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, 1998
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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
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PEC Israel Economic Corporation
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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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. |X|
Exhibit Index is on Page 330
Page 1 of 377 pages.
<PAGE>
The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 26, 1999 was approximately
$101,041,000. 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 26, 1999, 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 1999 Annual Meeting of Shareholders are incorporated by
reference in Part III.
Page 2
<PAGE>
PART I
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Item 1. BUSINESS
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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 three
cellular telephone providers (Cellcom Israel Ltd.), the cable television company
that serves the Tel-Aviv metropolitan area and several other areas in Israel
(Tevel Israel International Communications Ltd.), a company that is a world
leader in visual information communication for the digital preprint and digital
publishing 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.), one of Israel's most
active real estate construction and development companies (Property and Building
Corporation 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 indirect majority owned subsidiary, Discount
Investment Corporation Ltd. ("Discount Investment"), owns beneficially
approximately 81.35% of the outstanding Common Stock of PEC. IDB Holding is
controlled by Mr. Raphael Recanati, the father of Mr. Oudi Recanati, the
Chairman of the Board of PEC, and members of his family. IDB Development
Corporation Ltd., which is a majority owned subsidiary of IDB Holding ("IDB
Development"), owns approximately 71.7% of the ordinary shares of Discount
Investment.
IDB Holding is one of the largest business enterprises operating in the
private sector of the Israeli economy, with consolidated assets exceeding $9.3
billion at December 31, 1998. Discount Investment 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.
PEC is a party to an Agreement and Plan of Merger, dated as of December
15, 1998 (the "Merger Agreement"), by and among PEC, Discount Investment, as the
assignee of IDB Development, and PEC Acquisition Corporation, a wholly-owned
subsidiary of Discount Investment ("Merger Sub"). Pursuant to the Merger
Agreement, Merger Sub will be merged with and into PEC with PEC as the
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surviving corporation in the merger and each outstanding share of common stock
of PEC, except those shares owned by Discount Investment and those shares in
respect of which appraisal rights have been perfected in accordance with Maine
law, will be converted into the right to receive $30 in cash, without interest.
Immediately following the merger, Discount Investment will own the entire equity
interest in PEC. Completion of the merger requires the affirmative vote of at
least a majority of all outstanding shares of common stock of PEC to approve and
adopt the Merger Agreement. PEC is preparing a proxy statement for a special
meeting of shareholders to be held to vote on the Merger Agreement, which proxy
statement will describe the terms of the Merger Agreement. It is expected that
the special meeting will be held in May 1999.
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<PAGE>
The Affiliates
The following chart lists by industry group each entity in which PEC held
voting equity interests as of December 31, 1998 whose carrying value in PEC's
financial records equaled or exceeded $1.5 million as of December 31, 1998 (the
"Affiliates"), the principal business of each such entity and, with respect to
each such entity, the percentage of equity owned directly by each of PEC,
Discount Investment and the IDB Group in the aggregate. PEC believes that no
entity whose carrying value was below $1.5 million as of December 31, 1998 is
material to PEC and that all such entities, in the aggregate, were not material
to PEC. 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, 1998
-----------------------------------
Discount IDB
Principal Business PEC Investment Group (1)
------------------ ---- ---------- ---------
<S> <C> <C> <C> <C>
Telecommunications and Technology
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
Elron Electronic Diversified High 14.0 27.2 41.2
Industries Ltd. Technology Holdings
Scitex Corporation Ltd. Visual Information 6.6 6.6 26.2(3)
Communication
Gilat Satellite Networks Satellite Communications 4.6 4.2 8.8(4)
Ltd. Systems
Gilat Communications Satellite-Based 9.7 9.7 19.4
Ltd. Communications Services;
Satellite-Based Interactive
Distance Learning Systems
NICE Systems Ltd. Voice Logging and 5.1 5.1 10.2
Communication Intelligence
Systems
Tel-Ad Jerusalem Studios Television Station Operator 11.5 11.5 23.0
Ltd. and Producer of Television
Programs
Liraz Systems Ltd. Customized Computer 20.7 20.8 41.5
Software Systems: Distri-
bution of Packaged Software;
and Provider of Outsourcing
Services
</TABLE>
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<TABLE>
<CAPTION>
Percentage
Equity Ownership as of
December 31, 1998
-----------------------------------
Discount IDB
Principal Business PEC Investment Group (1)
------------------ ---- ---------- ---------
<S> <C> <C> <C> <C>
Telecommunications and Technology (continued)
Gemini Israel Fund L.P. Venture Capital Fund 16.0% 16.0% 42.7%(5)
(Primarily High Technology)
RDC-Rafael Development Development Stage 16.7 16.7 50.1(6)
Corporation Ltd. High Technology
Products
Electronics Line (E.L.) Electronic Security 13.9 13.9 27.8
Ltd. Systems
Libit Signal Processing Ltd. Modem Technologies 4.2 4.2 8.4
Orbital Imaging Corporation Satellite-Delivered 1.3 -- 1.3
Earth Imagery Services
KenTech Ventures Ltd. Development Stage 9.1 9.2 24.4(7)
Software and Data
Communications
Industry
Tambour Ltd. Paint and Related Products 43.3 42.3 86.8(8)
Klil Industries Ltd. Aluminum Extrusions and 18.9 42.5 65.8(9)
Finished Products
Tefron Ltd. Lingerie and Undergarments 7.1 7.2 14.3
Mul-T-Lock Ltd. Locks and Security Doors 14.8 15.0 33.2(10)
Agis Industries (1983) Ltd. Pharmaceuticals 2.5 2.5 5.0
NewCheck Corporation Self-Service 6.5 3.9 10.4
Automatic Checkout
Counters
Ham-Let (Israel-Canada) Ltd. Instrumentation 6.8 6.8 13.6
Valves and Fittings
Maxima Air Separation Center Ltd. Industrial Gas Production 12.1 11.6 23.7
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage
Equity Ownership as of
December 31, 1998
-----------------------------------
Discount IDB
Principal Business PEC Investment Group (1)
------------------ ---- ---------- ---------
<S> <C> <C> <C> <C>
Real Estate
Property and Building Real Estate Construction 41.4 15.0 56.5(11)
Corporation Ltd. and Development
Retail, Shipping and Other
Super-Sol Ltd. Supermarkets 20.1 24.9 45.0(12)
El-Yam Ships Ltd. (13) 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 2.1 2.1 4.2
Operation of Hotels
</TABLE>
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<PAGE>
(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 13.0% ownership interest of Clal Electronics Industries Ltd.
and its subsidiary Clal Electronics Ventures Ltd., both affiliates of IDB
Holding.
(4) As a result of sales of ordinary shares of Gilat Satellite Networks Ltd.
("Gilat Satellite") after December 31, 1998 by Discount Investment and
Gilat Satellite in an underwritten public offering, as of March 26, 1999,
PEC owned 3.7%, Discount Investment owned 0.9% and the IDB Group owned
4.6% of the ordinary shares of Gilat Satellite.
(5) PEC and Discount Investment each own 25.0% of Gemini Capital Fund
Management Ltd. ("Gemini Capital"), the general partner of Gemini Israel
Fund L.P. ("Gemini") which has a nominal equity interest in Gemini. The
ownership interest of the IDB Group includes the 5.3% and 5.4% ownership
interests of Elron Electronic Industries Ltd. and Scitex Corporation Ltd.,
respectively, in Gemini. The interests of PEC, Discount Investment and the
IDB Group in Gemini represent nonvoting limited partnership interests.
(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) The ownership interest of the IDB Group in KenTech Ventures Ltd. includes
the 6.1% ownership interest of Liraz Systems Ltd.
(8) Includes the proportionate interest of the IDB Group in the 1.4% ownership
interest in Tambour Ltd. ("Tambour") held by subsidiaries of Tambour.
(9) Includes the proportionate interest of the IDB Group in the 6.7% 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, 1998 by PEC and Discount
Investment, as of March 26, 1999, PEC owned 20.2%, Discount Investment
owned 45.5% and the IDB Group owned 70.4% respectively, of the ordinary
shares of Klil.
(10) Includes the proportionate interest of the IDB Group in the 10.3%
ownership interest in Mul-T-Lock Ltd. ("Mul-T-Lock") held by Mul-T-Lock
Technologies Ltd., a wholly-owned subsidiary of Mul-T-Lock.
(11) The ownership interest of the IDB Group in Property and Building
Corporation Ltd. includes the 0.1% ownership interest of IDB Development.
As a result of purchases of ordinary shares of Property and Building
Corporation Ltd. after December 31, 1998 by PEC and Discount Investment
and the transfer to Discount Investment by IDB Development of IDB
Development's
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ordinary shares of Property and Building Corporation Ltd., as of March
26, 1999, PEC owned 41.6%, Discount Investment owned 15.2% and the IDB
Group owned 56.8%, respectively, of the ordinary shares Property and
Building Corporation Ltd.
(12) As a result of purchases of ordinary shares of Super-Sol Ltd. after
December 31, 1998 by Hevrat Hanechasim Shel Supersol B.M. ("Hevrat"), a
wholly-owned subsidiary of Super-Sol Ltd., as of March 26, 1999, the IDB
Group owned 46.6% of the ordinary shares of Super-Sol Ltd., including its
proportionate interest in the 3.5% ownership interest in Super-Sol Ltd.
held by Hevrat.
(13) Includes the Company's interest in Financial Holdings El-Yam (Hamigdal)
Ltd.
In November 1998, in connection with a loan of $90 million arranged
by PEC and Discount Investment to United Pan-Europe Communications N.V. ("UPC"),
a corporation which owns and operates cable-based communications networks in
Europe and, through Tevel Israel International Communications Ltd., in Israel,
UPC granted PEC and Discount Investment an option exercisable, among other
things, upon an initial public offering of shares of UPC, to acquire ordinary
shares of UPC at a price equal to 90% of the initial public offering price. In
January 1999, UPC notified PEC of a proposed initial public offering and on
February 1, 1999, PEC and Discount Investment exercised their respective
options. On February 17, 1999, UPC completed the sale of its ordinary shares in
an initial public offering and PEC Israel Finance Corporation Ltd. ("PECFC"), a
wholly-owned subsidiary of PEC, purchased approximately 0.63% of the outstanding
ordinary shares of UPC for approximately $24.3 million. As of March 26, 1999,
the closing price of an ordinary share of UPC on the NASDAQ/NMS was $36.375 and
the UPC shares PECFC purchased had a quoted market value of approximately $28.3
million. The trading symbol of UPC on the NASDAQ/NMS is "UPCOY". PECFC may not
sell its shares of UPC for a 180-day period.
PEC and Discount Investment received an additional option to acquire
ordinary shares of UPC at a price per share equal to the greater of (1) $32.78
or (2) the average sale price of an ordinary share of UPC on the Amsterdam Stock
Exchange for the 30-day period immediately preceding the exercise date. The
aggregate purchase price for the ordinary shares that may be purchased by PEC
pursuant to the additional option would be equal to the sum of $22.5 million,
plus interest thereon at the rate of 8% per annum from November 9, 1998 through
the closing of the additional option. The additional option will terminate if it
is not exercised on or before September 30, 2000.
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<PAGE>
The businesses of PEC's most significant Affiliates are described below.
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 February 1999, over 1,090,000 subscribers
were utilizing Cellcom's cellular telephones, an increase of approximately
240,000 subscribers in the past year and over 570,000 customers in the past two
years. Approximately 35% of Israelis have mobile phones, a usage rate second
only to the Scandinavian countries. Cellcom has invested approximately $800
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. Cellcom pays the Israeli government annual royalties of 8% of its
revenues from air time and monthly charges. 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 began operations in October 1998. Elbit Ltd., a 43% owned
subsidiary of the Company's affiliate Elron Electronic Industries Ltd., owns
16.5% 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 and switches to carry telephone calls. At the end of
1998, Cellcom had 770 operating cell sites and 12 switches. In order to improve
the quality of its existing service, Cellcom intends to construct an additional
125 cell sites in 1999.
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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 customers an interconnect fee and, since
1997, a monthly fee of $6.00, which is adjusted for inflation after an aggregate
increase in the Israeli consumer price index of more than 8.5%. Cellcom's peak
charges are lower than the charges of the operator of Israel's first and third
cellular network during peak hours.
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 1998, Cellcom products and services were offered in over 65 cities
throughout Israel at over 360 locations, of which 18 were Cellcom retail stores.
In October 1998, plans for a proposed initial public offering of shares in
Cellcom were discontinued due to instability in the stock market and the absence
of necessary Israeli regulatory approvals. Although Cellcom is considering an
initial public offering of its shares, it is uncertain when, if ever, such
public offering would be undertaken and on what terms.
Tevel Israel International Communications Ltd. ("Tevel"). The Company
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. The Company's partners in Tevel are DIC and United Pan Europe
Communications N.V. ("UPC"), a major owner and operator of cable television
systems in Europe. UPC holds its interests in Tevel through wholly owned
subsidiaries. PEC acquired a 0.63% interest in UPC in February 1999.
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. In addition, through
Gvanim Cable Television Ltd., which Tevel purchased in April 1998, Tevel holds
the franchises to
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operate cable television in Rishon Lezion, Ramle, Lod and the Krayot near Haifa.
All of the Tevel and Gvanim franchises include approximately 600,000 households
- - - about 40% of the homes in Israel. Tevel and Gvanim have completed the
construction of approximately 95% of the cable network in their franchise areas.
At the end of 1998, Tevel had approximately 403,000 subscribers, constituting
approximately 69% of the households in the area in which network construction
has been completed.
The franchises granted to Tevel have a 12-year term expiring in 2002 with
a four-year renewal right. Some of Gvanim's franchise areas have a 15-year term.
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 more than 1.9% above the 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 packaged by Tevel under Tevel's brand name "Home Cinema". During 1998,
monthly sales of "Home Cinema" events increased steadily, reaching a sales rate
of 102,000 events per month. The total sales in 1998 amounted to 1,220,000
events. Tevel does not yet have a license to offer pay per view services in the
Gvanim franchise areas it acquired in 1998.
Tevel holds a 50% ownership interest in Globcall Ltd., an operator of
telecommunication and switching systems for businesses. At the end of 1998,
Globcall served approximately 400 business locations with 50,000 telephone
extensions. Tevel also owns a 33% ownership interest in NetVision Ltd., Israel's
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largest Internet services provider (the Company's affiliate, Elron Electronic
Industries, Ltd., also owns 32% of NetVision Ltd.)
Tevel and other cable television corporations in Israel are considering
combining their operations. Any such combination would require the approval of
the government of Israel and it is uncertain when, if ever, any such combination
would occur and on what terms.
It is anticipated that direct satellite television broadcasting will be
introduced to Israel in the near future and that such broadcasting will compete
with cable television. The effect of such possible competition on Tevel is
uncertain.
The Israeli cable television regulatory authorities have expressed their
intention to end the exclusivity of Tevel's cable television franchises and to
pay Tevel compensation for the loss of such exclusivity. It is uncertain as to
(i) when, during the remaining term of Tevel's franchise, the regulatory
authorities will end such exclusivity, (ii) the amount of compensation that will
be paid to Tevel and (iii) the effect of the end of such exclusivity on Tevel.
The government approval granted to a consortium of Israeli cable
television companies, including Tevel, that permits the companies to purchase
television programs jointly expires at the end of June 1999. It is uncertain
whether the regulatory authorities will extend the approval and, if they do not,
the effect of the end of such consortium on Tevel.
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, 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
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substantial resources to companies developing technologies and products for the
Internet and the Internet network management software.
Elron's affiliates include publicly-traded and privately-held companies.
As of February 28, 1999, its principal publicly-traded affiliates were Elbit
Medical Imaging Ltd. (39% owned-medical products and services in the field of
diagnostic imaging and establishment of diagnostic and therapeutic imaging
centers around the world, mainly in developing countries - NASDAQ/NMS symbol
"EMITF" and also traded on the Tel Aviv Stock Exchange (the "TASE"). On February
25, 1999, Elron announced that it had agreed to sell its shares of Elbit Medical
Imaging Ltd. for $145 million); Elscint Ltd., a 57% owned subsidiary of Elbit
Medical Imaging Ltd. (in November 1998, Elscint completed the sale of its
computer tomography business to Picker International for $269.5 million and the
sale of its magnetic resonance imaging and nuclear medicare businesses to GE
Medical Systems for $100 million; Elscint and GE Medical Systems are continuing
their joint venture ELGEMS, which was established in 1997, for the design and
manufacturing capabilities of nuclear imaging products. On February 18, 1999,
Elbit Medical stated its intention to purchase all the shares of Elscint it did
not own 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 TASE); Elbit Ltd. (43% owned-communications access systems for public and
private networks; in February 1998 its affiliate, Partner Communications Company
Ltd. (16.5% owned), was awarded the license to become the third cellular
telephone operator in Israel - NASDAQ-NMS symbol "ELBTF" and also traded on the
TASE); 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"); 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 - over-the-counter stock symbol
"MNTK"); NetManage Inc. (1.5% owned - provider of standards-based software for
the Internet and corporate intranets
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- - - 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 interactive, simulation-based educational software
products - NASDAQ/NMS symbol "LOGLF").
Elron's privately-held affiliates as of February 16, 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 Rafael Armament Development Authority, a division of
Israel's Ministry of Defense); Chip Express Corp. (35% 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); 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 the Company and DIC are
limited partners.
Elron's wholly-owned subsidiary, Elron Software Inc. develops and sells
Internet network management products through its two divisions: - the Internet
Product Division, which focuses on small to mid-size networks, and the System
Integration Division, which was acquired on December 1998 and supplies complete
solutions to large organizations. Elron Software's business mission is to be the
leading provider of Internet/network management software solutions that span the
range from small-to-medium-size networks, to large enterprise networks, and to
very large service provider networks, to help customers manage the productive
use of the Internet by leveraging access to Israeli technology.
Elron also has ownership interests in the following five privately-held
companies which focus on advanced technologies, products and services within the
information technology field,
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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. (36% owned - provides single point
access to the Internet with any real time communication device); Ornetix
Technologies Ltd. (43% 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); and
ServiceSoft Corporation (13% owned - software products that provide self-service
support information directly to end users over the Internet and Intranets).
Elron's three major affiliates, Elbit Medical Imaging Ltd., Elbit Systems
Ltd. and Elbit Ltd., constituted approximately 66% of Elron's total assets as of
December 31, 1998.
Elron's ordinary shares are listed for quotation on the NASDAQ/NMS (symbol
"ELRNF") and on the TASE.
Scitex Corporation Ltd. ("Scitex"). Scitex is a world leader in visual
information communication. Scitex designs, develops, manufactures, markets and
supports products, systems and devices primarily for the digital preprint and
digital printing markets.
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 platesetters 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.
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 color servers and digital front ends for
print-on-demand systems, working with Xerox Corporation and
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others. Scitex sells its digital printing products mainly to commercial
printers, periodical printers and form printers.
Scitex customers include Fortune, The New York Times, National Geographic,
Sports Illustrated, R.R. Donnelley Corporation, Unisys, Banta, Rizzoli,
Monhadori, Dai Nippon Printing, Ashai Shimbun and Tappan Group.
Scitex, in a joint venture with Koenig & Bauer AG, the world's third
largest press manufacturer, has developed and markets a digital offset press,
designed to print high quality, short runs at a competitive cost and to digitize
traditional print processes, which increases productivity and predictability,
and thus reduces costs.
In 1998, Scitex acquired Idanit Technologies Ltd., a developer of wide
format, inkjet digital printing systems, for approximately $60 million in cash;
the Grand Jet product line of Matan Digital Printing was added subsequently.
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.
In 1998, Scitex and British Telecom launched a joint venture called Vio.
This powerful network-based communication service is dedicated to the graphic
arts. It interconnects the customer base globally and extends the workflow
beyond organizational and geographical boundaries.
The ordinary shares of Scitex are listed for quotation in the United
States on the NASDAQ/NMS (symbol "SCIXF").
Gilat Satellite Networks Ltd. ("Gilat Satellite"). Gilat Satellite is a
leading provider of products and services for satellite-based communications
networks. Gilat Satellite designs, develops, manufactures, markets and services
products that enable complete end-to-end telecommunications and data networking
solutions based on very small aperture terminal ("VSAT") satellite earth
stations, related central station (hub) equipment and software. With Gilat
Satellite's acquisition of GE Spacenet Services, Inc. ("Spacenet") from GE
American Communications, Inc. ("GE Americom"), a subsidiary of General Electric
Company, on December 31, 1998, Gilat Satellite now provides service offerings
which include
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access to satellite transponder capacity, installation of network equipment,
on-line network monitoring and network maintenance and repair services.
Gilat Satellite's networks are primarily used for:
o on-line data delivery and transaction-oriented applications
including point-of-sale (for example, credit and debit card
authorization), inventory control and real time stock exchange
trading
o telephone service in areas that are underserved by the
existing telecommunications services or in remote locations
without service
o Internet Protocol ("IP") based networking applications such as
corporate intranets, corporate training and other broadband
multicasting applications
Through December 31, 1998, Gilat Satellite sold more than 110,000
interactive VSATs. According to Comsys, a leading industry source, Gilat
Satellite has approximately 30% of the worldwide interactive VSAT market. Comsys
also reported that in 1998, Gilat Satellite's market share was approximately 40%
of the total interactive VSATs for which contracts were awarded worldwide. Major
users of Gilat Satellite's products and services include the United States
Postal Service, British Petroleum, John Deere, First Union Bank, PageNet, Rite
Aid, Peugeot-Citroen and Telkom South Africa.
Gilat Satellite distributes its products and services worldwide through
its own direct sales force, selected service providers and agents and, in
certain circumstances, joint ventures, alliances, and affiliated companies. Its
distribution network and service offerings were enhanced by the Spacenet
acquisition, which added a significant existing customer base as well as a
distribution infrastructure in the United States, Europe, Asia and South
America.
On February 8, 1999, Gilat Satellite completed a public offering of
4,745,000 of its ordinary shares, of which Gilat Satellite sold 4,000,000
ordinary shares and selling shareholders sold 745,000 ordinary shares (including
500,000 ordinary shares
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sold by a subsidiary of Discount Investment). As a result of the public
offering, PEC recorded an estimated $5.9 million gain on issuance of shares by
an Affiliated Company in the first quarter of 1999. In consideration of PEC not
selling ordinary shares of Gilat Satellite in the offering, the subsidiary of
Discount Investment which sold shares in the offering granted PEC the right to
sell up to 250,000 ordinary shares of Gilat Satellite to the subsidiary at a
price of $54.72 per share plus interest from February 8, 1999 to the date of
sale, such right being exercisable from May 9, 1999 to August 7, 1999. Gilat
Satellite's stock is traded on the NASDAQ/NMS under the trading symbol "GILTF".
NICE Systems Ltd. ("NICE"). NICE is a leading global provider of
integrated digital recording and quality management solutions. NICE's solutions
help customers improve their business by recording, storing, evaluating and
managing voice communications, call data, desktop screens and video. NICE serves
the business needs of multiple markets, primarily financial institutions, call
centers, air traffic control (ATC) sites, public safety centers, and closed
circuit television (CCTV) security installations. NICE also develops and
provides voice recording and communications intelligence (COMINT) systems for
government agencies.
Partnership and integration are key elements of NICE's corporate strategy.
NICE works closely with telecommunication providers to deliver solutions that
seamlessly integrate with the working environment. NICE is a leader for advanced
Computer Telephony Integrated (CTI) recording solutions.
NICE sells indirectly to customers through its global distribution
partners, including telecommunication providers such as Lucent Technologies,
Siemens, Alcatel, IPC Information Systems and ETRALI, and a growing distributor
network around the world.
NICE offers its customers a broad range of professional services that
include system integration - providing tailored solutions to meet customers'
needs, consulting, installation, ongoing training and implementation support.
NICE's flagship product, NiceLog, is a CTI digital voice recording system
that provides a wide range of scaleable recording solutions including total
recording, recording-on-demand and selective recording. NiceLog provides
continuous, unattended, reliable, high-quality digital recordings of telephone
conversations for immediate retrieval and playback. All incoming and outgoing
call information is stored in NICE's comprehensive database, NiceCLS (Call
Logging System).
NICE also offers NiceUniverse, a tool for evaluation and managing the
quality of service provided by call center agents. It is designed to elevate the
performance of the call center and
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create a competitive advantage by improving the experience of the customer.
NiceUniverse is based on NICE's advanced digital voice recording and desktop
screen capture capabilities. Application software allows call center managers to
automate the process of recording customer calls. An integrated scoring form
generator enables managers to evaluate agents consistently. The system provides
custom reports and charts to measure performance levels, pinpoint training
requirements and track progress of the quality program.
NICE has recently launched its new total digital video and audio recording
system, NiceVision, that provides organizations using multiple CCTV cameras with
continuous, multi-channel, high motion, total digital recording and archiving
capabilities for complete coverage of the security environment.
Other products include NiceCall, a compact and cost-effective voice
recording system for smaller applications and NiceCMS, a powerful call
management solution for monitoring, tracking, evaluating and verifying call
traffic in organizations.
For ATC applications, NICE provides NiceFix a powerful
interferometer-based direction finding (DF) system that covers both VHF and UHF
frequency ranges to detect and display aircraft/vessel direction, and NiceSoft a
multi-channel integrated, voice and radar recording system, designed and
manufactured jointly with Comsoft GmbH of Germany.
In the COMINT sector, NICE's key product is CDF-1500, a high performance,
spectral surveillance and direction finding system that detects, identifies,
locates, monitors and records transmission sources.
NICE's American Depositary Shares are listed for quotation on the
NASDAQ/NMS under the trading symbol "NICEY".
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
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station. The broadcast license is in effect until October 31, 2003. 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. Since
September 1998, Tel-Ad's programs have been broadcast on Sunday and Wednesday.
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 1998, 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 20-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 internationally popular
television series. The programs span a wide range of genres and formats,
including entertainment, drama 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
long-running drama series "Ramat Aviv Gimmel", the critically acclaimed late
night drama series "Florentene" and the popular television travel magazine
"World Travel".
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.
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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 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
72% 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.
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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 distributes cleaning, disinfecting and
maintenance products for the institutional and industrial markets.
The stocks of Tambour, Serafon and Kedem are 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.
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, 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 31%
of Israel's total citrus exports in 1998.
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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, Petach Tikvah, Haifa and Herzliya
on which it can build approximately 4,200 apartments, of which 540 apartments
are currently in various stages of development and construction, including 200
apartments which have been sold.
Property & Building owns and rents to tenants approximately 472,000 square
meters of commercial floor space located mainly in prime areas. The occupancy
rate for Property & Building's rental properties is approximately 91%.
Subsidiaries of Property & Building constructed industrial and office buildings
in 1998 having 51,750 square meters of rental space and 28,150 square meters for
car parking and basement areas. Such companies are currently constructing
commercial, office and industrial buildings having 38,300 square meters of
rental space and 38,700 square meters for car parking and basement areas in Tel
Aviv, Herzliya, Petach Tikvah, Rechovot and Netanya.
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 one of Israel's largest
supermarket chains, accounting for an estimated 39% of total sales by
supermarket chains and an estimated 15% 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.
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As of February 28, 1999, Super-Sol had 128 stores, which sell food and
consumer items such as household goods and textiles. Its chain includes 43
neighborhood Super-Sol stores, located in upscale, residential urban areas,
which cater primarily to high and middle income families with emphasis on a wide
variety of high quality food products and services; 30 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; 45 Hypernetto stores which sell a
variety of goods at higher discounts and appeal to price-conscious customers;
four discount Birkat Rachel stores offering specially certified Kosher products
which cater to religious shoppers; three membership warehouse-club Universe Club
stores offering food and a wide variety of non-food items at discount prices;
and three Cosmos mega-stores of approximately 8,000 square meters that feature
larger selections, specialty departments and significant space devoted to
non-food items.
Super-Sol also operates a central computerized ordering center which
caters to customers in major metropolitan areas desiring to place orders by toll
free telephone, Internet and facsimile.
Super-Sol's supermarket sales in Israel accounted for 97% of its total
revenues during 1998. 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 1998, Super-Sol sold at a gain its interests in Super-Kozert, its
Hungarian supermarket chain, and in "Ace/Kne Uvne", a chain of "do it-yourself"
stores in Israel. During the second quarter of 1998, Super-Sol began operating a
new logistics center in Rishon Lezion, which will allow Super-Sol to increase
self-distribution and to improve efficiency.
Super-Sol also holds equity interests in three shopping malls and three
commercial centers and in one commercial center and one shopping mall currently
under construction.
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Super-Sol's ordinary shares are traded on the TASE.
Super-Sol's American Depositary Shares ("ADSs"), each ADS representing
five ordinary shares, are listed for 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 bulk cargoes, such as grain, coal and iron ore. El-Yam has
been engaged in the worldwide shipping business for over 45 years.
International shipping rates for bulk cargoes are subject to wide
fluctuation. The recession in the Far East has adversely affected the bulk
transportation market and, as a result, El-Yam has reduced its bulk shipping
operations.
El-Yam's major asset is its nonvoting preferred stock of FHEY, which
represents substantially all of the equity in FHEY. FHEY in turn owns
approximately 37.3% of IDB Holding. IDB Holding owns through IDB Development and
Discount Investment approximately 81.35% of the PEC's common stock. PEC owns
approximately 10.1% of the voting shares of FHEY and Discount Investment owns
approximately 14.3% of such voting shares.
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 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
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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 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.
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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.
On October 23, 1998, following several days of negotiation in the Wye
Plantation, Maryland, Israel and the Palestinian Authority signed an agreement
(the "Wye Agreement") which provides for Israeli withdrawal from 13.1% of the
West Bank in three stages and the cancellation of those articles in the
Palestinian Covenant which call for the destruction of Israel. President Clinton
and King Hussein of Jordan also signed the agreement. The agreement was ratified
by the Israeli Government on November 11, 1998. On December 14, 1998, the
Palestinian National Council voted to annul those articles in the Palestinian
Covenant which call for Israel's destruction. Implementation of the Wye
Agreement has been suspended because of disagreements between Israel and the
Palestinian Authority concerning their respective compliance with the provisions
of the Wye 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.
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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.
In January 1999, the Knesset, Israel's parliament, voted to schedule
elections for Prime Minister and all of the members of the Knesset on May 17,
1999. To date, one of the principal issues of the election campaign has been
what actions, if any, Israel should take in order to advance the peace process.
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 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 903,000 new immigrants
arrived through the end of 1998, of which approximately 57,000 arrived in 1998,
a decrease of 14% from 1997. The future level of immigration is largely
dependent on the political stability of Russia and the other countries of the
former Soviet Union.
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Although 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 the decrease in the rate of immigration may relieve strain on
government services, short-term economic development and national resources,
such a decrease may 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 from the republics of the
former Soviet Union. 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. This $10 billion loan guarantee program has now ended. There
is no assurance that foreign aid from the United States will continue at or near
amounts received in the past. Israeli and American officials have discussed
gradually ending the annual civilian aid package of $1.2 billion. If the grants
for economic and military assistance are eliminated or reduced significantly,
the Israeli economy could suffer material adverse consequences.
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The Economy
Overview
Israel's economy, which has become increasingly integrated with the
world economy in recent years, was affected in 1998 by the slower growth rate in
world trade and the decrease in prices of tradeable goods, especially
commodities. The slower growth rate in world trade depressed the rate of growth
of Israel's exports while the drop in world prices for goods led to cheaper
imports. Since prices of Israel's exports rose by two to three percent more than
the costs of Israel's imports, Israel's balance of payments deficit fell for the
second consecutive year. Reduced costs of imports helped lower production costs
in Israel and decreased the inflation rate for most of the year.
Total consumption of goods and services in Israel grew more slowly
in 1998 than at the beginning of the decade. The growth rate in private
consumption of goods and services, which accounted for over half of total uses
of resources in Israel's economy, decreased in 1998 compared to 1997, reflecting
the reduced effects of the mass immigration earlier in the decade that led to a
boom in consumption. This reduced growth rate decreased Israel's overall
economic growth rate in 1998. In addition, reduced investment in housing
construction, arising from the success in earlier years of meeting the housing
demands of immigrants, decreased the growth rate of Israel's economy.
As a result of the slowdown in world trade and reduced immigration,
Israel's gross domestic product (GDP) rose by only 1.9% in 1998 compared to 2.4%
in 1997. Business sector GDP grew even less, 1.6% compared to 2.1% in 1997. The
slower growth rate resulted in an increase in Israel's unemployment rate to an
average of 8.6% in 1998 compared to an average of 7.8% in 1997 and 6.7% in 1996.
Although Israel's Central Bureau of Statistics estimates that investment,
industrial production and exports increased during the last two months of 1998,
the unemployment rate for this two-month period was a relatively high 8.5%,
representing 195,000 unemployed persons. While the sluggish growth in world
trade lowered the rate of growth in Israel's economy and increased the
unemployment rate, Israel was spared many of the adverse effects from this
slowdown due to Israel's relatively small short-term national debt and the Bank
of Israel's tight control over Israel's financial system (although
I-30
<PAGE>
such tight control has been criticized for lowering the economic growth rate).
Until August 1998, Israel's consumer price index ("CPI") rose at an
annual rate of 3.9%, bringing Israel's inflation rate close to the level of a
majority of developed countries. However, the rapid devaluation of the New
Israel Shekel ("NIS") during the last quarter of 1998 increased the inflation
rate, which rose to 8.6% for all of 1998 compared to 7% for 1997. The shekel
devalued by 17.6% against the dollar and by 20.4% against the currency basket
during 1998. At the end of the year, the exchange rates of the dollar and
currency basket to the shekel were NIS 4.16 and NIS 4.56, respectively.
During the first seven months of 1998, the Bank of Israel,
responding to a relatively low annual inflation rate of 3.9% and a 4% inflation
target for 1999, decreased the interest rate it charges banks, reducing rates
gradually from 13.4% to 9.5%. Following the approximately 10% decline in the
exchange rate of the shekel against the dollar during October 1998 that resulted
from the financial crisis in Russia, the Bank of Israel raised the interest rate
it charges banks by 4% to 13.5%, where it remained until the end of the year.
During 1998, progress was made towards streamlining the Israeli
economy through privatization of government companies and further liberalization
of foreign exchange controls. Except for restrictions on large investment
organizations and foreign residents' futures transactions, all restrictions on
foreign currency activity by Israelis and currency activity in Israel by foreign
residents were removed at the end of April. In contrast to the past regulations,
which prohibited all foreign currency transactions except for those expressly
permitted, all foreign currency transactions are now permitted except for those
that are expressly forbidden.
Balance of Payments and Foreign Trade
The balance of payments current account deficit fell to $1.5 billion
in 1998 compared with $3.1 billion in 1997 and $4.9 billion in 1996, primarily
because Israel's exports rose at a higher rate than Israel's imports. However,
the rate of growth of Israel's exports of goods and services slowed in 1998
compared to 1997, rising by 5.2% compared with 7.0% in 1997. The slower
I-31
<PAGE>
export growth rate resulted principally from reduced growth in world trade
following the financial crises in Southeast Asia, Russia and South America,
decreased revenue from tourism (which is regarded as an export) because of
political tensions in the Persian Gulf region at the beginning of 1998, and
continued decline in trade with the territories administered by the Palestinian
Authority.
The change in the mix of Israel's industrial exports continued in
1998. Exports by high technology industries, where Israel enjoys a relative
advantage in terms of expertise and innovation, expanded rapidly while exports
by the traditional industries, such as textiles, stagnated. The fastest growing
export industry in 1998 was software, with foreign sales reaching a record $1.5
billion, a 50% increase compared to 1997. Overall industrial exports excluding
diamonds increased by 7.2% in 1998 compared with 11.9% in 1997. Diamond exports
dropped by 10.2% in 1998 due to the economic crises in many of the countries in
Southeast Asia, which region is among the largest markets for Israel's diamond
exports.
Investment
Investment in fixed assets declined by 4.1% in 1998 following a
decrease of 3% in 1997. Investment in fixed assets is composed of two major
categories, housing construction and all other investment, including
non-residential construction, capital investment goods and, since 1998,
intangible assets, which consist mainly of computer software. Housing investment
fell by 7.2% in 1998 primarily because of a decrease in demand following the
fulfillment in recent years of the housing needs of immigrants who came to
Israel earlier in the decade. Investment in all other fixed assets decreased by
0.7% in 1998. The inclusion of computer software in this investment category in
1998 reduced the overall decrease, because software investment increased at an
average annual rate of 17% during the last three years. Imports of capital
investment goods, an indicator of current and future investment trends in the
economy, fell 1% during 1998, but imports increased in the second half of 1998
compared to the first half. In addition, infrastructure investment grew by 10.2%
in 1998 compared to a decrease of 1.5% in 1997, a positive development for
future economic growth.
I-32
<PAGE>
The Labor Market
The slower economic growth rate in 1998 was clearly evidenced in the
labor market. Employment rose by 1.1% in 1998 compared to a 1.9% increase in
1997 and considerably higher increases in previous years. Since the size of the
potential work force grew at the same rate in 1998 compared to 1997, the smaller
increase in employment in 1998 compared to 1997 resulted in an increase in the
unemployment rate for 1998 to an annual average rate of 8.6% from 7.8% in 1997.
While public sector employment rose by 3% in 1998, business sector employment
increased by only 0.2%. The number of persons employed in labor intensive
traditional industries, such as textiles, decreased while employment in high
technology industries or services increased. Average real wages in both the
business sector and the public sector rose by 1.5%. Although employment of lower
paid, less skilled workers in the business sector decreased during 1998,
employment of more highly trained, higher paid employees in the high technology
sector of the economy rose, explaining the increase in wages at a time of rising
unemployment. The average monthly wage of an employee reached NIS 6,270
(approximately $1,510) in 1998.
Despite the increase in the unemployment rate during 1998, the
number of foreign workers in Israel did not decline, indicating that such
workers have become integrated in the Israeli economy and terminating their
employment is difficult. The large number of foreign workers reduces employment
opportunities for Israelis and has serious sociological implications. In
contrast to the situation at the beginning of the decade, when the unemployment
rate increased because of an increase in the labor force resulting from mass
immigration, the unemployment rate grew in 1998 because of a slower economic
growth rate.
The Budget
Israel's aggregate government budget deficit in 1998 was NIS 8.8
billion, 2.4% of GDP, which was the government's targeted level. The government
met the target level primarily because the government had a larger than planned
NIS 3.4 billion surplus arising from its activities abroad, principally interest
on the Bank of Israel's foreign exchange reserves, which reached a record level
of $22.7 billion at the end of 1998. Israel's
I-33
<PAGE>
domestic budget deficit, however, was NIS 12.2 billion, or 3.3% of GDP, compared
with a targeted deficit of 2.2% of GDP. The increase in the budget deficit is
attributable mainly to a decrease in government revenue.
The government's domestic budget deficit was financed primarily from
revenue of NIS 5.1 billion from the privatization of government businesses, NIS
3.4 billion surplus from the government's activities abroad and government
borrowing of NIS 3.7 billion.
The Capital Market
Stock trading during 1998 was heavily influenced by developments in
world markets, and stock prices were highly volatile. During the year as a
whole, the general share index of stocks listed on the Tel Aviv Stock Exchange
(the "TASE") fell by 5.1% after rising by over 26% in 1997. From the beginning
of the year until the middle of February, prices fell due to the political
tension in the Persian Gulf region. From the middle of February until the end of
May, share prices rose by 24%, accompanied by high trading volume and an active
market for new stock issuances. The rise in share prices during this period was
attributed to the increase in stock prices on markets in the United States and
the decrease in the inflation rate to an annual rate of 1.8% for the first five
months of the year. In June, the upward trend in the general share index was
reversed and the index declined by 24% from the end of May through the end of
October, fluctuating considerably during this period. The decline in the index
resulted from the crises in foreign markets and, in particular, from the
decrease in stock prices in the United States. Stock prices were also adversely
affected by the 15% increase in the exchange rate of the U.S. dollar to the
shekel from July until the end of the year, which resulted in an increase in the
inflation rate during the last third of 1998. From October through year end, the
general share index rose by 16%. For all of 1998, all share indexes fell, the
index of the 25 largest companies traded on the TASE (the "Maof Index") declined
by 6.6%, the index of the 100 most heavily traded stocks decreased by 5.1% and
the Yeter index of all other shares and convertible securities fell by 4.8%.
I-34
<PAGE>
In real terms, CPI-indexed bonds fell by 1.5% in 1998, unlinked
bonds rose by 1.7% and dollar-linked bonds went up by 12.4% (3.4% in dollar
terms). As a result of increased volatility in the stock market and the
concentration of trading in shares of larger corporations, trading volume in
options on the Maof Index increased by 30% in 1998 compared to 1997. The market
value of equity securities listed on the TASE, including convertible securities,
at the end of 1998 was NIS 169 billion, 7.3% more than the NIS 157.5 billion
value of the bond market at year end.
The government raised NIS 4.4 billion in 1998 from the sale of its
holdings in corporations and banks in public offerings of shares on the TASE,
50% more than the amount raised in 1997. Israel's holding in Israel Chemicals
was sold for NIS 1.3 billion in the largest stock issuance of 1998. In addition,
the government raised NIS 800 million from the sale of shares of Bank Mizrahi,
NIS 630 million from the sale of shares of Bank Leumi, NIS 430 million from the
sale of shares of Bank Hapoalim and NIS 500 million from the sale in a public
offering of shares of Bezeq. The government also received NIS 710 million from
the exercise of options issued in the past on shares owned by the government in
Bank Leumi, Bank Hapoalim and Bank Mizrahi.
I-35
<PAGE>
Item 2. PROPERTIES
- - ------- ----------
None.
Item 3. LEGAL PROCEEDINGS
- - ------- -----------------
On December 11, 1998, two shareholders of PEC instituted a purported
class action in the Supreme Court of New York State, County of New York, against
PEC and its directors. In their complaint, the plaintiff shareholders allege
that the defendants breached their fiduciary duties and engaged in self-dealing
without regard to conflicts of interest in approving on the date the complaint
was filed a proposed merger under which a wholly-owned subsidiary of IDB
Development would merge into PEC and each shareholder of PEC other than IDB
Development (which then owned 81.35% of PEC's common stock) would, as a result
of the merger, receive $30 in cash for each of his shares of PEC common stock.
The plaintiffs also assert that the $30 per share price is unfair and inadequate
and is below the fair or inherent value of PEC's assets and PEC's future
prospects.
The plaintiffs seek, among other things, to prohibit the proposed
merger and to be paid unspecified damages, attorneys' fees and other relief. To
date, no motion to enjoin the proposed merger has been made.
PEC believes that the allegations in the complaint are without
merit, and PEC intends to contest the action vigorously. To date, none of the
defendants has been required to answer, move, or otherwise respond to the
complaint and no discovery has been taken.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------- ---------------------------------------------------
None.
I-36
<PAGE>
Executive Officers of the Registrant
- - ------------------------------------
Date First
Elected to
Name Age Position Office
- - ---- --- -------- ----------
Frank J. Klein(a) 56 President Jan. 1995
James I. Edelson(b) 42 Executive Feb. 1992
Vice President,
Secretary and
General Counsel
William Gold(c) 61 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-37
<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.
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
1998 High Low
---- ---- ---
First Quarter $23-1/8 $ 19-15/16
Second Quarter 24-1/4 21-11/16
Third Quarter 26-1/2 22-3/4
Fourth Quarter 29 23-5/8
On March 26, 1999, the closing price of the Company's Common Stock on the
New York Stock Exchange was $29-11/16 per share.
(b) As of March 26, 1999, there were 2,245 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.
II-1
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
- - ------- ------------------------------------
The following selected consolidated financial data for the years ended
December 31, 1998, 1997 and 1996, and at December 31, 1998 and 1997, are derived
from the audited consolidated financial statements of the Company set forth
elsewhere in this Annual Report which have been audited in 1998 and 1997 by
PricewaterhouseCoopers LLP and Haft & Gluckman LLP, each independent public
accountants, and in 1996 by Arthur Andersen LLP and Haft & Gluckman LLP, each
independent public accountants, as indicated in their reports included elsewhere
herein. The reports of PricewaterhouseCoopers LLP and Haft & Gluckman LLP on the
1998 and 1997 financial statements and the report of Arthur Andersen LLP and
Haft & Gluckman LLP on the 1996 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, 1995 and
1994, and at December 31, 1996, 1995 and 1994, 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>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(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 $16,446 $ 48,538 $23,438 $23,720 $25,338
Total Revenue 45,258 88,630 44,535 42,065 40,798
Net Income* 20,042 54,503 28,213 25,242 32,566
Net Income per Common Share*
Basic 1.09 2.95 1.51 1.35 1.73
Diluted 1.05 2.92 1.49 1.34 1.72
Weighted Average Number of
Outstanding Common Shares 18,362 18,472 18,714 18,759 18,759
Total Assets 466,929 461,104 407,703 392,967 383,691
Total Liabilities 61,704 44,979 33,827 35,680 42,223
Shareholders' Equity 405,225 416,125 373,876 357,287 341,468
Common Shareholders' Equity
per Common Share 22.07 22.66 20.20 19.05 18.20
Number of Outstanding Common
Shares at the End of Each Year 18,362 18,362 18,508 18,759 18,759
</TABLE>
*Net income for 1994 is after the cumulative effect of a change in accounting
for marketable securities of $2,472,879 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) and $104,000 for 1994
($.01 per share).
No dividends were paid during the last five years.
II-2
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
- - ---------------------
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
Consolidated net income for 1998 was $20.0 million compared with $54.5
million for 1997. The decrease in net income reflected declines of $32.1 million
in equity in net income of Affiliated Companies, $4.7 million in net gain on
sales, and change in market value, of trading securities, $3.4 million in net
gain on issuance of shares by Affiliated Companies, and $3.6 million in other
income. The decrease also reflected increases of $1.3 million in general and
administrative expenses, attributable principally to expenses related to the
proposed acquisition by Discount Investment (the owner of 81.35% of PEC's common
stock) of the shares of PEC common stock owned by PEC's public shareholders and
of $1.1 million in interest expense due to PEC's borrowing of $20 million in
February 1998 compared with no debt outstanding in 1997. The net decrease
attributable to the foregoing items was partially offset by a decrease of $12.1
million in the provision for income taxes.
Equity in net income of Affiliated Companies for 1998 was $16.4 million
compared with $48.5 million for 1997. The decrease in net income of Affiliated
Companies for 1998 reflected PEC's share of net losses in respect of some of its
Affiliated Companies, particularly Scitex, which recorded a loss of $110.8
million resulting from $76.5 million of costs related to the disposal of its
digital video business and its write-off of $44 million of in-process research
and development costs in connection with its acquisition of Idanit Technologies
Ltd. (PEC's share was a loss of $7.6 million compared with a loss of $234,000
for 1997), Gilat Satellite, which reported a loss of $81.6 million arising from
one-time charges of $106.4 million relating to Gilat Satellite's acquisition of
GE Capital Spacenet Services, Inc. ("Spacenet") (PEC's share was a loss of $5.5
million compared with income of $1.1 million for 1997), DIC and PEC Cable TV
Ltd., the company that holds PEC's interest in Tevel, which is amortizing good
will associated with its acquisition of Gvanim Cable Television Ltd. for
approximately $235 million (substantially all of which was borrowed) and is
incurring higher interest expenses because of the debt incurred in making such
acquisition (PEC's share was a loss of $1.7 million compared with income of $4.6
million for 1997), Mondex Israel Ltd. (provider of an electronic smart card in
Israel), which had start-up operating losses and with respect to which PEC took
write-offs (PEC's share was a loss of $4.2 million compared with a loss of
$859,000 for 1997), Mul-T-Lock, which incurred operating losses (PEC's
II-3
<PAGE>
share was a loss of $335,000 compared with income of $961,000 for 1997), and
Tradanet Electronic Commerce Services Limited (provider of electronic commerce
services in Israel), which had start-up operating losses (PEC's share was a loss
of $1.1 million compared with no income in 1997). In addition, PEC had reduced
net income in respect of certain other Affiliated Companies, especially El-Yam
(PEC's share was $400,000 compared with $2.8 million for 1997), Tambour (PEC's
share was $5.0 million compared with $7.1 million for 1997) and Cellcom (PEC's
share was $9.5 million compared with $11.3 million for 1997). This decrease was
partially offset by PEC's increased net income in respect of other Affiliated
Companies, especially Property & Building, which realized a gain on the sale of
a building in the fourth quarter of 1998 (PEC's share was $14.1 million compared
with $9.0 million for 1997).
PEC realized a net gain of $7.0 million on issuance of shares by
Affiliated Companies for 1998 compared with a net gain of $10.4 million for
1997. PEC realized a net gain of $7.2 million on the issuance of 5 million
shares of Gilat Satellite in connection with Gilat Satellite's acquisition of
Spacenet, which was partially offset by a net loss of $200,000 on the exercise
of stock options held by employees of Affiliated Companies. PEC realized net
gains of $4.9 million on the sale of ordinary shares of Tefron Ltd. 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 Ltd. in December
1997 in an initial public offering in the United States.
PEC realized a net gain on sales of investments in Affiliated Companies of
$8.1 million for 1998 compared with $8.3 million for 1997. During 1998, PEC
realized net gains of $7.4 million and $700,000 from the sale of 30.1% of
Caniel-Israel Can Company Ltd. and 13.2% of Lego Irrigation Ltd., respectively,
constituting PEC's entire ownership interests in such corporations. 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 Ltd., 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 Ltd.
II-4
<PAGE>
PEC's other income was $249,000 for 1998 compared with $3.8 million for
1997. This decline primarily resulted from reduced income from partnerships in
which PEC is a partner, particularly Gemini Israel Fund L.P., Renaissance Fund
LDC, and a partnership that invests and trades in debt and equity securities,
and receipt of less management fees.
As described in Note 5 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1998 (the "1998 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 1998 decreased to $9.4 million from $21.5 million for 1997,
principally because PEC's income before income taxes decreased to $29.5 million
for 1998 from $76.0 million for 1997. PEC's provision for income taxes for 1998
increased as a proportion of income before income taxes compared with 1997
because of a decrease in the proportion of income from Majority- Owned
Affiliated Companies.
PEC's comprehensive loss was $12.2 million for 1998 compared with
comprehensive income of $45.2 million for 1997. PEC's translation adjustment,
net of tax benefit, reduced PEC's comprehensive income by $26.8 million for 1998
compared with a reduction of $14.6 million for 1997. The exchange rate of the
New Israel Shekel declined against the U.S. dollar approximately 17.6% and 8.8%
for 1998 and 1997, respectively. PEC's comprehensive income was reduced by $5.5
million for 1998 as a result of PEC's unrealized losses on its
available-for-sale marketable securities portfolio, net of tax benefit
(principally arising from a decline in the price of NICE Systems Ltd.), compared
with an increase in comprehensive income of $5.3 million for 1997 due to PEC's
unrealized gain on this portfolio, net of taxes.
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
II-5
<PAGE>
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 loss of $3.5 million for 1996),
Elron and Liraz Systems Ltd. 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-Rafael Development
Corporation Ltd.) and Soreq Development Center (S.D.C.) Ltd. (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. During 1997, PEC realized
net gains of $4.9 million and $1.0 million on the sale of ordinary shares by
Tefron and Gilat Communications, respectively, in initial public offerings and a
net gain of $4.4 million on the sale by Super-Sol of American Depositary Shares
representing ordinary shares of Super-Sol in a public offering. 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
Educational Software and Systems Ltd., 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 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, 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.
II-6
<PAGE>
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 Israel Fund L.P., and increased
management fees.
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.
PEC's comprehensive income was $45.2 million for 1997 compared with
comprehensive income of $20.8 million for 1996. PEC's translation adjustment,
net of tax benefit, reduced PEC's comprehensive income by $14.6 million for 1997
compared with a reduction of $6.2 million for 1996. The exchange rate of the New
Israel Shekel declined against the U.S. dollar approximately 8.8% and 3.7% for
1997 and 1996, respectively. PEC's comprehensive income was increased by $5.3
million for 1997 as a result of PEC's unrealized income on its available for
sale marketable securities portfolio, net of taxes, compared with a decrease in
comprehensive income of $1.3 million for 1996 due to PEC's unrealized losses on
this portfolio, net of taxes.
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.
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 material to PEC's financial
position or results of operations. Although it is not possible to be certain
that all issues of becoming Year 2000 compliant for the customers, suppliers or
other third parties who have business relations with PEC and PEC's Affiliated
Companies will be fully resolved, and, accordingly, PEC may be affected by such
issues, either directly or through its Affiliated Companies, PEC believes that
the financial impact of becoming Year 2000 compliant will not be material to
PEC's financial position or results of operations in any given year.
II-7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- - --------------------------------
As of December 31, 1998, PEC's liquid assets (consisting of cash and money
market funds) totaled approximately $22.0 million. As discussed in Note 7 to the
1998 Notes, as of the end of 1998 PEC had commitments extending over the next
several years to make capital contributions or loans of up to approximately
$10.6 million to existing Affiliated Companies. For the year ended December 31,
1998, PEC received cash dividends and interest totaling $29.4 million (including
$25.9 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 1998, PEC generated a total $79.1 million of liquid funds, of which
$33.3 million was realized from the sale of marketable securities of U.S.
companies, $25.7 million was realized from the sale of shares of Affiliated
Companies (Caniel- Israel Can Company Ltd. - $23.1 million and Lego Irrigation
Ltd. - $2.6 million), $16.5 million was realized from distributions from a fund
and partnerships, and $3.6 million was generated from the collection of capital
notes and bonds.
During 1998, PEC borrowed $20.0 million from a bank. The loan is unsecured
and bears interest at the rate of LIBOR plus 0.74% payable semi-annually. The
loan is repayable in 11 consecutive semi-annual installments of $1.67 million
each commencing on November 5, 2003 and a final installment consisting of the
outstanding balance on May 5, 2009.
During 1998, PEC purchased equity and debt securities of, and contributed
capital to, new and existing Affiliated Companies and other Israeli and United
States corporations for approximately $88.6 million. The new Affiliated
Companies in which PEC purchased securities in 1998 and PEC's purchase price for
such securities consisted primarily of NewCheck Corporation (developer of
self-service automatic checkout counters for use by customers in supermarkets -
6.5% ownership interest) - $2.5 million, KenTech Ventures Ltd. (developmental
stage software and data communications - 9.15% ownership interest) - $1.5
million, Global Village Telecom Inc. (provider of telecommunications services to
remote areas - 5.7% ownership interest) - $2.5 million, of which $1.0 million
was deferred, Aviv Giladi Productions Ltd. (a corporation that represents actors
and artists and produces programs and commercials for television - 12.5%
ownership interest) - $1.3 million, and H.T.C. Ltd. (developer, producer and
marketer of components for ultra-high purity gas delivery systems for the
semiconductor industry - 4.85% ownership interest)- $1.3 million. Discount
Investment acquired similar ownership interests in the foregoing companies on
the same terms
II-8
<PAGE>
as PEC. The existing Affiliated Companies in which PEC purchased securities in
1998 and PEC's purchase price for such securities consisted primarily of
Super-Sol - $43.7 million, Nice - $9.2 million, Property and Building - $9.0
million, Cellcom - $2.9 million (shareholder loans), Liraz - $2.6 million, Elron
- - - $2.3 million, Mondex - $1.8 million, Gemini Israel Fund - $1.5 million and
Soreq - $1.0 million. During 1998, PEC purchased marketable securities of U.S.
companies for approximately $9.1 million.
