<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
------------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________________
Commission file number 1-8707
PEC Israel Economic Corporation
(Exact name of registrant as specified in its charter)
Maine 13-1143528
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock (par value $1.00 per share) New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Exhibit Index is on Page 259.
Page 1 of 285 pages.
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The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 25, 1998 was approximately
$72,515,000. Such aggregate market value was computed on the basis of the
closing price of the Common Stock of the registrant on the New York Stock
Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common
Stock and Related Stockholder Matters."
As of March 25, 1998, 18,362,188 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed in
connection with its 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III.
Page 2
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PART I
Item 1. BUSINESS
PEC Israel Economic Corporation ("PEC" or the "Company") organizes,
acquires interests in, finances and participates in the management of companies,
predominantly companies which are located in the State of Israel or are
Israel-related. PEC is often involved in the early development of a company and
has participated in the organization, financing or increase in capital of over
150 Israeli enterprises since its incorporation in 1926. The Company
participates actively in management through representation on boards of
directors and is involved in a broad cross-section of Israeli companies engaged
in various fields of business, including telecommunications and technology,
manufacturing, real estate, retailing, shipping and consumer products.
Among PEC's holdings are significant interests in one of Israel's two
cellular telephone providers (Cellcom Israel Ltd.), the cable television company
that serves the Tel-Aviv metropolitan area and two other areas in Israel (Tevel
Israel International Communications Ltd.), a company that is a world leader in
digital visual information communication for the graphic design, printing,
publishing and video markets (Scitex Corporation Ltd.), one of Israel's leading
diversified high technology holding companies (Elron Electronic Industries
Ltd.), Israel's largest paint manufacturer (Tambour Ltd.), Israel's largest
manufacturer of cans and metal packaging material (Caniel-Israel Can Company
Ltd.), one of Israel's most active real estate construction and development
companies (Property and Building Corporation Ltd.), one of Israel's largest
shipping companies (El-Yam Ships Ltd.) and Israel's largest supermarket chain in
terms of revenue (Super-Sol Ltd.). PEC is also involved in several venture
capital funds and early stage development companies.
PEC acquires interests in companies it believes have attractive long-term
growth potential. PEC generally seeks to acquire and maintain a sufficient
equity interest in a company to permit PEC, in conjunction with other companies
controlled by IDB Holding Corporation Ltd. ("IDB Holding" and, together with the
companies controlled by it, the "IDB Group"), to have a significant influence in
the management and operation of that company. PEC emphasizes the potential for
long-term capital appreciation over the ability or intention of an enterprise to
provide a cash return in the near future. Among the other factors PEC considers
in determining whether to acquire an interest in a specific enterprise are
quality of management, global or domestic market share, export sales potential
and ability to take advantage of the growth of the domestic Israeli economy.
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IDB Holding, through its majority owned subsidiary, IDB Development
Corporation Ltd. ("IDB Development"), owns beneficially approximately 81.35%
of the outstanding Common Stock of PEC. IDB Holding is controlled by Mr. Raphael
Recanati, Chairman of the Board of PEC, and members of his family.
IDB Holding is one of the largest business enterprises operating in the
private sector of the Israeli economy, with consolidated assets exceeding $2.7
billion at December 31, 1997. Discount Investment Corporation Ltd. ("Discount
Investment"), another indirect subsidiary of IDB Holding, owns shares of many
Israeli companies in which PEC has holdings and, through a subsidiary, has an
agreement with PEC that each will offer the other equal participation in
business opportunities that become available to either of them in Israel for a
fee of 2.5% of the equity or long-term debt invested by the paying party in
business opportunities initiated or initially presented by the other party. PEC
participates directly and through a contractual arrangement with Discount
Investment in the management of the companies in which PEC holds equity
interests. PEC and Discount Investment have agreed to cooperate on matters
concerning the advancement and development of companies in which each of them
owns voting interests, including the use of their voting power as shareholders
on a mutually agreed basis. PEC also has entered into voting agreements with
other members of the IDB Group with respect to voting of the stock of certain of
such companies.
PEC believes that its agreements with Discount Investment and PEC's
relationship with the IDB Group afford PEC an important source of new business
opportunities in Israel, significant influence in the management and operations
of companies in which PEC holds shares and savings in PEC's cost of conducting
its business.
PEC has received an Order from the United States Securities and Exchange
Commission determining that it is not an investment company within the meaning
of the Investment Company Act of 1940. In light of the Order, PEC has determined
that its business holdings should continue to be concentrated in Israel-related
companies that it, IDB Holding and other members of the IDB Group control or in
which they exercise a significant influence.
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The Affiliates
The following chart lists by industry group the companies in Israel or
related to Israel in which PEC holds voting equity interests (the "Affiliates"),
the principal business of each such company and, with respect to each such
company, the percentage of equity owned directly by each of PEC, Discount
Investment and the IDB Group in the aggregate. For additional information with
respect to the Affiliates, including information with respect to carrying
values, see Note 3 of the Notes to Consolidated Financial Statements of PEC and
Subsidiaries.
<TABLE>
<CAPTION>
Percentage
Equity Ownership as of
December 31, 1997
----------------------
Discount IDB
Principal Business PEC (20) Investment Group (1)
------------------ -------- ---------- ---------
Telecommunications and Technology
<S> <C> <C> <C> <C>
Cellcom Israel Ltd. Cellular Telephone Provider 12.5% 12.5% 25.0%
Tevel Israel International Cable Television 23.7 24.8 48.5(2)
Communications Ltd. Broadcast Franchise
Scitex Corporation Ltd. Digital Visual Information 6.6 6.6 26.3(3)
Communication
Elron Electronic Diversified High 13.6 26.4 40.0
Industries Ltd. Technology Holdings
Gilat Satellite Networks Satellite Communications 6.8 6.2 13.0(4)
Ltd. Systems
Gilat Communications Satellite-Based 9.8 9.8 19.6
Ltd. Communications Services;
Satellite-Based Interactive
Distance Learning Systems
Tel-Ad Jerusalem Studios Television Station Operator 11.5 11.5 23.0
Ltd. and Producer of Television
Programs
NICE Systems Ltd. Voice Logging and 2.1 2.1 4.2
Communication Intelligence
Systems
Liraz Systems Ltd. Customized Computer 15.8 15.9 31.7(5)
Software Systems: Distri-
bution of Packaged Software;
and Provider of Outsourcing
Services
RDC-Rafael Development Development Stage 16.7 16.7 50.1(6)
Corporation Ltd. High Technology
Products
</TABLE>
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<TABLE>
<CAPTION>
Percentage
Equity Ownership as of
December 31, 1997
----------------------
Discount IDB
Principal Business PEC (20) Investment Group (1)
------------------ -------- ---------- ---------
Telecommunications and Technology (continued)
<S> <C> <C> <C> <C>
Gemini Israel Fund L.P. Venture Capital Fund 11.2% 11.2% 29.9%(7)
(Primarily High Technology)
Gemini Israel II Limited Venture Capital Fund 3.8 3.8 7.6 (7)
Partnership (Primarily High Technology)
Advent Israel Limited Venture Capital Fund 5.4 5.4 10.8 (8)
Partnership (Primarily High Technology)
Electronics Line (E.L.) Electronic Security 13.9 13.9 27.8
Ltd. Systems
Libit Signal Processing Ltd. Modem Technologies 5.3 5.4 10.7
Lipman Electronic Electronic and Computerized 2.4 2.5 4.9
Engineering Ltd. Systems
Tradanet Electronic Electronic Commerce 30.0 30.0 60.0
Commerce Services Ltd. Services
Soreq Development Center Support of Development-Stage 25.0 25.1 50.1
(S.D.C.) Ltd. High Technology Companies
Soundesigns Multimedia Integration of Computers and 13.2 13.2 26.4 (9)
Communication Systems Ltd. Conventional Communications
LOGAL Educational Software Educational Software 4.3 4.3 22.4 (10)
and Systems Ltd.
PAMOT Fund Acquisition of Development - 3.3 3.3 6.6 (11)
Stage Companies
Incubator for Technological Support of Development - 16.6 16.7 33.3
Entrepreneurship Kiryat Stage High Technology
Weizmann Ltd. Companies
</TABLE>
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<TABLE>
<CAPTION>
Percentage
Equity Ownership as of
December 31, 1997
----------------------
Discount IDB
Principal Business PEC (20) Investment Group (1)
------------------ -------- ---------- ---------
Industry
<S> <C> <C> <C> <C>
Tambour Ltd. Paint and Related Products 42.8% 21.3% 64.3%(12)
Tefron Ltd. Lingerie and Undergarments 7.1 7.2 14.3
Caniel-Israel Can Company Ltd. Cans and Metal Containers 29.2 14.7 43.9 (13)
Klil Industries Ltd. Aluminum Extrusions and 16.7 37.4 56.4 (14)
Finished Products
Mul-T-Lock Ltd. Locks and Security Doors 14.9 15.0 33.3 (15)
Ham-Let (Israel-Canada) Ltd. Instrumentation 5.7 5.7 11.4
Valves and Fittings
Maxima Air Separation Center Ltd. Industrial Gas Production 12.1 11.6 23.7
Lego Irrigation Ltd. Irrigation Equipment 13.2 13.2 26.4 (16)
Real Estate
Property and Building Real Estate Construction 38.8 14.9 53.7 (17)
Corporation Ltd. and Development
Retail, Shipping and Other
Super-Sol Ltd. Supermarkets 13.5 11.8 37.8 (18)
El-Yam Ships Ltd. (19) Bulk Shipping 10.1 14.3 24.4
Renaissance Fund LDC Acquisition of Equity Interests 3.7 -- 3.7
for Capital Appreciation
General Engineers Limited Distribution of Power 100.0 -- 100.0
Generation Equipment
Isrotel Ltd. Ownership, Management and 2.3 2.3 4.6
Operation of Hotels
Mondex Israel Ltd. Electronic Smart Card 25.0 25.0 50.0
</TABLE>
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(1) Total holdings of members of the IDB Group.
(2) Interests in Tevel Israel International Communications Ltd. are held
through a separate company, DIC and PEC Cable TV Ltd., whose shareholders
are PEC (49%) and Discount Investment (51%).
(3) The ownership interest of the IDB Group in Scitex Corporation Ltd.
includes the 13.1% ownership interest of Clal Electronics Industries Ltd.
and its subsidiary Clal Electronics Ventures Ltd., both affiliates of IDB
Holding.
(4) As a result of purchases of ordinary shares of Gilat Satellite Ltd. after
December 31, 1997 by Clal Electronics Industries Ltd. and its subsidiary
Clal Electronics Ventures Ltd., both affiliates of IDB Holding, as of
March 25, 1998, the IDB Group owned 20.6% of the ordinary shares of Gilat
Satellite Ltd.
(5) In addition, PEC and Discount Investment own options to acquire ordinary
shares of Liraz Systems Ltd. If all of the outstanding options of Liraz
Systems Ltd. are exercised, PEC would own 17.9%, Discount Investment would
own 18.0% and the IDB Group would own 35.9%, respectively, of the ordinary
shares of Liraz Systems Ltd.
(6) Interests in RDC-Rafael Development Corporation Ltd. are held through a
separate company, DEP Technology Holdings Ltd. The ownership interest of
the IDB Group includes the 16.7% ownership interest of Elron Electronic
Industries Ltd. in RDC-Rafael Development Corporation Ltd.
(7) PEC and Discount Investment each own 18.5% of Gemini Capital Fund
Management Ltd. ("Gemini Capital"), the general partner of each of Gemini
Israel Fund L.P. ("Gemini") and Gemini Israel II Limited Partnership
("Gemini II"), which has a nominal equity interest in Gemini and Gemini
II. The ownership interest of the IDB Group includes the 3.7% and 3.8%
ownership interests of Elron Electronic Industries Ltd. ("Elron") and
Scitex Corporation Ltd. ("Scitex"), respectively, in Gemini. As a result
of a purchase of ordinary shares of Gemini Capital after December 31,
1997, as of March 25, 1998, PEC and Discount Investment each owned 25% of
the ordinary shares of Gemini Capital. As a result of purchases of
interests in Gemini after December 31, 1997, as of March 25, 1998, PEC
owned 16%, Discount Investment owned 16%, Elron owned 5.3%, Scitex owned
5.4% and the IDB Group owned 42.7%, respectively, of Gemini. The interests
of PEC, Discount Investment and the IDB Group in Gemini and Gemini II
represent nonvoting limited partnership interests.
(8) Represents interests in Advent Israel Limited Partnership and a parallel
limited partnership (together, "Advent Israel"), on a combined basis,
other than in the assets and results of operations attributable to Advent
Israel's interest in Gemini.
(9) In addition, PEC and Discount Investment own options to acquire ordinary
shares of Soundesigns Multimedia Communications Systems Ltd. If such
options are exercised, PEC would own 17.2%, Discount Investment would own
17.2% and the IDB Group would own 34.4%, respectively, of the ordinary
shares of Soundesigns Multimedia Communications Systems Ltd.
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(10) The ownership interest of the IDB Group includes the 12.4% and 1.4%
ownership interests of Gemini and Elron Electronic Industries Ltd.,
respectively, in LOGAL Educational Software and Systems Ltd.
(11) PAMOT Fund refers to five parallel limited partnerships and the
percentages represent ownership interests in the five partnerships on a
combined basis.
(12) Includes the proportionate interest of the IDB Group in the 0.4% ownership
interest in Tambour Ltd. ("Tambour") held by Tovalah Ltd., a wholly-owned
subsidiary of Tambour. As a result of purchases of ordinary shares of
Tambour after December 31, 1997 by PEC and Discount Investment, as of
March 25, 1998, PEC owned 43.1%, Discount Investment owned 21.4% and the
IDB Group owned 64.8%, respectively, of the ordinary shares of Tambour.
(13) Includes the 27% equity interest in Caniel-Israel Can Company Ltd. of
Ispah Holdings Ltd., a company in which PEC and Discount Investment each
hold a 50% equity interest.
(14) Includes the proportionate interest of the IDB Group in the 4.1% ownership
interest in Klil Industries Ltd. ("Klil") held by Klil Aluminum Products
Ltd., a wholly-owned subsidiary of Klil. As a result of purchases of
ordinary shares of Klil after December 31, 1997 by PEC and Discount
Investment, as of March 25, 1998, PEC owned 17.3%, Discount Investment
owned 39.3% and the IDB Group owned 59%, respectively, of the ordinary
shares of Klil.
(15) Includes the proportionate interest of the IDB Group in the 10.3%
ownership interest in Mul-T-Lock Ltd. held by Mul-T-Lock Technologies
Ltd., a wholly-owned subsidiary of Mul-T-Lock Ltd.
(16) After December 31, 1997, PEC and Discount Investment Corporation Ltd. sold
their entire ownership interests in Lego Irrigation Ltd.
(17) As a result of purchases of ordinary shares of Property and Building
Corporation Ltd. after December 31, 1997 by PEC, as of March 25, 1998, PEC
owned 41.2%, Discount Investment owned 14.9% and the IDB Group owned
56.1%, respectively, of the ordinary shares of Property and Building
Corporation Ltd.
(18) The ownership interest of the IDB Group includes the 12.7% ownership
interest of "Delek" - The Israel Fuel Corporation Ltd. in Super-Sol Ltd.
As a result of purchases of ordinary shares of Super-Sol Ltd. after
December 31, 1997 by PEC and Discount Investment, as of March 25, 1998,
PEC owned 17.6%, Discount Investment owned 17.6% and the IDB Group owned
47.9%, respectively, of the ordinary shares of Super-Sol Ltd.
(19) Includes the Company's interest in Financial Holdings El-Yam (Hamigdal)
Ltd.
(20) The chart does not include one company with respect to which PEC holds
less than a 2.5% equity interest which is not material to PEC.
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Telecommunications and Technology
Cellcom Israel Ltd. ("Cellcom"). Cellcom, a corporation owned by PEC,
Discount Investment, BellSouth Enterprises Inc. and companies controlled by
Joseph Safra and Moise Safra of Brazil, operates Israel's second cellular
telephone system. Cellcom began operations at the end of December 1994 and
serves all of Israel. By the middle of March 1998, over 850,000 subscribers were
utilizing Cellcom's cellular telephones, an increase of approximately 250,000
subscribers in the past year and over 600,000 customers in the past two years.
Approximately 27% of Israelis have mobile phones, a usage rate second only to
the Scandinavian countries. Cellcom has invested approximately $660 million in
the development and operation of its cellular telephone system.
Cellcom's license to operate the second cellular telephone system expires
in 2004. Cellcom has the right to request, and Israel's Ministry of
Communications can agree, to extend the license for one or more periods of six
years. In February 1998, Israel's Ministry of Communications granted to Partner
Communications Ltd. ("Partner") a license for the establishment and operation of
a third cellular telephone system in Israel, which system is expected to begin
operations in September 1998. Elbit Ltd., a 40% owned subsidiary of PEC's
Affiliated Company Elron Electronic Industries Ltd., owns 17.5% of Partner.
Cellcom uses TDMA (time division multiple access) digital technology, an
advanced technology for cellular communication. Cellcom's cellular telephone
system utilizes cell sites, switching machines and mobile telephone switching
offices to carry telephone calls. At the end of 1997, Cellcom had 600 operating
cell sites, six mobile telephone switching offices and 11 switching machines. In
order to improve the quality of its existing service, Cellcom intends to
construct an additional 150 cell sites, one mobile telephone switching office
and two switching machines in 1998.
Cellcom's marketing strategy is based on the premise that cellular
telephones and service should be offered on a mass market basis. Cellcom's
rates, which are regulated by its license, are among the lowest in the world.
Cellcom charges users of its cellular service 12.9 cents per minute during peak
hours and 10 cents per minute during off peak hours. Cellcom may increase these
charges whenever the Israeli consumer price index increases by more than 8.5% in
any year. In addition, Cellcom charges an interconnect fee and, in 1998 and
1999, Cellcom may charge customers a monthly fee of $5.65, not including any
adjustments for inflation. Cellcom's peak charges are lower than the charges of
the operator of Israel's first cellular network during peak hours, which are 20
cents per minute.
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Cellcom markets cellular telephones and its cellular telephone system
through its own retail stores, a telemarketing group with service centers,
independent authorized distributors and independent importers of telephones. At
the end of 1997, Cellcom products and services were offered in over 65 cities
throughout Israel at 360 locations, of which 11 were Cellcom retail stores.
Tevel Israel International Communications Ltd. ("Tevel"). PEC owns,
through its interest in DIC and PEC Cable TV Ltd., 23.7% of Tevel, which was
established in 1988 to develop, construct and operate cable television systems
in Israel. PEC's partners in Tevel are Discount Investment, Tele-Communications
Inc. ("TCI"), a leading owner and operator of cable television systems in the
United States, and United Pan European Co. ("UPC"), a major owner and operator
of cable television systems in Europe. TCI and UPC hold their interests in Tevel
through wholly owned subsidiaries.
Tevel has exclusive franchises for the whole of the Tel Aviv-Givataim
metropolitan area, the southern region of Ashdod-Ashkelon and the
Nazareth-Jezreel Valley in the northern part of Israel. These franchises include
approximately 360,000 households - about 23% of the homes in Israel. Tevel has
completed the construction of approximately 97% of the cable network in its
franchise areas. At the end of 1997, Tevel had approximately 242,000
subscribers, constituting approximately 69% of the households in the area in
which network construction has been completed.
The exclusive franchises granted to Tevel have a twelve year term expiring
in 2002 with a four-year renewal right. Tevel pays the Israeli government annual
franchise royalties of 5% of its gross revenues. The government regulates the
basic service subscription rates which cannot be increased beyond cost of living
index increases. Currently, government regulations prevent cable television
operators from offering advertising.
Tevel offers customers a uniform, extended basic package of 41 channels
for a fixed monthly fee. The basic package includes local, national and regional
broadcasting channels, satellite delivered channels from Europe and Asia, and
five channels, subtitled in Hebrew - a movie channel, a sports channel, a family
entertainment channel, a science, nature and cultural channel and a children's
entertainment channel.
Tevel has installed advanced scrambling and addressable two-way equipment
that protects the service from theft, and enables Tevel to offer additional
programming for which it may charge separately. Tevel offers its customers
recent theatrical movies on a pay per view basis over five channels programmed
and
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packaged by Tevel under Tevel's brand name "Home Cinema". During 1997, monthly
sales of "Home Cinema" events increased steadily, reaching a sales rate of
93,000 events per month during the last quarter of 1997, and total sales in 1997
amounted to 1,040,000 events.
Tevel holds a 50% ownership interest in Globcall Ltd., an operator of
telecommunication and switching systems for businesses. At the end of 1997,
Globcall served approximately 400 business locations with 35,000 telephone
extensions. In December 1997, Tevel acquired a 33% ownership interest in
NetVision Ltd., Israel's largest Internet services provider.
In March 1998, Tevel agreed to purchase for $280 million Gvanim Cable
Television and a 32.3% ownership interest in Monitin Publishing. Gvanim holds
the franchise to operate cable television in Rishon Lezion, Ramle, Lod and the
Krayot near Haifa and has 140,000 subscribers. Monitin owns the financial daily
"Globes" and has ownership interests in other communication companies. The
acquisition is subject to the approvals of Israeli regulatory authorities.
Scitex Corporation Ltd. ("Scitex"). Scitex is a world leader in visual
information communication. Scitex designs, develops, manufactures, markets and
supports products, systems and devices for three markets: digital preprint,
digital printing and digital video.
Digital preprint covers input, output and proofing. The input line
consists of digital camera backs and color separation scanners. The output line,
which consists of hardware systems and software, includes digital front ends,
color inkjet printing and proofing systems, imagesetters and plate setters for
outputting color separation films or plates, client servers and archivers and
telecommunication workflow solutions.
Scitex markets its preprint products to tradeshops, digital service
bureaus, commercial printers, and publishers. Customers include Fortune, The New
York Times, National Geographic, Sports Illustrated, R.R. Donnelley Corporation,
Le Figaro, The Daily Telegraph, Dai Nippon Printing and Ashai Shimbun.
Digital printing includes the manufacture of computer-driven, inkjet
printers for very high speed, high volume printing and for variable-data
printing of personalized mass mailings, billings, bar codes, business forms and
lottery tickets. Scitex also offers servers and front ends for print-on-demand
systems, working with Xerox Corporation and others. Scitex sells its digital
printing products mainly to commercial printers, periodical printers and form
printers. Its customers include R.R. Donnelley Corporation, Unisys, Standard
Register,
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Banta, Dai Nippon Printing and Toppan Group.
Scitex, in a joint venture with KBA-Planeta AG, the world's third largest
press manufacturer, has developed and will begin marketing in 1998 a digital
offset press which is designed to print high quality, short runs at a
competitive cost and to digitize traditional print processes to increase
productivity and predictability, and thus reduce costs.
In February 1998, Scitex announced an agreement to acquire Idanit
Technologies Ltd., a developer of wide format, inkjet digital printing systems,
for approximately $60 million in cash. Idanit's systems are used for short and
medium print runs of point of purchase displays, banners, truck and bus
advertising and outdoor advertising. Idanit's products are sold primarily to
silk screen printers and digital service bureaus worldwide.
Digital video consists of the manufacture and marketing of digital video
non-linear, post-production, video editing systems and video manipulation
systems, such as digital video effects (DVE) generators and character
generators, which can be on-line or off-line, live or post production, as well
as other devices such as disks and switches. In 1997, Scitex Digital Video
received an Emmy Award from the National Academy of Television Arts and Sciences
for its development of real-time three dimensional manipulation for nonlinear
editing. The division markets its products to television broadcasters and
professional video stores. Its customers include ABC, CBS, NBC, British
Broadcasting Corporation, ESPN, and Home Box Office.
The ordinary shares of Scitex are listed for quotation in the United
States on the National Association of Securities Dealers Automatic Quotation
System/National Market System ("NASDAQ/NMS") (symbol "SCIXF"). PEC, Discount
Investment, Clal Electronics Industries Limited ("Clal"), another member of
the IDB Group, and International Paper Company are parties to a shareholders'
agreement with respect to their ordinary shares of Scitex that, among other
things, (i) provides that Scitex shall have a board of directors consisting
of up to four nominees designated by each of PEC and Discount Investment as a
group, International Paper Company and Clal, and, if the three groups
determine that there should be another director, a nominee agreed upon by all
three groups, (ii) provides that the Chairman of the Board of Scitex and of
its executive committee be selected from the directors designated by PEC,
Discount Investment and Clal and (iii) restricts the acquisition and
disposition by such shareholders of ordinary shares of Scitex. The parties to
the shareholders agreement and Scitex have agreed that the Board of Directors
of Scitex will include two independent directors.
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Elron Electronic Industries Ltd. ("Elron"). Elron conducts its business
principally through high technology operating companies in which it holds
controlling or other significant equity interests. Elron's various affiliates
design, develop, manufacture, market and service products in the fields of
medical imaging, defense electronics, semiconductors, machine vision, software
and information technology. Elron has organized, invested in and developed
companies with new technologies believed to have global marketing potential that
could benefit from ties with Israel. Elron has developed and expanded by
identifying focused entrepreneurial teams and providing them with significant
strategic, financial and managerial assistance to refine and exploit their
technologies. In recent years, Elron has allocated substantial resources to
companies developing technologies and products for the Internet and intranets.
Elron's affiliates include publicly-traded and privately-held companies.
As of March 25, 1998, its principal publicly-traded affiliates were Elbit
Medical Imaging Ltd. (40% owned-medical products and services in the fields of
diagnostic imaging and diagnostic ultrasound and establishment of diagnostic and
therapeutic imaging centers around the world, mainly in developing countries; in
February 1998, Elbit Medical signed an agreement to sell its diagnostic
ultrasound business to GE Medical Systems for $230 million - NASDAQ/NMS symbol
"EMITF" and also traded on the Tel Aviv Stock Exchange); Elscint Ltd., a 57%
owned subsidiary of Elbit Medical Imaging Ltd. (imaging technologies for medical
diagnostics, including computer tomography, magnetic resonance imaging, nuclear
medicine and mammography - New York Stock Exchange symbol "ELT"); Elbit Systems
Ltd. (35% owned - designs, develops and supplies integrated defense systems and
military electronic systems and products as well as upgrades and modernizes
military platforms in the fields of airborne, ground combat, naval and ground
command, control and communications systems - NASDAQ/NMS symbol "ESLTF" and also
traded on the Tel Aviv Stock Exchange); Elbit Ltd. (40% owned - communications
access systems for public and private networks; in February 1998 its affiliate,
Partner Communications Company Ltd. (17.5% owned), was awarded the license to
become the third cellular telephone operator in Israel - NASDAQ-NMS symbol
"ELBTF" and also traded on the Tel Aviv Stock Exchange); Elbit Vision Systems
Ltd. (54% owned by Elbit Ltd. - proprietary automated vision systems based on
computer vision and image interpretation technologies for the textile industry -
NASDAQ/NMS symbol "EVSNF"); Orbotech Ltd. (2.6% owned - application of machine
vision and related computer-based technologies to improve the production
processes of printed circuit boards and liquid crystal displays - NASDAQ/NMS
symbol "ORBKF"); Zoran Corporation (16% owned - integrated circuits and software
for digital video and audio compression applications - NASDAQ/NMS symbol
"ZRAN"); Mentortech Inc. (7% owned - technology-based training products -
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over-the-counter stock symbol "MNTK"); NetManage Inc. (2% owned - provider of
standards-based software for the Internet and corporate intranets -
NASDAQ/NMS symbol "NETM"); and LOGAL Educational Software and Systems Ltd.
(1.5% owned (PEC and Discount Investment each also own a 4.36% equity
interest and Gemini Israel Fund L.P. owns a 12.7% equity interest) - designs,
creates, publishes and markets simulation-based, educational software
products - NASDAQ/NMS symbol "LOGLF").
Among Elron's privately-held affiliates as of March 25, 1998 included
RDC-Rafael Development Corporation Ltd. (16.7% owned (PEC and Discount
Investment each also own a 16.7% equity interest) - commercialization of
technologies developed by RDC-Rafael Armament Development Authority, a division
of Israel's Ministry of Defense); Chip Express Corp. (40% owned - laser
technology which enables the production of engineering prototypes of Gate Arrays
(integrated circuit devices composed of an array of logic gates integrated to
form specific logic applications) to customers within 24 hours, the supply of
early production quantities in a week and competitively-priced volume production
parts); Eliashim Ltd. (15.8% owned - designs and develops information security,
anti-virus and anti-vandal software for personal computers, Local Area Networks
and the Internet); and Oren Semiconductor, Inc. (13% owned - design, manufacture
and marketing of integrated circuits based on a patented digital filter,
adaptive equalization and digital signal processing technologies for canceling
"ghost" images and for the consumer television market, which circuits are
designed to fit into conventional analogue television sets, VCRs, cable decoders
and television set top boxes). Elron also has a 5.3% limited partnership
interest in Gemini Israel Fund L.P., a venture capital fund in which PEC and
Discount Investment are limited partners.
Elron also has ownership interests in the following six privately-held
companies which focus on advanced technologies, products and services within the
information technology field, including Internet/Intranet, networking and
application development for client/server and web environments: NetVision Ltd.
(32% owned - Israel's largest Internet services provider); MediaGate N.V. (40.3%
owned - provides single point access to the Internet with any real time
communication device); Ornetix Technologies Ltd. (44.8% owned - proprietary
network technology for CD-ROM drives, "CD jukebox" servers and management
software for computer networks); ArelNet Ltd. (16% owned - message switching
technologies and solutions including i-FAX, which enables faxes to be sent at
competitive prices over the Internet); Elementrix Technologies Ltd. (48.1% owned
- -Intranet/Internet security company that develops advanced security products and
technologies); and ServiceSoft Corporation (26% owned - software
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products that provide self-service support information directly to end users
over the Internet and Intranets).
In October 1997, Elron's wholly-owned subsidiary, Elron Software Inc.,
purchased for $12 million all the assets of the Network Management and Network
Security Division of ON Technology Corporation headquartered in Cambridge,
Massachusetts, which develops software products for local area networks, wide
area networks, the Internet and corporate Intranets.
Elron's three major affiliates, Elbit Medical Imaging Ltd., Elbit Systems
Ltd. and Elbit Ltd., constituted approximately 75% of Elron's total assets as of
December 31, 1997.
Elron's ordinary shares are listed for quotation on the NASDAQ/NMS
(symbol "ELRNF") and on the Tel Aviv Stock Exchange ("TASE").
Gilat Satellite Networks Ltd. ("Gilat Satellite"). Gilat Satellite
designs, develops, manufactures, markets and supports very small aperture
terminal ("VSAT") satellite earth stations and related equipment and software
for voice and data communications. Gilat Satellite's products are incorporated
into telecommunications networks which provide satellite-based communications
between a central location (a "hub") and a large number of
geographically-dispersed locations.
Gilat Satellite markets principally three VSAT product lines:
o Satellite data delivery.
FlexSat facilitates batch and interactive data communications for
credit and debit card authorization, inventory control, lottery systems, remote
training and automatic teller machine (ATM) services for customers such as
retail chains, gas stations and supermarkets. Gilat Satellite's OneWay VSAT
provides unidirectional data broadcast for the distribution of real-time
financial information, newswire broadcasts and paging signals for customers such
as stock exchanges, news agencies and paging operators.
o Satellite telephony.
DialAway VSAT is a telephony product which provides single and dual
channel voice services such as satellite pay phones in remote areas. In 1997,
Gilat Satellite's subsidiary, Global Village Telecom Ltd., was awarded the right
to provide telecommunications services to over 1,500 villages in Chile using the
DialAway VSAT. The FaraWay VSAT provides multi-channel, on-demand voice,
telecopy and data services to remote and
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undeveloped areas that lack adequate telecommunications infrastructure. The ISAT
is a frame-relay based product for comprehensive data, voice and video
applications for small corporate networks.
o Satellite-based Internet/Intranet.
Skysurfer provides high speed Intranet access and high-quality
business television for an unlimited number of users using a plug-and-play
personal computer card.
Gilat Satellite has established strategic relationships for product
development and marketing with GE Spacenet Corporation, COMSAT RSI Inc., AT&T
Tridom and GTECH Corporation in the United States and with ANT Bosch Telecom in
Germany and IBM Global Network in France. These service providers and equipment
suppliers offer certain of Gilat Satellite's products as integral parts of their
VSAT network offerings. Gilat Satellite, which is based in Israel, has offices
in the United States, France, China and Thailand.
Gilat Satellite's stock is traded on the NASDAQ/NMS under the trading
symbol "GILTF".
Gilat Communications Ltd. ("Gilat Communications"). Gilat Communications
provides satellite-based communications services in Israel, offering domestic
and international private data and voice communication networks by means of very
small aperture terminals (VSATS), satellite-based interactive distance learning
("IDL") systems and digital video broadcasting. Gilat Communications also
develops and provides satellite-based IDL systems worldwide, permitting
academic, training, governmental and commercial institutions to conduct and
create fully integrated academic courses or employee training to and from remote
sites.
Gilat Communications' principal products are LearnNet and TrainNet, both
fully interactive distance learning and training systems. The two systems offer
proprietary hardware and software for creating, broadcasting and conducting
educational and training sessions. LearnNet is primarily designed for academic
instruction while TrainNet is targeted at corporate training.
Through its wholly-owned subsidiary Israsat, Gilat Communications provides
international point-to-point private satellite communications and has an
estimated market share in Israel of almost 80%.
Gilat Communications owns 25% of Spacecom Satellite Communications
Services Ltd., which holds exclusive marketing rights for the "AMOS 1" satellite
for the Middle East and Central
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Europe.
In December 1997, Gilat Communications had an initial public offering of
its ordinary shares in the United States and its ordinary shares are traded on
the NASDAQ/NMS under the trading symbol "GICOF".
Tel-Ad Jerusalem Studios Ltd. ("Tel-Ad"). Tel-Ad is a major broadcaster
and producer of television programs in Israel, producing prerecorded and live
studio productions as well as productions on location.
In July 1993, Tel-Ad was selected as one of three companies to operate
Israel's second television station (the "Second Channel"), the only privately
operated commercial television station. The broadcast license expires on October
31, 1999 and Tel-Ad may request that the license be extended for one four year
term. Broadcasts on the second television station began in November 1993. Each
of the three licensees is responsible for the entire programming for two days
every week, which two days may be Sunday and Wednesday, Monday and Thursday, or
Tuesday and Friday, and for every Saturday in one year of each three year
period. The two day pairings are rotated among the three licensees every two
years. From September 1996 through August 1997, Tel-Ad's programs were broadcast
on Tuesdays and Fridays. Since September 1997, Tel-Ad's programs have been
broadcast on Sunday and Wednesday, which will continue through August 1998.
The Second Channel is the most-watched television station in Israel. The
popularity of the channel has provided the impetus for advertisers and
advertising agencies alike to take advantage of the opportunities that the
medium offers. In 1997, 30% of all Israeli advertising budgets were allocated
for television. Substantially all of Tel-Ad's revenues are derived from the sale
of advertising air time. Tel-Ad's broadcast license permits Tel-Ad to allocate
up to 10% of its daily 18-hour broadcast time to commercials.
Tel-Ad broadcasts a varied program schedule, with approximately half of
the programs produced in Israel and half of the programs acquired from outside
of Israel, including top-rated feature films and popular television series. The
programs span a wide range of genres and formats, including entertainment,
drama, humor and satire, sporting events, game shows, talk shows and current
affairs. Tel-Ad programs that achieved particular success with the viewing
audience included the investigative reporting magazine "Fact", the humor and
satire program "Harzufim", the entertainment/variety show "Laila Gov", the
dramatic series "Ramat Aviv Gimmel" and "Florentene" and television travel
magazine "World Travel".
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Tel-Ad's offices in the Jerusalem Theatre Building include
state-of-the-art technical facilities, including the first fully digital
television studio in Israel, two multi-purpose television studios, and fully
equipped computerized editing and animation suites. Tel-Ad's offices in Tel Aviv
house its sales and marketing divisions.
NICE Systems Ltd. ("NICE"). NICE develops, designs, manufactures, markets
and services computer telephony integration (CTI) products that provide logging,
quality measurement and management solutions for voice, fax and data. NICE
provides reliable and secure systems for managing communication transactions in
organizations. NICE's products are based on an open architecture and incorporate
enhanced digital networking and voice, fax and data processing technologies. The
principal product of NICE is NiceLog, a technologically leading CTI digital
voice recording and retrieval system, known as a voice logging system, that
performs continuous, reliable recordings of up to thousands of channels. NiceLog
offers advanced voice processing features and provides a variety of connectivity
options to computer networks. The NiceCLS (Call Logging System), a CTI add-on
module, enables prompt location and retrieval of data according to comprehensive
call details such as the time of the call, duration, extension number and
calling number.
NICE also offers NiceCall and NiceFax. NiceCall is a compact voice logging
system that uses between eight and 24 channels for smaller applications such as
public safety services and bank branches. NiceFax is an advanced enterprise-wide
fax management and archiving system for managing all incoming and outgoing fax
traffic in a computerized database.
In 1997, NICE purchased Dees Communications, a Canadian corporation that
provides call center monitoring software solutions for quality measurement,
training and agent productivity enhancement. In March 1998, NICE signed a
definitive agreement to acquire the major assets of IBS Corporation, a
California based corporation that develops and distributes software products
incorporating proprietary technologies for screen and voice management and
screen capturing for IBM Mainframe, AS400 and various client/server
environments.
NICE markets, distributes and services its voice logging products
worldwide through independent distributors that predominantly specialize in the
voice logging market and through its own sales and technical support force in
the United States, Canada, Germany and Israel. In 1997, NICE entered worldwide
distribution agreements with Lucent Technologies and Siemens; these agreements
are in addition to similar arrangements with IPC Information Systems and ETRALI.
NICE's voice logging systems are used by a broad range of users such as
financial institutions,
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air traffic control centers, public safety agencies and intelligence agencies.
Users of NiceLog systems include ABN AMRO Bank, Bank of Montreal, Chase
Manhattan, Citibank, Deutsche Bank, First Chicago, the Sydney Futures Exchange,
air traffic control authorities in several countries throughout the world, and
call centers such as Great West Life, Legal and General, Thomas Cook and British
Gas.
NICE also provides communication intelligence ("COMINT") systems that are
used primarily by government agencies to detect, identify, locate, monitor and
record transmissions from a variety of sources. NICE's principal COMINT system,
NiceFix, is a spectral surveillance and direction finding system that detects,
identifies, locates, monitors and records transmission sources. NICE markets its
COMINT systems primarily through electronic system integrators, such as TRW Inc.
and ELTA, taking advantage of the strengths of such companies in selling
integrated intelligence and electronic systems to governments.
In January 1996 and July 1997, NICE had public offerings in the United
States of American Depositary Shares representing ordinary shares of Nice.
NICE's American Depositary Shares are listed for quotation on the NASDAQ/NMS
under the trading symbol "NICEY". NICE's ordinary shares are traded on the TASE.
Liraz Systems Ltd. ("Liraz"). Liraz and its subsidiaries and
affiliates develop and sell comprehensive computerized business system solutions
in Israel and abroad. In Israel, Liraz specializes in system integration
services and the development of software solutions in the banking,
manufacturing, health care, retail and petroleum areas as well as the provision
of outsourcing services. Liraz's subsidiaries and affiliates include the
following companies:
o Level 8 Systems, Inc., formerly named Across Data Systems, Inc., a 51.9%
owned subsidiary which develops and markets business software and provides
consulting and ancillary services. Level 8's principal business is the
development and sale of middleware software products and services which utilize
messaging and object technology to solve enterprise-wide integration problems
associated with linking centralized computer systems, desktop computers and the
Internet. Middleware products facilitate communication among applications that
reside on distributed and often incompatible hardware and software. Level 8 also
offers a manufacturing resource planning software package for use in managing
manufacturing operations and reporting financial results, as well as related
installation, training and support services. In addition, Level 8 provides
consulting services for enterprise messaging and for the manufacturing and
financial services industries. Level 8's stock is traded on the NASDAQ/NMS under
the trading symbol "LVEL".
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o Yaana Systems Ltd., a 74.7% owned subsidiary which specializes in
outsourcing services, payroll, labor management and complete application
packages. Yaana's stock is traded on the TASE.
o Bintel Systems Ltd., a wholly-owned subsidiary which develops and
markets new artificial intelligence applications, including marketing business
intelligence (MBI), which organizes information from raw data into a concise
decision-making tool for executive management.
o Kedem Computer and Information Systems Ltd., a 60.6% owned subsidiary
which offers professional courses in computer systems.
o ASE Advanced Systems Europe B.V., a wholly-owned subsidiary based in the
Netherlands which provides software and system integration services for the
Benelux countries.
o Burford International Applications Ltd., a wholly-owned subsidiary based
in England which provides complete global business solutions for financial and
commercial industries on personal computer and UNIX systems.
The stock of Liraz is traded on the TASE.
RDC-Rafael Development Corporation Ltd.("RDC"). RDC was established
in July 1993 to conduct the commercialization of non-military applications of
technologies developed by Rafael Armament Development Authority, a division of
the Israel Ministry of Defense ("Rafael"). Rafael is one of Israel's largest
industrial enterprises and Israel's largest research and development
organization.
The two shareholders of RDC are DEP Technology Holdings Ltd., a company
owned equally by PEC, Discount Investment and Elron, who are all members of the
IDB Group, and Galram Technology Industries Ltd., the Israeli governmental
entity in charge of the commercialization in non-military markets of Rafael's
technologies.
RDC, through its interests in the following companies, is working on
several projects, including the development of the products and processes set
forth below:
o Geotek Communications, Inc., which has developed and is marketing in
certain areas, primarily in the United States, a wireless telecommunications
network that provides full duplex service, utilizing frequency-hopping multiple
access technology. RDC acquired most of its interest in Geotek as a result of
its transfers to Geotek of its equity and debt interests in
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PowerSpectrum Technology Ltd. for shares of common stock of Geotek. Geotek's
stock is traded on the NASDAQ/NMS under the trading symbol "GOTK".
o Witcom Ltd., which is developing millimeter wave radio - based digital
networking solutions that provide higher transmitted output power and superior
receiver sensitivity for a wide range of applications such as cellular telephone
systems, local loops, local exchange bypass and local area networks. RDC owns
60% of Witcom and PEC, Discount Investment and Elron each own 6.67% of Witcom
which they acquired in February 1998.
o Oramir Semiconductor Equipment Company Ltd., which is developing the
L-Stripper, an innovative process that allows the removal by laser of
photoresist in the manufacturing process of silicon wafers used in the
semiconductor industry.
o Semiconductor Engineering Laboratories (SELA) Ltd., which manufactures
and markets a line of semiautomatic micro-cleaving systems which produce a cross
section of semiconductor wafers for later examination by a scanning electron
microscope for the purposes of failure analysis and process monitoring.
o Galil Medical Ltd., which develops, manufactures and markets medical
systems for cryotherapy of tissue during general surgery as well as minimally
invasive procedures.
o VSOFT LTD., a software company that integrates solutions and develops
applications in the areas of digital video, database management and real time
information systems.
o 3DV Systems Ltd., which is developing a camera that utilizes laser
technology to produce a three-dimensional picture.
o Medicard Ltd., which is developing products for vascular surgery,
cardiac surgery and other areas of cardiology based on pulsatile technology.
o VerdEco Technologies Ltd., which has developed an in-situ analysis
device that monitors the presence of heavy metals in water and wastewater.
o Given Imaging Ltd., which is developing a swallowable video capsule
designed to pass through the digestive system while transmitting real-time color
video images of the small intestines.
RDC also manages a research and development fund which is currently
supporting one project for the development of satellite communication equipment
utilizing millimeter waves for commercial application such as transmission of
television, high data rates
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and Internet services, another project for the dynamic allocation of frequencies
to cellular telephone subscribers in order to improve channel capacity and
service quality and a third project for the integration of silicon and gallion
arsenide components on a silicon wafer in order to create a complete radio on a
chip.
Gemini Israel Fund L.P. ("Gemini") and Advent Israel Limited Partnership
("Advent Israel"). In 1993, PEC, Discount Investment, Advent International
Corporation, an American company that initiates and manages venture capital
funds, and a corporation formed by the Israeli government ("Yozma"), established
a $36 million investment program with two components, Gemini and Advent Israel.
Gemini is a venture capital limited partnership that invests in high
technology companies located in Israel, especially those that are export
oriented and are in the early stages of their development. Advent Israel is a
venture capital limited partnership managed by Advent International that
acquires interests in high technology companies that are either located in
Israel or whose businesses are related to Israel. Advent Israel is a limited
partner in Gemini.
Advent Israel and a parallel limited partnership have received $20 million
of capital from their partners, of which Advent Israel and such limited
partnership have invested $10.75 million in Gemini and have invested or plan to
invest $9.25 million in portfolio companies. Gemini has received approximately
$26.75 million of capital from its partners. Together, Gemini and Advent Israel
constitute a substantial venture capital program whose purpose is to invest in
companies located in Israel or related to Israel. PEC has contributed $3 million
of capital to Gemini. In January 1998, the partners in Gemini other than Yozma,
namely PEC, Discount Investment, Scitex and Elron (two of PEC's affiliated
companies) and Advent Israel, exercised an option granted by Yozma when Gemini
was formed to purchase Yozma's ownership interest in Gemini and PEC's ownership
interest in Gemini increased from 11.2% to 16%. Gemini may offer PEC and the
other partners the opportunity to purchase interests in entities in which Gemini
is acquiring an interest.
At the end of 1997, Gemini had invested approximately $24.5 million in 27
companies, including $5 million invested in 1997. Gemini is now fully invested.
Among the corporations in which Gemini has an equity interest are the following:
o LOGAL Educational Software and Systems Ltd., a corporation that
designs, creates, publishes and markets simulation-based, educational
software products for science and math curriculums in high schools and
colleges (more fully described below). PEC also has a direct
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interest in LOGAL.
o Angiosonics Ltd., a developer and manufacturer of vascular ultrasound
systems for the removal of arterial obstructions.
o Commtouch Ltd., a corporation engaged in the development of electronic
messaging solutions, including an e-mail product for the home consumer market
and a method to use e-mail as a multimedia promotional and delivery vehicle for
Internet advertising - so called "netvertising".
o Client/Server Technology (CST) Ltd., a developer of software that
converts "Legacy" systems to distributed client/server environments such as MS
Windows and Java.
o Combact Diagnostic Systems Ltd., a developer of a novel and proprietary
automated system for rapid bacterial analysis of urine.
o Verisity Ltd., a corporation that designs and develops software tools
that assist designers of electronic devices, such as integrated circuits, to
verify the correctness of their designs.
o Aisys Ltd., a designer and developer of software for automatic
programming of silicon microcontrollers to operate peripherals.
Since its inception, Gemini has disposed of its equity interests in three
corporations for a gain of approximately $3.3 million on a total cost of
approximately $2.2 million.
PEC is also a limited partner in Advent Israel and has contributed
$500,000 of capital to Advent Israel. As a limited partner in Advent Israel, PEC
has an indirect interest in all of Advent Israel's holdings other than Advent
Israel's interest in Gemini. At the end of 1997, Advent Israel had directly
invested approximately $8.4 million in 24 companies other than Gemini. Among the
corporations in which Advent has an equity interest and Gemini does not are a
developer of airless fluid spraying devices and a corporation which uses voice
compression technology for high-quality Internet voice transmissions.
Gemini Israel II Limited Partnership ("Gemini II"). Primarily as a result
of Gemini investing substantially all of its funds, in 1997, PEC, Discount
Investment and Advent International Corporation established Gemini II, a venture
capital limited partnership that acquires interests in high technology companies
that either are located in Israel or whose businesses are related to Israel.
Gemini II and parallel limited
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partnerships have received capital commitments of approximately $110 million.
PEC has agreed to contribute $1.5 million to Gemini II, of which it has
contributed $450,000 as of March 25, 1998.
As of February 28, 1998, Gemini II had invested $16.7 million in 12
companies, including the following corporations:
o Oridion Medical Ltd., a developer and manufacturer of carbon dioxide
monitoring machines and portable breath test analyzers.
o Oramir Semiconducter Equipment Company Ltd., a corporation that is
developing the L-stripper, an innovative process that allows the removal by
laser of photoresist in the manufacturing process of silicon wafers used in the
semiconductor industry. RDC has also invested in Oramir.
o Butterfly VLSI Ltd., a corporation that designs and develops advanced
spread-spectrum wireless chip sets for personal computers.
o Novadent Ltd., a company that is developing an ultrasonic cavities
detector, a noninvasive and radiation-free device for the detection of cavities
at sites near contact areas between teeth with more accuracy than using X-rays.
Electronics Line (E.L.) Ltd. ("Electronics Line"). Electronics Line is
engaged in the design, development, production and international marketing of
advanced electronic home and business alarm and security systems. Its products
include passive infrared, dual technology and glass break detectors, alarm
control panels, wireless encoders, transmitters and repeaters, closed camera
television observation systems and radio or telephone operated devices for
long-range communication with central monitoring stations. Electronics Line has
been innovative in the application of radio communication and infrared and
microwave technologies to several devices. Electronics Line generates more than
90% of its revenues from sales outside of Israel. Electronics Line's stock is
traded on the TASE.
Libit Signal Processing Ltd. ("Libit"). Formed in 1994, Libit develops
integrated circuits for use by original equipment manufacturers in the cable
industry for broadband digital communication applications such as Internet
connectivity and broadcast digital television. The acceptance of a single
standard for two-way broadband digital communication over cable television
systems is critical to Libit's business potential. Libit has agreements with
Fujitsu and Analog Devices under which both companies manufacture integrated
circuit components according to Libit's designs and specifications. Toshiba
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Corporation has standardized its entire digital cable television product line
based on Libit's technology.
Lipman Electronic Engineering Ltd. ("Lipman"). Lipman develops,
manufactures and markets a variety of sophisticated microprocessor-based
electronic and computerized systems primarily for communication applications,
incorporating imaging and scanning technologies. Lipman's products include
telephone line and wireless point of sale/electronic fund transfer retail
business payment terminals, electronic cash registers and thermal and impact
printers. These products include credit, debit and smart card technologies. In
addition, Lipman manufactures a compact desk-top home services and betting
terminal and coin-operated or credit, debit or smart card vending machine
payment systems for use with commercial washers and dryers, photocopiers and
other vending machines and for garages and gasoline stations. Lipman has also
developed a unique hand-held pen-sized multilingual scan translator. Lipman's
stock is traded on the TASE.
Tradanet Electronic Commerce Services Limited ("Tradanet"). In November
1997, PEC, Discount Investment and GE Information Services, a global leader in
business-to-business electronic commerce solutions and a unit of General
Electric Company, formed Tradanet, which will provide electronic commerce
services in Israel. GE Information Services agreed to transfer to Tradanet
technology and business know-how and to supply Tradanet with its Electronic Data
Interchange (EDI) platform, a value-added business communications service which
makes possible the electronic interchange of commercial, administrative,
financial and shipping documents. The EDI platform has been designed to
streamline trading procedures and transactions, add reliability compared to
traditional data and document interchange, save costs and improve the user's
productivity. Approximately 100,000 companies use the EDI platform throughout
the world. Tradanet will also offer Internet based products that will connect to
the Value Added Network of GE Information Services. In December 1997, Israel's
Ministry of Communications granted Tradanet a license to operate electronic
commerce services in Israel. Tradanet expects to begin operations during the
first half of 1998.
Soreq Development Center (S.D.C.) Ltd. ("Soreq"). Soreq develops
non-military commercial applications of nuclear technologies derived at The
Center for Nuclear Research, Nahal Soreq (the "Research Center"), a division of
the Israeli Ministry of Defense, and operates a technological incubator for the
development of high technology companies with the support of Israel's Ministry
of Industry and Trade. PEC and Discount Investment own 50.1% of Soreq and Isorad
Limited, an Israeli government corporation established for the purposes of
commercially developing the technologies of the Research Center,
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owns 49.9% of Soreq. The Research Center and Isorad have granted Soreq licenses
to use the technologies of the Research Center that Soreq desires to develop.
Among the projects Soreq is developing are a gamma camera with a
lightweight, miniaturized camera head, a process for the clean up of industrial
and radioactive waste water contaminated with heavy metals, a radioactive
catheter for both treatment and imaging, an ion beam for wafer cleaning and
lasers for medical and industrial applications.
Soundesigns Multimedia Communication Systems Ltd. ("Soundesigns"). Formed
in 1993, Soundesigns develops, produces and markets products that integrate the
telephone, the personal computer and telephone, data and Internet networks.
