% 10,355 Fungicides

3.1% 1,260 Others

100% 40,475 Total

Source: Phillips McDougall; data provided in March 2009. At the time of this Report, we have no 2009 figures.

7.2 Key markets

The company's CPP operations are focused on Europe, North America and South America, and on the

whole, cover more than 100 countries worldwide. In recent years, it has been making an effort to expand its

presence in the European, North-American and Eastern European markets; the latter is characterized by

steady growth and rising standards of living as detailed above. Pursuant to this effort, the Company

completed the acquisition of two Eastern European countries in 2009, as reported in Subsection 1.4 above.

At the time of this Report, Company sales in Europe (including Eastern Europe) represent some 40% of its

total CPP sales. In addition, since the North-American market is the world's largest, it continually represents

an important target for further growth and expansion of company CPP operations. The company began

expanding its presence in this market in 2004 by acquiring three companies which allowed it, among other

things, to enter other activity areas. Moreover, the Company began developing products tailored for the

North-American market, including the non-crop sector. In the South American market, which is extensive

and important on a global scale, the Company has been working to reinforce its position (created in the late

1990's) by focusing on expanding its existing product range and providing a more comprehensive response

to the variety of customers in this region, with their diverse requirements and characteristics. Finally, during

2008-2009, the Company started fully-owned marketing companies in Canada and India.


36�

In 2009, the Company began operating directly in the Indian market, which represents a key emerging Asian

market. During the same year, it also acquired CPP formulator Bold in order to reinforce its operational

infrastructure to ensure continued sales growth in the US.

The company has established its position in the abovementioned markets and expanded its product offerings

therein through a process of organic growth as well as by a combination of acquiring companies with

production lines and/or distribution networks and acquiring products and/or certain rights thereto.

Sometimes, the Company buys these products such that it acquires full ownership rights to the product,

underlying knowledge, required registrations, related goodwill and trademarks as well as global distribution

rights. In other cases, it only acquires certain rights to the product, such as distribution in a limited territory.

Total CPP Sales in the Company's Key Markets

Growth 2009 ($m) 2008 ($m)

-7.1% 939.5 1,010.9 Europe

-19.9% 540.9 675.0 S. America

-9.4% 402.2 444.0 N. America

-16.2% 245 292.4 Rest of world

23.2-% 87 113.2 Israel

-12.7% 2,214.6 2,535.5 TOTAL

7.3 Generic Products

As mentioned above, the Company produces and markets generic CPP's. Generic products are similar

to source products developed by RBCs over a long R&D process whose patents have expired. (See

Subsection 6.3 above for further details).

The generic CPP area has several distinct characteristics:

Although their development is generic, developing new CPP's still requires advanced development and

registration processes and production process adjustments. In order to complete the developing process,

CPP companies have to meet high costs. Nevertheless, the Company estimates that the costs of

developing generic products are significantly lower than source product R&D costs.

As aforementioned, registering the products for marketing in the various target markets is subject to

obtaining regulatory approval and marketing permits for each market, a process which may take

between three to seven years (together with the development period). (For more details on regulations

applicable to the Company's activity area, see Sections 16 and 26 below). The procedures of obtaining

the required regulatory approvals in each country carry considerable costs for CPP companies, including

expenses on research studies and hiring the services of licensed representatives in the EU, North

America and South America. Some regulatory approvals are contingent on reviews of research and

production processes of the instrumentation and machinery in question, requiring the producer to

redesign labs and production facilities, establish an auditing mechanism and invest in skilled and

professional human resources.


37�

Regulatory authorities in the CPP areas dictate development conditions (good laboratory practices, or

GLP) to ensure that processes related to the development, trial and research of CPP's are completed in a

controlled and secure environment. GLPs are also required for registering all CPP products. These

practices are updated from time to time, and entail prolonged registration procedures which include

audits of the product's development and registration processes, the quality of labs and equipment, lab

consistency and reliability and periodic reviews conducted by the regulatory authorities in countries in

which the product is marketed, after its approval, based on these authorities' policies.

The Company estimates that in recent years, the market share of patent-protected source products in the

CPP area has been steadily shrinking due to patent expiry on the one hand, and reduced entries of new

source products on the other. For example, to the best of the Company's knowledge, during 2009-2012

patents are expected to expire for source products whose global annual sales total some 4 billion

dollars. Upon expiry, these products usually free market shares for generic companies which represent

a significant growth potential, should they make timely development and registration efforts.

Nevertheless and at the same time, new patent-protected products continue entering the market and

reducing the market share of generic products.

According to the Company's estimate, this trend represents growth potential for generic CPP

companies, since at the time of this report, there are source products whose patents has already expired

long ago, which are still sold by source companies although their patents no longer protect against the

development of similar generic products. In addition, over the next few years, in view of the

aforementioned patent expiry forecast, this product share is expected to grow and constitute additional

growth potential for generic companies, out of sales hitherto protected by source companies. At the

same time, this growth potential also represents growing competition among existing generic

companies, potential entry by new competitors and price erosion, and the ability to take advantage of it

depends on the ability of each player, including the Company, to launch new generic products, at the

right time, volumes and diversity in order to maintain their market shares. Making the most of this

potential also requires investment in development and registration, marketing channels, production

facilities, advanced technologies and more. (See Sections 11, 15.1 and 20 for further details). At the

time of this Report, the Company intends to operate over the period mentioned according to its strategy

by expanding its product range and increasing its market share, among other things through the

development and registration of new generic products based on patent-expired source products.

Despite being generic, the Company also has two patent-protected products, for which it holds

exclusive production and marketing rights: (1) the Novaluron (Rimon®) insecticide used mainly in

edible crops such as apples, pears and potatoes;7 and (2) the Herold® herbicide whose marketing and

production rights are applicable in Germany and Belgium alone. See Section 16 below for further

details. At the time of this Report, company incomes from these products are operationally immaterial.

7 The basic patent for Rimon® expired in all countries in 2007-2008, apart for Italy, where it received an

extension up to December 2011, and Japan and Switzerland, where it was extended until December 2012.


38�

However, note that their gross profitability is higher than the average profitability of the Company's

generic products.

The abovementioned company assessments of future source product development potential in the CPP area

constitute hypothetical and forward-looking statements as defined in the 1968-5728 Securities Act, relying

on subjective company estimates of uncertain validity, among other things due to the materialization of risk

factors or the effects of extraneous factors beyond the Company's control.

7.4 Production Process in the Crop Protection Area

The company's operations include (1) production and marketing of active ingredients (over 100 in

number) through multistage synthetic chemical processing of raw materials; (2) production and marketing of

end products (some 1,000 different formulations, as defined below); and (3) buying active products and

processing them through various formulation activities before selling them to third parties. Thus, the

Company's production sites use active substances both as inputs in the process of producing end products

and for sale to third parties. At the time of this Report, the annual sales of each product sold by the Company

(excluding Glyphosate) do not exceed 10% of all company sales.

The company's main production process is chemical reaction (synthesis). Various

products require between one and several reaction stages.

Formulation is a process wherein active substances produced by the Company or bought from third parties

are adjusted for chemical preparations designed for various agricultural uses. During this adjustment and

preparation stage, the concentration of active ingredients is reduced, and various additives are added.

Sometimes, the active agent's physical shape is transformed (including its liquefaction or solidification, as

the case may be).

Usually, the active agent is produced in one of the Company's plants, while final formulation and packaging

– which require less complex production facilities – are completed in the Company's main plants or in the

customer's country or a nearby country where the Company operates formulation facilities or is party to a

formulation services agreement. The highest percentage of active ingredients is produced in Israel. Outside

Israel, the Company operates active ingredient plants in Poland, Brazil and Columbia. It also operates

formulation facilities in Brazil, Poland, Greece, Spain, Italy, Columbia and the US.

In addition to the Company's manufacturing activity, it also operates commercially, on a smaller scale, in

buying end products and/or active agents from third parties and selling them "as is", without any

manufacturing intervention (usually to complement the Company's product offerings).

In 2009, Company sales (including non-CPP operations) totaled USD2,214,616K. Out of this total, company

sales of own manufactured products totaled USD1,852.022K. Company commercial sales totaled

USD362,594K.


39�

7.5 Marketing the Glyphosate Herbicide

As already mentioned, Glyphosate is a nonselective herbicide developed by Monsanto. It is a world

bestseller, it is easy to use, allows for reuse and used for basic treatment of a variety of crops thanks to its

broad protective range.

In 1998, the Company began marketing Glyphosate through multi-annual (non-exclusive) agreements with

Monsanto for supplying active ingredients for manufacturing Glyphosate, and is currently marketing the

herbicide in Brazil, Europe and other regions. Over the said period, these agreements were renegotiated and

renewed several times, most recently in 2009, for a period of several more years.

These marketing agreements include various mechanisms to determine the amounts supplied, the price per

each amounts, as well as payment and delivery conditions, and so forth. The agreements adjust the purchase

price as a function of the market selling price. Moreover, they arrange for support for the registration of

products containing the raw materials bought according to the supply agreements. Finally, particularly during

the last year, following the rising numbers of Glyphosate suppliers and suppliers of active ingredients used

for producing the herbicide, all around the world but particularly in China, the Company has been buying,

subject to its discretion and based on price considerations, active ingredients for manufacturing Glyphosate

products from other (particularly Chinese) suppliers. At the time of this Report, the Company has contracted

long-term agreements with these suppliers, according to which it buys said active ingredients, formulates

them and packages and markets (but not produces) Glyphosate mainly in Brazil, but also in other countries.

The first half of 2009 saw the continuation of the trend which began in the last third of 2008 – falling

Glyphosate prices worldwide due to large-scale accumulation of inventories in the marketing channels and

significant oversupply due to falling demand for the product due to the Global Crisis as well as the

increasing number of suppliers (particularly Chinese). Towards the end of that year, this trend came to a halt

and for the past several months, we have witnessed stability both in purchasing prices and in sales prices. At

the time of this writing, this product's share in Company CPP sales is estimated at around 10%. (For more

details on the relationship between this product and GMO technology, see Subsection 6.4 above).


40�

7.6 Product Pricing

The company's products are sold in competitive markets, such that well-known competing products

exist for almost all its product range. The company's share in the various markets is relatively small, and it

estimates its global market share at about 5%. In view of these facts, the Company usually adjusts the prices

of its products to those of market available products, such that company costs have little effect on their

pricing and the Company's ability to weigh them so as to obtain prices higher than market prices is limited.

Nevertheless, the Company usually tries to maximize the valuation of raw material costs in its sales prices.

When the Company realizes that producing a certain product is not economically viable on the longer term, it

evaluates the option of ceasing its production and/or marketing.

7.7 Product Branding

The company has a flexible policy regarding its worldwide use of brands. The decision to use brands is

made on an individual case basis. Sometimes, the Company buys products and decides to retain the

manufacturer's original brand names. In other cases, it changes the brands into its own. When companies are

bought, their brands are sometimes changed into own brands. On the other hand, when existing brands have

significant goodwill attached to them in their sales regions, bought brands are retained.

7.8 Product Return and Liability Policies

On the whole, Company policy does not allow the return of intact sold products. The amount of

products returned in 2009 was negligible, and Company policy dictates the allocation of appropriate

provisions for expected refunds in its financial reports. At the time of this Report, the Company has a third-

party liability and defective products insurance policy of up to USD350m in aggregate annual damages.


41�

8. NEW PRODUCTS

As discussed above, the Company's strategy is to maximize its agrochemical capabilities and expand

its existing and newly developed product range according to market needs, penetrate new markets and

reinforce its position in existing ones by developing and producing either complementary or new generic

products as well as through M&A's. Accordingly, the Company is continually developing and registering

new herbicides, pesticides and fungicides. In 2009, the Company continued to pursue this policy of investing

in new product development and manufacturing by launching 6 new active agents and 19 new compounds,

and obtaining 280 permits for marketing its products in new regions (a rate exceeding last year's by no less

than 73%). To the best of the Company's knowledge, at the time of this writing none of said products is

material to the Company and none of them (either self-developed or bought) may materially affect its sales

volume or development costs in 2010. See Subsection 28.1 below for further details about the Company's

strategic collaboration agreement with Cibus for a new joint venture for developing improved crop traits.


42�

9. PRODUCT REVENUE SEGMENTATION

Company Revenues by Major* Product Groups (in $ thousands)

*Representing more than 10% of Company revenues

Note that the volatility of pesticide and fungicide sales is higher than that of herbicide sales, since the former

are more sensitive to the presence or lack of particular diseases or pests.

2009

Product Group Revenues Percentage of Corporate

Revenues

Herbicides 1,060,407 47.9%

Pesticides 562,815 25.4%

Fungicides 418,948 18.9%

CPP Total 2,042,170 92.2%

Other Operations 172,446 7.8%

TOTAL 2,214,616 100.0%

2008


Revenues

Herbicides 1,323,321 52.2%



CPP Total 2,042,170 92.2%

Other Operations 172,446 7.8%

TOTAL 2,214,616 100.0%

2007


Revenues

Herbicides 992,540 48.1%



CPP Total 1,879,435 91.0%

Other Operations 186,090 9%

TOTAL 2,065,525 100.0%


43�

The Company's Share of Global CPP Sales by Product Group in 2008*

*At the time of this Report, we have not yet received the 2009 figures.

Note: Company sales of active agents are immaterial in comparison to end product sales.

$m Percentage of

Global Sales

Herbicides 1,323 6%

Pesticides 598 6%

Fungicides 413 5%

Others 201

TOTAL 2,535 6%


44�

10. CUSTOMERS

10.1 Customer Characteristics and Nature of Business Relationship

The company's CPP customers may be found in dozens of countries throughout the world. As a rule,

the Company's agricultural products are sold to regional and local distributors in the different countries, who

in turn market them to end customers in their area. Among its other customers, the Company also sells to

multinationals (which buy its products in order to market them either as end products or as mediator

materials for their manufacturing operations) and to other producers who manufacture end products based on

the Company's active ingredients. In countries where the Company has no independent marketing and

distribution organization, it sometimes also sells directly to large cooperatives and landowners.

Almost all sales are made to regular customers, normally without long-term supply contracts. In most

countries, purchases are made without requiring long-term advance orders, while in some areas they are

made on the basis of (non-binding) current sales forecasts and actual orders, such that the Company's actual

production is based on these forecasts.

Customer sales prices are determined, among other things, by the quantity procured, with some discounts

contingent on minimum order quantities. These discounts are included in the Company's financial reports

relative to the progress in meeting its objectives, but only when these objectives are expected to be reached

and discount totals may be reasonably estimated. The lead supply times of products in countries where

company subsidiaries operate are very short, usually a few days after receiving the order.

10.2 The Company Supply Chain

In the past, the Company sold mainly to importers – those who buy and import the active ingredients,

formulate and package them or, alternatively, buy the post-formulation end products and store them in

warehouses. The importers are usually also those who own the relevant local registration or franchise from

the registration owner. In recent years, following the Company's expansion and acquisition and creation of

subsidiaries in various regions worldwide, it is usually company subsidiaries who act as the importers.

Usually, importers sell the end products to distributors (whether company subsidiaries or third parties to

which the Company sells the active materials) who in turn sell them to retailers who supply them to farmers.

The general model depicted here varies according to local practices. For example, in some countries farmers

tend to form cooperatives, which buy large quantities of products directly from the wholesalers.

In the past, farmers used to store the inventory in their own warehouses, but today most of the goods are

stored in the importers' (subsidiaries') warehouses. In recent years, the increasing competition in the CPP

area led many to maintain large inventories in order to respond more quickly to urgent customer demand.

Importer/Formulator* Distributor Retailer Farmer


45�

10.3 Customer Credit Control Procedure

As mentioned above, most of the Company's sales are made to regular customers with whom it

maintains good long-term business relationships. The company follows a rigorous credit control procedure

which requires frequent credit evaluations of new and existing customers, and adjusting each customer's

credit limits to changing circumstances including credit history, collaterals, country credit rating and the

credit insurance the Company is able to obtain for the customer in question. As of the last third of 2008 and

during 2009, following the Global Crisis, the Company has taken steps to ensure even stricter credit control.

The company has an annually renewable agreement with an international insurance company for insuring

customer credit for some of its customers and subsidiaries.

As a result of growing company sales and acquisitions of companies and products over the past few years,

the number of the Company's customers keeps rising. As it adds new customers to its contact list, however,

the Company continues to act to maintain its long-term customers.

Several years ago, the Company began securitizing some of its customers' debts in certain countries. For

details about the securitization agreement, see Note 5 in its financial reports, as well as Subsection 22.3

below. At the time of this writing, the remaining customer debts sold in cash totaled some 157.2 million US

dollars.

On December 31, 2009, the Company's provisions for bad debts totaled 48.1 million US dollars (compared

to 35.1 the year before). In 2009, the Company reduced its expenses on bad debts to a total of about 6.4

million dollars (compared to 9 in 2008). The balance of the change in provisions for bad debts is due to

exchange rate differences between the dollar rate and that of the currency in which the provision is made. At

the time of this Report, the Company has no single customer whose purchases exceed 10% of its turnover,

and according to the Company's estimate, it is not dependent on any single client. Nevertheless, the

Company does have a significant customer in Brazil, as detailed in Note 31 in its financial reports.

Importantly, the Company follows a policy according to which the provision is made for specific debts, and

as mentioned, a considerable part of its bad debts originates in Brazil.


46�

11. DISTRIBUTION AND MARKETING

As already mentioned the Company's marketing operations are global and designed to consistently

increase its market share. In the past, the Company focused mainly on the production of active materials sold

mainly to formulators and/or local distributors, which imported the active material and formulated it (either

themselves or through subcontractors). As the years went by, the Company expanded its marketing channels

and refocused on independent distribution. It created and acquired distribution companies in various regions

which import end materials and active ingredients and carry out any formulations required (themselves or

through third parties), and then sell to cooperatives or local distributors (often company subsidiaries), which

sell them to the end customers. The company followed the same approach in 2008-2009 when it took steps to

expand its network by starting marketing companies in both India and Canada.

At the time of this Report, the company's sales organization, which equally serves all product groups

(herbicides, pesticides and fungicides), is arranged into four main activity areas in which corresponding HQs

are located: North America, Brazil, Europe and the rest of the world. After the balance date, the Company

has announced its intention of creating three new global centers: Europe (both East and West), the Americas,

and Asia-Pacific and Africa. Moreover, the Company operates product manager teams responsible for

developing and marketing the products under their responsibility worldwide. The company has more than 50

subsidiaries active in more than 100 countries. Through its own startups and acquisitions, it created a global

network of subsidiaries responsible for marketing, selling, developing and registering company products.

(For a complete list of subsidiaries, see the Appendix to the Company's Financial Reports).

In countries where the Company has no subsidiaries, it operates networks of (mostly exclusive) local agents

and marketing channels in line with the market structure in those countries, helping the Company with its

ongoing customer contacts. Since in the main company's markets the marketing networks rely on

subsidiaries, the Company estimates it is independent of external marketing channels whose loss might

significantly compromise its operations. When the Company sells through agents, after receiving its payment

from the customer, it pays its agents sales commission usually ranging from 3% to 5% of the sale value.

The company's marketing activity is handled by local salespersons and directed at distributors, agricultural

consultants and farmers. This activity includes a broad range of marketing and promotion tools, such as

meetings with farmers and distributors, in situ demonstrations, ads in trade magazines, direct marketing and

Internet infomercials. The company also closely follows market data to allow it to quickly appraise present

and future customer needs and expectations.

Another important activity is the professional agronomic support the Company offers to farmers. According

to the Company's estimate, this activity is particularly valued by small-scale growers in developing countries.

In recent years, the Company has held many courses to train growers worldwide in using its products

beneficially and safely.


47�

The company's strategy of enhancing its independent marketing and sales capabilities in its key markets is

designed to continually reduce its dependence on external distributors and maintain high profit margins

(which would otherwise shrink due to payments to distributors and other players along the supply chain).

The company's marketing and sales costs in the CPP area totaled some 343 million US dollars or about 17%

of its total sales in 2009.


48�

12. ORDER BACKLOG

To the best of the Company's understanding, since its products are sold on a current basis and over the

immediate term rather than based on long-term contracts, it has no significant amount of order backlog in the

CPP area. As mentioned above, at the time of this report, company estimates are based on non-binding

forecasts of annual order volume by its key customers.


49�

13. COMPETITION IN THE CPP AREA

As noted in Subsection 6.6 above, the CPP market is characterized by high entry barriers and

controlled by six giant multinational source companies, each with an annual CPP turnover exceeding two

billion dollars. At the time of this Report, we have yet to receive updated figures on these companies' market

shares.

According to Phillips McDougall's list of both source and generic companies, the Company ranked seventh

worldwide in 2008. The company estimates its 2008 market share at 5% (compared to about 4.9% in 2007).

It is considered to be the largest generic CPP company. In 2008, its global market shares in the herbicide,

pesticide and fungicide product families were 6.9%, 6.2% and 4%, respectively.

The company's competitors are mainly multinational source companies which continue producing and

marketing their source products after their patents have expired, as well as other generic companies.

According to the Company's estimate, in most cases the original producer's market share falls to between

60% and 70% within a few years after patent expiry, leaving the remaining market share open to competition

among generic companies, in addition to the competition between them and the source company (which

continues manufacturing the product in question and even leads its market prices and sales conditions).

The company competes with source companies in all the markets in which it operates, since like it, all have

global marketing and distribution networks. As a rule, other generic players who do not own international

marketing and distribution networks compete with the Company focally in certain geographical markets.

Three emerging trends may affect the nature of competition in the CPP area: (1) The proportion of products

whose patents have expired continues to rise relative to that of patent-protected source products. This is

mainly owing to the fact that the rate of patent expiry exceeds that of new patent registration; (2) Some

generic companies8 have been expanding (among other things, as a result of mergers and company and

product acquisitions) and increasing their market shares, and in the future they may compete with company

products in world markets they have hitherto neglected; and (3) Smaller companies have began operating in

certain markets with relatively lower entry barriers, as detailed in Subsection 6.6 above.

The company's expertise in launching new generic products, as soon as possible following the expiry of their

patents, represents a crucial factor in maintaining the Company's status in the global market. The company

normally pilot tests the feasibility of manufacturing and producing a patent-protected source products some

five to six years prior to patent expiry. These tests include market size analysis and future demand forecasts,

as well as assessments of the potential to expand the use of the product in question compared to others.

Moreover, the Company estimates expected changes in the product's price and global market share against

the share it may be able to capture as it begins to market it. All these factors are evaluated, among other

things, in reference to market aspects and the availability of competing products launched over the same

period, genetic engineering developments (as detailed in Subsection 6.4 above) and their potential impact on

8 Such as the Australian Nufarm, Japanese Arysta, Danish Cheminova, and Indian UPL.


50�

product launch, as well as the Company's estimated technological ability to manufacture the product

efficiently and economically. Finally, possible means of manufacturing and marketing the product are

evaluated.

In recent years, the CPP area has been characterized by growing competition, among other things due to the

following key factors: (1) Growing competition by Southeast Asian producers (which conversely reduces

raw material and product costs); (2) Extenuated product registration requirements, which decrease

registration costs in certain countries and make it easier for new (small- and medium-scale) generic

competitors, while at the same time reducing the Company's own registration costs, allowing it to enter

markets and products in which it would otherwise have been inactive; (3) The generic CPP market's growth

potential, as detailed in Subsection 7.3 above; and (4) Product acquisition by farmer consortiums and

cooperatives made directly from the distributors and producers.

According to the Company's estimate, at the time of this Report it enjoys material competitive advantages

arising, among other things, from its technological and chemical expertise; professional knowledge; financial

strength and the availability of funding for building and upgrading production facilities; development

capabilities; experience in registration processes in various markets around the world (and the resulting

ability to launch generic products soon after patent expiry); strict observance of environmental standards;

global marketing and distribution network; and, finally, production and marketing collaborations with

multinationals.


51�

14. SEASONAL EFFECTS

CPP sales are directly affected by the timing of growing seasons in each of the Company's markets, the

climate and weather in each region and its typical crop cycles – factors completely beyond the Company's

control. Therefore, at the time of this report, the Company's quarterly revenues vary. In the Northern

Hemisphere (mainly Europe and North America), the growing season spans the first two quarters of the year,

in which the Company accordingly reports higher sales, subject to the effects of external factors and the

Company's year-round risk factors. Conversely, in the Southern Hemisphere the growing seasons span the

last two quarters, apart for Australia where most of the sales are made from April to July. According to the

Company's estimate, its global reach and market diversity mitigate those seasonal effects.

Total Quarterly Sales in the CPP Area, by Region

2009 Q1 Q2 Q3 Q4 Annual

Israel 20,860 2.9% 23,299 4.2% 21,902 5.0% 20,908 4.2% 86,969 20,860

North America 124,353 17.2% 120,007 21.4% 76,969 17.7% 80,915 16.3% 402,244 124,353

South America 143,841 19.9% 98,842 17.6% 101,757 23.3% 196,457 39.6% 540,897 143,841

Europe 367,615 50.9% 265,692 47.4% 177,116 40.6% 129,049 26.0% 939,472 367,615

Rest of the world 65,599 9.1% 52,411 9.4% 58,186 13.3% 68,838 13.9% 245,034 65,599

TOTAL 722,268 100% 560,251 100% 435,930 100% 496,167 100% 2,214,616 722,268

Quarterly percentage

of annual sales 32.6 25.3 19.7 22.4

2008 Q1 Q2 Q3 Q4 Annual

Israel 25,405 3.5% 32,187 4.7% 31,866 5.0% 23,756 4.8% 113,214 4.5%

North America 110,749 15.3% 140,655 20.6% 93,274 14.6% 99,291 20.2% 443,969 17.5%

South America 147,362 20.4% 143,633 21.1% 206,099 32.2% 177,912 36.2% 675,006 26.6%

Europe 339,964 47.1% 279,906 41.0% 248,841 38.9% 142,183 29.0% 1,010,894 39.9%

Rest of the world 98,688 13.7% 85,875 12.6% 59,972 9.4% 47,886 9.8% 292,421 11.5%

TOTAL 722,168 100% 682,256 100% 640,052 100% 491,028 100% 2,535,504 100%

Quarterly percentage

of annual sales 28.5 26.9 25.2 19.4


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15. DEVELOPMENT AND REGISTRATION ACTIVITY

In source companies, R&D expenses represent significant cost factors, since developing patent-

protected molecules requires research involving years of considerable financial investments until the active

ingredient and the appropriate molecules are successfully developed and the product is ready for marketing.

On the other hand, as a generic producer, the Company does not conduct studies to discover and/or develop

new molecules, but rather develops production processes and licensing data for existing molecules in the

source product, and hence spends a lot less compared to source product R&D companies.

15.1 Development

The company's main development and registering activity is the chemical-engineering development of

production processes for new generic products, biological and agrochemical tests designed to meet

registration requirements, inhouse development of mixtures, as well as streamlining of production processes

and development of innovative and unique formulations of existing products. The company also provides

scientific-technological support for existing production processes, emphasizing quality improvement,

efficiency, safety, environmental protection as well as production cost reduction. Some development

activities are conducted in company and subcontractor labs, in Israel and other countries (such as China).

Such development efforts may be based on exclusive proprietary knowledge, on knowledge jointly

developed with the subcontractor, or on knowledge exclusively owned by the latter.

The fact that the Company's development and registration costs are lower than those of multinational source

companies gives it a competitive edge and allows it to offer a broad and diverse range of generic products at

competitive costs. Nevertheless, introducing a new generic product in the market still requires considerable

investment in development and registration, particularly in view of recent developments and increasing

competition in the generic market. (See Subsection 7.3 above for more on this matter).

Product sales in the various international markets progress in line with obtaining the registering required by

each country. In 2009, the Company's recognized R&D costs (excluding registration expenses) totaled 21.8

million US dollars, or 1% of its consolidated incomes for that year. R&D costs are not recognized as

intangible assets.

According to the Company's estimate, and subject to the materialization of its work plan, during the twelve

months following the publication of this Report, it expects to spend some 29 million dollars on R&D

activities. At the time of this writing, the Company operates several research labs in Israel, Germany and

Brazil, which also conduct QA tests for its various products. In 1996, Makhteshim and Agan received a

standard certificate from German health authorities, attesting to the high quality of working procedures in its

R&D Division's analytical labs (GLP, or Good Laboratory Practice). The company employs some 200

development and registration workers, most of whom with academic degrees in chemistry, chemical

engineering, agriculture and the life sciences. The company also hires the research and consulting services of

several researchers and institutes specializing in agricultural, chemical and toxicological studies.


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15.2 Chief Scientist

Up to the time of this report, the Company has financed its registration and development investments

using its own funds, bank and non-bank funding, and in the past, immaterial grants by the Ministry of

Industry, Trade and Labor's Research and Development – Chief Scientist's bureau (hereafter, Chief Scientist).

The Chief Scientist is empowered by the Encouragement of Industrial Research and Development Law

5744-1984 and subsequent bylaws (hereafter, R&D Law) to promote commercial and industrial R&D

according to Israeli government policy. As a rule, and according to the Chief Scientist's normal support

programs, it grants up to 50% of the R&D budget of programs submitted for its approval, based on criteria

determined by its Research Committee. Upon receiving that grant, its receiver is subject to the provisions of

the R&D Law, briefly reviewed below. The receiver of a Chief Scientist grant is required to pay it royalties

on future sales of products bases on the supported R&D program, at rates determined in the bylaws and

subject to provisions set out in permits issued to the Company by the Chief Scientist. In general, the

aggregate royalties involved equal the grant, linked to the dollar and bearing LIBOR interest, which is

updated from time to time. Note that in certain cases (such as due to conducting production operations

outside Israel), this royalty ceiling may rise, subject to provisions of the R&D Law.

The R&D Law also prohibits granting non-Israeli residents rights to knowledge derived from an approved

program (which is not the product developed in the course of that program), or any right deriving from it,

unless approved by the Research Committee and subject to payments required by the law.

In December 31, 2009, the balance of Chief Scientist grants to R&D programs currently pursued by the

Company or such that have been completed successfully, net of royalties paid (entered in the financial

reports as liabilities due to development grants), totals some 3.9m US dollars. (See Note 20 to the Company's

Financial Reports for details on development grants refund terms).

15.3 Registration – General

As already mentioned, the materials and products marketed by the Company require, at various stages

of their production and marketing, registrations in every country where the Company intends to market them.

For this purpose, the company employs over 100 professional registration workers – mostly scientists,

engineers and technicians in chemistry, agronomy, biology and other life sciences – and also hires the

services of third parties in order to develop registration data.

CPP's are sold under the supervision of state authorities in every country (usually the Ministries of

Agriculture, Health and Environment). Registration requirements tend to become stricter with time in various

countries, including Eastern European and South American countries; consequently, registration costs

sometimes rise and more time is required to prepare registration portfolios. In some countries, registrations

have no time limit, although additional tests are required every several years. In other countries, registrations


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are limited to 10-15 years and have to be renewed, with additional tests and data required for that purpose. In

preparation for such tests, chemical, toxicological, environmental and agricultural data have to be collected.

Registrations might be revoked should such information fail to meet the required criteria. The cost of

registration and the time required to obtain a registration change vary by country. Usually, the Company

develops chemical, toxicological, environmental and agricultural data for a main database and then carries

out additional work based on specific registration requirements of target countries. Registration costs are

typically several hundreds of thousands of US dollars per product, sometimes exceeding one million or even

two. In countries such as the US and Japan, they may even total several millions per product.

The US, Japan and the EU have the most stringent standards. Other countries are gradually adjusting their

own requirements to those standards. Obtaining a registration requires meeting health, safety and

environmental standards.

During 2009, the Company obtained some 280 new registrations for active materials, formulations and

various mixtures in the CPP area. This total does not include registration renewals and new crop indications

for registered products.

During that year, the Company's registrations costs totaled some 70 million US dollars net, plus depreciation

and amortizations, or about 3% of the Company's gross annual income.

15.4 Registration in the United States

The registration process in the US includes federal registration by the Environmental Protection

Agency (EPA) for the active material and chemical preparations, which are the end products for sale.

Moreover, several states (such as California and Arizona) require special permits and registrations for the

various preparations and configurations of active materials already registered at the federal level. This

naturally requires developers to provide more registration relevant information.

There are two main procedures for obtaining federal registrations:

(1) Submitting a complete portfolio which includes all the data and studies required. This data portfolio

should cover four key development aspects: chemical, toxicological, environmental and the effects of

leftovers in the final product. Preparing this portfolio takes 4-5 years, and the EPA review in this type of

procedure takes 2-4 years, according to the product's estimated importance for the American agricultural

market.

(2) Following 10 registration years, citing all the existing data on another company's active material (Cite

All), and demonstrating that the active material to be registered is chemically similar to the existing

material. In this procedure, the generic company is required to compensate the development company

with the original registration to an agreed extent which is a function of the data's value and the cost of

registering the original product, as well as the value of the time saved by speeding up the registration

process. Should the generic company and the original registration owner fail to agree on the


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compensation amount, a mandatory mediation mechanism is introduced. This procedure takes between

six and twelve months. Note that it is also possible to cite only part of another company's active material

data, restricting the compensation liability to those data only, but that in most cases, this approach takes

longer since authorities tend to review the data submitted more thoroughly. Fifteen years after having

obtained a registration, the data at its basis are open to the public, and from this time on there is no

compensation liability.

As part of the EPA's additional re-registration requirements (re-registration is a procedure in which a

company is required to periodically provide additional data), several companies may pool their resources to

save time and money (including the need to compensate the original developer for the re-registration costs)

to prepare the newly required data by creating a "re-registration task force". The company is reputed to be a

professional and reliable group, so that international companies tend to cooperate with it when developing

new data for re-registration purposes.

15.5 Registration in Europe

The registration processes of EU members have recently been consolidated, which resulted in new

CPP regulations. Today, every new material intended for use in EU countries passes through a rigorous

registration process composed of two main stages. Stage 1 enables the producer to include the active material

in the list of materials allowed for use in EU countries (Annex I). In Stage 2, the final product has to be

registered for its various uses in EU countries. In 1991, EU authorities began reevaluating all CPP

registrations in the European market (including the Company's products), a process which continues to this

day. CPP companies were required to submit registration portfolios based on the new registration

requirements (Directive 91/414), including additional registration data according to a timetable determined

separately for each active material. The company continually prepares and submits the newly required data

based on those timetables. Preparing the complete data requires 3-4 years, while the EU authorities' review

takes another 3-4 years.

In July 2011, a new registration regulation (1107/2009) will enter into effect instead of Directive 91/414.

This new regulation involves rejecting products based on their potential hazard, as opposed to the older

directive, which assesses products based on their risk to humans and the environment.

The company takes part in several multi-company groups, or task forces, to jointly develop the data required

for several of the materials it develops, in order to reduce re-registration expenses. Note that even after the

abovementioned consolidation, additional data must be submitted for registration in each country separately.

The registration portfolios and the permits themselves represent strategically important economic assets. The

company policy has been and is to retain ownership of company product registrations and indications. In

some countries, the Company has allowed and allows distributors of its materials to use such registrations in

order to enable them to sell the products in question, but when distribution contracts terminate, it is generally

possible to revoke distributor registrations.


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REACH Legislation

In December 2006 the European Parliament and Council of Ministers ratified the Framework Legislation for

the Registration, Evaluation and Authorization of Chemicals (REACH). REACH came into effect on June 1,

2007, and it applies to existing as well as to new chemicals either produced in or imported into Europe.

REACH requires chemical producers in the EU as well as importers thereto (including CPP chemicals but

excluding active CPP materials regulated by the aforementioned Directive 91/414) to submit registration

dossiers with detailed information on every material or chemical compound produced in or imported into

Europe which are included in the product in question, apart for the active ingredient, but only when the

quantities exceed one ton a year. These dossiers are included in a central database on all such materials. The

registration dossiers are then evaluated by the authorities to determine which products are be required to

undergo an authorization procedure before they could be marketed and consumed in Europe. Factors playing

into this decision are, among other things, the product's environmental and health aspects and suggested

ways of managing them. As for highly toxic materials, alternative development programs may be required to

encourage transition to safer materials.

It is hereby made clear that to the best of the Company's knowledge, this legislation does not require new

registration of active materials already egistered in Europe, but sets forth a procedural requirement whose

first stage is the registration of all chemicals the Company imports to or produces in Europe for the purpose

of developing and manufacturing its products.

REACH will be implemented gradually over the years 2007-2018 under the supervision of a new agency –

European Chemical Agency (ECHA). The company has already met the first (pre-registration) period

deadlines, during which importers and exporters were required report materials designated for registration in

order to receive an extension for completing their full registration, allowing it to continue selling them.

At the same time, the Company prepares for the first stage of submitting complete registration dossiers,

whose deadline has been set to December 1, 2010. Recently, and as the deadline approaches, the Company

has been receiving many appeals from members of the Substance Information Exchange Forum (SIEF) for

sharing expenses involving preparing the data for the portfolio and submitting it, in return for access to data

and works submitted jointly thereby. The Company evaluates the relevance of each substance to its business

operations, and accordingly determines the level of its involvement in regulation-mandated forums designed

to allow such information exchange. In addition, the Company has begun preparing to update all the safety

data of its products according to the format and contents required by REACH.

During 2009, the Company appointed an exclusive representative, as required by REACH for a non-EU

manufacturer, to export the materials (in pure form or in mixtures) to the EU. The Company ordered this

representative to mail an official letter to all the Company's suppliers, requiring them to declare their

intention to register the said materials as required by REACH. Similar applications by companies buying

Company products for the EU market are received by the Company on an ongoing basis.


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The company receives continuous support and consultation services, in both the legal and product

registration areas, in order to assimilate REACH and meet its targets. At the time of this Report, the

Company estimates that the costs involved in implementing this legislation over the following year would

not be material. (For more on registration as an external factor liable to affect company operations, see

Section 5 above).

The company's assessments regarding the completion of authorization procedures and/or the costs involving

REACH implementation detailed in this subsection constitute forward-looking statements as defined in the

1968-5728 Securities Act, relying on the Company's familiarity with the procedures required as well as

company tasks required thereby. These assessments may not materialize should the relevant authorities'

requirements and/or the Company's failure to meet them prolong the process and make it more costly.

15.6 Registration in Brazil

The generic substance registration procedure in Brazil is based on chemical identity with an active

substance available in the market. If the registration applicant proves such chemical identity according to

specified rules, it may be granted a registration following an expedited review process of 1-2 years. Despite

this, at the time of this Report, the actual registration procedure takes 2-4 years to complete, due to rigorous

review by the Health Ministry (Anvisa) and the present portfolio overload. (See Subsection 33.2 below for

details about the Company's Brazilian subsidiary Milenia's registration contacts with Brazilian authorities).


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16. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY IN THE CPP AREA

Most of the Company's CPP's (both in absolute and in relative sales terms) are generic, and therefore

not protected by patents. Nevertheless the Company owns some 30 patent families protecting processes,

formulations, material properties and unique mixtures. It also relies on trademark registration to establish its

reputation for products it manufactures and markets. At the time of this Report, the Company owns over

5,000 such trademarks. Some of the Company's products are branded beyond each product's trademark under

the well-known and registered Makhteshim-Agan logo.

The company also owns two patent-protected products for which it has exclusive registrations: (1) the

Novaluron (Rimon®) insecticide whose patent extensions have expired in various countries during 2007-

2008, and will expire in Italy in December 2011 and in Switzerland and Japan in December 2012; and (2) the

Flufenacet/ Diflufenican (Herold®) herbicide whose marketing and production rights are applicable in

Germany and Belgium alone, the patent for which will expire in 2011. Moreover, in 2007 the Company

bought all the rights to four patent-protected materials (a nematode repellent, two types of insecticides and

one type of fungicide), some of which are already in the Company's name while others are still in the process

of ownership transfer.

Finally, the Company owns several exclusive local registrations for other materials. For further details on the

Lycord subsidiary's patents and other intangible assets, see Subsection 18.1 below. See Note 11 to the

Company's Financial Reports for details on agreements to acquire CPP registrations and distribution rights

from Bayer CropScience, Aventis and Syngenta in 2001-2002.

In view of the fact that most of the Company's products are generic, it may begin commercial production and

marketing thereof only after the source product patent has expired. The company has an intellectual property

department responsible for registering patents on company developments and for trademarking its products.

This department also provides the Company with important technical and legal expertise to help it introduce

new generic products while avoiding the infringement of relevant valid patents. The company acts to

safeguard and protect its unregistered commercial secrets through confidentiality clauses, differential

authorization, etc.

In order to prepare for initial production and marketing of a patent-expired product, the Company needs to

develop its manufacturing process, initiate registration procedures as well as build a new production facility

or adapt an existing one for its manufacture. The registration process normally requires the production of

small, non-commercial amounts of the product, subject to the laws applicable in each country determining

the legality of such production (albeit in small quantities) prior to patent expiration.

According to accepted accounting rules, the sums amounts recognized as assets due to the Company's major

intangible assets (including subsidiary goodwill) totaled some 615 million dollars in December 31, 2009.


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17. RAW MATERIALS, INVENTORIES AND SUPPLIERS

The company buys a large variety of raw materials, the lion's share of which is distant oil derivatives,

which may not be uniformly characterized. It also buys complementary raw materials required to produce the

finished product and/or its formulation.

The shelf lives of most of these raw materials are several years, and they maintain their stability throughout

the years. Moreover, they may usually be extended by simple treatments. In view of this fact, raw material

losses in company warehouses due to obsoleteness are negligible.

The most significant factor in the Company's sales costs is the cost of raw materials used in its industrial

activities. This cost is affected by the volatility of world oil prices. The cost of buying finished products for

marketing to third parties is also significant. (See Section 34 below, as well as the attached Board Report for

information about material changes in the world prices of oil and its derivatives during 2009 and their impact

on company results).

In 2009, the raw materials and packaging costs totaled 1,044 million US dollars. This cost represented about

78.7% of the Company's total production costs in the crop protection area (excluding finished products),

which totaled 1,326 US dollars.

In 2008, the raw materials and packaging costs totaled 1,460 million US dollars. This cost represented about

81.8% of the Company's total production costs in the crop protection area (excluding finished products),

which totaled 1,784 US dollars.

The company buys its raw materials from various suppliers, mainly in Europe, the US, China and South

America. The company's supplier network has not changed significantly over the past few years, but

nevertheless, it gradually increased the volumes procured from various Chinese suppliers (such that most of

the increase derived from purchases in China, with no significant reduction in the quantities bought from the

Company's other suppliers) in view of their lower costs. Nevertheless, as part of the Company's attempt to

cut down its inventory, in 2009 it reduced its purchases in China as well.

The company stores raw material inventories in accordance with the order forecast for each season, for

periods averaging two months. At the time of this Report, the Company estimates itself to be independent of

any single supplier. For further details on supplier credit, see Subsections 22.4 and 22.5 below. On the

agreement with Monsanto to buy raw materials for Glyphosate production, see Subsection 7.5 above.

Finally, see Subsection 27.9 below on the Company's agreement with a Chinese supplier for exclusive

substance development and production.


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Part IV: Further Operations

18. GENERAL

In addition to the Company's core operational area, it is also active in various other, non-CPP areas.

The Company's aggregate incomes from and investments in these additional activities do not exceed 10% of

its total consolidated incomes and investments. At the time of this Report, the Company has additional

activities, particularly in the following prioritized areas: (1) Dietary supplements and food additive

ingredients; (2) Aromatic products; (3) Industrial chemicals; and (4) other products.

In these additional activities, the Company takes advantage of its knowledge, experience and chemical and

industrial capabilities. In view of the highly diverse nature of those additional activities and products, and

since they do not represent core Company activities in view of their small scales, they are reviewed and

analyzed below separately, to an extent commensurate with their impact on Company results.

18.1 Dietary Supplements and Food AdditiveAdditive Ingredients

At the time of this writing, the Company holds 100% of Lycord Ltd. (Lycord),9 after having acquired

2% from minority shareholders, who had exercised a put option granted as part of Lycord's 2005 acquisition

agreement.10 Lycord is mainly active in developing, manufacturing and marketing dietary supplements (DS)

and special food additive ingredients, and in developing and manufacturing DS materials and applications

(produced by its clients in their own brands) (hereafter, "supplements"), mainly for non-Israeli markets.

Lycord manages independent and separate operations, including its own development, production, marketing

and distribution organization. The Lycord plant is located on land bought from the Company's around the

latter's Beer-Sheba plant.

Lycord sells mainly materials, ingredients and application added in the process of producing processed food

and DS. It specializes in developing and producing natural (anti-oxidant) carotenoids and a large variety of

other (natural and synthetic) food additive products. These are marketed both as mixtures for the food

industry and as formulated products (ready for use in the final products).

Lycopene. At the time of this writing, one of Lycord's unique products is natural lycopene produced out of

tomatoes. Lycord has developed a unique and innovative process for producing this material (the carotenoid

which gives the tomato its red color), which some ascribe with properties for protecting the human body

against degenerative and malignant diseases. In order to produce lycopene, Lycord has developed (jointly

with Volcani Center and Zeraim Gedera, Ltd.) unique tomato strains (mainly intended for industrial

9 92.9.% fully diluted, assuming realization of options issued to Lycord employees and based on their value at

balance date. 10 The agreement granting the minority shareholders the option to oblige the company to buy their remaining

holdings in Lycord was signed before one of those grantees was appointed to high office at the company, and exercising

the option of that minority shareholder, at a rate of 1% of Lycord's stocks, was carried out after the end of his term as an

executive in the company, and following the balance date. Accordingly the remaining percent has been consolidated

after the balance date.


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applications), with particularly high lycopene content. In addition, Lycord has developed technological

capabilities for extracting, separating and concentrating the products of tomato processing and adapting them

to market requirements.

Beta-carotene and lutein. Lycord develops, produces and markets beta-carotene (including synthetic) and

lutein, products designed mainly for the DS industry.

In addition to carotenoids, Lycord has several secondary activities: (1) It provides formulating services for

active DS materials; (2) It provides coating for active ingredients, such as vitamins, minerals and other

natural materials for food additive.

Lycord's gross profit margins are not materially different than those of the Company's in the CPP area.

Structure, recent developments and competition in the DS market

Food additive ingredients are added to food in industrial production processes in order to enrich the final

product with certain nutritional or health properties, marketed either as separate ingredients and/or in

mixtures for the food additive and DS industries.

The food and nutrition industry may be characterized by retail-based competition, technological

conservatism and increasing commitment to the quality of food and supplements, health consequences,

consumer nutritional habits and changes in consumer tastes. From the producers' point of view, these factors

require technological innovativeness, responsiveness to the requirements of customers – both food and DS

producers – as well as the ability to meet high quality standards. In recent years we have witnessed a

growing consolidation trend in the area, with M&A's and consequent shrinking of supply chains, which have

resulted in reduced competitiveness by small companies. Nevertheless, relatively small companies with

unique and innovative products such as Lycord have managed to grow and establish their position despite

said trend. The DS industry has also been exposed to growing competition by East Asian producers which

market raw materials, and have recently begun to market formulated materials as well.

In recent years, consumers worldwide have become growingly aware of the nutritional importance of

carotenoids, including lycopene – Lycord's main products. Lycord's operations in these areas may be affected

by attempts to introduce synthetic lycopene, which competes with its natural product. Nevertheless, some

natural lycopene properties have no synthetic substitute, although the end consumers – who are truly aware

of the health advantages of lycopene – may not necessarily be aware of the advantages of natural versus

synthetic lycopene (particularly as the latter is significantly cheaper). On the other hand, as the Company has

been informed by Lycord, the penetration of synthetic lycopene into the multivitamin market may also

increase public awareness of lycopene, thus contributing to natural lycopene's absolute market share.

During 2005, Lycord received the FDA's approval for using its natural lycopene product as food color,

following past permits to distribute the product in Europe and Japan. This approval was highly significant for

Lycord, since Europe and the US have yet to approve the use of synthetic lycopene for the same purpose, due


62�

to the fact that – according to the Company's estimate – there are still not enough data to prove that the

synthetic variety is not a health hazard.

As the Company has been informed, Lycord estimates that the more the food market uses lycopene

complementary products, it could launch new products based on natural lycopene, thus competing with the

cheaper synthetic variety.

Synthetic lycopene producers such as BASF SE and DSM Nutritional Products compete with Lycord in the

carotenoid area. Other competitors are natural lutein producers like Kemin Industries, Inc., formulators like

DSM Nutritional Products and vitamin and mineral mixture producers such as Fortitech Strategic Nutrition.

Volume and profitability developments

As mentioned above, recent years have seen increased competitiveness by international companies and

continued shrinking of margins for older products. In 2009, Lycord's sales totaled some USD83m, compared

to 78m in 2008. At the time of this Report, Lycord's market share is immaterial in any of its product groups.

Critical success factors

The Company estimates that the main success factors in Lycord's DS operations are: (1) Technological

leadership and innovativeness; (2) Responsiveness to the changing requirements of the food and nutrition

industry, and ever-changing consumer preferences; (3) Maintaining and reinforcing its relationships with

regular clients, while providing optimal customer service; (4) Global marketing deployment allowing it to

form tight relationships and develop new marketing niches in the markets it operates in as well as in other

countries and improve international trading relations; (5) Expertise and experience.

Entry barriers

Like all companies in the DS areas, Lycord is required to obtain and maintain various permits and

registrations, as well as to meet a large number of quality standards required by customers in various

countries. In addition, DS companies require, among other things, knowledge, unique technologies and rich

experience in scientific development, extraction technologies and storage techniques (to make the most of

DS products), chemical expertise and advanced technology to produce relevant product applications. In turn,

these require own capital, financial standing and reputation since it takes a long time to establish a position in

the DS area. Furthermore, proven technological knowledge and extensive experience are required to

manufacture market and distribute DSs, together with the ability to extract, separate, stabilize and fully

utilize the manufacturing process's various products and byproducts.

Customers


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In the DS area, Lycord's customers are mainly manufacturing companies, including those which produce and

sell end products to retailers, and those which formulate and package ingredients supplied by Lycord for

dietary supplements and private labels.

Marketing and distribution

At the time of this Report, Lycord sells its products mainly in North America, Europe and Japan. These sales

are usually not based on long-term contracts and orders, but on specific, current orders received shortly

before supply deadlines. Lycord's estimates are based on non-binding forecasts of annual order volumes from

key customers. Over the years, it has developed its own marketing and distribution channels, as well as

customer and technical support services. Sometimes, Lycord also relies on local agents.

R&D

Most of Lycord's activities are carried out in its own labs, but occasionally, as dictated by development

constraints, it uses external laboratory or research services. Lycord's main R&D activity is the development

and improvement of lycopene-rich potato strains, development of other products based on potato extraction

byproducts and development of new formulations in response to food and health market demand. In addition,

it conducts clinical studies to demonstrate the contribution of lycopene-based products to the prevention of

cancer and other degenerative diseases, sclerosis and high blood pressure, as well as dermal conditions and

menopause side effects. It performs these studies in Israeli, European, North American and East Asian

research facilities. All of its past and present R&D activity has been funded independently.

Regulatory restrictions, registrations and permits

Production and marketing of dietary supplements and food additive ingredients are usually subject to

national health agencies registration and quality requirements. As already mentioned, Lycord has recently

received the FDA's approval for using tomato-produced lycopene as a natural food color, in addition to

permits it has already received from European and Japanese authorities. Following the publication of new

studies, some of the various US recommendations for vitamins and minerals have been revised, and later

adopted also in Israel. In 2001, based on new EC regulations, Israel adopted Public Health (Food) (Dietary

Supplements) Regulations, 2001-5761, which list permitted supplements, measures and values.

Raw materials and suppliers

At the time of this Report, the raw materials of Lycord's products are tomatoes, Marigold flowers (Tagetes

erecta), and algae. Consequently, its main DS suppliers are farmers so that supply is also dependent on

factors affecting the agricultural industry, including those detailed in Sections 5 and 6 above. Moreover,

Lycord has contracted with Zeraim Gedera, Ltd. for the supply and development of special tomato strains, as

well as with growers whom it supplies with seeds and growing instructions. In addition, Lycord buys


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vitamins and minerals from Western and East Asian companies. Recently, the prices of these materials have

risen substantially, so that Lycord had to raise its selling prices. An import permit by the Ministry of Health is

required for most imported vitamins and minerals.

Lycopene inventory planning is crucial, since Lycord extracts the material from its uniquely developed

potato strains, which yield crops during June to September. Nevertheless, thanks to Lycord's extraction

technologies and unique storage methodology, it usually manages to maintain inventory levels sufficient for

lycopene production until the following growing season.

Intellectual property

All of Lycord's products have been originally developed. At the time of this Report, Lycord has some 15

registered production and formulation process patent families, as well as some additional 20 patent families

in advanced registration stages. Some of the patents refer to production and formulation processes, as

mentioned above, while others refer to the health-promoting properties of active materials developed by

Lycord. Lycord also owns several brands, registered as trademarks, such as Lyc-O-Mato, Tomat-O-Red and

other formulation brands.

18.2 Aromatic Products for the Cosmetics and Flavors & Fragrances (FF) Industries

At the time of this writing, the Company holds 100% of Agan Aroma and Fine Chemicals, Ltd.

(hereafter, Agan Aroma), which mainly develops, manufactures and markets synthetic chemicals and

fragrances for the detergent industry (soaps, washing powders, laundry softeners, cleaning agents, etc.), for

the cosmetics and body care industry (lotions, shampoos and deodorants) and for the fine fragrances industry.

The great majority of these products are intended for export. Agan Aroma owns over ten types of aromatic

chemicals used to produce scent extracts. It focuses on R&D, manufacturing and marketing of added-value

aromatic chemicals. Its products are raw materials included in the final product, providing it with the main

source of fragrance.

Agan Aroma's activity focuses on chemical production based on organic synthesis of fragrances for the

aromatic industry in its dedicated facilities in Ashdod. Most of its raw materials are high-grade chemicals.

Structure, recent developments and competition in the aroma market

The aromatic chemicals market has developed considerably over the past few years in view of rising

standards of living and changing preferences of end consumers who want their products accompanied with

pleasant fragrances, almost in every product category.

Activity in this area requires innovativeness, expertise and advanced R&D, as well as the technological

knowhow required for sophisticated production and initial funding for investment in complex production


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facilities. Critical success factors are good reputation and branding, which take years to build up. Clients for

whom unique aromatic products have been customized require high levels of reliability and consistency.

