FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE … · Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions (the non-sweet taste spectrum),

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FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE COMPANY'S BUSINESS

FOR THE PERIOD ENDING MARCH 31, 2012

BOARD OF DIRECTORS' DISCUSSIONS OF THE COMPANY'S STATE OF BUSINESS A. REVIEW OF ACTIVITY

Frutarom Industries Ltd. (the "Company”) is a global company established

in Israel in 1933. Frutarom became a public company in 1996 upon registration of its shares for trade on the Tel Aviv Stock Exchange. In February 2005, the Company’s Global Depository Receipts were also listed on the London Stock Exchange Official List. The Company, itself and through its subsidiaries ("Frutarom" or the "Group") develops, produces and markets flavors and fine ingredients used in the manufacture of food, beverages, flavors, fragrances, pharmaceuticals/nutraceuticals and personal care products. Frutarom operates production facilities in Europe, North America, Latin America, Israel, Asia and Africa, marketing and selling over 30,000 products to more than 14,000 customers in more than 130 countries, and employing 2,100 people throughout the world.

Frutarom operates in two major segments: the Flavors segment and the

Specialty Fine Ingredients segment. The Flavors Segment - Frutarom develops, produces, markets and

sells sweet and savory flavor solutions, including flavors and products which in addition to flavors also contain fruit or vegetable ingredients and other natural ingredients ("food systems") which are used mainly in the manufacture of foods, beverages and other consumed products. Frutarom develops thousands of different flavors for its customers, most of which are tailor-made and customized for specific customers, and consistently develops new products to meet changing consumer preferences and future customer needs.

In recent years, Frutarom's Flavors segment has undergone

accelerated growth, mainly the result of its focus on natural and plant food flavors it offers its mid-size and local customers, in emerging and developed markets (focusing in particular on private labels); the provision of customized services, including technological and marketing support and assistance in the development of products, the offer of high level tailor-made services and products, as are normally provided for large multi-national companies; Frutarom’s unique, cutting edge products offered to the large multi-national market sector,

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and Frutarom’s strategic acquisitions, which have and are being successfully incorporated with Frutarom's global activities.

The Specialty Fine Ingredients Segment - Frutarom develops,

produces, markets and sells natural flavor extracts, natural functional food ingredients, natural pharmaceutical/nutraceutical extracts, aroma chemicals, essential oils, unique citrus products, natural gums and stabilizers. The Specialty Fine Ingredients products are sold primarily to the food, beverage, flavor, fragrance, pharmaceutical/nutraceutical and personal care industries.

Specialty Fine Ingredients activities focus on a value-added product

basket, which gives Frutarom a competitive edge over its rivals. Most of the specialty fine ingredients are natural products which enjoy higher-than-average demand compared to non-natural products. Frutarom acts to expand the natural product portfolio it offers its customers, with particular emphasis on the area of natural, functional and healthy foods.

PROFITABLE GROWTH STRATEGY AND ACQUISITIONS Frutarom continues to act with determination to implement its rapid growth

strategy through a combination of organic, profitable growth in its core activities and strategic acquisitions. The Company intends to continue growing in the main regions in which it operates and to expedite its expansion in emerging markets including Asia, Central and South America, Central and Eastern Europe and Africa in which growth rate is higher, as well as in North America, which is the largest market in the world for flavors. Frutarom acts to accelerate its expansion in these markets through focused efforts on strengthening its research and development, production, sales and marketing infrastructures in important target countries and by exploring options for additional strategic acquisitions.

Frutarom has extensive experience with successful implementation of

acquisitions and mergers and it acts to integrate the acquired companies and activities into its existing activity, utilizing both commercial and operational synergies, to optimize cross-selling opportunities, cost savings and improvement of profit margin.

After having conducted seven acquisitions in 2007 and three in 2009, all of

which were successfully integrated with its global activities and contribute to both a growth in sales and improved margins, Frutarom has continued with its acquisition strategy and completed five additional strategic acquisitions in 2011, and three more at the beginning of 2012. The integration of activities is moving ahead successfully and according to plan, and as it

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progresses it is expected to contribute to growth in sales as well as to improved margins and future profits for Frutarom.

Details of the three strategic acquisitions completed during the first quarter of 2012 are as follows: 1) Acquisition of Savoury Flavours

On January 4, 2012, Frutarom, through a subsidiary in the UK, signed an agreement to acquire 100% of the share capital of the UK company Savoury Flavours (Holding) Ltd. and its subsidiaries ("Savoury Flavours") for US$ 5.9M (GBP 3.8M), and additional consideration to be calculated according to performance, using a mechanism prescribed in the agreement, which according to the Company’s estimate will not exceed an amount equal to 5% of the transaction consideration. The transaction was completed upon signing. Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions (the non-sweet taste spectrum), including mainly flavors, seasoning compounds, marinades and sauces, specializing in snacks and convenience foods. Savoury Flavours has a development, manufacture and marketing site in Britain and a wide customer base including food manufacturers and private labels in the UK and in emerging markets. Savoury Flavours’ sales turnover over the twelve months ending on December 31, 2011 totaled US$7.1 M. From the date of the completion of the transaction until March 31, 2012, the acquired activity yielded US$ 1.6M and net profits (after financing expenses) in the amount of US$0.1 M. Savoury Flavours’ production site is located adjacent to the East Anglican Food Ingredients Ltd. (EAFI) production site, acquired by Frutarom in January 2011, which also manufacturers savory productsl. Frutarom has begun merger and integration of the two activities, and integration of Savoury's activities with those of Frutarom UK will continue over the coming months. The geographic proximity between the two sites, along with the two companies’ complimentary product range and technology, will allow the creation of significant synergies and integration of activities between Savoury Flavours and Frutarom’s savory activities in the UK and throughout the world, which has grown significantly over the last few years. For more details on the acquisition of Savoury Flavours, see the Company's immediate report of January 5, 2012.

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2) Acquisition of Etol:

During the first quarter of 2012, Frutarom, through a Swiss subsidiary, acquired 98% share capital of the Slovenian public company Etol Tovarna arom in eteričnih olj d.d. ("Etol"), in return for €34. M. On May 8, 2012 Etol was delisted from the Slovenian Stock Exchange. Frutarom will acquire the balance of shares from the minority shareholders, for €141 per share (in total €755 thousand) in accordance with the Slovenian law, so that the cost of the acquisition of Etol’s entire share capital will be €35.4 M (US$45.8 M). Etol, founded in 1924, is a leading flavor company, which together with its subsidiaries (the “Etol Group”) develops, manufactures, and markets flavor solutions, focusing on natural flavor products for the food and beverage industry. The Etol Group also has great experience in the development of sweet and savory flavors and fruit based flavors and products and food systems, specializing in local fruits of the region, as well as extensive activities in the growing area of beverage bases that Frutarom plans to further invest in order to substantially expand its global activity. Etol also has trade and marketing activity for products it does not manufacture, targeted for European countries, which will be integrated into Frutarom’s trade and marketing segment together with the trade and marketing activity in Israel. The trade and marketing activity is not counted among Frutarom’s core activities. The Etol Group has a sophisticated and innovative plant located on 70 dunam of land east of Ljubljana in Slovenia. The Etol Group’s products are sold to a wide customer base in Central and Eastern Europe and in emerging markets, with an emphasis on Slovenia, Russia, Poland, the Ukraine, Croatia, Serbia, Belarus, Macedonia, the Czech Republic, Kazakhstan, Turkey and other emerging markets such as Switzerland, Germany and the UK. Etol’s customers include leading food and beverage manufacturers in the countries in which it operates, among them large multi-national food companies. The Etol Group’s activities are synergetic with Frutarom’s activities. Frutarom is acting to integrate Etol's research and development, marketing and sales, logistics, procurement and manufacture with its own global operations, creating operational synergies and cross-selling. In 2011, Etol's sales turnover totaled US$71.4 M (€51.3M). Between January 1, 2012 and March 31, 2012 the acquired activity yielded revenues in the amount of US$15.4 M (€1.7 M), and net profit in the amount of US$ 2.5M (€1.9 M), after acquisition and financing expenses and a one-time income from negative goodwill profit.

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For more details regarding the acquisition of Etol, see the Company's immediate reports of January 17, 18 and 26, 2012, February 12, 2012 and March 17, 2012.

3) Acquisition of Mylner

On February 6, 2012, Frutarom signed an agreement, through its subsidiary in Brazil, to acquire 100% of the share capital of Mylner Indústria E Comércio Ltda, a Brazilian Flavors company, and its Brazilian mother company, Vila Osório Participações s/a (“Mylner”) in return for US$ 15.7 M (BRL27.1 M). Frutarom also paid an additional BRL4.4 M for Mylner's cash balance, BRL2.7 M of which has not yet been paid and serves as security for the sellers' undertaking for indemnification under the share purchase agreement, to be released in installments over three years. Mylner, founded in 1974, develops manufactures and markets flavor solutions, focusing mainly on sweet flavors for beverages and baked goods, natural plant extracts and natural flavor products. Mylner has a modern development, production and marketing site near Sao Paulo, Brazil, including land for future expansion. Mylner’s wide customer base includes leading food and beverage manufacturers in developing countries in Latin America and mainly Brazil. Mylner’s sales turnover in 2011 totaled US$11.4M1. From February 6, 2012 through March 31, 2012, the acquired activity yielded revenues in the amount of US$1.6 M, and its net profits were in the amount of US$0.3 M (before one-time acquisition expenses in the amount of US$0.4 M). For more information regarding this acquisition, see the Company's immediate report of February 7, 2012.

It is Frutarom's assessment that its capital structure (total assets of US$788 M, equity of US$414 M as of March 31, 2012, constituting 52.5% of the total assets) and net debt level (total loans after deduction of cash), which stand at US$186 M as of March 31, 2012, supported by the cash flow it achieves, and together with bank backing, will allow it to continue to realize its strategic acquisitions as it has done over the past few years while strengthening its position as one of the leading global companies in the field of flavors and fine ingredients, and to realize its vision:

“To be the Preferred Partner for Tasty and Healthy Success.”

1 The financial assessments presented above are based on Mylner's managerial reports, which have not been audited.

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B. FINANCIAL STATUS The Group's total assets as at March 31, 2012 totaled US$788.1 M compared to US$558.7 M as at March 31, 2011 and US$650.0M as at December 31, 2011. The Group's current assets totaled US$305.8 M, compared to US$ 236.5 M as at March 31, 2011 and US$246.6 M as at December 31, 2011. The fixed assets deducted by accumulated depreciation and other assets net as at March 31, 2012 totaled US$479.1 M compared to US$320.4 M as at March 31, 2011 and US$401.2 M as at December 31, 2011. The increase in total assets was mainly affected by the acquisitions completed in 2011 and during the first quarter of 2012, and by currency exchange translation differences of subsidiary assets values in European currencies versus the US dollar (the strengthening of the currency exchange rates of European currencies versus the US dollar as at December 31, 2012 compared to December 31, 2011).

C. RESULTS OF OPERATIONS IN Q1 2012

Frutarom sales over Q1 2012 (net of currency effects) increased by 27.5% and reached a quarterly sales record high of US$151.2 M, compared to US$121.0 M in the same quarter of 2011. Over the first quarter of 2012, the global trend of substantial raw material prices increase which had begun during the second half of 2010, continued to moderate, and there were even a small number of price reductions in some of the ingredients used by Frutarom from the record high level which they had reached at the end of last year. Frutarom acted and has continued over the past few months to act with diligence to adapt the sales prices of its products affected by the price increase of raw materials, and will continue to do so as long as the this trend continues. In order to lower costs, Frutarom also continues to expand its circle of suppliers and to strengthen its global purchasing power for raw materials and to maximally utilize of all the varied capacities of its many production sites throughout the world and the many operational synergies gained through its recent acquisitions. Frutarom has acted and acts in order to achieve a successful integration and maximal utilization of cross-selling possibilities deriving from the acquisitions made during 2011 and at the beginning of 2012. The acquisitions performed during the first quarter of 2012 contributed to an increase of US$31.4 M in sales for this quarter.

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The integration of research and development, purchasing and production activities of the eight activities acquired in 2011 and during the first quarter of 2012 are progressing as planned and successfully, and their contribution to the increase in profits is expected to increase in the coming quarters as the integration process progresses. Frutarom estimates that the continued internal growth and a combination of stabilization of raw material prices, together with adjustment of product selling prices which has continued even over the last few months, contribution of the continued realization of streamlining processes and improving the competitive costs structure, while taking maximum advantage of its production sites throughout the world and the successful merging of its recent acquisitions, will bring about improved future margins and continued strengthening of Frutarom’s competitive status as one of the leading companies in the world in the fields of taste, health and fine ingredients.

Sales In Q1 2012, Frutarom's sales, not taking into account the currency effect,

increased by 27.5% reaching a quarterly record high of US$ 151.2M compared to US$121.0 M in the same quarter in 2011. The weakening of the Euro and the British pound and the NIS versus the dollar (offset slightly following the strengthening of the Swiss Franc compared to the US dollar) compared to the first quarter last year, reduced sales in dollar terms by 2.6%. The acquisitions completed over the quarter contributed US$31.4 M to sales during this quarter.

Frutarom's sales in the Flavor segment (again not taking into account the

currency effect) increased by 39.4% compared to the same quarter last year, reaching a quarterly record high of US$109.0M. The effect of the currency exchange rates, as mentioned, reduced sales in dollar terms by 3.6%. The acquisitions preformed during 2011 and in the beginning of 2012 contributed US$27.6 M to sales during this quarter.

Frutarom's sales in the Specialty Fine Ingredients segment decreased (not

taking into account the currency effect) by 3.3% compared to the same quarter last year, and totaled US$37.5M. The effect of the currency exchange rates, as mentioned, reduced sales in dollar terms by 1%. The decrease in sales was impacted to a certain extent by the continued trend of reduction of inventory of some of Frutarom's fine ingredient customers.

Frutarom's sales in the trade and marketing sector increased by 125.0%

compared to the same quarter last year, reaching US$5.4 M. Sales include

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Etol activities in this segment, which contributed US$3.8 M to sales during this quarter.

Sales Breakdown by Fields of Activity in Q1 in 2001-2012 (US$ M and %)

Q1

2012 Q1

2011 Q1

2010 Q1

2009 Q1

2008 Q1

2007 Q1

2006 Q1

2005 Q1

2004 Q1

2003 Q1

2002 Q1

2001

109.0 80.2 75.4 67.4 84.4 49.9 44.7 40.3 20.3 12.7 10.8 9.0 Sales Flavor Segment 72.1% 66.3% 66.5% 68.5% 69.2% 62.0% 63.0% 62.3% 46.2% 45.0% 39.9% 37.3% %

37.5 39.1 37.6 29.6 35.3 29.1 25.5 23.4 22.5 14.2 14.9 13.9 Sales Fine Ingredient Segment 24.8% 32.3% 33.1% 30.1% 28.9% 36.2% 35.9% 36.2% 51.3% 50.4% 55.0% 57.7% %

5.4 2.4 1.2 2.2 3.6 2.6 1.4 1.8 1.7 1.8 1.6 1.5 Sales Trade & Marketing 3.6% 2.0% 1.1% 2.2% 3.0% 3.2% 2.0% 2.8% 3.9% 6.4% 5.9% 6.2% %

0.6- 0.7- 0.8- 0.7- 1.3- 1.1- 0.6- 0.8- 0.6- 0.5- 0.2- 0.3- Sales Inter Segments 0.4% - 0.6% - 0.7% - 0.8% - 1.1% - 1.4% - 0.9% - 1.2% - 1.4% - 1.8% - 0.7% - 1.2% - %

151.2 121.0 113.5 98.4 122.0 80.5 71.0 64.7 43.9 28.2 27.1 24.1 Total Sales

The following is a summary of the profit and loss report for Q1 2010 – 2012 (US$ M):

Q1 2010

Q1 2011

Q1 2012

Difference between

2011 - 2012(%)

Sales 113.5 121.0 151.2 24.9% Gross profit 43.5 45.7 54.9 20.3% R&D, Selling, Administration, General and Other expenses 26.9 29.0 37.1 27.8% Operating profit 16.6 16.6 17.8 7.3% EBITDA 21.3 21.5 25.0 16.2% Financing expenses(income) 1.3 )0.9( 0.9

Profit before tax 15.3 17.5 16.9 -3.4%

Net profit 11.1 13.1 13.5 2.8%

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Gross Profit The Company’s gross profit in Q1 2012 increased by 20.3%, reaching a

quarterly record high of US$54.9 M compared to US45.7 M during the same quarter last year. Gross margin reached 36.3% compared to a gross margin of 37.7% in the same period last year. Net of Etol’s trade and marketing activity (which is not a core activity of Frutarom) gross margin achieved 36.9%.

The increase in gross profit and margin were affected by substantial increase in raw material prices which had begun in 2010 and strengthened over the course of 2011 (as a result of which Frutarom's inventory costs rose). The Company acted and continues to act with determination and will continue to act so as long as the trend continues, in order to prevent future harm and improve Frutarom’s activities and profitability.

Selling and Marketing, Research and Development, General and

Administrative and Other Expenses In Q1 2012 selling, marketing, research and development, general and

administrative and other expenses, totaled US$ 37.1M (24.5% of sales), compared to US$ 29.0M (24% of sales) during the same quarter last year.

Sales and marketing, research and development, general and administrative expenses included one-time reorganization expenses in the amount of US$1.1 M. Other expenses included one – time income in the amount of US$1.3 M (income from negative goodwill for the acquisition of Etol in the amount of US$1.8 M, which was offset by one-time acquisition expenses in the amount of US$0.5 M), so that the net impact on the operating profit was US$0.2M. The increase in expenses derived from a growth in the scope of activity, and mainly from the acquisitions made in 2011 and over the first quarter of 2012 and from one-time expenses for acquisitions, as explained above. Frutarom acted and acts to achieve maximum efficiency while improving its future competitiveness.

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Operating Profit and EBITDA In Q1 2012, operating profit reached a quarterly high for first quarters, totaling US$17.8 M (11.8% of sales) compared to US$16.6 M (13.7% of sales) during the same quarter last year. The EBITDA achieved by Frutarom in Q1 2012 increased by 16.2% reaching a first quarter record high of US$25 M (16.5% of sales), compared to US$21.5 M during the same period last year (17.7% of sales). Operating profit and EBITDA included one-time revenues of US$0.2 M, as detailed above. Finance Expenses / Income In Q1 2012, finance expenses totaled US$0.9 M (0.6% of sales), compared to financing income of US$0.9 M (0.7% of sales) during Q1 2011. Interest expenses during Q1 2012 reached US$1.9 M compared to US$0.4 M during the same quarter last year. The increase in interest expenses is due to the increase in the Company’s loans in light of the acquisitions made. Financing income due to differences in currency exchange rates totaled US$1.0 M compared to financing income due to differences in currency exchange rates which totaled US$1.3 M during the same quarter last year. The difference in financing income is due to the impact of the weakening of the dollar exchange rate versus European currencies and the Israeli shekel as of March 31, 2012, compared to the exchange rate of the dollar versus those same currencies at December 31, 2011, similar to the weakening trend of the dollar versus those same currencies during the same period last year.

Profit before Tax In Q1 2012, profit before tax totaled US$16.9 M (11.2% of sales) compared

to US$17.5 M in Q1 2011 (14.5% of sales). Taxes on Income In Q1 2012, taxes on income totaled US$3.4 M (20.2% of profit before tax)

compared to US$4.4 M in Q1 2011 (25.0% of profit before tax). The reduction in the rate of tax expenses during Q1 2012 is mainly due to

changes in profit mix between companies in the Group acting in different

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countries, where there are different tax rates, and from a lowering of tax rates in some of the countries in which Frutarom operates. Net Profit In Q1 2012, net profit reached a quarterly record high of US$13.5 M compared to US$13.1 M in Q1 2011. Net margin totaled 8.9% compared to 10.8% during the same quarter last year. Earnings per Share In Q1 2012, earnings per share reached US$0.23 per share, similar to the same quarter last year.

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Summary of the quarterly profit and loss reports for 2009 - 2012 (US$ M):

Q1

2009 Q2

2009 Q3

2009 Q4

2009 Q1

2010 Q2

2010 Q3

2010 Q4

2010 Q1

2011 Q2

2011 Q3

2011 Q4

2011 Q1

2012

Income 98.4 106.7 111.6 108.5 113.5 114.3 111.0 112.4 121.0 130.6 135.3 131.6 151.2Gross profit 35.2 39.4 41.2 39.6 43.5 46.9 43.2 41.3 45.7 48.5 47.7 46.8 54.9 Selling, Marketing, R&D, General and Administrative, and Other Expenses

25.0 26.7 27.9 28.6 26.9 27.5 28.2 29.2 29.0 31.5 34.8 34.6 37.1

Operating profit 10.2 12.8 13.3 11.0 16.6 19.4 15.0 12.1 16.6 17.0 12.9* 12.2 17.8

EBITDA 14.5 17.4 18.3 16.0 21.3 24.0 19.8 16.9 21.5 22.2 *18.6 18.1 25.0

Finance expenses 3.3 0.1 0.0 0.9 1.3 2.3 -0.2 -0.2 -0.9 0.8 2.6 3.2 0.9 Profit before tax 6.9 12.7 13.2 10.1 15.3 17.1 15.2 12.2 17.5 16.2 10.3 8.9 16.9 Net profit 5.6 10.1 10.0 7.5 11.1 13.0 11.1 8.8 13.1 12.3 8.7 7.9 13.5

Frutarom’s business is characterized by seasonal fluctuations, generally expressed by higher sales and margin in

the first half of a given year, with lower sales and margin during the second half, mainly in the fourth quarter. The seasonality is a result of the fact that a substantial portion of the Company’s products are used by its customers in the manufacture of beverages, ice cream and yogurt, for which the demand increases during the summer months. As a result, sales of certain flavor solutions and fine ingredients produced by the Company tend to increase in the first half of the year as manufacturers of beverages, ice cream and yogurt restock their inventories and increase production in advance of rising demand during the summer months. The effect of seasonality on the Company’s results and activity has become more moderate in recent years with the significant increase in sales of savory products following the acquisitions of companies and activities in this field. The increase in the sales of natural functional food ingredients, and natural pharmaceutical/nutraceutical extracts, which are intended for the pharmaceutical/nutraceutical industries, also contributes to the lower seasonality's effect on demand.

