-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qku4qf5ZnlK/UCdqUI9UmL0XmmPgEcBp5n5ajPm3DycGVFeKlH8jPLoL4WSE+dil GjJ0G9BAku1B+Aoxpxcdug== 0001005477-98-001847.txt : 19980529 0001005477-98-001847.hdr.sgml : 19980529 ACCESSION NUMBER: 0001005477-98-001847 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980528 SROS: AMEX SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMPAL AMERICAN ISRAEL CORP /NY/ CENTRAL INDEX KEY: 0000731859 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 130435685 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-08466 FILM NUMBER: 98632955 BUSINESS ADDRESS: STREET 1: 1177 AVENUE OF THE AMERICAS STREET 2: 12TH FLR CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2127822100 MAIL ADDRESS: STREET 1: 1177 AVENUE OF THE AMERICAS STREET 2: 12TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 10-K405/A 1 AMENDMENT NO. 1 TO FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K/A (Amendment No. 1) FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------- (Mark One) _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR _ _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission file number 0-538 AMPAL-AMERICAN ISRAEL CORPORATION (Exact Name of Registrant as Specified in Its Charter) NEW YORK 13-0435685 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1177 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10036 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (212) 782-2100. Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Class A Stock American Stock Exchange Warrants to purchase shares of Class A American Stock Exchange Stock Securities registered pursuant to Section 12(g) of the Act: Class A Stock 4% Cumulative Convertible Preferred Stock 6 1/2% Cumulative Convertible Preferred Stock (Titles of Classes) ----------- 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 number of shares outstanding of the issuer's Class A Stock, its only authorized common stock, is 23,849,043 (as of March 20, 1998). The aggregate market value of the voting stock held by non-affiliates of the registrant is $38,311,699 (as of March 20, 1998). ================================================================================ ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OF AMPAL-AMERICAN ISRAEL CORPORATION PART I ITEM 1. BUSINESS As used in this report (the "Report"), the term "Ampal" only refers to Ampal-American Israel Corporation, the parent company; the term "Company" refers to Ampal and its consolidated subsidiaries. Ampal is a New York corporation founded in 1942. For industry segment financial information and financial information about foreign and domestic operations, see Note 12 to the Company's consolidated financial statements included elsewhere herein. The Company acquires interests in businesses located in the State of Israel or that are Israel-related. The Company seeks to invest in companies which have long-term growth potential. The Company is involved in a broad cross-section of Israeli companies engaged in various fields including high technology and communications, hotels and leisure-time, real estate, finance, energy distribution and industry. The Company generally participates in the management of its investee companies through representation on boards of directors and otherwise. In order to identify investment opportunities in the Israeli market, the Company is active in those sectors where it believes that the Israeli market has a competitive advantage in the global market. Currently, the Company has identified the Israeli high-technology and communications sector as being of world-class stature. As a result, the Company invested approximately $8.9 million during 1997 in the high-technology and communications sector. These new investments, which represent the Company's primary investments in 1997, as well as the largest investment in the Company's history - the purchase of a one-third interest in the shared networks operations of Motorola Communications Israel, Ltd. ("Motorola Israel"), in January, 1998 - represent a cornerstone in the Company's strategic planning for the future. The Company expects to continue its activities in this sector. The Company is constantly attempting to identify and take advantage of other Israeli business sectors which have or will become of world-class stature. Similarly, the Company constantly evaluates its investments in order to determine which investments do not meet these standards or do not have attractive growth potential. The Company will then divest itself of such investments. For example, the Company sold its interest in Pri Ha'emek (Canned and Frozen Food) 88 Ltd., a processor and packager of frozen vegetables, canned juices and other vegetable and citrus products, in December 1996 and its interest in Orlite Industries (1959) Ltd., a manufacturer of composite material products, in May 1997. The Company competes for investment opportunities with other established and well-capitalized investing entities. There can be no assurance that opportunities will continue to be available to the Company at valuations and on terms which are favorable. 1 Listed below by industry segment are the Company's most significant investees, the principal business of each and the percentage of equity owned, directly or indirectly, by Ampal. The table below also indicates whether the investee is listed on the American Stock Exchange ("AMEX"), Nasdaq Stock Market ("NASDAQ") or the Tel Aviv Stock Exchange ("TASE"). For further information with respect to the more significant investee companies, see below.
PERCENTAGE AS OF INDUSTRY SEGMENT PRINCIPAL BUSINESS DECEMBER 31, 1997 ---------------- ------------------ ----------------- HIGH TECHNOLOGY AND COMMUNICATIONS A.T.V. Broadcasting Ltd.---------------------- Arabic Cable Channel 24.9 Breeze Wireless Communications Ltd.----------- Wireless Local Area Network 8.3 Clalcom Ltd.---------------------------------- Communications 0.7 Fundtech Ltd.--------------------------------- Banking Software 2.2 Mercury Interactive Corporation (NASDAQ: "MERQ")----------------------------- Software Quality Products 0.4 M-Systems Flash Disk Pioneers Ltd. (NASDAQ: "FLSHF")---------------------------- Data Storage Material 1.4 Mutek Solutions Ltd.-------------------------- Develops Software for Servers 7.2 NKO, Inc.------------------------------------- Facsimile Transmission 3.0 Ortek Ltd.------------------------------------ Electro-optical Devices 24.99 PowerDsine Ltd.------------------------------- Telecommunications Components 12.5 Qronus Interactive Israel (1994) Ltd.--------- Software Quality Products 10.0 Shellcase Ltd.-------------------------------- Packaging Process for Computer Chips 11.0 Shiron Satellite Communications (1996) Ltd.--- Satellite Modems and Fast Internet Access 12.0 TODD Investments Limited (Geotek Communications Ltd.)----------------- Wireless Telecommunications Systems 15.0(1) Trinet Venture Capital Ltd..------------------ Venture Capital Fund 50.0 Comfy Interactive Movies Ltd.(TASE)-------- Computer Technology for Children 4.5(2) ImageNet, Inc.----------------------------- Computer Systems, Software and Hardware 21.9(2) Logal Software and Educational Systems Ltd. (NASDAQ: "LOGLF")------------ Educational Software 2.9(2) Peptor Ltd.-------------------------------- Pharmaceutical Products 1.0(2) Smart-Link Ltd.---------------------------- Multimedia 20.3(2) U.D.S.-Ultimate Distribution Systems Ltd.----- Distribution Software 21.9 Unic View Ltd.-------------------------------- Projection Television System 7.3 VisionCare Ophthalmic Technologies Ltd.------- Advanced Optical Products 5.1 XaCCt Technologies Ltd.----------------------- TCP/IP Network Software 11.8 REAL ESTATE Am-Hal Ltd.----------------------------------- Senior Citizen Facilities 50.0 Ampal Development (Israel) Ltd.--------------- Holding Company and Commercial Real Estate 100.0 Ampal Financial Services Ltd.----------------- Holding Company and Commercial Real Estate 100.0 Ampal (Israel) Ltd.--------------------------- Holding Company and Commercial Real Estate 100.0 Ampal Realty Corporation---------------------- Commercial Real Estate 100.0 Bay Heart Limited----------------------------- Shopping Mall Owner/Lessor 37.0 Etz Vanir Ltd. and Yakhin Mataim Ltd.--------- Citrus Groves 50.0 Frenkel Lefkovitz & Co.----------------------- Real Estate 20.0 Nir Ltd.-------------------------------------- Holding Company and Commercial Real Estate 99.9 Ophir Holdings Ltd. ("Ophir")----------------- Holding Company 42.5 Clark/67 Associates L.P.------------------- Commercial Real Estate 21.3(3) Courses Investment in Technology Ltd.------ Venture Capital Fund 4.6(3) Industrial Buildings Corporation Ltd. (TASE)------------------------------- Industrial Real Estate 5.6(3) Mainsoft Corporation----------------------- Develops Tools for Unix 1.8(3) Memco Software Ltd.(NASDAQ: "MEMCF")------- Computer Security Software Products 4.9(3) Shmey-Bar Group---------------------------- Commercial Real Estate 7.1(3) Teledata Communications Ltd. (NASDAQ: "TLDCF")------------------------- Telecommunications Systems 1.2(3) Shikun U'Fituach le-Israel Ltd.--------------- Real Estate 0.7(4) ENERGY DISTRIBUTION Granite Hacarmel Investments Ltd. (TASE------- Distribution of Refined Petroleum Products 21.5 HOTELS AND LEISURE-TIME Coral World International Limited------------- Underwater Observatories and Marine Parks 50.0 Country Club Kfar Saba Limited---------------- Country Club Facility 51.0 Hod Hasharon Sport Center (1992) Limited Partnership-------------------------- Country Club Facility 50.0 Moriah Hotels Ltd.---------------------------- Hotel Chain 46.0 FINANCE AND OTHER HOLDINGS Epsilon Investment House Ltd.----------------- Investment House 20.0 Renaissance Israel---------------------------- Investment Fund 15.0 INDUSTRY Carmel Container Systems Limited (AMEX: "KML")-------------------------------- Packaging Materials and Carton Production 20.7 M.D.F. Industries Ltd.------------------------ Medium Density Fiber Products 50.0 Paradise Industries Ltd.---------------------- Mattresses and Fold-out Beds 85.1
- ---------- (1) The Company's ownership of Geotek Communications Ltd. is through TODD Investments Limited, of which the Company directly owns 15%. (2) As of December 31, 1997, Trinet Venture Capital Ltd., held the following percentage interests: Comfy Interactive Movies Ltd.--------------- 4.6% ImageNet, Inc.------------------------------ 39.4% Logal Software and Educational Systems Ltd.- 5.7% Peptor Ltd.--------------------------------- 2% Smart-Link Ltd.----------------------------- 40.6% The Company's percentage of the above companies reflects 50% of Trinet's ownership plus any direct holdings. (3) As of December 31, 1997, Ophir Holdings Ltd. held the following percentage interests: Clark/67 Associates L.P.-------------------- 50% Courses Investment in Technology Ltd.------- 5% Industrial Buildings Corporation Ltd.------- 13.3% Mainsoft Corporation------------------------ 4.3% Memco Software Ltd.------------------------- 11.6% Shmey-Bar (I.A.) 1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd. and Shmey-Bar Real Estate 1993 Ltd.------------ 16.7% Teledata Communications Ltd.