Personal computers connect with external systems, such as the Internet, through
an entrance, such as a modem or network card, which, when in use, prevents the
computer from connecting to another communication channel such as the telephone.
Soundesigns' principal product, introduced in 1997, is a patented technology
called "SoundWare" that integrates the telephone and a telephone line into any
standard personal computer sound card.
Using SoundWare, Internet telephone calls can be made directly from the
telephone rather than having to use the personal computer's microphone and
speakers. In addition, SoundWare permits a personal computer to automatically
dial the least expensive telephone carrier at the time of the phone call, thus
reducing long distance phone bills.
Soundesigns believes that SoundWare is attractive to manufacturers because
it is universal - working with any standard sound card without requiring any
circuit redesign - and is cost-effective. Final testing of SoundWare has begun
and marketing of SoundWare has started.
Soundesigns also licenses its TapiVision software which enables developers
of telephony applications for Microsoft's Windows software to monitor the
functioning of their applications. Users of TapiVision include Lucent
Technologies, Siemens, Digicom and Genoa Technologies Ltd.
LOGAL Educational Software and Systems Ltd. ("LOGAL"). LOGAL designs,
creates, publishes and markets interactive, simulation-based educational
software products for science and math curriculums in high schools and colleges.
LOGAL markets 29 product titles which are based on an "active" approach to
learning in the areas of biology, chemistry, physics, economics and mathematics.
All of LOGAL's products are available on both Macintosh and Windows operating
platforms as well as over the Internet.
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LOGAL's line of science and math products incorporate dynamic solutions
which actively engage students in the learning process and are easy to use and
can be customized to meet the individual needs of students and teachers. LOGAL's
science and economic products are based on a proprietary simulation engine,
Explorer, and are designed around a common platform that reduces the development
time, the cost of new product titles, and facilitates product updates. To date,
over 4,000 schools in the United States have purchased LOGAL's products. In
1997, LOGAL began to offer its science and math products over the Internet using
LOGAL.net, a proprietary browser. LOGAL sells its products through its own sales
force and through distributors.
LOGAL's stock is traded on the NASDAQ/NMS under the trading symbol
"LOGLF".
PAMOT Jersey US L.P. ("PAMOT US"). PAMOT US is one of five parallel
limited partnerships (the "PAMOT Fund") formed in October 1996 for the purpose
of acquiring equity interests primarily in companies established to develop
early-stage projects based on technologies developed at the Weizmann Institute
of Science (the "Weizmann Institute"). The PAMOT Fund has received capital
commitments of $20.5 million. PEC and Discount Investment have each committed to
contribute $500,000 to the capital of the PAMOT Fund, of which $250,000 has been
paid by each of them as of March 25, 1998.
The PAMOT Fund has an agreement with Yeda Research and Development Company
Ltd., the entity that holds all property rights to inventions developed at the
Weizmann Institute, under which the PAMOT Fund has a first opportunity right to
evaluate all technology and projects with commercial potential developed within
the Weizmann Institute that are available for investment. If the PAMOT Fund
desires to develop a project, it and Yeda must agree upon a budget for the
company formed to develop the project and the project company will enter a
research and license agreement with Yeda. The PAMOT Fund will acquire an 80%
equity interest in the project company, and Yeda and the supervising inventor
scientists as a group will each acquire a 10% equity interest. In addition, Yeda
will receive 15% of the distributable gains to the PAMOT Fund. The PAMOT Fund
may not contribute more than $3.075 million to the capital of a project company.
To date, the PAMOT Fund has purchased interests in six early stage
companies, three of which utilize technologies developed at the Weizmann
Institute. The businesses of such companies include the design of antibacterial
peptides that destroy the walls of bacteria and infected cells but do not affect
the walls of normal cells; the development of orally active iron scavengers for
the treatment of iron overload
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condition; the design and development of optical elements for incorporation into
lasers in order to produce a compact laser that has a low divergence of the
output beam; the development of a novel diagnostic tool for the detection of
colon cancer; the development and commercialization of proprietary cellulose
binding domain technology; and the development of an ultrasonic cavities
detector.
Incubator for Technological Entrepreneurship Kiryat Weizmann Ltd.
("Incubator Company"). Incubator Company, an affiliate of the Weizmann Institute
of Science, provides funding, managerial expertise, administrative support and
facilities to initial development stage companies that Incubator Company
believes can successfully develop products for commercial use utilizing novel
technologies. PEC has agreed to purchase a 5% interest in up to 12 new companies
that are admitted to the Incubator Company program for a purchase price of
$10,000 for each 5% interest. Generally as part of its purchase, PEC will
receive the right to increase its interest in each new company by an additional
8% if an interest in the new company is purchased by a third party. The purchase
price of such 8% interest will be based on the purchase price paid by the third
party.
PEC has purchased interests in eight companies in the Incubator program.
The businesses of such companies include the development of transparent,
electrically conductive polymers for use in the electronics industry; the design
of equipment for improved processing and production of tomato seeds; the
development of technology for the production of liquid absorbing polymers with
variable absorbing capacity; the development of a transducer for high precision
measurement of angular coordinates; the design and development of a novel method
for cutting and coating heavy gauge metals; the development of high quality
personal care and dermatological products derived from whey, a completely
natural source, containing vitamins, lactic acid, protein and many minerals; the
commercial development of ultrastable enzymes for either improved performance in
commercial applications where enzymes are presently used or new applications for
which enzymes are not presently used because of insufficient durability; and the
development of a technique for increasing the digestibility of cellulose rich
wastes of feed-stuff (such as wheat or rice straw) used in the feeding of farm
animals.
Industry
Tambour Ltd. ("Tambour"). Tambour is Israel's largest paint manufacturer.
Its products include a wide range of water-based and synthetic paints,
polyurethanes, epoxies, varnishes, texture coatings and primers, as well as
special purpose paints for aviation and marine applications. Tambour currently
supplies approximately 60% of Israel's decorative paint requirements and
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exports its products throughout the world.
Tambour conducts its operations through the following four major companies
or divisions:
o Tambour Decorative Paint Division, the division responsible for the
manufacture and sale of decorative paints and decorative wall-facing bricks for
home and building use. This division also is responsible for the adhesives,
additives and sealants produced by Tambour's 56% owned subsidiary, Serafon
Resinous Chemicals Corporation Ltd. ("Serafon"), for the construction industry.
o Tambour Industrial Paints Division, the division that produces and
markets industrial paint products, emulsions and resins, including automotive,
industrial maintenance, specialty marine and aviation coatings. This division
also includes the printing ink operations of Tambour's 80% owned subsidiary,
Tzah-Israeli Printing Inks Ltd., and the emulsion and polymer business of
Serafon for customers in the industrial and construction fields.
o Tambour Ecology Ltd., a company in which Tambour has a 66% ownership
interest, produces and markets water treatment facilities, chemicals, metal
treatment chemicals and industrial sewage treatment systems. This division also
includes Tambour's affiliate, Safety Kleen Israel Ltd., which provides
environmental services for parts cleaning and solvent recycling, and Tambour's
71% owned subsidiary, SDL Technologies (SOL) Ltd., which treats and purifies
industrial and municipal waste water and purifies water for drinking needs,
using concentrated solar radiation.
o Logistics Division, the service division which coordinates the purchase
of raw materials, shipment of products, storage of materials at warehouses and
the distribution of finished products to purchasing agents.
Tambour also holds a 20% interest in "Ace/Kne Uvne", a chain of ten
"do-it-yourself" stores in Israel selling building and home improvement
products. Super-Sol Ltd. holds a 40% interest in "Ace/Kne Uvne".
In addition, Tambour's 82% owned subsidiary, Kedem Chemicals Ltd., has
formed a joint venture with Diversey Lever, named Diversey Lever Israel Ltd., in
which Kedem has a 49.9% interest, which manufactures and distributes cleaning,
disinfecting and maintenance products for the institutional and industrial
markets.
The stocks of Tambour, Serafon and Kedem are traded on the TASE.
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Tefron Ltd. ("Tefron"). Tefron manufactures boutique-quality everyday
intimate apparel sold throughout the world by such name-brand marketers as
Victoria's Secret and Warnaco/Calvin Klein. Through the utilization of
manufacturing technologies and techniques developed or refined by Tefron, Tefron
is able to mass-produce boutique-quality garments featuring unique designs
tailored to its customers' individual specifications at competitive prices.
Tefron's products include knitted briefs, tank tops, loungewear, nightwear,
bras, T-shirts and bodysuits, primarily for women.
Tefron's operating strategy is to apply its manufacturing technologies and
techniques to meet the fashion and merchandising needs of its customers. Tefron
has redesigned and streamlined the production process for intimate apparel,
which has historically been labor intensive, to increase substantially the
computerization and automation of its sewing and cutting operations, achieving
higher levels of product quality and consistency and reducing labor costs.
Tefron seeks to develop strong relationships with large name-brand
marketers of intimate apparel and to become their principal supplier for
products which Tefron manufactures. Tefron believes that by collaborating with
customers in the design and development of its products, it strengthens its
relationships with its customers and improves the quality of its products.
In September 1997, Tefron had an initial public offering of its ordinary
shares in the United States and its ordinary shares are traded on the New York
Stock Exchange under the trading symbol "TFR".
Caniel-Israel Can Company Ltd. ("Caniel"). Caniel is Israel's largest
manufacturer of cans and metal containers for processed and canned foods, soft
drinks and beer. Caniel utilizes the latest technology to produce a full line of
high quality products. It is Israel's only manufacturer of beverage cans.
Caniel also manufactures metal packaging for a variety of industrial and
household products such as paints, lubricants, detergents and aerosols.
Substantially all of Caniel's cans are sold to customers in Israel. In recent
years, Caniel has begun to export aerosol cans to Europe. Caniel also produces
biodegradable plastic bottles for soft drinks.
Caniel has formed a joint venture with a Jordanian corporation to
construct and operate a can manufacturing plant in Jordan. The cans manufactured
at this plant will be sold to
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customers in Jordan and other countries in the Middle East. Caniel expects the
plant to start operations in 1998.
Caniel's stock is traded on the TASE.
Klil Industries Ltd. ("Klil"). Klil is engaged in aluminum extrusion,
including casting of billets, manufacturing of extrusion dies and painting of
extrusions. Klil is a leading supplier of aluminum extrusions in the form of
semi-finished, painted and mill-finished products for industry, as well as
finished aluminum products to the building industry, such as windows, doors,
curtain walls and shutters. Most of Klil's products are sold in Israel. Among
Klil's marketing methods are the distribution to architects and other
professionals of software discs that contain computerized drawings of Klil's
products.
Klil operates two plants in Israel. The plant in Kiryat Motzkin, covering
53,000 square meters, houses Klil's headquarters, manufacturing facilities and a
training center for customers to learn how to assemble and install products
manufactured by Klil. Klil's 124,000 square meter, state-of-the-art factory in
Carmiel, Israel has modern production lines for extruding and painting
extrusions. Klil's stock is traded on the TASE.
Mul-T-Lock Ltd. ("Mul-T-Lock"). Mul-T-Lock, through its four manufacturing
divisions, designs, manufactures, markets and distributes high security
products, including a wide range of sophisticated cylinders and padlocks,
automobile protection products, decorative security doors, blast and
gas-resistant doors and windows, fire resistant doors and safes and
sophisticated machines for product manufacture and assembly. Some of these
products incorporate high technology electronic applications. Many of
Mul-T-Lock's products are protected by patents and proprietary designs.
Mul-T-Lock's manufacturing plants cover 300,000 square feet. Mul-T-Lock
markets its products throughout Israel and exports them worldwide through a
network of distributors and sales personnel of its subsidiaries. Mul-T-Lock's
stock is traded on the TASE.
Ham-Let (Israel Canada) Ltd. ("Ham-Let"). Ham-Let designs, develops,
produces and markets high quality instrumentation valves and fittings in a
variety of markets for high pressure, temperature and vacuum applications.
Ham-Let's valves are sold to the chemical, energy, petrochemical and
biotechnology industries and are used as essential components in the transport
of ultra pure liquids and gases for the micro-electronic industry. More than 90%
of Ham-Let's revenues are generated from
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sales outside of Israel. Ham-Let manufactures its fittings and valves at its
plant in Migdal Haemek, Israel. Ham-Let is constructing a new production and
operations center in Ziporit, Israel, near Nazareth, which will automate the
production and warehousing of Ham-Let's products.
Ham-Let's stock is traded on the TASE.
Maxima Air Separation Center Ltd. ("Maxima"). Maxima is Israel's second
largest producer of industrial and specialized gases, with a market share in
Israel of approximately 40%. Its primary products are nitrogen, oxygen and
argon. Nitrogen is used in the chemical, petro-chemical and food industries.
Oxygen is used primarily in hospitals and for welding in the metal industry.
Maxima's customers are mainly larger industrial users of gases.
Maxima extracts nitrogen, oxygen and argon from the air at its two plants
in the Negev desert in southern Israel. Maxima also sells acetylene and has
facilities for mixing industrial gases and for filling containers with helium
and hydrogen. Maxima imports specialized gases for laboratories and for use in
the electronics industry.
Praxair Inc., one of the largest American producers of industrial and
specialized gases, owns a majority interest in Maxima and is party to a
shareholders agreement with PEC and Discount Investment. The shareholders
agreement, among other things, (i) provides that as long as PEC and Discount
Investment own at least 20% of the ordinary shares of Maxima (or if Maxima sells
additional ordinary shares, as long as PEC and Discount Investment own at least
15%), they shall be entitled to designate not less than 25% of the members of
Maxima's board of directors, (ii) provides that Maxima's board of directors
cannot approve of certain actions, primarily those not in the ordinary course of
business, without the support of the directors designated by PEC and Discount
Investment, and (iii) grants each party certain purchase options and put options
upon another party's transfer of ordinary shares of Maxima.
Maxima's stock is traded on the TASE.
Real Estate
Property and Building Corporation Ltd. ("Property & Building"). Property &
Building is one of the largest real estate holding companies in Israel. It is
engaged, directly and through its subsidiaries and affiliates, in the
initiation, development, construction and sale of residential and commercial
buildings, the initiation, construction and rental of industrial parks and
office and commercial buildings, the purchase and development of land, and the
furnishing of financial services,
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property management and property maintenance. Property & Building is also a
substantial shareholder in companies engaged in the citrus industry in Israel.
These companies accounted for approximately 33% of Israel's total citrus exports
in 1997.
In the development of residential housing, it is Property & Building's
policy to develop and construct large, high quality apartment building projects
and sell the apartments principally to upper income purchasers; such projects
generally include recreational and commercial facilities. Property & Building
owns land in Tel Aviv, Jerusalem, Ramat Gan, Haifa and Herzliya on which it can
build approximately 4,333 apartments, of which 806 apartments are currently in
various stages of development and construction, including 390 apartments which
have been sold.
Property & Building owns and rents to tenants approximately 458,000 square
meters of commercial floor space located mainly in prime areas. The occupancy
rate for Property & Building's rental properties is approximately 93%.
Subsidiaries of Property & Building constructed industrial and office buildings
in 1997 having 21,100 square meters of rental space and 15,500 square meters for
car parking and basement areas. Such companies are currently constructing
commercial, office and industrial buildings having 74,200 square meters of
rental space and 46,450 square meters for car parking and basement areas in Tel
Aviv, Ramat Gan, Jerusalem, Natayna, Lod and other areas.
A subsidiary of Property & Building owns interests in modern sports
complexes in Israel and another subsidiary engages in the installation of
central heating and air conditioning systems.
The stock of Property & Building and the stock of five of its subsidiaries
and affiliates are traded on the TASE.
Retail, Shipping and Other
Super-Sol Ltd. ("Super-Sol"). Super-Sol is Israel's largest supermarket
chain (in terms of revenue), accounting for an estimated 39% of total sales by
supermarket chains and an estimated 14% of total retail sales of items typically
sold in supermarkets. Super-Sol believes it has maintained its leadership
position as a result of its (i) well stocked and well managed stores, (ii)
marketing innovations, (iii) product variety, (iv) store remodeling and
renovation program, (v) superior sites and (vi) flexibility in responding to
changing Israeli consumer food-shopping preferences.
Super-Sol's 122 stores sell food and consumer items such as household
goods and textiles. Its chain includes 42 neighborhood Super-Sol stores, located
in upscale, residential urban areas, which cater primarily to high and middle
income families with
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emphasis on a wide variety of high quality food products and services; 31 large
regional Hypercol stores, located primarily in shopping malls, commercial
centers and on commercial thoroughfares and serving predominately high and
middle income families with both food and other products; 32 Hypernetto stores
which sell a smaller variety of goods than other stores at substantially lower
prices and appeal to price-conscious customers; nine discount Gal-Yarok stores,
located primarily in lower income urban areas; five discount Birkat Rachel
stores offering specially certified Kosher products which cater to religious
shoppers; two membership warehouse-club Universe Club stores offering food and a
wide variety of non-food items at discount prices; and one Cosmos mega-store of
approximately 9,000 square meters that features larger selections, specialty
departments and significant space devoted to non-food items.
In February 1997, Super-Sol acquired 25 retail food stores from the Shekem
department store chain. These stores (other than two which were closed) have
been integrated into Super-Sol's foregoing seven formats of food stores and are
now part of Super-Sol's 122 store chain.
Super-Sol also operates a central computerized ordering center which
caters to customers in major metropolitan areas desiring to place orders by
telephone.
Super-Sol's supermarket sales in Israel accounted for at least 90% of its
total revenues during each of the last five years. In addition to its Israeli
supermarket business, Super-Sol provides consulting and purchasing services and
supplies products to operators of convenience stores, independent supermarkets
and small supermarkets.
In February 1998, Super-Sol sold its ownership interest in Super Kozert, a
chain of 27 supermarkets in metropolitan Budapest, Hungary.
Super-Sol also holds a 40% interest in "Ace/Kne Uvne", a chain of ten
"do-it-yourself" stores in Israel selling building and home improvement
products. Tambour Ltd. also owns a 20% interest in "Ace/Kne Uvne".
Super-Sol also holds equity interests in three shopping malls and two
commercial centers and in two commercial centers and one shopping mall currently
under construction.
Super-Sol's ordinary shares are traded on the TASE.
In October 1997, Super-Sol had a public offering in the United States of
American Depositary Shares ("ADSs"), each ADS representing five ordinary shares,
and the ADSs are listed for
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trading on the New York Stock Exchange under the trading symbol "SAE".
El-Yam Ships Ltd. ("El-Yam") and Financial Holdings El-Yam (Hamigdal) Ltd.
("FHEY"). El-Yam is engaged, through subsidiaries, in worldwide ocean
transportation of oil and dry bulk cargoes, such as grain, coal and iron ore.
Its fleet is operated under charters for varying durations. El-Yam has been
engaged in the worldwide shipping business for over 44 years.
El-Yam owns nonvoting preferred stock of FHEY representing substantially
all of the equity in FHEY. FHEY in turn owns approximately 37.1% of IDB Holding.
IDB Holding owns through IDB Development approximately 81.35% of PEC's common
stock. PEC owns 10.1% of the voting shares of FHEY and Discount Investment owns
approximately 14.3% of such voting shares.
Renaissance Fund LDC ("Renaissance"). Renaissance is a fund established in
1994 which raised approximately $135 million of capital. Its objective is to
generate capital appreciation through acquisitions of significant equity
interests primarily in a portfolio of Israeli and Israel-related privately held
and publicly traded companies.
In October 1994, Renaissance was part of a group that purchased a 33%
equity interest in Paz Oil Company Ltd. ("Paz"), Israel's largest oil marketing
and distribution company. As a result of the purchase, Renaissance acquired a
14.3% equity interest in Paz for approximately $46.9 million. On January 3,
1997, Renaissance sold a 1.4% equity interest in Paz and realized a gain of $1.2
million on such sale. Paz is engaged in seven main businesses: gasoline service
stations, industrial lubricants and solvents, asphalt, liquid propane gas,
wholesale fuels, aviation fuel and real estate.
In March 1995, Renaissance was part of a group which purchased from the
Government of Israel 100% of the shares of Shikun ve'Pituach le-Israel Ltd., one
of Israel's largest housing and development companies ("SHOP"). Renaissance
acquired a 20.1% equity interest in SHOP for approximately $23.7 million. In
February 1998, Renaissance sold its entire interest in SHOP for approximately
$25.12 million in cash and approximately $8.95 million in shares of Azorim
Development and Investments Company Ltd., a publicly traded real estate
development corporation in Israel, resulting in a gain of $10.4 million.
Renaissance holds a 19.6% equity interest in Clalcom Ltd. ("Clalcom"), a
subsidiary of Clal Industries Ltd., which it purchased for approximately $7.2
million. Clalcom provides outgoing international facsimile services from Israel,
interactive voice response services and operates the "Sprintnet"
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data network in Israel. In 1997, in response to capital calls from Clalcom,
Renaissance invested an additional $1.5 million to fund Clalcom's operations. In
1998, Clalcom made a new capital call, of which Renaissance's share is
approximately $550,000, which capital will be used to pay debt and fund
operations.
Clalcom has a 44% interest in the joint venture Barak I.T.C. (1995) - The
International Telecommunications Services Corporation ("Barak"), which was one
of the winners of a tender for two additional licenses for international
telecommunications from Israel. Barak started operations at the end of June
1997. Barak does not expect to be profitable during its first four years of
operation, due in part to the high cost of market entry and access fees payable
to the state-owned telephone company. Renaissance holds an indirect 8.6% equity
interest in Barak.
In 1996, Renaissance purchased for approximately $15 million a seven-year
4.5% convertible note of ECI Telecom Ltd., a provider of digital
telecommunications and data transmission services; acquired for approximately
$15 million equity securities of Indigo, N.V., a corporation that produces,
sells and services proprietary "Digital Offset Color" printing systems; and
purchased for approximately $10 million equity securities of Geotek
Communications Inc., a company that develops telecommunications products and
wireless communications systems based on frequency hopping multiple access
digital technology. The ordinary shares or common stock of ECI, Indigo and
Geotek are publicly traded on the NASDAQ/NMS under the trading symbols "ECILF,"
"INDGF" and "GOTK," respectively.
Renaissance also manages a public securities portfolio whose cost was
$19.8 million as of December 31, 1997.
General Engineers Limited ("General Engineers"). General Engineers sells,
installs and services equipment for the following markets in Israel: Energy -
power generation, power delivery and power control equipment; Medical -
diagnostic x-ray, ultra-sound and surgical equipment; Scientific - diffraction
and spectroscopy systems and electron microscopes; General Industry - a wide
variety of electrical and mechanical systems, and industrial diamonds; Factory
Automation - programmable controls and data acquisition systems; and Lighting -
lamps and luminaires. This variety of equipment is manufactured by various
United States, European and Japanese manufacturers. General Engineers is the
only distributor and service agent for certain General Electric (USA) equipment
in Israel, and represents in Israel, among others, Steris Inc., Lapp Insulator
Inc., Saftronics Ltd., Hitachi Instruments, GE-Fanuc, 3-L Filters and Rigaku Co.
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Isrotel Ltd. ("Isrotel"). Isrotel develops, owns, manages and operates
hotels in Eilat, Mitzpe Ramon, Tel Aviv and Zichron Ya'acov in the Carmel
mountain range, Israel. The nine hotels in the Isrotel chain have 2,106 hotel
rooms, of which Isrotel owns in whole or in part 1,588 rooms. Isrotel's hotels
are The King Solomon Hotel, Royal Beach Hotel, Sport Hotel, Lagoona Hotel,
Riviera Hotel, all of which are located on the North Beach in Eilat, the Red Sea
Sports Club Hotel, located on Coral Beach in Eilat, the Ramon Inn in Mitzpe
Ramon, Israel, the Tower in Tel Aviv and the Carmel Forest Spa Resort located
near Zichron Ya'acov.
The nine hotels in the Isrotel chain serve a range of clientele from
customers interested in luxury vacations to those interested in family or sports
oriented vacations.
Isrotel is currently constructing two new hotels on the North Beach of
Eilat, one named "Royal Garden Suites" with a total of 330 rooms and the other
named "Flamingo", which will be a three star hotel.
Isrotel also owns a sailing, diving, recreation and sports club and a
travel agency.
Isrotel's stock is traded on the TASE.
Mondex Israel Ltd., ("Mondex"). In 1997, PEC, Discount Investment and Paz
Oil Company Ltd. established Mondex to offer an electronic smart card in Israel.
Mondex International, a corporation owned by MasterCard International and 27
banks from all over the world, has granted Mondex an exclusive license to use
the software, technologies, and know-how of Mondex International in Israel.
Mondex intends to offer the smart card beginning in the second quarter of 1998.
The card will be designed to be a complete alternative to cash and will permit
the transfer of money from card to card and the handling of up to five different
currencies. The smart card to be used by Mondex will also permit users to check
their balances, see the last 10 transactions that were performed and block
unauthorized usage. Mondex believes that its smart card will be the first such
card to be offered in Israel. The cards are expected to generate revenues from
businesses which allow the use of the cards and from the sale of machines needed
to operate the card.
Conditions in Israel
Substantially all of the Company's Affiliates conduct their principal
operations in Israel and are directly affected by economic, political and
military conditions in that country. The manufacturing operations of certain of
the Affiliates are heavily dependent upon components and raw materials imported
from the
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United States, several nations in Europe and other countries, and a substantial
majority of the sales of some Affiliates are made outside Israel. Accordingly,
the results of operations of the Company and substantially all of the Affiliates
could be adversely affected if major hostilities involving Israel should occur
or if trade between Israel and its present trading partners should be
interrupted for substantial periods.
Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, among Israel and various
Arab countries. In addition, Israel and companies doing business with Israel
have been the subject of an economic boycott by the Arab countries since
Israel's establishment. Furthermore, following the Six-Day War in 1967, Israel
commenced administering the territories of the West Bank and the Gaza Strip and,
since December 1987, increased civil unrest has existed in these territories.
Although, as described below, Israel has entered into various agreements with
Arab countries and the Palestine Liberation Organization ("PLO") and various
declarations have been signed in connection with efforts to resolve some of the
aforementioned problems, no prediction can be made as to whether a full
resolution of these problems will be achieved or as to the nature of any such
resolution. To date, these problems have not had a material adverse impact on
the financial condition or operations of the Affiliates although there can be no
assurance that continuation of these problems will not have such an impact in
the future.
A peace agreement between Israel and Egypt was signed in 1979 under which
full political relations were established; however, economic relations have been
very limited.
In September 1993, Israel entered into a Declaration of Principles with
the PLO, which outlined interim Palestinian self-government arrangements. Prior
to the signing of the declaration, PLO Chairman Arafat sent a letter to the
Israeli Prime Minister in which the PLO recognized Israel's right to exist in
peace and security, renounced terrorism and violence, and affirmed that the
clauses of the PLO covenant denying Israel's right to exist are no longer valid.
In reply, Israel recognized the PLO as the representative of the Palestinian
people in the peace negotiations.
In May 1994, Israel and the PLO signed an agreement in which the
principles of the September 1993 Declaration were implemented. In accordance
with this agreement, Israel transferred the civil administration of the Gaza
Strip and Jericho to the Palestinian Self-Rule Authority and the Israeli army
withdrew from these areas. On September 28, 1995, Israel and the PLO signed an
additional agreement regarding the transfer in stages of civil administration in
major Palestinian cities and
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in certain other populated areas in the West Bank to the Palestinian Authority,
and the Israeli army withdrew from certain of such areas as well.
On January 15, 1997, Israel and the Palestinian Authority signed a
Protocol Concerning the Redeployment in Hebron, with respect to the completion
of the first stage of Israeli redeployment in the West Bank. In addition, a Note
for the Record was agreed upon, reaffirming Israeli and Palestinian commitments
to the peace process and detailing certain measures for the continued
implementation of the September 1995 agreement.
In October 1994, Israel and Jordan signed a peace treaty, which provides,
among other things, for the commencement of full diplomatic relations between
the two countries, including the exchange of ambassadors and consuls. In
addition, such treaty expresses the mutual desire of the parties for economic
cooperation and calls for both parties to lift economic barriers and
discrimination against the other and to act jointly towards the removal of any
economic boycotts by third parties. On December 4, 1996, Israel and Jordan
signed a trade agreement designed to liberalize trade between the two countries.
Although Israel has held direct negotiations at different times since
October 1991 with Syria and Lebanon, Israel's neighboring countries on its
northern border, to end the state of hostility between them and establish peace,
to date such negotiations have not resulted in any agreement. Furthermore,
notwithstanding the agreements and joint declarations described above, the
relationships between Israel and Egypt and the PLO are not yet fully normalized.
Recently there has been stagnation in the peace process in the Middle
East. No prediction can be made as to whether or how the "peace process" will
develop or what effect it may have upon PEC or the Affiliates.
Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are, unless exempt, obligated to perform up to approximately 39
days of military reserve duty annually. Additionally, all such residents are
subject to being called to active duty at any time under emergency
circumstances. Many of the Affiliates' officers and employees are currently
obligated to perform annual reserve duty. While the Affiliates have operated
effectively under these and similar requirements in the past, no assessment can
be made of the full impact of such requirements on the Affiliates' work forces
or businesses in the future, particularly if emergency circumstances occur.
The results of operations of certain of the Affiliates have been favorably
affected to some extent by their participation in
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Israel Government programs related to research and development, foreign currency
exchange rate insurance, taxation and capital investment incentives, some of
which have been reduced in recent years. Their results of operations would be
adversely affected if these programs were further reduced or eliminated and not
replaced with equivalent programs or if their ability to participate in these
programs were significantly reduced.
Demographics
Since 1989, Israel has been experiencing a new wave of immigration
primarily from the former Soviet Union. Approximately 845,000 new immigrants
arrived through the end of 1997, of which approximately 66,000 arrived in 1997.
The future level of immigration is largely dependent on the political stability
of Russia and the other countries of the former Soviet Union.
Although the increased immigration from the former Soviet Union may
benefit Israel and its economy in the long-term by providing highly educated,
cost competitive labor and by stimulating the economy's growth, the immigration
has placed an increased strain on government services, short-term economic
development and national resources. The Israeli Government has found it
necessary to raise additional revenue and to dedicate substantial funds to
support programs, including housing, education and job training, designed to
assist in the absorption of the new immigrants. No prediction can be made as to
the policies that will be adopted in the future or their effect on these or
other government spending programs.
While a decrease in the rate of immigration would relieve strain on
government services, short-term economic development and national resources,
such a decrease could also have a negative effect on those Affiliates whose
revenues are derived mainly from the sale of products and services in Israel.
These Affiliates include housing developers, such as Property & Building,
manufacturers of supplies for the construction and housing industry, such as
Tambour, Klil and Mul-T-Lock, and purveyors of food and other necessities, such
as Super-Sol. No assessment can be made of the full impact of a significant
change in the flow of immigration on the results of operations of these
Affiliates or the other companies in which PEC has an interest.
The State of Israel receives significant amounts of economic and military
assistance from the United States, averaging approximately $3 billion annually
over the last several years. In addition, in 1992, the United States agreed to
provide Israel with supplemental assistance in the form of up to $10 billion of
loan guarantees during United States fiscal years 1993-1998 to help Israel
absorb a large influx of new immigrants, primarily
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from the republics of the former Soviet Union. In January 1998, Israel issued
$1.44 billion of 30-year U.S. Government-backed bonds, which was the last issue
conducted as part of U.S. Government guaranteed facility. Israel has used the
funds it has borrowed in 1993-1998 to bolster its foreign exchange reserves and
to fund increased investments, mainly in infrastructure. There is no assurance
that foreign aid from the United States will continue at or near amounts
received in the past. In January 1998, Israeli and American officials began
discussions concerning gradually ending the annual civilian aid package of $1.2
billion. If the grants for economic and military assistance or the United States
loan guarantees are eliminated or reduced significantly, the Israeli economy
could suffer material adverse consequences.
Economy
Overview
Israel's economy continued to grow in 1997, but at a considerably
slower pace than in previous years. Gross domestic product (GDP) rose by 1.9%
last year to New Israel Shekel (NIS) 338 billion ($96 billion) compared with a
4.4% increase in 1996 and an annual average growth rate of 6% from 1990 through
1995. The 1997 GDP growth rate was less than the economy's potential, and lower
than the 2.4% increase in Israel's population, resulting in a 0.3% decrease in
per capita GDP.
Business sector GDP rose by 2% in 1997 to NIS 225 billion ($64
billion), compared with a 5% increase in 1996 and an average annual rate of 7.2%
from 1990 through 1995. The reduced growth rate in business sector GDP reflected
a 2.5% increase in the GDP attributable to the industrial sector and a 4.9%
decrease in GDP attributable to the construction sector, resulting primarily
from a decrease in housing construction. Although overall economic activity in
Israel decreased in 1997, industrial exports increased by 10% in real terms to
$14.3 billion. Production and sales in the high technology sector continued to
grow, but at a slower rate than in previous years. Production and sales fell in
older, labor intensive industries, such as textiles, cardboard containers and
other wood and paper products.
The lower economic growth rate last year resulted primarily from
reduced immigration, the government's comparatively tight fiscal policy which
reduced the government's budget deficit as a percentage of GDP, and the Bank of
Israel's policy of monetary restraint. In addition, much of the positive effect
on Israel's economy from the mass immigration at the beginning of the decade,
which resulted in higher consumption and domestic demand and a more flexible
labor force, has diminished and is no longer a force for new economic growth.
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<PAGE>
One of the most positive economic developments in 1997 was the
reduction in the inflation rate. Israel's consumer price index (CPI) rose by 7%
in 1997, the lowest annual rate since 1969. This rate of inflation compares
favorably with the 10.6% increase in 1996 and the 8% increase in 1995, and was
at the low end of the government's targeted annual inflation range of 7% to 10%.
The reduced inflation rate resulted primarily from the Bank of
Israel's policy of monetary restraint. The Bank of Israel lowered the rate of
interest it charges commercial banks on its funds three times during the first
half of 1997 from 14.7% to 12.7% as the rate of inflation slowed. However,
following relatively large increases in the CPI in June and July, the Bank of
Israel raised interest rates to 13.4% in order to bring inflation under control.
The high interest rates in Israel encouraged an influx of capital from abroad
(where interest rates were lower), resulting in Israel's foreign exchange
reserves increasing by $8.7 billion to a record level of $20 billion at the end
of 1997. The combination of high real interest rates and a strong shekel,
however, adversely affected investment and business sector activity and
contributed to Israel's economic slowdown.
In 1997, the shekel was devalued 8.8% against the dollar, from NIS
3.251 to NIS 3.536, and by 4.2% against the currency basket, from NIS 3.635 to
NIS 3.786. In June, the Bank of Israel increased the range in which the exchange
rate of the shekel may fluctuate in furtherance of its policy of liberalizing
the foreign currency market and free capital movements.
Private consumption rose by 3.3% in 1997, the lowest rate of
increase since 1990. Per capita private consumption increased by 0.9%
principally as a result of a 2% decrease in real terms in per capita disposable
income and reduced demand for automobiles, appliances and consumer electronic
goods from immigrants who arrived during the mass immigration and who have
already accumulated these items. The decline in per capita disposable income
reflected both the economic slowdown, which resulted in an increase in the
unemployment rate, and higher income taxes arising from an adjustment of tax
brackets. Although the decrease in per capita disposable income reduced the
growth rate of per capita private consumption, per capita private consumption
did not decrease because the rate of private savings as a percentage of
disposable income declined from 10% in 1996 to 8% in 1997.
Investment in fixed assets declined by 6% in 1997, reflecting
decreases of 5.2% in housing construction, 6% in machinery and equipment, 14% in
transportation equipment and 7.6% in other construction work including
infrastructure and
I-41
<PAGE>
development. Housing starts, which totaled 45,000 in 1997, 52,870 in 1996 and
63,470 in 1995, decreased because of reduced demand for housing and an increase
in housing supply. The Israeli government was unable to counter the slowdown in
business sector investments by increasing its own investment activity because
the government did not want to exceed its aggregate budget deficit goal of 2.8%
of GDP.
Foreign trade continued to grow, but at a slower pace than in
previous years, reflecting the economic slowdown. Imports of goods and services
grew by 2.4% in real terms in 1997 to $32.9 billion, compared to 6.2% in 1996.
Exports increased by 7.7% to $24.2 billion, greater than the 6.3% increase in
1996 but comparable to the rate of growth in world trade. Since the growth rate
of exports compared to imports was higher in 1997 than in 1996 and the level of
fund transfers to Israel was relatively unchanged during the two years, the
balance-of-payments current account deficit fell to $3.5 billion in 1997 from
$5.4 billion in 1996.
The increasing unemployment rate in 1997 was one of the more
troubling economic developments of the year. The unemployment rate rose to an
average of 7.8% in 1997 compared to an average of 6.7% in 1996. The increase in
unemployment was a direct result of the economic slowdown. In contrast, from
1995 until the end of June 1996, the unemployment rate fell from a record 11.2%
to 6.5%.
Foreign Trade
Imports of goods and services grew by 2.4% in real terms in 1997,
compared with an annual average increase of 9.0% since 1990. This small increase
was a direct result of the economic slowdown, and reflected a real decrease of
1.0% in imports of goods, mainly raw materials and capital investment goods. The
decrease in imports of goods was more than offset by an 11.7% increase in the
import of services, such as services performed by foreign workers.
Imports of goods excluding ships, planes and diamonds in 1997
decreased by 4.7% in dollar terms compared with the prior year. All import
components declined, including capital investment goods which fell 9.5%, raw
materials which decreased 3.7%, and consumer goods which declined 1.7%. This
reduction in imports reflected the adaptation of manufacturers to the economic
slowdown. As 1997 progressed, however, imports of goods grew, increasing at an
annualized rate of 15% in annual dollar terms during the fourth quarter compared
with an annualized decrease in dollar terms of 3.5% in the first quarter.
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<PAGE>
Exports of goods and services grew by 7.7% in real terms during 1997
to $24.2 billion, compared with 5.0% in 1996 and an annual average of 11.7% from
1992 through 1995. Exports of services slowed in 1997 primarily because of the
11.3% decrease in tourism (which is regarded as an export) resulting from the
uncertain geopolitical situation.
Industrial exports, excluding diamonds, grew by 12.2% in real terms,
reflecting the expansion of high technology industries and a 2% improvement in
Israel's terms of trade (a greater increase in export prices than in import
prices).
Exports of goods to Southeast Asia reached $2.5 billion in 1997,
accounting for 11% of Israel's total exports. Approximately half of these
exports consisted of diamonds while the other half consisted of high technology
products. The adverse impact of the financial crisis in Southeast Asia on
exports to countries in that region was immediate, with a 26% decrease in dollar
terms in exports during the last quarter of 1997 compared with the average for
the first three quarters of the year. Diamond exports were particularly hard
hit, falling by 36%. The economic crisis and sharp devaluations in the currency
exchange rates of these countries will harm the competitiveness of Israeli
exporters who are already suffering from the real appreciation of the shekel
exchange rate in 1997.
Employment and Wages
The increase in the unemployment rate in 1997 resulted from an
increase in the work force that was greater than the growth in the number of
jobs. The number of employed persons in 1997 rose to 2.0 million, an increase of
1.3% compared with a gain of 2.4% in 1996 and an annual average increases of
5.1% from 1990 through 1995. This lower rate of increase reflected reduced
employment in older, labor intensive industries, a 7.8% real increase in the
minimum wage during 1997 and a manpower shortage in the high technology
industries. During 1997, the labor force grew by 2.5% compared with 2.2% in
1996, and its proportion of the general population remained unchanged at 53.6%.
Labor productivity fell by 0.9% in 1997 after rising by 0.8% in
1996. Labor productivity in the business sector decreased by 0.7% in 1997, after
rising by 1.4% in 1996. The reduction in labor productivity indicates that labor
costs have not adjusted to the decreased level of economic activity, which may
result in increased unemployment. However, labor productivity rose in the
industrial sector, excluding diamonds, by 2.8% in 1997, following an average
annual increase of 3.8% from 1992 through 1996. This continued growth of labor
productivity in the industrial sector reflected the growth in the
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relative share of the high technology sector industries, where productivity
rates are particularly high.
The number of foreign workers legally employed in Israel averaged
92,000 in 1997, 2% less than in 1996. The number of foreign workers illegally
employed in Israel is estimated at three times the number legally employed. Most
foreign workers are unskilled and constitute 65% of workers in the construction
sector and 20% of the agriculture sector. During the years when the Israeli
economy experienced rapid growth and decreases in the unemployment rate, the
influx of foreign workers helped to reduce wage increases and inflation. During
the current economic slowdown, the employment of foreign workers has aggravated
the unemployment situation, especially because employers are unlikely to
discharge foreign workers who accept lower wages than comparable Israeli
workers. In addition, the employment of large numbers of foreign workers
threatens to result in serious social problems in the long term.
The average monthly wage of an employee reached NIS 5,500 ($1,555)
in 1997, a real increase of 1.7%, reflecting gains of 2.3% in wages of employees
in the business sector and 0.6% in wages of employees in the public sector. The
increase in business sector wages, despite the growth in unemployment, resulted
from the growing demand for high paid employees capable of working in high
technology industries, and the dismissal of low paid workers in older, labor
intensive industries.
The Budget
Israel's aggregate government budget deficit in 1997 totaled NIS 8.1
billion ($2.3 billion), or 2.4% of GDP, below the government's targeted level of
2.8% of GDP. The government's domestic budget deficit of NIS 9.1 billion ($2.6
billion) was higher than planned, constituting 2.9% of GDP, while the government
had a budget surplus of 0.5% of GDP arising from its activities abroad,
primarily interest income on Israel's foreign exchange reserves.
Government revenue amounted to NIS 124.5 billion ($35 billion) in
1997, while government spending reached NIS 133.6 billion ($38 billion). The $3
billion domestic budget deficit exceeded its targeted level of 2.0% of GDP by
0.9% because of the economic slowdown, which reduced domestic revenues by NIS
6.9 billion ($2.0 billion) and budgeted domestic spending by NIS 4 billion ($1.1
billion).
The government's domestic budget deficit was financed primarily from
revenue of NIS 8.8 billion ($2.5 billion) from the privatization of government
businesses, a substantial increase from the NIS 400 million ($113 million) of
privatization revenue
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<PAGE>
realized in 1996. Net government borrowing from the public amounted to NIS 575
million ($163 million) in 1997 compared with NIS 7.9 billion ($2.2 billion) in
1996.
The Capital Markets
The stock market enjoyed a year of rising prices in 1997 after three
difficult years. Average daily volume on the Tel Aviv Stock Exchange ("TASE")
grew to NIS 214 million ($61 million), almost double the average for 1996.
Twelve corporations had initial public offerings in Israel and 73 corporations
listed on the TASE had public offerings during the year. As a result, the value
of issuances of equity securities listed on the TASE, including convertible
securities, reached NIS 6.3 billion ($1.8 billion), a nearly three-fold increase
compared with 1996. Total equity issuances by Israeli corporations in Israel,
abroad, in private offerings and from the exercise of options, reached NIS 7.7
billion ($2.2 billion) in 1997. The majority of equity issuances on the Israeli
market in 1997 consisted of convertible securities, rather than stock.
The general share index of stocks listed on the TASE rose by 26.4%
in 1997. In real terms, CPI-linked bonds rose by 2.4%, dollar-linked bonds went
up by 4.4%, and unlinked bonds increased by 6.4%. The market value of equity
securities listed on the TASE, including convertible securities, at the end of
1997 was NIS 160.5 billion ($45 billion), 9% more than the NIS 147 billion ($42
billion) value of the bond market.
As noted earlier, the government raised a record NIS 8.8 billion
($2.5 billion) in 1997 from the sale of its holdings in corporations and banks.
Primarily as a result of such sales, the market value of the government's
holdings in publicly traded corporations as a percentage of the total market
value of all publicly traded corporations fell from 16% at the end of 1996 to
11% at the end of 1997. The government realized revenues in 1997 of NIS 1.7
billion ($500 million) from the sale of its holdings in corporations and banks
pursuant to stock exchange issuances compared with NIS 250 million ($71 million)
in 1996. The government received proceeds of NIS 740 million ($209 million) from
the sale of shares of Bank Leumi, NIS 210 million ($59 million) from the sale of
Israel Discount Bank and NIS 740 million ($209 million) from the exercise of
options previously issued by the government for shares of Israel Discount Bank
and Bank Leumi.
Most of the NIS 7.1 billion ($2 billion) of privatization revenue
that was generated from private sales was attributable to four transactions: (i)
the sale of a 43% controlling interest in Bank Hapoalim to a consortium lead by
Ted Arison for NIS 4.9 billion ($1.4 billion); (ii) the disposition
I-45
<PAGE>
of 25% of Bank Mizrahi's shares for NIS 450 million ($127 million); (iii) the
sale of a 17% ownership interest in Israel Chemicals for NIS 670 million ($189
million); and (iv) the disposition of 12% of Bezeq's equity to Merrill Lynch for
NIS 890 million ($252 million). The government also sold its holdings in two
non-stock exchange companies, namely, Hanal was sold for NIS 90 million ($25
million) and Yozma was sold for NIS 50 million ($14 million).
I-46
<PAGE>
Item 2. PROPERTIES
None.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Date First
Elected to
Name Age Position Office
- ---- --- -------- ----------
Frank J. Klein(a) 55 President Jan. 1995
James I. Edelson(b) 41 Executive Feb. 1992
Vice President,
Secretary and
General Counsel
William Gold(c) 60 Treasurer Feb. 1992
Officers are elected for a one-year term at the Annual Meeting of
Directors scheduled in May or June of each year.
(a) Mr. Klein served as Executive Vice President of the Company from
November 1977 to November 1991 and as Treasurer of the Company from
May 1980 to November 1991. For more than 20 years prior to 1995, Mr.
Klein was an officer of Israel Discount Bank of New York ("IDBNY"),
serving as Executive Vice President of IDBNY from December 1985 to
December 1994.
(b) Mr. Edelson is also U.S. Resident Secretary of IDB Holding.
(c) Mr. Gold was Secretary and Assistant Treasurer of the Company from
August 1970 to February 1992.
I-47
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The range of high and low sales prices of the Company's Common Stock
as reported on the New York Stock Exchange Composite Tape for each of the fiscal
quarters during the last two fiscal years are set forth below.
1996 High Low
---- ---- ---
First Quarter $24-3/4 $19-1/2
Second Quarter 22-7/8 17-1/2
Third Quarter 19 15-1/2
Fourth Quarter 18-1/8 14
1997 High Low
---- ---- ---
First Quarter $21-1/2 $ 17
Second Quarter 25-1/8 18
Third Quarter 24-1/4 18-3/4
Fourth Quarter 22-3/8 18-1/2
On March 25, 1998, the closing price of the Company's Common Stock on the
New York Stock Exchange was $21-3/8 per share.
(b) As of March 25, 1998, there were 2,335 shareholders of record of the
Company's Common Stock.
(c) The Company has not paid cash dividends since 1979. The decision not
to pay cash dividends reflects the policy of the Company to apply retained
earnings, including funds realized from the disposition of holdings, to finance
its business activities. The payment of cash dividends in the future will depend
upon the Company's operating results, cash flow, working capital requirements
and other factors deemed pertinent by the Board of Directors.
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<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1997, 1996 and 1995, and at December 31, 1997 and 1996, are derived
from the audited consolidated financial statements of the Company set forth
elsewhere in this Annual Report which have been audited in 1997 by Price
Waterhouse LLP and Haft & Gluckman LLP, each independent public accountants, and
in 1996 and 1995 by Arthur Andersen LLP and Haft & Gluckman LLP, each
independent public accountants, as indicated in their reports included elsewhere
herein. The report of Price Waterhouse LLP and Haft & Gluckman LLP on the 1997
financial statements and the reports of Arthur Andersen LLP and Haft & Gluckman
LLP on the 1996 and 1995 financial statements are based in part on the reports
of other independent accountants whose reports also appear herein. The selected
consolidated financial data for the years ended December 31, 1994 and 1993, and
at December 31, 1995, 1994 and 1993, are derived from other audited consolidated
financial statements of the Company not appearing in this Annual Report which
have also been audited by Arthur Andersen LLP and Haft & Gluckman LLP.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars except for per share amounts which are in dollars and
except for the number of shares which are in thousands of shares.)
<S> <C> <C> <C> <C> <C>
Income from:
Equity in net income of
Affiliated Companies $ 48,538 $ 23,438 $ 23,720 $ 25,338 $ 33,542
Total Revenues 88,630 44,535 42,065 40,798 60,648
Net Income* 54,503 28,213 25,242 32,566 41,970
Net Income per Common Share*:
Basic 2.95 1.51 1.35 1.73 2.24
Diluted 2.92 1.49 1.34 1.72 2.23
Weighted Average Number of
Outstanding Common Shares 18,472 18,714 18,759 18,759 18,759
Total Assets 461,104 407,703 392,967 383,691 347,873
Total Liabilities 44,979 33,827 35,680 42,223 40,636
Shareholders' Equity 416,125 373,876 357,287 341,468 307,237
Common Shareholders' Equity
per Common Share 22.66 20.20 19.05 18.20 16.38
Number of Outstanding Common
Shares at the End of Each Year 18,362 18,508 18,759 18,759 18,759
</TABLE>
*Net income for 1993 is after the cumulative effect of a change in accounting
for income taxes of $(1,174,000) or $(.06) per share of Common Stock. Net income
for 1994 is after the cumulative effect of a change in accounting for marketable
securities of $2,473,000 or $.13 per share of Common Stock. Net income is after
loss from discontinued operations of General Engineers Limited, net of income
taxes, of $380,000 for 1995 ($.02 per share), $104,000 for 1994 ($.01 per share)
and $67,000 for 1993 (no cents per share).
No dividends were paid during the last five years.
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<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Consolidated net income rose to $54.5 million for 1997, up from
$28.2 million for 1996. The rise in net income reflected increases of $25.1
million in equity in net income of Affiliated Companies, $9.5 million in net
gain on issuance of shares by Affiliated Companies, $5.8 million in net gain on
sales of investments in Affiliated Companies, $1.5 million in net gain on sales,
and changes in market value, of trading securities and $852,000 in other income.
The provision for income taxes increased by $16.7 million for 1997 compared
with 1996.
Equity in net income of Affiliated Companies for 1997 rose to $48.5
million, up from $23.4 million for 1996. The increase reflected increased net
income in respect of certain Affiliated Companies, primarily Cellcom (of which
PEC's share was $11.3 million compared to a net loss of $3.5 million for 1996),
Elron and Liraz and reduced operating losses at Scitex (of which PEC's share was
$234,000 compared to a loss of $11.7 million in 1996). This increase was
partially offset by PEC's reduced net income in respect of some of its other
Affiliated Companies, particularly Tambour and Super-Sol (substantially arising
from a change in accounting relating to a financing transaction) and net losses
in respect of DEP Technology Holdings Ltd. (the company through which PEC holds
its ownership interest in RDC) and Soreq (arising from a write-off of acquired
in-process research and development because Soreq is a developmental stage
company).
PEC realized a net gain on issuance of shares by Affiliated
Companies of $10.4 million for 1997 compared to $849,000 for 1996. PEC realized
net gains of $4.9 million on the sale of ordinary shares by Tefron in September
1997 in an initial public offering in the United States, $4.4 million on the
sale by Super-Sol of American Depositary Shares representing ordinary shares of
Super-Sol in a public offering in October 1997 in the United States and $1.0
million on the sale of ordinary shares by Gilat Communications in December 1997
in an initial public offering in the United States. During 1996, PEC realized
net gains of $745,000 and $470,000 from public offerings in the United States of
American Depositary Shares by Nice and ordinary shares of Logal, respectively.
These net gains were partially offset by a net loss of $405,000 on the issuance
of shares by Gilat Satellite in connection with Gilat Satellite's acquisition of
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<PAGE>
Skydata, Inc. in December 1996 through an exchange of all the outstanding equity
of Skydata for ordinary shares of Gilat Satellite.
PEC realized a net gain on sales of investments in Affiliated
Companies of $8.3 million for 1997, up from $2.5 million for 1996. During 1997,
PEC realized net gains of $4.1 million, $2.9 million, $2.8 million and $2.7
million on sales of 2.6% of Tefron, 4.0% of VocalTec Ltd. (constituting PEC's
entire ownership interest in VocalTec), 1.4% of Super-Sol and 1.9% of Nice,
respectively, and net losses of $2.6 million, $557,000 and $541,000 relating to
PEC's sale of its ownership interests in RTS Telecommunications Services Ltd.,
Tius Elcon Ltd. and Bulk Trading Corporation, respectively, and a net loss of
$662,000 relating to the expiration of PEC's warrants to purchase shares of
Isrotel. During 1996, PEC realized net gains of $1.8 million, $1.7 million and
$210,000 on the sales of 1.6% of Nice, 1.2% of Super-Sol and 1.4% of VocalTec,
respectively, and a net loss of $1.2 million relating to PEC's sale of its
ownership interest in Bulk Trading.