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D. LIQUIDITY

During Q1 2012, the Company's cash flow from current activities reached

US$17.7 M, compared to a cash flow of US$2.8 M for the same quarter last year.

Frutarom acts and will continue to act to maintain an optimal level of working capital suited to the expected rate of growth, taking into account seasonality, demand and the various raw materials and their current and future anticipated prices.

E. SOURCES OF FINANCE Sources of Equity Frutarom's equity as at March 31, 2012 totaled US$413.6 M (52.5% of its

total assets) compared to US$380.1 M as at March 31, 2011 (68.0% of its total assets) and US$393.6 M as at December 31, 2011 (60.6% of its total assets). The change derives mainly from the growth in profit. Long-Term Loans Including Current Maturities of Long Term Loans (Average)

Average long-term credit from banks provided to the Company in Q1 2012

totaled US$163.0 M compared to US$63.1 M in Q1 2011. The increase is a result of an increase in loans taken for financing the Company’s acquisitions.

Short-Term Loans Excluding Current Maturities of Long Term Loans (Average)

Average short -term credit from banks provided to the Company in Q1 2012

totaled US$50.9 M compared to US$2.6 M in Q1 2011. The increase is a result of an increase in loans taken for financing the Company’s acquisitions.

Suppliers’ and Customers’ Credit (Average)

In Q1 2012, the Company utilized credit from suppliers and other creditors

in the amount of US$89.0 M compared to US$67.5 M in the same quarter last year. During Q1 2012, the Company granted credit of US$109.4 M to its customers, compared to US$78.7 M during the same period last year. The increase in credit from suppliers and to customers is a result mainly of the increase in the Group's sales and its activities.

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EXPOSURE TO MARKET RISKS AND THEIR MANAGEMENT During Q1 2012, there were no substantial changes regarding the Company's exposure to market risks and its management of such, including the impact of the Company's linkage balance, with regard to the Company's reports on this matter in its periodic report for 2011, published by the Company on March 15, 2012, except with regards to its loans, which have increased following the Company’s latest acquisitions. As of March 31, 2012, the Group has a long term loan after deduction of current maturities in a total amount of US$111.7 M, and its short term loans, including current maturities, of long term loans total US$112.1 M. The Company has cash balances of US$37.5 M. SENSITIVITY TESTS Sensitivity to Changes in the US Dollar- NIS Exchange Rate

Profit (Loss) from changes

Fair valueProfit (Loss) from

changes % of change +10% +5% - -5% -10%

Exchange rate 4.087 3.901 3.715 3.529 3.344 Cash and cash equivalents (5) (3) 52 3 5Customers (1,196) (598) 11,960 598 1,196Other debtors (106) (53) 1,062 53 106 (1,307) (654) 13,074 654 1,307

Bank loans 183 92 1831 (92) (183)Suppliers and service providers 201 101 2,011 (101) (201)Other creditors 115 57 1,146 )57( )115( 499 250 4,988 (250) (499)

Total exposure, net (808) (404) 8,086 404 808

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Sensitivity to Changes in the US Dollar-Pound Sterling Exchange Rate

Sensitivity to Changes in the US Dollar-Euro Exchange Rate




Exchange rate 0.688 0.657 0.625 0.594 0.563 US$ 000 Cash and cash equivalents (745) (373) 7,453 373 745 Customers

(1,139) (569) 11,389 569 1,139 Other debtors (127) (64) 1,273 64 127 (2,011) (1,006) 20,115 1,006 2,011

Bank loans 4,006 2,003 40,058 (2,003) (4,006) Suppliers and service providers 738 369 7,384 (369) (738) Other creditors 766 383 7,660 (383) (766) 5,510 2,755 55,102 (2,755) (5,510)

Total exposure, net 3,499 1,749 (34,987) (1,749) (3,499)




Exchange rate 0.825 0.788 0.750 0.713 0.675 US$ 000 Cash and cash equivalents (880) (440) 8,799 440 880Customers (4,754) (2,377) 47,535 2,377 4,754Other debtors (153) (77) 1,531 77 153 (5,787) (2,894) 57,865 2,894 5,787

Credit from banks 11,724 5,862 117,241 (5,862) (11,724)Suppliers and service providers 2,817 1,409 28,171 (1,409) (2,817)Other creditors 985 492 9,848 (492) (985) 15,526 7,763 155,260 (7,763) (15,526)

Total exposure, net 9,739 4,869 (97,395) (4,869) (9,739)

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Sensitivity to Changes in the US Dollar-Swiss Franc Exchange Rate

Sensitivity to Changes in the US Dollar-Other Currencies Exchange Rate




Exchange rate 0.994 0.949 0.904 0.859 0.813 US$ 000 Cash and cash equivalents (212) (106) 2,116 106 212Customers (716) (358) 7,163 358 716Other debtors (257) (128) 2,569 128 257 (1,185) (592) 11,848 592 1,185

Credit from banks 536 268 5,362 (268) (536)Suppliers and service providers 853 426 8,529 (426) (853) 1,389 694 13,891 (694) (1,389)

Total exposure, net 204 102 (2,043) (102) (204)



changes % of change +10% +5% - -5% -10% US$ 000 Cash and cash equivalents (835) (417) 8,349 417 835Customers (1,584) (792) 15,836 792 1,584Other debtors (37) (18) 367 18 37 (2,456) (1,227) 24,552 1,227 2,456

Credit from banks 252 126 2,524 (126) (252)Suppliers and service providers 245 123 2,454 (123) (245)Other creditors 274 137 2,739 (137) (274)Other long term creditors 75 38 750 (38) (75)

846 424 8,467 (424) (846)

Total exposure, net (1,610) (804) 16,085 804 1,610

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Sensitivity to Changes in Interest Rate on Fixed Rate Loans – Fair Value Risk Profit (Loss) from

changes Fair

value Profit (Loss) from


US$ 000 Short Term Loans (RMB) 23 12 2,503 (11) (23)

Long Term Loans (Euro) 65 32 5,285 (33) (66)

Total exposure, net 88 44 7,788 (44) (89)

F. SUMMARY OF SENSITIVITY TESTS TABLES The functional currency of the majority of the Group's companies is the local

currency in their respective country of residence; therefore, the translation differences of these companies’ balance sheet balances do not affect the Company’s profit and loss report and are directly attributed to the Company's equity (currency translation capital fund).

Sensitivity to Changes in the US Dollar- NIS Exchange Rate

Sensitivity to Changes in the US Dollar-Pound Sterling Exchange Rate


Fair value


% of change +10% +5% - -5% -10%

Exchange rate

4.087 3.901 3.715 3.529 3.344

US$ 000

Total Exposure, net (808) (404) 8,086 404 808


Fair value


% of change +10% +5% - -5% -10%

Exchange rate 0.688 0.657 0.625 0.594 0.563

US$ 000

Total Exposure net 3,499 1,749 (34,987) (1,749) (3,499)

18

Sensitivity to Changes in the US Dollar-Euro Exchange Rate

Sensitivity to Changes in the US Dollar-Swiss Franc Exchange Rate

Sensitivity to Changes in the US Dollar-Other Currencies Exchange Rate

Sensitivity to Changes in Interest Rate on Fixed Rate Loans – Fair Value Risk Profit (Loss) from

changes Fair

value Profit (Loss) from


US$ 000 Total exposure, net 88 44 7,788 (44) (89)


Fair value


% of change +10% +5% - -5% -10%

Exchange rate 0.825 0.788 0.750 0.713 0.675

US$ 000 Total exposure, net 9,739 4,869 (97,395) (4,869) (9,739)


Fair value


% of change +10% +5% - -5% -10%

Exchange rate 0.994 0.949 0.904 0.859 0.813

US$ 000 Total exposure, net 204 102 (2,043) (102) (204)


Fair value


% of change +10% +5% - -5% -10%

US$ 000

Total exposure, net (1,610) (804) 16,085 804 1,610

19

CORPORATE GOVERNANCE ASPECTS APPROVAL PROCESS OF THE FINANCIAL STATEMENTS

The Company's financial statements are submitted for approval to the Board of Directors, which is the body responsible for the Company's governance, a few days after the committee of the Board of Directors for the review of the financial statements (the "Balance Sheet Committee") discusses the financial statements and forms recommendations to the Board of Directors in accordance with the Companies Regulations (Instructions and Terms for the Approval Procedure of the Financial Statements), 2010 ("Statements Approval Regulations").

Members of the Company's Board of Directors The Board of Directors of the Company is comprised of seven members, of

whom five are directors with accounting and financial expertise as detailed above. For further details regarding the Company's directors see regulation 26 to Chapter D of the Company's periodic report for 2011, published on March 15, 2012 (Further Details on the Corporation).

Balance Sheet Committee and Members

The members of the Balance Sheet Committee are the members of the Audit Committee – Ya'acov Elinav, External Director and the chairman of the committee, Isaac Angel, External Director, and Gil Leidner, Director. The Balance Sheet Committee members have financial and accounting expertise and the capacity to read and understand financial statements and have provided the Company with a written declaration in this regard. Mr. Ya'acov Elinav and Mr. Isaac Angel are independent directors by virtue of their being external directors. Mr. Gil Leidner is an independent director in accordance with the determination of the Company's Audit Committee of May 19, 2011, and the determinations of the Board of Directors on August 17, 2011. For details regarding the skills, education and experience of the members of the Balance Sheet Committee, based on which the Company refers to them as directors with financial and accounting expertise, see regulation 26 in Chapter D of the Company's periodic report dated for 2011, published on March 15, 2012 (Further Details on the Corporation). Balance Sheet Committee Processes for Forming Recommendation to the Board of Directors The Company's financial statements were discussed at the meeting of the Balance Sheet Committee held on May 24, 2012. The members of the committee received the financial statements several days prior to the meeting. The three members of the Balance Sheet Committee attended the meeting as

20

well as the Company's independent auditors, the Company's President and CEO, Mr. Ori Yehudai, the Executive Vice President and CFO, Mr. Alon Granot, the Vice President of Finance, Mr. Guy Gill, and the Global Vice President of Legal Affairs and Corporate Secretary, Ms. Tali Mirsky. At the meeting, presentations were given by the Company and by the auditors. The Balance Sheet Committee discussed, among other things, the estimates and evaluations included in the financial statements, the internal control on financial reporting, the completeness and fairness of the disclosure in the financial statements, the accounting policy adopted, the financial practice implemented at the material matters of the Group, and the valuations, including the assumptions and estimations on which the data in the financial information is based. Within the discussion, the Balance Sheet Committee formed its recommendations to the Board of Directors in accordance with the Statements Approval Regulations. The recommendations of the committee were delivered to the Company's Board of Directors three business days prior to the Board meeting at which the financial statements were discussed, which in the opinion of the Board of Directors was a reasonable time period in light of the scope and complexity of the recommendations. Approval Procedure of the Reports by the Board of Directors

The members of the Board of Directors received the draft of the financial statements several days prior to the date of the Board meeting at which the statements were submitted for their approval. The Company's Independent Auditors and members of the Company's senior management were also invited to attend the meeting, including Mr. Ori Yehudai - the President and CEO, Mr. Alon Granot - Executive Vice President and CFO, Mr. Amos Anatot, Executive Vice President Global Supply Chain and Operations, Mr. Guy Gill - Vice President of Finance, and Ms. Tali Mirsky - Global Vice President of Legal Affairs and Corporate Secretary. The Internal Auditor of the Company, Mr. Yoav Barak, was also invited to that meeting. During the meeting, the Board of Directors discussed the recommendations of the Balance Sheet Committee regarding the financial statements. The President and CEO and Executive Vice President and CFO presented during the meeting the Group's business and financial results to the Board of Directors for the relevant period in comparison with previous periods emphasizing special events that occurred during the period. During the presentation of the results of the Group, the Company's management members answered questions and related to the Directors' comments. Following presentation of the Company's financial results, the Company's Independent Auditors answered the Directors’ questions. Finally, the Board of Directors voted on approval of the financial statements. All of the members of the Board of Directors were present at the Board meeting held on May 29, 2012, where the financial statements for March 31, 2012 were unanimously approved.

21

DISCLOSURE RELATING TO THE CORPORATE FINANCIAL REPORTING A. DIVIDEND DISTRIBUTION IN 2012 On March 14, 2012, the Company's Board of Directors resolved to approve

a distribution of cash dividend in the amount of NIS 0.2 per share. The dividend in the total amount of US$3,113 thousand was paid on May 6, 2012.

B. CRITICAL ACCOUNTING ESTIMATIONS

No significant event has occurred in the report period compared to the Company's periodic report for 2011, published on March 15, 2012.

C. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT ON THE FINANCIAL STATUS At Frutarom's request and according to the resolution of Etol's shareholders, on May 8, 2012, Etol's shares were delisted from trade on the Slovenian Stock Exchange. Frutarom continues to act to acquire the balance of Etol's shares from the remaining shareholders.

D. EXCLUSION OF THE COMPANY'S SEPARATE FINANCIAL

STATEMENTS UNDER REGULATION 9(C) TO THE REGULATIONS The Company excluded, from the Periodic Report, a separate financial

statement as set forth in Regulation 9C to the Regulations (the "Solo Statements") due to the negligibility of the additional information of such statements and the fact that the Solo Statement will not add any material information to a reasonable investor which is not included in the Company's consolidated statements.

The Company determined that the information is negligible as the Company

does not have any commercial activities of any kind whatsoever and therefore the Company's results of operations have no effect on the Groups' consolidated profit and loss statements. The Company does not employ people and it does not have any sales or expenses toward third parties.

All of the Company's revenues (dividend and financing income on re-evaluations of capital bills versus Frutarom Ltd.) derive from Frutarom Ltd. From a balance sheet aspect, other than the settling of accounts with the income tax authority, the Company has no balances versus third parties. The only balances it has are loans and balances to Group members (fully owned) and land in the amount of US$139 thousand.

22

The management of the Company has determined that so long as income from externals or from Companies not fully held by the Company are lower than 5% of total revenues in the consolidated financial reports, and so long as expenses to externals or Companies not fully held by the Company are lower than 5% of total expenses in the consolidated financial statements, the Company's separate financial information under regulation 9C to the Regulations is insignificant, and the absence of such does not harm investors' ability to estimate the Company's fluidity risks and does not add any substantial information for reasonable investors.

The management of the Company has also examined the warning signs contained in Regulation 10(14) to the Regulations and determined that they do not exist..

The Board of Directors thanks Frutarom’s management and employees for the Company’s fine achievements. _____________________ _____________________ Ori Yehudai Dr. John Farber President & CEO Chairman of the Board May 29, 2012

FRUTAROM INDUSTRIES LTD.

INTERIM FINANCIAL INFORMATION

(Unaudited)

31 MARCH 2012


INTERIM FINANCIAL INFORMATION

(Unaudited)

31 MARCH 2012

TABLE OF CONTENTS

Page

REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION 2

CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION – IN U.S. DOLLARS:

Condensed Consolidated Statement of Financial Position 3-4

Condensed Consolidated Income Statement and Condensed Consolidated

Statement of Comprehensive Income 5

Condensed Consolidated Statement of Changes in Shareholders’ Equity 6-8

Condensed Consolidated Statement of Cash Flows 9-10

Explanatory notes to Condensed Consolidated Financial information: 11-17

Kesselman & Kesselman, 1 Nathanson Street, Haifa 33034, Israel, P.O Box 33984, Haifa 31339 Telephone: +972 -4- 8605000, Fax:+972 -4- 8605001, www.pwc.co.il

2

Report on Review of Interim Financial Information to the shareholders of Frutarom

Industries LTD.

Introduction We have reviewed the accompanying financial information of Frutarom Industries Ltd. and its subsidiaries (hereafter - the group), which includes the condensed consolidated statement of financial position as of 31 March, 2012 and the related condensed consolidated statement of income, comprehensive income, changes in shareholders’ equity and cash flows for the three-month period then ended. The Board of Directors and management are responsible for preparation and presentation of the financial information for this reporting period in accordance with IAS 34 – "Interim Financial Reporting"; our responsibility is to express a conclusion of the financial data for this interim period based on our review. We did not review the condensed interim financial information of certain consolidated companies, whose assets included in consolidation constitute approximately 25.14% of total consolidated assets as of 31 March, 2012 and whose revenues included in consolidation constitute approximately 24.41% of total consolidated revenues for the three-month period ended on that date. The condensed financial information of these companies was reviewed by other auditors, whose review reports have been furnished to us; and our conclusion, insofar as it relates to the financial information included for these companies, is based on review reports of the other auditors. Scope of review

Our review was performed in accordance with Standard No. 1 on Review Engagements of the Institute of Certified Public Accountants in Israel - "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". Review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Auditing Standards generally accepted in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review and the review reports of the other auditors, nothing came to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with IAS 34.

Haifa, Israel Kesselman & Kesselman 29, May, 2012 Certified Public Accountants (lsr.) A member firm of PricewaterhouseCoopers International Limited

3


CONDESED CONSOLDIATED STATEMENT OF FINANCIAL POSITION

31 MARCH 2012

31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands

A s s e t s CURRENT ASSETS:

Cash and cash equivalents 37,526 33,665 36,472 Accounts receivable:

Trade 115,933 85,106 86,054 Other 7,237 11,494 6,990

Prepaid expenses and advances to suppliers 11,705 5,163 5,916 Inventories 133,362 101,113 111,214

305,763 236,541 246,646 NON-CURRENT ASSETS:

Property, plant and equipment 193,442 130,694 145,455 Intangible assets 285,652 189,682 255,710Deferred income tax assets 2,580 1,594 2,073 Prepaid expenses in respect of operating lease 61 167 67 Others 631 - -

482,366 322,137 403,305 Total assets 788,129 558,678 649,951

Dr. John Farber )

Chairman of the Board )

Ori Yehudai ) President and CEO )

Alon Granot )

Executive Vice President and CFO )

Date of approval of the interim financial information by the board of directors: May 29, 2012

4

31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands

Liabilities and equity CURRENT LIABILITIES:

Short-term bank credit and loans and current maturities of long-term loans 112,143 41,031 52,699

Accounts payable: Trade 56,472 39,961 40,239 Other 49,903 33,323 38,444

Dividend payable 3,113 3,290 - 221,631 117,605 131,382

NON-CURRENT LIABILITIES: Long-term loans, net of current maturities 111,727 26,052 88,947Retirement benefit obligations 13,965 11,916 11,359 Deferred income tax liabilities 26,450 23,032 24,669 Other 750 - -

152,892 61,000 124,975 Total liabilities 374,523 178,605 256,357

EQUITY: Equity attributable to owners of the parent Ordinary shares 16,597 16,597 16,597 Other capital surplus 97,835 96,825 97,356 Translation differences 19,894 28,074 12,356 Retained earnings 280,558 241,456 270,266 Less - cost of company shares held by subsidiary (3,199) (2,879) (2,981)

411,685 380,073 393,594 Non-controlling interests 1,921 - -

Total equity 413,606 380,073 393,594

Total equity and liabilities 788,129 558,678 649,951

The accompanying notes are an integral part of these condensed financial statements.