SUBSEQUENT EVENTS
- - -----------------
On February 8, 1999, Gilat Satellite concluded a secondary public offering
of its ordinary shares under which a wholly-owned subsidiary of Discount
Investment sold 500,000 ordinary shares of Gilat Satellite. As a result of the
public offering, PEC recorded an estimated $5.9 million gain on issuance of
shares by an Affiliated Company in the first quarter of 1999. In consideration
of PEC not selling ordinary shares of Gilat Satellite in the offering, the
subsidiary granted PEC the right to sell up to 250,000 ordinary shares of Gilat
Satellite to the subsidiary at a price of $54.72 per share plus interest from
February 8, 1999 to the date of sale, such right being exercisable from May 9,
1999 to August 7, 1999.
In connection with the purchase by PEC Israel Finance Corporation Ltd.
("PECFC") of shares of United Pan-Europe Communications N.V. on February 17,
1999, PECFC borrowed $24.0 million to finance the purchase. The loan bears
interest at an annual rate of 5.75%, payable at maturity on May 17, 1999. The
loan is unsecured but the bank, in its discretion, may request that PECFC
provide security for the loan. PEC has guaranteed the obligations of PECFC with
respect to the loan.
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 sheets of PEC Israel
Economic Corporation and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1998. 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
revenues of 15% and 40%, respectively, of the consolidated totals as of and for
the year ended December 31, 1998 and 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 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>
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PEC Israel Economic Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
HAFT & GLUCKMAN LLP PRICEWATERHOUSECOOPERS LLP
New York, New York
March 29, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of PEC Israel Economic Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of PEC Israel Economic Corporation (a Maine
corporation) and subsidiaries for the year 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 audit. We did not audit the financial statements of certain Affiliated
Companies of the Company, which statements reflect equity in net income of $19.1
million of the consolidated total for the year ended December 31, 1996. 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.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the results of operations and cash flows of PEC Israel Economic Corporation and
subsidiaries for the year 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,
------------
1998 1997
--------- ---------
ASSETS
Cash and cash equivalents (Note 2) $ 22,007 $ 8,948
Investments (Notes 2 and 3) 432,112 444,398
Assets of General Engineers
Limited (Note 2) 7,950 5,274
Other assets 4,860 2,484
--------- ---------
Total assets $ 466,929 $ 461,104
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Note payable (Note 4) $ 20,000 $ --
Liabilities of General Engineers
Limited (Note 2) 5,163 1,767
Deferred income taxes (Notes 2 and 5) 28,487 38,451
Other liabilities 8,054 4,761
--------- ---------
Total liabilities 61,704 44,979
--------- ---------
Commitments and contingencies (Notes 3 and 7)
Shareholders' equity (Notes 2 and 6):
Common stock, $1.00 par value,
40,000,000 shares authorized in
1998 and in 1997, 31,952,180
shares issued in 1998 and in
1997 and 18,362,188 shares
outstanding at 1998 and 1997 31,952 31,952
Class B preferred stock, no par value,
544,514 shares authorized, none
issued and outstanding -- --
Additional paid-in capital 104,616 103,282
Accumulated comprehensive income (65,952) (33,676)
Retained earnings 354,976 334,934
--------- ---------
425,592 436,492
Treasury stock, 13,589,992 shares at
1998 and 1997 (20,367) (20,367)
--------- ---------
Total shareholders' equity 405,225 416,125
--------- ---------
Total liabilities and
shareholders' equity $ 466,929 $ 461,104
========= =========
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)
Years Ended December 31,
------------------------------------
1998 1997 1996
------- ------- -------
REVENUES:
Interest and dividends $ 1,618 $ 1,255 $ 964
Equity in net income of
Affiliated Companies
(Notes 2 and 3) 16,446 48,538 23,438
Net gain on issuance of
shares by Affiliated
Companies 6,938 10,360 849
Revenues of General
Engineers Limited (Note 2) 9,902 9,738 8,635
Net gain on sales of
investments in Affiliated
Companies (Note 2) 8,143 8,274 2,512
Net gain on sales,
and changes in market value,
of trading securities(Note 2) 1,962 6,643 5,167
Other 249 3,822 2,970
------- ------- -------
45,258 88,630 44,535
------- ------- -------
EXPENSES:
General and administrative 4,526 3,237 3,037
Cost of sales and expenses
of General Engineers
Limited (Note 2) 10,114 9,352 8,496
------- ------- -------
14,640 12,589 11,533
------- ------- -------
Income before interest and
income taxes 30,618 76,041 33,002
Interest expense (Note 4) 1,144 -- --
------- ------- -------
Income before income taxes 29,474 76,041 33,002
Income taxes (Note 5) 9,432 21,538 4,789
------- ------- -------
Net income $20,042 $54,503 $28,213
======= ======= =======
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - except per share amounts)
(Continued)
Years Ended December 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
Other comprehensive income:
Unrealized (loss) gain on
available-for-sale securities
arising during year $ (5,487) $ 9,206 $ (1,288)
Less: Reclassification
adjustment for gains included
in net income -- (3,874) --
-------- -------- --------
Unrealized (loss) gain arising
during year, net of tax
(benefit) provision of $(2,953),
$2,870, and $(693) for the
year ended December
31, 1998, 1997 and 1996,
respectively (5,487) 5,332 (1,288)
Translation adjustment, net
of tax benefit of $ (14,424),
$(7,877), and $(3,324) for the
year ended December 31, 1998,
1997 and 1996, respectively (26,789) (14,629) (6,174)
-------- -------- --------
Other comprehensive loss (32,276) (9,297) (7,462)
-------- -------- --------
Comprehensive (loss) income $(12,234) $ 45,206 $ 20,751
======== ======== ========
Earnings per common share
- basic (Note 6) $ 1.09 $ 2.95 $ 1.51
======== ======== ========
Earnings per common share
- diluted (Note 6) $ 1.05 $ 2.92 $ 1.49
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Comprehensive Income
--------------------
Unrealized Gains
(Losses) on
Common Stock Additional Available-for Cumulative
------------------ Paid-in - Sale Translation Retained Treasury
Shares Amount Capital Securities Adjustment Earnings Stock Total
------- ------- -------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1996 18,758 $31,952 $103,228 $ 3,226 $(20,143) $252,218 $(13,194) $ 357,287
Paid-in capital of
Affiliated Companies -- -- 54 -- -- -- -- 54
Unrealized holding
losses on available-for-
sale equity securities,
net of tax -- -- -- (1,288) -- -- -- (1,288)
Cumulative translation
adjustment -- -- -- -- (6,174) -- -- (6,174)
Purchase of treasury
stock (Note 6) (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
Unrealized holding gains
on available-for-
sale equity securities,
net of tax -- -- -- 5,332 -- -- -- 5,332
Cumulative translation
adjustment -- -- -- -- (14,629) -- -- (14,629)
Purchase of treasury
stock (Note 6) (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
Paid-in capital of
Affiliated Companies -- -- 1,334 -- -- -- -- 1,334
Unrealized holding
losses on available-for-
sale equity securities,
net of tax -- -- -- (5,487) -- -- -- (5,487)
Cumulative translation
adjustment -- -- -- (26,789) -- -- (26,789)
Net income -- -- -- -- -- 20,042 -- 20,042
------- ------- -------- -------- -------- -------- -------- ---------
Balance,
December 31, 1998 18,362 $31,952 $104,616 $ 1,783 $(67,735) $354,976 $(20,367) $ 405,225
======= ======= ======== ======== ======== ======== ======== =========
</TABLE>
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)
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash Flows From Operating
Activities:
Net income $ 20,042 $ 54,503 $ 28,213
Adjustments to reconcile
net income to net cash
provided by operating
activities -
Changes in market value of
trading securities 6,913 (2,008) (1,506)
Purchase of trading
securities (9,059) (18,457) (13,131)
Proceeds from sale of
trading securities 33,264 12,906 17,602
Equity in net income
of Affiliated Companies (16,446) (48,538) (23,438)
Net gain on sales of
investments in Affiliated
Companies (8,143) (8,274) (2,512)
Net gain on sales of
trading securities (8,875) (4,635) (3,661)
Loss (gain) on investment
in partnerships 1,145 (2,000) (794)
Income of consolidated
subsidiaries (929) (1,120) (1,124)
Net gain on issuance
of shares by Affiliated
Companies (6,938) (10,360) (849)
Dividends from
Affiliated Companies 25,872 24,068 12,459
Change in other assets and liabilities 1,383 2,791 2,232
Provision for deferred income taxes (2,344) 7,944 (1,537)
-------- -------- --------
Net cash provided by
operating activities $ 35,885 $ 6,820 $ 11,954
-------- -------- --------
(Continued)
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,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash Flows From Investing
Activities:
Collection of U.S. Government and State
obligations $ -- $ -- $ 3,015
Purchases of notes receivable (3,179) (5,284) (4,892)
Collection of capital notes and loans
receivable 3,618 412 1,349
Proceeds from sales of equity interests 25,722 30,462 8,687
Return of capital 16,450 406 --
Acquisitions of equity interests (85,437) (27,955) (23,556)
-------- -------- --------
Net cash used in
investing activities (42,826) (1,959) (15,397)
-------- -------- --------
Cash Flows From Financing
Activities:
Proceeds from Bank loan 20,000 -- --
Purchases of treasury stock -- (2,957) (4,216)
-------- -------- --------
Net cash provided by (used in)
financing activities 20,000 (2,957) (4,216)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 13,059 1,904 (7,659)
Cash and cash equivalents, beginning of
year 8,948 7,044 14,703
-------- -------- --------
Cash and cash equivalents,
end of year $ 22,007 $ 8,948 $ 7,044
======== ======== ========
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the
year for income taxes $ 13,127 $ 12,231 $ 5,905
Cash paid during the
year for interest $ 959 $ -- $ --
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. As of December 31, 1998, the Company was 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". For additional information, see Note 9(a).
The Company is a party to an Agreement and Plan of Merger, dated as of December
15, 1998 (the "Merger Agreement") by and among the Company, Discount Investment,
as the assignee of IDB Development, and PEC Acquisition Corporation, a
wholly-owned subsidiary of Discount Investment ("Merger Sub"). Pursuant to the
Merger Agreement, Merger Sub will be merged with and into the Company with the
Company as the surviving corporation and each outstanding share of common stock
of the Company, except those shares owned by Discount Investment and its
affiliates and those shares in respect of which appraisal rights have been
perfected in accordance with Maine law, will be converted into the right to
receive $30 in cash, without interest. As a result of the transaction described
in Note 9(a), immediately following the merger, Discount Investment will own the
entire equity interest in the Company. Completion of the merger requires the
affirmative vote of at least a majority of all the outstanding shares of the
Company to approve and adopt the Merger Agreement. The Company is preparing a
proxy statement for a special meeting of shareholders which is expected to be
held in May 1999.
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.
10
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd
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 component
of accumulated comprehensive income. Debt securities classified as "held to
maturity" are reported at amortized cost.
On an on-going basis, management reviews the carrying values of its investments
to identify potential impairments in value.
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 the 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
accumulated comprehensive income within 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 U.S. 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. Significant estimates made by management include the
evaluation of the carrying values of the Company's investments in early stage
companies. Investments in early stage technology companies are characterized by
risks associated with rapid technological changes, product obsolescence and the
need for continuous development efforts.
Reclassification
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1998 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):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1998 1997
--------------------------------- ----------------------------------
Quoted Quoted
Percentage Carrying Market Percentage Carrying Market
Owned Value Value Owned Value Value
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Affiliated Companies:
Super-Sol Ltd.(a) 20% $ 85,986 $104,626 13% $ 47,501 $ 79,840
Property and Building
Corporation Ltd.
(b) 41 80,798 128,950 39 71,398 129,498
Elron Electronic
Industries Ltd.
(g) 14 38,477 46,552 14 33,583 44,797
Tambour Ltd.(c) 43 36,430 33,211 43 54,922 48,426
Cellcom Israel Ltd. (d) 13 29,582 * 13 23,628 *
El-Yam Ships Ltd.
See Note 7(i) 10 29,234 * 10 29,190 *
Scitex Corporation Ltd.
(e) 7 27,849 33,355 7 34,759 34,242
Klil Industries Ltd.
(g) 19 10,553 7,522 17 11,346 6,752
Gilat Satellite Networks
Ltd. (f) 5 9,145 41,174 7 7,497 21,380
Mul-T-Lock Ltd.(g) 15 6,044 3,364 15 7,660 5,514
Gemini Israel Fund L.P. 16 5,691 * 11 4,346 *
Tefron Ltd. (g)(h) 7 5,177 6,290 7 4,321 22,044
DIC and PEC Cable TV Ltd.(g)
See Note 7(e) 49 4,572 * 49 9,302 *
Renaissance Fund LDC 4 4,004 * 4 5,217 *
Gilat Communications Ltd.
(g) 10 3,048 8,825 10 2,590 6,550
Maxima Air Separation
Center Ltd. (g) 12 2,300 1,822 12 2,258 2,047
Tel-Ad Jerusalem Studios
Ltd. (g) See Note 7(f) 12 2,054 * 12 1,810 *
Caniel-Israel Can
Company Ltd.(g)(h) -- -- -- 29 14,295 13,646
Other (g) -- 11,598 (g) -- 11,021 (g)
-------- --------
$392,542 $376,644
======== ========
</TABLE>
* The equity securities of this entity are not publicly traded.
13
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
December 31,
-------------------
1998 1997
-------- --------
Carrying Carrying
Value Value
-------- --------
Investments at cost $ 20,317 $ 15,313
Investments in trading
securities 125 33,363
Investments in available-
for-sale securities 19,128 19,078
-------- --------
39,570 67,754
-------- --------
Total $432,112 $444,398
======== ========
Information about certain Affiliated Companies follows:
(a) Super-Sol Ltd. ("Super-Sol") operates one of Israel's largest chains of
supermarkets. Summarized financial information for Super-Sol follows (in
thousands):
December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Current assets $ 283,870 $ 309,202 $ 234,803
Total assets 622,538 674,510 490,021
Current liabilities 205,577 218,782 220,715
Long-term liabilities 85,170 104,646 7,154
Shareholders' equity 331,791 351,082 248,808
Revenues 1,280,856 1,291,358 1,027,474
Earnings before taxes 59,094 54,895 57,735
Net earnings 42,232 39,172 43,837
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 on issuance of shares 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%.
During 1998, the Company purchased an additional 6.7% of Super-Sol for
$43.7 million.
14
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
(b) 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,
------------------------------
1998 1997 1996
-------- -------- --------
Current assets* $ 88,852 $ 99,005 $ 72,518
Total assets 472,536 447,954 399,880
Current liabilities 64,602 53,342 55,753
Long-term liabilities 175,066 156,991 116,292
Minority interest 52,287 60,048 56,794
Shareholders' equity 178,498 175,123 168,376
Income 151,220 125,899 111,800
Earnings before taxes on
income 55,308 40,066 40,136
Net earnings 36,663 24,535 24,309
* Including building
projects and inventories
of apartments 33,216 30,091 21,075
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 1998 and 1997, the Company purchased an additional 2.6% and 1.0% of
Property and Building for $9.0 million and $3.3 million, respectively,
increasing the Company's ownership interest to 41%.
(c) Tambour Ltd. ("Tambour") is Israel's largest paint manufacturer.
Summarized financial information for Tambour follows (in thousands):
15
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Current assets $ 94,166 $118,727 $121,471
Total assets 138,516 173,658 184,867
Current liabilities 42,873 32,966 29,895
Long term liabilities 11,961 3,264 2,621
Minority interest 7,841 9,489 9,509
Shareholders' equity 84,763 127,940 142,840
Revenue from sales 155,091 179,209 189,028
Gross profit 58,477 66,206 65,914
Income before taxes
on income 15,967 20,548 30,843
Net income from
continuing operations 11,839 15,073 21,531
Net income 11,497 16,756 22,702
In 1998 and 1997, Tambour paid substantial dividends in excess of its
current earnings, reducing shareholders' equity in each of these years.
During 1998 and 1997, the Company received gross dividends of $16.4
million and $8.8 million, respectively, from Tambour.
(d) Cellcom Israel Ltd. ("Cellcom") operates one of Israel's three cellular
telephone systems. Summarized financial information for Cellcom follows
(in thousands):
December 31,
-----------------------------------
1998 1997 1996
-------- --------- ---------
Current assets $159,661 $ 142,252 $ 93,666
Total assets 643,992 614,873 419,028
Current liabilities 255,374 225,286 316,938
Long-term liabilities 362,208* 426,056* 222,033*
Shareholders' equity
(deficit) 25,489 (36,469) (119,947)
Income from sales and
services 695,001 612,945 304,072
Gross profit 304,581 252,847 85,692
Profit (loss) before taxes
on income 96,221 57,609 (42,387)
Net profit (loss) 61,839 75,691 (42,387)
*Includes loans from the Company of approximately $25 million, $27 million
and $25 million for 1998, 1997 and 1996, respectively.
Certain of Cellcom's current and long-term liabilities at December 31,
1998, aggregating $69 million and $226 million, respectively, and at
December 31, 1997, aggregating $118 million and $202 million,
respectively, are secured by pledges of all of Cellcom's assets.
16
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
In December 1998, Bezeq - The Israel Communication Corporation Ltd.
("Bezeq") as well as Cellcom and other operators in the Israeli
communications industry, received a copy of a motion filed with the
District Court in Tel-Aviv by one of Bezeq's subscribers to approve a
lawsuit attached thereto as a class action pursuant to Israel's Consumers
Protection Act on behalf of the Bezeq's subscribers for damages in the
amount of approximately NIS 2 billion ($480.8 million) in respect of
airtime charges collected by Bezeq and remitted to Cellcom for the use of
some of the network services.
Cellcom rejects such allegations and intends to vigorously contest this
lawsuit. Cellcom's management, based on the opinion of its legal advisors,
believes Cellcom has a strong defense against the claims of this lawsuit.
At this stage, Cellcom's management and its legal advisors are unable to
evaluate the outcome of this lawsuit and the effect thereof, in the event
that it is approved as a class action. Therefore, no provision has been
made in Cellcom's financial statements with respect thereto.
(e) Scitex Corporation Ltd. ("Scitex") is a world leader in visual information
communication for the digital preprint and digital printing markets.
Summarized financial information for Scitex follows (in thousands):
December 31,
---------------------------------
1998 1997 1996
--------- -------- ---------
Current assets $ 405,098 $488,992 $ 523,587
Total assets 565,508 668,727 704,734
Current liabilities 159,802 167,711 203,511
Long-term liabilities 4,483 907 496
Shareholders' equity 401,223 500,109 500,727
Revenues 640,311 675,677 695,048
Gross profit 271,275 262,753 231,101
Income (loss) before
taxes on income (17,164) 4,823 (180,132)
Net income (loss) (110,827) 582 (178,279)
Scitex recognized a net loss of $110.8 million for 1998, of which $76.5
million was from discontinued operations and $44 million was from the
write-off of in-process research and development costs in connection with
an acquisition, compared with net income of $0.6 million for 1997, and a
net loss of $178.3 million for 1996, of which $110 million was
attributable to restructuring and other charges.
(f) Gilat Satellite Networks Ltd. ("Gilat Satellite") is a leading provider of
products and services for satellite-based communications networks.
Summarized financial information for Gilat Satellite follows (in
thousands):
17
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
December 31,
--------------------------------
1998 1997 1996
--------- -------- --------
Current assets $ 175,476 $112,840 $ 83,468
Total assets 409,886 211,960 112,201
Current liabilities 111,785 27,759 21,836
Total liabilities 189,516 103,622 22,443
Shareholders' equity 220,370 108,338 89,758
Sales 155,335 103,690 74,126
(Loss) income before taxes
on income (80,644) 17,074 5,556
Net (loss) income (81,633) 16,944 5,472
On December 31, 1998, Gilat Satellite acquired GE Capital Spacenet
Services, Inc. ("Spacenet") in exchange for 5 million newly issued
ordinary shares of Gilat Satellite. As a result of one-time charges of
$106.4 million relating to Gilat Satellite's acquisition of Spacenet,
Gilat Satellite recorded a net loss of $81.6 million for 1998. As a result
of the issuance of the 5 million shares of Gilat Satellite in exchange for
Spacenet, the Company recorded a gain on issuance of shares by Affiliated
Companies of $7.2 million and the Company's ownership interest in Gilat
Satellite was reduced from 6.8% to 4.6%.
In February 1999, Gilat Satellite issued 4 million ordinary shares in a
public offering in the United States. As a result of the public offering,
the Company's ownership interest in Gilat Satellite decreased from 4.6% to
3.7% and the Company recorded an estimated $5.9 million gain on issuance
of shares by an Affiliated Company in 1999.
(g) The following Affiliated Companies, which are not listed in the
table above, are publicly traded and their shares are quoted on the Tel
Aviv Stock Exchange and/or U.S. exchanges. The aggregate market value of
the shares owned by the Company, based on the closing price on the
principal market on which such shares are traded are as follows
(in thousands):
December 31,
1998 1997
------- -------
Electronics Line (E.L.) Ltd. $ 1,070 $ 1,131
Ham-Let (Israel-Canada) Ltd. 2,661 3,964
Lego Irrigation Ltd. -- 2,478
Lipman Electronic Engineering Ltd. 990 1,333
Liraz Systems Ltd. 7,787 9,090
LOGAL Educational Software and Systems Ltd. 124 249
18
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
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,
------------------------------
1998 1997 1996
-------- -------- --------
Current assets $ 36,120 $ 51,140 $ 66,626
Total assets 120,825 150,752 168,068
Long-term debt 14,277 16,095 16,777
Shareholders' equity 89,431 114,475 117,723
Revenue 61,995 83,021 130,410
Net income 10,522 15,833 15,276
(h) Significant capital transactions during the three years ended December 31,
1998 that are not otherwise discussed herein 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 December 1998, the Company sold its entire ownership interest in Caniel
- Israel Can Company Ltd. ("Caniel") for a gain of approximately $7.4
million before income taxes.
(i) The Company's equity in the net income of Affiliated Companies by major
lines of business was as follows (in thousands):
December 31,
------------------------------
1998 1997 1996
-------- ------- --------
Telecommunications and
technology $ (6,462) $19,073 $(10,193)
Industry 7,335 12,273 14,638
Real estate 13,815 8,972 9,119
Retail, shipping and other 1,758 8,220 9,874
-------- ------- --------
$ 16,446 $48,538 $ 23,438
======== ======= ========
19
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS - cont'd
(j) Available-for-sale marketable securities are summarized as follows
(in thousands):
December 31, 1998
Gross Unrealized Gross Unrealized Unrealized
Cost Holding Gains Holding Losses Market Value
---- ------------- -------------- ------------
$19,567 $2,192 $2,631 $19,128
December 31, 1997
Gross Unrealized Gross Unrealized Unrealized
Cost Holding Gains Holding Losses Market Value
---- ------------- -------------- ------------
$10,251 $9,093 $ 266 $19,078
Proceeds from sales of available-for-sale securities were approximately
$9.4 million for the year ended December 31, 1997. In 1997, gross gains on
the sale of available-for-sale securities amounted to approximately $2.9
million and gross losses amounted to approximately $664,000. There were no
sales of available-for-sale securities in 1998 or 1996.
4. NOTE PAYABLE
In February 1998, the Company borrowed approximately $20 million from
Israel Discount Bank Ltd. pursuant to a $26 million line of credit
agreement. The line of credit agreement was unsecured and provided for the
outstanding loan balance to bear interest at a rate of 0.5% over the one
week London Interbank Offered Rate ("LIBOR") per annum.
In May 1998, the Company refinanced this loan with a new loan agreement
with Bank Hapoalim, N.A. The loan is unsecured and bears interest at an
annual rate of LIBOR plus 0.74%, the sum of which approximated 5.85% as of
December 31, 1998, payable semiannually. The loan is repayable in 11
consecutive semi-annual installments of $1.67 million each commencing on
November 5, 2003 and a final installment consisting of the outstanding
balance on May 5, 2009. The loan contains covenants, including the
maintenance of a minimum net worth and a debt coverage ratio and
restrictions on the grant of additional security interests in the
Company's assets. As of December 31, 1998, the Company was in compliance
with all of its financial covenants.
20
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The U.S. and Foreign components of income before income taxes are as
follows (in thousands):
December 31,
----------------------------------
1998 1997 1996
-------- ------- -------
U.S $ (2,674) $ 5,491 $ 3,229
Foreign 32,148 70,550 29,773
-------- ------- -------
$ 29,474 $76,041 $33,002
======== ======= =======
Income tax expense is comprised of the following components (in
thousands):
December 31,
----------------------------------
1998 1997 1996
------- ------- -------
Current:
U.S $ 4,508 $ 9,161 $ 3,790
Foreign 7,268 4,433 2,536
Deferred (2,344) 7,944 (1,537)
------- ------- -------
$ 9,432 $21,538 $ 4,789
======= ======= =======
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,
--------------------------------
1998 1997 1996
-------- -------- --------
U.S. income taxes at statutory
rate of 35% $ 10,316 $ 26,614 $ 11,551
Deficit (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 335 (5,173) (6,805)
Excess foreign tax credits
realized and other (1,219) 97 43
-------- -------- --------
$ 9,432 $ 21,538 $ 4,789
======== ======== ========
21
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES - cont'd
Assets (liabilities) for deferred income taxes are as follows:
December 31,
--------------------
1998 1997
-------- --------
Foreign tax credit carryforwards $ 8,565 $ 6,780
Valuation allowance (8,565) (6,780)
Gross deferred tax liabilities (28,487) (38,451)
-------- --------
Deferred income taxes $(28,487) $(38,451)
======== ========
Deferred income taxes of approximately $8.3 million have not been accrued
on the Company's temporary differences, totaling approximately $34.2
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, 1998, the Company had approximately $8.6 million of
foreign tax credits that expire through 2003. 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.
6. 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. No shares were repurchased during 1998.
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. 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):
22
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAREHOLDERS' EQUITY - cont'd
For the Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net income available to common
shareholders - basic $ 20,042 $ 54,503 $ 28,213
-------- -------- --------
Effect of dilutive securities:
Dilutive effect of PCEs
issued by certain Affiliated
Companies (687) (563) (272)
-------- -------- --------
Net income available to common
shareholders - diluted $ 19,355 $ 53,940 $ 27,941
======== ======== ========
Basic and diluted earnings per share are computed using the weighted
average number of common shares outstanding during the year which was
18,362,188, 18,471,838, and 18,714,113 for 1998, 1997 and 1996,
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.
7. 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 $7.3 million as of December 31,
1998 through the purchase of capital notes of DEP.
(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 1998, 1997 and 1996, the
Company incurred expenses of $130,000 for these services. For
additional information, see Note 9 (a).
(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 1998, 1997 and 1996, the Company incurred fees of
approximately $258,000, $501,000 and $133,750 under this agreement,
respectively, and received fees of approximately $123,000 in 1998.
23
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES - cont'd
(e) Tevel Israel International Communications Ltd. ("Tevel"), which is
48.4% held 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
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. The Company has not provided any financing to Tel-Ad
since 1993.
(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. The Company has
contributed approximately $600,000 to Gemini II through December 31,
1998 and contributed an additional $150,000 to Gemini II in January
1999.
(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, 1998, the Company contributed approximately $2.4 million and an
additional $151,000 was contributed to Soreq in January 1999.
(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 37.3% 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. In May 1998, the plaintiff appealed to the Supreme
24
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES - cont'd
Court of Israel the dismissal by the Tel Aviv District Court. At
this time, Hamigdal is unable to determine what effect, if any, the
action will have on its financial position and results of
operations. Accordingly, the Company is unable to determine what
effect, if any, the action will have on its financial position and
results of operations.
(j) The holder of a 50% ownership interest in Mondex Israel Ltd.
("Mondex") has the right to sell to the Company, which has a 25%
ownership interest in Mondex, up to 25% of Mondex for a price equal
to such holder's investment in Mondex plus interest at a rate equal
to 5% above the increase in Israel's Consumer Price Index. This
right to sell to the Company expires on February 1, 2000. The holder
has notified the Company of its intention to exercise its right to
sell to the Company 12.5% of Mondex for a price of approximately
$1.25 million. Completion of the sale is subject to receipt of the
approval of certain Israeli government authorities. The holder
continues to have the right to sell to the Company its remaining
12.5% of Mondex until February 1, 2000. The Company has made a
provision of approximately $2.5 million in its 1998 financial
statements for the purchase price of the entire 25% ownership
interest in Mondex which it may be required to purchase.
(k) In May 1998, the Company purchased a 5.7% ownership interest in
Global Village Telecom Inc. ("Global Village"), a provider of remote
telecommunications services and an affiliate of Gilat Satellite ,
for a purchase price of $2.5 million, of which the Company paid $1.4
million and is required to pay a balance of $1.1 million in October
1999.
(l) On December 11, 1998, two shareholders of the Company instituted a
purported class action in the Supreme Court of New York State,
County of New York, against the Company and its directors. In their
complaint, the plaintiff shareholders allege that the defendants
breached their fiduciary duties and engaged in self-dealing without
regard to conflicts of interest in approving, on the date the
complaint was filed, a proposed merger under which a wholly owned
subsidiary of IDB Development would merge into PEC and each
shareholder of PEC other than IDB Development (which then owned
81.35% of PEC's common stock) would, as a result of the merger,
receive $30 in cash for each of his shares of common stock of the
Company. The plaintiffs also assert that the $30 per share price is
unfair and inadequate and is below the fair or inherent value of the
Company's assets and the Company's future prospects. The plaintiffs
seek, among other things, to prohibit the proposed merger and to be
paid unspecified damages, attorneys' fees and other relief. To date,
no motion to enjoin the proposed merger has been made.
The Company believes that the allegations in the complaint are
without merit, and the Company intends to contest the action
vigorously. To date, none of the defendants have been required to
answer, move, or otherwise respond to the complaint and no discovery
has been taken.
25
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES - cont'd
(m) 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.
(n) In addition to the lawsuits described elsewhere in these notes
against some of the Affiliated Companies, other lawsuits have been
filed against some of the Company's affiliates in the ordinary
course of their business. 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.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments ("FAS 107"), 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 carrying value of the outstanding note payable at December 31, 1998
approximated its fair value since the note bears a variable market rate of
interest.
The commitments described in Note 7 are generally for the near term, and,
accordingly, their contract value is considered their fair value.
9. SUBSEQUENT EVENTS
(a) On January 7, 1999, IDB Development transferred to Discount
Investment all of IDB Development's shares of common stock of the
Company in exchange for shares of Discount Investment. As a result
of the transfer, Discount Investment acquired 81.35% of the
Company's outstanding common stock.
In connection with the transfer of shares of common stock of the
Company from IDB Development to Discount Investment, IDB Development
assigned to Discount Investment all of IDB Development's rights and
obligations under the contract between IDB Development and the
Company pursuant to which IDB Development provided certain advisory
services to the Company in Israel.
(b) In November 1998, in connection with a loan of $90 million arranged
by the Company and Discount Investment to United Pan-Europe
Communications N.V. ("UPC"), a corporation which owns and operates
cable-based communications networks in Europe and, through Tevel
Israel International Communications Ltd., in Israel, UPC granted the
Company and Discount Investment an option exercisable, among other
things, upon an initial public offering of shares of UPC, to acquire
ordinary shares of UPC at a price equal to 90% of the initial public
offering price. In January 1999, UPC notified the Company of a
proposed initial public offering and on February 1, 1999, the
Company and Discount Investment exercised their respective options.
26
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUBSEQUENT EVENTS - cont'd
On February 17, 1999, UPC completed the sale of its ordinary shares
in an initial public offering and PEC Israel Finance Corporation
Ltd. ("PECFC"),a wholly-owned subsidiary of the Company, purchased
approximately 0.63% of the outstanding ordinary shares of UPC for
approximately $24.3 million. PECFC may not sell its shares of UPC
for a 180-day period beginning February 17, 1999.
(c) In connection with PECFC's purchase of shares of UPC, PECFC borrowed
$24.0 million on a short-term basis to finance the purchase. The
loan bears interest at an annual rate of 5.75%, payable at maturity
on May 17, 1999. The loan is unsecured but the bank, in its
discretion, may request that PECFC provide security for the loan.
The Company has guaranteed the obligations of PECFC with respect to
the loan.
10. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
---------------------------------------------
1998 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Revenues $19,152 $13,811 $ 4,509 $ 7,786
======= ======= ======= =======
Net income $10,743 $ 7,184 $ 443 $ 1,672
======= ======= ======= =======
Earnings per
common share-basic $ 0.59 $ 0.39 $ 0.02 $ 0.09
======= ======= ======= =======
Earnings per common
share-diluted $ 0.57 $ 0.36 $ 0.01 $ 0.06
======= ======= ======= =======
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
======= ======= ======= =======
27
<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 1999 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, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
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, 1998 and 1997.
Statements of Earnings for the years ended December 31, 1998,
1997 and 1996.
Statement of Shareholders' Equity for the years ended December
31, 1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
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:
Super-Sol Limited and Subsidiaries:
Independent Accountants' Report.
Consolidated Balance Sheets as at December 31, 1998 and 1997.
IV-1
<PAGE>
Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to the Consolidated Financial Statements.
(a)(2)(c) 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, 1998 and 1997.
Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996.
Statement of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Balance Sheets as at December 31, 1998 and 1997.
Statements of Income for the years ended December 31, 1998,
1997 and 1996.
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to the Financial Statements.
(a)(2)(d) 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, 1998:
Cellcom Israel Ltd.
DEP Technology Holdings Ltd.
DIC and PEC Cable TV Ltd.
Elron Electronic Industries Ltd.
IV-2
<PAGE>
Gemini Capital Fund Management Ltd.
Gemini Israel Fund L.P.
Gemini Israel II Limited Partnership
Ham-Let (Israel-Canada) Ltd.
Maxima Air Separation Center Ltd.
Mondex Israel Ltd.
PEC Israel Finance Corporation Ltd.
Property and Building Corporation Ltd.
Super-Sol Ltd.
Tefron Ltd.
Tel-Ad Jerusalem Studios Ltd.
Tradanet Electronic Commerce Services Ltd.
Witcom Ltd.
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.
Gilat Communications Ltd.
Gilat Satellite Networks Ltd.
Klil Industries Ltd.
Mul-T-Lock Ltd.
IV-3
<PAGE>
Naveh Building and Development Limited (report appears after
the financial statements of Property and Building Corporation
Ltd.)
Scitex Corporation Ltd.
(a)(2)(e) 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, filed as Exhibit
3(ii) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by reference.
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 December 30, 1992 and incorporated
herein by reference.
10(i)(d). 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.
IV-4
<PAGE>
10(i)(e). Amendment to Exhibit 10(i)(d) 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)(f). 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)(g). 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(i)(h). Loan Agreement dated May 5, 1998 between Bank Hapoalim B.M.
and the Company, filed as Exhibit 10(i) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference.
10(i)(i). General Debit Agreement dated February 11, 1999 between The
First International Bank of Israel Ltd. and PEC Israel Finance
Corporation Ltd.
10(i)(j). Specific Guarantee dated February 17, 1999 made by the Company
in favor of The First International Bank of Israel Ltd. ("FIBI")
with respect to the obligations of PEC Israel Finance Corporation
Ltd. to FIBI under the General Debit Agreement listed as Exhibit
10(i)(i), together with the Notice to Guarantor.
10(i)(k). Agreement and Plan of Merger among IDB Development Corporation
Ltd., PEC Acquisition Corporation and the Company dated as of
December 15, 1998 included as Annex A to the Company's Preliminary
Proxy Statement on Schedule 14A with respect to a special meeting of
shareholders of the Company to be held in April 1999 and
incorporated herein by reference.
10(i)(l). Agreement dated January 28, 1999 between DIC Finance &
Management Ltd. ("DICFM") and the Company relating to the Company's
right to sell to DICFM up to 250,000 ordinary shares of Gilat
Satellite Networks Ltd.
IV-5
<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). The registrant filed on December 21, 1998 a report on Form 8-K
dated December 11, 1998 reporting under Item 5 that (i) on December
11, 1998, the Special Committee of the Company's Board of Directors
and the Company's Board of Directors recommended acceptance by the
Company's shareholders of a revised offer from IDB Development
Corporation Ltd. ("IDBD") to acquire all of the outstanding shares
of common stock of the Company not owned by IDBD (the "Public
Shares") for a cash price of $30 per share, (ii) on December 11,
1998, two shareholders of the Company filed a purported class action
against the Company and its directors alleging that IDBD's revised
offer to purchase the Public Shares for a cash price of $30 per
share is unfair and (iii) on December 15, 1998, the Company signed a
definitive merger agreement for the acquisition by IDBD of the
Public Shares on a cash price of $30 per share.
- - ----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.
IV-6
<PAGE>
Property and Building Corporation
Limited and Subsidiaries
Financial Statements
As at December 31, 1998
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Contents
Page
----
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 11
Annex - Percentage of Holding in Related Companies 64
<PAGE>
March 11, 1999
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, 1998 and 1997.
- - - 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, 1998.
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% of the total consolidated assets as at December 31, 1998 and
1997, and whose revenues constitute 86%, 72% and 90% of the consolidated
revenues for the years ended on December 31, 1998, 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 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, 1998 and 1997 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, 1998. 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 35C to the financial
statements.
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
Balance Sheets as at December 31
- - --------------------------------------------------------------------------------
In terms of shekels of December 1998 (in NIS thousands)
Consolidated The Company
-------------------- --------------------
Note 1998 1997 1998 1997
----- --------- --------- --------- ---------
Current Assets
Cash and cash
equivalents 2 102,997 168,583 1,220 1,634
Short-term deposits
and loans 3,547 1,768
Marketable securities 3 13,223 38,571 576 644
Trade receivables 4 48,814 22,165 31
Other receivables
and debit balances 5 48,533 22,066 20,987 5,855
Apartments and other
inventories 6 74,124 6,693 7,285 1,439
Building projects
under construction 7 105,780 141,011 4,690 2,861
--------- --------- --------- ---------
397,018 400,857 34,789 12,433
--------- --------- --------- ---------
Land 8 499,061 434,130 4,072 9,471
--------- --------- --------- ---------
Long-term loans and
deposits 9 4,965 3,527 3,237 2,840
--------- --------- --------- ---------
Investments
In investee companies 10 155,024 126,752 1,067,610 971,805
--------- --------- --------- ---------
Fixed Assets 11
Buildings, land,
plantations and other 1,640,048 1,444,770 55,656 55,554
Less/- Accumulated
depreciation 343,966 339,672 24,338 23,540
--------- --------- --------- ---------
1,296,082 1,105,098 31,318 32,014
--------- --------- --------- ---------
Deferred Charges
and Other Assets 24,916 26,311 379 410
--------- --------- --------- ---------
2,377,066 2,096,675 1,141,405 1,028,973
========= ========= ========= =========
The notes and the annex are an integral part of the financial statements.
<PAGE>
Property and Building Corporation Limited and Subsidiaries
- - --------------------------------------------------------------------------------
Consolidated The Company
-------------------- --------------------
Note 1998 1997 1998 1997
------ --------- --------- --------- ---------
Current Liabilities
Advances from purchasers
of apartments and
others, net 13 19,432 4,345 2,603 1,058
Short-term credit from banks 14 17,500 27,367
Current maturities of long -
term liabilities 52,727 47,943 2,191 2,609
Suppliers and contractors 15 14,055 9,912
Creditors and credit balances 16 127,733 77,157 19,655 34,486
Deferred taxes 17 2,347 49
Proposed dividend 31,265 25,100 20,000 18,466
--------- --------- --------- ---------
262,712 194,171 44,449 56,668
--------- --------- --------- ---------
Long-term Liabilities
Convertible debentures 18 240,469 248,254
Debentures 18 33,239 38,992
Liabilities to banks and
provident funds 18 352,597 223,691
Other long term liabilities 18 60,151 63,601 6,574 8,798
Capital note 18 20,000
Deferred taxes 17 24,546 21,445 1,764 1,294
Liability for employee
severance benefits, net 19 3,442 2,566
--------- --------- --------- ---------
714,444 598,549 28,338 10,092
--------- --------- --------- ---------
Minority interest 330,465 330,915
--------- ---------
Receipt on account of
option warrants in
a subsidiary 10,827 10,827
--------- ---------
Shareholders' Equity 1,068,618 962,213 1,067,610 962,213
--------- --------- --------- ---------
Contingent Liabilities
and Commitments 20
2,377,066 2,096,675 1,141,405 1,028,973
========= ========= ========= =========
- - ---------------------------
Dov Tadmor - Chairman of the Board
- - ---------------------------
Abraham Attias - Managing Director
March 11, 1999
4
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Earnings for the Year Ended December 31
- - --------------------------------------------------------------------------------
In terms of shekels of December 1998 (in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
------------------------- -------------------------
Note 1998 1997 1996 1998 1997 1996
---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income
Rentals and warehousing 156,481 149,130 139,941 9,865 8,520 8,328
From construction and other sources 21 334,765 292,156 249,906 50,563 57,746
The Company's equity in the net earnings of investee companies 22 6,582 7,115 13,788 111,750 65,356 69,105
Gain on sale of investments and fixed assets 23 70,715 10,985 3,087 15 655 81
Income from securities, financing and others 24 12,682 12,796 7,519 1,955 2,226 2,696
------- ------- ------- ------- ------- -------
581,225 472,182 414,241 174,148 134,503 80,210
------- ------- ------- ------- ------- -------
Costs and Expenses
Construction and other costs 25 242,800 212,620 175,549 33,327 41,747
Administrative and general 26 38,505 34,829 33,780 8,230 7,828 7,423
Selling and marketing 27 5,381 5,426 4,146 266 953
Property maintenance (excluding depreciation) 12,970 12,237 11,446 1,057 847 883
Depreciation and amortization 28 27,875 24,454 21,573 1,059 1,050 1,371
Property taxes on land 8,390 9,450 8,239 540 923 1,049
Financing 29 26,320 26,150 17,901 1,287 1,177 3,393
------- ------- ------- ------- ------- -------
362,241 325,166 272,634 45,766 54,519 14,119
------- ------- ------- ------- ------- -------
Earnings before taxes on income 218,984 147,016 141,607 128,382 79,984 66,091
Taxes on income 30 64,877 47,285 46,316 6,276 6,561 (1,007)
------- ------- ------- ------- ------- -------
Earnings after taxation 154,107 99,731 95,291 122,106 73,423 67,098
Less/- Minority interest in earnings 32,001 26,308 28,193
------- ------- ------- ------- ------- -------
Net earnings for the year 122,106 73,423 67,098 122,106 73,423 67,098
======= ======= ======= ======= ======= =======
Earnings Per Share
Net earnings per share of a par value of NIS 1.00 (in NIS) 29.46 17.81 17.24 29.46 17.81 17.24
======= ======= ======= ======= ======= =======
</TABLE>
The notes and the annex are an integral part of the financial statements.
5
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Statements of Shareholders' Equity
- - --------------------------------------------------------------------------------
In terms of shekels of December 1998 (in NIS thousands)
<TABLE>
<CAPTION>
Share Capital Premium Capitalized Retained Total
capital surplus on shares surplus in earnings
subsidiaries
-------- ------- --------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance as at January 1,
1996 193,135 155,734* 28,192 383,974 761,035
Net earnings for the year 67,098 67,098
Issue of shares 669 85,594 86,263
Inflationary erosion of dividend
declared in the previous year 644 644
Proposed dividend - 280% (13,365) (13,365)
------- ------- ------ ------ ------- ---------
Balance as at December 31,
1996 193,804 155,734 85,594 28,192 438,351 901,675
Net earnings for the year 73,423 73,423
Exercise of share options 29 4,451 4,480
Tax benefit in respect of the
exercise of share purchase
options by employees 666 666
Inflationary erosion of dividend
declared in the previous year 435 435
Proposed dividend - 412% (18,466) (18,466)
------- ------- ------ ------ ------- ---------
Balance as at December 31,
1997 193,833 156,400 90,045 28,192 493,743 962,213
Net earnings for the year 122,106 122,106
Exercise of share options 15 3,716 3,731
Tax benefit in respect of the
exercise of share purchase
options by employees 306 306
Inflationary erosion of dividend
declared in the previous year 262 262
Proposed dividend - 482.7% (20,000) 20,000)
------- ------- ------ ------ ------- ---------
Balance as at December 31,
1998 193,848 156,706 93,761 28,192 596,111 1,068,618
======= ======= ====== ====== ======= =========
</TABLE>
* Capital surplus created until December 31, 1991.
The notes and the annex are an integral part of the financial statements.
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 1998 (in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash flows generated by operating activities
Net earnings 122,106 73,423 67,098 122,106 73,423 67,098
Adjustments to reconcile net earnings to
net cash flows generated by operating activities (Annex): (7,763) 46,987 62,912 (102,377) (104,823) (27,275)
-------- -------- -------- -------- -------- --------
Net cash inflow (outflow) generated by operating activities 114,343 120,410 130,010 19,729 (31,400) 39,823
-------- -------- -------- -------- -------- --------
Cash flows generating by investing activities
Proceeds from realization of investment in investee company 29,800
Payments on account of investments (26,274) (1,020)
Investments in investee companies (32,930) (2,938) (40,368) (27,697) (4,765) (101,949)
Dividend received from investee companies 5,772 8,534 8,852 44,662 18,242 13,861
Acquisition of the interest of another shareholder, in a formerly
proportionately consolidated company (Annex B) (10,213)
Repayment of another shareholder's portion of shareholders' loan
in a formerly proportionately consolidated company (17,505)
Purchase of marketable securities (7,281) (42,255) (654,850) (39) (37) (11)
Proceeds from sale of marketable securities 35,755 44,863 660,926 95 99 130
Acquisition and development of land (87,093) (38,948) (132,311) (2,408) (2,698) (5,330)
Purchase and construction of fixed assets (188,842) (163,788) (136,760) (368) (1,090) (168)
Collections of credit relating to sale of real estate 1,669 1,862
Proceeds from sale of fixed assets and real estate 60,891 1,182 2,199 51 34
Repayment of long-term deposits and loans 1,351 2,000 790 912
Granting of long-term loans (4,801) (3,145) (2,513) (2,308) (1,231)
Repayment (Granting) of short-term deposits (1,779) 16,546 (17,927)
Repayment of loans to subsidiaries 11,661 857
-------- -------- -------- -------- -------- --------
Net cash inflow (outflow) generated by investing activities (272,949) (146,480) (307,587) 11,675 19,104 (93,807)
-------- -------- -------- -------- -------- --------
</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 1998 in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash flows generated by financing activities
Dividend paid
- - - by the parent company (18,204) (12,930) (10,280) (18,204) (12,930) (10,280)
- - - to outside shareholders of subsidiary companies (6,539) (5,384) (4,915)
Payment of debentures (13,562) (9,716) (14,370)
Payment of long-term loans (31,450) (67,734) (3,492) (2,191) (405) (320)
Receipt of long-term loans 167,872 33,733 148,245
Receipt of capital note from subsidiary 20,000
Repayment (receipt) of long-term loan from subsidiary, net 1,550 (21,818)
Receipt (repayment) of credit from subsidiary company (34,748) 20,389
Receipt (repayment) of short-term bank credit (9,867) 13,129 (16,949) (406) (405) 405
Payments to outside shareholders of subsidiary (125) (79) (495)
Repayments of credit in respect of real estate acquisition (612) (14,511) (36,537)
Securities issue by a subsidiary 1,776 190,253 69,540
Share issue by the Company 3,731 4,481 86,262 3,731 4,481 86,263
------- ------- ------- ------- ------- -------
Net cash inflow (outflow) generated by financing activities 93,020 131,242 217,009 (31,818) 12,680 54,250
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (65,586) 105,172 39,432 (414) 384 266
Cash and cash equivalents at beginning of year 168,583 63,411 23,979 1,634 1,250 984
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of year 102,997 168,583 63,411 1,220 1,634 1,250
======= ======= ======= ======= ======= =======
</TABLE>
The notes and the annex are an integral part of the financial statements.
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 1998 (in NIS thousands)
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Annex A
Adjustments to reconcile net earnings to
net cash generated by operating activities:
Transactions not involving cash flows:
The Company's equity in the net earnings of investee companies (6,582) (7,115) (13,788) (111,750) (65,356) (69,105)
Outside shareholders' interest in earnings 32,001 26,308 28,193
Depreciation and amortization 28,706 25,188 22,178 1,059 1,050 1,372
Net changes in deferred taxes (11,282) (19,216) 4,502 (40) 1,671 (1,793)
Increase (decrease) in liability for employee severance benefits 876 (28) (93) (8) (1) 1
Decrease (increase) in value of securities (3,126) (3,463) (5,414) 12 (27) (26)
Income from realization of investments
and issue of capital by investee companies (11,028) (58) (655) (58)
Capital losses (gains) on sale of fixed assets and real estate (68,055) 43 (3,029) (15) (23)
Inflationary erosion of long-term deposits and loans, net (380) 6,433 1,844 328 445 123
Amortization of debenture discount 1,057 1,149 904
Changes in current assets and liabilities:
(Increase) decrease in trade receivables (26,649) 23,656 (16,378) (31)
(Increase) decrease in other receivables 3,415 2,374 20,211 1,502 (1,347) (1,541)
(Increase) decrease in construction costs net 7,787 (475) 22,052 1,677 (4,528) 7,368
Increase (decrease) in suppliers and subcontractors 4,143 (1,186) 3,050
Increase (decrease) in other payables 30,326 4,347 (1,262) 4,889 (36,075) 33,325
------- ------ ------ -------- -------- -------
Total adjustments (7,763) 46,987 62,912 (102,377) (104,823) (27,275)
======= ====== ====== ======== ======== =======
Significant non-cash transactions:
Purchase of fixed assets on credit 328 11,444
------ ------
Purchase of real estate on credit 11,570
-------
Sale of fixed assets on credit 18,725 1,669
------- ------
</TABLE>
9
<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 1998 (in NIS thousands)
Consolidated
------------
1998
------------
Annex B
Acquisition of the interest of another shareholder, in a formerly
proportionately consolidated company
Assets and liabilities of the company at the date of acquisition :
Working capital (cash and cash equivalents) 30
Fixed assets, net 22,836
Long term liabilities (17,505)
Difference created due to acquisition 4,852
-----------
10,213
===========
10
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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, in
accordance with Regulation 8 of the Securities Regulations
(Preparation of Annual Financial Statements), 1993)
B. Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. Similar problems may
also occur in systems that use the digits "99" in a date field as
indication of something other than the year 1999. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and if
not addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect an
entity's ability to conduct regular business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting
the Company including those relating to the remediation efforts of
customers, suppliers or other third parties, will be fully resolved.
11
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
C. Financial statements in adjusted values
1. The Company prepares 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 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 shekels of December
1998.
D. Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to use estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results may differ from such
estimates.
E. 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 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 adjustment of related balance sheet
items.
12
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
E. Principles of adjustment (cont'd)
2. Statement of earnings (cont'd)
(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 outside
shareholders' share in the results of operation of
subsidiaries was based on the adjusted financial
statements of such companies.
(4) Net financing items reflect revenue and expenses in real
terms, the inflationary erosion of monetary items during
the year, and profits and loss from realization and
revaluation of marketable securities.
(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. Amounts payable (or
refundable) have been included unadjusted. Current taxes
include, therefore, the expense derived from inflationary
erosion of the value of payments made on account from time of
payment to year end.
Deferred taxes - see Note 1F(12) 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 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 guidelines based on Section 36A
of the Securities Law - 1968.
13
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
E. Principles of adjustment (cont'd)
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 current year end.
F. Accounting policies
1. Consolidated financial statements
(a) The consolidated financial statements include the controlled
subsidiaries. Companies under joint control are consolidated
in the financial statements using the proportionate
consolidation method.
(b) The list of companies whose reports were included in the
consolidated reports, the percentage of voting rights, and the
percentage of shareholding granting rights to profits, is
presented in the annex to the financial reports. In addition,
affiliated companies not consolidated are also presented in
the annex to the financial reports.
(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 uniform Group accounting principles.
(d) Balances between subsidiaries and inter-company profits from
sales between the companies not yet realized outside of the
Group were canceled.
(e) (1) At the time of acquisition, the excess cost of
investment over net asset value is recorded as goodwill.
(2) Excess cost attributed to assets and liabilities is
recorded in the appropriate accounts on the balance
sheet.
(3) Excess of adjusted net asset value over cost of
investment is initially attributed to intangible assets,
any excess of adjusted net asset value over cost of the
investment not attributed to intangible assets is
attributed to nonmonetary assets, in accordance with the
company's interest in such assets.
(f) Goodwill disclosed on the consolidated balance sheet under the
heading "Deferred charges and other assets" is amortized
equally, on an annual basis, over a 10 year period.
14
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Accounting policies (cont'd)
1. Consolidated financial statements (cont'd)
(g.) Real estate properties of the Company and its subsidiaries
that are registered 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.
4. Inventory
(a) The inventory of apartments and work in process are recorded
at cost (cost of land, subcontractors and other expenses) not
to exceed the market value of the built apartments.
(b) Inventory of supplies, air conditioning and others 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 under 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.
15
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Accounting policies (cont'd)
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 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 10% per year.
7. Provision for doubtful debts
The provision for doubtful debts is calculated on the basis of
specific identification of balances whose collection is in doubt.
8. Fixed assets
(a) Fixed assets are stated at cost. Depreciation is computed by
the straight line method over the estimated useful life of the
assets.
(b) The financing cost incurred as a result of loans and credit,
for the purchase or development of fixed assets and other
acquisition/development costs were added to the cost of the
asset, up until the date of use.
9. Other assets - Initial difference which cannot be allocated to
assets - see Note 1F(6)(c).
10. Deferred charges
(a) Expenses relating to debenture issues are written off against
income over debenture lives in proportion to their outstanding
balance.
(b) Taxes in connection with unrealized profits from real estate
transactions - taxes relating to real estate transactions are
amortized over the life of the asset or parallel to the period
of transaction.
16
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Accounting policies (cont'd)
11. Convertible debentures
(a) Debentures, the conversion of which is not, as at balance
sheet date, expected according to guidelines set by the
Institute of Certified Public Accountants in Israel, 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 received at the date of the issue and the stated value
of the debentures) is amortized using the implicit interest
method over the period of the debentures in proportion to
their outstanding balance.
12. Deferred taxes
Deferred taxes in the adjusted financial statements reflect mainly
the following areas of timing differences of items between their
financial statement inclusion and 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.
(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.
17
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Accounting policies (cont'd)
13. 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 activities relate to installation of air
conditioning systems as an executing contractor, recognizes
income from long-term projects by the "percentage of
completion method".
14. Year 2000 compliance
The costs to prepare and convert those years belonging to the
existing programs of the company, to be able to differentiate the
20th century and those belonging to the 21st century, are recorded
as current expenses at the time they are incurred.