---------------- 2.7% Ophir sold its interest in Clark, effective February 20, 1998. The Company's percentage of the above companies reflects 42.5% of Ophir's ownership plus any direct holdings. (4) As of February 1998, the Company no longer has an interest in Shikun U'Fituach le-Israel. See "Renaissance Israel." SIGNIFICANT RECENT DEVELOPMENTS SINCE BEGINNING OF LAST FISCAL YEAR Formation Of A New Communications Service Provider In Israel On January 22, 1998 (the "Closing Date"), Ampal Communications, Inc. ("Communications"), a Delaware corporation and a wholly-owned subsidiary of Ampal, completed its purchase of a one-third interest in the assets of the shared networks operation ("SNO") of Motorola Israel, an Israeli corporation, for a purchase price of $110 million. The purchase was made pursuant to a Purchase and Sale Agreement, dated January 5, 1998, between Motorola Israel and Communications. The Purchase Agreement, as amended, is referred to as the "Purchase Agreement." In addition to the purchase price, Communications paid Motorola Israel $279,904 for interest on the purchase price that accrued between the date of the Purchase Agreement and the closing of the transaction. The payment for the purchase price was obtained from Ampal's own resources as well as from two short-term bridge loans, one in the amount of $40 million from Bank Leumi USA (of which $8 million plus interest was repaid on February 2, 1998) and a second in the amount of $35 million from Bank Hapoalim B.M. ("Hapoalim"), the holder of approximately 23% of Ampal's Class A Stock, $1.00 par value (the "Class A Stock") on a fully-diluted basis (as of December 31, 1997). Each loan has a term of 90 days and bears interest at a rate of LIBOR plus 0.5%. Ampal anticipates obtaining long-term bank financing. Pursuant to the terms of the Purchase Agreement, a new wireless communications service provider (the "Provider" or the "Corporation"), which will be owned one-third by Communications and two- 2 thirds by Motorola Israel, will coordinate and operate the digital and analog public-shared two-way cellular radio and other services in Israel previously furnished by Motorola Israel. The digital wireless communications services are based on the iDENTM integrated wireless communication technology, which is known as MIRS in Israel. Multi-functional iDEN technology allows rapid communication for people in workgroups by enabling four services in a single handset: high quality mobile telephone, two-way radio, text messaging and data capabilities. iDEN systems have been deployed in the United States, Canada, Japan and Israel. Communications and Motorola Israel entered into a shareholders' agreement which governs the relationship between the shareholders of the Corporation (the "Shareholders' Agreement"). Communications owns all of the authorized preferred shares of the Corporation and Motorola Israel owns all of the authorized ordinary shares. Each share issued by the Corporation is entitled to one vote. Under certain circumstances, the preferred shares will be converted to ordinary shares. To the extent of available after-tax profits, the Provider is required to pay distributions or dividends to Communications equal to at least $3,800,000 for fiscal year 2000 and $7,100,000 for each fiscal year thereafter so long as the financial stability of the Provider will not be impaired. The Shareholders' Agreement contains provisions whereby the Provider shall endeavor to pay distributions or dividends in the following amounts: for fiscal year 1998, $4,950,000, for fiscal year 1999, $10,725,000 and for fiscal year 2000 and thereafter, $23,430,000 (inclusive of the required payments), which all holders of an interest in the Provider shall share on a pro rata basis. To the extent that any of the above distributions or dividends are not paid by the Provider, they will accumulate. Pursuant to the Articles of Association of the Corporation, no dividends will be paid by the Corporation to Motorola Israel until Communications has received all of its accumulated dividends. Any distributions or dividends which are paid in excess of the above amounts for a given fiscal year will similarly be paid pro rata to Communications and Motorola Israel based on their shares in the Provider. Pursuant to the Purchase Agreement, Motorola Israel guaranteed that Communications would receive from the Provider at least $3,800,000 for fiscal year 2000 and $7,100,000 for each fiscal year between 2001 and 2005 inclusive, subject to an obligation of Communications to repay such guarantee payments in amount equal to the excess over $7,500,000 actually received by Communications from the Provider with respect to any subsequent year. Motorola Israel has agreed to make certain payments to Communications in the event that, prior to the thirteenth anniversary of the Closing Date, there is a dissolution, liquidation, bankruptcy, winding up, or sale of all or substantially all of the assets of the Provider and the total proceeds to the partners or shareholders of the Provider is less than $450 million. Certain actions will require the approval of 75% of the interests in the Provider, including (a) the sale of an interest in the Provider, (b) a material change in the business of the Provider which is not in the ordinary course, (c) the merger, reorganization, consolidation or sale or other disposition of all or a substantial part of the Provider's assets, (d) the liquidation or filing of a petition for bankruptcy of the Provider, (e) the declaration and payment of certain dividends and distributions, and (f) the issuance of a request to shareholders for additional funding. 3 The Provider will be governed by a Board of Directors consisting of up to six members, with each member entitled to cast one vote. Each holder of a 15% or greater interest in the Provider will be entitled to appoint one member of the Provider's Board of Directors for each 15% share held. Initially, the Provider's Board of Directors has six members, two of whom will be appointed by Communications and the other four of whom (including the Chairman of the Board) will be appointed by Motorola Israel. Communications and Motorola Israel agreed to the initial senior management team of the Provider. In the future, so long as Motorola Israel owns at least a 40% interest in the Provider, it will have the right to nominate candidates for General Manager and, so long as Communications owns at least a 15% interest in the Provider, Communications will be entitled to nominate the candidates for Financial Manager. The actual appointment of any such candidates will require the approval of five out of the six directors of the Provider. The Shareholders' Agreement contains restrictions on transfers of interests. Transfer by a shareholder of all or any part of its interest in the Provider to a third party is subject to the other shareholder's right of first refusal. Any transfer of an interest in the Provider, the consideration for which is not wholly in cash, must be approved by the holders of at least 75% of the interests in the Provider. The Shareholders' Agreement also provides that for a two-year period commencing on the date that the partnership transferred its assets to the Corporation, no shareholder will be permitted to transfer its shares if, as a result of such transfer, the combined ownership of Communications and Motorola Israel would be less than 90% of the outstanding capital stock of the Corporation. Of the 10% interest the parties might be permitted to transfer during the two-year period, Ampal would be permitted to transfer 8% and Motorola Israel 2%. Furthermore, in the event that Motorola Israel desires to transfer some or all of its shares to a third party, as long as Communications owns no more than a 50% interest in the Corporation, Communications will have the right to transfer the same proportion of its shares to such third party on the same terms as Motorola Israel transfers its shares. Under certain circumstances, Motorola Israel may require Communications to sell its shares to a third party in connection with a sale by Motorola Israel of its shares to such third party. Communications has agreed that as long as Motorola Israel has the largest interest in the Provider, the Provider will, pursuant to a supply and maintenance agreement, utilize exclusively subscriber equipment and infrastructure equipment manufactured or supplied by Motorola Israel and utilize Motorola Israel's purchasing services so long as the prices for such equipment do not exceed agreed-upon amounts. Furthermore, for a period of three years from the formation of the Provider, Motorola Israel will, pursuant to an administrative agreement, supply the Provider certain administrative services. The Provider has the right to terminate in whole or in part such administrative agreement if the prices for such services are not competitive. Ampal has considered the terms of such supply and maintenance agreement and administrative agreement and has determined that both such agreements are in the best interests of the Provider and Communications. The $110 million purchase price for Communications' one-third interest in the Provider was based upon Ampal's current valuation of the SNO and its prospects. The Purchase Agreement provides that under specified circumstances indicating that there has been an increase in the enterprise value of the Corporation, Communications must pay Motorola Israel an additional amount (the "Bonus"). The formula for the Bonus varies depending upon whether an initial public offering of the Corporation's shares (an "IPO") has been consummated. If an IPO is consummated prior to December 31, 2002, Communications must pay Motorola Israel a Bonus based on an increase in the valuation of the Corporation for purposes of the IPO. In no event will such Bonus payment exceed $33 million multiplied by 1.16n, where n represents the number of years (and any part thereof) between the Closing Date and the closing of the IPO. 4 If an IPO is not consummated prior to December 31, 2002 and if all dividends accumulated with respect to Communications' preferred shares up to that time have been paid, then Communications must pay Motorola Israel a Bonus if (A) the then present value of the actual after tax net income of the Corporation (as reported by the Corporation's auditors in compliance with generally accepted accounting principles in Israel, excluding capital gains derived from each transaction, not in the ordinary course of business, in which the consideration for the Corporation is more than $5 million) for fiscal years 1998 through 2002, discounted at the rate of 13%, exceeds (B) $71 million. In this case, the amount of the Bonus, if any, will equal the lesser of (i) the amount of such excess multiplied by 2.3376, or (ii) $46 million. In March 1998, Communications transferred its interest in the Provider to a limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of Communications (the "General Partner") is the general partner of the Partnership and owns 75.1% of the Partnership. The limited partners of the Partnership purchased their interests in the Partnership from the Partnership and include (i) an entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the controlling persons of Ampal's principal shareholder), which acquired a 9.1% interest in the Partnership for $10 million, (ii) Hapoalim, which acquired a 7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third party, which acquired a 7.45% interest in the Partnership for $8.195 million, and (iv) an entity owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer, which purchased a .9% interest for $1 million. In addition to the purchase price, the limited partners also reimbursed the Company for their pro rata share of the expenses incurred by the Company in connection with the original purchase from Motorola Israel (including interest from the date of the Purchase Agreement until the purchase date of the limited partnership interests). The related parties purchased their limited interests on the same terms as the unrelated third party which were determined through arm's length negotiations between the Company and the unrelated third party. Each of the limited partners paid 35% of their respective purchase price in cash and assumed their pro rata share of Ampal's financing of the original purchase (equal to 65% of their respective purchase prices) and will assume their pro rata share of Ampal's long term financing. A portion of the $350,000 cash payment made by Dr. Gleitman's entity was obtained through two loans aggregating $250,000 from the Company. One loan, in the amount of $150,000, has a term of 10 years, an interest rate of LIBOR plus .8% and is without recourse to Dr. Gleitman. The second loan, in the amount of $100,000, has a term of 10 years, an interest rate of LIBOR plus .5% and is with recourse to Dr. Gleitman. Both loans are secured by Dr. Gleitman's interest in the Partnership. It is intended that the loans to Dr. Gleitman will mirror the terms of the long-term financing that Ampal anticipates obtaining. Should the long-term financing terms differ from what Ampal currently anticipates, the terms of Dr. Gleitman's loans will be adjusted accordingly. Since the Partnership was formed prior to the formation of the Corporation, the restrictions on transfer discussed above do not apply to the purchase of limited interests in the Partnership. Furthermore, pursuant to an agreement among all the partners of the Partnership, for two years only the General Partner will be able to transfer a portion of its interest. The Partnership is entitled to all of Communications' rights under the Purchase Agreement and has assumed all of its obligations. HIGH TECHNOLOGY AND COMMUNICATIONS A.T.V. Broadcasting Ltd. ("A.T.V.") On February 25, 1997, the Company acquired a 24.9% interest in A.T.V. Roll Communications Ltd., a prominent Israeli media company, also has a 10% equity interest in A.T.V. A.T.V. is expected to submit a bid to the Israeli Ministry of Communications ("MOC") for the establishment and operation of a new cable channel targeted at the Arabic-speaking population of Israel. As of the date hereof, the MOC has not yet published the tender offer. The Company originally invested $37,000 in A.T.V. Pursuant to the shareholders' agreement, should A.T.V. be selected by the MOC to manage and operate the cable channel, the Company will be required to invest an additional $197,000 and to make available $406,000 as a loan. The Company may also be required to provide additional financing. It is anticipated that the cable channel may be carried by regional cable companies and that its signal may be made available to the entire population