Agan Aroma's main competitors include leading FF multinationals with significant production capacity, such

as International Flavors and Fragrances, Inc. (IFF), leading chemical producers such as SE BASF and other

companies in East Asia. Note, however, that as Agan Aroma focuses on producing unique materials and

products it avoids competition with its customers, which gives it a competitive edge.

Customers

Most (75%) of Agan Aroma's customers in the FF area are multinationals. The rest are medium- and small-

scale companies. Agan Aroma supplies most of the leading FF companies (with an aggregate market share of

75% of world activity). Its major customers in this area include multinationals such as Firmenich, Givaudan,

Symrise, IFF, Procter & Gamble, Quest International Fragrances and Robertet Flavors. Aromatic chemicals

are usually developed in response to customer demand, requiring long-term strategic relationships with

clients, as well as collaboration in development and customization efforts.

Marketing

Most aromatic products sales are based on long-term contracts and orders, and the rest on current orders

received by Agan Aroma shortly before the supply deadlines. Agan Aroma's estimates are based on non-

binding forecasts of annual order volumes by key customers. Its marketing, distribution and sales network is

based on: (a) direct sales (usually through Agan Aroma subsidiaries) to end customers; (b) commission-based

sales through agents in various countries (such as in Europe, Singapore, India and Japan); and (c) sales

through a company jointly held (50%) by Agan Aroma (for joint company products alone).

R&D

Agan Aroma focuses on constant development and improvement of aromatic products manufacturing

processes and applying technologies appropriate for high-grade aromatic chemicals. Other R&D activities

are designed for QC, to ensure company products meet global standards.

Regulatory restrictions, registrations and permits

Agan Aroma products are being gradually subjected to strict health and safety standards. For further details,

see "REACH legislation", in Subsection 15.5 above. Customers require producers to provide certificates

demonstrating that their FF products meet regulatory standards and legal requirements. Recently, producers

are increasingly required to document production processes and meet stringent environmental standards.


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In order to maintain high quality and availability, FF producers such as Agan Aroma need to forge long-term

relationships with suppliers. Recently, production of certain chemicals – particularly aromatic chemicals – in

low-cost economies such as China and India has increased. Agan Aroma's main raw material suppliers are

based abroad. At the time of this Report, it is independent of any single supplier. Finished products in the FF

area may be stored for a period of several months.

Volume and profitability developments

Agan Aroma's sales totaled USD40m in 2009, compared to 47m in 2008.

Intellectual property

All the aromatic products manufactured by the Company's subsidiaries are generic.

18.3 Industrial Chemicals

At the time of this writing, the Company produces and markets industrial chemicals, mainly

byproducts and sometimes raw materials of its CPP production processes, as detailed below:

Hydrogen peroxide, used mainly in the production of detergents for the paper and chemical industries

Electrolysis products, sold by the Company to manufacturers, mainly in Israel

CO2 and hydrogen for industrial uses, mainly in the food industry

The Company's industrial chemical operations include the production of chemicals, as well as their

importation and marketing in Israel. It is its industrial chemical capabilities which allow it to produce these

products. Note some production activity is carried out in the Company's ordinary facilities, while others are

carried out in dedicated facilities.

In 2009, industrial chemical sales totaled about USD40m, compared to some 63m in 2008.

Customers

Since this activity area involves basic chemicals, it caters to a variety of customers, including mainly

manufacturers in areas such as food, energy, textiles, plastics, construction and chemistry. As already

mentioned, most of the Company's industrial chemicals customers are Israeli. Products in this area are

marketed through dedicated distribution agreements or based on orders, as the case may be.

Following a production malfunction discovered in November 2009 in CO2 supplied to company clients, CO2

supply was suspended temporarily. At the time of this Report, this issue is handled by the Company's insurer,

and the Company estimates it has full insurance coverage.


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Competition

The company controls over half of the Israeli industrial chemicals market. Its main competitors in Israel

include importers as well as local producers, such as Fertilizers and Chemicals, Ltd. and Deptochem, Ltd.


Most raw materials inputs in the industrial chemical market derive from the Company's CPP activity. Since

most industrial chemicals are raw materials produced by the Company or byproducts of end product

manufacturing processes, inventory periods are short, usually no more than a few weeks.

18.4 Additional Products

In addition to the products detailed in this section above, the Company produces several industrial

chemicals for which it takes advantage of its production expertise and/or technologies – mediating materials

for the pharmaceutical and other industries – however, the production and sales volumes of each are

negligible.


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Part V: Issues Relevant to the Entire Group

19. PERMANENT ASSETS AND FACILITIES

The Company's permanent assets are mainly the plants where it manufactures, researches and

develops, formulates and packages its products. Its main production facilities are in Israel and Brazil; it also

operates several proprietary formulation and packaging facilities around the world, and others owned by

distribution companies acquired throughout the years. See Subsection 7.4 above for a description of the

Company's production, formulation and packaging processes.

19.1 Major Production Plants

Beer Sheba

The Company's plant in Beer Sheba currently formulates and packages the pesticides and fungicides

produced in the Ramat Hovav plant. The plant also formulates and packages other products produced by

third parties and sold by the Company.

The plant is located on a land area of some 100 acres,11 which the Makhteshim subsidiary leases from the

Israel Land Administration (ILA), including a constructed area of some 37,000m2 with buildings, offices,

facilities and warehouses. The leasing periods are long-term and different for various parts of the land,

ending between 2018-2068. The leasing agreements include provisions which commonly appear, from time

to time, in leasing agreements with the ILA, including extension rights.

In addition, the plant perimeter is also home to a Lycord plant. As already mentioned, Lycord is a subsidiary

which produces dietary supplements and food additive ingredients as detailed in Subsection 18.1 above, on

land owned by the Company since 2001. (See below for details about other Lycord plants).

Ramat Hovav

At the time of this Report, the Company's Ramat Hovav plant manufactures all the Company's active

materials used for pesticide and fungicide production. The plant also packages active materials. Furthermore,

11 At the time of this Report, the Company is conducting advanced negotiations related to a capitalization

settlement for leasing about 18 acres of the Beer Sheba land, such that it concurrently has extension options under the

original lease agreement with the Israel Land Administration (ILA). Despite the time that had elapsed and in view of the

progress in the lease extension negotiations, both parties continue to abide by the original lease contract provisions,

whose term had already expired, and the Company estimates no significant exposure may be expected in relation to this

contract.

In addition, some five acres of the plant grounds used by the Company are registered in ILA books as leased to

Harsa Israeli Ceramics Ltd., and the Company's use of this land used to be governed by a settlement between Harsa and

the Company. In practice, it was agreed to assign the leasing rights on that land to the Company and at the time of this

writing, the Company is in the process of completing the leasing rights' registration in ILA books. The leasing rights

granted by this rights assignment agreement will expire in 2017.


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it is used to manufacture industrial chemicals for the Company and other industries, as detailed in Subsection

18.3 above.

Company land in Ramat Hovav. The Ramat Hovav plant is built on a land area of some 270 acres, leased

form the ILA, with a constructed area of 169,471m2 with buildings, offices, facilities and warehouses. The

leasing periods are long-term and different for various parts of the land, ending between 2023-2029. The

leasing agreements include provisions which commonly appear, from time to time, in leasing agreements

with the ILA, including extension rights. (See Subsections 25.8 and 29.4 below for further details and

procedures concerning this plant's operations).

In May 2007, Makhteshim signed an agreement with Ramat Negev Energy Ltd. (Negev Energy) – a third

party unaffiliated with the Company – according to which it will sublet to Negev Energy some land (subject

to the ILA's approval, which has not been obtained at the time of this writing), on which Negev Energy will

build an electric and steam power plant using natural gas (subject to the availability of a pipeline and regular

supply of natural gas) within four years after signing the agreement. The return for leasing this land is

immaterial to the Company. In addition, the agreement provides for Negev Energy to supply energy,

electricity, steam, soft water, distilled water and compressed air to Makhteshim's facilities in Ramat Hovav

for a period of 24 years and 11 months after signing the aforementioned sublet agreement, after which time

the power station will be owned by Makhteshim. To the best of the Company's knowledge, at the time of this

writing not all the approvals required to build this power plant have been obtained, and the funding required

has yet to be raised. The construction works are under Negev Energy's responsibility and at its expense, and

so are obtaining the legally mandated permits and registrations.

Ashdod

The Ashdod plant, located in the city's northern industrial area, is mainly used to manufacture the active

materials used for herbicide production, as well as for producing the Group's aromatic products, as detailed

above in Subsection 18.2. The plant also includes formulation and packaging facilities.

At the time of this Report, the manufacturing plant is built on a land area of 60 acres, of which some 22 have

been registered under the Company's name, and 28 will be registered as such following consolidation and

allocation procedures which have yet to be completed, at the time of this writing. The remaining ten acres are

leased from the ILA. These leasing agreements are for periods ending in 2050 and 2054, and include

provisions which are common, form time to time, in ILA leasing agreements.

This land includes a constructed area of 41,600m2 with production facilities, warehouses, storage areas for

packages, engineering services, technical equipment, offices, laboratories, platforms, employee welfare

services and various auxiliary buildings. In addition, Agan leases – from various third parties unaffiliated

with the Company – an area of less than two acres, next to the plant grounds, for parking, with two buildings

(500 and 1750 m2) used for storage, for amounts immaterial to the Company.


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In April 2006, Agan signed a 24-year agreement with the Ashdod Municipality, allowing it to make use of a

land area of five acres to build a sewage treatment plant in return for Agan's own investment in the

construction, expected to total some 130m NIS, most of which have already been invested (See paragraph

25.10.2 below for more details).

In July 2006, Agan signed an agreement with Ashdod Energy Ltd. – a third party unaffiliated with the

Company – according to which it will sublet to the latter a land area of 2.6 acres, part of a 5.5 acre land area

leased by Agan from the ILA, on which Ashdod Energy will build an electric and steam power plant using

natural gas (subject to the availability of a pipeline and regular supply of natural gas) within four years after

signing the agreement. The return for leasing this land is immaterial to the Company. In addition, the

agreement provides for Ashdod Energy to supply Agan with energy for a period of a period of 20 years after

the power plant starts operating or for a period of 24 years and 11 months after signing the aforementioned

sublet agreement, whichever is sooner. When this power plant becomes commercially viable, the discounted

electricity and steam rates will represent complete disbursement of the rental fee of $80,000 a year. The

building and construction works are under Ashdod Energy's responsibility, and so is obtaining the legally

mandated permits and registrations.

Other Lycord plants

As already mentioned, Lycord has a plant in Beer Sheba on land bought from the Company, not far from the

Company's own facilities there, over an area of 17,300m2. The procedure of registering the land on Lycord's

name will be completed after settling the capitalization agreements with the ILA.

Lycord also has a plant in Yavne, where it leases an area of 3,000 m2 at an ordinary lease for 20 years which

started in 1992 and is automatically renewable for another ten years.

Lycord has two more fully owned plants (both the land and the structures), one in the UK and one in the US.

These produce carotenoids, vitamin and mineral coating, mixtures for the food industry and other dietary

supplements. These facilities have been developed by Lycord itself and are customized for manufacturing its

specific products.

Finally, Lycord has operational rights in other plants in Israel and abroad.

Plants in Brazil

Londrina, State of Paraná. This plant is located in the city's industrial area and is fully owned by the

Milenia Agrociencias Group S.A. (hereafter, Milenia). The plant is built on an area of 60 acres of which

36,000m2 are constructed and include manufacturing, formulation and packaging facilities, as well as

warehouses. This site is also the location of Milenia's Brazilian HQ.


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Taquari, State of Rio Grande do Sul is home to another Milenia plant. The plant's area covers more than

120 acres, with a constructed area of 68,000m2, including CPP manufacturing, formulation and packaging

facilities.

19.2 Packaging and Formulation Plants

In addition to the abovementioned production plants, the Group operates several facilities in its

activity areas worldwide, including in the US, Columbia, Spain, Italy and Greece, which are designed mainly

for final formulation and packaging of products and materials produced in Israel. At the time of this Report,

however, their operations are immaterial in relation to the Group's volume of operations. Moreover, as

already mentioned, the Group has agreements with distributors around the world, some of them under its

control and others acting as partners, as well as with still other companies, for outsourced formulation and

packaging services in their own facilities as required.

19.3 Company HQ

In April 2007, the Company agreed to lease an office space of some 3,870m2 (at a cost immaterial to

the Company) in the Airport City compound at Ben-Gurion International Airport. During the fourth quarter

of that year, the Company's HQ moved to the new location, including its management, sales, development,

registration and financial departments as well as senior executive ranks, main subsidiary managements and

its procurement operations in Israel. According to the leasing agreement, the lease periods ends after 15

years, but the Company has the option of terminating the contract on three milestones (following 9, 11, and

13 years, subject to an advance written notice of 12 months) in return to a predetermined compensation.

19.4 Machinery

The main machinery in the Company's facilities includes active material production lines. Its size,

constituent materials and number of units change from one facility to another. Company facilities include the

following items:

Revolving machine tools, such as pumps, reactors and compressors of various types.

Static machinery and pipelines, such as distillation columns, containers and cooling towers.

Electricity and control, such as computerized control systems.

Civil engineering and iron or concrete constructions.

On December 31, 2009, the machinery's amortized costs totaled some USD475.3m.

19.5 Investments in Production Facilities

The Company acts continuously to expand its production capacity, mainly by expanding existing

synthesis, formulation and packaging facilities and by building new production facilities on its existing


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locations, operating production facilities owned by acquired distribution companies, expanding its R&D

infrastructures and various environmental protection projects. During 2007, the Company has completed the

construction of three ecological treatment plants: a biological sewage treatment facility at Ramat Hovav, a

thermal oxidizer at the Agan plant, and another in Ramat Hovav. In addition to those ecological plants, the

Company has constructed an additional biological sewage treatment facility at the Agan plant, which is at the

running stage at the time of this writing. (See paragraph 25.10.2 for details on this facility).

In 2009, the Company invested a total of some USD72m in facilities and machinery. The Company intends

to continue expanding its production capacity by investing in production facilities, as and to the extent

required, subject to various applicable legal restrictions and requirements.

Moreover, the Company intends to continue expanding its environmental investments, whether of its own

initiative or to meet regulatory and legal requirements. In December 2009, it concluded a multi-annual

agreement with Egyptian company EMG (East Mediterranean Gas) for providing natural gas for the Group's

production facilities in Ashdod and Ramat Hovav. (See Subsection 25.6 below for more details about this

agreement and the Company's investments in ecological facilities in the years leading up to this report).

The various expansions of the Company's plants in Israel have been granted an Approved Enterprise status

eligible for investment grants and/or tax benefits under the Law for the Encouragement of Capital

Investments, 1959-5719. Note that the Ashdod plant is eligible to tax benefits only (and not to grants).

During 2006, the Company has completed the following investment programs approved by the Ministry of

Industry's Investment Center (hereafter, Center):


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Ramat Hovav and Beer Sheba. On December 27, 2005, the Center approved a grants program totaling

some NIS117m (about USD30m) for the construction and expansion of production facilities, as well as

safety- and environmentally-related activities. In July 2006, a further investment of some NIS6m in land

and infrastructure development, new structures and machinery was approved. At the time of this Report,

the Company has completed its investments, but the Center's execution approval of this program is still

pending.

Ashdod. On December 31, 2006, the Company completed an USD7.4m program for investing in the

Company's production facilities, together with a neutralized investment of some USD7.2m in systems,

structures, general-purpose systems and new machinery, approved by the Center on July 19, 2004 as a

non-grant, tax benefits program. The benefits period for several expansion programs ended in 2008, and

for others, will end in 2010 and 2012.

All benefits accrued by virtue of the abovementioned approvals are contingent on meeting legal and

regulatory provisions, and on applicable terms set forth in the approval documents for investment in the

Approved Enterprises. The Company consistently operates according to the provisions of the Law for the

Encouragement of Capital Investments.

In addition, during 2009 Milenia undertook current investments totaling some USD3.1m for expanding and

enhancing the production capacity of its Brazil facilities, including in order to improve the development and

manufacturing capabilities of new products and enhance its environmental protection to meet stricter legal

requirements.

19.6 The balance of amortized permanent assets cost in the Company's consolidated financial reports for

December 31, 2009, net of investment grants, totals some USD576.4m. (See Note 10 in the financial

reports).


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20. PRODUCTION CAPACITY

The Company's production capacity is affected mainly by the location of production, formulation

and packaging facilities in several sites in Israel and abroad, their output and each one's area and time

allocation at full capacity.

In general, the Company's production plants (detailed in Section 19 above) operate around the clock, in

shifts, apart for self-initiated stops for occasional maintenance work, during which the Company sells mainly

inventoried products. At the time of this Report, the average number of annual actual production stops due to

such maintenance work, as well as malfunctions, holidays and other such events is fifteen (15) days.

The Company's production sites house two types of facilities: (1) Dedicated facilities designed to produce a

single product or product family; and (2) versatile facilities – over half the Company's facilities – where

several different kinds of products may be manufactures. The latter provide the Company with

manufacturing flexibility and enable it to prepare for the production of new products.

As mentioned above, the Company continuously invests in expanding its production capacity. The Company

estimates that its existing sites have enough facilities and land areas to expand its production capacity, if

necessary, among other things by taking the following measures: (1) Expansions and changes in existing

facilities; (2) changes in work processes; and (3) expanding the activity volume of certain shifts, which are

currently below maximum capacity (for example, by adding weekend shifts; note that the Company has a

permit to employ workers on the Sabbath).

In general, the Company's average output is about 80%. Nevertheless, in certain times of the year some of its

facilities operate at higher outputs exceeding 90%. As the demand for products manufactured in these plants

increases, the Company will consider expanding them or alternatively, purchase the same materials from

other suppliers. According to the Company's estimate, expanding a production facility may take between six

(6) and eighteen (18) months, following regulatory approval. Facility expansion costs vary with the nature of

each facility and extent of expansion required.

The Company estimates that should it be required to reduce production volumes in its facilities, in view of

market conditions, its overheads – which vary from one facility to another – would represent a higher

proportion of its income.

For further details about the Company's investments in production facilities, see Subsection 19.5 above. In

addition, see Subsection 7.4 above for details about the production processes of Company products.

Please note that this section includes forward-looking statements as defined in the 1968-5728 Securities Act,

relying on subjective company estimates of uncertain validity as to the output of its production facilities,

facility expansion timeframes, and the availability of its existing locations and facilities. Such estimates may

not necessarily materialize due, among other things, to the risk factors enumerated in Section 34 below as

well as failure to complete facility expansion on schedule due to dependence on subcontractors, and – as

concerns facility output – machinery and equipment wear and tear.


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21. HUMAN RESOURCES

On December 31, 2009, the Group employed 3,872 workers. Over the two years prior to this writing,

these were employed according to the following breakdowns:

December 31, 2008 December 31, 2009

Production 1,771 1,755

R&D 145 156

Sales & Registration 1,071 1,587

Management & Administration 345 374

TOTAL 3,332 3,872

* The main increase is in India, where a marketing company was started during 2009.

On May 24, 2009, the Company's board decided to appoint Mr. Erez Vigodman as CEO. Mr. Vigodman

began his term as CEO on January 1, 2010, and Mr. Avraham Bigger, who had previously been both the

Company's Chairperson and its CEO, continues his term as an active Board Chairperson.

On January 25, 2010, the Company announced its management's move to change the positions or authorities

of several high-ranking executives. (See Section 1.4 above for further details).

For details about the appointments and termination of Company executives in 2009, see immediate reports of

January 1, May 24, November 12 & December 30, 2009 and January 6, 2010 (RN 2009-01-000525, 2009-

01-118647, 2009-01-281157, 2009-01-336402 & 2010-01-345501, respectively).

See Chapter D of this Report for further details about the Company's top executives and their employment

terms.

December 31, 2008 December 31, 2009

Israel 1,459 1,431

Latin America 1,100 988

Europe 515 747

North America 174 279

Rest of the world 84 427*

TOTAL 3,332 3,872


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The Company's Organizational Chart

21.1 Labor Relations and Employment Agreements in the Company's Key Subsidiaries

Makhteshim

Products

&

Marketing

Global

Resources

&

Business

Develop-

ment

Strategy,

Innovation

&

Knowledge

Management

Legal Counsel ,

Company

Secretariat &

Corporate

Accountability

Finance

President & CEO

Agan

Joint CEO

Makhteshim

Israeli & Foreign Subsidiaries*

*Whether fully owned or jointly owned with other parties

Board of Directors

Regional Managers

Human

Resources

Corporate

Communication


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Makhteshim employees are represented by a Workers' Council comprised of three historical councils. From

time to time, the subsidiary's management and its employees sign collective agreements and pay contracts for

predetermined periods, which set forth pay conditions as well as benefits. In late 2007, a collective labor

agreement was signed which put an end to the labor dispute in the company, and settled the pay and

employment terms for each of the years 2007-2009. Both parties abide by the valid collective agreements.

This agreement states that the parties thereto accept the principle that allowances be paid only out of

Makhteshim profits. It also includes a commitment to industrial peace and avoidance of unilateral steps.

Finally, the agreement determines the extent of promotions and makes them contingent on employee

performance.

During 2008, Makhteshim workers declared a labor dispute. Both parties were involved in legal proceedings,

most of which have already been completed.

Recently, the Company has been negotiating with the employees and their representatives.

Agan

Labor relations in Agan are governed by a special collective agreement signed by the management and the

Ashdod Workers' Council on May 31, 1973. From then on, Agan's management and its Workers' Council

sign special collective agreements, usually for periods of two years at the time (normally at the end of each

such period), which revise select issues included in the historical agreement and introduce new

arrangements. The collective agreement was to expire in October 31, 2004 (2004 Agreement) and it governed

the following issues, among others: inducting new employees according to employee groups divided into two

generations; employee recruitment and promotion arrangements; working conditions; pay, bonuses and

plant-wide allowances; promotions; social and other benefits; professional education; temporary

employment, etc. Some Agan workers are employed according to individual contracts. Relations between the

Agan management and the employees are correct, with no strikes or labor disputes in the Ashdod plant over

the past ten years.

The 2004 Agreement has been extended to December 31, 2010, and it governs mainly the issues detailed

above, as well as including a commitment by the employees to maintain industrial peace throughout said

period. In September 2007, a special collective agreement was signed to arrange for the early retirement of

up to thirty employees, the costs entailed thereby are being insignificant to the Company at the time of this

Report.


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Milenia

The employment conditions of Milenia employees follow CLT (Consolidação das Leis Trabalhistas) rules

– the Federal legislation rules governing employment in Brazil. Every private company in this country is

required to meet their labor requirements. At the time of this Report, labor relations in the Londrina plant are

correct.

Labor relations at the Taquari plant are governed by a biannually renewed collective agreement. At the time

of this Report, labor relations there are correct and to the best of the Company's knowledge, no significant

labor disputes have plagued this plant in recent years.

For details on the Company's commitments upon termination of employment relations, see Note 19 in its

financial reports.

21.2 Investments in Training, Employee Development and Incentives

From time to time, Group members offer their employees training in accordance with their positions

and Group requirements. Occasionally, employees received updated information on areas related to their

roles, by taking part in exhibitions, lectures, seminars and professional education.

On October 14, 2007, the Company's Compensation Committee approved quantitative criteria for bonus

allocation as part of the Company's general policy of compensating non-executive, senior and junior

management Company employees, in reference to both annual bonuses and long-term compensation

programs. These criteria are subject to the framework of an allocation budget to be annually approved as part

of the Company's work plan. The extent of the bonus, should there be any, is a function of employee

performance and Company results, so that this policy is not expected to significantly increase the rate of

actual bonus payment.

21.3 Executives and Senior Management

At the time of this Report, the Company's senior management team comprises 8 managers, mostly

employed in its offices in Israel and abroad (sometimes through a management services agreement).

The Company's executive compensation policy (which applies both to middle-ranking executives and to

members of the senior management team) is composed of the following three tiers:

(1) Basic pay and allowances;

(2) Annual bonuses; and

(3) Warrants (see Note 22 to the Company's financial reports for the economic value of warrants issued to senior

Company Officers on December 31, 2009).


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For further details about the employment conditions of senior Company officers, see Chapter D of this

Report, as well as Note 29 in the financial reports. See Subsection 21.4 below for details about Company

stock warrants issued to senior Company officers and employees, as well as about the updating of warrants

granted to senior executives and employees in the Company and its subsidiaries in August 2009.

Board Chairman

Until the end of 2009, Mr. Avraham Bigger held the two offices of Company Chairman and CEO, and on

2010 Mr. Erez Vigodman replaced him as Company CEO; Mr. Bigger continues his term as active Chairman

of the Board.

The Company's Audit Committee, in its meeting on December 26, 2007, the Company's Board in its meeting

on January 9, 2008 and the Company's General Assembly convened on February 17, 2008, all approved the

Company's contracting of an amended management services agreement between it and the company which

provides it with management services, including the provision of Board Chairman and/or Company CEO

services through Mr. Avraham Bigger, which settled the monthly compensation to the company controlled by

Mr. Bigger as detailed in Chapter D.

CEO

On May 24, 2009, the board approved Mr. Erez Vigodman's nomination as CEO, as of January 1, 2010. On

August 11, 2009, the board also approved (following the Audit Committee's approval thereof) the Company's

individual employment agreement with Mr. Vigodman, as detailed in the Company's immediate report of

August 12 (RN 2009-01-195411). See Chapter D for details about Mr. Vigodman's compensation package.

21.4 The Company's Warrant Plans

For details about the Company's warrant plans and warrants allocated to employees and senior

executives, see Note 20 to its financial reports of December 31, 2009.

21.5 Senior Executives' Insurance and Reimbursement

Insurance. Directors and senior executives in the Company and its consolidated subsidiaries are

insured up to a liability limit of USD100m. Note that this policy was initially provided by Clal

Insurance Ltd. before the owner of its controlling interest, IDB, became an entity that could be

considered the owner of the Company's controlling interest. The policy is renewed annually according

to a framework resolution approved by the Company's General Meeting on October 6, 2005, for

periods that will not exceed five years on aggregate, i.e. until December 1, 2010. See Chapter D for

further details about the board's decisions regarding executive insurance.


80�

Reimbursement. On October 8, 2007, the Company's General Meeting approved an undertaking to

reimburse in advance senior executives in office at that time and who may be appointed in the future

(including those who may be considered owners of a controlling interest in the Company); the

Company's regulations were amended accordingly. (See the Company's immediate report on August

26, 2007, RN 2007-01-371416 for details).

21.6 See Section 29 below for details about corporate governance resolutions.

21.7 At the time of this Report, the Company estimates that it is not dependent in any way on any of its

employees.


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22. WORKING CAPITAL

22.1 General

Company Working Capital in 2009

Working Capital Reserve Current Ratio Quick Ratio

1,196,443 2.02 1.17

22.2 Customer Credit

As a rule, the Company follows a customer credit control procedure which sets forth the conditions for

providing customer credit frameworks, as well as collection follow-up. The Company normally gives its

customers credit of between several months and one year, such that a separate liability is managed for each

customer according to its profile (i.e., previous transactions between the Company and the customer and

their relationships, the customer's collaterals, the insurance the Company received for the customer, if any,

etc.), its specific requirements and the type of business relations it has with the Company. For additional

details on this procedure, see Subsection 10.3 above.

The amount of credit extended to customers varies as a function of the competitiveness in each of the

Company's markets, the types of crops in the region in question, the number of entities involved in the

supply chain, and other such factors which may affect the extent of credit at any given time. In certain

regions, mainly in South America, the credit is extended (compared to that given to West European

customers), and sometimes, among other things, due to bad crops or difficult economic conditions, the

Company may find it difficult to collect its debts, prolonging the collection period for up to several years.

This risk is also marked in developing countries where the Company is less familiar with its customers, their

collaterals are of doubtful value and there is no certainty as to such customers' insurance cover. In this

context, see also Subsection 10.3 in reference to provisions for bad debts.

The Company usually extends credit to its customers according to the credit terms common in the markets in

which it operates.

The average customer credit extended in 2009 was about 130 days. During the second half of 2009, however,

the credit extended to the Company's South American customers grew significantly longer due to the

increased competition, particularly in Brazil. The customer debt balance (including deferred promissory

notes) totaled some USD629m on December 31, 2009. (See Note 5 to the Company's financial reports for

further details).

The Company's provision for bad debts totaled some USD6.4m in 2009. Fur further details, see the

Company's Board Report.


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22.3 Customer Debt Securitization

The Company has concluded ongoing customer debt securitization transactions in order to reduce the

extent of Company funding from both bank and non-bank sources, under which foreign special purpose

entities (SPE's) (not owned or controlled by the Company) created and funded by international financial

institutes will buy its customers' debts. At the time of this Report, debt acquisition by these companies is

limited to a total of 250 million US dollars on a current basis, such that the consideration received from the

customers whose debts have been sold would be used to purchase new customer debt. In September 2009,

the customer debt securitization agreement was amended and extended to an additional term of three years,

with no significant changes in the structure of the extended securitization transaction (Securitization

Agreement).

Customer debts are sold to the SPE for a price lower than the actual debt, such that the reduction is

calculated based on the expected payment date. For further details, see Note 5 to the financial reports; see

Subsection 23.4 below for restrictions the Securitization Agreement enforced on the Company; see Note 3 to

the financial reports for details about debt securitization insurance.

22.4 Inventory Policy

In view of the seasonal nature of Company sales, the relative distance of its production plants from its

various markets and the high importance attached by the Company to the quality of its customer service, the

Company usually follows a flexible inventory policy with regard to both raw materials and finished goods.

The Company's production plan is based on a projection of periodic (seasonal) orders, which is updated on a

continuous basis according to actual orders. According to this plan, the Company normally orders its raw

materials from suppliers in view of their expected future availability and logistical considerations, and

subject to the various production limits, if any; however, it plans, to the extent possible, to receive the raw

materials in close proximity to the planned production deadlines (for reasons of funding and efficiency). The

Company usually stores in its plants an inventory of raw materials in line with such projections. The shelf

lives of most raw materials are several years, and may even be extended by simple treatments.

The Company has a dedicated inventory policy for each finished product, based on its profitability as well as

production deadlines and expected customer orders. In addition, the Company attaches great importance to

managing its current inventory efficiently and to shortening its global supply chain. Due to the fact that the

Company's customer sales are based on orders submitted on short notice, its inventory policy enables it to

maintain product availability throughout each season and according to its stages.


83�

Total Inventory and Inventory Days, December 31, 2009 (in USD thousands)

Raw materials & products inventory 931,470

Marketed products inventory 69,121

Total inventory 1,000,591

Inventory days (for historical sales) 230

The Company's inventories of finished goods and raw materials fell from a total of USD1,135m in 2009 to a

total of 1,001m in 2009, thanks to adjusting the procurement plan to the Company's sales targets.

22.5 Supplier Credit

Normally, the Company receives 30- to 180-day supplier credit. It acts continuously to raise the

number of credit days it receives from various suppliers.

On December 31, 2009, supplier credit totaled 507,356 thousand US dollars. The average supplier credit

period at that time was 129 days.

The balance of the Company's debts to suppliers totaled some 501.7 US dollars.


84�

23. FINANCING AND CREDIT

The Company finances its business activity with its own capital,12 as well as with non-bank credit,

mainly medium- and long-term bonds (as detailed in Subsection 23.3 below), whose balance at the time of

this Report was some USD980m. Under the bond terms, the Company has not undertaken to comply with

any financial standards.

The smaller share of the Company's external funding comes from: (1) long-term bank credit, whose balance

at the time of this Report (including current maturities) was some USD324m, and under which the Company

has undertaken to comply with certain financial standards, as detailed in Subsection 23.4 below; (2) short-

term bank credit, whose balance at the time of this Report (excluding current maturities), totaled USD216m;

(3) customer debt securitization limited to 250 million dollars, with a total balance of USD157m on

December 31, 2009, under which the Company has undertaken to meet certain financial standards as detailed

in Subsection 23.4 below (see Subsection 22.3 above for details about the Company's Securitization

Agreement); and (4) supplier credit. On the other hand, on December 31, 2009, the Company had cash and

cash-equivalent balances totaling USD562m.

From December 31, 2009 to the time of this Report, the Company received long-term bank credit totaling

about 50 million dollars from a banking corporation.

For details about credit limitations applicable to the Company by virtue of its financial funding agreements

and the Securitization Agreement, see Subsection 23.4 below.

23.1 Long-term loans

Long-Term Loans: Interest Rate and Value according to Currency

Long-term bank loans (incl. current maturities), December 31, 2009

Weighted Interest

Rate, Dec. 31 2009

Effective interest

rate (%) Value (in $ thousands)

USD 2.8 2.83 313,403

Brazilian Real 6.93 7.11 2,159

Euro 4.3 5.51 5,384

Others 5 5.1 3,179

TOTAL - 324,125

12 For details about a fundamental board resolution of March 9, 2010, to issue shares by way of rights to the

Company's shareholders, see Subsection 2.4 above.


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Expected Loan Payments

Payment Year 2009 Value (in $ thousands)

2010 20,926

2011 235,188

2012 31,478

2013 19,668

2014+ 16,865

23.2 Short-Term Loans and Variable Interest Credit

Short-Term Bank Loans: Interest Rate and Value according to Currency, 2009

Weighted

Interest Rate,

Dec. 31 2009

Effective

interest rate

(%)

Value (in $ thousands)

Overdraft

NIS 2.3 2.32 73

USD 3.7 3.77 62,766

Euro 5 5.12 12,775

Brazilian Real 8.6 8.98 7,548

Others 3.2 3.25 4,516

TOTAL 87,678

Short-term Credit

USD 5.6 5.76 13,382

NIS - - -

Euro 4.7 4.81 5,942

Others 7.3 7.57 13,350

TOTAL 32,674

23.3 Company Bonds

Outstanding Company Bond Liabilities, 2009

Series Linkage Interest

rate )%(Value (in $ thousands)

B Indexed 5.15 461,945

C Indexed 4.45 333,016

D Non-indexed 6.5 185,075

BALANCE 980,036


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In December 2006, the Company issued bonds to institutional investors in three separate series at a total

book value of 2.35 billion NIS: (1) Indexed bonds at a total book value of some 1,650 million NIS and basic

annual interest rate of 5.15%, with principal paid off in 17 equal installments over the years 2020-2036

(Series B); (2) Indexed bonds at a total book value of some 465 million NIS and basic annual interest rate of

4.45%, with principal paid off in 4 equal installments over the years 2010-2013 (Series C); and (3) Non-

indexed bonds at a total book value of some 235 million NIS and basic annual interest rate of 6.5%, with

principal paid off in 6 equal installments over the years 2011-2016 (Series D). These three series have been

rated ilAA by Standard and Poor's Maalot, as detailed in Subsection 23.6 below. The Company is subject to

no restrictions in receiving credit by way of these said bonds.

On May 27, 2008, the Company published a shelf prospectus and a trade registration prospectus, in which it

registered its Series B, C and D bonds. Until that date, the Company paid an additional annual interest for

said bonds, and also met financial obligations it had undertook for the period up to the trade registration

according to the indentures. On June 4, 2008, the bond (Series C & D) owners' class meetings decided to

appoint Hermetic Trust Services as a trustee of these bonds, instead of Aurora Fidelity, in view of Aurora's

trusteeship of Series B as well, whose lifecycle is considerably longer than that of Series C and D.

During 2009, the Company and a fully-owned subsidiary bought, subject to the management's discretion and

market conditions, an aggregate total of some 80.4 million NIS (book value) bonds (Series B), for a total of

$16.4m. Due to these transactions, Series B bonds of some 12.5 million NIS (b.v.) were removed from TASE

trading. At the time of this report, the book value of traded bonds (Series B) totals 1,637.5 million NIS.

On May 27, 2008, the Company published a shelf prospectus (as corrected from time to time13) according to

which it may offer the public, through shelf offer reports under any law, the following securities, including

by way of rights offer: up to 250,000,000 common Company shares, of a 1.00 NIS book value each; the three

abovementioned bond series (B, C and D) such that each series will have a total book value of up to

1,500,000,000 NIS, offered by way of extending the negotiable series first registered for trade on the Stock

Market according to the prospectus; up to 3 bond series (E, F and G), each at a total book value of up to

1,500,000,000 NIS; up to 3 series of bonds (H, I and J), each at a total book value of up to 1,500,000,000

NIS; up to 5 series of warrants (1 to 5), each including no more than 250,000,000 warrants); and up to 5

series of warrants (6 to 10), each including no more than 15,000,000 warrants.

On March 24, 2009 the Company issued, by way of series extension based on a shelf offering report, Series

C bonds with a book value of 661m NIS and Series D bonds with a book value of 472m NIS. The gross

return totaled 1,201m NIS. The bonds (Series C & D) were issued for 101.56% and 98.95% of their book

value, respectively. On April 1, 2009, the Company announced the bonds' weighted discount rate (as detailed

in the immediate report of the same date, RN 2009-01-079908). For details about the board's resolution, the

13 See the Company's immediate reports regarding the correction of errors in the shelf prospectuses of March 23

& August 12, 2009 (RN 2009-02-063858 & 2009-01-194178, respectively).


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bond issue and its outcomes, see immediate reports of March 22, 23, 24 & 26 and April 1, 2009 (RN 2009-

01-062781, 2009-01-064998, 2009-01-065625, 2009-01-067944 & 2009-01-079908, respectively).

23.4 Credit Restrictions

A. Restrictions by virtue of long-term bank credit documents

The Company's own and its consolidated subsidiaries' bank financing documents include undertakings

by the Company to maintain financial ratios (financial covenants), the most important of which are the

following:

(1) The ratio between the Company's interest-bearing financial liabilities and its own capital

will not exceed that specified in some of the financing documents, or 1.25 (the strictest) to

1.5 (on December 31, 2009, the actual ratio was 0.7).

(2) The ratio between the Company's interest-bearing financial liabilities and its earnings before

interest, taxes depreciation and amortization (EBITDA) will not exceed that specified in

some of the financial documents, or 3 (the strictest) to 4 (on December 31, 2009, the actual

was 3.9).

(3) The Company's own capital will be no less than that specified in some of the financing

documents, or between USD1,200m (the strictest) and USD850m (on December 31, 2009,

the actual own capital totaled USD1,280m).

(4) It is also agreed that no change in control (as defined in the applicable documents) of the

Company or its Agan and Makhteshim subsidiaries will be made without the bank's prior,

written consent.

In addition, note that consolidated subsidiaries are subject to certain credit restrictions which are, to

the best of the Company's knowledge, immaterial, and that at the time of this Report, they comply

with said restrictions.

At the time of this writing, the Company has been granted consent letters from its funding banks,

according to which the Company's financial reports covering the period up to and including December

31, 2009 and March 31, 2010 reflect a ratio no greater than 4.5 (for any of the funding banks) or 5 (for

the other funding banks) between its financial liabilities or EBIDTA

B. Restrictions by virtue of long-term bank credit documents

The Securitization Agreement detailed in Subsection 22.3 above includes undertakings by the

Company to maintain certain financial ratios (financial covenants), the chief among them are the

following:


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(1) The ratio between the Company's financial liabilities and its own capital will not exceed

1.25 (on December 31, 2009, the actual ratio was 0.7).

(2) The ratio between the Company's interest-bearing financial liabilities and EBITDA will not

exceed 3.3.

(3) The Company's own capital will be no less than USD1,000m (on December 31, 2009, the

actual own capital totaled USD1,280m).

(4) Unused cash balances and/or credit lines, totaling no less then USD250m, will be made

available by July 30, 2010.

In January 2010, the Securitization Agreement was amended so that the Company's financial reports

for the periods specified in said amendment (see below) reflect a ratio between financial liabilities and

EBIDTA of no more than 4.2 for December 31, 2009; of no more than 4.3 for March 31, 2010; and

for no more than 3.7 for June 30, 2010. Note that on December 31, 2009, the actual ratio was 3.9.

The original financial covenants and those stipulated in the consent letters, as described in (1) and (2)

above, will be jointly termed, above and below, the financial covenants.

In addition to the above, the Company has undertaken, within the framework of said consent letters, to

meet further standards that, according to the Company's estimate at the time of this writing, do not

restrict its operations materially. (See Section 3 above for details about the Company's dividend-

related undertakings).

The Company estimates that with the gradual improvement expected in its results, as described in

Subsection 6.3 above, it will be able to meet the original financial standards by the end of 2010 (see

also Subsection 2.4 above). Moreover, the Company estimates that should the consent letters need to

be extended for another quarter/s, the funding banks' agreement to that may be obtained. Despite the

above, however, any unexpected worsening in Company results, due to an extraneous event or non-

realization of Company forecasts, as detailed in Subsection 6.3 above, could mean that the Company

would fail to meet the standards stipulated in the consent letters, including for the Q1 2010.

At the time of this Report and for the time just prior to its publication, and to the best of the Company's

knowledge, the Company meets all its restrictions as stipulated in said consent letters. According to said

financing documents and consent letters, the Company's compliance therewith is assessed on a quarterly

basis, as well as for all four quarters prior to the assessment.

Please note that the above text regarding the Company's estimates to the effect that it would not require the

extenuations specified in the consent letters until the end of 2010, and its forecast that the banks would agree

to extend their waivers, for as long as required, constitute forward-looking statements as defined in the 1968-

5728 Securities Act, relying on subjective company estimates of uncertain validity. Such estimates may not

necessarily materialize due, among other things, to the materialization of risk factors as well as the effects of

extraneous factors beyond the Company's control.


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23.5 Further Credit Restrictions on the Company as a Borrowing Group Member

Since IDB holds the Company indirectly, MA Industries and each of the Group members are members

of a "borrowing group" (as the term is defined in the Bank of Israel's Proper Banking Procedure) of IDB

Holdings, Ltd. Israeli banks are accordingly extend limited credit to each member of the IDB group as a

"single borrower" (as the term is defined in the Bank of Israel's Proper Banking Procedure), including the

Company and the other members of the Makhteshim-Agan Group, affected by the total credit extended to the

Group as a whole. These restrictions may affect the credit extended to the Group by certain Israeli Banks, its

ability to invest in companies which have received significant credit from certain Israeli banks, as well as its

ability to complete certain business transactions with entities which have been extended such credit.

In 2009, and at the time of this Report, the Company financed its operations with own credit, as well as with

non-bank and bank credit (both short- and long-term), customer securitization and supplier credit, and it

continuously assesses the effect of said restrictions on its ability to obtain bank credit or on the extent of such

credit, as required.

23.6 The Company's Credit Rating

On November 22, 2006, Standard and Poor's Maalot's Rating Committee decided to give the

Company's (Series B, C and D) bonds an AA rating. On December 2, 2006, Maalot announced their final

rating of said bonds as AA/Stable. This rating was based, among other things, on the Company's business

and financial policies. The considerations on which the rating decision had been based were updated in April

2007 and during May 2008.

On December 11, 2008, Maalot informed the Company of its intention to review its (Series B, C and D) bond

rating (credit watch negative). For additional details and for the full text of Standard and Poor's Maalot's

announcement, see the Company's immediate report on December 11, 2008 (RN 2008-01-351129).

On March 22, 2009, Maalot rated the planned expanded issue of Series C and/or D to the extent of up to 1.2

billion dollars "ilAA/Negative". It also announced that the Company will not be included in the review

process (credit watch negative). (For further details, see the Company's immediate reports on March 22 &

23, 2009 (RN 2009-01-062781 & 2009-01-064998, respectively)).

On December 3, 2009, Maalot announced a downgrading of the Series B, C and D bonds issued by the

Company from ilAA to ilAA-/Stable. (For further details and the complete text of Maalot's announcement,

see the Company's immediate report of December 3, 2009 (RN 2009-01-309126)).


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23.7 Variable Interest Credit

Interest Range (book values) at the time of this Report and its publication

Type of Credit Currency

Credit Volume

at the time of

financial report

(in NIS

thousands)

Variation

Mechanism

Interest

Rate at the

time of this

Report

Interest

Range in

2009

Long-term loan USD 41,666 1 M Libor 0.231 0.231-0.564




Long-term loan EUR 5,384 3 M Libor 0.661 0.66-2.847

Overdraft USD 62,766 1 D USD 0.169 0.103-0.51

Overdraft EUR 12,775 1 D EUR 0.291 0.267-2.143

Overdraft ILS 73 1 D ILS 1.260 0.51-2.6

Overdraft BRL 7,548 1 D BRL 8.550 8.19-9.36

Overdraft Others 4,516 - 3.620 1.97-5.71

Short-term credit USD 13,382 3 M Libor 0.251 0.248-1.421

Short-term credit EUR 5,942 3 M Libor 0.649 0.66-2.847

Short-term credit Others 13,350 - 4.000 -


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24. TAXATION

24.1 General

The Company is assessed according to the Israeli tax law in accordance with the Income Tax

Ordinance and Regulations, 1961-5721.

As already mentioned, at the time of this report the Company is the largest generic crop protection products

company in the world. Consequently, it is active in more than one hundred (100) countries worldwide,

through some 50 subsidiaries incorporated in various countries, which employ most of the Group's workers.

Each of these subsidiaries plays a different role and contributes differently to the Group's operations, and

they are assessed according to the local tax laws, as detailed below.

Note that what follows is an extremely concise description based on tax laws at the time of this report, and

that any future change therein would necessarily yield different results.

24.2 Tax Laws and Rates Applicable to the Company in Israel

A. Corporate Tax

The Israeli tax base is territorial and personal, thus applicable to companies defined as residing in

Israel based on provisions of the Income Tax Ordinance.14

According to Section 1 of the Tax Ordinance, the Company would be considered as residing in Israel for

income taxation purposes if it had been incorporated in Israel or if it is controlled and governed from

Israel. The term "control and governance" is not defined in the Income Tax Ordinance. To the best of the

Company's knowledge, the foreign subsidiaries held by the Company are controlled and governed from

outside Israel, and therefore, to the best of the Company's knowledge, they are not considered as residing

in Israel for income taxation purposes. Note that the Israeli and/or foreign tax authorities may not accept

the taxation results as described in general above and below.

On February 26, 2008, the Knesset (Israeli parliament) legislated the Income Tax Law (Inflationary

Adjustment) (Amendment No. 20) (Restricting Term and Application), 2008-5768 (Amendment).

According to the Amendment, the Adjustments Law will expire in 2007, and from 2008 onwards, it

provisions will no longer apply, apart for transitional provisions designed to prevent distortions in tax

calculations.

Based on the Amendment, from the beginning of 2008 onwards, the amortization amounts for fixed assets

and loss amounts for taxation purposes will no longer be indexed, and the balances to be accounted for

14 See reference to the annulment of the Income Tax Law (Inflationary Adjustments), 1985-5745, in this

paragraph below.


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will be the indexed balances for the end of 2007. At the time of this Report, the Amendment has been

published in the records and entered into force.

On July 25, 2005, the Knesset legislated the Income Tax Ordinance Amendment Law (No. 147), 2005-

5765 (Amendment 147), stipulating, among other things, that the corporate tax rate will be gradually

reduced as follows: 27% in 2008, 26% in 2009 and 25% in 2010 and onwards.

On July 14, 2009, the Knesset legislated the Law for Economic Efficiency (Amendments for the

Implementation of Economic Plan for 2009- 2010), 2009-5769 (Efficiency Law). Based on the Efficiency

Law and Section 160 of the Income Tax Ordinance (New Version), 1961-5721 (Amendment 171), the

corporate tax rate is expected to be reduced gradually from 2011 to 1016. According to the Efficiency

Law, the corporate tax rates applicable in 2010 and onwards will be as follows: 25% in 2010, 24% in

2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015, and 18% in 2016 and onwards. The

Efficiency Law also provided for a gradual reduction in individual marginal tax rates from a maximum of

46% in 2009 to 45% in 2010-2011, to be gradually reduced to 39% in 2016.

The implications of these revised tax rates are reflected in the Company's financial reports of December

31, 2009, in a reduced liability balance due to deferred taxes and recognition of net tax revenues totaling 6

million dollars.

B. Law for the Encouragement of Capital Investments

Israeli law promotes the building and expansion of industrial plants and other projects by defining

such investment plans as Approved Enterprise. Until Amendment 60 to the law was promulgated, the

general guidelines for granting this status had been benefits to the national economy, competitiveness in

international markets, use of innovative technologies, job creation, high added value and providing

satisfactory solutions to the unique needs of the (new) nation's economy.

Amendment 60 added several criteria for obtaining the Approved Enterprise status. The main criteria

(export conditions) are as follows: (1) The enterprise's main activity is in the biotechnological or nano-

technological areas; (2) Its revenues during the tax year from sales in a given market do not exceed 75%

of its total revenues during the same tax year; and (3) At least 25% of its total sales revenues during the

tax year come from sales in a given market with more than 12 million inhabitants.

The law offers two main benefit programs: (1) The grant program – this is offered to enterprises which

have met the abovementioned criteria and is also contingent on own capital investment by the enterprise

owner. It is also contingent on receiving the Israel Investment Center (IIC)'s approval, which is entitled to

add further conditions; (2) The tax benefit programs – before Amendment 60, the main benefit program

was the alternative program, as detailed below. The amendment added two more programs: The Priority

Area Program and the Strategic Program. After the amendment, enterprises included in the tax holiday

programs are called "Beneficiary Enterprises".


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Grant Program. An approved enterprise in Priority Area A is entitled to a two-year corporate tax holiday

and to reduced tax for the remainder of the grant period on unallocated revenues (5 years for an Israeli

investor and 8 years for a foreign investor). If profits from the holiday period are allocated, the enterprise

owners will have to pay a reduced dividend tax, while the enterprise will have to pay the tax it would have

paid had it not opted for the alternative program. The reduced corporate tax rate is 25% (this rate may be

reduced down to 10% according to the rate of foreign investment in the enterprise).

Tax Benefit Programs:

(1) Alternative Program. This program is under the Tax Authority's responsibility. A corporation seeking

tax benefits in view of its industrial operations and subject to meeting certain conditions such as

minimal own investment and export conditions as detailed above, is entitled to accelerated

depreciation as well as priority area-based tax benefits, as follows:

Priority Area A Priority Area B Central Israel

Corporate Tax Holiday 10 Years 6 Years 2 Years

Reduced Corporate Tax

Israeli Investor None 1 Year 5 Years

Foreign Investor None 4 Years 8 Years

(2) Priority Area Program. This program is offered for enterprises in Priority Area A only. Its tax benefits

are as follows:

Reduced Corporate Tax Dividend Tax

Israeli Investor 11.5% 15%

Foreign Investor 11.5% 4%

(3) Strategic Investment Program. This program is offered for enterprises requiring relatively high capital

investments, and exclusively for priority areas. In general, the program grants a complete tax

exemption over the benefit period for enterprises meeting its conditions.

The Approved Enterprise tax benefits are granted for a consecutive period of 7 years, from the first taxable

income year, assuming 14 years have not elapsed from the approval year (or the selection year, for

Beneficiary Enterprises) and 12 years have not elapsed from the year the enterprise started operating (or

the startup year, for Beneficiary Enterprises), as determined by the IIC.

The Approved Enterprise tax dividend is 15% subject to the various double taxation treaties in case of

dividends allocated to foreign residents.

The various expansions of the Company's plants in Israel have been granted Approved Enterprise status.

Note that the Ashdod facility enjoys only tax benefits, since the benefit period granted for several of its


94�

expansion plans ended in 2008, and will end for several others in 2012. For still other plans, the benefit

period has yet to begin. (See Note 18 to the financial reports for further details about the tax benefits and

approval documents obtained by the Company).

C. Encouragement of Industry (Taxes) Law, 5729-1969

The Company is entitled to certain benefits by virtue of the provisions of the Encouragement of

Industry (Taxes) Law, 5729-1969.

D. Capital Gains in Israel and Dividends

The tax rate for real tax gains accrued by the Company, excluding negotiable securities, on assets

acquired after January 1, 2003 (hereafter, in this paragraph, effective date) is 25%.

For assets bought before the effective date, the tax rate will be calculated in a linear fashion, such that the

share of the capital gains accrued up to the effective date will be taxed according to the ordinary corporate

tax rate, while the capital gains accrued thereafter will be taxable at the 25% rate. Since the corporate tax

rate in Israel from 2010 onwards is 25, this distinction is now moot.

When a company receives a dividend originating in revenues produced or accrued in Israel and received,

whether directly or indirectly, from another corporate taxable entity, it is not required to pay corporate tax

for it.

When a company receives a dividend originating in revenues produced or accrued outside Israel, as well

as a dividend whose origin lies outside Israel, it must pay a 25% corporate tax. Alternatively, if the

company chooses to receive indirect credit (as detailed below) for this dividend, the dividend, when

grossed-up, will be taxable by the ordinary corporate rate.

According to Amendment 169 to the Income Tax Ordinance which entered into effect on January 1, 2009,

as a temporary regulation for tax year 2009 only (2009 amendment), a company could have chosen to pay

a 5% tax for dividend income accrued in 2009, and paid to it by a foreign entity, so long as several

conditions obtained, the most significant of which are the following:

(1) Dividend income does not include income from gains by a foreign controlled subsidiary, as defined in

Section 75(B) of the Income Tax Ordinance, that had they not been allocated to the company or to

another entity in the corporate chain would have been construed as unpaid gains which are taxable

according to the provisions of said section.

(2) The dividend income was used in Israel during 2009 or within one year from actually receiving the

dividend. In this context, "use in Israel" would mean: (1) paying to an Israeli resident for services

rendered in Israel or for work completed in Israel; (2) paying for the acquisition or rental of assets to

be used in Israel, as well as paying an Israeli resident for such acquisition or rental; (3) paying for the


95�

improvement or maintenance of assets in Israel; (4) investing in research and development in Israel;

(5) paying a debt owed to an Israeli resident, and if the debt is paid to an affiliated entity – on

condition that this entity spends the money in Israel; (6) paying interest, discount fees or index

differentials for a bond traded in an Israeli stock exchange, as well as an acquisition move by the

company paid by a dividend for such a bond issued thereby; (7) making a deposit in Israel, in an

Israeli resident banking corporation, for a period of at least one year, or buying securities traded in an

Israeli stock exchange and holding them for a period of at least one year, under certain conditions

these may be integrated within the one-year period.

(3) Direct or indirect payment to an individual with a controlling interest in the company receiving the

dividend will not be considered use in Israel.

(4) If a company controls the entity paying out the dividend, the income from the dividend entitled to

reduced tax under this section will be deducted by (1) the amount of a loan extended by the company

to the entity paying out the dividend or its affiliated entity for the period between December 1 2008 an

December 31 2010 (herein, effective period), hitherto unpaid during the effective period; (2) a

guarantee given by the company to the entity paying out the dividend or its affiliate for a loan taken

by that entity during the effective period, so long as the guarantee has been exercised over that period;

(3) an amount paid by the company during the effective period for buying securities of the entity

paying out the dividend or its affiliate.

