SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A NO. 4 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 ----------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 1-8707 ------ PEC Israel Economic Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maine 13-1143528 - ----------------------------------------- -------------------- (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 511 Fifth Avenue, New York, New York 10017 - ----------------------------------------- -------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 687-2400 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - -------------------------------------------------------------------------------- Common Stock (par value $1.00 per share) New York Stock Exchange - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (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| 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. The Registrant, PEC Israel Economic Corporation ("PEC" or the "Company"), hereby amends (i) Item 8 of Part II of PEC's Annual Report on Form 10-K for the year ended December 31, 1998, as previously amended (the "1998 Form 10-K"), by replacing the financial statements of Property and Building Corporation Ltd. ("Property & Building") as at and for the year ended December 31, 1998 (the "Prior Property & Building 1998 Financial Statements") with the financial statements of Property & Building as at and for the year ended December 31, 1998 (the "Current Property & Building 1998 Financial Statements"), which begin four pages after this page, the sole difference between the Prior Property & Building 1998 Financial Statements and the Current Property & Building 1998 Financial Statements being a revised Note 35 in the Current Property & Building 1998 Financial Statements, and (ii) Item 14(a)(2)(f) of Part IV of the 1998 Form 10-K by adding the following 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: Aclim 2000 (for Ecology) Limited, a subsidiary of Property and Building Corporation Ltd. Adir International Communications Services Corporation Ltd. ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd. Camdev Ltd. "Gad" Building Company Limited, a subsidiary of Property and Building Corporation Ltd. Galil Medical Ltd., a subsidiary of DEP Technology Holdings Ltd. Ham-Let U.S.A., Inc., a subsidiary of Ham-Let (Israel-Canada) Ltd. H.T. Components U.S.A., Inc., a subsidiary of Ham-Let (Israel- Canada) Ltd. I.C.P. - Israel Cable Programming Company Ltd., a subsidiary of DIC and PEC Cable TV Ltd. ISPRO The Israeli Properties Rental Corporation Ltd., a subsidiary of Property and Building Corporation Ltd. Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd. Liraz Systems Ltd. Logal Educational Software and Systems Ltd. Medi-Card Ltd., a subsidiary of DEP Technology Holdings Ltd. Merkaz Herzlia "A" Ltd., a subsidiary of Property and Building Corporation Ltd. Merkaz Herzlia "B" Ltd., a subsidiary of Property and Building Corporation Ltd. Naveh Building and Development Ltd., a subsidiary of Property and Building Corporation Ltd. Netvision Ltd., a subsidiary of DIC and PEC Cable TV Ltd. Polyoptics Ltd., a subsidiary of Soreq Development Center (S.D.C.) Ltd. Renaissance Fund LDC Sano Dispec Development Ltd. Science Based Industries Campus Ltd., a subsidiary of Property and Building Corporation Ltd. Soreq Development Center (S.D.C.) Ltd. Verdeco Technologies Ltd., a subsidiary of DEP Technology Holdings Ltd. For the year ended December 31, 1997: Adir International Communications Services Ltd. ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd. Bayside Land Corporation Ltd., a subsidiary of Property and Building Corporation Ltd. Century Canning Industries Co. W.L.L., a subsidiary of Caniel- Israel Can Company Ltd. DEP Technology Holdings Ltd. DIC and PEC Cable TV Ltd. Dutch Can Pack Holding B.V., a subsidiary of Caniel - Israel Can Company Ltd. Gemini Capital Fund Management Ltd. Gemini Israel Fund L.P. General Engineers Limited Ham-Let U.S.A., Inc., a subsidiary of Ham-Let (Israel-Canada) Ltd. H.T. Components U.S.A., Inc., a subsidiary of Ham-Let (Israel- Canada) Ltd. Israsat International Communications Ltd., a subsidiary of Gilat Communications Ltd. Kedem Chemicals Ltd., a subsidiary of Tambour Limited Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd. Lev Hamifratz Ltd., a subsidiary of Super-Sol Ltd. Mul-T-Lock France S.A.R.L., a subsidiary of Mul-T-Lock Ltd. Mul-T-Lock USA, Inc., a subsidiary of Mul-T-Lock Ltd. Nitroxid (1993) Production and Marketing Ltd., a subsidiary of Maxima Air Separation Center Ltd. Rol Profil Ltd., a subsidiary of Klil Industries Ltd. Skydata, Inc., a subsidiary of Gilat Satellite Networks Ltd. Tambour Paints Ltd., a subsidiary of Tambour Limited For the year ended December 31, 1996: ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd. Dutch Can Pack Holding B.V., a subsidiary of Caniel-Israel Can Company Ltd. Ispah Holdings Ltd. Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd. Lev Hamifratz Ltd., a subsidiary of Super-Sol Ltd. Maxima-Air Separation Center Ltd. Retail Chains Hungary Kereskedelmi Kft., a subsidiary of Super- Sol Ltd. Sano Dispec Development Ltd. Tambour Paints Ltd., a subsidiary of Tambour Limited Yaana Systems Ltd., a subsidiary of Liraz Systems Ltd. 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 By: /S/ JAMES I. EDELSON -------------------------------------- DATE: September 3, 1999 James I. Edelson Executive Vice President and Secretary Property and Building Corporation Limited and Subsidiaries Financial Statements As at December 31, 1998 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 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. 