PEC's other income increased to $3.8 million for 1997 compared to
$3.0 million for 1996 primarily because of increased income from partnerships in
which PEC is a partner, particularly Gemini, and increased management fees.
As described in Note 4 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1997 (the "1997 Notes"), PEC
provides deferred income taxes on undistributed earnings of, and gains on
issuances of shares by, Affiliated Companies that are not more than 50% owned
by the IDB Group and in which the IDB Group does not otherwise have effective
control. The Company does not provide deferred income taxes with respect to
undistributed earnings of, and gains on issuances of shares by, Affiliated
Companies that are more than 50% owned by the IDB Group or in which the IDB
Group otherwise has effective control and for which such amounts are
currently expected to be permanently reinvested (the "Majority-Owned
Affiliated Companies"). PEC's provision for income taxes for 1997 rose to
$21.5 million from $4.8 million for 1996 principally because of increased
income and a decrease in the proportion of income from undistributed earnings
of Majority-Owned Affiliated Companies.
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
Consolidated net income rose to $28.2 million for 1996, up from
$25.2 million for 1995. The rise in net income primarily reflected increases of
$1.3 million in net gain on sales of investments in Affiliated Companies and
$1.8 million in other income as well as a decrease of $1.5 million in the
provision for
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<PAGE>
income taxes. Partially offsetting the rise attributable to these items were
decreases of $1.4 million in net gain on issuance of shares by Affiliated
Companies and $1.1 million in interest and dividend income.
Equity in net income of Affiliated Companies of $23.4 million for
1996, compared with $23.7 million for 1995, was adversely affected by the net
loss of $178.3 million incurred by Scitex, of which $110 million was
attributable to restructuring and other charges, compared with a net loss of
$34.5 million in 1995, all of which was attributable to special charges. PEC's
share of the Scitex loss was $11.7 million in 1996, compared with $2.3 million
in 1995. The reduction in PEC's equity in net income of Affiliated Companies
also reflected write-offs of goodwill in respect of Liraz and Lego. Partially
offsetting these losses was increased net income in respect of certain other
Affiliated Companies, particularly Property & Building, DIC and PEC Cable TV
Ltd. (the corporation through which PEC holds its interest in Tevel), Tambour
and Tefron, and reduced losses in respect of Cellcom (of which PEC's share was
$3.5 million in 1996 compared to $6.9 million in 1995).
PEC realized a net gain on sales of investments of Affiliated
Companies of $2.5 million for 1996 compared with $1.2 million for 1995. During
1996, PEC realized net gains of $1.8 million, $1.7 million and $210,000 on the
sale of 1.6% of Nice, 1.2% of Super-Sol and a 1.4% of VocalTec, respectively.
Partially offsetting these net gains was a net loss of $1.2 million on PEC's
sale of its entire ownership interest in Bulk Trading Corporation Ltd. at the
end of 1996. All of PEC's $1.2 million net gain on sales of investments for 1995
resulted from PEC's sale of a small portion of its shares of Gilat Satellite.
PEC realized a net gain on issuance of shares by Affiliated
Companies of $849,000 for 1996 compared with $2.3 million for 1995. PEC realized
net gains on issuance of shares of $745,000 on the sale by Nice in January 1996
of American Depositary Shares representing ordinary shares of Nice in a public
offering in the United States and $470,000 on the sale by Logal in March 1996 of
ordinary shares in an initial public offering in the United States. These net
gains on issuance of shares by Affiliated Companies were partially offset by a
net loss of $405,000 on the issuance of shares by Gilat Satellite in connection
with Gilat Satellite's acquisition of Skydata, Inc. All of the net gain on
issuance of shares by Affiliated Companies in 1995 resulted from Gilat
Satellite's sale in October 1995 of ordinary shares in a public offering in the
United States.
II-5
<PAGE>
PEC's net gain on sales, and change in market value, of trading
securities for 1996 was $5.2 million, up from $4.5 million for 1995. PEC's other
income rose to $3.0 million for 1996 from $1.1 million for 1995 primarily
because of increased management fees and income from limited partnerships,
principally Renaissance.
PEC's interest and dividend income decreased to $964,000 for 1996
compared with $2.1 million for 1995 primarily because PEC's liquid assets
decreased. Liquid assets were reduced principally because of the net purchases
of securities of new and existing Affiliated Companies and securities of other
Israeli companies.
The provision for income taxes for 1996 decreased to $4.8 million,
down from $6.3 million for 1995. This decrease was attributable to the provision
of $3.0 million of additional income taxes in 1995 arising from PEC's sale of
nonvoting preferred shares of Israel Discount Bank of New York ("IDBNY") in
1995, which sale did not result in a gain for financial statement purposes.
Although income before income taxes, loss from discontinued
operations and cumulative effect of accounting change was almost the same for
1996 and 1995, $33.0 million in 1996 compared with $31.9 million in 1995, the
provision for income taxes for 1996 was $4.8 million compared to $3.3 million
for 1995 after excluding the additional $3.0 million of income taxes
attributable to PEC's sale of nonvoting preferred shares of IDBNY. This increase
is primarily attributable to a decrease in the proportion of income from
undistributed earnings of Majority-Owned Affiliated Companies in 1996 compared
to 1995, in part because Super-Sol ceased to be a Majority-Owned Affiliated
Company in 1996 and PEC, therefore, provided deferred income taxes on its share
of undistributed earnings of Super-Sol in 1996.
SHAREHOLDERS' EQUITY
The unrealized gain, net of taxes, from "available-for-sale
securities" that was included in shareholders' equity as of December 31, 1997
increased to $7.3 million from $1.9 million as of December 31, 1996. This
increase is primarily attributable to PEC changing its method for
accounting for its holdings in Nice from the equity method to treating its
holdings in Nice as "available-for-sale securities" (due to a reduction of
PEC's interest in Nice).
As discussed in Note 2 to the 1997 Notes, translation differences
are reflected in shareholders' equity as a "Cumulative Translation Adjustment".
The exchange rate of the New Israel
II-6
<PAGE>
Shekel declined approximately 8.8% against the U.S. dollar at the end of 1997
compared to the end of 1996. As of December 31, 1997, the Cumulative Translation
Adjustment reduced shareholders' equity by $40.9 million compared to a reduction
of $26.3 million at the end of 1996.
In accordance with PEC's announcement in 1996 that it would
purchase up to 500,000 shares of its common stock from time to time in the
open market at its discretion, taking into account such factors as price and
prevailing market conditions, PEC purchased 146,200 shares of its common
stock for an aggregate cost of $3.0 million in 1997, reducing the number of
outstanding shares of PEC's common stock to 18,362,188. In 1996, PEC
purchased 250,200 shares of its common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings
per Share ("FAS 128"), which replaces the "primary" and "fully diluted"
calculations of earnings per share with "basic earnings per share" which
includes only actual net income and weighted average number of shares
outstanding and "diluted earnings per share" which includes the effect of any
common stock equivalents or other items that dilute income available to
common shareholders and/or weighted common shares outstanding for the
reporting period. PEC has implemented FAS 128 for 1997. PEC's "basic earnings
per share" and "diluted earnings per share" for 1997 is $2.95 and $2.92,
respectively.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("FAS 130"), which
establishes standards for reporting and display of comprehensive income and
requires that all components of comprehensive income be reported in a
financial statement having the same prominence as other financial statements.
For PEC, FAS 130 is effective in 1998 and will require the reclassification
of prior period financial statements for comparative purposes. Adoption of
FAS 130 should have little effect on PEC'S financial statements since the new
requirements primarily involve modifications to the way that existing
information is displayed.
READINESS FOR YEAR 2000
The Year 2000 compliance issues concern the ability of certain
computerized information systems to properly recognize date-sensitive
information as the year 2000 approaches. Systems that do not recognize such
information could generate erroneous data or cease to function.
II-7
<PAGE>
PEC and its Affiliated Companies utilize a number of computerized
information systems in conjunction with their operations. PEC has taken actions
to understand the nature of any work required to make its and its Affiliated
Companies' systems and infrastructure Year 2000 compliant. The financial impact
of becoming Year 2000 compliant has not been and is not expected to be material
to PEC's financial position or results of operations in any given year.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, PEC's liquid assets (consisting of cash,
money market funds and marketable securities of U.S. companies) totaled
approximately $45.1 million. As discussed in Note 6 to the 1997 Notes, as of the
end of 1997 PEC had commitments extending over the next several years to make
capital contributions or loans of up to approximately $11.0 million to existing
Affiliated Companies. For the year ended December 31, 1997, PEC received cash
dividends and interest totaling $25.3 million (including $24.1 million of
dividends received from Affiliated Companies, which do not affect PEC's net
income for financial statement purposes), which substantially exceeded the
amount needed to pay PEC's general and administrative expenses.
During 1997, PEC generated a total $43.8 million of liquid funds, of
which $30.5 million was realized from the sale of shares of Affiliated Companies
("Delek" - The Israel Fuel Corporation Ltd. - $7.7 million, Super-Sol - $6.9
million, Tefron - $5.6 million, VocalTec Ltd. - $5.0 million, Nice - $3.7
million and Lipman - $1.1 million), $12.9 million was realized from the sale of
marketable securities of U.S. companies and $412,000 was generated from the
repayment of loans.
During 1997, PEC purchased equity and debt securities of, and
contributed capital to, new and existing Affiliated Companies and other Israeli
corporations for approximately $27.2 million. The new Affiliated Companies in
which PEC purchased securities in 1997 and PEC's purchase price for such
securities consisted primarily of Ham-Let - $3.7 million, Libit - $2.2 million,
Tradanet - $900,000 and Mondex - $860,000. The existing Affiliated Companies in
which PEC purchased securities in 1997 and PEC's purchase price for such
securities included Property & Building - $3.3 million, Cellcom - $1.8 million
(shareholder loans), Soreq - $1.6 million, RDC - $1.4 million, RTS
Telecommunications Services Ltd. and RPA Leasing Inc. - $1.4 million
contribution in connection with the disposition of those companies and Bulk
Trading Corporation - $1.0 million in connection with the sale of Bulk Trading.
In addition, PEC acquired a small ownership interest in a publicly-traded
Israeli corporation for $5.9 million and purchased a convertible debenture of
another Israeli corporation for $1.0 million. During 1997, PEC
II-8
<PAGE>
purchased marketable securities of U.S. companies for approximately $18.5
million and purchased interests in limited partnerships that acquire marketable
securities of U.S. companies for approximately $6.0 million.
During 1997, PEC purchased 146,200 shares of its common stock for
approximately $3.0 million.
SUBSEQUENT EVENTS
During January and February 1998, PEC sold its entire ownership
interest in Lego Irrigation Ltd. for $2.6 million and will realize a net gain of
approximately $800,000 during the first quarter of 1998. In addition, PEC
purchased 2.4% of Property & Building during the first two months of 1998 for
approximately $7.8 million and purchased 4.1% of Super-Sol in February 1998 for
approximately $29.9 million. In connection with the purchase of the additional
ownership interest in Super-Sol, PEC borrowed $19.9 million from Israel Discount
Bank Ltd. pursuant to a line of credit. The line of credit is unsecured and
provides that the outstanding balance of the loan bears interest at the rate of
one week London Interbank Offered Rate (LIBOR) plus 0.5% per annum. The loan is
payable on demand. The line of credit expires on April 30, 1998.
II-9
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item commences on the following page.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and Board of Directors
of PEC Israel Economic Corporation:
We have audited the accompanying consolidated balance sheet of PEC Israel
Economic Corporation and subsidiaries (the "Company") as of December 31,
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. We did not
audit the financial statements of certain Affiliated Companies of the
Company, which statements reflect assets and revenues of 23% and 29%,
respectively, of the consolidated totals as of and for the year ended
December 31, 1997. Those statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to
the amounts included for those entities, is based solely on the reports of
the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of other auditors provide a reasonable
basis for our opinion.
<PAGE>
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PEC Israel Economic Corporation and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
HAFT & GLUCKMAN LLP PRICE WATERHOUSE LLP
New York, New York
March 26, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and Board of Directors
of PEC Israel Economic Corporation:
We have audited the accompanying consolidated balance sheet of PEC Israel
Economic Corporation (a Maine corporation) and subsidiaries as of December 31,
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of certain Affiliated
Companies of the Company, which statements reflect assets and equity in net
income of $196.2 million and $19.1 million, respectively, of the consolidated
totals as of and for the year ended December 31, 1996 and equity in net income
of $20.5 million of the consolidated total for the year ended December 31, 1995.
Those statements were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts included
for those entities, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
<PAGE>
Page 2
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of PEC Israel Economic Corporation and subsidiaries as of
December 31, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
HAFT & GLUCKMAN LLP ARTHUR ANDERSEN LLP
New York, New York
March 31, 1997
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - except share and per share amounts)
DECEMBER 31,
--------------------
1997 1996
-------- --------
ASSETS
Cash and cash equivalents (Note 2) $ 8,948 $ 7,044
Investments (Notes 2 and 3) 444,398 391,802
Assets of General Engineers
Limited (Note 2) 5,274 4,763
Other assets 2,484 4,094
-------- --------
Total assets $461,104 $407,703
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Liabilities of General Engineers
Limited (Note 2) $ 1,767 $ 1,384
Deferred income taxes (Notes 2 and 4) 38,451 26,428
Other liabilities 4,761 6,015
-------- --------
Total liabilities 44,979 33,827
-------- --------
Commitments and contingencies (Notes 3 and 6)
Shareholders' equity (Notes 2 and 5):
Common stock, $1.00 par value,
40,000,000 shares authorized in
1997 and in 1996, 31,952,180
shares issued in 1997 and
in 1996 and 18,362,188 and
18,508,388 shares outstanding at
1997 and 1996, respectively 31,952 31,952
Class B preferred stock, no par value,
544,514 shares authorized, none
issued and outstanding - -
Additional paid-in capital 103,282 103,282
Unrealized gain on marketable
securities, net 7,270 1,938
Cumulative translation adjustment (40,946) (26,317)
Retained earnings 334,934 280,431
-------- --------
436,492 391,286
Treasury stock, 13,589,992 and
13,443,792 shares at
1997 and 1996, respectively (20,367) (17,410)
-------- --------
Total shareholders' equity 416,125 373,876
-------- --------
Total liabilities and
shareholders' equity $461,104 $407,703
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - except per share amounts)
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
REVENUES:
Interest and dividends $ 1,255 $ 964 $ 2,057
Equity in net income of
Affiliated Companies
(Notes 2 and 3) 48,538 23,438 23,720
Net gain on issuance of
shares by Affiliated
Companies 10,360 849 2,282
Revenues of General
Engineers Limited (Notes 2
and 3(k)) 9,738 8,635 7,197
Net gain on sales of
investments in Affiliated
Companies (Note 2) 8,274 2,512 1,181
Net gain on sales,
and changes in market value,
of trading securities(Note 2) 6,643 5,167 4,502
Other 3,822 2,970 1,126
------- ------- -------
88,630 44,535 42,065
------- ------- -------
EXPENSES:
General and administrative 3,237 3,037 3,154
Cost of sales and expenses
of General Engineers
Limited (Note 2) 9,352 8,496 7,007
------- ------- -------
12,589 11,533 10,161
------- ------- -------
Income before income
taxes and loss from
discontinued operations 76,041 33,002 31,904
Income taxes (Note 4) 21,538 4,789 6,282
------- ------- -------
Income before loss from
discontinued operations 54,503 28,213 25,622
Loss from discontinued
operations of General
Engineers Limited, net
of income taxes - - (380)
------- ------- -------
Net income $54,503 $28,213 $25,242
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - except per share amounts)
(continued)
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
Earnings per common share
before loss from discontinued
operations - basic $ 2.95 $ 1.51 $1.37
Loss from discontinued
operations of General
Engineers Limited, net
of income taxes - basic
and diluted - - (0.02)
------ ------ ------
Earnings per common share -
basic (Note 5) $ 2.95 $ 1.51 $ 1.35
------ ------ ------
------ ------ ------
Earnings per common share
- diluted (Note 5) $ 2.92 $ 1.49 $ 1.34
------ ------ ------
------ ------ ------
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Gain on Cumulative
---------------- Paid-in Marketable Translation Retained Treasury
Shares Amount Capital Securities Adjustment Earnings Stock Total
------ ------ ------- ---------- ---------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 18,758 $31,952 $ 99,613 $ 2,845 $(13,114) $233,366 $(13,194) $341,468
Paid-in capital of
Affiliated Companies - - 3,615 - - - - 3,615
Change in market
value of available-for
-sale equity securities,
net of tax - - - 381 - - - 381
Cumulative translation
adjustment - - - - (7,029) - - (7,029)
Retained earnings
adjustment (Note 5) - - - - - (6,390) - (6,390)
Net income - - - - - 25,242 - 25,242
------ ------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1995 18,758 31,952 103,228 3,226 (20,143) 252,218 (13,194) 357,287
Paid-in capital of
Affiliated Companies - - 54 - - - - 54
Change in market
value of available-for
-sale equity securities,
net of tax - - - (1,288) - - - (1,288)
Cumulative translation
adjustment - - - - (6,174) - - (6,174)
Purchase of treasury
stock (Note 5) (250) - - - - - (4,216) (4,216)
Net income - - - - - 28,213 - 28,213
------ ------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1996 18,508 31,952 103,282 1,938 (26,317) 280,431 (17,410) 373,876
Change in market value of
available-for-sale equity
securities, net of tax - - - 5,332 - - - 5,332
Cumulative translation
adjustment - - - - (14,629) - - (14,629)
Purchase of treasury
stock (Note 5) (146) - - - - - (2,957) (2,957)
Net income - - - - - 54,503 - 54,503
------ ------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1997 18,362 $31,952 $103,282 $ 7,270 $(40,946) $334,934 $(20,367) $416,125
------ ------- -------- -------- -------- -------- -------- --------
------ ------- -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
Cash Flows From Operating
Activities:
Net income $ 54,503 $28,213 $25,242
Adjustments to reconcile
net income to net cash
provided by operating
activities -
Change in market value of
trading securities (2,008) (1,506) (3,217)
Purchase of trading
securities (18,457) (13,131) (14,566)
Purchase of U.S.
Government obligations - - (25,310)
Proceeds from sale of
trading securities 12,906 17,602 16,435
Proceeds from sale of U.S.
Government obligations - - 25,807
Equity in net income
of Affiliated Companies (48,538) (23,438) (23,720)
Net gain on sales of
investments in Affiliated
Companies (8,274) (2,512) (1,181)
Net gain on sales of
trading securities (4,635) (3,661) (1,285)
Gain on investment
in partnerships (2,000) (794) (31)
Income of consolidated
subsidiaries (1,120) (1,124) (665)
Loss from discontinued
operation, net of income
taxes - - 380
Amortization of premiums
on receivables, net - - 83
Net gain on issuance
of shares by Affiliated
Companies (10,360) (849) (2,282)
Dividends from
Affiliated Companies 24,068 12,459 9,291
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(continued)
Years Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Change in other assets and
liabilities $ 2,791 $ 2,232 $ 1,653
Provision for deferred
income taxes 7,944 (1,537) (3,099)
Write-off of deferred
charges - - 246
------- ------- -------
Net cash provided by
operating activities 6,820 11,954 3,781
------- ------- -------
Cash Flows From Investing
Activities:
Collection of U.S.
Government and State
obligations - 3,015 -
Purchases of notes
receivable (5,284) (4,892) (16,295)
Collection of capital
notes and loans
receivable 412 1,349 483
Proceeds from sales of
equity interests 30,462 8,687 28,833
Return of capital 406 - -
Acquisitions of equity
interests (27,955) (23,556) (22,835)
------- ------- -------
Net cash used in
investing activities (1,959) (15,397) (9,814)
------- ------- -------
Cash Flows From Financing
Activities:
Purchases of treasury stock (2,957) (4,216) -
------- ------- -------
Net cash used in financing
activities (2,957) (4,216) -
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 1,904 (7,659) (6,033)
Cash and cash equivalents,
beginning of year 7,044 14,703 20,736
------- ------- -------
Cash and cash equivalents,
end of year $ 8,948 $ 7,044 $14,703
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(continued)
Years Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the
year for income taxes $ 12,231 $ 5,905 $ 8,830
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
PEC Israel Economic Corporation and subsidiaries ("PEC" or the "Company")
organizes, acquires equity interests in, finances and participates in the
management of companies, predominantly companies which are located in the
State of Israel or are Israel-related. The Company is a subsidiary of IDB
Development Corporation Ltd. ("IDB Development"). Discount Investment
Corporation Ltd. ("Discount Investment") is also a subsidiary of IDB
Development. IDB Development is a subsidiary of IDB Holding Corporation Ltd.
("IDB Holding"). All of these companies are hereinafter referred to as the
"IDB Group". As of December 31, 1997, IDB Development owned approximately
71.9% of the Company's outstanding common stock. For additional information,
see Note 9.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Company accounts for substantially all of its investments on the equity
method. Under the equity method, the Company records its proportionate share of
profits and losses and capital transactions based on its percentage of direct
and indirect interests in earnings of companies 20% to 50% owned and in
companies less than 20% owned in which the Company, together with other
corporations in the IDB Group, has the ability to exercise significant
influence. These investees are collectively referred to as "Affiliated
Companies".
The excess of cost over net assets acquired and the excess of net assets
acquired over cost, to the extent not otherwise applied, are amortized primarily
over a ten-year period. Gains and losses on issuances of shares by Affiliated
Companies are recognized in the accompanying consolidated statements of income.
The Company consolidates its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
General Engineers Limited, a wholly-owned Israeli subsidiary of the Company,
sells various types of equipment in Israel, especially power generation
equipment. Its assets, liabilities, and results of operations are grouped
and presented separately in the accompanying consolidated financial
statements.
All investments in which the Company owns less than 20% that are not accounted
for on the equity method and are not marketable securities, are accounted for
using the cost method.
The Company accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115 "Accounting For Certain
Investments in Debt and Equity Securities" ("FAS 115"). Under FAS 115,
marketable debt and equity securities, other than equity securities accounted
for under the equity method, are reported at fair value, with unrealized gains
and losses from those securities which are classified as "trading securities"
included in net income and unrealized gains and losses from those securities
which are classified as "available-for-sale securities" reported as a separate
component of shareholders' equity. Debt securities classified as "held to
maturity" are reported at amortized cost.
10
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd
FOREIGN CURRENCY TRANSLATIONS
Two foreign subsidiaries and several Affiliated Companies prepare their primary
financial statements in their local currency, the New Israel Shekel ("NIS"), in
accordance with generally accepted accounting principles in Israel, which
require financial statements to be adjusted for the effects of inflation in
Israel. For purposes of the Company's financial statements, these subsidiaries
and Affiliated Companies provide financial information, which is denominated in
NIS, prepared in accordance with generally accepted accounting principles in the
United States.
Subsidiaries and Affiliated Companies whose functional currency is NIS translate
their financial information to the U.S. dollar based on exchange rates at
year-end for assets and liabilities and at average exchange rates for revenues
and expenses. Translation differences are reflected as a component of
shareholders' equity under the caption "Cumulative translation adjustment".
Upon disposition of an investment, the related cumulative translation adjustment
balance is recognized in determining income or loss. If the NIS is devalued
against the dollar in the future, such cumulative translation adjustments are
likely to result in additional reductions of shareholders' equity.
Affiliated Companies whose functional currency is the U.S. dollar translate
their assets and liabilities that are denominated in foreign currency using
year-end exchange rates, except for property and equipment, inventory and
certain investment and equity accounts which are translated using exchange rates
prevailing on the dates of acquisition. Revenues and expenses that are
denominated in foreign currency are translated primarily at the exchange rates
in effect at the time of the relevant transactions and partially at average
rates of exchange during the year. Revenue and expense items relating to assets
translated at historical rates are translated on the same basis as the related
asset. Translation differences are included in the determination of income for
the year.
11
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd
PROVISION FOR INCOME TAXES
Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are recognized
based on differences between financial statement and income tax bases of assets
and liabilities using presently enacted tax rates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management of the Company and its
Affiliated Companies to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1997 presentation.
12
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
Certain information about the Company's investments follows
(in thousands):
December 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
Percentage Carrying Percentage Carrying
Owned Value Owned Value
---------- -------- ---------- --------
Affiliated Companies:
Property and Building
Corporation Ltd.
(a)(i) 39% $ 71,398 38% $ 65,669
Tambour Ltd.(b)(i) 43 54,922 43 61,322
Super-Sol Ltd.(c)(i) 13 47,501 18 44,300
Scitex Corporation Ltd.
(d)(i) 7 34,759 7 34,994
Elron Electronic
Industries Ltd.
(f)(i) 14 33,583 14 32,670
El-Yam Ships Ltd. (f)
See Note 6(i) 10 29,190 10 26,644
Cellcom Israel Ltd. (e) 13 23,628 13 11,304
Caniel-Israel Can
Company Ltd.(f)(i) 29 14,295 29 15,768
Klil Industries Ltd.
(f)(i) 17 11,346 17 12,205
DIC and PEC Cable TV Ltd.(f)
See Note 6(e) 49 9,302 49 6,998
Mul-T-Lock Ltd.(f)(i) 15 7,660 17 7,510
Gilat Satellite Networks
Ltd. (f)(i) 7 7,497 7 6,361
Renaissance Fund LDC 4 5,217 4 5,225
Gemini Israel Fund L.P. 11 4,346 11 2,971
Tefron Ltd. (f)(g)(i) 7 4,321 13 1,849
Liraz Systems Ltd. (f)(i) 16 3,294 16 3,114
Gilat Communications Ltd.(f)(i) 10 2,590 12 1,094
Maxima Air Separation
Center Ltd. (f)(i) 12 2,258 12 2,267
Tel-Ad Jerusalem Studios
Ltd. (f) See Note 6(f) 12 1,810 12 1,564
"Delek" The Israel Fuel
Corp. Ltd. (f)(i) - - 3 7,362
Other (f)(i) - 7,727 - 11,706
-------- --------
$376,644 $362,897
-------- --------
13
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
December 31,
---------------------------
1997 1996
--------- --------
Carrying Carrying
Value Value
--------- --------
Investments at cost $ 15,313 $ 2,854
Investments in marketable
securities 52,441 25,653
State obligations and
Government of Israel Bonds - 398
--------- --------
67,754 28,905
--------- --------
Total $ 444,398 $391,802
--------- --------
--------- --------
Information about certain Affiliated Companies follows:
(a) Property and Building Corporation Ltd. ("Property and Building") is
one of the largest real estate holding and development companies in
Israel. Summarized financial information for Property and Building
follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Current assets* $ 99,005 $ 72,518 $ 42,543
Total assets 447,954 399,880 303,980
Current liabilities 53,342 55,753 42,543
Long-term liabilities 156,991 116,292 69,253
Minority interest 60,048 56,794 54,097
Shareholders' equity 175,123 168,376 133,182
Income 125,899 111,800 99,283
Earnings before taxes on
income 40,066 40,136 39,106
Net earnings 24,535 24,309 19,907
* Including building
projects and inventories
of apartments 30,091 21,075 8,797
14
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
In May 1996, Property and Building raised approximately $25 million of
capital through a rights offering in Israel to its shareholders to
purchase ordinary shares of Property and Building. The Company
exercised the rights offered to it for $8.2 million and purchased
additional ordinary shares in the open market for $1.5 million,
slightly increasing the Company's ownership interest to 38% at a total
cost of $9.7 million.
The Company's equity in net income of Property and Building was $9.1
million for 1996, of which $4.9 million was recognized in the fourth
quarter as Property and Building recognizes revenue under the
completed contract method of accounting.
During 1997, the company purchased an additional 1.0% of Property and
Building for $3.3 million. For additional information,see Note 9.
(b) Tambour Ltd. ("Tambour") is Israel's largest paint manufacturer.
Summarized financial information for Tambour follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Current assets $118,727 $121,471 $121,217
Total assets 173,658 184,867 167,019
Current liabilities 32,966 29,895 21,916
Long term liabilities 3,264 2,621 1,485
Minority interest 9,489 9,509 5,509
Shareholders' equity 127,940 142,840 138,110
Revenue from sales 179,209 189,028 160,317
Gross profit 66,206 65,914 56,427
Income before taxes
on income 20,548 30,843 27,252
Net income from
continuing operations 15,073 21,531 19,984
Net income 16,756 22,702 20,018
15
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
(c) Super-Sol Ltd. ("Super-Sol") operates Israel's largest chain of
supermarkets in terms of revenues. Summarized financial information
for Super-Sol follows (in thousands):
December 31,
------------------------------
1997 1996* 1995
------------------------------
Current assets $ 309,202 $ 234,803 $205,971
Total assets 674,510 490,021 392,852
Current liabilities 218,782 220,715 159,910
Long-term liabilities 104,646 7,154 6,525
Shareholders' equity 351,082 248,808 224,023
Revenues 1,291,358 1,027,474 834,836
Earnings before taxes 54,895 57,735 53,602
Net earnings 39,172 43,837 36,216
* Restated
In October 1997, Super-Sol raised approximately $90 million of capital
through the sale of American Depositary Shares representing ordinary
shares of Super-Sol in a public offering in the United States in
which the Company realized a net gain of $4.4 million. During 1997,
the Company sold 1.4% of Super-Sol and realized a net gain of $2.8
million. As a result of the offering and the Company's sales, the
Company's ownership interest in Super-Sol was reduced to approximately
13.5%. For additional information, see Note 9.
(d) Scitex Corporation Ltd. ("Scitex") is a world leader in visual
information communication for the digital preprint, digital printing
and digital video markets. Summarized financial information for Scitex
follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Current assets $488,992 $523,587 $703,030
Total assets 668,727 704,734 920,831
Current liabilities 167,711 203,511 224,991
Long-term liabilities 907 496 424
Shareholders' equity 500,109 500,727 700,981
Revenues 675,677 695,048 728,900
Gross profit 262,753 231,101 308,273
Income (loss) before
taxes on income 4,823 (180,132) (46,852)
Net income (loss) 582 (178,279) (34,511)
16
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
Scitex recognized net income of $0.6 million for 1997, compared
with a net loss of $178.3 million for 1996, of which $110 million
was attributable to restructuring and other charges, and a net
loss of $34.5 million for 1995, all of which was attributable to
special charges.
(e) Cellcom Israel Ltd. ("Cellcom") operates Israel's second cellular
telephone system. Summarized financial information for Cellcom
follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Current assets $ 142,252 $ 93,666 $ 44,993
Total assets 614,873 419,028 240,783
Current liabilities 225,286 316,938 133,700
Long-term liabilities 426,056* 222,033* 188,339*
Shareholders' deficit (36,469) (119,947) (81,256)
Income from sales and
services 612,945 304,072 130,232
Gross profit 252,847 85,692 3,466
Profit (loss) before
taxes on income 57,609 (42,387) (70,247)
Net profit (loss) 75,691 (42,387) (70,247)
*Includes loans from the Company of approximately $27 million,
$25 million and $21 million for 1997, 1996 and 1995,
respectively.
Certain of Cellcom's current and long-term liabilities at
December 31, 1997, aggregating $118 million and $202 million,
respectively, are secured by pledges of all of Cellcom's assets.
In October 1997, a Cellcom subscriber filed a motion with the
District Court in Jerusalem, Israel that the court approve a
lawsuit filed with the motion as a class action on behalf of
Cellcom's subscribers under Israel's Consumer Protection Law against
Cellcom for damages of approximately $44 million because of
Cellcom's alleged misrepresentation of the manner in which it
calculates air time charges and the way it rounds off time for
telephone calls. Cellcom has denied the plaintiff's allegations
and stated that it will vigorously oppose the lawsuit. Relying
upon the advice of its legal counsel, Cellcom's management
believes that Cellcom has valid defenses to the recognition of
the lawsuit as a class action. At this early stage, it is
impossible for Cellcom's management and its legal counsel to
estimate the effects of the lawsuit on Cellcom if it is
recognized as a class action.
17
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
(f) The following summarized financial information represents an
aggregation of the Company's percentage interests in the Affiliated
Companies for which summarized financial information is not provided
above (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Current assets $ 51,140 $ 66,626 $ 56,200
Total assets 150,752 168,068 161,733
Long-term debt 16,095 16,777 12,937
Shareholders' equity 114,475 117,723 126,250
Revenue 83,021 130,410 93,939
Net income 15,833 15,276 11,865
(g) Significant capital transactions during the three years ended
December 31, 1997 that are not otherwise discussed in Note 3
are as follows:
In September 1997, Tefron Ltd. ("Tefron") raised approximately $53
million of capital through the sale of its ordinary shares in an
initial public offering in the United States in which the Company also
sold ordinary shares of Tefron. As a result of the sales, the Company
realized a gain on issuance of shares by Tefron of approximately $4.9
million and a gain on sales of investments of approximately $4.1
million. As a result of the sales, the Company's ownership interest
in Tefron was reduced from 13% to 7.1%.
In October 1995, Gilat Satellite Network Ltd. ("Gilat Satellite") sold
ordinary shares in a secondary public offering in the United States in
which the Company also sold ordinary shares of Gilat Satellite. As a
result of the sales, the Company realized a gain on issuance of shares
by Gilat Satellite of approximately $2.3 million and a gain on sales
of investments of approximately $1.1 million. As a result of these
sales, the Company's ownership interest in Gilat Satellite was
reduced from 10% to 7%.
(h) The Company's equity in the net income of Affiliated Companies by
major lines of business was as follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------------------------------
Telecommunications and
technology $19,073 $(10,193) $(4,254)
Industry 12,273 14,638 12,284
Real Estate 8,972 9,119 6,246
Retail, shipping and other 8,220 9,874 9,444
------- -------- -------
$48,538 $ 23,438 $23,720
------- -------- -------
------- -------- -------
18
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
(i) Certain of the Affiliated Companies are publicly traded and their
shares are quoted on the Tel Aviv Stock Exchange and/or U.S.
exchanges. The aggregate market values of the shares owned by the
Company, based on the closing sale price on the principal market on
which such shares are traded, were approximately $451 million and $347
million and their carrying values were approximately $314 million and
$300 million at December 31, 1997 and 1996, respectively.
(j) On July 25, 1995, the Company sold to Israel Discount Bank of New York
("IDBNY") all of the Company's nonvoting preferred shares of IDBNY for
approximately $27 million, a price that equaled PEC's carrying value
of those shares. While the sale did not result in a gain for
financial statement purposes, PEC did realize a gain for tax purposes,
for which PEC provided approximately $3 million of additional income
taxes during 1995.
(k) During the second quarter of 1995, General Engineers Limited (i)
entered into an agreement with a majority owned subsidiary of Discount
Investment for that company to distribute household appliances made by
manufacturers represented by General Engineers Limited and (ii) sold
its service and repair business for household appliances to an
unrelated party. As a result of these transactions, the Company has
restated its results of operations for the year ended December 31,
1995 to reflect these discontinued operations of General Engineers
Limited.
4. INCOME TAXES
The U.S. and Foreign components of income before income taxes are as
follows (in thousands):
December 31,
------------------------------
1997 1996 1995
------- ------- -------
U.S. $ 5,491 $ 3,229 $ 5,364
Foreign 70,550 29,773 26,540
------- ------- -------
$76,041 $33,002 $31,904
------- ------- -------
------- ------- -------
Income tax expense is comprised of the following components
(in thousands):
December 31,
------------------------------
1997 1996 1995
------- ------- -------
Current:
U.S. $ 9,161 $ 3,790 $ 7,298
Foreign 4,433 2,536 2,083
Deferred 7,944 (1,537) (3,099)
------- ------- -------
$21,538 $ 4,789 $ 6,282
------- ------- -------
------- ------- -------
19
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES - cont'd
Deferred income tax expense principally represents temporary differences
related to equity in net income of, and gain on issuances of shares by,
Affiliated Companies and to changes in the market value of marketable
securities.
A reconciliation of income tax expense as reflected in the accompanying
statements with the statutory U.S. Federal income tax rate is as follows
(in thousands):
December 31,
------------------------------
1997 1996 1995
------- ------- -------
U.S. income taxes at statutory
rate of 35% $26,614 $11,551 $11,166
Excess of taxes at statutory
rate over taxes provided
on equity in net income
of, and net gain on
issuance of shares by,
Affiliated Companies (5,173) (6,805) (4,781)
Other 97 43 (103)
------- ------- -------
$21,538 $ 4,789 $ 6,282
------- ------- -------
------- ------- -------
Assets (liabilities) for deferred income taxes are as follows:
December 31,
---------------------
1997 1996
-------- --------
Foreign tax credit
carryforwards $ 6,780 $ 7,506
Valuation allowance (6,780) (7,506)
Gross deferred tax
liabilities (38,451) (26,428)
-------- --------
Deferred income taxes $(38,451) $(26,428)
-------- --------
-------- --------
Deferred income taxes of approximately $8.3 million have not been accrued
on the Company's temporary differences, totaling approximately $34.6
million, related to its investments in Affiliated Companies which are more
than 50% owned by the IDB Group or in which the IDB Group otherwise has
effective control and for which such amounts are currently expected to be
permanently reinvested (the "Majority-Owned Affiliated Companies").
Deferred income taxes relate to temporary differences with respect to
the Company's share of undistributed earnings of, and gains on issuances of
shares by, Affiliated Companies that are not the Majority-Owned Affiliated
Companies and changes in the market value of marketable securities.
At December 31, 1997, the Company had approximately $6.8 million of foreign
tax credits that expire through 2002. Because the utilization of these
foreign tax credits is considered unlikely, the Company has provided
a full valuation allowance.
The Company's foreign subsidiaries and the Affiliated Companies file
separate tax returns and provide for taxes accordingly.
20
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SHAREHOLDERS' EQUITY
In July 1996, the Company announced that it would purchase from time to
time up to 500,000 shares of its common stock in the open market at its
discretion, taking into account such factors as price and prevailing market
conditions. During 1997 and 1996, the Company purchased 146,200 shares and
250,200 shares of its common stock for $3.0 million and $4.2 million,
respectively.
In December 1995, the Company purchased from IDB Development a 6.5% equity
interest in Property and Building, based on the market price of Property
and Building's shares on the Tel Aviv Stock Exchange on the purchase date.
Since this transaction was between related parties, the Company recorded in
its financial statements the carrying value of such equity interest on IDB
Development's financial statements and the Company reduced its retained
earnings by approximately $6.7 million, the difference between the amount
the Company paid for such equity interest ($15.5 million) and IDB
Development's carrying value of such equity interest ($8.8 million).
EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, ("FAS 128") which requires the presentation of
basic earnings per share and, for all entities with complex capital
structures, diluted earnings per share. Certain of the Company's
Affiliated Companies have issued equity instruments which may be converted
into potential common stock ("PCEs") that, if converted, would have a
dilutive effect on the Company's equity in net income of such Affiliated
Companies. FAS 128 requires that earnings per common share information for
the years ended December 31, 1996 and 1995 be restated to present diluted
earnings per common share. Diluted earnings per common share for 1996 and
1995 are $0.02 and $0.01 per share, respectively, less than previously
reported earnings per common share. The following is a reconciliation of
the net income used in the computation of basic earnings per share to net
income assuming conversion of the PCEs (in thousands):
For the Year Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
Income from
continuing operations
-basic $54,503 $28,213 $25,622
Loss from
discontinued operations -- -- (380)
-------- -------- --------
Net income available to common
shareholders - basic 54,503 28,213 25,242
Effect of dilutive securities:
Dilutive effect of PCEs
issued by certain Affiliated
Companies (563) (272) (106)
-------- -------- --------
Net income available to common
shareholders-diluted $ 53,940 $ 27,941 $ 25,136
-------- -------- --------
-------- -------- --------
21
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAREHOLDERS' EQUITY - cont'd
Basic and diluted earnings per share are computed using the weighted
average number of common shares outstanding during the year which were
18,471,838, 18,714,113, and 18,758,588 for 1997, 1996 and 1995,
respectively. Weighted average number of common shares used in the
computation of basic and diluted earnings per share is not affected by the
assumed exercise of the PCEs issued by the Affiliated Companies and is
therefore the same for both calculations.
6. COMMITMENTS AND CONTINGENCIES
(a) The Company has agreed to contribute up to $9.0 million over a 10 year
period ending in 2003 to DEP Technology Holdings Ltd. ("DEP") of which
the Company had contributed $6.3 million as of December 31, 1997
through the purchase of capital notes of DEP. In January 1998, the
Company contributed approximately $667,000 to DEP through the purchase
of additional equity.
(b) General Engineers Limited has a $2 million credit agreement with a
bank. The Company has agreed with the bank that General Engineers
Limited will remain a subsidiary of the Company as long as the credit
agreement is in effect.
(c) The Company has contracted with IDB Development for it to give certain
advisory services to the Company in Israel, including advice as to
financial, economic, accountancy, legal and tax matters, for an annual
fee of $130,000. During each of 1997, 1996 and 1995, the Company
incurred expenses of $130,000 for these services.
(d) The Company and a wholly-owned subsidiary of Discount Investment are
parties to an agreement under which, among other things, each party
provides services to the other party and offers the other party equal
participation in new business opportunities. In consideration for
such services and offers, each party pays the other a fee of 2 1/2% of
the equity or long-term debt invested by such paying party in business
opportunities initiated or initially presented by the other party. In
1997, 1996 and 1995, the Company incurred fees of $501,292, $133,750
and $34,610 under this agreement, respectively.
(e) Tevel Israel International Communications Ltd. ("Tevel"), which is
held 48.4% by DIC and PEC Cable TV Ltd., was awarded cable television
franchises in Israel in 1988. Under the terms of the franchises,
the Company and Discount Investment are jointly committed to arrange
for 51% of the financing required by Tevel to perform its franchise
obligations. The Company has not arranged any financing for Tevel
since October 1992 and does not presently anticipate being required to
arrange any such financing in the near future.
(f) Tel-Ad Jerusalem Studios Ltd. ("Tel-Ad") is one of the three companies
awarded a franchise in 1993 by Israel's Second Authority
22
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES - cont'd
for Television and Radio to operate Israel's second television
station. The Company is obligated to provide up to $4 million of
the financing required by Tel-Ad to fulfill its obligations under
the franchise.
(g) In connection with the Company's investments in Gemini Israel II
Limited Partnership ("Gemini II"), a venture capital limited
partnership, the Company may be required to make capital contributions
of up to $1.5 million to Gemini II. In 1997, the Company had
contributed approximately $300,000 and an additional $150,000 was
contributed to Gemini II in March 1998.
(h) The Company has agreed to contribute up to $4.2 million over a four
year period ending in 2001 to Soreq Development Center (S.D.C.) Ltd.
("Soreq"), a developer of non-military commercial applications of
nuclear technologies of Israel's Ministry of Defense. As of
December 31, 1997, the Company contributed approximately $1.3 million
and an additional $200,000 was contributed to Soreq in January 1998.
(i) El-Yam Financial Holding (Hamigdal) Ltd. ("Hamigdal"), a corporation
in which the Company owns a 10.1% interest and accounts for on the
equity method, was named among the defendants in an action instituted
in the Tel-Aviv District Court in Israel on August 5, 1997 against
Discount Investment and 19 other defendants. The defendants also
include IDB Holding. The plaintiff in the action alleges, among
other things, that IDB Holding and Hamigdal (the owner of
approximately 37.1% of IDB Holding), as indirect controlling
shareholders of Discount Investment, breached various obligations
under law allegedly applying to them, including provisions relating to
fiduciary duty and norms of conduct of controlling shareholders, in
connection with Discount Investment's sale on August 3, 1997 of all of
Discount Investment's shares in Is. H. Ltd. (which is the controlling
shareholder of Iscar Ltd.), Blades Technology International Inc. and
Blades Technology Ltd. for total consideration valued at approximately
$244 million. The plaintiff requested that the action be approved as
a class action for all of Discount Investment's shareholders other
than IDB Development, and that the court award all of the class
members damages from the defendants of at least $142 million or,
alternatively, (i) order the defendants other than Discount Investment
to pay to Discount Investment damages of at least $471 million or (ii)
cancel the sales. Hamigdal, IDB Holding and Discount Investment have
each denied the allegations against it and each intends to vigorously
defend itself. On March 25, 1998, the Tel Aviv District Court
dismissed the plaintiff's motion to have the action approved as a
class action. The plaintiff has until the middle of May 1998 to appeal
the Court's dismissal. At this time, the Company is unable to
determine what effect, if any, the action will have on its financial
position and results of operations.
23
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES - cont'd
(j) Certain directors of IDB Holding and/or its affiliates are also
directors of the Company.
(k) In the ordinary course of the Company's business, the Company has
entered into shareholder arrangements with Discount Investment and
other shareholders of Affiliated Companies with respect to the
voting and transfer of the Company's shares in such Affiliated
Companies.
(l) Lawsuits have been filed against some of the Company's affiliates
in the ordinary course of their businesses. Management of these
affiliates believe that the results of these lawsuits would not
have a material effect on such affiliates' financial statements.
Accordingly, management of the Company believes that the results
of these lawsuits would not have a material effect on the
Company's financial statements.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107")
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
entities to disclose information about the estimated fair values of their
financial instruments. FAS 107 does not apply to investments accounted for
under the equity method (See Notes 2 and 3).
Cash equivalents and non-marketable investments not accounted for on the
equity method are reflected at cost, which approximates their fair values.
The commitments described in Note 6 are generally for the near term, and,
accordingly, their contract value is considered their fair value.
8. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
("FAS 130"), which establishes standards for reporting the components of
comprehensive income. The Company will adopt FAS 130 in fiscal 1998. The
adoption of FAS 130 will affect financial statement disclosure and
presentation but will have no impact on the Company's consolidated
financial position, results of operations or liquidity.
9. SUBSEQUENT EVENTS
In January and February 1998, the Company purchased 2.4% of Property and
Building for $7.8 million, increasing its ownership interest in Property
and Building to 41.2%.
In February 1998, the Company purchased an additional 4.1% equity interest
in Super-Sol for approximately $29.9 million, increasing the Company's
ownership interest in Super-Sol to 17.6%. In connection with such
purchase, the Company borrowed $19.9 million from Israel Discount Bank Ltd.
pursuant to a $26 million line of credit agreement. The line of credit
agreement is unsecured and provides that the outstanding loan balance bears
interest at the rate of 0.5% over the one week London Interbank Offered
Rate ("LIBOR") per annum and is payable on demand. The line of credit
agreement expires on April 30, 1998.
On March 25, 1998, IDB Develpment purchased an additional 9.45% of the
Company's outstanding common stock, increasing its ownership interest in
the Company to 81.35%.
24
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
-----------------------------------------------------
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Revenues $20,002 $19,675 $33,438 $15,515
------- ------- ------- -------
------- ------- ------- -------
Net income $12,973 $12,526 $22,600 $ 6,404
------- ------- ------- -------
------- ------- ------- -------
Earnings per
common share-basic $ 0.70 $ 0.68 $ 1.22 $ 0.35
------- ------- ------- -------
------- ------- ------- -------
Earnings per common
share-diluted $ 0.69 $ 0.67 $ 1.21 $ 0.35
------- ------- ------- -------
------- ------- ------- -------
Quarter Ended
-----------------------------------------------------
1996 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Revenues $15,551 $14,281 $ 2,088 $12,615
------- ------- ------- -------
------- ------- ------- -------
Net income $10,391 $ 8,485 $ 1,032 $ 8,305
------- ------- ------- -------
------- ------- ------- -------
Earnings per
common share
- basic $ 0.55 $ 0.45 $ 0.06 $ 0.45
------- ------- ------- -------
------- ------- ------- -------
Earnings per
common share
- diluted $ 0.54 $ 0.45 $ 0.06 $ 0.44
------- ------- ------- -------
------- ------- ------- -------
25
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13 Below. Information with respect to executive officers of
the Company is included at the end of part I above.
Item 11. EXECUTIVE COMPENSATION
See Item 13 Below.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 Below.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for under Items 10, 11, 12 and 13 is
incorporated by reference from the definitive proxy statement to be filed by the
Company in connection with its 1998 Annual Meeting of Shareholders.
III-1
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of PEC Israel Economic
Corporation are filed in response to Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(a)(2)(a) Financial statement schedules filed in response to Item 14(d)
pursuant to Rule 3-09 of Regulation S-X:
Property and Building Corporation Limited and
Subsidiaries:
Auditors' Report.
Balance Sheets as at December 31, 1997 and 1996.
Statements of Earnings for the years ended December 31, 1997,
1996 and 1995.
Statement of Shareholders' Equity for the years ended December
31, 1997, 1996 and 1995.
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to the Financial Statements.
(a)(2)(b) Financial statement schedules filed in response to Item 14(d)
pursuant to Rule 3-09 of Regulation S-X:
Tambour Limited and Subsidiaries:
Auditors' Report.
Consolidated Balance Sheets as at December 31, 1997 and 1996.
IV-1
<PAGE>
Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995.
Statement of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Balance Sheets as at December 31, 1997 and 1996.
Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to the Financial Statements.
(a)(2)(c) Reports of certified public accountants with respect to the
financial statements of the following entities filed pursuant to
Rule 2-05 of Regulation S-X:
For the year ended December 31, 1997:
Bayside Land Corporation Ltd. (report appears
after the financial statements of Property
and Building Corporation Ltd.)
Caniel-Israel Can Company Ltd.
Elron Electronic Industries Ltd.
General Engineers Ltd.
Gilat Communications Ltd.
Gilat Satellite Networks Ltd.
Klil Industries Ltd.
Liraz Systems Ltd.
Level 8 Systems, Inc.
LOGAL Educational Software and Systems Ltd.
Mul-T-Lock Ltd.
Naveh Building and Development Limited (report
appears after the financial statements of
Property and Building Corporation Ltd.)
PEC Israel Finance Corporation Ltd.
Renaissance Fund LDC
Scitex Corporation Ltd.
IV-2
<PAGE>
Tefron Ltd.
Tel-Ad Jerusalem Studios Ltd.
For the year ended December 31, 1996:
Cellcom Israel Ltd.
DIC and PEC Cable TV Ltd.
Gemini Capital Fund Management Ltd.
Gemini Israel Fund L.P.
Ispah Holdings Limited
Maxima Air Separation Center Ltd.
Property and Building Corporation Ltd.
Super-Sol Ltd.
Tambour Ltd.
(a)(2)(d) Schedules of PEC Israel Economic Corporation have been omitted since
they are not applicable or the required information is shown in the
financial statements or notes thereto.
(a)(3) The following exhibits are included in response to Item 14(c):
(3)(i). Composite Articles of Incorporation of the Company, as amended,
filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein
by reference.
(3)(ii). Composite By-Laws of the Company, as amended.
10(i)(a). Voting Agreement dated December 10, 1980 between the Company and
Discount Investment Corporation Ltd. (formerly Discount Bank
Investment Corporation Ltd.), as amended by a Letter Agreement dated
May 4, 1983 and by an Addendum dated December 30, 1983, filed as
Exhibit 10(i)(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference.
10(i)(b). Addendum to Exhibit 10(i)(a) dated December 7, 1995, filed as
Exhibit 10(b)(i) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference.
10(i)(c). Amendment to Exhibit 10(i)(a) dated as of February 1, 1993, filed as
Exhibit 10(i)(c) to the Company's Annual Report on Form 10-K for the
fiscal year ended
IV-3
<PAGE>
December 30, 1992 and incorporated herein by reference.
10(i)(d). Shareholders' Agreement dated May 20, 1992 among Clal Electronics
Industries Ltd., the Company, Discount Investment Corporation Ltd.
and International Paper Company, filed as Exhibit A to Amendment No.
13 to the Company's Statement on Schedule 13D in respect of ordinary
shares of Scitex Corporation Ltd. held as of June 12, 1992 and
incorporated herein by reference.
10(i)(e). Business Opportunities Agreement dated as of November 30, 1993 among
the Company, DIC Finance and Management Ltd., and, for the purpose
of section 5 thereof only, PEC Finance Company Ltd. and Discount
Investment Corporation Ltd., filed as Exhibit 10(i)(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference.
10(i)(f). Amendment to Exhibit 10(i)(e) dated as of December 25, 1996, filed
as Exhibit 10(i)(f) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and incorporated herein by
reference.
10(i)(g). Agreement dated July 1, 1995 between IDB Development Corporation
Ltd. and PEC Finance Company Ltd. (now named PEC Israel Financial
Corporation Ltd.), filed as Exhibit 10(i)(f) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
10(i)(h). Voting Agreement dated June 10, 1997 by and among Discount
Investment Corporation Ltd., the Company and Delek Investments and
Properties Ltd.