(5) A "house property company" as defined in Section 64 of the Income Tax Ordinance, a "family

company" under Section 64a or a "transparent company" under Section 61a1 will not be entitled to the

benefits of this section.

After having analyzed the implications of the 2009 Amendment, on August 11, 2009, the Company's

board approved a one-time withdrawal of up to $300 million in profits from Group members abroad, to be

spent on the Company's ongoing needs. The profits were withdrawn by the Company during Q4, 2009.

Note that this profit withdrawal implies no change in the Company's dividend allocation policy and/or

timing.

24.3 Taxation Overseas

At the time of this Report, the Company develops, purchases, produces and markets its products

through multiple subsidiaries worldwide. Over 90% of the Group's sales are in international markets outside

Israel, hence its choice to operate through multiple subsidiaries which, to the best of the Company's

knowledge, are incorporated, controlled and managed outside Israel, and accordingly, assessed subject to

their countries' tax laws.


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Some of these foreign subsidiaries have been founded by the Company, while others have been acquired

during the long years during which it has become a multinational, the great majority of its commercial and

marketing operations conducted overseas.

24.4 Taxation of Foreign Income in Israel

Income derived from dividends distributed by foreign companies abroad will be taxable in Israel,

while the tax paid abroad will be deducted, including by means of indirect credit, subject to provisions of the

Ordinance, as detailed below.

When interest income from a foreign to an Israeli company is taxable under the Israeli Corporate Tax Law,

the taxed company will be credited for the whole tax originally deducted by the foreign company. As a rule,

the credit due to foreign tax is limited to the tax level the Israeli company is required to pay for its incomes

from that source. Excess credit which is non-deductible in a given tax year will be deductible over the next

five years vis-à-vis the same source.

Indirect credit in Israel

Instead of committing to a 25% tax, Israeli companies are entitled to choose to commit to the current

corporate tax rate (27% in 2008; this rate is expected to fall gradually to 25% in 2010, and t0 18% in 2016 as

aforementioned) for the whole income out of which dividends have been distributed and receive "indirect

credit" for the foreign corporate tax applicable to that income, so long as they holds 25% or more of the

foreign subsidiary which distributes the dividends. Israeli companies are entitled to such indirect credit for

corporate tax applicable to foreign sub-subsidiaries, so long as they hold 25% or more of the foreign

subsidiary, while the latter directly holds more than 50% of the foreign sub-subsidiary which is the source of

the income out of which the dividends have been distributed.

Foreign controlled company

Should most of the income of foreign companies held by the Company (whether directly or indirectly) be

passive, those same foreign companies may be considered "foreign controlled". In such an eventuality,

according to Section 75b of the Ordinance, the company which controls the foreign company which is

considered a foreign controlled company will be taxable as though it has received its share of the latter's

undistributed earnings in the tax year in which they've been accrued. To recap, this section's provisions refer

to earnings derived from passive income by the foreign company (such as income derived from interest or

dividend that may not be considered an enterprise).


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24.5 Transfer Pricing

On November 29, 2006, Section 85a of the Income Tax Ordinance entered into effect with the

publication of the Income Tax Regulations (Market Terms Determination), 5767-2006, on that very day

(Transfer Pricing Regulations). According to that section and the Transfer Pricing Regulations, a cross-

border transaction (in which one of the parties involved is not an Israeli resident), in which the two parties

have a "special relationship" (as defined therein), will report according to market terms and be taxed

accordingly. The Transfer Pricing Regulations apply to various cross-border transactions, including the initial

stages of manufacturing a product up to selling it, concluded on and from the day the came into effect. Rules

for ongoing reports have been formulated by virtue of these regulations, and the assessment authorities have

also been authorized to demand market studies.

Section 85a and the Transfer Pricing Regulations adopt the market pricing principle by stating that price

appropriateness and the terms of cross-border transactions between parties who have a special relationship

will be evaluated by comparing them to similar transactions between parties with no such relationship. If

there is no comparable transaction with identical characteristics, the cross-border transaction in question will

be compared to an identical or similar transaction concluded by the assessed party.

According to Regulation 2(a), in order to determine whether a cross-border transaction is indeed a market

terms transactions, a market study will be conducted to compare the transaction in question with similar

transactions by the assessed party, as defined in the Transfer Pricing Regulations. The comparison will be

made according to one of the methods detailed in this regulation. The study will be submitted to the

assessment authorities within 60 days as per their request, unless the cross-border transaction has been

approved as a one-tie transaction, according to Regulation 4.

The cross-border transaction will be considered a market terms transactions if the said study's findings do not

exceed the inter-quarterly range (the values between the 25th and 75

th percentiles) compared to similar

transactions. In the pricing comparison method, a transaction is considered a market terms transactions if it is

completely within the range of similar transactions. For transactions which cannot be construed as such, the

transaction price will be reported according to the value of the 50th percentile in the range of values obtained

by comparison to similar transactions.

As aforementioned, the Company develops, purchases, produces and markets its products through multiple

subsidiaries worldwide. Each of these subsidiaries which are assessed for tax purposes in various regions

worldwide plays a part in the overall network of the Company's international business operations (sometimes

within the same product chain) – manufacturing, knowledge maintenance and development, procurement,

logistics, marketing and sales. Accordingly, some of the Group members hold intangible assets, others act as

manufacturing contractors, and still others are responsible for procurement or perform logistic or marketing

services.


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Company services or products (at their various production stages) are priced based on transfer pricing studies

conducted to assess the relative contributions and risks of each relevant subsidiary and to reflect the market

price these services or products would have fetched had they been provided to non-group members.

Accordingly, the before-tax profit is divided among many countries with varying tax rates. At the time of this

Report, the various double taxation treaties have no material effect on the Company. Differential

classification or categorization of the return for the value elements of each Group member in the various

countries, or of their characteristics, however, affect the amounts of profit accrued and assessed for taxation

purposes in each country, and this may indeed have a material effect on taxing the Group and its results. (See

also Section 34 – Risk Factors – below).

24.6 Effective Tax Rate

The Group's main taxable incomes in 2009 came from Group members active in Israel (whose rates

are detailed above), as well as European countries (mainly Italy, Spain and France), the US and South

American countries. To the best of the Company's knowledge, the statutory corporate tax rates applicable on

December 31, 2009 were 32 % in Italy, 30% in Spain, 33% in France and 40% in the US; in Latin American

countries, the rates vary between 25% and 35%; in other countries where the group is active, they range

between 16% and 40%, while some Group members have been incorporated in foreign territories where the

rates are significantly lower than in Israel.

As detailed above, the year 2009 was characterized by a sharp drop in Company's overall profits, such that in

some regions, mainly South America, the Company reported losses, while in others it reported slight margin

shrinkage. Accordingly, losses for tax purposes transferred to the following year – whose adjusted total on

balance day is some 200 million dollars (mainly due to the South American operations) – may be realized

over a period of several years. The company has accumulated tax assets for aggregate losses totaling some 45

million dollars based on the Company's estimate that these losses are highly likely to be realized over the

next few years. The (consolidated) negative effective tax rate in 2009 was 33.4%.

Some of the Company's surpluses come from revenues of Approved Enterprises in Israel (see Note 18 to the

financial reports) and of its foreign subsidiaries. Allocating these surpluses could, on certain conditions,

create a tax liability. Since the Group's policy is to use most of the operational surpluses to expand Group

operations, and as stated in Note 3 to the Company's financial report, when calculating the deferred taxes, the

taxes that would have been levied had investments in the held companies would have been realized were not

taken into account since at the time of this Report, the Company intends to hold these investments rather than

realize them. Moreover, in cases which are not tax exempt, the Group may be liable to additional tax in case

of dividend payout among Group members. This additional tax was also not taken into account when

calculating the deferred taxes in the financial documents, due to the aforementioned policy of not allocating

dividends if this entails a material increase in tax rates (apart for the dividend allocated by the Company

pursuant to Amendment 2009, as described above). At the time of this Report, the Company has no


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information about the extent of liability, should there be any, for having paid out those dividends, but based

on its preliminary estimate, should the Company be required to allocate said surpluses under certain

circumstances (contrary to its said policy and as a function of the amounts involved), this liability could

prove material. (See Note 18 for further details and explanations about the tax provisions applicable to the

Company and the difference between its statutory and effective tax rates).

24.7 Taxable Income

According to the Company's financial reports of December 31, 2009, as well as Note 18 therein, in

2009 the Company's before-tax profit totaled some USD26m, with statutory tax expenses totaling some

USD6.8m. However, the consolidated Company's effective tax revenues, according to said note, totaled some

USD9.7m, thanks, among other things, to a total of USD24.6m for the Group's activity in countries where

the tax rate was lower than that in Israel (for details about such data for previous years, see Note 18(i) to the

Company's Financial Reports of December 31, 2009).

24.8 Tax Assessments

Final tax assessments have been received for up to 2005 for Agan, for up to and including tax year

2003 for Makhteshim and the Company, and for up to and including 2006 for Lycord.


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25. ENVIRONMENTAL PROTECTION

25.1 General

The Company's production processes, as well as the products it manufactures and markets involve

environmental risks and have environmental impact. Both in the countries where it operates production

plants and in the countries where it sells its products, the Company is therefore subject to comprehensive

regulations governing the production, storage, treatment, transportation, usage and disposal of its products,

their components and their waste, as well as to emissions resulting from their manufacturing process.

The main environmental risks and impact of Company operations are related to the following areas: (1)

atmospheric emissions; (2) industrial sewage; (3) soil and sweet water pollution; (4) seawater pollution; and

(5) environmental and health damages due to Company products.

To the best of the Company's knowledge, at the time of this report, the Company's environmental permits

and licenses are valid (on this matter, see also Section 34.2 below, under "Civil or criminal liability due to

incompliance with environmental, health and safety laws and regulations"). Over the past few years,

regulations governing the Company's production processes and facilities have become significantly more

rigorous, and the same applies to environmental oversight and the enforcement of environmental standards

worldwide, a trend which may be expected to continue over the following years. Consequently the Company

invests considerable resources in ensuring compliance with the provisions of environmental laws applicable

to its operations, seeking to prevent or at least minimize environmental risks attending its activities. The

Company acts continuously and consistently to minimize its environmental impact and will continue

adapting its operations to changes in regulations, legal provisions and directions by environmental

authorities. The main environmental laws applicable to the Company's Israeli operations are the Law for the

Prevention of Nuisances, 1961-5721; Hazardous Materials Law 1993-5753; Business Licensing Law, 1968-

5728; Law for the Prevention of Sea Pollution from Land-Based Sources, 1988-5748; Water Law, 1959-

5719, and the regulations developed to implement them.

On July 22, 2008, the Knesset passed the Clean Air Law, 2008-5768, which will come into force on January

1, 2011. Nevertheless, note that with regard to emission permit applications, the subsidiaries are required to

submit these applications as of March 1, 2014. The purpose of this law is to protect the quality of air in Israel

and prevent its pollution, among other things, by establishing a national monitoring system for measuring air

pollution and set air pollution standards. At the time of this Report, the Company is yet unable to estimate the

implications of this law on its operations. The Ramat Hovav plant has began preparing for complying with

its provisions as part of business licensing requirements imposed on it on March 23, 2008. The Agan plant

has also taken initial steps to comply with some of the law's provisions, among other things, as part of

formulating the draft air quality business license terms submitted to Agan in January 2010.


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The main environmental requirements relevant to the Company's production facilities and processes in Israel

may be found in the special conditions for business licensing, toxin permits and sea emission permits of the

Company's Ramat Hovav, Beer Sheba and Ashdod plants, as detailed below.

A significant part of the Company's raw materials, as well as the products it manufactured, are considered

hazardous materials according to the Hazardous Materials Law 1993-5753, and the Company needs specific

permits in order to store them in its Israeli plants. The company has permits for storing all its hazardous

materials in Israel, which determine, among other things, their storage conditions and the maximal storable

amounts of each material. As required by law, the Company has appointed hazardous materials officers in

each of its plants.

Company products manufactured or sold in Israel require registration according to Crop Protection Law,

1956-5716 and the regulations developed to implement it. The objective of this registration mechanism is to

protect public health and the environment against the effects of various ingredients in crop protection

products.

See Subsection 25.11 below for details on legal and regulatory requirements applicable to the Company's

plants in Brazil.

25.2 Atmospheric Emissions in Israel

The business licenses of the Company's subsidiaries – Makhteshim and Agan – set strict limits on the

volumes and constituent materials of their atmospheric emissions. In May 1998, they voluntarily joined the

Convention for Applying Emission Standards for Hazardous Air Pollutants, based mainly on the German TA

Luft standard (1986), concluded between the Ministry of Environmental Protection and the Manufacturers

Association of Israel. After joining the convention, they adopted the emission standards determined therein

as part of the special terms of their business licenses. Note that recently, the Ministry of Environmental

Protection has been basing its additional terms for the Company's subsidiaries' air quality business licenses

on provisions of the European Integrated Pollution Prevention and Control (IPPC) Directive.

Both Makhteshim and Agan take many other steps to prevent the emission of hazardous pollutants and smell

nuisances. (For further details about the atmospheric emissions in Makhteshim's Ramat Hovav plant, see

Subsection 25.8 below; for further details about the atmospheric emissions in Agan's Ashdod plant, see

Subsection 25.10 below; for further details about the significant reduction of atmospheric (including

greenhouse gas) emissions in electricity production thanks to the transition to clean-source energy, see

Subsection 25.6 below).

The Company operates two thermal oxidizers – one in Ramat Hovav and the other in Ashdod – which, to the

best of its knowledge, represent the best available technique (BAT) at the time of this Report for removing

volatile organic pollutants from gasses emitted out of production facilities.


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25.3 Industrial Sewage in Israel

Industrial sewage containing various pollutants is a byproduct of manufacturing processes of

Company products in each of its sites. They are treated differently, according to each site's conditions,

circumstances and business license terms. For industrial sewage treatment in Ramat Hovav, Beer Sheba and

Ashdod see Subsections 25.8, 25.9 and 25.10, respectively.

25.4 Solid Waste in Israel

Solid waste produced by Makhteshim and Agan's plants is largely disposed of in the national toxic

waste disposal site run by the Environmental Services Company, Ltd. (hereafter, ESC), such that the

standards governing the way the waste is packed and marked and the waste disposal price rates are

frequently updated, making requirements ever stricter.

25.5 Environmental Standard Certificates

Makhteshim, Agan and Milenia (in charge of the Company's production plants in Brazil) have

received the ISO 14001 – Environmental Management System certificate. This is an international standard

adopted as an Israeli standard by the Standards Institution of Israel in February 1997. The standard's main

objectives are to protect the environment, prevent pollution and establish management systems which take

corrective action to ensure constant improvement.

The standard sets forth the requirements of an organized environmental management system integrated in

general management activities, and includes five main sections: (1) Setting an environmental policy by the

senior management; (2) Proper planning of the implementation of this policy, both from the environmental

and from the legal perspectives; (3) Implementation of the policy-based planning; (4) Evaluation and

correction of actual implementation; and (5) Executive review of the environmental management system.

Makhteshim and Agan also qualify for the Occupational Health and Safety Standard (OHSAS 18001), which

is similar to ISO 14001.

The aforementioned ISO qualifications apply to all Company plants.

25.6 Environmental Investments

2

0

0

7

2

0

0

8

20

09

Approx.

total

investme

3

2

3

5 39


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nt (in $

millions)

Approx.

current

costs

(before

depreciat

ion; in $

millions)

1

5

2

4 33

The company intends to continue investing in environmental protection, as much as required to pursue its

BAT policy.

In December 2009, the Group signed a multi-annual agreement with East Mediterranean Gas (EMG) for

natural gas supply for its production facilities in Ashdod and Ramat Hovav. Natural gas will substitute for

crude oil, diesel fuel and liquefied petroleum gas (LPG) beginning in the second half of 2010. The transition

to clean-source energy consumption is part of the Group's long-term policy of reducing fossil fuel

consumption and will result in a significant decrease in atmospheric emissions due to electricity production,

including greenhouse gas emissions, contributing significantly to environmental preservation. (See the

immediate report of December 20, 2009 (RN 2009-01-335130); for details regarding the Company's

contracts with Negev Energy and Ashdod Energy for the establishment of natural gas-powered electric and

steam power plants, see Subsection 19.1 above).

25.7 Environmental Protection and Safety Committee

In 2003, the Company's board created the Environmental Protection and Safety Committee in order to

set the Group's overall environmental policy. Specific environmental issues are dealt with by the Company's

subsidiaries, as they vary among production sites and countries.

Environmental aspects of the Company's main production plants

25.8 Makhteshim's Ramat Hovav Plant

25.8.1 In the past, the Ramat Hovav site has been selected by the Israeli Government as a chemical

industrial center, on the basis of two assumptions: (1) The chalk layers over the aquifer are

impervious to percolation and any potential pollution by local plants; (2) The prevailing wind in

the area is such that most of the time, it does not blow in the direction of Beer Sheba. Over the

years, Makhteshim moved most of its production operations from its Beer Sheba plant to its

Ramat Hovav plant, and in 2000, it completely suspended all production processes involving

chemical reactions in the former plant.

The Ramat Hovav Industrial Park was built by the Israeli Government in 1975 as a central hub

for developing chemical and other heavy industries. The Ramat Hovav Local Industrial Council


104�

(hereafter, Council) was founded in 1989 by virtue of a joint decree by the Ministers of Finance,

Internal Affairs, and Industry and Commerce. The Council coordinates and manages joint

services for local plants (hereafter in this section, users), including: cleaning and first-aid

services; business licensing and the enforcement of various state laws and regulations,

particularly in the environmental protection area; oversight; public infrastructure development,

etc. The Council's area of jurisdiction is defined as Priority Area A.

To finance its ongoing activities, the Council collects property tax and various fees, including

for the use of its facilities on an actual usage basis. The facility fees charged of new users

(who've not shared in the financing of their construction) are higher than those charged of old

users (who have). The Council's Executive Committee, whose membership includes two user

representatives (including one Company representative), makes investment decisions, related

mainly to infrastructure and environmental protection. Such investments are approved following

an internal discussion among users and a broad-based discussion of their reservations, if any.

The Executive Committee's resolutions are ratified by the Council plenum, where the users are

represented by three delegates.

25.8.2 Makhteshim's Ramat Hovav facilities have been constructed with an emphasis on the ecological

aspect. The following steps have been taken accordingly:

I A continuous emission monitoring system (CEMS) has been installed in the facility stacks,

above and beyond the environmental monitoring system installed by the Council.

II An acid distillation system has been installed, to allow reusing or selling acids instead of

neutralizing them.

III A new physical-chemical sewage treatment system has been installed.

IV The sewage pipelines have been replaced, and sewage flows separated. The new pipelines have

been installed above ground in order to allow for rapid leak detection and treatment without

sewage percolation into underground water.

V A plant-wide biological treatment facility has been constructed, as detailed in Subsection 25.8.6

below.

VI The company is doing its best its best to operate plant-wide evaporation pools, as detailed in

Subsection 25.8.6 below. Recently, the Company announced, together with other Ramat Hovav

plants which took part in the mediation process described in Subsection 25.8.5 below, a one-year

postponement in the deadline for completing work on these pools, to November 2011.

VII The company is doing its best to start operating a system for oxidizing some of the sewage flows

before they reach the biological sewage treatment facility, as detailed in Subsection 25.8.7

below, as of the latter half of 2010.


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VIII A thermal oxidizer for stack emissions has been installed and is operational from February

2009.

25.8.3 Makhteshim continuously tests its stack emissions. The results of these tests are submitted to the

Ministry of Environmental Protection (hereafter, Ministry) and the Council, in accordance with

the business license terms of all plants in the area, including the Company's. These tests are

conducted in addition to the multiple surprise tests carried out by the Ministry and the Council.

25.8.4 A report submitted in December 1997 to the Ministry and the Council included findings of a

study suggesting that the quality of the upper underground water has improved to a certain

degree, such that underground pollution need not be treated.

Moreover, monitoring activities undertaken in the last two years also show that the quality of

underground water in most areas in Ramat Hovav has improved. In a small number of specific

locales where underground water pollution has been detected, which may not be attributed to

the Company or to other plants in the area, polluted water is drained and pumped out by the

Council.

25.8.5 Following severe smell nuisances in the Ramat Hovav and Beer Sheba area, which emanated

from the Council's evaporation pool in the summer of 2002, the Ministry decided in 2004 to add

further terms to the business licenses of Makhteshim and other Ramat Hovav plants, requiring

the implementation of an innovative process for treating industrial sewage until they solidify – a

process called zero liquid discharge, or ZLD – within a given timeframe. Consequently, the

plants initiated a mediation process at the end of which, in December 2006, they reached an

agreement with the Ministry, the Council and the Sustainable Development for the Negev NPO

(hereafter, Mediation Agreement), which received the force of law, stipulating new business

license terms for the plants, including Makhteshim's Ramat Hovav plant. The plants which were

party to the Mediation Agreement (including Makhteshim's) have subsequently undertaken

considerable financial investments to prevent environmental future nuisances.

The Mediation Agreement, integrated into the business licensing terms of Makhteshim's Ramat

Hovav plant, stipulates that (1) sewage treatment will be under each plant's exclusive

responsibility, and no sewage discharge to the central treatment system will be allowed (for

details on sewage treatment see the following Subsection 25.10.2 below); (2) Each plant will

build a storage and evaporation pool at its own responsibility; and (3) Quality values for

wastewater have been determined, including interim values, which the plants will have to meet

subject to detailed timetables.

To the best of the Company's knowledge, at the time of this Report its Ramat Hovav plant

complies with its business license terms and meets all related requirements.


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The Company takes steps related to the construction of a wastewater desalination facility in its

Ramat Hovav plant, planned to operate so that high-quality water is returned to the ground and

only the concentrate is vaporized; this will enable the Company to reduce the surface area of

future pools, preventing the need to salinate them and save considerable amounts of water.

During 2009, a joint agreement was signed among all the Mediation Agreements cosignatories

governing the joint construction of the future vaporization pools. In addition, during 2009 the

Company continued building the Loprox® oxidation system for treating sewage before their

biological treatment. By the end of the year, the system began a trial run, and is intended to

become fully operational during the first half of 2010.

In February 2010, the Company's Ramat Hovav plant received a draft text of additional terms

updating its sewage-related business license terms. The plant's sewage is treated in a physical-

chemical facility in the plant's courtyard, up to the treatment level required as threshold for

beginning the biological treatment. The biological treatment plant facility was built at a cost of

some 17 million dollars, based on expertise and design by the Japanese Kobota company – a

world leader in this technology. The treatment includes a gas washing installation designed to

significantly reduce the smell nuisances which may emanate from the biological treatment

facility's activity. Following this onsite treatment, the sewage is directed into the evaporation

pools built by the Council and jointly used by the plants in the area.

25.8.6 In recent years, the Company has undertaken several initiatives in its Ramat Hovav plant to

minimize its environmental impact. These include the construction of atmospheric emission

purification systems such as biological purification systems, integrated absorption facilities for

production processes and a thermal oxidizer system for stack emissions of most of the plant's

facilities. Moreover, in December 2009 the Company contracted with EMG for natural gas

supply for its Ashdod and Ramat Hovav facilities, as detailed in Subsection 25.6 above.

25.8.7 On April 1, 2007, the Israeli Government decided to task the Ministry of Defense and the IDF

with building the new training camp complex around the Negev Junction, located some six

miles from Ramat Hovav. The decision includes directions to the Ministry and the Council

designed to ensure local air quality as required by a court ruling in this matter. At the time of

this Report, the Company is unable to assess the effects of this decision and its implementation,

whatever they may be, on the operations of its Ramat Hovav plant.

25.9 Makhteshim's Beer Sheba Plant

25.8.5 The Beer Sheba plant used to be Makhteshim's main production site. Thirty years ago, though, it

began moving its production activity, including chemical syntheses, to the Ramat Hovav plant


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as mentioned before. Today, the Beer Sheba plant is used for formulation, as well as packaging

and storage of materials and products.

25.8.6 As part of the Company's effort to prevent ecological nuisances, the following facilities, among

others, have been installed in the Beer Sheba plant:

I A ten-mile pipeline directing waste to the Ramat Hovav site. Ever since its installment, the Beer

Sheba plant's industrial sewage is treated in the Ramat Hovav biological facility.

II In early 2009, the Company decided to stop using the underground line to conduct wastewater

from the Beer Sheba to the Ramat Hovav plans. After prompt preparation and completing the

required readjustments, the Company began shipping the wastewater from Beer Sheba to Ramat

Hovav in tank trucks. .

III Absorption systems for gasses and odors emitted from various sources.

IV Recently, the plant's storage facilities have been improved to prevent agrochemical powder

emissions, as per the Ministry's requirements.

From time to time, Makhteshim is required to inspect claims that grounded waste or remnants

thereof have been found in areas neighboring its plant, or that waste produced by the

manufacturing process have percolated underground. Should such soil pollution in fact

materialize, Makhteshim may be required to immediately clean up the above- or underground

areas in question.

25.8.7 During 2008, several leaks have been discovered in the underground waste pipeline connecting

the Beer Sheba and Ramat Hovav plants. Company executives have been summoned for inquiry

following these events.

25.10 Agan's Ashdod Plant

In its Ashdod plant, Agan has been acting and investing in protecting the environment. In view

of the stricter Ministry requirements, particularly in view of the plant's location in an industrial

park near a population center, the Company invests considerable resources, including

considerable managerial resources, both in terms environmental preservation facilities and

technologies and in terms of ongoing costs. These activities include, among other things, the

following.

25.10.1 Atmospheric pollutant emissions, material emissions and odor nuisance. The Ashdod plant

operates based on special environmental business licensing terms. To meet them, Agan is

required to use low-sulfur fuels, as well as special additives. Moreover, the Company has

recently completed – at a cost of some 10 million US dollars – the installation of a system for


108�

collecting gasses emitted from production processes and their oxidation in a thermal oxidizer,

which will also allow the use of non-recyclable organic solvents and wastes as fuel, reducing

both Agan's energy and its organic waste disposal costs. In May 2008, new business license

terms related to the thermal oxidizer's operation were received. The thermal oxidation facility

has been constructed and has been operating for three years now, to the Ministry's satisfaction,

significantly reducing atmospheric emissions. To the best of the Company's knowledge, at the

time of this Report its Ashdod plant complies with its business license terms and meets all

related requirements.

In view of Agan's natural gas supply agreement with EMG (see 25.6 above), it expects that

following the construction process its atmospheric emissions will be reduced even further.

Moreover, the transition from fossil fuels to natural gas (subject to the availability of a natural

gas pipeline and regular supply) is expected to reduce its energy costs.

In January 2010, Agan received a draft of additional business license terms focusing on

atmospheric emissions and providing guidelines for conducting process reviews, BAT gap

reviews, fugitive emissions leak detection and repair (LDAR) programs and various other

environmental reviews and monitoring activities. As part of implementing the draft terms, Agan

is currently in the process of completing an LDAR.

26

25.10.2 Industrial sewage treatment. Since 1975, the industrial sewage produced by the plant is

discharged about 1,100 meters into the Mediterranean by a delivery pipe owned by Paz Ashdod

Refinery, Ltd. (Paz). Agan has a multi-annual agreement with Paz for using this pipe. Although

this agreement has expired, the parties still abide by it, and negotiations for its renewal are

currently underway. Discharging the sewage into the sea requires a permit by the Marine

Discharge Permit Committee (Committee).

Agan is also required to pay a marine discharge fee of immaterial value. Nevertheless, as of

2010, Agan will be required to pay significantly higher fees than those paid in the past.

In order to meet permit requirements, it has been required to treat its sewage in a biological

facility prior to their discharge. Having successfully completed a pilot test, Agan has

accordingly begun constructing the new biological treatment facility (biological facility) on land

leased for that purpose from the Ashdod Municipality (see Subsection 19.1 above for details).

In June 2008, Agan completed work on the biological facility, at a total investment of some 130

million NIS, and it started running. At the time of this Report, the facility is still being trial run

and subjected to additional pilot testing, all according to the Ministry's requirements.

In February 2009, Agan received a marine discharge permit for a period of one year, subject to

sewage quality standard Agan is required to meet. The permit document states that these

standards will be reviewed from time to time in consultations with the Ministry's Sea and


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Beaches Division. The permit is also contingent on additional sewage treatments, such as

upstream treatments.

In June 2009, Agan received a new permit with updated standards. In December of that year, it

was decided to allow Agan to make several adjustments in its 2009 permit as well as to renew it

to cover 2010 under specified terms. The Company has since filed a motion to review some of

the 2010 terms. At the time of this Report, the Committee hasn't reached its final decision yet,

and the Company is thus unable to estimate the costs involved in the additional treatment and/or

is unable to estimate the effects of this decision on the plant's operations.

Note that Agan is intensively active in improving the quality of its sewage, not only downstream

(the biological facility), but also upstream. Furthermore, it is currently evaluating the option of

installing advanced technologies for improving the quality of its sewage by contracting with

companies in Israel and abroad. The Company is in ongoing contacts with the Ministry and acts

to comply with its requirements.

In recent years, the Committee's policy and the terms it requires companies to meet are

becoming consistently stricter, and this includes Agan's marine discharge permits for 2009 and

2010 in particular. Consequently, Agan is required to invest considerable amounts in sewage

treatment technologies, resulting in potential negative material effects on its operations, results

and finances.

25.10.3 Industrial waste treatment. Agan transports some of its industrial waste for treatment in the

national dumping site. Since it is unable to treat non-recyclable solvents locally, ESC exports

these materials to facilities overseas. The regular operation of the thermal oxidizer from the end

of 2007 allows Agan to use some of these solvents and waste flows as fuel for the oxidizer and

for steam production.

25.10.4 Noise. During 2009, Agan undertook several projects to reduce noise nuisances in the plant's

environment.

25.10.5 Detailed plans for a logistical center for storing raw materials and output in a new area in the

Northern Industrial Park. Operating this center will reduce the amount of materials transported

in the plant grounds.

25.10.6 Land. In August 2009, Agan was required to submit plans to conduct a land survey, and is

currently coordinating implementation details with the Ministry.

25.11 Milenia's Plants in Brazil


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Milenia – the Company's subsidiary in Brazil – operates two main plants in that country: one,

the bigger, near Taquari, State of Rio Grande do Sul, and another in Londrina, State of Paraná.

To the best of the Company's knowledge, at the time of this report no environmental permits or

licenses held by Milenia have been denied.

From 1996 up to and including 2008, Milenia invested in safety and ecological facilities in these

two factories as part of its ecological process improvement policy. Milenia invested in

subsurface tests and remedying irregularities, changes in production processes, constructing

sewage purification facilities and byproduct storage.

25.11.1 The sewage treatment system in Taquari conducts the sewage to a nearby river after treatment

based on flocculation and filtering, as well as on a biological process subject to the requirements

of binding regulations and rules enforced by the state environmental protection agencies.

25.11.2 The Londrina plant, which focuses on formulation, produces a relatively small amount of liquid

sewage. Some of it is treated locally and recycled for internal use, while others are treated in an

external site. Solid wastes and non-recyclable solvents are led to an external site and burnt there.

`25.11.3 Milenia's atmospheric emission monitoring plan, initiated in 2002, relies on advanced

technology and machinery. Recent assessments reveal that its emission volumes meet the state

environmental protection agency's requirements.

25.11.4 Water sources and industrial waste control. Milenia regularly tests the water sources

surrounding its plants and in most cases, is also active in recycling industrial waste. It has

recently joined a group of plants which voluntarily act to set procedures for treating and

removing empty crop protection product packages.

A third plant in Cruz Alta, Rio Grande do Sul, produces only organic, non-toxic materials, so

that it requires no investment in ecological systems.

25.12 Environment-Related Legal Proceedings against Makhteshim

See Note 20 to the financial reports for details on such legal proceedings.

25.13 Environmental insurance

The Company is insured against sudden and unexpected environmental pollution incidents, both

in Israel and abroad. According to its insurance consultants, the extent of the Company's

insurance cover for such incidents is appropriate.


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At the time of this Report, the Company has only limited and relatively small-scale insurance

cover for ongoing environmental pollution. This is due to the difficulty in obtaining broader

cover at a reasonable cost.


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25.14 The Company's Environmental Officers

Mr. Joseph Goldstein is responsible for environmental protection and safety in Israel. Mr.

Goldstein has a BA in chemical engineering and an MA in industrial engineering management.

Mr. Goldstein previously managed the Ramat Hovav plant for six years.

Mr. Nethanel Nagar heads the Safety and Environmental Protection Dept. and Chief Safety

Officer in Makhteshim's Ramat Hovav plant and its Chief Safety Officer since 2009. Mr. Nagar

has a BA in chemical engineering and an MBA.

Mr. Benjamin Marx is in charge of environmental issues in the Agan plant. Mr. Marx has a BA

in chemical engineering, an MA in industrial engineering management and a second MA in

Environmental Engineering, with qualifications and publications in environmental protection,

safety and chemicals production processes. Mr. Marx has been involved in Agan's

environmental matters since 1999.

Mr. Hernando Vidal & Ms. Angela H. Pessato are in charge of environmental protection in

Milenia. Mr. Vidal has an MA in chemistry, and is responsible for Milenia's production and

supply activities, including procurement, distribution, logistics, manufacturing, QA,

maintenance, environmental protection and safety. Ms. Pessato has a degree in chemical

engineering, and is in charge of safety and environmental protection.

The information concerning expected investments, completion of facility construction projects and deadlines

expected to be met as detailed in this Section 25 constitutes forward-looking statements as defined in the

1968-5728 Securities Act, and by the nature of things, may not materialize, whether in whole or in part, or

materialize in a manner different than expected by the Company, as it essentially relies on Company

estimates and expectations, based on its past experience and subjective assessments. These assessments may

change, in whole or in part, from time to time, among other things due to developments in the Company's

area of operations. There is therefore no certainty that the Company's intentions will be realized or its

strategy implemented.


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26. REGULATION AND CONTROL OF COMPANY OPERATIONS

As an integral part of the Company's business activities, it is subject to certain legal and regulatory

controls. These are detailed in the following summary of legal and regulatory restrictions and

arrangements relevant to the Company's operations.

26.1 Registering active agents, products and dietary supplements. The Company's operations involve

the production and marketing of active agents and chemicals for planet protection. Producing and

marketing these products and materials usually require completing statutory registration procedures

which apply to various stages in the process. The registration procedure is complex and prolonged.

(See Section 16 above for details).

26.2 Environmental laws and related quality standards. The Company's operations involve chemical-

industrial processes, and are therefore subject to certain environmental laws and related quality

standards. (See Section 25 above for details).

26.3 Crop protection laws. Company products manufactured or sold in Israel must be registered according

to the Crop Protection Law and its related regulations, in order to protect public health and the

environments from potential ill effects of certain materials contained in crop protection products.

26.4 Business licenses. All Company plants require business licenses according to local laws. (For details

about the special terms in the Ramat Hovav plant's business license and related mediation proceedings,

see Subsection 25.8.5 above, as well as Note 20 to the Company's financial reports).

During 2005, the Company was informed by the Ashdod Municipality that it is incompliant with its

business license in terms of significant changes to the approved construction plan. At the time of this

Report, the Company takes the steps required to settle this matter.

26.5 Quality control. Makhteshim and Agan's plants in Israel and Milenia's in Brazil qualify for ISO 9002,

which specified standard production process standards, as well as overseeing all ancillary processes.

Moreover, Makhteshim and Agan qualify for the Occupational Health and Safety Standard (OHSAS

18001), which is similar to ISO 14001. In October 2001 Milenia qualified for International ISO 14001.

26.6 Encouragement of Industrial Research and Development Law, its provisions, related regulations

and rules, and R&D grants given to the Company by the Chief Scientist (see Section 15 for details).

26.7 Law for the Encouragement of Capital Investments, its provisions and related regulations, as well

as approvals granted for the Company's various investments (see Subsection 19.5).

26.9 Israel Land Administration owns 93% of Israel's lands. In particular, most of the lands on which

Company plants are located are leased from the ILA on a long-term basis. They rights to these lands

and related transactions are thus subject to contractual provisions and land use regulations.

Accordingly, the Group is required to pay certain fees to the ILA, such as permit fees, consent fees,

leasing fees and capitalization fees.


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27. MATERIAL AGREEMENTS

27.1 Securitization Agreement. See Subsection 22.3.

27.2 Acquisitions during 2005-2009. See Subsection 1.4.

27.3 Capital raises . See Section 23.

27.4 Multi-annual agreements for material purchases and sales (including the agreement to buy the

azoxystrobin fungicide from Syngenta and the agreement with Monsanto) – see Subsections 7.1 & 7.5.

27.5 Agreements to build two electric and steam power plants in Ashdod and Ramat Hovav. See

Subsection 19.1.

27.6 Agreement to construct the biological plant in Ashdod. See Subsection 19.1.

27.7 Agreement to supply natural gas to the Ashdod and Ramat Hovav plants. See Subsection 25.6.

27.8 Collaboration agreement with Cibus. See Subsection 28.1.

27.9 Agreement for exclusive material production and marketing. During 2009, the Company

contracted an agreement with a Chinese supplier for exclusive material production and marketing. The

agreement provides for completing materials in the process of development, as well as development of

new materials by the Chinese supplier, based on its own and the Company's knowledge. The company

undertook to invest an immaterial amount in researching, developing and manufacturing the new

materials, as well as to buy a significant share of the new materials produced. The agreement also

governs both parties' property rights to the developed products. Finally, the two parties also signed an

exclusive supply agreement to be applied to each of the fully developed products.


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28. COLLABORATION AGREEMENTS

28.1 Agreements with Cibus

In September 2009, the Company signed a strategic collaboration agreement with Cibus, according to

which it will invest up to 37 million dollars, by milestones, over a period of five years, in a joint

venture for developing enhanced traits in five key crops (based, according to the directive at the time

of this Report, on natural enhancement rather on genetic seed engineering (non-GMO)), with emphasis

on the European market. The company will become an exclusive partner of Cibus in selling these

enhanced traits in the European and other markets, and has been granted an exclusive option of

collaborating with Cibus and the joint venture on future developments of these enhanced traits, should

Cibus decide to commercialize them.

In addition, the parties also signed a strategic investment agreement, granting the Company several

options that will enter into effect gradually over a period of several years, starting in 2014, for

converting said investment into Cibus shares and build up to holding 50.1% of Cibus.

According to the collaboration agreement, Cibus will develop for the venture strains with unique and

enhanced seed traits, designed to maximize yield and make key crops resistant to a variety of

herbicides marketed by the Company. The joint venture plans to contract with leading seed distributors

in order to integrate these enhanced traits in quality stains and market them through the seed

distributors, in return for royalties paid to the venture and shared between Cibus and the Company.

According to the agreement, the joint venture will cause the seed distributors to sell the seeds together

with the Company's crop protection products.

The joint venture and trait development are based on Cibus's Rapid Trait Development System

(RTDSTM

). (See immediate report of September 21, 2009 (RN 2009-01-236325) for further details

about this technology and the agreements with Cibus).

28.2 At the time of this Report, the Company has no other strategic collaborations. However, it has signed a

large number of collaboration agreements with leading multinationals for developing product

registration data and submitting them to regulatory authorities, as detailed in Section 16 above.


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29. CORPORATE GOVERNANCE

29.1 The Board's Governance Resolutions

The Company abides by the principles of corporate governance to ensure checks and balances in the

conduct of its affairs. Accordingly, on May 9, 2007, its board made the following resolutions

concerning the Company's corporate governance:

29.1.1 Written resolutions by the board. The board will make no written resolutions without convening, apart for

matters of a purely technical nature, matters already discussed in detail in the board so that the resolution

is only intended to formally approve the final version of the resolution already discussed, and matters

involving the execution of resolutions previously made by the board.

29.1.2 Minutes will be produced of the board and its committees' meetings so as to properly reflect the content of

their discussions and clearly present members present and absent at each stage of the discussion.

29.1.3 Parallel presentation of issues in the board and its Review Committee. Any matter requiring joint approval

by the Review Committee and the board will be discussed separately and fully (including its presentation)

in those two organs, according to the sequence required by the Companies Law, i.e., discussion and

resolution by the Review Committee, followed by the board. Moreover, directors who are not also

members of the Review Committee will attend its discussions only when summoned for that purpose.

29.1.4 "Irregular transaction" criteria in compensation terms. A quantitative test has been adopted for the

classification of compensation terms for Company officers as "irregular transaction" (as defined in the

Companies Law), in order to ensure transparency and avoid any doubt or ambiguousness in the process of

approving the employment terms of Company officers. For details on the principles of this quantitative

test, see the Company's immediate report published on June 7, 2007 (RN 2007-01-420299).

29.1.5 Presenting the complete compensation terms upon approval of a new compensation element. Whenever a

new compensation element for a Company officer is included in the board's agenda, his/her complete

compensation package will be presented.

29.2 Board Committees

In addition to the abovementioned Review Committee, board committees include the following:

Environmental Protection and Safety Committee; Compensation Committee; Finance Committee; and

Product Development Committee.

29.3 Work Procedures


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During 2007-2008, the Company has revised its work procedures, on various issues, such as

information security, confidentiality, use of communication systems and sexual harassment.

29.4 Ethical Code

In its meeting of March 10, 2009, the board decided to impose an ethical code on all Company

employees in Israel and abroad. The ethical code is designed to provide simple and easily applicable

guidelines for the Company's and its employees' required behavior. Among other things, the code

includes rules concerning the Company's commitment to its employees, the employees' responsibility

to the Company, business ethics, community relations and responsibility for appropriate behavior.

During 2009, the Company took steps to ensure all its operations, and those of its subsidiaries in Israel

and abroad, comply with the code.

29.5 Negligible Transactions

For details, see the board's report in Chapter B.

29.6 Committee on Corporate Governance Code in Israel

The Company has begun reviewing recommendations by the Committee on Corporate Governance

Code in Israel ("Goshen Committee"), and from time to time, it implements some of these.

Accordingly, on March 1, 2009, Mr. Gideon Shitiat – an external board member – was appointed

Chairman of the Company's Review Committee.


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30. LEGAL PROCEEDINGS

For details regarding material current legal proceedings involving the Company at the time of this

Report, see Note 20 to its Financial Reports of December 31, 2009.


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31. BUSINESS OBJECTIVES AND STRATEGY

As already mentioned, the Company is among the leading multinationals in its core operational area

– crop protection products. The Company also has other activities in other areas of expertise, which, at the

time of this report, are immaterial to its results. At the time of this Report, the Company's chief objective is

to continue leading the generic (off-patent) crop protection products area. At the same time, as an

agrochemical producer, the Company constantly reviews options to expand its operations in its areas of

expertise – agriculture and chemistry – including the assessment of new operations and investments in its

main activity area and in related areas, all subject to the policies and decisions of its board and management,

and the economic feasibility of such operations and investments.

Accordingly, and subject to policies determined by the Company's board and management, the Company

may consider expanding its crop protection products activity, or enter into one or several new activity areas

related to its main activity areas or relying on the Company's accumulated knowledge and existing

capacities, including so as to maximize the potential of its chemical capabilities. Entering additional activity

areas will be assessed according to market viability and penetrability.

At the time of this writing, the Company periodically reviews the strategy guiding its operations and

objectives in senior management forums and board meetings. This review is based on considerations such as

its competitive positioning, growth, profitability and trends and developments in its business environment.

Accordingly, based on available information and the Company's estimates of economic and technological

developments in its area, it has set certain objectives (which may change from time to time) in order to

obtain a relative edge in the competitive global crop protection products market. At the time of this Report,

the Company's main business objectives are as follows:

The Company's marketing and sales objectives include reinforcement and bolstering of its current

position in the markets in which it operates, as well as expanding its shares in markets with high

growth potential (such as Eastern Europe, Asia and Latin America). To do so, the Company actively

improves its relationships with existing customers; locates new markets and identifies their customer

needs; expands its local marketing platforms in its main operational regions; and initiates and strives

for collaborations with local and international entities to leverage mutual product development,

registration and distribution capabilities.

The Company's product objectives include growth based on its current product range, involving the

development of new registrations for these products for additional crops and in additional regions. The

Company also acts to expand its product range by launching and registering patent-expired products as

well as by upgrading advanced and environment-friendly formulation and improving its finished

product mixtures. All these activities are compliant with periodically changing regulatory

requirements.


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The Company continuously strives to enhance its production capacity and competitiveness by

operational streamlining of all its supply chain elements. The Company constantly invests in

improving its facilities, production processes and working environments, so as to meet high safety and

environmental protection standards.

The Company continuously assesses business opportunities in the crop protection products area to

acquire companies and product rights so as to enable it to decentralize its distribution and marketing

networks, access new customers and markets, as well as expand its product range and production

capacity.

In the context of its other, non-core activities, the Company is mainly active in promoting the dietary

supplements and food additive area, as well as the aromatic products area, by completing the development of

product lines and supporting their marketing.

Most of the Company's efforts are focused on maintaining the uniqueness and added value of its products,

while ensuring innovativeness and a broad technological basis, establishing R&D capabilities and acquiring

new technologies. Finally, the Company constantly seeks to provide high-level services and to offer a broad

and diverse product range to large- and medium-scale international customers.

The strategy and objectives detailed in this Section 28 are based on the Company's management assessment

and rely on its accumulated experience with economic (global, local and industry-specific), technological,

social and other developments, as well as on estimates of the effects of each development on the others. By

necessity, these aforementioned developments may change or not materialize, in whole or in part, or

materialize in a manner different than anticipated by the Company, from time to time, among other things,

due to developments in the markets where the Company operates, in its area of operations and in the demand

for its products. There is therefore no certainty that the Company's intentions will be realized or that its

strategy implemented. In such eventualities, the Company's management will review the strategy detailed

above and its main objectives, and assess its compatibility with future developments.


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32. SIGNIFICANT CHANGES IN THE COMPANY'S OPERATIONS

To the best of the Company's knowledge, no significant changes have occurred in its operations,

including in the course of its regular activities, in the period following the date of its financial reports

up to the time of this Report, which are known to the Company at the time of this Report.


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33. UNUSUAL EVENTS OR ISSUES

33.1 On January 14, 2009 a fire broke out in a material warehouse in Agan's Ashdod plant. This event is not

expected to materially affect the Company's operations and/or profitability. (For further details, see the

Company's immediate report of January 15, 2009 (RN 2009-01-013932)).

33.2 On July 7, 2009 the Company announced that following reviews by Brazilian health authorities in

Milenia's facilities, as well as other agrochemical companies' facilities, regarding the registration of

several formulations produced and/or marketed in Brazil by Milenia, Milenia was required to

temporarily avoid producing and selling these formulations, a decision which also applied to

inventories held by some of its clients.

Milenia's position, as presented to the authorities, was that the formulation it sells are similar to those

sold in Brazil by others, and that the modifications it had made to these formulations were minor and

designed to enhance their quality, so that if there was any difference at all, it was only an

administrative and procedural matter. Subsequently, this argument was fundamentally accepted by the

Brazilian authorities and at the time of this Report, most of the products seized by the authorities in

two Brazilian states were released for production, distribution and sale, with no need for any

modification and/or adjustment, although Milenia could still face administrative fines for immaterial

amounts. (For further details, see immediate reports of July 7 & August 2, 2009 (RN 2009-01-164559

& 2009-01-184518, respectively), as well as Note 20 to the Company's financial reports).


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31. RISK FACTORS

According to the Company's estimate, it is exposed to several major risk factors, related to its

economic environment, the industry and the Company's unique characteristics, as detailed below

(without prioritization):

31.1 Macroeconomic Risk Factors

Exchange rate fluctuations

As the Company conducts its business on a global scale, it is continually exposed

to exchange rate fluctuations involving mainly the ratio between the value of the

currency in which it buys raw materials and other inputs and the value of the

currency in which it sells its products, so that revaluation of the former relative to

the latter is liable to compromise its profitability. Moreover, the dollar value of

customer and supplier debts denominated in the Company's reports in currencies

which are not the US dollar is exposed to fluctuations as the dollar revaluates or

devaluates relative to those currencies. For further details on the foreign currencies

relevant to the Company and their effect thereon, see Section 5 above. Periodically

and according to its estimates, the Company initiates currency protection

transactions to reduce this exposure, as detailed in Section 5 above. At the time of

this Report, the Company's main operational currency is the US dollars, and its

major exposures are to the Euro, the NIS and the Brazilian Real. For further

details on exchange rate fluctuations and the Company's currency protection

transactions, see attached board report.

Interest rate, CPI and NIS exchange rate fluctuations

Some of the Company's liabilities bear interest at varying rates, and its bond

liabilities (Series B and C) are NIS-denominated and linked to the consumer price

index (CPI) and bear fixed interest. Therefore, any rise in the exchange rate or CPI

might lead to a concomitant rise in the Company's financing costs. At the time of

this Report, most of said risks are hedged by various instruments, as detailed in

the board report attached herein.

Business operations in emerging markets

The company conducts its business – mainly product sales and raw material

procurement – also in emerging markets such as Latin America, Eastern Europe,

Asia and Africa, which exposes it to risks typical of those markets, including: the

regimes' sensitivity to political upheavals leading to economic instability; volatile


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exchange rate of the local currency (in which customer debts are denominated)

against the dollar; fiscal instability and frequent revisions of economic legislation;

relatively high inflation and interest rates; barter deals; and potential entry of

international competitors and accelerated market consolidation by large-scale

competitors. On the other hand, the Group's deployment in multiple regions

contributes to diversifying such risks and to reducing its dependency on particular

economies. In addition, registration requirement upgrades or giving precedence to

customers in developed countries so as to limit the use of raw materials purchased

in emerging economies will require redeployment of the company's procurement

organization, which might compromise its profitability for a certain period.

The Global Crisis

The Global Crisis which affected markets, peaking in the last third of 2008 and the

first half of 2009, influenced various factors in the business environment where

the Company and its competitors operate, and had a negative effect on its 2009

results, particularly its sales (volumes and amounts). (See Section 5 above and the

board report for further details about the effects of the Global Crisis).

The Company estimates that in 2010 the effects of the Global Crisis on its results

will gradually weaken. Nevertheless, should the rate of global recovery slow down

or fluctuate, the continued trend of financial market instability (particularly in

emerging markets where a material part of Company operations are conducted)

could materially impact Company operations, among other things by slowing

down its multi-annual growth trend and leading to extreme fluctuations in the

other factors affecting its results.

Hostilities in Israel

As the Company's major plants are located in Israel, military conflicts, hostilities

or acts of terror, particularly in Southern Israel, might compromise the Company's

ongoing operations and profitability.

34.2 Industry Risk Factors

Competition

At the time of this Report, six leading multinational source companies are active

in the crop protection products areas. These R&D giants have significant financial

resources at their disposal. The company's ability to effectively compete with

them as a mainly generic producer involves continuous efforts and significant


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investments in timely new product development and registration, as well as in

ongoing marketing and sales of existing products. Moreover, in most of its

markets, the Company also competes with other generic companies and smaller-

scale source companies, most of which have yet to deploy global distribution

networks at the time of this report, and are active on a local basis. Any delay in

developing or obtaining registrations for products and/or delayed penetration into

markets and/or growth of generic competitors (whether by the expansion of their

product range or by the globalization of their distribution networks) might affect

the Company's total sales in its core activity area, affect its global position and

erode sales prices. For further details about the Company's position as a leading

generic company and its global ranking as seventh among all the companies active

in its core area, see Subsection 6.3 above.

Extreme weather and other changes affecting farmers

Most of the Company's crop protection products are designed for use throughout

the growing season. Many extraneous factors, such as extreme weather conditions,

significant drops in agricultural commodity prices, changes for the worse in

government policies and farmers' economic situation, necessarily lead to reduced

farming intensity, and consequently to reduced demand for company products,

lower product prices and collection difficulties – all liable to significantly affect

Company results. The Company has no way of forecasting bad growing seasons,

but should an unbroken sequence of such seasons occur, Company results might

be significantly affected.

Legislative and regulatory changes in the environmental area

The Company operates in a heavily regulated environment, particularly in relation

to the storage, treatment, manufacturing, transport, usage and disposal of its

products, their ingredients and byproducts some of which are considered

hazardous. The regulatory requirements imposed on the Company vary from

product to product and from market to market, and tend to become stricter with

time. In recent years, both law enforcement authorities and environmental NPOs

have been applying growing pressure, mainly through increasingly stricter

legislative proposals related to companies and products which may potentially

pollute the environment. Since the Company must meet such legislative and

regulatory requirements in order to continue manufacturing and marketing its

products, it is required to spend considerable human and financial resources (both

in terms of ongoing costs and in terms of material one-time investments) in order


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to meet mandatory environmental standards. In some cases, this results in delaying

the introduction of Company products into new markets, affecting its profitability.

In addition, any changing or toughening of environmental license or permit terms,

or their revocation, might significantly affect the Company's finances and business

results.

Although the Company invests material sums in adapting its facilities and in

constructing special facilities as per environmental requirements, it is currently

unable to assess with any certainty whether these investments (current and future)

and their outcomes would satisfy or meet future requirements, should these be

significantly updated or upgraded. (See Paragraph 25.10.2 for details about the

significantly stricter policy of the Marine Discharge Permit Committee and its

implications for Agan).

Legislative and regulatory changes in the product registration area

Most materials and products marketed by the Company require registrations in

various stages of their production and marketing, and are also subject to strict

regulatory oversight in each country. Compliance with registration requirements,

which vary from country to country (some of which becoming stricter with time),

involves significant investments of time and resources. Noncompliance therewith

is liable to materially affect the Company's cost structure and profit margins, as

well as its ability to introduce its products in the market involve. Moreover, to the

extent that new regulatory requirements are imposed on registered products

(requiring additional investment or leading to the existing registration's

revocation) and/or the Company is required to compensate another for its use of

the latter's product registration data, these amounts might accrue to significant

sums, considerably increasing the Company's costs and affecting its results.

Nevertheless, in countries where the Company has a large market share, any

toughening of registration requirements may represent a competitive advantage

vis-à-vis other companies interested in penetrating those markets and competing

with it therein. See Section 15 above for further details on Company product

registration.

Environmental, health and safety exposure

The Company's operations involve dangerous substances as defined in the 5753-

1993 Dangerous Substances Law. In the extremely unlikely eventuality of a

significant industrial malfunction leading to the release of such dangerous


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substances, this could threaten lives or the environment where the Company is

active.