15. Foreign currency and linkage
Assets and liabilities that are linked to 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.
18
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Accounting policies (cont'd)
15. Foreign currency and linkage (cont'd)
Data concerning consumer price index and foreign currency rates:
<TABLE>
<CAPTION>
% of change
December 31 December 31 December 31 ----------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer price
index, in points 166.3 153.1 143.1 8.6 7.0 10.6
Consumer price
index, (latest
known index)
in points 166.2 153.6 142.0 8.2 8.2 11.0
Exchange
rate of the
U.S. dollar,
in NIS 4.16 3.536 3.251 17.6 8.8 3.7
</TABLE>
16. 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.
19
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 2 - Cash and Cash Equivalents
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Short-term deposits with banks 102,709 168,268 1,208 1,628
Cash at bank 288 315 12 6
----------- ----------- ----------- -----------
102,997 168,583 1,220 1,634
=========== =========== =========== ===========
</TABLE>
The cash and deposits are stated in Israeli shekels.
Note 3 - Marketable Securities
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Government loans 7,372 22,021
Mutual fund certificates 5,379 11,014
Debentures issued by a
subsidiary* 576 644
Other debentures 330 805
Shares 142 1,621
Convertible securities 3,110
----------- ----------- ----------- -----------
13,223 38,571 576 644
=========== =========== =========== ===========
</TABLE>
* See Note 20C(1)
20
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 4 - Trade Receivables
A. Composition:
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------
December 31 December 31 December 31
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Purchasers of apartments and shops 30,101 4,778 31
Rentals and warehousing* 10,292 11,238
Air conditioning and others* 4,976 4,097
Notes receivable 3,445 2,052
----------- ----------- ------------
48,814 22,165 31
=========== =========== ============
* After deduction of provision for
doubtful debts 1,215 1,123
=========== ===========
</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
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accrued income 5,122 6,487 235
Purchasers of fixed assets* 18,969
Deferred taxes 15,906 5,537 3,845 3,384
Deposits and prepaid expenses 1,246 1,030 12 9
Advances to Tax Authorities
less provisions 1,267 3,037 442
Current maturities of long-term
loans to employees and
deposits 2,965 1,333 1,620 789
Other debtors 1,359 3,642 44 1,438
Value Added Tax authorities 1,699 1,000
Subsidiary - current account** 15,024
----------- ----------- ----------- -----------
48,533 22,066 20,987 5,855
=========== =========== =========== ===========
</TABLE>
* Balance linked mainly to U.S. dollar.
** Carries annual interest rate of 2%.
21
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 6 - Apartments and Other Inventories
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Apartments in completed building 72,628 5,777 7,285 1,439
Air-conditioning equipment and
other 1,496 916
----------- ----------- ----------- -----------
74,124 6,693 7,285 1,439
=========== =========== =========== ===========
</TABLE>
Note 7 - Building Projects Under Construction
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land 60,004 86,030 4,306 3,147
Construction work 108,332 153,737 1,237 3,331
----------- ----------- ----------- -----------
168,336 239,767 5,543 6,478
Less - Advances from
apartment purchasers 62,556 98,756 853 3,617
----------- ----------- ----------- -----------
105,780 141,011 4,690 2,861
=========== =========== =========== ===========
</TABLE>
22
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 8 - Land
A. Composition:
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
Freehold land * 250,809 201,632 4,072 9,471
Leasehold land 237,519 221,320
Stores in completed
buildings and other
installations 5,623 5,849
Parking lot and sports
center 3,450 3,477
Expenses relating to
future stages of
construction 1,660 1,852
----------- ----------- ----------- -----------
499,061 434,130 4,072 9,471
=========== =========== =========== ===========
* Including NIS 29.2 million in rights to land which have not yet been
registered in the name of the subsidiary (the subsidiary did
register a caveat).
Land at a value of NIS 2.2 million is in an area in which the land
ownership rights are in the process of being finalized. Once the
process is completed the rights will be registered in the name of
the Company. Land at a value of NIS 25 million will be registered in
the name of the company upon completion of the payments on account.
B. In the opinion of Management the value of land exceeds the value
stated in the balance sheet.
C. Leasehold rights in land:
The lease Cost
expires in
----------- ---------
Capitalized leasehold 2048 236,573
Uncapitalized leasehold 2040 *946
---------
237,519
=========
* The land has not as yet been registered in the name of the
Company at the Land Registry Office.
23
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 9 - Long-term Loans and Deposits
A. Composition:
(1) In the consolidated balance sheet:
Interest December 31
rate December 31, 1998 1997
-------- ---------------------------- -----------
Total Current Balance Balance
% maturities
-------- ------ ---------- ------- -----------
Loans to
employees for
issue of stock and
realizing
options(C) 2 7,892 2,955 4,937 3,493
Deposits with
banks -
For the granting
of loans to
apartment
purchasers 4 38 10 28 34
------ --------- ------ ---------
7,930 2,965 4,965 3,527
(2) In the
company
balance sheet:
Loans to
employees for
issue of stock and
realizing options 4,857 1,620 3,237 2,840
====== ========= ====== =========
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.
24
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 9 - Long-term Loans and Deposits (cont'd)
D. Classification of long-term deposits and loans by years of maturity:
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within 12 months - current
maturities 2,965 1,333 1,620 789
=========== =========== =========== ===========
During second year 2,482 1,162 1,620 789
During third year 2,483 1,103 1,617 789
No date of redemption but no
later than 2001 1,262 1,262
----------- ----------- ----------- -----------
4,965 3,527 3,237 2,840
=========== =========== =========== ===========
</TABLE>
E. Loans at a value of NIS 4,938 thousand are eligible for early
repayment.
25
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 10 - Investments in Investee Companies
A. Consolidated balance sheet
<TABLE>
<CAPTION>
December 31
December 31, 1998 1997
------------------------------ -----------
Opening Changes Total Total
balance
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
1. Composition:
Affiliated companies
Shares at cost, include -
Adjusted net asset value at the
date of acquisition (a) 101,650 101,650 101,650
Initial difference, net 3,488 3,488 3,488
-------- --------- -----------
105,138 105,138 105,138
Add -
The Company's share in the net
post-acquisition profits 21,688 3,351 25,039 21,688
Amortization of initial
difference (1,952) (1,353) (3,305) (1,952)
-------- --------- --------- -----------
Book value of shares (b) 124,874 1,998 126,872 124,874
-------- --------- --------- -----------
Payment in respect of initial
difference of subsidiary
company (c) 1,447 1,447 1,447
Payment on account of share
acquisition (d) 26,274 26,274
Other company 431 431 431
-------- --------- --------- -----------
126,752 28,272 155,024 126,752
======== ========= ========= ==========
</TABLE>
(a) The investment is presented net of dividends distributed by an
affiliated company out of pre-acquisition earnings, amounting to NIS
5,256 thousand.
(b) Includes quoted shares whose adjusted equity value at balance sheet
date is NIS 112,366 thousand (December 31, 1997 - NIS 86,462
thousand). The market value of these shares at balance sheet date is
NIS 159,238 thousand (December 31, 1997 - NIS 112,364 thousand).
(c) Payment on account of options in the subsidiary company (i.e.
payment in respect of initial difference) amounted to NIS 1,447
thousand. The market value of the options as at December 31, 1998 is
NIS 363 thousand.
(d) Payments on account of share acquisitions - see Note 20C(7).
26
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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, 1998 and 1997:
December 31 December 31
1998 1997
----------- -----------
(a) Balance sheet data
Assets:
Current assets 265 429
Fixed assets 52,103 59,613
------------ ----------
52,368 60,042
============ ==========
Liabilities and shareholders' equity:
Current liabilities 5,870 4,341
Long-term liabilities 13,409
Shareholders' equity 33,089 55,701
------------ ----------
52,368 60,042
============ ==========
(b) Statements of earnings
December 31 December 31 December 31
1998 1997 1996
----------- ----------- -----------
Income: 3,706 3,842 3,229
----------- ----------- -----------
Costs and expenses:
Property maintenance 355 482 413
Administrative and general 423 446 375
Financing, net 370 81
Depreciation 815 897 863
----------- ----------- -----------
1,963 1,906 1,651
----------- ----------- -----------
Earnings before taxes 1,743 1,936 1,578
Taxes on income 628 680 570
----------- ----------- -----------
1,115 1,256 1,008
=========== =========== ===========
27
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 10 - Investments in Investee and Other Companies (cont'd)
B. Company balance sheet
<TABLE>
<CAPTION>
Subsidiaries Affiliated December 31 December 31
companies 1998 1997
----------- -----------
Total Total
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Shares at cost, include --
Adjusted net asset value at
date of acquisition 365,526 365,526 342,755
Initial difference, net (2) 12,722 19,631 32,353 27,427
------------ ---------- ----------- -----------
378,248 19,361 397,879 370,182
Add -
The Company's share in net
post-acquisition profits 688,625 3,730 672,355 603,448
Amortization of initial
difference (1,576) (2,499) (4,075) (2,256)
------------ ---------- ----------- -----------
Book value of shares (1) 1,045,297 20,862 1,066,159 971,374
Loan (3) 1,020 1,020
Other company 431 431 431
------------ ---------- ----------- -----------
1,046,748 20,862 1,067,610 971,805
============ ========== =========== ===========
</TABLE>
(1) Payment on account of options in the subsidiary company (i.e.
payment in respect of initial difference) amounted to NIS 1,447
thousand. The market value of the options as at December 31, 1998 is
NIS 363 thousand.
(2) Includes quoted shares whose adjusted equity value at balance sheet
date is NIS 776,284 thousand (December 31, 1997 - NIS 843,214
thousand). The market value of these shares at balance sheet date is
NIS 1,105,420 thousand (December 31, 1997 - NIS 1,072,097 thousand).
(3) Payment on account of investment in Carmelton Group Ltd.- See Note
20C(6).
28
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 11 - Fixed Assets
A. Consolidated balance sheet:
<TABLE>
<CAPTION>
Leased Land Buildings Plantations
commercial intended under and
buildings for the construction irrigation
and office construction network
premises of buildings
(1) (1)(2) (3)
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cost
Balance at beginning of year 995,590 264,658 150,918 8,429
Additions 103,713 32,200 90,216
Transfers 102,111 (15,906) (86,205)
Disposals (31,938)
---------- ------------ ------------ -----------
Balance at end of year 1,169,476 280,952 154,929 8,429
---------- ------------ ------------ -----------
Accumulated depreciation
Balance at beginning of year 315,300 7,432
Depreciation 23,874
Disposals (20,786)
---------- -----------
Balance at end of year 318,388 7,432
---------- -----------
Depreciated cost
as at December 31, 1998 851,088 280,952 154,929 997
========== ============ ============ ===========
Depreciated cost
as at December 31, 1997 680,290 264,658 150,918 997
========== ============ ============ ===========
<CAPTION>
Vehicles Machinery Other Total Total
and assets
equipment
December 31 December 31
1998 1997
-------- --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cost
Balance at beginning of year 6,080 7,870 11,225 1,444,770 1,268,085
Additions 1,791 5 567 228,492 177,830
Transfers
Disposals (1,040) (236) (33,214) (1,145)
-------- --------- ------ ----------- -----------
Balance at end of year 6,831 7,639 11,792 1,640,048 1,444,770
-------- --------- ------ ----------- -----------
Accumulated depreciation
Balance at beginning of year 2,644 7,091 7,205 339,672 317,641
Depreciation 888 272 913 25,947 22,760
Disposals (631) (236) (21,653) (729)
-------- --------- ------ ----------- -----------
Balance at end of year 2,901 7,127 8,118 343,966 339,642
-------- --------- ------ ----------- -----------
Depreciated cost
as at December 31, 1998 3,930 512 3,674 1,296,082
======== ========= ====== ===========
Depreciated cost
as at December 31, 1997 3,436 779 4,020 1,105,098
======== ========= ====== ===========
</TABLE>
29
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
A. Consolidated balance sheet: (cont'd)
(1) Including rights in land aggregating NIS 459,118 thousand. The land
is, mainly registered in the names of the Company and the
subsidiaries. Part of the land, of an adjusted cost of NIS 234,404
thousand, is freehold land of the Company and the subsidiaries.
Another part, of an adjusted cost of NIS 234,717 thousand, is
leasehold land, leased by subsidiaries (of which NIS 8,373 is an
uncapitalized 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 18,544 thousand 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) The plantations are on land area totaling 334 dunams (freehold land
- 97 dunams, leasehold land - 237 dunams, leased until the year 2062
and thereafter).
(4) The cost of the fixed assets includes financing costs of NIS 6,593
thousand (December 31, 1997 - NIS 4,111 thousand).
30
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
B. Company balance sheet
<TABLE>
<CAPTION>
Leased Buildings Vehicles Other Total Total
building under assets
and office construction
premises
December 31 December 31
(1) (2) 1998 1997
---------- ------------ -------- -------- ----------- -----------
Cost
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 38,232 15,490 841 991 55,554 54,465
Additions 1,089
Transfers 15,490 (15,490) 290 78 368
Disposals (266) (266)
---------- ------------ -------- -------- ----------- -----------
Balance at end of year 53,722 865 1,069 55,656 55,554
---------- ------------ -------- -------- ----------- -----------
Accumulated depreciation
Balance at beginning of year 22,611 568 361 23,540 22,519
Depreciation 781 113 133 1,027 1,021
Disposals (229) (229)
---------- -------- -------- ----------- -----------
Balance at end of year 23,392 452 494 24,338 23,540
---------- -------- -------- ----------- -----------
Depreciated cost as at
December 31, 1998 30,330 413 575 31,318
========== ======== ======== ===========
Depreciated cost as at
December 31, 1997 15,620 15,490 274 630 32,014
========== ============ ======== ======== ===========
</TABLE>
(1) Includes rights in land amounting to NIS 24,605 thousand.
(2) Land on which an office building is being constructed in a combination
transaction.
31
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 11 - Fixed Assets (cont'd)
C. Rates of depreciation
%
-------
Buildings 4-2
Plantations and irrigation plants 20-15
Vehicles 15
Machinery and equipment 20-10
Other assets 33-6
Note 12 - Deferred Charges and Other Assets
<TABLE>
<CAPTION>
Cost Accumulated
amortization Amortized cost
----------- ------------ ------------------------
December 31 December 31 December 31 December 31
1998 1998 1998 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
A. Consolidated balance sheet
Deferred charges -
Capital raising expenses 19,418 10,325 9,093 11,375
Deferred taxes in connection
with unrealized profits from
real estate transactions 2,970 1,487 1,483 1,635
----------- ------------ ----------- -----------
Deferred charges 22,388 11,812 10,576 13,010
----------- ------------ ----------- -----------
Other assets - initial difference 6,280 1,570 4,710 5,338
Deferred taxes for timing
differences 9,630 9,630 7,963
----------- ------------ ----------- -----------
15,910 1,570 14,340 13,301
----------- ------------ ----------- -----------
38,298 13,382 24,916 26,311
=========== ============ =========== ===========
B. The Company balance sheet
Deferred charges -
Taxes in connection with
unrealized profits from
real estate transactions 734 355 379 410
=========== ============ =========== ===========
</TABLE>
32
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 13 - Advances from Purchasers of Apartments and Others, Net
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
Advances 72,263 43,302 17,236 9,796
----------- ----------- ----------- -----------
Less -
land 6,586 14,338 4,708 3,147
construction work 46,245 24,619 9,925 5,591
----------- ----------- ----------- -----------
52,831 38,957 14,633 8,738
----------- ----------- ----------- -----------
19,432 4,345 2,603 1,058
=========== =========== =========== ===========
Note 14 - Credit from Banking Entities
Consolidated
Terms of ---------------------------
linkage and December 31 December 31
interest 1998 1997
-------------- ----------- -----------
Overdraft Prime + 1% 14,483 10,511
Import financing German marks 3,017 3,001
Short-term loans 13.8% - 15.2% 13,855
---------- ----------
17,500 27,367
========== ==========
Note 15 - Suppliers and Subcontractors
Consolidated
----------------------------
December 31 December 31
1998 1997
----------- -----------
Current accounts 10,107 6,108
Checks and notes payable 3,948 3,804
----------- -----------
14,055 9,912
=========== ===========
33
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 16 - Creditors and Credit Balances
<TABLE>
<CAPTION>
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sellers of land 11,570 592
Income received in advance 4,779 3,834
Employees and other liabilities
related to salaries 6,762 4,470 1,865 1,704
Institutions 26,906 21,200 8,942 7,489
Subsidiary - current account* 19,724
Provision for completion of
construction 41,201 14,398 6,550 3,418
Liability relating to
appreciation tax and
consent fees 8,254 10,317
Expenses payable 13,139 16,474 1,712 1,129
Others 15,122 5,872 586 1,022
----------- ----------- ----------- -----------
127,733 77,157 19,655 34,486
=========== =========== =========== ===========
</TABLE>
* Bear annual interest at rates of 2% (1997 - bear annual interest at
prime rate).
Note 17 - Deferred Taxes
1. Composition:
<TABLE>
<CAPTION>
In respect of In respect of Other timing Total Total
depreciable building differences
fixed assets projects December 31, December 31,
less advances 1998 1997
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A. Consolidated
Balance as at
beginning of
year (8,577) (9,491) 7,776 (10,292) (29,508)
Changes (3,510) 15,465 (673) 11,282 19,216
------------- ------------- ------------ ------------ ------------
Balance as at
end of year (12,087) 5,974 7,103 990 (10,292)
============ ============ =========== =========== ===========
B. The Company
Balance as at
beginning of
year 21 1,407 613 2,041 3,712
Changes (5) (17) 62 40 (1,671)
------------- ------------- ------------ ------------ ------------
Balance as at
end of year 16 1,390 675 2,081 2,041
============ ============ =========== =========== ===========
</TABLE>
34
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Under current assets 15,906 5,537 3,845 3,384
Under other assets 9,630 7,963
Under current liabilities (2,347) (49)
Under long-term liabilities (24,546) (21,445) (1,764) (1,294)
----------- ----------- ----------- -----------
990 (10,292) 2,081 2,041
=========== =========== =========== ===========
</TABLE>
Note 18 - Long-term Liabilities
A. Composition in the consolidated balance sheet:
<TABLE>
<CAPTION>
Consolidated Consolidated
----------------------------------- ------------
December 31, 1998 1997
----------------------------------- ------------
Total Current Balance Balance
maturities
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Convertible debentures 248,325 7,856 240,469 248,254
Debentures (2) 38,891 5,652 33,239 38,992
Liabilities to banks (3) 230,645 9,169 221,476 99,941
Liabilities to provident funds (4) 161,171 30,050 131,121 123,750
Other liabilities (5) 60,151 60,151 63,601
--------- ---------- --------- ------------
739,183 52,727 686,456 574,538
========= ========== ========= ============
</TABLE>
1. Convertible debentures
(a) Convertible debentures, with a balance, as at balance sheet date, of
NIS 51,676 thousand were issued by Hadarim Properties Ltd. (a
subsidiary) per a prospectus published on February 28, 1996.
The debentures bear interest at the rate of 3.5% p.a.. Both
principal and interest are linked to the CPI published for February
1996, 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 for each ordinary share of a par value of NIS 1. After
February 8, 2001 the debentures will no longer be convertible.
35
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
The market value of the debentures as at December 31, 1998 is NIS
53,013 thousand. (December 31, 1997 - NIS 55,113)
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 54,779 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 for 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 141,870 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 for each
ordinary share of a par value of NIS 1. After August 31, 2001 the
debentures will no longer be convertible.
The market value of the debentures as at December 31, 1998 is NIS
123,375 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.
36
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
A. Composition: (cont'd)
2. Debentures
Composition:
Consolidated
-----------------------------
December 31 December 31
1998 1997
----------- -----------
Total debentures 38,891 44,665
Current maturities 5,652 5,673
----------- -----------
33,239 38,992
=========== ===========
Series B
Marketable debentures, the balance of which as at the balance sheet date
was NIS 38,891 thousand were issued by Property and Building (Finance
1986) Limited (subsidiary) per a 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 1998 - 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 the debentures at December 31, 1998 is NIS 33,327 thousand.
Series - 6 and 7
Debentures from these series were issued in the past by the Company, and
transferred to Property and Building (Finance 1986) Limited (subsidiary)
as part of a court approved reorganization between the companies,
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 bore
interest at the rate of 5% per annum and were linked (principal 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 undertook 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).
37
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
A. Composition: (cont'd)
3. Liabilities to banks
<TABLE>
<CAPTION>
Interest December 31 December 31
Rate Current 1998 1997
---------- Total maturities ----------- -----------
% Balance Balance
---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated
balance sheet 4.7 - 4.95 230,645 9,169 221,476 99,941
======= ========== =========== ===========
</TABLE>
4. Liabilities to provident funds
<TABLE>
<S> <C> <C> <C> <C> <C>
Consolidated
balance sheet 4.9 161,171 30,050 131,121 123,750
======= ========== =========== ===========
</TABLE>
The liabilities at (3) and (4) are linked to the consumer price index.
5. Other long-term liabilities
The liability is non-interest bearing and is linked to the
construction input index - see Note 20C(5).
B. Composition in the Company balance sheet:
(1) Other long-term liabilities
Loans from subsidiaries bear interest of 4% and are linked to the
consumer price index.
(2) A capital note of NIS 20,000 bears an annual interest rate that
cannot exceed 30% of the rate of increase in the consumer price
index.
38
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 18 - Long-term Liabilities (cont'd)
C. Classification of long-term liabilities by years of maturity
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
Within 12 months -
current maturities 52,727 47,943 2,191 2,609
=========== =========== =========== ===========
During second year 154,167 52,147 2,191 2,200
During third year 110,682 142,600 2,191 2,200
During fourth year 110,659 86,240 2,192 2,200
During fifth year 84,573 81,975 2,198
Beyond fifth year till 2005 166,224 147,975
Without redemption date* 60,151 63,601
----------- ----------- ----------- -----------
686,456 574,538 6,574 8,798
=========== =========== =========== ===========
* 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:
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
Liability in respect of
employee severance* 9,302 8,145 457 474
Less - amounts funded* 5,860 5,579 457 474
----------- ----------- ----------- -----------
3,442 2,566 - -
=========== =========== =========== ===========
* 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, 1997 - NIS 2.4 millions) is included in the
balance sheet as part of the above mentioned severance liability.
39
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 20 - Contingent Liabilities and Commitments
A. Contingent liabilities
Consolidated The Company
------------------------ ------------------------
December 31 December 31 December 31 December 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
1. Guarantees Granted
(a) In respect of dwelling
purchase insurance 55 288 55 288
(b) On behalf of
subsidiaries
in respect of -
Performance guarantees 229 225
Debentures 38,891 44,665
The guarantees are linked mainly to the consumer price index and partly to
the construction inputs index.
2. Claims have been filed against the Company and subsidiaries, in the
regular course of business, by apartment purchasers, alleging
building defects and/or late delivery. 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.
3. A legal suit was filed in 1994 against a subsidiary regarding the
distribution of profit from a project 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. 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 5,839 plus legal costs connected with the
claim. 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.
4. Regarding the private placement of Hadarim Properties Ltd. (a
subsidiary), the Company undertook to compensate Hadarim Properties
Ltd. (with regards to the lots of the subsidiary in their respect of
which a contract exists with Israel Land Administration) with the
value of the lots, if by chance the above mentioned contract is not
executed and the lots are returned to the Administration. Should
payment be made to the Administration, Property and Building Ltd.
will pay Hadarim Properties Ltd., a sum of not more than NIS 11.1
million linked to the CPI of the month of September 1995, bearing
interest of 8%.
40
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 20 - Contingent Liabilities and Commitments (cont'd)
B. Liens
1. A subsidiary has pledged real estate in two projects as well as the
assets and anticipated receipts of a project in favor of a bank (an
interested party) in respect of the financing of 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, 1998, balances held by the bank, per
the above arrangement, amounted to NIS 270,108 (nominal value) in
debentures and NIS 702 thousand in cash (including short-term
deposits) (December 31, 1997 - NIS 290,400 N.V. and NIS 776 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 271 million. (December
31, 1997 - NIS 244 million).
3. A subsidiary leased part of a building to the Government of Israel
for a term of 15 years, from 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.
5. In 1995, a subsidiary acquired 72% of the land rights in an area of
72 dunams for a price of NIS 56.8 million, which will be paid in
construction services.
6. After the balance sheet date, a contract was signed, between the
Israeli Government and Carmelton Group Ltd., giving Carmelton the
right to renovate, build, finance and operate the Carmel tunnels.
The shareholders of Carmelton are an International Spanish Company,
Drogdos (40%), Property and Building Ltd.(20%), Astrom (20%) and
Fibi (20%). The expected cost of the project is $160 million. In
addition, Carmelton will pay royalties of NIS 266 million to the
Government of Israel.
7. After the balance sheet date, a deal was finalized between Bayside
Ltd. (a subsidiary) and Industrial Information Center-Haifa (MATAM).
According to the deal, MATAM will allot 50.1% of its shares to
Bayside for NIS 246.5 million which will be invested in MATAM.
41
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 21 - Income from Construction and Other Sources
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ---------------------------
Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Apartments,
stores and land 302,969 259,479 213,055 50,563 57,746
Air-conditioning
systems and
others 30,783 31,561 35,569
Citrus crop 1,013 1,116 1,282
----------- ----------- ----------- ----------- -----------
334,765 292,156 249,906 50,563 57,746
=========== =========== =========== =========== ===========
</TABLE>
Note 22 - The Company's Equity in the Net Earnings of Investee Companies
<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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
The Company's
equity net, in
the earnings of
investee
companies 7,935 7,824 14,325 113,569 66,578 69,468
Portion of
initial
difference
amortized (1,353) (709) (537) (1,819) (1,222) (363)
----------- ----------- ----------- ----------- ----------- -----------
6,582 7,115 13,788 111,750 65,356 69,105
=========== =========== =========== =========== =========== ===========
Includes
dividend
received 4,389 8,534 8,852 44,662 18,242 13,861
=========== =========== =========== =========== =========== ===========
</TABLE>
42
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gains on
realization of
investments in
investee
companies 11,028 58 665 58
Gains on sale
of fixed
assets and land 70,715 (43) 3,029 15 23
----------- ----------- ----------- ----------- ----------- -----------
70,715 10,985 3,087 15 655 81
=========== =========== =========== =========== =========== ===========
</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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gains relating to
marketable
securities -
Appreciation
(depreciation)
in value 3,126 3,463 1,300 (12) 27 25
Interest from
securities 2,514 1,923 1,118 14 15 15
----------- ----------- ----------- ----------- ----------- -----------
5,640 5,386 2,418 2 42 40
Interest -
From banks
and others 3,378 4,938 3,298 64
From investee
companies 27 4 815
Management
fees 1,935 1,671 1,628 1,926 2,116 1,841
Other income 1,729 801 175
----------- ----------- ----------- ----------- ----------- -----------
12,682 12,796 7,519 1,955 2,226 2,696
=========== =========== =========== =========== =========== ===========
</TABLE>
43
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 25 - Construction and Other Costs
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ---------------------------
Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Apartments,
shops and land:
Construction
expenses 180,261 140,790 112,113 34,087 36,879
Land 54,755 37,062 23,232 5,086 6,301
Change in
inventories of
apartment and
shops (19,704) 5,265 6,141 (5,846) (1,439)
----------- ----------- ----------- ----------- -----------
215,312 183,117 141,486 33,327 41,741
----------- ----------- ----------- ----------- -----------
Air conditioning
systems and
others:
Materials and
installation* 31,904 28,124 28,840
Change in
inventories of
air-conditioning
and other
equipment (5,823) 2 3,904
----------- ----------- -----------
26,081 28,126 32,744
----------- ----------- -----------
Citrus crops -
Cultivating and
picking
expenses 1,407 1,377 1,319
----------- ----------- -----------
242,800 212,620 175,549 33,327 41,741
=========== =========== =========== =========== ===========
* Including
depreciation 695 734 604
=========== =========== ===========
</TABLE>
44
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and
related expenses 26,053 23,470 24,117 6,195 5,757 5,998
Directors' fees 863 950 1,044 306 290 323
Professional
services 3,744 3,010 2,642 534 296 191
Office
maintenance 3,630 3,468 3,188 1,109 1,009 976
Other 4,376 4,102 3,128 653 993 448
----------- ----------- ----------- ----------- ----------- -----------
38,666 35,000 34,119 8,797 8,345 7,936
----------- ----------- ----------- ----------- ----------- -----------
Less -
Directors fees
received from
affiliated
companies (161) (171) (339)
Participation in
expenses by a
subsidiary (567) (517) (513)
----------- ----------- ----------- ----------- ----------- -----------
38,505 34,829 33,780 8,230 7,828 7,423
=========== =========== =========== =========== =========== ===========
</TABLE>
The expected costs to complete computer system compliance with year 2000
is of NIS 258 thousand. The accumulated cost to date for computer system
compliance at December 31, 1998 is NIS 247 thousand. Total costs for the
year are NIS 247 thousand.
45
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 27 - Selling and Marketing
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------------------- ---------------------------
Year ended Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31 December 31
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Salaries and
related
expenses 1,676 1,697 1,441
Advertising and
others 3,705 3,729 2,705 266 953
----------- ----------- ----------- ----------- -----------
5,381 5,426 4,146 266 953
=========== =========== =========== =========== ===========
</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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation 24,811 22,025 19,738 1,028 1,021 1,340
Amortization 3,064 2,429 1,835 31 29 31
----------- ----------- ----------- ----------- ----------- -----------
27,875 24,454 21,573 1,059 1,050 1,371
=========== =========== =========== =========== =========== ===========
</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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
To investee
companies 936 1,177 3,372
In respect of
debentures 7,382 8,467 4,394
To banks and
others 18,562 17,678 13,499 100 21
To income tax
authority 376 5 8 251
----------- ----------- ----------- ----------- ----------- -----------
26,320 26,150 17,901 1,287 1,177 3,393
=========== =========== =========== =========== =========== ===========
</TABLE>
46
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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 measurement of results for tax
purposes, on a (non-inflationary) basis. The various adjustments required
by the above Law are intended to result in taxation based on real income.
This notwithstanding, adjustment of nominal profit according to the tax
laws does not always equal the adjustment for inflation according to
opinions of the Institute of Certified Public Accountants in Israel. As a
result there are differences between adjusted profit per the financial
statements and adjusted profit for tax purposes.
B. Carryforward to future years of losses and deductions for tax
purposes
Carryforward losses for tax purposes in subsidiary companies, adjusted for
inflation are in the amount of NIS 15,840 thousand as at balance sheet
date (December 31, 1997 - NIS 16,410 thousand). Losses from securities
that are deductible in future years against real income from marketable
securities amount to an adjusted amount of NIS 11,285 thousand at balance
sheet date. (December 31, 1997 - NIS 16,527)
Deductions for inflation of subsidiaries carried forward are in the amount
of NIS 35,730 thousand (December 31, 1997 - NIS 32,035 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 7,070 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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Provision for
current year 76,764 66,282 41,714 6,493 4,890 798
Taxes relating
to prior years (605) 219 100 (177) (12)
Deferred taxes,
net (11,282) (19,216) 4,502 (40) 1,671 (1,793)
----------- ----------- ----------- ----------- ----------- -----------
64,877 47,285 46,316 6,276 6,561 (1,007)
=========== =========== =========== =========== =========== ===========
</TABLE>
47
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 30 - Taxes on Income (cont'd)
D. Final tax assessments for the Company have been received up to and
including 1997. Subsidiary companies have received final assessments
for tax years 1987-1997. 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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Adjusted income before
taxes per statement of
earnings 218,984 147,014 141,607 128,382 79,984 66,901
Statutory tax rate (%) 36 36 36 36 36 36
----------- ----------- ----------- ----------- ----------- -----------
Theoretical tax on the
adjusted earnings 78,834 52,925 50,978 46,217 28,794 23,793
Tax additions (savings) from:
Company's equity in the
net earnings of investee companies (2,370) (2,561) (4,963) (40,230) (23,527) (24,878)
Realization of
investments in
and gain on issue of
capital by investee companies (2,130) (21) (236) (29)
Expenses not recognized
for tax purposes :
Depreciation and
amortization 2,187 3,383 2,949 220 235 352
Others 51 162 162 30 152 128
Inflationary erosion of
advance tax payments 1,824 612 1,170 243 1 10
Income subject to
reduced tax
rates (12,785) (268) (995)
Losses carried forward
from prior years (1,148) (2,279) (3,352)
Losses for which
deferred taxes
were not provided (mainly
from securities) (1,277) (1,233) 1,332
Outside shareholder
interest in
joint venture 35 (2) (180)
Other -- mainly
difference in
inflationary adjustment
principles for financial
reporting purposes and for
</TABLE>
48
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
tax purposes 131 (1,543) (864) (27) 1,142 (371)
Adjustments relating to
prior years (605) 219 100 (177) (12)
----------- ----------- ----------- ----------- ----------- -----------
64,877 47,285 46,316 6,276 6,561 (1,007)
=========== =========== =========== =========== =========== ===========
</TABLE>
49
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 31 - Related Parties and Interested Parties
Consolidated
<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
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A. Balance sheet data
Cash, security deposits
and receivables 93,932 154,143 6,848 5,539
Subsidiary - current account* 15,024
Loans from banks
and provident funds 154,190 164,578 8,765 11,407
Creditors - Orchard
cultivation and others 868 709 558
Subsidiary - current account 20,353
Highest balance during
the year 43,978
Subsidiary - capital
note 20,000
B. Statement of
earnings data
Financing income from
deposits and loans
From investee companies 26 3 815
From banks and others 2,926 2,208 2,252 (8) 8
Participation of
related parties in
general expenses 567 517 513
Other income from
related parties
Management fees 1,935 1,671 1,628 1,926 2,116 1,841
Rent 24,067 24,027 15,282 1,275 1,504 1,301
Financing charges to
related parties
Investee companies 936 1,141 3,372
Banks and others 12,568 9,670 5,187
Benefits to an
interested party
employed by the
Company:
Salary and fringe
benefits** 1,706 1,598 1,507 1,706 1,598 1,507
Payments to members of
the Board of Directors
(1997 and 1998 for 8
directors;
1996 for 9 directors) 306 290 323 306 290 323
</TABLE>
* Represents the highest balance during the period.
50
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
** During the reporting year, the interested party exercised options that had
been granted to him in the past (see Note 32C). 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 445 thousand (1997 - difference in respect
of utilization of rights to shares amounted to NIS 1,001 thousand).
51
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 31 - Related Parties and Interested Parties (cont'd)
C. Trust funds are managed by a 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 from regular market terms and prices.
Note 32 - Private Placement and Issue of Subsidiary
A. A security issue by the Company
In May 1996 the Company issued 549,356 ordinary shares with a par value of
NIS 1 per share, by way of rights to shareholders and unquoted option
holders.
In addition, the Company issued 7,357 ordinary shares to employees. The
net proceeds of the issues was NIS 86,263 thousand.
B. Issues by subsidiaries
1. In the month of March 1996, the subsidiary, Hadarim Properties Ltd.,
effected an issue to the public of registered debentures in the
amount of NIS 49,988,750, (see Note 18A(1)(a)). The debentures 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. Proceeds from the public issues amounted
to NIS 68,444 thousand.
In addition, 2,072,600 ordinary shares with a par value of NIS 1 per
share, were issued to shareholders of the subsidiary by way of
rights. Proceeds of this issue amounted to NIS 90,025 thousand.
2. In the month of August 1997, the subsidiary, Hadarim Properties
Ltd., effected a private placement of (nonmarketable) convertible
debentures to the provident funds of Bank Discount Group, at a value
of NIS 50 million. The debentures bear an interest rate of 2.5% p.a.
Both the principal and interest rate are linked to the consumer
price index and are convertible until August 12, 2001. The proceeds
from the private placement amounted to NIS 49,938 thousand.
52
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
B. Issues by subsidiaries (cont'd)
3. In the month of September 1997, the subsidiary, Bayside Land
Corporation Ltd., effected an issue to the public of registered
debenture in the amount of NIS 130,005 thousand N.V.. The debentures
bear interest of 2.5% p.a., are linked to the consumer price index
and are convertible until August 31, 2001. (See Note 18A (1)(c)).
270,000 share purchase option warrants which are exercisable until
September 20, 2001, were also issued to the public.
The proceeds from the public issues amounted to NIS 136,024
thousand.
C. Share purchase option programs
1. The Company has the following share purchase option programs for its
employees and for the employees of its subsidiaries:
Share purchase option programs that have been exercised:
(a) A program dated May 1992 for the allotment of option warrants,
at no cost, to senior executives of the Company and of its
subsidiaries. From 1996 through 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
3,372 thousand, (as at balance sheet date). The loans bear
interest of 2% and are repayable in three annual installments
plus any consumer price index linkage differentials.
(b) A program dated October 1994 for the allotment of option
warrants, at no cost, to senior executives of the Company and
of its subsidiaries for the purchase of shares of the Company.
During 1998, the option holders exercised all the allotted
options of the program (according to a prospectus published on
May 1996 for the issue of rights of the Company). Total shares
purchased amounted to 14,650 at an aggregate price of NIS
3,731 thousand (as at the balance sheet date). Option holders
who are employees of the Company or its subsidiaries were
given loans of NIS 2,870 thousand (as at balance sheet date).
The loans bear interest of 2% and are repayable in three
annual installments plus any consumer price index linkage
differentials.
53
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
C. Share purchase option programs (cont'd)
Share purchase option program not yet exercised:
A program dated December 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 (as of the balance sheet date). The exercise
price of the remaining 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
are 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., declared two share purchase option
programs for its senior employees:
Share purchase option program that has been exercised:
A program dated October 1994 for the allotment of option
warrants, at no cost to senior executives of the Company.
During the years 1997 and 1998 the option shareholders
exercised all the options allotted, based on the program, and
acquired 6,970 shares of the Company with a par value of NIS 1
per share at an aggregate price of NIS 2,600 thousand (as at
balance sheet date). Options holders, according to the
program, who are employees of the Company, were given loans of
NIS 1,676 thousand, (as at the balance sheet date), that will
be repaid in three installments starting November 1999.
Share purchase option program not yet exercised :
A program dated November 1997 for the allotment of option
warrants, to senior executives of the Company, for purchase of
12,418 shares of the Company. Under the assumption that all
the options under the plan are exercised the warrants will
provide 0.6.% of the equity in the Company and 0.9.% in the
voting rights.
54
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 32 - Private Placement and Issue of Subsidiary (cont'd)
C. Share purchase option programs (cont'd)
2. Subsidiaries have share purchase option programs as described
below:(cont'd)
(b) Hadarim Properties Ltd. allotted 8,727 share purchase
option warrants (Series 1) to its employees under a
prospectus published in February 1996. The said
subsidiary also published an option program on January
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
are exercised, all of the shares acquired represent
1.06% (0.86% in full dilution) of Hadarim Properties
equity and voting rights.
(c) Ispro Israel Company for building rental Ltd.
(subsidiary), published a share purchase option program
in January 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
Ispro's equity and voting rights.
Note 33 - Financial Instruments and Risk Management
A. Risk management
As at December 31, 1998 and 1997 the Group had cash and cash equivalents
on deposit with Israeli banks in the amount of NIS 102,997 thousand and
NIS 168,589 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 purchasers 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 instrument 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).
55
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal Historical Values - The
Company
A. Balance Sheet
December 31 December 31
1998 1997
----------- -----------
Current Assets
Cash and cash equivalents 1,220 1,504
Marketable securities 576 593
Other receivables 20,711 4,900
Building projects under construction and
apartments inventory 11,004 3,357
----------- -----------
33,511 10,354
----------- -----------
Land 300 5,348
----------- -----------
Long-term Loans 3,237 2,615
----------- -----------
Investments
In investee and other companies 675,291 563,248
----------- -----------
Fixed Assets
Buildings, land, plantations and others 9,858 10,126
Less/- Accumulated depreciation 686 599
----------- -----------
9,172 9,527
----------- -----------
Deferred Charges 26 28
----------- -----------
721,537 591,120
=========== ===========
56
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal Historical Values - The
Company (cont'd)
A. Balance Sheet (cont'd)
December 31 December 31
1998 1997
----------- -----------
Current Liabilities
Advances from purchasers of
apartments and others, net 2,832 1,402
Current maturities of long-term liabilities 2,191 2,402
Other payables 19,655 32,367
Proposed dividend 20,000 17,000
----------- -----------
44,678 53,171
----------- -----------
Long-term Liabilities
Liabilities to banks and provident funds 6,574 8,100
Capital note 20,000
----------- -----------
26,574 8,100
----------- -----------
Shareholders' equity 650,285 529,849
----------- -----------
721,537 591,120
=========== ===========
57
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 34 - Condensed Financial Statements in Nominal
Historical Values - The Company (cont'd)
B. Statements of Earnings for the Year Ended December 31
1998 1997 1996
------- ------- -------
Income
Rentals and warehousing 9,378 7,643 6,827
From construction 47,022 49,084
The Company's equity in the net
earnings of investee companies, net 126,946 72,255 86,417
Gains from investments and fixed assets 28 1,904 22
Income from securities, financing
and others income 2,448 2,770 3,603
------- ------- -------
185,822 133,626 96,869
------- ------- -------
Costs and expenses
Construction 30,665 34,669
Administrative, selling and others 8,307 8,014 6,340
Property maintenance (excluding depreciation) 1,005 763 733
Depreciation and amortization 213 147 146
Property taxes on land 510 817 864
Interest and linkage differences 3,966 4,214 9,720
------- ------- -------
44,666 48,624 17,803
------- ------- -------
Earnings before taxes on income 141,156 85,002 79,066
Taxes on income 4,853 5,005 (1,036)
------- ------- -------
Net earnings for the year 136,303 79,907 80,102
======= ======= =======
58
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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, 1996 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 year ended
December 31, 1997 79,907 79,907
Exercised option warrants 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
Net earnings for current year 136,303 136,303
Exercised option warrants 15 4,118 4,133
Proposed dividend - 482.7% (20,000) (20,000)
------- ------- -------- -------
4,144 96,744 549,397 650,285
======= ======= ======== =======
</TABLE>
D. Share capital (cont'd)
1. Composition
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- ----------------------
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 4,143,615 6,000,000 4,128,965
========== ========= ========== =========
</TABLE>
59
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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.
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.
60
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements
1. Balance Sheet
Consolidated
-------------------------------
December 31 December 31
1998 1997
----------- ------------
Current Assets
Cash and cash equivalents 102,985 155,017
Short-term deposits and loans 3,547 1,628
Marketable securities 13,223 35,509
Trade receivables 49,091 20,501
Other receivables and debit balances 62,602 30,844
Apartments and other inventories 62,805 5,482
Building projects under construction 75,373 100,919
----------- ------------
369,626 350,080
----------- ------------
Land 393,781 319,774
----------- ------------
Long-term Deposits 4,965 3,247
----------- ------------
Investments
In investee companies 120,769 102,505
----------- ------------
Fixed Assets
Buildings, land and other 1,109,056 856,560
Less/- Accumulated depreciation 118,248 113,619
----------- ------------
990,808 742,941
----------- ------------
Deferred Charges and Other Assets 85,801 65,419
----------- ------------
1,965,750 1,583,966
=========== ============
61
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)
B. Condensed Financial Statements (cont'd)
1. Balance Sheet (cont'd)
Consolidated
--------------------------
December 31 December 31
1998 1997
----------- ------------
Current Liabilities
Advances from purchasers of
apartments and others, net 21,071 11,965
Credit from banks 19,900 28,955
Current maturities of long-term liabilities 53,405 44,138
Suppliers and sub-contractors 14,055 22,379
Creditors and credit balances 130,545 57,968
Deferred taxes 105
Proposed dividend 29,768 23,107
----------- ------------
268,744 188,617
----------- ------------
Long-term Liabilities
Long-term loans 723,734 551,475
Deferred taxes 1,099 1,284
Liability in respect of employee
severance benefits 3,442 2,362
----------- ------------
728,275 555,121
----------- ------------
Minority interest 217,513 212,329
----------- ------------
Receipt on account of option warrants
in a subsidiary 8,665 8,665
----------- ------------
Shareholders' Equity
Share capital 81,327 81,312
Capital surplus 96,670 92,684
Retained earnings 564,556 445,238
----------- ------------
742,553 619,234
----------- ------------
1,965,750 1,583,966
=========== ============
62
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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
Consolidated
December 31 December 31
1998 1997
----------- ------------
Income
Rentals and warehousing 150,363 135,647
From construction and other sources 314,527 254,702
The Company's equity in the net
earnings of investee companies 13,231 12,435
Gains on sale of investments and fixed assets 77,163 12,652
Income from securities, financing and others 19,353 18,664
----------- ------------
574,637 434,100
----------- ------------
Cost and expenses
Construction and other costs 206,232 176,030
Administrative, selling and others 42,747 36,913
Property maintenance (excluding depreciation) 12,827 11,231
Depreciation and amortization 18,114 14,570
Property taxes on land 8,066 8,510
Financing 76,042 48,699
----------- ------------
364,028 295,953
----------- ------------
Earnings before taxes on income 210,609 138,147
Taxes on income 36,518 23,415
----------- ------------
Earnings after taxation 174,091 114,732
Less/- Minority interest in earnings 34,773 30,136
----------- ------------
Net earnings 139,318 84,596
=========== ============
Earnings Per Share
Primary earnings per share of NIS 1.00 par
value (in NIS) 33.62 20.53
=========== ============
Diluted earning per share 32.66 19.72
=========== ============
63
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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, 1997 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
-------- --------- --------- -------
Net earnings for the year
ended December 31, 1998 139,318 139,318
Issue of Shares 15 3,505 3,520
Paid in capital options, net 481 481
Proposed dividend, net - 482.7% (20,000) (20,000)
-------- --------- --------- -------
Balance as at
December 31, 1998 81,327 96,670 564,556 742,553
======== ========= ========= =======
</TABLE>
64
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
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:
Year ended
-----------------------------
December 31 December 31
1998 1997
----------- -----------
Nominal historical net income as per
the statement of earnings 136,303 79,907
Adjustment of differences relating to
the following items: 3,365 1,245
Advances from apartment purchasers
Construction work and land 1,271 (544)
The Company's equity in the net earnings
of investee companies 2,974 657
Income from investments and fixed assets (3,177) (1,881)
Financing (2,567) 854
Depreciation and amortization (3,073) (3,169)
Deferred taxes 6,859 9,113
Minority interest in earnings (125) (1,758)
Others (2,512) 172
----------- -----------
Net income for the special purpose
statement of earnings 139,318 84,570
=========== ===========
65
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Annex - Percentage of Holding in Investee Companies as at December 31, 1998
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Percent of holding (1) Percent of holding (1)
---------------------- ----------------------
Voting Equity Voting Equity
------------- ------ -------------- ------
% % % %
------------- ------ -------------- ------
<S> <C> <C> <C> <C>
Subsidiary companies
Bayside Land Corporation Ltd.*(2) 73.74 67.44 70.58 64.42
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. 73.94 73.94 66.38 66.38
Shadar Building Company Ltd. 100 100 100 100
Merkaz Herzlia "A" Ltd. 100 100 100 100
Merkaz Herzlia "B" Ltd. (4) 100 74.16 100 100
"Hon" Investment and Trust
Company Ltd. 100 100 100 100
Property and Building
(Finance 1986) Ltd. 100 100 100 100
Aclim 2000 for Ecology Ltd. 100 100 100 100
"Gilat" Building and Housing
in Development Areas Ltd. 100 100 100 100
Nichsei Nachalat Beit
Hashoeva B.M 100 100 100 100
Em Hamoshavot - Hatzafon
Hachadash 100 100 100 100
Affiliated companies
Science Based Industries 50 50 50 50
Campus Ltd.
Mehadrin Ltd. 34.96 34.96 34.96 34.96
Bartan Holdings and
Investment Ltd. 30.93 30.93 30.93 30.93
K.B.A Townbuilders Group Ltd. (7) 23.13 23.13 23.13 23.13
Carneltan Group Ltd. 20.00 20.00
</TABLE>
(1) Including shareholding through subsidiaries.
(2) Conversion of the Consolidated Companies will dilute the Companies
holdings from 56.22% in capital stock and 57.32% in voting.
66
<PAGE>
Property and Building Corporation Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
- - --------------------------------------------------------------------------------
Annex - Percentage of Holding in Investee Companies as at December 31, 1998
(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 results in the dilution of the
Company's holding to 76.78%.
The conversion of non marketable debentures of the subsidiary,
together with the previous conversions will result in a dilution of
the Company's holding to 73.46%.
(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) See Note 20C(6).
(7) As to the dilutive influence of the Consolidated Employee Option
Plan - See Note 32C(2).
67
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN, 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.
Base on our audit, 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,
/s/ Kesselman & Kesselman
<PAGE>
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 and Kesselman
<PAGE>
Super-Sol Ltd.
Consolidated
Financial Statements
December 31, 1998
<PAGE>
DIRECTORS
Dalia Lev Chairperson of the Board
Eliahu Cohen
Jacob Eshel Resigned on March 31, 1998
Avinoam Finkelman Resigned on July 2, 1998
Professor Ehud Hominer
Frank Klein
Lenny Recanati (2)
Amnon Sadeh (2) Resigned on July 2, 1998
Dr. Aliza Savir (1)(2) Resigned on September 30, 1998
Herzel Shalem (1)(2) Resigned on April 27, 1998
Professor Yaakov Hornik (1)(2) Appointed on April 28, 1998
Dr. Yoram Turbowicz Appointed on April 1, 1998
Robin Hacke (1)(2) Appointed on October 1, 1998
Company Management
Amiaz Sagis President of the Company - Appointed on
January 1, 1999
David Alphandary President of the Company - Resigned on
December 31, 1998
Chaim Elkan Vice President
Dr. Yehuda Freidenberg Vice President
Ya'akov Ginsburg Vice President
David Lev Vice President
Ariel Levinson Vice President
- - ----------
(1) Independent Director
(2) Member of Audit Committee
<PAGE>
Consolidated Financial Statements as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Contents
Page
----
Independent Accountants' Report 2
Financial Statements Adjusted for the Effect of Inflation on the
Basis of the CPI for December 1998:
Consolidated Balance Sheets as at December 31, 1997 and 1998 4
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998 6
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1996, 1997 and 1998 7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 9
Notes to the Consolidated Financial Statements 13
List of Investee Companies - Schedule A 65
Details of Investments in Affiliates and Summaries of their
Financial Statements - Schedule B 66
<PAGE>
Independent Accountants Report to
the Shareholders of Super-Sol Ltd.
We have audited the attached consolidated balance sheets of Super-Sol Ltd. (the
Company) and its subsidiaries as at December 31, 1997 and 1998 and the
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years the last of which ended on December 31, 1998.
The consolidated 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 consolidated financial statements based on our audits.
We have not audited the financial statements of subsidiary companies in prior
years, whose assets represent approximately 1.9% of the total consolidated
assets as at December 31, 1997, and whose income represents approximately 5.6%
and 4.5% of the total consolidated income for the years ended December 31, 1996
and 1997, respectively. The financial statements of these companies were audited
by other auditors who provided us with their reports and our opinion, inasmuch
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 net asset
value of investments in affiliated companies in the consolidated financial
statements as at December 31, 1998 and to the Company's equity in the results of
these companies for the year ended December 31, 1998, 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 auditing standards are substantially identical
to generally accepted auditing standards in the United States. These 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 statements presentation. We believe that our audits
provide a fair basis for our opinion.
The above mentioned financial statements have been 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.
2
<PAGE>
In our opinion, based upon our audits and the reports of other auditors
mentioned above, the above mentioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as at December 31, 1997 and 1998, the results of
operations and the changes in shareholders' equity and cash flows, for each of
the three years the last of which ended on December 31, 1998, in conformity with
generally accepted accounting principles (GAAP) in Israel (as applicable to
these financial statements, Israeli GAAP and U.S. GAAP are substantially
identical in all material respects, except as otherwise described in Note 30 to
the consolidated financial statements).
Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulations (Preparations of Annual Financial Statements),
1993.
Somekh Chaikin
Certified Public Accountants (Isr.)
Tel Aviv, March 9, 1999
3
<PAGE>
Consolidated Balance Sheets
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
<TABLE>
<CAPTION>
Convenience
translation
into U.S.
------------------------- dollars
Adjusted NIS (Note 1D)
------------------------- -----------
December 31 December 31 December 31
----------- ----------- -----------
1997 1998 1998
----------- ----------- -----------
Note (thousands)
----------- ---------------------------------------
<S> <C> <C> <C> <C>
Assets 25
Current assets 29
Cash and cash equivalents 2 18,940 41,863 10,063
Marketable securities at
market value 3 179,931 106,406 25,578
Short-term loans and deposits 4 29,785 5,642 1,356
Trade receivables, net 5 571,853 607,846 146,117
Other current assets 6 63,741 49,506 11,900
Inventories 7 325,046 371,221 89,236
----------- ----------- -----------
1,189,296 1,182,484 284,250
----------- ----------- -----------
Investments and loans
Investments 8 84,910 38,984 9,371
Long-term loans and receivables 9 26,543 41,446 9,963
----------- ----------- -----------
111,453 80,430 19,334
----------- ----------- -----------
Fixed assets, net 10 1,628,095 1,787,259 429,630
----------- ----------- -----------
Deferred expenses and other assets 11 81,413 61,527 14,790
----------- ----------- -----------
_____________________________ Chairperson of the Board of Directors
Dalia Lev
_____________________________ Director
Lenny Recanati
_____________________________ President
Amiaz Sagis
March 9, 1999
----------- ----------- -----------
Total assets 3,010,257 3,111,700 748,004
=========== =========== ===========
</TABLE>
4
<PAGE>
Super-Sol Ltd.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convenience
translation
into U.S.
------------------------- dollars
Adjusted NIS (Note 1D)
------------------------- -----------
December 31 December 31 December 31
----------- ----------- -----------
1997 1998 1998
----------- ----------- -----------
Note (thousands)
----------- ---------------------------------------
<S> <C> <C> <C> <C>
Liabilities and shareholders'
equity
Current liabilities 29
Short-term bank credits 12 72,637 21,405 5,145
Trade payables 636,181 671,949 161,526
Other payables 13 138,823 169,598 40,769
----------- ----------- -----------
847,641 862,952 207,440
----------- ----------- -----------
Long-term liabilities
Loans from banks 14 412,098 393,233 94,527
Loans from others 15 6,588 7,471 1,796
Provision for employee
severance
benefits, net 16 5,146 5,081 1,221
Deferred taxes 22 29,762 33,167 7,973
----------- ----------- -----------
453,594 438,952 105,517
----------- ----------- -----------
Shareholders' equity
Share capital 17 222,149 222,218 53,418
Capital reserves 421,683 430,515 103,490
Retained earnings 1,065,190 1,157,063 278,139
----------- ----------- -----------
1,709,022 1,809,796 435,047
----------- ----------- -----------
Contingent liabilities and 24
commitments
----------- ----------- -----------
Total liabilities and shareholders' equity 3,010,257 3,111,700 748,004
=========== =========== ===========
</TABLE>
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
5
<PAGE>
Consolidated Statements of Income for
the Years Ended December 31 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
Convenience
translation
into U.S.