10(i)(i). Application to Israel Discount Bank Ltd. dated March 4,1998 for the
Allocation of a Credit Line in Foreign Currency to the Company.
10(i)(j). Agreement dated January 31, 1993 among the Company, DIC Energy
Holdings Ltd. and N.E.K. Properties Ltd. in respect of ordinary
shares of Tambour Ltd., filed as Exhibit 10(i)(k) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992 and incorporated herein by reference.
10(i)(k). Exchange Agreement dated as of January 4, 1994 among the Company,
PEC Holdings Limited and IDB Development Corporation Ltd., filed as
Exhibit 10(i)(l) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference.
IV-4
<PAGE>
10(iii)(a). Supplemental Retirement Agreement dated as of January 1, 1995
between the Company and Frank J. Klein, filed as Exhibit 10(iii)(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.*
21. Subsidiaries of the Registrant.
27. Financial Data Schedule
Reports on Form 8-K:
(b) No reports on Form 8-K were filed during the fiscal quarter ended
December 31, 1997.
- ----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.
IV-5
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Financial Statements
December 31, 1997
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Auditors' Report 2
Balance Sheets 3
Statements of Earnings 5
Statement of Shareholders' Equity 6
Statements of Cash Flows 7
Notes to the Financial Statements 10
Annex - Percentage of Holding in Related Companies 61
</TABLE>
<PAGE>
Somekh Chaikin
Tel-Aviv, March 11, 1998
Auditors' Report to the Shareholders of
Property and Building Corporation Limited
We have audited the financial statements of Property and Building Corporation
Limited (hereinafter "the Company") and its consolidated financial statements,
as follows:
- - Balance sheets as at December 31, 1997 and 1996.
- - Statements of earnings, statements of changes in shareholders' equity
and statements of cash flows for each of the three years the last of
which ended December 31, 1997.
These financial statements are the responsibility of the Company's Board of
Directors and of its Management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 80% and 72% of the total consolidated assets as at December 31, 1997
and 1996 respectively, and whose revenues constitute 72%, 90% and 86% of the
consolidated revenues for the years ended on December 31, 1997, 1996 and 1995
respectively. The financial statements of those subsidiaries were audited by
other auditors whose reports thereon were furnished to us. Our opinion, insofar
as it relates to amounts emanating from the financial statements of such
subsidiaries, is based solely on the said reports of the other auditors.
Furthermore, the data included in the financial statements which relates to the
net asset value of an affiliate and the Company's equity in its earnings is
based on financial statements which were audited by other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner of
Auditor's Performance) - 1973. Such standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement whether due to error or intentional misrepresentation.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the Board of
Directors and by Management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
<PAGE>
The above mentioned financial statements were prepared on the basis of the
historical cost convention, in historical values, adjusted for the changes in
the general purchasing power of the Israeli currency in accordance with opinions
of the Institute of Certified Public Accountants in Israel. Condensed data in
nominal historical values, on the basis of which the adjusted financial
statements were prepared, is presented in Note 34.
In our opinion, based on our audit and on the reports of the abovementioned
other auditors, the financial statements referred to above present fairly, in
all material respects, in conformity with accounting principles generally
accepted in Israel, consistently applied, the financial position of the Company
and the consolidated financial position of the Company and its subsidiaries as
at December 31, 1997 and 1996 and the results of their operations, the changes
in the shareholders' equity and their cash flows for each of the three years the
last of which ended December 31, 1997. Furthermore, these statements have, in
our opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements) 1993.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter affects the determination of historical net earnings
and shareholders' equity to the extent summarized in Note 35 C to the financial
statements.
/s/Somekh Chaikin
- -----------------------------------
Certified Public Accountants (Isr.)
<PAGE>
Balance Sheets as at December 31
- --------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
----------------------- ------------------
Note 1997 1996 1997 1996
----- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents 2 155,202 58,376 1,504 1,151
Short-term deposits
and loans 1,628 16,861
Marketable securities 3 35,509 34,722 593 625
Trade receivables 4 20,406 42,186
Other receivables
and debit balances 5 20,314 23,579 5,390 3,754
Apartments and other
inventories 6 6,162 18,838 1,325
Building projects
under construction 7 129,818 81,820 2,634 7,143
--------- --------- ------ ------
369,039 276,382 11,446 12,673
--------- --------- ------ ------
Land 8 399,671 418,941 8,719 20,658
--------- --------- ------ ------
Long-term loans and
deposits 9 3,247 1,332 2,615 1,133
--------- --------- ------ ------
Investments 10
In investee companies 116,691 135,850 894,189 844,286
--------- --------- ------ ------
Fixed Assets 11
Buildings, land,
plantations and other 1,330,092 1,165,980 51,625 50,622
Less/- Accumulated
depreciation 312,711 290,978 21,672 20,732
--------- --------- ------ ------
1,017,381 875,002 29,953 29,890
--------- --------- ------ ------
Deferred Charges
and Other Assets 12 24,223 14,006 377 405
--------- --------- ------ ------
1,930,252 1,721,513 947,299 909,045
--------- --------- ------ ------
--------- --------- ------ ------
</TABLE>
The notes and the annex are an integral part of the financial statements.
<PAGE>
Property and Building Corporation Limited and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated The Company
----------------------- -------------------
Note 1997 1996 1997 1996
---- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Current Liabilities
Advances from purchasers
of apartments and
others, net 13 4,000 11,842 974 10,115
Short-term credit
from banks 14 25,195 13,108 373
Current maturities of long -
term liabilities 44,138 50,782 2,402 8,944
Suppliers and
contractors 15 9,125 10,217
Creditors and
credit balances 16 71,032 77,778 31,749 46,803
Deferred taxes 17 2,161 14,880 45
Proposed dividend 23,107 17,427 17,000 12,304
--------- --------- ------- -------
178,758 196,034 52,170 78,539
--------- --------- ------- -------
Long-term Liabilities
Convertible debentures 18 228,549 52,433
Debentures 18 35,897 40,617
Liabilities to banks and
provident funds 18 205,936 225,577 372
Other long term liabilities 18 58,553 63,618 8,100
Deferred taxes 17 19,743 17,487 1,191 28
Liability for employee
severance benefits, net 19 2,362 2,388 1
--------- --------- ------- -------
551,040 402,120 9,291 401
--------- --------- ------- -------
Minority interest 304,648 283,286
--------- --------- ------- -------
Receipt on account of
option warrants in
a subsidiary 9,968 9,968
--------- --------- ------- -------
Shareholders' Equity 885,838 830,105 885,838 830,105
--------- --------- ------- -------
Contingent Liabilities
and Commitments 20
1,930,252 1,721,513 947,299 909,045
--------- --------- ------- -------
--------- --------- ------- -------
</TABLE>
/s/Dov Tadmor
- ----------------------------------
Dov Tadmor - Chairman of the Board
/s/Abraham Attias
- ----------------------------------
Abraham Attias - Managing Director
March 11, 1998
4
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Earnings for the Year Ended December 31
- -------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------- --------------------------------
Note 1997 1996 1995 1997 1996 1995
---- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income
Rentals and warehousing 137,293 128,834 117,891 7,844 7,667 7,672
From construction and other sources 21 268,966 230,070 235,542 53,163 -- --
The Company's equity in the
net earnings of investee companies 22 6,550 12,693 12,913 60,168 63,620 60,441
Gain on sale of investments and fixed assets 23 10,113 2,842 6,648 603 74 116
Income from securities, financing and others 24 11,781 6,922 8,046 2,049 2,482 2,332
------- ------- ------- ------- ------ ------
434,703 381,361 381,040 123,827 73,843 70,561
------- ------- ------- ------- ------ ------
Costs and Expenses
Construction and other costs 25 195,743 161,615 174,872 38,428 -- --
Administrative and general 26 32,065 31,099 30,205 7,207 6,834 6,664
Selling and marketing 27 4,995 3,817 3,364 877 -- --
Property maintenance (excluding depreciation) 11,266 10,537 10,451 780 813 808
Depreciation and amortization 22,513 19,861 18,056 967 1,262 1,244
Property taxes on land 28 8,700 7,585 5,990 850 966 500
Financing 29 24,074 16,480 5,076 1,083 3,123 2,834
------- ------- ------- ------- ------ ------
299,356 250,994 248,014 50,192 12,998 12,050
------- ------- ------- ------- ------ ------
Earnings before taxes on income 135,347 130,367 133,026 73,635 60,845 58,511
Taxes on income 30 43,532 42,640 46,693 6,040 (927) (975)
------- ------- ------- ------- ------ ------
Earnings after taxation 91,815 87,727 86,333 67,595 61,772 59,486
------- ------- ------- ------- ------ ------
Less/- Minority interest in earnings 24,220 25,955 26,847 -- -- --
------- ------- ------- ------- ------ ------
Net earnings for the year 67,595 61,772 59,486 67,595 61,772 59,486
------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------ ------
Earnings Per Share
Net earnings per share of a par value
of NIS 1.00 (in NIS) 16.40 15.87 16.29 16.40 15.87 16.29
------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------ ------
</TABLE>
The notes and the annex are an integral part of the financial statements.
5
<PAGE>
Property and Building Corporation and Subsidiaries
Statements of Shareholders' Equity
- -------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Share Capital Premium Capitalized
capital surplus on shares surplus in Retained
subsidiaries earnings Total
------- -------- --------- ------------ -------- --------
<C> <C> <C> <C> <C> <C> <C>
Balance as at January 1, 1995 177,805 *143,373 13,490 303,978 638,646
Net earnings for the year 59,486 59,486
Capital surplus from
private placement of
shares of a subsidiary 12,464 12,464
Inflationary erosion of
dividend declared in the
previous year 89 89
Proposed dividend, net - 240% (10,057) (10,057)
------- -------- --------- ------------ -------- --------
Balance as at December 31,
1995 7,805 143,373 25,954 353,496 700,628
Net earnings for the year 61,772 61,772
Issue of shares 616 78,800 79,416
Inflationary erosion of
dividend declared in the
previous year 593 593
Proposed dividend - 280% (12,304) (12,304)
------- -------- --------- ------------ -------- --------
Balance as at December 31,
1996 178,421 143,373 78,800 25,954 403,557 830,105
Net earnings for the year 67,595 67,595
Issue of shares 27 4,098 4,125
Tax benefit in respect of the
exercise of share purchase
options by employees 613 613
Inflationary erosion of dividend
declared in the previous year 400 400
Proposed dividend - 412% (17,000) (17,000)
------- -------- --------- ------------ -------- --------
Balance as at December 31,
1997 178,448 143,986 82,898 25,954 454,552 885,838
------- -------- --------- ------------ -------- --------
------- -------- --------- ------------ -------- --------
</TABLE>
* Capital surplus created until 31.12.91
6
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Cash Flows for the Year Ended December 31
- --------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash flows generated by operating activities
Net earnings 67,595 61,772 59,486 67,595 61,772 59,486
Adjustments to reconcile net earnings to
net cash flows generated by operating activities (Annex): 43,258 57,918 25,211 (96,502) (25,110) (61,143)
-------- -------- -------- ------ ------- ------
Net cash inflow (outflow) generated by operating activities 110,853 119,690 84,697 (28,907) 36,662 (1,657)
-------- -------- -------- ------ ------- ------
Cash flows generating by investing activities
Proceeds from realization of investment
in investee companies 27,435 -- -- -- -- --
Investments in investee companies (2,705) (37,164) (4,177) (4,387) (93,857) (169)
Dividend received from investee companies 7,858 8,149 9,338 16,794 12,761 11,172
Purchase of marketable securities (38,902) (602,871) (39,138) (34) (10) (186)
Proceeds from sale of marketable securities 41,303 608,465 104,649 91 120 185
Acquisition and development of land (35,857) (121,809) (129,439) (2,484) (4,907) (6,921)
Purchase and construction of fixed assets (150,787) (125,904) (120,391) (1,003) (155) (3,023)
Collections of credit relating to sale of real estate 1,537 1,714 684 -- -- --
Proceeds from sale of fixed assets and real estate 1,088 2,024 8,278 -- 31 --
Repayment of long-term deposits and loans 1,840 728 1,498 -- -- 58
Repayment (Granting) of short-term deposits 15,233 (16,504) -- -- -- --
Granting of long-term loans (2,895) -- -- (2,125) (1,133) --
Granting of loans to subsidiaries -- -- -- -- -- (889)
Repayment of loans to subsidiaries -- -- -- 10,735 789 894
-------- -------- -------- ------ ------- ------
Net cash inflow (outflow) generated by investing activities (134,853) (283,172) (168,698) 17,587 (86,361) 1,121
-------- -------- -------- ------ ------- ------
</TABLE>
7
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Cash Flows for the Year Ended December 31 (cont'd)
- --------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Cash flows generated by financing activities
Dividend paid
- - by the parent company (11,904) (9,464) (7,622) (11,904) (9,464) (7,622)
- - to outside shareholders of subsidiary companies (4,957) (4,525) (3,843) -- -- --
Payment of debentures (8,945) (13,230) (12,831) -- -- --
Payment of long term loans (62,359) (3,215) (15,588) (373) (295) (297)
Receipt of long-term loans 31,056 136,478 119,416 -- -- --
Receipt of long-term loan from subsidiary -- -- -- 1,427 (20,086) 8,549
Receipt of credit from subsidiary company -- -- -- 18,771 -- --
Receipt (repayment) of short-term bank credit 12,087 (15,604) 19,703 (373) 373 --
Payments to outside shareholders of subsidiary (73) (456) (2,711) -- -- --
Repayments of credit in respect of real estate acquisition (13,359) (33,637) (19,984) -- -- --
Securities issue by a subsidiary 175,155 64,021 -- -- -- --
Share issue by the Company 4,125 79,416 -- -- 79,416 --
------- ------- ------- ------ ------ -----
Net cash inflow generated by financing activities 120,826 199,784 76,540 11,673 49,944 630
------- ------- ------- ------ ------ -----
Net increase (decrease) in cash and cash equivalents 96,826 36,302 (7,461) 353 245 94
Cash and cash equivalents at beginning of year 58,376 22,074 29,535 1,151 906 812
------- ------- ------- ------ ------ -----
Cash and cash equivalents at end of year 155,202 58,376 22,074 1,504 1,151 906
</TABLE>
8
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Cash Flows for the Year Ended December 31 (cont'd)
- --------------------------------------------------------------------------------
In terms of shekels of December 1997
(in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
-------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Annex
Adjustments to reconcile net earnings to
net cash generated by operating activities:
Cash flows not involving cash flows:
The Company's equity in the net
earnings of investee companies (6,550) (12,693) (12,913) (60,168) (63,620) (60,441)
Outside shareholders' interest in earnings 24,220 25,955 26,847 -- -- --
Depreciation and amortization 23,189 20,418 18,634 967 1,262 1,244
Net changes in deferred taxes (17,691) 4,145 (2,328) 1,538 (1,651) (1,395)
Increase (decrease) in liability for
employee severance benefits (26) (85) 361 (1) 1 --
Decrease (increase) in value of securities (3,188) (4,984) (425) (25) (24) 36
Income from realization of investments
in investee companies and issue of capital (10,153) (53) (62) (603) (53) (62)
Capital losses (gains) on sale of fixed
assets and real estate 40 (2,789) (6,586) -- (21) (54)
Inflationary erosion of long-term
deposits and loans, net 5,921 1,695 (23) 411 113 (80)
Amortization of debenture discount 1,058 832 -- -- -- --
Changes in current assets and liabilities:
Trade receivables 21,779 (15,078) (4,986) -- 1,419 (247)
Trade and other receivables 2,186 18,607 (24,980) (1,240) 6,783 3,081
Construction costs, net (437) 20,302 9,167 (4,169) -- --
suppliers and subcontractors (1,092) 2,808 5,172 -- -- --
Other payables 4,002 (1,162) 17,333 (33,212) 30,680 (3,225)
------ ------ ------ ------- ------- -------
Total adjustments 43,258 57,918 25,211 (96,502) (25,110) (61,143)
------ ------ ------ ------- ------- -------
------ ------ ------ ------- ------- -------
Significant non-cash transactions:
Purchase of fixed assets on credit 302 10,536 69,323
------ ------ ------
Purchase of real estate on credit 2,965
------
Sale of fixed assets on credit (1,537) (1,714)
------ ------
</TABLE>
9
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies
A. Reporting Principles
1. Definitions
In these financial statements:
a. Subsidiaries - companies whose financial statements
are consolidated directly or indirectly with those of
Property and Building Corporation Limited (the
"Company").
b. Proportionately consolidated subsidiaries - companies
whose financial statements are consolidated with
those of the Company by the proportionate
consolidation method.
c. Affiliated companies - companies, except for
subsidiaries and proportionately consolidated
subsidiaries, the investment in which is included
directly or indirectly on the equity basis in the
company's statements.
d. Investee companies - subsidiaries, proportionately
consolidated subsidiaries and affiliated companies.
e. Other companies - companies which are not investee
companies.
f. Initial difference - difference between acquisition
cost and adjusted net asset value of investments in
shares of investee companies as at acquisition date.
g. Related parties - as defined in Opinion No. 29 of the
Institute of Certified Public Accountants in Israel.
h. Interested parties - as defined in the Israeli
Securities Law.
i. Group - The Company and her subsidiaries
2. The financial statements have been prepared in a format
suited, in the opinion of the Management, to the Company's
type of business.
B. Financial statements in adjusted values
1. The Company prepares the adjusted financial statements on the
basis of cost adjusted for the changes in the general
purchasing power of the shekel (see Note 34 for condensed
financial statements in nominal historical values).
2. The adjusted value of non-monetary assets do not purport to
reflect their real economic or market value but rather
historical cost adjusted for the changes in the purchasing
power of the shekel.
3. In the adjusted financial statements, the term, "cost" means
"adjusted cost".
4. Comparative figures have also been adjusted to the shekel of
December 1997.
10
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
C. Principles of adjustment
1. Balance sheet
Non-monetary items (construction work and advances, real
estate, investment in companies, fixed assets, deferred
charges, share capital), have been adjusted on the basis of
changes in the consumer price index from the index published
in respect of the month of the transaction to the index
published in respect of the month of the balance sheet date.
Monetary items are stated in the adjusted balance sheet at
their historical values.
The net asset value of investments in investee companies is
determined on the basis of the adjusted financial statements
of these companies.
2. Statement of earnings
a. The various items of the statement of earnings have
been adjusted according to the changes in the
consumer price index as follows:
1) Income and expenses deriving from
non-monetary items (such as depreciation and
amortization, building projects, changes in
inventory, prepayments and deferred income,
etc.) or from provisions included in the
balance sheet (e.g., provisions for
severance pay, holiday pay, etc.) have been
adjusted on the basis of specific indices
parallel to the adjustment of the related
balance sheet item.
2) The remaining items in the statement of
earnings (e.g., rental income, selling,
general and administrative expenses) except
for components of the financing item, have
been adjusted on the basis of the index in
respect of the month in which the
transaction was effected.
3) The calculation of the Company's equity in
the results of operation of the investee
companies and the outside shareholders'
share in the results of operation of the
subsidiaries was based on the adjusted
financial statements of such companies.
4) The net financing items which cannot be
independently calculated is derived from the
other items of the statement of earnings.
This includes, inter alia, amounts required
to adjust various items in the statement of
earnings in respect of the inflationary
component of the financing therein.
11
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
C. Principles of adjustment (cont'd)
b. Taxes on income
Current taxes comprise payments on account made
during the year plus amounts due at balance sheet
date (or less amounts refundable at balance sheet
date). The payments on account have been adjusted on
the basis of the consumer price index of the date the
payments were made. Those amounts payable (or
refundable) have been included unadjusted. Current
taxes include, therefore, the expense derived from
the inflationary erosion of the value of payments
made on account from the time of payment to the year
end.
Deferred taxes - see Note D.11. below.
3. Statement of shareholders' equity
The dividend that was declared and actually paid in the year
has been adjusted on the basis of the consumer price index at
the date of payment. The dividend proposed/declared during the
year but unpaid at the balance sheet date is included with no
adjustment.
The amount stated as "erosion in value of dividend" reflects
the erosion of the real value of the dividend
proposed/declared in the previous year and actually paid
during the current year (this erosion relates to the period
from the beginning of the current year up to the date of
payment).
The difference between the net asset value of companies
transferred from the Company to a subsidiary and the
consideration given in exchange thereof, by way of issue of
shares, has been carried to a capital reserve in accordance
with a guideline based on Section 36A of the Securities Law -
1968.
4. Statement of cash flows
The statement has been prepared in accordance with Opinion No.
51 of the Institute of Certified Public Accountants in Israel.
The statement provides information on cash receipts and
payments during the year from current activities, investment
and finance, and is expressed in terms of shekels of the end
of the current year.
12
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
D. Accounting policies (cont'd)
1. Consolidated financial statements
a. The consolidated financial statements include the
financial statements of the Company and the Company's
subsidiaries. (See Appendix to the Financial
Statements).
b. In addition to the above companies which were fully
consolidated, certain companies under joint ownership
were consolidated by the proportionate consolidation
method in accordance with Opinion No. 57 of the
Institute of Certified Public Accountants in Israel.
c. For the purposes of consolidation, the amounts in the
financial statements of the subsidiary companies
being consolidated were included after adjustments
required in respect of application of the uniform
accounting principles of the Group.
d. Balances between subsidiaries and inter-company
profits from sales between the companies not yet
realized outside of the Group were cancelled.
e. Real estate properties of the Company and its
subsidiaries that are requested in the name of other
subsidiaries that are property companies (which were
established for the sole purpose of holding real
estate or for their rental) are included in the
balance sheets based on the cost of these assets to
those subsidiaries.
In the statement of earnings, the income and expenses
relating to the above assets were included based on
the Company's rate of holding in the stated
subsidiary companies.
2. Marketable securities
a. Marketable government bonds and other marketable
securities are stated at their market value as at
balance sheet date.
b. Mutual fund certificates in trust funds are stated at
redemption value as at balance sheet date.
c. Changes in value of securities are fully recognized
on a current basis.
3. Building projects
a. The Company and subsidiary construction companies
record construction work on the basis of approved
invoices and amounts paid on account to the
contractors, designers and others.
b. The completed units and units under construction are
stated in the financial statements at cost but not
exceeding their market value.
13
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
D. Accounting policies (cont'd)
4. Inventory of air-conditioning and other equipment
Inventory is valued at the lower of cost or market value, cost
being determined on the "FIFO" basis.
5. Land
a. Land is stated at cost which is not in excess of
market value.
b. The portion of the land which is in the stage of
construction is included in building projects and
stated under current assets or as a deduction from
advances from purchasers of apartments under current
liabilities.
c. Shops in completed buildings are stated at cost but
not in excess of market value.
6. Investments in related and other companies
a. Investments in investee companies are stated on the
equity basis. The investments in shares of other
companies, which are not quoted securities, are
stated at cost which, in Management's opinion, is not
less than its fair value.
b. The Company's equity in the profits and losses of the
investee companies is based on the latest audited
financial statements of these companies, after
adjustments required from the application of the
uniform accounting principles of the Group.
c. The initial difference regarding investee companies,
is allocated to assets of such companies (building
projects, real estate and fixed assets) and their
amortization as an expense or as income is made in
accordance with the life of those assets or upon
their realization; amounts which cannot be allocated
to such assets are amortized at 20% per year.
7. Fixed assets
Fixed assets are stated at cost. Depreciation is computed by
the straight line method over the estimated useful life of the
assets.
8. Other assets - Initial difference which cannot be allocated to
assets - see Note 1.D.6.c.
14
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
D. Accounting policies (cont'd)
9. Deferred charges
a. Expenses relating to the issue of the debentures are
written off against income over the life of the
debentures in proportion to their outstanding
balance.
b. Taxes in connection with unrealized profits from real
estate transactions - taxes relating to real estate
transaction are amortized over the life of the asset
or parallel to the period of transaction.
10. Convertible of debentures
a. Debentures, the conversion of which is not, as at
balance sheet date, expected according to guidelines
set by the Institute, are stated as long-term
liabilities. The debentures include the liabilities
at balance sheet date in accordance with the
conditions of the issue, less the discount which has
not been amortized as at balance sheet date.
b. The above discount (resulting from the difference
between amount of the linked liability at the date of
the issue and the nominal value of the debentures) is
amortized using the straight line method over the
period of the debentures in proportion to their
outstanding balance.
11. Deferred taxes
The calculation of deferred taxes in the adjusted financial
statements account mainly for the following areas of timing
differences of items between their being charged in the
financial statements and their inclusion in chargeable income
for tax purposes, or because their treatment for tax purposes
is different:
a. Differences between the undepreciated cost of
depreciable assets for tax purposes and their
undepreciated cost in the financial statements.
b. Differences in recognition of income from marketable
securities held from the beginning of the year.
c. Differences relating to adjustment of cost of
inventory, advances from customers, adjustment of
land and development.
15
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
D. Accounting policies (cont'd)
11. Deferred taxes (cont'd)
d. Expenses allowable in the future for tax purposes -
sales expenses, administrative expenses, and finance
expenses that for tax purposes were allocated to
buildings under construction, provisions for holiday
pay and severance pay.
e. The deduction for inflation which is carried forward
to future years.
f. Losses for tax purposes which are expected to be
realized.
g. Advance rental payments which are liable to tax upon
receipt and other timing differences.
Deferred taxes are computed using the tax rate
expected to be in effect at the time of reversal as
known at the time of the preparation of the financial
statements.
No deferred tax was computed in respect of
investments in investee companies as the intention of
the Management is to hold these companies and not to
realize them.
12. Income recognition
a. Income from rent -
Rental income is recognized in the period to which
the rent related, amounts in arrears are recognized
only upon collection.
b. Income from construction work -
Income from construction transactions is recognized
according to the "completed contract" method, that is
when the construction work has been completed and the
major part of the constructed units has been sold
where all the constructed units have been sold before
they have been completed, income is recognized
according to the "percentage of completion method".
A subsidiary whose operations is installing air
conditioning systems as an executing contractor,
recognizes income from long-term projects by the
"percentage of completion method".
13. Provision for doubtful debts
The provision for doubtful debts is calculated on the basis of
specific identification of balances whose collection is in
doubt.
16
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
D. Accounting policies (cont'd)
14. Foreign currency and linkage
Assets and liabilities that are linked or denominated in
foreign currency are included as follows:
a. Balances linked to the consumer price index are
stated in the balance sheet according to the index in
respect of the last month of the reported year except
for balances which are linked to the known index
which are adjusted according to the last index
published as at the date of the financial statements.
b. Foreign currency balances or those linked to foreign
currency are adjusted using the representative rate
published by the Bank of Israel as at balance sheet
date.
Data concerning consumer price index and foreign currency
rates:
<TABLE>
<CAPTION>
% of change
---------------------------------------
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consumer price
index, in points 153.1 143.1 129.4 7.0 10.6 8.1
Consumer price
index, (latest
known index)
in points 153.6 142.0 127.9 8.2 11.0 7.8
Exchange
rate of the
U.S. dollar,
in NIS 3.536 3.251 3.135 8.8 3.7 3.9
</TABLE>
15. Earnings per share
Earnings per share were calculated in accordance with Opinion
No. 55 of the Institute of Certified Public Accountants in
Israel, based on the par value of the issued and paid up share
capital outstanding during the year as stated in Note 34D.
17
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 2 - Cash and Cash Equivalents
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- --------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Short-term deposits with banks 154,912 56,865 1,499 1,150
Cash at bank 290 1,511 5 1
------- ------ ----- -----
155,202 58,376 1,504 1,151
------- ------ ----- -----
------- ------ ----- -----
</TABLE>
Note 3 - Marketable Securities
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- ------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Government loans 20,273 22,895 -- --
Mutual fund certificates 10,140 8,429 -- --
Debentures issued by a
subsidiary* -- -- 593 625
Other debentures 741 2,664 -- --
Shares 1,492 503 -- --
Convertible securities 2,863 231 -- --
------ ------ --- ---
35,509 34,722 593 625
------ ------ --- ---
------ ------ --- ---
</TABLE>
* See Note 20 C (1)
18
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 4 - Trade Receivables
A. Composed of:
<TABLE>
<CAPTION>
Consolidated
---------------------------
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Purchasers of apartments and shops 4,399 30,584
With respect to rentals and warehousing* 10,346 7,074
With respect to air conditioning and other* 3,772 2,175
Notes receivable 1,889 2,353
------ ------
20,406 42,186
------ ------
------ ------
* After deduction of allowance for
doubtful debts 1,034 899
------ ------
------ ------
</TABLE>
B. Purchasers of apartments are linked mainly to the construction
inputs index.
Note 5 - Other Receivables and Debit Balances
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- --------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accrued income 5,972 7,752 216 117
Purchasers of land* -- 1,503 -- --
Deferred taxes 5,098 5,180 3,115 3,445
Deposits and prepaid expenses 948 704 8 8
Advances to Tax Authorities
less provisions 2,796 3,899 -- --
Current maturities of long-term
loans to employees and
deposits 1,227 2,162 726 13
Other debtors 3,352 2,279 1,325 171
Israel Treasury - value
added tax 921 265 -- --
------ ------ ----- -----
20,314 23,744 5,390 3,754
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
* Balance linked mainly to U.S. dollar.
19
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 6 - Apartments and Other Inventories
<TABLE>
<CAPTION>
Consolidated The Company
------------------------- -----------
December 31 December 31 December 31
1997 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Apartments in completed building 5,319 17,741 1,325
Air-conditioning equipment and
other 843 1,097 --
----------- ------------ -----------
6,162 18,838 1,325
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
Note 7 - Building Projects Under Construction
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ---------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land 79,203 73,432 2,897 4,666
Construction work 141,534 105,944 3,067 3,081
----------- ----------- ----------- -----------
Land and construction works 220,737 179,376 5,964 7,747
Less - Advances from
apartment purchasers 90,919 97,556 3,330 604
----------- ----------- ----------- -----------
129,818 81,820 2,634 7,143
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
20
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 8 - Land
A. Composed of:
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- ---------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Freehold land * 185,627 229,510 8,719 20,658
Leasehold land 203,753 179,360
Stores in completed
buildings and other
installations 5,385 5,385
Parking lot and sports
center 3,201 3,165
Expenses relating to
future stages of
construction 1,705 1,521
----------- ----------- ----------- -----------
399,671 418,941 8,719 20,658
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
* Including NIS 2.1 million in rights to land which have not yet
been registered in the name of the subsidiary (the subsidiary did
register a caveat).
The land ownership rights in the area in which the land is located
are in the process of being formalized. Once the process is
completed the rights will be registered in the name of the
Company.
B. In the opinion of Management the value of land exceeds the value
stated in the balance sheet.
C. Leasehold rights in land:
<TABLE>
<CAPTION>
The lease Cost
expires in
---------- --------
<S> <C> <C>
Capitalized leasehold 2,048 202,881
Uncapitalized leasehold 2,040 872*
--------
203,753
--------
--------
</TABLE>
* The land has not as yet been registered in the name
of the Company at the Land Registry Office.
21
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 9 - Long-term Loans and Deposits
A. Composition:
(1) In the consolidated balance sheet:
<TABLE>
December 31
December 31, 1997 1996
-------------------------------------------------- -----------
Interest Total Current Balance Balance
rate maturities
---------- --------- ---------- ----------- -----------
%
----------
<S> <C> <C> <C> <C> <C>
Loans to
employees for
issue of stock and
realizing 2 4,425 1,209 3,216 1,298
options(c)
Deposits with
banks -
For the granting
of loans to
apartment
purchasers 4 49 18 31 34
--------- ---------- ----------- -----------
4,474 1,227 2,447 1,332
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
(2) In the company balance sheet:
Loans to
employees for
issue of stock and
realizing options 2 3,341 726 2,615 1,133
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
B. The deposits and the loans are linked to the consumer price index.
C. Employee loans are secured by liens on severance pay funds and
insurance policies.
D. Classification of long-term deposits and loans by years of maturity:
<TABLE>
Consolidated The Company
------------------------------ -----------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within 12 months - current
maturities 1,227 2,162 726 13
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
During second year 1,070 34 726
During third year 1,014 726
No date of redemption but no
later than 2001 1,163 1,298 1,163 1,133
----------- ----------- ----------- -----------
3,247 1,332 2,615 1,133
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
22
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 10 - Investments in Investee Companies
A. Consolidated balance sheet
<TABLE>
December 31 December 31
1997 1996
----------- -----------
Total Total
----------- -----------
<S> <C> <C>
1. Composition:
Affiliated companies
Shares at cost, include -
Adjusted net asset value at the date of
acquisition (a) 93,582 *101,210
Initial difference, net 3,211 *8,411
----------- -----------
96,793 109,621
Add -
The Company's share in the net post-
acquisition profits 19,965 26,976
Total amounts of the initial difference
amortized (1,796) (1,144)
----------- -----------
Book value of shares (b) 114,962 135,453
----------- -----------
----------- -----------
Payment in respect of initial difference 1,332
of subsidiary company (c)
Other company 397 397
----------- -----------
----------- -----------
116,691 135,850
----------- -----------
----------- -----------
</TABLE>
* Reclassified
(a) The investment is presented net of dividends distributed by an
affiliated company out of pre-acquisition earnings, amounting to
NIS 4,839 thousand.
(b) Includes quoted shares whose adjusted equity value at balance
sheet date is NIS 79,599 thousand (December 31, 1996 -
NIS 98,167 thousand). The market value of these shares at
balance sheet date is NIS 103,445 thousand (December 31, 1996 -
NIS 116,683 thousand).
(c) Payment on account of options in the subsidiary company (i.e.
payment in respect of initial difference) amounted to NIS
1,332 thousand. The market value of the options as at
December 31, 1997 is NIS 510 thousand.
23
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 10 - Investments in Investee Companies
A. Consolidated balance sheet (cont'd)
2. The following are details pertaining to proportionally
consolidated subsidiaries which were included in the
consolidated financial statements of the company as at
December 31, 1997 and 1996:
<TABLE>
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
(a) Balance sheet data
Assets:
Current assets 395 1,390
Fixed assets 54,881 64,510
----------- -----------
55,276 65,900
----------- -----------
----------- -----------
Liabilities and shareholders' equity:
Current liabilities 3,996 1,791
Long-term liabilities 39,176 48,416
Shareholders' equity 12,104 15,693
----------- -----------
55,276 65,900
----------- -----------
----------- -----------
</TABLE>
<TABLE>
(b) Statements of earnings
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Income 3,537 4,699
----------- -----------
Costs and expenses:
Property maintenance 444 382
Administrative and general 485 546
Financing, net - 730
Depreciation 826 1,369
----------- -----------
1,755 3,027
----------- -----------
Earnings before taxes 1,782 1,672
Taxes on income 626 606
----------- -----------
1,156 1,066
----------- -----------
----------- -----------
</TABLE>
24
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 10 - Investments in Investee and Other Companies (cont'd)
B. Company balance sheet
<TABLE>
Subsidiaries Affiliated December 31 December 31
companies 1997 1996
------------ ---------- ----------- -----------
Total Total
----------- -----------
<S> <C> <C> <C> <C>
Shares at cost, include -
Adjusted net asset value at the
date of acquisition 315,549 9,850 325,399 307,878
Initial difference, net 6,697 7,390 14,087 14,586
------------ ---------- ----------- -----------
322,246 17,240 339,486 322,464
Add -
The Company's share in the net
post-acquisition profits 554,764 1,619 556,383 511,281
Total amounts of the initial
difference amortized (877) (1,200) (2,077) (952)
------------ ---------- ----------- -----------
Book value of shares (1) 876,133 17,659 893,792 832,793
Loan (3) 11,096
Other company 397 397 397
------------ ---------- ----------- -----------
876,530 17,659 894,189 844,286
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
(1) Includes quoted shares whose adjusted equity value at balance
sheet date is NIS 776,284 thousand (December 31, 1996 - NIS
777,196 thousand). The market value of these shares at balance
sheet date is NIS 1,034,750 thousand (December 31, 1996 - NIS
838,445 thousand).
(2) Payment on account of options in the subsidiary company (i.e.
payment in respect of initial difference) amounted to NIS
1,332 thousand. The market value of the options as at
December 31, 1997 is NIS 510 thousand.
(3) 1996 - The loan to an investee company is linked to the consumer
price index, bear annual interest rates of 7%.
25
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 11 - Fixed Assets
A. Consolidated balance sheet:
<TABLE>
<CAPTION>
Commercial Land Buildings Plantations Vehicles Machinery Other
buildings intended under and and assets
leased out for the construction irrigation equipment
and office construction network
premises of buildings
thereon
(1) (1)(2)(3) (4)
---------- ------------ ----------- ----------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
Balance at beginning
of year 774,362 234,557 129,138 8,140 4,982 7,153 9,099
Additions 34,901 18,351 107,466 - 1,555 92 1,350
Transfers 107,302 (9,257) (97,665) (380)
Disposals (939) (115)
------- ------- ------- ----- ----- ----- ------
Balance at end of year 916,565 243,651 138,939 7,760 5,598 7,245 10,334
------- ------- ------- ----- ----- ----- ------
Accumulated depreciation
Balance at beginning
of year 271,142 6,841 2,260 6,219 5,967
Additions 19,131 1 739 309 773
Disposals (564) (107)
------- ------- ------- ----- ----- ----- ------
Balance at end of year 290,273 6,842 2,435 6,528 6,633
------- ------- ------- ----- ----- ----- ------
Depreciated cost
as at December 31, 1997 626,292 243,651 138,939 918 3,163 717 3,701
------- ------- ------- ----- ----- ----- ------
------- ------- ------- ----- ----- ----- ------
Depreciated cost
as at December 31, 1996 503,220 248,787 114,908 1,299 2,722 934 3,132
------- ------- ------- ----- ----- ----- ------
------- ------- ------- ----- ----- ----- ------
26
<PAGE>
Total Total
December 31 December 31
1997 1996
----------- -----------
Cost
Balance at beginning
of year 1,167,431 1,031,348
Additions 163,715 136,440
Transfers
Disposals (1,054) (1,808)
--------- ---------
Balance at end of year 1,330,092 1,165,980
--------- ---------
Accumulated depreciation
Balance at beginning
of year 292,429 273,445
Additions 20,953 18,728
Disposals (671) (1,195)
--------- ---------
Balance at end of year 312,711 290,978
--------- ---------
Depreciated cost
as at December 31, 1997 1,017,381
---------
---------
Depreciated cost
as at December 31, 1996 875,002
--------
--------
</TABLE>
26
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
A. Consolidated balance sheet: (cont'd)
(1) Including rights in land aggregating NIS 369,502 thousand. The
land is, for the most part, registered in the names of the
Company and the subsidiaries. Part of the land, of an adjusted
cost of NIS 189,307 thousand, is freehold land of the Company
and the subsidiaries. Another part, of an adjusted cost of NIS
180,195 thousand, is leasehold land, leased by subsidiaries
(of which NIS 5,222 noncapitalized lease). The lease is for
various periods up to 2042, with the option for extension for
another 49 years. Part of the land has not yet been registered
in the names of the companies, mainly because the land
ownership rights have not yet been formalized in certain areas
where some of the property is located.
(2) Including land amounting to NIS 2,177 thousands in respect of
which the Residential Building Commission approved a plan to
rezone the land from agricultural land to land for residential
and commercial purposes.
(3) Including land amounting to NIS 14,261 thousands
(4) The plantations are on land area totalling 334 dunams
(freehold land - 97 dunams, leasehold land - 237 dunams,
leased until the year 2062 and thereafter).
27
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
B. Company balance sheet
<TABLE>
<CAPTION>
Building Buildings Vehicles Other Total Total
Leased out under assets
and office construction
premises
December 31 December 31
(1) (2) 1997 1996
---------- ------------ --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cost
Balance at beginning of year 34,773 14,230 775 844 50,622 50,688
Additions 903 31 69 1,003 156
Disposals (222)
------ ------ ------- ----- ------ ------
Balance at end of year 35,676 14,261 775 913 51,625 50,622
------- ------- ------- ----- ------ ------
------- ------- ------- ----- ------ ------
Accumulated depreciation
Balance at beginning of year 20,068 423 241 20,732 19,707
Additions 748 100 92 940 1,235
Disposals (210)
------- ------- ------- ----- ------ ------
Balance at end of year 20,816 523 333 21,672 20,732
------- ------- ------- ----- ------ ------
Depreciated cost as at
December 31, 1997 14,860 14,261 252 580 29,953
------- ------- ------- ----- ------
------- ------- ------- ----- ------
Depreciated cost as at
December 31, 1996 14,705 14,230 352 603 29,890
------ ------ ------ ----- -------
------ ------ ------ ----- -------
</TABLE>
(1) Includes rights in land amounting to NIS 8,391.
(2) Land on which an office building is being constructed in a combination
transaction.
28
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
C. Rates of depreciation
<TABLE>
<CAPTION>
%
----
<S> <C>
Buildings 2-4
Plantations and irrigation plants 15-20
Vehicles 15
Machinery and equipment 10-20
Other assets 6-33
</TABLE>
Note 12 - Deferred Charges and Other Assets
<TABLE>
<CAPTION>
Cost Accumulated
amortization Amortized cost
------------ ------------ ------------------------------
December 31 December 31 December 31 December 31
1997 1997 1997 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
A. Consolidated
Deferred charges -
Capital raising expenses 17,877 7,405 10,472 6,116
Taxes in connection with
unrealized profits from
real estate transactions 2,734 1,228 1,506 2,374
------------ ------------ ------------ --------------
Deferred charges 20,611 8,633 11,978 8,490
------------ ------------ ------------ --------------
Other assets - initial difference 5,782 868 4,914 5,496
Deferred taxes for timing
differences 7,331 20
------------ ------------ ------------ --------------
5,782 868 12,245 5,516
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
26,393 9,501 24,223 14,006
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
B. The Company
Deferred charges -
Taxes in connection with
unrealized profits from
real estate transactions 676 299 377 405
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
</TABLE>
29
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 13 - Advances from Purchasers of Apartments and Others, Net
<TABLE>
<CAPTION>
Consolidated The Company
-------------------------------- ------------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Advances 39,865 31,062 9,018 28,434
------------ ------------ ------------ --------------
Less - land 13,200 2,225 2,897 2,226
construction work 22,665 16,995 5,147 16,093
------------ ------------ ------------ --------------
35,865 19,220 8,044 18,319
------------ ------------ ------------ --------------
4,000 11,842 974 10,115
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
</TABLE>
Note 14 - Credit from Banking Entities
<TABLE>
<CAPTION>
Consolidated The Company
Terms of ---------------------------- ---------------------------
linkage and December 31 December 31 December 31 December 31
interest 1997 1996 1997 1996
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Overdraft Prime + 1% 9,677 491 373
Import financing German marks 2,763 2,622
Short-term loans 13.8% - 15.2% 12,755 9,995
----------- ------------ ----------- -----------
25,195 13,108 373
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
Note 15 - Suppliers and Subcontractors
<TABLE>
<CAPTION>
Consolidated
---------------------------
December 31 December 31
1997 1996
------------- -----------
<S> <C> <C>
Current accounts 5,623 7,888
Checks and notes payable 3,502 2,329
------------- -----------
9,125 10,217
------------- -----------
------------- -----------
</TABLE>
30
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 16 - Creditors and Credit Balances
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ -----------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sellers of land 545 13,600
Income received in advance 3,530 2,354 76
Employees and other liabilities
related to salaries 4,115 4,228 1,569 1,373
Withholdings and taxes
Remittable 19,517 12,351 6,895 2,294
Subsidiary current account* 18,158 41,889
Provision for completion of
construction 13,255 23,504
Liability relating to
appreciation tax and
consent fees 9,498 9,370
Expenses payable 15,167 8,117 4,186 1,104
Others 5,405 4,254 941 67
----------- ------------ ----------- -----------
57,777 54,274 31,749 46,803
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
* Bear annual interest at rates of 2% (1996 - bear annual
interest at prime rate).
Note 17 - Deferred Taxes
<TABLE>
<CAPTION>
In respect of In respect of Other timing Total Total
depreciable building differences
fixed assets projects December 31, December 31,
less advances 1997 1996
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
a. Consolidated
Balance as at
beginning of
year (7,414) (26,817) 7,065 (27,166) (23,021)
Changes (482) 15,529 2,644 17,691 (4,145)
------------- ------------- ------------ ------------- ------------
Balance as at
end of year (7,896) (11,288) 9,709 (9,475) (27,166)
------------- ------------- ------------ ------------- ------------
------------- ------------- ------------ ------------- ------------
b. The Company
Balance as at
beginning of
year (28) 3,445 3,417 1,766
Changes 47 (1,255) (330) (1,538) 1,651
------------- ------------- ------------ ------------- ------------
Balance as at
end of year 19 (1,255) 3,115 1,879 3,417
------------- ------------- ------------ ------------- ------------
------------- ------------- ------------ ------------- ------------
</TABLE>
31
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 17 - Deferred Taxes (cont'd)
2. The deferred taxes are stated as follows:
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------- ------------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Under current assets 5,098 5,180 3,115 3,445
Under other assets 7,331 21
Under current liabilities (2,161) (14,880) (45)
Under long-term liabilities (19,743) (17,487) (1,191) (28)
--------------- ------------- --------------- ------------
(9,475) (27,166) 1,879 3,417
--------------- ------------- --------------- ------------
--------------- ------------- --------------- ------------
</TABLE>
Note 18 - Long-term Liabilities
A. Composition:
<TABLE>
<CAPTION>
Consolidated Consolidated
-------------------------------------------------- -------------
December 31, 1997 1996
-------------------------------------------------- -------------
Total Current Balance Balance
maturities
--------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Debentures convertible to
shares (1) 235,810 7,261 228,549 52,433
Debentures (2) 41,120 5,233 35,897 40,617
Liabilities to banks (3) 96,309 4,301 92,008 88,234
Liabilities to provident funds (4) 138,859 24,931 113,928 137,343
Other liabilities (5) 60,975 2,422 58,533 63,618
------------ ------------- ------------ ------------
573,073 44,138 528,935 382,245
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
(1) Debentures convertible into shares
(a) Convertible debentures, with a balance, as at balance sheet
date, of NIS 49,008 thousand were issued by Hadarim Properties
Ltd. (a subsidiary) per a prospectus published on February 28,
1997.
The debentures bear interest at the rate of 3.5% p.a. Both
principal and interest are linked to the CPI published for
February 1997, and they are redeemable on February 28 of each
year from 1998 to 2005. The debentures can be converted into
shares on any business day, beginning with the day they are
registered for trading and until February 8, 2001 at the
conversion price of NIS 80 par value of debentures per each
ordinary share of a par value of NIS 1. After February 8,
2001 the debentures will no longer be convertible.
32
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
The market value of the debentures as at December is NIS
53,238 thousand.
The debentures are secured by a fixed charge on a token
deposit which was deposited with the trustee of the
debentures. The subsidiary is free to pledge its assets
without limitation as to amount and degree, including the
registering of charges on additional debenture series, without
the necessity of obtaining the consent of the trustee.
(b) Non marketable convertible debentures, with a balance, as at
balance sheet date, of NIS 50,626 thousand were issued by
Hadarim Properties Ltd. (a subsidiary) per a prospectus
published on August 31, 1997.
The debentures bear interest at the rate of 2.5% p.a.. Both
principal and interest are linked to the CPI published for
July 1997, and they are redeemable on August 31 of each year
from 2001 to 2004. The debentures can be converted into shares
on any business day, beginning with the day they are
registered for trading and until August 12, 2001 at the
conversion price of NIS 130 par value of debentures per each
ordinary share of a par value of NIS 1. After August 12, 2001
the debentures will no longer be convertible.
The debentures are secured by a fixed charge on a token
deposit which was deposited with the trustee of the
debentures. The subsidiary is free to pledge its assets
without limitation as to amount and degree, including the
registering of charges on additional debenture series, without
the necessity of obtaining the consent of the trustee.
(c) Marketable convertible debentures, with a balance, as at
balance sheet date, of NIS 131,115 thousand were issued by
Bayside Land Corporation (a subsidiary) per a prospectus
published on September 24, 1997.
The debentures bear interest at the rate of 2.5% p.a.. Both
principal and interest are linked to the CPI published for
September 1997, and they are redeemable on September 20 of
each year from 2000 to 2006. The debentures can be converted
into shares on any business day, beginning October 1, 1997 and
until August 31, 2001 at the conversion price of NIS 885 par
value of debentures per each ordinary share of a par value of
NIS 1. After August 31, 1997 the debentures will no longer be
convertible.
The market value of the debentures as at December is NIS
117,005 thousand.
The debentures are secured by a fixed charge on a token
deposit which was deposited with the trustee of the
debentures. The subsidiary is free to pledge its assets
without limitation as to amount and degree, including the
registering of charges on additional debenture series, without
the necessity of obtaining the consent of the trustee.
33
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
A. Composition: (cont'd)
(2) Debentures
Composition:
<TABLE>
<CAPTION>
Consolidated
-----------------------------
December 31 December 31
1997 1996
----------- ------------
<S> <C> <C>
Total debentures 41,120 48,706
Current maturities 5,223 8,089
----- -----
35,897 40,617
------ ------
------ ------
</TABLE>
Series B
Marketable debentures, the balance of which as at the balance sheet
date was NIS 41,787 thousand were issued by the Property and Building
(Finance 1986) Limited (subsidiary) per the prospectus published on
July 29, 1990. The debentures bear interest at the rate of 1.85% per
annum and are linked (principal and interest) to the consumer price
index. The redemption dates are in the years 1997 - 2002. The
debentures were issued to the public at a price of NIS 90 for every NIS
100 nominal value of debenture. The market value of debentures at
December 31, 1997 is NIS 47,011 thousands.
Series - 6 and 7
Debentures from these series were issued in the past by the Property
and Building Corporation Limited, and transferred to Property and
Building (Finance 1986) Limited (subsidiary) under the framework of a
reorganization between the companies which was approved by the court,
effective from July 1, 1987. The balance of the outstanding debentures
was fully redeemed in 1997 together with the long-term deposits whose
source was the proceeds from the issue of the debentures. These
debentures bear interest at the rate of 5% per annum and are linked
(principle and interest) to the consumer price index.
Guarantees
Debentures from Series B are secured by way of an equal first floating
charge on all assets of the subsidiary company. The Company has
guaranteed the full redemption of all the debentures issued and has
undertaken not to create in the future any lien on its assets so long
as the series B debentures are not fully redeemed.
Assurance of regular trading of debentures - See Note 20C(1).
34
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
A. Composition: (cont'd)
(3) Liabilities to banks
<TABLE>
<CAPTION>
Interest December 31 December 31
rate Current 1997 1996
--------- Total maturities ------------- ------------
% Balance Balance
--------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated
balance sheet 4.7 - 4.95 96,309 4,301 92,008 88,234
------ ------ ------ ------
------ ------ ------ ------
Company
balance sheet 5.75 377 377 372
------ ------ ------ ------
------ ------ ------ ------
(4) Liabilities to provident funds
Consolidated
balance sheet 4.9 138,859 24,931 113,928 137,343
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The liabilities at (3) and (4) are linked to the consumer price index.
(5) Other long-term liabilities
<TABLE>
<CAPTION>
Interest December 31 December 31
rate Current 1997 1996
--------- Total maturities ------------- ------------
% Balance Balance
--------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated
balance sheet
Liabilities for
construction(1) 60,975 2,422 58,553 63,618
------ ------ ------ ------
------ ------ ------ ------
Company balance sheet
Subsidiary
company (2) 4.0 10,125 2,025 8,100
------ ------ ------
------ ------ ------
</TABLE>
(1) The liability is non-interest bearing and is linked to the
construction input index (pertaining to an amount of NIS 52,220
- see also Note
20C(5).
(2) The loan is linked to the consumer price index.
35
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
B. Classification of long-term liabilities by years of maturity
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ -----------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within 12 months -
current maturities 44,138 50,840 2,402 8,944
------ ------ ------ ------
------ ------ ------ ------
During second year 48,008 36,661 2,025 372
During third year 131,281 39,100 2,025
During fourth year 79,395 126,961 2,025
During fifth year 75,469 39,100 2,025
Beyond fifth year till 2005 136,229 76,805
Without redemption date* 58,553 63,618
------ ------
528,935 382,245 8,100 372
------- ------- ------- -----
------- ------- ------- -----
</TABLE>
* Liabilities pertaining to construction and land sellers.