5


CONDESED CONSOLIDATED STATEMENT OF INCOME

FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012 3 months ended Year ended 31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands, except for income per share data

SALES 151,217 121,033 518,443

COST OF SALES 96,285 75,370 329,866

GROSS PROFIT 54,932 45,663 188,577 Selling, marketing, research and development expenses- net 25,260 20,099 88,641 General and administrative expenses 13,016 8,887 39,231 Other expenses (income) - net (1,181) 49 2,041

INCOME FROM OPERATIONS 17,837 16,628 58,664

FINANCIAL EXPENSES (INCOME) – net 923 (874) 5,798 INCOME BEFORE TAXES ON INCOME 16,914 17,502 52,866

TAXES ON INCOME 3,413 4,371 10,835

INCOME FOR THE PERIOD 13,501 13,131 42,031

PROFIT ATTRIBUTABLE TO: OWNERS OF THE PARENT 13,405 13,131 42,031 NON-CONTROLLING INTERESTS 96 - -

TOTAL INCOME 13,501 13,131 42,031 EARNINGS PER SHARE: Basic 0.23 0.23 0.73 Fully diluted 0.23 0.23 0.73

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012

U.S. dollars in thousands INCOME FOR THE PERIOD 13,501 13,131 42,031 OTHER COMPREHENSIVE INCOME -

translation differences 7,538 10,463 (5,255) TOTAL COMPREHENSIVE INCOME

FOR THE PERIOD 21,039 23,594 36,776

OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO:

OWNERS OF THE PARENT 20,943 23,594 36,776 NON-CONTROLLING INTERESTS 96 - -

TOTAL INCOME 21,039 23,594 36,776


6

(Continued) - 1


CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT

Cost of Total Other company company's Non- Ordinary capital Translation Retained shares held shareholders' controlling shares surplus differences earnings by subsidiary equity interests Total U . S . d o l l a r s i n t h o u s a n d s BALANCE AT 1 JANUARY 2012 (audited) 16,597 97,356 12,356 270,266 (2,981) 393,594 - 393,594 CHANGES DURING THE 3 MONTHS

ENDED 31 MARCH 2012 (unaudited): Comprehensive income - income for the period - - - 13,405 - 13,405 96 13,501 Other comprehensive income - translation differences - - 7,538 - - 7,538 - 7,538 Total comprehensive income for the period - - 7,538 13,405 - 20,943 96 21,039 Plans for allotment of company shares to employees of subsidiary:

Acquisition of the Company shares by subsidiary - - - - (579) (579) - (579) Receipts in respect of allotment of company shares to employees - (58) - - 361 303 - 303

Allotment of shares and options to senior employees- recognition of compensation related to employee stock - 537 - - - 537 - 537 and options grants

Dividend including erosion - - - (3,113) - (3,113) - (3,113) - 479 - (3,113) (218) (2,852) - (2,852)

Non-controlling interest arising on business combination - - - - - - 1,825 1,825

BALANCE AT 31 MARCH 2012 (unaudited) 16,597 97,835 19,894 280,558 (3,199) 411,685 1,921 413,606


7

(Continued) - 2




Cost of Other company Ordinary capital Translation Retained shares held shares surplus differences earnings by subsidiary Total U . S . d o l l a r s i n t h o u s a n d s BALANCE AT 1 JANUARY 2011 (audited) 16,597 96,630 17,611 231,615 (2,661) 359,792 CHANGES DURING THE 3 MONTHS

ENDED 31 MARCH 2011 (unaudited): Comprehensive income - income for the period - - - 13,131 - 13,131 Other comprehensive income - translation differences - - 10,463 - - 10,463 Total comprehensive income for the period - - 10,463 13,131 - 23,594 Plans for allotment of company shares to employees of subsidiary:

Acquisition of the Company shares by subsidiary - - - - (350) (350) Receipts in respect of allotment of company shares to employees - (88) - - 132 44

Allotment of shares and options to senior employees- recognition of compensation related to employee stock and options grants - 283 - - - 283

Dividend including erosion - - - (3,290) - (3,290) - 195 - (3,290) (218) (3,313)

BALANCE AT 31 MARCH 2011 (unaudited) 16,597 96,825 28,074 241,456 (2,879) 380,073


8

(Concluded) - 3




Cost of Other company Ordinary capital Translation Retained shares held shares surplus differences earnings by subsidiary Total U . S . d o l l a r s i n t h o u s a n d s ( A u d i t e d )

BALANCE AT 1 JANUARY 2011 (audited) 16,597 96,630 17,611 231,615 (2,661) 359,792 CHANGES DURING THE YEAR ENDED

DECEMBER 2010 (audited): Comprehensive income: Income for the year - - - 42,031 - 42,031 Other comprehensive income - Translation differences - - (5,255) - - (5,255) Total comprehensive income for the year - - (5,255) 42,031 - 36,776 Plan for allotment of Company shares to employees

of subsidiary: - - - - (892) (892) Purchase of Company shares by subsidiary Receipts in respect of allotment of Company - (382) - - 572 190

shares to employees Allotment of shares and options to senior employees- Recognition of compensation related to employee - 1,108 - - - 1,108

stock and option grants - - - (3,380) - (3,380)

Dividend paid - 726 - (3,380) (320) (2,974)

BALANCE AT 31 DECEMBER 2011 (audited) 16,597 97,356 12,356 270,266 (2,981) 393,594


9


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


3 months ended Year ended 31 March 31 December, 2012 2011 2011 U.S. dollars in thousands (Unaudited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES:

Cash generated from operations (see appendix) 20,465 7,014 47,363Income tax paid (2,775) (4,215) (11,788) Net cash provided by operating activities 17,690 2,799 35,575

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property, plant and equipment (3,600) (1,742) (7,835) Purchase of intangibles (653) (558) (2,564)Interest received 170 120 642 Acquisition of subsidiaries - net of cash acquired (63,597) - (57,963) Acquisition of operations (notes 4) - (9,113) (43,698)Reimbursement in respect of acquisition of operation - - 3,850 Proceeds from sale of property, plant and equipment 72 47 289 Net cash used in investing activities (67,608) (11,246) (107,279)

CASH FLOWS FROM FINANCING ACTIVITIES:

Interest paid (1,379) (364) (2,207) Receipt of long-term bank loans 18,788 - 102,002 Repayment of long-term bank loans (11,956) (7,671) (40,064) Receipt of short-term bank credit and loans – net 46,213 6,956 8,201 Purchase of company shares by subsidiary – net of receipts in respect of the shares (276) (306) (702) Dividend paid - - (3,380) Net cash used in financing activities 51,390 (1,385) 63,850

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS

AND BANK CREDIT 1,472 (9,832) (7,854) BALANCE OF CASH AND CASH EQUIVALENTS AND BANK

CREDIT AT BEGINNING OF PERIOD 36,472 44,389 44,389 LOSSES FROM EXCHANGE DIFFERENCES ON CASH,

CASH EQUIVALENTS AND BANK CREDIT (690) (892) (63) BALANCE OF CASH, CASH EQUIVALENTS AND BANK

CREDIT AT END OF PERIOD 37,254 33,665 36,472


10


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


Appendix for Condensed Consolidated Statement of Cash Flows – net cash generated from operations:

3 months ended Year ended 31 March 31 December, 2012 2011 2011 U.S. dollars in thousands (Unaudited) (Audited)

Income before taxes on income 16,914 17,502 52,866 Adjustments required to reflect the cash flows from operating activities:

Depreciation and amortization 6,585 4,570 20,612 Recognition of compensation related to employee stock

and options grants 537 283 1,108 Liability for employee rights upon retirement – net 50 29 225 Loss (income) on from sale of fixed assets 24 (11) 17 Increase (decrease) in provisions – net - (2) 29 Erosion of loans - 146 - Interest paid – net 1,209 244 1,565 Gain on a bargain purchase (1,729) - - 6,676 5,259 23,556

Operating changes in working capital: Increase in accounts receivable: Trade (9,684) (11,919) (12,035) Other 173 (2,828) (3,046) Increase (decrease) in accounts payable and accruals: Trade 9,766 8,083 8,342 Other 1,764 813 (5,524) Increase in inventory (5,144) (9,896) (16,796) (3,125) (15,747) (29,059)

Net cash flow from operating activities 20,465 7,014 47,363


11


EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION

31 MARCH 2012

(UNAUDITED)

NOTE 1 - GENERAL:

a. Frutarom Industries Ltd. is a global company, founded in 1933. The Company operates through the consolidated company (hereafter - Frutarom Ltd.) and the companies under its control (hereafter – the Group). The Group has two main operations: the Flavours activity and the Fine Ingredients activity. The Group develops, manufactures, markets and sells flavours and fine ingredients used by producers of food and beverage, pharma-nutraceutical, flavours and fragrances, and personal care and cosmetics products as well as other products.

b. The Company’s activity is subject to seasonal fluctuations, with generally higher sales in the first

half of a given year and lower sales in the second half of a given year (in particular in the fourth quarter). Many of the Company’s products are used by its customers in the manufacture of beverages and dairy products such as soft drinks, ice cream and yogurts, for which demand generally increases during the summer months. As a result, sales of certain flavors and fine ingredients produced by the Company are higher in the first half of the year than in the second half.

NOTE 2 - BASIS OF PREPARATION OF CONDESED CONSOLIDATED FINANCIAL STATEMENTS

a. The interim condensed consolidated financial information of the group as of 31 March , 2012

and for the 3 month period ended on that date (hereinafter - the interim financial information) was prepared in accordance with International Accounting Standard No. 34 - "Interim Financial Reporting" (hereafter – "IAS 34"). The interim financial information should be read in conjunction with the annual financial statements as of 31 December, 2011 and for the year ended on that date and with the notes thereto, which were all prepared in accordance with International Financial Reporting Standards (hereafter – "IFRS"). The interim financial information is reviewed and is not audited.

b. Estimates –

The preparation of interim financial statements requires management to exercise its judgment; it also requires the use of accounting estimates and assumptions that affect the application of the group's accounting policy and the amounts of reported assets, liabilities, income and expenses. Actual results may differ from those estimates. In preparation of these condensed consolidated interim financial statements, the significant judgments that were exercised by the management in applying the group's accounting policy and the key sources of estimation uncertainty were similar to those applied in the consolidated annual financial statements for the year ended December 31, 2011.

NOTE 3 - PRINCIPAL ACCOUNTING POLICIES:

a. The accounting policies used in preparation of the interim financial information are consistent

with the 2011 annual financial statements, except as described below: Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss.

12



31 MARCH 2012

(UNAUDITED)

NOTE 3 - PRINCIPAL ACCOUNTING POLICIES (continued):

b. As specified in the annual financial statements of the group for the year 2011, standards, amendments and interpretations to existing standards came into effect and are effective for reporting period commencing on January 1, 2011, but first time implementation of these standards and interpretations had no material effect on the financial information for the interim period (including comparative figures) of the Group.

c. Additional new standards and amendments to existing standards that are not yet in effect and that

the company elected not to early adopt are listed in the group's 2011 annual financial statements. NOTE 4 – BUSINESS COMBINATIONS

a. Acquisition of Savoury Flavours

On January 4, 2012, Frutarom signed, through a UK subsidiary, an agreement for the purchase of 100% of the share capital of UK company Savoury Flavours (Holding) Limited and its subsidiaries (hereafter – "Savoury Flavours") in consideration for $ 5.9 million (£ 3.8 million) and an additional consideration to be computed in accordance with performances based on a mechanism set in the agreement; in the opinion of the Company, the additional consideration shall not exceed 5% of the amount of the transaction. Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions, including mainly flavors, seasoning compounds, marinades, and sauces, specializing in snacks and convenience foods. It has a development, manufacturing, and marketing site in the United Kingdom, and a wide customer base including food manufacturers and private label manufacturers in the U.K. and in emerging markets. In the 12 months ended December 31, 2011, Savoury Flavours' sales turnover total $7.1 million. Savoury Flavours’ production site is located close to EAFI’s production site (savory operation that was acquired in 2011). Frutarom has started the merger and combination of the two operations as well as with integrating those operations into Frutarom's savory operations in the UK, and will continue doing so over the coming months. The geographic proximity, along with the two companies’ complementary product portfolios and technologies, will allow significant business synergies between Savoury Flavours’ and Frutarom’s fast growing activities in savory foods categories in the UK and worldwide. The transaction was financed using bank credit. The transaction was completed on the day the said agreement was signed. The cost of acquisition was fully allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. Determination of the fair falue of the acquired assets and liabilities is subject to final allocation of the consideration of the purchase to the fair value of assets, Allocation which is performed by the Company and has not yet been completed as of the date of approval of these financial statements.

13



31 MARCH 2012

(UNAUDITED)

NOTE 4 – BUSINESS COMBINATIONS (continued):

Assets and liabilities of Savoury Flavours at date of acquisition:

Fair value U.S. dollars in

thousands Current assets: Accounts receivable: Trade 1,078 Inventory 990 Others 123 Non-current assets: Fixed assets 170 Intangible assets 4,984 Current liabilities : Accounts payable and accruals-

Trade (526) Others (429)

Deferred income taxes (578) 5,812

The acquired operations generated revenue of $ 1,553 thousands and net income of $102 thousands (after acquisition and finance costs), for the period from the acquisition date through March 31, 2012.

b. Acquisition of Etol

In the first quarter, Frutarom acquired, through a Swiss subsidiary, 98% of the share capital of the public Slovenian company Etol in consideration for € 34.6 million. On May 8, 2012, Etol was delisted from the Slovenian Stock Exchange. Frutarom will acquire the remaining shares of Etol from the remaining shareholders in consideration for € per share (a total of € 0.8 million) in accordance with the Slovenian law, so that the total cost of acquisition of all of Etol's shares shall be € 35.4 million ($ 45.8 million). Etol, founded in 1924, develops, manufactures and markets sweet and savory flavors, focusing on natural flavor products for the food and beverage industry. Etol also has great experience in the development of fruit based flavors and products and Food Systems, specializing in local fruits of the region, as well as extensive activities in the growing area of bases for beverages that plans to further invest in order to substantially expand its global activity. Etol also has trade and marketing activities for products it does not manufacture, targeted for European countries, which will be integrated into the trade and marketing sector, together with the trade and marketing sector in Israel. Trade and marketing activities are not counted among Frutarom’s core activities.

14



31 MARCH 2012

(UNAUDITED)


In the twelve months ended December 31, 2011, Etol's sales turnover amounted to € 51.3 million ($ 71.4 million). Etol has a sophisticated and innovative plant located on some 70 dunam of land east of Ljubljana in Slovenia. Etol’s products are sold to a wide customer base in Central and Eastern Europe and in emerging markets, including Russia, Poland, the Ukraine, Croatia, Serbia, Belarus, Hungary, Slovakia, Macedonia, the Czech Republic, ,Kazakhstan, Turkey and other emerging markets characterized by higher than average growth rates in comparison with the world average market growth as well as developed countries such as the UK, Switzerland and Germany. Leading food and beverage manufacturers in the countries it operates in number among Etol’s customers, including large multi-national food companies. The acquisition is synergetic with Frutarom’s activities. Frutarom is acting to integrate Etol's research and development, marketing and sales, logistics, procurement and manufacture with its own global operations, creating operational synergies and cross-selling. The consideration paid in cash amounted to $ 44,718 thousands (€ 34,601 thousands) and was fully funded by short-term bank credit, the company intends to replace it in 2012 to long-term credit. The cost of acquisition was allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. The intangible asests recognized include product formulas in the total amount of € 2,472 thousands ($ 3,195 thousands), customer relations in the total amount of € 1,267 thousands ($ 1,637 thousands) and gain on a bargain purchase in the total amount of € 1,338 thousands ($ 1,729 thousands). The product formulas and customer relations are amortized over an economic useful life of 20 years and 10 years, respectively. The gain on a bargain purchase was recorded as a one-off expense in the statement of income.

15



31 MARCH 2012

(UNAUDITED)


Assets and liabilities of Etol at date of acquisition:


thousands Current assets: Cash and cash equivalents 1,068 Accounts receivable: Trade 16,092 Inventory 10,435 Others 4,925 Non-current assets: Fixed assets 38,647 Computer software 1,752 Other non-current assets 629 Intangible assets:

Product formulas 3,195 Customer relations 1,637 Gain on a bargain purchase (1,729)

Current liabilities : Accounts payable and accruals-

Trade (4,049) Others (4,004)

Deferred income taxes (534) Retirement benefit obligations, net (2,144) Long term loans (21,202) 44,718

The acquired operations generated revenue of $ 15,361 thousands and net income of $ 2.5 million (net of acquisition, finance and gain on a bargain purchase .)

c. Acquisition of Mylner Industria E Comercio Ltda

On February 6, 2012 Frutarom signed, through a subsidiary, an agreement for the acquisition of 100% of the share capital of the Brazilian company Mylner Industria E Comercio (hereafter – “Mylner”) and its parent company Vila Osorio Participacoes in consideration for $ 15.7 million (27.1 Brazlian real). Frutarom also paid a total of 4.4 Brazilian reals for the cash balance of Mylner out of which a total of 2.7 Brazilian real (capitalized value – 2.5 million Brazilian real) was not paid yet and used as security for the seller's indemnification liability in accordance with the purchase agreement, to be realized in installments over 3 years.

16



31 MARCH 2012

(UNAUDITED)

NOTE 4 – BUSINESS COMBINATIONS (continued): Mylnar, founded in 1974, develops, produces and markets sweet flavors for beverages and baked goods, and natural flavor products. Mylner has a modern development, production, and marketing site in the area of Sao Paulo, Brazil, including land for future expansion, and employs some 70 workers. Mylner’s wide customer base includes leading food manufacturers mainly in Brazil, and in other developing countries in Latin America In 2011, Mylner sales turnover amounted to $ 11.4 million (app. 19 million Brazilian real). The transaction was financed by bank credit and was completed on the date of signing the agreement. The cost of acquisition was allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. Determination of the fair falue of the acquired assets and liabilities is subject to final assessment of allocation of the consideration of the purchase to the fair value of assets and liabilities; this assessment is performed for the Company and has not yet been completed as of the date of approval of these financial statements. Assets and liabilities of Mylner at date of acquisition:


thousands Current assets: Cash and cash equivalents 2,542 Accounts receivable: Trade 766 Inventory 1,053 Non-current assets: Fixed assets 1,359 Intangible assets 12,974 Current liabilities : Accounts payable and accruals-

Trade (578) Others (858)Short term bank credit (5)

Deferred income taxes (12) Non-current liabilities - Others (782) 16,459

The acquired operations generated revenue of $1,602 thousands and net income of $ 272 thousands (before acquisition and finance costs in the amount of $316 thousands) for the period from the acquisition date through March 31, 2012.

17



31 MARCH 2012

(UNAUDITED)

NOTE 5 – DIVIDEND

On 14, March 2012, the Company’s Board of Directors declared the distribution of a dividend of NIS 0.2 per share, in the total amount of $ 3,113 thousands.

NOTE 6 – SEGMENT REPORTING

For management purposes, the Group is organized on a worldwide basis into two major operating activities: Flavour and Fine Ingredients. Another operating activity is Trade and Marketing. Results of operation of the segments are being measured based on operating profit. Segment data provided to the President and the CEO in respect of the reported segments is as follows:

Fine Trade and

Flavors ingredients Marketing Total

operations operations operations Eliminations Consolidated U.S. dollars in thousands

3 months ended 31 March 2012 (unaudited): Revenues 108,966 37,468 5,386 (603) 151,217

Segment results 14,002 3,646 362 (173) 17,837

3 months ended 31 March 2011 (unaudited): Revenues 80,211 39,137 2,394 (709) 121,033 Segment results 11,204 5,451 191 (218) 16,628

Year ended 31 December 2011 (audited): Revenues 369,894 145,008 6,373 (2,832) 518,443

Segment results 46,811 11,745 353 (245) 58,664

The reconciliation of the reported profits and total profits before taxes for the reported periods is described below:

3 months ended Year ended 31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands Reported segment profits 17,837 16,628 58,664Financing expenses (income) 923 (874) 5,798 Profit before taxes on income 16,914 17,502 52,866

Very Substantial Valuation

The following are details about the purchase price allocation for ETOL according to IFRS3R and the directives of Regulation 8b to the Securities Regulations (Periodic and Immediate Reports), 1970:

Valuation subject Allocation of acquisition price of ETOL Valuator BDO Ziv Haft Consultants and Management Ltd.

Valuation requester Frutarom Industries Ltd., by Mr. Guy Gill, VP Finance

Engagement date March 2012 Approval to attach to reports

The valuator approved in writing the attachment of the evaluation to the Company's reports

Valuation timing Allocation of assets as of January 17, 2012. Valuation was conducted during March – May 2012.

Purchase Price Allocation for assets and liabilities In Euro 000'

Tangible assets, net 33,734 Intangible assets Customer relations 1,267 Know how 2,472 Deferred tax on intangible assets

)747(

Goodwill )1,338( Total 35,387

Identification of evaluator and its characterization

Ziv Haft Consulting and Management was established by partners in the BDO Ziv Haft Accounting firm. Ziv Haft Consulting and Management is part of the global BDO network and provides consulting and management services in a wide variety of areas for companies operating in different areas. The company has rich experience in the following areas: valuations, due diligence – financial and accounting) valuation of goodwill and intellectual assets, performance of financial analysis, current analysis of Israeli public hitech and communications companies, business plans, planning of presentations for potential investors, financial management and analysis of BOT and PFI projects, receivership, liquidation and appointment as special administrator, handling companies in crisis, formulating recovery plans, management of business and companies, supporting mergers and splits, transaction planning and more. Evaluator: Pini Shmueli Nissan. Evaluator's education BA in Economics, Ben Gurion University of the Negev.

M.Sc. in economics, Eitan Bargelis School at the Tel-Aviv University.

Positions held: Director of research and consulting department at

Forsyth; Director of consulting department at Ernst & Young Areas of expertise: Performance of financial assessments and valuations,

including valuations for accounting purposes for reporting corporations in scopes similar to those of the reported valuation or larger;

Pricing and analysis of financial issues for government and private bodies;

Support in IPOs and consultation in mergers. The evaluator has no dependency on Frutarom and there are no indemnification agreements with the evaluator.

Valuation model Customer relations – DCF – Discounted Cash Flow Know how – Royalty Relief Method

Valuation Assumptions

Discount rate: 11% before taxes Growth rate: 2% long term Rate of permanent asset return – 7% Rate of working capital – 4% Rate of HR contribution – 11% Data used as a basis for comparison: the Company’s results in recent years and its forecast.

Frutarom Industries Ltd. Purchase Price Allocation - ETOL Group

Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 2

BDO Ziv Haft Amot Bituach House Building B, 48

Menachem Begin Road, Tel Aviv 66180 Israel www.bdo.co.il

Frutarom Industries Ltd.

Re: A Purchase Price Allocation of ETOL Group.

In accordance with a request Frutarom. (Hereinafter: "Frutarom" or "The

purchaser") BDO Ziv Haft Consulting & Management Ltd. (Hereinafter:

"BDO") has performed an investigation and valuation of the net assets of

ETOL Tovarna arom in etericnih olj d.d. (Hereinafter: "ETOL" or/and the

"Company") with its subsidiary (Hereinafter: "The Group" or/and the "ETOL

Group") acquired by Frutarom, as of January 17th, 2011 (Hereinafter: the

"Valuation Date").

The valuation is based upon data and information delivered to us by the

Company and its management. Among data and information used are:

The company's audited Financial Reports as of December 31, of the

years 2009-2011;

The acquisition Details;

Other information provided by Management, written or oral;

Discussions with Management;

Publicly available information (articles, websites) regarding the

industry;

While making this PPA, BDO used the data and information supplied by the

Company without examining its correctness and completeness. The data and

information received from the Company were assumed correct, and any

reliance thereof is neither confirmation nor verification of their validity.

BDO and its employees are not responsible for the completeness or accuracy

of the aforementioned data, or for any inaccuracy, error, omission or any

other fault caused by using the aforementioned data.

The valuation of the Company's assets involves assumptions, estimates and

forecasts, yet supposed to reasonably assess the economic value based on

the available information at the time of the evaluation. Any change in the

different variables or supplemental information may affect the outcomes of

the evaluation, and consequently the conclusions of the analysis.