---------------------------------- dollars
Adjusted NIS (Note 1D)
---------------------------------- ---------
1996 1997 1998 1998
--------- --------- ---------- ---------
Note (In thousands except per share data)
---------- ----------------------------------------------
Revenues
Sales 4,005,971 4,911,212 5,101,821 1,226,399
Rentals and
operation of
shopping malls 18 30,279 31,661 33,230 7,988
--------- --------- ---------- ---------
4,036,250 4,942,873 5,135,051 1,234,387
--------- --------- ---------- ---------
Costs and expenses
Cost of sales 2,999,895 3,688,077 3,794,593 912,162
Operating, selling,
administrative and
general 19 770,433 953,879 1,063,751 255,709
Depreciation and
amortization 81,916 104,272 112,580 27,063
--------- --------- ---------- ---------
3,852,244 4,746,228 4,970,924 1,194,934
--------- --------- ---------- ---------
Operating profit 184,006 196,645 164,127 39,453
--------- --------- ---------- ---------
Other income
(expenses), net
Financial income, net 20 17,028 3,558 9,453 2,272
Sundry income
(expenses), net 21 (6,718) (5,061) 29,818 7,168
--------- --------- ---------- ---------
10,310 (1,503) 39,271 9,440
--------- --------- ---------- ---------
Earnings before
income taxes 194,316 195,142 203,398 48,893
Income taxes 22 77,682 76,156 77,605 18,655
--------- --------- ---------- ---------
Earnings before
earnings of affiliates
and minority interest 116,634 118,986 125,793 30,238
Company's equity in
the earnings of
affiliated companies,
net 2,428 2,052 1,261 303
--------- --------- ---------- ---------
119,062 121,038 127,054 30,541
Minority interest in
net losses (earnings)
of consolidated
subsidiaries 255 535 (35) (8)
--------- --------- ---------- ---------
Net earnings 119,317 121,573 127,019 30,533
========= ========= ========== =========
Earnings per NIS 1
par value of Ordinary
Shares of NIS 0.1
each 27
Primary and diluted 6.76 6.57 6.01 1.44
========= ========= ========== =========
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
6
<PAGE>
Consolidated Statement of Changes in Shareholders' Equity
Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
<TABLE>
<CAPTION>
Share Capital Capital Cumulative Retained Total
capital reserves reserve in translation earnings
(1) (2) respect of adjustment
employee
stock option
------- -------- ------------ ----------- -------- ---------
Adjusted NIS (thousands)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 218,374 76,296 1,081 (1,101) 873,730 1,168,380
Adjustments arising from the translation of
financial statements of an investee company -- -- -- (1,878) -- (1,878)
Exercise of stock options 68 3,457 -- -- -- 3,525
Net earnings for the year ended
December 31, 1996 -- -- -- -- 119,317 119,317
Dividend paid -- -- -- -- (24,519) (24,519)
------- -------- ------------ ----------- -------- ---------
Balance at December 31, 1996 218,442 79,753 1,081 (2,979) 968,528 1,264,825
Adjustments arising from the translation of
financial statements of an investee company -- -- -- (1,047) -- (1,047)
Tax benefit in respect of stock option
exercised by employees -- 194 -- -- -- 194
Exercise of stock options 116 7,750 (841) -- -- 7,025
Issuance of shares (3) 3,591 337,772 -- -- -- 341,363
Net earnings for the year ended
December 31,1997 -- -- -- -- 121,573 121,573
Dividend paid -- -- -- -- (24,911) (24,911)
------- -------- ------------ ----------- -------- ---------
Balance at December 31, 1997 222,149 425,469 240 (4,026) 1,065,190 1,709,022
Adjustments arising from the translation of
financial statements of an investee company -- -- -- 4,026 -- 4,026
Issuance expenses -- (46) -- -- -- (46)
Tax benefit in respect of stock option
exercised by employees -- 865 -- -- -- 865
Exercise of stock options 69 4,140 (153) -- -- 4,056
Net earnings for the year ended
December 31,1998 -- -- -- -- 127,019 127,019
Dividend paid -- -- -- -- (35,146) (35,146)
------- -------- ------------ ----------- -------- ---------
Balance at December 31, 1998 222,218 430,428 87 -- 1,157,063 1,809,796
======= ======== ============ =========== ======== =========
</TABLE>
(1) Includes capital reserves up to October 31, 1985.
(2) As from November 1, 1985.
(3) After the deduction of issuance expenses in the sum of NIS 28,952
thousand.
See Note 17 in respect of the issuance of shares after the balance sheet date
following the exercise of stock options.
See Note 26 regarding the acquisition of the Company's shares by a wholly owned
subsidiary after balance sheet date.
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
7
<PAGE>
Consolidated Statement of Changes
in Shareholders' Equity (cont'd) Super-Sol Ltd.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convenience translation into U.S. Dollars (Note 1D)
----------------------------------------------------------------------------
Share Capital Capital Cumulative Retained Total
capital(1) reserves(2) reserve in translation earnings
respect of adjustment
employee
stock option
---------- ----------- ------------ ----------- -------- -------
(thousands)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 53,401 102,276 58 (968) 256,055 410,822
Adjustments arising from the translation of
financial statements of an investee company -- -- -- 968 -- 968
Issuance expenses -- (11) -- -- -- (11)
Tax benefit in respect of stock option
exercised by employees -- 209 -- -- -- 209
Exercise of stock options 17 993 (35) -- -- 975
Net earnings for the year ended
December 31, 1998 -- -- -- -- 30,533 30,533
Dividend paid -- -- -- -- (8,449) (8,449)
---------- ----------- ------------ ----------- -------- -------
Balance at December 31, 1998 53,418 103,467 23 -- 278,139 435,047
========== =========== ============ =========== ======== =======
</TABLE>
(1) Includes capital reserves up to October 31, 1985.
(2) As from November 1, 1985.
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
8
<PAGE>
Consolidated Statements of Cash Flows
for the Years Ended December 31 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
Convenience
translation
into U.S.
---------------------------------- dollars
Adjusted NIS (Note 1D)
---------------------------------- ----------
1996 1997 1998 1998
--------- --------- ---------- ----------
(thousands)
-----------------------------------------------
Cash flows generated by
operating activities
Net earnings 119,317 121,573 127,019 30,533
Adjustments necessary to
reflect cash flows generated
by operating activities
(see Annex 1) 24,234 69,381 92,320 22,191
--------- --------- ---------- ----------
Net cash inflow generated by
operating activities 143,551 190,954 219,339 52,724
--------- --------- ---------- ----------
Cash flows generated by
investing activities
Purchase of fixed assets (275,697) (535,754) (296,578) (71,293)
Investment in deferred
costs and other assets (36,150) (54,091) (4,257) (1,023)
Purchase of marketable
securities (923,953) (224,347) (187,369) (45,041)
Proceeds of sale of
marketable securities 1,027,001 118,348 248,274 59,681
Short-term deposits repaid
(received) -- (27,851) 27,500 6,611
Proceeds from disposal of
fixed assets 3,739 5,854 861 207
Additional acquisitions
of shares in a subsidiary (1,064) (4,448) -- -
Proceeds of sale of a
partnership and investee
company -- -- 35,421 8,515
Proceeds of sale of an
investment in a previously
consolidated company
(see Annex 2) -- -- 75,548 18,161
Proceeds of sale of
long-term investments 530 -- -- -
Long-term loan granted, net (8,758) (16,107) (17,232) (4,142)
Proceeds (investments) in
capital notes and loans to
investee companies, net (3,055) 16,422 15,307 3,680
Proceeds (investment) in
partnership rights (15,697) -- 3,473 835
--------- --------- ---------- ----------
Net cash outflow generated
by investing activities (233,104) (721,974) (99,052) (23,809)
--------- --------- ---------- ----------
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
9
<PAGE>
Consolidated Statements of Cash Flows
for the Years Ended December 31 (cont'd) Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
Convenience
translation
into U.S.
---------------------------------- dollars
Adjusted NIS (Note 1D)
---------------------------------- -----------
1996 1997 1998 1998
--------- --------- ---------- -----------
(thousands)
-----------------------------------------------
Cash outflows generated by
financing activities
Issuance of shares, net
of costs -- 341,363 (46) (11)
Exercise of stock options
(after deduction of issue
expenses) 3,525 7,025 4,056 975
Dividend paid (24,519) (24,911) (35,146) (8,449)
Receipt (payment) of
long-term liabilities (10) (12,498) 459 110
Receipt (payments) of
long-term bank loans (5,433) 333,470 (8,225) (1,977)
Credit from banks, net 127,600 (118,481) (58,462) (14,053)
--------- --------- ---------- ----------
Net cash (outflow)
provided by financing
activities 101,163 525,968 (97,364) (23,405)
--------- --------- ---------- ----------
Translation differences
in respect of cash balances
in an investee company (1,353) (201) -- --
--------- --------- ---------- ----------
Increase (decrease) in
Cash and Cash equivalents 10,257 (5,253) 22,923 5,510
Balance of Cash and Cash
Equivalents at the beginning
of the year 13,936 24,193 18,940 4,553
--------- --------- ---------- ----------
Balance of Cash and Cash
Equivalents at the
end of the year 24,193 18,940 41,863 10,063
========= ========= ========== ==========
The accompanying notes and schedules are an integral part of these
consolidated financial statements.
10
<PAGE>
Consolidated Statements of Cash Flows
for the Years Ended December 31 (cont'd) Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
Convenience
translation
into U.S.
dollars
Adjusted NIS (Note 1D)
---------------------------------- -----------
1996 1997 1998 1998
--------- --------- ---------- -----------
(thousands)
-----------------------------------------------
Annex 1
Adjustments necessary to
reflect cash flows generated
by operating activities
Income and expenses not
involving cash flows:
Depreciation and amortization
of deferred expenses 87,298 105,181 130,396 31,345
Change in deferred taxes, net 3,224 (8,264) 9,049 2,175
Company's equity in the
earnings of affiliated
companies, net (2,428) (2,052) (1,261) (303)
Company's equity in loss
of partnership 1,341 2,396 444 107
Minority interest in
subsidiaries earnings (losses) (255) (535) 35 8
Increase (decrease) in
provision for employee
severance benefits, net 231 (1,281) (65) (16)
Capital losses , net 3,039 3,620 4,451 1,070
Appreciation (erosion) of
long-term liabilities 124 7,574 (1,733) (417)
Appreciation (erosion) and
accrued interest on loans
granted to investee companies
and a partnership, net (781) (307) 32 8
Erosion and accrued interest
on long term loans granted
to others, net -- (1,129) (1,064) (256)
Decrease (increase) in
value of marketable
securities (6,895) (3,604) 7,909 1,901
Decrease (increase) in value
of shares in a foreign company (150) 114 -- -
Profit on sale of subsidiary
(Annex 2) -- -- (44,242) (10,635)
Profit on sale of a partnership
and investee company -- -- (7,500) (1,803)
Changes in asset and
liability items:
Increase in trade receivables (88,687) (88,588) (36,408) (8,752)
Decrease (increase) in
other current assets (14,028) 3,206 6,222 1,496
Increase in inventories (41,956) (70,149) (61,401) (14,760)
Increase in trade payables 78,158 111,669 53,068 12,757
Increase in other payables 5,999 11,530 34,388 8,266
--------- --------- ---------- ----------
24,234 69,381 92,320 22,191
========= ========= ========== ==========
11
<PAGE>
Consolidated Statements of Cash Flows
for the Years Ended December 31 (cont'd) Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Adjusted New Israeli Shekels as of December 1998
Convenience
translation
into U.S.
dollars
Adjusted NIS (Note 1D)
---------------------------------- -----------
1996 1997 1998 1998
--------- --------- ---------- -----------
(thousands)
-----------------------------------------------
Annex 2
Proceeds of sale of a subsidiary
Assets and liabilities of
previously consolidated
subsidiary:
Working capital (excluding cash
and cash equivalents -- -- 2,856 687
Fixed assets -- -- 27,526 6,617
Long-term liabilities -- -- (3,102) (746)
Other current assets -- -- 4,026 968
Gain on sale of investment -- -- 44,242 10,635
--------- --------- ---------- ----------
-- -- 75,548 18,161
========= ========= ========== ==========
Annex 3
Additional data relating
to investing and financing
activities not involving
cash flows
Investment in fixed assets 1,775 1,466 4,543 1,092
========= ========= ========== ==========
Increase in deferred costs 4,317 1,217 526 126
========= ========= ========== ==========
12
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies
General
The main activity of Super-Sol Ltd. (the "Company") is the operation of a
supermarket chain and the retail sales of supermarket goods in Israel.
The Company's Consolidated Financial Statements presented herein are
prepared in accordance with generally accepted accounting principles in
Israel ("Israeli GAAP"), which differ in certain respects from those
followed in the United States. See Note 30.
In respect of the uncertainty due to the Year 2000 Issue, see Note 24G.
A. Certain definitions
In these financial statements:
(1) Subsidiaries - companies in which the Company holds more than 50% of
the voting rights or share capital (either directly or indirectly),
or the right to appoint the majority of the members of the Board of
Directors of that company, and whose financial statements have been
consolidated with those of the Company.
(2) Proportionately consolidated investees - companies jointly
controlled and managed by the Company and one or more partners and
whose financial statements are consolidated with those of the
Company by the proportionate consolidation method.
(3) Affiliates - companies in which the Company holds at least 20% of
the voting rights or share capital, or has the right to appoint at
least 20% of the members of the Board of Directors, other than
subsidiaries or proportionately consolidated investees, and in
respect of which the Company's investment in these companies is
included on the equity basis.
(4) Investee companies - subsidiaries, proportionately consolidated
investees and affiliates.
(5) Another company - a company in which a subsidiary holds voting and
equity rights of less than 20% and in which the Company appears to
have no significant influence.
(6) Related parties - as defined in Opinion 29 of the Institute of
Certified Public Accountants in Israel (the "IICPA"):
a. Parties, one of which directly or indirectly (1) owns 10% or
more of the issued share capital of the other company, or of
its voting rights or of the rights to appoint its directors,
(2) has the right to appoint the company's chief executive
officer or (3) acts as the company's director or general
manager;
b. Any corporate entity of which one of the parties mentioned in
(a) above, owns 25% or more of the entity's issued share
capital, or of its voting rights or of the rights to appoint
its directors; or
c. Spouses or minor children of parties described in (a) above.
13
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
A. Certain definitions (cont'd
(7) Interested parties - as defined in paragraph (1) of the definition
of "interested parties" in Section 1 of the Israeli Securities Law -
1968:
a. The holder of 5% or more of the issued share capital or of the
voting rights of a company, a person who has the right to
appoint one or more members of the board of directors of a
company or its chief executive officer, a person serving as
the chief executive officer or as a member of the board of
directors, an entity in which a person described above holds
20% or more of its issued share capital or of its voting
rights, or has the right to appoint 20% or more of its board
members; or
b. A subsidiary of a company, other than a nominee company.
B. Financial statements in adjusted values
(1) The consolidated financial statements have been prepared on the
basis of historical cost adjusted for the changes in the general
purchasing power of the Israeli currency.
(2) The adjusted amounts of non-monetary assets do not necessarily
represent their market value or their value to the business, but
rather their cost as adjusted to reflect the changes in the general
purchasing power of the Israeli currency.
(3) In the adjusted statements the term "cost" means "adjusted cost."
(4) Financial statements for prior periods presented have been adjusted
for comparison purposes to New Israel Shekels (NIS) adjusted to the
Consumer Price Index published for December 1998 as explained in C.
below.
C. Principles of adjustment
(1) Balance sheet
Non-monetary items (such as fixed assets and shareholders' equity)
have been adjusted on the basis of the changes in the Israeli
Consumer Price Index (the "CPI") from the month in which each
transaction was effected to the CPI published for December 1998.
Monetary items are stated in the adjusted balance sheet at their
historical values. The balance sheet value of investments in
investee companies is based on their adjusted financial statements.
The comparative figures are also stated in terms of NIS of December
1998.
14
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
C. Principles of adjustment (cont'd)
(2) Statement of income
a. Income statement items were adjusted according to the changes
in the CPI as follows:
(1) Expenses derived from non-monetary items (such as
depreciation and amortization) or from provisions
included in the balance sheet (such as accruals for
employee severance benefits and vacation pay) were
adjusted on the basis of specific CPI indices matching
those utilized for the adjustment of the balance sheet
item.
(2) The other components of the income statement (such as
sales, purchases and other costs), excluding financial
income and expenses, were adjusted on the basis of the
CPI indices relating to the months in which the relevant
transactions took place.
(3) Financial income, net, is comprised of the difference
between the adjusted profit and other income statement
figures.
b. Taxes on income:
Payments on account of income taxes have been adjusted on the
basis of the CPI for the month of payment while amounts due
for payment (or for refund) have not been adjusted. Thus the
taxes currently payable include the erosion of the value of
the advance payments made, from the date of payment until the
end of the year.
c. The Company's equity in the operating results of affiliates is
determined on the basis of their adjusted financial
statements.
d. The Company's share in the losses of a partnership of which it
is a member is determined on the basis of the adjusted
financial statements of the partnership.
(3) Statement of changes in shareholders' equity
a. Dividends declared and paid during the year have been adjusted
based on the CPI at the date of payment.
b. Share capital and capital reserves created from retained
earnings represent capitalization of real profits.
15
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
C. Principles of adjustment (cont'd)
(4) Adjustment of financial statements of foreign investees
The financial statements of an autonomously operating foreign
investee company (that was sold in 1998) have been translated in
prior years at the exchange rates prevailing on the balance sheet
date (after their adjustment for changes in the purchasing power of
the currency of that foreign country). The difference arising as a
result of the adjustment of the Company's ownership share of the
foreign investee company according to changes in the Israeli CPI,
and the adjustment of the foreign investee's shareholders' equity,
according to changes in the general purchasing power of the currency
of that foreign country and changes in the rate of exchange, has
been charged to the capital reserve "Cumulative translation
adjustment."
The financial statements of integrated subsidiaries operating abroad
have been adjusted based on the changes in the Israeli CPI according
to Opinion No. 36 of the IICPA, after being translated into Israeli
currency as follows:
(i) Non monetary balance sheet items - according to exchange rates
prevailing at the date of purchase.
(ii) Monetary balance sheet items - according to the rate of
exchange prevailing on the balance sheet date.
(iii) Income statement items - according to average exchange rates.
D. Convenience translation into U.S. Dollars
For the convenience of the reader, the adjusted NIS figures of December
31, 1998 and for the year then ended have been presented in U.S. Dollars,
using the representative exchange rate of December 31, 1998 (NIS 4.16 =
U.S.$1). The dollar amounts presented in these financial statements should
not be construed as representing amounts receivable or payable in dollars
or convertible into dollars, unless otherwise indicated.
E. Principles of consolidation
The financial statements of the Company were consolidated with those of
its subsidiaries. The financial statements of 50% jointly controlled
investees have been consolidated by the proportionate consolidation
method.
In respect of Companies that were consolidated in the past and are not
included in the 1998 financial statements, see Notes 8D1) and 8D2).
Material balances and transactions between and among the Company, its
subsidiaries and its proportionately consolidated investees have been
eliminated upon consolidation.
List of investee companies - see Schedule A to the Consolidated Financial
Statements.
16
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
F. Cash equivalents
Cash equivalents include bank deposits deposited for an initial period not
in excess of three months in accordance with Opinion 51 of the IICPA.
G. Provision for doubtful accounts
The provision for doubtful accounts, stated as a deduction from "trade
receivables", represents management's estimate of the loss anticipated on
receivables in respect of which collection is doubtful.
H. Inventory
Inventory, stated at the lower of cost or market, is valued as follows:
Merchandise -
in stores - on the "retail inventory method" basis
in warehouses - at cost (determined by the moving
average method).
spare parts and office supplies - at the cost determined by the moving
average method.
I. Investments
(1) Investments in affiliates are stated according to the equity method
on the basis of their audited financial statements at the balance
sheet date.
(2) The excess of acquisition cost over equity value at the date of
acquisition ("original difference") which was not attributed to
assets was treated as goodwill.
(3) Other investments in non-quoted companies are accounted for at the
lower of cost or market value.
J. Marketable securities
Shares, bonds and mutual funds held for the short-term are stated at
market value in accordance with opinions issued by the IICPA. Changes in
market value are reflected in the Consolidated Statements of Income.
17
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
K. Fixed assets
(1) Fixed assets are stated at cost less accumulated depreciation,
calculated by the straight line method at the following annual
rates:
%
--------------------------
Buildings 2 - 2.8 (mainly 2)
Leasehold improvements 10
Equipment and fixtures 6 - 20 (mainly 10)
Motor vehicles 10 - 20 (mainly 10)
(2) The difference between the acquisition cost and equity value of a
subsidiary at the date of acquisition, sold during 1998, was
attributed to fixed assets and amortized according to the
depreciation rates of the relevant assets.
(3) Equipment purchased under capital leases is treated as the Company's
assets and valued at their purchase prices (without the financing
component) and depreciated at the normal rates for the type of
assets.
(4) A subsidiary and a proportionately consolidated investee have
constructed commercial centers. Specific expenses were capitalized
over the construction period.
L. Deferred expenses and other assets
Cost of acquisition of computer software is amortized at an annual rate of
33.33%.
Goodwill is amortized at an annual rate of 10%.
Stores in respect of which goodwill was recorded, and a negative future
cash flow is predicted - The Company reassesses the value of the goodwill,
in accordance with SFAS 121, based on projected cash flows from that
store. In accordance with the results of such reassessment, the Company
decides whether the balance of goodwill associated with that asset should
be amortized. (See also Note 11). Acquisition taxes in respect of
long-term leases are amortized over the periods of the leases.
M. Deferred taxes
The Company's subsidiaries and proportionately consolidated investees
provide for deferred taxation in respect of:
- Timing differences in the recognition of income and expenses for
financial statement and income tax reporting purposes.
18
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
M. Deferred taxes (cont'd)
- Future tax savings from "inflationary deductions".
- The amount of the inflationary adjustment of depreciable fixed
assets which is not an allowable expense for tax purposes (other
than buildings which are depreciated over 50 years).
Each year the deferred amount is calculated using the liability approach,
at tax rates which will prevail at the time of the utilization of the
deferred taxes or the future tax benefits, as such tax rates become known
prior to the date of the preparation of the financial statements. Taxes on
unrealized gains on the Company's investments in investee companies have
not been included in the calculation of deferred taxes, as it is the
Company's intention to hold these investments and not to sell them.
The Company's and its subsidiaries and proportionally consolidated
investees share of net earnings of affiliates included in the Consolidated
Statement of Income under the equity method of accounting (see I above)
may be subject to capital gains tax if the investments are sold at a price
exceeding cost. In management's opinion, no provision is necessary for
taxation on the above-mentioned earnings, as the shares are not intended
for sale.
N. Financial statement presentation
In management's opinion, the financial statement presentation used is
suitable for the type of activities undertaken by the Company.
O. Suppliers
Under agreements with suppliers, the Company can legally offset discounts
claimed against amounts due the suppliers for purchases. Accordingly, the
discounts are recorded as a reduction of amounts due to suppliers.
P. Assets and liabilities in foreign currency or linked thereto
In the Consolidated Financial Statements, assets (other than marketable
securities) and liabilities linked to the CPI are stated on the basis of
the latest known CPI published prior to the balance sheet date or
according to the index for the month in which the balance sheet date
falls, in accordance with the terms of the transactions. Assets and
liabilities in foreign currency or linked thereto are stated on the basis
of the representative rates of exchange as published by Bank of Israel at
the balance sheet date.
19
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
P. Assets and liabilities in foreign currency or linked thereto
(cont'd)
Details of the CPI, representative rates of exchange and rates of change
therein:
Financial Rate of change for the year
statements as at ended
------------------- ------------------------------
December 31 December 31
------------------- ------------------------------
1997 1998 1996 1997 1998
---- ---- ---- ---- ----
CPI 153.1 166.3 10.59% 6.99% 8.62%
Representative
rates of exchange
U.S. $1 - NIS 3.536 4.16 3.70% 8.77% 17.65%
100 Hungarian
Forints - NIS 1.742 1.90 (12.41%) (11.52%) 9.01%
Q. Financial instruments
(1) Fair value of financial instruments
The financial statements include disclosures relating to the fair
value of financial instruments in accordance with the requirements
of International Accounting Standard (IAS) No. 32.
The fair value of financial instruments is determined as follows:
Marketable securities - in accordance with stock exchange values at
the balance sheet date.
Current financial assets and liabilities and long-term loans and
deposits granted or received - there is no material difference
between the value recorded in the Company's books of account and the
fair value of the assets or liabilities.
(2) Derivative financial instruments
The results of derivative financial instrument transactions held for
the purpose of hedging existing balance sheet exposures are
reflected in the Consolidated Statements of Income in conjunction
with the accounting treatment accorded to the item in respect of
which the hedging transaction was undertaken.
20
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 1 - Reporting Principles and Accounting Policies (cont'd)
R. Earnings per share
Earnings per share were computed according to Opinion 55 of the IICPA. The
primary earnings per share include convertible securities issued by the
Company if the likelihood of exercise of stock options or conversion is
reasonable under the conditions of the Opinion.
In calculating the diluted earnings per share, all convertible securities
not included in primary earnings per share have been included in the
calculation of earnings per share provided that the effect of such
inclusion is not anti-dilutive.
S. Use of estimates in the preparation of the financial statements
The preparation of the financial statements in conformity with Israeli
GAAP requires management to make assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2 - Cash and Cash Equivalents
Composition:
December 31 December 31
1997 1998
----------- ----------
Adjusted NIS (thousands)
-----------------------
New Israeli Shekels 11,367 14,806
Foreign currency or linked thereto* 7,573 27,057
------ ------
18,940 41,863
====== ======
* In U.S. dollars 5,119 26,957
In Hungarian Forints 2,454 100
------ ------
7,573 27,057
======= ======
21
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 3 - Marketable Securities
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
---------------------------
Government bonds 117,456 54,626
Short-term notes 30,320 33,230
Other securities:
Bonds 12,685 7,307
Participation units in mutual funds 543 --
Shares and convertible bonds 18,927 11,243
------- -------
179,931 106,406
======= =======
Note 4 - Short-term Loans and Deposits
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
----------------------------
Short-term deposits:
Unlinked* 16,784 352
CPI linked 11,068 --
------ -----
27,852 352
Current maturities of CPI linked
long-term loans 1,933 5,290
------ -----
29,785 5,642
====== =====
* Interest rate: 9.5%
22
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 5 - Trade Receivables, Net
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
---------------------------
Customer receivables 51,165 59,893
Checks and negotiable instruments 52,530 50,837
------- -------
103,695 110,730
Less/ - provision for doubtful accounts* (11,294) (19,373)
------- -------
92,401 91,357
Credit card companies 479,452 516,489
------- -------
571,853 607,846
======= =======
* See Note 19B.
Note 6 - Other Current Assets
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
----------------------------
Income taxes 7,779 3,477
Employees 5,353 5,973
Deferred tax asset* 17,322 12,093
Affiliates and a partnership 1,717 209
Proportionately consolidated investee 172 228
Rental and other prepaid expenses 12,255 11,970
Sundry 19,143 15,556
------ ------
63,741 49,506
====== ======
* Including taxes paid in respect of expenses reflected in the
Consolidated Statements of Income but which are recognized for tax
purposes only upon actual payment of the expenses. The utilization
of these amounts is dependent upon the existence of adequate taxable
income in future years. See also Note 22D.
23
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 7 - Inventories
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
----------------------------
Merchandise 316,227 362,663
Spare parts and office supplies 5,679 7,226
------- -------
321,906 369,889
Payments on account of merchandise ordered 3,140 1,332
------- -------
325,046 371,221
======= =======
Note 8 - Investments
A. Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
----------------------------
Investees
Shares -
Cost* 12,738 12,725
Company's equity in post-acquisition
earnings, net 16,642 18,279
------ ------
29,380 31,004
Convertible capital notes 1 1
Unlinked capital notes (1) 3,164 2,913
Non-interest bearing loans linked to
the CPI (1) 16,873 3,482
Loans linked to the CPI bearing interest at
the rate of 5.5%(2) 3,765 1,584
------ ------
53,183 38,984
Partnership 31,717 --
Shares in another company abroad 10 --
------ ------
84,910 38,984
====== ======
24
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 8 - Investments (cont'd)
A. Composition at December 31, 1998 (cont'd)
(1) The repayment dates of the unlinked and non-interest bearing capital
notes and loans have not yet been determined.
(2) The loans (including interest and linkage) are repayable 15 months
after the date upon which the affiliate has made a demand to repay
such loan. The affiliate had not made such a decision as of the
balance sheet date.
* Including payments on account of shares in the amount of NIS 614
thousand (December 31, 1997 - same).
B. Original difference
The excess of cost of the investment over net asset value at the date of
acquisition of the affiliate in the sum of NIS 820 thousand (December 31,
1997 - same) was attributed to the cost of the land and has not been
amortized.
C. Sale of the Ace Kne Uvne Group
In September 1998, following an agreement signed in July 1998, the Company
sold its entire holding in the Ace Kne Uvne group to Clal Consumer Leasing
Limited for a consideration of approximately NIS 35 million. The capital
gain from the transaction was NIS 7.5 million. For tax purposes this gain
was set off against the Company's brought forward capital losses and
therefore, no capital gains tax is due on the transaction.
The transaction was authorized by the Supervisor of Restrictive Practices.
D. Changes during the year
1) Sale of Hungarian Subsidiary
On December 22, 1997, the Company executed an agreement to sell its
shares in Super Kozert to Spar Hungary for NIS 68 million
(approximately US$17.6 million). The agreement was subject to the
approval of the Hungarian antitrust authorities, received on
February 26, 1998.
In December 1998, following the agreement, the Company received a
further NIS 10 million, net.
The total capital gain from the sale was included in the 1998
financial statements in the sum of NIS 44 million, pre-tax. The
taxable capital gain was offset against brought forward capital
losses and consequently, NIS 8 million of deferred tax benefits were
written off during the first quarter with respect to these utilized
losses. The net capital gain from this sale was NIS 36 million.
25
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 8 - Investments (cont'd)
D. Changes during the year (cont'd)
1) Sale of Hungarian Subsidiary (cont'd)
The consolidated financial statement as at December 31, 1998 and for
the year ended on that date do not include the financial statements
of Super Kozert which were previously consolidated and the
investment therein which was realized during the accounting year.
Details in respect of this company, previously included in the
consolidated financial statements of December 31, 1997 are as
follows:
December 31
1997
------------
Adjusted NIS
(thousands)
------------
Balance sheet
Cash and cash equivalents 2,354
Working capital (excluding cash and cash
equivalents) 1,872
Fixed assets 27,544
Long term liabilities (2,119)
------
29,651
======
Year ended December 31
------------------------
1996 1997
------ -------
Adjusted NIS (thousands)
-------------------------
Income statement
Sales 225,632 223,879
======= =======
Net loss 2,068 4,562
======= =======
2) Sale of Super Office Limited (hereby "Super Office")
During 1997, Super Office Limited and the Company entered into an
agreement with Office Depot (Israel) Ltd. (Office Depot) providing
for the sale of two out of three stores of the office supply
business conducted by the Company's subsidiary Super Office. The
purchase price was NIS 2 million plus an amount based on the value
of Super Office's inventory and equipment sold to Office Depot. The
agreement provides that the Company will not compete with Office
Depot for the three year period from the date of signing the
agreement. The third store was closed during the fourth quarter of
1997.
26
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 8 - Investments (cont'd)
D. Changes during the year (cont'd)
2) Sale of Super Office Limited (hereby "Super Office") (cont'd)
Following this transaction Super Office entered into voluntary
liquidation procedures.
Sales and net losses relating to the retail activities of Super
Office Ltd. previously included in the consolidated financial
statements are as follows:
Year ended December 31
------------------------------
1996 1997
------ ------
Adjusted NIS (thousands)
------------------------------
Sales 59,898 45,013
====== ======
Net loss 20,023 13,786
====== ======
Note 9 - Long-term Loans and Receivables
A. Composition:
Interest Repayment
Linkage terms rate dates
------------- -------- --------- December 31 December 31
% 1997 1998
-------- ----------- -----------
Adjusted NIS (thousands)
---------------------------
Index linked 5.75 Monthly -- 2,585
Index linked 4.5 Bi-annual 1,429 1,092
Index linked 5.5 Quarterly 477 361
Index linked 5.8 Monthly 18,676 17,986
Index linked 6.0 Monthly 7,244 24,477
Index linked 4.0 380 --
------ ------
28,206 46,501
Less/ - current maturities (1,933) (5,290)
------ ------
26,273 41,211
Minority interest in capital
deficit of consolidated
subsidiary 270 235
------ ------
26,543 41,446
====== ======
27
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 9 - Long-term Loans and Receivables (cont'd)
B. Amounts receivable in years after the balance sheet date
December 31
1998
------------
Adjusted NIS
(thousands)
------------
Second year 5,814
Third year 5,834
Fourth year 5,468
Fifth year 5,448
Sixth to tenth year 8,387
Eleventh to fifteenth year 6,943
After fifteenth year 3,317
------
41,211
======
28
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 10 - Fixed Assets, Net
A. Composition
<TABLE>
<CAPTION>
December 31
December 31, 1998 1997
----------------------------------------------------------------- ------------
Building Leasehold Equipment Motor Total Total
including improvements and vehicles
land and fixtures
leasehold
rights
--------- ------------ --------- -------- --------- ---------
Adjusted NIS (thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost
Beginning of year 1,205,300 264,641 880,047 28,172 2,378,160 1,868,300
Additions 97,834 39,090 154,294 6,511 297,729 534,288
Disposals -- (12,872) (23,659) (4,888) (41,419) (23,317)
Disposals due to
a sale of an
investment in a
previously
consolidated
company (17,857) (7,337) (24,987) (338) (50,519) (1,111)
--------- ------- ------- ------ --------- ---------
End of year 1,285,277 283,522 985,695 29,457 2,583,951 2,378,160
--------- ------- ------- ------ --------- ---------
Accumulated
depreciation
Beginning of year 113,567 152,891 466,568 17,039 750,065 667,854
Depreciation and
amortization 16,718 18,004 67,888 3,119 105,729 95,835
Disposals -- (11,668) (20,265) (4,176) (36,109) (13,278)
Disposals due to
a sale of an
investment in a
previously
consolidated
company (11,039) (670) (11,115) (169) (22,993) (346)
--------- ------- ------- ------ --------- ---------
End of year 119,246 158,557 503,076 15,813 796,692 750,065
--------- ------- ------- ------ --------- ---------
Undepreciated
balance
End of year 1,166,031 124,965 482,619 13,644 1,787,259 1,628,095
========= ======= ======= ====== ========= =========
End of previous
year 1,091,733 111,750 413,479 11,133 1,628,095
========= ======= ======= ====== =========
</TABLE>
29
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 10 - Fixed Assets, Net (cont'd)
B. Composition of the cost of buildings, including land and leasehold
rights
<TABLE>
<CAPTION>
End of lease
period
------------ December 31 December 31
Years 1997 1998
------------ ----------- -----------
Adjusted NIS (thousands)
--------------------------
<S> <C> <C> <C>
Company:
Owned (1) 303,640 330,379
Capitalized leases 2024-2044 195,735 355,541
Non-capitalized leases 2020-2077 79,043 84,880
Development contracts 2039-2045 142,050 31,964
--------- ---------
720,468 802,764
--------- ---------
Subsidiaries (including Company's
portion of proportionately consolidated
investees):
Owned(1) 170,050 180,343
Capitalized leases 2000-2040 245,072 245,496
Non-capitalized leases 2010-2021 21,109 21,109
Capitalized lease 2000 30,746 35,565
Owned and leasehold rights, in Hungary 17,855 --
--------- ---------
484,832 482,513
--------- ---------
Total consolidated balance sheet 1,205,300 1,285,277
========= =========
(1) Registered with Lands Registrar:
Company:
Registered 282,724 307,005
Not registered* 20,916 23,374
--------- ---------
303,640 330,379
========= =========
Subsidiaries:
Registered 103,085 103,106
Not registered* 66,965 77,237
--------- ---------
170,050 180,343
========= =========
</TABLE>
* Land rights have not yet been registered in the Company's name or in the
name of subsidiaries at the Land Registry, principally due to registry
requirements or procedural difficulties.
C. Leasehold land and development contracts are not registered in the
Company's name at the Land Registry.
D. The cost of buildings as stated in the Consolidated Balance Sheets
includes specific expenses of NIS 2,417 thousand (December 31, 1997 - NIS
2,417 thousand), which were capitalized during the construction period.
E. Liens - see Note 25.
30
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 11 - Deferred Expenses and Other Assets
A. Composition:
<TABLE>
<CAPTION>
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
--------------------------
<S> <C> <C>
Acquisition tax in respect of leases for long periods 18,073 17,399
Goodwill (1) 58,619 36,915
Prepaid rent and other prepaid expenses 1,850 3,276
Other assets 2,871 3,937
------ ------
81,413 61,527
====== ======
(1) Original sum 86,044 86,044
Accumulated amortization 27,425 49,129
------ ------
58,619 36,915
====== ======
</TABLE>
In respect of the amortization policy used for deferred expenses and other
assets, see Note 1L.
B. Amortization of Goodwill
1. Amortization of goodwill arising from stores, in respect of which
the remaining lease term is less than ten years, is in accordance
with the Company's policy, based on management's experience from
prior years, that such rental agreements will be renewed for
additional periods of up to a minimum of ten years from the date of
acquisition of said goodwill.
2. The goodwill arising from the purchase of the Shekem stores was
allocated between the 25 stores on the basis of the turnover of each
store, in the financial year preceding the acquisition. At the end
of one year following the purchase of stores from Shekem Ltd., the
Company reassessed the value of assets purchased based on projected
cash flows from these stores. In accordance with the results of the
reassessment, the Company wrote off the balance of goodwill of some
of the Shekem stores in the amount of NIS 14,336 thousand in the
first quarter of 1998. Due to the impending closing of the Birkat
Rachel store in Jerusalem, the amount of NIS 2,247 thousand was
amortized in the first quarter of 1998 in respect of part of the
goodwill paid for this store.
31
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 12 - Short-term Bank Credit
Composition:
<TABLE>
<CAPTION>
Interest rate
at December 31 December 31 December 31
1998 1997 1998
-------------- ----------- -----------
% Adjusted NIS (thousands)
-------------- ---------------------------
<S> <C> <C> <C>
Overdraft - unlinked 18 - 21.5 933 5,253
Short-term loans - unlinked 62,782 --
Current maturities of long-term loans 8,922 16,152
------ ------
72,637 21,405
====== ======
</TABLE>
Note 13 - Other Payables
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
--------------------------
Government institutions for taxes and
employee deductions 15,458 16,258
Employees and salary related liabilities 79,208 86,572
Interested parties 74 68
Advances from customers 24,916 36,765
Others 19,167 29,935
------- -------
138,823 169,598
======= =======
32
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 14 - Long-term Bank Loans
A. Composition
<TABLE>
<CAPTION>
Linkage terms Repayment Interest rate at
terms December 31 December 31 December 31
1998 1997 1998
----------- ----------- -----------
% Adjusted NIS (thousands)
------------------------ --------- ----------- ------------------------
<S> <C> <C> <C> <C>
Linked to the CPI
(principal
and interest): (1) 7 151,567 150,985
(2) 4.4 172,118 171,458
Quarterly 3.75 - 5.25 19,078 17,049
Quarterly 3 - 4.85 76,553 69,893
Linked to the Hungarian
Forint Bi-annual 25 1,704 --
-------- --------
421,020 409,385
Less: Current maturities (8,922) (16,152)
-------- --------
412,098 393,233
======== ========
</TABLE>
(1) Bi-annual repayments, starting August 1999.
(2) Annual repayments, starting March 2000.
B. Liens - see Note 25.
C. The long-term loans are repayable as follows
December 31
1998
Repayable in the years ------------
after balance sheet date Adjusted NIS
------------------------ (thousands)
------------
Second year 41,131
Third year 41,442
Fourth year 41,750
Fifth year 42,073
After fifth year 226,837
--------
393,233
========
33
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 15 - Long-term Loans from Others
A. Composition
<TABLE>
<CAPTION>
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
-------------------------
<S> <C> <C>
Notes payable(1) 441 --
From external shareholders in a subsidiary(2) 6,574 7,467
From external shareholders in a proportionately
consolidated investee 23 14
------ ------
7,038 7,481
Less/ - Current maturities (450) (10)
------ ------
6,588 7,471
====== ======
</TABLE>
(1) The notes are linked to the CPI and do not bear interest.
(2) The loans are linked to the CPI, bear no interest and the terms of
repayment have not yet been determined.
B. The long-term loans are repayable as follows:
December 31
Repayable during the year 1998
ended December 31 ------------
- - ------------------------- Adjusted NIS
(thousands)
------------
2000 4
Not yet determined 7,467
------
7,471
======
34
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 16 - Accrued Employee Severance Benefits, Net
Composition:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
-------------------------
Accrued severance pay 15,855 16,264
Accrued retirement grants 6,907 7,834
Accrued unutilized sick leave 4,441 7,867
----------- -----------
27,203 31,965
Less: Amounts funded with a central severance pay
fund, including earnings thereon (22,057) (22,884)
Less: amounts funded with a sick pay fund -- (4,000)
----------- -----------
5,146 5,081
=========== ===========
The Company deposits funds on a current basis with a pension fund to
provide pension rights to Company employees upon reaching pensionable age.
Employees whose employment is terminated prior to their reaching
pensionable age or who retire under other specific circumstances are
entitled to receive severance pay based on their last salary. In the event
that amounts accrued in the pension fund are insufficient to cover
severance payments, the Company makes up the difference.
Past experience has shown that the majority of the Company's employees
continue their employment with the Company until reaching pensionable age.
Accordingly, the Company's management is of the opinion that the liability
to cover any deficiency in severance provisions for employees is
immaterial and thus no provision has been made in this respect.
The above deposits and balance sheet accruals fully cover the Company's
liabilities in respect of employee pension rights upon retirement.
The accrual for payment of severance pay for uninsured employees, either
wholly or in part, by a pension fund or by executive insurance policies,
is calculated on the basis of one month's salary for each year of service.
In accordance with a collective bargaining agreement, the Company is
obligated to pay retiring employees an amount equal to one month's salary
for each eight years of service, but not in excess of three months'
salary. The accrual for this retirement grant is calculated in accordance
with the accrued seniority of each employee as compared to the maximum
possible seniority at retirement date.
Since 1994, in connection with another collective bargaining agreement,
the Company has been obligated to pay employees retiring with a pension an
extra grant in respect of un-utilized sick leave. In 1998 the same
collective agreement was extended, and in it's framework the Company
updated the extra grant by a rate of 67%. In respect of this liability,
the Company has made a provision according to an actuarial valuation,
based on the employees' unutilized sick leave entitlement.
Amounts funded by the pension fund and insurance companies are not
included in the balance sheet since they are not under the control of the
Company.
35
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity
A. Share capital
(1) Prior to 1993, the Company had authorized and outstanding Ordinary
'A' Shares and Ordinary 'B' Shares. In 1993, the Company distributed
a stock dividend to its holders of Ordinary 'A' Shares, effected a
consolidation of the share capital and subsequently amended its
Articles of Association, as a result of which and as of the balance
sheet date, the Company's only authorized and issued class of
capital stock consists of Ordinary Shares, par value NIS 0.1 per
share ("Ordinary Shares"). Except as otherwise specifically stated
herein, all references to share capital relate to the Ordinary
Shares after giving effect to such stock dividend, consolidation of
share capital and amendment to the Articles of Association. The
Ordinary Shares are traded on the Tel-Aviv Stock Exchange.
The paid-up share capital, including paid in surplus received, has
been adjusted for the effect of inflation from the date of receipt
of each payment until December 31, 1998.
The amount of share capital set forth in the Consolidated Balance
Sheets includes capital reserves to October 31, 1985 and the amount
of capital reserves set forth in the balance sheets includes capital
reserves from November 1, 1985 to the applicable date.
2) Composition
December 31
1997 and 1998
-------------
Number of
shares
-------------
Authorized (See (3) below)
Ordinary shares of par value of NIS 0.1 400,000,000
=============
Issued and fully paid Number of
share capital shares
-------------
Balance at January 1, 1996 173,758,828
Exercise of stock options 564,710
-------------
Balance at December 31, 1996 174,323,538
Exercise of stock options 1,028,527
Issuance of shares on the New York Stock Exchange 33,250,000
-------------
Balance as at December 31, 1997 208,602,065
Exercise of stock options 648,706
-------------
Balance as at December 31, 1998 209,250,771
=============
The above shares are traded on the Tel-Aviv Stock Exchange and in the New
York Stock Exchange.
Subsequent to December 31, 1998, 131,571 Ordinary Shares were issued upon
the exercise of stock options issued to employees during 1993 and 1995 for
the consideration of NIS 891 thousand.
36
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
A. Share capital (cont'd)
(3) Increase in Authorized Share Capital
In June 1997 the Company's authorized share capital was increased by
200 million Ordinary Shares of NIS 0.1 each. After this increase,
the Company's Authorized Share Capital is of NIS 40 million par
value.
(4) Public Offering of ADSs in the U.S.
On September 30, 1997 the Company entered into an underwriting
agreement in connection with a public offering of shares in the
United States, whereby 6,500,000 American Depositary Shares ("ADS"),
representing 32,500,000 Ordinary shares, were offered to the public.
Each ADS represents 5 Ordinary Shares of par value NIS 0.1 per
share. The price of each ADS was set at US$14.75.
In addition, the underwriters of the offering exercised an option
granted by the Company, effective for 30 days, and purchased, at the
end of the 30 day period, 150,000 additional ADSs, representing
750,000 Ordinary shares, at the same price as that of the offering.
The gross proceeds from the offering after the exercise of the
option were approximately $98.1 million and $90.5 million net (after
deduction of the issue and underwriting expenses).
(5) In respect of the issue of stock options to employees see Notes 17B
and 17C and 17D.
B. Stock options granted in 1993 to senior employees of the Company and
certain subsidiaries
Under the 1993 plan, stock options exercisable into Ordinary "A" Shares of
par value NIS 0.02 each were granted to 20 senior employees of the Company
and certain subsidiaries on March 1, 1993. The granting of these options
was without consideration, by way of a private placement, and at a total
par value of NIS 149,000.
The exercise price of these options was the average price of the Ordinary
Shares on the Tel-Aviv Stock Exchange during the month of November 1992
less 15%, and the exercise price was linked to the CPI of November 1992
until the exercise date.
37
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
B. Stock options granted in 1993 to senior employees of the Company and
certain subsidiaries (cont'd)
The shares to be issued following the exercise of these stock options will
be registered for trading on the Tel-Aviv Stock Exchange in accordance
with a permit received from the Tel-Aviv Stock Exchange.
Following the stock dividend and consolidation of the share capital, data
regarding the options as at the balance sheet date were as follows:
Exercisable Exercise
for price
Ordinary --------
Year of grant Shares NIS
- - ------------- ----------- --------
1993 134,496 71.8
Subsequent to December 31, 1998, options to purchase 101,571 Ordinary
Shares were exercised for aggregate consideration of NIS 721 thousand. The
stock option plan ended on February 28, 1999 and unexercised options were
forfeited.
C. Stock options granted in 1995 to senior employees of the Company and
certain subsidiaries
Pursuant to a plan approved by the Board of Directors, on April 11, 1995,
234,900 options were granted on May 18, 1995 by a private placement
without consideration to 35 senior employees of the Company and certain
subsidiaries to purchase 2,349,000 Ordinary Shares. Of these stock
options, stock options exercisable into 300,000 Ordinary Shares were
granted to the Company's president. The exercise price of the stock
options is the average market price of the Ordinary Shares during March
1995, less 15%, linked to the March 1995 CPI until the exercise date.
The stock options are not transferable. Stock options in respect of one
third of the amount granted are not exercisable for two years from the
date of grant, an additional one-third are not exercisable for three years
from such date and the remainder is not exercisable for four years from
such date. The stock options can be exercised over a three year period
from the date upon which they first become exercisable.
38
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
C. Stock options granted in 1995 to senior employees of the Company and
certain subsidiaries (cont'd)
An employee exercising options will be entitled to receive a CPI-linked
loan from the Company, with interest at the annual rate of two percent, in
order to exercise the options. The loan will be repayable in three equal
annual installments.
The shares to be issued as a result of the exercise of stock options are
registered for trading on the Tel-Aviv Stock Exchange in accordance with a
permit received from the Tel-Aviv Stock Exchange.
The economic value at the time of grant of each stock option was
determined as follows:
- the economic value of each stock option expiring on the fifth
anniversary of the date of grant was NIS 3.17
- the economic value of each stock option expiring on the sixth
anniversary of the date of grant was NIS 3.39
- the economic value of each stock option expiring on the seventh
anniversary of the date of grant was NIS 3.60
This economic value was calculated using the Black-Scholes formula taking
into account the closing price of Ordinary Shares on the last day prior to
approval of the plan by the Board of Directors (NIS 5.08 per Ordinary
Share), with the weekly standard deviation of 6.11%.
The economic value was calculated using the following assumptions:
1. Each stock option will be exercised on the last day of each exercise
period.
2. The standard deviation was calculated based on the weekly changes in
the market price of the Ordinary Shares over a six month period from
October 1994 to the end of March 1995.
3. The assumed risk-free annual interest rate was 4%.
During 1998, 700 stock options were cancelled (1997: 14,900 stock options)
due to the retirement of employees, that were granted under the 1995
option plan.
As of December 31, 1998, there are 174,600 stock options exercisable into
1,746,000 Ordinary Shares.
The exercise price of each stock option from this plan was NIS 57.3 at the
balance sheet date.
Subsequent to December 31, 1998, options to purchase 30,000 Ordinary
Shares were exercised for aggregate consideration of NIS 170 thousand.
39
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
D. Stock Options granted in 1997 to senior employees of the Company and
certain Subsidiaries
On July 17, 1997, the Company's Audit Committee and the Board of Directors
adopted the 1997 Share Incentive Option Plan, which provides for the grant
of 2,654,000 options to purchase 2,654,000 Ordinary Shares to 35 senior
employees of the Company and its subsidiaries. Options exercisable into
330,000 Ordinary Shares were granted to the Company's president. The 1997
Share Incentive Option Plan provides that options will be exercisable in
three equal annual installments commencing on the second anniversary of
the date of grant and each such installment may be exercised at any time,
in whole or in part, for three years subsequent to the day when it first
becomes exercisable. The exercise price of the options will be NIS 10.67
per Ordinary Share (equal to 90.5% of the average closing prices of the
Ordinary Shares on the Tel-Aviv Stock Exchange during the 30 trading days
preceding the adoption of the plan by the Board of Directors) and is
linked to the exchange rate of the NIS against the U.S. dollar. Under
certain circumstances, an option holder will be entitled to receive a loan
from the Company for the purpose of exercising such holder's options.
The economic value of a stock option was determined at the time of the
approval of the plan by the Audit Committee and the Board of Directors as
follows:
- The economic value of the stock option expiring on the fifth
anniversary of the date the grant was NIS 5.94
- The economic value of a stock option plan expiring on the sixth
anniversary of the date the grant was NIS 6.44
- The economic value of a stock option expiring on the seventh
anniversary of the date the grant was NIS 6.88
The economic value was calculated using the Black-Scholes formula taking
into account the closing price of the Ordinary Shares on the last day
prior to approval of the plan by the Audit Committee and the Board of
Directors (NIS 12.29 per Ordinary Share), with the weekly standard
deviation of 5.21%.
The economic value was calculated using the following assumptions:
1. Each stock option will be exercised on the last day of each exercise
period.
2. The standard deviation was calculated based on the weekly changes in
the market price of the Ordinary shares over a six month period from
December 1996 to the end of May 1997.
3. The assumed risk-free annual interest rate was 6%.
During 1998, 260,000 stock options were cancelled (1997: 40,000 stock
options) due to the retirement of two employees who were granted options
under the plan Subsequent to balance sheet date, 40,000 stock options were
cancelled due to the retirement of an employee. As of December 31, 1998,
there are 2,354,000 stock options exercisable into the same number of
Ordinary Shares.
The exercise price of each stock option from this plan was NIS 12.48 at
the balance sheet date.
40
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
E. Stock Options granted in 1998 to the Company's General Manager
On September 8, 1998, the Company's Board of Directors resolved to approve
a plan to allot stock options (the "Plan") to the Company's General
Manager, Mr. Amiaz Sagis (President of the company - appointed on January
1, 1999). On October 26, 1998, the shareholders of the Company approved
the Plan at a General Shareholders' Meeting. The plan was also approved by
the Securities Authority.
In accordance with the Plan, on October 27, 1998, 465,300 options were
granted to the Company's General Manager, without consideration, by means
of a private issue. The options are exercisable into up to 465,300
Ordinary Shares par value NIS 0.1 per share as detailed below.
The options are not transferable. One third of the options will be blocked
for a period of two years from the date of grant ("first lot"), one third
of the options will be blocked for a period of three years from the date
of grant ("second lot"), and the remaining one third of the options will
be blocked for a period of four years from the date of grant ("third
lot"). The options will be exercisable at any time for a period of three
years from the end of the blocking period for each lot.
The basic exercise price of the options was set at NIS 9.94. The basic
exercise price of the options was set according to the average price of
the Company's shares on the Tel Aviv Stock Exchange in the 30 trading days
ended September 8, 1998 (the date of the Plan's approval by the Board of
Directors), that is a price of NIS 11.04 per share less 10% (the "base
price").
The exercise price of each option (the "exercise price") will be as set
forth in section (a) below in respect to the first lot and the lower of
the prices set forth in sections (a) and (b) in respect to the second lot
and third lot.
(a) The base price is linked to changes in the representative rate of
the U.S. dollar as published by the Bank of Israel from the
representative rate known at the time of the Plan's approval by the
Board of Directors (that is NIS 3.857 = U.S.$1) to the last
representative rate of the dollar known at the date of exercise.
(b) The average closing price of the Company's shares in the seven
trading days preceding the end of the relevant blocking period (the
second or third, as the case may be), that price being linked to
changes in the representative rate of the dollar from the end of the
second or third blocking period, as the case may be, and until the
date of exercise.
The options offered under the Plan are only exercisable into such quantity
of shares that reflects the benefit element accruing from them to the
offeree on the date of exercise, that is the difference between the
exercise price of each option and the closing price of the Company's
shares on the trading day preceding the exercise date. As such, the
consideration to be paid by the offeree to the Company upon the exercise
of the options is only for the amount of the par value of the shares
actually allotted at the time of exercise. The exercise price is not an
amount actually paid to the Company but merely serves to determine the
quantity of shares to be allotted.
41
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 17 - Shareholders' Equity (cont'd)
E. Stock Options granted in 1998 to the Company's General Manager
(cont'd)
The shares allotted from the exercise of the above described options will
be registered for trading on the Tel Aviv Stock Exchange in accordance
with an authorization received from the Tel Aviv Stock Exchange.