of the Middle East via satellite. Furthermore, for the first time, an Israeli cable channel will be licensed to sell advertising time. Breeze Wireless Communications Ltd. ("Breeze") In June 1995, the Company invested $1 million to acquire a 13.6% equity interest in Breeze. The Company's interest was diluted to 8.5% in 1996 and to 8.3% in 1997 due to the issuance of shares by Breeze. Breeze, formerly known as Lannair, Ltd., is an Israeli company which develops, manufactures and markets wireless local area networks ("LANS") for computers, using license-free, spread spectrum radio technology. Breeze's product strategy focuses on two product lines, wireless LANS for personal computers and notebooks and wireless remote bridges and modems. Breeze has a distribution network with more than 100 distributors in 45 countries. It has a United States subsidiary which develops sales and provides support to customers on the American continent. Fundtech Ltd. ("Fundtech") In April, 1997, Ampal purchased a 2.2% interest in Fundtech, for a purchase price of $750,000. Fundtech is an Israeli company which designs, builds and sells payment systems to financial institutions and their customers, using advanced technology and innovative human engineering. In March 1998, Fundtech completed a public offering of its shares. As a result of the offering, the Company's equity interest in Fundtech was reduced to 1.6% (before the underwriters exercised their over-allotment options on March 31, 1998). Ampal received $307,000 for the shares it sold in the offering. Idan Software Industries I.S.I. Ltd. ("Idan") The Company owned 7.9% of Idan, which it purchased in 1993. On March 27, 1997, the 5 Company sold its interest in Idan to Idan's principal shareholder for $945,000. The Company recorded a gain of $143,000 with respect to this transaction in the first quarter of 1997. ImageNet, Inc. ("Imagenet") The Company has a 21.9% equity interest in ImageNet. The Company purchased its direct holding of 2.2% in April, 1997 for $340,000. (The rest of the Company's interest is through Trinet Venture Capital Fund.) ImageNet develops and markets the award winning CANE(R) family of network design, analysis and simulation tools. CANE, the emerging standard in Computer Aided Network Engineering, is the only integrated, end-to-end, multi-layer, network design tool on the market. ImageNet's strategy is to help its customers design and maintain sophisticated computer networks. Using CANE, network and system integrators and network managers design, simulate and analyze efficient, reliable networks quickly and easily. CANE is a highly sophisticated package built from the ground up to resolve network chaos and manage the accelerating pace of network change while reducing network equipment, consulting and staff costs. Medco Electronics Systems Ltd. ("Medco") In February 1998, the Company purchased a 15.4% interest in Medco for $500,000. Medco is developing a special device used to detect cardiac problems in fetuses. Memco Software Ltd. ("Memco") The Company owns a 4.9% interest in Memco through Ophir. Memco, which underwent an initial public offering in October 1996, develops and markets comprehensive information security products designed to protect and manage access to critical information assets and system resources in distributed computing environments. See "Ophir Holdings Ltd." for a more complete description of Memco. Memco's Ordinary Shares are listed on NASDAQ under the symbol MEMCF. M-Systems Flash Disk Pioneers Ltd. ("M-Systems") In January 1995, the Company acquired 260,416 common shares of M-Systems, equal to a 4.1% interest, for $1 million and received warrants to purchase an additional 130,206 common shares at $4.61 per share until June 30, 1998. M-Systems is an Israeli company that designs, develops, manufactures and markets innovative software and hardware data storage solutions. During 1997, the Company sold 66,000 common shares of M-Systems for a net gain of $.1 million after taxes. As a result of the Company's sales of shares of M-Systems in 1996 and 1997 and the issuance of new shares by M-Systems, the Companys interest decreased to 1.4% as of December 31, 1997. M-Systems' shares are listed on NASDAQ under the symbol "FLSHF." Mutek Solutions Ltd. ("Mutek") In October 1996, the Company purchased a 7.2% interest in Mutek for $750,000. Mutek, which was founded in 1996, is a developer of innovative software development tools. Mutek is active in the fields of code instrumentation, abstract interpretation, semantic analysis and others. Its products include BugTrapperTM, an automatic tracing system, AutoParTM, a tool for transforming sequential programs written in FORTRAN-77 into parallel programs with explicit message passing directions, and BugPredictorTM, a powerful tool for static debugging. 6 The Company has agreed to invest approximately $700,000 in Mutek in order to maintain its current initial percentage when Mutek undergoes additional financing in the second quarter of 1998. NKO, Inc. ("NKO") In June 1997, the Company purchased a 3% interest in NKO for $1 million. NKO is developing a unique "fax-over-data" network technology for long distance fax transmission services. NKO is a subsidiary of Clalcom Ltd., an Israeli telecommunication company. See "Renaissance Israel" for a more complete description of Clalcom. Ortek Ltd. ("Ortek") In September 1997, the Company acquired a 24.99% interest in Ortek for $500,000. Ortek is a developer and manufacturer of electro-optical devices and systems for the military and civilian markets. Ortek is a subsidiary of ELOP Electro-Optical Industries Ltd., the industry leader in electro-optics in Israel. A related party of Ampal also owns a 24.99% interest in Ortek. PowerDsine Ltd. ("PowerDsine") In August 1997, the Company invested $2 million to acquire 12.5% of PowerDsine, an Israeli company specializing in the development, manufacture, marketing and sale of unique, innovative modules and components for the telecommunications industry. PowerDsine recently introduced its first line of off-the-shelf products - telephone ring generators - and is marketing them in North America, Europe and Asia. Additional products are currently being designed. Qronus Interactive Israel (1994) Ltd. ("Qronus") In 1994, Qronus was established to develop and sell automated software testing tools for real-time embedded systems, which are typically custom-built computer systems built for a specific control need. The key target markets for Qronus' technology are medical systems, industrial automation and instrumentation, point-of-sale and other non-standard client-server applications, telecommunications, military and aerospace. The Company, as of December 31, 1997, owned a 10.0% interest in Qronus. In the first quarter of 1998, the Company invested an additional $325,000 in Qronus and increased its interest to 13.0%. Shellcase Ltd. ("Shellcase") The Company purchased an 11% interest in Shellcase for a purchase price of $2,000,000. Shellcase has developed a packaging process for computer chips. These packages are the smallest available to the computer industry. Shiron Satellite Communications (1996) Ltd. ("Shiron") In November 1997, the Company purchased a 12% interest in Shiron for a purchase price of $1,250,000. Shiron is developing a line of satellite modems which achieve high data rates, designed to answer the requirements of satellite data and voice applications such as rural telephony, video conferencing and other applications. In addition, Shiron in developing a two-way fast internet access via satellite systems. Teledata Communications Ltd. ("Teledata") Teledata designs, develops, manufactures, markets and supports advanced wireline and wireless customer access network equipment for telephone operating companies worldwide. Its products enable telephone operating companies to enhance the capacity, reach and functionality of the network of transmission links that connects subscribers to a local exchange, generally known as the "local loop" or "customer access network." Using Teledata's products, telephone operating companies can quickly and cost-effectively deploy new networks using fiber, copper or radio links and upgrade the existing infrastructure in 7 order to substantially increase the number of subscribers that can be served and improve the scope and quality of services offered. Teledata supplies advanced access systems to major telecom operators in Europe, South and Central America, Asia, Africa and the Pacific Rim. During 1997, Ophir sold 860,000 shares of Teledata as part of a Teledata public offering. Ophir sold an additional 542,000 shares of Teledata at prices ranging from $19.125 per share to $45.625 per share. As of December 31, 1997, Ophir owned 342,347 shares of Teledata. As a result of the sales by Ophir, Ampal recorded income in 1997 in the amount of approximately $12.3 million ($8 million net of taxes) Additionally, during 1997, the Company directly sold 119,800 shares of Teledata at prices ranging from $23.50 per share to $33.50 per share. As a result of its direct sales, the Company recorded net income, in 1997 in the amount of approximately $2.9 million ($1.9 million net of taxes.) As of July 29, 1997, the Company no longer had any direct holding in Teledeta. Teledata's shares are quoted on the NASDAQ NM under the symbol "TLDCF." Trinet Venture Capital Ltd. ("Trinet") In February 1994, the Company and Investment Company of Bank Hapoalim Ltd. ("ICH"), established Trinet, a venture capital fund for investments in high-technology ventures in Israel including start-up entities. Each of the Company and ICH had committed to invest up to $2.5 million in Trinet. In 1996, the commitment was increased by $4 million ($2 million each). In 1995, Trinet invested $900,000 for a 51% interest in Smart-Link Link Ltd. ("Smart-Link"), a developer and marketer of multimedia products. In 1996, Trinet increased its holdings in Smart-Link to 60.1% through an investment of an additional $600,000. Between November 1996 and April 1997, other investors invested or committed to invest $4 million in Smart-Link. Trinet's current equity interest in Smart-Link is 40.6%. As a result of Trinet's unrealized loss, the Company recorded a $.2 million net loss after taxes in 1997. In December 1996 and January 1997, Trinet invested an aggregate amount of $1 million for a 62.2% interest in Nulan Technologies Ltd., a developer, producer and marketer of communications and multimedia products. As a result of Trinet's unrealized loss, the Company recorded a $.3 million net loss after taxes in 1997. Trinet also has a 4.6% interest in Comfy Interactive Movies Ltd., a developer and marketer of computer technology for children; a 5.7% interest in Logal Software and Educational Systems Ltd., a developer and marketer of computer-integrated educational systems for scientific instruction in educational systems; a 39.4% interest in ImageNet, a developer of activities related to computer systems, software and hardware; and a 2% interest in Peptor Ltd., a developer of advanced pharmaceutical products based on synthetic peptide. In the first quarter of 1998, the Chief Executive Officer of Trinet resigned and Trinet's holdings are currently being managed by Ophir. See "Ophir Holdings Ltd." U.D.S.