This Purchase Price Allocation report contains forward-looking statements,

with respect to the Company, its financial condition and projected results of

its operations. These forward-looking statements are subject to risks and

uncertainties, including, but not limited to, changes in general economic

conditions, failure to forecast the market trends, and specific risks

associated with the nature of target markets and unanticipated events or

circumstances. Changes in economic conditions and market trends might

significantly affect the valuation.

http://www.bdo.co.il/


Details regarding the valuation specialist

BDO was founded by the partners of BDO Certified Public Accountants. BDO

is part of the international BDO network, provides a full range of business

services required for national and international businesses in any sector.

BDO has vast experience in the following fields: business valuations,

financial and tax due diligence, goodwill and intangible assets valuations,

financial analyses, business plans, project finance PFI/PPP advisory, M&A,

investment banking and more.

Your exclusive remedy and BDO’s sole liability to you, for any cause

whatsoever will be limited to the fees paid to BDO under this Agreement.

The foregoing limitation will apply regardless of the form of action, whether

contract or tort, including without limitation, negligence, except that such

limitation shall not apply in the case of gross negligence, revenue, data, use

of other commercial injury, or any special, incidental, indirect or

consequential damages, suffered by Frutarom or any third party, whether or

not BDO has been advised of the possibility of such loss, injury, damages or

third party claim, under any cause of action arising out of or relating to this

Agreement.

You acknowledge that Frutarom is solely responsible for the payment of all

fees, expenses, indemnification or other amounts due under or in

connection with this engagement. Frutarom shall indemnify, defend, hold

harmless, and release BDO from and against any and all claims, lawsuits,

judgments, proceedings, damages, costs, and expenses (including court

costs and reasonable attorney’s fees) in any manner relating to, arising out

or associated with this engagement or any of the services provided by BDO

under this Agreement, except that such indemnity shall not apply in the

case of gross negligence or willful misconduct by BDO.

BDO reserves the right to update the evaluation in light of new information,

which was not introduced prior to this analysis.

We would be delighted to be of any assistance.

Respectfully submitted,

BDO Ziv Haft

Consulting & Management Ltd.


Results Results

According to the assumptions detailed in this report, we have arrived to the

conclusion that some of the acquired intangible assets were needed to

revaluate to reflect market value. The following table provides details

regarding these assets (In Thousands €):

Source: company's financial reports+ BDO analysis


Remark

The balance sheet data as of the Valuation Date are based on the Groups'

unaudited financial data as of December 31, 2011, according to Frutarom's

management that there were no material changes between December 31,

2011 and the Valuation Date.

Tousands € Note Book Value Fair value% of Purchase

Price

Life Span

(Years)

Current Assets

Cash 826 826 – 2.3%

Short-Term Investments 1,001 1,001 – 2.8%

Account recievables 1 10,815 10,815 – 30.6%

Other recievables 2 1,635 1,635 – 4.6%

Inventories 3 9,316 9,852 536 27.8%

Invetory's Tax Benefit Factor 3 80 (27) (107) -0.1%

Other assets, net 48 48 – 0.1%

Total Current Assets 23,720 24,149 428 68.2%

Long Term Assets

Fixed Assets 4 16,031 29,903 13,872 84.5%

Fixed Asseets's Tax Benefit Factor 4 – (2,774) (2,774)

Intangible assets and long term deferred taxes 1,356 1,356 – 3.8%

Long-Term Financial Investments 1,475 1,475 – 4.2%

Total Long Term Assets 18,862 29,960 11,098 84.7%

Deferred Tax Assets 3,135 3,135 – 8.9%

Total Assets 45,717 57,243 11,526 161.8%

Tousands € Note Book Value Fair value of Purchase Price % )Years(Life Span

Liabilities

Short-Term Financial Liabilities 6 7,064 7,064 20.0%

Account payables 5 3,133 3,133 8.9%

Employees short term liabilities 1,097 1,097 3.1%

Other Short-Term Liabilities 9 9 0.0%

Short-Term Accrued Costs And Deferred Revenues 191 191 0.5%

Provisions And Long-Term Deferred Taxes And Accrued Income 2,578 2,578 7.3%

Loans 6 9,373 9,373 26.5%

Other Long-Term Financial Liabilities 63 63 0.2%

Total Liabilities 23,510 23,510 66%

Total Assets 22,208 33,734 95%

Intangible Assets

Costumers Relationships 1,267 3.6% שנים 10

Tax Benefit Factor 7 (253) -0.7%

KnowHow 2,472 7.0% שנים 20


Total Itangible Assets 2,991 8.5%

GoodWill 8 (1,338) -3.8%

Purchase Price 9 35,387


Notes Notes

1. According to the Company, the Account receivable, as of the Valuation

Date, is attributed to short-term operating amounts, which are received

by the costumers during the current business and expected to be

charged during the current year. Therefore, there is no difference

between the book value and the fair value of this balance and no

adjustments had been made.

2. According to the Company, the other receivables, as of the Valuation


during the current business and expected to be charged during the

current year. Therefore, there is no difference between the book value

and the fair value of this balance and no adjustments had been made.

3. According to the Company, the inventory balance consists of raw

materials inventory in the amount of €7,175 thousands and of finished

goods inventory in the amount of €2,141 thousands. According to IFRS3R,

we re-calculated the value of the finished goods inventory and

adjustments had been made (See Appendix D). Due to the difference,

between the book value and the fair value of this balance, we created a

deferred tax, according to the Group's tax rate received by Frutarom's

management.

4. The Group's fixed assets, as presented in its financial report, consist of

land and buildings, production equipment and machinery, other

appliances and equipment and property-plant and equipment under

construction or in production. The land and the buildings are located at

39 Škofja vasst in Slovenia and serve as the Group's operating activity. In

order to present the land and buildings in their fair value, we used a real

estate valuation expert as of December 31, 2011, received by the

Company. According to the expert valuation, there is a difference

between the book value and the fair value of this balance and

adjustments had been made. Due to the difference between the book

value and the fair value of this balance, we created a deferred tax,

according to the Group's tax rate received by Frutarom's management.

5. On December 31, 2011 the Group's long-term financial liabilities and

short-term financial liabilities balances were set on about €9,373

thousands and €7,064 thousands, respectively. According to the

Company's management the loans were taken in a variable interest,

except one loan, which its interest reflects the market interest rates.

Accordingly, no adjustments had been made as the current liabilities

were already recognized on their fair value.

6. Tax benefit factor was calculated and added to each of the intangible

assets, using the Group's tax rate received by Frutarom's management.

7. The goodwill value is the difference between the purchase price and the

fair value of the tangible and intangible assets

8. The total purchase price amounted to €35,387 thousands (for more

details see section 1 - the acquisition)


Contents

The Acquisition 7

Company Overview 9

Financial Statement 14

The Purchaser 17

Market Overview 31

Methodology 43

Valuation of Intangible Assets 51

Results 62

Appendix 65


Section 1

The Acquisition


The acquisition

The Acquisition The Acquisition

Over the course of the months January to May 2012, Frutarom, through a

Swiss subsidiary, acquired 97.9% of the Slovenian public company ETOL, in

return for €34.6 M. The acquisition was performed in a number of stages:

over January and February 2012, Frutarom acquired 63.4% of ETOL's share

capital in transactions on and outside the Stock Exchange, in return for an

overall sum of €22.3M. on March 15, 2012, Frutarom completed its

acquisition bid in Slovenia, under which it purchased an additional 87,000

shares, which constituted 34.2% of ETOL's share capital, in return for Euro

141 per share (a total of €12.3 M), and following this, Frutarom held 97.7%

of ETOL's share capital. Following this acquisition bid, Frutarom acted to

delist ETOL from the Slovenian Stock Exchange, and this was completed on

May 8, 2012. Over this period Frutarom acquired a further 0.02% of ETOL's

share capital in transactions on the Stock Exchange. Frutarom is further

acting to acquire the balance of shares from the remaining shareholders, for

€141 per share, and in total, consideration of Euro 755 thousand, so that the

cost of the acquisition of all shares in ETOL will be Euro35.4 M (US$45.8 M).

According to Frutrom's management's declaration, that its first intention was to acquire

the entire share capital of ETOL and therefore should be seen at all the purchase

transaction, as detailed above, one acquisition which was planned to achieve one

commercial goal, and subject to IAS 27, we see all of Frutarom's purchase transactions

as a single acquisition.

In light of the above, the acquisition consideration is €35,387 thousands (Hereinafter:

the "Consideration").

As of the Valuation date and before, the Slovenian market was in economic crisis, a

fact which allowed companies' acquisitions in law prices. Accordingly, we believe that

this acquisition was made in coincidental price. A fact that supports this assumption is

that the EBITDA multiplier which derived from this acquisition is lower than the EBITDA

multipliers which derived from Frutarom's previous acquisitions.

ETOL's activity is synergetic to Frutarom's activity. Frutarom estimates that the

acquisition of ETOL will increase its client's portfolio and the amount of revenue in

emerging markets, while expending product portfolio, strengthening its operations and

its market share in these markets. Frutarom intends to utilize ETOL's development,

sales and production capabilities to develop its business in this geographical area.

Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 9

Section 2

Company Overview


Company Overview

General Description Products

ETOL, founded in 1924, is a flavor company dealing, together with its

subsidiaries, in development, manufacture and marketing of sweet and

savory taste solutions, focusing on natural flavor products for the food and

beverage industry.

ETOL also has experience in the development and manufacture of fruit

based flavors and products and food systems, specializing in local fruits of

the region, as well as extensive activities in the area of plant bases for

beverages, in which Frutarom intends to significantly invest and expand

activities.

ETOL has a development, manufacturing and marketing site in Sofia Vas,

Slovenia, in which it has invested widely over the past few years in order to

allow expansion, development and integration of innovative technologies in

the area of flavors, as well as additional real estate properties for future

expansion.

Products

As mentioned, the company is dealing with the sweet and savory tastes

solutions market. The following are the main products of the company;

Syrup products, including various fruit preparations, bases, syrups,

emulsions, liquid aromas for non-alcoholic beverages, casings for

tobacco products, and dry fruit extracts;

Aromas, including household aromas, essential oils, synthetic dyes,

seasoning concentrates, various extracts, powdered flavours, and

tobacco flavours;

Powdered products, including powdered fruit, juices, aromas, spices,

and natural dyes;

Fruit concentrates, distillates and distillation of flavourings (juniper oil,

citrus oil, and spirits extracts).

Costumers

ETOL’s products are sold to a wide customer base in Central- and Eastern

Europe and in emerging markets, with an emphasis on Russia, Poland, the

Ukraine, Turkey, Croatia, Serbia, Slovakia, Belarus, Hungary, Macedonia, the

Czech Republic, Kazakhstan and other developing countries characterized by

higher than average growth rates in comparison with the world average

market growth. Leading food and beverage manufacturers in the countries it

operates in number among ETOL’s customers, including large multi-national

food companies.


Company's Overview

Costumers Customers

The following presents the sales areas by geographic marketing activities of

the company:

(EU and CEFTA)1 – As for the year 2011 is 45% of the company's sales. The

biggest market in this area is Slovenia, where in 2010 we achieved slightly

lower revenues than the year before. The decrease in sales is contributed to

the lower turnover of the Slovenian food industry in the past two years and

an outflow of customers to low-price traders, where the Slovenian food

industry has not been present so much. The second biggest market in this

area is Poland, where we have slightly fallen behind the last year’s sales,

but we did, however, increase our sales to new customers. Last year’s sales

results were surpassed on the markets of Austria, Germany, Slovakia, Czech

Republic, and Great Britain, whereas lower sales were recorded on the

Hungarian and Lithuanian markets.

(Southeast Europe)- As for the year 2011 is 34% of the company's sales. The

biggest market in this area is Croatia, where we exceeded our results from

2009; followed by Serbia, where we slightly fell behind the achieved

revenues for 2009. The same was also seen in Bosnia and Herzegovina and

Macedonia. The greatest problem of these markets lies in the poor

macroeconomic situation of the countries and, consequently, a general fall

of consumption, and a serious lack of payment discipline. The fastest

growing market of the sales area 2 is Turkey; record sales were achieved in

2010 as a result of intensive and successful sales activities in this market.

(New markets)- As for the year 2011 is 2% of the company's sales. This was

achieved primarily with new transactions, especially on the markets of

Jordan, Saudi Arabia, and United Arab Emirates.

(Eastern Europe) - As for the year 2011 is 22% of the company's sale. The

largest market in this area is Russia, where we created significantly more

revenues than in 2009. The increase in the turnover on the Russian market is

a result of the good work performed by all field units. The second largest

market in this area is Ukraine, where we also achieved a substantial increase

in revenues compared to 2009.

1 The CEFTA area contains Albania, Bosnia, Croatia, Macedonia, Moldavia, Mortgagor and Serbia


Company Overview

Costumers Costumers

The following presents the company's market share by geographic areas as

for 31.12.2011;

Source: company's financial reports as for 31.12.2011

The following presents the company's income out of its 10 biggest

customers, during the years 2009-2011 (Thousands €):

Source: Data's from company+ BDO analysis

Research and Development

Research and development activity is of crucial importance for market

success. In the area of development, the company organize various

activities such as creating new products and applications, training

programmes, marketing assistance, presentations to buyers and sales

representatives, and the evaluation of raw material, end products and

production. The company also takes part in the general rationalization

and transparency of the company’s operations in whole.


Company Overview

Employees

ETOL, together with its subsidiaries employs some 248 employees, including

in research and development and sales, and an experienced management

team.

The following presents the employees divided to the different departments,

as for 31.12.2011;

source: company's management

2011Department

38 Management

61 S&M

29 R&D

120 manufacture

248 Sum

Section 3: Financial Statement | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 14

Section 3

Financial Statement


Financial Statements

Profit and Loss Statement Profit and Loss Statement

Following are the Company's audited profit and loss statements for the

twelve months ended on December 31, for the years 2009-2010 and un-

audited statements for the twelve months ended on December 31, 2011

(Thousands €);

Source: company's financial reports

The following is the company's revenue and gross profit tendency, during the

years 2009-2011;

sour

Source: BDO analysis (the decrease in the gross profit during the years 2010-2011 is

attributed to raw materials prices.

Thousands € 2009 2010 2011

Net Revenue 42,946 46,047 51,291

% growth 7.2% 11.4%

Costs Of Products 24,634 26,395 34,532

% of revenue 57.4% 57.3% 67.3%

Gross Profit 18,312 19,652 16,759

Gross profit % 42.6% 42.7% 32.7%

Operating Expences 14,379 16,280 13,771

Operating Profit 3,932 3,371 2,987

% Operating Profit 9.2% 7.3% 5.8%

42,946

46,047

51,291 42.6% 42.7%

32.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

38,000

40,000

42,000

44,000

46,000

48,000

50,000

52,000

Net Revenue % Gross profit


Financial Statement

Balance Sheet Balance Sheet

Following are the Company's audited balance sheets as of December 31, for

the years 2009-2010 and un-audited balance sheets as of December 31, 2011

(Thousands €);



Thousands €

December

2009 ,31

December

2010 ,31

December

2011 ,31

Current Assets

Cash 844 443 826

Short-Term Investments 4,151 3,536 1,001

Account recievebles 11,017 11,913 10,815

Other recievebles 656 444 1,635

Inventories 6,950 9,807 9,316

Invetory's Tax Benefit Factor – – 80

Other assets, net 41 44 48

Total Current Assets 23,660 26,187 23,720

Long Term Assets

Fixed Assets 16,521 15,347 16,031

Intangible assets and long term deferred taxes 1,580 1,336 1,356

Long term financial investments 12,551 5,567 1,475

Total Long Term Assets 30,652 22,250 18,862

Deferred Tax Assets 1,771 3,425 3,135

Total Assets 56,083 51,862 45,717

Thousands €

December

2009 ,31

December

2010 ,31

December

2011 ,31

Short-Term Liabilities

Short-Term Financial Liabilities 2,809 3,500 7,064

Account payables 2,486 3,278 3,133

Employees short term liabilities 1,118 2,736 1,097

Other Short-Term Liabilities 23 73 9

Short-Term Accrued Costs And Deferred Revenues 10 52 191

Provisions And Long-Term Deferred Taxes And Accrued Income 1,194 1,227 2,578

Total Short-Term Liabilities 7,640 10,867 14,073

Long-Term Liabilities

Loans 15,457 13,064 9,373

Other Long-Term Financial Liabilities 60 18 63

Other Operational Liabilities 11 6 –

Total Long-Term Liabilities 15,528 13,088 9,436

Total Liabilities 23,168 23,954 23,510

Capital 32,915 27,907 22,207

Total Capital & Liabilities 56,083 51,862 45,717

Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 17

Section 4

The Purchaser


The Purchaser

General General

Frutarom was incorporated in Israel in 1995 as a private company under the

name Frutarom NewCo (1995) Ltd. In 1996 Frutarom changed its name to


Frutarom Ltd., a wholly owned subsidiary of Frutarom through which

Frutarom operates and manages its business and production activity, was

established in 1933 as Frutarom Palestine Ltd. Frutarom's operations

initially consisted of the cultivation of aromatic plants and flowers for the

extraction and distillation of flavor and fine ingredients materials and

essential oils.

In 1952, Frutarom's assets were purchased by Electrochemical Industries

(1952) Ltd. In May 1996, as part of Frutarom's spinoff from Electrochemical

Industries (1952) Ltd., Frutarom's shares were listed for trade on the Tel

Aviv Stock Exchange.

In February 2005, Frutarom raised capital from international and Israeli

institutional investors by issuing shares and registering GDRs for trade on the

London Stock Exchange Official List. The goal of raising capital was to

finance future strategic acquisitions as part of Frutarom's rapid growth

strategy, combining rapid internal growth of core activities at above-

industry-average rates, with strategic acquisitions of activities and knowhow

in Frutarom's main fields of activity and in strategic geographic locations.

Today, Frutarom is a global company, one of the ten leading companies in

the world in the fields of flavors and specialty fine ingredients. It serves

mainly the food, beverage, flavor, fragrance, pharmaceutical/nutraceutical,

health and functional food, food additive and personal care industries.

Frutarom is engaged in the development, production and marketing of

flavors and specialty fine ingredients used in the production of food,

beverages, flavor, fragrance, pharmaceutical/nutraceutical, personal care

products among others. Frutarom operates production facilities in Europe,

North America, Latin America, Israel and Asia that serve a customer base of

over 14,000 in more than 130 countries. Frutarom markets and sells over

30,000 products and employs roughly 1,900 people.

Frutarom’s main shareholder is the ICC Group which, through ICC Industries

Inc., holds 21,406,922 shares as of the date of this report, representing

approximately 37.02% of Frutarom's share capital and voting rights.


The Purchaser

The Group Structure Company's Activities

All of the Group’s companies are wholly owned by the Group, excluding ETOL Tovarna arom in

eteričnih olj d.d. (63.4%), ETOL-RUS, Ltd. (99.1%), Nutra Lease Ltd. (55%), Frutarom South

Africa (Proprietary) Ltd (75%), Frutarom Gida Urunleri San. Ve Tic. Ltd. Sti (99%), Pucheng

Yongfang Fragrance (51%) and M/S Aromco Flavours India (P) Ltd. (51%).

Frutarom is a global company that develops, manufactures, markets and

sells flavors and specialty fine ingredients used in the production of food and

beverage, flavors and fragrances, pharmaceutical/nutraceutical, personal

care and other products. Frutarom has two main activities, each of which is

a main field of activity and reported as a business sector in Frutarom's

consolidated financial reports (see also Note 6 in the financial reports for

2011), as detailed below:

The Flavor Activity

As part of the Flavor activity, Frutarom develops, produces, markets and

sells sweet and savory flavors used mainly by manufacturers of food and

beverages and other consumer products including flavors and food system

products (products combining fruits, vegetables and/or other natural

ingredients, including sweet and savory flavors). These products are used

in a wide variety of food products such as dairy products, ice cream, sweets,

savory baked products, convenience foods and prepared meals). Frutarom

develops for its customers thousands of different flavors, most of which are

tailor-made, and continuously develops new formulas in order to meet

changing consumer preferences and customer needs. The Flavor Activity is

the most profitable of Frutarom's activities and has experienced accelerated

growth since 2001. Flavor sales increased from US$39.1 million in 2001 to

US$369.9 million in 2011. The growth in the sales of the Flavor activity

derives mainly from Fruarom’s focus on both developed and emerging


The Purchaser

Company's Activities Company's Activities

markets, and by serving multinational, mid-sized and local customers with a

special focus on private label customers, and from the successful execution

of strategic acquisitions in recent years. The relative portion of Frutarom's

total sales deriving from the Flavors activity has increased from 39.0% in

2001 to 71.3% in 2011.

The Specialty Fine Ingredient Activity

As part of the Specialty Fine Ingredient activity, Frutarom develops,

produces, markets and sells natural flavor extracts, natural functional food

ingredients, natural pharmaceutical/nutraceutical extracts, specialty

essential oils, citrus products, aroma chemicals and natural gums. Fine

Ingredients are sold principally to the food and beverage, flavor and

fragrance, pharmaceutical/nutraceutical and personal care industries. Sales

of Specialty Fine Ingredients have grown significantly from US$57.5 million

in 2001 to US$145 million in 2011.

The growth in the sales of the Specialty Fine Ingredients was mainly

achieved by the development of new, with special focus on natural

products, by focusing on multinational, mid-sized and local customers and as

a result of several successful strategic acquisitions made in recent years.

The relative portion of Frutarom's total sales deriving from the Specialty

Fine Ingredient activity totaled 28% in 2011.

The majority of the fine ingredients produced by Frutarom are sold to third

parties. However, a portion of the specialty fine ingredients are used by

Frutarom as well and there are some ingredients, for example in the citrus

field, which are used solely by the Flavor activity in the production of

certain flavors giving Frutarom a unique advantage.