The economic value of each option at the time of the Board of Directors'
decision is contingent upon, among other things, the duration of the
exercise period. As such, the economic value of each option whose maximum
exercise period is five years is NIS 4.32. The economic value of each
option whose maximum exercise period is six years is NIS 4.74. The
economic value of each option whose maximum exercise is seven years is NIS
5.12.
The economic value was calculated in accordance with the "Black - Scholes"
formula, taking into account the closing price of the Company's shares on
the Tel Aviv Stock Exchange on the date of the Plan's approval by the
Board of Directors, which was NIS 11.07, with the weekly standard
deviation being approximately 3.72%.
In calculating the economic value, the following assumptions were taken
into account.
1. The options will be exercised on the last day of each exercise
period.
2. The standard deviation estimate was calculated in accordance with
the weekly yields of the Company's shares during the six month
period between February and July 1998.
3. The annual capitalization rate for the options was set at 5.5%.
4. The calculation of the economic value does not take into account the
fact that the exercise price of the second and third lot may be
lower than the exercise price of the first lot. This fact increases
the economic value of these options.
The exercise price at balance sheet date of each option was NIS 10.72 and
this will be used to determine the benefit element as described above.
Note 18 - Rental and Operation of Malls
Composition:
Year ended December 31
----------------------------------------
1996 1997 1998
------ ------ ------
Adjusted NIS (thousands)
----------------------------------------
Rental income 24,948 26,623 27,794
Management fees 5,331 5,038 5,436
------ ------ ------
30,279 31,661 33,230
====== ====== ======
42
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 19 - Operating, Selling, Administrative and General Expenses
A. Composition
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- --------
Adjusted NIS (thousands)
----------------------------------------
Salaries and wages 403,172 485,900 543,685
Rent and municipal taxes 113,796 148,136 153,012
Advertising 57,306 75,954 100,790
Other expenses, net 196,159 243,889 266,264
--------- --------- ---------
770,433 953,879 1,063,751
========= ========= =========
B. Provision for doubtful accounts
Balance at the beginning of the year 5,442 6,957 11,294
Charged to other expenses, net 2,546 6,348 8,812
Adjustments (1,031) (2,011) (733)
--------- --------- ---------
Balance at end of year 6,957 11,294 19,373
========= ========= =========
Note 20 - Financial Income, Net
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
-----------------------------------------
<S> <C> <C> <C>
This item includes:
Profit from marketable securities 10,681 11,529 2,643
Real interest on loans in respect of
long-term loans 337 2,152 2,288
Real interest expenses in respect of
long-term loans (3,893) (26,618) (20,848)
Real interest income (expense) from
banks for short-term monetary items, net (10,775) 3,740 3,952
Real interest income in respect of net
short-term debtors and creditors 20,678 12,755 21,418
--------- --------- ---------
17,028 3,558 9,453
========= ========= =========
</TABLE>
43
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 21 - Sundry Income (Expenses), Net
Composition:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
-----------------------------------------
<S> <C> <C> <C>
Loss from partnership (1,341) (2,396) (444)
Loss on disposal of fixed assets, net (3,039) (3,620) (510)
Equipment disposal from closed branches -- -- (3,941)
Loss from discontinuing past operations -- -- (950)
Profit on sale of subsidiary (see
Note 8 D.1) -- -- 44,242
Profit on sale of a partnership and
investee company (see Note 8.C) -- -- 7,500
Write-off of goodwill (see Note 11.B.2) (4,305) -- (16,583)
Management fee from an affiliate 142 147 145
Management fee from a proportionately
consolidated investee 128 134 256
Other income 1,697 674 103
--------- --------- ---------
(6,718) (5,061) 29,818
========= ========= =========
</TABLE>
Note 22 - Income Taxes
A. Taxes under inflationary conditions
According to the Income Tax Law (Inflationary Adjustments) - 1985, results
of operations for tax purposes are measured on a constant, or real, basis,
according to increases in the CPI. The Company is assessed for taxes based
on this law.
B. Benefits under the law for the encouragement of industry
One of the Company's subsidiaries is an "industrial company" as defined in
the Law for the Encouragement of Industry (Taxes) - 1969, and, as such,
benefits from accelerated depreciation rates for tax purposes.
C. Tax rates
(1) Israeli companies: in accordance with Adjustment No. 19 of the
Income Tax Ordinance dated December 31, 1992, the Company's income
tax rates have gradually decreased.
The tax rate applicable to the Company from 1996 is 36%.
(2) Hungarian subsidiaries: the tax rates for the Company's Hungarian
subsidiaries were 18% in 1996 and thereafter.
44
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 22 - Income Taxes (cont'd)
D. Deferred taxes
Deferred taxes have been calculated using tax rates expected to be in
effect at the time the deferred taxes are paid or utilized.
Deferred taxes relating to:
<TABLE>
<CAPTION>
Provision Fixed assets Losses for Other Total
Vacation for tax current
pay and employee purposes items
convalescence severance
expense benefits
allowance
------------- --------- ------------ ---------- ------- ------
Adjusted NIS (thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as at January 1, 1997 (6,099) (2,001) 31,406 (1,148) (742) 21,416
Movement during 1997 -
Translation differences 4 4 (49) -- -- (41)
Decrease in deferred taxes due to a change in
the excess of investment cost -- -- (671) -- -- (671)
Transferred to Income Statement (1,233) 155 2,241 (9,305) (122) (8,264)
------- ------- ------- ------- ------- -------
Balance as at December 31, 1997 (7,328) (1,842) 32,927 (10,453) (864) 12,440
Movement during 1998 -
Decrease in deferred taxes due to a sale of an
investment in a previously consolidated
company -- -- (1,400) 985 -- (415)
Transferred to income statement (643) 35 4,855 8,061 (3,259) 9,049
------- ------- ------- ------- ------- -------
Balance as at December 31, 1998 (7,971) (1,807) 36,382 (1,407) (4,123) 21,074
======= ======= ======= ======= ======= =======
</TABLE>
Deferred tax assets have not been recorded in respect of approximately NIS
549 thousand (December 31, 1997 - NIS 140 thousand) relating to losses
available to be carried forward for tax purposes and approximately NIS 544
thousand (December 31, 1997 - NIS 373 thousand) in respect of losses from
securities.
45
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 22 - Income Taxes (cont'd)
D. Deferred taxes (cont'd)
The deferred taxes are presented in the Consolidated Balance Sheets as
follows:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
-------------------------------
Current assets (17,322) (12,093)
Long-term liabilities 29,762 33,167
------- -------
12,440 21,074
======= =======
Deferred taxes reflect timing differences between the recognition of
income and expenses for financial statement purposes and their recognition
for tax purposes.
E. Composition of income taxes included in the Consolidated Statements
of Income
Year ended December 31
-----------------------------------------
1996 1997 1998
--------- --------- ----------
Adjusted NIS (thousands)
-----------------------------------------
Current taxes 74,458 84,420 68,556
Deferred taxes 3,224 (8,264) 9,049
--------- --------- ---------
77,682 76,156 77,605
========= ========= =========
46
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 22 - Income Taxes (cont'd)
F. Reconciliation of the theoretical tax on the consolidated adjusted
income before taxes to the tax expense included in the Consolidated
Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
----------------------------------------
<S> <C> <C> <C>
Tax calculated at the rate of 36% 69,953 70,251 73,223
Increase (decrease) in respect of:
Adjustment for lower tax rates on
Hungarian subsidiaries 466 1,163 --
Unallowable expenses (including
depreciation and amortization) 9,830 9,302 8,391
Losses of subsidiaries for which no
deferred tax provision has been made 6,325 819 1,657
Tax exempt income (3,010) (619) (451)
Utilization of previous year's tax
losses (2,168) (4,110) (8,477)
Utilization of previous year's tax
losses from marketable securities (4,596) (191) --
Inflationary erosion of advance tax
payments 1,832 962 2,508
Effect of inflationary tax laws (950) (1,421) 754
--------- --------- ---------
Taxes on income in the consolidated
statement of Income 77,682 76,156 77,605
========= ========= =========
</TABLE>
G. Tax losses
Three subsidiaries have tax losses on marketable securities of
approximately NIS 161 thousand available for use in future years.
Four subsidiaries have tax losses of approximately NIS 4,854 thousand
available for use in future years.
47
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 22 - Income Taxes (cont'd)
H. Final tax assessments
The Company has final assessments (including self assessments regarded as
final) up to and including the 1992 tax year.
Ten subsidiaries have received final assessments for the years between
1990-1995.
Seven other subsidiaries have not yet received final assessments since the
dates of their incorporation, which were between 1988-1998.
Note 23 - Leases
The minimum rentals (not including additional rentals computed as a
percentage of sales) linked to the CPI or to the U.S. dollar, and payable
in future years by the Company or its investee companies, of which the
Company is a guarantor, are in respect of long-term leases of stores and
office premises, based on the terms in effect on the balance sheet date,
as follows:
December 31
1998
------------
Adjusted NIS
(thousands)
------------
Within years subsequent to balance sheet date:
First year 102,385
Second year 100,944
Third year 94,565
Fourth year 92,985
Fifth year 71,252
Sixth to tenth year 234,228
Eleventh to fifteenth year 167,541
Sixteenth to twentieth year 106,185
-------
970,085
=======
Including rentals to:
Proportionately consolidated investees 16,516
Affiliate 23,517
Interested parties 10,046
48
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 24 - Contingent Liabilities and Commitments
A. The Company and its consolidated subsidiaries have commitments to
construct new store premises and to purchase equipment as follows:
December 31 December 31
1997 1998
----------- -----------
Adjusted NIS (thousands)
-------------------------
Linked to the residential Building Costs Index 102,053 62,482
Linked to the CPI 45,883 9,558
In foreign currency or linked thereto 8,105 20,080
Unlinked 28,571 7,371
------- -------
Total 184,612 99,491
======= =======
B. Rental agreements
Contingent liabilities exist for the payment of rentals linked to the CPI
or to the U.S. dollar in respect of long-term rental leases on buildings,
depending on the completion of the building by the lessors and the taking
possession of stores unencumbered by any operational limitations in the
amount of NIS 462,480 thousand.
During 1993, the Company sold one-half of a building construction project
having an area of approximately 10,000 square meters. The sale contract
provided that the building would be used for rental purposes. Within the
framework of the division between partners of rental income from the
building, the Company has agreed that the purchasers will receive a
minimum income from rentals for the first six years following the
completion of construction. Rental income received from the project from
the beginning of 1995 was in excess of the minimum guaranteed income.
C. Legal proceedings
Legal claims have been asserted against the Company, certain officers and
directors and some of its subsidiaries, the majority of which relate to
the ordinary course of business of the Company, including claims related
to the cessation of employee/employer relationships. Similarly, claims for
damages have been asserted against the Company in its role as an employer
or as asset owner. Claims for damages are covered by adequate insurance
policies. Based on the opinion of the Company's legal advisors provisions
have been made which, in the Company's estimate, will cover these
liabilities if they occur.
49
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 24 - Contingent Liabilities and Commitments (cont'd)
D. Acquisition taxes
The Company and its subsidiaries have received assessments from the tax
authorities for the payment of acquisition taxes in the amount of NIS
4,506 thousand. These assessments relate to long-term leases entered into
in the ordinary course of business after January 1993. Appeals have been
filed against these assessments.
Based on the claims of the tax authorities and the advice of its
professional advisers, the Company has established reserves which it
believes will cover its acquisition tax liabilities in respect of these
leases.
E. Guarantees
(1) The Company and a subsidiary have guaranteed the liabilities of an
affiliated company in the amount of NIS 26,925 thousand.
(2) The Company has guaranteed on behalf of a limited partnership, in
which it held an approximate 40% interest, rental payments required
to be made by the limited partnership in respect of stores leased
for various periods, up to the amount of NIS 1,887 thousand, linked
to the CPI (*).
(3) The Company had guaranteed on behalf of a subsidiary of a previously
owned limited partnership lease payments required to be made by such
subsidiary for two stores for different periods, up to the amount of
$160 thousand, and in respect of another three stores, also for
different periods, up to the amount of NIS 9,941 thousand linked to
the CPI (*).
(4) The Company provided guarantees to the above-described limited
partnership in the amount of $600 thousand for merchandise purchased
from an overseas supplier (*).
(5) The Company and a consolidated subsidiary have a liability in
respect of documentary credits related to imports of merchandise
amounting to NIS 31,987 thousand
(6) In order to secure the liabilities of the Company and subsidiaries
to various sources, the Company provided bank guarantees in the
amount of NIS 811 thousand.
(7) In order to secure liabilities of a proportionately consolidated
investee to a local authority the Company provided a bank guarantee
in the amount of NIS 717 thousand.
(8) In order to secure the registration of a building in the purchaser's
name, the Company provided the purchaser with bank guarantees in the
amount of NIS 1,138 thousand.
(9) The Company has provided a guarantee to a subsidiary in respect of
an agreement to purchase a store up to the amount of NIS 5,853
thousand.
(10) The Company gave a guarantee to Spar Hungary amounting to $1,805
thousand related to possible claims regarding the sale of the
Hungarian subsidiary.
50
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 24 - Contingent Liabilities and Commitments (cont'd)
E. Guarantees (cont'd)
* In respect of guarantees mentioned in items (2), (3) and (4) above,
the Company received a letter of indemnity from a third party in
respect of all damages or expenses which the Company may incur in
respect of these guarantees.
F. Indemnity and insurance of office holders
In accordance with the Company's Articles of Association, the Company will
indemnify office holders in respect of their responsibilities, subject to
legal and other limitations.
G. Uncertainty due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the Year 2000 as 1900 or some other date, resulting in errors
when information using Year 2000 dates is processed. Similar problems may
also occur in systems that use the digits "99" in a date field as
indication of something other than the Year 1999. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and if
not resolved, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect a
company's ability to conduct regular business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the Company including those related to the remediation efforts of
customers, suppliers, or other third parties, will be fully resolved.
Note 25 - Liens
A. Liens relating to investees' obligations
(1) In order to secure the liabilities of a subsidiary to a bank, in the
amount of NIS 17,424 thousand and to the Company, in the amount of
NIS 7,732 thousand the subsidiary placed an unlimited first charge
on land, fixed and current assets in favor of the bank and the
Company (the relevant land, fixed and current assets are included in
the Consolidated Financial Statements at a value of NIS 38,478
thousand). Similarly, a fixed first level charge was registered on
the subsidiary's right to receive rental payments from the lessees
of the land.
(2) In order to secure the liabilities of a proportionately consolidated
investee to banks, which are included in the Consolidated Financial
Statements in the amount of NIS 69,893 thousand the foregoing
company registered a fixed charge and first mortgage (unlimited in
amount) on all of its property rights and eight specific rental
agreements and a floating charge on all of its assets. The total
assets of the proportionately consolidated investee which are
included in the Consolidated Financial Statements are NIS 112,336
thousand.
51
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 26 - Events Subsequent to Balance Sheet Date
Subsequent to balance sheet date, a wholly owned subsidiary purchased
7,313,564 Ordinary Shares of NIS 0.1 of the Company, which represent 3.49%
of the issued capital, for the consideration of NIS 72.1 million.
Note 27 - Details of Earnings Per Share Calculation
The nominal value of shares and net earnings used for the purpose of
calculating earnings per share are as follows:
Year ended December 31
-----------------------------------------
1996 1997 1998
--------- --------- ---------
(thousands)
-----------------------------------------
Nominal value of shares 17,804 18,632 21,113
========= ========= =========
Net earnings (adjusted NIS) 120,127 122,442 126,924
========= ========= =========
Note 28 - Related and Interested Parties
The Company and its investees carry out business transactions with Israeli
banks considered to be related and interested parties due to their control
of mutual and provident funds which have invested in the Company's shares.
These transactions are principally finance-oriented and are conducted in
the ordinary course of business. The amounts included below do not include
balances with these entities and their interested parties.
A. Balances with related and interested parties
December 31 December 31
*1997 1998
----------- -----------
Adjusted NIS (thousands)
------------------------
Assets
Cash and cash equivalents 718 233
Marketable securities at market value 3,591 1,945
Other receivables -
Affiliates and partnership 1,717 209
Proportionately consolidated investees 172 228
Current maturities of long-term investments granted 333 348
Long-term loans** 1,096 744
Liabilities
Trade payables 10,234 4,958
Investee Companies 1,500 --
* Reclassified
** In respect of long-term loans to investee companies - see Note 8.
52
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 28 - Related and Interested Parties
B. Transactions with related and interested parties
The Company and its subsidiaries carry out business transactions in
respect of the purchase of inventory and building construction services
with related and interested parties in the ordinary course of business and
on commercial terms.
The Securities Authority, using the authority granted to it under Section
64 3(D) of the Securities Regulations (Preparation of Annual Financial
Statements) - 1993 has exempted the Company from the necessity of
disclosing transactions, other than in the case of extraordinary
transactions, with companies held by interested parties.
C. Benefits to interested parties
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Number of recipients
Employed interested parties 1 1 2
========= ========= =========
Directors 10 10 12
========= ========= =========
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
----------------------------------------
Amounts of benefits
Employed interested parties - salary
and benefits* 2,077 1,611 6,679
========= ========= =========
Directors' fees 696 843 788
========= ========= =========
* In respect of the issue of options to interested parties see Note 17 C, D
and E.
53
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 28 - Related and Interested Parties (cont'd)
D. The consolidated statement of income includes the following income
(expenses) relating to transactions with Investee Companies as
follows:
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
----------------------------------------
Operating, selling, administrative and
general expenses:
Proportionately consolidated investee
companies (1,906) (1,842) (1,854)
Affiliate (3,573) (3,630) (3,596)
Real interest income in respect of
long-term loans:
Affiliated companies 67 1,127 108
Sundry income, net:
from proportionately consolidated
investee company 128 134 256
from affiliate 142 147 145
Note 29 - Monetary assets and liabilities analyzed by currency and linkage base
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Foreign currency or
Israeli currency linked to linked thereto
-------------------------- -------------------------
Non-linked Israeli CPI U.S. dollars Hungarian
Forints
----------- ----------- ------------ ---------
Adjusted NIS (thousands)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 11,367 -- 5,119 2,454
Marketable securities at
market value 179,934 -- -- --
Short-term investments 27,851 -- -- --
Trade receivables, net 571,062 212 -- 589
Other current assets 18,621 13,606 -- 1,939
Long-term loans,
including current maturities 3,165 48,846 -- --
-------- -------- ------ -------
812,000 62,664 5,119 4,982
======== ======== ====== =======
Short-term bank credit 63,716 -- -- --
Trade payables 617,731 -- -- 18,461
Other payables 113,239 17,966 2,475 4,695
Long-term loans,
including current maturities -- 426,361 -- 1,703
-------- -------- ------ -------
794,686 444,327 2,475 24,859
======== ======== ====== =======
</TABLE>
54
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 29 - Monetary assets and liabilities analyzed by currency and linkage base
(cont'd)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
Foreign currency or
Israeli currency linked to linked thereto
-------------------------- -------------------------
Non-linked Israeli CPI U.S. dollars Hungarian
Forints
----------- ----------- ------------ ---------
Adjusted NIS (thousands)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 14,806 -- 26,957 100
Marketable securities at
market value 106,406 -- -- --
Short-term investments 352 -- -- --
Trade receivables, net 607,749 97 -- --
Other current assets 15,587 9,845 -- 10
Long-term loans,
including current maturities 2,914 51,567 -- --
------- ------- ------- -------
747,814 61,509 26,957 110
======= ======= ======= =======
Short-term bank credit 5,253 -- -- --
Trade payables 671,941 -- -- 8
Other payables 151,688 15,900 2,011 --
Long-term loans,
including current maturities -- 416,866 -- --
------- ------- ------- -------
828,882 432,766 2,011 8
======= ======= ======= =======
</TABLE>
55
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP
A. Details of differences
(1) Effect of Inflation:
The Company, in accordance with Israeli GAAP, comprehensively
includes the effect of price level changes in the accompanying
Consolidated Financial Statements, as described in Note 1.
Such Israeli accounting principles measure the effect of price level
changes in the inflationary Israeli economy.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. Such effects have not been included in the
following reconciliation to U.S. GAAP.
(2) Stock options granted to employees:
As described in Note 17, certain options were granted at exercise
prices which were lower than the fair market value of the Ordinary
Shares on the date of the grant.
In accordance with Israeli GAAP, recording of expense equal to the
difference is not required. Under U.S. GAAP in accordance with
Accounting Principles Board ("APB") No. 25 - recording of
compensation expense is required over the expected vesting period.
In October 1996, the FASB issued Statement No. 123 - "Accounting for
Stock Based Compensation" ("SFAS 123"), which establishes financial
accounting and reporting standards for stock-based compensation
plans. The Statement defines a fair-value based method of accounting
for employee stock options. In 1997, the Company adopted the
disclosure provisions of SFAS 123 but elected to remain under the
expense recognition provision of APB 25 for U.S. GAAP reporting
purposes.
(3) Liability for employee rights upon retirement:
Under Israeli GAAP, amounts funded by purchase of insurance policies
and by deposits with recognized severance pay funds are deducted
from the related severance pay liability.
Under U.S. GAAP, the amounts funded should be presented as other
long-term assets and the amounts of the liability should be
presented as long-term liabilities.
(4) Proportionate consolidation:
Under Israeli GAAP, jointly controlled entities are included in the
Company's Consolidated Financial Statements according to the
proportionate consolidation method.
Under U.S. GAAP, investments in jointly controlled entities are
accounted for by the equity method. Proportionate consolidation,
however, is permitted by the Securities and Exchange Commission
("SEC") rules applicable to foreign private issuers.
Summarized financial information about the effect of balances
included under proportionate consolidation is included in B6b below.
56
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
A. Details of differences (cont'd)
(5) Deferred taxes on income:
Under Israeli GAAP the Company does not provide for deferred income
taxes on differences between the financial reporting and income tax
basis of fixed assets, for which the depreciation period is longer
than 20 years, arising from adjustments for changes in the Israeli
CPI. Under SFAS No. 109 - "Accounting for Income Taxes" ("SFAS
109"), a provision for income taxes is required to be made for all
assets and liabilities that have a different basis for financial
reporting and for income tax purposes.
(6) Gains on disposal of building.
Under Israeli GAAP, the Company recognized profits in the year 1994
on the sale of an undivided 50% interest in a building for NIS 50.6
million. After the sale, the Company records its 50% interest in the
profits of the property and records depreciation expense on the 50%
of the property retained.
However, because the Company continues to lease a portion of the
building, recognition of the sale and accompanying gain is not
permitted under U.S. GAAP (SFAS 98). Instead, the Company is
required to recognize this as a financing transaction. Accordingly,
the NIS 50.6 million received would be recorded as debt and the
asset which was legally sold would continue to be reflected on the
balance sheet. In periods after the sale, the Company would record
100% of the rental income on the property, depreciation expense on
the full cost of the property and imputed interest on the NIS 50.6
million. This accounting method effectively defers and amortizes the
gain on the transaction over the life of the project.
For purposes of the U.S. GAAP reconciliation, the Company has
applied the financing method by reversing the NIS 20 million gain
recognized for Israeli GAAP purposes, recognizing this amount as a
liability and is amortizing this gain over the depreciable life of
the property (50 years). The Company has determined that other
differences between Israeli GAAP and U.S. GAAP with respect to this
transaction are not material.
(7) Classification of gains (losses) on disposal of fixed assets.
Israeli practice is not to classify gains (losses) on disposal of
fixed assets as a cost of operations whereas they are considered to
be a cost of operations under U.S. GAAP. For the amount of such
gains (losses) see Note 21.
(8) Dividends:
In accordance with Israeli GAAP, dividends declared subsequent to
the balance sheet date are reflected in the balance sheet as
compared to U.S GAAP, which requires that dividends be recorded in
the period declared.
57
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
A. Details of differences (cont'd)
(9) Earnings per share:
In February 1997 the FASB issued SFAS 128 Earnings per share. SFAS
128 specifies modifications to the calculations of earnings per
share from that currently used by the Company. Under SFAS 128 basic
earnings per share will be calculated based upon the weighted
average number of Ordinary Shares actually outstanding, and diluted
earnings per share will be calculated based upon the weighted
average number of Ordinary Shares and other convertible securities
outstanding.
SFAS 128 was adopted in 1997. See Note 30B(3) below.
According to Israeli GAAP the dilutive effect of convertible
securities is included in the computation of basic earnings for
share if their exercise is considered to be probable, based on the
ordinary relationship between the market price of the shares
issuable upon the conversion and the discounted present value of the
future proceeds derived from the exercise of the convertible
securities.
(10) Other recent accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of
hedge transaction.
B. The effect of the differences between Israeli GAAP and U.S. GAAP on
the above mentioned items on the Consolidated Financial Statements
is as follows
(1) On the statement of income:
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
----------------------------------------
Net earnings as reported under
Israeli GAAP 119,317 121,573 127,019
Deferred income on disposal of
building (277) 399 398
Compensation expense in respect of
stock options granted to employees (1,012) (783) (709)
Deferred taxes 1,083 715 808
-------- -------- --------
Net earnings under U.S. GAAP 119,111 121,904 127,516
======== ======== ========
58
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
B. The effect of the differences between Israeli GAAP and U.S. GAAP on the
above mentioned items on the Consolidated Financial Statements is as
follows
(2) Number of shares used for the computation of earnings per share:
Year ended December 31
------------------------------------------
1996 1997 1998
----------- ----------- -----------
Under U.S. GAAP: Primary 174,052,310 182,792,940 208,962,100
=========== =========== ===========
Diluted 175,107,280 184,364,040 209,975,290
=========== =========== ===========
The difference between the number of shares for the purpose of calculation
of primary earnings per share and diluted earnings per share result from
exercise of employee stock options.
(3) On earnings per share:
Year ended December 31
-----------------------------------------
1996 1997 1998
--------- --------- ----------
NIS
-----------------------------------------
Primary and diluted earnings per share:
As reported under Israeli GAAP 0.67 0.66 0.60
========= ========= =========
As per U.S. GAAP 0.68 0.66 0.61
========= ========= =========
(4) On balance sheet items:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
------------------------------------------ ------------------------------------------
As reported Adjustments As per As reported Adjustments As per
under U.S. GAAP under U.S. GAAP
Israeli Israeli
GAAP GAAP
----------- ----------- --------- ----------- ----------- ---------
Adjusted NIS (thousands)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred expenses
and other assets 81,413 34,973 116,386 61,527 35,224 96,751
Total assets 3,010,257 34,973 3,045,230 3,111,700 35,224 3,146,924
Deferred tax
liability 29,762 5,428 35,190 33,167 4,783 37,950
Accrued employee
severance benefits 5,146 34,973 40,119 5,081 35,224 40,305
Deferred income -- 18,720 18,720 -- 18,322 18,322
Retained earnings 1,065,190 (27,791) 1,037,399 1,157,063 (27,295) 1,129,768
Capital reserves 421,683 3,643 425,326 430,515 4,190 434,705
Total liabilities
and shareholders'
equity 3,010,257 34,973 3,045,230 3,111,700 35,224 3,146,924
</TABLE>
59
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
B. The effect of the differences between Israeli GAAP and U.S. GAAP on
the above mentioned items on the Consolidated Financial Statements
is as follows:(cont'd)
(5) Statement of cash flows:
Cash paid for interest and income tax was as follows:
Year ended December 31
-----------------------------------------
1996 1997 1998
--------- --------- ----------
Adjusted NIS (thousands)
-----------------------------------------
Interest 15,258 18,979 21,690
========= ========= =========
Income tax 93,025 88,853 82,089
========= ========= =========
(6) Additional disclosure required by U.S. GAAP
a. Deferred taxes, net
Year ended December 31
----------------------------------------
1996 1997 1998
--------- --------- ---------
Adjusted NIS (thousands)
----------------------------------------
Balance, as reported (21,417) (12,440) (21,074)
Depreciable fixed assets (13,349) (12,777) (12,086)
Stock options granted to employees 569 811 904
Deferred income on disposal of
buildings 6,677 6,538 6,399
Net operating losses carried
forward 13,112 140 549
Losses from marketable securities
carried forward not allowable as
an expense against other income 1,736 373 544
Valuation allowance (14,848) (513) (1,093)
--------- --------- ---------
Balance, after adjustment (27,520) (17,868) (25,857)
========= ========= =========
b. Proportionate consolidation
December 31, 1998
-------------------------------------------
As reported
under Effect of As in
Israeli proportionate equity
GAAP consolidation basis
----------- ------------- ---------
Adjusted NIS (thousands)
-------------------------------------------
Balance sheet
Current assets 1,182,484 (1,463) 1,181,021
Investments and loans 80,430 36,744 117,174
Non-current assets 1,848,786 (110,670) 1,738,116
Current liabilities 862,952 (7,744) 855,208
Non-current liabilities 438,952 (67,645) 371,307
60
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
B. The effect of the differences between Israeli GAAP and U.S. GAAP on
the above mentioned items on the Consolidated Financial Statements
is as follows:(cont'd)
(6) Additional disclosure required by U.S. GAAP (cont'd)
b. Proportionate consolidation (cont'd)
Year ended December 31, 1998
------------------------------------------
As reported
under Effect of As in
Israeli proportionate equity
GAAP consolidation basis
----------- ------------- --------
Adjusted NIS (thousands)
------------------------------------------
Statement of income
Revenues 5,135,051 (15,813) 5,119,238
Operating profit 164,127 (5,644) 158,483
Statement of cash flows
Net cash provided by operating
activities 219,339 (7,310) 212,029
Net cash provided by investing
activities (99,052) 624 (98,428)
Net cash provided by financing
activities (97,364) 6,295 (91,069)
61
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
B. The effect of the differences between Israeli GAAP and U.S. GAAP on
the above mentioned items on the Consolidated Financial Statements
is as follows:(cont'd)
(6) Additional disclosure required by U.S. GAAP (cont'd)
b. Proportionate consolidation (cont'd)
December 31, 1997
------------------------------------------
As reported
under Effect of As in
Israeli proportionate equity
GAAP consolidation basis
----------- ------------- ---------
Adjusted NIS (thousands)
------------------------------------------
Balance sheet
Current assets 1,189,296 (1,480) 1,187,816
Investments and loans 111,453 33,502 144,955
Non-current assets 1,709,508 (113,838) 1,595,670
Current liabilities 847,641 (7,943) 839,698
Non-current liabilities 453,594 (73,874) 379,720
Year ended December 31, 1997
------------------------------------------
As reported
under Effect of As in
Israeli proportionate equity
GAAP consolidation basis
----------- ------------- --------
Adjusted NIS (thousands)
------------------------------------------
Statement of income
Revenues 4,942,873 (15,552) 4,927,321
Operating profit 196,645 (7,909) 188,736
Statement of cash flows
Net cash provided by operating
activities 190,954 (6,938) 184,016
Net cash provided by investing
activities (721,974) 13,108 (708,866)
Net cash provided by financing
activities 525,968 (6,116) 519,852
62
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
b. Proportionate consolidation
Year ended December 31, 1996
------------------------------------------
As reported
under Effect of As in
Israeli proportionate equity
GAAP consolidation basis
----------- ------------- --------
Adjusted NIS (thousands)
------------------------------------------
Statement of income
Revenues 4,036,250 (15,962) 4,020,288
Operating profit 184,006 (7,981) 176,025
Statement of cash flows
Net cash provided by operating
activities 143,551 (4,754) 138,797
Net cash provided by investing
activities (233,104) 474 (232,630)
Net cash provided by financing
activities 101,163 7,633 108,796
c. Additional disclosures required by SFAS 123
Year ended December 31
-----------------------------------------
1996 1997 1998
--------- --------- ----------
Adjusted NIS (thousands)
-----------------------------------------
(i) Compensation cost
recognized for stock
options to employees 1,218 1,869 4,120
========= ========= =========
(ii) Net earnings 117,893 120,035 123,396
========= ========= =========
(iii) Earnings per share NIS NIS NIS
--------- --------- ---------
- Primary and Diluted 0.67 0.65 0.59
========= ========= =========
<TABLE>
<CAPTION>
December 31 December 31
1997 1998
----------- -----------
<S> <C> <C>
(iv) Options outstanding
Number of shares 4,727,000 4,234,496
Weighted average exercise price for one share (in NIS) 8.94 9.53
Weighted average remaining contractual life in years 4.68 3.61
(v) Options currently exercisable
Number of shares 696,000 1,301,829
Weighted average exercise price for one share (in NIS) 5.75 5.89
</TABLE>
63
<PAGE>
Notes to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Note 30 - Differences between Israeli GAAP and U.S. GAAP (cont'd)
C. Additional disclosures required by SFAS 123
December 31 December 31
1997 1998
----------- -----------
(vi) Number of options outstanding at beginning
of year 6,367,754 5,150,206
Options issued -- 465,300
Options converted to shares (1,217,548) (648,706)
Cancelled and forfeited options -- (267,004)
----------- -----------
Number of options outstanding at year end 5,150,206 4,699,796
=========== ===========
64
<PAGE>
Schedule A to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
List Of Investee Companies
Percentages of equity and control based on the holdings of the Company and its
subsidiaries
Ownership Control
--------- -------
% %
--------- -------
Subsidiaries
Katif B.M 100 100
Hanetz - Exporters and Importers Ltd. 100 100
Near East Trust Company Ltd. 88 99
Hyper - Kol B.M 100 100
Hevrat Hanechasim Shel Supersol B.M 100 100
Tinshemet Hevra Lehashkaot B.M 100 100
Orvani Hevra Lehashkaot B.M 100 100
Gidron Taassiot B.M 100 100
Super-Sol Pituah Vehashkaot (1983) B.M 100 100
Tozereth Hevrah Leaspaka Veshivuk B.M 100 100
Livnit B.M 100 100
Hyper Reshet Hagal Hayarok B.M 100 100
Katif Ibud Tozereth Haklait (1989) B.M 100 100
Super-Sol - Bailsol Hashkaot B.M 50 51
Hyperneto (Retail chain Ltd.) (Previously
Super Office Ltd.)* 100 100
Super Sol Magyarorszag Kft 100 100
Retail Chains Hungary Keresekedelmi Kft.* 100 100
Proportionately Consolidated Investees
Israel Kanyonim Ltd. 50 50
Merkaz Hakirya (Ashdod 1995) Ltd. 50 50
Affiliated Companies
Avnat B.M 46.9 46.9
Bay Heart Ltd. 37 37
* In voluntary liquidation
65
<PAGE>
Schedule B to the Consolidated Financial Statements
as at December 31, 1998 Super-Sol Ltd.
- - --------------------------------------------------------------------------------
Details Of Investments In Affiliates And Summary Of Their Financial Statements
As at December 31, 1998 and for the year ended on that date
Adjusted New Israeli Shokels as of December 1998
Bay Heart Avnat
Limited B.M.
-------- -----
Percentage ownership of share capital. 37% 46.9%
======= =======
(NIS thousands)
----------------------
Investment in these companies:
Share Capital and retained earnings 22,192 8,812
Loans 1,584 3,482
Unlinked capital notes -- 2,914
------- -------
23,776 15,208
======= =======
Guarantees granted 26,925 --
======= =======
Summary of financial statements:
Current assets 3,357 1,265
Investments, loans and long-term balances 616 --
Fixed assets 225,224 146,378
Other assets and deferred expenses -- 1,486
------- -------
229,597 149,129
======= =======
Current liabilities 13,740 28,485
Long-term liabilities 155,879 100,104
Shareholders' equity 59,978 20,540
------- -------
229,597 149,129
======= =======
Net earnings (loss) for the year 6,171 (1,791)
======= =======
66
<PAGE>
Tambour Limited and Subsidiaries
Financial Statements
December 31, 1998
<PAGE>
Contents
Page
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 64
<PAGE>
Tirat HaCarmel, March 8, 1999
Report of Independent Public Accountants
Tambour Limited
We have audited the accompanying balance sheets of Tambour Ltd. (the Company) as
at December 31, 1998 and 1997 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, for each of the three years,
the last of which ended December 31, 1998. 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, whose assets
constitute 10.5% of the total consolidated assets as at December 31, 1997, and
whose revenues constitute 7.5% and 12.4% 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
resulting 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. 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 reasonable basis
for our opinion.
The above mentioned financial statements were prepared on the basis of the
historical cost convention, 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 of the Company in nominal
historical values, on the basis of which its adjusted financial statements were
prepared, is presented in Note 21.
<PAGE>
In our opinion, based on our audits and on the reports of the above mentioned
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company and the
consolidated financial position of the Company and its subsidiaries as at
December 31, 1998 and 1997 and the results of operations, changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 1998, in conformity with generally accepted
accounting principles. 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
nominal/historical net income and shareholders' equity to the extent summarized
in Note 22 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 1998
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Note NIS thousands NIS thousands
---- ------------- -------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 24,424 34,117
Marketable securities 3 9,988 57,333
Accounts receivable - trade 4A 201,990 203,248
Other receivables 4B 28,251 28,658
Bank deposits 5A 18,300 18,673
Inventories 6 110,276 114,350
------------- -------------
393,229 456,379
------------- -------------
Investments and long-term assets
Affiliated companies 7B 17,628 34,328
Bank deposits and other receivables 5B 3,184 3,851
Deferred taxes, net 17C 280 289
------------- -------------
21,092 38,468
------------- -------------
Property, plant and equipment 8
Cost 591,925 574,794
Less: Accumulated depreciation 376,715 355,299
------------- -------------
215,210 219,495
------------- -------------
Intangible assets and deferred charges 9 539 1,633
------------- -------------
630,070 715,975
============= =============
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
2
<PAGE>
Tambour Limited and Subsidiaries
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Note NIS thousands NIS thousands
---- ------------- -------------
Current liabilities
<S> <C> <C> <C>
Bank credits and others 10 52,398 28,671
Accounts payable - trade 11A 46,338 42,845
Other accounts payable 11B 47,166 55,103
Dividend declared -- 48,708
------------- -------------
145,902 175,327
------------- -------------
Long-term liabilities
Long-term debt 12A 45,992 3,837
Liability regarding termination of
employee-employer relationship, net 13 3,765 8,698
Deferred taxes, net 17C 8,109 8,159
------------- -------------
57,866 20,694
------------- -------------
Minority interest 36,175 40,355
------------- -------------
Liens, guarantees contingencies and commitments 15
Shareholders' equity
Share capital 14 105,697 105,697
Paid-in capital 248,464 248,464
Retained earnings 40,382 126,640
------------- -------------
394,543 480,801
Less: Company shares held by subsidiaries 4,416 1,202
------------- -------------
390,127 479,599
------------- -------------
630,070 715,975
============= =======
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
3
<PAGE>
Tambour Limited and Subsidiaries
Consolidated Statements of Income for the Year Ended December 31,
- - --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1998
<TABLE>
<CAPTION>
1998 * 1997 * 1996
------------- ------------- -------------
Note NIS thousands NIS thousands NIS thousands
---- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue from sales 19A 620,508 676,333 680,626
Cost of sales 19B 397,081 438,474 444,098
------------- ------------- -------------
Gross profit 223,427 237,859 236,528
------------- ------------- -------------
Selling and marketing expenses 19C 132,376 137,956 120,289
General and administrative expenses 19D 50,357 53,545 47,121
------------- ------------- -------------
182,733 191,501 167,410
------------- ------------- -------------
Operating income 40,694 46,358 69,118
Finance expenses, net 19E (9,297) (724) (5,592)
Other income (expenses), net 19F 4,773 (873) 1,292
------------- ------------- -------------
Income before income taxes 36,170 44,761 64,818
Income taxes 17E 13,634 15,285 25,490
------------- ------------- -------------
Net income after income taxes 22,536 29,476 39,328
Equity in income (losses) of
affiliated companies, net (4,366) 832 33
Minority interest in subsidiaries' losses (income) 655 (1,700) (2,233)
------------- ------------- -------------
Net income from continuing operations 18,825 28,608 37,128
Income (Loss) from discontinued operations, net 19G (1,748) 5,731 1,842
------------- ------------- -------------
Net income for the year 17,077 34,339 38,970
============= ============= =============
Earnings per NIS 1 par value of shares -
in NIS: 16
Continuing operations 0.31 0.48 0.61
============= ============= =============
Discontinued operations (0.03) 0.09 0.03
============= ============= =============
Net income 0.28 0.57 0.64
============= ============= =============
</TABLE>
* Reclassified - Also see Note 2V.
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 1998
<TABLE>
<CAPTION>
Company
shares held
Share Retained by
Capital Premium earnings subsidiaries Total
------- ------- -------- ------------ --------
NIS thousands
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as at
December 31, 1995 105,697 248,464 227,202 -- 581,363
Changes during1996:
Net income -- -- 38,970 -- 38,970
Dividend * -- -- (105,106) -- (105,106)
Company shares
acquired by subsidiary -- -- -- (1,202) (1,202)
Balance as at
------- ------- -------- ------ --------
December 31, 1996 105,697 248,464 161,066 (1,202) 514,025
Changes during1997:
Net income -- -- 34,339 -- 34,339
Dividend** -- -- (68,765) -- (68,765)
------- ------- -------- ------ --------
Balance as at
December 31, 1997 105,697 248,464 126,640 (1,202) 479,599
Changes during 1998
Net income -- -- 17,077 -- 17,077
Dividend -- -- (103,335) -- (103,335)
Company shares
acquired by subsidiaries -- -- -- (3,214) (3,214)
------- ------- -------- ------ --------
Balance as at
December 31, 1998 105,697 248,464 40,382 (4,416) 390,127
======= ======= ======== ====== ========
</TABLE>
* Including dividend declared of NIS 58,106 thousand.
** Including dividend declared of NIS 48,708 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 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income for the year 17,077 34,339 38,970
Reconciliation of net income to net cash provided by
operating activities (a) 24,501 6,952 64,948
------------- ------------- -------------
Net cash provided by operating activities 41,578 41,291 103,918
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of shares in an affiliated company that
became a subsidiary (b) -- -- (683)
Acquisition of shares of newly-consolidated subsidiary (c) -- -- (51,382)
Additions to property, plant and equipment (31,080) (37,685) (46,315)
Proceeds from sale of property, plant and equipment 3,630 2,108 3,564
Sale of marketable securities, net 48,576 6,526 19,103
Investments in affiliated companies and others -- (6,632) (260)
Proceeds (Payment) from sale of affiliate 17,705 (147) --
Loans to affiliated companies (3,000) -- (7,761)
Collection of loans to affiliated companies 1,549 -- 462
Proceeds (Expenses) from sale of operations of a subsidiary (3,439) 46,313 --
Long-term bank deposits and other long-term receivables 19,444 5,202 88,895
Long-term bank deposits and long-term debt -- -- (21,772)
Acquisition of shares of subsidiary (2,005) (8,046) (812)
Investment in intangible assets and deferred charges -- -- (269)
Short-term bank deposits, net (17,648) -- --
------------- ------------- -------------
Net cash provided by (used in) investment activities 33,732 7,639 (17,230)
------------- ------------- -------------
Cash flows from financing activities:
Dividend distributed (152,043) (78,163) (47,000)
Dividend to minority interest in subsidiaries (698) (774) (10,887)
Increase (Decrease) in short-term bank credits, net (17,965) 357 7,470
Additions to long-term debt 129,137 1,341 2,162
Repayment of long-term debt (40,321) (4,275) (5,368)
Acquisition of company shares by subsidiaries (3,214) -- (1,202)
Proceeds from redemption of debentures in subsidiaries 101 75 77
Premium from the minority interest -- 66 --
------------- ------------- -------------
Net cash used in financing activities (85,003) (81,373) (54,748)
------------- ------------- -------------
Increase (Decrease) in cash and cash equivalents (9,693) (32,443) 31,940
Balance of cash and cash equivalents
at beginning of year 34,117 66,560 34,620
------------- ------------- -------------
Balance of cash and cash equivalents at end of year 24,424 34,117 66,560
============= ============= =============
</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 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
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 29,845 33,278 37,429
Deferred taxes, net (387) 3,278 12,296
Increase in liability regarding termination of
employee - employer relationship, net 154 1,330 378
Minority interest in earnings (losses) of subsidiaries (854) 8,184 3,489
Equity in losses (earnings) of affiliated companies, net 4,366 (832) (33)
Loss (Income) from sale of discontinued operations and
from sale of operation to affiliate 3,911 (11,111) --
Loss (Gain) on sale of affiliates (3,978) 2 239
Capital gains, net (300) (1,328) (1,057)
Erosion of loans and long-term debt, net (5,145) (190) (1,095)
Increase in value of marketable securities (1,231) (3,241) (178)
Increase in value of bank deposits (913) (1,155) (2,084)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable - trade 862 (23,644) 4,915
(Increase) Decrease in other receivables 824 (767) (873)
(Increase) Decrease in inventories 1,606 (1,986) 22,456
Increase (Decrease) in accounts payable - trade 3,373 1,016 (13,450)
Increase (Decrease) in other accounts payable (7,632) 4,118 2,516
------------- ------------- -------------
24,501 6,952 64,948
============= ============= =============
(b) Acquisition of shares in an affiliate
that became a subsidiary *:
Assets and liabilities of Chemitas (1998) Ltd. as at the
date of acquisition (net of cash):
Working capital (net of cash) 4,722
Fixed assets, net 1,936
Deferred taxes 39
Goodwill created on acquisition 52
Minority interest at date of acquisition (2,899)
-------------
3,850
Investment on equity basis as at date of becoming
a subsidiary (3,167)
-------------
683
=============
</TABLE>
* See note 7H.
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 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
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) 38,383
Fixed assets, net 23,294
Intangible assets, net 1,154
Long term liabilities (7,977)
Goodwill at date of acquisition 17,149
Minority interest at date of acquisition (20,621)
-------------
51,382
-------------
** See Note 19F
(d) Significant non-cash transactions:
Long-term receivables on sale of fixed assets -- 723 --
============= ============= =============
Fixed assets acquired on credit terms 1,740 1,721 1,271
============= ============= =============
Minority interest in dividend declared by subsidiaries 517 -- --
============= ============= =============
Dividend declared -- 48,708 57,903
============= ============= =============
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
8
<PAGE>
Balance Sheets as at December 31,
- - --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1998
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Note NIS thousands NIS thousands
---- ------------- -------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 8,581 6,574
Marketable securities 3 9,364 53,413
Accounts receivable - trade 4A 119,332 108,160
Other receivables 4B 44,621 45,854
Bank deposits 5A -- 18,673
Inventories 6 81,752 87,789
------------- -------------
263,650 320,463
------------- -------------
Investments and long-term assets
Subsidiaries and affiliates 7 113,651 130,134
Bank deposits and other receivables 5B 2,565 2,824
------------- -------------
116,216 132,958
------------- -------------
Property, plant and equipment 8
Cost 447,774 434,838
Less: Accumulated depreciation 302,028 285,026
------------- -------------
145,746 149,812
------------- -------------
Intangible assets and deferred charges 9 120 160
------------- -------------
525,732 603,393
============= =============
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
9
<PAGE>
Tambour Limited
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Note NIS thousands NIS thousands
---- ------------- -------------
<S> <C> <C> <C>
Current liabilities
Bank credits 10 46,224 17,548
Accounts payable - trade 11A 22,227 18,595
Other accounts payable 11B 24,267 31,690
Dividend declared -- 48,880
------------- -------------
92,718 116,713
------------- -------------
Long-term liabilities
Long-term debt 12A 37,086 --
Liability regarding termination of
employee - employer relationship, net 13 2,506 2,729
Capital notes issued to subsidiaries 12C 485 2,243
Deferred taxes, net 17C 2,810 2,109
------------- -------------
42,887 7,081
------------- -------------
Liens, guarantees, contingencies and commitments 15
Shareholders' equity
Share capital 14 105,697 105,697
Paid-in capital 248,464 248,464
Retained earnings 40,382 126,640
------------- -------------
394,543 480,801
Less: Company shares held by subsidiaries 4,416 1,202
------------- -------------
390,127 479,599
------------- -------------
525,732 603,393
============= =============
</TABLE>
The accompanying notes and appendix are an integral part of the financial
statements.
10
<PAGE>
Tambour Limited
Statements of Income for the Year Ended December 31,
- - --------------------------------------------------------------------------------
Adjusted to New Israel Shekels of December 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
Note NIS thousands NIS thousands NIS thousands
---- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue from sales 19A 461,357 478,367 484,756
Cost of sales 19B 286,092 * 301,578 * 309,022
------------- ------------- -------------
Gross profit 175,265 176,789 175,734
------------- ------------- -------------
Selling and marketing expenses 19C 104,298 * 99,677 * 86,435
General and administrative expenses 19D 35,258 * 37,185 * 32,422
------------- ------------- -------------
139,556 136,862 118,857
------------- ------------- -------------
Operating income 35,709 39,927 56,877
Finance income (expense), net 19E (5,311) * 3,449 *(2,347)
Other income, net 19F 7,660 2,190 3,260
------------- ------------- -------------
Income before income taxes 38,058 45,566 57,790
Income taxes 17E 14,024 14,385 21,683
------------- ------------- -------------
Net income after income taxes 24,034 31,181 36,107
Equity in earnings (losses) of subsidiaries
and affiliates, net (6,957) 3,158 2,863
------------- ------------- -------------
Net income for the year 17,077 34,339 38,970
============= ============= =============
Earnings per NIS 1 par value of shares -
in NIS: 16 0.28 0.57 0.64
============= ============= =============
</TABLE>
* Reclassified.
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 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income for the year 17,077 34,339 38,970
Reconciliation of net income to net cash
provided by operating activities (a) 6,615 (3,385) 41,436
------------- ------------- -------------
Net cash provided by operating activities 23,692 30,954 80,406
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (18,206) (23,896) (31,401)
Proceeds from sale of property, plant and equipment 1,182 719 1,411
Sale of marketable securities, net 45,063 10,388 7,883
Investments in affiliates and subsidiaries (25) *(351) (58,510)
Proceeds from sale of affiliate 17,705 -- 23,818
Loans to affiliates and subsidiaries (3,613) (5,113) (10,358)
Long-term bank deposit and other long-term receivables -- -- (21,772)
Collection of loans to affiliates and subsidiaries 1,549 211 959
Investment in capital notes of affiliates and subsidiaries (1,980) *(8,048) (24,877)
Long-term bank deposits and long-term debt 19,342 4,954 88,742
Dividends received from affiliates and subsidiaries 15,433 992 15,538
Acquisition of investment from subsidiary (14,542) -- --
Investment in intangible assets -- -- (252)
------------- ------------- -------------
Net cash provided by (used in) investment activities 61,908 (20,144) (8,819)
------------- ------------- -------------
Cash flows from financing activities:
Dividend distributed (152,582) (78,239) (47,000)
Increase (Decrease) in short-term bank credits, net (16,975) 17,436 (43)
Repayment of capital notes (1,710) -- --
Additions to long-term debt 122,685 -- --
Repayment of long-term debt (35,011) -- --
------------- ------------- -------------
Net cash used in financing activities (83,593) (60,803) (47,043)
------------- ------------- -------------
Increase (Decrease) in cash and cash equivalents 2,007 (49,993) 24,544
Balance of cash and cash equivalents
at beginning of year 6,574 56,567 32,023
------------- ------------- -------------
Balance of cash and cash equivalents at end of year 8,581 6,574 56,567
============= ============= =============
</TABLE>
* Reclassified.
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 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
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 20,739 20,900 24,710
Deferred taxes, net 256 1,999 10,626
Increase (Decrease) in liability regarding termination
of employee -employer relationship, net (223) 986 247
Equity in (earnings) losses of subsidiaries
and affiliates, net 6,957 (3,158) (2,863)
Loss (Gain) on sale of subsidiaries and affiliates (3,978) -- 239
Capital gains, net (627) (437) (845)
Erosion of loans and long-term debt, net (4,862) (290) (566)
Increase in value of marketable securities (1,014) (3,182) (758)
Increase in value of bank deposits (261) (1,155) (2,084)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable - trade (11,172) (16,990) 1,365
(Increase) Decrease in other receivables (2,464) (5,496) 3,125
(Increase) Decrease in inventories 6,037 (7,520) 18,505
Increase (Decrease) in accounts payable - trade 3,282 6,106 (9,599)
Increase (Decrease) in other accounts payable (6,055) 4,852 (666)
------------- ------------- -------------
6,615 (3,385) 41,436
============= ============= =============
(b) Significant non - cash transactions:
Dividend declared -- 48,880 58,106
============= ============= =============
Fixed assets acquired on credit terms 650 1,668 1,143
============= ============= =============
Conversion of short-term loan to subsidiary into long-term 7,307 -- --
============= ============= =============
</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, 1998
- - --------------------------------------------------------------------------------
Note 1 - General
A. 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
wastes, industrial oils, the treatment of metals, production of
adhesives, sealants and emulsions, polymers and additives for the
construction industry as well as printing inks.
B. Uncertainty due to the year 2000 ("Y2K") issue.
The Y2K issue arises because many computerized systems use two
digits, rather than four, to identify a year. Date-sensitive systems
may recognize the year 2000 as 1900 or some other date, resulting in
errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use the
digits "99" to represent something other than a date. The effects of
the Y2K issue may be experienced before, on, or after January 1,
2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems
failure, which could affect an entity's ability to conduct normal
business operations. It is not possible to ensure that all aspects
of the year 2000 issue affecting the company, including those
relating to the remediation efforts by customers, suppliers or other
outside parties will be resolved in full.
Note 2 - Reporting Principles 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 subsidiary, including
partnership which is included directly or indirectly, in the
Company's financial statements on the equity basis.
(3) Related parties - As defined in Opinion No. 29 of the
Institute of Certified Public Accountants in Israel.
(4) Interested parties - As defined in paragraph 1(1) of the
Securities Law.
(5) Index or CPI - The consumer price index published by the
Central Bureau of Statistics.
14
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
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 terms "cost" and
"equity" signify adjusted cost and adjusted equity.
(4) All comparative figures (including monetary items) are
adjusted to the index of the end of the current year.
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
their 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 have been adjusted
according to the changes in the Consumer Price Index as
follows:
One. 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.
Two. 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.
15
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
C. Principles of adjustment (cont'd)
(2) Statements of Income (cont'd)
Three. The equity in the operating results of affiliated
companies and the minority interest of subsidiaries'
operating results, have been determined based on the
adjusted financial statements of the respective
companies.
Four. Finance income (expense), net, represents finance income
and expense in real terms, erosion of monetary items
during the year, gains and increase in value of
marketable securities as well as gains and losses from
financial instruments.
Five. Income taxes - Current taxes consist of advance payments
made during the year and amounts due at balance sheet
date (or net of amounts to be refunded as of 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 refundable) are not adjusted.
Therefore, the current taxes include the expense
resulting from the erosion in value of the advance
payments of income taxes from payment date to the
balance sheet date. Deferred taxes - see Notes 2K and
17C
(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 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 statements 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.
16
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
D. Consolidation of the financial statements (cont'd)
(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 1996 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 and affiliates
(1) Investments 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 were taken into consideration if redemption or
conversion was considered probable. No such losses have been
included in these financial statements since the redemption or
conversion of these securities was not considered probable.
(3) Income from sales not yet realized outside the group have been
eliminated.