The Company might become significantly liable, civilly or criminally (including

high fines) due to any divergence from and/or violation of environmental, health

or safety laws and regulations. Some of the existing legislation might impose such

liability without any intention or negligence on the Company's part (to the best of

the Company's knowledge, from the authorities' point of view this is strict liability

in most cases and absolute liability in others). Other environmental laws hold the

Company liable for treating pollutions, potentially exposing it to the costs

involved in cleansing and purifying soils and/or water bodies, should and to the

extent that such pollution occur (even after the Company's production activities in

a certain area be terminated, should and to the extent that they be terminated).

Moreover, the increasing pressure applied in recent years, both by law

enforcement authorities and by environmental NPOs, on potentially polluting

companies and products, as described in Subsection 25.1 above, also involves

criminal, civil and administrative legal proceedings. Finally, the Company is

exposed to lawsuits claiming bodily injury or property damage due to exposure to

hazardous materials, mostly covered by the Company's insurance policies. (For

further details concerning legal proceedings related to environment, health and

safety issues, see Note 20 in the financial reports; see Paragraph 25.10.2 about the

significantly stricter policy of the Marine Discharge Permit Committee and its

implications for Agan).

Product liability

Product and producer liability represent a risk factor. Regardless of their prospects

or actual results, product liability lawsuits might involve considerable costs as

well as tarnish the Company's reputation, potentially affecting its incomes. The

Company has a third-party and defective product liability insurance cover of up to

300 million dollars in aggregate annual damages. Nevertheless, there is no

certainty that any future product liability lawsuit or series of lawsuits would not

materially affect Company operations and results, should the Company lose the

lawsuit or should its insurance cover not suffice or apply in that particular case.

Market penetration and product diversification

Following their development, the Company must market new products in its

various markets. Should these fail to meet registration requirements or should it

take too long to obtain registrations for them, the Company's ability to


128�

successfully introduce a new product to the market in question in the future would

be affected. Successful market penetration involves, among other things, product

diversification in order to respond to each market's changing needs. Therefore, to

the extent that the Company fails to adapt its product mix accordingly, its future

ability to penetrate that market would be similarly affected. Failure to introduce

new products to given markets and meet Company objectives (given the

considerable time and resources invested in their development and registration)

might affect the sales of the product in question in those markets, as well as the

Company's results and margins.

Infringement on third-party property rights

As already mentioned, the Company is mainly active in the generic products area.

As such, it owns no patent-protected intellectual property for most of its products.

The Company depends on protecting its commercial secrets and exposed to the

possibility that its competitors develop similar or competing technologies. The

Company is also exposed to legal claims that its products or production processes

infringe on third-party intellectual property rights (even though the source

products similar to its own are no longer patent protected). To the best of the

Company's knowledge, up to the time of this writing, all such lawsuits have been

settled for immaterial amounts.

Raw material and sales price fluctuations

Raw materials represent a significant element in the company's production inputs.

Many of them are oil derivatives, and as such are heavily dependent on (often

considerable) market price fluctuations. Extreme world oil price fluctuations

might materially affect the Company's raw material and sales prices and erode its

profitability and competitiveness. Over the past few months, oil prices have

dropped significantly, and this is expected to affect the prices of most of the

Company's raw materials, as well as the sales prices of its products in the medium

and long run. Since the Company has an inventory purchased at oil prices higher

than the present ones, should sales prices drop sharply, this would affect its

profits.

Recent developments in the genetically modified seeds market

Any further significant development in the market of seeds genetically modified

for agricultural crops and/or any significant increase in the sales of genetically

modified seeds or Glyphosate and/or to the extent new crop protection products


129�

are developed for further crops and widely used (substituting for traditional

products), this will affect demand for crop protection products, requiring the

Company to respond by adapting its product range to the new demand structure.

Consequently, to the extent that the Company fails to adapt its product range

accordingly, this might reduce demand for its products, erode their sales price and

necessarily affect Company results and market shares.

Nevertheless, the fact that the Company itself markets Glyphosate acts to mitigate

this exposure (albeit only in terms of marketing margins). For further details about

this technological innovation and its implications, see Subsection 6.4 above.

Operational risks

Company operations, including its manufacturing activities, rely, among other

things, on state-of-the-art computer systems. The company continually invests in

upgrading and protecting these systems. Any unexpected malfunction in these

systems which could not be repaired within a reasonable timeframe is liable to

affect the Company's operations and results. The Company has a property and

loss-of-profit insurance policy covering up to $1,490.4m in aggregate annual

damages.

34.3 Company-Specific Risk Factors

Disruptions in raw material supply and/or shipping and port services

Lack of raw materials or other inputs used for manufacturing Company products

might prevent the Company from supplying its products or significantly increase

their production costs. Moreover, the Company imports raw materials to its

production facilities in Israel and/or abroad, whence it exports its products to its

Subsidiaries abroad for formulation and/or marketing purposes, as the case may be

– all through ports in Israel and other countries. Prolonged disruptions and/or

strikes and/or infrastructural defects in any of the ports used by the Company

might significantly affect its ability to obtain raw materials in general, or to obtain

them at reasonable prices, as well as limit its ability to supply its products and/or

meet supply deadlines. These might negatively affect the Company and its

finances, customer relations and results.

Failed M&A's

As already mentioned, the Company's strategy includes mergers and acquisitions

designed to calculatedly expand its product range and deepen its presence in


130�

certain markets. This requires assimilation of acquired operations and their

effective integration in the Group, including the ability to realize projections,

maintain profitability and adapt to certain market and competitive conditions.

Failure to achieve these could mean wasting away the added value projected,

losing customers, exposure to unexpected liabilities, reduced value of the

intangible assets included in the merger or acquisition as well as the loss of

professional and skilled human resources.

Production concentrated in a few plants

The lion's share of the Company's production operations is concentrated in a small

number of locations. Natural disasters, hostilities, substantial operational

malfunctions or any other material damage might materially affect Company

operations.

International taxation

Over 90% of Company sales are in markets outside Israel, through its consolidated

subsidiaries worldwide. These play various roles in the Company's operational

structure (sometimes in relation to the same product), including production,

knowledge maintenance and development, as well as procurement, logistics,

marketing and sales of the Company's various products. These firms are assessed

according to the tax laws in their countries of residence. Due to the varying tax

rates imposed on the Group's earnings in various countries, substantially different

classification or allocation of the return on each subsidiary's value elements in the

various countries or any change in their attributes (including changes related to the

location of their HQ) might affect the amount of earnings made and assessed in

each country, with a possibly material affect on the Group's tax rates and financial

results. (For further details, as well as regarding the tax laws applicable to the

Company, see Section 24 above).

Failure to meet the Approved Enterprise terms

Some of the Company's plants have received benefits (in the form of tax relief

and/or grants) under the Law for the Encouragement of Capital Investments, 1959-

5719. Failure to comply with the Approved Enterprise terms on which these

benefits are conditioned might lead to withdrawal of said benefits and/or the

imposition of added tax due for past earnings. According to the Company's


131�

estimate, it complies with these terms at the time of this Report. (See Subsection

19.5 above for further details).

Failure to comply with the Chief Scientist's terms

State grants received under the Chief Scientist programs limit the Company's

ability to produce and transfer technologies outside Israel, and oblige it to comply

with certain terms. Failure to meet these terms might force the Company to repay

those grants (together with interest and fines) as well as expose it to criminal

proceedings. According to the Company's estimate, it complies with these terms at

the time of this Report. For details about grants thus received by the Company, see

Subsection 19.5 above.

Bank credit restrictions

For the purposes of the Israeli banking system, the Company is part of an IDB

Holdings Ltd. "borrower group" (see Subsection 23.5 above). Consequently, it

might be not be able to raise bank credit unrestrictedly. In addition, the Company's

funding documents require it to meet certain financial standards, as detailed in

Subsection 23.4 above. Failure to meet these standards due to an extraneous event

or non-materialization of Company forecasts, as well as should it not obtain the

agreement of its funders to extend or update these financial standards according to

its abilities, could lead the funders to oblige the Company to immediately pay off

its liabilities (or part thereof).

Customer credit

The Company's sales to its customers in Israel and abroad usually involve

customer credit as customary in each market (and as detailed in Subsection 22.2

above). Some of these credit lines are insured, while the rest are exposed to risk,

particularly during economic slowdowns. The Group's aggregate credit, however,

is distributed among many customers in multiple countries, mitigating this risk.

Nevertheless, in certain regions, particularly in South America, credit lines are

particularly long (compared to those extended in Western Europe, for example),

and sometimes, among other things due to bad crops or economic downturns in

those countries, the Company might find it difficult to collect customer debts, with

some debts finally collected only after several years.

This risk is also marked in developing countries where the Company is less

familiar with its customers, their collaterals are of doubtful value and there is no

certainty as to such customers' insurance cover. Credit default by any of its


132�

customers might affect the Company's cash flow and financial results. This risk is

particularly relevant to developing markets such as South America, Eastern

Europe, Africa and Asia. (For further details, see board report notes and the

Company's financial reports)


133�

Company Risk Factors Breakdown according to Potential Impact

Risk Factor

Potential

impact on the

Company's

overall

operations

H

i

g

h

M

e

d

i

u

m

L

o

w

Macro risks

Exchange rate fluctuations +

Interest rate, CPI and NIS exchange rate

fluctuations +

Business operations in emerging

markets +

The Global Crisis +

Hostilities in Israel +

Industry risks

Competition +

Extreme climatic and other changes

affecting farmers +

Legislating and regulatory changes

(environment) +

Legislating and regulatory changes

(product registration) +

Environmental, health and safety

exposure +

Product liability +

Market penetration and product

diversification +

Infringement on third-party property

rights +

Raw material and sales price

fluctuations +

Developments in the genetically

modified seeds market +

Operational risk +

Company-specific risks

Disruptions in raw material supply

shipping & port services

+

Failed M&A's +


134�

Risk Factor

Potential

impact on the

Company's

overall

operations

H

i

g

h

M

e

d

i

u

m

L

o

w

Production concentrated in a few plants +

International taxation +

Failure to meet the Approved Enterprise

terms +

Failure to comply with the Chief

Scientist's terms +

Bank credit restrictions +

Customer credit +

1

Makhteshim Agan Industries Ltd. REPORT OF THE BOARD OF DIRECTORS FOR THE YEAR

ENDED DECEMBER 31, 2009 The board of directors of the Company is pleased to submit herewith the report of the board of directors on the affairs of the Company for the year ended December 31, 2009 (the “Report Period”).

A. Board of Directors’ Description of the State of the Corporation’s Business

1. Brief description of the Company and its business environment

Makhteshim Agan Industries Ltd. and the companies held by it (the “Company”) specializes in the chemicals industry and as at the date of this Report, focus mainly on the agricultural chemicals (agrochemical) industry. In this context, the Company deals in the development, manufacture and marketing of crop protection products. In addition, the Company operates in other areas which are based on its core capabilities in the fields of agriculture and chemistry and as the date of this Report are not material. As at the date of the report, the Company is the world's leading off-patent manufacturer of crop protection products and sells its products in more than 100 countries worldwide. The Company's success factors are, mainly, goodwill, know-how, high-level technological-chemical abilities, expertise in product licensing, observance of strict standards of environmental protection, stringent quality control, an international marketing and distribution structure, and financial resilience. Investments in consistent and ongoing development facilitate the launching of new off-patent products at opportune times.

The Company's business strategy and goals in the crop protection products market focuses mainly on: (1) strengthening and establishing its presence in markets in which it operates and expanding its market share in markets with a high growth potential; (2) continued growth, based on the composition of the Company's existing product portfolio and the ability to launch new products; (3) continued improved of the Company's operating capabilities, allowing for efficient production, at competitive costs; and (4) growth through the acquisition of companies and products registrations, affording the Company access to new customers and markets. At the same time, the Company, as an agrochemical company, is continuously examining the possibilities of expanding and increasing its operations in the fields of its expertise, the fields of agriculture and chemistry, and in this context, examines entry, from time to time, into operations and investments in the principal fields of its operation and in related areas, all subject to the policy and resolutions of the board of directors and the board of management of the Company, and the feasibility of such investments and operations.

For a description of the corporation’s business and substantial events during the Report Period, see Chapter A of this Report.

2

Brief Overview of Changes in the Business Environment

Due to the cumulative effect of a number of factors, some of which were of a one-time nature, 2009 was characterized by differences in the Company’s operations during the various quarters.

The following is a brief overview of the trends that characterized the Company’s business environment in 2009 in general, and in the fourth quarter in particular:

1. 2009 was characterized by high levels of inventory in marketing channels in all of the companies in the industry (mainly in Brazil), due to increased stocking by distributors of crop protection products in 2008. Due to the global financial crisis and climatic conditions as described below, a declining trend in demand was observed in the first three quarters of the year (in most products). During the course of the fourth quarter, there was a trend of depletion in the level of inventory with distributors which led to stabilization of the level of demand. This trend is expressed through the sales of the Company which, for the first time this year, recorded an increase in sales in the fourth quarter compared with the corresponding quarter in the previous year, after recording a sharp decrease in sales in the second and third quarters of the year compared with the corresponding quarters in the previous year.

2. The slow-down in the rate of sales of crop protection products during the course of 2009 and the high level of inventory in marketing channels (distributors) and with competitors (manufacturers) in the field led to a decreasing trend in the sale prices of most of the products, which impacted the sales and profits of the Company’s products. Most of the price decreases were in Brazil and in sales of the non-selective herbicide (glyphosate) all around the world. In the Company’s estimation, despite the fact that on a quarter-to-quarter comparison a decrease was recorded in the prices of the Company’s products, during the fourth quarter there was stability in sales prices in most areas.

3. Depletion of existing inventories purchased at high cost and sold at market prices which were lower than the corresponding period caused a sharp decrease in the Company’s gross profits. During 2009, there was a drop in the prices of raw materials and of oil and energy which is expected to give rise to a gradual saving on costs and to gradually improved profits during 2010, upon completion of depletion of existing inventories.

4. Weather conditions in the regions in which the Company operates, including strong rains in North America in the second quarter and dry conditions in Northern Europe in the third quarter brought about a reduction in the demand for crop protection products. The slow-down in demand was particularly prominent in light of the trend of pre-buy due to the high levels of demand in the market in 2008.

5. During the second half of 2009, there was a relief of credit pressures on growers in developing regions such as South America, Asia, Eastern Europe and Africa, who had encountered difficulties in the first half of 2009 in obtaining credit due to the impact of the global financial crisis and were forced to make purchases in measured quantities close to application dates.

6. The Company reports its results in US dollars (“dollar”) and therefore, the revaluation of the exchange rate of the dollar compared with other currencies in which the Company operates during the first three quarters of 2009 brought about a decrease in the dollar value of the Company’s sales

3

and profits, particularly in Europe. Hedging transactions performed by the Company partially off-set, mainly in the first quarter, this exchange rate effect.

7. Following examinations conducted by the health authorities in Brazil at the subsidiary, as were later conducted on other companies in the industry, it was held that the subsidiary would be temporarily prevented from manufacturing and selling a number of the products which were examined. The subsidiary’s position that the products sold by it were similar to those sold on the Brazilian market by other companies and that the changes in the formulations were minor and were only intended to improve their quality was mostly accepted by the authorities and as of the date of this Report, most of the products were released for sale and distribution. These events, inter alia, brought about a decrease in sales in Brazil and an erosion of profits, mainly in the third quarter, however, their impact harmed the Company’s profits during the fourth quarter of the year as well.

8. Depletion of existing inventories in 2009, which was expressed by a drop of USD 135 million in inventory during the report period, as well as efficient collection from customers, brought about an improvement in cash flows from current operations and an increase in the Company’s free cash flow.

9. During 2009, the fundamental trends affecting the field of crop protection products remained stable. Population increases and an increase in standards of living (mainly in developing countries) alongside limited planted areas which are expected to increase the need to use crop protection products in order to increase yields per existing unit of land, and the high level (over the long term) of prices of agricultural outputs are expected to continue to support demand for crop protection products.

In the Company’s assessment, assuming that no significant one-time events take place, actions taken by the Company to expand its operations and investments, as well as a positive cash flow, together with the fundamentals trends in the industry and an improvement which began to occur in the conditions of the business environment, as described above, expected to gradually return the Company to a path of growth, and to improve its profits during the course of 2010 and will have full effect only after the first quarter of 2010.

However, should the rate of exit from the global crisis slow down or be characterized by fluctuations, the continued trend of instability in financial markets (and in particular in developing markets in which a substantial portion of the Company’s operations are concentrated) might substantially impact the Company’s operations and cause, inter alia, a slow down of its long-term growth trend and cause greater fluctuations of the other factors that affect its results.

4

2. RESULTS OF OPERATIONS – SUMMARY OF TOTAL PROFIT STATEMENTS

Annual total profit statements ($ millions)

% 2009 % 2008 Change % Revenues 2,214.6 2,535.5 (320.9) (12.7%) Gross profit 26.3% 581.9 33.4% 847.7 (265.9) (31.4%) R&D and SG&A expenses 20.9% 462.1 19.0% 480.5 (18.4) (3.8%) Operating profit (EBIT) 5.4% 119.7 14.5% 367.3 (247.5) (67.4%) Financial expenses, net 4.2% 93.7 3.8% 96.6 (2.9) (3.0%) Pre-tax profit 1.2% 26.0 10.7% 270.6 (244.6) (90.4%) Net profit after minority share 1.5% 32.7 8.6% 219.0 (186.4) (85.1%) EBITDA 9.8% 217.7 18.0% 456.5 (238.8) (52.3%)

Total profit statements for the fourth quarter of 2009 ($ millions)

% 10-12/2009 % 10-12/2008 Change % Revenues 496.2 491.0 5.1 1.0% Gross profit 20.3% 100.9 28.2% 138.4 (37.5) (27.1%) R&D and SG&A expenses 23.8% 118.3 21.2% 104.3 14.1 13.5% Operating profit (EBIT) (3.5%) (17.4) 7.0% 34.1 (51.6) - Financial expenses, net 4.7% 23.1 2.1% 10.4 12.7 122.4% Pre-tax profit (8.2%) (40.5) 4.8% 23.8 (64.3) - Net profit after minority share (6.0%) (29.8) 1.8% 8.7 (38.5) - EBITDA 1.8% 8.7 11.8% 57.8 (49.0) (84.9%)

3. Analysis of Results of Business Operations

During the fourth quarter of 2009, the Company’s sales amounted to $496.2 million compared with $491.0 million during the corresponding quarter of the previous year – an increase of $5.1 million, due mainly to a quantitative increase in sales in South America (mainly in Brazil) and in Asia, and due to a first time consolidation of new companies.

The Company’s sales in 2009 amounted to the sum of $2,214.6 million compared with $2,535.5 million in 2008. In 2009, there was a decrease in the sum of $320.9 million in the Company’s sales compared with 2008, which was due to: (1) a decrease in quantities sold due to a decrease in demand as a result of the trends described above; (2) a decrease in the sale prices of most of the Company’s products, and particularly glyphosate; and (3) a decrease in the dollar value of the Company’s sales (net) due to the revaluation of the dollar as compared with the other currencies in which the Company operates.

Segmentation of Revenues by Geographical Region

Breakdown of Annual Sales in $ millions:

% 2009 % 2008 Change % Europe 42.4% 939.5 39.9% 1,010.9 (71.4) 7.1)%) South America 24.4% 540.9 26.6% 675.0 (134.1) 19.9)%) North America 18.2% 402.2 17.5% 444.0 (41.7) 9.4)%) Rest of the world 11.1% 245.0 11.5% 292.4 (47.4) 16.2)%) Israel 3.9% 87.0 4.5% 113.2 (26.2) (23.2%) Total 100.0% 2,214.6 100.0% 2,535.5 (320.9) (12.7)%

5

Breakdown of Quarterly Sales in $ millions: % 10-12/2009 % 10-12/2008 Change % Europe 26.0% 129.0 29.0% 142.2 (13.1) (9.2%) South America 39.6% 196.5 36.2% 177.9 18.5 10.4% North America 16.3% 80.9 20.2% 99.3 (18.4) (18.5%) Rest of the world 13.9% 68.8 9.8% 47.9 21.0 43.8% Israel 4.2% 20.9 4.8% 23.8 (2.8) (12.0%) Total 100.0% 496.2 100.0% 491.0 5.1 1.0%

Percentage Distribution of Annual Sales:

The following is a description of unique trends which affected the Company’s operations in addition to the general trends described above, divided into regions of operation:

In Europe

In the fourth quarter of 2009, the Company’s sales in Europe amounted to $129.0 million, compared with $142.2 million in the corresponding quarter last year, a decrease of $13.1 million.

The reduction in sales in Europe during the fourth quarter stemmed from a decrease in sales quantities due to a decrease in demand, due to the trends described above.

2009

South America

24.4%

North America

18.2%

Rest of World

11.1%Israel

3.9%Europe

42.4%

2008

South America

26.6%

North America

17.5%

Rest of World

11.5%

Israel

4.5%Europe

39.9%

6

In 2009, the Company’s sales in Europe amounted to $939.5 million compared with $1,010.9 million in 2008, a decrease of $71.4 million.

The decrease in sales in Europe during the Report Period stemmed from net currency devaluations less hedging in countries in Europe (mainly, the Euro, the Pound and the Zloty) compared with the Dollar.

Despite the decrease in sales, during the Report Period, the Company retained its position as one of the leading companies in the industry in Europe.

In South America

In the fourth quarter of 2009, the Company’s sales in South America amounted to $196.5 million, compared with $177.9 million in the corresponding quarter last year, an increase of $18.5 million. The increase in sales was due mainly to an increase in quantities sold, particularly in Brazil, despite the fact that there was a decrease in the sales prices of the Company’s products (particularly glyphosate) compared with the corresponding quarter in the previous year.

The Company’s sales in South America in 2009 amounted to the sum of $540.9 million compared with $675.0 million in 2008. In 2009, there was a decrease in the sum of $134.1 million in the Company’s sales compared with 2008, which was due to: (1) a decrease in demand as a result of the trends described above, which was expressed in particular in light of an increase in demands which led to early supplying by distributors in 2008; (2) a decrease in prices due to the trends described above and mainly a significant decrease in the price of the non-selective herbicide glyphosate; and (3) a drop in sales in Brazil due to the one-time events at the Brazilian subsidiary which caused a decrease in the Company’s market share in Brazil;

In North America

During the fourth quarter of 2009, the Company’s sales in North America amounted to $80.9 million compared with $99.3 million in the corresponding quarter of the previous year.

In 2009, the Company’s sales in North America amounted to $402.2 million compared with $444.0 million in 2008, a decrease of $41.7 million.

The decrease in sales in North America during the Report Period stemmed from: (1) a decrease in sales quantities due to weather conditions which caused a shortening of the agricultural year in the USA; and (2) a decrease in the sales prices of the Company’s products.

In the Rest of the World

The Company’s sales in the rest of the world in the fourth quarter of 2009 amounted to the sum of $68.8 million compared with $47.9 million in the corresponding quarter of the previous year, an increase of $21.0 million, reflecting growth of 43.8%. The significant increase in sales stemmed from an increase in quantities sold (mainly in India) and a revaluation of the currencies in which the Company operates (mainly the Australian Dollar) compared with the Dollar.

The Company’s sales in the rest of the world in 2009 amounted to the sum of $245.0 million compared with $292.4 million in 2008. In 2009, there was a decrease in sales in the sum of $47.4 million which was due to: (1) erosion of prices compared with 2009, which stemmed mainly from a

7

drop in the price of glyphosate and (2) a revaluation of the USD compared with the other currencies in which the Company operates (mainly the AUD) which reduced the USD value of sales.

In Israel

The Company’s sales in the fourth quarter of 2009 amounted to the sum of $20.9 million compared with $23.8 million in the corresponding quarter of the previous year.

In 2009, sales in Israel amounted to the sum of $87.0 million compared with $113.2 in 2008.

The decrease in sales in Israel in the fourth quarter and in the Report Period stemmed mainly from the revaluation of the dollar in comparison with the shekel, which reduced the dollar value of the sales and from a decrease in the sale of products which are mostly not products in the field of crop protection.

A. Additional Activities

During the fourth quarter of 2009, the Company’s sales from other areas of activity amounted to $46.3 million compared with sales of $46.9 million in the corresponding quarter of the previous year.

In 2009, the Company’s sales from other areas of activity amounted to $172.4 million compared with $201.0 million in 2008. In 2009, there was a decrease of $28.5 million in sales which stemmed mainly from a slow down in demand and a decrease in sales prices compared with the corresponding period.

B. Gross profit

In 2009, gross profit amounted to $581.9 million (26.3% of sales) compared with $847.7 million dollars (33.4% of sales) in 2008.

Gross profit in the fourth quarter of 2009 amounted to $100.9 million (20.3% of sales) compared with $138.4 million (28.2% of sales) in the corresponding quarter of the previous year.

The decrease in gross profit and gross margin during the fourth quarter and in the Report Period stemmed from the following factors:

(1) Realization of inventory purchased at high costs and sold at market prices, which were lower than in the corresponding period.

(2) A write-off during the Report period, related to devaluation of inventory of products with higher book value than the expected net real value (expected sale price less expected selling expenses).

(3) A decrease in the sale prices of the Company’s products compared with their prices during the corresponding period in the previous year. The decrease was mainly in the price of glyphosate all around the world, and in sale prices in Brazil.

(4) A decrease in sales and adjustment of the Company’s production capacity due to the reduction in demand which led to attribution of fixed expenditure at a higher rate than sales.

8

(5) A decrease in the dollar value of sales due to the revaluation of the exchange rate of the dollar as against the currencies in which the Company operates, which occurred in the first three quarters of 2009;

(6) The impact of the one-time events on the subsidiary in Brazil, which despite not having a substantial impact on the Company’s sales in the quarter, brought about an erosion of profits.

In the assessment of management of the Company, during the course of 2010, upon depletion of the surplus inventory purchased at high costs and sold at market prices which were lower than in the corresponding period, there is expected to be a gradual improvement in gross profits. Notwithstanding this, an unexpected decline in the Company’s results due to the occurrence of an external event to the Company, or in the event the Company's forecasts will not materialize or the occurrence of one of the Company’s risk factors as set out in Chapter A of the Periodic Report might, inter alia, cause a slow down in the trend of improvement of gross profits.

C. Operating profit

Operating profit

In 2009, operating profit amounted to $119.7 million (5.4% of sales) compared with $367.3 million dollars (14.5% of sales) in 2008.

During the fourth quarter of 2009, the Company’s operations amounted to an operating loss of $17.4 million compared with an operating profit of $34.1 million in the corresponding quarter of the previous year.

The decrease in operating profit during the fourth quarter and the Report Period stemmed mainly from a decrease in gross profit, as aforesaid.

Operating expenses

Operating expenses in 2009 amounted to $462.1 million (20.9% of sales) compared with $480.5 million (19.0% of sales) in 2008. The decrease in operating expenses stemmed from a decrease in variable operating expenses due to a decrease in sales. On the other hand, fixed expenses, which did not decrease, together with a reduction in sales, caused an increase in the ratio of operating expenses to sales.

Operating expenses amounted, in the fourth quarter of 2009, to $118.3 million (23.8% of sales) compared with $104.3 million (21.2% of sales). The increase in operating expenses in the fourth quarter of 2009 stemmed mainly from an increase in sales, from a first-time consolidation of new companies and from a revaluation of the currencies in which the Company operates in comparison with the dollar, which increased the dollar value of the expenses.

R&D expenses

In 2009, R&D expenses amounted to the sum of $21.8 million compared with $22.4 in 2008.

R&D expenses in the fourth quarter of 2009 amounted to $5.2 million compared with $4.5 million in the corresponding quarter of the previous year.

9

Sales expenses

In 2009, sales expenses amounted to the sum of $358.4 million (16.2% of sales) compared with $375.2 million (14.8% of sales) in 2008.

The reduction in sales expenses during the Report Period is mainly a reduction in variable expenses as a result of a reduction in sales. On the other hand, fixed expenses, which did not decrease in direct proportion to the reduction in sales, caused an increase in the ratio of expenses to sales.

Sales expenses in the fourth quarter of 2009 amounted to $92.8 million (18.7% of sales) compared with $83.3 million (17.0% of sales) in the corresponding quarter of the previous year. The increase in sale expenses is an increase in variable expenses due to an increase in quantities of sales, a first-time consolidation of new companies and from a revaluation of the currencies in which the Company operates in comparison with the dollar, which increased the dollar value of the expenses.

General & administrative expenses

G&A expenses in 2009 amounted to $79.4 million (3.6% of sales) compared with $84.0 million (3.3% of sales) in 2008, a decrease of $4.6 million. The decrease in these expenses in 2009 stemmed mainly from a decrease in the payment of grants due to results of operations in 2009.

General and administrative expenses in the fourth quarter of 2009 amounted to $19.2 million (3.9% of sales) compared with $16.8 million (3.4% of sales) in the corresponding quarter last year, an increase of $2.4 million.

D. Financing expenses

Financing expenses in 2009 amounted to the sum of $93.7 million, similar to financing expenses in 2008, which amounted to the sum of $96.6 million.

Financing expenses in the fourth quarter of 2009 amounted to $23.1 million compared with $10.4 million in the corresponding quarter of the previous year. The increase in financing expenses during the quarter stemmed mainly from: (1) financing income recorded in the fourth quarter of 2008 due to the devaluation of the shekel compared with the dollar and adjustment of the value of the Company’s shekel undertakings to its employees (such as severance pay, vacation pay, sick leave, etc.) to the dollar value thereof on the balance sheet; and (2) an increase in the Company’s debt balance.

E. Taxes on income

During the Report Period, revenues from taxes amounted to $8.7 million compared with an expense in the sum of $49.7 million in 2008.

On August 11, 2009, the Company's Board of Directors approved a one-time withdrawal of profits from the Group's overseas companies, in the sum of up to $300 million based on a temporary provision resulting from the amendment of section 169 of the Israeli Income Tax Ordinance. The Company recorded a one-time tax of approximately $15 million (approx. 5% of the above amount).

Revenues from taxes in the fourth quarter of 2009 amounted to $10.7 million compared with an expense in the sum of $14.8 million in the corresponding quarter of the previous year. Tax revenues in the quarter were due to the creation of tax assets due to cumulative losses.

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Revenues from taxes during the quarter and during the Report Period stemmed mainly from a decrease in the Company’s profits and a decrease in the balance of deferred tax undertakings and from recognition of a tax revenue as a result of a decrease in tax rates following the enactment of the Economic Rationalization (Statutory Amendments for the Implementation of the Economic Program for 2009 and 2010) Law, 5769-2009.

As set out in Chapter A of the Periodic Report, 2009 was characterized by a sharp decrease in the profits of the Company in general, and in certain regions, mainly South America, the Company presented losses whilst in other areas there was a slight erosion of profits. In light of this, losses for tax purposes carried over into the following years and amounting, as at the balance sheet date, to the adjusted sum of approximately $200 million (which originated mainly in operations in South America) are likely to be realized over a period of several years. The Company created a tax asset for cumulative losses in the sum of approximately $45 million in accordance with the Company’s assessment that there is a high level of certainty regarding realization of such losses in the coming years. The Company recorded effective (consolidated) tax revenues in the rate of 37.2% of its consolidated losses.

F. Net profit ascribed to shareholders of the Company

In 2009, net profit amounted to $32.7 million (1.5% of sales) compared with $219.0 million dollars (8.6% of sales) in 2008.

The Company’s operations in the fourth quarter of 2009 amounted to a loss in the sum of $29.8 million compared with a profit in the sum of $8.7 million (1.8% of sales) in the corresponding quarter of the previous year.

G. EBITDA

In 2009, EBITDA amounted to $217.7 million (9.8% of sales) compared with $456.5 million dollars (18.0% of sales) in 2008.

EBITDA in the fourth quarter of 2009 amounted to the sum of $8.7 million (1.8% of sales) compared with $57.8 million (11.8% of sales) in the corresponding quarter of the previous year.

The reduction in EBITDA during the quarter and the period of the report stemmed mainly from a reduction in the Company’s operating profits, as set out above.

4. Financial Condition and Liquidity

A. Cash flow from current operations

Cash flow from current operations in 2009 amounted to a positive cash flow in the sum of $209.6 million compared with a positive cash flow in the sum of $14.8 million in 2008. The increase in current cash flow in 2009 stemmed mainly from the realization of existing inventory which was expressed by a decrease of $135 million in inventory during the Report Period, and from efficient collection from customers. However, during the second half of 2009 there was a considerable increase in the number of credit days that the Company granted to its customers in South America, against the backdrop of the sharp increase in competition, mainly in Brazil.

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Operating cash flow during the fourth quarter of 2009 was negative, amounting to $10.0 million, compared with a negative cash flow of $87.2 million in 2008.

B. Cash flows used in investment activities:

In 2009, the Company’s investments (less short-term and other investments) amounted to the sum of $160.5 million compared with $150.1 million in 2008. Investment activities included investments in product licenses, investments in intangible assets and investments in fixed assets. Investments in fixed assets mostly included investments in plant and equipment for upgrade and improvement of environmental standards and amounted, less investment grants, to $69.4 million, compared with $70.4 million in the previous year.

The Company’s investments in the fourth quarter of 2009 (less short-term and other investments) amounted to the sum of $47.5 million compared with $48.9 million in the corresponding quarter last year. These investments mostly include product registrations, intangible assets and investments in fixed assets. Investments in fixed assets mostly included investments in plant and equipment for upgrade and improvement of environmental standards and amounted, less investment grants, to $24.3 million, compared with $12.0 million in the corresponding quarter in the previous year.

C. Free Cash Flow

In 2009, free cash flow (less short-term investments) amounted to a positive cash flow of $52.3 million, compared with a negative cash flow of $127.8 million in 2008. The increase in free cash flow in 2009 stemmed from a significant improvement in cash flow from current operations.

Free cash flow (less short term investments) in the fourth quarter of 2009 amounted to a negative cash flow of $56.7 million compared with a negative cash flow of $133.4 million in the corresponding quarter of the previous year.

D. Current assets

Total current assets as at December 31, 2009 amounted to the sum of $2,365.0 million compared with $2,139.5 million as at December 31, 2008. The increase in current assets stemmed mainly from a significant increase of approximately $350 million in the Company’s inventory balances.

E. Investments in Fixed Assets:

See Cash Flow chapter above.

F. Cash, current liabilities and long-term loans

The Company’s credit (bank credit and bonds) amounted, on December 31, 2009, to the sum of $1,520.1 million (of which 21.1% was short-term credit) compared with $1,108.8 million (of which 37.3% was short-term credit) on December 31, 2008.

Cash balances and short term investments as at December 31, 2009 amounted to $562.9 million compared with $215.4 million on December 31, 2008.

The Company’s net debt (loans from banks and bonds less cash and short-term loans) amounted, as at December 31, 2009, to $957.2 million compared with $893.3 million as at December 31, 2008.

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The Company’s net debt (less the effect of hedging transactions ascribed to debt) amounted, as at December 31, 2009, to the sum of $858.5 million compared with $914.6 million on December 31, 2008, a decrease of $56.1 million which was mainly achieved due to an increase in cash flows from current operations and a decrease in inventories, as set out above.

The change in the net debt balance as at December 31, 2009 compared with the net debt balance as at December 31, 2008 stems, inter alia, from payment of a dividend in the sum of approximately $70 million which the Company paid its shareholders in October 2009.

The Company is subject to covenants on obtaining credit, by virtue of the long-term bank credit documents and the securitization agreement regarding the trade receivables of the Company and consolidated subsidiaries of the Company (including amendments thereto). During the Report Period and after the balance sheet date, the Company received deeds of consent from its financing banks and drafted an amendment to the securitization agreement. As at the report date and immediately prior to publication of the report, to the best of the Company’s knowledge the Company is in compliance with all of the applicable covenants of the deeds of consent and amendment of the securitization agreement as aforesaid. Notwithstanding this, an unexpected decline in the Company’s results due to the occurrence of an external event to the Company or in the event the Company's forecasts, as mentioned above, will not materialize, might result in the Company not meeting the covenants contained in the deed of consents including with respect to eh first quarter of 2010. For further details, see section 23.4 of Chapter A of this Report.

G. Equity

The Company’s equity (including minority rights) as at December 31, 2009 amounted to $1,276.8 million compared with $1,286.7 million as at December 31, 2008. The equity to balance sheet ratio as at December 31, 2009 amounted to 34.0% compared with 38.1% as at December 31, 2008.

The Company’s issued and paid up capital as at December 31, 2009 amounted to 474,713,010 ordinary shares of NIS 1.00 par value each, and under full dilution, to 474,833,218 ordinary shares of NIS 1.00 par value each.

H. Dividend

On August 11, 2009, the board of directors of the Company passed a resolution to distribute the sum of $70 million as a dividend to shareholders of the Company on the basis of the fact that under the Company’s financial statements for the period ended on June 30, 2009, the Company was in compliance with the profit test set out in section 302 of the Companies Law and that, following a discussion on the matter, to the best of the knowledge of members of the board of directors, in light of the Company’s needs and its expected cash flow, there is no reasonable fear that payment of the dividend might prevent the Company from meeting its existing and expected debts when the time comes to meet them. For restrictions on the payment of dividends which the Company has undertaken in the context of the letters of consent to financiers, see section 3 of Chapter A.

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I. Financial Ratios

2008 2009 As at December 31, 1.71 2.02 Ratio of current assets to current liabilities (current ratio)

0.8 1.17 Ratio of current assets excluding inventory, to current liabilities (acid-test ratio)

32.9% 40.4% Ratio of financial liabilities to total gross balance

86.2% 119.1% Ratio of financial liabilities to total gross equity

J. Sources of Funding

The Company finances its commercial operations using independent means and via external financing as set out below. The principal source of external financing for the Company is medium- and long-term debentures raised by the Company, the balance of which, as at the date of the Report, is approximately $980 million. The Company has not undertaken to comply with any financial covenants under these debentures.

The smaller portion of the Company’s external financing originates from: (a) long-term bank credit the balance of which (including current maturities) as at the date of the Report is approximately $324 million, under which the Company has undertaken to comply with financial covenants as set out in Chapter A of the Periodic Report; (b) short-term bank credit the balance of which (not including current maturities) as at the date of the Report is approximately $216 million; (c) securitization of trade receivables in the sum of approximately $250 million the balance of which as at December 31, 2009 is approximately $157 million, in which the Company has undertaken to comply with financial covenants as set out in Chapter A of the Periodic Report; and (d) trade payables. On the other hand, as at December 31, 2009, the Company has liquid cash and cash equivalent balances in the sum of approximately $562 million.

Between December 31, 2009 and the date of the report, the Company received long-term credit from a banking corporation in the sum of approximately $50 million.

On March 25, 2009, the Company issued, by extension of existing series, NIS 661,000,000 par value debentures (series C) and NIS 472,000,000 par value debentures (series D).

During the course of 2009, the Company issued 87,226 ordinary shares of NIS 1.00 par value each as a result of the realization of (non-negotiable) options in accordance with the employee option plans that exist at the Company.

For details regarding the Company's Board of Directors principle resolution regarding the issuance of shares to the Company's shareholders by way of rights issue see chapter dealing with Events After Report Date.

B. Exposure to market risks and methods of managing such risks

1. General

The Company conducts its business in a number of different currencies. Due to its activities, the Company is exposed to market risks, which mainly involve exchange rate fluctuations, partial

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adjustment of the prices of products to reflect changes in the cost of raw materials, changes in the rates of increase of the CPI and changes in interest rates. The board of directors of the Company approved a policy to use acceptable financial instruments (such as options, forward contracts and swap contracts) for the purpose of hedging against exposure to exchange rate fluctuations and increases in the CPI flowing from the Company’s operations. The Company only effects such transactions via banking corporations and stock exchanges, which are obligated to meet capital adequacy requirements or to maintain a scenario-based level of collateral.

For details of credit risks and liquidity risks see Note 31 to the Company’s financial statements.

2. Risk Management Officer

The Company’s Market Risk Manager is the CFO, Ran Maidan. For details on the qualifications, expertise and commercial experience of the Risk Manager, see Chapter 4 of this Report – Additional Particulars of the Company.

The following are exchange rate data for the principal currencies used by the Company, in comparison with the dollar, as well as LIBOR interest data:

December 31, 2009 Q4 Average FY 2009 Average

2009 2008 change 2009 2008 change 2009 2008 change

1.442 1.393 -3.5% 1.476 1.316 -12.2% 1.390 1.463 5.0% EUR/USD

1.741 2.337 25.5% 1.738 2.282 23.8% 1.997 1.829 -9.2% USD/BRL

2.850 2.962 3.8% 2.833 2.869 1.3% 3.127 2.413 -29.6% USD/PLN

7.40 9.411 21.4% 7.522 9.960 24.5% 8.453 8.273 -2.2% USD/ZAR

0.900 0.687 31.1% 0.908 0.670 35.4% 0.780 0.836 -6.7% AUD/USD

1.619 1.459 10.9% 1.632 1.568 4.1% 1.559 1.835 -15.0% GBP/USD

3.775 3.802 -0.7% 3.769 3.810 -1.1% 3.933 3.591 9.5% USD/ILS

0.25% 1.43% -82.5% 0.27% 2.77% -90.3% 0.69% 2.93% -76.5% USD L3M

The exchange rate fluctuations for these currencies during the quarter and the period are accredited to the various items in the financial statements of the Company. The net effect of changes in the exchange rates of the currencies during the period following the balance sheet date on balance sheet exposures is not substantial due to the high levels of balance sheet hedging effected by the Company, as set out above.

3. Description of Market Risks

Company’s Policy regarding Market Risk Management

The Company’s policy is to maintain as high as possible a coefficient between the currency in which it sells its products and the currency in which it purchases its raw materials. The Company is continually examining its balance sheet and economic exposures 12 months in advance, in accordance with its revenue and expenditure forecasts. As at the date of approval of the financial statements, the Company hedges most of its balance sheet exposure and some of its economic exposure in respect of its principal currencies.

The following are details of the policies implemented for each risk. Note that as at the date of approval of the financial statements, there have been no significant changes in the Company’s risk management policy.

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Currency Risks

The Company’s financial statements are set out in US dollars (the Company’s functional currency) whilst its operations, sales and purchases of raw materials are effected in a variety of currencies. Therefore, exchange rate fluctuations of the purchasing currency as against the sale currency, either positively or negatively as the case may be, will affect the Company’s results. In the Company’s assessment, the Group’s most substantial exposure is to the Euro, the Shekel and the Brazilian Real. In addition, there are lesser exposures to other currencies such as the UK Pound, Polish Zloty, Australian Dollar and South African Rand. The strengthening of the dollar as against other currencies in which the Company operates reduces the scope of the Company’s dollar sales, and vice versa.

Currency exposure deriving from foreign currency exchange rate fluctuations is constantly checked against the assets (including inventory of finished products in countries of sale), liabilities and cash flows denominated in non-US Dollar currencies. The high rate of fluctuation of these currencies might increase the costs of transactions to hedge against currency exposures thereby increasing the costs of financing the Company. The Company tends to use common financial instruments (such as options, forward contracts and swap contracts) to hedge most of its substantial net balance sheet exposure to any particular currency. However, since the Company hedges against most of its balance sheet exposure in the context of these operations, and only against part of its economic exposure, fluctuations in the exchange rates of these currencies might affect the Company’s results and profits positively or negatively, as the case may be. As at the date of the financial statements, the Company hedged most of its exposure to the Euro, Real and Shekel.

In addition, crop protection product sales depend directly on agricultural seasons and on the cyclical nature of crop growth, and therefore, the Company’s revenues and its exposure to various currencies are not evenly distributed over the year. Countries in the northern hemisphere have similar agricultural seasons and in those countries, the highest sales are usually in the first half of the calendar year. During this period, the Company has substantial exposures to the Euro, the Zloty and the Pound. In the southern hemisphere, the seasons are opposite, and most of the local sales (except in Australia) are made in the second half of the year. Currently, most of the exposure is to the Brazilian Real. The Company has more sales in the markets in the northern hemisphere and therefore the Company’s sales in the first half of the year are higher than its sales in the second half of the year.

During the month of November 2006, the Company completed a raising of debentures in the sum of NIS 2,350,000,000 par value and on March 25, 2009, the Company completed an issue of debentures by way of extension of series C and D in the sum of NIS 1,133,000,000 par value (hereinafter jointly: the “Debentures”). The main portion of the Debentures is linked to the consumer price index, and therefore, an increase in the consumer price index as well as fluctuations in shekel rates may bring about a significant exposure to the Company’s operating currency, which is the dollar. As at the date of approval of the financial statements, the Company hedged most of its exposure resulting from the issues of the Debentures, as aforesaid, in swap transactions and forward contracts.

For further details see Note 31 to the financial statements of the Company for December 31, 2009.

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Exposure to CPI Linkage

The main portion of the above bonds is linked to the consumer price index, and therefore, an increase in the consumer price index might bring about a significant increase in the Company’s financing expenses. As at the date of approval of the financial statements, the Company has hedged most of its exposure to this risk on an ongoing basis in CPI hedging transactions.

Risks in raw material prices (in source currency)

Approximately 75% of the Company’s sales costs stem from raw material costs. Most of the Company’s raw materials are distant derivatives of oil prices. Therefore, any increase or decrease in oil prices affects raw material prices.

In order to reduce exposure to fluctuations in the prices of raw materials, the Company customarily enters into long-term purchase contracts for principal raw materials wherever possible. Equally, the Company tries to adjust the selling prices, as far as possible, in order to reflect changes in the prices of raw materials.

As at the date of approval of the financial statements, the Company has not entered into any transactions to hedge against oil or the prices of raw materials.

Interest risks

The Company is exposed to changes in the LIBOR interest rate on the US dollar, since the Company has liabilities in that currency which bear a variable LIBOR rate. The Company prepares a quarterly summary of its exposure to changes in the LIBOR rate. As at the date of approval of the financial statements, the Company has not hedged against this exposure.

4. Means of supervision of market risk management policy and method of implementation thereof

The Company keeps internal documentation regarding the designation of financial instruments for exposures which indicate the link between the instruments and the exposure. The board of directors and the finance committee discuss the Company’s exposure to market risks and the acts done by management of the Company in respect thereof, once every quarter. The Company’s management examines the control procedures on an ongoing basis, and updates them in accordance with the scope of operations and the risk derived from the operations.

5. Sensitivity Tests

Discussion of analysis of sensitivity to changes to risk factors

The following is a description of the models used for examining the sensitivity of the fair values of various financial instruments:

1. B&S formula options – the known standard deviation curve and the rates of the relevant base asset.

2. Forward transactions – the rate of the relevant base asset, and the interest points derived from the interest rates.

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3. Debentures and bank loans – the known interest curve and the exercise price of the debenture.

4. Various interest rates:

Interest rates of up to one year

Cross Yatzig

EUR.USD 1.4415

GBP.USD 1.6189

JPY.USD 92.3796

BRL.USD 1.7412

AUD.USD 0.9002

ZAR.USD 7.3976

ILS.USD 3.7750

USD.PLN 2.8503

USD.CHF 1.0294

USD.CZK 18.4379

USD.RON 2.9361

USD.RUB 30.2442

USD.CAD 1.0478

USD.HUF 190.2110

USD.SEK 7.1173

Interest rates of over one year

Interest rate - Ask Interest rate - Bid Currency 1M 2M 3M 6M 9M 1Y 1M 2M 3M 6M 9M 1Y

USD 0.27 0.30 0.43 0.45 0.70 0.95 0.17 0.20 0.23 0.25 0.50 0.75

JPY 0.30 0.36 0.42 0.42 0.59 0.76 0.06 0.11 0.10 0.21 0.30 0.39

GBP 0.75 0.80 0.88 1.12 1.57 2.02 0.46 0.45 0.53 0.77 0.90 1.02

CHF 0.38 0.40 0.49 0.70 0.81 0.92 0.06 0.09 0.15 0.35 0.46 0.57

SEK 0.35 0.38 0.48 0.82 0.99 1.15 0.23 0.26 0.36 0.42 0.59 0.75

EUR 0.59 0.55 0.68 0.98 1.12 1.26 0.34 0.45 0.58 0.88 1.02 1.16

ILS 1.32 1.45 1.51 1.76 2.06 2.35 1.24 1.37 1.43 1.68 1.98 2.27

AUD 3.96 4.02 4.05 4.47 4.86 5.25 3.76 3.82 3.80 4.27 4.66 5.05

ZAR 7.70 7.74 7.74 8.15 8.33 8.50 6.99 7.26 7.35 7.55 7.73 7.90

CZK 1.35 1.47 1.58 1.83 1.98 2.13 1.00 1.12 1.23 1.48 1.63 1.78

RON 10.56 10.72 10.66 10.46 10.46 10.46 10.06 9.63 10.16 9.71 9.71 9.71

RUB 6.38 6.87 6.75 8.00 8.38 8.75 5.96 6.06 5.75 7.50 6.63 5.75

CAD 0.41 0.45 0.68 0.90 1.15 1.40 0.16 0.20 0.38 0.60 0.80 1.00

HUF 6.31 6.26 6.24 6.25 5.35 4.45 5.72 5.68 5.64 5.10 4.28 3.45

PLN 3.75 3.80 4.00 4.40 4.47 4.54 3.40 3.60 3.80 4.20 4.27 4.34

BRL 8.19 7.91 8.42 9.03 9.34 9.65 8.09 7.65 7.76 8.41 8.88 9.36

2 Y 5 Y 10 Y

ILS 3.10 4.60 5.55

ILS CPI 0.32 1.84 2.83

USD 1.42 3.05 4.17

EURO 1.84 2.84 3.70

BRL 11.83 12.78

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For details of the impacts of fair value of hedging transactions, exchange rates, interest and financial instruments, see the Appendix to this Report.

C. Corporate Governance

1. Directors with accounting and financial expertise

Pursuant to a resolution of the board of directors of March 8, 2004, the minimum number of directors who have accounting and finance expertise is to be two.

As at the date of publication of this report, five directors of the Company have declared that they have accounting and finance expertise and that they are in compliance with the conditions by law: Messrs. Avraham Bigger, Nochi Dankner, Ra'anan Cohen, Yitzhak Manor and Prof. Dov. Peckelman. In addition, Mr. Gideon Chitayat also serves on the board of directors of the Company as an external director with accounting and finance expertise. For details on the qualifications, expertise and commercial experience of these directors, see Chapter 4 of this Report – Additional Particulars of the Company.

2. Independent directors The articles of association of the Company contain no provisions regarding the number of independent

directors.

Likewise, as at the date of approval of the financial statements, there are no independent directors, as

that term is defined in the Companies Law, 5759-1999 (other than external directors), acting in the

Company either due to the term of their office or due to the fact that they do not comply with the

conditions of qualification to appoint an external director.

3. Internal auditor

A. Identity of the internal auditor

Mr. Yehoshua Hazenfratz, CPA, was appointed as internal auditor of the Company and commenced work at the Company on November 6, 2007.

B. Compliance of internal auditor with statutory requirements:

To the best knowledge of the Company's management, the internal auditor is in compliance with the provisions of section 146(b) of the Companies Law and with the provisions of section 8 of the Internal Audit Law.

C. Holding of securities of the Company or of an affiliated entity:

As at the date of this report, the internal auditor does not hold any securities of the Company or of any affiliated entity.

D. Relationship between the internal auditor and the Company or an affiliated entity.

To the best knowledge of the Company's management, the internal auditor serves as the internal auditor of Clal Biotechnologies Ltd. and Nesher Israel Cement Factories Ltd. Aside from the above, the internal auditor has no substantial business relations or other substantial relations with

19

the Company nor any other commercial relations which might constitute a conflict of interest with his position as internal auditor of the Company.

E. Additional functions of the internal auditor at the Company.

The internal auditor is an external service provider of the Company on behalf of the accounting firm of Shief, Hazenfratz & Co. With the exception of his function as internal auditor of the Company, the internal auditor is not employed by the Company or nor does he provide it with any other external services.

F. Other functions of the internal auditor outside of the Company.

Mr. Joshua Hazenfratz is a partner in the accounting firm of Shief, Hazenfratz & Co.

G. Method of appointment of the internal auditor

Mr. Joshua Hazenfratz was appointed to act as internal auditor of the Company, on the recommendation of the Company's Audit committee of November 1, 2007 and upon a resolution of the Board of directors of November 6, 2007. In the discussion of the Audit committee and the Board of directors, Mr. Joshua Hazenfratz was appointed as internal auditor of the Company, following thorough examination of his education and extensive experience. Mr. Hazenfratz was found suitable to serve as the Company's internal auditor, inter alia, taking into account the scale of operations and complexity of the Company's operations.

H. Identity of internal auditor’s supervisor

The internal auditor is directly subordinate to the chairman of the board of directors.

I. Audit plans

The internal auditor's audit plan is an annual audit plan, based on a long-term audit plan.

The work plans are devised by the internal auditor, in coordination with the Board of directors and with its approval, under the supervision of the CEO and with the approval of the Company's Audit Committee. The guiding considerations in setting up the plan are based on matters seen as requiring in-depth examination, based on their risk level, with the aim of finding defects, of making systems more efficient, or ensuring protection of Company assets, and of ensuring the performance of the Company’s procedures and compliance with the laws of the countries in which it operates.

The annual work plan also includes follow-up audits of implementation of the recommendations of the internal auditor and the Audit Committee, by Company management. The audits are conducted based on the plan, supervised by the internal auditor and are adjusted on the basis of developments and findings that become apparent during the course the audit.

J. Substantial transactions

The internal auditor receives an invitation, including background material, to meetings of the audit committee and attends meetings of the committee at which transactions are considered and approved, as provided in section 270 of the Companies Law, 5759-1999. Similarly, the internal auditor is given, on his request, minutes of meetings of the board of directors at which such transactions were approved.

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K. Overseas audit and audit of subsidiaries

The internal auditor is also the internal auditor of the subsidiaries Makhteshim and Agan. The audit work on the overseas subsidiaries is done mainly by Deloitte Touche.

With respect to audits of substantially held subsidiaries, the Company’s long-term audit plan aims to cover the entire gambit of audit-related issues once every few years, for each subsidiary.

L. Employment of internal auditor

The internal auditor’s employment conditions are determined by the audit committee in accordance

with the audit plan that it approves. In 2009, the internal audit of the Company and its subsidiaries

amounted to approximately 5,468 hours, according to the division set out in the table below. The

scope of the position was determined based on the needs of the audit plan, and is not limited by the

party being audited.