-Ultimate Distribution Systems Ltd. ("U.D.S.") In September 1995, the Company invested $1.3 million to acquire a 21.9% equity interest in U.D.S. and three-year options to acquire an additional 4.4% equity interest. U.D.S., formerly known as Barshar Ltd., is an Israeli-based software company specializing in the management and optimization of a variety of logistic tasks for the distribution industry. Its products allow savings in the cost of distribution and increased management control over routing of products and people. Its software has been adopted by major food and beverage distributors including Coca-Cola and CPC Israel. Recent users in the United States include Anheuser-Busch, Miller, Coors and Pepsi. Because of uncertainty with respect to U.D.S.'s future operations, the Company has written-down its carrying value in U.D.S. to zero. Unic View Ltd. ("Unic View") 8 In March 1997, the Company invested $1 million to acquire a 7.3% interest in Unic View. Unic View is a manufacturer and marketer of a liquid screen display projector for video, large-screen television and computer projection systems and a developer of a new projector engine for home use. VisionCare Ophthalmic Technologies Ltd. ("VisionCare") In March 1997, the Company invested $250,000 to acquire a 5.1% interest in VisionCare. VisionCare is developing and marketing opthalmic implantable products that give patients better, more natural visual function. VisionCare's first product is a patented intraoccular telescopic lens for treatment of macular degeneration. XaCCt Technologies Ltd. ("XaCCt") Ampal's original investment in XaCCt, made in June 1997, was $400,000 for an 11.8% interest. On March 2, 1998, Ampal invested an additional $838,000 for a total equity interest of 19.1%. XaCCt is developing billing, auditing and accounting software for TCP/IP networks. This software will allow such networks to generate reports of networks transactions and services by treating them exactly like telephone calls. REAL ESTATE In Israel, most land is owned by the Israeli government. In this Report, reference to ownership of land means either direct ownership of land or a long-term lease from the Israeli Government, which is in most respects regarded in Israel as the functional equivalent of ownership. It is the Israeli government's policy to renew its long-term leases (which usually have a term of 49 years) upon their expiration. Am-Hal Ltd. ("Am-Hal") The Company and a subsidiary of The Israel Corporation, a major Israeli holding company, each own 50% of Am-Hal. The aggregate cost of the center was approximately $21 million, and was financed principally by loans made or guaranteed by the shareholders and refundable tenant deposits. These loans have been repaid. Am-Hal has developed and operates a luxury senior citizens center in Rishon Lezion, a city located approximately 10 miles south of Tel Aviv. The center, which was completed in March 1992, includes 162 apartments (of which 160 were occupied on December 31, 1997), an 80-bed geriatric ward, a swimming pool and other recreational facilities. The geriatric ward is leased by Am-Hal to a non-affiliated health care provider until 2002. Rental payments are based upon the profits of the geriatric ward, with a minimum rent of $340,000 per year. Due to the success of this project and the increased demand for such services, Am-Hal has entered into a joint venture agreement with, among others, the owner of a property consisting of 2.5 acres of land in Hod Hasharon, a city located approximately 7 miles north of Tel Aviv. The joint venture intends to build a senior citizens center on this site, a building of approximately 225,000 square feet (the building in Rishon Le-Zion is approximately 120,000 square feet). It is anticipated that the center will include 260 apartments. The joint venture anticipates that the center will be opened towards the end of 1999. Ampal Development (Israel) Ltd. ("Ampal Development"), Nir Ltd. ("Nir") and Ampal Financial Services Ltd. ("Ampal Financial") (Together, The "Holding Companies") Ampal Development, Nir and Ampal Financial, each of which is wholly-owned by the Company, are engaged in the business of financing acquisitions by the Company and holding and leasing commercial real estate in Israel. Prior to 1989, these companies had acted primarily as lenders, and their financing activities were the principal activities of the Company. In 1990, the Holding Companies sold substantially all their loan portfolios to Hapoalim, and they relinquished their banking licenses. The Holding Companies still service certain loans made by them prior to their ceasing lending activity which are guaranteed by 9 Hapoalim. It has been reported in the media that Israeli banks are the subject of allegations that they engaged in improper business practices regarding lending. The lending practices engaged in by the Holding Companies were substantially similar to the lending practices of the other Israeli banks. One claim in the amount of 3.6 million New Israeli Shekels ("NIS" or "shekels") (approximately $805,970) has already been filed with the District Court in Tel Aviv. However, to the best of the Company's knowledge, the Company's subsidiaries, which operated as banking institutions, acted within the law and in accordance with the procedures and customs in effect at the time. The Company expects to continue to vigorously defend the claim. Ampal Development owns five commercial properties located in Israel aggregating approximately 37,000 square feet for which it received approximately $1.4 million in rent for 1997. Four of these properties are net leased to Hapoalim. Nir owns four commercial properties located in Israel aggregating approximately 18,000 square feet for which it received approximately $.5 million in rent in 1997. Three of these properties are net leased to Hapoalim. Ampal Financial owns two commercial properties located in Israel aggregating approximately 7,000 square feet for which it received approximately $.6 million in rent in 1997. Both of these properties are net leased to Hapoalim. For a discussion of Israeli real estate tax considerations that may be applicable to certain real property leases of the Holding Companies, see "Certain United States and Israeli Regulatory Matters-Certain Israeli Real Estate Tax Matters." The Holding Companies hold interests in other companies discussed elsewhere in this Report and also make loans to these and other investees in furtherance of their businesses. Ampal Development issued debentures which are publicly traded on the TASE. An aggregate of approximately $29.2 million of these debentures were outstanding as of December 31, 1997. Ampal Development has deposited with Hapoalim funds sufficient to pay all principal and interest on these debentures. Ampal Industries (Israel) Ltd. ("Ampal Industries") Ampal Industries, a wholly-owned subsidiary of Ampal, which holds interests in various investee companies described elsewhere in this Report, acquired in 1997 a long-term lease interest in one-half of a commercial building located in Migdal Ha'emek. In 1997, it received approximately $108,000 in rent for this property. Ampal (Israel) Ltd. ("Ampal (Israel)") Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an approximately 57,000 square feet commercial property located in Tel Aviv which houses its principal offices. A portion of this property is net leased to Hapoalim and another portion is net leased to Moriah. Ampal (Israel) also acts as a holding company for other investments discussed elsewhere in this Report. Ampal Realty Corporation ("Ampal Realty") In June 1995, Ampal Realty purchased real property on which an approximately 290,000 square foot office building is located, for approximately $45 million. The building is located at 800 Second Avenue, New York, New York. The building is 43.9%-occupied by the Consulate of the Government of Israel in New York and many other Israeli government offices. On December 12, 1996, the building was converted into an office condominium. Following the conversion, on January 31, 1997, the Government of Israel purchased a condominium unit consisting of floors 10 through 18 from Ampal Realty for a purchase price of $31 million. The original purchase by Ampal Realty was partially financed by a loan of $30 million from Hapoalim at an interest rate of LIBOR plus 1% which was to have matured on the initial expiry date of June 28, 1996. As originally contemplated, Ampal Realty requested, and Hapoalim agreed, to extend the repayment of the balance of the loan until June 28, 2000 10 with quarterly principal payments commencing March 28, 1997. Ampal guaranteed $20 million of this loan. Concurrent with the Conversion, Ampal Realty repaid $15 million of the outstanding principal of the loan, the maturity date of the loan was set at February 28, 1998, the interest was set at LIBOR plus .50% and Ampal's guarantee was reduced to $10 million. As of January 6, 1998, the maturity date for the repayment of the $15 million of outstanding principal was extended to February 28, 1999, the interest rate was set at LIBOR plus .75% and Ampal agreed to guarantee all outstanding obligations. Currently, 79% of the space owned by Ampal Realty in the building is occupied. Pursuant to an agreement dated June 19, 1997, Ampal (Israel) purchased the 6% interest in Ampal Realty previously held by an unrelated third party. Pursuant to the same agreement, Ampal repaid all financing provided to Ampal Realty by this third party. During 1997, Ampal Realty recorded approximately $3.6 million in rent. Ampal Realty intends to offer its remaining interests in the building for sale or long term lease. Bay Heart Limited ("Bay Heart") Bay Heart was established in 1987 to develop and lease a shopping mall (the "Mall") in the Haifa bay area. Haifa is the third largest city in Israel. The Mall, which opened in May 1991, is a modern three-story facility with approximately 280,000 square feet of rentable space. The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment facilities including seven movie theaters. Approximately 37,500 square feet of the Mall are occupied by Supersol Ltd., one of the two largest Israeli supermarket chains, and the parent of a co-investor in Bay Heart. Shekem Department Stores, a major Israeli department store, is the other anchor tenant under a net lease for approximately 57,600 square feet of retail and approximately 17,750 square feet of storage and other space expiring in 2001. As of December 31, 1997, approximately 98% of the Mall premises was occupied, primarily under two-year leases, with options to extend for four additional years, except for anchor tenants. The total cost of the Mall was approximately $53 million, which was financed principally with debt. The Company owns 37% of Bay Heart. Bay Heart owns a 50% interest in 90,000 square feet of land adjacent to the Mall. The remaining 50% interest is held by an unrelated group of investors with whom Bay Heart entered into a joint venture agreement. Bay Heart also owns 30,000 square feet of land adjacent to the Mall. These plots of land are intended to be used for the construction of an addition to the Mall. Bay Heart is a party to a Letter of Intent with both the Ports and Railways Authority and a subsidiary of the Egged bus company regarding the establishment of a joint company, in which each will be equal investors, for the construction of a transportation and business complex next to the Mall. This project will include the construction of both a bus terminal and train station. The land for this project is owned by the Ports and Railways Authority which, pending proper regulatory approval, is expected to make it available to the joint company. See "Certain United States and Israeli Regulatory Matters-Certain Israeli Real Estate Tax Matters" for a discussion of Israeli real estate tax considerations that may be applicable to certain real property leases of Bay Heart. Etz Vanir Ltd. ("Etz Vanir") and Yakhin Mataim Ltd. ("Yakhin Mataim") Both Etz Vanir and Yakhin Mataim cultivate orange, grapefruit, clementine, lemon and avocado groves in Israel, both for export and domestic use, pursuant to various long-term land leases which, including renewal options, do not expire until the mid-21st century. These properties are located near the city of Netanya between an existing and a proposed highway. Approximately 1,200 acres are presently under cultivation by these two companies. Ampal owns 50% of the equity of Etz Vanir and Yakhin Mataim. The remaining 50% of the equity of these companies is owned by an unrelated company, Yakhin Hakal Ltd. ("Yakhin Hakal") which manages their operations. Because of a dispute between Ampal and Yakhin Hakal regarding the operating agreement for the companies, Ampal had requested that an Israeli court declare the agreement null and void, and, in its response, Yakhin Hakal had stated that the companies owed it approximately $4 million for services it had rendered to the companies. The court ruled that Ampal and Yakhin Hakal should jointly appoint an additional director of these companies, who will cast the deciding vote in cases of dispute. Yakhin Hakal filed an appeal and requested a stay concerning the implementation of the court's ruling. The appeal was denied by the Israeli Supreme Court. The parties subsequently agreed to the appointment of the Honorable Dov Levine, a retired judge, as the additional director with the deciding vote. In addition, both Ampal and Yakhin Hakal have appointed independent accountants who will jointly prepare Etz Vanir's and Yakhin Mataim's financial statements. Etz Vanir and Yakhin Mataim have not reported their financial results to Ampal since 1990 and therefore, their financial results have not been included in the Company's financial statements. In February 1995, Yakhin Hakal and its affiliates commenced a legal proceeding seeking to cause Etz Vanir and Yakhin Mataim to redeem perpetual debentures owned by Ampal for approximately $700,000 and to require Ampal to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for their par value, which is nominal. Ampal is contesting this legal proceeding. Though a hearing has been held, no judgment in this case has been rendered as of the date hereof. See "Legal Proceedings." Industrial Buildings Corporation Ltd. ("Industrial Buildings") Industrial Buildings, Israel's largest owner/lessor of industrial property, is engaged principally in the development and construction of buildings in Israel for industrial and commercial use and in project management. Industrial Buildings carries out infrastructure development projects for