Note 19 - Liability For Employee Severance Benefits, net
A. The commitments in respect of employee severance pay of the
Company and of its subsidiaries are fully covered by deposits
with severance pay funds, profits and linkage increments
accrued thereon, insurance policies and provisions. With
respect to the major part of the above-mentioned sums, the
Group companies have no rights of withdrawal.
B. Composition
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ -----------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Liability in respect of
employee severance* 7,498 8,155 36 396
Less - amounts funded* 5,136 5,767 436 395
----- ----- --- ---
2,362 2,388 - 1
----- ----- --- ---
----- ----- --- ---
</TABLE>
* Not including the surrender values of insurance policies
for severance pay.
C. A wholly-owned subsidiary is committed to a retirement
arrangement with a widow of an ex-general manager of the
subsidiary. Based on an independent actuary's opinion, a
liability amounting to NIS 2.3 million (December 31, 1996 -
NIS 2.2 million) is included in the balance sheet.
36
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 20 - Contingent Liabilities and Commitments
A. Contingent liabilities
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ -----------------------------
December 31 December 31 December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Guarantees Granted
(a) In respect of dwelling
purchase insurance 265 265 265 265
(b) On behalf of subsidiaries
in respect of -
Performance guarantees 207
Debentures 41,787 49,477
</TABLE>
The guarantees are linked mainly to the consumer price index and partly
to the construction inputs index.
2. An appeal has been lodged with the Supreme Court against a
District Court judgement which had rejected a claim against the
Company and its subsidiary, Naveh Building and Development
Co.Ltd., for brokerage fees of NIS 7 million in respect of the
"Marom Naveh" real estate transaction. In the opinion of legal
counsel, considering the determination of the District Court,
the chances of the success of the appeal are negligible.
Therefore, no provision in respect of this appeal has been
included in the financial statement.
3. Claims have been filed against the Company and subsidiaries, in
the regular course of business, by apartment purchases, alleging
building defects and/or late delivery. There are also 2 claims
for agents' fees. The Company and the subsidiaries do not make
any provisions for repairs and warranties, since the agreement
with the executing contractors provide for the contractors to
indemnify them in respect of such claims.
4. A legal suit has been filed against a subsidiary regarding the
distribution of the profit from a project which was executed in
the years 1981-1985. The plaintiff contends that a partnership,
with which the Company had an agreement, is entitled to receive a
share in the profits in a cumulative amount of NIS 7,582 thousand
as at balance sheet date. The plaintiff, who claims that he is
entitled to one half of the profits of the partnership, is
demanding that the said subsidiary pay him NIS 3,690 plus legal
costs connected with the claim and interest and linkage
increments. The subsidiary has filed a statement of defense
against the said claim in which it denies the facts stated in the
statement of claim. The subsidiary has made no provision in its
books in respect thereto.
37
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 20 - Contingent Liabilities and Commitments (cont'd)
B. Liens
(1) A subsidiary has pledged real estate purchased in 1996 as well
as the assets and anticipated receipts of a project in favor
of a bank (an interested party) in respect of the financing
accompaniment to the project.
(2) Another subsidiary has rights in land in favor of banks to
secure loans received to finance its acquisition. The Company
has also given a dollar linked promissory note in the amount
of NIS 2.9 million as security as well as a bank guarantee in
the amount of NIS 0.58 million linked to the dollar to secure
the performance of its undertaking towards the Israel Lands
Administration to develop the area.
C. Commitments
1. Under the terms of a prospectus for the issue of debentures
(series "B") by a subsidiary as stated in Note 18A.(2) the
Company supplied a bank with debentures out of the
aforementioned issue, in an amount of NIS 375,000 N.V. and
cash of NIS 337,500 linked with terms identical to those of
the debentures. The debentures and cash held by the bank will
be used to ensure regular trading at the stock exchange and
will be reduced proportionately to the repayment of the
debentures. As at December 31, 1997, balances held by the
bank, per the above arrangement, amounted to NIS 290,400
(nominal value) in debentures and NIS 714,000 in cash
(including short-term deposits) (December 31, 1996 - NIS
314,475 nominal value and NIS 867,000, in cash).
2. There are commitments of the Company and subsidiaries in
respect of the purchase of real estate, residential
construction, and development and construction of building
estimated as at balance sheet date at an approximate amount of
NIS 225 million.
3. A subsidiary leased part of a building to the Government of
Israel for a term of 15 years, from the year 1992, with a
right, of the lessee, to shorten the term to 12 years. Annual
lease payments amount to approximately NIS 3,800 thousand.
4. The Company has signed an agreement with a subsidiary
according to which the subsidiary will manage a construction
project for the Company, and will receive a management fee at
a given rate of the sales proceeds. During the current year,
approximately NIS 1,018 thousand (1996 - NIS 609 thousand) was
paid.
5. During 1995, a subsidiary purchased 72% of the rights in 72
dunams of land at a price of approximately NIS 52.2 million
that will be paid by way of construction services.
38
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 21 - Income from Construction and Other Sources
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------------------------- -----------
Year Ended Year Ended Year Ended Year Ended
December 31 December 31 December 31 December 31
1997 1996 1995 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Apartments, stores and land 238,883 196,144 197,334 53,163
Air-conditioning systems and
others 29,056 32,746 36,629
Citrus crop 1,027 1,180 1,579
-------- -------- -------- --------
268,966 230,070 235,542 53,163
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Note 22 - The Company's Equity in the Net Earnings of Investee Companies
<TABLE>
Consolidated The Company
------------------------------------------ ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
The Company's
equity net, in the
earnings of
investee
companies 7,203 13,188 *13,389 61,293 63,954 60,852
Portion of initial
difference
amortized (653) (495) (476) (1,125) (334) (411)
----- ------ ------ ------ ------ ------
6,550 12,693 12,913 60,168 63,620 60,441
----- ------ ------ ------ ------ ------
Includes dividend
received 7,857 8,149 9,338 16,794 12,761 11,172
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
</TABLE>
* In the past, the Company's equity in the earnings and in the net
asset value of two affiliates was based on financial statements of the
affiliates with a time lag of six months. Beginning with the Company's
financial statements of September 30, 1996 the net asset value data of
the affiliates is based on their up-to-date financial statements. As a
result of the elimination of the time lag, the Company's equity in the
earnings of affiliates increased by NIS 2,199 thousand.
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 23 - Income from Investments and Fixed Assets
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------------------ ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gains on
realization of
investments in
investee
companies 10,153 53 62 603 53 62
Gains on sale
of fixed
assets and land (40) 2,789 6,586 21 54
------------ ----------- ----------- ----------- ----------- -----------
10,113 2,842 6,648 603 74 116
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
</TABLE>
Note 24 - Income from Securities, Financing and Other Income
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gains relating to
marketable
securities -
Appreciation
in value 3,188 1,197 425 25 23
Interest from
securities 1,771 1,029 1,450 14 14
----------- ----------- ----------- ----------- -----------
4,959 2,226 1,875 39 37
Interest -
From banks
and others 4,546 3,036 2,754 59 37
From investee
companies 3 750 674
Management
fees 1,538 1,499 2,080 1,948 1,695 1,621
Other income 738 161 1,337
----------- ----------- ----------- ----------- ----------- -----------
11,781 6,922 8,046 2,049 2,482 2,332
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
40
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 25 - Construction and Other Costs
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------------- -----------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
1997 1996 1995 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Apartments, shops and land -
Construction expenses 129,615 103,214 131,922 33,952
Land 34,120 21,388 16,247 5,801
Change in inventories of
apartment and shops 4,847 5,654 (6,177) (1,325)
----------- ----------- ----------- -----------
168,582 130,256 141,992 38,428
----------- ----------- ----------- -----------
Air conditioning systems and others -
Materials and installation* 25,891 26,551 32,899
Change in inventories of
air-conditioning and other equipment 2 3,594 (1,270)
----------- ----------- -----------
25,893 30,145 31,629
----------- ----------- -----------
Citrus crops -
Cultivating and picking expenses 1,268 1,214 1,251
----------- ----------- ----------- -----------
195,743 161,615 174,872 38,428
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
* Including depreciation 676 556 575
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Note 26 - Administrative and General Expenses
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and related
expenses 21,607 22,203 20,444 5,300 5,522 5,038
Directors' fees 875 961 926 267 297 298
Professional services 2,772 2,432 2,835 273 176 262
Office maintenance 3,193 2,935 3,354 929 899 1,020
Other 3,775 2,880 2,919 914 412 514
----------- ----------- ----------- ----------- ----------- -----------
32,222 31,411 30,478 7,683 7,306 7,132
----------- ----------- ----------- ----------- ----------- -----------
Less -
Directors fees
received from
affiliated companies (157) (312) (273)
Participation in
expenses by a
subsidiary (476) (472) (468)
----------- ----------- ----------- ----------- ----------- -----------
32,065 31,099 30,205 7,207 6,834 6,664
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
41
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 27 - Selling and Marketing
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------------------- -----------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
1997 1996 1995 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Salaries and related expenses 1,562 1,327 1,317
Advertising and others 3,433 2,490 2,047 877
----------- ----------- ----------- -----------
4,995 3,817 3,364 877
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Note 28 - Depreciation and Amortization
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation 20,277 18,172 16,440 940 1,234 1,216
Amortization 2,236 1,689 1,616 27 28 28
----------- ----------- ----------- ----------- ----------- -----------
22,513 19,861 18,056 967 1,262 1,244
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Note 29 - Financing Expenses
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
To investee
companies 1,083 3,104 2,813
In respect of
debentures 7,795 4,045 1,261
To banks and
others 16,275 12,428 3,815 19
To income tax
authority 4 7
----------- ----------- ----------- ----------- ----------- -----------
24,074 16,480 5,076 1,083 3,123 2,813
Decrease in value
of securities 36
Interest on
securities (15)
-----------
21
-----------
24,074 16,480 5,076 1,083 3,123 2,834
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
42
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 30 - Taxes on Income
A. Tax under inflationary conditions
The Income Tax Law (Adjustments for Inflation) - 1985, effective
beginning with the 1985 tax year, put into practice measurements of the
results for tax purposes, on a (non-inflationary) basis. The various
adjustments required by the above Law are intended to result in the
taxation based on the real income. This notwithstanding, the adjustment
of the nominal profit according to the tax laws does not always equal
the adjustment for inflation according to the opinions of the Institute
of Certified Public Accountants in Israel. As a result there are
differences between the adjusted profit per the financial statements
and the adjusted profit for tax purposes.
B. Carryforward to coming years of losses and deductions for tax purposes
Carryforward losses to coming years for tax purposes in subsidiary
companies, adjusted for inflation are in the amount of NIS 17,486
thousand as at balance sheet date (December 31, 1996 - NIS 18,925
thousand). Losses from securities that are deductible in the future
years against a real income from marketable securities amount to an
adjusted amount of NIS 15,021 thousand at balance sheet date. (December
31, 1996 - NIS 17,065)
Deductions for inflation of subsidiaries carried forward are in the
amount of NIS 33,217 thousand (December 31, 1996 - NIS 33,423
thousand).
The balances of carryforward losses and the deduction for inflation are
carried forward linked to the changes in the consumer price index as
per the Law mentioned in A above. No deferred taxes have been created
in respect of these carryforwards, with the exception of NIS 7,700
thousand for which deferred taxes were created.
C. Composition:
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Provision for
current year 61,022 38,404 49,002 4,502 735 994
Taxes relating
to prior years 201 91 19 (11) (573)
Deferred taxes,
net (17,691) 4,145 (2,328) 1,538 (1,651) (1,396)
----------- ----------- ----------- ----------- ----------- -----------
43,532 42,640 46,693 6,040 (927) (975)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
43
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 30 - Taxes on Income (cont'd)
D. Final tax assessments for the Company have been received through the
years 1993. Subsidiary companies have received final assessments for
tax years 1987-1996. One subsidiary has not received tax assessments
since inception (1986).
E. The main differences between the theoretical tax on the reported income
and the amount of the provision for taxes actually charged for the
current year:
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Adjusted income before taxes
per statement of earnings 135,347 130,367 133,026 73,527 60,845 58,511
Statutory tax rate (%) 36 36 37 36 36 37
----------- ----------- ----------- ----------- ----------- -----------
Theoretical tax on the
adjusted earnings 48,725 46,932 49,220 26,470 21,904 21,649
Addition (saving) of tax,
from:
Company's equity in the net
earnings of investee companies (2,358) (4,569) (4,778) (21,660) (22,903) (22,363)
Realization of investments
in and gain on issue of
capital by investee companies (1,961) (19) (22) (217) (27) (22)
Expenses not recognized for tax
purposes:
Depreciation and amortization 3,114 2,715 3,643 216 324 316
Others 149 149 386 140 118 118
Inflationary erosion of advance
tax payments 563 1,077 1,051 1 9 30
Income subject to reduced tax
rates (247) (916) (316)
Losses carried forward from
prior years (2,098) (3,086) (805)
Losses for which deferred
taxes were not provided (mainly
from securities) (1,135) 1,226 35
Outside shareholder interest
in joint venture (2) (166) (308)
Other - mainly difference in
inflationary adjustment
principles for financial
reporting purposes and for
tax purposes (1,419) (794) (1,432) 1,090 (341) (130)
Adjustments relating to
prior years 201 91 19 (11) (573)
----------- ----------- ----------- ----------- ----------- -----------
43,532 42,640 46,693 6,040 (927) (975)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
44
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 31 - Related Parties and Interested Parties
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31 December 31
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A. Balance sheet data
Cash, security deposits
and receivables 141,908 77,526 22,669 5,099 2,911 1,618
Loans from banks
and provident funds 151,515 151,196 12,613 10,502 1,118 2,222
Loans from
investee companies -
Creditors - Orchard
cultivation and others 653 386 96 514
Subsidiary -
current account 18,738 31,190
Highest balance during the 40,488 31,190
year
B. Statement of
earnings data
Financing income from
deposits and loans
From investee companies 3 750 674
From banks and others 2,033 2,073 2,743 7 37
Participation of related
parties in general expenses
Other income from
related parties
Management fees 1,538 1,499 2,080 1,948 1,695 1,621
Rent 22,120 14,069 14,742 1,385 1,198 1,254
Financing charges to
related parties
Investee companies 1,050 3,104 2,813
Banks and others 8,903 4,775 2,229
Benefits to an
interested party
employed by the
Company:
Salary and fringe benefits* 1,471 1,387 1,361 1,471 1,387 1,361
Payments to members of
the Board of Directors
(for 8 directors) 267 297 298 267 297 298
</TABLE>
* During the reporting year, the interested party exercised options that
had been granted to him in the past (see Note 32D). The difference
between the exercise price of the options and the value of the shares
received according to the market prices of the shares on the dates of
exercise, amounted to approximately NIS 922 thousand (1996 - difference
in respect of utilization of rights to shares amounted to NIS 97
thousand).
45
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 31 - Related Parties and Interested Parties (cont'd)
C. Trust funds are managed by related parties.
D. Transactions with entities connected with certain banking groups.
The Company was exempted by the Securities Authority, from including
the disclosure of transactions with an interested party, as is required
by the regulations, other than in the case of extraordinary
transactions. In the opinion of Management the transactions with such
banks were effected in the ordinary course of business, at terms and at
prices which are not different than regular market terms and prices.
Note 32 - Private Placement and Issue of Subsidiary
A. Private placement
1. In March 1995, the Company transferred 100% of the shares of Naveh
Building and Development Ltd and 80% of the shares of Gad
Construction Co. Ltd (the remaining 20% were held by Naveh) which
were held by Property and Building Co. Ltd to Hadarim Properties
Ltd. (hereinafter Hadarim), in consideration for the private
placement of 3,281,500 shares of Hadarim of a par value of NIS 1
each at a price of NIS 74.63 per share to Property and Building Co.
Ltd.
2. In connection with the above private placement, Property and
Building Co. has undertaken to indemnify Hadarim for the value of
plots of land of a subsidiary, in respect of which there is a
contract with the Israel Lands Authority, in the event that the
contract will not be extended and the plots will revert to the
authority. In the event that a payment will have to be made to the
Authority, Property and Building Co will pay to Hadarim an amount
which will not exceed NIS 11.1 million. Such amount will be linked
to the cost of living index (of September 1995) and will bear
interest of 8% p.a.
B. Issues by subsidiaries
(1) In the month of March 1996, the subsidiary, Hadarim Properties Ltd.,
effected an issue to the public of registered bonds in the amount of
NIS 49,988,750 (see Note 18.A.1.a). The bonds bear interest of 3.5%
p.a., are linked to the consumer price index and are convertible
until February 8, 2001. 615,625 share purchase option warrants which
are exercisable until February 28, 2000, were also issued to the
public. The proceeds from the public issues amounted to NIS 63,011
thousand.
In addition, 2,072,600 ordinary shares of NIS 1 each were issued to
the shareholders of the subsidiary by way of rights. The proceeds of
this issue amounted to NIS 82,879 thousand.
46
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
B. Issues by subsidiaries (cont'd)
(2) In the month of September 1997, the subsidiary, Bayside Land
Corporation Ltd., effected an issue to the public of registered
bonds in the amount of NIS 130,005,000. The bonds bear interest of
2.5% p.a., are linked to the consumer price index and are
convertible until August 31, 2001.
270,000 share purchase option warrants which are exercisable until
September 20, 1997, were also issued to the public.
The proceeds from the public issues amounted to NIS 125,227
thousand.
C. A security issue by the Company
In May 1996 the Company issued 549,356 ordinary shares of a par value of NIS
1 each, by way of rights to shareholders and by holders of the unquoted
option warrants of the Company.
In addition, the Company issued 7,357 ordinary shares to employees. The net
proceeds of the issues was NIS 79,416 thousand.
D. Share purchase option programs
1. The Company has the following share purchase option programs for its
employees and for the employees of its subsidiaries:
a) A program dated May 19, 1992 for the allotment of 24,996 option
warrants, at no cost, to senior executives of the Company and of
its subsidiaries, for the purchase of up to 24,996 shares of the
Company (of which 7,099 option warrants were allotted to the
Managing Director). One half of the option warrants were
allotted immediately following the date of the program, and the
second half were issued one year thereafter. The options are
exercisable over a three year period, commencing two years after
the date they were allotted. During 1997, the option holders
exercised 24,043 options at an aggregate exercise price of NIS
3,874 thousand (as at balance sheet date). According to the
terms of the program, loans were made available to the employees
holding the options in an aggregate amount of NIS 3,104
thousand (as at balance sheet date). The loans bear interest of
2% and are repayable in three annual installments. As at balance
sheet date, all of the option warrants of this program had been
exercised.
47
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
D. Share purchase option programs (cont'd)
b) A program dated October 5, 1994 for the allotment of 14,860
option warrants, at no cost, to senior executives of the Company
and of its subsidiaries for the purchase of up to 14,860 shares
of the Company (of which 4,250 option warrants were allotted to
the Managing Director). 7,430 option warrants were allotted
immediately following the date of the program and 6,518 option
warrants were allotted one year thereafter. The options are
exercisable after the lapse of two years from the date they
were allotted. The first portion is exercisable within two
years, and the second portion within one year. As at balance
sheet date, the exercise price per option of the first portion
is NIS 269.09 and NIS 219.28 per option of the second portion.
According to a prospectus published on May 31, 1996 for the
issue of rights of the Company, the option holders were granted
rights to purchase 2,144 shares. As at balance sheet date, the
exercise price per right was NIS 145.6. In 1997, 300 option
warrants were exercised as were the rights to purchase 1,142
shares, which produced proceeds aggregating NIS 246 thousand (as
at balance sheet date). The outstanding balance of the option
warrants and rights entitles their holders to purchase 14,650
shares of the Company.
c) A program dated December 4, 1997 for the allotment of 40,140
option warrants, at no cost, to senior executives of the Company
and of its subsidiaries for the purchase of 40,140 shares of the
Company (of these, the Managing Director is entitled to 11,707
option warrants). The options will be allotted in three equal
portions and will be exercisable over a three year period,
commencing two years after the date they were allotted. The
exercise price of the first portion is NIS 241.62 per option.
This price which is linked to the representative exchange rate
of the U.S. dollar of December 2, 1997 represents the average
market price of the Company's shares during the 30 trading days
preceding the date of the program, less 10%. The exercise price
of the second and third portions will be the lower of the above
mentioned exercise price linked to the exchange rate of the U.S.
dollar or the average of the closing market prices in the 7
trading days preceding the date they were granted. Assuming that
all of the as yet unexercised option warrants of the above
described programs will be exercised, all of the shares acquired
under these option programs, represent 0.96% of the Company's
equity and voting rights.
2. Subsidiaries have share purchase option programs as described below:
a) Bayside Land Company Ltd., published two share purchase option
programs for its senior employees, in accordance with
resolutions of the Board of Directors dated October 11, 1994,
and November 12, 1997. The options allotted under both programs
combined entitles their holder to purchase up to 19,388 shares
of Bayside of a par value of NIS 1 each. Assuming that all of
the option warrants still outstanding will be exercised, all of
the shares acquired under these two option programs represent
0.89% of Bayside's share capital.
48
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
D. Share purchase option programs (cont'd)
b) Hadarim Properties Ltd. allotted 8,727 share purchase option
warrants (Series 1) to its employees under a prospectus
published on February 22, 1996. The said subsidiary also
published an option program on January 14, 1998 for the
allotment of 68,307 share purchase option warrants to its senior
employees and to the employees of its subsidiaries. Assuming
that all of the outstanding option warrants allotted under the
above two programs will be exercised, all of the shares
acquired represent 1.06% (0.86% in full dilution) of Hadarim
Properties equity and voting rights.
c) Ispro Israeli Company for building rental, published a share
purchase option program on January 14, 1998 allotting options to
its senior employees to purchase 41,513 of its shares. Assuming
that all of the options allotted will be exercised, the shares
which will thereby be acquired represent 1.3% of Aspro's equity
and voting rights.
Note 33 - Financial Instruments and Risk Management
A. Risk management
As at December 31, 1997 and 1996 the Group had cash and cash equivalents on
deposit with Israeli banks in the amount of NIS 155,202 thousand and NIS
58,376 thousand respectively. Marketable securities of NIS 35,509 thousand
and NIS 34,722 respectively, held by the Group consist mainly of quoted
government bonds, mutual fund certificates and other debentures. The debts
of apartment purchases included in the balance sheet are secured by the
apartments themselves until delivery, which is effected only upon final
payment. Therefore, the Company does not consider itself subject to any
significant risk exposure.
B. Fair value of financial instruments
The Groups' financial instruments consist of non-derivative assets; cash and
cash equivalents, quoted securities, and accounts receivable, and
non-derivative liabilities, short-term credit, accounts payable, loans,
convertible debentures and other liabilities. Because of their nature the
fair value of the financial instruments described above, included in working
capital is the same as the value at which they are stated in the balance
sheet. The fair value of the loans included in other long-term liabilities,
liabilities to banks and provident funds is also close to its value as
stated in the balance sheet, since such financial instruments bear interest
at rates which are close to the going market interest rates. The fair value
of the convertible debentures is given in Note 18A(1). The fair value of
marketable debentures is presented in Note 18A(2).
49
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Values - The Company
A. Balance Sheet
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents 1,504 1,076
Marketable securities 593 584
Trade receivables
Other receivables 4,900 3,509
Building projects under construction and
other inventory 3,357 5,676
----------- -----------
10,354 10,845
----------- -----------
Land 5,348 14,962
----------- -----------
Long term Loans 2,615 1,059
----------- -----------
Investments
In investee and other companies 563,248 500,860
----------- -----------
Fixed Assets
Buildings, land, plantations
and other 10,126 9,160
Less/- Accumulated depreciation 599 454
----------- -----------
9,527 8,706
----------- -----------
Deferred Charges 28 30
----------- -----------
591,120 536,462
----------- -----------
----------- -----------
</TABLE>
50
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Values - The Company (cont'd)
A. Balance Sheet (cont'd)
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Current Liabilities
Advances from purchasers of
apartments and others, net 1,402 9,172
Short-term bank credit 349
Current maturities of long-term liabilities 2,402 8,360
Other payables 32,367 43,746
Proposed dividend 17,000 11,500
----------- -----------
53,171 73,127
----------- -----------
Long-term Liabilities
Liabilities to banks and provident funds 8,100 348
Other long-term liabilities
Liability for employee severance benefits 1
----------- -----------
8,100 349
----------- -----------
Shareholders' Equity 529,849 462,986
----------- -----------
591,120 536,462
----------- -----------
----------- -----------
</TABLE>
51
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Values - The Company (cont'd)
B. Statements of Earnings for the Year Ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income
Rentals and warehousing 7,643 6,827 6,156
From construction 49,084
The Company's equity in the net
earnings of investee companies, net 72,225 86,417 66,690
Gains from investments and fixed assets 1,904 22 103
Income from securities, financing
and other income 2,770 3,603 2,843
------- ------- -------
133,626 96,869 75,792
------- ------- -------
Costs and expenses
Construction 34,669
Administrative, selling and others 8,014 6,340 5,485
Property maintenance (excluding depreciation) 763 733 652
Depreciation and amortization 147 146 150
Property taxes on land 817 864 398
Interest and linkage differences 4,214 9,720 5,313
------- ------- -------
48,624 17,803 11,998
------- ------- -------
Earnings before taxes on income 85,002 79,066 63,794
Taxes on income 5,005 (1,036) (864)
------- ------- -------
Net earnings for the year 79,907 80,102 64,658
------- ------- -------
------- ------- -------
</TABLE>
52
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Value - The Company (cont'd)
C. Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Share Capital Retained Total
capital surplus earnings
------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance as at
January 1, 1995 3,546 11,019 245,427 259,992
Net earnings for the year
ended December 31, 1995 64,658 64,658
Capital surplus from private
placement of shares of a
subsidiary 6,390 6,390
Proposed dividend - 240% (8,500) (8,500)
------- ------- -------- -------
Balance as at
December 31, 1995 3,546 17,409 301,585 322,540
Net earnings for the year
ended December 31, 1996 80,102 80,102
Capital issue 557 71,287 71,844
Proposed dividend - 280% (11,500) (11,500)
------- -------- -------- --------
Balance as at
December 31, 1996 4,103 88,696 370,187 462,986
Net earnings for current year 79,907 79,907
Capital issue 26 3,930 3,956
Proposed dividend - 412% (17,000) (17,000)
------- -------- -------- --------
Balance at December 31,
1997 4,129 92,626 433,094 529,849
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
53
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Value - The Company (cont'd)
D. Share capital (cont'd)
1. Composition
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- -----------------------
Authorized Issued Authorized Issued
---------- ---------- ---------- ----------
NIS NIS NIS NIS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ordinary shares of a par value
of NIS 1 each (registered) -
Listed on the Tel-Aviv
Stock Exchange 6,000,000 4,128,965 6,000,000 4,103,480
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Note 35 - Statements for Incorporation in the Financial Statements of PEC
A. Change in Reporting Principles
The main consolidated financial statements of Property and Building
Corporation Limited and subsidiaries as at December 31, 1997 and for
the year ended at that date are prepared in NIS adjusted for the
changes in the consumer price index, according to the rules set forth
in the opinions of the Institute of Certified Public Accountants in
Israel.
For the purpose of their inclusion in the financial statements of the
ultimate American shareholder of the Company, PEC Israel Economic
Corporation ("PEC"), the Company prepared these special condensed
financial statements ("special statements") which are presented in
accordance with the instructions of PEC (see below).
Up to and including December 31, 1992, for the purpose of inclusion in
the financial statements of PEC, the Company prepared financial
statements in U.S. dollars ("dollars"). These dollar financial
statements were translated into dollar terms in accordance with the
remeasurement principles set forth in Opinion No. 52 of the Financial
Accounting Standards Board of the United States for entities operating
in highly inflationary economies.
The rate of inflation declined significantly in recent years. For this
reason, in 1993 PEC decided that the translation to dollars will be
done in accordance with the principles applied regarding economies
which are no longer considered highly inflationary.
54
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
A. Change in Reporting Principles (cont'd)
These statements were prepared for the purpose of their translation
into dollars and inclusion in the consolidated financial statements of
PEC, according to the instructions of PEC, as follows:
1. The special statements are prepared in nominal NIS.
2. The balances in NIS as at January 1, 1993, were calculated by
the translation to NIS of the non-monetary assets and capital
reserves and surplus as presented in the dollar statements as
at December 31, 1992 according to the exchange rate in effect
at that date ($1 = NIS 2.764).
3. Transactions executed after January 1, 1993 are stated in the
special statements at their original value in nominal NIS.
4. In addition to their being presented according to the
instructions of PEC, the special statements were adjusted to
accounting principles generally accepted in the United States.
5. During 1995 the Company adopted Opinion No. 57 of the
Institute of Certified Public Accountants in Israel whereby
entities under joint control are consolidated on a
proportionate basis. For the purposes of this Note the opinion
has not been implemented. The non-implementation has no effect
on the profits reported in this note.
55
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements
1. Balance Sheet
<TABLE>
<CAPTION>
Consolidated
---------------------------
December 31 December 31
1997 1996
----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents 155,017 55,336
Short-term deposits and loans 1,628 15,760
Marketable securities 35,509 32,454
Trade receivables 20,501 39,544
Other receivables and debit
balances 30,844 24,143
Apartments and other
inventories 5,482 15,051
Building projects under
construction 100,919 53,467
----------- ------------
350,080 235,755
----------- ------------
Land 319,774 321,738
----------- ------------
Long-term Deposits 3,247 1,091
----------- ------------
Investments
In investee companies 102,505 121,735
----------- ------------
Fixed Assets
Buildings, land and other 856,560 675,157
Less/- Accumulated depreciation 113,619 96,850
----------- ------------
742,941 578,307
----------- ------------
Deferred Charges and Other
Assets 65,419 41,383
----------- ------------
1,583,966 1,300,009
----------- ------------
----------- ------------
</TABLE>
56
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements (cont'd)
1. Balance Sheet (cont'd)
<TABLE>
<CAPTION>
Consolidated
----------------------------
December 31 December 31
1997 1996
----------- ----------
<S> <C> <C>
Current Liabilities
Advances from purchasers of
apartments and others, net 11,965 12,873
Credit from banks 28,955 12,252
Current maturities of long-term
liabilities 44,138 46,639
Suppliers and sub-contractors 22,379 31,518
Creditors and credit balances 57,968 55,182
Deferred taxes 105 6,500
Proposed dividend 23,107 16,289
--------- ----------
188,617 181,253
--------- ----------
Long-term Liabilities
Long-term loans 551,475 374,174
Deferred taxes 1,284 1,660
Liability in respect of employee
severance benefits 2,362 2,232
--------- ----------
555,121 378,066
--------- ----------
Minority interest 212,329 184,636
--------- ----------
Receipt on account of option
warrants in a subsidiary 8,665 8,665
--------- ----------
Shareholders' Equity
Share capital 81,312 81,287
Capital surplus 92,684 88,460
Retained earnings 445,238 377,642
--------- ----------
619,234 547,389
--------- ----------
1,583,966 1,300,009
--------- ----------
--------- ----------
</TABLE>
57
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements (cont'd)
2. Statement of Earnings for the Year Ended December 31
<TABLE>
<CAPTION>
Consolidated
-----------------------------
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Income
Rentals and warehousing 135,647 114,593
From construction and other sources 254,702 201,753
The Company's equity in the net
earnings of investee companies 12,435 16,710
Gains on sale of investments and fixed assets 12,652 2,780
Income from securities, financing and others 18,664 20,810
----------- -----------
434,100 356,646
----------- -----------
Cost and expenses
Construction and other costs 176,030 135,188
Administrative, selling and others 36,913 32,123
Property maintenance (excluding depreciation) 11,231 9,598
Depreciation and amortization 14,570 10,854
Property taxes on land 8,510 6,617
Financing(*) 48,699 34,239
----------- -----------
295,953 228,619
----------- -----------
Earnings before taxes on income 138,147 128,027
Taxes on income 23,415 20,324
----------- -----------
Earnings after taxation 114,732 107,703
Less/- Minority interest in earnings 30,136 30,157
----------- -----------
Net earnings 84,596 77,546
----------- -----------
----------- -----------
Earnings Per Share
Primary earnings per share of NIS 1.00 par
value (in NIS) 20.53 19.92
----------- -----------
----------- -----------
Diluted earning per share 19.72 19.58
----------- -----------
----------- -----------
</TABLE>
* A subsidiary engaged in construction work, purchased real estate
rights for construction projects. These investments were financed by
bank loans and by other Group companies, in a total amount of NIS
131 million. The financing expenses relating to such loans, which
amounted to NIS 17,400 thousands during the year ended December 31,
1996, were attributed in these statements to the cost of the real
estate, resulting in an increase in the net earnings for the period
of NIS 11,136 thousands.
58
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements (cont'd)
3. Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Share Capital Retained Total
capital surplus earnings
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Balance as at
January 1, 1996 80,729 16,700 311,596 409,025
Net earnings for the year
ended December 31, 1996 77,546 77,546
Issue of share 558 71,287 71,845
Paid-in capital stock options, net 473 473
Proposed dividend, net - 280% (11,500) (11,500)
-------- ------- -------- ------
Balance as at
December 31, 1996 81,287 88,460 377,642 547,389
Net earnings for the year
ended December 31, 1997 84,596 84,596
Issue of Shares 25 3,930 3,955
Paid in capital options, net 294 294
Proposed dividend, net -412% (17,000) (17,000)
-------- ------- -------- ------
Balance as at
December 31, 1997 81,312 92,684 445,238 619,234
-------- ------- -------- ------
-------- ------- -------- ------
</TABLE>
59
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
C. Adjustment of the nominal historical income to the income for
the purpose of PEC:
<TABLE>
<CAPTION>
Year ended
-----------------------------
December 31 December 31
1997 1996
----------- -----------
<S> <C> <C>
Nominal historical net income as per
the statement of earnings 79,907 80,102
Adjustment of differences relating to
the following items: 1,245 405
Advances from apartment purchasers (195)
Construction work and land (544) (2,677)
The Company's equity in the net earnings
of investee companies 657 (1,355)
Income from investments and fixed assets (1,881) 19
Financing 854 (2,609)
Depreciation and amortization (3,169) (3,287)
Deferred taxes 9,113 8,370
Minority interest in earnings (1,758) (701)
Others 172 (526)
----------- -----------
Net income for the special purpose
statement of earnings 84,570 77,546
----------- -----------
----------- -----------
</TABLE>
60
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Annex - Percentage of Holding in Investee Companies as at December 31, 1997
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Percent of holding (1) Percent of holding (1)
------------------------- --------------------------
Voting Equity Voting Equity
------- ------- ------- -------
% % % %
------- ------- ------- -------
<S> <C> <C> <C> <C>
Subsidiary companies
Bayside Land Corporation Ltd.*(2) 70.58 64.42 71.12 64.87
Hadarim Properties Ltd. (3) 90.00 90.00 90.00 90.00
Naveh Building & Development Ltd. 90.00 90.00 90.00 90.00
"Gad" Building Company Ltd. 90.00 90.00 90.00 90.00
"Ispro" The Israeli Properties
Rental Corp. Ltd. 66.38 66.38 65.26 65.26
Shadar Building Company Ltd. 100.00 100.00 100.00 100.00
Merkaz Herzlia "A" Ltd. 100.00 100.00 100.00 100.00
Merkaz Herzlia "B" Ltd. (4) 100.00 74.16 100.00 74.16
"Hon" Investment and Trust
Company Ltd. 100.00 100.00 100.00 100.00
Property and Building
(Finance 1986) Ltd. 100.00 100.00 100.00 100.00
Aclim 2000 for Ecology Ltd. 100.00 100.00 100.00 100.00
"Gilat" Building and Housing
in Development Areas Ltd. 100.00 100.00 100.00 100.00
Nichsei Nachalat Beit
Hashoeva B.M.(5) 100.00 100.00 50.00 50.00
Em Hamoshavot - Hatzafone
Hachadash 100.00 100.00
Affiliated companies
Science Based Industries
Campus Ltd. 50.00 50.00 50.00 50.00
Mehadrin Ltd. 34.96 34.96 34.96 34.96
Pri - Or Ltd. (6) 12.12 12.12
Bartan Holdings and
Investment Ltd. 30.93 30.93 37.19 37.19
K.B.A Townbuilders Group Ltd. (7) 23.06 23.06 20.59 20.59
</TABLE>
(1) Including shareholding through subsidiaries.
(2) Conversion of the Consolidated Companies will dilute the Companies'
holdings from 53.76% in capital stock and 54.76% in voting.
61
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
Annex - Percentage of Holding in Investee Companies as at December 31, 1997
(3) The conversion of the debentures of the subsidiary will result in
the dilution of the Company's holding therein to 82.86%.
The exercise of the option warrants of the subsidiary together with
the conversion of the debentures will result in the dilution of the
Company's holding to 76.78%.
(4) This shareholding entitles the Company to 97.35% of the profits
distributed by way of cash dividend.
(5) Directly and through the Company A.A. Holdings Ltd.
(6) As to the diluted influence of the Consolidated Employee Option Plan
- See Note 23(D)(2).
Details in respect of the Equity and profits of affiliated companies (not
public companies) based on their last financial statements in NIS thousands.
<TABLE>
<CAPTION>
Equity Profit Total assets
--------------- ------------------------ ---------------
Adjusted values Adjusted values Adjusted values
--------------- ------------------------ ---------------
Before tax After tax
---------- ----------
<S> <C> <C> <C> <C>
K.B.A. Townbuilders Group Ltd. 98,746 42,958 27,273 201,032
Bartan Holdings and Investment
Ltd. 31,275 1,830 1,717 47,943
Science Based Industries
Campus Ltd. 17,795 5,806 3,660 22,398
</TABLE>
62
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
March 10, 1998
Somekh, Chaikin, CPA's
Tel-Aviv
Dear Sirs,
Re: Bayside Land Corporation Ltd.
-----------------------------
We have audited the primary financial statements of Bayside Land Corporation
Ltd. (hereafter - the company) at December 31, 1997 and for the year then ended,
which have been adjusted on the basis of the changes in the consumer price
index, in accordance with the provisions of Opinions of the Institute of
Certified Public Accountants in Israel.
Based on our audits, we issued an unqualified auditors' report, dated March
10, 1998, on the above financial statements.
The attached special condensed financial statements of the company and its
subsidiaries at December 31, 1997 and for the year then ended (the "special
statements") were drawn up in accordance with the instructions of the
company's ultimate American shareholder - PEC Israel Economic Corporation
("PEC"), solely for the purpose of inclusion in PEC's consolidated financial
statements (see note to the special statements).
At the company's request, we hereby report that the special statements are
presented properly, in accordance with the instructions of PEC, as explained
in the note to the special statements.
Sincerely,
Kesselman & Kesselman
<PAGE>
KESSELMAN COOPERS
& KESSELMAN & LYBRAND
certified public
accountants (Isr.)
H0-11288-90008972
March 10, 1998
Naveh Building and Development Limited
Tel-Aviv
Dear Sirs,
Re: Naveh Building and Development Limited
--------------------------------------
We have audited the primary financial statements of Naveh Building and
Development Limited (hereafter - the company) at December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997, which have
been adjusted on the basis of the changes in the consumer price index, in
accordance with the provisions of Opinions of the Institute of Certified Public
Accountants in Israel.
Based on our audits, we issued an unqualified auditors' report, dated March 1,
1997, on the above financial statements.
The attached special condensed financial statements of the company and its
subsidiaries at December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 (the "special statements") were drawn up in
accordance with the instructions of the company's ultimate American shareholder
- - PEC Israel Economic Corporation ("PEC"), solely for the purpose of inclusion
in PEC's consolidated financial statements (see note to the special statements).
At the company's request, we hereby report that the special statements are
presented properly, in accordance with the instructions of PEC, as explained in
the note to the special statements.
Sincerely,
Kesselman & Kesselman
<PAGE>
Tambour Limited and Subsidiaries
Financial Statements
December 31, 1997
<PAGE>
Tambour Limited and Subsidiaries
Financial Statements as at December 31, 1997
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Auditor's Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Balance Sheets--The Company 9
Statements of Income--The Company 11
Statements of Cash Flows--The Company 12
Notes to the Financial Statements 14
Appendix 61
</TABLE>
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tirat HaCarmel, March 6, 1998
REPORT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
TAMBOUR LIMITED
We have audited the accompanying balance sheets of Tambour Ltd. ("the
Company") as at December 31, 1997 and 1996 and the consolidated balance
sheets of the Company and its subsidiaries as at such dates, and the related
statements of income, changes in shareholders' equity, and cash flows, of the
three years in the period then ended, expressed in New Israel Shekels. These
financial statements are the responsibility of the Company's Management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We did not audit the financial statements of certain subsidiaries, whose
assets constitute 10.5% and 9.5% of the total consolidated assets as at December
31, 1997 and 1996, respectively, and whose revenues constitute 7.5% of the total
consolidated revenues for the years ended December 31, 1997 and 1996,
respectively. The financial statements of those subsidiaries were audited by
other auditors whose reports thereon were furnished to us. Our opinion, insofar
as it relates to amounts emanating from the financial statements of such
subsidiaries, is based solely on the said reports of the other auditors.
Furthermore, the data included in the financial statements relating to the net
asset value of the Company's investments in affiliates and to its equity in
their operating results is based on the financial statements of such affiliates,
some of which were audited by other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner
of Auditor's Performance) 1973 and, accordingly, we have performed such
auditing procedures as we have considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference
between generally accepted Israeli auditing standards and auditing standards
generally accepted in the United States. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The above statements have been prepared on the basis of historical cost
as adjusted for the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Condensed statements of the Company in historical values which form the
basis of the adjusted statements appear in Note 21 to the financial
statements.
In our opinion, based on our audit and on the reports of other auditors,
the above mentioned financial statements present fairly, in all material
respects, the financial position of the Company and the consolidated
financial position of the Company and its subsidiaries as at December 31,
1997 and 1996, the results of its operations, the changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with accounting principles generally
accepted in Israel, consistently applied.
Accounting principles generally accepted in Israel differ in certain
respects from accounting principles generally accepted in the United States.
The application of the latter would have affected the determination of
nominal/historical net income (loss) and shareholders' equity to the extent
summarized in Note 23 to the financial statements.
Somekh Chaikin
Certified Public Accountants (Israel)
<PAGE>
Consolidated Balance Sheets as at December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996
----------- ------------
NOTE NIS THOUSANDS NIS THOUSANDS
--------- -------------- --------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 31,409 61,277
Marketable securities 3 52,782 55,806
Accounts receivable--trade 4A 187,115 166,280
Other receivables 4B 26,383 25,895
Bank deposits 5A 17,191 3,561
Inventories 6 105,274 110,875
------- -------
420,154 423,694
------- -------
Investments and long-term assets
Affiliated companies 7B 31,603 21,257
Bank deposits and other receivables 5B 3,545 19,927
Deferred taxes, net 17C 266 189
------- -------
35,414 41,373
Property, plant and equipment 8
Cost 529,169 616,910
Less: Accumulated depreciation 327,097 415,301
------- -------
202,072 201,609
------- -------
Intangible assets and deferred charges 9 1,503 15,045
------- -------
659,143 681,721
------- -------
------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
2
<PAGE>
Tambour Limited and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ------------
NOTE NIS THOUSANDS NIS THOUSANDS
--------- -------------- --------------
<S> <C> <C> <C>
Current liabilities
Bank credits and others 10 26,395 25,211
Accounts payable--trade 11A 39,444 38,611
Other accounts payable 11B 50,729 40,160
Dividend declared 22 44,842 53,494
------- -------
161,410 157,476
------- -------
Long-term liabilities
Long-term debt 12A 3,532 3,926
Convertible debentures of a subsidiary 12B -- 3,089
Liability regarding termination of employee-employer relationship,
net 13 8,008 2,102
Deferred taxes, net 17C 7,511 4,804
------- -------
19,051 13,921
------- -------
Minority interest 37,152 37,100
------- -------
Liens, guarantees contingencies and commitments 15
Shareholders' equity 14
Common stock 97,307 97,307
Paid-in capital 228,742 228,742
Retained earnings 116,588 148,282
------- -------
442,637 474,331
Less: Company shares held by subsidiary 1,107 1,107
------- -------
441,530 473,224
------- -------
659,143 681,721
------- -------
------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
- ----------------------------------------------
JACOB ESHEL--ACTING CHAIRMAN
- ----------------------------------------------
REUBEN SHULSTEIN--DIRECTOR AND GENERAL MANAGER
March 6, 1998
3
<PAGE>
Consolidated Statements of Income for the Year Ended December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 * 1996 1995
---------- ----------- -----------
NOTE NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue from sales 19A 631,134 634,966 594,820
Cost of sales 19B 412,763 418,190 397,284
------- ------- -------
Gross profit 218,371 216,776 197,536
------- ------- -------
Selling and marketing expenses 19C 127,036 110,524 95,111
General and administrative expenses 19D 47,191 41,269 36,875
------- ------- -------
174,227 151,793 131,986
------- ------- -------
Operating income 44,144 64,983 65,550
Finance expenses, net 19E (1,402) (5,745) (2,839)
Other income (expenses), net 19F (804) 1,189 4,031
------- ------- -------
Income before income taxes 41,938 60,427 66,742
Income taxes 17E 14,336 23,785 27,851
------- ------- -------
Net income after income taxes 27,602 36,642 38,891
Equity in income (losses) of affiliated companies,
net 766 30 (653)
Minority interest in subsidiaries' income (1,711) (2,233) (833)
------- ------- -------
Net income from continuing operations 26,657 34,439 37,405
Income from discontinued operations, net 19G 4,956 1,438 --
------- ------- -------
Net income for the year 31,613 35,877 37,405
------- ------- -------
------- ------- -------
Earnings per NIS 1 par value of shares--in NIS:
Primary and diluted earnings per share--continuing
operations 0.44 0.55 0.62
------- ------- -------
------- ------- -------
Primary and diluted earnings per share-- discontinued
operations 0.08 0.04 --
------- ------- -------
------- ------- -------
Primary and diluted earnings per share--net income 0.52 0.59 0.62
------- ------- -------
------- ------- -------
</TABLE>
* Reclassified--See Note 2U.
The accompanying notes and appendix are an integral part of the financial
statements.
4
<PAGE>
Tambour Limited and Subsidiaries
Statement of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
PROCEEDS FROM COMPANY
SHARE ISSUE RETAINED SHARES HELD BY
CAPITAL PREMIUM OF WARRANTS EARNINGS SUBSIDIARIES TOTAL
------------- ------------ ------------- ------------- ---------------- --------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- -------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance as at
December 31, 1994 97,307 203,609 25,133 195,452 -- 521,501
Changes during 1995:
Expiration of warrants -- *25,133 *(25,133) -- -- --
Net income -- -- -- 37,405 -- 37,405
Dividend -- -- -- (23,689) -- (23,689)
------ ------- ------------- ------- ------ -------
Balance as at
December 31, 1995 97,307 228,742 -- 209,168 -- 535,217
Changes during 1996
Net income -- -- -- 35,877 -- 35,877
Dividend** -- -- -- (96,763) -- (96,763)
Company shares held by
subsidiary -- -- -- -- (1,107) (1,107)
------ ------- ------------- ------- ------ -------
Balance as at
December 31, 1996 97,307 228,742 -- 148,282 (1,107) 473,224
Changes during 1997
Net income -- -- -- 31,613 -- 31,613
Dividend *** -- -- -- (63,307) -- (63,307)
------ ------- ------------- ------- ------ -------
Balance at
December 31, 1997 97,307 228,742 -- 116,588 (1,107) 441,530
------ ------- ------------- ------- ------ -------
------ ------- ------------- ------- ------ -------
</TABLE>
- ------------------------
* Net of issue and registration expenses, after tax effect.
** Including dividend declared of NIS 53,494 thousand.
*** Including dividend declared subsequent to the balance sheet date of NIS
44,842 thousand.
The accompanying notes and appendix are an integral part of the financial
statements.
5
<PAGE>
Tambour Limited and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income for the year 31,613 35,877 37,405
Reconciliation of net income to net cash provided by operating
activities (a) 6,400 59,793 29,774
------- ------- -------
Net cash provided by operating activities 38,013 95,670 67,179
------- ------- -------
Cash flows from investing activities:
Acquisition of shares in an affiliated company that becomes a
subsidiary (b) -- (629) (1,081)
Acquisition of shares of newly-consolidated subsidiary (c) -- (47,304) --
Additions to property, plant and equipment (34,694) (42,639) (44,172)
Proceeds from sale of property, plant and equipment 1,941 3,281 2,273
Sales (Purchases) of marketable securities, net 6,008 17,587 (3,944)
Investments in affiliated companies and others (6,106) (239) (800)
Proceeds (Payment) from sale of affiliate (135) -- 159
Loans to affiliated companies -- (7,145) (5,485)
Collections of loans to affiliated companies -- 425 800
Proceeds from sale of operations in subsidiary 42,637 -- --
Long-term bank deposits and other long-term receivables 4,789 81,839 42,268
Long-term bank deposits and long-term debt -- (20,044) (4,673)
Acquisition of shares of subsidiary (7,407) (748) (1,728)
Investment in intangible assets and deferred charges -- (248) --
------- ------- -------
Net cash provided by (used in) investment activities: 7,033 (15,864) (16,383)
------- ------- -------
Cash flows from financing activities:
Dividend distributed (71,959) (43,269) (36,479)
Dividend to minority in subsidiary (713) (10,023) --
Increase (Decrease) in short-term bank credits, net 329 6,877 (3,702)
Receipt of long-term debt 1,235 1,990 1,163
Repayment of long-term debt (3,936) (4,942) (1,720)
Acquisition of company shares by subsidiary -- (1,107) --
Proceeds from redemption of debentures in subsidiary 69 71 --
Premium from the minority 61 -- --
------- ------- -------
Net cash used in financing activities (74,914) (50,403) (40,738)
------- ------- -------
Increase (Decrease) in cash and cash equivalents (29,868) 29,403 10,058
Balance of cash and cash equivalents at beginning of year 61,277 31,874 21,816
------- ------- -------
Balance of cash and cash equivalents at end of year 31,409 61,277 31,874
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
6
<PAGE>
Tambour Limited and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (Cont'd)
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
-------------- -------------- --------------
<S> <C> <C> <C>
(a) Reconciliation of net income to net cash provided by operating
activities
Income and expenses not involving cash flows:
Depreciation and amortization 30,637 34,458 29,188
Deferred taxes, net 3,018 11,320 763
Increase in liability regarding termination of employee - employer
relationship, net 1,224 348 425
Minority interest in earnings of subsidiaries 7,534 3,212 833
Equity in losses (earnings) of affiliated companies, net (766) (30) 653
Income from sale of operations (10,229) -- --
Loss (Gain) on sale of affiliates 2 220 (159)
Capital gains, net (1,223) (973) (1,820)
Erosion of loans and long-term debt, net (175) (1,008) (302)
(Increase) Decrease in value of marketable securities (2,984) (164) 538
Increase in value of bank deposits (1,063) (1,919) (2,959)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable--trade (21,767) 4,525 (19,437)
(Increase) Decrease in other receivables (706) (804) 28,629
(Increase) Decrease in inventories (1,828) 20,674 185
Increase (Decrease) in accounts payable--trade 935 (12,382) (10,581)
Increase in other accounts payable 3,791 2,316 3,818
------- ------- -------
6,400 59,793 29,774
------- ------- -------
------- ------- -------
(b) Acquisition of shares in an affiliated company that became a
consolidated company *:
Assets and liabilities of the affiliated company as at the date of
acquisition (net of cash):
Working capital (net of cash) -- 4,348 13,799
Fixed assets, net -- 1,782 25,660
Deferred charges, net -- -- 695
Long-term liabilities -- -- (1,791)
Deferred Taxes -- 36 --
Goodwill created on acquisition -- 48 857
Minority interest at date of acquisition -- (2,669) (19,047)
------- ------- -------
3,545 20,173
Investment on equity basis as at date of becoming a consolidated
company -- (2,916) (19,092)
------- ------- -------
-- 629 1,081
------- ------- -------
------- ------- -------
</TABLE>
- ------------------------
* As follows:
(1996)- Chemitas (1988) Ltd.
(1995)- Serafon Resinous Chemicals Ltd.
The accompanying notes and appendix are an integral part of the financial
statements.