Trade & Marketing Activity

In addition to the Flavor and Specialty Fine Ingredient activities, Frutarom

trades and markets various raw materials produced by third parties to

customers in Israel. This activity is not considered a core activity by

Frutarom's management as volumes are low; it is therefore not reviewed

separately in this report. In 2011, this activity totaled approximately US$6.4

million and its relative portion of Frutarom's total sales was approximately

1.2%.

The following are the Group's sales (in US$ thousands) for the years 2009

through 2011, showing Flavor Activity sales and their percentage of the

Group's total income:

Source: company's management

Thousands $ 2008 2009 2010 2011

Income From Flavors Division 339,819 297,062 306,374 369,894

% of revenues 72% 70% 68% 71%


The Purchaser

Company's Activities

Customers

The Flavor Activity is the most profitable of Frutarom's activities and has

undergone accelerated growth since 2001. Flavor sales grew from US$39.1

million in 2001 to US$369.9 million in 2011. The relative portion of the

Flavors Activity out of Frutarom's overall activities grew from 39% in 2001 to

71.3% in 2011.

New Products

As part of its Flavors activity, Frutarom is constantly developing a variety of

new products. New products are generally developed in cooperation and

adapted to the needs of a specific customer. No new product developed by

Frutarom is significant in terms of expected sales turnover and/or

development costs.

Customers

The flavors manufactured by Frutarom are sold to an extensive customer

base comprised of thousands of large multinational, mid-sized, local and

small customers. The customers are primarily food and beverage

manufacturers and they are located in over 120 different countries

worldwide. The Flavors activity does not have any one customer whose

purchasing turnover constitutes over 10% of Frutarom's sales turnover (over

the last few years there have also been no customers whose scope of

purchase was more than 3% of Frutarom’s sales turnover).

The management of Frutarom estimates that it has no dependency on any

one of its customers.

The majority of sales are made to permanent customers since, as previously

discussed, the flavor segment is characterized by long-term relationships

and customer loyalty. As is customary in the flavor market, there are no

long-term supply contracts.

Marketing and Distribution

Frutarom maintains a global marketing, sales and customer technical

support organization, with established local R&D, sales and marketing

personnel in all of its key target markets. Frutarom estimates that its global

presence provides it with a competitive advantage and is a key factor in the

success of its growth strategy. On December 31, 2011, Frutarom had 660

professionals, approximately 50 sales and marketing offices and 30 local

laboratories which are located in its target markets, in close proximity to its

customers, including in the US, Brazil, Mexico, the UK, Germany,

Switzerland, France, Italy, Slovenia, Norway, Denmark, Israel, Russia,

Ukraine, Turley. Kazakhstan, Romania, China, Japan, Hong Kong, Indonesia,

India and South Africa. Frutarom markets and sells its products


The Purchaser

Marketing and Distribution Research and Development

primarily through its own sales personnel. In certain countries, Frutarom

uses third party agents and distributors to sell its products.

Frutarom's global sales and marketing organization is a key component of its

strategy to provide tailor-made specialized products and services and high

quality customer support to both large multinational and mid-sized and local

customers.

Research and Development

Frutarom's sales and marketing personnel and its research and development

personnel work equally closely with both large multinational and mid-sized

and local companies to offer timely and responsive personalized

development services, including custom flavors development and specialty

fine ingredients tailor made to the customer's specific needs. Frutarom

estimates that the mid-sized and local customer segment represents more

than 60% of the global food and beverage market.

The development of fine ingredients is in many cases Frutarom's own

initiative, based on its assessment of market trends and needs while

focusing on developing products with higher margins in order to continue

and improve Frutarom's product mix and optimize production capabilities

and capacity.

The Flavors activity has approximately 23 research and development

laboratories. The main laboratories are locatedin the UK, Switzerland,

Germany, the US, Slovenia, Israel, Italy, Turkey, China, Brazil and South

Africa. In the Fine Ingredient field, Frutarom has approximately 8 research

and development facilities located in Israel, the UK, Switzerland the US and

the Netherlands.

Seasonality

Frutarom's business is subject to seasonal fluctuations, generally with higher

sales and profitability in the first half of a given year and lower sales in the

second half of a given year (in particular, in the fourth quarter). A major

part of Frutarom’s products are used by its customers in the manufacture of

beverages and dairy products such as soft drinks, ice cream and yogurts, for

which demand generally increases markedly during the summer months. As a

result, sales of certain flavors and fine ingredients produced by Frutarom

rise in the first half of the year, as manufacturers of beverages and dairy

products re-stock their inventories and increase production in advance of

rising demand during the summer months.

Sales of Frutarom’s products slightly decrease in the third quarter as the

summer ends and further in the fourth quarter as the weather cools, and


The Purchaser

Seasonality Raw Materials and Suppliers

many of Frutarom’s customer’s reduce production and inventory levels in

advance of the year end and the holiday season.

The impact of seasonality on Frutarom’s results has steadily decreased in

recent years as Frutarom has increased its sales of products such as savory

flavors, functional food ingredients and natural botanical extracts intended

for the pharmaceutical/nutraceutical industry, generally impacted less by

seasonality.

Raw Materials and Suppliers

30.1 Frutarom purchases thousands of raw materials from a wide range of

suppliers which it uses for the manufacture of its products, with more than

one supplier for most products. The principal raw materials purchased by

the Group include plants, leaves and roots from which Frutarom produces

natural flavor extracts, functional food ingredients and

pharmaceutical/nutraceutical extracts. In addition Frutarom purchases

essential oils from which it manufactures specialty essential oils such as

citrus oils and mint oils. Other raw materials purchased by the Group

include natural and synthetic chemicals, alcohols, esters and acids and

oleoresins. The Group’s supply chain managers, both global and local, and

the purchasing units regularly monitor the raw materials price trend and if

necessary, the Group acts to adjust the selling prices of its products to the

changes in the raw material prices. Frutarom has a global unit which

coordinates purchase of raw materials defined as strategic from suppliers,

serving both of the Group’s primary activities.

In recent years, none of Frutarom's suppliers have supplied more than 10% of

the consumption of its raw materials. There is a small number of raw

materials for which Frutarom has sole suppliers; however, since these raw

materials are used in only a limited number of Frutarom's wide range of

approximately 30,000 products, and since the raw materials having only one

supplier are used in a limited number of Frutarom's products (none of which

is substantial), Frutarom's management estimates that Frutarom's

dependency on these exclusive suppliers is not material.

Human Resources

As at December 31, 2011 Frutarom employs 1,644 employees. The following

table shows the breakdown of the Group's employees by fields of activity in

the last three years:

Field 2009 2010 2011

Sales and Marketing 329 334 353

Research and Development 214 229 253

Operations 688 688 775

Management 217 221 263

Total 1,448 1,472 1,644


The Purchaser

Goals and Business Strategy Goals and Business Strategy

Frutarom’s strategic objective is to achieve growth combining rapid organic

profitable growth of its core business, at higher rates than average in the

industry, and continued improvement in profitability. Frutarom's strategy of

rapid growth combines internal profitable growth of its core businesses

together with strategic acquisitions in order to achieve its vision.

The key elements of Frutarom’s strategy are as follows:

Focus on two core businesses, leveraging synergies between them and

providing comprehensive taste and health solutions to the food and

beverage industry: Frutarom will continue to focus on its two core

businesses, Flavors and Specialty Fine Ingredients, while leveraging the

synergies between them to create partnerships with and value to its

customers by providing unique health and flavor solutions, tailor-made and

customized according to its customers' demands. The trends of health and

taste leads the growth in the global food and beverage market in recent

years in view of consumers' growing demand for food and beverage products

with natural content and nutritional and healthy ingredients (low fat, salt,

sugar etc.) and consumers' perception of these products as high-quality,

healthier and environmentally friendlier along with the demand that

products would not lose their high-quality taste despite their being

"healthier". Since fine ingredients are the key components used in the

production of flavors, Frutarom's expertise in natural fine ingredients and

other ingredients enable it to develop and produce high quality, unique and

customized flavor and health solutions as per its customers' demands. The

Group’s Fine Ingredient business benefits from the expertise of the Group in

the Flavor business, allowing it to better understand the needs of its

customers including third party flavor manufacturers. In addition, as some

of Frutarom’s fine ingredients are sold directly to food and beverage

producers, the Group’s strategy is to use a single sales person to sell both

flavor and fine ingredients products to its customers, thereby improving its

operational efficiency and increasing the level of service.

As part of its strategy combining its core businesses, Frutarom focuses on its

ability to offer its customers comprehensive, integrative solutions in the

fields of taste and health. This way, for example, Frutarom combines its

Food Systems capabilities with its capabilities in the field of natural flavors,

natural functional food ingredients, and other natural extracts for the

production of new, innovative, integrative solutions suited to the needs of

its customers, food and beverage producers. As part of its rapid and

profitable growth strategy and its wish to offer its customers comprehensive

solutions, Frutarom acted and will act to expand the scope of its activity

and wide product portfolio in the savory field. Frutarom’s acquisitions in

recent years significantly strengthened its market share and the solutions it

offers to manufacturers of meat and fish products, snacks and convenience

food in a manner which will contribute to its continued growth.


The Purchaser


Continues focus on superior customer service and product development

for both large multinational, midsized and local customers: Frutarom

continues to enhance its customer service and expand its product and

solution portfolio for both large multinational as well as mid- size and local

customers. In the large multinational food and beverage customer segment,

Frutarom focuses on specialized product offering and increase its offering of

comprehensive natural solutions. In the mid-size, local and private label

customer segment, Frutarom intends to continue to offer its customers the

same level of service and customized product and solution development as

normally reserved for large multinational companies. In addition, Frutarom

offers midsized, local and private label customers, which are usually of

limited resources compared to large, multinational customers, assistance in

the development of their products while providing marketing support and

flexibility in supply and quantities.

Expand market position in developed markets: Frutarom believes there

are additional opportunities to expand in both Western Europe and North

America supported by the unique solution portfolio it offers to its customers

and by leveraging cross-selling opportunities resulting from its recent

acquisitions and the many opportunities to perform additional acquisitions.

Further penetration and foothold in emerging markets: Frutarom believes

that there are significant growth opportunities in certain fast growing

emerging markets with growing demand for flavors and unique ingredients

and with above average growth in the food and beverage markets. Over 2011

and in the beginning of 2012, Frutarom has acted to strengthen its position

in and further penetrate the emerging markets where it already operates,

which include, among others, Asia, Central and Eastern Europe , Central and

South America, Asia and Africa, and will continue to act thus, through

organic growth and strategic acquisitions. Frutarom intends to expand into

additional emerging markets, and to benefit from the high growth potential

in these markets. Frutarom believes that increasing its local presence in

these emerging markets will provide it with a competitive advantage and

acts to accelerate its growth in these markets by focused strengthening of

the development, production, marketing and sales in important targets

countries while exploring options for strategic acquisitions.

Achieving leadership position in the growing market for natural and

healthy products: Frutarom is well-positioned to take advantage of the

growing trend of food and beverage manufacturers to utilize more natural

and healthy ingredients in their products. The acquisitions of companies

and activities it implemented in recent years in the fields of unique

ingredients, and the various flavors fields, as well as strengthening its


The Purchaser


research and development and marketing infrastructure, strengthened

Frutarom’s position as a global market leader in the natural and healthy

products field. Frutarom leverages the variety of its existing expertise in

natural flavor extracts, functional food ingredients and natural

pharmaceutical/nutraceutical extracts thus empowering its abilities to

provide its customers with full solutions with the emphasis on taste and

health. Frutarom intends to continue allocating resources to its research

and development and sales and marketing activities to continue and expand

the development and marketing of healthy and natural products. Frutarom

cooperates with academic institutions, research institutes and start-ups

worldwide in order to expand its pipeline of unique and innovative products

that it intends to launch in coming years, while focusing on consumers'

health and convenience.

Expanding investments in research and development: Frutarom believes

that technology and innovation are key to its success. Therefore, Frutarom

intends to continue to invest in research and development both in the Flavor

and Fine Ingredient activities.

Improving profitability: Frutarom intends to act to expand its margins by:

(i) continuing to focus on achieving organic profitable growth at a higher

rate than the rate of the increase of fixed expenses (ii) continuing to

leverage and exploiting the synergies in and between the segments (iii)

continued focus on operating efficiencies including maximization of facilities

utilization and inventory management and strategic lowering of the cost of

raw materials, while unifying global purchase and management, and

allocating resources to focused purchase in important target countries, such

as China and India; (iv) adjusting prices of Frutarom’s products; (v) efficient

assimilation and integration of acquisitions of recent years and new

acquisition to be made (vi) integration and joining of sites and activities,

while achieving substantial operational savings and maximizing the cross

selling opportunities , and (vii) continuing to improve its product mix and to

develop and market unique new, higher margin, value-added products.

Continue rapid growth also through strategic acquisitions: Acquisitions

have also contributed to Frutarom’s rapid growth and Frutarom will continue

to evaluate acquisition opportunities that meet its strict investment criteria

and keep enhancing shareholder value as part of its ongoing growth strategy.

Frutarom examines and will continue examining acquisition opportunities

that will expand its portfolio of products, targeted geographic reach and

customer base, and which provide Frutarom with further options to expand

its integrative product portfolio and cross-selling opportunities. In addition,

Frutarom is working diligently to integrate its recent acquisitions with its

own operations in order to optimize cross-selling opportunities and


The Purchaser


additional synergies while realizing cost savings.

As stated, in 2011 and even after the balance sheet date, Frutarom

continued to execute strategic acquisitions and implement its rapid growth

strategy. Over 2011, Frutarom performed five acquisitions and after the

balance sheet date, Frutarom performed three more acquisitions. These

acquisitions strengthened Frutarom’s position as a global leading player in

flavors and its geographic spread and allowed it to enter new markets. In

addition, these acquisitions expended its product portfolio in the area of

sweet and savory solutions, including natural products, combining fruit and

vegetable ingredients and beverage bases, its customer base, both large,

multi-nationals and medium sized and local, and provided Frutarom with a

wide variety of cross selling options. The acquisitions also contributed to

Frutarom’s technology and know-how and managerial capacity.

During the last few years Frutarom executed strategic acquisitions as

follows:

Acquisition of the Savory activity of Rieber: On December 23, 2010,

Frutarom signed an agreement through a Norwegian subsidiary for the

acquisition of Rieber's Savory activity (the "Rieber Activity") in consideration

for approximately US$4.3 million (approximately 25 million NOK). The

acquisition was completed on February 1, 2011.

The Rieber Activity was part of an international food group of Rieber & Son

ASA and includes the development, production and marketing of savory

flavor solutions including flavors, seasoning mixes and functional ingredients

used by the food industry, and in particular by the processed meat and fish

and convenience food sectors.

The Rieber Activity has a wide customer base, which includes leading food

manufacturers, mainly in the Scandinavian countries. The Reiber Activity is

highly synergetic with Frutarom’s activities in the savory field in Europe,

which has grown substantially over the last few years following the

acquisition of the savory activities of Nesse, Gewurzmuller and the German

CH, acquired by Frutarom in 2006, 2007 and 2009, and the acquisitions of

EAFI, Savory Activities of Reiber and of CH Italy in 2011 and the acquisition

of Savoury Flavours in 2012. The sales turnover of the Rieber's Activity from

the date of completion of the acquisition until December 31, 2011 totaled

approximately US$ 6.3 million (approximately 34.9 million NOK).

Frutarom has acted for the integration of Rieber activities, and at the end of

2011 completed transfer of production work to its plant in Germany, thus

achieving efficiency and operational economy, leaving development,

marketing and sales in Norway.


The Purchaser


Acquisition of EAFI's activity and assets: On January 20, 2011, Frutarom

signed an agreement, through a UK subsidiary, for the acquisition of the

activity and assets of the English company EAFI in consideration for US$4.8

million (GBP 3 million). The acquisition was completed on January 31, 2011.

EAFI, founded in 1979, develops, manufactures and markets savory solutions

including flavors, seasoning mixes and functional ingredients to the food

industry in general, and to the processed convenience food, snacks and

processed meat and fish in particular. EAFI has a wide customer base and a

development, manufacturing and marketing site in the UK.

EAFI's activity is highly synergetic with that of Frutarom in the UK as well as

with Frutarom's savory activity in Europe, which increased substantially in

recent years as explained in section 1.12 above.

EAFI's sales turnover from the date of completion of the transaction until

December 31, 2011 totaled US$9 million (approximately GBP 5.6 million).

Acquisition of Savory assets and activities of CH Italy: On May 26, 2011

Frutarom, through its subsidiary, signed an agreement to acquire the assets

and savory activity of Christian Hansen ITALIA in return for €25 million. The

acquisition was completed on July 29, 2011.

CH Italy’s savory activity develops, produces and markets unique and

innovative savory solutions including flavors, seasoning compounds and

functional ingredients for the food industry, with special emphasis on

processed meat and convenience food applications. The acquired activity is

a leader in savory solutions with an extensive customer base comprised

mainly of the leading Italian meat processors; the activity also enjoys export

sales in Russia, Ukraine, Poland, Czech Republic and France. The acquisition

also included a state-of-the-art, high-capacity plant located in Parma, Italy

that will enable Frutarom to increase its activities and to take advantage of

operational synergies with its existing savory activities in Europe, and

innovative R&D laboratories.

CH Italy’s sales turnover from the date of completion of the transaction until

December 31, 2011 totaled approximately US$8.6 (approximately €6.3

million).

Acquisition of Aromco: On August 19. 2011 Frutarom, through a subsidiary

in the UK, signed an agreement to acquire 100% of the share capital of the

UK company Aromco Ltd. for approximately USD 24.6 million (GBP 15

million). The acquisition was completed upon signing.

Aromco, founded in 1985, develops, manufactures, and markets flavors for

the food and beverage industry. Aromco is active in emerging markets with


The Purchaser


high growth potential in Eastern Europe, Africa and Asia as well as in the UK.

Aromco operates a plant in Hertfordshire, England.

Aromco’s sales turnover from the date of completion of the transaction until

December 31, 2011 totaled approximately US$5.9 million (approximately

£3.7 million).

Acquisition of Flavor Systems: On September 13, 2011 Frutarom signed an

agreement to acquire 100% of the shares capital of the US Flavor Systems

International Inc. company ("Flavor Systems")in return for the sum of

US$34.8 million. The final price of the transaction will be determined in

accordance with an agreed earn-out mechanism, based on a 6.5 multiplier of

EBITDA exceeding US$5 million, gained by Flavor Systems during the 12

months starting on October 1, 2011 and ending on September 30, 2012 (the

"EBITDA"), up to a cap of US$10 million. In addition, in the event that the

EBITDA during that period will be less than US$5 million, the sellers will

repay an amount of up to US$6 million to Frutarom. Therefore, the

consideration for the acquisition may range from US$28.8 million to US$44.8

million, according to the aforementioned mechanism. In addition, Frutarom

paid US$6.5 million for real-estate assets owned by other companies held by

the shareholders of Flavor Systems. The acquisition was completed on

October 3, 2011.

Flavor Systems, established in 1994, deals in development, production and

marketing of sweet and savory flavors to the food and beverages markets.

Flavor Systems owns a modern plant and R&D laboratories, located in

Cincinnati, in the Mid-West of the USA. The acquisition also includes a new

and advanced production site, with a high production capacity. The site will

allow substantial expansion in areas, among others, where Frutarom has not

yet acted until now, such as coffee and flavored shakes sold in convenience

stores and in leading food chains throughout the US. Through this

acquisition, Frutarom also entered the area of savory flavors, where it has

not yet acted to date.

Flavor System’s sales turnover from the date of completion of the

transaction until December 31, 2011 totaled approximately US$5.1 million.

Acquisition of Savoury Flavours: On January 4, 2012, Frutarom, through a

subsidiary in the UK, signed an agreement to acquire 100% of the share

capital of the UK company Savoury Flavours (Holding) Ltd. ("Savoury

Flavours") for approximately US$5.9 million (GBP 3.8 million), and additional

consideration to be calculated according to performance, using a mechanism

prescribed in the agreement, which in Frutarom’s estimate will not exceed

an amount equal to 5% of the purchase price. The acquisition was completed

upon signing.


The Purchaser

Goals and Business Strategy

Savoury Flavours, founded in 1999, develops, manufactures, and markets

savory taste solutions, including mainly flavors, seasoning compounds,

marinades and sauces, specializing in snacks and convenience foods. Savoury

Flavours has a development, manufacture and marketing site in the UK, and

a wide customer base including food manufacturers and private labels in the

UK and in emerging markets.

Savoury Flavours’ turnover over the twelve months ending on December 31,

2011 totaled USD 7.1 million (£4.4 million).

Savoury Flavour’s production site is located in close proximity to the

production site of EAFI, which also deals in the savory field. the geographic

proximity between the sites, the complementary product basket and

technologies of the two activities will allow the creation of significant

synergies between the activities of Savoury Flavours and Frutarom’s growing

activities in the UK and throughout the world, which have significantly

increased over the past few years.

Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 31

Section 2

Market Overview


Market Overview

The Global Market of Flavors, Fragrances and Fine Ingredients The Global Market of Flavors, Fragrances and Fine Ingredients

The global flavors, fragrances and fine ingredients market in 2011 was

estimated at approximately US$23 billion. Frutarom does not operate in the

market for fragrance compounds, but does operate in the markets for

functional food ingredients (which is not included in the above estimation).

Accordingly, the Company believes that the global market in which it

operates is valued at approximately US$18.2 billion. Based on Leffingwell &

Associates’ data, Frutarom is ranked globally as one of the top ten

companies in the field of flavors and fragrances.

In 2011 IAL Consultants estimated that global sales in industrialized nations

(the USA and Western Europe) in the flavors market in which the Company

operates would grow at an annual rate of between 3% and 3.4% during the

years 2012-2015. The Company estimates that the volume of sales in these

countries in the fine ingredients market in which the Company operates will

increase at a similar annual rate during the same period. In accordance with

these estimations, the growth rate in emerging markets in which Frutarom

operates, such as Asia, Central and South America, Eastern Europe and

Africa is expected to be significantly higher as a result of changes in

consumers' preferences in these markets and the shift to processed foods,

and may reach average annual rates of 4% to 7.1% from 2012 to 2015. The

manufacturers of the flavor, fragrance and fine ingredient markets can be

divided into three main groups: large multinational

companies, mid-sized companies, and local and small companies.