industrial and residential purposes, principally for a number of government agencies and authorities. Industrial Buildings hires and coordinates the work of contractors, planners and suppliers of various engineering 11 services. Industrial Buildings owns approximately 13.2 million square feet of space in industrial buildings throughout Israel. It owns both multi-purpose buildings and built-to-suit buildings which are constructed in accordance with the specific requirements of tenants. In certain cases, there is an option in the tenant's favor to purchase the leased property, and, in the case of most built-to-suit properties, a commitment on the part of the tenant to purchase the property. The buildings which are owned by Industrial Buildings are leased to approximately 2,437 lessees under net leases having terms of up to ten years. See "Conditions in Israel-Certain Israeli Real Estate Tax Matters" for a discussion of Israeli real estate tax considerations that may be applicable to certain real property leases of Industrial Buildings. The occupancy rate in buildings owned or leased by Industrial Buildings was approximately 86.5% at December 31, 1997. Industrial Buildings' plans include building a project in the Tel Aviv area comprising approximately 448 apartments, a commercial center of approximately 43,000 square feet, an office building of approximately 156,000 square feet and parking facilities of approximately 883,000 square feet. Approximately 6% of Industrial Buildings' space is located in the administered territories. Industrial Buildings cannot predict whether the ongoing peace process involving the State of Israel and the Palestine Liberation Organization will have an effect on this space. Historically, however, the Government of Israel has compensated property owners for forfeitures resulting from government actions. Industrial Buildings' policy is to distribute as a dividend not less than 60% of each year's earnings during the period 1993 through 2000. In December 1997, Industrial Buildings distributed a dividend of approximately NIS 60 million ($16.7 million). Ophir's interest in Industrial Buildings are subject to foreclosure in the event of a default by any of the investors under the bank credit agreements entered into in connection with the original acquisition of Industrial Buildings from the Government of Israel in 1993. Any amounts distributed as a dividend by Industrial Buildings are required to be applied first to pay then due borrowings. Industrial Buildings had a staff of approximately 51 permanent employees as of December 31, 1997. The Company's interest in Industrial Buildings, as of December 31, 1997, was 5.6%. Ophir Holdings Ltd. ("Ophir") Ophir is a holding and investment company that holds interests in high technology and real estate companies. In addition, Ophir has invested in two mutual funds and seven start-up companies in the fields of biotechnology, software and medical equipment. During 1997, Ophir invested $2.9 million in start-up companies and wrote-down $1.6 million as research and development. Ophir is 42.5%-owned by the Company. Ophir owns, through a wholly-owned subsidiary, seven real estate properties located in Israel aggregating approximately 118,360 square feet. Two of these properties are leased to Hapoalim or its subsidiaries. For a discussion of Israeli real estate tax considerations that may be applicable to certain real property leases of Ophir, see "Certain United States and Israeli Regulatory Matters-Certain Israeli Real Estate Tax Matters." The Company and ICH, which also owns 42.5% of Ophir, are parties to a shareholders' agreement regarding joint voting, directorships and rights of first refusal with respect to Ophir. Ophir has developed approximately 60,000 square feet of office and commercial space and approximately 59,000 square feet of parking space on property owned by it in Petach Tikva, Israel. On December 11, 1996, Ophir entered into an agreement to sell this space and property for $11.5 million, with a net profit of $2.6 million (which was recognized in the first quarter of 1997). 12 Ophir owns two acres of land in an industrial park in Netanya, Israel together with an unrelated party. These parties entered into a joint venture agreement regarding this site on which they intend to develop a 326,000 square foot building (including parking) for both industrial and commercial uses. The estimated cost of development of this project is $16.5 million. Ophir's share of the property and joint venture is 70%. Ophir owns a 16.7% interest in the Shmey-Bar group of companies ("Shmey-Bar"). Shmey-Bar acquired 2.3 million square feet of real estate properties from Hamashbir Hamerkazi, Ltd. ("Hamashbir Hamerkazi") for $27.7 million. In the same transaction, Shmey-Bar received an option to acquire, for $26.3 million, an additional 700,000 square feet of real estate properties from Hamashbir Hamerkazi. These properties are situated in various locations in Israel. Ophir's interest in Shmey-Bar was acquired with a nominal investment accompanied by a $2.6 million shareholder's loan. Ophir was, through a wholly-owned subsidiary, a limited partner in Clark/67 Associates L.P. ("Clark/67") which purchased an office building in New Jersey for $3.2 million. Ophir invested $250,000 of Clark/67's $500,000 capital. Ophir sold its interest in Clark/67, effective February 20, 1998 for a sale price of $1.2 million, representing an estimated net profit after taxes of $.6 million to Ophir. On October 17, 1996, Memco Software Ltd. ("Memco"), a provider of computer security solutions, conducted its initial public offering of 3,870,000 ordinary shares (including 450,000 over-allotment shares) at $15.00 per share. Memco sold 3,450,000 of these shares and received net proceeds of approximately $46 million, and existing shareholders sold 420,000 shares. Prior to the offering, Ophir owned a 17.9% interest in Memco, which it purchased for $2.5 million. Ophir sold ordinary shares in the offering, reducing its ownership interest to 13.1%. The Company recorded a fourth quarter gain in 1996 of approximately $1.2 million, after taxes, with respect to the offering. In 1997, Ophir sold an additional 200,000 shares of Memco for a gain of $2.3 million, after taxes and in the first quarter of 1998 sold 200,000 shares of Memco for a gain of $2.1 million after taxes. After these sales, Ophir has a 10.3% interest in Memco. In December 1994, Ophir invested approximately $6.75 million and acquired 33% of a 60,000 square foot property in Tel Aviv. The owners of the property have nearly completed construction of a building on the property consisting of 229,000 square feet of office space, 22,000 square feet of commercial space and 500 parking spaces at a total cost of approximately $30 million. In addition, Granite invested $3 million and acquired 17% of this property. It is anticipated that Hapoalim will occupy space in this building. Since January 1995, Ophir and Granite have invested additional funds for the construction of the building. On February 20, 1997, Ophir, Granite, and an unrelated third party, Zeus Investments Ltd., entered into an agreement with Revadim (Properties) Ltd., a subsidiary of Hapoalim, to sell their interests in the property. Pursuant to the agreement, Granite and Ophir will sell their entire interests and Zeus will sell a portion of its interest. Granite's share of the consideration will be approximately NIS 36 million (approximately $10.7 million) and Ophir's share will be approximately NIS 70 million (approximately $20.9 million). Completion of the sale, which will take place upon the completion of the building, is expected to take place in the second quarter of 1998. In 1997, Ophir recorded a net gain of $1.9 million, after taxes, from the sale of the building based on an estimated partial completion of the building and an estimated provision for construction costs. In September 1995, Ophir acquired a 10% interest in a joint venture which has agreed to purchase 4.4 million square feet of land near Haifa for approximately $15 million, on which the parties intend to develop a commercial real estate project for rent. Ophir has obligated itself to invest up to $1.5 million in the first stage of this project and its share of development costs is estimated to be as much as $30 million. During 1997, Ophir sold 1,402,000 Teledata Ordinary Shares (including 860,000 Ordinary Shares as part of Teledata's public offering) for $41.1 million dollars. Ophir's net gain on sale of these Ordinary Shares was approximately $29 million, net of taxes. Ophir reduced its interest to Teledata to 342,347 Ordinary Shares or 2.7%. Because it sold a substantial number of Teledata Ordinary Shares in 1997, Ophir no longer records its investment in Teledata by the equity method of accounting. The carrying value of its interest is now recorded at fair market value. As a result, Ophir recorded an unrealized net gain of $2.2 million in 1997. In addition, Ophir had an unrealized net gain of $1.9 million in conjunction with Teledata's public offering. For information regarding Ophir's interest in Teledata, see "Teledata 13 Communications Ltd." In February 1998, Dr. Gleitman, Chief Executive Officer of Ampal, became Chairman of Board of Directors of Ophir. ENERGY DISTRIBUTION Granite Hacarmel Investments Ltd. ("Granite") Granite owns the Sonol group of companies, the second largest Israeli distributor of refined petroleum products. Supergas, a wholly-owned subsidiary of Granite, is the third largest marketer and distributor in Israel of liquefied petroleum gas. Through its subsidiaries, Granite also manufactures and markets lubricating oils and automotive batteries. During 1997, Sonol had a net gain of 16 public gas stations to its network. As of December 31, 1997, Sonol supplied petroleum products to 173 public gas stations in Israel, of which 134 are owned by or leased to Sonol. Sonol sold approximately 2.1 million metric tons of refined petroleum products and lubricating oils in 1997. Pursuant to the recommendation of a committee appointed by the Minister of Energy and Infrastructure, the Minister announced his intention to change the policy which required petroleum companies to hold emergency stocks of crude oil and refined products and to separate them from the operating inventories of the oil companies. For the period which commenced November 1996 and ended February 1997, the requirement to hold emergency stocks of heavy fuel oil was gradually reduced. Also, the government intends to separate the storage of refined products included in the emergency stocks from the storage of inventories used in current operations, and in the future, to have tender offers to determine the party who will hold the emergency stocks in storage facilities specially designated by the government. In the first quarter of 1998, the Minister of National Infrastructure published a tender offer for storage of a part of the crude oil emergency stocks, which are today held by the major oil companies, including Sonal. In accordance with the government ordinance issued by the Minister of the Finance and the Minister of National Infrastructures regarding the supplying of aviation kerosene (hereinafter "ATK") to the airline companies at Ben-Gurion Airport, as of September 1, 1996, Aviations Services Ltd., an affiliate of Granite, (hereinafter, "Aviation Services") ceased to be the sole supplier of ATK. Sonol was one of the suppliers of ATK to Aviation Services for many years. As a result of the cancellation of the right of Aviation Services to supply ATK, Sonol will, like other fuel companies, become a direct supplier of ATK to the airline companies at Ben-Gurion Airport. The decree also determined the prices for refueling services and for infrastructure services provided to the airline companies at Ben-Gurion Airport. In accordance with agreements signed with the budget division of the Finance Ministry and with the Airports Authority, Aviation Services will provide the refueling services and its 50% owned subsidiary, Aviation Properties Ltd., will provide the infrastructure services. The agreements do not provide Aviation Services with exclusivity in providing refueling services at Ben-Gurion Airport. On September 1, 1995, the Israeli government published a decree, the purpose of which is to regulate infrastructure rates in the fuel economy. The decree establishes, among other things, the various types of infrastructure services and the maximum prices allowed, as well as the method for updating the prices. Sonol and Delek The Israel Fuel Corporation Ltd. ("Delek") jointly own the rights to the Dalkan 2000, a computerized system for marketing fuel products (primarily to automobile fleets). On January 26, 1997, the Controller of Restrictive Trade Practices ruled that the joint marketing arrangement of the Dalkan 2000 system between Sonol and Delek is a restrictive trade agreement. As a result of the position taken by the Controller, Sonol and Delek agreed to divide the Dalkan 2000 system between themselves so that each company will operate an independent system in a manner that will enable customers, in accordance with their own preferences, to enter into an agreement with either of the companies. The implementation of the separation agreement will be carried out up to the end of March 1998. A private legislative proposal dealing with the shortening of the terms of exclusive agreements entered into between the fuel marketing companies and filling station owners and operators is currently before the Knesset. 