7
<PAGE>
Tambour Limited and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (Cont'd)
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- -------------- -----------------
<S> <C> <C> <C>
(c) Acquisition of shares in a newly consolidated subsidiary **:
Assets and liabilities of Kedem Chemicals Ltd. as at the date of
acquisition (net of cash):
Working capital (net of cash) -- 35,337 --
Fixed assets, net -- 21,445 --
Intangible assets, net -- 1,062 --
Long term liabilities -- (7,344) --
Goodwill at date of acquisition -- 15,788 --
Minority interest at date of acquisition -- (18,984) --
------ ------- -------
-- 47,304 --
------ ------- -------
------ ------- -------
** See Note 19G
(d) Significant non-cash transactions:
Long-term receivables on sale of fixed assets 666 -- 560
------ ------- -------
------ ------- -------
Fixed assets acquired under credit 1,584 1,170 --
------ ------- -------
------ ------- -------
Minority portion of dividend declared by a subsidiary -- -- 263
------ ------- -------
------ ------- -------
Dividend declared 44,842 53,307 --
------ ------- -------
------ ------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
8
<PAGE>
Tambour Limited
Balance Sheets as at December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996
------------- --------------
NOTE NIS THOUSANDS NIS THOUSANDS
--------- -------------- --------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 6,052 52,077
Marketable securities 3 49,172 55,806
Accounts receivable--trade 4A 99,575 83,934
Other receivables 4B 42,214 35,970
Bank deposits 5A 17,191 3,561
Inventories 6 80,821 73,898
------- -------
295,025 305,246
------- -------
Investments and long-term assets
Subsidiaries and affiliates 7 119,805 106,711
Bank deposits and other receivables 5B 2,600 19,422
------- -------
122,405 126,133
------- -------
Property, plant and equipment 8
Cost 400,323 485,868
Less: Accumulated depreciation 262,402 350,971
137,921 134,897
------- -------
Intangible assets and deferred charges 9 147 189
------- -------
555,498 566,465
------- -------
------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
9
<PAGE>
Tambour Limited and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
NOTE NIS THOUSANDS NIS THOUSANDS
--------- -------------- --------------
<S> <C> <C> <C>
Current liabilities
Bank credits 10 16,155 103
Accounts payable--trade 11A 17,119 11,498
Other accounts payable 11B 29,175 24,224
Dividend declared 22 45,000 53,494
------- -------
107,449 89,319
------- -------
Long-term liabilities
Liability regarding termination of employee--employer relationship, net 13 2,512 1,604
Capital notes issued to subsidiaries 12C 2,065 2,209
Deferred taxes, net 17C 1,942 109
------- -------
6,519 3,922
------- -------
Liens, guarantees, contingencies and commitments 15
Shareholders' equity 14
Share capital 97,307 97,307
Paid-in capital 228,742 228,742
Retained earnings 116,588 148,282
------- -------
442,637 474,331
Less: Company shares held by subsidiary 1,107 1,107
------- -------
441,530 473,224
------- -------
555,498 566,465
------- -------
------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
- ---------------------------------------------
Jacob Eshel-Acting Chairman
- ---------------------------------------------
Reuben Shulstein-Director and General Manager
March 6, 1998
10
<PAGE>
Tambour Limited
Statements of Income for the Year Ended December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
NOTE NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue from sales 19A 440,398 446,279 466,907
Cost of sales 19B 281,833 289,083 300,287
------- ------- -------
Gross profit 158,565 157,196 166,620
------- ------- -------
Selling and marketing expenses 19C 90,164 78,039 77,969
General and administrative expenses 19D 31,700 27,297 27,226
------- ------- -------
121,864 105,336 105,195
------- ------- -------
Operating income 36,701 51,860 61,425
Finance income (expense), net 19E 3,232 (1,659) 213
Other income, net 19F 2,016 3,001 2,157
------- ------- -------
Income before income taxes 41,949 53,202 63,795
Income taxes 17E 13,243 19,961 25,935
------- ------- -------
Net income after income taxes 28,706 33,241 37,860
Equity in earnings (losses) of subsidiaries and
affiliates, net 2,907 2,636 (455)
------- ------- -------
Net income for the year 31,613 35,877 37,405
------- ------- -------
------- ------- -------
Earnings per NIS 1 par value of shares--in NIS: 16
------- ------- -------
------- ------- -------
Primary and diluted earnings per share 0.52 0.59 0.62
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
11
<PAGE>
Tambour Limited
Statements of Cash Flows for the Year Ended December 31
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income for the year 31,613 35,877 37,405
Reconciliation of net income to net cash provided by operating
activities (a) (3,114) 38,147 21,509
------- ------- -------
Net cash provided by operating activities 28,499 74,024 58,914
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (21,999) (28,909) (38,155)
Proceeds from sale of property, plant and equipment 662 1,299 1,092
Sales (Purchases) of marketable securities, net 9,563 7,257 (3,196)
Investments in affiliates and subsidiaries (7,732) (53,866) (3,659)
Proceeds from sale of affiliate -- 21,927 159
Loans to affiliates and subsidiaries (4,707) (9,536) (8,288)
Long-term bank deposit and other long-term receivables -- (20,044) (4,673)
Collections of loans to affiliates and subsidiaries 194 883 5,063
Investment in capital notes of affiliates and subsidiaries -- (22,902) --
Long-term bank deposits and long-term debt 4,559 81,698 42,154
Dividend received from affiliated subsidiaries' companies 913 14,305 --
Investment in intangible assets -- (232) --
------- ------- -------
Net cash used in investment activities (18,547) (8,120) (9,503)
------- ------- -------
Cash flows from financing activities:
Dividend distributed (72,029) (43,269) (36,479)
Increase (Decrease) in short-term bank credits, net 16,052 (40) 127
------- ------- -------
Net cash used in financing activities (55,977) (43,309) (36,352)
------- ------- -------
Increase (Decrease)in cash and cash equivalents (46,025) 22,595 13,059
Balance of cash and cash equivalents at beginning of year 52,077 29,482 16,423
------- ------- -------
Balance of cash and cash equivalents at end of year 6,052 52,077 29,482
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
12
<PAGE>
Tambour Limited
Statements of Cash Flows for the Year Ended December 31 (cont'd)
- --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1997
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- --------------
<S> <C> <C> <C>
(a) Reconciliation of net income to net cash provided by
operating activities
Income and expenses not involving cash flows;
Depreciation and amortization 19,241 22,749 22,812
Deferred taxes, net 1,840 9,783 221
Increase in liability regarding termination of employee -
employer relationship, net 908 227 177
Equity in (earnings) losses of subsidiaries and affiliates,
net (2,907) (2,636) 455
Loss (Gain) on sale of subsidiaries and affiliates -- 220 (159)
Capital gains, net (402) (778) (879)
Erosion of loans and long-term debt, net (266) (521) 409
Increase in value of marketable securities (2,929) (698) (210)
Increase in value of bank deposits (1,063) (1,919) (2,959)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable--trade (15,641) 1,257 (15,791)
(Increase) Decrease in other receivables (5,060) 2,877 22,868
(Increase) Decrease in inventories (6,923) 17,036 (1,562)
Increase (Decrease) in accounts payable--trade 5,621 (8,837) (7,577)
Increase (Decrease) in other accounts payable 4,467 (613) 3,704
--------------- ------ -------
(3,114) 38,147 21,509
--------------- ------ -------
--------------- ------ -------
(b) Non cash transactions:
Dividend Declared 45,000 53,494 --
--------------- ------ -------
--------------- ------ -------
Fixed assets acquired under credit 1,536 1,052 --
--------------- ------ -------
--------------- ------ -------
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
13
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 1--General
Tambour Limited (hereafter "the Company") manufactures and markets a wide
range of paints and coating materials, and is also involved, through its
affiliated and subsidiary companies (hereafter the consolidation or the
group), in detergents and disinfectants for the institutional and retail
markets, in the treatment of water and waste, industrial oils the treatments
of metals and the production of emulsions, polymers additives for the
construction industry and printing inks.
Note 2--Reporting and Accounting Policies
A. Definitions
In these financial statements--
(1) Subsidiary--A company and partnerships whose financial statements are
fully consolidated with those of the Company.
(2) Affiliate--A company other than a consolidated company, including
partnership which is included directly or indirectly, in the Company's
financial statements on the equity basis.
(3) Goodwill--The excess of the cost of an investment
in shares over the adjusted balance sheet value at the date of
acquisition.
(4) Related parties--As defined in Opinion No. 29 of the Institute of
Certified Public Accountants in Israel.
(5) Interested parties--As defined in paragraph 1(1) of the Securities
Law.
(6) Index--The consumer price index published by the Central Statistics
Institute.
B. Financial statements in adjusted values
(1) The Company prepares its financial statements on a historical cost
basis adjusted for changes in the general purchasing power
of the Shekel (Note 21 presents condensed financial statement
data of the Company in nominal values).
(2) The adjusted values of non-monetary assets do not necessarily
represent the value of those assets in the market or to the business,
but rather their cost adjusted for the changes in the general
purchasing power of the Shekel.
(3) In the adjusted financial statements, the words "cost" and "equity"
signify adjusted cost and adjusted equity.
(4) All comparative figures from previous years (including monetary
items) are adjusted to the index of the end of the current year.
14
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
C. Principles of adjustment
(1) The Balance Sheet
Non-monetary items (mainly property, plant and equipment,
inventories, share capital and paid-in capital) have been
adjusted for the changes in the consumer price index from the
month of execution of each transaction to the index published for
the balance sheet month.
Monetary items are presented in the adjusted balance sheet at nominal
value.
The value on equity basis of affiliated and subsidiary companies is
determined on the basis of the adjusted financial statements of those
companies.
Deferred taxes, net, are calculated based on the adjusted data.
(2) Statements of Income
The items of the statements of income were adjusted according to the
changes in the Consumer Price Index as follows:
a. Income and expenses deriving from non-monetary items (such as
depreciation and amortization, changes in inventory, prepaid
expenses and income, etc.) or from provisions included in the
balance sheet (such as severance pay and vacation provision,
etc.), were adjusted according to specific indices together with
adjustment of the balance sheet item.
b. The remaining items of the statement of income (such as sales,
purchases and production costs, etc.), other than the elements
of finance income (expense), have been adjusted according to
indices of the month the transactions were carried out.
c. The equity in the operating results of affiliated companies and
the minority interest of consolidated subsidiaries operating
results, were determined based on the adjusted financial
statements of the respective companies.
d. Finance income (expense), net, which cannot be calculated
separately, is derived from the other elements of the financial
statements. The item contains, inter alia, amounts required to
correct various items in the statement of income for the
inflationary component of the finance expenses incorporated
therein.
e. Income taxes--Current taxes consist of advance payments made
during the year and amounts due at the balance sheet date (or net
of amounts to be refunded as of the balance sheet date). The
advance payments are adjusted on the basis of the index at the
time of each payment, while the amounts due (or refund due) are
not adjusted. Therefore, the current taxes include the expense
resulting from the erosion in value of the payments on account of
income taxes from payment date to the balance sheet date.
Deferred taxes--see Notes 2K and 17C
15
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
C. Principles of adjustment (cont'd)
(3) Statement of Changes in Shareholders' Equity
Dividends declared and paid during the year are adjusted based on the
index of the month of payment. Dividends declared during the year but
not yet paid as of the balance sheet date are not adjusted.
The erosion of a dividend declared during the prior year which pertains
to the period from the beginning of the current year through the date
the dividend was actually paid, is presented as a reduction of the
current year's dividend.
D. Consolidation of the financial statements
(1) The consolidated financial statements include the financial
statements of the Company and its subsidiaries.
A list of the companies whose financial reports are included in the
consolidated financial statements and the extent of ownership and
control of them, appears in the Appendix to the financial statements.
(2) Goodwill represents the excess of acquisition cost of the investment
in subsidiaries over the fair value of the identifiable assets less
the fair value of the identifiable liabilities (after recording
deferred taxes from temporary differences) upon acquisition.
(3) The excess of acquisition cost ascribed to assets and liabilities is
included in the appropriate balance sheet items.
(4) Goodwill is included in the Consolidated Balance Sheet as part of
"Intangible assets and deferred charges" and is amortized on a
straight-line basis over 10 years. Such balances pertaining to
acquisitions prior to 1995 are amortized over five years.
(5) All intercompany balances, transactions and income from intercompany
sales not yet realized outside the group--have been eliminated.
E. Investments in subsidiaries, affiliates and partnerships
(1) Investments in companies and partnerships are included on the equity
basis which, according to management, does not exceed their fair
value.
(2) In calculating the company's share in equity, anticipated losses from
the redemption of convertible securities issued by subsidiaries are
taken into consideration if redemption or conversion is considered
probable. No such losses have been included in these financial
statements since the redemption or conversion of these securities is
not considered probable.
16
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
E. Investments in subsidiaries, affliates and partnerships (cont'd)
(3) Income from sales not yet realized outside the group have been
eliminated.
(4) Amortization of goodwill--see note 2D(4)
F. Cash and cash equivalents
Cash and cash equivalents include short-term deposits in banks for an
original period of up to three months.
G. Inventories
Inventories are carried at the lower of cost or market value. The cost is
determined mainly as follows:
Raw materials and packaging materials--moving average method.
Finished products--based on computed costs of production, including raw
materials, packaging materials, labor and fringe benefits and other
production costs.
Work in progress--based on raw materials plus actual production costs.
H. Allowance for doubtful accounts
The financial statements include allowances for doubtful accounts that
reflect fairly, based upon management's estimation, the losses included
in accounts receivable, the collection of which is doubtful.
The allowance for doubtful accounts is computed mainly at the rate of
8.5% of the open balances of accounts receivable and, in small part
specifically for accounts which are, in management opinion, doubtful.
Accounts receivable that, in management's opinion, are uncollectible, are
written-off.
I. Marketable securities
Short-term marketable securities are presented on the basis of their
market value on the balance sheet date.
The changes in their value are included in the statement of income.
17
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
J. Property, plant and equipment
(1) Property, plant and equipment are presented at cost.
(2) The cost of assets for which an investment grant was
received is reflected net of the amount of the grant.
(3) Improvements are added to the cost of assets, while maintenance and
repair expenses are expenses as incurred.
(4) Depreciation is computed on the straight-line method, based on the
estimated useful lives of the assets.
Annual depreciation rates:
<TABLE>
<CAPTION>
%
---------
<S> <C>
Buildings 5-10
Machinery and equipment 5-20
Motor vehicles 15-20
Computers 20-33
Furniture and office equipment 6-100
Leasehold improvements . 6-20
</TABLE>
(5) Assets leased by capital lease are presented as Company assets at
their normal purchase price (without the financing element), and
depreciated at the accepted rates for such assets. Lease amounts
payable in coming years, after deduction of the inherent finance
element, are included in liabilities. The interest on these amounts
is accrued currently and included in the statement of income.
(6) Land lease from The Israel Land Registry is amortized over the period
of the lease.
(7) Some property, plant and equipment has been reduced to realization
value.
K. Deferred taxes
Companies in the group regulate the tax burden for timing differences of
expense and income items between accounting and income tax purposes,
additions from inventory adjustment and the adjustment element of
depreciable assets not recognized for tax purposes.
The amount deferred each year is computed according to the liabilities
approach at the tax rates that will be applicable upon utilization of the
deferred taxes or upon realization of the tax benefits, as known at the
time of approval of the financial statements by the Board of Directors.
Both the consolidated balance sheet and the balance sheet of the Company
include deferred tax assets, the realization of which is dependent upon
the existence of taxable income in future years. In management's
estimation, these deferred tax assets are realizable in the future.
18
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
K. Deferred taxes (cont'd)
Deferred taxes included in current assets pertain to current items
(inventory, provisions for vacation, etc.). Deferred taxes included in
"Investments and long-term debit balances" and in "Long-term liabilities"
pertain to items that are not current (property, plant and equipment,
liability regarding termination of employee-employer relationship etc.).
The main factors in respect of which deferred taxes are not computed are as
follows:
a. Adjustment amounts for changes in the purchasing power of the Shekel
pertaining to private motor vehicles, under the rules determined by
the Institute of Certified Public Accountants in Israel.
b. Investments in subsidiaries and affiliates, since the Company
intends to hold such investments and not sell them.
c. Timing differences, net, for which a tax asset should be created but
the possibility of realization of the benefit is in doubt.
d. Accumulated losses for tax purposes of a subsidiary.
L. Intangible assets and deferred charges, net
(1) Know-how and patent rights, manufacturing and distribution rights and
foundation costs--are stated at amortized cost and amortized on the
straight-line basis over 5-8 years upon commencement of their
utilization over their anticipated period benefits.
(2) Goodwill of subsidiaries is presented at amortized cost and is
amortized in equal annual installments over 10 years.
(3) Issue costs of convertible debentures of a subsidiary are amortized
in equal annual installments through the date of redemption of the
debentures.
(4) The book value of the intangible assets and deferred charges does not
exceed their economical value as of the balance sheet date.
M. Convertible debentures
Convertible debentures are included based on tests of probability of
conversion, as determined under Opinion No. 53 of the Institute of
Certified Public Accountants in Israel. Convertible debentures whose
conversion is not considered probable are reflected under long-term
liabilities at the value of the liability as of the balance sheet date.
N. Earnings per share
Earnings per share are computed in accordance with Opinion No. 55 of the
Institute of Certified Public Accountants in Israel.
The computation of primary earnings per share takes into account warrants
issued by the Company if their exercise is reasonable according to the
tests provided in the above Opinion.
19
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
N. Earnings per share (cont'd)
Computation of the diluted earnings per share takes into account
convertible securities issued by the Company and by a subsidiary that
were not included in the computation of the primary earnings per share,
if their exercise does not lead to an increase in earnings per share
(anti-dilutive effect).
O. Foreign currency and linkage
(1) Assets (other than securities) and liabilities denominated in or
linked to a foreign currency are stated at the representative
exchange rates published by the Bank of Israel on the balance sheet
date.
Assets (other than securities) and liabilities linked to the
Consumer Price Index are stated at the linkage terms determined for
each balance.
Data on Consumer Price Indices and exchange rates:
<TABLE>
<CAPTION>
December 31 Percentage of Change
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
CPI in points 153.1 143.1 129.4 6.99 10.59 8.10
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
U.S. dollar exchange rate 3.536 3.251 3.135 12.79 3.70 3.88
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
(2) Income and expenses in foreign currency are included in the nominal
statements of income in the relevant line items at the exchange rates
in effect at the time of their occurrence.
(3) Exchange rates and linkage differences occurring as a result of the
adjustment of foreign currency or CPI-linked assets and liabilities,
appear in the nominal statements of income in the relevant line items
upon their occurrence.
P. Financial Instruments
(1) The fair value of financial instruments (bank deposits, long-term
liabilities and the components of working capital except inventory
and deferred taxes) is not materially different from their book value
as of the balance sheet date. Financial instruments are presented at
book value as at the balance sheet date.
(2) Foreign exchange forward contracts--results are included in the
statement of Income as they occur. The amounts of foreign exchange
forward contract during the period of these financial statements is
immaterial.
Q. Liability regarding termination of employee-employer relationship
The liability of the Company and its affiliates and subsidiaries
regarding the termination of employee-employer relationship is covered by
provisions for severance indemnities, deposits in approved pension and
severance funds and managers' insurance policies.
20
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 2--Reporting and Accounting Policies (cont'd)
R. Research and development expenses
Research and development costs are expensed as incurred.
S. Erosion of capital notes
The erosion of unlinked capital notes bearing no interest which were
issued by the Company to subsidiaries or vice versa, is recorded directly
to additional paid-in capital and not to the Statement of Income.
T. Use of estimates
The preparations of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
U. Reclassification--Discontinued Operations
(1) The operations of a subsidiary, Kedem Chemicals Ltd.
(hereafter--Kedem), in the retail detergents field (hereafter -
Fantastik operations) were sold during 1997 (see Note 7E(1)).
In accordance with generally accepted accounting principles, the
Statement of Income figures pertaining to the Fantastik operations
which have been discontinued and are included in the prior year's
comparative figures, have been reclassified to a separate line in the
Consolidated Statement of Income in order to reflect the results of
the group from continuing operations and in order to present the
results of discontinued operations separately (see Note 19G).
The Statement of Income comparative figures have been reclassified
as of January 1996 when control over Kedem was acquired by the
Company.
(2) The comparative figures of industrial and institutional detergents
operations have not been reclassified as a discontinued operation
since Kedem holds a substantial part (49.9%) (the group-- 38.75%) of
the affiliated company that will continue these operations. The
results of these operations will be presented in the coming years in
the line "Equity in income of affiliated companies, net" (see Note
7E(2)).
21
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 3--Marketable Securities
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
Consist of: 1997 1996 1997 1996
------------- ------------- ------------- -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Shares 140 11 140 11
Participation certificates in mutual funds 9,290 9,420 9,290 9,420
Debentures *43,352 46,375 39,742 46,375
------ ------ ------ ------
52,782 55,806 49,172 55,806
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* Includes government convertible debentures in a subsidiary in the amount of
NIS 3,610 thousand deposited in the name of a trustee for the benefit of the
owners of the convertible debentures of the subsidiary. This deposit was
created upon removal of a floating lien on these debentures. Upon payment of
the convertible debentures in 1998, the deposit will be transferred to the
subsidiary's name.
22
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 4--Accounts Receivable--Trade and Others
Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
-------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
A. Trade
Open accounts 129,298 120,134 68,023 61,649
Checks receivable 54,409 46,461 27,569 20,226
Related and interested parties 7,376 4,842 9,440 8,005
Income receivable 7,742 7,285 268 757
------------ ------------ ------------ ------
198,825 178,722 105,300 90,637
Less: Allowances for doubtful accounts 11,710 12,442 5,725 6,703
------------ ------------ ------------ ------
187,115 166,280 99,575 83,934
------------ ------------ ------------ ------
------------ ------------ ------------ ------
B. Others
Advance payments of income taxes less provision 13,733 10,996 8,024 8,121
Advances to suppliers 1,090 718 150 388
Affiliates and subsidiaries 10 27 19,706 14,738
Government institutions 787 196 468 62
Deferred taxes, net (I) 6,566 7,019 4,599 4,606
Employees 98 172 -- 52
Prepaid expenses 2,151 2,472 913 966
Short-term loans (II) -- 766 7,256 5,400
Current maturities of other long-term receivables 424 533 291 401
Other receivables 1,139 2,996 557 1,236
Income receivable 385 -- 250 --
------------ ------------ ------------ ------
26,383 25,895 42,214 35,970
------------ ------------ ------------ ------
------------ ------------ ------------ ------
</TABLE>
(I) See Note 17C
(II) December 31, 1997--in the Company, including a loan to a consolidated
company in the amount of NIS 7,256 thousand, unlinked, at prime less 1%
(December 31, 1996--NIS 4,727 thousand, unlinked, at 15.2% interest p.a.)
23
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 5--Bank Deposits and Other Receivables
Balances on linkage and interest rate basis:
<TABLE>
<CAPTION>
Annual Interest
Rates as of Consolidated The Company
December 31 ---------------------------- ----------------------------
1997 December 31, December 31, December 31, December 31,
% 1997 1996 1997 1996
--------------- ------------- ------------- ------------- -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C> <C>
A. Included in current assets
Current maturities of long-term bank
deposits 17,191 3,561 17,191 3,561
------ ------ ------ ------
------ ------ ------ ------
B. Included in investments and
long-term assets
Deposit in a commercial bank linked to
the index 4.6 8,849 8,752 8,849 8,752
Deposit in a mortgage bank linked to
the index 3.1-5.3 8,342 11,393 8,342 11,393
Other receivables linked to the
index 0-5.1 3,401 3,876 2,891 3,239
Other receivables linked to the
dollar 568 -- -- --
------ ------ ------ ------
21,160 24,021 20,082 23,384
Less--current maturities of bank
deposits 17,191 3,561 17,191 3,561
Current maturities of other
receivables 424 533 291 401
------ ------ ------ ------
3,545 19,927 2,600 19,422
------ ------ ------ ------
------ ------ ------ ------
Maturity Dates:
Second year 901 17,016 552 16,885
Third year 694 395 287 302
Fourth year 395 395 301 302
Fifth year 411 395 316 302
Thereafter 1,144 1,726 1,144 1,631
------ ------ ------ ------
3,545 19,927 2,600 19,422
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
24
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 6--Inventories
Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
-------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------- -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Finished products 45,793 46,646 32,809 28,397
Work-in-process 9,419 5,563 9,374 5,561
Raw material and packing materials 47,315 53,534 36,323 35,626
In transit 2,747 5,132 2,315 4,314
------------ ------------ ------ ------
105,274 110,875 80,821 73,898
------------ ------------ ------ ------
------------ ------------ ------ ------
</TABLE>
Note 7--Subsidiaries and Affiliates
A. Consolidated subsidiaries
<TABLE>
<CAPTION>
The Company
--------------------------
December 31, December 31,
1997 1996
------------ ------------
Adjusted NIS thousands
<S> <C> <C>
Investment on equity basis, loans and capital notes
Balance of investments as at December 31, 1991 16,852 16,852
Additions, at cost 67,384 59,652
Dividend from subsidiaries (15,547) (14,634)
Share in accumulated income net since January 1, 1992 10,181 8,977
Erosion of capital notes 1,507 --
Affiliate that became a consolidated subsidiary 7,802 7,802
Reductions (21,927) (21,927)
Company shares held by subsidiary (1,107) (1,107)
------------ ------------
Balance of investments at end of year (I) 65,145 55,615
Capital notes (II) 23,627 25,278
Long-term loans and debit balances (see C below) 9,086 4,541
------------ ------------
97,858 85,434
------------ ------------
------------ ------------
</TABLE>
(I) Including deferred credit not yet fully amortized--see note 9.
(II) Unlinked, bearing no interest
25
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 7--Subsidiaries and Affiliates (cont'd)
B. Affiliates
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ---------------- ------------- -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Investment on equity basis, loans and capital notes
Balance of investments as at December 31, 1991 10,942 10,942 803 803
Additions at cost (I) 25,982 16,230 11,728 11,728
Share in accumulated loss, net, since 1.1.92 (I) (532) (954) (675) (1,305)
Reductions 258 (157) (157) (157)
------------ ------- ------ ------
Balance at end of year 36,650 26,061 11,699 11,069
Less: affiliate that became a consolidated
subsidiary (23,097) (23,097) (7,802) (7,802)
------------ ------- ------ ------
Balance at end of year 13,553 2,964 3,897 3,267
Capital notes (II) -- 160 -- --
Long-term loans and debit balances (see E below) 18,050 18,133 18,050 18,010
------------ ------- ------ ------
31,603 21,257 21,947 21,277
------------ ------- ------ ------
------------ ------- ------ ------
</TABLE>
(I) Including partnerships.
(II) Unlinked, bearing no interest.
C. Long-term loans and debit balances
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Linked to Linked to Linked to Linked to
Index Index Index Index
0% 5 % 0% 5 %
----------- ----------- ----------- -----------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Consolidated
Long-term loans and debit balances (I) 11,796 6,254 12,998 5,135
----------- ----- ----------- -----
----------- ----- ----------- -----
The Company
Long-term loans and debit balances (I) 20,882 6,254 17,416 5,135
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
(I) No due date
26
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 7--Subsidiaries and Affiliates (Cont'd)
D. Securities listed for trading
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------- ----------------------
Market Carrying Market Carrying
Value Value Value Value
--------- ----------- --------- -----------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Includes share of sub-company traded
on the Tel-Aviv Stock Exchange 48,687 67,010 37,444 56,751
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
E. (1) In September 1997, a subsidiary, Kedem, signed an agreement with a
company in the Unilever group for the sale of a group of products
under the brand name "Fantastik" under which the ownership of the
goodwill, brandnames, know-how, distribution system and part of its
fixed assets and inventory will be transferred to Lever Israel Ltd.
of the Unilever group (hereafter--Lever), for NIS 35 million. Kedem's
activities relating to the "Fantastik" products constituted
approximately 45% of Kedem's overall activities.
Details regarding the income from this discontinued operation -see
Note 19G.
(2) In addition to the aforementioned in paragraph (1) above, on the same
date, the Company and Kedem signed an agreement with Lever to jointly
create a new company -Diverseylever Israel Ltd.
(hereafter--Diverseylever) under which the companies will consolidate
their operations in Israel in the institutional and industrial
chemical, detergent and disinfectant fields. In addition, Lever
Israel Ltd. transferred its operations in this field to
Diverseylever.
Kedem received approximately NIS 13.9 million for the
transfer of operations and related assets (fixed assets and
inventory) to the new company. Upon the conclusion of the agreement,
Kedem holds 49.9% and the Unilever group holds 50.1% of the shares of
Deverseylever. Details regarding the results of the deal--see Note
19F.
F. In September 1997, the courts granted a request to merge the subsidiaries
Italchem Ayalon Ltd and Aniam Purification Systems Ltd. into Chemitas
(1988) Ltd. (hereafter--Italchem, Aniam and Chemitas, respectively).
Other authorizations necessary for the merger were received prior to
that, as follows: the income tax authorities, the Controller of
Restrictive Practices, and the Investment Center. According to the merger
agreement, the merger date is December 31, 1996. In addition, according
to this agreement, the assets and liabilities of Italchem and Aniam would
be transferred to Chemitas in exchange for regular share capital allotted
to the shareholders of the merging companies.
Chemitas' name was changed, after the merger, to Tambour Ecology Ltd.
The effect of the merger, included in the financial statements,
is not material.
27
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 8--Property, Plant and Equipment
A. Consist of:
<TABLE>
<CAPTION>
Machinery Furniture Computers
Land and and and Office and Motor
Buildings Equipment Equipment Peripherals Vehicles Total
---------- ------------ ----------- ----------- ------------ -----------
Adjusted NIS thousands
<S> <C> <C> <C> <C> <C> <C>
Cost:
Balance--January 1, 1997 198,298 343,350 24,287 20,585 30,390 616,910
Additions during the year 8,292 15,071 1,689 2,901 7,421 (1) 35,374
Reductions during the year (339) (96,451) (9,793) (10,869) (4,663) (5) (122,115)
Accrued for decrease in value -- 1,000 -- -- -- (6) 1,000
---------- ------------ ----------- ----------- ----------- -------------
Balance--December 31, 1997 206,251(4) 260,970 16,183 12,617 33,148 529,169
---------- ------------ ----------- ----------- ----------- -------------
---------- ------------ ----------- ----------- ----------- -------------
Accumulated depreciation
and amortization:
Balance--January 1, 1997 109,933 254,694 17,453 17,687 15,534 415,301
Additions during the year 5,211 16,321 1,998 1,110 4,544 29,184
Reductions during the year (128) (92,910) (10,178) (10,869) (3,303) (5)(117,388)
---------- ------------ ----------- ----------- ----------- -------------
Balance--December 31, 1997 115,016 178,105 9,173 7,928 16,775 327,097
---------- ------------ ----------- ----------- ----------- -------------
---------- ------------ ----------- ----------- ----------- -------------
Depreciated balance:
December 31, 1997 (3) 91,235 82,865 6,910 4,689 (2)16,373 202,072
---------- ------------ ----------- ----------- ----------- -------------
---------- ------------ ----------- ----------- ----------- -------------
Depreciated balance:
December 31, 1996 (3) 88,365 88,656 6,834 2,898 (2)14,856 201,609
---------- ------------ ----------- ----------- ----------- -------------
---------- ------------ ----------- ----------- ----------- -------------
</TABLE>
(1) In the company and consolidation, includes advance payments of NIS 1,604
thousand (December 31, 1996--NIS 321 thousand).
(2) Includes depreciated balance of motor vehicles acquired by capital lease in
the amount of NIS 1,283 thousand (December 31, 1996--NIS 747 thousand).
Subsequent to the balance sheet date, motor vehicles were sold to an
affiliate at depreciated cost of NIS 1,095 thousand. At the same time, the
liability, regarding the aforementioned lease, was transferred to the
affiliate.
(3) Includes depreciated balance of leasehold improvements in the amount of NIS
3,777 thousand. (December 31, 1996--NIS 2,567 thousand).
(4) Net of NIS 811 thousand investment grants received by a subsidiary. To
guarantee the terms related to receiving the grant, a lien in favor of the
State of Israel was secured on all the assets for which the grant was
received. If the abovementioned company does not meet the terms related to
the receipt of the grant, it will have to return the amount of the grant
in addition to interest from the date it was received.
(5) Includes the write-off of fully depreciated property, plant and equipment in
the amount of NIS 112,481 thousand.
(6) In a subsidiary, as a result of discontinued operations, see notes 7E and
19G.
28
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 8--Property, Plant and Equipment (cont'd)
The Company
<TABLE>
<CAPTION>
Machinery Furniture Computers
Land and and and Office and Motor
Buildings Equipment Equipment Peripherals Vehicles Total
--------- ----------- ----------- ----------- --------- -----------
Adjusted NIS thousands
<S> <C> <C> <C> <C> <C> <C>
Cost
Balance--January 1, 1997 163,865 274,045 16,843 18,468 12,647 485,868
Additions during the year 5,630 9,913 845 (1) 2,531 3,564 22,483
Reductions during the year -- (86,921) (8,465) (10,869) (1,773) (3) (108,028)
--------- ----------- ----------- ----------- --------- -------------
Balance--December 31, 1997 169,495 197,037 9,223 10,130 14,438 400,323
--------- ----------- ----------- ----------- --------- -------------
--------- ----------- ----------- ----------- --------- -------------
Accumulated depreciation and amortization:
Balance--January 1, 1997 98,580 217,414 12,504 15,976 6,497 350,971
Additions during the year (2) 4,264 10,871 1,315 839 1,910 19,199
Reductions during the year -- (86,921) (8,465) (10,869) (1,513) (3) (107,768)
--------- ----------- ----------- ----------- --------- -------------
Balance--December 31, 1997 102,844 141,364 5,354 5,946 6,894 262,402
--------- ----------- ----------- ----------- --------- -------------
--------- ----------- ----------- ----------- --------- -------------
Depreciated balance:
December 31, 1997 66,651 55,673 3,869 4,184 7,544 137,921
--------- ----------- ----------- ----------- --------- -------------
--------- ----------- ----------- ----------- --------- -------------
Depreciated balance:
December 31, 1996 65,285 56,631 4,339 2,492 6,150 134,897
--------- ----------- ----------- ----------- --------- -------------
--------- ----------- ----------- ----------- --------- -------------
</TABLE>
(1) Includes advance payments of NIS 1,236 thousand (December 31, 1996--NIS 321
thousand).
(2) In both the Company and consolidated figures, includes amortization of land
lease rights in the amount of NIS 26 thousand.
(3) Includes the write-off of fully depreciated property, plant and equipment in
the amount of NIS 106,059 thousand.
B. (1) Part of the land and buildings in the amount of NIS 318 thousand is
registered in the Land Registry Office in the name of a wholly-owned
subsidiary.
(2) NIS 1,273 thousand represents approximately 50,000 sq.m. of land,
registered in the Land Registry in the name of a wholly-owned
subsidiary, leased for a period of 49 years which expires in the year
2,039. Beginning in 1993, these land lease rights are being amortized
over the remaining lease period.
C. For information relating to liens and commitments on property, plant and
equipment, see Note 15.
29
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 9--Intangible Assets, Net
Consists of:
Consolidated
<TABLE>
<CAPTION>
Amortization Amortized Balance
Transfer to Pertaining to ------------------------------
Accumulated Investment Realized December 31, December 31,
Cost Amortization in Affiliates Operations * 1997 1996
--------- ------------- ------------- ------------- --------------- -------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C> <C> <C>
Goodwill, net 15,070 909 2,473 10,367 1,321 14,602
Know-how production and
distribution rights 780 588 -- 38 154 356
Debentures issue cost 165 148 -- -- 1 70
Foundation costs 712 701 -- -- 11 17
--------- ----- ----- ------ ----- ------
16,727 2,346 2,473 10,405 1,503 15,045
--------- ----- ----- ------ ----- ------
--------- ----- ----- ------ ----- ------
</TABLE>
The Company
<TABLE>
<CAPTION>
Amortized Balance
------------------------------------
Accumulated December 31, December 31,
Cost Amortization 1997 1996
----------- --------------- ----------------- -----------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C>
Distribution rights 232 85 147 189
--- --- --- ---
--- --- --- ---
</TABLE>
* See Note 7E.
30
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 10--Bank Credits and Others
Balances on linkage and interest rate basis:
<TABLE>
<CAPTION>
Annual
Interest
Rates as of Consolidated The Company
December 31, ---------------------------- -----------------------------
1997 December 31, December 31, December 31, December 31,
% 1997 1996 1997 1996
-------------- ------------- ------------- ------------- --------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C> <C>
Bank credit in Israeli currency, unlinked 12.5-17.9 1,944 5,723 286 103
Short-term loans unlinked 15.7 2,250 13,909 -- --
Bank credit of foreign currency 3.25 1,578 1,680 -- --
Short-term bank loans, linked to the index 4.35 15,869 -- 15,869 --
Current portion of long-term loans 1,559 647 -- --
Current portion of convertible debentures 2 3,195 3,252 -- --
-------------- ------------- ------------- ------------- --------------
26,395 25,211 16,155 103 --
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
</TABLE>
Note 11--Accounts Payable--Trade and Others
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C>
A. Accounts payable--Trade and services
Open accounts 27,976 26,608 12,485 10,097
Related parties 4,150 1,152 4,459 1,152
Checks payable 7,318 10,851 175 249
------ ------ ------ ------
39,444 38,611 17,119 11,498
------ ------ ------ ------
------ ------ ------ ------
B. Others
Employees including provisions for fringe benefits 22,353 19,945 15,130 13,269
Government institutions 5,357 9,614 3,000 3,206
Affiliated and subsidiary companies -- -- 2,103 1,660
Customer advances 3,931 1,434 3,000 675
Accruals and others 12,724 9,167 5,942 5,414
Accruals for anticipated expenses in connection with
discontinued operations 6,364 -- -- --
------ ------ ------ ------
50,729 40,160 29,175 24,224
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
31
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 12--Long-Term Liabilities
A. Long-term loans*
1. Balances on Linkage and Interest Rate Basis
<TABLE>
<CAPTION>
Annual Interest Consolidated
Rates as of NIS Thousands
December 31, --------------------------------
1997 December 31, December 31,
% 1997 1996
Adjusted NIS Thousands
--------------- --------------- ---------------
<S> <C> <C> <C>
Unlinked Israeli currency debt (I) 926 1,012
Index-linked Israeli currency debt (II) 4.8 1,257 652
Debts in or linked to foreign currencies (III) 7-7.25 1,737 2,233
Capital lease debt--index linked 7-7.2 1,171 676
------- ----- -----
5,091 4,573
Less: current maturities 1,559 647
----- -----
3,532 3,926
----- -----
----- -----
(I) Includes capital notes unlinked bearing no interest,
to minority in the amount of 926 988
----- -----
----- -----
(II) Includes loans linked to the index from minority
in the amount of 1,246 652
----- -----
----- -----
(III) Include loans from related party in the amount of 825 1,269
----- -----
----- -----
</TABLE>
2. Balances by Due Dates
<TABLE>
<CAPTION>
Consolidated
------------------------------
<S> <C> <C>
December 31, December 31,
1997 1996
------------- -------------
Adjusted NIS Thousands
<S> <C> <C>
First year 1,559 647
Second year 490 613
Third year 389 602
Fourth year 167 504
Fifth year--thereafter 314 568
No due date 2,172 1,639
----- -----
5,091 4,573
----- -----
----- -----
</TABLE>
* All loans, except capital lease debt and notes and loans from related
parties, are bank loans.
32
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 12--Long-Term Liabilities (Continued)
B. Convertible debentures of consolidated company
(1) Consists of:
<TABLE>
<CAPTION>
Consolidated
Adjusted NIS Thousands
--------------------------------
<S> <C> <C>
December 31, December 31,
1997 1996
--------------- ---------------
Convertible debentures of a subsidiary* 3,195 6,341
Less: Current maturities--Included in credit from others 3,195 3,252
----- -----
-- 3,089
----- -----
----- -----
* Market value of convertible debentures at their value on the stock exchange 3,128 6,118
----- -----
----- -----
</TABLE>
(2) The convertible debentures were issued by Kedem, in the framework of a
prospectus issued to the public, registered by name, on July 9, 1990.
The debentures' nominal par value of NIS 6,080 thousand, principle
and interest linked to the Consumer Price Index bearing interest at
2% per annual, and mature in 4 equal payments on June 30 of each year
from 1995 through and including 1998. The debentures are convertible
each business day until June 25, 1998, into regular shares of Kedem,
registered by name, NIS 1 par value each, according to a conversion
of NIS 38 par value debentures for each regular share of NIS 1 par
value, adjusted. The balance of convertible debentures par value in
Nominal shekels of December 31, 1997 is NIS 1,430 thousand. Of the
total convertible debentures issued, NIS 40 thousand par value are
held by a subsidiary.
(3) Liens to guarantee payment of the convertible debentures--see
Note 15A(3).
C. Capital notes issued to subsidiaries
unlinked, bearing no interest.
33
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 13--Liability Regarding Termination of Employee - Employer
Relationship, Net
A. Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
Provisions for severance pay 6,455 5,656 4,320 3,969
Liability regarding the termination of employee-
employer relationship resulting from the sale of
major fields of operations of a subsidiary (See B(7)
below) 4,682 -- -- --
Less deposits (5,029) (4,581) (3,708) (3,392)
------ ------ ------ ------
6,108 1,075 612 577
Provision for unutilized sick leave (*) 1,900 1,027 1,900 1,027
------ ------ ------ ------
8,008 2,102 2,512 1,604
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------------------
(*) See C. below
B. (1) The employees of the group, except for a few of the executive staff,
are insured by a comprehensive pension plan. The Company deposits
amounts in a pension fund to secure pension rights to the employees
on retirement.
(2) Pursuant to the agreement between the group and employees, the group
covered its liabilities for severance pay due to each of its employees
for the period from the start of their employment in the Company up to
joining the pension plan by depositing the appropriate amounts due to
each of them, in the severance pay fund accounts in the employee's name.
(3) The group's liabilities for employee severance pay not covered by
the said comprehensive pension plans except for those mentioned in
(1) above, are covered by payments of premiums for management
insurance policies.
(4) In addition to the aforementioned in (1) above, the group deposits
2.33% of the salaries and wages of employees in severance pay funds
in the employees' names.
(5) The deposits and payments mentioned above are not reflected in the
group's financial statements, as they are neither under its control
nor its management.
(6) Other liabilities for severance pay are fully covered by provisions
that are partially covered by deposits in a general fund (see A. above).
34
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 13--Liability Regarding Termination of Employee - Employer
Relationship, Net (cont'd)
(7) As a result of the sale of significant operations of a subsidiary,
the subsidiary signed a special group agreement with the Ashdod Workers
Union and the subsidiary's Workers Union under which the subsidiary's
employees would be entitled to greater severance pay and adjustment
grants in amounts granted according to tenure. The liability of the
subsidiary is covered by an appropriate accrual included mainly in
long-term liabilities as well as in "Accrual for expenses in connection
with discontinued operations" in short-term liabilities.
C. Unutilized sick leave
In accordance with an agreement between the employees and the Company,
employees reaching 55 years of age are entitled to compensation, to the
employee or his heirs, for a number of days for each 30 unutilized sick days
determined by the percentage of utilized days during the period.
The financial statements include a provision, based on management's
estimate, for unutilized sick pay for employees who have reached 60 years of
age, except for a number of employees for whom the accrual has been
calculated from 55 years of age.
The accrual is calculated as explained above because of the uncertainty
that employees who have not yet reached this age will receive this
compensation due to actual utilization of sick days or early retirement.
Note 14--Share Capital and Reserves
A. The share capital consists of:
<TABLE>
<CAPTION>
Authorized Issued and paid for
-------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------- -------------
Number of shares
(thousands)
<S> <C> <C> <C> <C>
Ordinary shares of NIS 1 each 100,000 100,000 60,582 60,582
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
B. The balance of warrants issued in 1993 which were not exercised expired
in February 1995.
35
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 15--Liens, Guarantees, Contingencies and Commitments
A. Liens
(1) Subsidiary companies' loans from banks and debt to automobile leasing
companies in the amount of NIS 1,180 thousand are secured by liens on
motor vehicles.
(2) Commitments of a number of subsidiaries to fulfill the
terms of projects approved by the "Investment Center" are secured
by liens on the machinery and equipment of the approved units of
these companies as well as by a lien on real-estate of a subsidiary
registered for the benefit of The State of Israel.
(3) In October 1997, an agreement was reached between a subsidiary and
the trustee for the convertible debentures of the subsidiary,
whereby, to insure payment of the debentures, the subsidiary would
secure a specific lien on a deposit into which government
debentures would be deposited whose value would be 10% more than
the balance of the convertible debentures and at the same terms.
The balance of this deposit on December 31, 1997 is NIS 3,610
thousand. This lien comes instead of a floating lien of the lowest
level on all the assets of the subsidiary that ensured payment of
the debentures.
(4) A subsidiary's long-term bank loan taken to finance the construction
of a production plant is secured by a lien on all claims pertaining
to this plant including insurance rights.
(5) A subsidiary's bank credit balance is secured by a lien on all the
assets of the Company and its insurance rights for the benefit of
the bank. The balance of this bank credit as of December 31, 1997
is NIS 2,800 thousand.
B. Guarantees
(1) Bank credits and other liabilities of subsidiaries and affiliates in
the maximum amount of approximately NIS 4,700 thousand are guaranteed
by the Company. The balance of these bank credits and other liabilities
as of December 31, 1997 amounted to approximately NIS 2,900 thousand.
(2) The Company has provided guarantees in the ordinary course of its
business and for the benefit of subsidiaries and affiliates in the
approximate amount of NIS 2,000 thousand. Several subsidiaries and
affiliates gave guarantees in the ordinary course of business in the
approximate amount of NIS 7,300 thousand.
(3) The Company has provided a guarantee to a bank for employees' and
sub-contractors loans of approximately NIS 620 thousand.
(4) In June 1997, the district court of Tel-Aviv denied a claim by an
importer to try to import and market products under the "Fantastik"
trademark in Israel.
As a result of this claim, Kedem obligated itself, under the terms of the
agreement regarding the sale of the "Fantastik" product group as detailed in
Note 7E, to compensate the Unilever group, the buyer, in the event of a
future court ruling that would allow the importer use of the "Fantastic"
brand-name in Israel.
The amount of the aforementioned obligation is $9.8 million during the
first year following the signing of the agreement. The amount of the
obligation will decrease by 20% each year for the five years thereafter.
As a guarantee of the terms of the obligation, the Company, Tambour Ltd,
guaranteed 61% of the amount of the obligation. In management's opinion,
based on legal counsel, the chances that this obligation will have to be
fulfilled are very small.
36
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 15--Liens, Guarantees, Contingencies and Commitments
B. Guarantees (cont'd)
(5) The Company provided a guarantee for the benefit of outside
shareholders of a subsidiary for the fulfillment of the shareholders'
agreement. The maximum amount of this guarantee is approximately
$4 million.
(6) The Company guaranteed the monthly rental payments of subsidiaries
and affiliates in the approximate amount of NIS 280 thousand. The total
future liability for which guarantees were given is approximately
NIS 14,400 thousand for the length of the periods of the leases.
C. Contingencies
(1) Various claims are pending against the group, in the total amount of
approximately NIS 1,300 thousand, which have been partly provided for
according to management's estimation, based on legal counsel. In
management's opinion, no further provisions are necessary.
(2) A lawsuit in the amount of NIS 20 million has been filed against
Kedem, 77.66% owned subsidiary, by a customer caused bodily harm by the
subsidiary's product. According to the subsidiary's management, based
on legal counsel, in the event the claim is paid, it will be much
smaller than the amount of the lawsuit and is covered by their
insurance.
(3) Credit Risk--Credit Risk is the maximum loss incurred when one
party to a financial instrument fails to discharge an obligation. The
credit risk to which the Company is exposed as of the balance sheet
date is equal to the book value of its assets.
(4) Director's and key employees' indemnity and insurance--the Company
articles allow for indemnification and insurance of directors and key
employees in accordance with the law. The liability is covered by a
group insurance policy of an interested party.
(5) As a result of a competitor's complaint, which in management's opinion
is unjustified, the Restrictive Trade Practices Controller is
investigating the matter.
D. Commitments
(1) The Company is committed, as of the balance sheet date, to purchase
fixed assets in the approximate amount of NIS 14,000 thousand.
(2) Commitments for the purchase of raw materials are presented as
"Inventory in transit"--see Note 6.
(3) The Company and several of its subsidiaries and affiliates are
required, under various know-how agreements, to pay royalties to those
supplying the know-how.
Such royalties amounted to NIS 841 thousand for the group in 1997
(1996--NIS 2,032 thousand, 1995--NIS 1,005 thousand).
The group is not dependent upon any specific supplier of know-how and no
material damage will be caused in the event of the termination of any
know-how agreement.
37
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 15--Liens, Guarantees, Contingencies and Commitments (cont')
D. Commitments (cont'd)
(4) The Company and several subsidiaries and affiliates entered into
leases for buildings used by them. Most of these leases include an
initial lease period with renewal options for additional periods not
exceeding 10 years in total. The rental payments are linked, mainly, to
the index, and in part, to the dollar. The total liability of the group
for rental payments in future years (based on rental payments in force
on December 31, 1997), is approximately NIS 21,000 thousands.
Note 16--Earnings Per Share
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
Weighted Weighted Weighted
average average average
number of number of number of
shares in shares in shares in
Primary primary Primary primary Primary primary
earnings earnings earnings earnings earnings earnings
-------------- -------------- --------------- -------------- --------------- ---------------
NIS thousands *NIS thousands NIS thousands *NIS thousands NIS thousands *NIS thousands
-------------- --------------- --------------- --------------- --------------- ---------------
Adjusted Adjusted Adjusted
-------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Primary earnings from
continuing
operations 26,657 60,369 35,877 60,529 37,405 60,582
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Primary earnings 31,613 60,369 35,877 60,529 37,405 60,582
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
* Number of shares in nominal NIS thousands.
In order to check the probability of the exercise of the convertible
securities and for the calculations of earnings per share, the present
value is calculated assuming the exercise of the convertible securities
on the last possible date, at Shekel interest rates for securities linked
to the Index, after taxes, of 4% (1996--4.5%; 1995--4.5%).
38
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 17--Taxes on Income
A. "Industrial company"--the Company and its main subsidiaries are industrial
companies under the Encouragement of Industry (Taxes) Law, 1969, and
are entitled to the benefit of accelerated depreciation rates.
B. The provisions for taxes were computed according to the Income Tax Ordinance
(New Version), 1961, and the Income Tax Law (Inflationary Adjustments), 1985.
C. The composition of deferred taxes:
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- ------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------- ------------- ---------------
Adjusted NIS thousands Adjusted NIS thousands
<S> <C> <C> <C> <C>
For property, plant and equipment (10,111) (8,423) (2,934) (416)
For public offering issue expenses, and others 8,878 8,182 5,666 5,343
For tax losses and deductions carried forward 725 3,336 -- --
For inventories (171) (691) (75) (430)
------------ ------ ------ -----
(679) 2,404 2,657 4,497
------------ ------ ------ -----
------------ ------ ------ -----
Included:
In current assets 6,566 7,019 4,599 4,606
In investments and long term assets 266 189 -- --
In long-term liabilities (7,511) (4,804) (1,942) (109)
------------ ------ ------ -----
(679) 2,404 2,657 4,497
------------ ------ ------ -----
------------ ------ ------ -----
</TABLE>
D. Changes in deferred taxes:
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------- ------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------- ------------ ------------- ---------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C>
Balance at beginning of year 2,404 8,815 4,497 9,238
Investment in subsidiary company (65) -- -- --
Affiliate company that became a subsidiary -- 372 -- --
Newly-consolidated subsidiary -- 4,537 -- 5,042
Change in deferred taxes presented in Statement of
income (3,018) (11,320) (1,840) (9,783)
------ ---------- ------ -----
Balance at end of year (679) 2,404 2,657 4,497
------ ---------- ------ -----
------ ----------- ------ -----
</TABLE>
39
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 17--Taxes on Income (cont'd)
E. Income taxes in statements of income
Income taxes in the adjusted statements of income consist of:
<TABLE>
<CAPTION>
Consolidated
-----------------------------------
For the year ended December 31,
-----------------------------------
1997 1996 1995
--------- ------------- ---------
Adjusted NIS thousands
<S> <C> <C> <C>
Provision for current year 11,234 14,045 25,668
Change in deferred taxes, net * 3,018 11,320 763
Taxes relating to previous years (73) 371 1,420
--------- ------ ---------
14,179 25,736 27,851
Presented in net income from discontinued operations, net 157 (1,951) --
--------- ------ ---------
14,336 23,785 27,851
--------- ------ ---------
--------- ------ ---------
</TABLE>
<TABLE>
<CAPTION>
The Company
For the year ended December 31,
-----------------------------------
1997 1996 1995
--------- ------------- ---------
Adjusted NIS thousands
<S> <C> <C> <C>
Provision for current year 11,403 10,178 24,276
Change in deferred taxes, net * 1,840 9,783 221
Taxes relating to previous years -- -- 1,438
--------- ------ ---------
13,243 19,961 25,935
--------- ------ ---------
--------- ------ ---------
* Includes change resulting from decrease in tax rate in the amount of
Consolidated -- -- 126
--------- ------ ---------
--------- ------ ---------
The Company -- -- 122
--------- ------ ---------
--------- ------ ---------
</TABLE>
F. Tax assessments
Final tax assessments have been received by the Company for tax years up
to and including 1994. Consolidated subsidiaries have received final tax
assessments for various years up to and including 1995.