Large multinational manufacturers generally operate globally and have

revenues in excess of US$ 1 billion. In the global flavor and fragrance

markets there are five such manufacturers which, according to Leffingwell &

Associates, represent approximately 64% sales in the flavor, fragrance and

fine ingredients markets (excluding sales of natural functional food

ingredients and pharmaceutical/nutraceutical extracts). These multinational

manufacturers focus primarily on customers who are large multinational

food and beverage producers.

Local and small companies generally have revenues of less than US$ 400

million (most of them are much smaller and sell only several million dollars).

The Company estimates that in the global flavor and fragrance markets

there are approximately 700 such companies that, according to the

estimation of Leffingwell & Associates, represent approximately 24% of the

value of the flavor, fragrance and fine ingredients market (again excluding

sales of natural functional food ingredients and

pharmaceutical/nutraceutical extracts). These companies generally focus

on smaller local customers and have limited capabilities in the areas of

service, research and development and innovation.

Mid-sized companies, such as Frutarom, have revenues between US$ 400

million and US$ 1 billion. In the global flavor and fragrance markets there


Market Overview

The Global Market of Flavors, Fragrances and Fine Ingredients The Global Market of Flavors, Fragrances and Fine Ingredients

are only five such mid-sized companies. According to the estimation of

Leffingwell & Associates these five companies represent approximately 12%

of the value of the flavor, fragrance and fine ingredients market (excluding

sales of natural functional food ingredients and pharmaceutical/

nutraceutical extracts). Some of these mid-sized players focus heavily on

specific geographic markets (such as the USA, France and Japan).

The flavor and fine ingredient market in which the Company is active is

characterized by high barriers to entry, such as:

Long-term relationships – The market is characterized by long-term

relationships between manufacturers and their customers, which include

mostly the food and beverage, flavor and fragrance and

pharmaceutical/nutraceutical industries. These industries impart great

importance to reliability, quality of service and the manufacturers'

knowledge and understanding of the customers' needs.

Research and development – End user preferences are dynamic, making the

customer’s market (usually in food or beverage) competitive. The market is

characterized by a large number of new and innovative products.

Accordingly, manufacturers are required to invest heavily in research and

development in order to offer a wide range of innovative products.

Sometimes this investment is undertaken

at the initiative of the flavor manufacturer, while other times at the

customers’ initiative (the food/beverage manufacturer) in cooperation with

the flavor manufacturer.

Compliance with quality and regulatory standards – The flavor and fine

ingredient products are principally intended for the food and beverage and

pharmaceutical/nutraceutical industries, which are subject to strict quality

and regulatory standards. As a result, manufacturers are required to meet

the same strict standards. In recent years the quality and regulatory

standards have become increasingly stringent, possibly imposing a burden on

the competitiveness of small flavor manufacturers and increasing barriers to

entry for new players.

The importance of flavors in the final product – Flavors play a major role

in determining the taste of the end product and are often a vital element in

determining its success. Flavors cannot be precisely replicated and, as they

represent a relatively small percentage of the final product's overall cost,

food and beverage manufacturers will usually avoid replacing the flavor and

its manufacturer.

Investment in production capabilities– In the fine ingredient field,

considerable capital investment is required to build manufacturing facilities

and/or increase


Market Overview

The Global Market of Flavors, Fragrances and Fine Ingredients

Flavors market

existing production capabilities. These investments serve as a significant

barrier to entry for new manufacturers in the industry.

In light of the barriers to entry described above, the penetration of new

manufacturers into the market is done mainly through mergers and

acquisitions. In general, the market is characterized by a trend of

consolidation and a decrease in the number of players.

Flavors market

General

Flavors are the key building blocks that impart taste in processed food and

beverage products and, as such, play a significant role in determining the

consumer acceptance of the end products in which they are used.

Frutarom estimates that global 2009 sales of flavors for the industry

amounted to approximately US$ 7.7 billion. Flavor products are sold

primarily to producers of prepared food, beverage, dairy, bakery, meat and

fish, confectionery and pharmaceutical products.

The following are examples of end user products using flavors:

Beverages - carbonated, noncarbonated, sport and functional, alcoholic and

juices.

Dairy - yogurt, drinking yogurt, ice cream, cheese and chilled desserts.

Bakery - cakes and cookies, crackers and cereals.

Confectionery - candy, chocolate, jam and chewing gum.

Savory and convenience food - ready meals, instant soup, ready sauces and

instant noodles.

Snacks - potato chips and other savory snacks.

Meat - sausages and frankfurters.

Processed Fish.

Oral hygiene and pharmaceuticals - toothpaste, mouthwash, vitamins and

medicines.

Others - animal feed and pet food and tobacco.

The global market for flavors has expanded rapidly over the last 60 years,

primarily as a result of an increase in demand for, as well as an increase in

the variety of, consumer end products containing flavors. The demand for

consumer goods containing flavor products has increased as a result of rapid

population growth and consumer preferences resulting from various factors


Market Overview

Flavors market

Flavors market

such as increases in personal income, leisure time, health concerns and

urbanization. These factors have led to an overall increase in food and

beverage products containing flavors and to rapid growth in demand for

convenience food and foods with healthier and more natural content.

The following table sets forth the sales of flavors by region in 2010 and the

projected annual growth rate in these geographic regions:

Source: Estimates based on IAL Consultants 2009.

Flavors in North America and Western Europe in 2009 accounted for

approximately 50% of global flavor sales in 2010although the population in

these countries account for less than 10% of the world's population. Demand

for flavor products in developed countries is expected to grow moderately,

with more rapid growth expected in emerging markets such as Asia Central

and South America, Eastern Europe and Africa. Sales in these emerging

markets are expected to grow as a result of projected growth in GNP in

these regions and from changes in consumer preferences. Frutarom is

enhancing its growth in these markets through a number of efforts including

a focused strengthening of the research and development, production,

marketing and sales infrastructure in the important target countries and

exploring options for strategic acquisitions.

Following are the characteristics of the Flavor Market:

• Reliable with high levels of service - Food and beverage producers, the

principal customers of flavor manufacturers, expect reliable, high-quality

service to meet their needs in terms of support and lead time, while

maintaining high quality, regulatory and safety standards. These

requirements encourage the formation of long-term relationships

between flavor producers and their customers. As a result large

multinational customers, and increasingly also mid-sized customers, have

Country

Estimated world consumption in

2010 (Millions $)

Average growth expected in

2010-2015

Western Europe 1,619 3%

Eastern Europe 551 4%

North America 2,315 3%

South America 493 7%

Asia 2,414 6%

Middle East and Africa 5,741 4%

Total 13,133 5%


Market Overview

Flavors market Flavors market

pruned the flavor suppliers that they will work with, placing those that

remain on "core lists" creating a barrier to entry for small flavor

manufacturers.

Research and development - The development of flavor products in

general and of new flavor extracts in particular is a complex, creative

and technological process that calls for depth of knowledge and skill on

the part of a flavor manufacturer's research and development personnel.

Effective research and development is critical in ensuring a continuous

stream of innovative products and in maintaining the profitability and

growth of a flavor manufacturer. The initiative for the development of

new flavor products can be spurred by the flavor manufacturer or by the

customer who is in need of a specific flavor for use in a newly developed

end product. As such, in order to anticipate market demands, a flavor

manufacturer's research and development personnel are required to be

familiar with the taste requirements of various end product types and

target markets. In addition, as most flavors are tailor made for a

specific customer, a close collaborative relationship with the customer is

essential. These flavor formulas are treated as commercial secrets and

remain the proprietary asset of the flavor manufacturer. As most flavor

products are tailor-made for a customer, customers are less likely to

replace suppliers for such flavor products during the course of the end

products' life cycle.

• Low price sensitivity - Since flavor products play a major role in

determining the flavor of the end product to which they contribute, they

are a vital element of its success. Flavor products cannot be precisely

matched and their cost, compared to the total cost of the end products,

is negligible. When selecting a flavor supplier, a customer will generally

place a greater emphasis on the reputation, innovation, service, quality

and consistency of the supplier than on the price of its flavors. The

demand for flavors is therefore generally less sensitive to changes in

price.

• Production processes - Flavor products in general and flavors in

particular typically contain a variety of ingredients (typically over 30 per

flavor), which are blended using unique formulas created by a

manufacturer's flavorists. The production processes involved in the

manufacture of flavor products are less complex and capital intensive

compared to those of fine ingredients. However, the production process

for flavor products requires skill and knowhow to achieve the required

consistency and quality.


Market Overview


• High and relatively stable profitability - As the flavors market tends to

be characterized by long-term relationships and high customer loyalty,

combined with relatively low price sensitivity and simple production

processes, it generally benefits from high and stable margins. This is

true also in comparison to the fine ingredient industry.

Food and Beverage Market Characteristics

Flavors are sold primarily to food and beverage producers; therefore the

flavor market is generally driven by trends characterizing the demands of

food and beverage consumers. According to Data Monitor, global sales in

the food and beverage market amounted to US$ 3,282 billion in 2010.

Frutarom estimates that over 50% of such total global sales are generated by

mid-sized, local and small food and beverage producers. Although there has

been a general trend towards consolidation in the food and beverage

industry, Frutarom estimates that mid-sized (annual revenues of between

US$ 100 million and US$ 3 billion) and local and small (annual revenues of

below US$ 100 million) food and beverage producers will continue to play a

significant role in the market, and that new mid-sized, local and small

producers will continue to emerge.

The large multinational flavor manufacturers often focus on large

multinational food and beverage producers, offering their customers a high

level of service and tailor-made product development. Frutarom believes

that these flavors producers focus to a lesser extent on mid- sized and local

customers, offering limited service and offering less customizable product

offering to these customers.

However, the Company believes that mid-sized and local food and beverage

producers require the same level of service and tailor-made products as

their larger counterparts, and also require short lead times and

manufacturing flexibility. Small, localized flavor producers generally do not

have the product variety and service capabilities to support the needs of

these customers. A specific example of this type of customer is the private

label customer. This situation creates a business opportunity for mid-sized

flavor producers to service this segment.

The following are the main trends in the consumer market for food and

beverages which in turn drive the flavor market:

• Local and global tastes - Taste preferences vary by geographic location

and among different cultures. Flavor manufacturers must have thorough

knowledge of local tastes in each of the countries in which they are

active. It is also important for a global flavor manufacturer to have a

physical presence in its key target markets in order to facilitate direct

contact with customers, to better understand local tastes and to be able


Market Overview


to respond quickly and efficiently to changes in consumer preferences.

Additionally, the trend toward globalization now characterizes the flavor

industry as multinational food and beverage customers are now

launching global brands in many different markets simultaneously, often

by changing the taste profile to meet the preferences of the respective

populations worldwide.

• Preference of natural products - There has been a general increase in

consumer demand for food and beverage products containing natural

ingredients and having dietary values (reducing fat, salt, cholesterol,

etc.). Natural products are generally perceived by consumers as being

of higher quality, healthier and more environmentally friendly.

Similarly, there is growing demand for organic products and ‘clean label’

products. As a result, natural food and beverage products are viewed as

specialty, premium products that can command higher prices. This

trend has created new opportunities for flavors manufacturers to

develop new and innovative natural flavor products. Frutarom focuses

on developing and producing natural products and currently its products

consist of two thirds of natural products.

• Private label - private label goods manufacturers, which tend to be mid-

sized, local or small food manufacturers, are a growing customer

segment in the flavor industry. Over the last decade consumers of food

products have become increasingly price conscious, increasing sales of

private label products in comparison to the branded food and beverage

industry. This trend was accelerated in 2009 as a result of the economic

crisis. As a result, supermarket chains and other retailers have been

increasing their private label product offerings. Supermarket chains and

other retailers have also placed greater importance on developing their

own brand image. The demand from supermarket chains and retailers

for private label products that mimic existing branded products as well

as unique premium products has provided the flavors industry with new

opportunities for growth. Frutarom has increased and will continue to

increase its market share in the private label market.

• Continuously growing consumption of convenience food - There is an

increase in demand for processed foods with greater convenience

(consumed both inside and outside of the home). This increase in

demand for convenience foods has been spurred by new packaging and

cooking technologies as well as changing social habits and consumer

preferences. Examples of convenience foods include "ready to eat"

meals, fresh pasta; ready-to-cook, fresh seasoned or marinated meat or

poultry; salads; and sauces in liquid form. This has created new

opportunities for flavor manufacturers in the savory flavors and


Market Overview


• functional fine ingredients fields which are responsible for the creation

of food texture and its extended shelf life, to develop and market

flavors and unique fine ingredients products for this segment.

• Emerging markets - In recent years, certain developing markets, such

as Asia, Central and South America, Eastern Europe and Africa have

experienced above-market-average growth in demand for flavors

products. Further, these markets have been characterized by a trend

towards increased consumption of processed foods, which in turn has

driven the emergence of mid-sized, local and small food companies,

creating new market opportunities for flavor manufacturers. The

Company expects that the improvement in the global economy and in

the consumption rate will lead to a continuous improvement in the

growth rate of these markets.

The key success factors in the flavor segment are:

• Long-term relationships - Long-term relationships with customers and

collaboration in the development of new products.

• Global and local presence in target markets - Knowledge of the

various flavor preferences in the different markets and the ability to

provide global and local support to customers.

• Superior and reliable service - The ability to provide a high level of

service and the reliability of a flavors manufacturer in giving service

are critical for mid-sized, local customers and multinational customers.

• Presence in emerging markets - Emerging markets grow at

considerably higher rates in comparison to developed markets.

Presence in these key areas, along with knowledge and understanding

of their unique needs and the ability to provide support to local

manufacturers is a critical success factor.

• Innovation in research and development - The ability to develop

innovative products both at the initiative of the flavor manufacturer

and in collaboration with customers is of extreme importance.

Competition

Compliance with strict quality, regulatory and safety standards - Since the

flavors are intended principally for the food and beverage and

pharmaceutical markets, they must comply with strict quality, regulatory

and safety standards.

In the flavor market, Frutarom's main competitors consist of large global

manufacturers, mid-sized companies and smaller, local manufacturers.

Competition is based to a large extent on innovation, product quality, the


Market Overview

Competition

Competition

ability to provide the customer with added value, and establish and

maintain long term customer relationships, value added service, reliability

and development of products which are tailor made for the customers'

needs and the future market directions. As the cost of flavors accounts for

only a small percentage of the total cost of an end product, this market

tends to display low price sensitivity. Flavor manufacturers must

differentiate themselves by maintaining close collaborative relationships

with customers, thorough knowledge and understanding of target markets,

innovative abilities, effective research and development and an established

reputation for consistent, reliable and effective service, product supply

and quality, and the ability to supply product on short notice and with

short lead time.

Large multinational flavor manufacturers are established, experienced

companies with a global presence and established technical and

commercial capabilities, focusing primarily on large multinationals

customers. The large multinational flavors producers with whom Frutarom

competes include Givaudan, Firmenich, IFF Inc., Symrise and Takasago.

The midsized flavors manufacturers with whom Frutarom competes focus

on both large multinational food and beverage producers as well as and

mostly on mid-sized and smaller food and beverage producers who tend to

operate in smaller geographical regions. Mid-sized flavor manufacturers

with whom Frutarom competes include Sensient, Mane, Robertet, Kerry

Ingredients; Wild and Dohler.

The Company estimates that there are approximately 700 small and local

flavor manufacturers with more limited research and development

capabilities who focus on narrow market segments and local customers. In

recent years there has been a trend towards consolidation in the flavor

manufacturing industry, resulting in increasing market concentration.

Risks Factors

The risks of the global market of flavors, fragrances and fine Ingredients

refers to macroeconomic risks and to risks related to the Industry.

Macroeconomic Risks

The following are the main macroeconomic risk factors:

• The effect of the global economy on the Company's activities - Due to

the nature of its global activity, Frutarom is exposed to fluctuations in

the global economy. Economic crisis and recession in important target

countries may cause dips in demand for the Companies products (mainly

for premium products) and significantly slow down the development and


Market Overview

Risks Factors

Risks Factors

launch of new products by the customers.

Stability in emerging markets - the companies operates in a number of

countries outside of Western Europe and the United States, such as

Russia, Turkey, Kazakhstan, Ukraine, China, countries in North, South

and West Africa and countries in Central and South America (such as

Mexico and Brazil), and therefore is generally exposed to the political,

economic and legal systems and conditions in these countries which are

generally less predictable than in developed countries

Currency fluctuations - The companies has sales, expenses, assets and

liabilities denominated in currencies other than the U.S. due to that

fact, Fluctuations in the exchange rates of these foreign currencies

could have an impact on companies results of operations.

Changes in interest rates - The companies' sources of banking finance,

as needed, for short and long term, are linked to different coins,

according to the activity currency of the subsidiary, and bear Libor

interest at variable rates. According to its policy. Therefore, if

interest rates increase, the companies may not be able to refinance its

credit agreements, or any other indebtedness, on attractive terms.

Increases in interest rates will impact companies' cash flow.

Risks Related to the Industry

Extensive competition - The companies in the global market of

flavors, fragrances and fine Ingredients faces an increased competition

both from large multinational and mid-sized companies as well as

smaller local companies in many of the markets in which it operates.

Some of the competitors have greater financial and technological

resources, large sales and marketing organizations and great name

recognition, and may therefore be better able to adapt to changes and

trends in the industry. The global market for flavors is characterized by

close, collaborative relationships between flavor manufacturers and

their customers, particularly in the large multinational customer

segment.

• Changes in regulations - The companies are subject to a variety of

health, safety and environmental rules at national, state and local

levels in the various countries in which it operates. Generally, there is

a trend towards increased regulation in the industry in which the Group

operates. This has been a result of increased public sensitivity toward

the composition and use of flavor products and from the fact that as a

result of their medicinal qualities and claimed health benefits,

nutraceuticals and functional food products are being increasingly

viewed by regulators as having similar characteristics to


Market Overview

Risks Factors

Risks Factors

pharmaceutical products, which may lead their subject to the

regulatory framework governing the market for pharmaceutical

products. The application of new governmental regulations on the

nutraceuticals and functional foods could result in substantially greater

ongoing compliance costs, which, in turn, could have a material

adverse effect on Companies business, results of operations or financial

condition.

Environmental, health and safety regulations - Companies in the

flavor and fine ingredients industry also use, manufacture, sell and

distribute a number of environmentally hazardous materials, and

therefore are subject to extensive regulation regarding the storage,

handling, manufacture, transportation, use and disposal of their

products, ingredients and byproducts. Any increase in the stringency of

applicable environmental regulations could have a material adverse

effect on companies business, results of operations or financial

condition.

• Fluctuations in prices of raw materials - The last years were

characterized by relatively high fluctuations in the prices of raw

materials used by the companies in the flavor and fine ingredients

industry the to manufacture its products, and in certain periods,

including the recent months, a global trend of increase occurred in the

prices of raw materials, including some of the raw materials Frutarom

uses in the manufacture of its products. The supply chain managers,

both global and local, and the purchasing departments are closely

monitoring the raw materials price trend globally.

• Payment of damages as a result of possible product liability claims

due to product warranty - The companies' business exposes it to a risk

of product liability, particularly as it is involved in the supply of flavors

and fine ingredients to the food and beverage, flavor and fragrance,

functional food, pharmaceutical and personal care industries. If a

large product liability claim was successfully brought against the

Company, its insurance coverage might not be adequate or sufficient to

cover such a claim in terms of paying damages and/or defense costs. A

lack of or inadequate insurance coverage could result in a material

adverse effect on the Company’s business, results of operations or

financial condition. If product liability claims were brought against the

Company, it might damage the Company’s reputation as well as require

the Company to divert significant time and effort of its management,

which could affect the Company’s business regardless of the outcome

of the claim.

Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 43

Section 4

Methodology


Methodology

General The Acquisition Method

According to IFRS 3R, the Venturer is required to identify the identifiable

assets and liabilities of the jointly controlled entity, at the acquisition date.

The goodwill figure was derived by applying the "Residual Approach". Under

this approach, the Purchase Price is allocated to tangible assets and to

specifically identifiable intangible assets, with any remainder allocated to

goodwill.

According to IFRS 3R, An entity shall account for each business combination

by applying the acquisition method.

Applying the acquisition method requires:

a) identifying the acquirer;

b) determining the acquisition date;

c) recognising and measuring the identifiable assets acquired, the

liabilities assumed and any non-controlling interest in the acquiree;

and

d) Recognising and measuring goodwill or a gain from a bargain purchase.

Identifying the acquirer

For each business combination, one of the combining entities shall be

identified as the acquirer.

Determining the acquisition date

The acquirer shall identify the acquisition date, which is the date on which

it obtains control of the acquiree.

The date on which the acquirer obtains control of the acquiree is generally

the date on which the acquirer legally transfers the consideration, acquires

the assets and assumes the liabilities of the acquiree—the closing date.

Recognising and measuring the identifiable assets acquired, the liabilities

assumed and any non-controlling interest in the acquiree

As of the acquisition date, the acquirer shall recognise, separately from

goodwill, the identifiable assets acquired, the liabilities assumed and any

non-controlling interest in the acquiree.

Classifying or designating identifiable assets acquired and liabilities

assumed in a business combination

At the acquisition date, the acquirer shall classify or designate the

identifiable assets acquired and liabilities assumed as necessary to apply

other IFRSs subsequently. The acquirer shall make those classifications or

designations on the basis of the contractual terms, economic conditions, its

operating or accounting policies and other pertinent conditions as they exist

at the acquisition date.


Methodology

Measurement principle Bargain purchases

The acquirer shall measure the identifiable assets acquired and the

liabilities assumed at their acquisition-date fair values.