Work Hours Internal audit at Company and at subsidiaries 5,468 Internal audit at Company’s subsidiaries 3,938 Internal audit of Company’s operations in Israel 2,967 Internal audit of Company’s operations outside of Israel 2,501

Out of the above total internal audit hours, approximately 2,967 audit hours were put in by the internal auditor on audits in Israel and approximately 2,501 audit hours were put in by the internal auditor on audits overseas.

The number of hours set aside for audit work at the Company and its subsidiaries was prescribed in accordance with the audit plan proposed by the internal auditor with the cooperation of management and approved by the audit committees of the various boards of directors.

M. Guiding Professional Standards in Conducting Audit

The internal auditor and the team of employees that report to him perform their audit work in strict compliance with the criteria necessary to conduct professional, reliable audits that are independent of the party being audited. According to information provided to management of the Company by the internal auditor, the audit reports rely on the findings of the audit and the facts documented in the audit are performed in accordance with generally accepted accounting practices, pursuant to section 4(b) of the Internal Audit Law, according to the professional standards of the IIA (standards 1000 and 2000 series), based on the professional directives of the Israel Institute of Internal Auditors. The board of directors relied on the reports of the internal auditor regarding his compliance with the professional standards under which he drafted his audit.

N. Internal auditor’s free access

Upon coordination, the internal auditor of the Company has free access to the relevant documents information and data systems of the Company and of its subsidiaries, including financial data, and has an independent status. With respect to overseas subsidiaries, the Company’s internal auditor conducts audits on the basis of reports received from the auditors of the overseas subsidiaries.

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O. Internal Audit Report

During the course of 2009, six meetings were held of the audit committee which discussed, inter alia, the reports of the internal auditor submitted in writing to the chairman of the audit committee and to the chairman of the board of directors and the CEO of the Company, as set out below:

On May 12, 2009, the audit committee discussed three reports submitted by the internal auditor on May 5, 2009.

On November 23, 2009, the audit committee discussed the report submitted by the internal auditor on October 21, 2009.

On December 27, 2009, the audit committee discussed the report submitted by the internal auditor on November 22, 2009.

P. Evaluation of internal auditor’s work by the board of directors of the Company

In the opinion of the board of directors of the Company, the scope, nature and continuity of the operations of the internal auditor and his work plan are reasonable under the circumstances, and will serve to realize the objects of the Company’s internal audit.

Q. Remuneration of internal auditor

The remuneration of the internal auditor of the Company and the Israeli subsidiaries is on an hourly basis, in accordance with the work plan approved by the audit committee. At the beginning of each year, the auditor submits a proposed annual audit plan which includes a planned framework of hours. The audit committee prescribes the audit plan and the quota of hours. The auditor may not exceed the quota of hours without the approval of the audit committee. In the event of further assignments being imposed on the auditor during the audit year – the audit committee determines the quota of hours for such additional assignments. In 2009, the payment to the internal auditor amounted to NIS 693,324 plus VAT.

In the Company’s assessment, due to the fact that the remuneration is based on hours worked, the aforesaid remuneration does not affect the internal auditor's exercise of professional discretion.

4. Donations

The Company views contributions and assistance to the community in Israel and in the countries in which the Company operates outside of Israel as well as being a very important component to be integrated into its general activities. The Company, like other companies in the IDB Group, views contributions and assistance to the community in Israel, mainly in the South of the country and in towns along the border near to areas in which the Company’s production facilities are located, and around the world with respect to the communities situated near to its factories, as being a central element of its commercial vision. The Company believes that it has responsibility towards society wherever it operates, recognizing that commercial mobility goes hand in hand with social and moral mobility.

Social responsibility, integration and giving back to the community are strategic goals which form an integral part of the Company’s commercial work plan, which sets aside financial resources for this matter in its annual work plan. Activities for the community are done with the involvement of employees, whilst instilling values of social responsibility and environmental protection.

22

The Company has chosen to focus on operations for the benefit of the community in the fields of education and environmental conservation, alongside activities in the fields of health, culture, art, sport, heritage, welfare and in Israel, the IDF.

Principles for implementation of social investment policies

(1) Allocation of financial resources for the benefit of the community: Donations for education and encouragement of excellence among children and youth; awarding scholarships to students in border towns in areas of hostilities, and to excellent students; donations for the purchase of medical equipment, to welfare institutions and in Israel, for IDF soldiers as part of the “Adopt a Soldier” program run by the Soldiers Welfare Association.

(2) Setting up community contribution partnerships: Promotion of educational projects in the fields of culture, art and environmental conservation, together with the Education Administration of the local authorities, institutions and organizations, kindergartens, primary schools and high schools.

This contribution is given as part of an approved plan created with the assistance of the recipient of the donations, and the Company. Following approval of the plan, a partnership is set up which is managed jointly, and is supervised and monitored constantly to ensure the attainment of the goals of the Company’s contribution. In addition, the Company is in constant contact and continuous dialog with dozens of social partners, including via indirect assistance for the promotion of educational and cultural projects regarding these activities, giving potential target groups exposure and expanding them.

(3) Involving employees in communal contributions: At the Company’s initiative and with its encouragement, many employees of the Company volunteer in areas such as: immigrant absorption, education and encouragement of children and youth to achieve excellence, and in the field of welfare. Employees donate their own money and time for the benefit of the community. The Company encourages cultivation of the value of giving and caring among children of employees, and employs them in community service jobs during summer holidays. These jobs are characterized by educational and ideological contributions to the community.

In 2009, the Company donated the sum of approximately $1.5 million of which the sum of $1.2 million was donated in Israel.

23

5. Remuneration of Senior Officers

In the assessment of the board of directors of the Company, the remuneration granted to the senior

officers as set out in Article 21 of Chapter D of this Report is adequate, fair and reasonable taking into

account the size of the Company, the scope and complexity of its operations and business, the tasks and

scope of liability of the senior officers who devote their effort and time for the purpose of promoting the

affairs of the Company and their contribution to the development of the Company’s business. In

addition, the Company has a policy of paying grants to its senior officers in accordance with the

discretion of the CEO of the Company and the approval of the relevant organs, and inter alia these are

contingent upon the results of the Company and are based on quantitative goals which include the

Company’s sales, profits and unique business development targets and the Company has no prior

undertaking with respect to such grants.

6. Definition of Negligible Transactions in the Company’s Financial Statements

On March 10, 2009, following an in-depth examination of the nature of the Company’s operations, the

scope of its revenues and the growth that the Company has recorded in recent years, the board of

directors of the Company resolved to adopt guidelines and rules for the classification of a transaction of

the Company or its subsidiary with an interested party (an interested party transaction) as a negligible

transaction, as set out in section 64(3)(d)(1) of the Securities (Drafting of Annual Financial Statements)

Regulations, 5753-1993. These rules and guidelines will be used by the Company to examine the scope

of disclosure in its various reports, including its periodic report and prospectuses (including shelf offer

reports), with respect to transactions with a controlling shareholder as defined in section 270(4) of the

Companies Law, 5759-1999, as required under any law, including in the Securities (Periodic and

Immediate Reports) Regulations, 5730-1970 (section 22 and section 37(a)(6) and the Securities (Details

of Prospectus and Draft Prospectus – Structure and Form) Regulations, 5729-1969.

During the ordinary course of their business, the Company and its subsidiaries, particularly in light of

the branched structure of the holdings of the Group and the variety of its operations, effect or might

effect interested party transactions, mainly regarding the purchase of services (such as logistics services,

transportation services, communications services, tourism, investment portfolio management), purchase

or hire of goods, chattels or land (insurance products, office equipment, offices), marketing transactions,

etc. Mostly, these are transactions that are not substantial for the Company either quantitatively or

qualitatively, and these are mostly on similar terms to transactions effected with third parties.

Therefore, the board of directors of the Company has determined that an interested party

transaction that is not an extraordinary transaction (i.e., that is done in the ordinary course of

business, for the good of the Company and on market conditions), will be deemed to be a

negligible transaction if it meets a two-tier test:

(1) The qualitative test – if, the nature, substance or impact of the transaction on the Company is not

substantial to the Company and there are no special considerations arising out of all of the

circumstances of the case attesting to the substantive nature of the transaction; (2) the quantitative test –

if the cumulative impact of the transaction is less than 1.5% of the total operating profit of the

Company, as recorded in the last published consolidated audited financial statements of the Company.

24

Note that even if an interested party transaction meets the above quantitative test, it will not be

considered negligible if qualitative considerations attest to the substantial nature of it, either due to its

impact on the Company or the importance of disclosing it to the investor public.

Note that for the purpose of determining the quantitative threshold at which a transaction will be

classified as negligible, the board of directors of the Company examined other parameters in the

Company’s balance sheet, the nature of the Company’s operations, the quality and significance of the

impact of the transactions against the parameter of operating profit, and, where possible, parameters

taken into account by similar companies. This examination showed that in light of the nature of the

Company’s operations, the relevant parameter which represents a substantial effect on the results and

operations of the Company are the net profit or the operating profit and best reflect the Company’s

operations and results and therefore, in the opinion of the board of directors, constitutes a yardstick for

the substantive nature of the transaction. If and to the extent that the Company is of the view that the

quantitative criterion referred to above is not relevant to examining the negligible status of a transaction,

the Company shall consider another relevant criterion for examining the aforesaid threshold.

Note that the aforesaid negligible transactions procedure is being discussed with the Securities

Authority and changes are expected to be made to it.

7. Chief Internal Auditor

A. Identity of the auditor

The chief auditors of the Company and its subsidiaries are the accounting firm of Somekh Chaikin of the KPMG Group (“KPMG”).

B. Auditor’s fees

The 2009 fees to KPMG for audit services, audit-related services, tax consultation services with respect to the financial statements of the Company and consultation services with respect to implementation of the Securities (Periodic and Immediate Reports) Regulations Amendment 3 (2009) amounted to the sum of $1,000,000 (for approximately 15,000 hours’ work) and outside of Israel, to the sum of $2,000,000 (for approximately 18,000 hours’ work). The difference between the fees paid to the auditor in 2009 and the fees paid to him in the previous year stems from the consultation services relating to the implementation of the Securities (Periodic and Immediate Reports) Regulations Amendment 3 (2009)

The fees for audit services constitute more than half of the auditor’s total income from the corporation during the report year. The fees are paid on the basis of hours worked. The persons approving the auditor’s fees are the board of management of the Company which has been authorized to do so by the general meeting.

8. Process of approval of financial statements

The Company has a finance committee which receives a detailed presentation each quarter of the financial results from the CFO. Each quarter, the committee discusses the financial results before presenting them to the board of directors and recommends that it approves the financial statements. The financial statements are approved by the board of directors, which is the organ responsible for the

25

overall control of the Company. In addition to these regular quarterly discussions, the finance committee holds additional meetings at its discretion, at which it discusses various matters arising from the Company's financial statements, in greater detail and depth. The Company’s finance committee is made up of 6 directors, one of whom is an external director. All the committee members have accounting and financial qualifications.

The members of the committee and members of the board of directors receive the draft financial statements a few days before convening the meetings.

Representatives of the Company's auditors are invited to meetings of the finance committee, as well as to those meetings of the board of directors at which the financial statements are discussed and approved and they refer to and respond to questions directed to them by members of the board of directors, relating to substantial issues deriving from the data presented in the relevant financial statements. When presenting the financial statements to the board of directors, the CEO of the Company, Mr. Erez Vigodman, sets out the main results of the Company's operations during the period under review and refers to substantial events that may have taken place during the period. Thereafter, Mr. Ran Maidan, CFO, gives a detailed presentation of the Company's financial results during the period under review and compares it with previous periods, with the emphasis being placed on the substantial issues that arise from such. During the course of these reviews, management responds to questions addressed to it by members of the board of directors. At the end of the discussion by the board of directors, a vote is held, during which the financial statements are approved.

9. Disclosure Regarding the Efficacy of Internal Audits on Financial Reporting and Disclosure

In December 2009, the Securities (Periodic and Immediate Reports) (Amendment No. 3) Regulations,

5770-2009 were published regarding the efficacy of internal audits on financial reporting and disclosure

(the “Regulations”). The commencement of the Regulations is as of the Periodic Report for December

31, 2010 (the “Date of Commencement”). Pursuant to the transitional provisions set out in the

Regulations, during the period between the date of publication of the Regulations and the Date of

Commencement, details regarding the stages of the Company’s preparation and progress towards

implementing the provisions of the Regulations (“Implementation of the Project”) are to be set out in the

report of the board of directors.

Disclosure regarding the actions taken by the Company prior to the report date:

The person responsible for Implementation of the Project at the Company is the CFO, Ran Maidan.

During the Report Period, the Company has prepared for implementation of the provisions of the

aforesaid regulations, including setting out a preparation plan for Implementation of the Project, which

has been presented to and approved by the Audit Committee.

The Company has examined and mapped out the sections of the consolidated report, the business units

and the very substantial process in terms of internal controls required for financial reporting and

disclosure, including:

• Mapping and identifying controls in the process of drafting and disclosure in the financial

statements.

• Mapping and identifying controls in control environment processes.

26

• Mapping and identifying controls in the information systems related to financial reporting.

In planning the work and mapping the issues, the sections of the financial statements, the very

substantial processes and the consolidated subsidiaries that are to be included in the work, the Company

looked into quantitative and qualitative factors for examining the potential for substantial errors in

financial reporting and disclosure.

The principal qualitative criteria used by the Company in mapping the very substantial processes were:

• The level of discretion and the existence of estimates and assessments.

• The ability of the information system infrastructure to process information in accordance with the

existing level of complexity and the level of expertise required for the purpose of processing the

information.

• The level of risk embodied in embezzlement, fraud and/or error.

• The qualifications of those dealing in the process.

• Errors during previous reporting periods or other substantial misstatements.

• The level of risk and/or complexity in the accounting item.

• Past experience

The following is a map of the processes and criteria used by the Company to determine the very

substantial nature of processes for financial reporting and disclosure:

1. Sales process – the Company sells its products over a very wide geographical region in 100

countries, to a very large number of customers. The scope of sales and the process of recognition of

revenue might have a substantial impact on financial reporting.

2. Inventory and purchasing process – for the purpose of effecting sales, the Company stocks up

with inventory of finished products and raw materials used in the production process. Setting the

value and quantity of inventory might have a substantial impact on financial reporting.

3. Financial instruments – the Group enters into transactions in financial instruments for the purpose

of hedging against foreign currency risks, inflationary risks and interest risks. The derivatives are

recorded in accordance with their fair value. The sum and magnitude of the transactions, including

setting the fair value, might have a substantial impact on financial reporting.

The Company takes all necessary steps in accordance with the provisions of the Regulations.

10. Authorized signatories for the Company

As at the date of this Report, the Company does not have independent authorized signatories as defined in the Securities Law, 5728-1968.

D. Disclosure regarding the Corporation’s Financial Reporting

1. Linkage Balances

See Note 31 to the financial statements of the Company for December 31, 2009.

2. Critical Accounting Estimates

27

The preparation of financial statements based on accepted accounting principles requires management of the Company to make assessments and estimates which affect the reported values for assets, liabilities, income and expenses, and disclosure regarding contingent assets and liabilities. For details of critical accounting estimates used by the Company in its financial statements, see Note 2 to the financial statements.

28

3. Events relating to the financial situation after the Report Date

1. On March 9, 2009, the board of directors of the Company approved entry by the Company into an

insurance policy covering property and loss of profits with Clal Insurance Company Ltd. (“Clal”),

a company under the control of IDB Development Company Ltd., as an extraordinary transaction.

Under this arrangement, the Company shall bear an annual premium for purchase of the policy in

the sum of approximately USD 5.8 million. IDB Development Company Ltd., which might be

considered the (indirect) controlling shareholder of the Company, might be considered to have a

personal interest in the transaction due to the fact that it is a controlling shareholder of Clal. In

addition, the individuals who might be considered (indirect) controlling shareholders of the

Company might be considered to have a person interest in the transaction due to them and/or their

relatives (as the term “relative” is defined in the Companies Law) holding the office of directors of

Clal.

2. On March 9, 2010 the Company's Board of Directors resolved, in principle, to issue shares to the

Company's shareholders by a way of rights issuance, based on a shelf prospectus published by the

Company on May 27, 2008, in an amount of $100-150 million. The rights issuance is subject to

obtaining all the required approval by law (including the approval of the General Shareholders

meeting and exclusion of outside holders as detailed below) and the final approval of the

Company’s Board of Directors with the respect to the issuance and details thereof. In addition, the

Company's Board of Directors resolved to convene a General Shareholder Meeting to approve the

exclusion of outside holders, as without such exclusion, pursuant to the Securities Regulations

(Securities Public Offering) 2007 the rights issuance would have required the Company to publish

prospectus in other countries.

In the Company's Board of Directors opinion, the rights issuance is required for expanding and

reinforcing the Company's capital base and to ensure, in any event, the Company’s compliance

with the financial covenants as specified in Chapter A of this Report.

29

E. Details of the Company’s debentures

See table attached as an appendix.

The Company’s board of directors and board of management express their appreciation to the officers of the Company, to management of the various companies in the Group and to their employees, and thank them for their invaluable contribution, willingness, devotion and readiness to meet the many challenges faced by the Group in 2009.

Avraham Bigger Erez Vigodman Ran Maidan

Chairman of the Board

President & CEO CFO

March 9, 2010, Tel Aviv

30

Appendix of details of the Company’s debentures

Series Date of Issue Rating

Total par value on date of issue

(NIS millions)

Type of interest

Interest rate set

Effective interest as at date of

report

Listed for

trading on Stock Exchange (Yes /

No)

Dates of payment of interest

Dates of repayment of principal

Basis for linkage

Nominal par value

as at Decembe

r 31, 2009 (NIS

millions)

Nominal CPI-

linked par value

as at Decembe

r 31, 2009 (NIS

millions)

On-book value of

debenture balances

as at December 31, 2009

(USD millions)

On-book value of interest

payable as at

December 31, 2009

(USD millions)

Fair value as

at Decembe

r 31, 2009 (USD

millions)

Series B 12/2006 ilAA (5) 1,650

Annual interest

Linked to CPI

5.15% 6.3% Yes

Twice a year on May 31, and November 30

in the years 2006-2036

On November 30 of each

of the years 2020-2036

CPI for October

2006 1,637.5 1,822.8 461.9 (6) 2.0 433.6

12/2006 465

Series C(4)

3/2009 ilAA (5)

661

Annual interest

Linked to CPI

4.45% 1.8% Yes





CPI for October

2006 1,126.0 1,253.4 333 1.3 354.5

12/2006 235

Series D(4)

3/2009 ilAA (5)

472

Annual interest 6.5% 5.7% Yes





Unlinked 707.0 707.0 185.1 1.0 195.7

(1) The trustee for the Debentures (Series B) is Aurora Fidelity Trust Company Ltd.: 12 Menachem Begin Road, Ramat Gan (Tel.: 03-6005946, Fax: 03-6120675). Contact person: Adv. Iris Shlevin; CEO;

Email: [email protected]. (2) The trustee for the Bonds (Series C and D) is : Hermetic Trusts (1975) Ltd. 113 Hayarkon St., Tel Aviv (Tel.: 03-5274867; Fax: 03-5271736); contact person: Dan Avnon or Meirav Ofer. Email: [email protected]. (3) As at the date of the report, the Company was in compliance with all of the conditions and undertakings under the deed of trust and no conditions existed giving rise to a cause of action for immediate

repayment of the bonds. (4) On March 25, 2009, the Company issued NIS 661,000,000 par value debentures (series C) and NIS 472,000,000 par value debentures (series D) by way of extension of the series under the shelf prospectus

published by the Company in May 2008. For further details, see the Company’s immediate report of March 26, 2009 (Ref . No. 2009-01-067944). (5) On December 4, 2006, Standard & Poors Maalot (“Maalot”) announced a rating of AA/Stable for the Debentures (Series B, C and D). On December 11, 2008, Maalot announced that the rating of the

Debentures (Series B, C and D) had been entered into Credit Watch Negative. On March 22, 2009, Maalot announced approval of an ilAA rating for the Debentures in circulation and an ilAA rating for the issue by way of extension of series C and D of up to NIS 1.2 billion. On December 3, 2009, Maalot announced that the rating of the Debentures (Series B, C and D) issued by the Company had been decreased from ilAA to ilAA-, with a forecast of steady rating.

(6) The on-book value of the balance of the Debentures (Series B) as at December 31, 2009 is presented less debentures acquired by a wholly owned subsidiary.

Makhteshim-Agan Industries Ltd.

Financial Statements As of December 31, 2009


Financial Statements as of December 31, 2009 CONTENTS PAGE Auditors’ Report 2 Financial statements Consolidated Statements of Financial Position 3 Consolidated Income Statements 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statements of Changes in Equity 7 Consolidated Statements of Cash Flows 10 Notes to the Financial Statements 13 Appendix to the Financial Statements - Schedule of Investee Companies 109

Somekh Chaikin Telephone 972 3 684 8000 KPMG Millennium Tower Fax 972 3 684 8444 17 Ha'arba'a Street, PO Box 609 Internet www.kpmg.co.il Tel Aviv 61006 Israel

Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative.

2

Report of the Auditors to the Shareholders of Makhteshim-Agan Industries Ltd. We have audited the accompanying consolidated statement of financial position of Makhteshim-Agan Industries Ltd. (hereinafter - “the Company”) as at December 31, 2009 and 2008, and the consolidated statements of income, the consolidated statements of comprehensive income, statements of changes in equity and the consolidated statements of cash flows for each of the three years, the last of which ended on December 31, 2009. These financial statements are the responsibility of the Company’s Board of Directors and its Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of consolidated subsidiaries, the assets of which included in the consolidation constitute about 5.5% and 6.9% of the total consolidated assets as at December 31, 2009 and 2008, respectively, and total revenues of which included in the consolidation constitute 10.8%, 11.8% and 11.5% of the total consolidated revenues for each of the three years, the last of which ended on December 31, 2009. The financial statements of those companies were audited by other auditors whose reports have been 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 generally accepted auditing standards in Israel including standards prescribed by the Auditors' Regulations (Manner of Auditor's Performance), 1973. 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 the Company’s Board of Directors and by its 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 on the reports of other auditors, the financial statements referred to above present fairly, in conformity with International Financial Reporting Standards, in all material respects, the consolidated financial position of the Company and its subsidiaries as at December 31, 2009 and 2008, and the consolidated results of operations, changes in its equity and the consolidated cash flows for each of the three years, the last of which ended on December 31, 2009. Furthermore, in our opinion, the above-mentioned statements are prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements), 2010.

As explained in Note 3B to the financial statements, since the Company’s functional currency is the U.S. dollar, these financial statements are prepared in U.S. dollars.

Somekh Chaikin Certified Public Accountants (Isr.) Tel-Aviv, Israel March 9, 2010


3

Consolidated Statements of Financial Position as at December 31 2009 2008 Note $ thousands $ thousands

Current assets Cash and cash equivalents 562,430 214,920 Short-term investments 4 448 514 Trade receivables 5 586,858 519,439 Subordinated capital note from sale of trade receivables 5 42,092 95,365 Prepaid expenses 13,320 10,328 Financial assets, including derivatives 6 151,192 149,972 Advances net of provision for income taxes 18 8,084 13,532 Inventories 7 1,000,591 1,135,418 2,365,015 2,139,488 Long-term investments, loans and receivables Other financial investments and receivables 8 104,548 54,190 Other non-financial investments and receivables 9 12,346 12,268 116,894 66,458 Fixed assets Cost 10 1,134,399 1,046,799 Less - accumulated depreciation 558,024 514,308 576,375 532,491 Deferred tax assets 18 86,542 62,412 Intangible assets Cost 11 1,104,748 *1,004,911 Less - accumulated amortization 489,727 *432,349 615,021 572,562 1,394,832 1,233,923 Total assets 3,759,847 3,373,411 * Reclassified


4

2009 2008 Note $ thousands $ thousands

Current liabilities Credit from banks and other lenders 12 236,975 413,857 Current maturities of debentures 83,480 - Trade payables 13 501,692 482,618 Other payables 14 278,980 320,318 Provision for taxes net of advances 18 43,347 16,958 Put options to minority shareholders 24,098 17,389 1,168,572 1,251,140 Long-term liabilities Loans from banks 15 303,199 60,121 Debentures 16 896,556 634,801 Other long-term liabilities 17 18,711 12,343 Deferred tax liability 18 39,591 63,375 Employee benefits 19 56,455 57,898 Put options to minority shareholders - 7,056 1,314,512 835,594 Equity Share capital 125,563 125,542 Premium on shares 623,861 623,882 Reserves 23,732 7,906 Retained earnings 731,401 759,544 Treasury shares (245,548) (245,548) Total equity attributable to equity holders of the Company 1,259,009 1,271,326 Minority interest 17,754 15,351 Total equity 22 1,276,763 1,286,677 Total liabilities and equity 3,759,847 3,373,411

Avraham Bigger Erez Vigodman Ran Maidan Chairman of the Board of Directors President & Chief Executive Officer Chief Financial Officer

Date the financial statements were approved: March 9, 2010

The notes are an integral part of the financial statements.


5

Consolidated Income Statements for the year ended December 31

2009 2008 2007 Note $ thousands $ thousands $ thousands

Revenues 23 2,214,616 2,535,504 2,065,525 Cost of sales 24 1,632,752 1,687,759 1,376,649 Gross profit 581,864 847,745 688,876 Expenses Other income (3,001) (3,684) (14,849)Marketing and sales 25 358,400 375,200 332,860 General and administrative 26 79,402 83,972 81,408 Research and development 27 21,816 22,374 20,270 Other expenses 5,517 2,633 1,157 462,134 480,495 420,846 Operating income 119,730 367,250 268,030 Financing expenses 127,665 180,645 116,318 Financing income (33,955) (84,038) (36,694)Financing expenses, net 28 93,710 96,607 79,624 Income before taxes 26,020 270,643 188,406 Expenses (income) tax 18 (8,681) 49,684 25,485 Income for the period 34,701 220,959 162,921 Attributed to: Company's equity holders 32,678 219,041 155,598 Minority interest 2,023 1,918 7,323 Income for the period 34,701 220,959 162,921 $ $ $Earnings per share Basic earnings per share 30 0.076 0.498 0.352 Fully diluted earnings per share 30 0.075 0.496 0.347 The notes are an integral part of the financial statements.

6

Makhteshim-Agan Industries Ltd. Consolidated Statements of Comprehensive Income For the year ended December 31

2009 2008 2007 $ thousands $ thousands $ thousands

Income for the period 34,701 220,959 162,921 Components of other comprehensive income Foreign currency translation differences for foreign operations 14,229 (12,275) 9,872 Effective portion of changes in fair value of cash flow hedges 33,029 22,279 - Net change in fair value of cash flow hedges transferred to profit or loss (26,420) (16,279) - Actuarial gains (losses) from defined benefit plan (366) (312) 1,671 Income tax on income and expense recognized directly in equity (3,391) 1,073 (397) Other comprehensive income for the period, net of tax 17,081 (5,514) 11,146 Comprehensive income for the period 51,782 215,445 174,067 Attributed to: Equity holders of the Company 48,287 214,940 165,536 Minority interest 3,495 505 8,531 Comprehensive income for the period 51,782 215,445 174,067


7

Makhteshim-Agan Industries Ltd. Consolidated Statements of Changes in Equity for the year ended December 31

Share capital Premium on

shares Capital reserves* Retained earnings

Company shares held by the

Company and subsidiaries

Total equity attributed to

equity holders of the Company Minority interest Total equity

$ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Balance at January 1, 2009 125,542 623,882 7,906 759,544 (245,548) 1,271,326 15,351 1,286,677 Exercise of employee options 21 (21) - - - - - - Options granted to employees - - - 8,658 - 8,658 - 8,658 Tax benefit in respect of employee options - - 27 - - 27 - 27 Dividend to equity holders - - - (69,289) - (69,289) - (69,289) First time consolidation - - - - - - 3,399 3,399 Dividend to minority interest - - - - - - (1,665) (1,665) Acquisition of minority interest - - - - - - (2,826) (2,826) Comprehensive income for 2009 - - 15,799 32,488 - 48,287 3,495 51,782 Balance at December 31, 2009 125,563 623,861 23,732 731,401 (245,548) 1,259,009 17,754 1,276,763

* The capital reserves include a capital reserve for the tax benefit from employee options totaling $4.6 million.

8

Makhteshim-Agan Industries Ltd. Consolidated Statements of Changes in Equity for the year ended December 31 (cont'd)








Balance at January 1, 2008 125,274 624,150 11,575 699,019 (144,196) 1,315,822 21,245 1,337,067 Exercise of employee options 268 (268) - - - - - - Buy-back of the Company's shares (see Note 22.E) - - - - (101,352) (101,352) - (101,352) Options granted to employees - - - 10,350 - 10,350 - 10,350 Tax benefit in respect of employee options - 175 - - 175 - 175 Dividend to equity holders - - - (168,609) - (168,609) (168,609) Dividend to minority interest - - - - - - (1,405) (1,405) Acquisition of minority interest - - - - - - (1,430) (1,430) Exercise of put option by the Company - - - - - - (3,564) (3,564) Comprehensive income for 2008 - - (3,844) 218,784 - 214,940 505 215,445 Balance at December 31, 2008 125,542 623,882 7,906 759,544 (245,548) 1,271,326 15,351 1,286,677


9

Makhteshim-Agan Industries Ltd. Consolidated Statements of Changes in Equity for the year ended December 31 (cont'd)








Balance at January 1, 2007 123,232 614,052 1,167 531,490 (144,196) 1,125,745 22,656 1,148,401 Exercise of employee options 695 (695) - - - - - - Conversion of convertible debentures into shares 1,347 10,793 - - - 12,140 - 12,140 Options granted to employees - - - 10,657 - 10,657 - 10,657 Tax benefit in respect of employee options - - 1,744 - - 1,744 - 1,744 Sale of investments in subsidiary - - - - - - (5,303) (5,303) Dividend to minority interest - - - - - - (4,951) (4,951) Issuance of capital to minority interest - - - - - - 312 312 Comprehensive income for 2007 - - 8,664 156,872 - 165,536 8,531 174,067 Balance at December 31, 2007 125,274 624,150 11,575 699,019 (144,196) 1,315,822 21,245 1,337,067


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Makhteshim-Agan Industries Ltd. Consolidated Statement of Cash Flows for the year ended December 31


Cash flows from operating activities Income for the period 34,701 220,959 162,921

Adjustments Interest paid in cash (79,074) (68,354) (65,715)Interest received in cash 14,987 5,593 15,553 Taxes paid in cash, net (9,626) (32,078) (35,793)Depreciation and amortization 100,000 91,191 96,123 Gain from buy-back of Company's debentures - (5,692) - Decrease (increase) in value of long-term investments - 103 (334)Capital loss (gain) from realization of fixed and other assets, net 426 153 (5,162)Amortization of discount and issue costs (73) 92 146 Expenses for employee options 8,658 10,350 10,969 Revaluation of call options - - 154 Revaluation of put options 355 1,702 981 Adjustment of long-term liabilities 59,559 32,649 69,066 Effect of swap transactions (15,886) (16,279) (16,884)Capital gain from realization of investment - - (10,282)Change in provision for tax and income tax advances, net 31,837 (2,501) (3,384)Taxes paid in cash, net 9,626 32,078 35,793 Interest paid in cash 79,074 68,354 65,715 Interest received in cash (14,987) (5,593) (15,553)Decrease (increase) in deferred taxes, net (50,648) 26,911 (6,924)

Changes in assets and liabilities Decrease (increase) in trade receivables, accounts receivable and other assets (50,491) (66,237) 57,658 Decrease (increase) in inventories 152,138 (355,094) (166,545)Increase (decrease) in trade payables, accounts payable and other liabilities (58,579) 76,276 109,149 Change in provisions and employee benefits (2,382) 232 7,252

Net cash provided by operating activities 209,615 14,815 304,904

Cash flows from investing activities Acquisition of fixed assets (69,417) (70,430) (60,747)Investment grant received - - 4,309 Additions to intangible assets (74,687) (60,686) (68,714)Short-term investments, net 66 95,345 (94,970)Repayment of long-term investments 203 541 - Proceeds from realization of fixed and other assets 2,982 6,882 4,980 Proceeds from realization of investments in subsidiaries (see B. below) - - 18,074 Repayment of liability for subsidiary acquired in the past - - (1,000)Dividend from affiliate - - 530 Payment for newly consolidated companies net of cash acquired (see A. below) (12,940) (2,520) (7,878)

Acquisition of minority interest in subsidiaries (3,450) (16,419) (1,105)

Net cash used in investing activities (157,243) (47,287) (206,521)


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Makhteshim-Agan Industries Ltd. Consolidated Statement of Cash Flows for the year ended December 31 (cont’d)


Cash flows from financing activities Receipt of long-term loans from banks 272,592 55,101 3,696 Repayment of long-term loans and liabilities from banks and other lenders, net (20,626) (5,085) (8,274)Increase (decrease) in short-term liabilities to banks (194,936) 285,934 (214,980)Settlement of swap transaction 18,000 - - Dividend to minority shareholders in subsidiaries (1,418) (326) (5,033)Issuance of debentures net of issue costs 285,749 - - Company buy-back of its shares - (101,352) - Dividend to shareholders (64,223) (168,609) - Company buy-back of its debentures - (16,425) - Net cash provided by (used in) financing activities 295,138 49,238 (224,591) Increase (decrease) in cash and cash equivalents 347,510 16,766 (126,208) Cash and cash equivalents at beginning of the year 214,920 198,154 324,362 Cash and cash equivalents at end of the year 562,430 214,920 198,154


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Makhteshim-Agan Industries Ltd. Consolidated Statement of Cash Flows for the year ended December 31 (cont’d)


A. Investments in newly consolidated companies Working capital (excluding cash and cash equivalents) (6,103) 208 (4,593)Fixed assets, net (9,980) (22) (1,857)Other assets, net (1,629) (8,836) (4,559)Excess cost of investment created on acquisition (9,630) - (2,032)Long-term liabilities 2,949 - 3,000 Liability in respect of acquisition of a company 8,054 - - Investment in affiliate company - - 2,163 Minority interest 3,399 - - Put options to minority shareholders - 6,130 - (12,940) (2,520) (7,878) B. Proceeds from realization of investment in

previously consolidated subsidiary Working capital (excluding cash and cash equivalents) - - 4,345 Fixed assets, net - - 196 Other assets, net - - 11,140 Long-term liabilities - - (2,586)Capital gain - - 10,282 Minority interest - - (5,303) - - 18,074


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Makhteshim-Agan Industries Ltd. Notes to the Financial Statements as at December 31, 2009 Note 1 - General

A. Description of the Company and its activities

1. The Company is an Israel-resident company that was incorporated in Israel, and its official address is the Arava Building in Airport City Park. The consolidated financial statements of the Company as at December 31, 2009 include those of the Company and its subsidiaries (together - "the Group"). The Group operates in Israel and abroad and is engaged in the development, manufacture and marketing of agrochemicals, intermediate materials for other industries, food additives and synthetic aromatic products, mainly for export. The Company is held by Koor Industries Ltd. (hereinafter, “Koor”). The Company's securities are listed for trading on the Tel Aviv Stock Exchange.

As at December 31, 2009, Koor holds approximately 46.6% of the issued and paid shares (after neutralizing dormant shares) of Makhteshim-Agan Industries and approximately 47.0% of the voting rights therein (after neutralizing dormant shares and shares owned by a subsidiary of the Company), (on December 31, 2008, Koor held approximately 41.5% of the Company’s issued and paid shares and approximately 41.9% of the voting rights therein).

2. Sales of agrochemical products are directly dependent on the agricultural seasons and the cyclical pattern of the growing seasons and, therefore, the Company’s income is not spread evenly throughout the year. Countries located in the northern hemisphere are characterized by the same timing of the agricultural seasons and, as a result, sales to these countries are usually highest in the first half of the year. In the southern hemisphere, the seasonal trends are the opposite and most of the local sales are made in the second half of the year, except for Australia where most of the sales are made in April through July. The Company’s worldwide operations act to balance out the seasonal impacts, even though the Company’s sales are higher in the northern hemisphere.

B. Definitions In these financial statements 1. International

Financial Reporting Standards ("IFRS")

- Standards and interpretations that were adopted by the International Accounting Standards Board (IASB), including International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS), including interpretations of these Standards that were prescribed by the International Financial Reporting Interpretations Committee (IFRIC) or interpretations prescribed by the Standing Interpretations Committee (SIC).

2. The Company - Makhteshim-Agan Industries Ltd. 3. The Group - Makhteshim-Agan Industries Ltd. and its investees. 4. Subsidiaries - Companies, including partnerships, whose financial statements are fully

consolidated, directly or indirectly, with the financial statements of the Company.

5. Proportionately consolidated companies

- Companies, including partnerships, whose financial statements are proportionally consolidated, directly or indirectly, with those of the Company.

6. Investee companies - Subsidiaries and proportionately consolidated companies. 7. Related party - As defined in International Accounting Standard 24 regarding related

parties 8. Interested parties - As defined in Paragraph (1) of the definition of "interested party" of a

corporation in Section 1 of the Israeli Securities Regulations - 1968. 9. CPI - The Consumer Price Index as published by the Israeli Central Bureau of

Statistics. 10. Dollar - The United States dollar.

Makhteshim-Agan Industries Ltd. Notes to the Financial Statements as at December 31, 2009

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Note 2 - Basis for Financial Statement Preparation A. Declaration of compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The Group adopted IFRSs for the first time in 2008, with the date of transition to IFRSs being January 1, 2007 (hereinafter – “the date of transition”). The financial statements have been prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements) - 2010. The consolidated financial statements were authorized for issue by the Company’s Board of Directors on March 9, 2010. B. Measurement basis The consolidated financial statements have been prepared on the historical cost basis except for the derivative financial instruments and liabilities for cash-settled share-based payment arrangements. Deferred tax assets and liabilities are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxes are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Provisions are recognized according to the best possible estimate at the end of the reporting period of the outflow required for settling the present obligation. The amount recognized as a defined benefit liability is the present value of the defined benefit obligation at the end of the reporting period less any unrecognized past service cost and less the fair value at the end of the reporting period of plan assets that will directly serve to settle the obligation. C. Use of estimates and judgment When preparing financial statements in conformance with IFRS, Company management is required to use judgment when making assessments, estimates and assumptions that affect the implementation of the policies and amounts of assets and liabilities, revenues and expenses. It is clarified that the actual results are likely to be different from these estimates. When formulating the accounting estimates used in the preparation of the Company's financial statements, management is required to make assumptions regarding circumstances and events that involve significant uncertainty. The judgment in determining the estimates by the Company's management is based on past experience, various facts, outside factors and reasonable assumptions, based on the appropriate circumstances for each estimate. The estimates and the assumptions used for preparing the financial statements are reviewed continuously. Changes in accounting estimates are recognized in the period during which the estimate was revised and in all affected future periods.


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Note 2 - Basis for Financial Statement Preparation (cont’d) C. Use of estimates and judgment (cont’d) Presented below is information on critical estimates made while applying the accounting policies, which have a material influence on the financial statements: • Contingent liabilities - When assessing the possible outcomes of legal claims filed against the

Company and its investees, the companies relied on the opinions of their legal counsel. These assessments by the legal counsel are based on the best of their professional judgment, considering the stage of the proceedings and the legal experience aggregated on various matters. Since the results of the claims will be decided by the courts, the outcomes could be different from the assessments.

In addition to the said claims, the Company is exposed to unasserted claims, inter alia, where there is doubt as to the agreement's interpretation and/or interpretation of the law and/or the manner in which they are to be implemented. This exposure is brought to the Company's attention in several ways. In assessing the risk deriving from the unasserted claims, the Company relies on internal assessments by officials dealing with these matters and by management, which weights the assessment of the prospects of a claim being filed, and the chances for its success, if filed. The assessment is based on experience gained with respect to the filing of claims and the analysis of the details of each claim. By their nature, in view of the preliminary stage of the clarification of the legal assertion, the actual outcome could be different from the assessment made before the claim was filed.

• Asset impairment - The Company evaluates the need for recording an impairment provision of goodwill once a year, on a fixed date. Likewise, on the balance sheet date, the Company evaluates whether events have occurred or there have been changes in circumstances that indicate that impairment has occurred in one or more of the non-monetary assets. If there are signs of impairment, an examination is made as to whether the amount at which the investment in the asset is stated can be recovered from the discounted cash flows expected from that asset, and as necessary, an impairment provision is recorded up to the recoverable amount. The discounted cash flows are calculated using an after-tax discount rate that represents the market's assessment of the time value of money and the specific risks attributed to the asset. Determination of the estimated cash flows is based on past experience of this asset or similar assets, and the Company's best assessment of the economic conditions that will prevail during the remaining estimated useful life of the asset. Changes in the Company's assessments, as noted, could lead to material changes in the book value of the assets and the operating results.

• Estimated useful life of intangible assets - Intangible assets are amortized methodically, over their

estimated useful lives. The amortization period reflects the best estimate of the period in which future economic benefits are expected to derive to the Company. Use of other assumptions could lead to a different assessment of the estimated period in which future economic benefits are expected to be received.

• Allowance for doubtful accounts - The Company's trade accounts receivable are stated net of the

allowance for doubtful accounts. The allowance for doubtful accounts is examined regularly by the Company's management and is determined mostly according to familiarity with the customer, quality of the customer, the amount of collateral from the customer. Changes in the assumptions for calculation of the provision could lead to material changes in the required allowances.


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Note 2 - Basis for Financial Statement Preparation (cont’d) C. Use of estimates and judgment (cont’d)

• Taxes - The Company and Group companies are assessed for tax purposes in a large number of jurisdictions and therefore, the Company's management must use considerable judgment in determining the total provision for taxes and attribution of income. Deferred taxes are calculated at the tax rates expected to be in effect when realized. Similarly the Company and group companies create deferred tax assets in respect of losses for tax purposes whose utilization may be spread over a number of years in those cases where there is a high level of probability of realization of these losses in the coming years. Changes in these assumptions could lead to material changes in the book values of the tax assets, tax liabilities and in operating results.

• Employee benefits - The Group's obligations for long-term and post-employment employee benefits are calculated according to the estimated future amount of the benefit to which the employee will be entitled in consideration for his services during the current period and prior periods. The benefit is stated at present value net of the fair value of the plan's assets, based on actuarial assumptions. Changes in the actuarial assumptions could lead to material changes in the book value of the liabilities and operating results.

• Derivative financial instruments - The Group enters into transactions in derivative financial instruments for the purpose of hedging foreign currency risks, inflationary risks and interest risks. The derivatives are recorded at their fair value. The fair value of derivative financial instruments is based on bank quotes. The reasonableness of the quotes are examined through future discounted cash flows, based on the terms and duration to maturity of each contract, while using the market interest of a similar instrument as at the measurement date. Changes in the economic assumptions and the calculation model could lead to material change in the fair value of the assets, liabilities and operating results.

• Inventories - Inventories are measured in the financial statements at the lower of cost and net realizable value. Net realizable value is an estimate of the sales price in the ordinary course of business, after deducting the estimated cost to completion and the costs required to effect the sale. The sales price is estimated on the basis of the expected sales price at the time inventories are sold. A reduction in the expected price could lead to an impairment in the carrying value of the inventories and in operating results, respectively.

D. Changes in accounting policies

(1) Presentation of financial statements

As from January 1, 2009 the Group implements revised IAS 1, Presentation of Financial Statements (hereinafter – the Standard). The Standard allows the presentation of one statement of comprehensive income (a combined statement of income and of other comprehensive income) or two statements – a statement of income and a separate statement of comprehensive income.

The Group has chosen to present income and expense items and components of other comprehensive income in two separate statements – a statement of income followed by a statement of comprehensive income. Furthermore, the Group presents a statement of changes in equity immediately after the statement of comprehensive income instead of in the notes. The statement includes changes in equity resulting from transactions with shareholders in their capacity as owners (such as dividends, transactions with controlling shareholders, issuance of shares and/or options, etc.). The Standard is applied on a retrospective basis. Since the change only impacts the presentation of the financial statements, there is no impact on the Group’s results of operations.


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Note 2 - Basis for Financial Statement Preparation (cont’d) D. Changes in accounting policies (cont’d) (1) Presentation of financial statements (cont’d)

The Company chose to present expenses recognized in the income statement by classification based on operational characteristics of those expenses, as this method provides relevant information regarding the Company’s activities.

(2) Segment reporting

As from January 1, 2009 the Group implements IFRS 8, Operating Segments (hereinafter – the Standard). The Standard determines that the “management approach” should be used in segment reporting, meaning in accordance with the format of the internal reports provided to the chief operating decision maker of the Group. Furthermore, as from January 1, 2009 the Group has early adopted the revision to IFRS 8 that was published in the framework of the 2009 improvements to IFRSs project, pursuant to which disclosure of information on segment assets is required only if such information is reported regularly to the chief operating decision maker. First-time application of the standard did not have any affect on the composition of the Group's reporting segments.

(3) Employee benefits

As from January 1, 2009 the Group implements the amendment made to IAS 19, Employee Benefits (hereinafter – the Amendment) in the framework of the 2008 improvements to IFRSs project, pursuant to which employee benefits shall be classified as short-term or as other long-term benefits according to the date on which the benefit is payable. Accordingly, certain benefits were classified as short-term benefits. The Amendment was adopted retrospectively. The effect of the Amendment on the financial statements was immaterial.

Note 3 - Significant Accounting Policy

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in Note 2D, Basis of Preparation, under the section addressing changes in accounting policies.

A. Basis for Consolidation

1. Subsidiaries

Subsidiaries are entities that are controlled by the Group. Control exists when the Group has the ability to control the financial and operational policy of the entity in order to derive benefit from its activity. When examining control, potential voting rights that can be exercised immediately are taken into account. The financial statements of the subsidiaries are included in the consolidated financial statements from the date control was acquired until the date control ceases to exist. The accounting policy of the subsidiaries was changed as necessary to correspond with the accounting policy adopted by the Company.


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Note 3 - Significant Accounting Policy (cont’d)

A. Basis for Consolidation (cont’d) 2. Transactions eliminated in the consolidation

Intercompany balances within the Group and unrealized income and expenses deriving from intercompany transactions are eliminated in preparation of the consolidated financial statements.

3. Proportional consolidation

The consolidated financial statements include a proportional part of the assets, liabilities, expenses and income of partly consolidated companies according to the holding percentage in those companies.

4. Put options to minority holders in a subsidiaries

Put options granted by the Company to minority holders are recorded as a liability equal to the present value of future payment, and treated as a pending purchase cost of the minority holders. The Company includes in its profits its share of the consolidated Company’s profits, taking into account the exercise of the put option. The revaluation of the liability in respect of the time component is reflected in finance expenses whereas the revaluation of the liability in respect of other components is allotted to goodwill

B. Functional currency and presentation currency

General

The dollar is the currency that represents the main economic environment in which the Company operates. Accordingly, the dollar is the functional and presentation currency in these financial statements.

Foreign currency transactions

Foreign currency transactions are translated to the Group’s functional currency according to the exchange rate prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currency on the reporting date are translated to the functional currency according to the exchange rate prevailing on that date. Exchange rate differences for monetary items are the difference between the amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and for payments during the payment and between the amortized cost in foreign currency translated according to the exchange rate at the end of the period. Exchange rate differences are recognized directly in the statement of income, in financing expenses. C. Foreign Operations

The assets and liabilities of foreign operations, including goodwill and adjustments to fair value created upon acquisition, were translated into dollars according to the exchange rates prevailing on the balance sheet date. Income and expenses of foreign operations were translated into dollars according to the exchange rates that were in effect at the time of the transaction.

Foreign currency differences are recognized directly in other comprehensive income since January 1, 2007, the date of transition to IFRSs, such differences have been recognized in equity in the foreign currency translation reserve.

When foreign operations are disposed of, in part or in whole, the appropriate amount in the translation reserve is transferred to the statement of income, as part of the profit or loss on disposal of the investment.


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D. Financial Instruments

1. Non-derivative financial instruments Initial recognition of financial assets The Group initially recognizes loans and receivables and deposits on the date that they are created. All other financial assets acquired in a regular way purchase, including assets designated at fair value through profit or loss, are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument, meaning on the date the Group undertook to purchase or sell the asset. Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables and cash and cash equivalents.

Derecognition of financial assets Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. Regular way sales of financial assets are recognized on the trade date, meaning on the date the Company undertook to sell the asset.

Securitization of trade receivables In July 2007, a company unrelated to the Group ("the acquiring company") acquired an insurance policy that was renewed in April 2009 from an insurance company to insure the trade receivables sold as part of the securitization transaction. As a result of the said policy, commencing from this date the securitization transaction meets the requirements for deduction of financial assets. Pursuant to the insurance policy, the insurance company will indemnify the acquiring company (which is the beneficiary of the policy) for the entire amount of the initial loss. Based on past experience, this amount is much higher than the Company's actual losses from the trade receivables sold in the securitization transaction. In addition, the insurance premium is fixed. Therefore, the risks and rewards in connection with the trade receivables sold in the securitization transaction have been transferred in full to the acquiring company. See also Note 5.

Cash and cash equivalents Cash balances include cash available for immediate use and demand deposits. Cash equivalents include highly-liquid short-term investments (with original maturities of three months or less) that may be easily converted into known amounts of cash, and which are exposed to insignificant risk of changes in value.

Investments presented at fair value through the statement of income A financial instrument is classified as measured according to fair value through the statement of income if it is held for trading or if it was designated as such at the time of the initial recognition. Financial instruments are designated as measurable according to fair value through gain and loss if the Group manages investments of this type and makes purchase and sale decisions on the basis of fair value, according to the way the Company documented the risk management or investment strategy. At the time of initial recognition, the attributable transaction costs are recorded in the statement of income as incurred. These financial instruments are then measured at fair value and the changes therein are recorded to gain and loss.


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D. Financial Instruments (cont’d)

1. Non-derivative financial instruments (cont’d)

Loans and receivables Loans and other assets are non-derivative financial assets with fixed or determinable that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and other assets are measured net of impairment losses. Offset of financial assets and liabilities Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

2. Non-derivative financial liabilities

The Group initially recognizes debt securities issued on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or cancelled. Financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.

3. Derivative financial instruments, including hedge accounting

The Group executes transactions in derivative financial instruments for the purpose of hedging against foreign currency risks, inflation risks and interest risks. The hedge is a cash flow hedge. Derivatives are initially recognized according to fair value; the attributable transaction costs are charged to the statement of income as incurred. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect profit or loss.

After initial recognition, changes in fair value of derivatives used for hedging cash flows, for the effective portion of the hedge, are recorded directly in equity. For the non-effective portion, changes in fair value are recorded in the statement of income. If the hedged instrument no longer meets the criteria for hedge accounting or it has expired or been sold, cancelled or realized, the accounting treatment of the hedge ceases. The gain or loss previously accumulated in equity remains in equity until the expected hedge transaction occurs or until the hedge transaction is no longer expected to occur.


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Note 3 - Significant Accounting Policy (cont’d) D. Financial Instruments (cont’d) 3. Derivative financial instruments, including hedge accounting (cont'd)

A hedge that does not meet the definition of an accounting hedge: The changes in the fair value of derivatives that do not meet the definition of an accounting hedge transaction are recorded in income and loss, in the financing item, in the period they occur.

4. CPI-linked assets and liabilities not measured at fair value

The value of CPI-linked financial assets and liabilities that are not measured according to fair value are revalued in every period, according to the actual rate of increase in the CPI.

Cash flow hedges Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognized through other comprehensive income directly in a hedging reserve, to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in profit or loss. The amount recognized in the hedging reserve is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the statement of income as the hedged item.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued. The cumulative gain or loss previously recognized through other comprehensive income and presented in the hedging reserve in equity remains there until the forecasted transaction occurs or is no longer expected to occur. If the forecasted transaction is no longer expected to occur, then the cumulative gain or loss previously recognized in the hedging reserve is recognized immediately in profit or loss. When the hedged item is a non-financial asset, the amount recognized in the hedging reserve is transferred to the carrying amount of the asset when it is recognized. In other cases the amount recognized in the hedging reserve is transferred to profit or loss in the same period that the hedged item affects profit or loss.

5. Share capital

The additional costs that are directly attributed to the issuance of ordinary shares and stock options are presented as a reduction of the equity capital.

Treasury shares When share capital that was recognized in equity is repurchased by the Group, the consideration paid, including direct costs, is deducted from equity. The repurchased shares are classified as treasury shares and are presented as a deduction from equity.


22

Note 3 - Significant Accounting Policy (cont’d) E. Property, plant and equipment 1. Recognition and measurement

Property, plant and equipment items are measured at cost less accumulated depreciation and impairment losses.

The cost includes expenditures that can be directly attributed to the purchase of the asset. The cost of assets that were constructed independently includes the cost of the materials and direct labor costs, as well as additional costs that are directly attributable to bringing the asset to the position and condition necessary for it to function as management intended, as well as costs to dismantle and remove the item and to restore its location and capitalized borrowing costs. The cost of purchased software, which is an integral part of operating the related equipment, is recognized as part of the cost of said equipment. When significant parts of a fixed asset (including costs of major periodic inspections) have different life expectancies, they are treated as separate items (significant components) of the fixed assets.

The gain or loss from the disposition of a fixed asset item is determined by comparing the consideration from its disposition to the book value, and is recognized net in the other income item in the Statement of Income.

2. Subsequent costs

The cost of replacing part of a fixed asset item is recognized as part of the book value of that item if it is expected that the future financial benefit embodied in the items will flow to the Group and its cost can be measured reliably. The book value of the part that was replaced is deducted. Routine maintenance costs are expensed when incurred.

3. Depreciation

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset, or other amount substituted for cost, less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of fixed asset item, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life for the current period and comparative periods is as follows:

Buildings 25-50 years Plant and equipment 22 years Furniture, equipment and accessories 7-17 years mainly 14 years Motor vehicles 5-7 years Computers and auxiliary equipment 3-5 years

The estimates regarding the depreciation method, the useful life and the residual value are reevaluated at least at the end of every reporting year and adjusted if appropriate.