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. Certified Public Accountants (Isr.) F-2 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 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. F-3 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 F-4 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) Consolidated The Company ----------------------------- ---------------------------- Note 1998 1997 1996 1998 1997 1996 ------- --------- -------- -------- -------- -------- -------- 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 ======= ======= ======= ======= ======= ======= The notes and the annex are an integral part of the financial statements. F-5 Property and Building Corporation Limited and Subsidiaries Statements of Shareholders' Equity - -------------------------------------------------------------------------------- In terms of shekels of December 1998 (in NIS thousands) Share Capital Premium Capitalized Retained Total capital surplus on shares surplus in earnings subsidiaries ------- ------- --------- ------------ -------- ------- 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 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 ======= ======= ====== ====== ======= ========= * Capital surplus created until December 31, 1991. The notes and the annex are an integral part of the financial statements. F-6 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) Consolidated The Company -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- 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) -------- -------- -------- -------- -------- -------- F-7 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 The Company -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- 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 ======= ======= ======= ======= ======= ======= The notes and the annex are an integral part of the financial statements. F-8 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 The Company -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- 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 -------- -------- F-9 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 ============ F-10 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. F-11 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. F-12 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. F-13 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. F-14 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, sub-contractors 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. F-15 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. F-16 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. F-17 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. F-18 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: % of change December 31 December 31 December 31 ------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- --------- -------- -------- 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 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. F-19 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 Consolidated The Company ------------------------- ------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== The cash and deposits are stated in Israeli shekels. Note 3 - Marketable Securities Consolidated The Company ------------------------- ------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== * See Note 20C(1) F-20 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: Consolidated The Company ----------------------------- ----------- December 31 December 31 December 31 1998 1997 1998 ----------- ----------- ----------- 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 =========== =========== B. Purchasers of apartments are linked mainly to the construction inputs index. Note 5 - Other Receivables and Debit Balances Consolidated The Company ------------------------------ ----------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== * Balance linked mainly to U.S. dollar. ** Carries annual interest rate of 2%. F-21 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 Consolidated The Company ------------------------------ ----------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 ====== ===== ===== ===== Note 7 - Building Projects Under Construction Consolidated The Company ------------------------------ ----------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 ======= ======= ===== ===== F-22 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. F-23 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. F-24 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: Consolidated The Company ------------------------- ------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 ===== ===== ===== ===== E. Loans at a value of NIS 4,938 thousand are eligible for early repayment. F-25 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 December 31 December 31, 1998 1997 ---------------------------------------- ----------- Opening Changes Total Total balance ------- ------- -------- ----------- 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 ======= ======= ======= ======= (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). F-26 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 =========== =========== =========== F-27 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 Subsidiaries Affiliated December 31 December 31 companies 1998 1997 ---- ---- Total Total ------------ ---------- ----------- ----------- 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 ========= ====== ========= ======= (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). F-28 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: Leased Land Buildings Plantations Vehicles Machinery commercial intended under and and buildings for the construction irrigation equipment and office construction network premises of buildings (3) (1) (1)(2) ---------- ------------ ------------ ------------ --------- --------- Cost Balance at beginning of year 995,590 264,658 150,918 8,429 6,080 7,870 Additions 103,713 32,200 90,216 1,791 5 Transfers 102,111 (15,906) (86,205) Disposals (31,938) (1,040) (236) ---------- ---------- ---------- ---------- ---------- ---------- Balance at end of year 1,169,476 280,952 154,929 8,429 6,831 7,639 ---------- ---------- ---------- ---------- ---------- ---------- Accumulated depreciation Balance at beginning of year 315,300 7,432 2,644 7,091 Depreciation 23,874 888 272 Disposals (20,786) (631) (236) ---------- ---------- ---------- ---------- Balance at end of year 318,388 7,432 2,901 7,127 ---------- ---------- ---------- ---------- Depreciated cost as at December 31, 1998 851,088 280,952 154,929 997 3,930 512 ========== ========== ========== ========== ========== ========== Depreciated cost as at December 31, 1997 680,290 264,658 150,918 997 3,436 779 ========== ========== ========== ========== ========== ========== Other Total Total assets December 31 December 31 1998 1997 ------ ----------- ----------- Cost Balance at beginning of year 11,225 1,444,770 1,268,085 Additions 567 228,492 177,830 Transfers Disposals (33,214) (1,145) ---------- ---------- ---------- Balance at end of year 11,792 1,640,048 1,444,770 ---------- ---------- ---------- Accumulated depreciation Balance at beginning of year 7,205 339,672 317,641 Depreciation 913 25,947 22,760 Disposals (21,653) (729) ---------- ---------- ---------- Balance at end of year 8,118 343,966 339,642 ---------- ---------- ---------- Depreciated cost as at December 31, 1998 3,674 1,296,082 ========== ========== Depreciated cost as at December 31, 1997 4,020 1,105,098 ========== ========== F-29 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). F-30 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 Leased Buildings Vehicles Other Total Total building under assets and office construction premises December 31 December 31 (1) (2) 1998 1997 ---------- ------------ -------- -------- ------------ ---------- Cost 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 ======= ======= ======= ======= ======= (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. F-31 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 Cost Accumulated amortization Amortized cost ----------- ----------- ----------- ----------- December 31 December 31 December 31 December 31 1998 1998 1998 1997 ----------- ----------- ----------- ----------- 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 ====== ====== ====== ====== F-32 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 ====== ===== F-33 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 Consolidated The Company -------------------------- -------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== * Bear annual interest at rates of 2% (1997 - bear annual interest at prime rate). Note 17 - Deferred Taxes 1. Composition: In respect of In respect of Other timing Total Total depreciable building differences fixed assets projects December 31, December 31, less advances 1998 1997 ------------- ------------- ------------ ------------ ------------ 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 ======= ====== ===== ======= ======= F-34 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: Consolidated The Company -------------------------- -------------------------- December 31 December 31 December 31 December 31 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== Note 18 - Long-term Liabilities A. Composition in the consolidated balance sheet: Consolidated Consolidated ----------------------------------- ------------ December 31, 1998 1997 ----------------------------------- ------------ Total Current Balance Balance maturities ------- ---------- ------- ------------ 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 ======= ====== ======= ======= 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. F-35 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. F-36 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). F-37 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 December 31 December 31 Interest Current 1998 1997 rate Total maturities -------- ------- ------- % Balance Balance -------- ------- ---------- ------- ------- Consolidated balance sheet 4.7 - 4.95 230,645 9,169 221,476 99,941 ======= ======= ======= ======= 4. Liabilities to provident funds Consolidated balance sheet 4.9 161,171 30,050 131,121 123,750 ======= ======= ======= ======= 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. F-38 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. F-39 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%. F-40 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. F-41 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 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 ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== Note 22 - The Company's Equity in the Net Earnings of Investee Companies 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== =========== F-42 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 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 ========== ========== ========== ========== ========== ========== Note 24 - Income from Securities, Financing and Other Income 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== =========== F-43 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 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 ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== F-44 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 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== =========== 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. F-45 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 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 ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== Note 28 - Depreciation and Amortization 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== =========== Note 29 - Financing Expenses 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== =========== F-46 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: 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 ----------- ----------- ----------- ----------- ----------- ----------- 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) =========== =========== =========== =========== =========== =========== F-47 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. 