(4) Amortization of goodwill - see note 2D(4)
(5) Goodwill pertaining to an investment in an affiliate has been
amortized over 10 years. The amortization has been accelerated
to 5 years due to accumulated losses in the affiliate.
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.
17
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting principles and Accounting Policies (cont'd)
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 balance of open accounts receivable and, in small
part specifically for accounts which are, in management's 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 as of balance sheet date.
The changes in their value are included in the statement of income.
10th. 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:
%
-------
Buildings 4-10
Machinery and equipment 5-33
Motor vehicles 15-20
Computers 20-33
Office furniture and equipment 6-33
Leasehold improvements 6-33
(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 and included in the
statement of income.
(6) Land leased from The Israel Land Administration is amortized
over the period of the lease.
(7) Some property, plant and equipment has been reduced to
realizable value.
18
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
K. Deferred taxes
Companies in the group record deferred taxes for timing differences.
Timing differences are differences between the value of assets and
liability for income tax purposes and their value for financial
reporting purposes.
The amount deferred each year is computed according to the liability
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 adequate taxable income in future
years. In management's estimation, these deferred tax assets are
realizable in the future.
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:
One. 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.
Two. Investments in subsidiaries and affiliates, since the Company
intends to hold such investments and not sell them.
Three. Timing differences, net, for which a tax asset should be
created but the possibility of realization of the benefit is
in doubt.
Four. 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 years upon
commencement of their utilization over their anticipated
benefit period.
(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 were
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 economic value as at balance sheet date.
Note 2 - Reporting Principles and Accounting Principles (cont'd)
19
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
M. Convertible debentures - Subsidiary
Convertible debentures of a subsidiary were 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 was not considered probable were
reflected under long-term liabilities at the value of the liability
as at 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.
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
applicable for each balance.
Data on Consumer Price Indices and exchange rates:
<TABLE>
<CAPTION>
December 31, Percentage of change
------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
CPI in points 166.3 153.1 143.1 8.62 6.99 10.59
===== ===== ===== ==== ==== =====
U.S. dollar
exchange rate 4.16 3.536 3.251 17.65 8.77 3.70
===== ===== ===== ==== ==== =====
</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 they arose.
(3) Exchange rates and linkage differences arising 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 as they arise.
20
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
P. Financial Instruments
(1) The fair value of financial instruments (bank deposits,
long-term liabilities and the components of working capital)
is not materially different from their book value as at
balance sheet date. Financial instruments are presented at
book value as at 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.
R. Research and development expenses
Research and development costs are expensed as incurred.
S. Erosion of capital notes
The inflationary erosion of unlinked, non-interest bearing capital
notes 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. Upgrade of computer systems to the year 2000
Costs of upgrading the existing computer programs to make them year
2000 compatible are expensed as incurred. As to uncertainty arising
from this issue, see Note 1B.
21
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policies (cont'd)
V. 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. In addition, in
1998, Kedem sold its operations in the fertilization,
disinfestation and disinfection field (hereafter - Ecogan
operations) (See Note 7F(1)).
In accordance with generally accepted accounting principles,
the Statement of Income figures pertaining to discontinued
operations 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).
(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 - 41.14%) of the affiliated company that
will continue these operations. The results of these
operations are presented, as of November 1997, in "Equity in
income of affiliated companies, net" (see Note 7F(2)).
Note 3 - Marketable Securities
Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Shares -- 154 -- 154
Participation certificates
in mutual funds -- 10,091 -- 10,091
Debentures 9,792 *44,100 9,168 *40,180
Convertible debentures 196 *2,988 196 *2,988
------------ ------------ ------------ ------------
9,988 57,333 9,364 53,413
============ ============ ============ ============
</TABLE>
* Reclassified.
22
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 4 - Accounts Receivable - Trade and Others
Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
------------ ------------ ------------ ------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
A. Trade
Open accounts 158,563 148,458 97,170 84,142
Post-dated checks receivable 52,051 59,100 30,440 29,946
Income receivable 9,217 8,410 357 291
------------ ------------ ------------ ------------
219,831 215,968 127,967 114,379
Less: Allowance for
doubtful accounts 17,841 12,720 8,635 6,219
------------ ------------ ------------ ------------
201,990 203,248 119,332 108,160
============ ============ ============ ============
B. Others
Advance payments of income taxes
less provision 13,245 14,918 9,178 8,715
Advances to suppliers 790 1,184 161 163
Affiliates and subsidiaries -- 11 23,903 21,405
Government agencies 238 855 -- 508
Deferred taxes, net (I) 7,478 7,132 5,441 4,996
Employees 118 106 58 --
Prepaid expenses 2,280 2,336 1,273 992
Short-term loans to subsidiary (II) -- -- 1,000 7,882
Current maturities of other
long-term receivables 437 461 291 316
Other receivables 1,908 1,237 1,662 605
Accrued income 1,757 418 1,654 272
------------ ------------ ------------ ------------
28,251 28,658 44,621 45,854
============ ============ ============ ============
</TABLE>
(I) See Note 17C
(II) December 31, 1998 - Current maturities of loan to a subsidiary,
unlinked, at prime less 1% (December 31, 1997 - Loan to subsidiary,
unlinked, at prime less 1%)
23
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 5 - Bank Deposits and Other Receivables
Classification by linkage basis and interest rate:
<TABLE>
<CAPTION>
Annual
interest Consolidated The Company
rates as of --------------------------- -----------------------------
December 31 December 31, December 31, December 31, December 31,
1998 1998 1997 1998 1997
----------- ------------ ------------ ------------ ------------
% Adjusted NIS thousands Adjusted NIS thousands
----------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
A. Included in current assets
Short-term bank deposits:
Unlinked 10-13.1 4,297 -- -- --
Linked to the index 3-7 14,003 -- -- --
Current maturities of long-term
bank deposits -- 18,673 -- 18,673
------------ ------------ ------------ ------------
18,300 18,673 -- 18,673
============ ============ ============ ============
B. Included in investments
and long-term assets
Deposit in a commercial bank
linked to the index -- 9,612 -- 9,612
Deposit in a mortgage bank
linked to the index -- 9,061 -- 9,061
Other receivables linked to
the index 0 - 5.1 3,308 3,695 2,856 3,140
Other receivables linked to
the dollar 313 617 -- --
------------ ------------ ------------ ------------
3,621 22,985 2,856 21,813
Less - current maturities of
bank deposits -- (18,673) -- (18,673)
Current maturities of other
receivables (437) (461) (291) (316)
------------ ------------ ------------ ------------
3,184 3,851 2,565 2,824
============ ============ ============ ============
Maturity Dates:
Second year 725 979 310 600
Third year 428 754 326 312
Fourth year 759 429 657 327
Fifth year 359 446 359 343
Thereafter 913 1,243 913 1,242
------------ ------------ ------------ ------------
3,184 3,851 2,565 2,824
============ ============ ============ ============
</TABLE>
24
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 6 - Inventories
Consist of:
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Finished products 53,821 49,742 38,495 35,638
Work-in-process 8,444 10,231 8,387 10,182
Raw material and packing materials 44,395 51,394 31,806 39,455
In transit 3,616 2,983 3,064 2,514
------------ ------------ ------------ ------------
110,276 114,350 81,752 87,789
============ ============ ============ ============
</TABLE>
Note 7 - Subsidiaries and Affiliates
A. Subsidiaries
<TABLE>
<CAPTION>
The Company
----------------------------
December 31, December 31,
1998 1998
------------ ------------
Adjusted NIS thousands
----------------------------
<S> <C> <C>
Investment on equity basis, loans and capital notes
Balance of investments as at December 31, 1991 18,305 18,305
Additions, at cost 65,171 * 65,146
Dividend from subsidiaries (18,493) (16,887)
Share in accumulated income net since January 1, 1992 1,679 11,059
Erosion of capital notes 4,517 * 1,743
Affiliate that became a consolidated subsidiary 8,475 8,475
Reductions (23,818) (23,818)
Company shares held by subsidiaries (4,416) (1,202)
------------ ------------
Balance of investments at end of year 51,420 *62,821
Capital notes (I) 32,764 *33,606
Long-term loans and debit balances (see C below) 19,590 9,869
------------ ------------
103,774 106,296
============ ============
</TABLE>
(A) Unlinked, bearing no interest
* Reclassified
25
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 7 - Subsidiaries and Affiliates (cont'd)
B. Affiliates
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- -----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
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 11,885 11,885 872 872
Additions at cost (I) 28,222 28,222 12,739 12,739
Share in accumulated loss, net,
since 1.1.92 (I) (5,039) (578) 582 (733)
Reductions 4,611 281 4,159 (171)
------------ ------------ ------------ ------------
Balance at end of year 39,679 39,810 18,352 12,707
Less: affiliate that became a
subsidiary (25,088) (25,088) (8,475) (8,475)
------------ ------------ ------------ ------------
Balance at end of year 14,591 14,722 9,877 4,232
Long-term loans and debit
balances (see C below) 3,037 19,606 -- 19,606
------------ ------------ ------------ ------------
17,628 34,328 9,877 23,838
============ ============ ============ ============
</TABLE>
(A) Including partnerships.
C. Long-term loans and debit balances
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- -----------------------------
Linked to Linked to Linked to Linked to
index index index index
0% 14% 0% 5%
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Consolidated
Long-term loans and debit
balances (I) -- 3,037 12,813 6,793
============ ============ ============ ============
The Company
Long-term loans and debit
balances (I) 13,590 (II) 6,000 (I) 22,682 (I)6,793
============ ============ ============ ============
</TABLE>
(I) No due date
(II) Loans mature at semi-annual intervals through 2005.
Note 7 - Subsidiaries and Affiliates (cont'd)
26
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
D. Changes in Investments during the year
<TABLE>
<CAPTION>
The Company
------------------------------
December 31, December 31,
1998 1997
------------ ------------
Adjusted NIS thousands
------------------------------
<S> <C> <C>
1. Subsidiaries
Balance, beginning of year 106,296 92,800
Change during the year:
Investment in share capital 25 351
Long-term loans given 10,920 5,113
Investment in capital notes 1,980 8,048
Company shares acquired by subsidiaries (3,214) --
Share of profit (loss) (9,380) 1,308
Collection of long-term loans -- (211)
Dividends (1,606) (992)
Other changes (247) (121)
------------ ------------
104,774 106,296
Current maturities of long-term loans 1,000 --
------------ ------------
Balance, end of year 103,774 106,296
============ ============
</TABLE>
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
2. Affiliates
Balance, beginning of year 34,328 23,090 23,838 23,111
Changes during the year:
Investment in share capital -- 8,419 -- --
Long-term loans given 3,000 -- -- --
Reductions 4,330 147 4,330 --
Share of profit (loss) (4,461) 458 1,315 684
Collection of loans (19,606) -- (19,606) --
Other changes 37 2,214 -- 43
------------ ------------ ------------ ------------
Balance, end of year 17,628 34,328 9,877 23,838
============ ============ ============ ============
</TABLE>
Note 7 - Subsidiaries and Affiliates (cont'd)
27
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
E. Securities listed for trading
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- ----------------------
Market Carrying Market Carrying
Value Value Value Value
------- -------- ------- --------
Adjusted NIS thousands Adjusted NIS thousands
---------------------- ----------------------
<S> <C> <C> <C> <C>
Includes share of Subsidiaries
traded on the Tel-Aviv Stock Exchange 45,379 65,749 52,885 72,788
======= ======== ======= ========
</TABLE>
F.(1) An the end of 1998, a subsidiary, Kedem, sold its "Ecogan"
operations to Lego Irrigation Ltd (hereafter - Lego). According to
the sales agreement, Kedem agreed to manufacture its "Ecogan"
products for Lego through May 1999.
At the end of 1997, 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 be transferred to Lever Israel Ltd. of the
Unilever group (hereafter - Lever), for NIS 38 million.
Kedem's activities relating to the "Fantastik" products constituted
approximately 45% of Kedem's overall activities.
Details regarding the income from these discontinued operations -
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 would 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 15 million for the transfer of
operations and related assets (fixed assets and inventory) to the
new company. Upon conclusion of the agreement, Kedem held 49.9% and
the Unilever group 50.1% of the shares of Deverseylever. Details
regarding the results of the transaction - see Note 19F.
G. During the third quarter of 1998, the Company sold its holdings in
Ace - Kne Uvne to Clal Consumer Leasing Ltd for adjusted NIS 17,705
thousand, which resulted in a capital gain, net of tax, of adjusted
NIS 3,181 thousands.
H. In September 1998, the courts approved 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
there to, as follows: the Income Tax Authorities, the Controller of
Restrictive Trade Practices, and the Investment Center.
According to the agreement, the merger date was 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 ordinary 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 immaterial.
28
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 8 - Property, Plant and Equipment
A. Consist of:
Consolidated
<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,
1998 * 224,499 * 282,392 * 16,128 * 15,334 * 36,441 574,794
Additions during
the year 8,547 12,822 1,218 5,473 2,618 30,678
Reductions during
the year (57) (4,595) (29) (34) (8,582) (13,297)
Provision for decrease in
value -- (250) -- -- -- (4) (250)
------------- ----------- --------- ------------ ---------- ----------
Balance - December 31,
1998 232,989 (3) 290,369 17,317 20,773 30,477 591,925
============= =========== ========= ============ ========== ==========
Accumulated
depreciation and
amortization:
Balance - January 1,
1998 124,934 * 193,664 * 8,974 * 9,519 18,208 355,299
Additions during the year 5,851 15,399 2,199 1,702 4,415 29,566
Reductions during
the year (8) (2,256) (6) (11) (5,869) (8,150)
------------- ----------- --------- ------------ ---------- ----------
Balance - December 31,
1998 130,777 206,807 11,167 11,210 16,754 376,715
============= =========== ========= ============ ========== ==========
Depreciated balance:
December 31, 1998 (2) 102,212 83,562 6,150 9,563 13,723 215,210
============= =========== ========= ============ ========== ==========
Depreciated balance:
December 31, 1997 *(2) 99,565 * 88,728 * 7,154 *(1) 5,815 * 18,233 219,495
============= =========== ========= ============ ========== ==========
</TABLE>
(1) December 31, 1997 - includes advance payments of NIS 1,742 thousand.
(2) Includes depreciated balance of leasehold improvements in the amount
of NIS 6,081 thousand. (December 31, 1997 - NIS 4,103 thousand).
(3) Net of NIS 881 thousand investment grants received by a subsidiary.
To secure the fulfillment of the terms related to receiving the
grant, a lien in favor of the State of Israel was registered 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 refund the amount of the grant in addition to
interest from the date it was received.
(4) In a subsidiary, as a result of discontinued operations, see notes
7F(1) and 19G.
* Reclassified.
29
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 8 - Property, Plant and Equipment (cont'd)
A. Consist of (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 1,1998 184,109 214,025 10,018 11,003 15,683 434,838
Additions during the year 4,111 6,405 915 5,152 605 17,188
Reductions during the year -- (1,099) -- -- (3,153) (4,252)
----------- ----------- ---------- ---------- ---------- -----------
Balance - December 31, 1998 188,220 219,331 10,933 16,155 13,135 447,774
=========== =========== ========== ========== ========== ===========
Accumulated
depreciation and
amortization:
Balance - January 1,1998 111,711 153,552 5,816 6,459 7,488 285,026
Additions during the year 4,634 11,285 1,624 1,218 1,938 20,699
Reductions during the year -- (1,088) -- -- (2,609) (3,697)
----------- ----------- ---------- ---------- ---------- -----------
Balance - December 31, 1998 116,345 163,749 7,440 7,677 6,817 302,028
=========== =========== ========== ========== ========== ===========
Depreciated balance:
December 31, 1998 (2) 71,875 55,582 3,493 8,478 6,318 145,746
=========== =========== ========== ========== ========== ===========
Depreciated balance:
December 31, 1997 72,398 60,473 4,202 (1) 4,544 8,195 149,812
=========== =========== ========== ========== ========== ===========
</TABLE>
(1) December 31, 1997 - Includes advance payments of NIS 1,342 thousand.
(2) Including depreciated balance of leasehold improvements of NIS 2,031
thousand.
B. (1) Part of the land and buildings in the amount of NIS 345 thousand is
registered in the Land Registry Office in the name of a wholly-owned
subsidiary.
(2) NIS 1,383 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.
30
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 9 - Intangible Assets, net
Consists of:
Consolidated
<TABLE>
<CAPTION>
Reductions Amortized Balance
Transfer to pertaining to --------------------------
Accumulated investment realized December 31, December 31,
Cost Amortization in affiliates operations* 1998 1997
--------- ------------ ------------- ----------- ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
---------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Goodwill, net 16,369 1,192 2,686 12,076 415 1,435
Know-how production
and distribution rights 847 686 -- 41 120 167
Debentures issue cost 179 179 -- -- -- 18
Foundation costs 774 770 -- -- 4 13
--------- ------------ ------------- ----------- ------------ ------------
18,169 2,827 2,686 12,117 539 1,633
========= ============ ============= =========== ============ ============
</TABLE>
The Company
<TABLE>
<CAPTION>
Amortized Balance
---------------------------
Accumulated December 31, December 31,
Cost Amortization 1998 1997
-------- ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Distribution rights 252 132 120 160
======== ============ ============ ============
</TABLE>
* See Note 7F.
Note 10 - Bank Credits and Others
Balances classified by linkage basis and interest rate:
<TABLE>
<CAPTION>
Annual interest Consolidated The Company
rates as of --------------------------- ----------------------------
December 31, December 31, December 31, December 31, December 31,
1998 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
% Adjusted NIS thousands Adjusted NIS thousands
------------ --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Bank credit in Israeli
currency, unlinked 13.75 - 18 1,649 2,113 73 311
Short-term loans unlinked 13.9 - 14.5 3,894 2,444 500 --
Bank credit of foreign currency -- 1,714 -- --
Short-term bank loans,
linked to the index -- 17,237 -- 17,237
Current portion of long-term loans 46,855 1,693 45,651 --
Current portion of subsidiary's
convertible debentures -- 3,470 -- --
------------ ------------ ------------ ------------
52,398 28,671 46,224 17,548
============ ============ ============ ============
</TABLE>
31
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 11 - Accounts Payable - Trade and Others
<TABLE>
<CAPTION>
Consolidated The Company
----------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
A. Accounts payable -
trade and services
Open accounts 39,241 34,896 21,709 18,405
Checks payable 7,097 7,949 518 190
------------ ------------ ------------ ------------
46,338 42,845 22,227 18,595
============ ============ ============ ============
B. Others
Employees including provisions
for fringe benefits 20,743 24,280 13,267 16,434
Government institutions 6,442 5,819 5,022 3,259
Affiliated and subsidiary companies -- -- -- 2,284
Customer advances 677 4,270 415 3,259
Accruals and others 13,890 13,821 5,563 6,454
Liability regarding the termination of
employee - employer relationship, net (I) 5,414 -- -- --
Accruals for anticipated expenses in
connection with discontinued operations -- 6,913 -- --
------------ ------------ ------------ ------------
47,166 55,103 24,267 31,690
============ ============ ============ ============
</TABLE>
(I) December 31, 1998 - Liability of subsidiary (see Note 13B(7)) as well as
provision for severance pay to an interested party employed by the company
in the amount of NIS 1,950 thousand fully covered by deposits.
32
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 12 - Long-Term Liabilities
A. Long-term loans and capital notes *
1. Balances on linkage and interest rate basis
<TABLE>
<CAPTION>
Annual interest Consolidated The Company
rates as of ---------------------------- ------------------------------
December 31, December 31, December 31, December 31, December 31,
1998 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
% Adjusted NIS thousands Adjusted NIS thousands
------------ ---------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Unlinked Israeli currency debt (I) 10.8 - 14 59,926 1,006 59,000 --
Index-linked Israeli currency debt (II) 3.5 - 6.3 25,086 1,365 23,737 --
Debts in or linked to foreign currencies 5.47 - 7 7,744 1,887 -- --
Capital lease debt - index linked 7 - 7.2 91 1,272 -- --
------------ ------------ ------------ ------------
92,847 5,530 82,737 --
Less: current maturities 46,855 1,693 45,651 --
------------ ------------ ------------ ------------
45,992 3,837 37,086 --
============ ============ ============ ============
(I) Includes capital notes unlinked
bearing no interest, to minority in
the amount of 926 1,006 -- --
============ ============ ============ ============
(II) Includes loans linked to the index
from minority in the amount of 1,348 1,353 -- --
============ ============ ============ ============
</TABLE>
2. Balances by due dates
<TABLE>
<CAPTION>
Consolidated The Company
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
First year 46,855 1,693 45,651 --
Second year 7,264 533 6,181 --
Third year 7,005 423 6,181 --
Fourth year 6,956 181 6,181 --
Fifth year - thereafter 22,493 341 18,543 --
No due date 2,274 2,359 -- --
------------ ------------ ------------ ------------
92,847 5,530 82,737 --
============ ============ ============ ============
</TABLE>
* All liabilities, except capital lease debt, notes and loans from
minority interests in subsidiaries, are bank loans.
33
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 12 - Long-Term Liabilities (cont'd)
B. Convertible debentures of consolidated company
(1) Consists of:
<TABLE>
<CAPTION>
Consolidated
---------------------------------
Adjusted NIS thousands
---------------------------------
December 31, December 31,
------------ ------------
1998 1997
<S> <C> <C>
Convertible debentures of a subsidiary* -- 3,470
Less: Current maturities - Included in credit from others -- 3,470
------------ ------------
-- --
============ ============
*Market value of convertible debentures at their value
on the stock exchange -- 3,398
------------ ------------
</TABLE>
(2) The convertible debentures were issue 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,
principal and interest linked to the Consumer Price Index bore
interest at 2% per annum, and matured in 4 equal payments on
June 30 of each year from 1996 through and including 1998.
The debentures were convertible each business day until June
25, 1998, into ordinary shares of Kedem, registered by name,
NIS 1 par value each, according to a conversion of NIS 38 par
value debentures for each ordinary share of NIS 1 par value,
adjusted. Through June 30, 1998, NIS 357 thousand, debentures
par value had been converted to shares, and NIS 5,723 thousand
par value have been redeemed.
C. Capital notes issued to subsidiaries
are unlinked, bearing no interest.
34
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
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,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Provisions for severance pay 5,695 7,011 2,200 4,693
Liability regarding the termination
of employee employer relationship
resulting from the sale of significant
operations of a subsidiary (See B(7) below) -- 5,086 -- --
Less deposits (4,380) (5,463) (2,144) (4,028)
------------ ------------ ------------ ------------
1,315 6,634 56 665
Provision for unutilized sick
leave (*) 2,450 2,064 2,450 2,064
------------ ------------ ------------ ------------
3,765 8,698 2,506 2,729
============ ============ ============ ============
</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).
35
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 13 - Liability Regarding Termination of Employee - Employer
Relationship, Net (cont'd)
(7) On December 31, 1997, 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 agreement in effective for two years from
the signature date. The liability of the subsidiary is covered by an
appropriate accrual included in "Accrual for expenses in connection
with discontinued operations" in other accounts payable (see Note
11B).
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, for these
employees only, 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
The share capital consists of:
<TABLE>
<CAPTION>
Authorized Issued and paid for
---------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Number of shares (thousands)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary shares of NIS 1 each 100,000 100,000 60,582 60,582
============ ============ ============ ============
</TABLE>
36
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 15 - Liens, Guarantees, Contingencies and Commitments
A. Liens
(1) Long-term bank loans of a subsidiary are secured by liens on
water purification equipment located on Haifa Chemicals South
Ltd.'s (hereafter - HCS) premises, all rights to receive
moneys from HCS and all rights to that equipment, per an
agreement from May 1994 and August 1998.
(2) Commitments of a subsidiary to fulfill the terms relating to
the receipt of investment grants are secured by a floating
lien in favor of the State of Israel on equipment located on
HCS's premises, per an agreement from May 1994.
(3) Commitments of a subsidiary to fulfill the terms of projects
approved by the "Investment Center", are secured by liens on
the machinery and equipment as well as by a lien on
real-estate of a subsidiary registered in favor of the State
of Israel.
(4) A subsidiary's liability to automobile leasing companies in
the amount of NIS 91 thousand are secured by a specific lien
on motor vehicles.
B. Guarantees
(1) Bank credits and other liabilities of subsidiaries and
affiliates in the maximum amount of approximately NIS 2,650
thousand are guaranteed by the Company. The balance of these
bank credits and other liabilities as of December 31, 1998
amounted to approximately NIS 1,350 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 1,550 thousand.
(3) Several subsidiaries and affiliates gave guarantees in the
ordinary course of business in the approximate amount of NIS
7,721 thousand.
(4) The Company has provided a guarantee to a bank for employees'
and sub-contractors' loans of approximately NIS 260 thousand.
(5) The Company guaranteed the monthly rental payments of
subsidiaries and affiliates in the approximate amount of NIS
140 thousand. The total future liability for which guarantees
were given is approximately NIS 1,680 thousand for the length
of the periods of the leases.
37
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 15 - Liens, Guarantees, Contingencies and Commitments (cont'd)
C. Contingencies
(1) Various claims are pending against the group, in the total
amount of approximately NIS 2,593 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) 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
at balance sheet date is equal to the book value of its
assets.
(3) 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.
(4) As a result of a competitor's complaint, which in management's
opinion is unjustified, the Commissioner of Restrictive Trade
Practices is investigating the matter.
D. Commitments
(1) The Company is committed, as at balance sheet date, to
purchase fixed assets in the approximate amount of NIS 4,900
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 1,012 thousand for the group in 1998 (1997 - NIS 913
thousand, 1996 - NIS 2,207 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.
(4) On January 31, 1995 a development contract was signed between
a subsidiary and the Israel Land Administration according to
which the subsidiary must develop the land adjacent to the
land upon which their plant is built, by November 1, 1997. In
the event the subsidiary meets the terms of the development
contract, a lease agreement will be signed with the Land
Administration according to which the subsidiary will lease
the land for 49 years through 2043. During 1998, the
subsidiary received an extension from the Land Administration
to complete the building by May 1, 1999, with no obligation to
re-appraise the asset.
(5) A subsidiary entered into an agreement with Lego Irrigation
Ltd. (hereafter - Lego) dated July 12, 1998 and an additional
agreement dated August 11, 1998 and a summary dated October
28, 1998 (together - "The agreement"). According to the
agreement, the subsidiary agreed to continue to manufacture
the Ecogan products sold to Lego through May 1999 according to
prices agreed upon by the parties. In the event Lego will be
interested in continued manufacture by the subsidiary, the
parties will negotiate according to the terms of the
agreement. The subsidiary is committed not to operate in the
Ecogan field, except for the period of manufacture for Lego,
as stated, for 5 years.
38
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 15 - Liens, Guarantees, Contingencies and Commitments (cont'd)
D. Commitments (cont'd)
(6) 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 projected rental payments for the next 5 years (calculated
based upon the rental payments in effect on December 31, 1998)
are as follows:
NIS thousands
-------------
1999 2,633
2000 1,278
2001 1,138
2002 1,096
2003 and thereafter 3,184
-------------
9,329
=============
(7) Commitments for lease agreements - The company has entered
into operating lease agreements for motor vehicles effective
until 2001. The lease payments are linked to the CPI.
The projected lease payments for the next 3 years (calculated
based upon the lease payments in effect on December 31, 1998)
are as follows:
NIS thousands
-------------
1999 1,214
2000 1,214
2001 1,022
-------------
3,450
=============
Note 16 - Earnings per Share
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Weighted average Weighted average Weighted average
Earnings number of shares* Earnings number of shares* Earnings number of shares*
-------- ----------------- -------- ----------------- -------- -----------------
NIS thousands
-----------------------------------------------------------------------------------------------
Adjusted Adjusted Adjusted
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income
from continuing
operations 18,825 60,234 28,608 60,369 37,128 60,529
======== ================= ======== ================= ======== =================
Net income 17,077 60,234 34,339 60,369 38,970 60,529
======== ================= ======== ================= ======== =================
</TABLE>
* Number of shares in nominal NIS thousands.
39
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 17 - Income Taxes
A. "Industrial company" - the Company and its main subsidiaries qualify
as industrial companies under the Encouragement of Industry (Taxes)
Law, 1969, and are entitled to 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,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
For property, plant and equipment (10,099) (10,983) (3,825) (3,187)
For provision for fringe benefits
and others 10,743 9,643 7,181 6,155
For tax losses and deductions
carried forward -- 788 -- --
For inventories (995) (186) (725) (81)
------------ ------------ ------------ ------------
(351) (738) 2,631 2,887
============ ============ ============ ============
Included:
In current assets 7,478 7,132 5,441 4,996
In investments and long term assets 280 289 -- --
In long-term liabilities (8,109) (8,159) (2,810) (2,109)
------------ ------------ ------------ ------------
(351) (738) 2,631 2,887
============ ============ ============ ============
</TABLE>
D. Changes in deferred taxes:
<TABLE>
<CAPTION>
Consolidated The Company
--------------------------- -----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Adjusted NIS thousands Adjusted NIS thousands
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year (738) 2,611 2,887 4,886
Investment in subsidiary -- (71) -- --
Change in deferred taxes presented
in Statement of Income 387 (3,278) (256) (1,999)
------------ ------------ ------------ ------------
Balance at end of year (351) (738) 2,631 2,887
============ ============ ============ ============
</TABLE>
40
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 17 - Income Taxes (cont'd)
E. Income taxes in statements of income
<TABLE>
<CAPTION>
Consolidated
-------------------------------------------
For the year ended December 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
Adjusted NIS thousands
-------------------------------------------
<S> <C> <C> <C>
Provision for current year 14,496 12,202 15,256
Change in deferred taxes, net (387) 3,278 12,296
Taxes relating to previous years (265) (79) 403
--------- --------- ---------
13,844 15,401 27,955
Presented in net income (loss) from
discontinued operations, net (210) * (116) * (2,465)
--------- --------- ---------
13,634 15,285 25,490
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The Company
-------------------------------------------
For the year ended December 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
Adjusted NIS thousands
-------------------------------------------
<S> <C> <C> <C>
Provision for current year 13,827 12,386 11,057
Change in deferred taxes, net 256 1,999 10,626
Taxes relating to previous years (59) -- --
--------- --------- ---------
14,024 14,385 21,683
========= ========= =========
</TABLE>
* Reclassified.
F. Tax assessments
Final tax assessments have been received by the Company for tax
years up to and including 1994. Subsidiaries have received final tax
assessments for various years up to and including 1996.
41
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 17 - Income Taxes (cont'd)
G. Effective tax reconciliation
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
Adjusted NIS thousands
---------------------------------------------
<S> <C> <C> <C>
Tax rates in effect 36% 36% 36%
========= ========= =========
Consolidated
Theoretical tax at rates in effect 13,021 * 16,114 * 23,334
Erosion of tax advances 489 269 395
Tax effect of permanent differences, net 437 1,606 1,608
Losses and tax benefits not utilized 2,016 1,022 532
Utilization of losses and benefit from previous year (1,736) (2,470) (1,967)
Differences between the definition of equity and assets
for tax purposes and book purposes and others, net (328) (1,217) * 1,185
Taxes for previous years (265) (79) 403
Offset of losses at regular tax rate by income taxed at
lower rate -- 733 --
Deletion of deferred tax balances -- (693) --
--------- --------- ---------
13,634 15,285 * 25,490
========= ========= =========
The Company
Theoretical tax at rates in effect 13,701 16,404 20,804
Erosion of tax advances 441 212 198
Tax effect of permanent differences, net 9 51 712
Utilization of losses and benefit from previous year -- (1,030) (533)
Differences between the definition of equity
and assets for tax purposes and others, net (68) (1,252) 502
Taxes for previous years (59) -- --
--------- --------- ---------
14,024 14,385 21,683
========= ========= =========
</TABLE>
* Reclassified - also see Note 2V(1).
H. Tax losses carried forward to future years
(1) The Company and several subsidiaries have accumulated real
losses on securities for tax purposes in the approximate
amount of NIS 36,000 thousand. This loss, linked to the index,
will only be tax-deductible in future years against income
from securities, if such exist. No deferred taxes assets have
been recorded for these losses.
(2) Several subsidiaries have accumulated losses for tax purposes
in the approximate amount of NIS 10,880 thousand for which no
deferred taxes assets have been recorded.
42
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 18 - Linked Balances
Consolidated
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------------------- ---------------------------------------------
In or linked In or 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 7,884 417 16,123 4,171 146 29,800
Marketable securities 73 5,379 4,536 1,870 34,037 21,426
Accounts receivable -trade 12,724 80 189,186 13,204 -- 190,044
Other receivables (I) 975 12,550 4,968 281 6,122 12,787
Bank deposits -- 14,003 4,297 -- 18,673 --
------------ ------------ ------------ ------------ ------------ ------------
21,656 32,429 219,110 19,526 58,978 254,057
Investments and
long-term assets
Affiliated companies and
others - capital notes and
loans including current
maturities -- -- 3,037 -- 19,606 --
Bank deposits and other
receivables 313 2,871 -- 617 3,234 --
------------ ------------ ------------ ------------ ------------ ------------
Total assets 21,969 35,300 222,147 20,143 81,818 254,057
============ ============ ============ ============ ============ ============
Current liabilities
Short-term bank credits
including current maturities 1,175 5,636 45,587 2,216 21,887 4,568
Accounts payable - trade 16,888 -- 29,450 13,251 -- 29,594
Other accounts payable 312 -- 46,854 658 66 54,379
Dividend declared -- -- -- -- -- 48,708
------------ ------------ ------------ ------------ ------------ ------------
18,375 5,636 121,891 16,125 21,953 137,249
Long-term liabilities
Liability regarding
termination of
employee-employer
relationship, net -- -- 3,765 -- -- 8,698
Long-term loans, net of
current maturities 6,569 19,640 19,783 1,888 1,949 --
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 24,944 25,276 145,439 18,013 23,902 145,947
============ ============ ============ ============ ============ ============
</TABLE>
(I) Exclusive of deferred taxes and prepaid expenses.
43
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 18 - Linked Balances (cont'd)
Company
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------------------- ---------------------------------------------
In or linked In or 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 7,099 -- 1,482 2,824 -- 3,750
Marketable securities 73 5,379 3,912 1,870 34,037 17,506
Accounts receivable -trade 10,615 -- 108,717 10,468 -- 97,692
Other receivables (I) 382 24,423 13,102 505 29,615 9,746
Bank deposits -- -- -- -- 18,673 --
------------ ------------ ------------ ------------ ------------ ------------
18,169 29,802 127,213 15,667 82,325 128,694
Investments
Subsidiaries -
loans and capital notes,
including current maturities -- 13,590 38,764 -- 9,869 *33,606
Affiliated companies and
others - capital notes and
loans including current
maturities -- -- -- -- 19,606 --
Bank deposits and other
receivables -- 2,565 -- -- 2,824 --
------------ ------------ ------------ ------------ ------------ ------------
Total assets 18,169 45,957 165,977 15,667 114,624 * 162,300
============ ============ ============ ============ ============ ============
Current liabilities
Short-term bank credits
including current maturities -- 5,607 40,617 -- 17,237 311
Accounts payable - trade 6,840 -- 15,387 4,789 -- 13,806
Other accounts payable -- -- 24,267 -- -- 31,690
Dividend declared -- -- -- -- -- 48,880
------------ ------------ ------------ ------------ ------------ ------------
6,840 5,607 80,271 4,789 17,237 94,687
Long-term liabilities
Liability regarding
termination of
employee-employer
relationship, net -- -- 2,506 -- -- 2,729
Capital notes issued to
subsidiaries -- -- 485 -- -- 2,243
Long-term loans, net of
current maturities -- 18,229 18,857 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 6,840 23,836 102,119 4,789 17,237 99,659
============ ============ ============ ============ ============ ============
</TABLE>
(I) Exclusive of deferred taxes and prepaid expenses.
* Reclassified.
44
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 19 - Supplementary Information to the Statements of Income
A. Sales (net of discounts)
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------
1998 *1997 * 1996
------- ------- -------
Adjusted NIS thousands
-----------------------------------------
<S> <C> <C> <C>
Consolidated
Local 581,895 600,168 602,320
Export 38,613 76,165 78,306
------- ------- -------
620,508 676,333 680,626
======= ======= =======
Company
Local 428,053 410,760 417,622
Export 33,304 67,607 67,134
------- ------- -------
461,357 478,367 484,756
======= ======= =======
</TABLE>
B. Cost of sales
<TABLE>
<S> <C> <C> <C>
Consolidated
Materials 280,912 314,492 310,824
Labor 63,475 71,933 64,463
Other manufacturing expenses 40,888 37,951 39,790
Depreciation and amortization 17,177 17,359 20,248
------- ------- -------
401,652 441,735 435,325
------- ------- -------
Decrease (Increase) in inventories of:
Work in process 1,787 (4,188) 3,096
Finished products (6,358) 927 5,677
------- ------- -------
(4,571) (3,261) 8,773
------- ------- -------
397,081 438,474 444,098
======= ======= =======
</TABLE>
* Reclassified - See Note 2V(1).
45
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
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,
---------------------------------------------
1998 *1997 *1996
------- ------- -------
Adjusted NIS thousands
---------------------------------------------
<S> <C> <C> <C>
Company
Materials 198,914 220,415 210,192
Labor 48,092 50,277 48,807
Other manufacturing expenses 27,905 27,563 27,734
Depreciation and amortization 12,243 12,257 14,560
------- ------- -------
287,154 310,512 301,293
------- ------- -------
Decrease (Increase) in inventories of:
Work in process 1,795 (4,142) 3,008
Finished products (2,857) (4,792) 4,721
------- ------- -------
(1,062) (8,934) 7,729
------- ------- -------
286,092 301,578 309,022
======= ======= =======
C Selling and marketing expenses
Consist of:
Consolidated
Labor 55,410 54,761 48,281
Depreciation and amortization 8,368 10,604 12,108
Advertising 21,148 22,706 18,087
Agents' commissions 381 5,418 6,489
Others 38,006 39,877 33,217
Doubtful accounts and bad debt expense 9,063 4,590 2,107
------- ------- -------
132,376 137,956 120,289
======= ======= =======
Company
Labor 42,747 38,924 35,984
Depreciation and amortization 5,777 5,937 6,907
Advertising 19,748 20,182 15,454
Others 30,192 31,211 25,911
Doubtful accounts and bad debt expense 5,834 3,423 2,179
------- ------- -------
104,298 99,677 86,435
======= ======= =======
</TABLE>
* Reclassified - See Note 2V(1).
46
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
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,
--------------------------------------
1998 * 1997 * 1996
------ ------ ------
Adjusted NIS thousands
--------------------------------------
<S> <C> <C> <C>
Consolidated
Labor 30,678 30,212 26,306
Depreciation and amortization 3,739 3,479 4,693
Others (I) 15,940 19,854 16,122
------ ------ ------
50,357 53,545 47,121
====== ====== ======
Company
Labor 21,450 21,822 17,798
Depreciation and amortization 2,719 2,706 3,243
Others (I) 11,089 12,657 11,381
------ ------ ------
35,258 37,185 32,422
====== ====== ======
</TABLE>
(I) Total costs of adjusting the computer programs to the year
2000, which have been expensed during the year, is immaterial.
* Reclassified - See Note 2V(1).
47
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 19 - Supplementary Information to the Statements of Income (cont'd)
E. Finance income (expense), net
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------
1998 *1997 1996
------- ------- -------
Adjusted NIS thousands
------------------------------------------
<S> <C> <C> <C>
Consolidated
Bank credit 317 (1,456) 99
Long-term loans finance (expense) income (24) (348) (24)
Interest on bank deposits 1,017 1,464 2,129
Gain from marketable securities 1,740 3,930 2,095
Commissions and bank expenses (529) (829) (792)
Erosion of monetary items and others, net (11,902) *(4,961) *(10,009)
------- ------- -------
(9,381) (2,445) (6,502)
Presented in income (loss) from
discontinued operations, net 84 * 1,476 910
------- ------- -------
(9,297) * (724) (5,592)
====== ======= ======
Company
Interest on long-term loans 70 -- --
Bank credit 412 (190) 151
Interest on bank deposits 261 1,157 2,084
Gain from marketable securities 1,188 3,765 1,967
Commission and bank expenses (135) (163) (130)
Erosion of monetary items and others, net (7,107) *(1,120) *(6,419)
------- ------- -------
(5,311) * 3,449 (2,347)
====== ======= ======
</TABLE>
* Reclassified - See Note 2V(1).
48
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
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,
----------------------------------------
1998 * 1997 1996
------ ------- ------
Adjusted NIS thousands
----------------------------------------
<S> <C> <C> <C>
Consolidated
Capital gains, net 300 1,328 1,057
Loss from sale of operations to affiliated
company (1,590) *(1,060) --
Profit (Loss) on realization of investment in
subsidiaries and affiliates 3,978 (2) (239)
Commission income 861 190 113
Sundry income 1,540 7 1,235
Amortization of goodwill (316) (1,336) (1,590)
Related parties:
Management fees and participation
in expenses -- -- 99
Rental income -- -- 617
------ ------- ------
4,773 (873) 1,292
====== ====== ======
Company
Capital gains, net 627 437 845
Profit (Loss) on realization of investment in
subsidiaries and affiliates 3,978 -- (239)
Sundry income 1,354 423 1,235
Related parties:
Management fees and participation
in expenses 136 167 184
Rental income 1,565 1,163 1,235
------ ------ ------
7,660 2,190 3,260
====== ====== ======
</TABLE>
* Reclassified - See Note 2V(2), net of expenses related to the
sale and net of amortization of goodwill arising of
acquisition of Kedem. For details regarding this sale - see
note 7F(2).
49
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 19 - Supplementary Information to the Statements of Income (cont'd)
G. Income from discontinued operations, net - See note 7F(1) and 2V(1)
Consist of:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------
1998 1997 1996
------ ----- -----
Adjusted NIS thousands
--------------------------------------
<S> <C> <C> <C>
Capital gain (loss) on the sale of assets, net (I) (2,056) 5,701 --
Results of discontinued operations through the
date of sale (II) 308 30 1,842
------ ----- -----
(1,748) 5,731 1,842
====== ===== =====
</TABLE>
(A) The capital gain (loss) on the sale of goodwill and fixed
assets is presented net of the tax effect, net of goodwill
created on acquisition that relates to the discontinued
operation and net of the minority interest.
(B) Following are details of the Statement of Income items of the
discontinued operations for the years ended December 31, 1998,
1997 and 1996. The Statement of Income items of the
discontinued operation for 1997 and 1996 have been
reclassified in the Consolidated Statement of Income and have
been presented as income from discontinued operations.
50
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 19 - Supplementary Information to the Statements of Income (cont'd)
G. Income (Loss) from discontinued operations, net - See note 7F(1) and
2V(1) (cont'd)
<TABLE>
<CAPTION>
Fantastik Ecogan
discontinued operations discontinued operations
------------------------ ---------------------------------------
For the year ended
December 31, For the year ended December 31,
------------------------ ---------------------------------------
1997 1996 1998 1997 1996
------ ------ ----- ----- -----
Adjusted NIS thousands Adjusted NIS thousands
------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from sales 31,622 39,050 8,085 9,216 9,086
Cost of sales 19,752 21,429 5,251 5,323 5,163
------ ------ ----- ----- -----
Gross profit 11,870 17,621 2,834 3,893 3,923
------ ------ ----- ----- -----
Selling and marketing expenses 8,523 8,961 1,815 2,323 2,476
General and administrative
expenses 2,815 3,152 351 467 478
------ ------ ----- ----- -----
11,338 12,113 2,166 2,790 2,954
------ ------ ----- ----- -----
Operating income 532 5,508 668 1,103 969
Finance expenses, net 1,166 762 84 310 148
------ ------ ----- ----- -----
Income (Loss) before income
taxes (634) 4,746 584 793 821
Income taxes (171) 2,120 210 287 345
------ ------ ----- ----- -----
Net income (loss) after income
taxes (463) 2,626 374 506 476
Minority interest in losses
(income) of subsidiary 144 (1,067) (66) (157) (193)
------ ------ ----- ----- -----
Income (Loss) for the year (319) 1,559 308 349 283
====== ====== ===== ===== =====
</TABLE>
51
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 19 - Supplementary Information to the Statements of Income (cont'd)
G. Income (Loss) from discontinued operations, net - See note 7F(1) and
2V(1) (cont'd)
<TABLE>
<CAPTION>
Total discontinued operations
-----------------------------------------
For the year ended December 31,
-----------------------------------------
1998 1997 1996
----- ------ ------
Adjusted NIS thousands
-----------------------------------------
<S> <C> <C> <C>
Revenue from sales 8,085 40,838 48,136
Cost of sales 5,251 25,075 26,592
----- ------ ------
Gross profit 2,834 15,763 21,544
----- ------ ------
Selling and marketing expenses 1,815 10,846 11,437
General and administrative expenses 351 3,282 3,630
----- ------ ------
2,166 14,128 15,067
----- ------ ------
Operating income 668 1,635 6,477
Finance expenses, net 84 1,476 910
----- ------ ------
Income before income taxes 584 159 5,567
Income taxes 210 116 2,465
----- ------ ------
Net income after income taxes 374 43 3,102
Minority interest in income of subsidiary (66) (13) (1,260)
----- ------ ------
Income for the year 308 30 1,842
===== ====== ======
</TABLE>
52
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 20 - Related Parties
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 disclosing transactions with interested parties,
except for unusual transactions. Details regarding balances and
transactions with related parties and other interested parties, are
presented in this note.
A. Remuneration of interested parties
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
Number 1998 1997 1996
of people ----- ---- ----
in 1998 Adjusted NIS thousands
--------- -------------------------------
<S> <C> <C> <C> <C>
Interested parties employed by the
Company or on its behalf 1 *2,582 2,053 1,926
====== ===== =====
Directors not employed by the
Company or on its behalf 14 280 336 418
====== ===== =====
</TABLE>
* Includes NIS 500 thousand severance pay not recorded in prior
years.
B. On October 6, 1997, Kedem signed two agreements with a subsidiary,
Tambour Ecology Ltd., relating to two transactions - 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 1.4 million (excluding proceeds from the sale of
the inventory). The effect of these agreements on the results of
operations of the group is immaterial.
C. Also see Notes 15 and 19F.
53
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 21 - Condensed Nominal Financial Statements of the Company
A. Balance Sheet
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
NIS thousands
----------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents 8,581 6,052
Marketable securities 9,364 49,172
Accounts receivable - trade 119,332 99,575
Other receivables 45,286 42,229
Bank deposits -- 17,191
Inventories 79,737 80,613
------------ ------------
262,300 294,832
------------ ------------
Investments and long-term assets
Subsidiaries and affiliates 99,651 107,231
Bank deposits and other receivables 2,565 2,600
------------ ------------
102,216 109,831
------------ ------------
Property, plant and equipment
Cost 223,095 209,339
Less: Accumulated depreciation 115,972 102,823
------------ ------------
107,123 106,516
------------ ------------
Intangible assets and deferred charges 83 123
------------ ------------
471,722 511,302
============ ============
</TABLE>
54
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 21 - Condensed Nominal Financial Statements of the Company (cont'd)
A. Balance Sheet (cont'd)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
NIS thousands
----------------------------
<S> <C> <C>
Current liabilities
Bank credits 46,224 16,155
Accounts payable - trade 22,227 17,119
Other accounts payable 24,267 29,175
Dividend declared -- 45,000
------------ ------------
92,718 107,449
------------ ------------
Long-term liabilities
Long-term loans 37,086 --
Liability regarding termination of
employee - employer relationship, net 2,506 2,512
Capital notes issued to subsidiaries 485 2,065
Deferred taxes, net 4,031 3,704
------------ ------------
44,108 8,281
------------ ------------
Shareholders' equity
Share capital 60,582 60,582
Paid-in capital 149,934 149,934
Retained earnings 128,526 186,076
------------ ------------
339,042 396,592
Less: Company shares held by subsidiaries 4,146 1,020
------------ ------------
334,896 395,572
------------ ------------
471,722 511,302
============ ============
</TABLE>
55
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 21 - Condensed Nominal Financial Statements of the Company (cont'd)
B. Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1998 1997 1996
------- --------- ---------
NIS thousands
-------------------------------------------
<S> <C> <C> <C>
Revenue from sales 437,521 431,578 401,231
Cost of sales 264,347 * 264,223 * 245,754
------- --------- ---------
Gross profit 173,174 167,355 155,477
------- --------- ---------
Selling and marketing expenses 97,429 * 87,369 * 68,688
General and administrative expenses 32,948 * 33,033 * 26,204
------- --------- ---------
130,377 120,402 94,892
------- --------- ---------
Operating income 42,797 46,953 60,585
Finance income, net 3,787 * 15,880 * 18,602
Other income, net 9,574 2,045 2,956
------- --------- ---------
Income before income taxes 56,158 64,878 82,143
Income taxes 11,916 12,035 17,111
------- --------- ---------
Net income after income taxes 44,242 52,843 65,032
Equity in earnings (losses) of subsidiaries
and affiliates, net (2,144) 5,579 6,473
------- --------- ---------
Net income for the year 42,098 58,422 71,505
======= ========= =========
</TABLE>
* Reclassified.
56
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 21 - Condensed Nominal Financial Statements of the Company (cont'd)
C. Statement of shareholders' equity
<TABLE>
<CAPTION>
Company
shares
Share Paid-in Retained held by
capital capital earnings subsidiary Total
--------- ---------- ---------- ---------- ----------
NIS thousands
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 acquired 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
Changes in 1998:
Net income -- -- 42,098 -- 42,098
Dividend -- -- (99,648) -- (99,648)
Company shares acquired by
subsidiaries -- -- -- (3,126) (3,126)
--------- ---------- ---------- ---------- ----------
Balance as of December 31, 1998 60,582 149,934 128,526 (4,146) 334,896
========= ========== ========== ========== ==========
</TABLE>
* Includes NIS 50,000 thousands dividend declared.
** Includes NIS 44,842 thousands dividend declared.
57
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - 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.
58
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - 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.
The tax effect of this expense was 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 was included partially in the
Statements of Income and the remainder was 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) 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.
59
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - Consolidated Financial Data Presented according to U.S. GAAP (cont'd)
C. Balance Sheets
December 31, December 31,
1998 1997
------------ ------------
NIS thousands
-----------------------------
Assets
Current assets
Cash and cash equivalents 24,424 31,409
Marketable securities 9,988 52,782
Accounts receivable - trade and others 231,551 213,607
Bank deposits 18,300 17,191
Inventories 107,468 104,831
------------ ------------
391,731 419,820
------------ ------------
Investments and long-term assets
Affiliated companies and others 13,472 26,747
Bank deposits and other receivables 3,184 3,545
Deferred taxes, net 6,300 5,333
------------ ------------
22,956 35,625
------------ ------------
Property, plant and equipment
Cost 353,197 330,517
Less - accumulated depreciation 191,825 173,293
------------ ------------
161,372 157,224
------------ ------------
Intangible assets, net 168 1,386
------------ ------------
576,227 614,055
============ ============
60
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - Consolidated Financial Data Presented according to U.S. GAAP (cont'd)
C. Balance Sheets (cont'd)
December 31, December 31,
1998 1997
------------ ------------
NIS thousands
-----------------------------
Liabilities and Shareholders' Equity
Current liabilities
Bank credits and others 52,398 26,395
Accounts payable - trade and others 92,987 90,173
------------ ------------
145,385 116,568
------------ ------------
Long-term liabilities
Long-term debt 45,992 3,532
Liability regarding termination of employee-
employer relationship, net 3,765 8,008
------------ ------------
49,757 11,540
------------ ------------
Minority interest 32,619 33,553
------------ ------------
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 125,627 226,429
------------ ------------
352,612 453,414
Less: Company shares held by subsidiaries 4,146 1,020
------------ ------------
348,466 452,394
------------ ------------
576,227 614,055
============ ============
61
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - Consolidated Financial Data Presented according to U.S. GAAP (cont'd)
D. Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 * 1997 * 1996
------- ------- -------
NIS thousands
---------------------------------------------
<S> <C> <C> <C>
Revenue from sales 589,346 609,637 563,284
Cost of sales 367,132 382,855 354,476
------- ------- -------
Gross profit 222,214 226,782 208,808
------- ------- -------
Selling and marketing expenses 124,002 122,506 94,965
General and administrative expenses 48,229 48,075 40,459
------- ------- -------
172,231 170,581 135,424
------- ------- -------
Operating income 49,983 56,201 73,384
Financing income, net 3,661 12,718 15,592
------- ------- -------
Operating income 53,644 68,919 88,976
Other income, net 7,032 1,192 3,289
------- ------- -------
Income before income taxes 60,676 70,111 92,265
Income taxes 9,639 14,393 17,816
------- ------- -------
Net income after income taxes 51,037 55,718 74,449
Equity in earnings (losses) of affiliated
companies, net (4,335) (630) 238
Minority interest in subsidiaries' income (1,714) (3,486) (6,331)
------- ------- -------
Net income from continuing operations 44,988 51,602 68,356
Net income from discontinued operations (1,300) 6,173 4,064
------- ------- -------
Net income 43,688 57,775 72,420
======= ======= =======
</TABLE>
* Reclassified - See Note 2V(1).
62
<PAGE>
Tambour Limited and Subsidiaries
Notes to the Financial Statements as at December 31, 1998
- - --------------------------------------------------------------------------------
Note 22 - Condensed Nominal Financial Statements Prepared in Accordance with
U.S. GAAP (cont'd)
E. Statement of changes in shareholders' equity
<TABLE>
<CAPTION>
Foreign
currency Company
translation shares
Share Additional adjustments Retained acquired by
capital paid-in capital earnings subsidiaries
------------ ------------- ----------- ------------- ------------
NIS thousands
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
Net income -- -- -- 43,688 --
Cash Dividend -- -- -- (144,490) --
Company shares acquired by
subsidiaries -- -- -- -- (3,126)
------------ ------------- ----------- ------------- ------------
80,561 144,721 1,703 125,627 (4,146)
============ ============= =========== ============= ============
</TABLE>
63
<PAGE>
Tambour Limited and Subsidiaries
Appendix - Consolidated and Affiliated Companies as of December 31, 1998
- - --------------------------------------------------------------------------------
Percentage of control
and ownership
---------------------
Consolidated companies
S.D.L. Technology (sol) Ltd. 72.00
S.D.L. partnership 98.55
R.R.E. Rotem Engineering Ltd. 56.01
Gains Properties Ltd. 82.45
Gil - the Israeli Marketing Paint Company* 24.00
Tambour Holdings 1993 Ltd. 100.00
Tambour Ecology Ltd. 66.00
Tambour Investments 1997 Ltd. 100.00
Tambourechev 1998 Ltd. 100.00
Safety Kleen (Israel) Ltd. 59.40
Scilab Laboratories Manufacturing Chemists Ltd. 82.45
Sicca Israel Chemical Enterprises Ltd. 82.45
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
Serafon Trading 1997 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
Tambour Switzerland 100.00
Kedem Chemicals Ltd.** 82.45
Affiliated companies
Diverseylever Israel Ltd. 41.14
British Paints L.L.C. 18.15
International Ilios Cotachem S.A. 43.00
* 100% ownership and control, in effect.