23


F. Intangible Assets 1. Goodwill

Goodwill that arises upon the acquisition of subsidiaries (including minority acquisitions) is included in intangible assets. Acquisitions prior to January 1, 2007 In respect of business combinations, acquisitions of affiliates, jointly controlled entities and acquisition of minority interests prior to January 1, 2007, the date of transition to IFRSs, goodwill represents the amount recognized by the Group under Israeli GAAP. In respect of these acquisitions, the accounting classification and treatment were not adjusted to IFRS. Acquisitions on or after January, 2007 In respect of business combinations, acquisitions of affiliates, jointly controlled entities on or after January 1, 2007, the date of transition to IFRSs, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognized immediately in profit or loss. Acquisition of minority rights Any difference between the amount paid and the carrying value of the minority rights acquired is recognized as goodwill.

Subsequent measurements Goodwill is measured according to cost after deduction of accrued impairment losses.

2. Research and development

Expenditures related to research activities undertaken for the purpose of acquiring know-how and new scientific or technical knowledge are expensed as incurred. Development activities are directly related to the production of new products or processes or significant improvement of existing products. Expenditures for development activities are recognized as an asset only if: it is possible to reliably measure the development costs; it is technically and commercially possible to implement the product or process; future economic benefit is expected from the product and the Group has intentions and sufficient resources to complete development of the asset and then use or sell it. The costs that were recognized as intangible assets include the cost of materials, direct salaries and overhead expenses that can be directly attributed to preparing the asset for its intended use. Other costs for development activities are expensed as incurred.

Development costs that were recognized as an asset are measured according to cost after the deduction of the amortization and accrued impairment losses.

3. Other intangible assets

Other intangible assets purchased by the Group, with a determinate useful life, are measured according to cost less amortization and accrued impairment losses.


24

Note 3 - Significant Accounting Policy (cont’d) F. Intangible Assets (cont’d) 4. Subsequent costs

Subsequent costs are recognized as an intangible asset only when they increase the future economic benefit embodied in the assets for which they were incurred. All other costs are expensed as incurred.

5. Amortization

Amortization is a systematic allocation of the amortizable amount of an intangible asset over its useful life. The amortizable amount is the cost of the asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis, other than as stated hereunder, over the estimated useful lives of the intangible assets from the date they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Goodwill has an indefinite useful life is not systematically amortized but is tested for impairment. Internally generated intangible assets are not systematically amortized until they are available for use, meaning are brought to the working condition for their intended use. The estimated useful life for the current period and comparative periods is as follows:

● Product licensing - mainly eight years. ● Intangible assets upon purchase of products - mainly twenty years. ● Marketing rights - five to ten years. ● Non-competition and confidentiality agreement - five years.

Licensing costs incurred for products that can be identified and separated, and from which the company expects to derive future economic benefit, are recognized as an asset in the “intangible assets” category and are amortized over the period of economic benefit they are expected to provide.

The estimates of the amortization method and useful lifespan are reevaluated at least at the end of every reporting year and determined accordingly.

The Group examines the estimated useful life of an intangible asset that is not amortized (goodwill) during every period, in order to determine if events and circumstances continue to support the determination that the intangible asset has an indeterminate lifespan.

G. Leased Assets

Land leases from the Israel Lands Administration (“ILA”) constitute operating leases. Prepaid lease fees to the ILA are presented in the balance sheet and are expensed over the lease period. The lease periods and amortization amounts take into account an option to extend the lease period, if on the date of the lease undertaking, it was reasonably certain that the option would be exercised.


25

Note 3 - Significant Accounting Policy (cont’d) H. Inventory Inventory is measured at the lower of cost or net realizable value. The cost of raw materials, packaging materials, spare parts, maintenance material and purchased materials inventories is determined according to the “moving average” method that includes the costs of purchasing the inventory and bringing it to its current location and condition. The cost of finished products and of products in process is determined on the basis of average production costs, including materials, labor and production expenses. The cost includes the allocable part of the production overhead, based on normal capacity. Net realizable value is the estimated selling price during the ordinary course of business, after deduction of the estimated cost to completion and the estimated costs required for effecting the sale.

I. Capitalization of Credit Costs The costs of specific credit and of non-specific credit were capitalized to qualified assets, during the period required for completion and construction, until they are ready for their intended use. Non-specific credit costs were capitalized in the same manner to the investment in qualified assets or to the part that was not financed by specific credit, using an interest rate that is the weighted-average of the cost rates for those credit sources that were not capitalized specifically. Other credit costs are expensed as incurred. J. Impairment 1. Financial assets A financial asset not carried at fair value through profit or loss is tested for impairment when objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

For material financial assets, the need to reduce the value of the asset is examined for each asset individually. For other financial assets, the need for impairment is examined collectively, for groups having similar credit risks.

All impairment losses are recorded to the statement of income.

The impairment loss is reversed when such recovery is objectively attributable to an event that occurred after recognition of the impairment loss. Reversal of an impairment loss of financial assets measured according to depreciated cost is recorded to the statement of income. 2. Non-financial assets The book value of the Group's non-financial assets, which are neither inventory nor deferred tax assets, is examined for each reporting period in order to determine if there are signs indicating impairment in value. If such signs exist, the estimated recoverable amount of the asset is calculated. On January 1, 2007, the transition date to IFRS, the Group examined for impairments in the value of goodwill. In subsequent periods, the Group conducts an annual examination on a constant date of the recoverable amount for goodwill, or more frequently if there are signs of impairment.


26

Note 3 - Significant Accounting Policy (cont’d) J. Impairment (cont’d) 2. Non-financial assets (cont’d)

The recoverable amount of an asset or a cash-producing unit is either its usage value or net selling price (fair value minus selling expenses), whichever is higher. When determining the usage value, the Group discounts the anticipated future cash flows according to the after-tax discount rate that reflects market assessments of the time value of the money and the specific risks attributed to the asset. For the purpose of examining for impairment in value, the assets are grouped together into the smallest group of assets that yields cash flows from continuing use, which are essentially independent of the other assets and other groups (“cash-generating unit”). For the purposes of goodwill impairment testing, cash-generating units to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill purchased in business combinations is allocated for the purpose of examining for impairment in value to cash-generating units that are expected to yield benefits from the synergy of the combination.

Impairment losses are recognized when the book value of the assets or of the cash-generating unit to which the asset belongs exceeds the recoverable value and are recorded to income and loss. Impairment losses that were recognized for cash- generating units are first allocated to reducing the book value of the goodwill attributed to these units and afterwards to reducing the book value of other assets in the cash- generating unit, proportionately.

An impairment loss on goodwill is not reversed. Regarding other assets, impairment losses that were recognized in previous periods are reexamined on each reporting date, in order to determine if there are signs indicating that the losses have decreased or no longer exist. An impairment loss is reversed if there is a change in the estimates used to determine the recoverable value, only if the book value of the asset, after reversal of the impairment loss, does not exceed the book value, after deduction of deprecation or amortization, that would have been determined if the impairment loss had not been recognized. K. Employee Benefits

1. Post-employment benefits The Group has several post-employment benefit plans. The plans are primarily funded by deposits with insurance companies or funds managed by a trustee, and they are classified as defined contribution plans and as defined benefit plans. a. Defined contribution plans

The Group’s obligation to make deposits in a defined contribution plan is recorded as an expense to income and loss in the periods during which services are rendered by employees.

b. Defined benefit plans

The Group’s net obligation, regarding defined benefit plans for post-employment benefits, is calculated separately for each plan by estimating the future amount of the benefit to which an employee will be entitled as compensation for his services during the current and past periods. The benefit is presented according to present value after deducting the fair value of the plan assets. The discount rate is determined according to the yield on government bonds, whose currency and maturity date are similar to the conditions obligating the Group, as at the reporting date. The calculations are performed by a licensed actuary using the “predicted eligibility unit” method.


27

Note 3 - Significant Accounting Policy (cont’d) K. Employee Benefits (cont’d)

b. Defined benefit plans (cont’d)

When on the basis of the calculations an asset is created for the Group, the asset is not recognized as an asset of the Group, since the Group is not entitled to refunds or a reduction in future deposits.

The Group records immediately, directly to retained earnings through other comprehensive income, all actuarial gains and losses deriving a defined benefit plan.

2. Other long-term employee benefits

The Group’s net obligation for long-term employee benefits, which are not attributable to post-employment plans, is for the amount of the future benefit to which employees are entitled for services that were provided during the current and prior periods. The amount of these benefits is discounted to its present value and the fair value of the assets related to this obligation is deducted therefrom. The discount rate is determined according to the yield on government bonds, whose currency and maturity date are similar to the conditions that obligate the Group, as at the reporting date. The calculations use the “predicted eligibility unit” method. Actuarial gains and losses are recorded to income and loss in the period in which they arose.

3. Termination benefits

Termination benefits are recognized as an expense when the Group is clearly obligated to pay it, without any reasonable chance of cancellation, in respect of termination of employees before they reach the customary retirement age according to a formal, detailed plan. The benefits given to employees upon voluntary retirement are charged when the Group proposes a plan to the employees encouraging voluntary retirement, it is expected that the proposal will be accepted and the number of employees that will accept the proposal can be reliably estimated. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. The discount rate is the yield at the reporting date on Government debentures denominated in the same currency, that have maturity dates approximating the terms of the Group’s obligations.

4. Short term benefits

Obligations for short-term employee benefits are measured on a non-discounted basis, and the expense is recorded when the related service is provided. Provisions for short-term employee benefits for cash bonuses or a profit-sharing plan are recognized when the Group has a current legal or constructive obligation to pay the said amount for services provided by the employee in the past and the amount may be reliably estimated.

5. Share-based payment transactions

The fair value at the time options are granted to employees is charged as salary expense, with a corresponding increase in the balance of retained earnings as part of equity, over the period in which the employees’ options vest. The expensed amount is adjusted in order to reflect the number of options that are expected to vest.

The fair value of the amount to which employees are entitled for an increase in the value of the shares, settled in cash, is recorded as an expense, against a corresponding increase in liabilities, over the period in which the employees’ eligibility for the payment is obtained. The liability is re-measured in each reporting period and on the settlement date. Any change in the fair value of the liability is recorded as salary expense to income and loss.


28

Note 3 - Significant Accounting Policy (cont’d) L. Legal claims A provision for claims is recognized if, as a result of a past event, the Company has a present legal or constructive obligation and it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the amount of obligation can be estimated reliably. When the value of time is material, the provision is measured at its present value M. Revenues

Income from the sale of merchandise in the ordinary course of business is measured according to the fair value of the consideration reviewed or receivable, less returns discounts and commercial and quantity discounts. Discounts to customers which are conditional upon the customers’ compliance with certain targets such as minimal annual purchases, are included in the financial statements as a deduction from income, on a basis proportionately to the pace of compliance, only when it is probable that the targets will be achieved and the amount of the discount can be reasonably determined. The Group recognizes revenue when the significant risks and rewards from ownership of the merchandise are transferred to the buyer, receipt of the proceeds is expected, it is possible to reliably estimate the chance that the merchandise will be returned and the costs that were incurred or will be incurred for the transaction can be reliably estimated, when management has no ongoing involvement in the merchandise and the revenue may be reliably estimated. Timing of the transfer of the risks and rewards changes according to the specific terms of the sale contract. Regarding sales of products in Israel, transfer of the risks and rewards generally exists when the products arrive at the customer's warehouses, although regarding certain international shipments, the transfer occurs when the merchandise is loaded on the shipper's transport vehicles. When the Group acts, within the scope of the transaction, as an agent and not an owner, the revenue is recognized up to the amount of the net commission. Where the credit period of a sale exceeds the accepted credit period given in the sector, the group recognizes the future consideration at their present value while using the effective interest risk of the customer. The difference between the fair value and the stated value of the proceeds is recognized as interest income over the extended credit period. N. Financing Income and Expenses

Financing income includes interest income on amounts invested, dividend income, changes in the fair value of financial assets presented at fair value through income and loss, exchange rate gains and from hedging instruments recognized in income and loss. Interest income is recognized as accrued, using the effective interest method. Dividend income is recognized when the Group is given the right to receive the payment.

Financing expenses include interest on loans received, changes in the time value of provisions, changes in the fair value of financial assets presented at fair value through income and loss, impairment losses of financial assets and losses from hedging instruments recognized in income and loss. Credit costs, which are not capitalized, are charged to the statement of income using the effective interest method. Gains and losses from exchange rate differences are reported on a net basis.


29

Note 3 - Significant Accounting Policies (cont’d) O. Tax Expenses on Income

Tax expenses on income include current and deferred taxes. Tax expenses on income are reported in the profit or loss unless the taxes originated in a transaction or event that is directly recognized in equity or in other comprehensive income. In these cases, the tax expenses on income are charged to equity or to other comprehensive income. Current tax is the expected tax payable (or receivable) on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date. Deferred taxes are recognized in respect to temporary differences between the book values of the assets and liabilities for financial reporting purposes and their value for tax purposes. The Company does not recognize deferred taxes for the following temporary differences: initial recognition of goodwill, initial recognition of assets and liabilities in transactions that do not constitute a business combination and do not impact the accounting income and the income for tax purposes, as well as differences deriving from investments in subsidiaries, if it is not expected that they will reverse in the foreseeable future and the extent the Group controls the date of reversal. Deferred taxes are measured according to the tax rates that are expected to apply to the temporary differences at the time they are realized, on the basis of the laws that were conclusively or effectively enacted as at the balance sheet date. The Company offsets deferred tax assets and liabilities if there is an enforceable legal right to offset current tax assets and liabilities and they are attributed to the same taxable income and are taxed by the same tax authority for the same assessed company or different companies that intend to settle current tax assets and liabilities on a net basis, or if the tax assets and liabilities are settled simultaneously. When calculating deferred taxes, taxes that would apply in the event that investments in investee companies are realized were not taken into account since it is the Company’s intention to hold these investments and not realize them. The Group may be subject to additional tax in a case of distribution of dividends for Group companies. This additional tax is not included in the financial statements since the Group’s policy is not to cause a dividend distribution involving additional tax for the Group. Nevertheless, according to the approval of the board of directors dated August 11, 2009 regarding one time dividend distribution from the group companies abroad under the provisions of the temporary order under amendment 169 to the income tax ordinance that allows the Company to pay reduced tax rate of 5% on dividend from foreign subsidiaries, foreign subsidiaries distributed dividends in the amount of $300 million USD in 2009. A deferred tax asset is recognized when it is expected that there will be taxable income in the future against which the temporary differences can be utilized. Deferred tax assets are examined at each balance sheet date and, if the related tax benefits are not expected to be realized, they are reduced. Deferred taxes for intercompany transactions in the consolidated financial statements are recorded based on the tax rate of the purchasing company. P. Government Grants

Grants received from the Chief Scientist for research and development projects are treated as forgivable loans, in accordance with the provisions of IAS 20. Accordingly, grants received from the Chief Scientist are recognized as liabilities according to their fair value on the date the grants were received unless it was reasonably certain on that date that the amount received will not be repaid. The obligation amount is reexamined in each period and any changes in the present value of the cash flows, discounted at the original interest of the grant, are recorded in the statement of income.


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Note 3 - Significant Accounting Policies (cont’d) Q. Earnings per share

The Group presents basic and diluted earnings per share data for its ordinary share capital. The basic earnings per share are calculated by dividing income or loss attributable to the Group’s ordinary equity holders by the weighted-average number of ordinary shares outstanding during the period. The diluted earnings per share are determined by adjusting the income or loss attributable to ordinary equity holders and the weighted-average number of ordinary shares outstanding for the effect of all potentially dilutive ordinary shares, including notes convertible into shares, stock options and stock options granted to employees. R. Segment Reporting

An operating segment is a component of the Group that meets three conditions as follows: 1. It engages in business activities from which it may earn revenues and incur expenses, including

revenues and expenses that relate to transactions with any of the Group’s other components; 2. Its operating results are reviewed regularly by the Group’s chief operating decision maker to make

decisions about resources to be allocated to the segment and assess its performance, and 3. Discrete financial information is available in its respect. S. Environmental costs

The routine costs for operation and maintenance of facilities for the prevention of environmental pollution and projected provisions for environmental rehabilitation costs stemming from current or past activities are recorded in the statement of income. The cost of constructing facilities to prevent environmental pollution, which increase the life expectancy of a facility or its efficiency, or decrease or prevent the pollution, are added to the cost of the fixed assets and are depreciated according to the usual depreciation rates used by the Group.

T. New standards and interpretations not yet adopted

Revised IFRS 3 Business Combinations (2008) and Revised IAS 27 Consolidated and Separate

Financial Statements (2008) (hereinafter – the Standards). The principal relevant revisions in the Standards are as follows:

a. The definition of a business has been broadened, so that more acquisitions will be treated as

business combinations. b. Transactions resulting in discontinuance of consolidation are to be accounted for at full fair

value, so that the residual holding after discontinuance of the consolidation is remeasured on the date of discontinuing the consolidation, at fair value, through profit or loss.


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Note 3 - Significant Accounting Policies (cont’d)

T. New standards and interpretations not yet adopted (cont’d)

c. Transactions resulting in the consolidation of financial statements (that were not consolidated before then) are to be accounted for at full fair value, so that the original holding before the consolidation is remeasured on the first date of consolidation, at fair value, through profit or loss.

d. The minority interest will be measured at either fair value, or at its proportionate interest in the

identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis. e. Acquisitions of additional shares or partial sales of existing shares, without the Company

discontinuing consolidation of the financial statements of the companies in respect of which the transactions were performed, are to be accounted for so that all the differences deriving from the transactions are included directly in equity (including differences that in the past would have been included in profit or loss or as goodwill).

f. Transaction costs will be expensed as incurred. g. Measurement at fair value of contingent considerations in business combinations with changes

in estimates relating to a contingent consideration that is a financial liability being recognized in profit or loss.

h. Goodwill is not to be adjusted in respect of the utilization of carry-forward tax losses that

existed on the date of acquiring businesses. i. The attribution of comprehensive income to all the shareholders. These standards shall apply to annual periods beginning on or after January 1, 2010. The principal revisions of these standards shall be applied prospectively, meaning in respect of transactions as from the initial date of implementation.

As part of the 2009 improvements project for international standards, the IASB published and approved 15 changes to international financial reporting standards on a wide number of accounting issues in April 2009. The changes will be effective for periods considering on or after January 1, 2010, with the possibility of early adoption subject to the conditions prescribed for each standard. Presented hereunder are the amendments that may be relevant to the Group and are expected to have an effect on the financial statements: * Amendment to IAS 17, Leases – Classification of leases of land and buildings

(hereinafter – the Amendment) – In accordance with the Amendment, a lease of land does not have to be classified as an operating lease in every case that ownership is not expected to pass to the lessee at the end of the lease period. In accordance with the amended standard, a land lease is to be examined according to the regular criteria for classifying a lease as a finance lease or as an operating lease. The Amendment also provides that when a lease includes both a land component and a buildings component, the classification of each component should be based on the criteria of the standard, with the principal consideration regarding the classification of land being the fact that land normally has an indefinite useful life.


32



The Amendment applies to financial statements for annual periods beginning on or after January 1, 2010. The Amendment is to be implemented retrospectively, which means that the classification of land leases is to be examined on the basis of the information that was available on the date of the lease agreement, and that in the event of reclassification of the lease, the provisions of IAS 17 are to be implemented retrospectively as from the date of the lease agreement. Nevertheless, if the entity does not have the information necessary to apply the Amendment retrospectively, it should use the information available on the adoption date of the Amendment and recognize the asset and liability related to a land lease that was classified as a result of the Amendment as a finance lease according to their fair value as at that date. Any difference between the fair value of the asset and the fair value of the liability shall be recognized in retained earnings. The Company is examining the effect of initial implementation of the standard.

* Amendment to IAS 36, Impairment of Assets – Unit of accounting for goodwill impairment test (hereinafter – the Amendment) – In accordance with the Amendment, for purposes of impairment testing the largest cash-generating unit to which goodwill should be allocated is the operating segment level as defined in IFRS 8 before applying the aggregation criteria in Paragraph 12 of IFRS 8. The Amendment is to be applied prospectively for annual periods beginning on or after January 1, 2010. The Company is examining the effect of initial implementation of the standard.

* Amendment to IAS 39, Financial Instruments: Recognition and Measurement – Scope

exemption for business combination contracts (hereinafter – the Amendment) – The Amendment clarifies that the scope exemption in IAS 39 is restricted to forward contracts between an acquirer and a seller with respect to the sale or acquisition of a controlled entity, in a business combination at a future acquisition date. In addition, the term of the forward should not be longer than the period normally necessary for obtaining the approvals required for the transaction. The Amendment is to be applied prospectively to all unexpired contracts for annual periods beginning on or after January 1, 2010.

Items Eligible for Hedging, amendment to IAS 39, Financial Instruments: Recognition and

Measurement (hereinafter – the Amendment). The Amendment makes clear that an entity may designate as a hedged item changes in cash flows or fair value of a one-sided risk, meaning the risk of exposure to changes above or below a specified price or other defined variable. The Amendment also clarifies that inflationary components can be designated as a separate risk, on the condition that they form a contractually specified portion of the cash flows of an inflation-linked debenture, so that they are separately identifiable and reliably measurable, and if the other cash flows of the instruments are not affected by the inflationary component.

The Amendment is effective retrospectively for annual periods beginning on or after January 1, 2010.


33



IFRS 9, Financial Instruments (hereinafter – the Standard). This standard is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (hereinafter – IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets. In accordance with the Standard, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with the Standard, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other financial assets are measured at fair value through profit or loss. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host. Instead, the entire hybrid contract is assessed for classification using the principles above. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss. Nevertheless, the Standard allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date. Dividends on equity instruments measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment. The Standard removes financial liabilities from its scope.

The Standard is effective for annual periods beginning on or after January 1, 2013 but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in the Standard. The Standard is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in the Standard. In particular, if an entity adopts the Standard for reporting periods beginning before January 1, 2012 it is not required to restate prior periods.

Note 4 - Short Term Investments December 31 2009 2008 $ thousands $ thousands

Composition: Deposits 448 514 448 514


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Note 5 - Trade Receivables and Subordinated Capital Note December 31 2009 2008 $ thousands $ thousands

Open debts** Foreign 633,881 * 550,467 Domestic (Israel) 1,068 *4,041 634,949 554,508 Net of allowance for doubtful accounts (48,091) (35,069) 586,858 519,439

December 31 2009 2008 $ thousands $ thousands

Non-current trade receivables 6,399 2,771 Trade receivables - open accounts 634,949 554,508 Net of allowance for doubtful accounts (48,091) (35,069)

593,257 522,210

* Reclassified ** Including post dated checks received (in the amount of $2,438 thousand USD as of

December 31, 2009 and $4,199 thousand USD as of December 31, 2008).


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Note 5 - Trade Receivables and Subordinated Capital Note (cont’d) Subordinated capital note from sale of trade receivables


Trade receivables included in the securitization transaction as at the balance sheet date 199,273 255,841 Less proceeds in respect of those receivables, net 149,437 183,061

Subordinated capital note 49,836 72,780

Trade receivables sold where the proceeds were received (refunded) subsequent to the balance sheet date, net (*) (7,744) 22,585

Subordinated capital note from sale of trade receivables 42,092 95,365

(*) As of the balance date, cash proceeds in the amount of $157.2 million were received from the sale of trade receivables (31 December 2008 - $160.5 million).

In October 2001, the Company and certain subsidiaries of Makhteshim Agan Industries signed an agreement regarding a securitization transaction for the sale by those companies of all their trade receivables to foreign companies that were established for this purpose (hereinafter - "special purpose companies"), which are neither owned nor controlled by the Makhteshim Agan Industries Group. The purchase of these trade receivables by the special purpose companies was financed by the American company Kitty Hawk Funding Corp. of the Bank of America Group.

In September 28, 2004, the Company and certain subsidiaries of Makhteshim Agan Industries (hereinafter, "the Companies) signed an agreement with Bank of America to terminate a securitization transaction. On that day, the Companies signed a new agreement with Rabobank International for the sale of trade receivables in a securitization transaction, replacing the previous agreement with Bank of America. The new agreement is similar in principle to the previous agreement, with certain changes that also include that the agreement for the new transaction includes additional subsidiaries of the Company. Pursuant to the new securitization agreement, the Companies will sell their trade receivables to a foreign company that was established for this purpose, which is neither owned nor controlled by the Makhteshim Agan Industries Group (hereinafter, “the Acquiring Company”). The purchase of these trade receivables by the Acquiring Company financed by the American company Erasmus Capital Corporation of the Rabobank International Group. Upon the transition from the previous agreement to the new agreement, the Acquiring Company acquired the trade receivables that remained under the ownership of the special vehicle company.

The trade receivables included in the securitization transaction are those that comply with a number of criteria, as stated in the agreement. The period in which the Companies will sell their trade receivables to the Acquiring Company is one year from the date of the closing of the transaction. The period may be extended, with the consent of both parties, for additional one-year periods, up to a maximum of 2 extensions.

On September 8, 2009, the Company and some of its subsidiaries extended the securitization agreement with Rabobank International by 3 more years. There are no significant changes in the extended securitization agreement.


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Note 5 - Trade Receivables and Subordinated Capital Note (cont’d)

The maximum expected volume of the financial means available to the Acquiring Company for the purpose of purchasing the trade receivables of the consolidated subsidiaries, is $250 million, on a current basis, such that the amounts collected from customers whose debts were sold will be available to purchase new trade receivables. The price at which the trade receivables will be sold is the amount of the debt being sold less a discount calculated on the basis of the period anticipated to pass between the date the debt was sold and the expected repayment date. On the date the debt is purchased, the Acquiring Company will pay the majority of the debt price in cash, with the balance in subordinated capital notes to be paid after the debt is collected. The rate of the cash payment varies in accordance with the composition and quality of the receivable portfolio. The Companies bear in full the losses that will be sustained by the Acquiring Company due to the non-payment of the trade receivables included in the securitization transaction, up to the amount of the total outstanding balance of the debt included in the subordinated capital note. The Acquiring Company will not have a right of recourse to the Companies with respect to the amounts paid in cash, except debts for which a commercial dispute arises between the Companies and their customers, namely, a dispute arising from an alleged failure by the seller to fulfil an obligation in the supply agreement for the product, such as: failure to supply the correct product, defect in the product, non-compliance with the supply date, etc. The Companies handle collection of the sold trade receivables included as part of the securitization transaction for the Acquiring Company. In July 2007, the Acquiring company purchased an insurance policy which was renewed in April 2009 from an insurance company to insure the trade receivables sold as part of the securitization transaction. Pursuant to this policy, the insurance company will indemnify the Acquiring Company (which is the beneficiary of the policy) for the entire amount of the initial loss. Based on past experience, this amount is much higher than the Company's actual losses from the trade receivables sold in the securitization transaction. In addition, the insurance premium is fixed. The accounting treatment of the sale of trade receivables in a securitization transaction is: Until July 2007, the transfer of the trade receivables to the Acquiring Company was not recognized as a sale. Therefore, the securitized trade receivables were not deducted from the financial statements. From July 2007, following the Acquiring Company's purchase of the insurance policy, as described above, the securitization transaction met the requirements for deducting the financial assets, since the risks and rewards involved in the securitized receivables were transferred in full to the Acquiring Company. Accordingly, the trade receivable balances that were sold, for which the proceeds were received in cash and/or unsubordinated liability, were deducted. The part of trade receivables included in the securitizations, for which cash proceeds were not received, a subordinated capital note was recorded in the amount of the difference between the trade receivables balance included in the securitization and the proceeds. The loss on sale of the trade receivables was recognized at the date of sale in the statement of income, in the item "financing expenses". Under the terms of the agreement, the Company committed to maintain certain financial covenants, mainly, financial liabilities to equity and profitability ratios - see Note 21D.


37

Note 6 - Financial Assets Including Derivatives* December 31 2009 2008 $ thousands $ thousands

Claims from the government in respect of participations and tax refunds 51,138 69,215 Employees 1,577 1,466 Current maturities of long-term receivables 10,918 134 Income receivable 1,108 4,737 Receivables in respect of hedging transactions 72,231 44,970 Advances to suppliers 5,137 21,013 Other 9,083 8,437 151,192 149,972

* Except for derivative transactions that are presented at fair value, the remaining items are classified to

loans and receivables. Note 7 - Inventories


Finished products 642,825 686,565 Products in progress 63,051 65,188 Raw materials 210,602 298,716 Packing materials 7,825 9,777 Spare parts and maintenance materials 17,029 14,789 941,332 1,075,035 Purchased products for sale 59,259 60,383 1,000,591 1,135,418 Additional information: Merchandise in transit (included in inventories balance) 52,590 45,228 The Group wrote-down inventory mainly, due to net realizable value at December 31, 2009 by the amount of $29.8 million and at December 31, 2008 by the amount of $6.2 million.


38

Note 8 - Other Financial Investments and Receivables A. Composition


Long-term investments, loans and receivables 73,991 32,766 Bank deposits 12 - Derivatives 41,463 21,558 115,466 54,324 Less - current maturities 10,918 134 104,548 54,190 B. Maturities The other financial investments and receivables mature as follows:

$ thousands First year (current maturities) 10,918 Second year 20,002 Third year 25,177 Fourth year 26,843 Fifth year and thereafter 29,468 Without fixed maturity date 3,058 115,466

Note 9 - Other Non-Financial Investments and Receivables


Leased land 3,457 3,545 Non-financial assets 8,889 8,723 12,346 12,268


39

Note 10 - Fixed Assets Composition Office furniture Land and Plant and Motor computers and buildings equipment vehicles equipment Total $ thousands Cost Balance at beginning of year 164,269 858,506 7,502 16,522 1,046,799 Additions, net of grants 4,384 72,045 1,983 3,788 82,200 Newly consolidated companies 2,903 9,099 278 210 12,490 Disposals (788) (4,314) (1,169) (819) (7,090)Balance at end of year 170,768 935,336 8,594 19,701 1,134,399 Accumulated depreciation Balance at beginning of year 75,233 424,948 3,000 11,127 514,308 Additions 5,762 33,849 1,416 3,210 44,237 Newly consolidated companies 23 3,150 142 104 3,419 Disposals (368) (1,885) (906) (781) (3,940)Balance at end of year 80,650 460,062 3,652 13,660 558,024 Depreciated balance at December 31, 2009 90,118 475,274 4,942 6,041 576,375 Office furniture Land and Plant and Motor computers and buildings equipment vehicles equipment Total $ thousands Cost Balance at beginning of year 162,606 808,919 5,871 15,091 992,487 Additions, net of grants 3,657 51,120 3,037 2,761 60,575 Newly consolidated companies - - - 33 33 Disposals (1,994) (1,533) (1,406) (1,363) (6,296)Balance at end of year 164,269 858,506 7,502 16,522 1,046,799 Accumulated depreciation Balance at beginning of year 71,651 397,441 2,823 10,330 482,245 Additions 4,410 28,431 1,238 1,886 35,965 Newly consolidated companies - - - 13 13 Disposals (828) (924) (1,061) (1,102) (3,915)Balance at end of year 75,233 424,948 3,000 11,127 514,308 Depreciated balance at December 31, 2008 89,036 433,558 4,502 5,395 532,491 Depreciated balance at January 1, 2008 90,955 411,478 3,048 4,761 510,242


40

Note 10 - Fixed Assets (cont’d) B. Additional information 1. The Makhteshim facilities are located on an approximately 1,086 acre plot in Ramat Hovav leased

for various periods expiring between the years 2023-2029 with an extension right and on an approximately 407 acre plot in Beer Sheba leased from the Israel Land Administration for periods expiring between the years 2018-2026 with an extension right. The Agan facilities are located in Ashdod on freehold area of approximately 242 acres of which approximately 40 acres are leased from the Israel Land Administration for lease periods expiring between the years 2050 and 2054. In addition, a company of Agan rents an additional plot of approximately 7 acres adjacent to the plant. The facilities of the companies outside Israel are located on freehold land.

2. Regarding liens - see Note 21. C. Collateral As at December 31, 2009, fixed asset items totalling $17,624 thousand (2008: $5,603 thousand) are pledged to secure bank loans (see Note 15, Long-term Bank Loans, regarding terms and maturity dates). D. Purchase of fixed assets for credit

During the year ended December 31, 2009, the Company purchased fixed assets for credit totalling $14,661 thousand. E. Investment grants Investment grants received for the purchase of fixed assets


Buildings and equipment in the Group’s plants 107,104 107,104 The investments grant that was deducted from the cost of the buildings and equipment in the Group’s plants were received for investments in an “approved enterprise” for many years. To secure compliance with the conditions for receipt of the grant, a floating lien was registered on all of the Group’s assets in favor of the State of Israel. For part of the investments, if the Group does not comply with the conditions for receipt of the grant, the investments will have to return the grant amount, in full or in part, plus interest at a rate to be prescribed by the Investment Center. During 2009, no additional grants were received. F. Capitalized costs


Credit costs 22,011 22,011 The discount rate used to determine the credit costs that should be capitalized in 2008 is 8%. During 2009 no credit costs were capitalized.


41

Note 10 - Fixed Assets (cont’d)

G. Additional Information The Group has fully-depreciated assets that are still in operation. The original cost of these assets as at December 31, 2009 is $215,051 thousand (December 31, 2008: $189,003 thousand). Part of the freehold land in Israel has not yet been registered in the name of the Group companies in the Land Registry Office, mostly due to registration arrangements or technical problems.

Note 11 - Intangible Assets

A. Composition:

December 31, 2009 Accumulated Unamortized Cost amortization balance $ thousands $ thousands $ thousands

Product registration and acquisition of know- how 479,715 248,525 231,190 Goodwill on acquisition of subsidiaries 211,782 47,830 163,952 Intangible assets on purchase of products 329,583 138,825 190,758 Software 33,680 25,903 7,777 Marketing rights 15,756 13,935 1,821 Other* 34,232 14,709 19,523 Total 1,104,748 ** 489,727 615,021

December 31, 2008 Accumulated Unamortized Cost amortization balance $ thousands $ thousands $ thousands

Product registration and acquisition of know-how 402,249 216,686 185,563 Goodwill on acquisition of subsidiaries 200,650 46,912 153,738 Intangible assets on purchase of products 329,583 122,681 206,902 Software 26,882 21,215 5,667 Marketing rights 15,756 12,426 3,330 Other* 29,791 12,429 17,362 Total 1,004,911 ** 432,349 572,562 * Including primarily lists of customers and trade names. ** Including impairment provision for impairment in value of licensed products totaling approximately

$19 million as of December 31, 2009 and 2008.


42

Note 11 - Intangible Assets (cont’d) A. Composition: (cont’d)

Accumulated Unamortized Cost amortization balance $ thousands $ thousands $ thousands

Balance at December 31, 2007 949,713 391,933 557,780 Additions 61,049 51,297 9,752 Disposals *(14,687) *(10,881) *(3,806)First-time consolidation 8,836 - 8,836 Balance at December 31, 2008 1,004,911 432,349 572,562 Additions 92,533 59,448 33,085 Disposals (4,462) (2,577) (1,885)First-time consolidation 11,766 507 11,259 Balance at December 31, 2009 1,104,748 489,727 615,021 * Reclassified B. Additional details 1. In 2002, subsidiaries, wholly-controlled by the Company, signed several agreements with Bayer

Crop Science AG for the acquisition of several products, licenses and distribution rights in the field of agrochemicals. The total consideration for such acquisition totaled approximately $185.3 million.

Approximately $34.6 million of the consideration was allocated to acquisition of licenses, approximately $144.1 million to intangible assets on purchase of products including: intellectual property rights, trademarks, brandname, technological know-how, information on customers and suppliers of raw materials and approximately $6.6 million was allocated to marketing and distribution rights.

2. In 2001, subsidiaries, wholly-controlled by the Company, signed agreements with Aventis and

Syngenta A.G. for the purchase of four new agrochemical products as well as the purchase of marketing and distribution rights of a product package in the Scandinavian countries. One of the products purchased is still protected by patents that were transferred to the purchasing company.

The total consideration for purchase of the four products totaled approximately $105 million. Approximately $20 million was allocated to product registration costs, approximately $2.5 million to the purchase of agreements with third parties and approximately $77.5 million to intangible assets on purchase of products which includes: intellectual property rights, trademarks, brand name, technological know-how, information on customers and suppliers of materials and $5 million was allocated to the marketing and distribution rights.


43

Note 12 - Loans and Credit from Banks and Other Lenders A. Current liabilities

December 31 December 31 2009 2008 $ thousands $ thousands

Credit from banks Overdrafts 87,678 108,100 Short-term credit 32,674 259,504 120,352 367,604 Customer discounting * 95,592 36,403 215,944 404,007 Current maturities of others 105 - Current maturities of long-term loans from banks 20,926 9,850

236,975 413,857

* A subsidiary is guarantor of trade receivables that were discounted. Therefore, the risks and benefits involved in these trade receivables have not been transferred.

B. Linkage terms and interest rates (excluding current maturities)

December 31

Weighted Interest rate as at balance sheet date

2009 2008 % $ thousands $ thousands

Credit from banks Overdrafts: In Israeli currency 2.3% 73 433 In US dollars 3.7% 62,766 92,250 In Euro 5% 12,775 14,923 In Brazilian currency 8.6% 7,548 494 In other currencies 3.2% 4,516 - 87,678 108,100 Short-term credit: In US dollars 5.6% 13,382 220,989 In Israeli currency - 26,407 In Euro 4.7% 5,942 10,486 In other currencies 7.3% 13,350 1,622

32,674 259,504 Customer discounting: In US dollars 5.6% 33,272 17,591 In Brazilian currency 11.8% 62,320 18,812 95,592 36,403 215,944 404,007 C. Regarding collateral - see Note 21A.


44

Note 13 - Trade Payables December 31 December 31 2009 2008 $ thousands $ thousands

Open accounts 498,686 480,857 Post-date checks provided 3,006 1,761 501,692 482,618

Note 14 - Payables and Credit Balances December 31 December 31 2009 2008 $ thousands $ thousands

Liabilities to employees and for salaries and wages 77,005 75,018 Government institutions 20,059 10,312 Payables in respect of hedging transactions 12,386 64,272 Accrued expenses 42,179 67,261 Payables in respect of other assets 31,646 18,621 Other 95,705 84,834 278,980 320,318

Note 15 - Long-term Loans from Banks

A. Composition


Loans from banks 324,125 69,971 Less - current maturities 20,926 9,850 303,199 60,121


45

Note 15 - Long-term Loans from Banks (cont’d) B. Linkage terms and interest rates

December 31 December 31

Weighted Interest rate as at balance sheet date

2009 2008 % $ thousands $ thousands

In US dollars 2.8 313,403 58,473 In Brazilian currency 6.93 2,159 983 In Euro 4.3 5,384 5,434 In other foreign currency 5 3,179 5,081 324,125 69,971

C. Maturities $ thousands

First year (current maturities) 20,926 Second year 235,188 Third year 31,478 Fourth year 19,668 Fifth year and thereafter 16,865 324,125

D. Regarding the commitment of the Company and certain subsidiaries to banks to maintain certain

financial covenants, mainly debt-equity and profitability ratios - see Note 21C. E. For collateral - see Note 21A.

Note 16 - Debentures

On December 4, 2006, the Company issued to institutional investors three series of debentures in the aggregate amount of NIS 2,350 million par value, broken down into three separate series, as follows: 1. Series B, totalling NIS 1,650 million par value, linked to the CPI and bearing base annual interest of

5.15%. The debenture principal is to be repaid in 17 equal payments during the years 2020-2036. The issue costs in respect of this series totalled $1,044 thousand.

2. Series C, totalling NIS 465 million par value, linked to the CPI and bearing base annual interest

of 4.45%. The debenture principal is to be repaid in 4 equal payments during the years 2010-2013. The issue costs in respect of this series totalled $294 thousand.


46

Note 16 - Debentures (cont’d) 3. Series D, totalling NIS 235 million par value, unlinked and bearing base annual interest of

6.5%. The debenture principal is to be repaid in 6 equal payments during the years 2011-2016. The issue costs in respect of this series totalled $149 thousand.

On May 27, 2008, the Company published a shelf prospectus and prospectus to list for trading, pursuant to which debentures of the Company (Series B, C and D) were listed for trading. Until this date, the Company had paid supplemental interest of 0.25% on these debentures, and met all the financial commitments it had assumed pursuant to the trust deeds during the period until listing for trading. At the publication date of the financial statements, the Company has no financial covenants in respect of the said debentures. During 2008, the Company purchased by itself and through a wholly-owned subsidiary, a cumulative total of NIS 80.4 million par value debentures (Series B), at a total cost of $16,425 thousand. Due to the Company's purchase, debentures having par value of NIS 12.5 million were de-listed from trading. As of the report date, the par value of the debentures (Series B) outstanding total NIS 1,637.5 million. On March 25, 2009, the Company issued debentures by the way of expanding Series C and D under shelf prospectus published May 27, 2008 in the total amount of NIS 1,133 million par value debentures for a consideration of 101.56% and 98.95% of its par value, respectively. Those debentures are divided into two Series as follows: 1) Series C in the amount of NIS 661 million par value debentures linked to the CPI (Base Index

October 2006), bearing base annual rate of 4.45%. The debenture principal will be repaid in 4 equal instalments in the years 2010 to 2013. The issue costs of those debentures were $1,297 thousand.

2) Series D in the amount of NIS 472 million par value debentures bearing base annual rate of

6.5% and is not linked to the CPI. The debenture principal will be repaid in 6 equal instalments in the years 2011 to 2016. The issue costs of that Series were $1,090 thousand.

A. Linkage terms and interest rates:

Interest rate as of balance sheet date Total Linkage terms % $ thousands

Debentures - Series B ILS CPI 5.15% 461,945 Debentures - Series C ILS CPI 4.45% 333,016 Debentures - Series D ILS 6.5% 185,075 980,036


47

Note 16 - Debentures (cont’d) B. Maturities

$ thousands First year (current maturities) 83,480 Second year 113,866 Third year 114,027 Fourth year 113,823 Fifth year 30,922 Sixth year and thereafter 523,918 980,036

Note 17 - Other Long-term Liabilities

Linkage terms: December 31 December 31

2009 2008 $ thousands $ thousands

Liabilities linked primarily to the Brazilian real 9,016 8,142 Liability in respect of purchase of a subsidiary 4,678 - Liability for State grants 2,320 3,910 Other liabilities 2,697 291

18,711 12,343


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Note 18 - Taxes on Income

Information on the tax environment in which the Group operates A. Benefits under the Law for the Encouragement of Capital Investments, 1959 The plants of subsidiaries in Israel have been granted “Approved Enterprise” or “Beneficiary Enterprise” status under the Israeli Law for the Encouragement of Capital Investments, 1959. Part of the income deriving from the “Approved Enterprise” or “Beneficiary Enterprise” during the benefit period is subject to tax at the rate of 25% (the total benefit period is seven years and in certain circumstances up to ten years, but may not exceed either 14 years from the date of the Letter of Approval or 12 years from the date the “Approved Enterprise” commenced operations). Other plants of subsidiaries in Israel are entitled to a tax exemption for periods of between two and six years and a reduced tax rate of 25% for the remainder of the benefit period. Should a dividend be distributed from the tax-exempt income, the subsidiaries will be liable for tax on the income from which the dividend was distributed at a rate of 25%. The benefit period has ended for some of the plants of the subsidiaries and for others will end during years until 2014. In addition, subsidiaries have other investment programs in progress or for which the benefit period has not yet commenced. The aforementioned benefits are conditional upon compliance with certain conditions specified in the Law, related Regulations and the Letters of Approval, in accordance with which the investments in the Approved Enterprises were made. Failure to meet these conditions may lead to cancellation of the benefits, in whole or in part, and to repayment of any benefits already received, together with interest. Management believes that the companies are in compliance with these conditions. B. Benefits under the Law for the Encouragement of Industry (Taxes), 1969 Under the Israeli Law for the Encouragement of Industry (Taxes) 1969, the Company is an Industrial Holding Company and the subsidiaries in Israel are “Industrial Companies”. The main benefit under this law is the filing of consolidated income tax returns (The Company files a consolidated income tax return with Makhteshim), higher depreciation for tax purposes and amortization of know-how over 8 years. C. Taxation under inflationary conditions The Israeli Income Tax Law (Inflationary Adjustments), 1985, ("the Law") has been in effect since the 1985 tax year. The Law instituted the measurement of results for tax purposes on a real basis. The various adjustments required by the Law are intended to bring about taxation of income on a real basis. Since the financial statements are not linked to the CPI from the date the Israeli economy was no longer considered a hyperinflationary economy, differences have been created between income according to the financial statements and adjusted income for income tax purposes, as well as temporary differences between the value of assets and liabilities in the financial statements and their tax basis. On February 26, 2008, the Knesset passed the Income Tax Law (Adjustments for Inflation) (Amendment No. 20) (Limited Period of Applicability) 2008 (hereinafter, “the Amendment”). Pursuant to the Amendment, the applicability of the Adjustments Law ended in 2007, and in 2008 the provisions of the law were no longer in effect, other than the transition provisions having the purpose of preventing distortions in the calculation of taxes.


49

Note 18 - Taxes on Income (cont'd) C. Taxation under inflationary conditions (cont'd) Pursuant to the Amendment, from 2008 forward, the adjustment of income for inflation is no longer calculated for purposes of taxation on a real basis. Furthermore, the linkage to the CPI of depreciation amounts for fixed assets and tax loss carryforwards ceased, so that these amounts are adjusted for the CPI as of the end of 2007 and their linkage to the CPI ceased from that point forward. The effect of this Amendment to the Adjustments Law was expressed in the calculation of current taxes and deferred taxes commencing in 2008. D. Foreign subsidiaries The companies are assessed according to the tax laws applicable in their countries of domicile. E. Change in tax rate On July 25, 2005 the Law for Amendment of the Income Tax Ordinance (No. 147) and Temporary Order), 2005 was passed, pursuant to which the Companies Tax rate will be gradually reduced to a tax rate of 25% for 2010 and thereafter. On July 14, 2009, the Knesset passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) – 2009, which provided, inter alia, an additional gradual reduction in the company tax rate to 18% as from the 2016 tax year. In accordance with the aforementioned amendments, the company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax year – 26%, in the 2010 tax year – 25%, in the 2011 tax year – 24%, in the 2012 tax year – 23%, in the 2013 tax year – 22%, in the 2014 tax year – 21%, in the 2015 tax year – 20% and as from the 2016 tax year the company tax rate will be 18%.

The effect of implementation was a reduction in deferred tax liability and recognition of net tax income in the sum of $5.5 million.

F. On January 1, 2009. Amendment No.169 to the Income Tax Ordinance was enacted as a

Temporary Provision for tax year 2009 alone, whereby a company may elect to pay 5% tax on dividend income it received in 2009 and paid to it by a foreign-resident body of persons, provided that several conditions prescribed in the Temporary Order are fulfilled. After the Company examined the manner in which the said Amendment to the Ordinance is to be implemented, the Company’s board of directors approved a proposal for a one-off withdrawal of earnings from the Groups foreign companies, totalling $300 million. The earnings transferred in the fourth quarter of 2009 will be used by the Company for its operating needs and as a reserve for a dividend distribution. The financial statements include a liability for taxes payable of $15 million (5% of the dividend amount). It should be clarified that the withdrawal of earnings, as noted, does not change the Company’s dividend distribution policy and/or its timing.

G. On February 4, 2010 was published temporary order amendment No. 174 to the income tax ordinance to the tax laws 2007, 2008 and 2009 (hereinafter "the ordinance amendment"). According to the ordinance amendment, Israeli accounting principle no. 29 concerning adoption of International Financial Reporting Standards (IFRS) will not apply for the use of determining the taxable income in the aforementioned years, although it was applied for the use of the financial statements. The effect of the Amendment on the financial statements is not material.


50

Note 18 - Taxes on Income (cont'd)

H. Deferred tax assets and liabilities (1) Deferred tax assets and liabilities recognized Deferred taxes are calculated at the tax rate expected to be in effect on the date of the reversal, as provided below. Deferred taxes for subsidiaries operating outside of Israel were calculated according to the relevant tax rates in each country. Deferred tax assets and liabilities are attributed to the following items: Fixed assets and Employee Tax loss other assets benefits carryforwards Inventories Other Total $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands Deferred tax asset (liability) balance at January 1, 2008 (84,588) 25,142 14,526 49,485 10,225 14,790 Changes charged to statement of income (814) (3,753) (2,800) (4,111) (7,878) (19,356)Changes charged to comprehensive income 11 55 - (242) 3,739 3,563 Business combinations - - - 40 - 40 Deferred tax asset (liability) balance at December 31, 2008 (85,391) 21,444 11,726 45,172 6,086 (963)Changes charged to statement of income 6,250 (2,852) 33,313 5,875 8,901 51,487 Changes charged to comprehensive income (53) 213 - 302 (4,035) (3,573)Deferred tax asset (liability) balance at December 31, 2009 (79,194) 18,805 45,039 51,349 10,952 46,951 December 31 December 31 2009 2008 $ thousands $ thousands Presented in: Deferred tax assets 86,542 62,412 Deferred tax liability (39,591) (63,375) Total 46,951 (963)


51

Note 18 - Taxes on Income (cont'd) H. Deferred tax assets and liabilities (cont’d) (2) Deferred tax assets not recognized

Deferred tax assets were not recognized for the following items:


Tax losses 36,199 31,994 According to existing tax laws, there is no time limit for the utilization of tax losses and the utilization of deductible temporary differences. Deferred tax assets were not recognized for these items, since it is not expected that there will be taxable income in the future, against which it will be possible to utilize the tax benefits.

I. Composition of tax expense

Components of income tax expenses (savings) For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Current tax expenses (income) for current period 38,570 38,168 35,328 Adjustments for prior years 4,236 (7,840) (1,246) 42,806 30,328 34,082 Deferred tax expenses (income) Creation and reversal of temporary differences (45,967) 19,356 (8,597)Change in the rate (5,520) - - (51,487) 19,356 (8,597) Total income tax expenses (income) (8,681) 49,684 25,485


52

Note 18 - Taxes on Income (cont'd)

J. Theoretical tax Following is reconciliation between the theoretical tax and the tax expense included in the statement of income:

For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Rate of statutory tax

Income before taxes on income 26,020 270,643 188,406 Company's main tax rate 26% 27% 29%Tax calculated at the ordinary tax rate 6,765 73,074 54,638 Tax benefits from Approved Enterprises (1,415) (5,397) (1,472)Difference between financial statement measurement of income and tax basis (13,228) 15,809 (12,177)Income taxable at other tax rates (24,664) (31,961) (22,412)Taxes in respect of previous years 4,236 (7,840) (1,246)Tax losses in the report year for which deferred taxes were not created 210 609 1,415 Tax in respect of dividend distributed within the group 15,000 - - Non-deductible expenses and other differences 9,935 5,390 6,739 Change in tax rate in respect of deferred taxes (5,520) - -

(8,681) 49,684 25,485 Income taxes charged directly to equity


Taxes recognized directly in equity 27 175 1,744 Taxes for components of other comprehensive income (3,391) 1,073 (397) L. Final assessments Agan has received final tax assessments up to the 2005 tax year. Makhteshim and the Company have received final tax assessments up to and including the 2003 tax year. Lycored has received final tax assessments up to and including the 2006 tax year. M. Losses and deductions available for carryforward to future years As of the balance sheet date tax losses carry forward adjusted amount of $200 million. For accrued losses, the Group has created a tax asset of $45 million, based on management's assessment that it is probable that these losses will be realized in future years. N. Additional Information Regarding tax claims against Milenia - see Note 20.


53

Note 19 - Employee Benefits Employee benefits include post-employment benefits, other long-term benefits, short-term benefits, termination benefits and share-based payments. Likewise, the Company has a defined benefit plan for some of its employees, which are subject to Section 14 of the Severance Pay Law, 1963. Severance pay and retirement grants The Company and its subsidiaries in Israel make regular deposits with “Nativ” (the Pension Fund of the Workers and Employees of the Histadrut Ltd.) and insurance companies, conferring pension rights or severance pay upon reaching retirement age. Amounts deposited in the pension fund are not included in the balance sheet because they are not under the management or control of the companies. Employees dismissed before reaching retirement age, to which Section 14 of the Severance Pay Law does not apply, will be eligible for severance benefits, computed on the basis of their most recent salary. Where the amounts accumulated in the pension fund are not sufficient to cover the computed severance benefits, the companies will cover the difference. In addition to their above mentioned pension rights, most employees are entitled to receive retirement grants at the rate of 2.33% of their salary at retirement age. The accrual in the balance sheet covers the companies’ obligations to pay retirement grants, as well as the full projected liability to pay severance benefits to some of their employees for the period prior to the date on which these employees joined the pension plan, during which period no deposits had been made in the fund in the name of the employee. Early retirement pension The financial statements include a provision for payment of pension benefits to a number of employees whose work was terminated before they reached retirement age. The provision was calculated in the period from the date their employment was terminated until the date stipulated in the agreement, on the basis of the present value of the pension payments. Employee Benefits

December 31, 2009

December 31, 2008

$ thousands $ thousands Present value of unfunded obligations 19,731 19,294 Present value of funded obligations 41,176 35,746 60,907 55,040 Total present value of obligations Fair value of plans' assets 25,893 20,977 Liability recognized for defined benefit plan 35,014 34,063 Liability in respect of early retirement 25,777 27,762 Liability for other short term benefits 13,344 11,729 Liability for other long-term benefits 25,606 21,232 Total employee benefits 99,741 94,786 Classified as follows: 43,286 36,888 Other payables 56,455 57,898 Long-term employee benefits 99,741 94,786


54

Note 19 - Employee Benefits (cont'd)

Post-employment benefit plans - defined benefit plan (1) Change in liability for defined benefit plan

For the year ended December 31 2009 2008* $ thousands $ thousands

Liability for defined benefit plan at January 1 55,040 55,592 Benefits paid (5,222) )6,169(Current service costs and interest 7,524 8,551 Changes due to translation adjustments 481 459 Actuarial losses (gains) charged to equity 3,084 )3,393(Liability for defined benefit plan at December 31 60,907 55,040 (2) Change in plan assets

For the year ended December 31 2009 2008 $ thousands $ thousands

Fair value of plan assets at January 1 20,977 24,480 Amounts deposited 1,392 1,905 Benefits paid )826( )3,632(Changes due to translation adjustments 181 246 Expected yield from plan assets 1,451 1,683 Actuarial gains (losses) charged to equity 2,718 )3,705(Fair value of plan assets at December 31 25,893 20,977 * Reclassified


55


Post-employment benefit plans - defined benefit plan (cont’d) (3) Expenses charged to statement of income

For the year ended December 31 2009 2008* 2007* $ thousands $ thousands $ thousands

Current service costs 3,872 4,630 4,212 Interest costs 3,652 3,921 2,768 Translation adjustments 300 213 3,010 Expected yield on plan's assets )1,451( )1,683( )1,145(

6,373 7,081 8,845

The expenses are classified in the following statement of income items:

For the year ended December 31 2009 2008* 2007* $ thousands $ thousands $ thousands

Cost of sales 1,669 1,948 2,336 Selling and marketing expenses 927 985 495 General and administrative expenses 1,109 1,170 987 Research and development expenses 167 527 394 Financing expenses 2,501 2,451 4,633

6,373 7,081 8,845 * Reclassified (4) Actuarial gains and losses charged directly to equity


Cumulative balance at January 1 1,359 1,671 - Amounts recognized during the period )366( (312) 1,671 Cumulative balance at December 31 993 1,359 1,671


56


Actuarial assumptions The key actuarial assumptions at the reporting date (weighted average)

2009 2008 2007 % % %

Discount rate on December 31 1.9 3.6 3.5Expected yield on plan's assets at January 1 2.9-3.6 2.0-3.6 2.0-3.5Rate of increase in the pension annuity Linked to the

CPILinked to the

CPI Linked to the

CPI The assumptions regarding the future mortality rate are based on published statistical data and mortality tables. Historical data

December 31 December 31 December 2009 2008 2007 $ thousands $ thousands $ thousands

Adjustments to liabilities deriving from past experience 3,084 )3,393( (1,760)Adjustments to assets deriving from past experience 2,718 )3,705( (89) The Company's estimate for expected deposits in 2010 in a funded defined benefit plan is $1,019 thousand. Post-employment benefit plans - defined contribution plans


Amount recognized as an expense for defined contribution plan 2,011 2,109 1,720


57

Note 20 - Commitments and Contingent Liabilities A. Commitments

1. The liability of directors and officers (including officers who might be considered controlling shareholders) of the Company and its subsidiaries is covered by an insurance policy, in which the liability limit is $100 million. The insurance policy is renewed annually according to the framework agreement approved by the General Assembly of the Company on October 6, 2005, for periods that will not exceed five years cumulatively, meaning until December 1, 2010.