Recognising and measuring goodwill or a gain from a bargain purchase

The acquirer shall recognise goodwill as of the acquisition date measured as

the excess of (a) over (b) below:

(a) the aggregate of:

1. the consideration transferred measured in accordance with this IFRS,

which generally requires acquisition-date fair value;

2. the amount of any non-controlling interest in the acquiree measured

Recognising and measuring goodwill or a gain from a bargain purchase

1. in accordance with this IFRS; and

2. In a business combination achieved in stages, the acquisition-date

fair value of the acquirer’s previously held equity interest in the

acquiree.

(b) The net of the acquisition-date amounts of the identifiable assets

acquired and the liabilities assumed measured in accordance with this IFRS.

Before recognising a gain on a bargain purchase, the acquirer shall reassess

whether it has correctly identified all of the assets acquired and all of the

liabilities assumed and shall recognise any additional assets or liabilities that

are identified in that review. The acquirer shall then review the procedures

used to measure the amounts this IFRS requires to be recognised at the

acquisition date for all of the following:

(a) the identifiable assets acquired and liabilities assumed;

(b) the non-controlling interest in the acquiree, if any;

(c) for a business combination achieved in stages, the acquirer’s

previously held equity interest in the acquiree; and

(d) The consideration transferred.

The objective of the review is to ensure that the measurements

appropriately reflect consideration of all available information as of the

acquisition date


Methodology

Bargain purchases Approaches to Valuation

Occasionally, an acquirer will make a bargain purchase, which is a business

combination in which the Net assets Acquired exceed the purchase price.

If that excess remains after applying the requirements, the acquirer shall

recognise the resulting gain in profit or loss on the acquisition date. The gain

shall be attributed to the acquirer.

Approaches to Valuation

The generally accepted approaches to valuate an asset's fair value, are

commonly referred to as the following:

1. Market approach;

2. Income approach;

3. Asset-based approach.

Within each category, a variety of methodologies exist to assist in the

estimation of fair value. The following sections contain a brief overview of

the theoretical basis of each approach, as well as a discussion of the specific

methodologies relevant to the analyses performed.

Market Approach

The market approach references actual transactions in the equity of the

enterprise being valued or transactions in similar enterprises that are traded

in the public markets. Third-party transactions in the equity of an enterprise

generally represent the best estimate of fair market value if they are done

at arm’s length. In using transactions from similar enterprises, there are two

primary methods. The first often referred to as the Guideline Transactions.

Method, involves determining valuation multiples from sales of enterprises

with similar financial and operating characteristics and applying those

multiples to the subject enterprise. The second, often referred to as the

Guideline Public Company Method involves identifying and selecting publicly

traded enterprises with financial and operating characteristics similar to the

enterprise being valued. Once publicly traded enterprises are identified,

valuation multiples can be derived, adjusted for comparability, and then

applied to the subject enterprise to estimate the value of its equity or

invested capital.

Income Approach

The income approach is based on the premise that the value of a security or

asset is the present value of the future earning capacity that is available for

distribution to investors in the security or asset. A commonly used

methodology under the income approach is a discounted cash flow analysis.

A discounted cash flow analysis involves forecasting the appropriate cash

flow stream over an appropriate period and then discounting it back to a


Methodology

Approaches to Valuation

present value at an appropriate discount rate. This discount rate should

consider the time value of money, inflation, and the risk inherent in

ownership of the asset or security interest being valued.

Asset-Based Approach

A third approach to the valuation is the asset-based approach. The discrete

valuation of an asset using an asset-based approach is based upon the

concept of replacement as an indicator of value. A prudent investor would

pay no more for an asset than the amount for which he or she could replace

the asset new. The asset-based approach establishes value based on the cost

of reproducing or replacing the property, less depreciation from physical

deterioration and functional obsolescence, if present and measurable. This

approach generally provides the most reliable indication of the value of land

improvements, special-purpose buildings, special structures, systems, and

special machinery and equipment. The asset based approach had used in this

study.

The valuation of the intangible assets of acquired companies is particularly

important since the most valuable assets of this type of company generally

are not recorded on the balance sheet before acquisition. Intangibles that

may exist at the time of the acquisition include: (a) base (or core),

developed, and in-process technologies; (b) customer-

related intangibles (such as a distribution network or a customer base); (c)

trademark(s), trade name(s), and related intellectual property; and (d)

covenants not-to-compete.

In the determination of the Fair Value for each intangible asset, each

assessment should consider specific factors of the asset, including (but not

limited to):

The value of economic or monetary benefit to market participants;

The remaining economic life;

The relative risk profile;

Assembled workforce was also identified for the valuation analysis, but was

incorporated as part of goodwill. IFRS3R - Business Combinations, requires

that the assembled workforce shall not be recognized as an intangible asset

apart from goodwill in a business combination. Nevertheless, the assembled

workforce was identified separately for the purpose of calculating the

appropriate contributory charge needed to arrive at the Fair Value of each

of the Intangible Assets on a standalone basis.

As a result of our review, two intangible asset categories (which meet the

criteria for separate recognition apart from goodwill) were identified for

analysis: (a) Know-How, (b) customer relationships.


Methodology

WACC WACC

When applying the Income Approach, the cash flows expected to be

generated by a business are discounted to their present value equivalent

using a rate of return that reflects the relative risk of the investment, as

well as the time value of money. This return, known as the weighted

average cost of capital (“WACC”) is calculated by weighting the required

returns on interest-bearing debt and common equity capital in proportion to

their estimated percentages in an expected industry capital structure.

The general formula for calculating the WACC is:

WACC = Kd (D%) + Ke (E%)

Where:

WACC= Weighted average rate of return on invested capital;

Kd= After-tax rate of return on debt capital;

D%= Debt capital as a percentage of the sum of the debt, preferred and

common equity capital (“Total Invested Capital”);

Ke= Rate of return on common equity capital; and

E%= Common equity capital as a percentage of the Total Invested Capital.

CAPM has been empirically tested and is widely accepted for the purpose of

estimating a company’s required return on capital. In applying the CAPM,

the rate of return on capital is estimated as the current risk-free rate of

return on US Treasury bonds, plus a market risk premium expected over the

risk-free rate of return, multiplied by the “beta” for the valued company.

Beta is defined as a risk measure that reflects the sensitivity of a company’s

stock (or capital) price to the movements of the stock market as a whole.

The CAPM rate of return on capital is calculated using the formula:

Ke = Rf + β(Rm * Rf)+ SCP+ Sp Where;

Ke= Rate of return on capital (in this case, Total Invested Capital);

Rf= Risk free rate of return;

Β= Beta or systematic risk for this type of capital investment (in this case,

asset beta);

Rm – Rf= Market risk premium; the expected return on a broad portfolio of stocks

in the market (Rm) less the risk free rate (Rf);

SCP Small cap premium - Ibbotson valuation edition 2011 yearbook

Srp Specific Premium


Methodology

WACC WACC

We based on the Capital Asset Pricing Model (CAPM) in calculating the

WACC.

Following are the parameters that served for the calculation of the

Company's WACC, as of December 31, 2011:

Source: BDO analysis.

Following are the comparable companies included in the beta calculation:

International Flavors & Fragrances Inc. IFF, Givaudan AG, Symrise AG and


Terminal growth rate of 2% was determined based upon the real economy

expected growth rate in the long run, and upon a conservative element of

the Unit's internal growth.

While implementing the Income Approach to evaluate different assets, each

asset should be discounted in a rate reflecting its own risk. The risk and

liquidity of each type of asset being acquired may be greater than, equal to

or less than the overall discount rate of the company (regardless of how it

was computed). In most businesses that possess an array of asset types,

certain acquired assets may be:

a) More risky and/or less liquid (e.g., technology/patents, IPR&D, goodwill);

b) Comparably risky and/or liquid (e.g., customer lists,); or,

c) Less risky and/or more liquid (e.g., fixed assets and working capital).

It is generally appropriate to address this issue by assigning reasonable

premiums or discounts to the overall company discount rate when valuing

specific assets. Individually, each asset requires a higher or lower return

specifically related to the risks associated with that asset achieving its

estimated cash flows. Working capital assets (e.g., cash, accounts

receivable and inventory) and other tangible assets (e.g., machinery and

equipment and real property) have lower risks than intangible assets (e.g.,

Name מקור Symbol Value

Company's Debt Based on the Comparison companies D/V 19%

Company's Equity Based on the Comparison companies E/V 81%

Cost Of Debt Weighted average from Company's management Kd 5.0%

Tax Rate effective tax rate of the Company T 20%

Risk Free Rate Slovenian 10 years govermental bonds (Bloomberg) Rf 4.08%

Beta Levered Beta- According to compairing Companys' data β 0.69

Market Premium Sloveniany risk premium- Damodaran Rm-Rf 7%

SCP Ibbotson valuation edition 2011 yearbook SCP 4.07%

Cost Of Capital Rf +β*)Rm-Rf(+SCP Ke 13.2%

Wacc (D/V)*(1-T)*Kd + (E/V)*Ke 11%


DCF Approach

WACC

engineering drawings, trained work force, patents, etc.) and therefore have

lower required returns. In the aggregate, however, the firm's required

return represents the weighted average return of the value of each asset

multiplied by its required return.

In the case of ETOL, however, since the value of the tangible assets is small

compared to the total (enterprise) value of the company, the required rates

of return of the related assets were estimated to equal the company’s

WACC. Accordingly, the following required rates of return for the each asset

were used to derive the appropriate capital “charges” for estimating cash

flows under the income approach[1]: fixed assets – 7%; Working Capital – 4%;

and assembled workforce – 11%;

Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 51

Section 5

Valuation of Intangible Assets



Customer Relationships

General

General

When an operating entity is sold, the company that was bought is often

party to agreements or relationships that are of material value to the

acquirer. These may include existing agreements with customers and/or

returning customers. Due to the fact that the future cash flow of the

business would be negatively affected in the absence of these agreements or

relationships, they are deemed to have an economic value.

Customer relationships can arise from contracts, but also from other sources

such as ordinary supplier-customer sales-related communications.

The Group engages in unofficial contracts with its customers, which form an

unwritten commitment between it and its customers. The Group's customers

portfolio consist of a variety of clients in different geographical areas,

when, to date, about 45% are from European union (mainly Slovenian and

Polish markets), about 34% from South East Europe (mainly Croatian and

Serbian markets), and about 20% from Eastern Europe (mainly Russian and

Korean markets). Flavors' manufacturing for the food industry whose

character, quality, importance, stability and a level of bureaucracy,

creating a long-term labour relationship.

The Group engages with its customers by orders. From the date the Group

received the current order, the transaction is validated and can't be

cancelled. In case the order hasn't been made, the client can terminate its

relationship with the Group. According to international standards, customer

list usually doesn't derive from contractual or other legal rights. However,

customer lists often leased or replaced. Therefore, customer list, acquired

in a business combination, maintains the separation criterion and can be

identify separately from goodwill.

To estimate the fair value of the customer relationships we have analysed

the Group's list of major customers (starting in 2006 until today). According

to the mentioned analysis and to the Company's management, the average

annual churn rate is about 10%. In addition, we found that the Group's

average sales amount from its key customers increased over the years.

The Valuation of the Intangible Asset

Following are the customer relationships' valuation's main assumptions:

The asset's economic useful life - The economic useful life of the customer

relationships derived from an analysis of the Group's major customers, which

constitute the majority of its revenues. This analysis shows that the

weighted average economic useful life is about 10 years, and more (the

economic useful life's calculation is taken as a function of the Group's





activity period with each client and the volume of purchases of the same

client). Accordingly, it was assumed that the average economic useful life of

the Group's customer relationships is 10 years and the derived average

annual churn rate of the group's existing customers is 10%.

Revenue - The analysis of the Group's customer list and revenue shows that

the Group's weighted revenue from existing customers growing over the

years (see section 2 – The Purchased Company and its Operation).

Accordingly, revenue from existing costumers, which is taken into account,

derived from the acquisition model considering an annual churn rate of 10%,

as obtained from the analysis below.

The following graph presents the Group's expected revenue amount from

the existing customer relationships between the years 2012-2021 (€

thousands):


Gross Profit – The forecasted customer relationships' gross margins are

based on the profitability rates presented in the acquisition model (see

Appendix A), as obtained by Frutarom's Management. In addition, the gross

profit was found reasonable in light of the Groups outcomes in the years

2009-2011.

.

48,008 44,381

40,387 36,002

31,202 25,460

19,477

13,245

6,755 3,445

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



The Valuation of the Intangible Asset The Valuation of the Intangible Asset

Sales and Marketing Expenses – According to the Company's management,

the strong competition in the flavours and raw materials industries requires

the Group to invest efforts in preserving existing customers. Therefore, it

was assumed, that over the entire projection period, the sales and

marketing expenses out of revenue from existing customers ratio will be 85%

of the corresponding ratio presented in the acquisition model (according to

the variable component of this expenditure which was assumed in the

acquisition model).

General and Administration Expenses – It was assumed, that that over the

entire projection period, the general and administration expenses out of

revenue from existing customers ratio, will be at the corresponding rate in

the acquisition model.

Research and Development Expenses - It was assumed, that that over the

entire projection period, the research and development expenses out of

revenue from existing customers ratio will be at the corresponding rate in

the acquisition model.

Contributory charge for the use of know-how – Contributory charge was

applied to the pre-tax cash flow, to reflect the customer relationships' use

of know-how (for details about determining the rate of royalties, see section

- valuation of know-How – Royalties rate).

Excess Cost Attributed to Inventory - From the forecasted cash flaws we

have deducted the excess cost attributed to inventory (see Appendix D).

Income Tax – A 20% tax rate was deducted from the forecasted cash flaw,

according to the effective applicable to the Group in Slovenia.

Contributory Charges - Contributory charges were applied to the after-tax

cash flow, to reflect the returns on other assets required to sustain the

customer relationships. These assets included assembled workforce, fixed

assets, and working capital (for details about the contributory charges

calculation see Appendix B).

Tax Benefit - Tax savings due to amortization of the asset were added to

derive the Fair Value of the customer relationships. These tax savings reflect

the future tax benefits associated with amortizing the asset for income tax

purposes. Accordingly, the value of the estimated tax benefit is 12% (see

Appendix C).

Discount Rate - Net cash flows were capitalized at discount rate of 11%




according to the Groups' weighted average cost of capital (see section

methodology – WACC calculation).

Asset Valuation - Based upon the above assumptions, the value of the

customer relationship asset was estimated at €1,127 thousands and with the

addition of tax benefit in the amount of €140 thousands was estimated at

€1,267 thousands.




The following table presents the valuation of the fair value of the customer relationships, as of the Closing Date (€ thousands):

Tousands € 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Revenue 48,008 44,381 40,387 36,002 31,202 25,460 19,477 13,245 6,755 3,445

COGS 31,917 29,409 26,675 23,701 20,473 16,651 12,738 8,662 4,418 2,253

Gross Profit 16,091 14,972 13,712 12,301 10,728 8,809 6,739 4,583 2,337 1,192

% of revenue 33.5% 33.7% 34.0% 34.2% 34.4% 34.6% 34.6% 34.6% 34.6% 34.6%

Operating Expences

S&M (4,850) (4,457) (4,033) (3,574) (3,080) (2,513) (1,923) (1,307) (667) (340)

% of revenue -10.1% -10.0% -10.0% -9.9% -9.9% -9.9% -9.9% -9.9% -9.9% -9.9%

G&A (5,235) (4,747) (4,236) (3,704) (3,148) (2,569) (1,965) (1,336) (682) (348)

% of revenue -10.9% -10.7% -10.5% -10.3% -10.1% -10.1% -10.1% -10.1% -10.1% -10.1%

R&D (1,554) (1,420) (1,277) (1,125) (964) (787) (602) (409) (209) (106)

% of revenue -3.2% -3.2% -3.2% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1%

Operating Profit 4,453 4,348 4,165 3,897 3,536 2,941 2,250 1,530 780 398

% of revenue 9.3% 9.8% 10.3% 10.8% 11.3% 11.5% 11.5% 11.5% 11.5% 11.5%

Know-How Charge (480) (444) (404) (360) (312) (255) (195) (132) (68) (34)

Less - the difference between

book value to fair value

attributed to Inventory (536)

Profit Before Tax 3,437 3,904 3,761 3,537 3,224 2,686 2,055 1,397 713 363

Tax Rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%

Tax (687) (781) (752) (707) (645) (537) (411) (279) (143) (73)

Net Profit After Tax 2,750 3,123 3,009 2,830 2,579 2,149 1,644 1,118 570 291

% Net Profit After Tax 5.7% 7.0% 7.5% 7.9% 8.3% 8.4% 8.4% 8.4% 8.4% 8.4%

Contributory Charges

Fixed Assets (2,015) (1,863) (1,695) (1,511) (1,310) (1,069) (818) (556) (284) (145)

Working Capital (656) (607) (552) (492) (427) (348) (266) (181) (92) (47)

WorkForce (541) (500) (455) (406) (352) (287) (219) (149) (76) (39)

Net Cash Flow (463) 153 306 421 491 445 340 231 118 60

Discounted Cash Flow (440) 131 236 292 307 251 173 106 49 22

Value For Discounted Cash Flow 1,127

Tax Benefit Fector 12%

Tax Benefit 140

Total Value Of CR 1,267



Know-How General

General

The ETOL Group's portfolio expresses the Group's accumulated knowledge

which is attributed to the products manufacturing method. The accumulated

knowledge in the Groups' product portfolio allows the Group to produce its

products in efficient way. The Group's Knowledge is of economic value, since

it is necessary to an optimally production and saves the time required for

product development. According to Frutarom's management estimations,

based on its past experience, the projected economic useful life of the

Group's know-how is 20 years. This Knowledge is updated gradually as a

result of a constant learning curve.

The Group is engaged in developing, manufacturing and marketing of flavors

extracts to the food and beverage industry. The Group's products are

manufactured with production innovative patents and extensive knowledge

that the Group acquired over the years, which gives it a competitive

advantage over competitors in the market.

The value of the Know-How was estimated by applying the Relief from

Royalties Approach. The Know-How ownership exempts the owner from

having to engage in product development and therefore to gain profits. The

implementation of the Relief from Royalties Approach requires evaluation of

the proper royalty rate, which was determined between unrelated parties.

The economic value of the accumulated know-How had been declining over

time, due to product obsolescence, for which the portfolio relates.

Therefore, the reasonable buyer is willing to pay only for the inherent value

in the ability to sell the product, reduced steadily with aging product

portfolio.

The Company has another activity area (Hereinafter: the "Trade Activity"),

which accounted for about 21% of the Groups' revenue in the years 2008-

2011. The Trade Activity doesn't involve know-how, as it engages in a field

of sale and purchase of raw materials. In light of the above, for the fair

value revaluation of the Groups' know-how, we relied on a rate of 79% of the

Group's future revenue, which were determined in the acquisition model, as

received by Frutarom's management.

Valuation of the Intangible Asset

The valuation of the intangible asset know-how was preformed according to

the Relief from Royalties Approach, when the asset value is estimated based

on the total revenue for which the royalties are paid.

Following are the Know-How's valuation's main assumptions:

The asset's economic useful life – We have analysed the economic useful

life of the Group's existing know-how since its inception. According to the

Company's management, the Group's production methods are used for many



Valuation of the Intangible Asset Valuation of the Intangible Asset

years. Based on discussions with the Company's management it was assumed

that the know-how average economic useful life is 20 years.

Royalty Rate – To assess the royalty rate saved for the use in the Group's

accumulated know-how, we examined a number of transactions (see

Appendix E) in which royalties paid for the use of accumulated know-how in

the production of products to the food and beverage industry, including the

utilization of food mixtures. To derive to the appropriate royalty rate, we

focused on transaction in which the accumulated know-how includes a

production formula, use in flavours and raw materials in a certain dosage as

part of the production process. These transactions show that the range of

royalties paid is in the range of 1% and 7% (www.royaltiessource.com).

Based on our experience, we assumed that the royalty rate on behalf of the

use of the ETOL Group's know-how is about 1%, similar to the lower bar of

the above range. Purchaser who doesn't have this knowledge will have to pay

royalties at a rate of about 1% for using it.

The royalty rate which is taken for calculation is lower than the excepted

royalty rate as "rule of thumb" in royalty's transactions (Royalty Rates for

Licensing Intellectual Property by Russell Parr, J Wally & Sons, 2007). The

rule indicates that the royalty rate should be about a quarter of the

operational profit rate. According to discussions with the Company's

management a royalty rate of 1% was taken, similar to the lower bar of the

royalties transaction range. The reason for using this royalty rate is that the

Group achieves profit margins which are lower than usual margins among

companies in the sector, due to the nature its activity. The Group is a

production enterprise in which most of the existing knowledge lies in its

fixes asset. Therefore, a potential buyer would pay a lower rate of royalties

for the Group's existing know-how.

In the first two years a royalty rate of 1% was charged from the total

expected revenue, as according to the Company's management this is the

time required to develop products to market. After this period, a royalty

rate of 1% was charged only for the portfolio, which is sold by ETOL Group,

as of the Closing Date. It was assumed that tae rate of these products will

gradually decrease until December 31, 2013 (the know-how economic useful

life is 20 years).

Because the production methods are updated throughout the period, a

potential buyer would pay royalties knowledge only on the knowledge he

had acquired in the first place.

http://www.royaltiessource.com/



Valuation of the Intangible Asset Valuation of the Intangible Asset

The following graph presents the revenue of which the know-how royalty

rates are recorded between the years 2012-2021 (€ thousands):


Income Tax – A 20% tax rate was deducted from the forecasted cash flaw,

according to the effective applicable to the Group in Slovenia.

Tax Benefit - Tax savings due to amortization of the asset were added to

derive the Fair Value of the customer relationships. These tax savings reflect

the future tax benefits associated with amortizing the asset for income tax

purposes. Accordingly, the value of the estimated tax benefit is 8.4% (see

Appendix C).