** Traded on the Tel-Aviv Stock Exchange.
64
<PAGE>
Tambour Limited and Subsidiaries
Appendix - Consolidated and Affiliated Companies as of December 31, 1998
(cont'd)
- - --------------------------------------------------------------------------------
Percentage of control
and ownership
---------------------
Inactive Companies
Ayalon Water Purification Ltd. 100.00
Engel-Aniam Ltd. 33.00
Askar Ltd. 100.00
Ecogen Ltd. 82.45
Hamerakeh - Hydrohamer Ltd. 66.00
Tambour Polimers Ltd. 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. 82.45
Kedem Chemicals Technologies Ltd. 82.45
Tamarin (Marine Paints) Ltd. 100.00
65
<PAGE>
[LETTERHEAD OF KPMG AND SOMEKH CHAIKIN]
February 25, 1999
Report Of Independent Public Accountants
Cellcom Israel Ltd.
We have audited the balance sheets of Cellcom Israel Ltd. (hereinafter the
"Company") as at December 31, 1998 and 1997, the related statements of income
and shareholders' equity and cash flows for each of the three years then ended,
expressed in New Israeli 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
(Auditors 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 27 to the financial statements.
In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company as at December 31, 1998 and
1997, the results of its operations, the changes in shareholders; equity and
cash flows for each of the three years ended December 31, 1998, in conformity
with accounting principles generally accepted in Israel, consistently applied.
<PAGE>
Without qualifying our opinion, we call attention to Note 18a of the financial
statements in connection with a motion to recognize as a class action, a lawsuit
against other operators in the communications industry and the Company,
concerning the Company's billing of certain network services.
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 materially affect the determination of
nominal/historical net income and shareholders' equity.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF KPMG AND SOMEKH CHAIKIN]
March 28, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE
SHAREHOLDERS OF DEP TECHNOLOGY HOLDINGS LTD.
We have audited the balance sheets of DEP Technology Holdings Limited and the
consolidated balance sheets of the Company and its subsidiaries as of December
31, 1998 and 1997, the related statements of income and shareholders' equity and
cash flows for each of the years then ended, expressed in New Isreal 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 subsidiary companies, whose
assets constitute 0.93% and 12.2% of the total consolidated assets as at
December 31, 1998 and 1997, respectively, and whose expenses constitute 16.5%
and 26.3% of the consolidated expenses for the years ended on such dates,
respectively. The financial statements of those subsidiary companies were
audited by other certified public accountants whose reports thereon were
furnished to us. Our opinion, insofar as it relates to amounts emanating from
the financial statements of such subsidiary companies, is based solely on the
said reports of the other accountants. Furthermore, the data included in the
financial statements relating to the net asset value of the Company's
investments in affiliated companies and to the company's share in their net
income (losses), is based on the financial statements of such affiliates,
(including a report on net assets to be disposed on, of an affiliated company)
which were audited by other certified public accountants.
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.
<PAGE>
The above mentioned financial statements were prepared on the basis of
historical cost of New Israeli shekel ("NIS"), adjusted for changes in the US
Dollar exchange rate against the NIS in accordance with opinions of the
Institute of Certified Public Accountants in Israel. Condensed nominal data, on
the basis of which the adjusted financial statements were prepared, is presented
in Note 22.
The Company has restated its financial statements for the year ended December
31, 1997 in order to retroactively reflect the change on the basis of
adjustment, as indicated in Note 1(f) a change with which we concur.
In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company and the consolidated
balance sheets of the Company and its subsidiaries as at December 31, 1998 and
1997, the results of its operations, the changes in shareholder's equity and
cash flows for each of the years then ended, 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 21 to the financial statements.
/s/ Somekh Chaikin
CERTIFIED PUBLIC ACCOUNTANTS (ISR)
<PAGE>
[LETTERHEAD OF KPMG AND SOMEKH CHAIKIN]
March 28, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE
SHAREHOLDERS OF DIC AND PEC CABLE TV LTD.
We have audited the balance sheets of DIC and PEC Cable TV Ltd. as of December
31, 1998 and 1997, the related statements of income and shareholders' equity and
cash flows for each of the years 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. As 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 5 to the financial statements.
<PAGE>
The date 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.
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 of at December 31, 1998 and 1997, the results of its
operations, the changes in shareholder's equity and cash flows for each of the
years then ended, 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 6 to the financial statements.
Somekh Chaikin
CERTIFIED PUBLIC ACCOUNTANTS (ISR)
<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, 1998 and 1997, the consolidated balance
sheets of the Company and its subsidiary as of December 31, 1998 and 1997, and
the related statements of income, shareholders' equity and cash flows for the
years ended December 31, 1998, 1997 and 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 conducted our audits in accordance with generally accepted auditing standards
in Israel and in 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 its subsidiary as
of December 31, 1998 and 1997 and the results of their operations, shareholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996, in
conformity with accounting principles generally accepted in Israel (as to
reconciliation to accounting principles generally accepted in the United States
- - - see Note 28).
/s/ Luboshitz, Kasierer /s/ Ratzkovsky Fried & Co.
Luboshitz, Kasierer Ratzkovsky Fried & Co.
Member Firm of Arthur Andersen Certified Public Accountants (Israel)
Haifa, Israel
March 29, 1999
-2-
<PAGE>
[LETTERHEAD OF KPMG -- SOMEKH CHAIKIN]
March 1, 1999
Auditors' Report to the Shareholders of
Gemini Capital Fund Management Ltd.
We have audited the accompanying balance sheets of Gemini Capital Fund
Management Ltd. as of December 31, 1998 and December 31, 1997, statements of
income, changes in shareholders' equity and cash flows for each of the two years
the last of which ended on December 31, 1998, 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 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 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 Management Ltd.
as of December 31, 1998 and December 31, 1997, the results of its operations,
changes in shareholders' equity and cash flows for each of the two years the
last of which ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States and Israel on the basis detailed in Note
21 to the financial statements.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF KPMG -- SOMEKH CHAIKIN]
March 1, 1999
Auditors' Report to the Partners of
Gemini Israel Fund L.P.
We have audited the accompanying balance sheets of Gemini Israel Fund L.P. as of
December 31, 1998 and December 31, 1997, statements of income, changes in
partners' capital and cash flows for each of the two years the last of which
ended on December 31, 1998, 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 standards established by the American
Institute of Certified Public Accountants. 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, 1998 and December 31, 1997, the results of its operations, changes
in partners' capital and cash flows for each of the two years the last of which
ended December 31, 1998 in conformity with accounting principles generally
accepted in the United States on the basis detailed in Note 2A to the financial
statements.
<PAGE>
As explained in Note 2, the financial statements include investments valued at
U.S. dollars 32,055 thousand (previous year - U.S. dollars 37,644 thousand)
(100% of partners' capital at balance sheet date, previous year - 95%) the
values of which 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 the 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 (Isr.)
<PAGE>
[LETTERHEAD OF KPMG -- SOMEKH CHAIKIN]
March 1, 1999
Auditors' Report to the Partners of
Gemini Israel II Limited Partnership
We have audited the accompanying balance sheets of Gemini Israel II Limited
Partnership as of December 31, 1998 and December 31, 1997, statements of income,
changes in partners' capital and cash flows for the year ended on December 31,
1998 and the period from April 14 to December 31, 1997, 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 standards established by the American
Institute of Certified Public Accountants. 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 II Limited
Partnership as of December 31, 1998 and December 31, 1997, the results of its
operations, changes in partners' capital and cash flows for the year ended
December 31, 1998 and the period from April 14 to December 31, 1997, in
conformity with accounting principles generally accepted in the United States on
the basis detailed in Note 2A to the financial statements.
<PAGE>
As explained in Note 2, the financial statements include investments valued at
U.S. dollars 13,345 thousand (previous year - U.S. dollars 5,556 thousand) (92%
of partners' capital at balance sheet date, previous year - 77%) the values of
which 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 the 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 (Isr.)
<PAGE>
Auditors' Report to the Shareholders
of
HAM-LET (ISRAEL - CANADA) Limited
We have audited the accompanying Balance Sheets of Ham-Let (ISRAEL - CANADA)
Limited (hereinafter - the Company) as of December 31, 1998 and 1997, and the
Consolidated Balance Sheets as of these dates, and the Statements of Operations,
the Statements of Changes in Shareholders' Equity and the Statements of Cash
Flows - of the Company and consolidated - for each of the three years in the
period ended December 31, 1998. 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 on the
basis of our examination.
We did not audit the financial statements of consolidated companies, whose
assets constitute approximately 17% and approximately 21% of total consolidated
assets as of December 31, 1998 and 1997, respectively, and whose revenues
constitute approximately 73%, 77%, and 42% of total consolidated revenues for
the years ended December 31, 1998, 1997, and 1996, 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 performed our audit in accordance with generally accepted auditing standards,
including those prescribed in the Auditors Regulations, (Mode of Performance)
1973. These regulations require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement, whether it originates in an error in the financial statements or
originates in a misrepresentation 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 the board of directors and management of the
Company, 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 the
historical cost convention, adjusted to reflect the changes in the general
purchasing power of U.S. Dollar, in accordance with the opinions of the
Institute of Certified Public Accountants in Israel.
Condensed nominal financial statements of the Company, on the basis of which the
adjusted financial statements were prepared, are presented in Note 29.
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,
1998 and 1997, 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, 1998, in conformity with generally accepted
accounting principles.
In our opinion, the abovementioned financial statements have been prepared in
conformity 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 in the determination of net loss
and shareholder's equity to the extent summarized in Note 30 to the financial
Statement.
Jungerman, Gilboa, Silber
Certified Public Accountants (Israel)
Tel Aviv, 22 March 1999
<PAGE>
March 8, 1999
Auditor's Report to the 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, 1998 and 1997 and the consolidated
balance sheet of the Company and its subsidiaries as at such date, and the
related statements of income, shareholders' equity, and cash flows, for each of
the two years in the period ended December 31, 1998. 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. The financial statements of the Company as of
December 31, 1996 were audited by other auditors whose report thereon dated
February 26, 1997 was unqualified.
We did not audit the financial statements of a proportionally consolidated
company whose assets constitute 5% of the total consolidated assets as at
December 31, 1997, and whose revenues constitute approximately 6% of the total
consolidated revenues for the year then ended. The financial statements of this
company were audited by other auditors whose report thereon was furnished to us.
Our opinion, insofar as it relates to amounts emanating from the financial
statements of this company, is based solely on the said reports of the 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 audit provides a reasonable basis
for our opinion.
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 of the
Company in nominal historical values, on the basis of which its adjusted
financial statements were prepared, is presented in Note 29.
<PAGE>
In our opinion, based on our audit and on the report of the above mentioned
other auditor, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company and the consolidated
financial position of the Company and its subsidiaries as at December 31, 1998
and the results of their operations, the changes in the shareholders' equity and
their cash flows for the two years then ended, in conformity with generally
accepted accounting principles ("GAAP") in Israel, as applicable to these
financial statements Israeli GAAP and U.S. GAAP are substantially identical, in
all material respects, except as otherwise described in Note 30 to the
consolidated financial statements. Furthermore, these statements have, in our
opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements) 1993.
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
March 28, 1999
Report of Independent Public Accountants
Mondex Israel Ltd.
We have audited the balance sheets of Mondex Israel Ltd. (hereinafter the
"Company") as at December 31, 1998 and 1997, the related statements of income
and shareholders' equity and cash flows for each of the three years then ended,
expressed in New Israeli 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
(Auditors 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 22 to the financial statements.
In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company as at December 31, 1998 and
1997, the results of its operations, the changes in shareholders; equity and
cash flows for each of the three years ended December 31, 1998, 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 not materially affect the determination of
nominal/historical net income and shareholders' equity.
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
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, 1998 and 1997, 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, 1998 and
1997, 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, 1998.
H.H.S.L. Haft & Haft & Co.
February 28, 1999 Certified Public Accountants (Isr.)
<PAGE>
March 11, 1999
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, 1998 and 1997.
- - - 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, 1998.
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% of the total consolidated assets as at December 31, 1998 and
1997, and whose revenues constitute 86%, 72% and 90% of the consolidated
revenues for the years ended on December 31, 1998, 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 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.
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.
<PAGE>
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, 1998 and 1997 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, 1998. 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 35C to the financial
statements.
Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
Independent Accountants Report to
the Shareholders of Super-Sol Ltd.
We have audited the attached consolidated balance sheets of Super-Sol Ltd. (the
Company) and its subsidiaries as at December 31, 1997 and 1998 and the
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years the last of which ended on December 31, 1998.
The consolidated 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 consolidated financial statements based on our audits.
We have not audited the financial statements of subsidiary companies in prior
years, whose assets represent approximately 1.9% of the total consolidated
assets as at December 31, 1997, and whose income represents approximately 5.6%
and 4.5% of the total consolidated income for the years ended December 31, 1996
and 1997, respectively. The financial statements of these companies were audited
by other auditors who provided us with their reports and our opinion, inasmuch
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 net asset
value of investments in affiliated companies in the consolidated financial
statements as at December 31, 1998 and to the Company's equity in the results of
these companies for the year ended December 31, 1998, 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 auditing standards are substantially identical
to generally accepted auditing standards in the United States. These 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 statements presentation. We believe that our audits
provide a fair basis for our opinion.
The above mentioned financial statements have been 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.
<PAGE>
In our opinion, based upon our audits and the reports of other auditors
mentioned above, the above mentioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as at December 31, 1997 and 1998, the results of
operations and the changes in shareholders' equity and cash flows, for each of
the three years the last of which ended on December 31, 1998, in conformity with
generally accepted accounting principles (GAAP) in Israel (as applicable to
these financial statements, Israeli GAAP and U.S. GAAP are substantially
identical in all material respects, except as otherwise described in Note 30 to
the consolidated financial statements).
Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulations (Preparations of Annual Financial Statements),
1993.
Somekh Chaikin
Certified Public Accountants (Isr.)
Tel Aviv, March 9, 1999
<PAGE>
TEFRON LTD.
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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States.
Luboshitz Kasierer
Member Firm of Arthur Andersen
Tel-Aviv, Israel.
March 11, 1999
<PAGE>
[LETTERHEAD OF ERNST & YOUNG
KOST FORER & CABBAY]
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, 1998 and 1997, and the
related statements of income and changes in shareholders' equity for each of the
three years in the period ended December 31, 1998. 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 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 1.
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, 1998 and 1997, the results of its operations and changes in its
shareholders' equity for each of the three years in the period ended December
31, 1998, 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).
Tel-Aviv, Israel KOST, FORER AND GABAY
March 4, 1999 Certified Public Accountants (Israel)
<PAGE>
[LETTERHEAD OF KPMG AND SOMEKH CHAIKIN]
Tel Aviv. March 15, 1999
Auditors' Report to the Shareholders of
Tradanet Electronic Commerce Services Ltd.
We have audited the accompanying balance sheet of Tradanet Electronic Commerce
Services Ltd. (hereinafter - the Company) as at December 31, 1998 and 1997, and
the related statement of operations, statement of shareholders' deficit and
statement of cash flows for the year ended December 31, 1998 and for the period
from December 16, 1997 to 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
The above mentioned financial statements have been prepared on the basis of
historical cost 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. The essence of the company financial statements
based on nominal historical value is presented in Note 18.
In our opinion, the above mentioned financial statements present fairly in all
material respects, the financial position of the Company as at December 31, 1998
and 1997, the results of its operations, the changes in shareholders' deficit
and its cash flows for the year ended December 31, 1998 and for the period from
December 16, 1997 to December 31, 1997, in conformity with generally accepted
accounting principles.
Without qualifying our opinion we would call attention to that stated in Note 1
C regarding the uncertainty relating to the conversion of the computer systems
to be Year 2000 compliant, and to the effect of this problem on the ability of
the Company to continue operating as a going concern.
<PAGE>
Pursuant to Section 211 of the Companies Ordinance - 1983, we state that we have
obtained all the information and explanations we required and that our opinion
on the above mentioned financial statements is given according to the best of
our information and the explanations received by us and as shown by the books of
the Company.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
<PAGE>
Tirat HaCarmel, February 18, 1999
Auditors' Report to the Shareholders of Witcom Ltd.
We have audited the accompanying balance sheets of Witcom Ltd. ("the Company")
as of December 31, 1998 and 1997, and the related statements of operations,
changes in shareholders' equity (deficit) and cash flows for the years then
ended. 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 conducted our audits in accordance with generally accepted auditing standards
in Israel, including those prescribed by the Auditors' Regulations (manner of
auditors performance), 1973. Such standards 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 assurances that
the financial statements are free of material misstatement, whether due to an
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 statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, the results of its operations, changes in shareholders' equity
(deficit) and cash flows for the years then ended, in conformity with generally
accepted accounting principles in the United States (U.S. GAAP).
Without qualifying our opinion, we would like to draw attention to the fact that
the Company is in the development stage, whereby its principal activities in the
reported periods are the development of products in the field of wireless
communications. The Company has not yet generated any revenues.
Somekh Chaikin
Certified Public Accountants (Isr.)
<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.
Tel-Aviv, March 5, 1998. ROJANSKY, HALIFI, MEIRI & CO.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN, CERTIFIED PUBLIC ACCOUNTANTS ISR.
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, CERTIFIED PUBLIC ACCOUNTANTS
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, CERTIFIED PUBLIC ACCOUNTANTS
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, CERTIFIED PUBLIC ACCOUNTANTS
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
Haifa, Israel
March 3, 1998
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN, CERTIFIED PUBLIC ACCOUNTANTS
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, CERTIFIED PUBLIC ACCOUNTANTS
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, Israel Kesselman & Kesselman
March 10, 1998 Certified Public Accountants (Isr.)
<PAGE>
[LETTERHEAD OF KESSELMAN & KESSELMAN, CERTIFIED PUBLIC ACCOUNTANTS
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>
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, 1999 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
---- ----
/s/ OUDI RECANATI March 31, 1999
- - ------------------------------
Oudi Recanati,
Chairman of the Board
of Directors
/s/ FRANK J. KLEIN March 31, 1999
- - ------------------------------
Frank J. Klein,
President and Principal
Executive Officer; Director
/s/ WILLIAM GOLD March 31, 1999
- - ------------------------------
William Gold,
Treasurer, Principal Financial
Officer and Principal Accounting
Officer
<PAGE>
Name Date
---- ----
/s/ ROBERT H. ARNOW March 31, 1999
- - ------------------------------
Robert H. Arnow, Director
/s/ ALAN R. BATKIN March 31, 1999
- - ------------------------------
Alan R. Batkin, Director
/s/ JOSEPH CIECHANOVER March 31, 1999
- - ------------------------------
Joseph Ciechanover, Director
/s/ ELIAHU COHEN March 31, 1999
- - ------------------------------
Eliahu Cohen, Director
/s/ ALAN S. JAFFE March 31, 1999
- - ------------------------------
Alan S. Jaffe, Director
/s/ HARVEY M. MEYERHOFF March 31, 1999
- - ------------------------------
Harvey M. Meyerhoff, Director
/s/ MICHAEL A. RECANATI March 31, 1999
- - ------------------------------
Michael A. Recanati, Director
/s/ ALAN S. ROSENBERG March 31, 1999
- - ------------------------------
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, filed as Exhibit 3(ii)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by reference.
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 December 30, 1992 and incorporated
herein by reference.
10(i)(d). 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)(e). Amendment to Exhibit 10(i)(d) 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)(f). 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)(g). Exchange Agreement dated as of January 4, 1994 among the
Company, PEC Holdings Limited and IDB
<PAGE>
Page No.
--------
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(i)(h). Loan Agreement dated May 5, 1998 between Bank
Hapoalim B.M. and the Company, filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by
reference.
10(i)(i). General Debit Agreement dated February 11, 1999
between The First International Bank of Israel Ltd. and
PEC Israel Finance Corporation Ltd. 333
10(i)(j). Specific Guarantee dated February 17, 1999 made by
the Company in favor of The First International Bank of
Israel Ltd. ("FIBI") with respect to the obligations of
PEC Israel Finance Corporation Ltd. to FIBI under the
General Debit Agreement listed as Exhibit 10(i)(i),
together with the Notice to Guarantor. 357
10(i)(k). Agreement and Plan of Merger among IDB Development
Corporation Ltd., PEC Acquisition Corporation and the
Company dated as of December 15, 1998 included as Annex A
to the Company's Preliminary Proxy Statement on Schedule
14A with respect to a special meeting of shareholders of
the Company to be held in April 1999 and incorporated
herein by reference.
10(i)(l). Agreement dated January 28, 1999 between DIC Finance
& Management Ltd. ("DICFM") and the Company relating to
the Company's right to sell to DICFM up to 250,000
ordinary shares of Gilat Satellite Networks Ltd. 372
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
- - ----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.
27. Financial Data Schedule
<PAGE>
EXHIBITS
TO
REPORT ON FORM 10-K
PEC ISRAEL ECONOMIC CORPORATION
FOR THE YEAR ENDED, DECEMBER 31, 1998
CUSTOMER'S NAME PEC Israel Finance Corporation Ltd.
IDENTITY CARD No. Company No. 51-025204-2
ACCOUNT No.
ADDRESS 3 Daniel Frisch St., (Fl. 23) Tel-Aviv
GENERAL DEBIT AGREEMENT
Made and signed at Tel-Aviv on the 11 day of the month of February in the year
1999.
BETWEEN
The First International Bank of Israel Ltd. (hereinafter referred to as "the
Bank") of the first part
9 Ahad Ha'am St., Tel-Aviv AND
PEC Israel Finance Corporation Ltd.
of 3 Daniel Frisch St., Tel-Aviv, Company No. 51-025204-2 (hereinafter referred
to as "the Customer") of the second part
WHEREAS the Customer has applied and/or may apply to the Bank from time to time
to give and/or to continue giving credit to the customer in accordance with the
terms hereof,
And WHEREAS the Bank has agreed to consider from time to time the customer's
application to give and/or to continue giving credit to the customer from time
to time in accordance with the terms hereof.
NOW THEREFORE THE PARTIES HAVE AGREED AS FOLLOWS:
1. The terms hereof shall be the terms governing all credit (whether extended
prior to the signing of the agreement or which may be extended in the
future from time to time) unless otherwise explicitly agreed upon in
writing between the Bank and the Customer, as the case may be.
2. In this agreement -
(a) "Credit" - includes all revolving credits, fixed credits, loans,
discounting of bills, purchasing of bills, selling of bills with the
Bank's mediation, overdrafts, guarantees, documentary credits,
granting of time, banking facilities, handling of bills of lading or
securities, services or other payments, given or which may be given
by the Bank to the Customer or to his order and all transactions or
other procedures according to which or whereupon duties or
obligations on behalf of the Customer towards the Bank are created
or likely to be created, whether as debtor or guarantor, alone or in
conjunction with others, whether due at present or in the future,
whether payable prior to the signing of this agreement or subsequent
thereto, whether due conditionally or unconditionally, directly or
indirectly, explicitly or implicitly.
"Security" - includes shares, stock, financial obligations, bonds,
notes, bills, debentures, debenture stock, Treasury bills, loan
certificates, loan debentures, a deposit receipt in respect of the
deposit of securities, units or sub-units in unit-trusts of
participation in investments, warrants conferring an option to
acquire securities, lottery bonds, coupons representing interest and
dividends, and negotiable instruments.
"Bill" - includes all bills of exchange, promissory notes, drafts,
cheques and other negotiable instruments unless the context
otherwise requires.
"Bank" - includes each and every one of the Bank's branches existing
at the date hereof and/or which may be opened henceforth at any
place, the attorneys and representatives of the Bank and its
substitutes and any company or body with which the Bank may merge in
any form whatsoever.
"The Customer" and all references to him shall be interpreted as
including and referring to all
<PAGE>
units comprising the Customer or whosoever of them, including their
successors, the executors and their administrators and all the
attorneys and substitutes of whosoever of them.
The obligations of all of the persons comprising the Customer shall
bind them jointly and severally.
In this agreement, unless the context otherwise requires, the
singular shall include the plural and vice-versa, and the masculine
shall include the feminine and vice-versa.
(b) Any right vesting in the Bank in accordance with this agreement
shall not be denied for any reason or by virtue of any claim unless
such right has been expressly denied in some other deed or document.
(c) Nothing herein contained shall be construed as to require the Bank
to extend to the Customer or to continue extending to him, any
credit whatsoever, other than insofar as the Bank may expressly
agree in writing to extend any particular credit, and the Customer
may receive or continue receiving credit only insofar as the Bank
shall expressly agree thereto in writing, subject however to the
right of the Bank as set out in Clause 3 below.
(d) Nothing herein contained shall be used in the interpretation of
other debitory agreements or documents or forms of the Bank, whether
signed by the Customer prior to the signing of this agreement or
thereafter, or whether they were or are at present or may be in the
future in use in the Bank, and such agreements, documents or forms
and all they may contain shall not influence the interpretation of
this agreement.
3. The Bank at any time, and from time to time, without giving the Customer
any notice or reason therefor, withhold in whole or in part, reduce or
discontinue any credit, at the absolute discretion of the Bank and as it
may deem fit.
4. (a) All the amounts due or which may become due from the Customer to the
Bank shall bear interest at the rate of ____% as shall be determined
from time to time per annum such interest to be calculated by the
Bank on the basis of the daily balances, and paid by the Customer or
added to the principal by the Bank at the end of the following
months - March, June, September and December of each year; or at the
end of any other period, at the absolute discretion of the Bank,
unless a different rate of interest for any transaction has been
agreed upon between the Bank and the Customer.
(b) The Bank may at any time increase the rate of interest provided that
it gives the Customer written prior notice of 15 days and after the
expiration of 15 days from the day upon which such notice was given
the Customer shall pay the Bank interest at the higher rate in the
manner and on the dates fixed in sub-clause (a) above.
5. Bank charges for handling the above account and for the other services
connected with the extension of credit shall be debited by the Bank to the
Customer's account at such times and rates prevailing and which may
prevail at the Bank from time to time; moreover, charges for the
collection of bills and other negotiable instruments and for any other
service whatever shall be debited by the Bank to the Customer's account at
such times and rate prevailing and which may prevail at the Bank from time
to time.
6. The Bank may, as it deems fit and at its absolute discretion, at any time
from time to time, debit any account of the Customer with any amount due
or which may become due to the Bank from the Customer, in any manner
whatsoever; furthermore the Bank may at any time and from time to time, as
it deems fit and at its absolute discretion, credit any amount it has
received or may receive whether before, at the time or after the date of
payment of all or any of the amounts due or which may become due to the
Bank
<PAGE>
from the Customer, in any manner or way from and/or on behalf of and/or on
account of the Customer and/or by the realisation and/or collection of any
rights and/or of any security in the possession or which may come into
possession of the Bank, in favour of any account as the Bank may decide,
and/or on account of any amount due or which may become due from the
Customer to the Bank, including on account of any principal and/or
interest, and/or charges, and/or costs and/or damages and/or an increment
owing to linkage of principal and/or interest, or partly on account of any
one or the other of the above. Furthermore the Bank may at any time as it
deems fit and at its absolute discretion transfer any amount credited to
the Customer in whichever account to any other account as chosen by the
Bank. The Customer may not rely on Section 1775 of the Mejelle or upon any
legal provision which may come in its stead or amend it or which shall
enact any similar provision.
7. (a) The Customer hereby undertakes to pay from time to time to the Bank
or to its order all the amounts due or becoming due from the
Customer to the Bank, and all the amounts given or which may be
given, paid or which may be paid to the Customer or in his favour or
at his request and on his responsibility, so that they may be paid
or repaid to the Bank, and all the amounts that the Customer has
undertaken or will undertake to pay or repay to the Bank, in any
manner, and all the amounts due or which may become due to the Bank
from the Customer by virtue of bills signed by the Customer,
endorsed by him or guaranteed by him which have been delivered or
which may be delivered to the Bank by the Customer or by any third
party, and similarly any monies which the Bank is or may become
entitled to claim and/or to receive from the Customer for any cause
whatsoever irrespective of whether such cause is attributable to the
relationship of banker and customer or not, within seven days of the
date of the Bank's first demand, notice of which has been given in
an ordinary letter, however nothing set out herein shall affect the
right of the Bank to demand payment without any prior notice in case
of the non-fulfilment by the Customer of his obligation to pay or
under any under any other circumstances entitling the Bank to
payment on demand on the strength of this deed or of any other deed
or by law.
(b) Where any credit is or may be given to the Customer in any foreign
currency (hereinafter referred to as "a foreign currency
transaction") the Customer is liable to pay the Bank or to its order
in the same foreign currency, all the amounts due and becoming due
from him with reference to that same foreign currency transaction
including principal, interest, linkage increments, commissions and
expenses. (The amounts due and becoming due from the Customer as set
out hereinafter referred to as "amounts due in respect of the
foreign currency transaction".) Without affecting the Customer's
specific obligation to repay in foreign currency all amounts due in
respect of the foreign currency transactions as set out above,
whenever, and for any cause whatsoever the Bank may be forced to
recover the amounts due in respect of any foreign currency
transactions in Israel Pounds or the equivalent of Israel Pounds,
and the Customer shall be bound by a Court of Law and/or Execution
Office to pay amounts due in respect of the foreign currency
transaction in Israel Pounds or the equivalent of Israel Pounds, the
Customer hereby agrees that such an obligation shall be binding upon
the Customer to pay the Bank such an amount in Israel Pounds as will
suffice for its conversion into the foreign currency due or becoming
due from him to the Bank as may be required for the recovery of the
amounts due in respect of the foreign currency transaction on the
actual date upon which any such sum is paid to the Bank whether
through the Execution Office or in any other way.
In order to remove any doubts, the Customer hereby agrees that he
will be released from his obligation in this sub-clause only after
he has paid to the Bank in the specific foreign currency as set out
above all the amounts due in respect of the foreign currency
transaction, or - in the case mentioned in the previous paragraph of
this sub-clause - after he has paid to the Bank such a sum in Israel
Pounds as will on the date of payment suffice for the purchase of
the required sum in foreign currency for the recovery of the amounts
due in respect of the foreign currency transaction from the Customer
to the Bank at such time, as set out above.
The Bank may but shall not be bound, at the absolute discretion of
the Bank, at any time after
<PAGE>
the date set out for payment of any amounts due in respect of the
foreign currency transaction, from time to time, to credit the
Customer's account with foreign currency in payment of the amounts
due in respect of the foreign currency transaction or any part
thereof as against the debiting of the Customer's account in Israel
Pounds, and in such a case the Customer shall be bound to pay the
Bank all the amounts in Israel Pounds which may be debited against
his account as stated above, and such a debit in Israel Pounds shall
be deemed to be credit in Israel Pounds extended to the Customer
under the provisions of this agreement as of the date his account
was debited as aforesaid with Israel Pounds and henceforward.
8. The Bank may at any time require the Customer to secure the amounts, in
whole or in part - principal, interest, commissions, linkage increments
and expenses - due or which may become due from the Customer by way of
bills, guarantees, assignments of debt, securities, bills of lading,
contracts, approvals, ready cash, debentures, mortgages, pledges,
pay-orders or any other securities (hereinafter referred to as "the
required securities") which the Bank may agree to accept, and in such a
case the Customer shall deliver the required securities to the Bank upon
the Bank's first demand, notice of which has been given in an ordinary
letter, and shall carry out all the procedures and shall sign all the
documents required or which may be required by the Bank for such a
purpose. This clause is not to be construed so as to limit the Bank to a
particular class of securities it may require by analogy or comparison
with any other terms whatsoever.
9. (a) The required securities given or which may be given to the Bank by
the Customer or on his behalf (hereinafter referred to as "the
securities") shall serve as security for the payment of all the
amounts due and which may become due to the Bank from the Customer,
irrespective of whether the amounts due from the Customer alone or
from the Customer together with others, or whether such amounts have
been given or may be given, have been paid or may be paid to the
Customer or for his behalf or at his request or at his
responsibility, or whether the Customer has undertaken or may
undertake alone or together with others to pay or to repay such
amounts to the Bank, whether as principal debtor, as surety or as
endorser.
Furthermore the securities secure and shall secure the payment of
all the amounts for which the Customer is responsible hereunder
and/or under any other instrument signed by the Customer in favour
of the Bank, irrespective of whether such amounts were, are or will
become due, have been given or will be given, have been paid or will
be paid, in the past, present or future, whether they are payable
prior to the collection and/or the realization of the securities or
thereafter, whether the foregoing amounts were, are or will become
due, have been paid or will be paid, were given or will be given in
any particular manner, conditionally or in any other manner, whether
the Customer has undertaken or may undertake to pay or repay such
amounts in any particular manner, conditionally or in any other
manner, whether they are due directly or indirectly, under the
Customer's name as a private individual or under the name of the
Customer's business or under any other name, whether they are due
from the Customer as he is presently comprised or otherwise
comprised, and in addition thereto all the payments and the expenses
which the Customer is obliged to pay under the provisions hereof.
All the amounts secured and which will become secured by the
securities shall be referred to hereinafter as "the secured
amounts".
(b) Where the Customer is a legal body of whatever type or description,
whether incorporated or unincorporated, or a committee, or a firm,
or a partnership, or a trustee, or a board of trustees, or an
executor of a will, or an administrator of an estate, or the holder
of a joint account with the Bank, or an organization or body
whatsoever being any combination of one or more of the foregoing
bodies, the Customer's obligations shall not be affected by any
alteration of name, structure or composition of the Customer, and
without derogating from the generality of the aforesaid, the
Customer's obligations shall continue to be in full effect as if the
Customer with the altered and/or new name, structure or composition
had existed under the same name, structure or composition on the day
this instrument was signed.
(c) The very fact that the securities are in the possession of the Bank
shall be taken as conclusive proof of their having been delivered to
the Bank as security for the payment of the secured amounts, and
there shall be no need for any deed of charge or for any other
specific instrument for the purpose of creating a legal charge upon
the securities.
10. (a) In every case where the Bank holds or may hold bills signed by the
Customer, endorsed to him or guaranteed by him, the following
provisions shall apply:
(i) The Bank shall be exempted from all the duties of the holder
of the bill such as presentment for acceptance or for payment,
protest, notice of dishonour, and any such legal formalities,
and all the obligations of the Customer deriving from his
signature, endorsement or guarantee shall remain in full force
even if the said formalities were not observed by the Bank at
all or where not observed in the correct manner, at the
correct time or place.
(ii) The Customer waives all rights pertaining to prescription
which he may have or acquire under the Bills of Exchange
Ordinance and/or any other law which may be in force at such
time.
(iii) The counter-value of the bills shall be credited to the
Customer's account only after collection, and even if the
counter-value should be credited to the Customer's account
prior to collection, the Customer shall not be entitled to the
amount thereof or the right thereto until after effective
collection, and the Bank may again debit the Customer's
account in case of non-collection of the bill.
This sub-clause shall apply only in those cases where the Bank
has received or may receive the bills in order that their
counter-value shall be credited to the Customer's account.
(b) In every case where the Bank has received or may receive bills from
the Customer or to his account or on his behalf, the following
provisions shall apply, in addition to the provisions contained in
clause (a) hereof.
(i) The Bank shall be exempted from any responsibility in the
event of such bills being lost in transit, not arriving at
their destination or being lost at the Bank or under any other
circumstances.
(ii) The Customer assumes full responsibility for the authenticity
and correctness of the signatures, endorsements, guarantees,
dates and all the other details pertaining to the bills, and
for authenticity and correctness of the said bills generally
and for their stamping in accordance with law.
(iii) The Bank may - but is not obliged to - protest the bills and
to debit the Customer's account with the costs of protest.
(iv) The Bank may transfer and discount the bills with others at
its discretion.
(v) The Bank may - but is not obliged to - take all legal and
other steps in order to collect the bills, to debit the
Customer's account with the cost of collection, to settle with
the signatories, the endorsers or the guarantors, or to make
allowances in their favour, to receive partial consideration
from them, and to use the counter-value of the bills for the
full or partial payment of the amounts due or which may become
due to the Bank from the Customer.
<PAGE>
(c) In every case where the Bank has received or may receive bills for
security from the Customer or to his account or on his behalf, the
following provisions shall apply, in addition to the provisions
contained in clauses (a) and (b) hereof:
(i) In this Clause "bills" means "bills for security".
(ii) All the bills shall be deemed to be pledged and charged to the
Bank and to its order by way of a first degree pledge as
security for the payment of the amounts due and which may
become due to the Bank from the Customer in accordance with
the conditions hereof. The very fact that the bills are in the
possession of the Bank shall be taken as conclusive proof of
their having been delivered to the Bank as security under the
conditions hereof and there shall be no need for any deed of
charge or for any other special instrument for the purpose of
creating a legal charge upon such bills.
(iii) The bills include the bills themselves and their counter-value
and all the revenue, the income, the rights and the
concessions resulting from the bills or connected thereto and
their counter-value for as long as the pledge shall continue
to exist. If and inasmuch as the Bank has guaranteed the
payment of the bills or of any of them by any person or body,
the bills shall contain the aforesaid guarantee and all the
rights and the monies due and which may become due with
respect to the aforesaid guarantee.
Where all or any of the bills have been lost, damaged or
discharged and the Customer is entitled to compensation or
indemnity or to any other right by virtue thereof, the pledge
and the charge shall apply to any such right to compensation
or indemnity and to any other such right.
(iv) The Customer hereby declares and undertakes that all the bills
delivered and which may be delivered to the Bank are and will
be at the time of their delivery in the complete possession
and ownership of the Customer, free from any pledge, charge,
attachment or any other third party rights, and that the
Customer is entitled and will be entitled to pledge them and
charge them in favour of the Bank.
The Customer undertakes to repay to the Bank upon its first
demand all the amounts expended by the Bank in connection with
an action in which allegations may be made against the
validity of the charge upon the bills, whether the Bank is a
party to the action or not.
(v) The Customer hereby undertakes not to sell, not to pledge to
whatever degree, not to charge to whatever degree, not to
assign, deliver and not to otherwise dispose of the bills or
any part thereof, either directly or indirectly either for
consideration or without consideration without the prior
written approval of the Bank therefor.
The Customer hereby undertakes to immediately notify the Bank
of any instance of an attachment being imposed on the bills or
on any part thereof, and to immediately inform the party
effecting the attachment of the charge in favour of the Bank
and at the expense of the Customer to immediately and without
delay take all steps for having the attachment removed.
(vi) The Customer hereby gives his irrevocable consent to the
effect that the Bank may from time to time assign the bills
and the pledge and the charge on the bills in whole or in part
to whosoever it chooses whether before payment is due thereon
or subsequently, at varying degrees of priority as the Bank
may deem fit.
(vii) In the event that at the time of collecting the bills, the
date of payment of the secured amounts (in whole or in part)
is not yet due, or that they (in whole or in part) only become
contingently due to the Bank, then the Bank may collect from
the amount collected (after deducting all the expenses and
Advocates' fees of the Bank) an amount as shall be sufficient
to cover the foregoing amounts, and the amount so collected
shall be charged as security therefore in favour of the Bank
and shall remain in the Bank's possession until the settlement
thereof.
(d) In the event that the Customer gives the Bank promissory notes
signed by him for facilitating the payment or collection of the
amounts due and which may become due from the Customer to the Bank
or for any other purpose, the following provisions shall apply, in
addition to the provisions contained in clauses (a) and (b) hereof:
(i) Delivery of such promissory notes or the dates for their
payment shall in no wise be deemed to fix the dates for the
payment of the amounts due or which may become due from the
Customer to the Bank, and therefore the right of the Bank at
all times to demand payment of all such amounts shall not be
affected and shall remain in force as if no such promissory
notes had been given.
(ii) Should any such note lack any material particular, the Bank
shall be fully authorized to complete the missing
particular(s) in any such manner and at any time as the Bank
in its absolute discretion may deem fit.
11. In every case where the Customer may assign to the Bank rights to sums of
money or may secure the payment of the amounts due or which may become due
from him to the Bank by way of charges or assignments of rights to sums of
money, the following provisions shall apply:
(a) in this clause the term "rights to sums of money" shall mean rights
of the Customer to receive sums of money from different persons
and/or bodies (hereinafter referred to as "the Debtors") which are
due or which may become due to the Customer by virtue of any
contract and/or undertaking and/or order and/or in any other way
which have been assigned and or which may be assigned by the
Customer to the Bank by way of assignment of debt and/or by way of
irrevocable instructions and/or by any other means (other than
bills).
(b) The Customer shall charge and/or assign to the Bank nothing but
rights to sums of money due or which shall become due in
consideration of work done and/or services rendered and/or
merchandise and/or material is supplied under valid and legitimate
contracts or undertakings. Nothing contained in this sub-clause
shall affect or detract from the rights of the Bank in the event of
rights to sums of money being assigned to it which do not conform
with the provisions hereof.
<PAGE>
(c) Upon the Bank's first demand the Customer shall sign and/or cause
the Debtor or any other person to sign the deeds of charge, the
instruments and confirmations of the assignment of debt, other
notices and documents required or expedient at the discretion of the
Bank for making the said charges and/or assignments effective.
(d) Upon the Bank's first demand the Customer shall present to the Bank
written confirmations of the Debtors that they will pay directly to
the Bank the debts so charged or assigned to the Bank.
(e) (i) The rights to sums of money shall be deemed to be charged to
the Bank and to its order by way of pledge and/or charge of
the first degree under the Pledges Law 5727-1967 or otherwise
as security for the payment of the amounts due or which may
become due from the Customer to the Bank and the very
assignment shall be taken as conclusive proof that the
assignment has been effected for the purpose of conferring a
security and a charge upon the Bank according to the
provisions hereof unless the Bank shall otherwise expressly
approve in writing, and there shall be no need for any deed of
charge or for any other specific instrument for the purpose of
creating a legal charge upon such rights to sums of money.
(ii) The Customer assumes full responsibility for the authenticity
and correctness of the signatures, the guarantees, the dates
and the other particulars connected with the rights to sums of
money and for the stamping of all the documents connected with
the rights to sums of money and the assignment thereof.
(iii) The Bank may but is not obliged to take all legal and other
steps in order to collect the rights to sums of money, to
debit the Customer's account with the costs of collection, to
settle with the Debtors or with any of their guarantors, or to
make allowances in their favour, to receive partial
consideration from any of them, and to use from time to time
the countervalue thereof for the full or partial payment of
the secured amounts.
(f) (i) The rights to sums of money include the rights themselves and
their counter-value and all the revenue, the income, and all
things resulting from the rights to sums of money or connected
thereto and their counter-value for so long as as the charge
and/or the pledge shall continue to exist.
(ii) Should all or part of the rights to sums of money be damaged
or discharged or should any other occurrence affecting the
rights to sums of money take place, and the Customer is
entitled to compensation or indemnity or to any other rights
as a result thereof, the pledge and/or the charge shall apply
to any such right to compensation or indemnity and to any
other such right.
(g) The Customer hereby declares and undertakes that the rights to sums
of money which have been assigned to the Bank and all the rights to
sums of money which may be assigned to the Bank, are and will be at
the time of their assignment, free from any pledge, charge,
attachment or any other third party rights, and that the Customer is
entitled, and will be entitled to pledge them and/or charge them in
favour of the Bank. The Customer undertakes to repay the Bank upon
its first demand all the amounts expended by the Bank in connection
with an action in which allegations may be made against the validity
of the charge of the rights to sums of money, whether the Bank is a
party to the action or not.
(h) (i) The Customer hereby undertakes to punctually perform all of
his undertakings under the agreement and/or the undertaking
and/or the order and/or anything else whatsoever in
accordance with which the rights are due.
(ii) The Customer hereby undertakes not to sell, not to pledge to
whatever degree, not to charge to whatever degree, not to
assign, deliver and not to otherwise dispose of the rights to
sums of money or any part thereof, either directly or
indirectly, either for consideration or without consideration,
not to collect the rights to sums of money, not to compromise
with the Debtors and not to relinquish any part of the rights
to sums of money without the prior written approval of the
Bank therefor.
(iii) The Customer hereby undertakes to immediately notify the Bank
of any instance of an attachment being imposed upon the rights
to sums of money or on any part thereof, and to immediately
inform the party effecting the attachment of the charge in
favour of the Bank and at the expense of the Customer to
immediately and without delay take all steps for having the
attachment removed.
(i) The Customer hereby gives his irrevocable consent to the effect that
the Bank may from time to time assign the rights to sums of money
and the pledge and/or the charge on the rights to sums of money in
whole or portions thereof to whosoever it chooses, before payment is
due thereon or subsequently, at varying degrees of priority to the
rights as the Bank may deem fit.
(j) In the event that at the time of collecting the rights to sums of
money, the date of payment of the secured amounts (in whole or in
part) is not yet due or that they (in whole or in part) become
contingently due to the Bank, then the Bank may collect from the
amount collected (after deducting all the expenses and Advocates'
fees of the Bank) an amount as shall be sufficient to cover the
foregoing amounts, and the amount so collected shall be charged as
security therefor in favour of the Bank and shall remain in the
Bank's possession until the payment thereof.
In every case where the Bank has received or may receive bills of lading
from the Customer or to his account the following provisions shall apply:
(a) In this clause the term "bills of lading" includes bills of lading,
documents of title to goods, warehousekeepers' certificates,
warrants for the delivery of goods, postal receipts, or any other
documents attesting to the despatch of merchandise abroad or to the
title to goods awaiting despatch or which have been despatched
abroad.
(b) The Customer shall deliver to the Bank only bills of lading
pertaining to goods ordered from the Customer in accordance with
valid and legitimate orders and/or contracts of sale, and referring
only to goods belonging entirely to the Customer free from any
charge, attachment or any other third-party right.
<PAGE>
(c) The charge vesting in the Bank by the delivery of the bills of
lading shall apply to the documents, the goods to which they refer,
the price obtained from all sales thereof, the insurances upon them,
and the rights of the Customer as vendors who have not yet received
their price, and any other rights of the Customer touching upon the
said goods and their price.
(d) The Customer shall insure the goods and shall continue to insure the
same for their full value against loss or damage in transit (by
land, sea and air), war risks, fire, civil commotion, theft and
other damage specified by the Bank, and with such insurers and on
such conditions as the Bank may require. The Customer shall endorse
the certificates of insurance in favour of the Bank or shall cause
the incorporation in the certificate of insurance of a clause
creating a charge in favour of the Bank, as the Bank shall choose,
and shall produce to the Bank the certificates of insurance and the
receipts received in payment of the insurance premiums at the first
demand of the Bank. The Bank itself may - but not be bound to do so
- insure the goods for a sum, against the risks, and on such
conditions as it may deem fit, and at the Bank's first demand the
Customer shall pay to the Bank the cost of insurance and all the
other expenses incurred or which may be incurred by the Bank in
connection therewith, in addition to interest at the rate specified
in clause 4 above, from the date the expense was incurred until full
payment has been made by the Customer. The Customer absolves the
Bank in advance from any responsibility should the Bank fail to
arrange such insurance or fail to arrange it in the correct manner
or for the correct sum, or in the event of the Insurance Company
failing to pay for the damage or loss as a result of a defect in
the form of the insurance of failure to make demand or for any other
reason whatsoever.
Whether the insurance of the goods is executed by the Customer or by
the Bank, or whether executed in accordance with the requirements of
this clause or otherwise, or if the rights arising from any
certificate of insurance have been assigned to the Bank or not, the
Customer hereby irrevocably authorises the Bank to represent him in
such a manner that the Bank alone (to the exclusion of the Customer)
shall be entitled to negotiate with Insurance Companies and to
settle with them all claims arising from the insurance, including
compromise settlements or by waiver of the Customer's rights, and to
collect the insurance payments, and to appropriate them to payment
on account of amounts due and which may become due from the Customer
to the Bank. This power of attorney is irrevocable since the rights
of the Bank are dependent upon it. The Customer hereby waives in
advance all and any assertions and/or claims whatsoever of any kind
or class without exception towards the Bank in respect of any such
arrangements made by the Bank. Should any Insurance Company transfer
any amounts to the Customer in respect of the insured goods, such
sums shall be kept in trust by the Customer on behalf of the Bank,
and the Customer shall be bound to transfer them to the Bank
immediately on their receipt.
(e) All the rights arising from the insurance of the goods, from
insurance against foreign trade risks in respect of the goods as
well as the rights under the Property Tax and Compensation Fund Law
5721 - 1961 as it may be in force from time to time or any law
replacing it - all these are hereby charged in favour of the Bank as
security for the full and prompt discharge of all the amounts due or
which may become due to the Bank from the Customer.
(f) The Customer takes full responsibility for the verity and
correctness of the details contained in the bills of lading, the
accounts and the other documents connected with the despatch of the
goods and for the verity and correctness of the signatures and of
the other details contained in the said documents.
(g) In case the purchaser does not redeem the goods or in any other
eventuality of the goods remaining or being returned to the Bank or
its agents - the Bank may sell them at home or abroad at such price
and under such conditions and to any purchaser as it shall deem fit,
and all the expenses involved in the sale or return of the goods or
in connection with any other matter touching upon the goods or their
counter-value shall be borne by the Customer in addition to interest
charged at the rate mentioned in clause 4 hereinabove from the date
the expense was incurred until full payment has been made by the
Customer. The Bank shall be free from any responsibility whatsoever
for losses, damages or expenses incurred by the Customer as a result
of the loss of the bills of lading or the gods or as a result of the
sale of the goods at reduced prices, or as a result of their return
to Israel or non-receipt or non-transfer of the goods or their
counter-value or the institution of legal proceedings or for any
other reason whatsoever.
13. In every case where the Bank has received or may receive securities from
the Customer or to his account, the following provisions shall apply:
(a) The Bank may, but shall not be bound to, insure on behalf of the
Customer or on its own behalf, all or part of the securities, liable
to participation in a lottery or to be redeemed at an amount less
than the market price and all the expenses involved therein shall be
borne by the Customer and debited to his account. The Bank shall be
free of any responsibility whatsoever in the case of the insurance
not being executed at all or not being executed at the right time or
in the correct manner or where the Insurance Company does not pay
for the damage or loss as a result of a defect in the form of the
insurance or as a result of failure to make demand or for any other
reason whatsoever.
(b) The charge vesting in the Bank by the delivery of the securities
shall also apply to the interest, the dividend and to all the
benefits and rights accruing to the securities in any form or manner
whatsoever and to the counter-value of the securities.
(c) The Bank may - but shall not be bound to - execute payments or
expenses in accordance with demands for payment on account of
securities or in connection with the collection of the counter-value
of the securities, or the interest coupons or the dividend or in
connection with any other matter affecting the securities and all
the said payments and expenses shall be debited to the account of
the Customer. The Bank shall be free of any responsibility
whatsoever in the event of such payments not being made at all or
not being made at the right time or in the correct manner.
(d) The Bank shall be free of any responsibility whatsoever for the
losses, damages or expenses incurred to the Customer in case of a
fall in the market price of the securities, their participation in a
lottery or the redemption at less than the market price or for any
other reason whatsoever.
(e) The Customer shall sign all deeds of transfer and other documents
which are required or which may be required at the absolute
discretion of the Bank in order to enable the Bank to sell the
securities or to handle them in any other manner, and the Customer
shall produce them to the Bank on first being demanded to do so by
the Bank.
<PAGE>
(f) The customer takes full responsibility for the verity and
correctness of all the details contained in the securities, the
deeds of transfer and the said documents.
14. In the event of death, legal disqualification bankruptcy, imprisonment or
of the departure from the country of any party including the maker,
drawer, drawee, endorser or guarantor - in respect of any of the
securities held or which may be held by the Bank, or in the event of the
issuance of a receiving-order or of a winding-up order or the adoption of
a resolution calling for the winding-up of such a party, or where the
security is a bill and the drawee will not accept such bill or in any
other case which, in the opinion of the Bank, affects or is liable to
affect the nature or validity of any of the said securities or affecting
or liable to affect an undertaking of any party thereto - the Customer
shall be bound to pay the Bank, on first being demanded to do so in an
ordinary letter, the full sum due for payment in accordance or in
connection with any security mentioned above whether its date of payment
has fallen due or not.
15. The Bank may, at any time, take all action whether legal or otherwise,
which may be required or deemed desirable in the opinion of the Bank in
order to collect any amount due for payment under any or all of the
securities held or being held by it; however the Bank shall not be obliged
to institute or continue such proceedings, and it shall not be held
responsible for the efficacy of the proceedings so instituted. All the
expenses involved in the above proceedings shall be debited to the
Customer's account and bear interest at the rate specified in clause 4
above as of the date such expenses were incurred by the Bank until their
full settlement by the Customer.
16. The Bank may, at any time and at its absolute discretion, settle with any
party to any of the securities held or which may be held by the Bank, by
accepting payments in instalments or by accepting an amount smaller than
the specified amount of the security in full discharge thereof, or by
release or waiver of all or any of the rights of the Bank or of the
Customer under any security, or by granting an extension or reduction or
by making any other arrangement whatsoever, as the Bank may deem fit, and
it is hereby stipulated that the above actions shall not detract, revoke,
influence, affect or diminish in any way whatsoever from the full force of
the obligations of the Customer hereunder or in respect of any security.
17. In each and every of the following cases, the Bank may demand the
immediate repayment of all the amounts due and/or becoming due from the
Customer to the Bank in any manner whatsoever, and these amounts shall
bear interest at the maximum rate of interest prevailing at the Bank at
such time or (whichever be the higher) interest at the maximum legal rate
permissible at such time in Israel, from the date thereof until full
payment has been made:
(a) Where the Customer does not punctually pay an amount of principal or
interest or charge or linkage increments or expenses or any other
amount.
(b) Where the Customer infringes and/or fails to observe any of the
provisions herein contained or contained in any other document which
has been signed or which may be signed by the Customer or where it
becomes apparent that any of the declarations which have been made
or which may be made herein by the Customer or in any other document
are incorrect or imprecise.
(c) Where a receiving order is issued against the Customer or against
any of the individual members constituting the Customer where a
winding-up order is issued against the Customer or against any of
the individual members, or where the Customer or one of the
individual members adopts a resolution calling for voluntary
winding-up.
(d) Where a receiver or receiver and manager are appointed over all or
any part of the assets of the Customer or over the assets of any one
of the individual members of the Customer.
(e) Where an attachment be placed upon or some similar procedure of
execution be taken against any part of the assets of the Customer or
of any one of the individual members of the Customer by a competent
court in Israel or if an attachment be placed upon or some similar
procedure of execution be taken against all or any of the securities
which have been delivered or which may be delivered to the Bank or
against goods in respect of which bills of lading have been
delivered or may be delivered to the Bank or against sums standing
to the Customer's credit in any account whatsoever, and have not
been removed within 15 days of their implementation.
(f) Where the Bank considers, at its absolute discretion, that a change
has been effected with regard to the control over the Customer as
against the state of affairs existing when this agreement was
signed, without having previously obtained the Bank's written
approval. Without affecting the generality of the aforesaid, the
following actions, among others, shall be deemed to be a change with
regard to the control over the Customer:
Transfer of shares voluntarily or otherwise (excluding the transfer
of shares by way of succession). A resolution adopted by the members
constituting the Customer influencing or liable to influence the
control over the Customer.
Any change in the composition of the members constituting the
Customer, in their comparative strengths and/or in the composition
of persons or institutions resolving or empowered to make
resolutions on behalf of the Customer, or in the number required by
law or empowered to act as required by law.