2. On October 8, 2007, the General Meeting of the Company approved giving a commitment for advance indemnification to officers by granting indemnity notes to officers of the Company (including officers who might be considered controlling shareholders). At the same time, the General Meeting of the Company approved an amendment to the sections of the Articles of Association dealing with exemption, insurance and indemnity of officers in the Company.

3. Regarding undertakings of the Company and its subsidiaries within the scope of a securitization transaction - see Note 5.

4. Regarding undertakings with interested parties - see Note 29.

5. In July 2006, Agan entered into an agreement with Ashdod Energy Ltd. (hereinafter, “Ashdod Energy”), pursuant to which it will rent to Ashdod Energy, as a subtenant, approximately 2.6 acres of land, which is part of a 5.5 acre lot rented by Agan from the Israel Lands Administration, on which Ashdod Energy will construct a power plant for production of electricity and steam. Furthermore, according to the agreement, Ashdod Energy will supply electricity and steam to Agan for a period of 20 years from the power plant’s operation date or a period of 24 years and 11 months from the signing date of the sublet agreement, whichever is earlier. When the power plant begins commercial production, the discount embedded in the tariffs for electricity and steam will serve as full payment of the rent, which comes to $80,000 for each year of rental.

To the best of the Company's knowledge, as of the report date, all of the approvals required for constructing the power plant had not yet been received and not all of the financing needed for its construction had been obtained. The construction projects and the building of the power plant are the responsibility of and at the expense of Negev Energy, which is also responsible for obtaining the necessary permits and licenses required by law.

6. In May 2007, Makhteshim entered an agreement with Ramat Hanegev Energy Ltd. (hereinafter,

“Negev Energy”), pursuant to which it will rent to Negev Energy, as a subtenant (conditional on the approval of the Israel Lands Authority which had not yet been given on the report date), land on which Negev Energy will construct a power plant for production of electricity and steam within four years from the signing of the agreement. Furthermore, according to the agreement, Negev Energy will supply electricity, steam, soft water, distilled water and compressed air to Makhteshim’s facilities in Ramat Hovav for a period of 24 years and 11 months from the signing date of the aforementioned sublet agreement. After that period, the power plant will be transferred to Makhteshim’s ownership. Construction of the power plant is conditional on receiving various approvals and financial support for its construction. To the best of the Company’s knowledge, as at the report date, all the requisite approvals for construction of the power plant have not yet been received nor has the financing needed to build the power plant been made available. The construction projects and the building of the power plant are the responsibility of and at the expense of Negev Energy, which is also responsible for obtaining the necessary permits and licenses required by law.


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Note 20 - Commitments and Contingent Liabilities

A. Commitments (cont’d)

7. In September 2009, the Company entered into a strategic collaboration agreement with Cibus, whereby the Company will invest up to $37 million, according to milestones, during a five-year period, in a joint venture, the objective of which is to develop improved traits in five key agricultural crops (which do not constitute, as of the directive existing on the report date, genetic engineering of seeds – non-GMO), with emphasis on the European market ("collaboration agreement"). Moreover, on the same date, a strategic investment agreement was signed by the parties, whereby the Company was given several options, which will take effect over several years, commencing in 2014, whereby it will be able to convert the said investment into shares in Cibus, and even to gradually raise its stake to holdings of up to 50.1% in Cibus.

Pursuant to the collaboration agreement, Cibus will develop for the venture, strains with unique and improved traits for seeds, intended to increase crops and develop the resiliency of key crops to a wide range of herbicides marketed by the Company. The joint venture intends to enter into agreements with leading seed companies, in order to cause the integration of the improved traits in the quality strains, and to be marketed by the seed companies, in consideration for royalties that will be paid to the venture, and divided between Cibus and the Company. According to the agreement, the joint venture will operate so that the seed companies will sell the seeds together with the Company's agrochemicals.

8. In December 2009, the Group entered into a multi-year agreement with EMG (East Mediterranean Gas), to supply natural gas for the Group's production facilities in its plants in Ashdod and Ramat Hovav. The supply of natural gas will replace the use of heavy crude, diesel and condensed carbonated gas, and will be carried out in the second half of 2010. The transition to consumption of clean energy is part of the Group's long-term policy to reduce consumption of natural resources, and will enable a significant reduction in atmospheric emissions from the production of electricity, including a reduction of greenhouse gases and a significant improvement in the quality of the environment.

B. Contingent liabilities

1. In accordance with the Israeli Law for the Encouragement of Capital Investments, 1959, Company subsidiaries received grants from the State of Israel in respect of investments in fixed assets made as part of plant expansion plans approved by the Investments Center. Receipt of the grants is conditional upon fulfilment of the terms of the Letter of Approval that include, among others, exports at certain rates. If the companies do not comply with the required terms, they will have to refund the grants amounts, together with interest from the date of their receipt. Managements of the subsidiaries believe that they are in compliance with the conditions of the approval. Also see Note 10.E.

2. In accordance with the Israeli Law for the Encouragement of Research and Development in Industry, 1984, subsidiaries received grants from the State of Israel in respect of the research and development expenses they incurred on projects approved by the Israeli Industrial Research and Development Administration. Receipt of the grants is conditional upon compliance with the terms of the letter of approval which include, among other things, the payment of royalties to the State of Israel at rates of between 2%-3.5% of the sales of the products, up to the amount of the State’s participation.

The balance of the State’s participation in the said companies’ research and development programs (net of royalties paid in respect thereof), after deduction of unsuccessful research projects, amounts to approximately $3 million.


59

Note 20 - Commitments and Contingent Liabilities B. Contingent liabilities (cont’d) 3. A subsidiary has an agreement pursuant to which it will pay royalties at the rate of 4% of sales,

with certain reductions stated in the agreement, with respect to a product whose development rights were acquired by the subsidiary, for a period of 10 years beginning from the year 2000, the date on which sales of the product outside the Group companies reached the level of sales stipulated in the agreement. Under certain the royalties may be reduced but not to a rate of less than 2%.

C. Environmental protection

1. The manufacturing processes of the Company, and the products that it produces and markets, entail environmental risks that impact the environment. The Company invests substantial resources in order to comply with the applicable environmental laws and attempts to prevent or minimize the environmental risks that could occur as a result of its activities. To the best of the Company’s knowledge, at the balance sheet date, none of its applicable permits and licenses with respect to environmental issues has been revoked. The Company has insurance coverage for sudden, unexpected environmental contamination in Israel and abroad. The Company estimates, based on the opinion of its insurance consultants, that the extent of its insurance coverage for said events is reasonable.

At the balance sheet date, the Company has only limited, relatively low insurance coverage for ongoing environmental contamination. Such insurance is difficult to obtain and, when it can be obtained, the cost of the premium and the conditions of the coverage do not justify its purchase, in the Company’s opinion, its pruchase.

2. In April 2006, Agan Chemical Manufacturers, Ltd. reached an agreement with the City of Ashdod for a total period of 24 years, pursuant to which Agan will be permitted to use real estate spanning approximately 5 acres, for purposes of constructing a waste purification facility, in return for Agan’s self-investment in constructing the facility, at an expected estimated total cost of NIS 130 million, the lion’s share of which has already been invested.

3. One of Makhteshim’s plants was constructed in Ramat Hovav, which was selected by the Government of Israel as a center for the chemicals industry based, inter alia, on two cumulative basic assumptions: (1) the assumption that the soil strata in that area were absolutely sealed against seepage of liquid discharges or contamination; and (2) the winds in the region do not blow in the direction of Beer Sheba most of the time. Over the years, Makhteshim has relocated most of its production from its plant in Beer Sheba to its plant in Ramat Hovav, and in 2000, discontinued all production, including chemical reactions in its Beer Sheba plant. A report submitted to the Ministry of Environmental Protection and the Ramat Hovav Local Industrial Council in December 1997, at their request, by researchers from academic institutions included data regarding subterranean contamination in Ramat Hovav reported data related to subterranean pollution of the Ramat Hovav district. The conclusions of research completed in early 2004 were that there has been some improvement in the quality of the upper ground water and there is no need to treat the subterranean contamination, which will remedy itself. In the last two years, the results of the monitoring clearly indicate that there has been an improvement in the quality of the subterranean water in most of the Ramat Hovav area. In a small number of specific centers in which subterranean water pollution was identified, which cannot be attributed to Makhteshim or the other plants in the region, drainage and pumping of the polluted water is being conducted by the Council.


60

Note 20 - Commitments and Contingent Liabilities C. Environmental protection (cont’d) 4. In 2004, the Ministry of Environmental Protection decided to add conditions to the business

licenses of Makhteshim and other factories in the Ramat Hovav area, regarding the treatment of industrial waste. Consequently, and due to the unreasonable nature of the Ministry of Environmental Protection’s requirements, the Israeli Union of Industrialists and factories in Ramat Hovav filed an administrative petition against the Ministry of Environmental Protection–Southern District and the Ramat Hovav Local Council in Be’er Sheba District Court. The petition was referred to a mediation process which was concluded with the signing of an arbitration agreement that was given the force of a court judgment on December 2006. As part of implementation of the ruling, Makhteshim took upon itself to make significant monetary investments in treating waste water and preventing environmental hazards.

5. On April 1, 2007, the Israeli Government decided to impose on the Ministry of Defense and the IDF to build a cluster of training camps at the Negev Junction site ("BHD City"), located 10 kilometers from the Ramat Hovav site. The decision includes instructions to the Ministry of Environmental Protection for the purpose of assuring the air quality in the area, as required in the court ruling on the subject. As of the report date, Makhteshim is unable to assess the effect of the Government's decision and its implementation, if any, on the operations of its plant in Ramat Hovav.

6. On July 22, 2008, the Knesset approved the Israel Clean Air Law, 2008 ("Clean Air Law"), which will take effect on January 1, 2011. However, it should be noted that in all that relates to requests for required emission permits, Makhteshim and Agan must submit these requests as from March 1, 2014. The objective of the Clean Air Law is to regulate the quality of the air in Israel and prevent its pollution, inter alia, by setting up a national monitoring system for measuring air pollution and prescribing air pollution standards. As of the report date, the Company is unable to assess the effect of the Law on its operations. The Makhteshim plant in Ramat Hovav began preparations to comply with the Law's conditions, within the scope of the conditions for a business license imposed on it on March 23, 2008. The Agan plant also began preliminary activities toward implementation of some of the Law's requirements, inter alia, within the scope of the draft of conditions for a business license related to air quality received by Agan in January 2010.

7. On November 4, 2009, an appeal was lodged with the Supreme Court by C.A.A. and Y.A.B.S. Investments Ltd. ("the appellants") against the Ministry of the Environment Protection and the Company, within the scope of which an order nisi was requested against the Ministry of the Environment Protection, ordering it, inter alia, to designate a risk radius for the Company's facilities and to refrain from renewing the poisons permit held by Makhteshim. On January 14, 2010, the Supreme Court accepted the motion with consent filed by Makhteshim to join the appeal, replacing the Company. At this stage, the prospects of the appeal cannot be assessed. Makhteshim has a poisons permit in effect until January 2011.


61

Note 20 - Commitments and Contingent Liabilities (cont’d) C. Environmental protection (cont’d) 8. On November 6, 2009, a ruling was received on the appeal filed by C.A.A. Ltd. ("CAA") with

the Administrative Court in Beer Sheba, in which CAA petitioned to revoke the ruling of the appeals committee which accepted the appeal and dismissed the CAA motion to issue a permit for exceptional usage, which will enable the commercial use of real estate zoned solely for industrial usage. Pursuant to the ruling issued in the appeal, the hearing on the motion to issue a permit for exceptional usage filed by the appellants will be returned to the appeals committee, which will hear it once again, after exhausting the bringing of evidence and addressing the full range of findings in the experts' opinion.

On December 9, 2009, the Beer Sheba local committee received a request to issue a permit for exceptional usage to the aforementioned company, whereby it will be permitted to operate a nursery on real estate zoned solely for industry. In December 2009, the appellants, a representative of the Ministry of the Interior Local Committee and a representative of the Minister of Construction and Housing filed an appeal with the Southern District Appeals Committee under Section 152(A)(2) of the Planning and Construction Law. In the appeal, the appellants asserted that the decision of the local committee should be revoked and it should be ruled that exceptional use of the location should not be permitted. On February 3, 2010, the appeals committee once again heard the aforementioned two appeals dealing with the parties' allegations and ruled that an expert will be appointed by the committee to evaluate the claims of the parties.

9. As a result of a malfunction that occurred in November 2009 in the dioxide supplied by

Makhteshim to various customers of the Company, supply of carbon dioxide to customers was halted. As of the report date, the matter is being addressed by the company that insures the Company, and the Company assesses that the excess insurance does not involve material amounts.

D. Claims against subsidiaries

In the ordinary course of business, legal claims were filed against the Company, including lawsuits for patent infringement. Inter alia, from time to time, the Company is exposed to class actions for large amounts, which it must defend against while incurring considerable costs, even if these claims, for the start, have no basis. A trend has become evident recently, of an increase in the filing of claims against companies such as the Company, with motions for class action recognition, due to various causes of action. In the estimation of the Company's management, based, inter alia, on the opinions of its legal counsel, regarding the prospects of the proceedings, the financial statements include appropriate provisions where necessary to cover the exposure resulting from the claims as provided below:

1. Administrative proceedings and fiscal claims are pending against Milenia (subsidiary in Brazil), all of which deal with demands for payment of various taxes, totaling $75.3 million (including interest and linkage differences at the balance sheet date). On the basis of the opinion of its legal advisors, Milenia estimates that its chances of prevailing in all the proceedings and fiscal claims pending against it are good and therefore, no provision for this claim was recorded in the financial statement.


62

Note 20 - Commitments and Contingent Liabilities (cont’d)

D. Claims against subsidiaries (cont’d) 2. In 2002, a claim was filed against Milenia by a private environmental protection organization,

claiming that Milenia’s plant in Londrina pollutes the environment and causes damage to its vicinity and residents. The plaintiff demands that Milenia prepare an environmental impact study, provide examinations for Milenia’s employees and neighbors, halt production activity at the plant and pay damages to the vicinity's residents. The plaintiffs estimate that the amount claimed from Milenia is $11.5 million. The lower court ordered an environmental impact study to be conducted but the court of appeals decided that Milenia is not obligated to prepare an environmental impact study and/or conduct examinations for Milenia’s employees and neighbors until a final ruling is issued obligating Melina to make these remedies. Milenia’s legal advisors estimate that Milenia has good defense arguments against the claim and therefore, no provision was recorded for this claim.

3. Following testing conducted by the Brazilian health authorities in Milenia relating to the issue of licensing several formulations that Milenia produces and/or markets in Brazil, it was ruled that Milenia must refrain temporarily from the production and sale of these formulations, and that the ban will also apply to the inventory existing at some of Milenia's customers. Milenia's position, as presented to the authorities, is that the formulations it sells are similar to those sold in the Brazilian market by other companies, and that the changes made to the formulations are minor, intended to improve their quality, and if there is any variation, it entails merely an administrative and procedural matter. This position was accepted, for the most part, by the authorities, and recently, most of the inventory of products seized by the authorities in two states in Brazil were released for sale, distribution and production, without the need to make changes and/or modifications. It is also possible that administrative penalties will be imposed on Milenia in immaterial amounts.

4. In 2004, six identical actions were filed against a subsidiary in the United States and six other

agrochemical companies in the State of Illinois, USA, by a local water supplier (hereinafter, “the Plaintiff”). The Plaintiff seeks to represent all the water suppliers in the State of Illinois. The Plaintiff claims that the product Atrazine, which is sold by the defendant companies, pollutes its water source and that water contaminated with Atrazine is a health hazard. The Plaintiff does not indicate the concentration of Atrazine in the water or that the quantity of Atrazine in its water exceeds the amount permitted by the Federal Water Standard but claims that Atrazine is a health hazard even at concentrations below the Federal Water Standard. One of the principal contentions in the claim is that the subsidiary (as well as the other defendants) is aware of the danger of Atrazine to human beings but is concealing this information from the authorities and the public. The subsidiary contends that it received its license for Atrazine pursuant to United States law by means of referring to studies submitted by the original license holder without it having been permitted to review the said studies. In addition, the subsidiary contends that it did not conduct its own independent studies and it is not aware of studies indicating that Atrazine at the concentration permitted by the Federal Water Standard is hazardous to human health. Additional causes of action claimed by the Plaintiff are encroachment, nuisance, negligence and violation of the environmental protection and water pollution laws. Among the remedies the Plaintiff is requesting are: obligating the defendants to prepare and implement a plan for cleaning the Plaintiff’s water, compensation to the Plaintiff for decline in value of its properties as a result of the presence of Atrazine in the water and damage to its reputation. As is customary for claims of this type in the United States, the claim does not state the amount of the damages sought or the compensation requested.


63

Note 20 - Commitments and Contingent Liabilities (cont’d)

D. Claims against subsidiaries (cont’d)

Although the claim was filed in 2004, it is still in the most preliminary stages and the stage of class action certification has not yet begun (although discovery has begun). Accordingly, and based on the opinion of its legal counsel, the subsidiary estimates that the prospects for dismissal are more likely than the prospects it will prevail, and therefore, no provision was recorded in the financial statement.

5. In 2003, a criminal complaint was filed against Makhteshim and one of its directors by Adam, Teva VeDin (Israel Union for Environmental Defense). The complaint accuses Makhteshim that on several occasions during the years 1999 through 2003, emissions of materials at prohibited concentrations were measured in the chimneys of its Ramat Hovav plant, creating severe pollution. Thus, the plaintiff alleges that Makhteshim created strong or unreasonable pollution, which disturbs people close to the site, which the complaint claims creates a crime under the Prevention of Hazards Law, 1961 (this crime is a stringent liability crime that does not require intent).Makhteshim does not admit these charges.

Makhteshim's legal advisors estimate that the prospects for the success of the defense are more likely than receipt of a conviction in most of the indictment's provisions. However, judging by the current levels of penalties imposed in similar cases, it is probable that even in the event of conviction, the penalty will not have a material adverse effect on the Company and hence no provision was included in the financial statements.

6. During 2007, three suits were filed in Beer Sheba District Court against the Ramat Hovav Local Industrial Council and the State of Israel by three groups of plaintiffs, among residents of the Ramat Hovav area. The Plaintiffs claim that they have suffered various illnesses and deformities and that there is a causal relationship between their illnesses and poisonous substances that were emitted by or seeped from the Ramat Hovav Industrial area. The Plaintiffs allege that two primary focal points of contamination have been identified: the water purification plants and the evaporation pools (that are owned and operated by the Ramat Hovav Local Industrial Council) and the factories that are located in the Ramat Hovav Industrial Area, including the Company’s factories, which the Plaintiffs allege significantly exceed the permitted amount of contamination. The Plaintiffs further alleged that the Ramat Hovav Local Industrial Council and the State of Israel were negligent, inter alia, in their supervision, enforcement and initiative to prevent the Plaintiffs’ exposure to contamination originating in the Ramat Hovav Industrial Area. The Plaintiffs estimate the sum of their claims at approximately NIS 242 million. This amount does not include general damages that were not quantified.

In 2008, third party notices were filed against Makhteshim and against thirty-six additional corporations and persons which were sent by the Ramat Hovav Industrial Council and by the State of Israel. In the third party notice on behalf of the State and the Local Industrial Council, each denies the claims against it, contending that if they are obliged to pay any amount to the plaintiffs, the third party notice recipients will have to compensate or indemnify it for the full amounts imposed on it. On March 30, 2009, Makhteshim filed its statement of defense against the notices of the Ramat Hovav Industrial Council and the State. On February 4, 2009, the court ruled that the hearing on the claims would revolve first around the question of whether there is a specific medical causal relationship between the illness claimed by each of the plaintiffs and his exposure to the materials emitted from the Ramat Hovav site. In the estimation of Makhteshim's legal advisors, based on medical opinions on behalf of the plaintiffs and some of the third parties, which are in the stage of final preparation, and assuming that these opinions will be signed without significant changes, the claims are not expected to be accepted, and therefore provisions for them were not included in the financial statements.


64

Note 20 – Commitments and Contingent Liabilities (cont’d

D. Claims against subsidiaries (cont'd) 7. Several claims were filed against Group companies in immaterial amounts, for damages that the

plaintiffs allege that they sustained as a result of usage of their products, the supply of defective products, etc. The cumulative amounts claimed in these lawsuits were estimated by the different plaintiffs at a total of $4 million. The Group companies assess, based on the opinions of their legal counsel, that it is more likely that the claims will be dismissed than that they will prevail or provisions included in the books are sufficient.

8. In October 2007, a monetary suit against Makhteshim, with a motion for a class action

recognition according to the Class Action Law, 2006, was filed in Beer Sheba District Court, by three residents of the village Wadi El-Naim claiming that damage to their health has apparently been caused by the Makhteshim factories in the Ramat Hovav Industrial Area, for various causes related to air pollution. If the claim is recognized as a class action suit, the plaintiffs estimate that the amount claimed from Makhteshim is NIS 1 billion. As of the report date, based on the opinion of the Company’s legal counsel, after examining the claims made by the plaintiffs as are expressed in the suit related to the aforementioned air pollution, the motion filed for recognition as a class action suit and the substance of the suit and considering the preliminary stage of the proceedings, the information and data in Makhteshim's possession and giving due attention to the fact that there are no precedents in this type of class action suit, for giving a judgment on the subject matter regarding damage in the class action suit related to air pollution, as well as the absence of precedents for the level of compensation awarded in this type of class action suit, in the opinion of the Company’s legal counsel, it is very difficult to estimate the chances that the motion for recognition as a class action suit will be granted and it is also very difficult to estimate the risk or chances of the suit, specifically, if it is approved. Notwithstanding the aforesaid, and under the restrictions described above, the legal counsel of Makhteshim believes that it is more likely that the claim will be dismissed than to prevail, and therefore, a provision for this claim was not included in the financial statements.

9. In January 2009, a monetary claim was filed in Beer Sheba District Court against Agan, and a

motion for recognition as a class action suit under the Class Action Law, by a resident of Ashdod, alleging damages that were apparently sustained, due to the suffering that the plaintiff alleges was caused as a result of a fire that occurred in the Agan plant in Ashdod on January 14, 2009. To the extent the claim will be recognized as a class action, the plaintiff estimates that the amount claimed from Agan will be NIS 100 million. On November 11, 2009, Agan and the Plaintiff filed a motion with the Beer Sheba District Court to approve a compromise agreement, pursuant to which Agan has undertaken: (A) without admitting any right and/or assertion against it, and in consideration for final settlement of the claims and the plaintiff and class members, Agan will set up a closed-circuit television system, which will enable watching at any given moment that which is occurring in the production facilities and warehouses in Agan and will facilitate prevention of the occurrence of unexpected events; likewise, Agan will finance/build within the bounds of the city of Ashdod a public garden also suitable for people with handicaps. Agan estimates that the cost of these actions totals NIS 1.2 million; (B) to pay the petitioner the total sum of NIS 20 thousand; (C) to pay the representative of the class' representative the sum of NIS 180 thousand as fees. The motion is still pending before the court for its ruling.


65

Note 20 – Commitments and Contingent Liabilities (cont’d)

D. Claims against subsidiaries (cont'd)

10. On July 1, 2009, a criminal complaint was filed in Beer Sheba Magistrate's Court against Agan, directors, officers and an executive in Agan, by a group of residents of the moshav Nir Galim ("the Complainants"). In the complaint, the Complainants assert that there were several instances during the years 2007-2009, in which the Ashdod plant of Agan produced strong and unreasonable odor nuisances in violation of the provisions of the Abatement of Nuisances Law, 1961. In the complaint, the Complainants are petitioning to convict the defendants and to impose penalties and/or imprisonment, based on the provisions of the relevant laws ("the Complaint"). At the Court's order, the Complaint was transferred to Magistrate's Court in Netanya, and the reading was called scheduled for March 17, 2010. After examination of the Complainants' assertions as expressed in the Complaint, and in view of the preliminary stage of the Complaint, and due to the fact that all of the Complainants’ testimony has not yet been given and that expert opinions have not yet been submitted, in the estimation of the Company’s legal counsel it is very difficult at this stage to assess the prospects of the Complaint. Moreover, the Company's legal counsel, after evaluating the plaintiffs' claims as expressed in the claim, and in view of the regulator's position from the end of 2009 regarding the non-existence of odor nuisances in the Company's operations, assess that it is less likely that the court will be asked to issue a restraining order and a mandatory injunction than that these orders will be issued.

11. On July 14, 2009, a lawsuit was filed in Beer Sheba Magistrate's Court against Agan, directors, officers and an executive in Agan, by a group of residents of the moshav Nir Galim ("the Plaintiffs"), claiming damages that the plaintiffs allege were sustained due to odor nuisances, noise and air pollution originating in the Agan plant. In the statement of complaint, the plaintiffs are petitioning the court to issue a restraining order and a mandatory injunction against Agan, and to require Agan to pay damages totalling NIS 59 million. Following the motion filed by the defendants, the court ruled that the plaintiffs must pay the full amount of the court fee, and if not, the claim will be dismissed, Therefore the plaintiffs filed a motion to delete the financial relief of NIS 59 million and to retain only the remedies of a restraining order and a mandatory injunction. Since a period of time elapsed, in which the fee was not paid in full, and since a motion was not filed to stay the execution of the court's ruling, the law is for the claim to be dismissed. On February 25, 2010, the plaintiffs filed a motion for leave to appeal with the Supreme Court of the court's January 14, 2010 ruling, in which the court was asked to rule that the court fee paid by the plaintiffs, when the claim was filed, was paid lawfully, and alternatively, to order the lower court not to dismiss the claim due to the existence of additional remedies, for which the court fee was paid lawfully. In the estimation of the Company's legal counsel, it is more likely that the motion for leave to appeal filed by the plaintiffs to be dismissed than that it will be accepted. Therefore, it is more likely that the financial element will be dismissed than that it will be accepted. Moreover, the Company's legal counsel, after evaluating the plaintiffs' claims as expressed in the claim, and in view of the regulator's position from the end of 2009 regarding the non-existence of odor nuisances in the Company's operations, assess that it is less likely that the court will be asked to issue a restraining order and a mandatory injunction than that these orders will be issued.

12. In October 2009, Agan was furnished with a demand by the Ashdod Municipality to pay

various development assessments totalling NIS 8.8 million. At the date of the financial statements, Agan had not yet received the details and reasons which it had requested relating to the legal and factual infrastructures on which the payment demand is based. In the estimation of Agan, based on the opinion of its legal counsel, the chances that these payment demands will be dismissed are reasonable.


66

Note 20 – Commitments and Contingent Liabilities (cont’d D. Claims against subsidiaries (cont'd) 13. In July 2009, Makhteshim was furnished with a demand by the Beer Sheba Municipality to pay

sewer and development assessments totalling NIS 20.6 million. At the date of the financial statements, Makhteshim had not yet received the details and reasons which it had requested relating to the legal and factual infrastructures on which the payment demand is based. In the estimation of Makhteshim, based on the opinion of its legal counsel, the chances that these payment demands will be dismissed are reasonable.

E. Guarantees

1. A subsidiary has committed to indemnify financial institutions, upon the fulfillment of certain conditions, in respect of credit received by the subsidiary's customers from those financial institutions, which were used for repayment of the debts of such customers.

The amount of the indemnification commitment at the balance sheet date, was approximately $49.9 million (December 31, 2008, approximately $42.3 million).

2. Subsidiaries have undertaken to indemnify the bank in the framework of the transaction for sale of trade receivables in certain cases that are defined in the agreements, if debts sold are not paid.

Note 21 – Liens and Collateral

A. Liabilities to banks secured by liens: The Company and its Israeli subsidiaries have made commitments to banks not to register liens

on their assets in favor of other parties, except specific liens for acquisition of an asset for the benefit of the party financing the acquisition of certain terms (as at the balance sheet date, an insignificant amount), except for creation of liens related to receipt of investment grants, as stated in Par. B below., and except for a lien on trade receivables within the scope of the securitization transaction, as discussed in Note 5.

B. To secure fulfilment of the conditions of investment grants received (see Note 18A), the

Company and its subsidiaries have registered floating liens in unlimited amounts on all of their assets.

C. The Company has committed to banks to maintain financial covenants, the main ones of which

are as follows:

(1) The ratio of the interest-bearing financial liabilities to shareholders’ equity of the Company shall not exceed the ratio prescribed in some of the financing documents, ranging between 1.25 (the most stringent ratio) and 1.5 (at December 31, 2009 the ratio was actually 0.7).

(2) The ratio of the interest-bearing financial liabilities to income before financing expenses, taxes, depreciation and amortization (EBITDA) shall not exceed the ratio prescribed in some of the financing documents, ranging between 3 (the most stringent ratio) and 4 (at December 31, 2009, the ratio was actually 3.9 - see letters of consent below).


67

Note 21 – Liens and Collateral (cont'd) C. (cont'd)

(3) The shareholders’ equity will not be less than the amount prescribed in some of the financing documents, ranging between $1.2 billion (the most stringent amount) and $850 million (at December 31, 2009, the amount was $1.28 billion).

(4) It was also agreed that there will be no transfer of control (as defined in the relevant agreements), in the Company and in the subsidiaries Makhteshim and Agan without obtaining the Bank's prior written consent.

Furthermore, it should be noted that there are limitations on the subsidiaries in receiving credit, which, to the best of the Company's knowledge, are not material and at the report date, they are in compliance with these limitations. During the report period, the Company received letters of consent from its financing banks, whereby the Company's financial statements for the period ended December 31, 2009 and the period ended March 31, 2010, the ratio between the financial liabilities to EBITDA as in subpar (2) above will not exceed 4.5 (with respect to one of the financing banks) or 5 (with respect to the other financing banks).

D. The securitization agreement of trade receivables of the Company and its subsidiaries

(including their amendments) include the Company's commitment to maintain financial ratios (financial covenants), of which the key covenants are as follows:

(1) The ratio between the interest-bearing financial liabilities and shareholders' equity of

the Company will not exceed 1.25 (at December 31, 2009, this ratio was actually 0.7).

(2) The ratio between the interest-bearing financial liabilities and EBITDA of the Company will not exceed 3.3 (see letters of consent below).

(3) The Company's shareholders' equity will not fall below $1 billion (at December 31, 2009, shareholders' equity totaled $1.28 billion).

In January 2010, an amendment was signed to the securitization agreement, whereby, according to the Company's financial statements for the periods prescribed in the amendment, the ratio between the financial liabilities to EBITDA as in subpar. (2) above at December 31, 2009 will not exceed 4.2; at March 31, 2010, will not exceed 4.3 and at June 30, 2010, will not exceed 3.7). It should be noted that at December 31, 2009, this ratio was actually 3.9. According to the amendment the Company will make available the balance of cash and/or unutilized credit facility to $250 million until July 30, 2010.

Furthermore, the Company has undertaken, within the framework of letters of consent with the financing parties, as described above, to comply with additional standard conditions, which in the estimation of the Company at the report date, do not impose significant limitations on the Company's operations.


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Note 22 - Equity

A. Share capital and premium on shares

Ordinary shares 2009 2008

In thousands of shares, NIS 1 par value Share capital issued and paid-up at January 1 474,626 473,716 Exercise of options for shares during the period 87 910 Share capital issued and paid-up at December 31 474,713 474,626 Authorized share capital 750,000 750,000 The holders of ordinary shares have the right to receive dividends as declared from time to time, and voting rights at general meetings of the Company, at one vote per share. Regarding the allotment of shares to employees, see Note 22D regarding share-based payments. B. Translation reserve of foreign activities The capital reserve includes all exchange rate differences deriving from the translation of the financial statements of foreign activities. C. Hedge fund The hedge fund includes the effective part of the net cumulative change in fair value of cash flow hedging instruments that relate to transactions that were hedged but did not yet occur. D. Share-based payments 1. On April 23, 2001 (hereinafter, “the record date”), the Company’s Board of Directors resolved

to grant options to employees of the Company and to employees of its subsidiaries (hereinafter, “Plan 2001”). In accordance with this plan, the above mentioned employees were allotted 17,400,000 option warrants which are exercisable for up to 17,400,000 ordinary shares of a par value of NIS 1 each, of the Company. The market value of a share at April 22, 2001 was NIS 8.12. All options warrants were issued to a trustee pursuant to the Plan. The options were issued in accordance with Section 102 of the Israeli Income Tax Ordinance and the shares to be issued upon their exercise will be held by the trustee for a period of at least two years from the date of issuance of the options. Eligibility to receive the option warrants, subject to the terms of the plan, is in three increments, as follows: One-third on the record date, an additional third one year after the record date and the balance two years after the record date. The options of each increment can be exercised one year after the date of entitlement, and they expire after five years from the date of the beginning of the exercise period of each increment.


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Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 1. (cont'd)

Pursuant to the options plan, at the time of exercise of the options, the Company will issue shares in a number that reflects the amount of the monetary benefit embodied in the option, that is, the difference between the price of an ordinary Company share on the exercise date and the exercise price of the option.

Under Plan 2001, the previous CEO of the Company was allotted 1,400,000 option warrants exercisable for 1,400,000 ordinary shares of a par value of NIS 1 each of the Company, which constitutes 8% of the total amount of options to be granted under the plan.

In 2007, 1,233,666 options were exercised by Company employees for 938,675 of the Company’s ordinary shares of NIS 1 par value each. In 2008, 55,153 options were exercised by Company employees for 47,288 of the Company’s ordinary shares of NIS 1 par value each.

In 2009, the rest of the options were exercised by Company employees. 33,334 options were exercised for 24,250 of the Company’s ordinary shares of NIS 1 par value each.

2. On April 14, 2003 (hereinafter, “the record date”), the Company’s Board of Directors decided

to adopt an employee compensation plan for the employees of the Company and its subsidiaries and directors of the Company and its subsidiaries (hereinafter, “Plan 2003”), pursuant to which 17,000,000 options would be issued to the employees, which are exercisable for up to 17,000,000 of the Company’s ordinary shares of NIS 1 par value each, at an exercise price of NIS 4.44 as at the balance sheet date, after adjustments made due to a dividend distribution (the closing share price of the Company’s shares on the stock exchange on the record date was NIS 9.13 per share).

All of the options were issued under Section 102 of the Income Tax Ordinance. The options issued and the shares to be issued upon their exercise will be held by a trustee for a period of at least two years from the end of the year in which the options are issued. In accordance with Plan 2003, at the time of exercise of the options, the Company will issue shares in an amount that reflects the amount of the monetary benefit embodied in the options, that is, the difference between the price of an ordinary share of the Company on the exercise date and the exercise price of the option.

The right to exercise the options is in three increment, as follows: one-third at the end of one year from the record date, an additional one-third at the end of two years from the record date and the balance at the end of three years from the record date. The expiration date of the options is five years from the beginning of the exercise period of each increment. Furthermore, in the framework of Plan 2003, the previous CEO was issued 1,600,000 options which are exercisable for up to 1,600,000 of the Company’s ordinary shares of NIS 1 par value each.

In addition, in the framework of Plan 2003, the Company’s directors were issued a total of 1,800,000 options.

On March 8, 2004, the Company’s Board of Directors resolved to make an additional issuance under Plan 2003 of 1,420,000 options to the directors (who were not serving at the time of prior issuance to the directors) and to Company employee. The options were allotted during 2004.

In 2007, Company employees exercised 1,698,336 options for 1,300,239 of the Company’s ordinary shares of NIS 1 par value.


70

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 2. (cont’d)

In 2008, Company employees exercised 36,667 options for 29,740 of the Company’s ordinary shares of NIS 1 par value. In 2009, Company employees exercised 86,333 options for 62,976 of the Company’s ordinary shares of NIS 1 par value.

3. On March 13, 2005, the Company’s Board of Directors resolved to adopt a new stock option

plan for officers and employees of the Company and its subsidiaries (hereinafter, “Plan 2005”). Pursuant to Plan 2005, on March 14, 2005, 14,900,000 options exercisable for up to 14,900,000 of the Company’s ordinary shares of NIS 1 par value each were allotted, of which 800,000 options were issued to the Company’s previous CEO, 11,600,000 were issued to employees of the Company and subsidiaries in Israel and overseas and the balance of 2,500,000 were issued to a trustee for purposes of future allotments. The exercise price of the options is as follows: Regarding the options issued to the Company’s previous CEO and seven additional employees (hereinafter, “Group A”), the exercise price will be equal to the opening price of the Company’s shares on April 15, 2006, and if there is no trading on that date, on the first subsequent trading day. Regarding the options issued to the other offerees (hereinafter, “Group B”), the exercise price will be equal to NIS 25.10 (subject to adjustments for dividend distributions), which is equal to the opening price of the Company’s share on the stock exchange at the time of the resolution by the Company’s Board of Directors (March 13, 2005). The cost of the benefit embedded in the options when issued, based on the fair value as at their allotment date, amounted to $21,981 thousand. This amount is amortized to the statement of income over the vesting period of each increment. On August 8, 2005, the Company’s Board of Directors resolved to revise the exercise price of the options issued to Group A so that the exercise price of these options will be equal to the exercise price determined for options issued to Group B. As at the balance sheet date, the exercise price after adjustments, as stated above, is NIS 21.94. The cost of the benefit embedded in the revised exercise price, based on fair value at the time of the revision, totaled $566 thousand. This amount is amortized to the statement of income over the vesting period. The options under the Plan will be allotted to the offerees pursuant to the provisions of Section 102 of the Income Tax Ordinance under the capital track. Regarding offerees who will be allotted options in the future, as stated above, (hereinafter, “Group C”), the exercise price will be equal to the closing price of the Company’s shares on the eve of the decision to allot options to them. Eligibility to exercise the options subject to the terms of Plan 2005 is in three increments, as follows: one-third at the end of two years from the record date, an additional third at the end of three years from the record date and the balance at the end of four years from the record date. The expiration date of each increment is 5 years from the beginning of its exercise period.


71


The record date for Group A was fixed as April 14, 2006 (which is the end of the third and final vesting period of the employee options plan from 2003) and for Group B and Group C, the record date is March 13, 2005 (the approval date of the plan).

On March 8, 2006, the Company’s Board of Directors decided to allot the balance of 2,500,000 of the aforementioned options to the employees. As at the balance date, the exercise price, after adjustments is NIS 20.99. The cost of the benefit inherent in the options, based on the fair value of the capital instruments granted is $3,748 thousand as at the grant date. This amount is amortized to the statement of income over the vesting period of each increment. In 2007, Company employees exercised 1,609,968 options for 492,341 of the Company’s ordinary shares of NIS 1 par value. In 2008, Company employees exercised 2,524,434 options for 832,304 ordinary shares, NIS 1 par value of the Company.

4. On November 26, 2006, the Company’s Board of Directors resolved to allot 2,700,000 options to Mr. Avraham Bigger. The exercise premium of the options is NIS 21.61 (based on the closing price of the Company’s shares on the stock exchange on the eve of the Board of Directors’ resolution on the issue). As at the balance sheet date, the exercise price after adjustments is NIS 19.61.

The cost of the benefit inherent in the options when issued, based on the fair value as at their allotment date, amounted to $3,957 thousand. This amount is amortized to the statement of income over the vesting period of each increment.

The options will vest in three equal increments, where one-third may be exercised one year after the record date, the second third of the quantity may be exercised two years after the record date, and the final third three years after the record date. The options from each increment referred to above are exercisable commencing from the vesting date of such increment and during a period of two years from such date. The other conditions of the options will be in accordance with the conditions of the options granted to the directors approved by the Company in 2003. On September 22, 2009, after receiving approval of the Company’s audit committee and board of directors, a general meeting of shareholders approved an amendment to the terms of the options that had been allotted to the Company’s former President and Chairman of the board (Avraham Bigger), whereby the expiration date of some of the instalments of options will be extended, as follows: The first instalment of options, which has vested, will be exercisable, commencing on the vesting date of that instalment and for a four-year period from such date. The options that are part of the second instalment, which has vested, will be exercisable to commencing on the vesting date of that instalment and for three years from such date. The options that are part of the third instalment that has vested will be exercisable commencing on the vesting date of that instalment and for a period of two years from such date. The cost of the embedded benefit resulting from the amendment for the options terms is $1,127 thousand. This amount was recorded as an expense in the third quarter of 2009.


72

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 5. On December 4, 2006, the Company’s Board of Directors resolved to allot 51,500 options to an

external director. The exercise premium of the options is NIS 22.58 (based on the closing price of the Company’s shares on the stock exchange on the eve of the Board of Directors’ allotment resolution). As at the balance sheet date, the exercise price after adjustments is NIS 20.58. The cost of the benefit inherent in the options allotted, based on the fair value as at their allotment date amounted to $93 thousand. This amount is amortized to the statement of income over the vesting period of each increment.

The record date for allotment of the said options is July 25, 2006. The options will vest in three equal increments, where one-third exercisable one year after the record date, the second third is exercisable two years after the record date, and the final third three years after the record date. The options from each increment referred to above are exercisable commencing from the vesting date of such increment and during a period of five years from such date.

The other conditions of the options will be in accordance with the conditions of the options granted to the directors approved by the Company in 2003.

6. On December 27, 2006, the Company’s Board of Directors resolved to allot 800,000 options to a

Company officer who is not an interested party in the Company and will not become an interested party as a result of the allotment.

The exercise premium of the options is NIS 22.49, which is the average price of a Company share in the 30 trading days preceeding the date the Company’s Board of Directors approved allotment of the said options. The record date for allotment of the said options is September 10, 2006. As at the balance sheet date, the exercise price after adjustments is NIS 20.49.

The cost of the benefit inherent in the options issued, based on the fair value as of their allotment date amounted to $1,363 thousand. This amount is amortized to the statement of income over the vesting period of each increment.

The options will vest in three equal increments, where one-third of the quantity may be exercised one year after the record date the second third may be exercised two years after the record date, and the final third, three years after the record date. The options from each increment referred to above are exercisable commencing from the vesting date of such increment and during a period of two years from such date.

In 2007, 266,667 options were exercises for 99,842 shares of the Company’s ordinary shares of NIS 1 par value.

The other conditions of the options will be in accordance with the conditions of the options granted to the directors approved by the Company in 2005. On august 11, 2009, the Company’s board of directors approved an update of the terms of the options, whereby the exercise period of the options would be extended for an additional two years. The cost of the benefit embedded in amendment of the options terms is $280 thousand. This amount was recorded as an expense in the third quarter of 2009.


73

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 7. On August 28, 2007, the Company’s Board of Directors resolved to allot 3,130,000 options to

officers and employees of the Company and its subsidiaries. The exercise premium of the options is NIS 30.07 linked to the CPI on the record date. The record dated for the said options is August 28, 2007. As at the balance sheet date, the exercise price after adjustments and CPI linkage is NIS 30.76.

The cost of the benefit inherent in the options allotted, based on the fair value as of their allotment date, amounted to $5,690 thousand. This amount is amortized to the statement of income over the vesting period of each increment.

The options will vest in two increments, where the first increment equaling two-thirds of the quantity may be exercised two years after the record date and the second increment equalling one-third, three years after the record date. The options from each increment referred to above are exercisable commencing from the vesting date of such increment and during a period of six months from such date. The exercise period was extended to 18 months on January 8, 2008.

The options under this plan were issued to the offerees pursuant to the provisions of Section 102 of the Income Tax Ordinance under the capital track.

On January 8, 2008, the Company's board of directors approved changes in the terms of the options that had been allotted to three officers and 7 employees of the Company, pursuant to the option plans that were allotted in August 2007, whereby the options that will vest, pursuant to the plan's terms, will be exercisable commencing from the vesting date and for a period of eighteen months commencing on that date, and not for a period of only six months, as provided in the plan.

The cost of the additional benefit inherent in the options allotted, based on the fair value on the date of the change, amounted to $934 thousand. This amount is recognized as an expense in the statement of income over the vesting period of each increment. On august 11, 2009, the Company’s board of directors approved an update of the terms of options, whereby the exercise period of some of the options will be extended for two additional years. The cost of the benefit embedded in amendment of the option terms is $1,038 thousand. This amount is amortized in the statement of operations over the balance of the vesting period of each instalment.

8. On January 9, 2008, the Company’s Board of Directors resolved to allot 900,000 options to the Chairman and previous CEO of the Company (Mr. Avraham Bigger). The exercise premium of the options is NIS 34.43 per option. The options can be exercised for up to 900,000 ordinary shares of the Company, NIS 1 par value each. As at the balance sheet date, the exercise price, after adjustments, is NIS 32.43. According to the options plan, when the options are exercised, the Company will issue shares that reflect the amount of the financial benefit inherent in the options, i.e. the difference between the price of one of the Company’s ordinary shares on the issue date and the exercise price of the option. The options that were allotted to the Chairman and previous CEO of the Company will vest in three equal increments, where one-third of the options may be exercised one year after the record date, the second third of the options may be exercised two years after the record date, and the final third, three years after the record date. The options from each of these increments are exercisable commencing from the vesting date of each installment and during a period of two years from such date.


74

Note 22 - Equity (cont'd) D. Share-based payments (cont'd)

8. (cont'd)

The cost of the benefit embedded in the allotted options, based on the fair value on their grant date totaled $2,711 thousand. This amount is recognized as an expense in the statement of income over the vesting period of each increment. Furthermore, it was resolved to allot 51,500 options to an outside director of the Company. The exercise premium of the options is NIS 36.27 per option. The options are exercisable for up to 51,500 ordinary shares of the Company, NIS 1 par value each. As at the balance sheet date, the exercise price, after adjustments, is NIS 34.27.

The options that were allotted to the outside director will vest in two increments, where two-thirds of the options may be exercised one year after the record date, and one-third of the options may be exercised two years after the record date. The options from each installment are exercisable commencing from the vesting date of such installment, and during a period of two years from such date.

The cost of the benefit inherent in the allotted options, based on the fair value on their grant date, totaled $128 thousand. This amount is recognized as an expense in the statement of income over the vesting period of each instalment.

On February 17, 2008, the General Meeting approved the aforementioned grants. On September 22, 2009, after receiving approval of the Company’s audit committee and board of directors, a general meeting of shareholders approved an amendment to the terms of the options that had been allotted to the Company’s former President and Chairman of the board (Avraham Bigger), whereby the expiration date of some of the instalments of options will be extended as follows: The first instalment of options, which has vested, will be exercisable commencing on the vesting date of that instalment and for a three-year period from such date. The options that are part of the second and third instalments will be exercisable commencing on the vesting date of that instalment and for a two-year period since such date. The cost of the embedded benefit resulting from the amendment of the options terms is $80 thousand. This amount was recorded as an expense in the third quarter of 2009.

9. On May 13, 2008, the Company's Board of Directors resolved to allot 800,000 options to an officer of the Company. The exercise premium is NIS 31.104 per option. The options may be exercised for up to 800,000 ordinary shares, NIS 1 par value each of the Company. The exercise premium is linked to the CPI on the record date. The record date for the allotment is January 1, 2008. As at the balance sheet date, the exercise price after adjustments and CPI linkage, as stated above, is NIS 32.67. The cost of the benefit inherent in the allotted options, based on the fair value on the grant date, totaled $1,648 thousand. This amount is recognized as an expense in the statement of income over the vesting period of each instalment. The options will vest in two increments, as follows: The first increment will contain 2/3 of the number of options allotted to the offeree, and will be exercisable two years after the record date. The second increment, which will include one-third of the number of options, will be exercisable three years after from the record date. The options included in the above increments will be exercisable from the vesting date of each instalment, for a period of eighteen months from that date.


75


On August 11, 2009, the Company’s board of directors approved an update of the terms of options, whereby the exercise period of some of the options will be extended for two additional years. The cost of the benefit embedded in amendment of the option terms is $307 thousand. This amount is recognized as an expense in the statement of operations over the balance of the vesting period of each instalment.

10. On August 11, 2009, the Company’s board of directors resolved to allot 3,600,000 options to the Company’s new President, as provided below: 1. With respect to the 900,000 options, the exercise price will be NIS 33.04 per option (“first

allotment”). As at the balance sheet date, the exercise price after adjustments is NIS 32.43.

2. With respect to the 2,700,000 options, the exercise price will be NIS 20.22 per option (“second allotment”). As at the balance sheet date, the exercise price after adjustments is NIS 19.61.

The record date for the purpose of the above allotments is September 15, 2009.

The options that were allotted to the Company’s new President will vest in three equal installments, with one-third of the options being exercisable one year after the date of record, the second third of the options being exercisable two years after the date of record, and the last third three years after the date of record. The options belonging to each of the above installments will be exercisable commencing on the vesting date, as noted, of that installment, and for a two-year period from such date.

The cost of the benefit embedded in the options allotted, as noted, based on the fair value on their grant date, totaled $4,786 thousand. This amount is recognized as an expense in the statement of operations over the balance of the vesting period of each installment.

11. Regarding the options that were allotted to other directors and officers in the Company pursuant to various option plans, it was provided that if certain events occur, such as upon liquidation, the sale of the Company or merger of the Company, the option terms will change, so that they will be exercisable immediately and over a short-period following the occurrence of the event.


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Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 12. Presented below are the changes in the options during the years 2007

First First Second Second allotment allotment allotment allotment in 2006 in 2006 in 2006 in 2006 from from from from Plan 2001 Plan 2003 Plan 2005 Plan 2005 Plan 2003 Plan 2003 Plan 2005 Plan 2007 Total

Balance as at January 1, 2007 1,352,153 2,049,344 12,040,000 2,500,000 2,700,000 51,500 800,000 - 21,492,997 Granted during the year - - - - - - - 3,130,000 3,130,000 Forfeited during the year (30,000) (36,667) (2,638,334) (250,000) - - - - (2,955,001) Exercised during the year (1,233,666) (1,698,336) (1,306,632) (303,336) - - (266,667) - (4,808,637) Total options in circulation as at December 31, 2007 (*) 88,487 314,341 8,095,034 1,946,664 2,700,000 51,500 533,333 3,130,000 16,859,359

The weighted average of the remaining contractual life of the options in circulation on December 31, 2007 is 4.6 years. (*) The exercise price of the options in circulation in Plan 2001 as at December 31, 2007 is $1.596. The exercise price of the options in circulation in Plan 2003 as at December 31, 2007 is

NIS 6.44 and the exercise price of the remaining options in circulation as at December 31, 2007 ranges between NIS 21.61 and NIS 30.28.


77

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 12. Presented below are the changes in the options during 2008

First First Second Second allotment allotment allotment allotment in 2006 in 2006 in 2006 in 2006 Plan 2008B from from from from from Plan 2001 Plan 2003 Plan 2005 Plan 2005 Plan 2003 Plan 2003 Plan 2005 Plan 2007 Plan 2008A Plan 2003 Plan 2008C Total

Balance as at January 1, 2008 88,487 314,341 8,095,034 1,946,664 2,700,000 51,500 533,333 3,130,000 - - - 16,859,359 Granted during the year - - - - - - - - 900,000 51,500 800,000 1,751,500 Forfeited during the year - - (346,665) (21,668) - - - - - - - (368,333) Exercised during the year (55,153) (36,667) (1,667,776) (856,658) - - - - - - - (2,616,254) Total options in circulation as at December 31, 2008(*) 33,334 277,674 6,080,593 1,068,338 2,700,000 51,500 533,333 3,130,000 900,000 51,500 800,000 15,626,272

The weighted average of the remaining contractual life of the options in circulation on December 31, 2008 is 3.5 years. (*) The exercise price of the options in circulation in Plan 2001 as at December 31, 2008 is $1.214. The exercise price of the options in circulation in Plan 2003 as at December 31, 2008 is NIS 5.04 and the exercise price of the remaining options in circulation as at December 31, 2008 ranges between NIS 20.22 and NIS 34.88.


78

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 12. Presented below are the changes in the options during 2009

First First Second Second First Second allotment allotment allotment allotment allotment allotment in 2006 in 2006 in 2006 in 2006 Plan 2008B in 2009 in 2009 from from from from Plan from from from Plan 2001 Plan 2003 Plan 2005 Plan 2005 Plan 2003 Plan 2003 Plan 2005 Plan 2007 2008A Plan 2003 Plan 2008C Plan 2008A Plan 2008A Total

Balance as at January 1, 2009 33,334 277,674 6,080,593 1,068,338 2,700,000 51,500 533,333 3,130,000 900,000 51,500 800,000 - - 15,626,272 Granted during the year - - - - - - - - - - - 900,000 2,700,000 3,600,000 Forfeited during the year - (35,000) (233,336) (40,001) - - - - - - - - - (308,337) Exercised during the year (33,334) (86,333) - - - - - - - - - - - (119,667) Total options in circulation as at December 31, 2009(*) - 156,341 5,847,257 1,028,337 2,700,000 51,500 533,333 3,130,000 900,000 51,500 800,000 900,000 2700,000 18,798,268

The weighted average of the remaining life of the options in circulation on December 31, 2009 is 3.4 years. (*) The exercise price of the options in circulation in Plan 2003 as at December 31, 2009 is NIS 4.44 and the exercise price of the remaining options in circulation as at December 31, 2009 ranges between NIS 19.61 and

NIS 34.27.