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 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) ======== ======== ======== ======== ======== ======== F-48 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 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 ----------- ----------- ----------- ----------- ----------- ----------- 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 * Represents the highest balance during the period. ** 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). F-49 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 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. F-50 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. F-51 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. F-52 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). F-53 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 =========== =========== F-54 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 =========== =========== F-55 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 ======= ======= ====== F-56 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 Share Capital Retained Total capital surplus earnings ------- ------- -------- ------- 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 ===== ====== ======= ======= D. Share capital (cont'd) 1. Composition December 31, 1998 December 31, 1997 ---------------------- ----------------------- Authorized Issued Authorized Issued ---------- ---------- ---------- ---------- NIS NIS NIS NIS ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== F-57 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. F-58 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 ========= ========= F-59 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 ========= ========= F-60 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 December 31 1998 1997 1996 ----------- ----------- ----------- Income Rentals and warehousing 150,363 135,647 114,593 From construction and other sources 314,527 254,702 201,753 The Company's equity in the net earnings of investee companies 13,231 12,435 16,710 Gains on sale of investments and fixed assets 77,163 12,652 2,780 Income from securities, financing and others 19,353 18,664 20,810 ----------- ----------- ----------- 574,637 434,100 356,646 ----------- ----------- ----------- Cost and expenses Construction and other costs 206,232 176,030 135,188 Administrative, selling and others 42,747 36,913 32,123 Property maintenance (excluding depreciation) 12,827 11,231 9,598 Depreciation and amortization 18,114 14,570 10,854 Property taxes on land 8,066 8,510 6,617 Financing (*) 76,042 48,699 34,239 ----------- ----------- ----------- 364,028 295,953 228,619 ----------- ----------- ----------- Earnings before taxes on income 210,609 138,147 128,027 Taxes on income 36,518 23,415 20,324 ----------- ----------- ----------- Earnings after taxation 174,091 114,732 107,703 Less/ - Minority interest in earnings 34,773 30,136 30,157 ----------- ----------- ----------- Net earnings 139,318 84,596 77,546 =========== =========== =========== Earnings Per Share Primary earnings per share of NIS 1.00 par value (in NIS) 33.62 20.53 19.92 =========== =========== =========== Diluted earning per share 32.66 19.72 19.58 =========== =========== =========== * A subsidiary engaged in construction work, purchased real estate rights for construction projects. These investments were financed by bank loans and by other Group companies, in a total amount of NIS 131 million. The financing expenses relating to such loans, which amounted to NIS 17,400 thousands during the year ended December 31, 1996, were attributed in these statements to the cost F-61 Property and Building Corporation Limited and Subsidiaries Notes to the Financial Statements as at December 31, 1998 (in NIS thousands) - -------------------------------------------------------------------------------- of the real estate, resulting in an increase in the net earnings for the year ended December 31, 1996 of NIS 11,136 thousands. F-62 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 Share Capital Retained Total capital surplus earnings ------- ------- -------- -------- Balance as at January 1, 1996 80,729 16,700 311,596 409,025 Net earnings for the year ended December 31, 1996 77,546 77,546 Issue of share 558 71,287 71,845 Paid-in capital stock options, net 473 473 Proposed dividend, net - 280% (11,500) (11,500) ------ ------ ------- ------- Balance as at December 31, 1996 81,287 88,460 377,642 547,389 Net earnings for the year ended December 31, 1997 84,596 84,596 Issue of Shares 25 3,930 3,955 Paid in capital options, net 294 294 Proposed dividend, net - 412% (17,000) (17,000) ------ ------ ------- ------- Balance as at December 31, 1997 81,312 92,684 445,238 619,234 ------ ------ ------- ------- 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 ====== ====== ======= ======= F-63 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: Consolidated --------------------------------------- December 31 December 31 December 31 1998 1997 1996 ----------- ----------- ----------- Nominal historical net income as per the statement of earnings 136,303 79,907 80,102 Adjustment of differences relating to the following items: 3,365 1,245 405 Advances from apartment purchasers (195) Construction work and land 1,271 (544) (2,677) The Company's equity in the net earnings of investee companies 2,974 657 (1,355) Income from investments and fixed assets (3,177) (1,881) 19 Financing (2,567) 854 (2,609) Depreciation and amortization (3,073) (3,169) (3,287) Deferred taxes 6,859 9,113 8,370 Minority interest in earnings (125) (1,758) (701) Others (2,512) 172 (526) ----------- ----------- ----------- Net income for the special purpose statement of earnings 139,318 84,570 77,546 =========== =========== =========== F-64 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 1998 1997 ---------------------- ---------------------- Percent of holding (1) Percent of holding (1) ---------------------- ---------------------- Voting Equity Voting Equity --------- ------ ---------- ------ % % % % --------- ------ ---------- ------ 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 (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. F-65 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). F-66