40
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 17--Taxes on Income (cont'd)
G. Effective tax reconciliation
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Adjusted NIS thousands
<S> <C> <C> <C>
Tax rates in effect 36% 36% 37%
--------- --------- ---------
--------- --------- ---------
Consolidated
Theoretical tax at rates in effect 15,098 21,754 24,695
Erosion of tax advances 248 364 824
Tax effect of permanent differences, net 1,479 1,480 2,228
Losses and tax benefits not utilized 941 490 510
Utilization of losses and benefit from previous year (2,274) (1,811) (704)
Differences between the definition of equity and assets for tax purposes and book
purposes and others, net (1,120) 1,137 (1,122)
Taxes for previous years (73) 371 1,420
Offset of losses at regular tax rate by income taxed at lower rate 675 -- --
Deletion of deferred taxes balances (638) -- --
--------- --------- ---------
14,336 23,785 27,851
--------- --------- ---------
--------- --------- ---------
The Company
Theoretical tax at rates in effect 15,102 19,153 23,604
Erosion of tax advances 195 182 783
Tax effect of permanent differences, net 47 656 1,288
Utilization of losses and benefit from previous year (948) (491) (704)
Differences between the definition of equity and assets for tax purposes and others,
net (1,153) 461 (474)
--------- --------- ---------
Taxes for previous years -- -- 1,438
13,243 19,961 25,935
--------- --------- ---------
--------- --------- ---------
</TABLE>
H. Tax--losses carried forward to future years.
(1) The Company has accumulated real losses on securities for tax
purposes in the approximate amount of NIS 26,515 thousand. This loss,
linked to the index, will only be tax-deductible in future years
against income from securities, if they so exist. No deferred taxes
receivable have been recorded for these losses - see Note 2K.
(2) Several subsidiaries have accumulated losses for tax purposes in the
approximate amount of NIS 11,000 thousand (See Note 2K) for which no
deferred taxes receivable have been recorded.
41
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 18--Linked Balances
Consolidated
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ---------------------------------
In or In or
linked linked
to foreign Index to foreign Index
currency linked Unlinked currency linked Unlinked
----------- --------- --------- ----------- --------- ---------
Adjusted NIS thousand
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents 3,840 134 27,435 14,724 -- 46,553
Marketable securities 1,722 31,335 19,725 1,791 25,873 28,142
Other receivables (*) 258 5,636 11,772 483 3,325 12,596
Accounts receivable--trade 12,156 -- 174,959 14,835 -- 151,445
Bank deposits -- 17,191 -- -- 3,561 --
----------- --------- --------- ----------- --------- ---------
17,976 54,296 233,891 31,833 32,759 238,736
Investments and long-term assets
Affiliated companies and others--capital notes and
loans including current maturities -- 18,050 -- -- 18,133 160
Bank deposits and other receivables 568 2,977 -- -- 19,927 --
----------- --------- --------- ----------- --------- ---------
Total assets 18,544 75,323 233,891 31,833 70,819 238,896
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
Current liabilities
Short-term bank credits 2,040 20,150 4,205 1,680 -- 19,632
Accounts payable--trade 12,199 -- 27,245 11,278 1,275 26,058
Other accounts payable 606 61 50,062 628 39 39,493
Dividend declared -- -- 44,842 -- -- 53,494
----------- --------- --------- ----------- --------- ---------
14,845 20,211 126,354 13,586 1,314 138,677
Long-term liabilities
Liability regarding termination of employee-employer
relationship, net -- 2,512 5,496 -- 1,604 498
Long-term loans 1,737 1,795 -- 2,238 1,296 1,039
Convertible debentures -- -- -- -- 6,341 --
----------- --------- --------- ----------- --------- ---------
Total liabilities 16,582 24,518 131,850 15,824 10,555 140,214
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>
(*) Exclusive of deferred taxes and prepaid expenses.
42
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 18--Linked Balances (cont'd)
Company
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ---------------------------------
In or In or
linked linked
to foreign Index to foreign Index
currency linked Unlinked currency linked Unlinked
----------- --------- --------- ----------- --------- ---------
Adjusted NIS thousands
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalent 2,600 -- 3,452 13,939 -- 38,138
Marketable securities 1,722 31,335 16,115 1,791 25,873 28,142
Other receivables (*) 465 27,265 8,972 659 19,866 9,873
Accounts receivable - trade 9,637 -- 89,938 12,087 -- 71,847
Bank deposits -- 17,191 -- -- 3,561 --
----------- --------- --------- ----------- --------- ---------
14,424 75,791 118,477 28,476 49,300 148,000
Investments
Subsidiaries--loans and capital notes, including
current maturities -- 9,086 23,627 -- 4,542 25,278
Affiliated companies and others--capital notes and
loans including current maturities -- 18,050 -- -- 18,010 --
Bank deposits and other receivables -- 2,600 -- -- 19,422 --
----------- --------- --------- ----------- --------- ---------
Total assets 14,424 105,527 142,104 28,476 91,274 173,278
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
Current liabilities
Short-term bank credits -- 15,869 286 -- -- 103
Accounts payable--trade 4,409 -- 12,710 4,205 -- 7,293
Other accounts payable -- -- 29,175 -- -- 24,224
Dividend declared -- -- 45,000 -- -- 53,494
----------- --------- --------- ----------- --------- ---------
4,409 15,869 87,171 4,205 -- 85,114
Long-term liabilities
Liability regarding termination of employee-employer
relationship, net -- 2,512 -- -- 1,604 --
Capital notes issued to subsidiaries -- -- 2,065 -- -- 2,209
----------- --------- --------- ----------- --------- ---------
Total liabilities 4,409 18,381 89,236 4,205 1,604 87,323
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>
(*) Exclusive of deferred taxes and prepaid expenses.
43
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 19--Supplementary Information to the Statements of Income
A. Sales (net of discounts)
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1997 *1996 1995
-------- -------- --------
Adjusted NIS thousands
<S> <C> <C> <C>
Consolidated
Local 561,016 562,875 554,239
Export 70,118 72,091 40,581
-------- -------- --------
631,134 634,966 594,820
-------- -------- --------
-------- -------- --------
Company
Local 378,157 384,473 432,510
Export 62,241 61,806 34,397
-------- -------- --------
440,398 446,279 466,907
-------- -------- --------
-------- -------- --------
B. Cost of sales
Consolidated
Materials 293,190 289,722 289,096
Labor 66,469 59,669 53,442
Other manufacturing expenses 36,458 37,711 35,536
Depreciation and amortization 19,649 23,012 21,702
-------- -------- --------
415,766 410,114 399,776
-------- -------- --------
Decrease (Increase) in inventories of:
Work in process (3,856) 2,850 859
Finished products 853 5,226 (3,351)
-------- -------- --------
(3,003) 8,076 (2,492)
-------- -------- --------
412,763 418,190 397,284
-------- -------- --------
-------- -------- --------
</TABLE>
44
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 19--Supplementary Information to the Statements of Income (cont'd)
B. Cost of sales (cont'd)
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1997 *1996 1995
-------- -------- --------
Adjusted NIS thousands
<S> <C> <C> <C>
Company
Materials 202,920 193,509 213,239
Labor 45,836 44,473 44,321
Other manufacturing expenses 26,375 26,269 28,587
Depreciation and amortization 14,927 17,717 17,783
---------- -------- ---------
290,058 281,968 303,930
---------- -------- ---------
Decrease (Increase) in inventories of:
Work in process (3,813) 2,769 (1,077)
Finished products (4,412) 4,346 (2,566)
---------- -------- ---------
(8,225) 7,115 (3,643)
---------- -------- ---------
281,833 289,083 300,287
---------- -------- ---------
---------- -------- ---------
C. Selling and marketing expenses
Consist of:
Consolidated
Labor 50,903 45,024 37,057
Depreciation and amortization 7,189 8,424 6,171
Advertising 21,470 17,194 16,387
Agents' commissions 5,842 6,784 1,527
Others 37,406 31,158 30,624
Doubtful accounts and bad debt expense 4,226 1,940 3,345
---------- -------- ---------
127,036 110,524 95,111
---------- -------- ---------
---------- -------- ---------
Company
Labor 35,834 33,129 30,331
Depreciation and amortization 3,357 3,862 3,892
Advertising 18,580 14,227 15,086
Others 29,242 24,815 26,045
Doubtful accounts and bad debt expense 3,151 2,006 2,615
---------- -------- ---------
90,164 78,039 77,969
---------- -------- ---------
---------- -------- ---------
</TABLE>
* Consolidated--Reclassified--See Note 2U.
45
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 19--Supplementary Information to the Statements of Income (cont'd)
D. General and administrative expenses
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 * 1996 1995
--------- --------- ---------
Adjusted NIS Thousands
<S> <C> <C> <C>
Consolidated
Labor 28,099 24,509 21,423
Depreciation and amortization 1,669 2,531 1,666
Others 17,423 14,229 13,786
--------- --------- ---------
47,191 41,269 36,875
--------- --------- ---------
--------- --------- ---------
Company
Labor 20,090 16,386 16,800
Depreciation and amortization 957 1,170 1,137
Others 10,653 9,741 9,289
--------- --------- ---------
31,700 27,297 27,226
--------- --------- ---------
--------- --------- ---------
E. Finance income (expense),net
Consist of:
<CAPTION>
For the year ended December 31,
-------------------------------
1997 * 1996 1995
--------- --------- ---------
Adjusted NIS thousands
<S> <C> <C> <C>
Consolidated
Bank credit (1,341) 91 (528)
Long-term loans finance (expense) income (320) (22) (177)
Interest on bank deposits 1,348 1,960 3,637
Gain from marketable securities 3,618 1,929 1,529
Commissions and bank expenses (763) (729) (1,438)
Erosion of monetary items and others, net (5,243) (9,676) (5,862)
--------- --------- ---------
(2,701) (6,447) (2,839)
1,299 702 --
--------- --------- ---------
(1,402) (5,745) (2,839)
--------- --------- ---------
--------- --------- ---------
Company
Bank credit (175) 139 90
Interest on bank deposits 1,065 1,919 3,661
Gain from marketable securities 3,466 1,811 1,529
Commission and bank expenses (150) (120) (703)
Erosion of monetary items and others, net (974) (5,408) (4,364)
--------- --------- ---------
3,232 (1,659) 213
--------- --------- ---------
--------- --------- ---------
</TABLE>
* Consolidated--Reclassified--See Note 2U.
46
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 19--Supplementary Information to the Statements of Income (cont'd)
F. Other income (expenses), net
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 * 1996 1995
--------- --------- ---------
Adjusted NIS thousands
-------------------------------
<S> <C> <C> <C>
Consolidated
Capital gains, net 1,223 973 1,820
Loss from sale of goodwill and fixed
assets to affiliated company **(976) -- --
Profit (Loss) on realization of
investment in affiliated company (2) (220) 159
Commission income 175 104 604
Sundry income 6 1,137 178
Amortization of (goodwill) deferred
credit (1,230) (1,464) 350
Related parties:
Management fees and participation
in expenses -- 91 236
Rental income -- 568 684
--------- --------- ---------
(804) 1,189 4,031
--------- --------- ---------
--------- --------- ---------
Company
Capital gains, net 402 778 879
Profit (Loss) on realization of
investment in affiliated company -- (220) 159
Sundry income 389 1,137 199
Related parties:
Management fees and participation
in expenses 154 169 236
Rental income 1,071 1,137 684
--------- --------- ---------
2,016 3,001 2,157
--------- --------- ---------
--------- --------- ---------
</TABLE>
* Consolidated--Reclassified--See Note 2U. ** Net of expenses related to the
sale and net of amortization of goodwill created upon acquiring Kedem.
For details regarding this sale--see note 7E(2).
G. Income from discontinued operations, net--See note 7E(1) and 2U
Consist of:
<TABLE>
<CAPTION>
For the year ended
December 31,
----------------------
1997 1996
--------- ---------
Adjusted NIS thousands
----------------------
<S> <C> <C>
Capital gain on the sale of goodwill and fixed assets (I) 5,249 --
Results of discontinued operations through the date of sale(II) (293) 1,438
--------- ---------
4,956 1,438
--------- ---------
--------- ---------
</TABLE>
47
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 19- -Supplementary Information to the Statements of Income (con't)
G. Income from discontinued operations, net (cont'd)
(I) The capital gain on the sale of goodwill and fixed assets is
presented net of the tax effect of NIS 2,953 thousand, net of
goodwill created on acquisition that relates to the discontinued
operation and net of the minority interest.
(II) Following are details of the Statement of Income items of the
discontinued operation for the years ended December 31, 1996 and
1997. The Statement of Income items of the discontinued operation for
1996 have been reclassified in the Consolidated Statement of Income
and have been presented as income from discontinued operations.
<TABLE>
<CAPTION>
Fantastik discontinued operations
For the year ended December 31,
---------------------------------
* 1997 1996
----------------- ------------
Adjusted NIS Thousands
<S> <C> <C>
Revenue from sales 29,112 35,950
Cost of sales 18,184 19,728
--------- ---------
Gross profit 10,928 16,222
--------- ---------
Selling and marketing expenses 7,846 8,250
General and administrative expenses 2,592 2,902
--------- ---------
10,438 11,152
--------- ---------
Operating income 490 5,070
Finance expenses, net 1,073 702
--------- ---------
Income before income taxes (583) 4,368
Income taxes (157) 1,951
--------- ---------
Net income after income taxes (426) 2,417
Equity in income (losses) of
affiliated companies, net 133 (979)
--------- ---------
Income (loss) for the period / year (293) 1,438
--------- ---------
--------- ---------
</TABLE>
* From January 1, 1997 until the operation was discontinued--November 1997.
48
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 20--Related Parties
A. The group carries out transactions, in the ordinary course of
business, with entities that are interested parties.
The Securities Authority has exempted the Company from describing
transactions with Clal Israel Ltd., Koor Industries Ltd., I.D.B.
Holdings Ltd., and Leumi Israel Bank Ltd. and the companies held
by them.
Details regarding balances and transactions with related parties and
other interested parties, mainly companies in the Tambour group, are
given in this note as well as in other notes (see also paragraph G.)
B. Balance sheet:
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------- ------------- --------------- -------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C>
(1) Included in assets
Cash and cash equivalents 19,124 31,059 1,531 24,350
------ ------ ----- ------
------ ------ ----- ------
Marketable securities 6,101 6,972 6,101 6,972
------ ------ ----- ------
------ ------ ----- ------
Short-term bank deposits 8,342 -- 8,342 --
------ ------ ----- ------
------ ------ ----- ------
Long-term bank deposits -- 7,836 -- 7,836
------ ------ ----- ------
------ ------ ----- ------
(2) Included in liabilities
Bank credits 4,758 6,543 -- --
------ ------ ----- ------
------ ------ ----- ------
Liability regarding termination of employee-employer
relationship 1,882 1,652 1,882 1,652
------ ------ ----- ------
------ ------ ----- ------
</TABLE>
C. The highest balance of interested parties in current assets
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Adjusted NIS Thousands Adjusted NIS Thousands
<S> <C> <C> <C> <C>
In cash and cash equivalents 32,734 31,059 32,734 24,350
------ ------ ------ ------
------ ------ ------ ------
In accounts receivable--trade and others 5,897 3,599 36,402 28,143
------ ------ ------ ------
------ ------ ------ ------
In bank deposits 15,000 46,099 15,000 46,099
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
49
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 20--Related Parties
D. Transactions (in the normal course of business):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Adjusted NIS Thousands
<S> <C> <C> <C>
Consolidated
Sales 13,677 * 13,947 5,993
--------- --------- ---------
--------- --------- ---------
Purchases and other expenses -- 991 901
--------- --------- ---------
--------- --------- ---------
Finance income 295 235 --
--------- --------- ---------
--------- --------- ---------
Company
Sales 34,416 *29,047 10,288
--------- --------- ---------
--------- --------- ---------
Purchases and other expenses 2,635 2,240 2,987
--------- --------- ---------
--------- --------- ---------
Management fees paid 963 1,101 914
--------- --------- ---------
--------- --------- ---------
Finance income 536 518 391
--------- --------- ---------
--------- --------- ---------
</TABLE>
* Reclassified--See Note 2U.
E. Remuneration of interested parties
<TABLE>
<CAPTION>
Year Ended December 31,
Number -------------------------------
of People 1997 1996 1995
------------- --------- --------- ---------
Adjusted NIS Thousands
<S> <C> <C> <C> <C>
Interested parties employed by the company or on its behalf 1 1,890 1,773 1,862
--------- --------- ---------
--------- --------- ---------
Directors not employed by the company or on its behalf 10 309 385 380
--------- --------- ---------
--------- --------- ---------
</TABLE>
F. On October 6, 1997, Kedem signed two agreements with a consolidated
company, Tambour Ecology Ltd., relating to two deals--for the sale of
the metal treatment operation and the water treatment operation which
includes the sale of goodwill, brand-names, distribution rights, raw
material inventory and finished goods as well as a non-competition
agreement whereby Kedem will not operate in these operations for
five years.
The proceeds from these agreements was approximately NIS 1.3 million
(excluding proceeds from the sale of the inventory). The effect of these
agreements on the results of operations of the group is immaterial.
G. Also see Notes 4, 7, 11, 12, 15 and 19F.
50
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 21--Condensed Nominal Financial Statements of The Company
A. Balance Sheet
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
NIS Thousands
<S> <C> <C>
Current assets
Cash and cash equivalents 6,052 48,675
Marketable securities 49,172 52,161
Accounts receivable--trade 99,575 78,452
Other receivables 42,229 33,963
Bank deposits 17,191 3,328
Inventories 80,613 67,954
------------ ------------
294,832 284,533
------------ ------------
Investments and long-term assets
Subsidiaries and affiliates 107,231 89,926
Bank deposits and other receivables 2,600 18,153
------------ ------------
109,831 108,079
------------ ------------
Property, plant and equipment
Cost 209,339 192,179
Less: Accumulated depreciation 102,823 93,181
------------ ------------
106,516 98,998
------------ ------------
Intangible assets and deferred charges 123 163
------------ ------------
511,302 491,773
------------ ------------
------------ ------------
</TABLE>
51
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)
A. Balance Sheet (cont'd)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
NIS Thousands
<S> <C> <C>
Current liabilities
Bank credits 16,155 96
Accounts payable--trade 17,119 10,747
Other accounts payable 29,175 22,642
Dividend declared 45,000 50,000
------------ ------------
107,449 83,485
------------ ------------
Long-term liabilities
Liability regarding termination of employee-employer relationship, net 2,512 1,499
Capital notes issued to subsidiaries 2,065 2,065
Deferred taxes, net 3,704 2,802
------------ ------------
8,281 6,366
------------ ------------
Shareholders' equity
Share capital 60,582 60,582
Paid-in capital 149,934 149,934
Retained earnings 186,076 192,426
------------ ------------
396,592 402,942
Less: company shares held by subsidiary 1,020 1,020
------------ ------------
395,572 401,922
------------ ------------
511,302 491,773
------------ ------------
------------ ------------
</TABLE>
52
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)
B. Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
NIS Thousands
<S> <C> <C> <C>
Revenue from sales 431,578 401,231 376,446
Cost of sales 266,234 247,523 232,959
--------- --------- ---------
Gross profit 165,344 153,708 143,487
--------- --------- ---------
Selling and marketing expenses 88,067 69,737 62,613
General and administrative expenses 30,887 24,284 21,784
--------- --------- ---------
118,954 94,021 84,397
--------- --------- ---------
Operating income 46,390 59,687 59,090
Finance income, net 16,443 19,500 17,881
Other income, net 2,045 2,956 1,840
--------- --------- ---------
Income before income taxes 64,878 82,143 78,811
Income taxes 12,035 17,111 20,021
--------- --------- ---------
Net income after income taxes 52,843 65,032 58,790
Equity in earnings of subsidiaries and affiliates, net 5,579 6,473 1,004
--------- --------- ---------
Net income for the year 58,422 71,505 59,794
--------- --------- ---------
--------- --------- ---------
</TABLE>
53
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)
C. Statement of shareholders' equity
<TABLE>
<CAPTION>
Company
Proceeds Shares
Paid-in From Issue Retained Held by
Share Capital Capital of Warrants Earnings Subsidiary Total
------------- ------------- -------------- -------------- --------------- --------------
NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands
------------- ------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1995 60,582 134,097 15,837 171,127 -- 381,643
Changes in 1995:
Expiration of warrants -- *15,837 *(15,837) -- -- --
Net income -- -- -- 59,794 -- 59,794
Dividend -- -- -- (20,000) -- (20,000)
------ ------------- ------- ------- ------ -------
Balance as of
December 31, 1995 60,582 149,934 -- 210,921 -- 421,437
Changes in 1996:
Net income -- -- -- 71,505 -- 71,505
Dividend ** -- -- -- (90,000) -- (90,000)
Company shares held by
subsidiary -- -- -- -- (1,020) (1,020)
------ ------------- ------- ------- ------ -------
Balance as of
December 31,1996 60,582 149,934 -- 192,426 (1,020) 401,922
Changes in 1997:
Net income -- -- -- 58,422 -- 58,422
Dividend*** -- -- -- (64,772) -- (64,772)
------ ------------- ------- ------- ------ -------
Balance as of
December 31,1997 60,582 149,934 -- 186,076 (1,020) 395,572
------ ------------- ------- ------- ------ -------
------ ------------- ------- ------- ------ -------
</TABLE>
* Net of issue and registration expenses, after tax affect.
** Includes NIS 50,000 thousands dividend declared (see also Note 22).
*** Includes NIS 44,842 thousands dividend declared subsequent to Balance Sheet
date (see also Note 22).
54
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 22--Subsequent Events
On March 6, 1998 the Company's Board of Directors declared an additional
interim cash dividend distribution of NIS 45,000 thousand which is approximately
NIS 0.74 per NIS 1 par value of shares outstanding on the date declared. The
dividend will be paid on April 28, 1998 and is included in these financial
statements as a dividend declared.
This dividend is included in these financial statements as a dividend
declared. In addition, the Board of Directors decided to recommend to the
shareholders at the General Meeting the interim dividend in the amount of NIS
65,000 thousand as the final dividend of 1997.
Note 23--Consolidated Financial Data Presented According to U.S. GAAP
A. Change in Method of Reporting
In December 1981, the Financial Accounting Standards Board in the U.S.A.
established a new standard for reporting the financial position and results of
operations of foreign subsidiaries in United States (U.S.) consolidated
financial statements (SFAS No. 52). The Israeli subsidiaries and investees of
PEC Israel Economic Corporation (PEC) had been preparing U.S. dollar financial
statements under SFAS No. 52 utilizing the hyper-inflationary economy approach
which essentially retains historical dollar values for non-monetary assets
including long-term investments, property and equipment and equity accounts.
The inflation rate in Israel has steadily declined to the point that the use
of historical dollar accounting as prescribed in SFAS No. 52 may no longer be
appropriate for the translation of accounting (SFAS No. 52), the functional
currency of the Israeli entities was defined as the reporting currency of the
U.S. investor. For the purpose of PEC's investee companies the transition date
for the reporting currency basis was determined to be December 31, 1992.
Consequently, as from January 1, 1993, for U.S. GAAP purposes, this conversion
has been implemented as follows:
(1) Dollar values which had been maintained on an historical accounting
basis (such as land, buildings, machinery and equipment, investments,
etc.) have been translated into NIS at the exchange rate ruling at
December 31, 1992.
(2) Shareholders' equity has been translated on an historical basis.
The treatment of transactions carried out during the year was as follows:
(1) Depreciation of assets converted according to 1. Above was computed
on the new NIS value over the remaining useful lives of the assets.
(2) All other transactions have been presented on the same basis as the
nominal consolidated financial statements. Section B of this note
explains the differences between the nominal NIS financial statements
prepared according to Israeli GAAP and the financial statement data
presented in NIS according to U.S. GAAP for the purposes of PEC.
(3) Deferred taxes associated with the temporary difference that arise
from a change in functional currency when an economy ceases to be
considered highly inflationary, are reflected (as per FASB's EITF
92-8) as an adjustment to the cumulative translation adjustments
component of shareholders' equity.
55
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- -------------------------------------------------------------------------------
Note 23--Consolidated Financial Data Presented According to U.S. GAAP (cont'd)
B. The main differences between the financial statements contained in
Sections C, D and E of this note prepared according to U.S. GAAP and the
financial statements prepared according to Israeli GAAP are as follows:
(1) Warrants issued to employees
Warrants issued to employees free of charge were recorded as an expense
in 1993 in these financial statements in accordance with U.S. GAAP.
The warrants issued to employees were recorded as an expense in the
nominal shekels financial statements in 1994 at the amount which was
taxable to the employees--see Note 13B (5).
The tax effect of this expense is included in the nominal NIS
financial statements in the Statement of Income. For the purposes of
the financial statements contained in this Note, prepared according
to U.S. GAAP, the tax effect is included partially in the Statement
of Income and the remainder is added to paid-in capital.
(2) Reserves in Shareholders' equity
Land, buildings, machinery and equipment were revalued in 1982 and a
capital reserve was created in the nominal financial statements as
permitted by Israeli GAAP. These assets are stated at historical cost
and no capital reserves exist in the financial statements that follow
in accordance with U.S. GAAP.
(3) Deferred credit (negative goodwill)
The consolidated nominal NIS financial statements include a deferred
credit amortized over five to the years, as permitted by Israeli
GAAP. For the purposes of the financial statements contained in this
note, prepared according to U.S. GAAP, property, plant and equipment
have been reduced by the excess cost over the assigned value of net
assets acquired.
(4) Dividends declared
According to Israeli GAAP, dividend from the earnings of a year are
accrued at the end of that year even though they are approved after
that year's end. For the purposes of the financial statements
contained in this note, these dividends have not been accrued since,
according to U.S. GAAP, dividends are reflected as a liability when
declared.
56
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- ----------------------------------------------------------------------------
Note 23--Consolidated Financial Data Presented according to U.S. GAAP
(cont'd)
C. Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
NIS Thousands
Assets
Current assets
Cash and cash equivalents 31,409 57,275
Marketable securities 52,782 52,161
Accounts receivable--trade and others 213,607 180,349
Bank deposits 17,191 3,328
Inventories 104,831 101,790
------------ ------------
419,820 394,903
------------ ------------
Investments and long-term assets
Affiliated companies and others 26,747 20,927
Bank deposits and other receivables 3,545 15,536
Deferred taxes, net 5,333 6,949
------------ ------------
35,625 43,412
------------ ------------
Property, plant and equipment
Cost 330,517 336,256
Less--accumulated depreciation 173,293 187,671
------------ ------------
157,224 148,585
------------ ------------
Intangible assets, net 1,386 14,101
------------ ------------
614,055 601,001
------------ ------------
------------ ------------
</TABLE>
57
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- ----------------------------------------------------------------------------
Note 23--Consolidated Financial Data Presented according to U.S. GAAP
(cont'd)
C. Balance Sheets (cont'd)
<TABLE>
<CAPTION>
December 31, December 31
1997 1996
------------ ------------
<S> <C> <C>
NIS Thousands
Liabilities and Shareholders' Equity
Current liabilities
Bank credits and others 26,395 23,564
Accounts payable--trade and others 90,173 73,626
------------ ------------
116,568 97,190
------------ ------------
Long-term liabilities
Long-term debt 3,532 6,557
Liability regarding termination of employee-employer relationship, net 8,008 1,965
------------ ------------
11,540 8,522
------------ ------------
Minority interest 33,553 30,915
------------ ------------
Shareholders' equity
Share capital 80,561 80,561
Paid-in capital 144,721 144,721
Foreign currency translation adjustment 1,703 1,703
Retained earnings 226,429 238,409
------------ ------------
453,414 465,394
Less: Treasury Stock 1,020 1,020
------------ ------------
452,394 464,374
------------ ------------
614,055 601,001
------------ ------------
------------ ------------
</TABLE>
58
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- ----------------------------------------------------------------------------
Note 23--Consolidated Financial Data Presented according to U.S. GAAP
(cont'd)
D. Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
NIS Thousands
-------------------------------
<S> <C> <C> <C>
Revenue from sales 617,914 570,758 481,997
Cost of sales 389,635 360,492 312,207
--------- --------- ---------
Gross profit 228,279 210,266 169,790
--------- --------- ---------
Selling and marketing expenses 125,294 98,051 76,072
General and administrative expenses 46,347 38,932 30,006
--------- --------- ---------
171,641 136,983 106,078
--------- --------- ---------
Operating income 56,638 73,283 63,712
Financing income, net 13,018 16,556 14,810
--------- --------- ---------
Operating income 69,656 89,839 78,522
Other income, net 1,192 3,289 3,412
--------- --------- ---------
Income before income taxes 70,848 93,128 81,934
Income taxes 14,595 18,126 19,550
--------- --------- ---------
Net income after income taxes 56,253 75,002 62,384
Equity in earnings (losses) of affiliated companies, net (630) 238 (500)
Minority interest in consolidated subsidiaries' income (3,653) (6,555) (1,751)
--------- --------- ---------
Net income from continuing operations 51,970 68,685 60,133
Net income from discontinued operations 5,805 3,735 --
--------- --------- ---------
Net income 57,775 72,420 60,133
--------- --------- ---------
--------- --------- ---------
</TABLE>
59
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1997
- ----------------------------------------------------------------------------
Note 23--Consolidated Financial Data Presented according to U.S. GAAP
(cont'd)
E. Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Foreign Company
Additional Proceeds Currency Shares
Share Paid-in from issue Translation Retained Acquired by
Capital Capital of Warrants Adjustments Earnings Subsidiary
--------- ----------- ----------- ----------- --------- -----------
NIS Thousands
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1995 80,561 131,161 13,560 1,703 175,856 --
In the year 1995:
Expiration of warrant -- *13,560 *(13,560) -- -- --
Net income -- -- -- -- 60,133 --
Cash dividend -- -- -- -- (30,000) --
--------- ----------- ----------- ----- --------- -----------
Balance as of December 31, 1995 80,561 144,721 -- 1,703 205,989 --
In the year 1996:
Net income -- -- -- -- 72,420 --
Cash Dividend -- -- -- -- (40,000) --
Company shares acquired by subsidiary -- -- -- -- -- (1,020)
--------- ----------- ----------- ----- --------- -----------
Balance as of December 31, 1996 80,561 144,721 -- 1,703 238,409 (1,020)
In the year 1997:
Net income -- -- -- -- 57,775 --
Cash Dividend -- -- -- -- (69,755) --
--------- ----------- ----------- ----- --------- -----------
Balance as of December 31, 1997 80,561 144,721 -- 1,703 226,429 (1,020)
--------- ----------- ----------- ----- --------- -----------
--------- ----------- ----------- ----- --------- -----------
</TABLE>
* Net of issue and registration expenses, after tax effect.
60
<PAGE>
Tambour Limited and Subsidiaries
Appendix--Consolidated and Affiliated Companies as of December 31,1997
<TABLE>
<CAPTION>
Percentage of
Control
-------------------
<S> <C>
Consolidated companies
S.D.L. Technology (sol) Ltd. 71.00
S.D.L. partnership 98.55
R.R.E. Rotem Engineering Ltd. 85.00
Gains Properties Ltd. 77.66
Gil--the Israeli Marketing Paint Company* 24.00
Tambour Holdings 1993 Ltd. 100.00
Tambour Ecology Ltd. 66.00
Tambour investments 1996 Ltd. 100.00
Tambourechev. 1997 Ltd. 100.00
Safety Kleen (Israel) Ltd. 59.40
Scliab Laboratories Manufacturing Chemists Ltd. 77.66
Sicca Israel Chemical Enterprises Ltd. 77.66
Tzevah Paint Industries Ltd. 100.00
Tzah--Israeli Printing Inks Ltd. 80.00
R.D. Glaso-Center Ltd. 100.00
Serafon Resinous Chemicals Corp. Ltd.** 56.15
Tovalah Ltd. 100.00
T.P. Developments Establishment 100.00
Cotachem Farben G.M.B.H 100.00
Tambour Paints (Hellas) LLC 100.00
Kedem Chemicals Ltd.** 77.66
Affiliated companies
Diverseylever Israel Ltd. 38.75
Vertigo Robotics Technology Ltd. 37.50
Kne Uvne Marketing (1992) Ltd. 20.00
British Paints L.L.C. 18.15
International Ilios Cotachem S.A. 43.00
Tambour Switzerland 100.00
Partnerships
Kne Ubne Limited Partnership 20.00
</TABLE>
61
<PAGE>
Tambour Limited and Subsidiaries
Appendix - Consolidated and Affiliated Companies as of December 31, 1997
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Control
-------------------
<S> <C>
Inactive Companies
Ayalon Water Purification Ltd. 10.000
Engel-Aniam Ltd. 33.00
Askar Ltd. 100.00
Ecogen Ltd. 77.66
Hamerakeh--Hydrohamer Ltd. 66.00
Tambour polimers Lts. 100.00
Activated Carbon Technologies Ltd. 33.00
Tambourechev Ltd. 100.00
Chemetal Ltd. 100.00
Memberfil Ltd. 50.00
Nad (Investments) Ltd. 100.00
C.T.I. Inks (1983) Ltd. 80.00
Kedem Asset and Investment Management (1991) Ltd. 77.66
Kedem Chemicals Technologies Ltd. 77.66
Tamarin (Marine Paints) Ltd. 100.00
</TABLE>
* 100% ownership and control, in effect.
** Traded on the Tel-Aviv Stock Exchange.
62
<PAGE>
[LETTERHEAD OF ROJANSKY, HALIFI, MEIRI & CO.]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
CANIEL - ISRAEL CAN COMPANY LIMITED
We have audited the Balance Sheets pertaining to Caniel - Israel Can Company
Limited (hereafter the Company) as of December 31, 1997 and 1996 and the
Consolidated Balance Sheets as of same dates, the related Statements of Income
and Statements of changes in Shareholders' Equity as well as the Statements of
Cash Flows - Company's and Consolidated - pertaining to each of the three years
within the period ended on December 31, 1997 . These Financial Statements are
the responsibility of the Company's Management. Our responsibility is to express
an opinion on these Financial Statements based on our audits.
We have not audited the Financial Statements pertaining to Consolidated
Companies, the assets of which accounted for in the consolidation approximate 2%
and 1% of the overall consolidated assets as of December 31, 1997 and 1996,
respectively. The Financial Statements pertaining to these Companies have been
audited by other Certified Public Accountants whose reports were provided to us,
therefore our opinion, as far as it relates to the figures accounted for as to
these Companies, is based on these other Certified Public Accountants' Reports.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors Regulations (Auditor's
Mode of Performance), 1973, and, accordingly we have performed such auditing
procedures as we considered necessary in the circumstances. For purposes of
these financial statements there is no material difference between generally
accepted Israeli auditing standards and auditing standards generally accepted in
the United States. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles applied and significant
estimates made by management as well as evaluating the overall financial
statement presentations. We believe that our audits provide a reasonable basis
for our opinion.
The above Statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israeli currency
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel.
Condensed statements in historical values which formed the basis of the adjusted
statements appear in Notes 22 - 23 to the financial statements.
In our opinion, based on our audit and the reports of other auditors, the above
mentioned financial statements present fairly the financial position - Company's
and consolidated - as of December 31, 1997 and 1996, the results of their
operations, the changes in shareholder's equity and cash flows - Company's and
consolidated - for each of the three years in the period ended December 31,
1997, in conformity with accounting principles generally accepted in Israel,
consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of historical
net income and shareholders' equity to the extent summarized in Note 25 to the
financial statements.
/s/ ROJANSKY, HALIFI, MEIRI & CO.
---------------------------------
Tel-Aviv, March 5, 1998. ROJANSKY, HALIFI, MEIRI & CO.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF ELRON ELECTRONIC INDUSTRIES LTD.
We have audited the accompanying balance sheets of Elron Electronic Industries
Ltd., (the "Company") as of December 31, 1997 and 1996, the consolidated balance
sheet of the Company and its subsidiary as of December 31, 1997, the related
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1997, 1996 and 1995, the consolidated statement of income and the
consolidated statement of cash flows for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel and the United States, including those prescribed by the Auditors'
(Mode of Performance) Regulations (Israel), 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company and consolidated as of
December 31, 1997 and 1996 and the results of operations, shareholders' equity
and cash flows of the Company and consolidated for the years ended December 31,
1997, 1996 and 1995, in conformity with accounting principles generally accepted
in Israel (as to reconciliation to accounting principles generally accepted in
the United States - see Note 2L).
Luboshitz, Kasierer & Co. Ratzkovsky Fried & Co.
Member Firm of Arthur Andersen Certified Public Accountants (Israel)
Haifa, Israel
March 9,1998
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
OF
GENERAL ENGINEERS LIMITED
We have audited the accompanying balance sheets of General Engineers Limited
("the Company") as of December 31, 1997 and 1996 and the statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997, expressed in New Israel Shekels. These financial
statements are the responsibility of the board of directors and management of
the Company. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors' Regulations
(Auditor's Mode of Performance), 1973, and accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material differences between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to an error in the financial
statements or to anything misleading therein. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the board of directors and management of the
Company, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a fair basis for our opinion.
The above financial statements were prepared on the historical cost basis
adjusted for changes in the general purchasing power of the Israeli currency
according to Opinions of the Institute of Certified Public Accountants in
Israel. Condensed financial statements in nominal values, on the basis of which
the adjusted financial statements were prepared, are presented in Note 14 to the
financial statements.
In our opinion, based on our audits, the abovementioned financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1996, the results of its operations, the changes in
its shareholders' equity and the cash flows for each of the three years in the
period ended December 31, 1997, in conformity with accounting principles
generally accepted in Israel, consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of historical
net income and shareholders' equity to the extent summarized in Note 15 to the
financial statements.
/s/ Braude Bavly
- -------------------------
Braude Bavly
Tel Aviv, February 12, 1998
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
GILAT COMMUNICATIONS LTD.
We have audited the consolidated balance sheets of Gilat Communications Ltd.
(the "Company") and its subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of Israsat International
Communications Ltd. (a wholly-owned subsidiary; through June 30, 1997 - a
proportionately consolidated company, see also note 2), whose assets, included
in consolidation, constitute approximately 3.3%; and 7.9% of total consolidated
assets as of December 31, 1997 and 1996, respectively, and whose revenues,
included in consolidation, constitute approximately 28.2%; 13.5% and 20.4% of
total consolidated revenues for the years ended December 31, 1997, 1996 and
1995, respectively. Those financial statements were audited by other independent
auditors, whose report has been furnished to us and our opinion, insofar as it
relates to amounts included for this company, is based solely on the report of
the other independent auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, either due to error or to intentional
misrepresentation. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Company's Board of Directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits and the
report of the other independent auditors provide a fair basis for our opinion.
In our opinion, based upon our audits and the report of the other independent
auditors referred to above, the aforementioned financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the results of
their operations, the changes in shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles ("GAAP") in Israel (as applicable
to these financial statements, Israeli GAAP and U.S. GAAP are practically
identical in all material respects, except as described in note 14).
/s/ Kesselman & Kesselman
-----------------------------------
Tel-Aviv, Israel Kesselman & Kesselman
February 9, 1998 Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
GILAT SATELLITE NETWORKS LTD.
We have audited the consolidated balance sheets of Gilat Satellite Networks Ltd.
(the "Company") and its subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
In 1996, following the merger of the Company and Skydata, Inc. ("Skydata"),
which was accounted for as a pooling of interests, the consolidated financial
statements for all years prior to the merger were restated (see note 2). We did
not audit the financial statements of Skydata for the years ended December 31,
1997, 1996 and 1995. The assets of Skydata at December 31, 1997 and 1996
constitute approximately 3.8% and 5.7%, respectively, of total consolidated
assets, and its sales for the years ended December 31, 1997, 1996 and 1995
constitute approximately 16.7%, 28.6% and 23.5%, respectively, of total
consolidated sales. The financial statements of Skydata were audited by other
independent auditors, whose report has been furnished to us, and our opinion,
insofar as it relates to amounts included for Skydata, is based solely on the
report of the other independent auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement, either due to error or to intentional
misrepresentation. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Company's Board of Directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits and the
report of the other independent auditors provide a fair basis for our opinion.
In our opinion, based upon our audits and the report of the other independent
auditors referred to above, the aforementioned financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the results of
their operations, the changes in shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles in Israel and in the United
States (as applicable to these financial statements, such accounting principles
are practically identical).
/s/ Kesselman & Kesselman
-----------------------------------
Tel-Aviv, Israel Kesselman & Kesselman
February 26, 1998 Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
AUDITORS' REPORT
To the shareholders of
KLIL INDUSTRIES LIMITED
We have audited the financial statements of Klil Industries Limited (hereafter -
the company) and the consolidated financial statements of the company and its
subsidiary: balance sheets as of December 31, 1997 and 1996, and statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the company's board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of the associated company, the
company's share in the equity of which as of December 31, 1997 and 1996 amounts
to adjusted NIS 270,000 and adjusted NIS 360,000, respectively, and the
company's share in the losses of which amounts in 1997 to adjusted NIS 90,000;
1996 adjusted NIS 81,000. Those statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to
amounts included for the foregoing company, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors (Mode of Performance)
Regulations, 1973. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement, either due to error or to ententional misrepresentation.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the company's
board of directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect the changes in the general purchasing power
of Israeli currency, in accordance with Pronouncements of the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data
of the company, on the basis of which its adjusted financial statements were
prepared, are presented in note 12.
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN COOPERS & LYBRAND]
In our opinion, based upon our audits and the reports of the other auditors
referred to above, the aforementioned financial statements present fairly, in
all material respects, the financial position - of the company and
consolidated - as of December 31, 1997 and 1996 and the results of operations,
changes in shareholders' equity and cash flows - of the company and consolidated
- - for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the abovementioned financial statements have been prepared in accordance with
the Securities (Preparation of Annual Financial Statements) Regulations, 1993.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net income and shareholders' equity to the extent summarized
in note 13.
/s/ Kesselman & Kesselman
- -------------------------
Kesselman & Kesselman
Haifa, Israel
March 3, 1998
<PAGE>
605 Third Avenue
New York, NY 10158-0142
TEL 212 599-0100
FAX 212 370-4520
Grant Thornton
GRANT THORNTON LLP
Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Level 8 Systems, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Level 8 Systems, Inc.
and Subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit. The financial
statements of Level 8 Systems, Inc. and Subsidiaries as of and for each
of the two years ended December 31, 1996, were audited by other
auditors whose report dated January 31, 1997, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Level 8 Systems, Inc. and Subsidiaries as of December 31, 1997, and
the consolidated results of their operations and their consolidated
cash flows for the year then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 23,1998 (except for Note N, as to which
the date is February 27, 1998)
<PAGE>
JUNGERMAN, GILBOA, SILBER
CERTIFIED PUBLIC ACCOUNTANTS (ISR.)
DAVID GILBOA C.P.A. (ISR.)
KOBI SILBER C.P.A. (ISR.)
AUDITORS' REPORT TO THE SHAREHOLDERS
OF
LIRAZ SYSTEMS LIMITED
We have audited the accompanying balance sheet of Liraz Systems Limited
(hereinafter - "the Company") as of December 31, 1997, and 1996 and the
Consolidated Balance Sheets as of these dates, and the Statements of Operations,
Statement of changes in Shareholders' Equity and Statement of Cash Flows of the
Company and consolidated - for each of the three years ended December 31, 1997.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements on the basis of our examination.
We did not audit the financial statements of consolidated companies, whose
assets constitute approximately 48.1% and approximately 60.9% of total
consolidated assets as of December 31, 1997 and 1996 respectively, and whose
revenues constitute approximately 48.6%, 60.6% and 50.6% of total consolidated
revenues for the year ended December 31, 1997, 1996 and 1995 respectively. The
financial statements of these companies were audited by other auditors, whose
reports were furnished to us, and our opinion, insofar as it relates to the
amounts included in respect of these companies, is based on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance) -1973. These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The aforementioned financial statements have been prepared on the basis of
historical cost convention, adjusted to reflect changes in the general
purchasing power of the Israel currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel. Condensed nominal
Israeli currency data, on the basis of which the adjusted financial statements
of the Company were prepared, is presented in Note 31.
In our opinion, based on our audit and on the reports of the other auditors, the
financial statements referred to above, present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 1997 and 1996, and results of its operations, changes in
shareholders' equity and cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
In our opinion, the above-mentioned financial statements have been prepared in
conformity with the Securities Regulations (Preparation of Annual Financial
Statements),1993.
JUNGERMAN, GILBOA, SILBER
Certified Public Accountants
TEL AVIV, MARCH 16,1998
Address: Rechov Aminadav 23, Tel-Aviv 67898, Fax: 03-5627190, Tel: 03-5622332
<PAGE>
KOST LEVARY & FORER
A MEMBER OF
ERNST & YOUNG INTERNATIONAL
Report of independent auditors
to the shareholders of
LOGAL Educational Software and Systems Ltd. and Subsidiary
We have audited the consolidated balance sheets of LOGAL Educational
Software and Systems Ltd. and its subsidiary at December 31, 1996 and 1997, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Auditors Regulations
(Mode of Performance) (Israel), 1973, which do not differ in any material
respect from United States generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiary at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally accepted in the United
States and Israel are substantially identical in all material respects.
Tel Aviv, Israel KOST, LEVARY and FORER
February 16, 1998 Certified Public accountants (Israel)
A member of Ernst & Young International
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
AUDITORS' REPORT
To the shareholders of
MUL-T-LOCK LIMITED
We have audited the financial statements of Mul-T-Lock Limited (hereafter - the
company) and the consolidated financial statements of the company and its
subsidiaries: balance sheets as of December 31, 1997 and 1996 and the statements
of income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the company's board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of certain subsidiaries, whose assets
constitute approximately 3.1% and 1.7% of total consolidated assets as of
December 31, 1997 and 1996, respectively, and whose turnover constitutes
approximately 5.2%, 3.4% and 2.7%, of total consolidated turnover for the years
ended December 31, 1997, 1996 and 1995, respectively. Those statements were
audited by other auditors, whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for the foregoing
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors (Mode of Performance)
Regulations, 1973. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement, either due to error or to intentional
misrepresentation. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the company's board of directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a fair basis for our opinion.
The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect the changes in the general purchasing power
of Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data
of the company, on the basis of which its adjusted financial statements were
prepared, are presented in note 16.
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
In our opinion, based upon our audits and the reports of the other auditors
referred to above, the aforementioned financial statements present fairly, in
all material respects, the financial position - of the company and consolidated
- - as of December 31, 1997 and 1996 and the results of operations, changes in
shareholders' equity and cash flows - of the company and consolidated - for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the
abovementioned financial statements have been prepared in accordance with the
Securities (Preparation of Annual Financial Statements) Regulations, 1993.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net income and shareholders' equity to the extent summarized
in note 17.
/s/ Kesselman & Kesselman
-----------------------------------
Tel-Aviv, Kesselman & Kesselman
March 10, 1998 Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF H.H.S.L. Haft & Haft & Co.]
[LOGO OF NEXIA INTERNATIONAL]
AUDITORS' REPORT TO THE SHAREHOLDERS OF PEC ISRAEL FINANCE CORPORATION LTD.
FOR PARENT COMPANY PURPOSES
We have audited the accompanying balance sheets of PEC Israel Finance
Corporation Ltd. as of December 31, 1997 and 1996, and the related statements of
profit and loss, changes in shareholders' equity and of cash flows for the
three years ended. These financial statements are the responsibility of the
Company's Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditor's Regulations (Auditor's
Mode of Performance) - 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The aforementioned financial statements have been prepared on the basis of
historical cost, adjusted to the reflect changes in the general purchasing power
of the Israeli currency in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in note 9.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and of the results of its operations, changes in shareholders' equity and
cash flows for the three years then ended, in accordance with generally accepted
accounting principles
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would not have materially affected the determination
of nominal / historical net profit nor shareholders' equity for the year ended
December 31, 1997.
/s/ H.H.S.L. Haft & Haft & Co.
-------------------------------------
H.H.S.L. Haft & Haft & Co.
March 26, 1998 Certified Public Accountants (Isr.)
<PAGE>
ARTHUR ANDERSEN LLP
--------------------
Harbour Centre
PO Box 1929
Grand Cayman
Cayman Island BWI
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Renaissance Fund LDC:
We have audited the accompanying statements of assets and liabilities, including
the schedule of investments, of Renaissance Fund LDC (a Cayman Islands Limited
Duration Corporation) as of December 31, 1997 and 1996, and the related
statements of operations, changes in net assets and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renaissance Fund LDC as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles in the United States.
As explained in Notes 1 and 4, the financial statements include portfolio
investments valued at $133,469,181 (92.22% of net assets) and $127,885,638
(90.56% of net assets) at December 31, 1997 and 1996, respectively, whose values
have been estimated by the Fund's Manager in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the investments existed, and the
differences could be material.
Arthur Andersen LLP
Grand Cayman, B.W.I.
February 10,1998
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
SCITEX CORPORATION LTD.
We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the
"Company") and its subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, either due to error or to intentional
misrepresentation. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Company's Board of Directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a fair basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations, the changes in shareholders' equity and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.
/s/ Kesselman & Kesselman
-----------------------------------
Tel-Aviv, Israel Kesselman & Kesselman
February 11, 1998 Certified Public Accountants (Isr.)
(except for notes 9 and 17 as to
which the date is February 25, 1998)
<PAGE>
[LETTERHEAD OF LUBOSHITZ, KASIERER & CO.]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of TEFRON LTD. (an
Israeli corporation) as of December 31, 1996 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel and in the United States, including those prescribed under the
Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with accounting principles generally accepted in the United
States.
/s/ LUBOSHITZ, KASIERER & CO.
------------------------------
LUBOSHITZ, KASIERER & CO.
MEMBER FIRM OF ARTHUR ANDERSEN
Tel-Aviv, Israel.
February 11, 1998.
<PAGE>
[LETTERHEAD OF KOST LEVARY & FORER]
Messrs.: D.I.C. Ltd.
PEC Israel Economic Corporation
- -------------------------------
Re: Financial statements of Tel-Ad Jerusalem Studios Ltd.
("the Company") remeasured into Nominal NIS
-----------------------------------------------------
We have audited the accompanying balance sheets of Tel-Ad Jerusalem Studios
Ltd. (an Israeli corporation) as of December 31, 1997 and 1996, and the related
statements of income and changes in shareholders' equity for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards including those prescribed by the Israel regulations (Mode of
Performance), 1973, which do not differ in any significant respect from United
States generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, either originating
within the financial statements themselves, or due to any misleading statement
included therein. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by Board of Directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
These financial statements are to be read in conjunction with the
accompanying primary audited financial statements of the company, see Note 2.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997 and 1996, the results of its operations and changes in its
stockholders' equity for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles in Israel,
which differ in certain respects from those followed in the United States (see
Note 3 to the financial statements).
/s/ KOST LEVARY & FORER
---------------------------------------
Tel-Aviv, Israel. KOST LEVARY & FORER
March 4, 1998. Certified Public Accountants (Israel)
A Member of Ernst & Young International
-39-
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, February 14, 1997
Report of Independent Public Accountants
Cellcom Israel Ltd.
We have audited the balance sheet of Cellcom Israel Ltd. (hereinafter the
"Company") as of December 31, 1996, the related statements of income and
shareholders' equity and cash flows for each of the two years in the period then
ended, expressed in New Israel Shekels. These financial statements are the
responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentations. We believe that our audits provide a reasonable basis
for our opinion.
The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel.
Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 23 to the financial statements.
<PAGE>
In our opinion, based on our audit and on the report of the abovementioned other
auditors, the above mentioned financial statements present fairly the financial
position of the company as at December 31, 1996, the results of its operations,
the changes in shareholder's equity and cash flows for each of the two years in
the period ended December 31, 1996, in conformity with accounting principles
generally accepted in Israel, consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net profit (loss) and shareholders' equity.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, March 17, 1997
Report of Independent Public Accountants to
the Shareholders of DIC and PEC Cable TV Ltd.