14 A draft proposal of legislation by the Ministry of Energy and Infrastructure regarding the term of exclusive contracts between the fuel marketing companies and station owners has been forwarded to government ministries, the President of the Supreme Court and law faculties for their comments. At this time, it is too early to estimate the effects of the foregoing developments on the overall Israeli fuel market in general, and on Sonol in particular. The Company's ownership of Granite, as of December 31, 1997, was 21.5%. The Company was party to an agreement with the other shareholders of Granite which expired on February 8, 1998 and which entitled the Company to appoint three of the eleven members of Granite's board. The Company and these shareholders, who currently own an aggregate of 85.3% of Granite, had also agreed to certain restrictions on transfer and to vote together at general meetings of Granite's shareholders. The parties to the Shareholders' Agreement have continued to act as if the agreement did not expire and anticipate entering into a new agreement. If the Company ceases to exercise "significant influence" over Granite, under applicable accounting principles (which the Company believes it continues to exercise by virtue of its ownership interest and board representation) the Company would no longer be permitted to account for its holdings in Granite under the equity method of accounting, and the Company's reported earnings could be adversely affected. HOTELS AND LEISURE-TIME Coral World International Limited ("Coral World") Coral World, which is 50%-owned by the Company, owns or controls marine parks in Eilat (Israel) and Perth and Manly (Australia). Coral World's marine park, located in Eilat is next to coral reefs and visitors at this park view marine life in its natural coral habitat through large underwater windows. Coral World's marine parks in Perth and Manly, Australia and Maui, Hawaii allow visitors to walk through a transparent acrylic tube on the bottom of a man-made aquarium surrounded by marine life. In addition to admission charges, Coral World's food and beverage facilities and retail outlets are a significant revenue source. Coral World and its affiliated companies employed approximately 150 persons as of December 31, 1997. In 1997, Coral World's parks had a total of approximately 936,000 visitors. In September 1995, Coral World's formerly owned marine park in St. Thomas (U.S. Virgin Islands) was damaged by two hurricanes and was closed. Under an insurance policy, $1.1 million was recovered. Coral World is in a dispute with another insurance company and its agent with respect to its claim for up to $1.2 million of additional coverage. It is too early to determine the outcome of this dispute. In May 1996, Coral World's management made a decision to sell its marine park in St. Thomas, and Coral World recorded a loss of approximately $2 million (the Company's share is $1 million, $.7 million net of taxes) to adjust the carrying value of its investment to net realizable value. The actual sale of the marine park in St. Thomas was made on April 11, 1997 for a purchase price of $.8 million. As a condition to the sale, Coral World retained a 97% interest in the insurance claim. On September 27, 1996, a wholly owned subsidiary of Coral World sold its marine park in Nassau (Bahamas) to an unrelated party for $3.75 million and Coral World recorded a loss on sale of approximately $5 million (the Company's share is $2.5 million, $1.7 million net of taxes). In March 1998, a new marine park, Maui Ocean Center, was opened by Coral World in Maui, Hawaii. This facility, which features an extensive exhibit related to whales with a sophisticated package of interactive displays, is the largest of Coral World's parks. It was constructed at a cost of approximately $20 million (including land acquisition) and was financed, in part, under a $9 million line of credit from Bank Hapoalim. Country Club Kfar Saba Limited ("Kfar Saba") Kfar Saba operates a country club facility (the "Club") in Kfar Saba, a town north of Tel Aviv. Kfar Saba holds a long-term lease to the real property on which the Club is situated. The Club's facilities include swimming pools, tennis courts and a clubhouse. The Club, which has a capacity of 2,000 member families, had approximately 1,900 15 member families for each of the 1996/97 and 1997/98 seasons. The construction cost of the Club was $5.2 million, which was financed principally with debt. Kfar Saba's revenues are principally attributable to annual memberships. The Company owns 51% of Kfar Saba. Hod Hasharon Sport Center (1992) Limited Partnership ("Hod Hasharon") On December 31, 1995, the Company purchased from Kfar Saba its 50% interest in Hod Hasharon for $1.4 million. Hod Hasharon operates a similar country club facility (the "H.H. Club") in Hod Hasharon, a town adjacent to Kfar Saba. The H.H. Club, which has a capacity of 1,600 member families, had approximately 1,450 member families for the 1997/98 season compared with 1,560 member families for the 1996/97 season. The H.H. Club, which opened in July 1994, was constructed at a cost of $4.8 million, of which $2.1 million was borrowed from banks. Moriah Hotels Ltd. ("Moriah") Moriah, which is 46%-owned by the Company, is one of the largest hotel chains in Israel based both upon the number of rooms and the number of locations. The following chart provides certain information with respect to hotels Moriah owns or operates: NO. OF MORIAH'S LOCATION CATEGORY ROOMS INTEREST - -------- -------- ----- -------- Jerusalem.............................. Luxury 292 Owns Eilat.................................. Luxury 306 Owns Dead Sea............................... Luxury 220 Owns Tel Aviv............................... Luxury 355 Lease(1) Tiberias............................... Luxury 265 Leases(2) Dead Sea............................... First Class 196 Manages(3) Zichron Yaakov......................... Economy 112 Manages(3) Nazareth............................... Economy 120 Manages(3) ------- Total.................................. 1,866 ------- - ---------- (1) Net lease which expires in 2006. (2) Net lease which expires in 2001. (3) Management agreement which expires in 2004. Moriah's competitive position has been enhanced by operating out of more locations than any other chain in Israel, improving its facilities and providing high quality service to its guests. During 1997, Moriah spent approximately $3 million on general improvements and renovations. Tourist arrivals in Israel during 1997 and 1996 were 2.1 million and 2.2 million, respectively. Moriah's occupancy rate was 67% (68%, exclusive of the economy hotels) in 1997 and 63% (65%, exclusive of the economy hotels) in 1996. The increased occupancy rate from 1996 to 1997 was primarily due to the closure of the Moriah hotel in Tel Aviv during a part of 1996. The average occupancy rate in the Israeli hotel industry during 1997 was 64%. Moriah's average room rate (expressed in dollars) increased by 3.7% in 1997 compared to 1996. Moriah's competitive position could be adversely affected by economic changes in foreign countries, construction of new hotels in locations which compete with Moriah's hotels or unrest in Israel or other areas of the Middle East. As a result of the significant rise in tourism in Israel in some recent years, additional hotels have been or are being constructed and competition is expected to intensify. 16 Moriah employed approximately 1,520 persons as of December 31, 1997. In December 1995, Moriah entered into an agreement with Radisson SAS, the international hotel chain, pursuant to which Moriah has been granted a 30-year exclusive franchise in Israel. Moriah's hotels have been renamed to include the Radisson name and are now included in the Radisson reservation network. The agreement also grants Moriah the right to operate hotels in Jordan under the name Radisson Moriah. FINANCE AND OTHER HOLDINGS Epsilon Investment House Ltd. ("Epsilon") In January 1995, the Company invested $1.5 million and acquired 20% of Epsilon and its affiliate, Renaissance Investment Company Ltd. ("Renaissance"). Epsilon is an investment bank which provides portfolio management services and Renaissance provides underwriting services in Israel through its subsidiaries. Renaissance Israel In July 1994, the Company agreed to invest $3 million for 15% of Renaissance Israel, a fund that invests in Israel-related companies generally on the same terms and conditions as the Renaissance Fund LDC (the "Renaissance Fund"). The Renaissance Fund was formed in 1994 to invest primarily in emerging markets, basic industry and government privatizations in Israel and elsewhere in the Middle East. The Company had invested an aggregate of $2.8 million in Renaissance Israel, as of December 31, 1997. In March 1998, the Company invested approximately $50,000, reducing its outstanding commitment to approximately 17 $150,000. The Company is entitled to certain potential co-investment opportunities. In March 1995, Renaissance Israel and the Renaissance Fund (together, the "Funds") invested a total of approximately $29 million and acquired a 24.9% interest in a holding company which acquired 100% of the shares of Shikun U'Fituach le-Israel Ltd. ("SHOP") from the Israeli government for approximately $293 million, of which approximately $175 million consisted of non-recourse debt financing from banks. The Company's interest and share of the investment in this holding company was 0.7% and $850,000, respectively. SHOP is one of Israel's largest housing and development companies whose activities include residential and industrial construction as well as infrastructure for residential areas. On February 10, 1998, the Funds sold their entire interest in SHOP to Azorim Development and Investments Company Ltd. ("Azorim") and Clal (Israel) Ltd., the controlling shareholder of Azorim, for NIS 112.3 million in cash (approximately $31.3 million) and NIS 40 million (approximately $11.1 million) in shares of Azorim. The Renaissance Fund's portion of the cash proceeds of the sale was NIS 94.5 million (approximately $25.1 million) and NIS 32.2 million (approximately $9 million) in shares. The balance of the cash proceeds was distributed among the investors in Renaissance Israel. The sale price reflects a company valuation of NIS 600 million (approximately $166.7 million), a greater than 50% increase in the valuation at which the Funds invested in SHOP in March 1995. The shares of Azorim are freely tradable on the TASE and will continue to be held by the Funds. In March 1998, the Company sold shares of Azorim for approximately $125,000. In March 1995, the Funds invested a total of approximately $8 million and acquired 25.1% of Clalcom Ltd. ("Clalcom"). Clalcom is engaged in the telecommunications business in Israel and is part of a group that recently won a bid to be the second international telecommunications carrier in Israel. On September 3, 1996, the Renaissance Fund made an additional investment in Clalcom in the form of a capital note, as part of a $3,000,000 investment in Clalcom's American subsidiary, NKO, Inc. ("NKO"). NKO is developing a data fax transmission network to compete with traditional voice transmission services. (The Company also has a direct interest in NKO. See "NKO, Inc.") The capital note is convertible into ordinary shares of Clalcom at any time. The principal amount of the note is payable at any time subsequent to August 2016, if not earlier converted. On October 7, 1997, the Renaissance Fund invested an additional $862,924 in Clalcom, as its pro rata share of a $4.4 million investment in Clalcom by existing shareholders. This investment was the second installment of an $8.4 million investment pursuant to a Clalcom Board of Directors decision to call additional capital from shareholders to fund operations. The first installment of $4 million, of which the Renaissance Fund's pro rata share was $784,476, was made on June 23, 1997. A capital call for an additional NIS 10 million (approximately $2.8 million) was recently made by Clalcom, as part of a total additional capital call of up to NIS 70 million (approximately $19.4 million). The proceeds from this capital call will be used to repay debt and fund operations. The Fund's (including Renaissance Israel) portion of the NIS 10 million (approximately $2.8 