(g) Where the Customer or anyone of the individual members constituting
the Customer stops paying his debts or carrying on his business or
comes to a settlement or a compromise with his creditors.
(h) Where there is a stoppage of work or a considerable part thereof for
two months or more in respect of the Customer's business or of any
one of the members constituting the Customer.
(i) Where the Bank considers, at its absolute discretion, that an event
has occurred which affects or is liable to affect the Customer's
financial capacity.
<PAGE>
18. In any of the cases specified in the previous clause the Bank may take
action as it deems fit in order to collect any amounts due or which may
become due from the Customer in any way whatsoever, and in particular,
without affecting the generality of its rights, the Bank may sell or
assign in any other manner whatsoever the securities held by the Bank at
such time and/or the goods in respect of which the Bank at such time may
hold bills of lading and/or to realize the said securities in any other
way which the law will allow. All the expenses therein involved shall
devolve upon one Customer and shall bear interest at the rate specified in
clause 4 above from such expenses were incurred until their full
repayment, and until such time the said expenses shall be secured by the
said securities or by their counter-value. Nothing herein contained shall
be deemed to prejudice the right of the Bank to claim from the Customer
alone or from the Customer together with others, upon any bill, contract,
undertaking, guarantee or security or any other document, and any such
claim shall not prejudice the right of the Bank to claim whatever may be
owed by the Customer to the Bank hereunder at such time as the Bank may
determine.
19. The Customer's obligations towards the Bank shall remain in full force and
effect even where the Bank, with or without the Customer's consent, and
without notifying the Customer at the Bank's sole discretion:
(a) Grants the Customer or any person responsible with or for him,
either as a guarantor or otherwise, any extension or concession or
causes the non-performance of any obligation for which the Customer
is responsible or is a surety therefor.
(b) Terminates, increases, varies or renews any credit extended or which
may be extended to the Customer, and terminates, varies or renews
any condition of such credit.
(c) Accepts, alters, exchanges, releases, renews, amends or refrains
from executing or realizing bills, negotiable instruments,
guarantee, guarantees and/or other securities held or which may be
held by the Bank, whether received or to be received from the
Customer or otherwise, whether as a result thereof damage is
incurred by the Customer or not.
(d) Compromises, makes any arrangement with the Customer or with others
or with any of them separately or with anyone else responsible
therefor together with the Customer or with any guarantor.
(e) Releases whosoever of the units comprising the Customer from all or
any part of their obligations hereunder and/or receives any
participation or makes any arrangement with the Customer or with any
of the units comprising the Customer separately.
20. Any amount and/or any payment in any form whatsoever, which the Bank may
receive from the Customer or to his account or from any other person or
assets or from the realization of any right and/or security in any way
whatsoever with a view to reducing the secured amounts or any of them,
irrespective of whether such amount and/or payment has been paid or made
prior to, at the time of or after the date of payment of all or any part
of the secured amounts, shall be deemed as general payment and the Bank
may hold them pending without it being obliged to employ them for reducing
secured amounts of any of them if the amount and/or the payment are
designated for such purpose by the person at liberty to so designate them
in his own accounts or at all.
21. The Bank shall have the right to possession, set-off and to a banker's
lien against all the amounts held or which may be held by it to the credit
of the Customer at any time in a current account and in any other account
and over any asset, (including, without derogating from the generality of
the aforesaid term, gold, securities, coins, bank notes, documents in
respect of goods, insurance policies, transfers of debt, deposits,
charges, mortgages and other rights) held and/or which may be held
standing at the disposal of and/or which may stand at the disposal of
and/or on behalf of the Customer by the Bank in any way or manner,
including such as have been delivered or which may be delivered to the
Bank for collection and/or for security and/or for safekeeping and/or in
any other way, and over their counter-value. The Bank may at any time make
whatever use of any asset to which the aforesaid lien shall apply,
including collection and sale, at any price and on any conditions as the
Bank may deem fit, and to make use of the counter-value (in whole or in
part) so obtained as a result of or in connection with such use and/or
collection or sale for the part or full payment of the amounts due or
which may become due from the Customer to the Bank. In the execution of
the aforesaid the Bank may take all legal steps or otherwise as it may
deem necessary. All the expenses involved in the said use and/or sale
and/or legal steps shall be borne by the Customer and the Bank may debit
them to the Customer's account. Whenever the Customer shall owe the Bank
sums of money hereunder, or is likely to owe or to owe such sums
contingently, the Bank may make full use of its aforesaid right to
possession, lien and set off or any of them, for the payment of the
amounts due or which may become due from the Customer to the Bank or as
security for their payment.
The Customer neither has nor shall have with regard to the Bank any claims
and/or complaints of any kind or nature whatsoever in respect of any of
the actions set out hereinabove.
22. The securities which have been delivered or which may be delivered to the
Bank by the Customer hereunder shall be mutually independent securities
and shall not influence and not be influenced by other or additional
securities which the Bank now holds or which it may hold from time to
time, and they shall constitute a fixed and revolving security
notwithstanding the settlement in part or in whole of the account in
whichever form and they shall also serve as a fixed and revolving security
for the payment of all the other amounts that the Customer may owe to the
Bank in any account and in any way whatsoever, and they shall remain in
full force until such time as the Bank may actually release the
securities.
23. Where any person guarantees the payment of the amounts, in whole or in
part, being due or which may become due to the Bank from the Customer, the
Bank may, but shall not be bound, to furnish such guarantor from time to
time with such information affecting the state of the account of the
Customer, as the Bank may deem fit.
24. The Bank shall be entitled to demand and receive from the Customer at any
time to be put at the Bank's disposal for inspection during accepted
business hours, any balance sheet, books of account, dockets, books and
other references with regard to the
state of the Customer's affairs, and to receive from the Customer signed
and certified copies of any document or reference as aforesaid or of any
extract therefrom, and explanations upon any matter therein contained.
25. The Bank may, at its absolute discretion, accept or refuse to accept any
instructions or messages which may be given to it verbally, by telephone,
by telegramme or in any other way not being a clear and legibly written
document, and inasmuch as the Bank may agree to act upon any instructions
or messages so given, the Customer accepts all risk and responsibility for
any error, mistake, misunderstanding, discrepancy, and the Customer
discharges the Bank from any responsibility for any damage or loss which
may be caused to the Customer as a result of giving orders or instructions
or messages in any way not being a clear and legibly written document as
aforesaid.
26. The Customer is obliged to inform the Bank immediately:
(a) Of any case where a demand is made or a claim of right is exercised
with regard to any security which he has given or which he may give
to the Bank and/or of any process of execution or of any steps taken
for the realization of any security as aforesaid.
(b) Of any security which the Customer is about to give to any person
other than the Bank.
(c) Of any act or event mentioned in clause 17 (c)-(h) above.
(d) Of any curtailment of the Customer's affairs or any reduction in the
Customer's capital.
(e) Of the reduced value of any security which has been given or which
may be given by the Bank to the Customer.
27. The Bank's accounts in all their details as recorded in its books shall be
deemed to be correct and shall serve as conclusive evidence against the
Customer, inter alia, with reference to the amount of the debt, with
reference to all the particulars of the bills, guarantees and other
securities which are given or which may be given to the Bank for security
or for collection and with reference to their collection.
28. The Customer shall be bound to inform the Bank in writing of any objection
or opposition he may have - if any - to any account, extract of account,
approval or notice (including copies thereof) which may be sent to the
Customer by the Bank, within 15 days of their receipt, and if such written
objection or opposition as aforesaid is not received by the Bank within
the time stated above, the Customer shall be deemed to have agreed to the
contents of any such document, and as acknowledgement by the Customer as
to the correctness of the sums and the other details therein contained.
29. Any waiver, estoppel or failure to respond on the part of the Bank in
connection with the non-performance or incomplete and imprecise
performance of any obligation of the Customer herein contained, shall not
be deemed to constitute a waiver on the part of the Bank of any right
whatsoever of the rights of the Bank in connection with such
non-performance or incomplete and imprecise performance. Should the Bank
on any occasion agree to any matter contrary to the conditions of this
agreement, its agreement shall be deemed to be limited to such occasion
alone and shall not be taken as agreement or waiver in general.
30. The Bank may from time to time assign its rights hereunder, in whole or in
part, to another or others without resorting to the agreement of the
Customer, by endorsement in the margin or on the face of this document, or
in any other way which the Bank shall deem fit.
31. The Customer hereby waives the necessity for all notarial and other
official notices with reference to a breach of any of the provisions
herein contained.
32. The address of the Customer is as specified at the head of the first page
hereof or any other address in Israel of which notice has been given to
the Bank by the Customer by registered letter, the receipt of which has
been affirmed in writing by the Bank. Any notice which may be sent to the
Customer by the Bank by ordinary post according to the address as
specified above shall be deemed to have been received by the Customer in
time in accordance with normal postal procedure. Written declaration by
the Bank as to the despatch of a notice, the date of its despatch and its
contents shall be conclusive evidence against the Customer as to the date
and despatch and contents thereof.
33. The parties hereto elect the city of Tel-Aviv as the place of jurisdiction
for any claim arising from this agreement, however nothing herein
contained shall affect the right of the Bank to sue the Customer in any
other Court of Law which it may deem fit.
34. All of the costs involved in drawing up this deed and the stamping
thereof and all of the costs involved in drawing up any of the documents
required and/or which may be required, at the Bank's absolute discretion,
in connection with the securities, their stamping and registration and all
of the costs involved in the collection and/or registration and/or
discharge and/or redemption of any of the securities including Advocates'
fees and all of the costs involved in safeguarding and maintaining any of
the securities shall devolve upon the Customer and they too shall be
secured by the securities.
35. (a) The Bank shall be entitled to entrust the securities or any of them
with a bailee at the discretion of the Bank and to replace such
bailee from time to time at the Bank's absolute discretion.
(b) The Bank shall be entitled to register the securities or any of them
with any competent authority under the provisions of any law.
36. The Customer and/or any person whose right is likely to be affected by the
delivery of the securities or of any of them or by their realization,
shall not be entitled to pay their debts before the prescribed date of
payment has fallen due, and they shall not be entitled to any other right
conferred upon them under Section 13(b) of the Pledges Law 5727-1967 (if
conferred) or under any other provision mending or being substituted for
the foregoing provision. The Customer undertakes to sign every document
and form as required by the Bank if and insofar as with reference to all
or any of the laws of the State of Israel and signature of the Customer is
or may be, at the absolute discretion of the Bank, required upon any
document or form in order to keep this deed and all of the provisions
thereof and/or the securities in full force and effect. With a view to
implementing the provisions contained in this clause, the Customer hereby
appoints the Bank as his attorney in fact, to be so by itself or through
such person to whom the Bank may assign its authority, with the authority
to sign any document or form as required by the Bank, without the Bank or
its attorney-in-fact being responsible in any way towards the Customer for
any act or omission committed by it in accordance with this clause or
pursuant thereto. This appointment is irrevocable since the rights of the
Bank are dependent thereon.
AND IN WITNESS WHEREOF THE PARTIES HAVE HEREBY SIGNED AT THE PLACE
AND ON THE DATE SPECIFIED HEREINABOVE.
The Customer The Bank
<PAGE>
THE FIRST INTERNATIONAL BANK A SAFRA BANK For Internal Use Account No.
________________
SUPPLEMENT TO THE GENERAL DEBIT AGREEMENT
IN THE MATTER OF COMPUTATION OF INTEREST
Made in Tel-Aviv on the 11 day of February 1999
BETWEEN:
The First International Bank of Israel Ltd.
(hereinafter the "Bank") of Ahad Ha'am 9 Street, Tel-Aviv of the one part
AND:
PEC Israel Finance Corporation Ltd.
of 3 Daniel Frisch Street, Tel-Aviv, Company No. 51-0252042
(hereinafter the "Customer") of the other part
Whereas the Bank and the customer have entered into a General Debit Agreement
(hereinafter: "Debit Agreement");
And whereas the Bank and the customer wish to amend the Debit Agreement and to
incorporate therein the amendments set forth below;
Now therefore it is agreed by and between the parties as follows:
1. The method of fixing and calculating interest stipulated in Clause 4 of
the Debit Agreement, for debit balances on current accounts in sheqels
(hereinafter - "current account"), shall be replaced by the following
procedure:
A. Interest on debit balances on current account shall be fixed at an
annual rate determined as below:
(1) The interest rate for debit balances on current account
(hereinafter the "debit account rate") consists of a base rate
(also known as "prime rate") which is fixed by the bank from
time to time for all customers pursuant to developments in the
economy and the credit market (hereinafter: the "base rate")
and a supplementary rate (also known as "risk supplement")
fixed by the bank for the particular customer (hereinafter:
the "supplementary rate"). The debit account rate, comprising
both the base rate and the supplementary rate as aforesaid, is
given at the foot of statements sent by the bank to each
customer. Interest, on debit balances that exceed an approved
overdraft facility will be charged at the debit account rate
plus an excess interest rate (hereinafter called: "excess
interest").
(2) The bank will notify customers from time to time of changes in
the base rate and of the date such change shall take effect.
The method of giving such notice and the effective date
thereof shall be as determined from time to time by the
Examiner of Banks or other competent authority.
(3) The supplementary rate will be notified by the bank to the
customer at the time the overdraft facility is agreed and/or
in the event of any change in the terms thereof.
(4) Amounts due or becoming due to the bank on current account in
excess of an approved overdraft facility will carry excess
interest at the rate fixed by the bank from time to time and
published as stated in sub-para (2) above.
(5) Should an overdraft facility not be approved for the customer
or be cancelled for any reason, debit balances on current
account shall bear interest at the base rate plus the maximum
supplementary rate prevailing in the bank, plus excess
interest.
B. Should different rates of interest be fixed for different amounts of
debit balances on current account, the provisions set out herein
shall apply to such rates.
C. Interest will be calculated by the bank on a daily basis (on the
actual number of days in the year) in respect of quarterly
accounting periods (i.e. January - March, April - June, July -
September, October - December) or in respect of such other
accounting periods as shall be determined by the bank.
D. Interest calculated in accordance with the foregoing shall be
charged to the customer's current account on the first banking
business day of the accounting period immediately following the
period in respect of which interest has been calculated and shall be
paid by the customer on such date.
2. Loans granted to the customer by the bank shall carry interest at such
rate and in such manner as shall be determined in the loan documentation.
3. If the parties hereto have signed a Supplement to the Debit Agreement in
the matter of computation of interest (form E-127) the provisions thereof
shall be replaced by this instrument.
AS WITNESS OUR SIGNATURES HERETO:
- - ----------------------------------- ----------------------------------------
THE BANK THE CUSTOMER
<PAGE>
THE FIRST INTERNATIONAL BANK OF ISRAEL LTD.
A Safra Bank
APPLICATION FOR FOREIGN CURRENCY LOAN (LIBOR + INTEREST)
ISRAELI RESIDENT
(convertible by the bank, wholly or partly, into a dollar-linked Sheqel loan and
reconvertible, with instructions to debit F.C. account only)
Customer's name: PEC Israel Finance Corporation Ltd.
Address: 3 Daniel Frisch St., Tel-Aviv
Account No.: 407057
Date: 17.2.99
The First International Bank of Israel Ltd.
Tel-Aviv Main Branch
Dear Sirs,
Within the scope of the General Debit Agreement signed between us
(hereinafter the "Debit Agreement") and subject to our obligations towards you
therein and under any other document signed and/or to be signed by us, we
request you to grant to us a foreign currency loan (hereinafter - "the loan") on
the terms set forth below:
1. LOAN CURRENCY AND AMOUNT
The loan will be in U.S. Dollars (hereinafter - "Dollars") in the amount
of 24,000,000.
2. REPAYMENT OF PRINCIPAL
The principal amount of the loan will be repaid in Dollars:
|_| by ____ monthly*/quarterly*/semi-annual* consecutive and equal
instalments of _______________ each on the _________ day of the
month, commencing on __________.
|_| by ____ consecutive and equal instalments of ___________ each on the
last day of March, June, September and December in each year
commencing on _____________.
|X| on 17.5.99.
3. LOAN INTEREST
a) Interest payment dates
<PAGE>
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We will pay you daily interest on the principal of the loan outstanding
from time to time, in Dollars and on the following dates:
|X| on the principal payment dates specified in clause 2 above.
|_| on the last day of each calendar month commencing on ________
and a final payment on the date of payment of the first
instalment of loan principal.
|_| on the last day of March, June, September and December in each
year commencing on _________, and a final payment on the date
of payment of the final instalment of loan principal.
|_| monthly*/quarterly*/semi-annually* on the _________ of each
month commencing on the __________, and a final payment on the
date of payment of the final instalment of loan principal.
b) Interest periods
Interest on the outstanding principal amount of the loan will be
computed by the bank in relation to interest periods.
The first interest period will run from the date of disbursement of
the loan up to the first interest payment date stipulated in
sub-para. (a) above or the deferred date pursuant to para. 4 below
(exclusive of such date). Subsequent interest periods will run from
an interest payment date (inclusive of such date) to the next
following interest payment date stipulated in sub-para. (a) above
(exclusive of such data) or the deferred date pursuant to para. 4
below.
c) Rate of interest and manner of determination
The principal amount of the loan outstanding from time to time shall
carry interest calculated on a daily basis from the date of
disbursement of the loan up to the principal payment dates specified
above at the rate of 0.75% above the LIBOR rate as defined below.
"LIBOR" rate herein shall mean the LIBOR rate determined by the bank
at the beginning of each interest period for Dollars and for a
period of 1, 3, 5 or 12 months (each such period being hereinafter
<PAGE>
-3-
referred to as "a fixed period") according to the interest period
stipulated in sub-para. (b) above PROVIDED HOWEVER that:
I) in a loan where interest is payable in a lump sum concurrently with
the principal amount and the period of the loan does not coincide
with any timed period, the LIBOR rate for the loan will be the LIBOR
rate determined by the bank for the first fixed period which is
immediately longer than the period of the loan.
II) in a loan where interest is payable by instalments and the first
and/or the last interest period(s) is/are shorter than the
intervening interest period(s), the LIBOR rate for the first and/or
the last interest periods (as the case may be) will the LIBOR rate
determined by the bank for a fixed period coinciding with the
intervening interest period(s).
The LIBOR rate for the first interest period is 5% p.a. and the full
interest rate for the first period is 5.75% p.a. (adjusted rate
____% p.a.).
At the end of each interest period, the bank will determine the
LIBOR rate for the following interest period and notice of such rate
will be sent to us.
4) DEFERRED PAYMENT
In this paragraph "Business Day" means a day on which transactions in
Dollars are carried out. If any date for payment of principal and/or
interest and/or commission shall fall on a day which is not a business day
in the bank, the date for effecting such payment shall be deferred to the
next following business day and interest up to such date will be
calculated accordingly.
5) EFFECTIVE COST
The effective cost of the loan is ____%.
6) TAXES, DUTIES AND OTHER CHARGES
Without derogating from our aforementioned obligations, we undertake to
pay you any amount demanded by you in reimbursement of any tax, duty or
fees that you have been and/or may be obligated to pay and/or which we
have been obliged and/or may be obliged to pay in connection with the loan
as well as in the event that the bank may demand immediate repayment of
the loan for any reason.
<PAGE>
-4-
7) LOAN CONVERSION
a) You may at any time at your discretion convert the unpaid balance of
the Loan or any part thereof into a dollar-linked Sheqel loan and
you may reconvert the same or any part thereof and repeat such
conversions, each conversion as aforesaid being referred to
hereinafter as a "conversion".
b) A conversion will be effected by making a new loan available, in
Sheqels or dollars as the case may be, in the amount that the bank
wishes to convert out of the existing loan and the proceeds of the
new loan will be used to redeem all or part of the existing loan.
c) For so long as a loan is maintained in Sheqels, the principal amount
thereof and interest thereon shall be linked to the dollar at the
representative rate of the dollar published by the Bank of Israel
from time to time.
d) For the avoidance of doubt, we confirm that no change shall take
effect by reason of any conversion, in the amount of principal,
interest or commission payable by us to you in dollars had such
conversion not taken place.
e) Save as aforesaid, the terms and conditions of the Loan as specified
herein shall remain unchanged.
8. PREPAYMENT
We shall not be entitled to prepay all or any part of the outstanding
principal amount of the loan or interest thereon or any part thereof
before the payment date(s) stipulated above unless we obtain you prior
consent thereto. You may attach such conditions to your giving consent as
you shall deem fit.
9. DISBURSEMENT INSTRUCTIONS
1. the loan will serve to cover foreign currency transactions permitted
under the General Permit to the Currency Control Regulations, as
follows:____________________________________________________________
____________________________________________________________________
|_| ____________________________________________________________________
Your compliance with our above instructions shall constitute
<PAGE>
-5-
proof of our receipt of the loan on the terms contained herein.
10. IRREVOCABLE INSTRUCTIONS
We hereby give you irrevocable instructions to debit our Dollar account
maintained with you in our name in the amount of all sums which we may be
obliged to pay under this instrument on the payment dates stipulated above
or on the deferred dates or on payment dates determined by you if we shall
be obliged to make immediate repayment of the loan under the Debit
Agreement as the case may be (hereinafter the "agreed repayment dates"),
and we undertake to pay any amount debited to our account as aforesaid on
the due date.
If on the agreed repayment dates the said account shall not show a
sufficient balance in the amount of the said debt, you may debit a foreign
currency debitory current account to be opened in our name and we warrant
and acknowledge that any sum debited as aforesaid and not paid by us on
its due date shall bear interest at the rate prevailing at the time in
your bank on debit balances in foreign currency that are not paid on their
due dates.
PEC Israel Finance Corporation Ltd.
Account No. 467057
The account no. is intended for
filing/internal use by the bank
only and does not form part of this
guarantee.
Details of the customer (the Debtors):
Identity No./
Name Corporate No. Address
---- ------------- -------
1. PEC Israel Finance 51-025204-2 3 Daniel Frisch St., Tel-Aviv
Corporation Ltd.
Details of guarantors:
(Guarantor's name to be inserted only at the time of signing this guarantee)
Identity No./
Name Corporate No. Address
---- ------------- -------
1. PEC Israel Economic 511 Fifth Avenue
Corporation New York, New York 10017, USA
with a copy c/o:
Discount Investment Corporation Ltd.
14 Beth Hashoeva Lane,
Tel-Aviv, Israel
Attn: Managing Director
TO:
The First International Bank of Israel Ltd.
SPECIFIC GUARANTEE
Preamble
Whereas PEC Israel Finance Corporation Ltd. (hereinafter: "the Debtors") are
indebted and/or may become indebted from time to time to The First International
Bank of Israel Ltd. (hereinafter: "the Bank") pursuant to in terms and
conditions as in the form attached a copy of which is attached hereto and forms
an integral part hereof (hereinafter: "the main agreement"), and shall be signed
by the Debtors not later than February 17, 1999.
NOW THEREFORE the undersigned hereby jointly and severally guarantee, engage,
declare, agree and undertake towards the Bank as follows:
General
1. a) The preamble to this instrument forms an integral part
thereof.
<PAGE>
b) Reference to the signatories hereof shall be deemed to include and
to refer to the signatories hereof or to whomsoever of them
including their successors, the executors of their wills and the
administrators of their estates and all the attorneys or
representatives of whomsoever of them.
c) The term "the Debtors" and reference to the same shall be deemed to
include and refer to the Debtors or to whomsoever of them, including
their successors, the executors of their wills and the
administrators of their estates and all the attorneys or
representatives of whomsoever of them.
d) The term "the Bank" includes each and every one of the Bank's
branches or offices existing at the date hereof and/or which may be
opened henceforth in any place, the attorneys and representatives of
the Bank and any company or body with whom the bank may become
amalgamated in any form whatsoever.
e) The term "bill" includes all negotiable instruments whatsoever.
f) Unless the context otherwise requires, the singular shall include
the plural and vice-versa, and the masculine shall include the
feminine and vice-versa.
g) If this instrument shall be signed by two or more persons, it shall
be binding upon them jointly and severally.
h) The headings hereof are for convenience of reference only and they
do not constitute a means for construing or interpreting this
instrument.
The Secured amounts
2. The undersigned hereby jointly and severally guarantee to pay to the Bank
from time to time on demand all amounts due or which may become due to the
Bank from the Debtors under the main agreement or any agreement amending
or replacing the same; all the amounts secured hereby are hereinafter
referred to as "the secured amounts".
Payment demand
3. The Bank may at any time demand of the undersigned to pay the secured
amounts, in whole or in part, in one or more payments without being
required to demand payment from the Debtors beforehand and without being
required to realize any other security beforehand, and the undersigned
hereby undertake to pay to the Bank from time to time such sum not
exceeding the secured amounts as the Bank may demand within seven days of
the Bank's first written demand provided, however, that all amounts
requested to be paid are due and payable under the main agreement. Any
amount demanded by the Bank from the aforesaid which is not paid to the
Bank within 7 days from the date of demand shall carry interest from the
date of demand until actual payment (even if payment is made after a claim
has been filed or judgment has been entered against the Debtors and/or the
undersigned) at the highest rate prevailing in the Bank from time to time
in
<PAGE>
respect of debit balances on current debit accounts (in Israel currency or
foreign currency as the case may be) which have not been paid when due,
calculated by the Bank and accrued to principal at the end of each March,
June, September and December in every year or at the end of such other
period at the Bank's sole discretion, or at the maximum interest
applicable to arrears in the payment of such sum pursuant to the main
agreement or any agreement amending or replacing the same, whichever rate
shall be chosen by the Bank. The bank's written confirmation of the
aforementioned rate of interest shall serve as proof against the
guarantors of the particulars contained therein.
Irrevocable guarantee
4. This guarantee is irrevocable and shall not be cancelled and/or amended in
any manner as the rights, inter alia of the Bank, are dependent thereon.
Void payments and securities
5. Notwithstanding the foregoing provisions, the undersigned hereby agree,
whether the Bank confirms to the undersigned that their liability has
terminated or whether the Bank has made any arrangement whatsoever with
the undersigned, that in the event any payment received or to be received
by the Bank from any source on account of the secured amounts or any
collateral or surety given or to be given to the Bank by the Debtors or by
the undersigned or by any other person before the confirmation or
execution of an arrangement shall be deemed to be void by virtue of the
provisions of any law including the provisions of any law relating to
bankruptcy and liquidation that shall be in force at such time and/or in
the event of the Bank being ordered by a court of law of repay to any
person or body any amount which has been paid to the Bank in settlement of
the amounts secured or on account thereof, the undersigned shall be liable
to the Bank for payment of the secured amounts as if the confirmation or
arrangement as aforesaid has never been given or made, as the case may be.
Change of name or constitution
6. Where the undersigned and/or the Debtors constitute any legal body whether
incorporated or unincorporated, or a committee or a firm, or a partnership
or a trustee, or a board of trustees or executor of a will or
administrator of an estate, or operate a joint account at the Bank, or
constitute an organization, or any body comprising any combination of one
or more of the above bodies, then the obligations of the undersigned shall
not be affected by any alteration of name, structure or composition of the
undersigned or of the Debtors (as the case may be), and without derogating
from the generality of the aforesaid, the obligations of the undersigned
shall continue to have full effect as if the undersigned or the Debtors
(as the case may be) having the different and/or new name, structure or
composition existed under the same name, structure of composition on the
day this instrument was executed.
Undertaking to indemnify
7. Without affecting or derogating from the provisions herein contained and
in addition hereto, this instrument shall constitute an undertaking of
indemnity and the undersigned hereby undertake to indemnify the Bank up to
<PAGE>
the secured amounts for any damage, expenses and loss of money which may
be caused to the Bank arising from the secured amounts and such
indemnification shall apply, mutatis mutandis, in accordance with the
provisions herein contained.
Bills
8. If the Bank holds or shall be the holder of bills, signed, endorsed or
guaranteed by the undersigned with respect to secured amounts under the
main agreement, the undersigned hereby exempt the Bank from all the duties
of holder of any bill such as presentment for acceptance or for payment,
notice of dishonour or protest, and the signatures, the endorsements and
the guarantees contained in any such bill or any other negotiable
instruments shall remain in force until payment has been made without need
of any formality whatsoever. Moreover the undersigned hereby waive in
advance any claim of prescription in connection with such bills and other
negotiable instruments.
Waiver
9. The undersigned hereby waive irrevocably and absolutely any claim that
they have or are likely to have against the Bank in connection with their
obligations under this guarantee owing to prescription, death or the legal
incapacity of the Debtors or any of them or of the undersigned or any of
them and/or the legal disability or lack of authority of the Debtors to
borrow monies or to enter into the main agreement or to amend or change it
or to enter into any agreement replacing it or to enter into any agreement
or undertaking or to execute any instrument and/or the legal disability or
lack of authority of the undersigned to give this guarantee and/or on the
strength of a contention that the Debtor or any of the undersigned have
become bankrupt or have been wound-up or have made an arrangement with
creditors (including an arrangement made by the court) and/or a contention
that the debiting of the Debtors and/or of any of the undersigned is not
valid for any reason whatsoever (except with respect to any amount
actually paid by the undersigned under this Guarantee) and/or owing to the
fact that the Bank is unable to pursue a claim against the Debtors or any
of the undersigned for any reason whatsoever, and in any of the
above-mentioned cases the Bank shall be entitled to demand from the
undersigned the secured amounts in full.
Without prejudice to the foregoing, if the Bank shall for any reason not
be entitled to claim all or part of the secured amounts from the
undersigned on the strength of their guarantee, the undersigned shall be
liable to pay such sums as principal debtors.
Additional security
10. If the bank has accepted or shall accept other or additional security from
any person or body, then this guarantee shall be in addition to such other
or additional security and shall not depend upon them and shall not affect
them nor be affected by them. Each and every one of the undersigned hereby
confirms that it is his intention to be liable for the full amount of the
guarantee irrespective of whether other guarantors have given their
guarantee with him or not, and even if it has been agreed between him and
the Bank that others shall give their guarantee together with him, and
some or all of the others have not given their guarantee together with him
for any reason whatsoever. The undersigned shall not be entitled to
receive or to claim or to benefit from any security or charge held or
which may be held by the Bank in the future in respect of all or part of
the secured amounts, or to claim or to receive part of such security or to
<PAGE>
have recourse to other guarantors who from time to time have guaranteed
towards the Bank the payment of all or part of the secured amounts, unless
the Bank shall agree thereto in advance and in writing. Without placing
any obligation upon the Bank in respect thereof, it is hereby agreed that
all the expenses entailed in such a transfer shall be borne by the
transferees. Any security which the Bank holds and/or may hold with regard
to the undersigned, and/or on their behalf and/or in their name in any
form or manner, shall also serve as security for the discharge of the
obligations herein contained, without the Bank being obliged to realize
any of the said security.
Changes in the obligation or security
11. The obligations of the undersigned herein contained shall remain in full
force even if the Bank, either with or without the consent of the
undersigned, and even without notification to them at the Bank's own
discretion:
a) will grant any extension or concession to the Debtors or to any
person liable with them or for them, whether as a guarantor or in
any other way, including whomsoever of the undersigned, or will
cause the non-fullfilment of any obligation for which the
undersigned are liable or have engaged to guarantee.
b) will discontinue, vary or renew any credit or loan or guarantee or
any other banking facility which it has extended or will extend to
the Debtors, and will discontinue, vary or renew any of the
provisions of such credit, loan guarantee or banking facility.
c) will accept, alter, invalidate, exchange, discharge, renew, correct
or refrain from executing or from realising bills, negotiable
instruments, sureties, guarantees and/or other securities, held
and/or which may be held by the Bank, whether obtained from the
undersigned or from other persons whether as a result thereof damage
will be caused to the undersigned or not.
d) will compromise or come to any arrangement with the undersigned or
with the Debtors or with other parties or with any of them, or with
any other person jointly liable with the undersigned or with the
Debtors or with any of their guarantors.
e) will relieve any of the undersigned from all or part of their
obligations hereunder and/or may accept any participation or will
make any arrangement with the undersigned or the Debtors or with
whomsoever of them.
f) in the event of any variation in any of the Debtors' obligations in
respect of the secured amounts or in any of the conditions thereof,
whereby the amount of the obligation is neither increased nor
decreased, the obligation of the undersigned shall be varied in
accordance therewith at the absolute discretion of the Bank, and the
undersigned shall not exercise the option given to them under
Section 5(c) of the Law of Guarantee 5727-1967 or under any other
enactment amending or replacing the said section.
<PAGE>
-6-
Defect in the obligation or security
12. The obligations hereunder shall not be affected by the Bank not having
received or not receiving any particular security or guarantee as
collateral for the discharge of the secured amounts or any part of them or
owing to any defect or fault now existing or that may exist in or in
connection with any security or guarantee as aforesaid which the Bank has
obtained or may obtain or in the main agreement or any amendment thereof
or in any agreement replacing the same or in connection with any debt or
obligation of the Debtors towards the Bank or arising out of any agreement
made or to be made in or in connection with secured amounts or part
thereof.
Prohibition on the acceptance of security
13. The undersigned hereby declare that they have not received any security
whatsoever from the Debtors against this guarantee or in connection
therewith and they undertake not to receive any such security otherwise
than with the prior written consent of the Bank. If it shall transpire
that the undersigned have received or shall receive such security without
the Bank's consent as aforesaid, the amount for which they are liable
shall be increased proportionately by the amount which the Bank will not
recover from the Debtors as a result of the receipt of security by the
undersigned as aforesaid.
Recourse to debtors
14. The undersigned agree that without the prior written consent of the Bank
they shall not be entitled to claim from or to take any steps whatsoever
against the Debtors or to prove their debt in the bankruptcy or winding-up
of the Debtors and/or to claim in competition with the Bank in respect of
or in connection with the secured amounts paid or demanded or that are
likely to be demanded to be paid to the Bank. If the secured amounts have
been paid to the Bank in full and provided that such secured amounts are
not subject to repayment by the Bank, then the undersigned may claim from
or take any steps whatsoever against the Debtors.
Bankruptcy, liquidation or arrangement
15. In the event of bankruptcy or winding-up or some other similar arrangement
of the Debtors with their creditors, the Bank may (notwithstanding any
payment to the Bank by the undersigned or by any other person, of part of
the secured amounts) claim the full amount owing to the Bank as a creditor
in the bankruptcy or in the winding-up or in any such arrangement, or may
agree to any payment in settlement and may receive such payment as if this
security did not exist, and the undersigned undertake not to claim in such
cases in competition with the Bank until such time as the Bank may receive
the full amount of its claim against the Debtors.
Possession, lien and set-off
16. For such time as the undersigned shall owe or may be liable to owe monies
to the Bank under these presents or shall be contingently liable therefor,
the Bank shall have the right to possession, set-off and to a banker's
lien against all the amounts which it may hold at any time to the credit
of the undersigned in any account whatsoever and over any asset
(including, without derogating from the generality of the aforesaid term,
gold, securities, bills, coins, bank notes, documents in respect of goods,
insurance policies, assignments of debt, negotiable instruments of all
kinds, deposits, charges,
<PAGE>
-7-
mortgages and other rights) held and/or which may be held standing and/or
which may be standing at the disposal of, and/or on behalf of the
undersigned by the Bank in any way or manner including such as have been
delivered or which may he delivered to the Bank for collection and/or for
security and/or of safe-keeping and/or in any other way, and over their
countervalue.
The Bank may at any time and from time to time but only in the event that
any amount owed by the Debtors is not paid when becoming due and payable
under the main agreement make whatever use of any asset to which the
aforesaid lien shall apply, including the collection and sale at any price
and on any conditions as the Bank may deem fit, and make use from time to
time of the countervalue (in whole or in part) obtained as a result of or
in connection with such use and/or collection and/or sale, for the part or
full payment of the secured amounts. In the execution of the aforesaid,
the Bank may take all legal steps or otherwise, as it may deem necessary.
All the expenses involved in the said use and/or sale and/or legal steps,
shall be borne by the undersigned and the Bank may debit them to the
account of the undersigned. In case of collection of bills by the Bank,
the Bank may transfer and discount the bills with others, may take all
legal and other steps required for the collection of the bills, may debit
the account of the undersigned with the costs of collection, settle with
the signatories, endorsers or guarantors, or make any concession to them,
accept part consideration of the bills for the full or partial payment of
the secured amounts.
Debit of accounts
17. The Bank may from time to time and at any time that it deems fit and at
its absolute discretion, but only in the event that any amount owed by the
Debtors is not paid when becoming due and payable under the main
agreement, debit any account of the undersigned with the secured amounts
or any part thereof whether such account exists or is opened by the Bank
for this purpose, and whether such account be debitory or shall become
debitory as a result of such debit, and the debit balance, if any, shall
carry interest as stated in clause 3 above.
General payments
l8. Any amount and/or any payment, in whatever form, which the Bank may
receive from the Debtors or from any person other than the undersigned, or
other assets or from the realisation of any right and/or security in
whatever manner with the aim of reducing the secured amounts irrespective
of whether such amounts and/or payments were rendered or paid before, on
or after the date of payment of all or part of the secured amounts, shall
be deemed to be a general payment on account of the secured amounts and
the Bank may hold them pending or in suspense account for so long as the
Bank deems fit without being obliged to employ them in reduction of the
secured amounts (except with respect to any secured amounts becoming due
and payable) even if the amount and/or payment have been designated for
such purpose by the person so entitled to designate them in his accounts
or in general, provided that any payment from the undersigned shall reduce
the secured amounts.
Appropriation of payments
19. The Bank may from time to time at its absolute discretion, credit any
amount it has received and/or may receive in respect of the secured
amounts whether before, on or after the date of payment of all or part of
the secured amounts, in any manner or way from and/or on behalf of and/or
on account of the Debtors and/or by the realisation of any right and/or
security in the possession or which may come into the possession of the
Bank, in favour of any account as the Bank may decide and/or on account of
any amount due or which may become due to
<PAGE>
the Bank and/or on account of the interest and/or principal and/or damages
and/or costs and/or charges and/or additional sums owing to linkage or
partly to one or any of the foregoing, and may transfer any amount
credited to the Debtors in whichever account to any other account so
chosen by the Bank, provided that any amount received by the Bank in
respect of the secured amounts shall reduce any part of the secured
amounts becoming due and payable under the main agreement, and the
undersigned shall have no rights to claim and/or benefit from any amount
which has been received and/or may be received and/or which may be debited
and/or transferred and/or credited by the Bank as aforesaid or in any
other way for the purpose of reducing the secured amounts, provided that
any payment received from the undersigned shall be applied to reduce the
secured amounts. The undersigned may not rely on Sections 49 and 50 of the
Contracts (General Part) Law 5733-1973 or upon any legal provisions
amending or replacing the same.
Expenses
20. All expenses involved in any proceedings concerning this guarantee or in
connection therewith as well as claims made hereunder or in its
realisation or enforcement including advocates' fees shall be borne by the
undersigned and they too will be secured by this guarantee.
Severance of claims
21. The Bank may sever its claims for payment of the secured amounts due or
that may be due to the Bank from the undersigned whether such claims are
based on the same or on different causes of action any it may claim
payment of such sums in several parts each part being considered a
separate cause of action.
Bank entries
22. All entries in the Bank's books and accounts shall be acceptable to the
undersigned and copies of the Debtor's accounts or any part of them or of
the last page thereof or a certificate signed by the Bank concerning the
state of the account shall serve as prima facie proof to the undersigned
of the details appearing therein.
In this instrument "the Bank's books" shall mean and include every book,
register, statement of account, instrument of undertaking, note, card
index, sheet, copies of any of the foregoing, spools, any means of storing
data for the purposes of electronic computers and any other means
whatsoever for storing data.
"Entries" shall mean every entry, copy entry or a handwritten copy whether
entered by typewriter or filed by the printer, duplicator, photocopier
(including microfilm) or by any mechanical, electrical or electronic means
or by electronic computer entry or by any other means of entry.
Addresses
23. The addresses of the undersigned are as specified above or any other
address in Israel of which notice has been given to the Bank by registered
letter the receipt of which has been confirmed by the Bank in writing. Any
notice, demand or other document whatever (including a negotiable
document) which may be despatched by the Bank to the undersigned by
ordinary mail or in any other manner to the above address, or to the
latest address notified to the Bank, shall be deemed to have been received
by the undersigned within 72 hours of its delivery to a Post Office in
Israel even if returned by the Post Office for whatever reason. A written
declaration by a clerk of the Bank as to the contents of a notice, its
delivery to the Post Office and the time of despatch shall serve as
proof of the foregoing facts.
<PAGE>
All notices from the undersigned to the Bank concerning the guarantee
shall be sent to the Bank at the following address:
(Address of branch) 9 Ahad Ha'am St., Tel-Aviv, Israel.
Place of jurisdiction
24. The undersigned hereby elects the city of Tel--Aviv as the place of
jurisdiction for all the purposes hereof however nothing herein contained
shall affect the right of the Bank to apply to any other competent court.
Israel Law
25. This guarantee shall be governed by and construed in accordance with the
laws of the State of Israel.
Assignment
26. The undersigned hereby irrevocably give their consent to the effect that
the Bank may, at any time and from time to time in its absolute discretion
and in any manner whatsoever, assign all or any of its rights arising
under this instrument, to whomever the Bank shall assign its rights in
connection with the secured amounts.
Saving of rights
27. The undersigned hereby waive notice in respect of breach of any of the
provisions hereunder. A waiver by the Bank in favour of the undersigned in
respect of a prior breach hereunder shall not be construed as a
justification for or a further breach. The undersigned hereby agree that
in any case where the Bank does not forthwith use its rights arising from
or connected with this instrument, such delay shall not be deemed to be a
waiver of those rights or any agreement or admittance on the part of the
Bank or any precedent and the Bank may use the rights arising from or
connected with this instrument and/or by virtue of law at any time as it
deems fit.
Signature on documents
28. The undersigned undertake to sign any document or form as the Bank may
demand if and when all or part of the laws of Israel require or may
require, at the absolute discretion of the Bank, the undersigned to sign
any document or form for the purpose of giving to all the provisions
hereof full force and effect or for the purpose of their remaining so.
Supplemental guarantee
29. This guarantee is a supplemental guarantee and does not replace any
guarantee given to the Bank for the Debtors by the undersigned.
<PAGE>
Additional security
30. This guarantee is the property of the Bank and the undersigned shall not
be entitled to obtain the same even if the secured amounts have been paid
to the Bank in full and/or their liability hereunder has been terminated.
Upon the undersigned request, and after all secured amounts have been paid
in full, the Bank shall confirm in writing to the undersigned that the
Guarantee is null and void.
31. See "Rider" and "Exhibit A" which are attached hereto and forms an
integral part hereof.
<TABLE>
<CAPTION>
Authentication by
bank officer
Name of Guarantor Signature Address Date Name Signature
- - ----------------- --------- ------- ---------------------
<S> <C> <C>
1. PEC Israel Economic 511 Fifth Avenue
Corporation New York, N.Y. 10017
U.S.A.
By Authorised Signatories: Signatures are hereby authenticated
Name:/s/ Frank J. Klein I.D. No: /s/ James I. Edelson
-------------------- -------- -----------------------
Frank J. Klein, President James I. Edelson, Attorney
Name: /s/ William Gold I.D. No:
------------------ -------
William Gold, Treasurer
</TABLE>
<PAGE>
Rider
Governing law and jurisdiction
a) This instrument and all certificates, approvals and notices to be
given in connection therewith shall be governed by, construed and
interpreted in accordance with the laws of the State of Israel.
b) We hereby irrevocably agree that the courts of Israel shall have
jurisdiction to hear and determine any suit, action or proceeding,
and to settle any disputes, which may arise out of or in connection
with this agreement and, for such purpose irrevocably submit to the
jurisdiction of such courts.
c) We irrevocably waive any objection which we might have now or
hereafter to the courts referred to in sub-clause (b) above being
nominated as the forum to hear and determine any suit, action or
proceeding, and to settle any disputes which may arise out of or in
connection with this agreement and agree not to claim that any such
court is not a convenient or appropriate forum.
d) In connection with any suit, action or proceeding in Israel, we
agree that the process by which my suit, action or proceeding is
begun may be served on us by being delivered to Discount Investment
Corporation Ltd. whose address is 14 Beth Hashoeva Lane, Tel-Aviv,
Israel Attn: Legal Counsel (hereinafter: the "Process Agent").
e) Our appointment of the aforementioned Process Agent is irrevocable
and we undertake to notify you promptly of any change of address of
the agent. We shall deliver to you a Form of Acceptance in the form
of Exhibit "A" duly signed by the Process Agent.
f) The submission to the jurisdiction of the courts referred to in
sub-clause (b) above shall not (and shall not be construed so as to)
limit the right of the Bank to take proceedings against us in any
other court of competent jurisdictions shall the taking of
proceedings in any one or more jurisdictions preclude the taking of
proceedings in any other jurisdictions, whether concurrently or not.
g) We hereby consent generally in respect of any legal action or
proceedings in the courts or other judicial authority arising out of
or in connection with this agreement to the giving of any relief or
the issue of any process in connection with such action or
proceeding including, without limitation, the making, enforcement or
execution against any assets or property whatsoever (irrespective of
its use or intended use) or any order or judgement which may be made
or given in such action or proceeding.
h) We irrevocably consent to the service of process out of the
aforesaid courts in any such action or proceedings by the mailing of
copies thereof by registered or certified airmail stage prepaid to
us at our above mentioned address. Such service became effective 30
days after mailing. Nothing herein shall affect the right to serve
process in any other manner permitted by law.
1
<PAGE>
Taxes
All amounts payable by us to you in connection with this guarantee will
be paid by us in full without set-off, deduction or withholding at source
of any amount in respect of any present of future taxes, fees, duties or
similar charges of whatsoever nature imposed on us in connection with the
payment of sums due from us in connection with this guarantee. Should any
such taxes, duties or similar charges be deducted or withheld at source,
we shall forthwith pay to you such additional amounts as will result in
your immediate receipt of the full amount which would have been received
had no such deduction or withholding been made.
/s/ Frank J. Klein, President
----------------------------------------
PEC Israel Economic Corporation
Signature is hereby authenticated:
/s/ James I. Edelson
----------------------------------------
James I. Edelson, Attorney
2
<PAGE>
EXHIBIT "A"
FORM OF ACCEPTANCE BY THE AGENT FOR SERVICE OF PROCESS
Date:
To:
The First International Bank of Israel Ltd.
Tel-Aviv Main Branch
Israel
Dear Sirs,
We understand that, pursuant to a specific guarantee dated ___________, of PEC
Israel Economic Corporation for PEC Israel Finance Corporation Ltd. (a copy of
which has been supplied to me), we have been irrevocably appointed agent of the
Guarantor to receive of process or other legal summons. We hereby irrevocably
accept such appointment.
We undertake to advise you immediately of any change in our address.
Yours Truly,
-------------------------------
Name: Discount Investment Corporation Ltd.
Address: 14 Beth Hashoeva Lane, Tel-Aviv, Israel
<PAGE>
THE FIRST INTERNATIONAL BANK OF ISRAEL LTD. A Satra Bank
NOTICE TO GUARANTOR
(Continuing Guarantee limited in amount or Specific Guarantee)
To: Guarantor's name: PEC Israel Economic Corporation Date:_______________
Identity No.:________________
|X| Specific Guarantee
Further to the Specific Guarantee signed by you as security for
payment of the obligations of PEC Israel Finance Corporation Ltd.
(hereinafter: the "debtor") towards The First International Bank of
Israel Ltd. (hereinafter: the "bank") pursuant to the Main Agreement
as defined in the guarantee (hereinafter the "debtor's
obligations"), and we also wish to point out that:
|_| 1. you are "sole guarantor of an obligation" within the meaning
of Ch.3 of the Guarantee Law - 1967
2. the total number of guarantors of the debtor's
obligations is: 1
3. your share of the debtor's obligations is:
|X| 100% of the debtor's obligations but not exceeding the
guarantee amount
|_| ___________ of the debtor's obligations, but not
exceeding the guarantee amount
4. The guarantee is security for:
|_| an existing debt (including future obligations as stated
above)
|X| a loan taken in lieu of an existing debt
<PAGE>
-2-
5. The debtor:
|_| is current with his debt repayments
|_| is not current with his debt repayments
|_| is a "restricted customer" within the meaning of the
Cheques without Cover Law - 1981
6. The guarantee is given in lieu of:
|_| the guarantee of shareholders of a debtor entity
|_| the guarantee of a director of a debtor entity
|_| the guarantee of a spouse of shareholder in a debtor
entity
|_| the guarantee of a spouse of a director of a debtor
entity
|_| 7. The debtor's outstanding obligations exceed the guarantee amount
8. Other material information:___________________________________
______________________________________________________________
|_| Place a [check mark] in the relevant box
Yours faithfully,
The First International Bank of Israel Ltd.
Tel-Aviv Main Branch
I hereby confirm receipt of the above information
PEC Israel Economic Corporation
By: /s/ Frank J. Klein, President
-------------------------------------
Guarantor's signature
Signature is hereby authenticated
/s/ James I. Edelson
----------------------------------------
James I. Edelson, Attorney
[LETTERHEAD OF DIC FINANCE & MANAGEMENT LTD.]
Tel Aviv, January 28, 1999
Our Ref: 2092/2028 - 9032
PEC Israel Economic Corporation
511 Fifth Avenue
New York, N.Y. 10017
U.S.A.
Dear Sirs,
Re: Gilat Satellite Networks Ltd. ("Gilat")
Whereas Gilat is currently preparing an underwritten public offering of Ordinary
Shares of Gilat ("Shares") to be sold partly by Gilat and partly by certain
shareholders of Gilat (the "Offering"); and
Whereas approximately 500,000 Shares may be sold in the Offering by shareholders
of Gilat who are affiliates of IDB Development Corporation Ltd. ("IDBD"); and
Whereas DIC Finance and Management Ltd. ("DICFM"), an affiliate of IDBD, is
currently in a process of becoming the owner of all of the Shares held until
recently by DIC Communication and Technology Ltd., another affiliate of IDBD;
and
Whereas PEC Israel Economic Corporation ("PEC"), an affiliate of IDBD, may sell
in the Offering such number of Shares ("PEC's Number of Shares") equal to 50% of
the number of Shares to be sold therein by all the shareholders of Gilat who are
affiliates of IDBD; and
Whereas DICFM desires to sell in the Offering the maximum number of Shares
available for sale therein by all the shareholders of Gilat who are affiliates
of IDBD (including PEC's Number of Shares that would otherewise be sold by PEC
in the Offering), and
Whereas for such purpose DICFM is willing to assure to PEC an opportunity to
sell PEC's Number of Shares during a certain period of time following the
consummation of the Offering at the same price per Share that PEC would receive
if it sold them in the Offering, and based on such assurance PEC is willing to
refrain from selling Shares in the Offering so that DICFM may sell in the
Offering also PEC's Number of Shares.
.../2
<PAGE>
[LETTERHEAD OF DIC FINANCE & MANAGEMENT]
- 2 -
Now, therefore, and in consideration of PEC agreeing not to sell in the Offering
any Shares owned by it, DICFM hereby grants to PEC an option to sell to DICFM
any number of Shares owned by PEC not exceeding in the aggregate PEC's Number of
Shares on the following terms and conditions (the "Put Option"):
1. The exercise of the Put Option shall require the delivery by PEC to DICFM
of a written notice specifying the number of Shares requested to be sold
by PEC (an "Exercise Notice"). An Exercise Notice may be delivered by PEC
to DICFM once or more than once at any time during the period commencing
90 days and ending 180 days after the date of consummation of the Offering
(the "Exercise Period").
2. The price per Share to be paid to PEC for Shares that will be sold by it
pursuant to the Put Option (the "Share Price") shall be equal to the
aggregate sum of (a) the amount of the net proceeds per Share in U.S.
Dollars received by DICFM from the sale of Shares by it in the Offering
(the "Proceeds") and (b) an amount equal to the increase of the Proceeds
by the Applicable Rate (as hereiafter defined) per annum computed for the
actual number of days elapsed from the date of consummation of the
Offering until the date of payment of the Share Price to PEC (based on 365
days in a year). For this purpose the "Applicable Rate" shall mean 1% per
annum above the annual rate of yield on an investment in U.S. Treasury
Bills acquired on the date of consummation of the Offering and maturing
approximately 180 days thereafter.
3. In each event that an Exercise Notice will be delivered by PEC to DICFM at
any time within the Exercise Period:
(a) DICFM shall purchase from PEC, and PEC shall sell to DICFM, the
number of Shares owned by PEC as specified in the Exercise Notice
for a cash consideration equal to the product of multiplying such
number of Shares by the Share Price thereof (the "Purchase Price").
(b) The consummation of such purchase and sale of Shares (the "Closing")
shall take place on the seventh business days following the delivery
to DICFM of the Exercise Notice triggering such Closing.
(c) At the Closing, PEC will deliver to DICFM a share transfer form duly
executed by PEC and a share certificate in the name of PEC for the
number
.../3
<PAGE>
[LETTERHEAD OF DIC FINANCE & MANAGEMENT]
- 3 -
of Shares specified in such Exercise Notice, as well as any other
document reasonably requested by DICFM for the purpose of obtaining
a share certificate in the name of DICFM for such Shares, and DICFM
shall pay to PEC the Purchase Price therefor in freely transferable
and immediately available funds in U.S. Dollars.
4. All of the Shares to be purchased from PEC pursuant to the Put Option
shall be sold and transferred by PEC to DICFM free and clear of any
pledge, lien or any other rights in favour of any third party (but subject
to the obligations of PEC under the Shareholders Agreement dated as of
December 31, 1998 among certain shareholders of Gilat including PEC with
respect to the Shares owned by them).
5. DICFM may cause any designee of DICFM to pay to PEC the Purchase Price for
any Shares as to which the Put Option will be duly exercised by PEC,
provided that a written notice of such designee shall be delivered by
DICFM to PEC at least one business day prior to the Closing with respect
to such Shares, and provided further that such designee shall be eligible
pursuant to the Shareholders Agreement referred to above to purchase such
Shares from PEC. In such case the payment of the Purchase Price for such
Shares to PEC by such designee at the Closing with respect thereto shall
discharge the obligation of DICFM to purchase such Shares from PEC
pursuant to the Put Option, and at the Closing PEC shall sell and transfer
such Shares, and shall deliver all documents in connection therewith as
required of PEC hereunder, to such designee.
If the foregoing is acceptable to you, please confirm your agreement thereto by
executing this document in the space provided for below.
Very truly yours,
/S/ DIC Finance and Management Ltd.
DIC Finance and Management Ltd.
We agree:
PEC Israel Economic Corporation
By: /s/ Frank J. Klein, President
-----------------------------
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>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1998 and the consolidated
statement of income for the year ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,007
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 466,929
<CURRENT-LIABILITIES> 0
<BONDS> 20,000
0
0
<COMMON> 31,952
<OTHER-SE> 373,273
<TOTAL-LIABILITY-AND-EQUITY> 466,929
<SALES> 0
<TOTAL-REVENUES> 45,258
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,144
<INCOME-PRETAX> 29,474
<INCOME-TAX> 9,432
<INCOME-CONTINUING> 20,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,042
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.05
</TABLE>