We have audited the balance sheet of DIC and PEC Cable TV. Ltd. as of December
31, 1996, the related statements of income and shareholders' equity and cash
flows for each of the two years in the period then ended, expressed in New
Israel Shekels. These financial statements are the responsibility of the
company's Management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentations. We believe that our audits provide a reasonable basis
for our opinion.
The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel.
Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 4 to the financial statements.
<PAGE>
In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the company as at December 31, 1996,
the results of its operations, the changes in shareholder's equity and cash
flows for each of the two years in the period ended December 31, 1996, in
conformity with accounting principles generally accepted in Israel, consistently
applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net profit (loss) and shareholders' equity to the extent
summarized in Note 5 to the financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, February 25 1997
Report of Independent Public Accountants
to the Shareholders of
Gemini Capital Fund Management Ltd.
We have audited the accompanying balance sheet of Gemini Capital Fund Management
Ltd. as at December 31, 1996, statements of income, changes in shareholders'
equity and cash flows for each of the two years the last of which ended on
December 31, 1996, translated into U.S. dollars. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
including those prescribed by the Israel Auditors' Regulations (Auditors' Mode
of Performance) - 1973. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gemini Capital Fund Management
Ltd. as at December 31, 1996, and the results of its operations, changes in its
shareholder's equity and cash flows for each of the two years the last of which
ended on December 31, 1996, in conformity with accounting principles generally
accepted in the United States and Israel on the basis outlined in Note 2A to the
financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, February 25, 1997
Report of independent Public Accountants
to the Partners of Gemini Israel Fund L.P.
We have audited the accompanying balance sheet of Gemini Israel Fund L.P. as of
December 31, 1996, statements of income, changes in partners capital and cash
flows for each of the two years the last of which ended on December 31, 1996,
translated into U.S. dollars. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israel Auditors' Regulations
(Auditors' Mode of Performance). These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gemini Israel Fund as of
December 31, 1996, the results of its operations, changes in its partners
capital and cash flows for each of the two years the last of which ended
December 31, 1996 in conformity with accounting principles generally accepted in
the United States on the basis detailed in Note 2A to the financial statements.
As explained in Note 2, the financial statements include investments valued at
U.S. dollars 20,733 thousand (previous year - U.S. dollars 10,822 thousand) (75%
of partners capital at balance sheet date, previous year -56%) whose values have
been estimated by the Limited Partnership's general partner in the absence of
readily ascertainable market values. We have reviewed the procedures used by
the general partner in arriving at its estimate of value of such investments and
have inspected underlying documentation and in the circumstances we believe the
procedures are reasonable and the documentation appropriate. However, because
of the inherent uncertainty of valuation these estimated values may differ
significantly from the values that would have been used, had a ready market for
the investments existed and the differences could be material.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, March 4, 1997
Report of Independent Public Accountants to
the Shareholders of Ispah Holdings Limited
We have audited the balance sheet of Ispah Holdings Limited as of December 31,
1996, the related statements of income and shareholders' equity and cash flows
for each of the two years in the period then ended, expressed in New Israel
Shekels. These financial statements are the responsibility of the company's
management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentations. We believe that our audits provide a reasonable basis
for our opinion.
The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel.
Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 4 to the financial statements.
The data relating to the net asset value of the Company's investments in an
investee company and to its equity in that company's operating results, is based
on financial statements audited by other auditors.
<PAGE>
In our opinion, based on our audit and on the report of the abovementioned other
auditors, the above mentioned financial statements present fairly the financial
position of the company as at December 31, 1996, the results of its operations,
the changes in shareholder's equity and cash flows for each of the two years in
the period ended December 31, 1996, in conformity with accounting principles
generally accepted in Israel, consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of nominal/
historical net profit (loss) and shareholders' equity to the extent summarized
in Note 5 to the financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
DELOITTE TOUCHE
TOHMATSU
IGAL BRIGHTMAN -------------------------------------------------------
&Co. 3 Daniel Frisch Street Telephone: 972(3) 692-4111
Tel Aviv 64731 ISRAEL Facsimile: 972(3) 696-0130
P.O.B. 16593, Tel-Aviv 61164
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
"MAXIMA" - AIR SEPARATION CENTER LTD.
-------------------------------------
We have audited the accompanying balance sheet of "Maxima" - Air Separation
Center Ltd. ("the Company") as of December 31, 1996, and the consolidated
balance sheet as of such date, and the related statements of operations, changes
in shareholders' equity and cash flows - of the Company and on a consolidated
basis - for each of the two years in the period ended December 31, 1996,
expressed in Israeli currency. These financial statements are the responsibility
of the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of a jointly controlled subsidiary
included under the proportionate consolidation method, whose assets constitute
approximately 5.2% of consolidated total assets as of December 31, 1996, and
whose revenues constitute approximately 7.1% and 8.3% of consolidated total
revenues for the years ended December 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included in respect of
the aforementioned subsidiary, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance) - 1973, which, for purposes of these financial statements,
are substantially identical to generally accepted auditing standards in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The aforementioned financial statements have been prepared on the basis of
historical cost, adjusted to reflect changes in the general purchasing power of
the Israeli currency in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements were prepared, is
presented in Note 30.
- --------------- ----------------------------------------------------------
Deloitte Touche Office in Jerusalem: New Clal Center 42 Agrippas Street
Tohmatsu Jerusalem 94301, P.O.B. 28090, Jerusalem 91280, ISRAEL
International Tel. 972 (2) 6235157 Fax. 972 (2) 6233628
Office in Haifa: 5 Ma'aleh Hashichrur Street, Haifa 33284,
P.O.B. 5648, Haifa 31055, ISRAEL
Tel. 972 (4) 8627373 Fax. 972 (4) 8672528
- --------------------------------------------------------------------------------
<PAGE>
[LETTERHEAD OF DELOITTE TOUCHE TOHMATSU IGAL BRIGHTMAN & CO.]
In our opinion, based on our audits and the reports of the other auditors, the
financial statements present fairly, in all material respects, the financial
position - of the Company and on a consolidated basis - as at December 31,
1996, and the results of operations, changes in shareholders' equity and cash
flows - of the Company and on a consolidated basis, for each of the two in
the period ended December 31, 1996, in accordance with generally accepted
accounting principles in Israel. Furthermore, in our opinion, the financial
statements are prepared in accordance with the Israeli Securities Regulations
(Preparation of Annual Financial Statements) - 1993.
The financial information presented in accordance with generally accepted
accounting principles in the United States is based on nominal historical
data in Israeli currency and is included in Note 31 to the financial
statements.
Igal Brightman & Co.
Certified Public Accountants
Tel Aviv, February 26, 1997
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv, March 13, 1997
Auditor's Report to the Shareholders of
Property and Building Corporation Limited
We have audited the financial statements of Property and Building Corporation
Limited (hereinafter "the Company") and the consolidated financial statements as
follows:
- - Balance sheet as at December 31, 1996
- - Statements of earnings, statements of changes in shareholders' equity and
statements of cash flows for each of the two years the last of which ended
on December 31, 1996.
These financial statements are the responsibility of the Company's Board of
Directors and of its management. Our responsibility is to express an opinion on
the financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 72% of the total consolidated assets as at December 31, 1996 and
whose revenues constitute 90% and 86% of the consolidated revenues for the years
ended on December 31, 1996 and 1995 respectively. The financial statements of
those subsidiaries were audited by other auditors whose reports thereon were
furnished to us. Our opinion, insofar as it relates to amounts emanating from
the financial statements of such subsidiaries, is based solely on the said
reports of the other auditors. Furthermore, the data included in the financial
statements which relates to the net asset value of an affiliate and the
Company's equity in its earnings is based on financial statements which were
audited by other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Auditor's
Mode of performance) - 1973. Such standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement whether due to error or intentional misrepresentation.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the Board of
Directors and by management. We believe that our audits provide a fair basis
for our opinion.
<PAGE>
As stated in Note 1D (17) the comparative figures are based on financial
statements which were restated and issued on May 30, 1996 (the original
statements were issued on March 18, 1996) in order to retroactively reflect a
change with which we concur in the accounting treatment of the recognition of
income from construction work by a subsidiary.
The above mentioned financial statements have been prepared on the basis of
historical cost, in historical values adjusted for the changes in the general
purchasing power of the Israel currency, in accordance with Opinions of the
Institute of Certified Public Accountants in Israel. Condensed data in nominal
historical terms, on the basis of which the adjusted statements were prepared,
is presented in Note 34.
In our opinion, based on our audit and the reports of other auditors mentioned
above, the above mentioned financial statements present fairly, in all material
respects, in conformity with accounting principles, generally accepted in
Israel, the financial position of the Company and of the Company and its
subsidiaries on a consolidated basis as at December 31, 1996 and the changes in
shareholders' equity and the results of their operations and cash flows for each
of the two years ended on December 31, 1996. Furthermore, these statements
have, in our opinion, been prepared in accordance with the Securities
Regulations (Preparation of Annual Financial Statements) - 1993.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of historical
net profit and shareholders' equity to the extent summarized in Note 35 C to the
financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tel-Aviv March 11, 1997
Auditor's Report to the Shareholders of
Super-Sol Limited
We have audited the financial statements of Super-Sol Limited (the Company) and
the consolidated financial statements of the Company and its subsidiaries
detailed below:
- - Balance sheet as at December 31, 1996
- - Statements of income, changes in shareholders' equity and cash flows for
the years ended on December 31, 1996 and 1995.
These financial statements are the responsibility of the Company's Board of
Directors and of its management. Our responsibility is to express an opinion on
the financial statements based on our audit.
We have not audited the financial statements of certain consolidated companies
whose assets represent approximately 0.6% of the total assets included in the
consolidated balance sheet at December 31, 1996 and whose income represents
approximately 5.6% and 5.8% of the income included in the consolidated
statements of income for the years ended December 31, 1996 and 1995. The
financial statements of these companies were audited by other auditors who
provided us with their reports and our opinion in as much as it relates to
amounts included in respect of these companies is based on the reports of the
other auditors.
Similarly the data relating to the equity value of investments in the
consolidated financial statements of investments in affiliated companies and to
the group's share in the results of these companies presented on an equity basis
are based on financial statements, some of which were audited by other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Auditor's
Mode of performance) - 1973. Such standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement whether due to error or intentional misrepresentation.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the Board of
Directors and by management. We believe that our audits provide a reasonable
basis for our opinion.
<PAGE>
The above mentioned financial statements have been prepared on the basis of
historical cost, in historical values adjusted for the changes in the general
purchasing power of the Israel currency, in accordance with Opinions of the
Institute of Certified Public Accountants in Israel. Condensed financial
statements in nominal historical terms, on the basis of which the adjusted
statements were prepared, as presented in Notes 29 and 30.
In our opinion, based on our audit and the reports of other auditors mentioned
above, the above mentioned financial statements present fairly in conformity
with generally accepted accounting principles, in all material respects, the
financial position of the Company and of the Company and its subsidiaries on a
consolidated basis as at December 31, 1996 and the changes in shareholders'
equity and the results of their operations and cash flows company and
consolidated for each of the two years ended on December 31, 1996.
Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulations (Preparation of Annual Financial Statements) -
1983.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of historical
net profit and shareholders' equity to the extent summarized in Note 31 to the
financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
CERTIFIED PUBLIC ACCOUNTANTS (ISR.)
<PAGE>
[LETTERHEAD OF SOMEKH CHAIKIN]
Tirat HaCarmel, March 5, 1997
Independent Auditor's Report to the
Shareholders of Tambour Ltd.
We have audited the balance sheet of Tambour Ltd. (hereinafter the "Company")
and the balance sheet of the Company and subsidiary companies as at December 31,
1996, the related statements of income and shareholders' equity and cash flows
for each of the two years in the period then ended, expressed in New Israel
Shekels.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
The financial statements of consolidated subsidiaries whose assets at December
31, 1996 comprised approximately 9.5% of the total assets in the Consolidated
Balance Sheet and whose revenues for the year ended December 31, 1996 comprised
approximately 12.4% of the total revenues in the Consolidated Statement of
income were audited by other auditors. The data relating to these subsidiaries
included in the financial statements, are based on the financial statements
audited by these other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors Regulations (Auditor's
Mode of Performance), 1973 and, accordingly we have performed such auditing
procedures as we considered necessary in the circumstances. For purposes of
these financial statements there is no material difference between generally
accepted Israeli auditing standards and auditing standards generally accepted in
the U.S. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentations.
We believe that our audits provide a reasonable basis for our opinion.
The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel.
Condensed statements of the Company in historical values which formed the basis
of the adjusted statements appear in Note 21 to the financial statements.
<PAGE>
In our opinion, based on our audit and the financial statements audited by other
auditors, the above mentioned financial statements present fairly the financial
position of the Company and of the Company and subsidiary companies as at
December 31, 1996, the results of its operations, the changes in shareholder's
equity and cash flows for each of the two years in the period ended December 31,
1996, in conformity with accounting principles generally accepted in Israel,
consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of nominal net
income and shareholders' equity to the extent summarized in Note 23 to the
financial statements.
/s/ Somekh Chaikin
- -----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PEC ISRAEL ECONOMIC CORPORATION
Date: March 31, 1998 By: /s/ JAMES I. EDELSON
-------------------------------
James I. Edelson,
Executive Vice President and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date
---- ----
March , 1998
- ----------------------------
Raphael Recanati,
Chairman of the Board
of Directors
/s/ FRANK J. KLEIN March 31, 1998
- ----------------------------
Frank J. Klein,
President and Principal
Executive Officer; Director
/s/ WILLIAM GOLD March 31, 1998
- ----------------------------
William Gold,
Treasurer, Principal Financial
Officer and Principal Accounting
Officer
<PAGE>
Name Date
---- ----
/s/ ROBERT H. ARNOW March 31, 1998
- ----------------------------
Robert H. Arnow, Director
/s/ ALAN R. BATKIN March 31, 1998
- ----------------------------
Alan R. Batkin, Director
/s/ JOSEPH CIECHANOVER March 31, 1998
- ----------------------------
Joseph Ciechanover, Director
/s/ ELIAHU COHEN March 31, 1998
- ----------------------------
Eliahu Cohen, Director
/s/ ALAN S. JAFFE March 31, 1998
- ----------------------------
Alan S. Jaffe, Director
/s/ HERMANN MERKIN March 31, 1998
- ----------------------------
Hermann Merkin, Director
/s/ HARVEY M. MEYERHOFF March 31, 1998
- ----------------------------
Harvey M. Meyerhoff, Director
/s/ OUDI RECANATI March 31, 1998
- ----------------------------
Oudi Recanati, Director
/s/ ALAN S. ROSENBERG March 31, 1998
- ----------------------------
Alan S. Rosenberg, Director
<PAGE>
EXHIBIT INDEX
Page No.
--------
(3)(i). Composite Articles of Incorporation of the Company, as amended,
filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein
by reference.
(3)(ii). Composite By-Laws of the Company, as amended. 262
10(i)(a). Voting Agreement dated December 10, 1980 between the Company and
Discount Investment Corporation Ltd. (formerly Discount Bank
Investment Corporation Ltd.), as amended by a Letter Agreement dated
May 4, 1983 and by an Addendum dated December 30, 1983, filed as
Exhibit 10(i)(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference.
10(i)(b). Addendum to Exhibit 10(i)(a) dated December 7, 1995, filed as
Exhibit 10(i)(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference.
10(i)(c). Amendment to Exhibit 10(i)(a) dated as of February 1, 1993, filed as
Exhibit 10(i)(c) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1992 and incorporated herein by
reference.
10(i)(d). Shareholders' Agreement dated May 20, 1992 among Clal Electronics
Industries Ltd., the Company, Discount Investment Corporation Ltd.
and International Paper Company, filed as Exhibit A to Amendment No.
13 to the Company's Statement on Schedule 13D in respect of ordinary
shares of Scitex Corporation Ltd. held as of June 12, 1992 and
incorporated herein by reference.
10(i)(e). Business Opportunities Agreement dated as of November 30, 1993 among
the Company, DIC Finance and Management Ltd., and, for the purpose
of section 5 thereof only, PEC Finance Company Ltd. and Discount
Investment Corporation Ltd., filed as Exhibit 10(i)(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference.
10(i)(f). Amendment to Exhibit 10(i)(e) dated as of December 25, 1996, filed
as Exhibit 10(i)(f) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and incorporated herein by
reference.
<PAGE>
Page No.
--------
10(i)(g). Agreement dated July 1, 1995 between IDB Development Corporation
Ltd. and PEC Finance Company Ltd. (now named PEC Israel Financial
Corporation Ltd.), filed as Exhibit 10(i)(f) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
10(i)(h). Voting Agreement dated June 10, 1997 by and among Discount
Investment Corporation Ltd., the Company and Delek Investments and
Properties Ltd. 276
10(i)(i). Application to Israel Discount Bank Ltd. dated March 4, 1998 for the
Allocation of a Credit Line in Foreign Currency to the Company. 278
10(i)(k). Agreement dated January 31, 1993 among the Company, DIC Energy
Holdings Ltd. and N.E.K. Properties Ltd. in respect of ordinary
shares of Tambour Ltd., filed as Exhibit 10(i)(k) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992 and incorporated herein by reference.
10(i)(i). Exchange Agreement dated as of January 4, 1994 among the Company,
PEC Holdings Limited and IDB Development Corporation Ltd., filed as
Exhibit 10(i)(l) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference.
10(iii)(a). Supplemental Retirement Agreement dated as of January 1, 1995
between the Company and Frank J. Klein, filed as Exhibit 10(iii)(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.*
21. Subsidiaries of the Registrant. 283
27. Financial Data Schedule. 285
- ----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.
<PAGE>
EXHIBITS
TO
REPORT ON FORM 10-K
OF
PEC ISRAEL ECONOMIC CORPORATION
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
EXHIBIT 3(ii)
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION
COMPOSITE
BYLAWS
* * * * * *
ARTICLE 1. OFFICES
The principal office in Maine shall be registered with the Corporation Trust
Company, Portland, Cumberland County, Maine. The Company may also have offices
at such other places as the Board of Directors may designate.
ARTICLE II. MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders for the
election of directors and for such other business as may properly come before
the meeting shall be held on the last Tuesday in May in each year (or if said
day be a legal holiday, then on the first day thereafter not a legal holiday),
or on such other day as shall be fixed by the Board of Directors. Notice of the
time, place and object of each meeting shall be mailed at least ten days before
the meeting to each stockholder at his address as it appears on the books of the
Company or at such address for such notice as he may have filed with the
Secretary in writing.
SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders shall be held
whenever called in writing by the President or the Board of Directors. Special
meetings shall be called whenever the owners of record of twenty percent of the
outstanding capital stock of the Company entitled to vote at such meeting shall
make application to that effect to the directors in writing, stating the objects
of the proposed meeting. All business transacted at such special meetings shall
be confined to the objects stated in the notice and matters germane thereto.
Unless otherwise expressly provided by statute, notice of each special meeting
stating the time, place and object thereof, shall be mailed at least ten days
before the meeting to each stockholder at his address as it appears on the books
of the Company or otherwise as provided in Section 1 hereof.
-1-
<PAGE>
SECTION 2(A). Meetings of stockholders may be held at such places as may be
designated by the Board of Directors within or outside of the State of Maine as
stated in the notice of meeting.
SECTION 3. QUORUM. At all meetings of stockholders, the presence of
stockholders, in person or by proxy, owning of record at least a majority of the
outstanding capital stock of the Company entitled to vote thereat shall
constitute a quorum. In the absence of such quorum, a majority of the
stockholders present in person or by proxy may adjourn from time to time without
notice other than by announcement at the meeting until a quorum in person or by
proxy is present. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 4. ORGANIZATION. At every stockholders' meeting the President or in
his absence, a Vice President, or in the absence of both, the Chairman elected
by the stockholders present shall preside. The Clerk shall keep the minutes of
every meeting of the stockholders and in his absence, a Clerk pro tem may be
elected to act as Clerk of such meeting.
SECTION 5(A). VOTING. Stockholders shall be entitled to vote in person or by
proxy and each stockholder shall have one vote for each share of stock
registered in his name on the books of the Company. All elections and all
questions shall be decided by a plurality vote and upon demand any vote shall be
by ballot.
(b). LIST OF STOCKHOLDERS. A full, true and complete list in
alphabetical order of all the stockholders entitled to vote at an ensuing
election and indicating the number of shares held by each, certified by the
Secretary, shall be filed in the office where the election is to be held at
least ten days before every election and shall, at all times during the usual
hours of business and during the whole time of the election, be open to the
examination of any stockholder. Only the persons in whose name shares of stock
stand on the books of the Company at the time of the closing of the transfer
books for such meeting, as evidenced by the list of stockholders so furnished,
shall be entitled to vote.
(c). PROXIES. Prior to any meeting but subsequent to the time of
closing the transfer books for such meeting, if such books have been closed, any
proxy may submit his powers of attorney to the Secretary, Treasurer or Transfer
Agent of the Company for examination. The certificate of the Secretary or of
the Treasurer or Transfer Agent as to the regularity of such powers of attorney,
and as to the number of shares held by the
-2-
<PAGE>
persons who severally and respectively executed such powers, shall be received
as prima facie evidence of the number of shares represented by the holder of
such powers of attorney, for the purpose of establishing the presence of a
quorum at such meeting and of organizing the same and for all other purposes.
SECTION 6. ORDER OF BUSINESS. The order of business at stockholders' meetings
shall be as follows:
1. Proof of notice of meeting.
2. Reports.
3. Election of Directors.
4. Other business.
ARTICLE III. BOARD OF DIRECTORS
SECTION 1(A). POWER. Subject to the provisions of the statute, the certificate
of incorporation, the bylaws, and regulations which may be made by the
stockholders, the Board shall have (in addition to such powers as are herein
expressly conferred upon it, or such powers as may be exercised by the Company)
the following powers: -
To purchase or otherwise acquire property, rights or privileges
for the Company, which the Company has power to take, at such
prices and on such terms as the Board may deem proper; and to pay
for such property, rights or privileges in whole or in part, with
money, stock, bonds, debentures or other securities of the
Company, or by delivery of other property of the Company.
To create, make and issue mortgages, bonds, deeds of trust, trust
agreements and negotiable or transferable instruments and
securities secured by mortgages or otherwise and to do every
other act and thing necessary to effectuate the same.
To appoint agents, clerks, assistants, factors, servants and
trustees, and to dismiss them at its discretion; to fix their
duties and emoluments and to change them from time to time and to
require security as it may deem proper; to confer on any Officer
of the Company the power of selecting, discharging or suspending
such employees; to delegate any of its powers to any committee,
agency, officer, or agent, and to grant the power to
sub-delegate.
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To determine by whom and in what manner contracts, or other
documents shall be signed in the name and on behalf of the
Company.
(b). The Board may also from time to time appoint an agent or
agents of the Company to represent and act in any foreign country or
countries, and all such appointments shall be either for a fixed term or
without any limitation as to the period for which the person or persons so
appointed is or are to hold such office, and the Board may from time to time
remove or dismiss him or them from office and appoint another or others in
his or in their place or places.
SECTION 2. PLACE OF MEETINGS. The Board may hold its meetings and keep the
books of the Company, except the original and duplicate stock ledger, outside of
the State of Maine at such places as it may from time to time determine.
SECTION 3(A). MEETINGS. After each annual meeting of stockholders, the Board
shall meet for the purpose of organization, the election of Officers and the
transaction of other business.
(b). Meetings may be held within or without the State of Maine at such
places as may be indicated in the notice or waiver of notice thereof. The
notices convening meetings shall briefly state the objects and purposes thereof.
Meetings may be called by the Chairman or Vice Chairman of the Board or
President on three days' notice in writing or on two days' notice by telephone
or telegram to each director and shall be called by such officer in like manner
on the written request of seven directors.
(c). Except as provided in the next sentence, a majority of the total
number of directors then in office shall constitute a quorum for the transaction
of business of the Board. If at any time there are fewer directors in office
than one-half of the number of directors fixed by the bylaws or, in the absence
of a bylaw fixing the number of directors, of the number stated in the articles
of incorporation, the directors then in office may transact no other business
than the filling of vacancies on the Board, in the manner and to the extent
provided by these bylaws and law, until sufficient vacancies have been filled so
that there are in office at lease one-half of the number of directors fixed by
bylaws or the articles of incorporation. In the absence of a quorum, a majority
of the directors present may adjourn from time to time without notice other than
by announcement at the meeting until a quorum is present. At any such adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called.
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<PAGE>
SECTION 4. NUMBER AND TERMS. The number of directors shall be not less than
three nor more than 60, their number to be fixed by resolution of the Board of
Directors from time to time.
SECTION 5. VACANCIES. Vacancies in the Board for any cause may be filled at
any annual or special meeting of the stockholders. Such vacancies may be filled
by the Board between annual meetings of stockholders and directors so elected
shall hold office until the next annual meeting of stockholders.
SECTION 6. ORDER OF BUSINESS. At meetings of the Board, business may be
transacted in such order as the Board may determine. At all meetings of the
Board, the Chairman of the Board, or in his absence a Vice-Chairman of the
Board, or in his absence the President, or in the absence of the latter, a
Vice-President shall preside.
SECTION 7. COMPENSATION. Directors shall receive such compensation and
reimbursement of expenses, if any, as the Board may determine. A director may
serve the Company in any other capacity and may receive compensation therefor.
ARTICLE IV. COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE. There may be an Executive Committee. The
members of the Committee shall be appointed by the Board of Directors who shall
also designate the Chairman of the Committee. The Executive Committee shall
exercise such powers as may be delegated to it by the Board of Directors. The
Executive Committee shall fix its own rules of procedure and keep regular
minutes of its proceedings and report same to the Board.
SECTION 2. OTHER COMMITTEES. The Board may authorize any other committees of
the Board which shall be appointed and shall exercise such powers as the Board
may prescribe. The Board may also authorize one or more committees from its own
membership or outside its membership, or both, as an advisory committee or
committees which shall exercise such powers as the Board may prescribe.
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<PAGE>
ARTICLE V. OFFICERS
SECTION 1(A). THE OFFICERS. The Officers of the Company shall consist of a
Chairman of the Board of Directors, one or more Vice-Chairmen, a President,
one or more Vice-Presidents, a Secretary, a Treasurer and a Clerk. As
determined by the Board of Directors from time to time, the Officers may also
include Honorary Chairmen, Presidents Emeriti, and any other desirable
Officers. The Chairman and Vice-Chairmen of the Board of Directors, and the
President, shall be directors, but other Officers need not be directors.
(b). The Chairman of the Board of Directors, the President, one or
more Vice-Presidents, the Secretary, the Treasurer and, commencing in 1988,
the Clerk shall be elected each year by a majority vote of quorum of the
Board at the first meeting held after the annual meeting of stockholders.
Vacancies in such offices may be filled by a majority vote of a quorum of the
Board at subsequent meetings prior to the following annual meeting of
stockholders. All such Officers shall hold office at the pleasure of the
Board until the first meeting of the Board held after the succeeding meeting
of the stockholders and until their respective successors are elected and
qualify.
(c). Honorary Chairmen, Presidents Emeriti, Vice-Chairmen of the
Board, and other desirable Officers as the Board may from time to time determine
shall be elected by a majority vote of a quorum of the Board at any meeting of
the Board and shall hold office at the pleasure of the Board until the first
meeting of the Board held after the succeeding meeting of the stockholders.
(d). In addition to the powers conferred upon them by the bylaws, all
Officers elected by the Board shall have such authority and shall perform such
duties as from time to time may be prescribed by the Board. All Officers of the
Company shall be subject to removal at any time with or without cause by a
majority vote of a quorum of the Board.
(e). Salaries and other compensation payable to Officers shall be
fixed by the Board. Such salary or other compensation shall be paid not by
virtue of any office but solely for services to the Company, and such services
and the payment therefor shall be terminable at the pleasure of the Board not
inconsistent with any contract.
SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall have general
supervisory powers over the business of the Company and its Officers and be an
ex officio member of all committees.
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<PAGE>
SECTION 3. VICE-CHAIRMAN OF THE BOARD. In the absence of the Chairman of the
Board, a Vice-Chairman of the Board shall be an ex officio member of all
committees and shall assist the Chairman in his general duties.
SECTION 4. PRESIDENT. The President shall be the chief administrative officer
of the Company. He shall manage the business; execute all contracts and
agreements authorized by the Board; see that all orders and resolutions of the
Board are carried into effect; perform such other duties as may be prescribed by
the Board; and shall be an ex officio member of all committees.
SECTION 5. VICE-PRESIDENT. Vice-Presidents shall have such powers and perform
such duties as may be prescribed by the Board.
SECTION 6. TREASURER. The Treasurer shall have custody of all funds and
securities of the Company which may come into his hands. He may endorse on
behalf of the Company all checks, notes or other obligations, and shall deposit
the same to the credit of the Company in such banks or depositories as the Board
may designate. Whenever required by the Board, he shall render a statement of
his accounts. He shall enter or cause to be entered regularly in the books of
the Company for that purpose full and accurate account of all moneys received
and paid on account of the Company. He shall at all reasonable times exhibit
his books and accounts to any Officer or Director upon application at the office
of the Company during business hours. He shall perform all acts incident to the
office of Treasurer, subject to the control of the Board. He shall give such
security for the faithful performance of his duties as the Board shall direct.
SECTION 7. SECRETARY. The Secretary shall keep the minutes of all meetings of
the Board and of all committee meetings, in books provided for that purpose. He
shall attend to the giving and serving of all notices of the Company. He shall
affix the seal of the Company to all instruments requiring the same. He shall
have charge of the corporate seal, certificate books, transfer books, stock
ledgers and such other books and papers as the Board may direct, all of which
shall, at all reasonable times, be open to the examination of any director, upon
application at the office of the Company during business hours. He shall, in
general, perform all the duties incident to the office of Secretary, subject to
the control of the Board.
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<PAGE>
SECTION 8. CLERK. The Clerk, who shall be a resident of the State of Maine,
shall be elected by the Board of Directors and shall be sworn to the faithful
performance of his duties. He shall act as the agent of this Corporation in the
State of Maine, on whom process against this Corporation may be served. He
shall record all votes of the stockholders and minutes of such meetings in a
book kept for that purpose. He shall maintain an office in the State of Maine
where he shall keep the records of all stockholders' meetings. In the absence
of the Clerk at any stockholders' meeting, a Clerk of the Meeting, who need not
be a resident of the State of Maine, shall be elected or appointed by the
meeting. He shall be sworn to the faithful performance of his duties, and he
shall keep the minutes of the votes and business transacted and promptly deliver
such minutes to the Clerk for him to record in the record books of the Company.
SECTION 9. VOTING POWER OF PRESIDENT. Unless otherwise ordered by the Board,
the President, or in case of his absence or failure to act, a Vice-President,
shall have full power and authority in behalf of the Company to attend and to
act and to vote at any meetings of any corporation in which the Company may hold
securities, and at any such meeting shall possess and may exercise any and all
rights incidental to such ownership as fully as the Company could do if present.
The Board may delegate like powers to any other person or persons.
ARTICLE VI. CHECKS, NOTES, ETC.
All checks and other orders for the payment of money out of the funds of the
Company and all promissory notes, acceptances and other evidences of
indebtedness of the Company for the account of the Company shall be signed on
behalf of the Company by such Officer or Officers as shall from time to time be
determined by the Board.
ARTICLE VII. CAPITAL STOCK
SECTION 1(A). CERTIFICATES. The certificate for shares of the capital stock of
the Company with the seal affixed shall be in such form as shall be approved by
the Board. The certificates shall be signed by the Chairman or a Vice-Chairman
of the Board, the President or a Vice-President and countersigned by the
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary. If a transfer
agent or registrar are appointed, certificates shall be countersigned by the
transfer agent or registered by the registrar and the signatures of the Officers
and the seal of the Company on such certificates may be facsimiles, engraved or
printed.
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<PAGE>
(b). All certificates shall be consecutively numbered. The name of
the person owning the shares represented thereby, with the number of such shares
and the date of issue, shall be entered on the Company's books.
(c) All certificates surrendered to the Company shall be cancelled,
and no new certificates shall be issued until the former certificate or
certificates for the same number of shares of the same class shall have been
surrendered and cancelled.
(d) No certificates for fractional shares of capital stock shall be
issued, but in lieu thereof, the Company will issue non-dividend, non-voting and
non-interest-bearing scrip certificates which shall entitle the holders to
receive a full share of capital stock upon surrender of two or more scrip
certificates aggregating a full share of capital stock of the same class, and
which shall contain such other terms and provisions as shall be fixed by the
Board. Such certificates may become void and of no effect after a reasonable
period from date of issue to be determined by the Board and stated in the
certificate. This sub-division (d) shall not be deemed to apply to any
fractional share of stock issued and created prior to January 1, 1939.
SECTION 2. TRANSFERS. Shares of the capital stock of the Company shall be
transferred only on the books of the Company by the holder thereof, in person or
by his attorney, upon surrender and cancellation of the certificate for a like
number of shares of the same class, properly endorsed.
SECTION 3. FIXING OF RECORD DATE. For purposes of determining stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of a dividend or other
distribution, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may fix in advance a record date for any
such determination of stockholders. Such date shall not in any case be more
than 60 days and, in the case of a meeting of stockholders, less than 10 full
days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken.
SECTION 4(A). REGULATIONS. The Board shall have the power and authority to
make all such rules and regulations as it may deem expedient concerning the
issue, transfer and registration of certificates for shares of the capital stock
of the Company.
(b). The Board may appoint a transfer agent and registrar, and may
require all stock certificates to bear the
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signature of such transfer agent and of such stock registrar, or either of them.
(c). The Board may make provision for the issue of new certificates in
place of lost or destroyed certificates.
(d). Any person claiming a certificate of stock to be lost or
destroyed shall make an affidavit or affirmation of that fact and shall, if the
Board so requires, give the Company a bond of indemnity, in form and with one or
more sureties satisfactory to the Board, in at least double the value of the
stock represented by said certificate, whereupon a new certificate may be issued
of the same tenor and for the same number of shares as the one alleged to be
lost or destroyed.
SECTION 5. LIABILITY FOR AMOUNT UNPAID ON SHARES NOT FULLY PAID. Until the
shares of stock for which certificates shall be issued shall have been fully
paid, the subscribers for the several shares of stock shall continue to be
severally liable for the sums remaining unpaid on the shares for which they have
respectively subscribed, and, in addition to such liability, any transferee of
such shares, by accepting a transfer thereof, shall be deemed to have assumed a
personal liability of the Company for the payment of the amount so remaining
unpaid to the same extent as though he had originally been the subscriber for
such shares.
SECTION 6. CALLS AND ASSESSMENTS. In the event of the failure of any
subscriber, stockholder or transferee to pay any call or assessments made upon
him by the Board within the time required for the payment thereof, in addition
to the remedy provided for in the foregoing Section, the Company, by decision of
the Board, may proceed to forfeit the stock of such subscriber, stockholder or
transferee, in conformity with and to resort to the proceedings provided for in
Section 46 of the Business Corporations Law of the State of Maine, and the
several acts mandatory thereof and supplemental thereto.
ARTICLE VIII. DIVIDENDS
Dividends upon the capital stock of the Company, when earned, may be declared by
the Board of Directors at any regular or special meeting called for that
purpose, and the Board shall fix the date on which stockholders shall be
entitled to receive dividends.
Before payment of any dividend or making any distribution of profits, there may
be set aside out of the surplus or net profits of the Company such sum or sums
as the Board may, from time to
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time, in its absolute discretion, think proper as a reserve fund to meet
contingencies or for equalizing dividends or for repairing or maintaining any
property of the Company or for such other purpose as the Board shall think
conducive to the interest of the Company.
ARTICLE IX. SEAL
The Board shall provide a suitable corporate seal containing the name of the
Company, which seal shall be in charge of the Secretary and affixed on behalf of
the Company to instruments requiring sealing.
ARTICLE X. FISCAL YEAR
The fiscal year of the Company shall be coincident with the calendar year.
ARTICLE XI. REGISTERED STOCKHOLDERS
The Company shall be entitled to treat the holder of record of any share or
shares of stock as the holder in fact thereof and accordingly shall not be bound
to recognize any equitable or other claim to or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, save as expressly provided by the laws of Maine.
ARTICLE XII. INSPECTION OF BOOKS
The Board shall determine from time to time whether, and if allowed, when and
under what conditions and regulations, the accounts and books of the Company
(except such as may by statute be specifically open to inspection) or any of
them shall be open to the inspection of the stockholders, and the stockholders'
rights in this respect are and shall be restricted and limited accordingly.
ARTICLE XIII. NOTICES
Whenever under the provisions of these bylaws notice is required to be given to
any stockholder, director or officer, it shall not
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be construed to mean personal notice, but such notice may be given in writing by
mail by depositing the same in the post office or letter box in a postpaid
sealed wrapper addressed to such addressee at such address as appears on the
books of the Company or in default of other address to such addresses at the
General Post Office in the City of Portland, Maine, and such notice shall be
deemed to be given at the time when the same shall be thus mailed. Any
stockholder, director or officer may waive notice required to be given under
these bylaws.
ARTICLE XIV. AMENDMENTS
The bylaws may be amended, altered, or repealed by the stockholders at a meeting
called for that purpose. Between meetings of the stockholders, the bylaws may
be amended, altered, or repealed by the Board at a meeting called for that
purpose.
ARTICLE XV. INDEMNIFICATION
SECTION 1. EXTENT. The Corporation shall indemnify any past, present or future
officer or director of the Corporation (and his heirs and personal
representatives) who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he, his
testator or intestate is or was a director or officer of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of, or in any capacity with, another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses, including attorney's fees, judgments, fines (including excise taxes
assessed in connection with service to an employee benefit plan), amounts paid
in settlement and reasonable expenses actually incurred by him in connection
with such action, suit or proceeding or any appeal therein, provided that no
indemnification shall be provided for any person with respect to any matter as
to which he shall have been finally adjudicated in any action, suit or
proceeding not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Corporation or, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. For purposes of the foregoing, the Corporation shall be deemed to
have requested a person to serve an employee benefit plan where the performance
by such person of his duties to the Corporation also imposes duties on, or
otherwise involves services by such person to, the plan or participants or
beneficiaries of the plan. The termination of any action, suit
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or proceeding by judgment, order or conviction adverse to such person or by
settlement or plea of NOLO CONTENDERE or its equivalent shall not of itself
create a presumption that such person did not act in good faith in the
reasonable belief that his action was in the best interest of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
SECTION 2. ADVANCEMENT OF EXPENSES. The Corporation shall pay the expenses
incurred by any person to whom Section 1 applies in defending any action,
suit or proceeding in advance of final disposition upon receipt of an
undertaking by or on behalf of such person to repay such amount unless it
shall ultimately be determined that he is entitled to be indemnified by the
Corporation pursuant to Section 1 or otherwise.
SECTION 3. NONEXCLUSIVE RIGHT; SUBSEQUENT MODIFICATION. The rights conferred
by this Article shall not be deemed exclusive of any and all other rights to
which any such person may be entitled, whether by law, agreement or otherwise.
This Bylaw shall be deemed a contract between the Corporation and its officers
and directors. Any officer or director of the Corporation who becomes such
while this Article is in effect shall be entitled to act in reliance thereon,
and no amendment, modification or repeal of this Article which has the effect of
reducing or terminating the benefit or protection hereof shall be effective with
respect to any officer or director who became such prior to such amendment,
modification or repeal.
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<PAGE>
EXHIBIT 10(i)(h)
<PAGE>
VOTING AGREEMENT
Made as of June 10, 1997 by and among Discount Investment Corporation Ltd.
("DIC"), PEC Israel Economic Corporation ("PEC") and Delek Investments and
Properties Ltd. ("Delek")
Whereas the parties hereto are shareholders of Super-Sol Ltd. (the "Company");
and
Whereas the parties hereto are willing to vote in concert at the General
Meetings of the Company's shareholders on the election from time to time of the
Company's directors;
NOW, THEREFORE, the parties hereto hereby agree as follows:
As long as Delek holds Ordinary Shares of the Company representing more than 10%
of the Company's Ordinary Shares being issued and outstanding from time to time:
1. DIC and PEC shall exercise all their voting rights as shareholders of the
Company and shall vote together with Delek at the General Meetings of the
Company's shareholders for electing to the Company's Board of Directors
such number of directors designated by Delek which shall be as near as
possible to but not less than 20% of number of all directors of the Company
who will serve on the Company's Board of Directors immediately after such
election of Delek's designees.
2. Delek shall exercise all its voting rights as a shareholder of the Company
and shall vote together with DIC and PEC at the General Meetings of the
Company's shareholders on the election of all other directors of the
Company in the same manner as DIC and PEC shall vote thereon.
3. The parties hereto acknowledge their common intention that one of the
Company's directors from those designated by Delek for election to the
Company's Board of Directors shall be included among the members of each
committee of the Company's Board of Directors. Accordingly, the parties
hereto shall present mutually agreed upon recommendations in line with the
foregoing to the Company's Board of Directors as to the composition of any
such committee.
4. This Agreement shall be governed and interpreted by the laws of the State
of Israel.
IN WITNESS WHEREOF, the parties have signed below:
PEC Israel Economic Corporation
/s/ D. TADMOR
Discount Investment Corporation Ltd.
By: /s/ FRANK J. KLEIN
---------------------------
/s/ A. SADEH
Delek Investments and Properties Ltd.
<PAGE>
EXHIBIT 10(i)(i)
<PAGE>
ISRAEL DISCOUNT BANK LTD FROM: Name PEC ISRAEL ECONOMIC CORPORATION
Branch FOREIGN CURRENCY DEPT. (190) ID/PASSPORT No. Date 3/4/98
----------- ----------
APPLICATION FOR THE ALLOCATION OF A CREDIT LINE IN FOREIGN CURRENCY TO
/ / A RESIDENT / / NON-RESIDENT IN ACCOUNT NO. 980-607495
----------
We hereby make application to Israel Discount Bank Ltd. (hereinafter referred to
as "the Bank") to allocate to us a credit line in the above account in the sum
of USD 26,000,000.00 (TWENTY SIX MILLION DOLLARS) (hereinafter referred to as
"the credit") for a period from 3/4/98 - 4/30/98.
The management terms and conditions of our foreign currency account specified at
the top of this document which we have signed (hereinafter referred to as "the
account") constituting an integral part of this document, and also the
additional terms and conditions particularised below in this our application,
shall apply to the credit:
1. DISCHARGING THE CREDIT
We hereby undertake to repay the credit to the Bank as follows:
/ / on the ________ day of _______________ 199_________ / / in ____
installments of _______ each on the ______day of each month from
_____________until ____________.
2. THE INTEREST RATE - METHOD OF DETERMINATION AND PAYMENT
(a) The credit shall bear daily compound interest on the daily debit balance
in the account at the rate and according to the method of calculation
particularised below. The interest shall be calculated each month on the
last day of such month and shall be paid by us at the end of such
Gregorian month. The interest calculation shall be effected on the basis
of 360 days in a year.
(b) We hereby instruct the Bank to debit our account no. ____________ in
NIS/foreign currency at your ______________ branch on the repayment date
(hereinafter referred to as "the repayment date") with every payment or
amount due from us to the Bank pursuant to this document (hereinafter
referred to as "the payment") in the amount required to discharge such
payment, and we hereby undertake to ensure that there shall, at all
times, be a sufficient balance standing to our credit in our said account
to effect the debits as aforesaid.
The Bank shall be entitled (but not bound) to carry out our said
instructions, irrespective of whether our said account is in credit or in
debit or becomes in debit in consequence of a debit as aforesaid. All
the amounts due or that shall be due from us to the Bank on account of
the credit and the interest shall be discharged to the Bank by paying the
consideration therefor in foreign currency or Israeli currency at the
foreign currency rate prevailing at the Bank on the date of actual
payment, together with an exchange commission as prevailing at the Bank
at such time.
(c) All the amounts that shall be charged to the credit of the account shall
firstly be used to discharge the interest and only thereafter to
discharge the credit principal or according to any other order as the
Bank shall elect. In any case where the repayment date falls on a day
that is not a banking business day as defined below, such repayment date
shall apply on the nearest banking business day as the Bank determines.
For the purposes of this document the expression "banking business day" means
a day on which the Bank actually effects transactions in foreign currency
without restriction as the Bank determines (and for this purpose the eve of
the Day of Atonement shall be deemed a day that is not a banking business
day).
/ / Credit in foreign currency to residents
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<PAGE>
The interest calculations as aforesaid shall be effected by the Bank in
respect of the daily debit balances in our account during the preceding
month, according to the average daily interest rate prevailing at the
Bank during such month for the loans in the credit currency.
The base for determining the interest rate as aforesaid by the Bank shall
be the Bank's daily interest rate for loans as aforesaid published by the
Bank each and every day during each month in the interest rates sheet
held at the Bank's branch (hereinafter referred to as "the interest
rate"). This interest is based on Libor + 0.50% rounded up to the
nearest 1/8%.
/ / Credit in Foreign currency to non-residents
The interest calculation shall be effected in respect of the daily debit
balances in the account during the period that elapsed at a rate that
shall be ______% above Libor applicable according to the Bank's
determination during the interest period in respect whereof interest as
aforesaid is calculated (hereinafter referred to as "the Interest rate").
For the purposes of this document:
the expression "Libor" (London Interbank Offered Rate) means the interest rate
to be determined by the Bank as the rate at which the banks are offered on the
determining date at about 11:00 hours (London time) loans in the credit currency
on the international market in London for a period identical to the interest
period in respect whereof the Libor is determined, as published by a service
known as Reuters (save for cases of technical malfunctions). In any event, the
Bank's determination in respect of the interest rate shall, in the Bank's
exclusive discretion, be final and decisive.
The expression "the determination date" means the banking business day that is
two banking business days prior to the day of commencement of the first interest
period or, at the Bank's election, the day of the commencement of the first
interest period and also on the banking business day that is two banking
business days prior to the commencement of any other interest period, at the
time when the Bank customarily determines the Libor rate.
The Bank shall determine the Libor rate and on the basis of its determination as
aforesaid it shall calculate and determine what is the interest rate that we are
required to pay in respect of the undischarged balance of the credit, and the
interest rate determined as aforesaid shall apply for the period from the
commencement of a relevant interest period until the conclusion thereof. For
the purposes of this paragraph alone, the expression banking "business day"
means a day on which the banks in London execute transactions amongst themselves
in foreign currency deposits on the Euro-banking market in London.
3. DEFAULT INTEREST
(a) Any amount due or that shall be due to the Bank and pursuant to this
document and not paid by us on the date prescribed or that shall be
prescribed for the payment thereof in this document or not paid according
to the Bank's first demand pursuant to clause 4 below shall, for the
period from the date on which we were liable to pay it until the actual
payment thereof, bear interest at a rate 5% higher than the interest rate
that would have been payable in respect of such period pursuant to
clauses 1 and 2 above.
(b) For the avoidance of doubt, it is hereby expressed that the
Bank's right to interest as provided in the clause above and also
the actual collection thereof shall not derogate from the Bank's
right to take (or continue to take) all the means to collect any
amount not discharged by us on the due date or according to its
demand as aforesaid.
(c) Interest as provided in paragraph (a) above shall accrue during
every Gregorian month, or at the Bank's election during any other
period in respect whereof the accrual of interest is permitted at
law, shall also bear interest as provided in paragraph (a).
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<PAGE>
4. CREDIT ALLOCATION COMMISSION
Upon allocating the credit line, you shall debit us, without notice on
your part, with a commission for such service at the rate prevailing with
you at such time, according to your determination from time to time, in
respect of the credit line allocation period.
You shall be entitled to a commission irrespective of whether the credit
line is fully utilised. Furthermore, you shall also be entitled to a
commission if the credit is reduced or cancelled at your initiative. We
are aware that in the present quarter the commission rate in respect of
the credit allocation is ________% per quarter of the credit amount.
5. IMMEDIATE REPAYMENT/REDUCTION/CANCELLATION OF THE CREDIT ALLOCATION
Without prejudice to other rights of the Bank against us in respect of
the credit that we receive pursuant to any document we sign and in
addition thereto, the Bank shall be entitled, in its exclusive discretion
and decision, not to allocate the requested credit to us and/or to reduce
the credit and/or to cancel the credit line and/or to demand immediate
repayment of the entire credit amount, and without the requirement of
prior or other notice to us, in any one of the cases particularised
below:
(a) If the state of the account or our other accounts at the Bank do
not enable the arrangement pursuant to this document to continue.
(b) If we breach and/or do not perform any obligation to the Bank
pursuant to this document or pursuant to any other document or
agreement or obligation or arrangement.
(c) If there is a risk of our inability to repay the credit or, at
the Bank's decision at such time, other conditions without
exception have been created that oblige the credit to be reduced
or the credit line to be cancelled immediately.
7. PURCHASING FOREIGN CURRENCY AGAINST SHEKELS TO COVER THE CREDIT
Without derogating from our obligation to repay the credit and the
interest in the said currency, if two business days prior to the date
designated for any repayment our account with you does not have a
sufficient amount in the said currency, you shall be entitled, but not
bound, to purchase the required foreign currency on our behalf at the
rate of exchnage prevailing with you on such day, and to debit our
account/s in NIS or in another foreign currency as you deem fit.
8. REPAYMENT OF CREDIT GIVEN TO A NON-RESIDENT
We hereby confirm that we are aware that pursuant to the applicable law
relating to foreign currency control, we are under a duty to repay the
credit mentioned in this document and interest thereon from immediately
available sources, i.e. in foreign currency in which the credit is given
originating abroad or in a property in Israel that is freely convertible
into foreign currency pursuant to the applicable law.
Without derogating from our obligation to repay the credit given to us
from free sources as aforesaid, you shall be entitled, but not bound, to
debit any account of ours or to purchase on our behalf the required
foreign currency herein at the rate of exchange prevailing with you on
such day and to debit our account with Israeli currency or with another
currency as you deem fit, and all subject to the foreign currency control
directives pursuant to the applicable law in force from time to time (or
pursuant to a specific permit from the Bank of Israel).
9. THE APPLICABLE LAW
The credit pursuant to this document, the terms and conditions thereof
and all matters connected
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<PAGE>
thereto are subject to the laws of the State of Israel, including any
law, regulation, order, foreign currency control directives, and/or
directions and/or directives of the Bank of Israel or any competent
authority as in force from time to time and at any time whatsoever
(hereinafter referred to as "the applicable law"), and the agreed and
exclusive place of jurisdiction herein shall be the competent court in
Israel in Tel-Aviv, Haifa, Jerusalem or Beersheva, according to the town
that is nearest to the branch at which the credit is given.
10. GENERAL
(a) The headings in this document are for convenience purposes. They
do not form part of the document and no significance shall be
attributed thereto for the purposes of interpreting this document
or any of the provisions hereof.
(b) In this document the plural includes the singular and vice versa,
the masculine includes the feminine and vice versa and everything
relating to a person shall also include a body corporate and vice
versa.
(c) If this document is signed by two or more persons, their
liability and obligation to the Bank shall be joint and several.
Our signature to this document also constitutes our acknowledgement of the
receipt of a copy of this document.
AS WITNESS OUR HANDS:
/s/ FRANK J. KLEIN
---------------------------------
Signature of Customer/s PRESIDENT
/s/ WILLIAM GOLD, TREASURER
---------------------------------
CONFIRMATION OF BRANCH/DEPARTMENT
---------------------------------------------------------
Name and signature of branch/department manager
-------------------------------------------------------
FOR THE BANK'S USE
The loan was effected on______________. The customer's
account was debited by the computer with a commission
to secure a credit line in the sum of _____________ on
_________________________.
This instruction was entered on _____________.
-------------------------------------------------------
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<PAGE>
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries % Owned Incorporation
------------ ------- -------------
General Engineers Limited 100% Israel
PEC Israel Finance Corporation
Ltd. 100% Israel
The Company accounts on the equity method for its interests in the Affiliated
Companies listed in Note 3 of the Notes to the Consolidated Financial Statements
of PEC Israel Economic Corporation and Subsidiaries, which consolidated
financial statements are included in response to item 8 herein.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of income for the year ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,948
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 461,104
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,952
<OTHER-SE> 384,173
<TOTAL-LIABILITY-AND-EQUITY> 461,104
<SALES> 0
<TOTAL-REVENUES> 88,630
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 76,041
<INCOME-TAX> 21,538
<INCOME-CONTINUING> 54,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,503
<EPS-PRIMARY> 2.95
<EPS-DILUTED> 2.92
</TABLE>