million) capital call was NIS 2.4 million (approximately $.67 million). INDUSTRY Carmel Container Systems Limited ("Carmel") Carmel is one of the leading Israeli designers and manufacturers of paper-based packaging and related products. Carmel manufactures a varied line of products, including corrugated shipping containers, moisture-resistant packaging, consumer packaging, triple-wall packaging and wooden pallets and boxes. Carmel estimates that it manufactures approximately 25% of the folding board, approximately 85% of the corrugated triple wall, and approximately 35% of the corrugated board packaging in Israel. Carmel's products are marketed to a wide variety of customers for diverse uses, but its principal market is packaging for agricultural products and for the food and beverage industry. During the last few years, sales of packaging products to exporters of agricultural products have declined slightly, but have been partially offset by an increase in domestic sales. In 1996 and 1997, Carmel invested approximately $30 million for machinery and infrastructure. On December 1996, one of Carmel's plants was relocated to a leased property in Caesarea, Israel and a second plant was moved and combined with the first plant 18 in the third quarter of 1997. As of December 31, 1997, Carmel employed 730 persons. As of December 31, 1997, the Company owned 20.7% of the shares of Carmel. Shares of Carmel are listed for trading on the AMEX under the symbol "KML." The Company, American Israel Paper Mills Ltd., the largest paper producer in Israel, and Robert Kraft, a United States investor, are parties to a shareholders' agreement with respect to their shareholdings (which aggregate approximately 78% of the shares) in Carmel. The agreement includes provisions governing board representation, required votes for specified corporate actions, matters on which the shareholders agree to cooperate and rights of first refusal with respect to the sale or transfer of the shares owned by the parties. Carmel has granted to International Forest Products Corporation, an affiliate of Mr. Kraft, a right to supply up to 80% of Carmel's requirements for imported paper and forest products in the ordinary course of Carmel's business and on a competitive basis. Davidson-Atai Publishers Ltd. ("Davidson-Atai") On February 27, 1997, the Company sold its 20.7% interest in Davidson-Atai, a publishing company, to principals of Davidson-Atai for approximately $100,000. The transaction yielded a nominal profit for the Company. M.D.F. Industries Ltd. ("M.D.F.") M.D.F. the Company's 50%-owned affiliate, which has established a plant in Israel for the production of medium density fiber boards, and which completed its running-in period on June 30, 1996, incurred significant losses in 1996 and 1997. The losses in 1997 are primarily attributable to a slow down in the Israeli construction industry where M.D.F. primarily markets its products. In view of the substantial losses incurred by M.D.F. and the continuing depressed prices with respect to its products, the Company believes that further substantial losses will be incurred by M.D.F. Consequently, because of the uncertainty with respect to M.D.F.'s future operations, the Company recorded a loss from impairment of this investment in December 1996 for its full remaining investment in and loans to M.D.F. in the amount of $8.8 million. This loss, in addition to the $1.3 million loss previously recorded by the Company in 1996 with respect to M.D.F., resulted in a total loss attributable to the operations of M.D.F. in the amount of $8.6 million, net of tax benefits. M.D.F. is no longer accounted for as an affiliate of the Company under the equity method of accounting. The Company, however, continues to be contingently liable with respect to $5 million of guarantees given by the Company with respect to M.D.F.'s bank obligations. The Company is attempting to reduce its exposure under these guarantees. In an effort to improve its financial results, M.D.F. is attempting to improve its efficiency and reduce its costs. Furthermore, pursuant to a request made by M.D.F., it is anticipated that an anti-dumping duty will be imposed by the Minister of Industry and Commerce on medium density fiber boards which are being imported from the United States and Europe. Orlite Industries (1959) Ltd. ("Orlite") Orlite, formerly known as Orlite Engineering Company Ltd., is one of Israel's largest manufacturers of composite material products for military and civilian applications, including specialized fireproof ammunition storage containers for the Israeli Merkava tank, ballistic helmets for military and police use, specialized aerospace components, outdoor storage distribution cabinets for telecommunications, cable and electrical switching equipment and filament wound non-metallic pressure vessels for agriculture and industrial water treatment systems. On May 8, 1997, Ampal sold (i) all of its direct holdings in Orlite and (ii) a wholly-owned subsidiary which held a separate interest in Orlite, to ICH for an aggregate purchase price of $5.3 million plus interest. Ampal recorded a gain on sale of $.3 million ($.2 million net of taxes in the second quarter of 1997). Paradise Industries Ltd. ("Paradise") Paradise is a leading manufacturer and distributor of mattresses and fold-out beds in 19 Israel. Paradise manufactures and distributes its mattresses under the brand names "Paradise," "Mefi" and "Sealy." "Sealy" mattresses are manufactured and distributed by Paradise under a ten-year exclusive license covering the Israeli market expiring in 2002 with an option for an additional five-year term. Paradise owns its own manufacturing facilities. It distributes mattresses through independent stores and by direct sales to hotels. On June 26, 1997, Paradise's main factory was heavily damaged by a fire and has been closed since then. Paradise was, however, able to resume its activities at the end of the third quarter by assembling mattresses and sofa beds out of its newly-built assembly plant rather than manufacturing them. Paradise uses imported and domestically produced components in its assembly process. Paradise carried both fire damage and business interruption insurance covering the factory. In December 1997, Paradise settled with the insurance company and agreed to accept $7.1 million of compensation for the damage caused by the fire. Paradise received $6.8 million of the insurance proceeds in December 1997 and the balance of the sum was received in early 1998. The insurance recovery for the loss of profits caused by fire was $.8 million. Paradise was also compensated for the additional expenses it incurred as a result of the fire. In January 1998, a new managerial team, experienced in the mattress and bedding industry, was installed at Paradise. The Company currently owns 85.1% of the share capital of Paradise. EMPLOYEES As of December 31, 1997, Ampal had 12 employees (one of who subsequently resigned her position) including one employee whose compensation is shared with Hapoalim. Ampal (Israel) had five employees (one of who resigned in January 1998), Ampal Industries (Israel) Ltd. had eight employees (which was increased to nine in March 1998) and Ampal Development (Israel) Ltd. had one employee as of that date. Relations between Ampal and its employees are satisfactory. CONDITIONS IN ISRAEL Most of the companies in which Ampal directly or indirectly invests conduct their principal operations in Israel and are directly affected by the economic, political, military, social and demographic conditions there. A state of hostility has existed, varying as to degree and intensity, between Israel and the Arab countries and the Palestine Liberation Organization (the "PLO"). While negotiations have taken place and are taking place between Israel, its Arab neighbors and the PLO to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their eventual affect on Ampal and its investee companies. ECONOMIC ACTIVITY Many of the Company's investee companies borrow and lend shekel-based loans which are typically linked to the Israeli Consumer Price Index ("CPI"). Therefore, changes in (i) the CPI; (ii) the rate of exchange between the Israeli shekel and the U.S. dollar; and (iii) inflation in Israel, can have a direct affect on the Company's financial statement. The Israeli inflation rate in 1997 was 7.0%, the lowest annual rate since 1969, versus 10.6% in 1996. The highest price increases were in health care (9.2%), education, culture and entertainment, (8.6%), and food, excluding fruits and vegetables (8.4%). The housing index rose 7.5%. The only index to decline was that for clothing and footwear (-4.4%). The relatively low annual inflation rate is attributed to the Bank of Israel's tight monetary policies. The Israeli economy grew 2.1% in 1997, the lowest rate of the decade. From 1990 to 1995, the Gross Domestic Product rose from 6% to 7% annually, declining to 4.6% in 1996. During 1997, the shekel was devalued by 8.8% relative to the United States dollar, a rate which was higher than the annual inflation rate. 20 To offset the effects of inflation on the purchasing power of the Israeli currency, the Government of Israel has instituted "linkage" policies which have also been followed by most private organizations. Through linkage, the amount of an obligation or payment is increased from time to time by an amount related to changes in an index which may be the exchange rate of a foreign currency or a price index. The payee is thus compensated for the relative decline in the purchasing power of the NIS. Linkage adjustments may be based upon the total or only a specified percentage of the change in the index being used. Many obligations or payments in shekels are linked to the United States dollar or the Israeli CPI, including payment obligations and receivables of many of the Companies' investees. The following table sets forth for the periods indicated the effects of annual inflation on linkage adjustments and annual devaluations, as discussed in the preceding paragraph.
ISRAEL ANNUAL U.S. ANNUAL CLOSING INFLATION ANNUAL INFLATION EXCHANGE ANNUAL ADJUSTED FOR INFLATION YEAR ENDED DEC. 31 RATE(1) RATE(2) DEVALUATION(3) DEVALUATION(4) RATE(5) - ------------------ ------- ------- -------------- -------------- ------- 1992................... 9.4 2.764 21.1 (9.64) 3.0 1993................... 11.2 2.986 8.0 2.93 3.0 1994................... 14.5 3.018 1.1 13.2 2.6 1995................... 8.1 3.135 3.9 4.1 2.8 1996................... 10.6 3.251 3.7 6.6 3.3 1997................... 7.0 3.536 8.8 (1.65) 1.7 ------ ------ ----- ------ ---
- ---------- (1) "Israel Annual Inflation Rate" is the percentage increase in the Israeli CPI between December of the year indicated and December of the preceding year. (2) "Closing Exchange Rate" is the rate of exchange of one United States dollar for the NIS at December 31 of the year indicated as reported by the Bank of Israel. (3) "Annual Devaluation" is the percentage increase in the value of the United States dollar in relation to the NIS during the calendar year. (4) "Annual Inflation Adjusted for Devaluation" is obtained by dividing the December Israeli CPI by the Closing Exchange Rate, thus first obtaining a United States dollar-adjusted Israeli CPI, and then calculating the yearly percentage changes in this adjusted index. (5) "U.S. Annual Inflation Rate" is obtained by calculating the percentage change in the United States Consumer Price Index for All Urban Consumers, as published by the Bureau of Labor Statistics of the United States Department of Labor. ISRAELI INVESTMENT Since the establishment of the State of Israel in 1948, the Government of Israel has promoted the development of industrial and agricultural projects through a variety of methods including tax abatements and tax incentives. Industrial research and development projects in Israel may qualify for government aid if they deal with the development of commercial products to be made in Israel for sale abroad. Direct incentives usually are provided in the forms of grants, regulated in accordance with the Law for Encouragement of Industrial Research and Development 1984. Many of the Company's investee companies have taken advantage of such incentives. CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS SEC EXEMPTIVE ORDER 21 In 1947, the SEC granted Ampal an exemption from the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to an Exemptive Order. The Exemptive Order was granted based upon the nature of Ampal's operations, the purposes for which it was organized, which have not changed, and the interest of purchasers of Ampal's securities in the economic development of Israel. There can be no assurance that the SEC will not reexamine the Exemptive Order and revoke, suspend or modify it. A revocation, suspension or material modification of the Exemptive Order would materially and adversely affect the Company. In the event that Ampal becomes