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Note 22 - Equity (cont'd) D. Share-based payments (cont'd) 13. The fair value of the options granted, as above, is estimated using the binomial model for pricing options.

The model assumptions include the share price on the measurement date, the exercise price of the instrument, the life expectancy of the instruments (based on past experience and the overall behavior of the option holders), dividends expected and risk-free interest rate (based on government bonds). The service terms and execution terms that are not market terms are not taken into account when determining fair value.

The parameters which served in the application of the model are as follows: First First Update of Second Second Update of First Second allotment allotment first allotment allotment second First Second Plan allotment allotment in 2006 in 2006 allotment in in 2006 in 2006 allotment in Update update Update 2008B Update in 2009 in 2009 from from 2006 from from from 2006 from for for Plan for Plan from Plan for Plan from from Plan 2005 Plan 2005 Plan 2003 Plan 2003 Plan 2003 Plan 2005 Plan 2005 Plan 2007 Plan 2007 Plan 2007 2008A 2008A Plan 2003 2008C 2008C Plan 2008 Plan 2008

Share price (in NIS) 25.5 23.52 21.61 17.90 22.0 24.18 17.90 31.90 36.27 17.9 36.27 17.90 36.27 32.30 17.90 17.34 17.34 Original exercise price (in NIS) 25.1 23.52 21.61 20.22 22.58 22.49 21.10 *30.07 *30.28 *30.83 34.43 33.04 36.27 *31.104 *32.71 33.04 20.22 Expected fluctuations 27.75% 25.83% 25.17% 42.43% 27.24% 25.29% 42.43% 25.38% 25.66% 42.43% 25.66% 42.43% 25.66% 28.3% 42.43% 42.63% 42.63% Average contractual life of the options (in years) 8 7 4 2.2 6.6 3.7 3.6 3 3.8 3.9 4.0 2.3 3.3 3.8 4.2 4 4 Risk-free interest rate 6.08% 6.13% 5.62% 2.08% 5.59% 5.4% 2.9% 3.28% 3.03% 0% 5.35% 2.5% 5.35% 1.9% 0.23% 3.5% 3.5% Economic value on grant date (NIS thousands) 97,452 17,661 17,040 4,203 391 5,718 1,085 23,470 3,550 4,016 10,300 300 487 6,337 1,189 2,799 15,201 Economic value on grant date ($ thousands) 22,547 3,748 3,957 1,127 93 1,363 280 5,690 934 1,038 2,711 80 128 1,648 307 744 4,042 * Linked to the increase in the CPI.

According to GAAP, the cost of the benefit from the options is calculated only once, at their economic value on the grant date, and is amortized over the period until the vesting date, and does not change and is not affected by changes in the share price or ability to actually exercise.

The anticipated fluctuations were determined based on the historical fluctuations in prices of the Company’s shares.

The lifespan of the options was determined based on management’s estimate with respect to the holding period by the employees of the options taking into account their positions with the Company and the Company’s past experience regarding the employee turnover rate.

The risk-free interest rate was determined based on the yield to redemption on government debentures, where the balance of their period is equal over the anticipated lifespan of the options.


80

Note 22 - Equity (cont'd) D. Share-based payments (cont'd) Salary expenses for share-based payments and other information


Share options granted in 2005 1,351 2,790 5,430 Share options granted in 2006 2,020 1,937 4,382 Share options granted in 2007 3,091 3,020 845 Share options granted in 2008 1,820 2,496 - Share options granted in 2009 853 - - Total expenses recognized as salary expenses for share-based payments 9,135 10,243 10,657 Regarding the options granted to related parties, see also Note 29 regarding related and interested parties. E. Buy-Back of Shares In March 2008, the Company’s Board of Directors resolved to buy-back the Company’s shares in an amount not in excess of $100 million. During 2008 the Company completed the buy-back. F. Options to employees in investees The subsidiary Lycored - Natural Products Ltd. ("Lycored") has options that were issued to employees, the exercise of which will dilute the Company's holding percentage in Lycored from 99% to 92.9%, based on the value of the employee options as at the balance sheet date. G. Dividend distribution policy On March 12, 2007, the Company's Board of Directors resolved to cancel the policy of distributing dividends at a fixed rate of the income. From time to time, the Board of Directors will examine the possibility of making dividend distributions and their amount in accordance with the investment policy and the Company's needs as they will be from time to time, in addition to the existence of sufficient distributable earnings. In March 2008, the Company’s Board of Directors resolved to distribute a dividend of $120 million. The amount of the dividend, after deducting the dividend for shares held by a subsidiary, is $119 million. On April 10, 2008 the Company distributed the aforementioned dividend.


81

Note 22 - Equity (cont'd) G. Dividend distribution policy (cont'd) In November 2008, the Company’s Board of Directors resolved to distribute a dividend of $50 million. The amount of the dividend, after deducting the dividend for shares held by a subsidiary, is $49.5 million. On December 10, 2008 the Company distributed the aforementioned dividend. In August 2009, the Company’s Board of Directors resolved to distribute a dividend of $70 million. The amount of the dividend, after deducting the dividend for shares held by a subsidiary is $69.3 million. On October 14, 2009, the Company distributed the aforementioned dividend. Dividends The following dividends were declared and paid by the Group:


$0.267 per ordinary share - 119,051 - $0.115 per ordinary share - 49,558 - $0.161 per ordinary share 69,289 - -

Note 23 - Revenues For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Foreign sales - As part of industrial operations 1,794,241 2,129,947 1,726,843 As part of commercial operations 336,607 293,441 237,030 2,130,848 2,423,388 1,963,873 Domestic sales - As part of industrial operations 57,781 66,783 62,339 As part of commercial operations 25,987 45,333 39,313 83,768 112,116 101,652 2,214,616 2,535,504 2,065,525


82

Note 24 - Cost of Sales For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Materials and commercial inventory 1,219,869 *1,642,901 1,116,932 Salaries and related expenses 103,532 107,501 94,809 Outsourcing 63,963 *67,188 44,243 Other production expenses 131,020 134,088 116,616 Depreciation 38,344 34,338 33,645 1,556,728 1,986,016 1,406,245 Change in finished products and goods in process inventory 76,024 (298,257) (29,596) 1,632,752 1,687,759 1,376,649 * Reclassified

Note 25 - Sales and Marketing Expenses For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Salaries and related expenses 105,937 104,652 86,105 Commissions and delivery costs 76,198 98,514 86,618 Advertising 24,319 24,748 21,581 Depreciation and amortization 57,433 53,460 58,195 Licensing 26,583 26,639 25,252 Professional services 8,452 * 9,633 8,568 Insurance 9,412 * 10,179 8,988 Royalties 3,821 3,042 2,560 Other 46,245 * 44,333 34,993 358,400 375,200 332,860

* Reclassified

Note 26 - General and Administrative Expenses For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Salaries and related expenses 33,413 38,443 41,911 Directors’ fees to Koor and the IDB Group 324 325 128 Depreciation and amortization 4,065 3,163 4,119 Bad and doubtful debts 6,388 9,227 3,666 Professional services 14,062 12,260 11,828 Insurance 3,446 2,384 2,024 Other 17,704 18,170 17,732 79,402 83,972 81,408


83

Note 27 - Research and Development Expenses For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

Salaries and related expenses 9,967 13,255 12,641 Field trials 4,406 2,784 2,257 Professional services 3,441 2,325 1,434 Materials 343 497 279 Other expenses 3,659 3,513 3,659 21,816 22,374 20,270

Note 28 - Net Financing Expenses (Income) For the year ended December 31 2009 2008 2007 $ thousands $ thousands $ thousands

A. Recognized in statement of income

Interest income on trade receivables 3,878 3,740 8,686 Gain from buy-back of Company's debentures - 5,692 - Interest income on short-term investments and from others 2,808 4,718 6,739 Net change in fair value of derivative financial assets - 68,205 9,446 Interest income from lawsuit - - 10,678 Exchange rate differences, net and others 25,818 - - Expected yield on assets of defined benefit plan 1,451 1,683 1,145 Interest income recognized in statement of income 33,955 84,038 36,694

Losses on sale of trade receivables in securitization 5,898 13,642 15,135 transaction Interest expenses on debentures 48,813 37,017 32,760 Linkage expenses on debentures 30,606 25,783 14,253 Interest expenses on short and long-term loans 30,214 20,292 15,737 Exchange rate differences, net and other expenses - 79,764 36,597 Dividend to maturity 1,702 1,317 - Interest expenses on post-employment employee benefits 3,652 3,921 2,768 Net change in fair value of financial asset derivatives 6,780 - - Less: capitalized credit costs - (1,091) (932)Financing expenses recognized in statement of income 127,665 180,645 116,318

Net financing expenses recognized in statement of income 93,710 96,607 79,624


84

Note 28 - Net Financing Expenses (Income)


B. Recognized directly in comprehensive income Foreign currency translation differences from foreign activities 14,229 (12,275) 9,872 Effective part of changes in fair value of hedged cash flows 6,609 6,000 - Income taxes on income and expenses recognized directly in comprehensive income (3,567) 1,018 - Financing income (expenses) recognized directly in comprehensive income, net 17,271 (5,257) 9,872


Financing income (expenses) recognized directly in equity net of related tax: Holders of equity rights in the Company Foreign currency translation differences from foreign activities 12,757 (10,865) 8,664 The effective part of changes in fair value of cash flows hedge, net 3,042 7,021 - 15,799 (3,844) 8,664 Minority interest Foreign currency translation differences from foreign activities 1,472 (1,410) 1,208 The effective part of changes in fair value of cash flows hedge, net - (3) - 1,472 (1,413) 1,208


85

Note 29 - Transactions and Balances with Related and Interested Parties A. Transactions with interested parties In July 2007, Discount Investment company of the I.D.B. Group acquired shares of Koor Industries Ltd. from the prior shareholders. (1) Trivial transactions

On March 10, 2009, the Company's board of directors resolved to adopt guidelines and principles for classifying a transaction of the Company or its subsidiary with an interested party (interested party transaction) as a minor transaction, as provided in Regulation 64(3)(d)(1) of Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993. These principles and guidelines will also be used by the Company to evaluate the scope of the disclosure in its various reports, including periodic report and prospectus (including shelf offerings), in connection with a transaction between a controlling shareholder, as defined in Section 270(4) of the Companies Law, 1999, as required by all laws, including the Israeli Securities Regulations (periodic and immediate reports), 1970 (regulation 22 and regulation 37(A)(6)) and including the Israeli Securities Regulations (Details of Prospectus and Draft Prospectus - Structure and Form), 1969. During the ordinary course of business, the Company and its subsidiaries, especially in view of the multi-branched holding structure of the Group and the diverse activities, effect or could effect interested party transactions, mainly the purchase of services (such as logistical services, shipping services, communication services, tourism, investment portfolio management), the purchase or rental of goods, movable property or real estate (insurance products, office equipment, offices), marketing transactions, etc. This mainly involves transactions that are not material for the Company, whether quantitatively or qualitatively, and they are effected mainly at terms similar to those of transactions made opposite unrelated parties. Therefore, the board of directors designated that an interested party transaction that is not an exceptional transaction (i.e. - is effected in the ordinary course of business, for the benefit of the Company and at market terms), will be deemed a trivial transaction if it meets a two-stage test: (a) Qualitative test - If from the standpoint of the nature, substance and influence on the

Company, is not material to the Company and there are no special considerations arising from the range of circumstances of the matter, testifying to the materiality of the transaction.

(b) Quantitative test - If the cumulative effect is less than 1.5% of total operating

income of the Company, as recorded in its latest published consolidated audited financial statements of the Company. It should be noted, that if the interested party transaction meets the above quantitative test, it will not be deemed trivial if qualitative considerations testify to its materiality, if from the standpoint of its influence on the Company, or due to the importance of its disclosure to the investing public.


86

Note 29 - Transactions and Balances with Related and Interested Parties (cont'd) A. Transactions with interested parties (cont'd) (1) Trivial transactions (cont'd)

(b) (cont’d)

It should be noted that for the purpose of determining the quantitative limit by which the transaction will be classified as trivial, the Company's board of directors evaluated additional parameters from the Company's balance sheet, the nature of the Company's activities, the quality and significance of the effect of transactions against the parameter of operating income, and, to the extent possible, these parameters were taken into account by similar companies. This evaluation showed that in view of the nature of the Company's activities, the relevant parameter that represent the material effect on the Company's results and activities is operating income, and best reflects the Company's activities and results. Therefore, in the opinion of the board of directors, it constitute a touchstone for the materiality of the transaction, to the extent the Company will find that the quantitative criteria mentioned above is not relevant for evaluating the triviality of the transaction, the Company will consider other relevant criteria for examining the mentioned limit. It should be noted that the above trivial transactions procedure is under discussion with the Israeli securities regulations, and it is expected to be changed. Furthermore, the Company pays directors' fees to Koor and to the I.D.B. Group, according to the amounts paid to directors from the public. See B. below.

(2) The Company’s Audit Committee, at its meeting on December 26, 2007, the Board of

Directors, at its meeting on January 9, 2008 and the General Assembly of the Company, which met on February 17, 2008, approved the Company’s relationship, in accordance with the amendment to the management services agreement between the Company and the company that provides it with management services, including the services of the Chairman of the Board of Directors and/or CEO of the Company through Mr. Avraham Bigger, and in that context the relationship with the company controlled by Mr. Bigger was reorganized, as well as the annual bonus that will be paid to it, if the predetermined goals are met.

(3) The Company’s audit committee, and its meeting on August 9, 2009, and the board of

directors, and its meeting on August 11, 2009, approved the employment terms of Mr. Erez Vigodman, the new CEO, and the wage he is entitled to, which his terms of office has begun in January 1, 2010.


87

Note 29 - Transactions and Balances with Related and Interested Parties (cont'd)

A. Transactions with interested parties (cont'd) (4) Regarding insurance and indemnification of interested parties – see Note 20(A)(1) and (2).

The insurance is provided by Clal insurance company Ltd., a company controlled by IDB Development Corp Ltd.

(5) Regarding options granted to interested parties – see Note 22. Presented below details of the transactions:


Revenues - 5,748 8,662 8,862 Expenses - 17,345 14,910 13,142 B. Benefits to interested parties


Salaries and related benefits to interested party employed by the Group* 378 438 359 Number of interested parties 1 1 1 Expenses from options to interested party employed by the Group 2,364 2,701 2,308 Number of interested parties 1 1 1 Fees to directors appointed by Koor and IDB 324 325 128 Number of directors** 7 8 8

Fees to other directors 208 181 69 Number of directors 4 4 4

Expenses in respect of options to directors 30 131 54

Number of directors 2 2 1 (*) Does not include the annual bonus that was paid to the company controlled by the former

CEO and Chairman of the Board of Directors for 2008 and 2007 according to the set criteria that were approved by the general meeting in the amount of NIS 3,714 thousand and NIS 2,815 thousand, respectively.

(**) During 2007, several directors were replaced, including outside directors.


88

Note 29 - Transactions and Balances with Related and Interested Parties (cont'd) C. Balances with related and interested parties


Trade receivables (1) - Related parties 58 1,828 Trade payables - Related parties 2,164 2,077 Severance pay fund administered by related companies 3,626 2,911 (1) Highest balance during the year - trade receivables 4,042 3,673 Benefits to a group of officers and senior management in Israel and abroad In addition to salary, senior executives in the Group are entitled to benefits beyond regular salary. These benefits include: annual bonuses, social and salary-related benefits and options granted. Senior executives also participate in the Group's option plans (see Note 22). The benefits attributed to the key management personnel are comprised as follows:


Direct salary 3,523 3,474 3,128 Bonuses* - 2,008 1,875 Post-employment and other benefits 1,096 1,104 1,025 Share-based payments** 7,386 6,703 5,391 12,005 13,289 11,419 * The bonuses are based on the operating results of the Group. ** The cost of the benefit to each officer from share-based payments is calculated only once,

according to the economic value of the options on the grant date, amortized over the vesting period until vesting date and does not change and is not affected by changes in the price of the share or the ability to exercise.


89

Note 30 - Earnings per Share Basic earnings per share Calculation of the earnings per share for the year ending December 31, 2009, is based on the earnings attributed to the holders of the ordinary shares in the amount of $32,678 thousand (in 2008, $219,041 thousand, in 2007 - $155,598 thousand), divided by the weighted-average number of ordinary shares outstanding of 430,392 thousand shares (in 2008, 439,414 thousand shares, in 2007, 441,025 thousand shares), calculated as follows:


Earnings attributed to ordinary shareholders 32,678 219,041 155,598


Weighted average of the number of ordinary shares: Balance as at January 1 474,626 473,716 465,352 Less shares of the Company held by the Company and subsidiaries as at January 1 (44,297) (29,291) (29,291) Net of company shares acquired by the company during the period - (5,628) - With the addition of convertible securities that were exercised into shares 63 617 4,964 Weighted average of the number of ordinary shares used in the computation of basic earnings per share 430,392 439,414 441,025 Fully diluted earning per share Calculation of diluted earnings per share for the year ending December 31, 2009, is based on the earnings attributed to the holders of the ordinary shares in the amount of $32,320 thousand (in 2008 - $218,763 thousand, in 2007, $155,381 thousand), divided by the weighted-average number of ordinary shares outstanding of 430,533 thousand shares (in 2008 - 441,330, in 2007, 447,522 thousand shares), calculated as follows:


Earnings used to calculate basic earnings per share 32,678 219,041 155,598 Adjustments for convertible securities in subsidiary (358) (278) (217)Earnings attributed to ordinary shareholders (diluted) 32,320 218,763 155,381


90

Note 30 - Earnings per Share (contd.)

For the year ended December 31 2009 2008 2007 Thousands

shares Thousands

shares thousands

shares Weighted average of the number of ordinary shares (diluted): Weighted average of the number of ordinary shares used to calculate basic earnings per share 430,392 439,414 441,025 Effect of convertible debentures - - 2,241 Effect of employee options 141 1,916 4,256 Weighted average of the number of ordinary shares used in the computation of diluted earnings per share 430,533 441,330 447,522 The average market value of the Company's shares for the purpose of calculating the dilutive effect of the share options was based on the quoted market prices for the period in which the options were outstanding.

Note 31 - Financial Instruments

A. General The Group has extensive international operations, and, therefore, it is exposed to credit risks, liquidity risks and market risks (including currency risk, interest risk and other price risk). In order to reduce the exposure to these risks, the Group uses financial derivatives instruments, including forward transactions, swaps and options (hereinafter, “derivatives”). Transactions in derivatives are undertaken with major financial institutions in Israel and abroad and, therefore, in the opinion of Group Management the credit risk in respect thereof is low. This note provides information on the Group's exposure to each of the above risks, the Group's objectives, policies and processes regarding the measurement and management of the risk. Additional quantitative disclosure is included throughout these consolidated financial statements. The board of directors holds overall responsibility for establishing the Group's risk management policy and monitoring it. The Finance Committee is responsible for establishing and monitoring the Group's risks management policy. The Chief Financial Officer reports about these risks to the Finance Committee on a regular basis The Group's risks management policy was formulated in order to identify and analyze the risks facing the Group, to prescribe reasonable limits for the risks and controls and monitoring of the risks and compliance with the limits. The risks and methods for managing the risks are reviewed regularly, in order to reflect changes in market conditions and the Group's activities. The Group, through training, and management standards and procedures, works to develop an effective control environment in which all the employees understand their roles and obligations.


91

Note 31 - Financial Instruments (cont'd) B. Credit risk Credit risk is the risk of financial loss that the Group will sustain if a customer or counter-party to a financial instrument does not meet its contractual obligations, and derives mainly from trade receivables and other receivables as well as from cash and deposits in bank corporations. Trade receivables and other current assets The Group’s revenues are derived from a large number of widely dispersed customers in many countries. Customers include multi-national companies and manufacturing companies, as well as distributors, agriculturists, agents and agrochemical manufacturers who purchase the products either as finished goods or as intermediate products for their own requirements. The financial statements contain specific provisions for doubtful debts, which properly reflect, in management’s estimate, the loss embodied in debts, for which collection is in doubt. In April 2006, the Company signed an agreement with an international insurance company. The cumulative amount of the insurance coverage was fixed at $65 million cumulative per year. In April 2009, the Company signed a new bi-yearly agreement with the insurance company. The amount of the insurance coverage was fixed at $100 million cumulative per year. The indemnification from the insurer is full indemnification up to a sum of $10 million for securitized trade receivables. For sums exceeding $10 million up to $100 million the indemnification is 80% of the debt of securitized trade receivables and for remaining trade receivables, indemnification is limited to 90% of the debt. The Group’s exposure to credit risk is influenced mainly by the personal characterization of each customer, and by the geographic characterization of the customer’s base, including the risk of insolvency of the industry and geographic region in which the customer operates. Approximately 2% of the Group’s revenues derive from sales opposite a single customer. The Company's management prescribed a credit policy, whereby each new customer will be examined thoroughly regarding the quality of his credit, before offering him shipping and payment terms customary for the Group. The examination made by the Group includes independent credit rating, if any, and in many cases, receipt of documents from an insurance company. A credit limit is prescribed for each customer, reflecting the maximum open amount of the trade receivable balance. These limits are examined annually. Customers that do not meet the Group's criteria for credit quality, may undertake with the Group on the basis of a prepayment or against the furnishing of appropriate collateral. Most of the Group's customers have done business with it for many years, and rarely have generated losses. In monitoring customer credit risk, the customers were grouped according to a characterization of their credit, based on geographical location, industry, aging of receivables, maturity, and existence of past financial difficulties. Customers’ rates as "high risk" are classified to a list of restricted customers and are under management's supervision and are reported to the Finance Committee.


92

Note 31 - Financial Instruments (cont'd) B. Credit risk (cont'd)

The Group recognizes an impairment provision, which reflects its assessment of losses sustained from trade receivables and other receivables and investments. The key elements of this provision are specific losses related to specific significant exposure, and examined the need for a general loss to be determined for groups of similar assets regarding losses sustained but net yet identified. The general loss provision was determined based on historical information about payment statistics relating to events that occurred in the past. Investments The Group limits its exposure to credit risk by investing only in liquid securities and only opposite a counter-part with a credit rating of at least "A1" from Standard & Poor's Ma'alot and at least "A" by Midroog. As at the balance sheet date, the Company has not investments in securities. Cash and Deposits The Company holds cash and deposits in bank corporations with high credit rating. These corporations are also committed to capital adequacy and securities in different scenarios. Guarantees The Company's policy is to furnish financial guarantees only to wholly-owned subsidiaries. For additional information on financial guarantees, see Note 20E. C. Liquidity risk

Liquidity risk is the risk that the Group will be unable to meet its obligation when they come due. The Group's approach to managing its liquidity risk is to assure, to the extent possible, an adequate degree of liquidity for meeting its obligations timely, under ordinary conditions and under pressure conditions, without sustaining unwanted losses or hurting its reputation. The Group uses operation-based pricing to price its products and services, which facilitates its monitoring cash flow requirements and maximizing the yield on its cash investments. The Group verifies the existence of sufficient levels of cash, according to requirements for the payment of expected operating expenses, including the amounts required to meet its financial obligations; the aforesaid does not take into account the potential effect of extreme scenarios that it is not reasonable to foresee, such as natural disasters. D. Market risks Market risk is the risk that changes in market prices, such as currency exchange rates, CPI, interest rates and prices of capital instruments, will affect the Group's revenues or the value of its holdings in its financial instruments. The objective of market risks management is to manage and monitor the exposure to market risks within acceptable parameters, while maximizing the yield.

During the ordinary course of business, the Group purchases and sells derivatives and assumes financial liabilities for the purpose of managing market risks. The said transactions are executed according to guidelines prescribed by the Finance Committee.

Currency risk The Group is exposed to currency risk from its sales, purchases and loans denominated in currencies that differ from the Group's functional currency. Most of the exposure is to the euro, Brazilian Real and the shekel. The Group uses foreign currency derivatives - forward transactions, swaps and currency options - in order to hedge the risk that the dollar cash flows, which derive from existing assets and liabilities and anticipated sales and costs and projected sales, may be affected by exchange rate fluctuations.


93

Note 31 - Financial Instruments (Cont'd)

D. Market risks (cont'd)

The Group hedged a part of the estimated currency exposure for projected sales and purchases during the subsequent year. Likewise, the Group hedges most of its financial balances denominated in a non-dollar currency. The Group uses foreign currency derivatives to hedge its currency risk, mostly with maturity dates of less than one year from the reporting date, except for the following swap transactions:

During November 2006 and March 2009, the Company held an offering of debentures, most of which are linked to the CPI; therefore, an increase in the CPI, as well as changes in the shekel exchange rate, could cause significant exposure toward the Company's functional currency the dollar. As at the approval date of the financial statements, the Company had hedged most of its exposure deriving from the issuance of the debentures, in a swap transaction and in forward contracts.

Interest rate risk The Group has exposure to changes in the Libor interest rate on the U.S. dollar, since the Group has U.S. dollar obligations, which bear variable Libor interest. The Company prepares a quarterly summary of exposure to a change in the Libor interest rate. As at the approval date of the financial statements, the Company had not hedged this exposure.

The Group does not enter into commodity contracts, except for barter contracts opposite a customer, for the purpose of meeting the estimated usage and sales needs; these contracts are not settled on a net basis. E. Determination of fair value - derivatives

The fair value of forward contracts on foreign currency is based on their listed market price, if available. In the absence of market prices, the fair value is estimated based on the discounted difference between the stated forward price in the contract and the current forward price for the balance of the contract period to maturity, using the appropriate interest rate.

The fair value of foreign currency options and interest rate swaps is based on bank quotes. The reasonableness of the quotes is evaluated through discounting future cash flow estimates, based on the conditions and duration to maturity of each contract, using the market interest rates of a similar instrument at the measurement date and Black&Scholes model.

F. Credit risk

(1) Exposure to credit risk

The carrying value of the financial assets represents the maximum credit exposure. The maximum exposure to credit risk on the balance sheet date was as follows:

December 31 December 31 2009 2008 Book value thousands $

Cash and cash equivalents 562,430 214,920 Short-term investments 448 514 Assets in respect of currency swap contracts used for hedging 41,463 21,558 Assets in respect of forward contracts on exchange rates not used for hedging 66,476 25,995 Assets in respect of forward contracts on exchange rates used for hedging 5,755 18,975

Customers and deferred capital note 628,950 614,804 1,305,522 896,766

The above balances are included in cash and cash equivalents, short-term investments, trade receivables and financial assets, including derivatives.


94

Note 31 - Financial Instruments (Cont'd) F. Credit risk (cont'd) (1) Exposure to credit risk (cont'd)

The maximum exposure to credit risk from trade receivables and subordinated capital note as at the balance sheet date, according to geographic regions was as follows:


Israel 6,140 5,146 Latin America 351,448 292,795 Europe 142,070 175,331 North America 59,855 78,693 Rest of the world. 69,437 62,839

628,950 614,804

The Group's major customer is an agricultural corporation that constitutes $29,512 thousand of the total carrying value of trade receivables as at December 31, 2009 (as at December 31, 2008: $58,300 thousand).

(2) Aging of receivables and allowance for doubtful accounts

Presented below is the aging of trade receivables (without subordinated capital note):


Not past due 492,166 439,003 Past due by less than 90 days 64,902 56,397 Past due by more than 90 days 77,881 59,108 634,949 554,508

The change in the allowance for doubtful accounts during the year was as follows:


Balance as at January 1 35,069 47,772 Changes during the year 6,388 9,227 Write-off to bad debts (715) (11,553)Exchange rate differences 7,349 (10,377)

Balance as at December 31 48,091 35,069


95

Note 31 - Financial Instruments (cont'd) G. Liquidity risk Presented below are the contractual maturity dates of the financial liabilities, including estimated interest payments:

As at December 31, 2009 Carrying Contractual Fifth year value cash flow First year Second year Third year Fourth year and above $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Non-derivative financial liabilities Bank overdrafts 87,678 88,608 88,608 - - - - Short-term loans from banks 32,674 33,175 33,175 - - - - Other short-term loans 95,592 104,783 104,783 - - - - Trade payables 501,692 501,692 501,692 - - - - Other payables 333,128 334,862 334,862 - - - - Debentures 980,036 1,511,712 134,091 160,790 155,236 149,317 912,278 Long-term loans from banks 324,125 345,817 30,047 241,089 34,388 21,886 18,407 Other long-term liabilities 18,711 18,711 12,165 220 220 4,898 1,208 Financial derivatives Derivatives in foreign currency 12,386 12,386 12,386 - - - - 2,386,022 2,951,746 1,251,809 402,099 189,844 176,101 931,893


96

Note 31 - Financial Instruments (cont'd) G. Liquidity risk (cont'd)

As at December 31, 2008 Carrying Contractual Fifth year value cash flow First year Second year Third year Fourth year and above $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Non-derivative financial liabilities Bank overdrafts 108,100 109,670 109,670 - - - - Short-term loans from banks 259,504 261,494 261,494 - - - - Other short-term loans 36,403 37,306 37,306 - - - - Trade payables 482,618 482,618 482,618 - - - - Other payables 295,841 296,873 289,463 7,410 - - - Debentures 634,801 1,132,500 32,611 65,396 74,238 72,115 888,140 Long-term loans from banks 69,971 78,594 12,702 20,312 14,159 11,185 20,236 Other long-term liabilities 12,254 12,254 - 12,254 - - - Financial derivatives Derivatives in foreign currency 56,317 56,317 56,317 - - - - Forward CPI/NIS 7,955 7,955 2,758 3,705 1,492 - - 1,963,764 2,475,581 1,284,939 109,077 89,889 83,300 908,376


97

Note 31 - Financial Instruments (cont'd) G. Liquidity risk (cont'd) The table below presents the periods in which projected cash flows that are related to the derivatives used to hedge cash flows:

2009 Carrying Projected 6 months 6-12 Second Third Fourth Fifth Sixth year value cash flows or less months year year year year and above $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Interest rate swap: 41,463 28,115 (1,739) 7,464 6,594 7,464 8,333 - - Forward contracts on exchange rates 3,064 3,064 2,274 790 - - - - - 44,527 31,179 535 8,254 6,594 7,464 8,333 - - The table below presents the periods in which cash flows that are related to the derivatives used to hedge cash flows are expected to impact income or loss.

2009 Carrying Projected 6 months 6-12 Second Third Fourth Fifth Sixth year value cash flows or less months year year year year and above (1) $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Interest rate swap (10,414) (10,414) (1,726) (1,726) (2,409) (1,627) (1,002) (481) (1,443) Forward contracts on exchange rates 3,064 3,064 2,274 790 - - - - - (7,350) (7,350) 548 (936) (2,409) (1,627) (1,002) (481) (1,443)


98

Note 31 - Financial Instruments (cont'd) G. Liquidity risk (cont'd)

The table below presents the periods in which projected cash flows that are related to the derivatives used to hedge cash flows:


Interest rate swap: Assets 21,558 30,577 (1,040) (1,040) 3,223 3,416 3,688 3,961 18,369 Forward contracts on exchange rates: Assets 23,468 23,468 16,299 7,169 - - - - - Liabilities (3,174) (3,174) (1,154) (2,020) - - - - -

41,852 50,871 14,105 4,109 3,223 3,416 3,688 3,961 18,369 The table below presents the periods in which cash flows that are related to the derivatives used to hedge cash flows are expected to impact income or loss.


Interest rate swap: Liabilities (11,604) (11,604) (987) (987) (1,973) (1,565) (1,293) (1,090) (3,709) Forward contracts on exchange rates: Assets 20,782 20,782 15,176 5,606 - - - - - Liabilities (3,174) (3,174) (1,154) (2,020) - - - - -

6,004 6,004 13,035 2,599 (1,973) (1,565) (1,293) (1,090) (3,709)

(1) Interest rate swap included in the period of 5 year and above, will be repaid in a single payment at the end of 2017.


99

Note 31 - Financial Instruments (cont'd)

H. Linkage and foreign currency risks

(1) Linkage terms of monetary balance

December 31, 2009 Denominated Denominated in or linked to In CPI-linked In unlinked in or linked to other In Brazilian Israeli Israeli Non-monetary dollar In euro currency real currency currency items Total $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Assets - Cash and cash equivalents 335,101 91,618 75,761 28,526 528 30,896 - 562,430 Short-term investments 1 95 352 - - - - 448 Trade receivables 246,641 82,793 110,732 145,890 - 802 - 586,858 Subordinated capital note from sale of trade receivables 26,868 1,749 7,273 - - 6,202 - 42,092 Other receivables and current assets * 72,522 17,590 12,976 12,966 1,479 17,604 18,457 153,594 Advances net of provision for income taxes 1,637 1,654 3,581 - 1,212 - - 8,084 Inventories - - - - - - 1,000,591 1,000,591 Long-term investments, loans and receivables 43,775 1,216 692 67,134 2,649 - 12,346 127,812 Deferred tax assets - - - - - - 86,542 86,542 Fixed assets - - - - - - 576,375 576,375 Other assets - - - - - - 615,021 615,021 726,545 196,715 211,367 254,516 5,868 55,504 2,309,332 3,759,847

Liabilities - Credit from banks (not including current maturities) 109,437 18,717 17,971 69,851 - 73 - 216,049 Trade payables 205,808 91,933 44,477 94,738 - 64,736 - 501,692 Other payables and current liabilities 75,361 66,157 40,140 12,497 8,807 75,107 911 278,980 Provision for taxes net of advances 25,248 1,826 4,167 - 12,106 - - 43,347 Loans from banks (including current maturities) 312,567 5,384 4,015 2,159 - - - 324,125 Debentures - - - - 794,961 185,075 - 980,036 Other long-term liabilities (including current maturities) 2,320 8,072 1,050 7,269 - - - 18,711 Deferred tax liability - - - - - - 39,591 39,591 Employee benefits 40 2,087 631 513 - 53,184 - 56,455 Put option to minority interest 17,917 6,181 - - - - - 24,098 748,698 200,357 112,451 187,027 815,874 378,175 40,502 2,483,084 * regarding the group’s exposure to linkage and foreign currency risks of financial derivatives, see Note (2) below


100


H. Linkage and foreign currency risks (cont’d)

(1) Linkage terms of monetary balance (cont’d)

December 31, 2008 Denominated Denominated in or linked to In CPI-linked In unlinked in or linked to other In Brazilian Israeli Israeli Non-monetary dollar In euro currency real currency currency items Total $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands $ thousands

Assets - Cash and cash equivalents 120,824 47,753 22,229 17,245 - 6,869 - 214,920 Short-term investments - 167 347 - - - - 514 Trade receivables 290,162 86,677 68,932 73,323 - 345 - 519,439 Subordinated capital note from sale of trade receivables 39,247 31,883 19,306 - - 4,929 - 95,365 Other receivables and current assets 34,468 20,823 9,815 30,624 73 33,156 31,341 160,300 Advances net of provision for income taxes 220 2,824 1,310 - 9,178 - - 13,532 Inventories - - - - - - 1,135,418 1,135,418 Long-term investments, loans and receivables 22,376 1,270 1,604 26,444 2,630 - 12,134 66,458 Deferred tax assets - - - - - - 62,412 62,412 Fixed assets - - - - - - 532,491 532,491 Other assets - - - - - - 572,562 572,562 507,297 191,397 123,543 147,636 11,881 45,299 2,346,358 3,373,411

Liabilities - Credit from banks (not including currency maturities) 330,830 25,410 1,622 19,306 - 26,839 - 404,007 Trade payables 276,895 111,357 14,911 28,129 - 51,326 - 482,618 Other payables and current liabilities 136,627 54,209 30,410 13,755 7,955 75,754 1,608 320,318 Provision for taxes net of advances 3,809 4,227 4,026 - 4,896 - - 16,958 Loans from banks (includes current maturities) 58,473 5,434 5,081 983 - - - 69,971 Debentures - - - - 573,109 61,692 - 634,801 Other long-term liabilities (includes current maturities) 3,911 692 291 7,360 - - 89 12,343 Provision for tax - - - - - - 63,375 63,375 Employee benefits 40 2,154 417 1,026 - 54,261 - 57,898 Put option to minority interest 24,445 - - - - - - 24,445 835,030 203,483 56,758 70,559 585,960 269,872 65,072 2,086,734


101


H. Linkage and foreign currency risks (cont’d)

(2) The exposure to linkage and foreign currency risk

The Group’s exposure to linkage and foreign currency risk in respect of derivatives is as follows: December 31, 2009 Currency/ Currency/

linkage linkage Date of Notional value receivable payable expiration (currency) Fair value $ thousands $ thousands

Forward foreign currency USD EUR 18/3/2010 323,355 1,131 contracts and purchase USD PLN 22/2/2010 78,831 (631) options USD BRL 26/01/2010 95,000 (291) USD GBP 23/02/2010 17,176 257 ILS USD 22/03/2010 747,079 58,159

USD Others 79,877 (69)CPI forward contract CPI ILS 2/11/2010 264,901 1,288 Interest rate swaps ILS ILS USD 29/11/2013 273,323 41,463 December 31, 2008 Currency/ Currency/ linkage linkage Date of Notional value receivable payable expiration (currency) Fair value $ thousands $ thousands

USD EUR 27/4/2008 418,586 859 Forward foreign currency USD PLN 23/2/2009 90,823 12,344 contracts and purchase USD BRL 9/4/2009 179,000 10,749 options USD GBP 23/2/2009 41,439 7,981 ILS USD 26/02/2009 540,700 (38,454)

USD Others 71,462 (424) CPI forward contract CPI ILS 16/2/2010 263,019 (7,955) Interest rate swaps ILS ILS USD 22/09/2015 254,000 21,558

Presented below are data on Consumer Price Index and significant exchange rates:

Average 1-12 December 31 Change in

2009 2008

2009

Change in

2009 2008

2009

5.0% 1.463 1.390 )3.5%( 1.393 1.442 EUR\USD )9.2%( 1.829 1.997 25.5% 2.337 1.741 USD/BRL )29.6%( 2.413 3.127 3.8% 2.962 2.850 USD/PLN )2.2%( 8.273 8.453 21.4% 9.411 7.40 USD/ZAR )6.7%( 0.836 0.780 31.1% 0.687 0.900 AUD/USD )15.0%( 1.835 1.559 10.9% 1.459 1.619 GBP/USD

9.5% 3.591 3.933 )0.7%( 3.802 3.775 USD/ILS 3.8% 110.547 114.767 Known Index 3.9% 110.443 114.767 Actual Index


102


H. Linkage and foreign currency risks (cont'd)

(3) Sensitivity analysis

The strengthening or weakening of the dollar against the following currencies as at December 31 and the increase or decrease in the CPI would increase (decrease) the equity and income or loss by the amounts presented below. This analysis assumes that all the remaining variables, among others interest rates, remained fixed. The analysis for 2008 was done on the same basis. December 31, 2009 Decrease of 5% Increase of 5% Equity Income (loss) Equity Income (loss) $ thousand $ thousand $ thousand $ thousand

Shekel (1,817) (4,060) 1,824 3,646 Pound sterling (991) (84) 1,006 34 Euro (10,342) (3,581) 10,830 4,123 Real 967 967 (2,165) (2,165)Polish zloty (1,437) (436) 905 27 Australian dollar 1,568 1,199 (1,612) (1,199)Consumer Price Index 14,237 15,456 (14,237) (15,456) December 31, 2008 Decrease of 5% Increase of 5% Equity Income (loss) Equity Income (loss) $ thousand $ thousand $ thousand $ thousand

Shekel (2,322) (4,584) 2,526 4,922 Pound sterling (1,966) (1,071) 1,794 1,073 Euro (22,801) (9,442) 24,135 9,386 Real (871) (871) 871 871 Polish zloty (3,393) (1,691) 2,863 1,241 Australian dollar (751) (429) 572 249 Consumer Price Indexs 2,027 2,027 (2,027) (2,027) I. Interest rate risks (1) Type of interest

Presented below are data on the type of interest on the Group's interest-bearing financial instruments:

December 31 2009 2008 Carrying value Carrying value $ thousands $ thousands

Fixed-interest instruments Financial assets 67,134 49,272 Financial liabilities (985,374) (634,801) (918,240) (585,529)

Variable-interest instruments Financial assets 6,869 5,052 Financial liabilities (534,731) (473,978) (527,862) (468,926)


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I. Interest rate risks (cont'd) (1) Type of interest (cont’d) The Group’s exposure to interest risk in respect of derivatives is as follows:

December 31, 2009 Interest Receivable (NIS Interest Date of Notional value CPI Linked) Payable (USD) expiration (currency) Fair value $ thousands

Interest rate swaps 4.45% 6.89% 29/11/2013 137,384 8,977 4.45% 6.295% 29/11/2013 135,939 32,486 6.603% 273,323 41,463

December 31, 2008 Interest Interest Date of Notional value receivable payable expiration (currency) Fair value NIS thousands

Interest rate swaps 5.15% 6.925% 31/05/2017 141,903 5,782 4.45% 6.295% 29/11/2013 131, 393 15,776 6.621% 273,296 21,558 (2) Sensitivity analysis of fair value flows regarding fixed interest instruments The Group's fixed-interest assets and liabilities are not measured at fair value through income/loss. Therefore, a change in the interest rate as at the balance sheet date is not expected to have any effect on income or loss due to changes in the value of the fixed-interest assets and liabilities. (3) Sensitivity analysis of cash flows regarding variable-interest instruments A change of 5% in the interest rates on the reporting date would increase or reduce equity and income or loss by the amounts presented below. This analysis assumes that all the remaining variables, among others exchange rates, remained fixed. The analysis for 2008 was done on the same basis.

As at December 31, 2009 Income or loss Income or loss Increase in

interest Decrease in

interest Increase in


interest $ thousands $ thousands $ thousands $ thousands

Variable-interest instruments 362 (364) 362 (364)

As at December 31, 2008 Income or loss Income or loss Increase in


interest Increase in


interest $ thousands $ thousands $ thousands $ thousands

Variable-interest instruments (530) 530 (530) 530


104


J. Fair value (1) Fair value compared with carrying value The carrying value of certain financial assets and liabilities, including cash and cash equivalents, trade receivables, other receivables, other short-term investments, derivatives, bank overdrafts, short-term loans and credit, trade payables, other payables and proposed dividends, conform to or approximate their fair value. The table below provides the carrying value and fair value of categories of long-term financial instruments, which are stated in the financial statements at other than their fair value:

December 31, 2009 December 31, 2008 Carrying value Fair value Carrying value Fair value $ thousands $ thousands $ thousands $ thousands

Financial assets Long-term loans and other receivables (1) 74,003 47,838 32,766 25,947

Financial liabilities Long-term loans (2) 324,125 333,785 69,971 74,899 Debenture (3) 980,036 965,791 634,801 525,580

(1) The fair value of the long-term loans given is based on a calculation of the present value of cash flows, using the acceptable interest rate for similar loans having similar characteristics.

(2) The fair value of the long-term loans received is based on a calculation of the present value of cash flows, using the acceptable interest rate for similar loans having similar characteristics.

(3) The fair value of the debentures were listed for trading on the stock exchange quotes. (2) The interest rate used determining fair value

The interest rates used to discount the estimate of projected cash flows are:

December 31 2009 2008 In % In %

Real 7.65-12.78 12.15-12.6U.S. dollar 0.17-3.05 2-2.23Shekel 1.24-5.55 1.85-4.05Euro 0.34-2.84 2.65-3.24

(3) Fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical instrument. Level 2: inputs other than quoted prices included within Level 1 that are observable, either

directly or indirectly Level 3: inputs that are not based on observable market data.


105


J. Fair value (cont’d)

(3) Fair value hierarchy (cont’d)

The Company’s financial instruments carried at fair value, are valuated by observable inputs and therefore are concurrent with the definition of level 2.

December 31, 2009 $ thousands

Derivatives used for hedging: Interest rate swaps 41,463Forward contracts and options 3,064

Derivatives not used for hedging: Forward contracts and options 56,781 101,308

Note 32 - Segment Reporting

A. Products and services:

The Company presents its segment reporting according to a primary format, which is based on a breakdown by business segments:

• Activity in the agrochemical products market (Agro) This is the main area of the Company’s operation and includes the manufacture and marketing of conventional agrochemical products.

• Non-Agro activity This field of activity includes a large number of sub-fields, including: Lycopan (an oxidization retardant), aromatic products, and other chemicals. It combines all the Company’s activities not included in the agro-products segment. Segment results reported to the chief operating decision maker include items directly attributable to a segment as well at those that can be allocated on a reasonable basis. Unallocated items comprise mainly financing expenses, net.

For the year ended December 31, 2009 Non-Agro Agro activity activity Adjustments Consolidated $ thousands $ thousands $ thousands $ thousands

Statement of Income information: Revenues Sales outside the Group 2,042,170 172,446 - 2,214,616 Inter-segment sales - 5,317 (5,317) - Total revenues 2,042,170 177,763 (5,317) 2,214,616

Results Segment's results 96,590 22,419 721 119,730 Financing expenses, net (93,710)Taxes on income 8,681 Minority interest in income of subsidiaries (2,023)Net income 32,678


106

Note 32 - Segment Reporting (cont'd) A. Products and services: (cont'd)


Statement of Income information: Revenues Sales outside the Group 2,334,517 200,987 - 2,535,504 Inter-segment sales - 8,849 (8,849) - Total revenues 2,334,517 209,836 (8,849) 2,535,504 Results Segment's results * 338,932 29,229 *(911) 367,250 Financing expenses, net (96,607)Taxes on income (49,684)Minority interest in income of subsidiaries (1,918)Net income 219,041


Statement of Income information: Revenues Sales outside the Group 1,879,435 186,090 - 2,065,525 Inter-segment sales - 5,230 (5,230) - Total revenues 1,879,435 191,320 (5,230) 2,065,525 Results Segment's results * 248,114 20,273 *(357) 268,030 Financing expenses, net (79,624)Taxes on income (25,485)Minority interest in income of subsidiaries (7,323)Net income 155,598 * Reclassified


107

Note 32 - Segment Reporting (cont'd)

B. Geographic:

Presented below are sales revenues according to geographic segments based on the location of the customers (sales’ targets):


Israel 86,969 113,214 102,460 Latin America 540,897 675,006 527,118 Europe 939,472 1,010,894 817,717 North America 402,244 443,969 390,781 Rest of the world 245,034 292,421 227,449

2,214,616 2,535,504 2,065,525

Note 33 – Investments in Investees

Additional details in respect of subsidiaries directly held by the Company

For the year ended December 31, 2009 Company Country of equity Loans to Investments association rights investees in investees % $ thousands $ thousands

Makhteshim Chemical Works Ltd. Israel 100 346,841 707,580 Agan Chemical Manufacturers Ltd. Israel 100 466,702 519,231 Lycored Ltd. Israel 99 - 55,650 813,543 1,282,461 Investment in company shares held by subsidiary (9,708)

1,272,753 For the year ended December 31, 2008 Company Country of equity Loans to Investments association rights investees in investees % $ thousands $ thousands

Makhteshim Chemical Works Ltd. Israel 100 163,690 655,838 Agan Chemical Manufacturers Ltd. Israel 100 396,360 538,995 Lycored Ltd. Israel 98 6,616 44,577 566,666 1,239,410 Investment in company shares held by subsidiary (9,708)

1,229,702

The Company is a guarantor of the liabilities to banks of subsidiaries unlimited in amount. The balance of subsidiaries’ liabilities to banks as at balance sheet date for which the Company is guarantor is 304 million dollars.


108

Note 34 – Subsequent Events 1. During January 2010, a minority shareholder exercised put options for the sale of 1% of the

shares of the subsidiary Lycord to the Company. As of the issue date of the financial statements, the Company holds 100% of the shares of Lycord.

2. During February 2010, a minority shareholder exercised a put option for 10% of the subsidiary

Aligrre (LLC) to the Company. As of the issue date of the financial statements, the Company holds 80% of the shares of that Company.

3. On March 9, 2010, the Company's board of directors adopted a resolution in principle to issue

shares by means of rights to the Company's shareholders, pursuant to a shelf prospectus published by the Company on May 27, 2008, amounting to between $100 million and $150 million. The issuance of rights is subject to obtaining the approvals required by law (including approval by a general meeting to the deviation in foreign holders, as provided below) and to a final resolution by the Company's board of directors regarding the issuance and its terms. Likewise, the Company's board of directors resolved to convene a special general meeting, on the agenda of which is approval of the deviation in the holders of the Company's securities, for were it not for their deviation, the offering would have required a prospectus in a foreign country, in accordance with the provisions of the Israeli Securities Law (Manner of Public Offering of Securities), 2007. In the opinion of the board of directors, raising capital through the issuance of rights is necessary in order to expand and strengthen the Company's capital base and in order to assure, in any case, the Company's compliance with the financial covenants to which the Company has committed.

Makhteshim-Agan Industries Ltd. Appendix – Schedule of Investee Companies

109

Control and ownership of holding company

Holding company Investee company % A. Domestic consolidated subsidiaries

Makhteshim-Agan Industries Ltd. Makhteshim Chemical Works Ltd. (Makhteshim) 100 Agan Chemical Manufacturers Ltd. (Agan) 100 Lycored Ltd. (Lycored) 99 Makhteshim Negev Peroxide - Registered Partnership 100 Agan Agan Aroma and Fine Chemicals Ltd. 100 Agan Chemical Marketing Ltd. 100 Lycored Lycored Bio Ltd. 100 Dalidar Pharma Israel (1995) Ltd. 100 B. Foreign consolidated subsidiaries Makhteshim Celsius Property B.V. (Celsius) 100 Agan Fahrenheit Holding B.V. (Fahrenheit) 100 Lycored Lycored Sarl 100 Dalidar Pharma 100 ALB Holdings UK 100 Lycored Corp. (USA) 100 BibDar USA Inc 4 ALB Holdings UK Lycored Bio Ltd. 100 Lycored Ltd (UK) 100 Makhteshim and Agan in equal parts Makhteshim gan Holding B.V. 100 Celsius Irvita Plant Protection N.V. 100 Irvita Plant Protection N.V. White Rock Insurance Company PCC

Limited/Macell 100

Fahrenheit Quena Plant Protection N.V. 100 Fahrenheit and Celsius in equal parts Magan HB B.V. 100 Aragonesas Agro S.A. 100 Magan Argentina S.A. 100 MA Italy Holding 100 MACEE k.f.t. 100 Proficol Andina N.V. 57.5 CFM B.V. 100.0 Proficol S.A. 57.5 Magan HB B.V. Milenia Participacoes S.A. 100 Milenia Participacoes S.A. Milenia Quimica do Nordeste S.A. 100 MA Italy Holding Kollant S.P.A. 100 Kollant S.P.A. Lifa S.R.L. 100 MACEE k.f.t Makhteshim Agan Hungaria K.F.T 100


110

Control and ownership of

holding company

Holding company Investee company %

B. Foreign consolidated subsidiaries (CONTD.)

CFM B.V Holland Orion Finance SCRL (Belgium) 100 Proficol Andina B.V Profiandina S.A. 100 Makhteshim Agan Holding B.V Agricur Defensivos Agricolas Ltd. 100 Agronica (New Zealand) Ltd. 100 agrovita Spel (S.R.O.) (Czech Republic) 100 Magan Holding Germany GmbH 100 Magan Italia S.R.L. 100 Magan Korea Co Ltd. 100 Magan Agrochemicals d.oo. Subotica 100 Marus Ltd. 100 ` Makhteshim Agan (Australia) Pty Ltd. 100 Makhteshim Agan Benelux and Nordic B.V. 55 Makhteshim Agan Costa Rica SA. 100 Makhteshim Agan Dominican Republic 100 Makhteshim Agan Espana S.A. 100 Makhteshim Agan France S.A.R.L. 100 Makhteshim Agan Guatemala Ltd 100 Makhteshim Agan India Private Ltd 100 Makhteshim Agan Italia S.R.L. 100 Makhteshim Agan Japan K.K. 100 Makhteshim Agan de Mexico S.A. 100 Makhteshim Agan (New Zealand) Ltd. 100 Makhteshim Aga of North America Inc. 100 Makhteshim Agan Paraguay S.R.L. 100 Makhteshim Agan Peru S.A. 100 Makhteshim Agan Poland SP Z.O.O 100 Makhteshim Agan Portugal Ltd. 100 Makhteshim Agan Romania S.R.L. 100 Makhteshim Agan (Shanghai) Trading Co Ltd. 100 Makhteshim Agan south Africa PTY Ltd. 100 Makhteshim Agan Switzerland AG 100 Makhteshim Agan (Thailand) Ltd. 100 Makhteshim Agan (UK) Ltd. 100 Makhteshim Agan Ukraine Ltd. 100 Makhteshim agan Venezuela S.A. 100 Rokita Agro Spolka Akcyjna 93.9 Magan Holding Germany GmbH Feinchemie Schwebda GmbH 100 Makhteshim Agan Deutschland GmbH 100 Makhteshim Agan of North America Inc. Farm Saver Group 100 Control Solutions Inc. 67.1 Alligare LLC 70


111

B. Foreign consolidated subsidiaries (CONTD.) MANA receivables Purchasing Inc. 100 Makhteshim Agan of North America CANADA Inc. Bold Formulators LLC 100 Makhteshim Agan Australasia Pty Ltd Farmoz Pty Limited 100 Ecktrade Australia Pty Ltd 100

C. Companies Proportionately Consolidated Makhteshim Agan Industries Biotec M.A.H. Management Ltd 50 Biotec M.A.H. - Registered Partnership 50 Biotec M.A.H Registered Partnership Biotec Agro Ltd. 100 Makhteshim Agan Holdings B.V. Alfa Agricultural Supplies S.A. 49 Fahrenheit InnovAroma S.A. 50

Makhteshim and Agan hold shares in other foreign companies that hold registration rights to certain produ`cts sold outside of Israel.

cchhaapptteerr aa tthhhee o cccoorrrpppo …...including the acquisition of cpp companies, as well...

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