Discount Rate - Net cash flows were capitalized at discount rate of 11%

according to the Groups' weighted average cost of capital (see section

methodology – WACC calculation).

Asset Valuation - Based upon the above assumptions, the value of the know-

how asset was estimated at €2,281 thousands and with the addition of tax

benefit in the amount of €191 thousands was estimated at €2,472 thousands.

42,141 43,826

42,135 39,110

37,043

32,610 30,239

27,759 25,168

22,463 19,639

16,693 13,621

10,420

7,086 3,686

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030



Valuation of the Intangible Asset

The following table presents the valuation of the fair value of the know-how, as of the Closing Date (€ thousands):

source: BDO analysis

Thousands € 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Revenues - Know How 42,141 43,826 43,047 42,135 41,082 39,110 37,043 34,877 32,610 30,239 27,759 25,168 22,463 19,639 16,693 13,621 10,420 7,086 3,614 3,317

Royalties 421 438 430 421 411 391 370 349 326 302 278 252 225 196 167 136 104 71 36 33

Tax Rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%

Net Cash Flow 337 351 344 337 329 313 296 279 261 242 222 201 180 157 134 109 83 57 29 27

Discounted Cash Flow 320 300 265 234 205 176 150 128 107 90 74 61 49 38 29 22 15 9 4 3

Value For Discounted Cash Flow 2,281

Tax Benefit Fector 8.4%

Tax Benefit 191

Total Vlue Of KH 2,472



Assembled Workforce Assembled Workforce

The assembled workforce was valued for the purpose of calculating the

appropriate contributory charge to be deducted from each of the Intangible

Assets’ cash flows. We used the Cost Approach to value the trained

workforce of the Group as of the Valuation Date. The Group’s realized

savings from obtaining a fully efficient, pre-existing, trained workforce

totalling approximately 248 employees, rather than incurring the costs to

assemble such a workforce, include:

Recruiting and screening expenses - Recruiting fees include recruiting

costs and placement fees (executive search firms) typically incurred to

hire new employees. Screening potential employees includes reviewing

resumes, interviewing and performing reference checks on the

candidates.

Training and orientation expenses - Training and orientation expenses

were calculated by multiplying the average time required to train a new

employee by the compensation, including benefits, of the trained

employee. Training costs include the start-up time for the trainee to

become oriented with the organization and reasonably proficient at his

or her task. Orientation costs were calculated by multiplying the

average time needed by a new employee to attain a full level of

productivity (the start up time) by the compensation, including

the benefits, of the new employee.

Based on this analysis, the Fair Value of the assembled workforce of teh

Groups, was estimated at € 5.2 million (see Appendix B).

Section 6: Results | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 62

Section 6

Results


Results

Results Results

According to the assumptions detailed in this report, we have arrived to the

conclusion that some of the acquired intangible assets were needed to

revaluate to reflect market value. The following table provides details

regarding these assets (In Thousands €):



Remark

The balance sheet data as of the Valuation Date are based on the Groups'

unaudited financial data as of December 31, 2011, according to Frutarom's

management that there were no material changes between December 31,

2011 and the Valuation Date.

Tousands € Note Book Value Fair value% of Purchase

Price

Life Span

(Years)

Current Assets

Cash 826 826 – 2.3%

Short-Term Investments 1,001 1,001 – 2.8%

Account recievables 1 10,815 10,815 – 30.6%

Other recievables 2 1,635 1,635 – 4.6%

Inventories 3 9,316 9,852 536 27.8%

Invetory's Tax Benefit Factor 3 80 (27) (107) -0.1%

Other assets, net 48 48 – 0.1%

Total Current Assets 23,720 24,149 428 68.2%

Long Term Assets

Fixed Assets 4 16,031 29,903 13,872 84.5%

Fixed Asseets's Tax Benefit Factor 4 – (2,774) (2,774)

Intangible assets and long term deferred taxes 1,356 1,356 – 3.8%

Long-Term Financial Investments 1,475 1,475 – 4.2%

Total Long Term Assets 18,862 29,960 11,098 84.7%

Deferred Tax Assets 3,135 3,135 – 8.9%

Total Assets 45,717 57,243 11,526 161.8%

Tousands € Note Book Value Fair value of Purchase Price % )Years(Life Span

Liabilities

Short-Term Financial Liabilities 6 7,064 7,064 20.0%

Account payables 5 3,133 3,133 8.9%

Employees short term liabilities 1,097 1,097 3.1%

Other Short-Term Liabilities 9 9 0.0%

Short-Term Accrued Costs And Deferred Revenues 191 191 0.5%

Provisions And Long-Term Deferred Taxes And Accrued Income 2,578 2,578 7.3%

Loans 6 9,373 9,373 26.5%

Other Long-Term Financial Liabilities 63 63 0.2%

Total Liabilities 23,510 23,510 66%

Total Assets 22,208 33,734 95%

Intangible Assets

Costumers Relationships 1,267 3.6% שנים 10


KnowHow 2,472 7.0% שנים 20


Total Itangible Assets 2,991 8.5%

GoodWill 8 (1,338) -3.8%

Purchase Price 9 35,387


Notes Notes

1. According to the Company, the Account receivable, as of the Valuation


by the costumers during the current business and expected to be

charged during the current year. Therefore, there is no difference

between the book value and the fair value of this balance and no

adjustments had been made.

2. According to the Company, the other receivables, as of the Valuation


during the current business and expected to be charged during the

current year. Therefore, there is no difference between the book value

and the fair value of this balance and no adjustments had been made.

3. According to the Company, the inventory balance consists of raw

materials inventory in the amount of €7,175 thousands and of finished

goods inventory in the amount of €2,141 thousands. According to IFRS3R,

we re-calculated the value of the finished goods inventory and

adjustments had been made (See Appendix D). Due to the difference,

between the book value and the fair value of this balance, we created a

deferred tax, according to the Group's tax rate received by Frutarom's

management.

4. The Group's fixed assets, as presented in its financial report, consist of

land and buildings, production equipment and machinery, other

appliances and equipment and property-plant and equipment under

construction or in production. The land and the buildings are located at

39 Škofja vasst in Slovenia and serve as the Group's operating activity. In

order to present the land and buildings in their fair value, we used a real

estate valuation expert as of December 31, 2011, received by the

Company. According to the expert valuation, there is a difference

between the book value and the fair value of this balance and

adjustments had been made. Due to the difference between the book

value and the fair value of this balance, we created a deferred tax,

according to the Group's tax rate received by Frutarom's management.

5. On December 31, 2011 the Group's long-term financial liabilities and

short-term financial liabilities balances were set on about €9,373

thousands and €7,064 thousands, respectively. According to the

Company's management the loans were taken in a variable interest,

except one loan, which its interest reflects the market interest rates.

Accordingly, no adjustments had been made as the current liabilities

were already recognized on their fair value.

6. Tax benefit factor was calculated and added to each of the intangible

assets, using the Group's tax rate received by Frutarom's management.

7. The goodwill value is the difference between the purchase price and the

fair value of the tangible and intangible assets

8. The total purchase price amounted to €35,387 thousands (for more

details see section 1 - the acquisition)

Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 65

Section 7

Appendix


Appendix A

The Acquisition Model

The following is the acquisition model- Base Case Scenario (In thousands €):

source: Company's Management

Thousands € 2009 2010 2011 2012 2013 2014 2015 2016 מייצגת

Net Revenue 42,946 46,047 51,291 53,342 55,476 57,695 60,003 62,403 63,651

growth % 7% 11% 4.00% 4.00% 4.00% 4.00% 4.00% 2.00%

Costs Of Products 24,634 26,395 34,532 35,463 36,762 38,107 39,502 40,947 41,628

of revenue % 57.4% 57.3% 67.3% 66.5% 66.3% 66.0% 65.8% 65.6% 65.4%

Gross Profit 18,312 19,652 16,759 17,879 18,715 19,588 20,501 21,456 22,023

Gross profit % 42.6% 42.7% 32.7% 33.5% 33.7% 34.0% 34.2% 34.4% 34.6%

Operating Expences

S&M 6,444 7,015 6,288 6,340 6,555 6,778 7,008 7,247 7,392

of revenue % 15.0% 15.2% 12.3% 11.9% 11.8% 11.7% 11.7% 11.6% 11.6%

G&A 7,935 9,265 5,824 5,817 5,933 6,052 6,173 6,296 6,422

of revenue % 18.5% 20.1% 11.4% 10.9% 10.7% 10.5% 10.3% 10.1% 10.1%

R&D - - 1,660 1,726 1,775 1,824 1,876 1,928 1,967

of revenue % 0.0% 0.0% 3.2% 3.2% 3.2% 3.2% 3.1% 3.1% 3.1%

Total Operating Expences 14,379 16,280 13,772 13,883 14,263 14,654 15,057 15,471 15,781

of revenue % 33.5% 35.4% 26.9% 26.0% 25.7% 25.4% 25.1% 24.8% 24.8%

Operating Profit 3,932 3,371 2,987 3,996 4,451 4,934 5,444 5,985 6,243

Operating Profit % 9.2% 7.3% 5.8% 7.5% 8.0% 8.6% 9.1% 9.6% 9.8%

Tax (799) (890) (987) (1,089) (1,197) (1,249)

Tax Rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Net Profit After Tax 3,197 3,561 3,947 4,356 4,788 4,994

Net Profit After Tax % 6.0% 6.4% 6.8% 7.3% 7.7% 7.8%

Change in Working Capital (119) (693) (734) (763) (793) (413)

Investment In Fixed Assets (2,186) (2,273) (2,364) (2,459) (2,557) (2,608)

Depreciation 3,568 3,294 3,080 2,909 2,772 2,608

Annual Cash Flow 4,460 3,889 3,929 4,043 4,210 4,582

Time 0.5 1.5 2.5 3.5 4.5 4.5

Residual Value 50,907

DCF 4,233 3,326 3,027 2,806 2,632 31,829

WACC 11.0%

None Operatin Assets 3,302

Less Financial Liabilities 16,500

Equity Value 34,654

As Of December 31, 2011


Appendix B

Workforce Contributory Charges

The following is the workforce fair value calculation as for the Valuation

Date (in thousands €);


The following is the working capital calculation:


Fixed Assets – The fixed assets fair value based on an external expert

valuation which recieved by company's management. The difference

between the book value and the fair value is attributed to the real estate

valuation expert of the company's land and the buildings.

Working capital – (see appendix D)

Workforce – (See appendix B)

Representative Income – the Revenue of 2011 was taken, which is

representative in our opinion for the Group activity.

Department No Of Employees

Average

Mounthly

Salery

(Thousands €)

No. of months

for training

Total cost

(Thousands €)

1 38 12.4 2 941

2 61 7.6 2 927

3 29 11.1 3 966

4 120 6.9 2 1,652

סה"כ 248 4,486

Total Training Cost (Thousands €) 4,486 (1)

Estimation of recruiting and screening expenses 2,082 (2)

Total Cost 6,568

Tax 20%

Total Cost after tax 5,254

Charge )Thousands €( Value

PT rate of

return

AT rate of

return

Annual

Charge Revenues

% Of

Revenues

Fixed Assets (1) 29,903 9% 7% 2,153 51,291 4.2%

Working Capital (2) 17,533 5% 4% 701 51,291 1.4%

Workforce (3) 5,254 11% 578 51,291 1.1%


Appendix C

Tax Benefit Tax Benefit

The following is the Tax benefit factor of the ETOL's Customer Relations

Asset;


The following is the Tax benefit factor of the ETOL's Know-How Asset;


NOCapitalization

Period

% Yearly

Amortization% Tax C * D PV(E) @12%

1 1 10% 20% 2% 1.9%

2 2 10% 20% 2% 1.7%

3 3 10% 20% 2% 1.5%

4 4 10% 20% 2% 1.4%

5 5 10% 20% 2% 1.3%

6 6 10% 20% 2% 1.1%

7 7 10% 20% 2% 1.0%

8 8 10% 20% 2% 0.9%

9 9 10% 20% 2% 0.8%

10 10 10% 20% 2% 0.7%

Tax Benefit Factor 12.4%

Tax Benefit Calculation NOCapitalization

Period

% Yearly

Amortization% Tax C * D PV(E) @12%

1 1 5% 20% 1% 0.9%

2 2 5% 20% 1% 0.9%

3 3 5% 20% 1% 0.8%

4 4 5% 20% 1% 0.7%

5 5 5% 20% 1% 0.6%

6 6 5% 20% 1% 0.6%

7 7 5% 20% 1% 0.5%

8 8 5% 20% 1% 0.5%

9 9 5% 20% 1% 0.4%

10 10 5% 20% 1% 0.4%

11 11 5% 20% 1% 0.3%

12 12 5% 20% 1% 0.3%

13 13 5% 20% 1% 0.3%

14 14 5% 20% 1% 0.2%

15 15 5% 20% 1% 0.2%

16 16 5% 20% 1% 0.2%

17 17 5% 20% 1% 0.2%

18 18 5% 20% 1% 0.2%

19 19 5% 20% 1% 0.1%

20 20 5% 20% 1% 0.1%

Tax Benefit Factor 8.4%

Tax Benefit Calculation


Appendix D

Inventory

The following is the revaluation of the Advances for inventories of the group

(Thousands €);


The book value of finished goods inventory is €2,141 thousands. In order to

to derive the fair value we divided the book value with the representative

cost of sales rate (66%). Out of the result we reduced 17% selling and

marketing expenses and marketing margin.

Therefore, the Advances For inventories fair value, is €2,676 thousands.

Thousands €

Advances For inventories 2,141

Selling Price 3,220

S&M And Marketing Margin 544

Fair Value 2,676


Appendix E

Royalties Transactions

The following are transactions in which royalties paid for the use of accumulated know-how in the production of products to the food and beverage industry;

Source: (www.royaltysource.com).

The Transaction Upper Range Down Range

Abrasive Asbestos & Misc Nonmetallic Mineral Products 4.0% 4.0%

Know-How Use License in the Beverage Manufacture Sector. Includs the Chemical formula and machining process 4.5% 4.5%

Diagnostic Substances 7.0% 7.0%

Bevereges 1.0% 1.0%

Pharmaceutical Preparations 3.0% 3.0%

Grain Mill Products 3.0% 3.0%

Agriculture Services 4.0% 4.0%

Miscellaneous Food Preparations & Kindred Products 5.0% 2.5%

Individual 2.0% 2.0%

Cookies and Crackers 1.5% 1.0%

Eating Places 5.0% 3.0%

Food and Kindred Products 4.0% 1.0%

Range 7.0% 1.0%

Quarterly Report Regarding

Effectiveness of Internal Audit on

Financial Reporting and on

Disclosure

Quarterly Report Regarding Effectiveness of Internal Audit on Financial Reporting

and on Disclosure Under Regulation 38C(A)

The management of Frutarom Industries Ltd (the “Company”), supervised by the

Company’s Board of Directors, is responsible for prescribing and conducting a proper

internal control on the Company's financial reporting and disclosure.

For this matter, the members of the management are:

1. Ori Yehudai, President and CEO

2. Alon Granot, Executive Vice President and CFO

3. Amos Anatot, Executive Vice President Global Supply Chain and Operations.

4. Dana Maor, Global Vice President, Human Resources

5. Guy Gill, Vice President Finance

6. Tali Mirsky-Lachman, Global Vice President, Legal Affairs and Corporate Secretary

7. Lilit Levi, Global Chief Information Officer

Internal control on financial reporting and disclosure includes controls and procedures

which are conducted in the Company, which are planned by the Company's President

and CEO, and CFO and under their supervision, or by whoever fills these positions in

practice, under the supervision of the Company's Board of Directors. These controls and

procedures are meant to provide a reasonable level of certainty regarding the reliability

of the financial reporting and the preparation of the financial reports in accordance with

the provision of the law, ensuring that the information the Company is required to

disclose in the reports it publishes under the provisions of the law is gathered,

processed, summarized and reported on the date and the manner prescribed by law.

Internal control includes, among others, controls and procedures designed to ensure that

the information the Company, as stated, is required to disclose is gathered and delivered

to the Company’s management including the President and CEO, and to the highest

ranking financial officer whoever fills these positions in practice, in order to allow timely

decision making with regards to the disclosure requirement.

Due to its structural limitations, the internal control on financial reporting and disclosure

is not designed to provide absolute certainty that misrepresentation or omission of

information in the reports will be avoided or revealed.

In the annual report regarding effectiveness of the internal control on the financial report

and disclosure attached to the periodic report for the period ending December 31, 2011

(hereinafter: the latest annual report for internal control), the Board of Directors and the

management assessed the Company’s internal audit; based on this assessment, the

Company's Board of Directors and management concluded that the aforesaid internal

audit for December 31, 2011 is effective.

As of the date of the report, no events or issues which could alter the assessment of the

effectiveness of the internal audit as presented in the latest annual report for internal

control regarding the latest internal control were brought to the attention of the Board of

Directors and the management.

As at the date of the report, based on the assessment of efficacy of the internal

assessment in the annual report regarding the latest internal audit, and based on the

information presented to the management and the Board of Directors as stated above,

the internal audit is effective.

Director’s Declaration

Declaration of the President and CEO

The undersigned, Mr. Ori Yehudai, hereby declares as follows:

1. I have reviewed the Quarterly Report of Frutarom Industries Ltd. (the "Company") for

the first quarter of 2012 (the "Reports");

2. To my knowledge, the Reports do not include any false representations of any

material fact and do not omit representation of any material fact required in order to

ensure that the representations contained in these, in light of the circumstances

under which they were included, are not misleading in relation to the period of the

Reports;

3. To my knowledge, the financial reports and other financial information contained in

the reports duly reflect the Company's financial situation, its results of operations

and cash flow for the dates and periods to which the Reports relate in all material

aspects;

4. I have disclosed to the Company's auditors, the Board of Directors and the Audit and

Balance Sheet Committees of the Company's Board of Directors, based on my most

updated assessment of the internal control on financial reporting and disclosure:

a. All the material deficiencies and weaknesses in prescribing and implementing

the internal control on the financial reporting and on the disclosure which may

reasonably adversely affect the ability of the Company to gather, process or

report on financial information in a manner which could raise concerns regarding

the reliability of the financial reporting and the preparation of the financial reports

in accordance to the provisions of the law; and –

b. Any fraud, material or not material, which involves the president and CEO or

anyone directly reporting to him or other employees who hold significant

positions in the internal control on the financial reporting and on disclosure;

5. I, alone, or together with others in the Company:

a. Set controls and procedures, or ensured the existence and set up of controls and

procedures under my supervision, designated to ensure that material information

relating to the Company, including its consolidated companies as defined in the

Securities Regulations (Annual Financial Reports), 2010, is brought to my

attention by others in the Company and the consolidated companies, particularly

during the preparation of the Reports; and

b. I set controls and procedures, or ensured the enactment and performance of

controls and procedures under my supervision, designed reasonably ensure the

reliability of the financial reporting and the preparation of the financial reports in

accordance with the provisions of law, including in accordance with accepted

accounting principles:

c. No events or issues occurring during the period between the 2011 periodic report

and this time which could change the Board of Directors’ and management’s

conclusion regarding effectiveness of the internal report on the Company’s

financial statement and on the disclosure have been brought to my attention.

The above does not derogate from my lawful responsibility, or from the lawful

responsibility of any other person.

Date: May 29, 2012 `

_______________

Ori Yehudai

President and CEO

Directors’ Declarations

Declaration of the Executive Vice President and CFO

I the undersigned, Alon Granot, hereby declare as follows:

1. I have reviewed the interim financial reports and the other financial information

contained in the interim reports of Frutarom Industries Ltd. (the "Company") for the

first quarter of 2012 (the "Reports");

2. To my knowledge, the interim financial reports and the other financial information

contained in the interim Reports do not include any false representations of any

material fact and do not omit representation of any material fact required in order to

ensure that the representations contained in these, in light of the circumstances

under which such representations were included, are not misleading in relation to

the period of the Reports;

3. To my knowledge, the interim financial reports and other financial information

contained in the interim reports duly reflect the Company's financial situation, its

results of operations and cash flow for the dates and periods to which the Reports

relate in all material aspects;

4. I have disclosed to the Company's auditors, the Board of Directors and the Audit and

Balance Sheet Committee of the Company's Board of Directors, based on my most

updated assessment of the internal control on financial reporting and disclosure:

a. All the material deficiencies and weaknesses in prescribing and implementing

the internal control on the financial reporting and on the disclosure insofar as it

relates to the interim reports and the other financial information contained in the

interim reports, which may reasonably adversely affect the ability of the

Company to gather, process or report on financial information in a manner which

could raise concerns regarding the reliability of the financial reporting and the

preparation of the interim financial reports in accordance to the provisions of the

law; and –

b. Any fraud, material or not material, which involves the president and CEO or

anyone directly reporting to him or other employees who hold significant

positions in the internal control on the financial reporting and on disclosure;

5. I, alone, or together with others in the Company:

a. Set controls and procedures, or ensured the existence and set up of controls and

procedures under my supervision, designated to ensure that material information

relating to the Company, including its consolidated companies as defined in the

Securities Regulations (Annual Financial Reports), 2010, , is brought to my

attention by others in the Company and the consolidated companies, particularly

during the preparation of the Reports; and

b. Set controls and procedures, or ensured the enactment and performance of

controls and procedures under my supervision, designed reasonably ensure the

reliability of the financial reporting and the preparation of the financial reports in

accordance with the provisions of law, including in accordance with accepted

accounting principles:

No events or issues occurring during the period between the 2011 periodic report

and this time, relating to interim financial reports and to any other financial

information contained in the interim report, which could, in my opinion, change the

Board of Directors’ and management’s conclusion regarding effectiveness of the

internal report on the Company’s financial statement and on the disclosure have

been brought to my attention.

The above does not derogate from my lawful responsibility, or from the lawful

responsibility of any other person.

Date: May 29, 2012 `

_______________

Alon Granot Executive Vice President and CFO

Documents

FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE … · Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions (the non-sweet taste spectrum),