subject to the provisions of the 1940 Act, it could be required, among other matters, to make material changes to its management, capital structure and methods of operation, including its dealings with principal shareholders and their related companies. CERTAIN ISRAELI REAL ESTATE TAX MATTERS Prior to November 1997, a lease of real property with a term of more than 10 years was required to be reported to the Israeli Appreciation Tax Authorities and was subject to a land appreciation tax or an income tax and an acquisition tax. The Israeli Tax Commissioner had taken the position that certain arrangements for the lease of real property, including multiple leases, leases with renewal options and leases or options to lease between affiliated companies, which in the aggregate provided a term exceeding 10 years, were subject to the above reporting and taxes. In November 1997, the law was amended whereby a lease of real property with a term of up to 25 years is no longer subject to the above reporting and taxes. ISRAELI BANKING REGULATIONS A provision of the Banking (Licensing) Law, 5741 1981, as amended (the "Banking Law") imposes limitations on the purchase and holding of means of control of non-banking corporations by Israeli banks. The Banking Law does not permit Israeli banks, including Hapoalim, to invest more than 25% of its capital in non-banking corporations, including Ampal, or to hold more than 25% of the means of control of each such corporation. Under an amendment to the Banking Law enacted in March 1994, Israeli banks, including Hapoalim, were required to reduce their holdings in and means of control over grandfathered non-banking corporations, including Ampal, to 25% by not later than December 31, 1996, and to 20% by December 31, 1999. Pursuant to this amendment, each bank's permitted investments in non-banking corporations by the end of 2002, cannot exceed 15% of each Israeli bank's capital, with the addition of up to 10% of its capital permitted to be invested, subject to certain limitations, in certain eligible non-banking corporations. In order to comply with Banking Law, during 1996, Hapoalim engaged in a series of transactions which reduced its holdings in Ampal and resulted in Hapoalim no longer controlling Ampal. From time to time, the Company engages in transactions with Hapoalim and its affiliates. Currently, the Company maintains substantial deposits with Hapoalim and its subsidiaries. See "Certain Relationships and Related Transactions." UNITED STATES BANKING REGULATIONS Hapoalim is subject, through the United States International Banking Act of 1978 ("IBA"), to the provisions of the United States Bank Holding Company Act of 1956 ("BHC"). Due to Ampal's status as a subsidiary of Hapoalim for purposes of the IBA and BHC, there may be limitations upon the direct or indirect investment activities of Ampal in the United States. While Ampal itself is considered to be a "grandfathered" investment of Hapoalim under the IBA for purposes of the BHC (which status may be reviewed by the Board of Governors of the Federal Reserve), Ampal may not invest in more than 25% of the voting shares or the equity of United States corporations or non-United States corporations which have a majority of their assets in or revenues derived from the United States, subject to certain exceptions. Management of Ampal does not believe that these limitations contained in the BHC and the regulations of the Board of Governors of the Federal Reserve System thereunder have had or will have any material adverse impact upon the Company or its operations. In November 1997, the law was amended whereby a lease of real property with a term of 22 up to 25 years is no longer subject to the above reporting and taxes. TAX INFORMATION ISRAELI TAXATION OF AMPAL Ampal (to the extent that it has income derived in Israel) and Ampal's Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax Ordinance. For 1997, Israeli companies were taxed on their income at a rate of 36%. A tax treaty between Israel and the United States became effective on December 30, 1994. This treaty has not had a substantial impact on the taxation of the Company in the United States or in Israel. Ampal has income from interest, rent and dividends resulting from its investments in Israel. Under Israeli law, Ampal has been required to file reports with the Israeli tax authorities with respect to such income. In addition, as noted below, Ampal is subject to a withholding tax on dividends received from Israeli companies at a rate of either 25%, 15% or 12.5%, depending on the percentage ownership of the investment and the type of income generated by that company (as opposed to dividends payable to Israeli companies, which are exempt from tax, except for the dividends paid by an approved enterprise to either residents or non-residents, the tax on which is withheld at a rate of 15%). Under an arrangement with the Israeli tax authorities, such income has been taxed based on principles generally applied in Israel to income of non-residents. Ampal has filed reports with the Israeli tax authorities through 1996 and has received "final assessments" with respect to such reports filed through 1993 (which final assessments are, under Israeli law, subject to reconsideration by the tax authorities only in certain limited circumstances, including fraud). Based on the tax returns filed by Ampal through 1993, it has not been required to make any additional tax payments in excess of the withholding on its dividends. In addition, under Ampal's arrangement with the Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and the United States on interest, rental and dividend income derived from Israeli sources has not exceeded the taxation which would have been payable by Ampal in the United States had such interest, rental and dividend income been derived by Ampal from United States sources. There can be no assurance that this arrangement will continue in the future. This arrangement does not apply to taxation of Ampal's Israeli subsidiaries. Generally, under the provisions of the Income Tax Ordinance, income paid to non-residents of Israel by residents of Israel is generally subject to withholding tax at the rate of 25%. However, withholding rates on income paid to United States residents by residents of Israel are subject to the United States-Israel tax treaty. No withholding has been made on interest and rent payable to Ampal under an exemption which Ampal has received from the income tax authorities on an annual basis. There can be no assurance that this exemption will continue in the future. The continued tax treatment of Ampal by the Israeli tax authorities in the manner described above is based on Ampal continuing to be treated, for tax purposes, as a non-resident of Israel that is not doing business in Israel. Under Israeli law, a tax is payable on capital gains of residents and non-residents of Israel. With regard to non-residents, this tax applies to gains on sales of assets either located in Israel or which represent a right to assets located in Israel (including gains arising from the sale of shares of stock in companies resident in Israel). Since January 1, 1994, the portion of the gain attributable to inflation prior to that date is taxable at a rate of 10%, while the portion since that date is exempt from tax, while the remainder of the profit, if any, was taxable to corporations at 36% in 1997. Non-residents of Israel are exempt from the 10% tax on the inflationary gain derived from the sale of shares in companies that are considered Israeli residents if they choose to compute the inflationary portion of the gain based on the change in the rate of exchange between Israeli currency and the foreign currency in which the shares were purchased from the date the shares were purchased until the date the shares were sold. The Income Tax Law (Adjustment for Inflation), 1985, which applies to companies which have business income in Israel or which claim a deduction in Israel for financing costs, has been in force since the 1985 tax year. The law provides for the preservation of equity whereby certain corporate assets are classified broadly into Fixed (inflation resistant) 23 and Non-Fixed (non-inflation resistant) Assets. Where shareholders' equity, as defined therein, exceeds the depreciated cost of Fixed Assets, a tax deduction which takes into account the effect of the annual inflationary change on such excess is allowed, subject to certain limitations. If the depreciated cost of Fixed Assets exceeds shareholders' equity, then such excess, multiplied by the annual inflation change, is added to taxable income. Individuals and companies in Israel pay VAT at a rate of 17% of the price of assets sold and services rendered. They can deduct VAT paid on goods and services acquired by them for the purpose of their business. UNITED STATES TAXATION OF AMPAL Ampal and its United States subsidiaries (in the following tax discussion, generally "Ampal") are subject to United States taxation on their consolidated taxable income from foreign and domestic sources. The gross income of Ampal for tax purposes includes or may include (i) income earned directly by Ampal, (ii) Ampal's share of "subpart F income" earned by certain foreign corporations controlled by Ampal and (iii) Ampal's share of income earned by certain electing "passive foreign investment companies" of which Ampal is a stockholder. Subpart F income includes dividends, interest and certain rents and capital gains. Since 1993, the maximum rate applicable to domestic corporations is 35%. Ampal is entitled to claim as a credit against its United States income tax liability all or a portion of income taxes, or of taxes imposed in lieu of income taxes, paid to foreign countries. If Ampal receives dividends from a foreign corporation in which it owns 10% or more of the voting stock, in determining total foreign income taxes paid by Ampal for purposes of the foreign tax credit, Ampal is treated as having paid the same proportion of the foreign corporation's post-1986 foreign income taxes as the amount of such dividends bears to the foreign corporation's post-1986 undistributed earnings. In general, the total foreign tax credit that Ampal may claim is limited to the proportion of Ampal's United States income taxes that its foreign source taxable income bears to its taxable income from all sources, foreign and domestic. The Internal Revenue Code of 1986, as amended (the "Code"), also limits the ability of Ampal to offset its United States tax liability with foreign tax credits by subjecting various types of income to separate limitations. Source of income and deduction rules may further limit the use of foreign taxes as an offset against United States tax liability. As a result of the operation of these rules, Ampal may choose to take a deduction for foreign taxes in lieu of the foreign tax credit. Ampal may be subject to the alternative minimum tax ("AMT") on corporations. Generally, the tax base for the AMT on corporations is the taxpayer's taxable income increased or decreased by certain adjustments and tax preferences for the year. The resulting amount, called alternative minimum taxable income, is then reduced by an exemption amount and subject to tax at a 20% rate. As with the regular tax computation, AMT can be offset by foreign tax credits (separately calculated under AMT rules and generally limited to 90% of AMT liability as specially computed for this purpose). In connection with the transfers in 1992 of its stock in Granite to separate foreign subsidiaries, Ampal entered into gain recognition agreements with the Internal Revenue Service. Under these agreements, if either foreign subsidiary sells all or a portion of its stock in Granite before 2003, Ampal generally will be required to recognize for tax purposes a proportionate amount of gain based upon the fair market value of the stock sold on the date of the transfer to the foreign subsidiary, and to pay tax due in respect of such gain together with interest accrued on such tax since the date of the gain recognition agreement. ITEM 2. PROPERTY Ampal subleases 4,960 rentable square feet of office space leased by Hapoalim at 1177 Avenue of the Americas, New York City under a sublease which expires on August 30, 2009. The base rent, which commenced in September 1994, is $169,000, subject to escalation. In 1997, Ampal's total payment to Hapoalim in connection with this lease was $155,000. Pursuant to the sublease agreement, Ampal was entitled to one month's free rent in 1997. 24 The Company leases office space in various locations in the United States and Israel to Hapoalim and its subsidiaries, pursuant to leases which will generally expire in the years between 2000 and 2003, in exchange for total rental payments in 1997 of approximately $2,953,000. Generally, the annual payments are based upon 10% of the value of the property linked to the CPI. In addition, the Company leases spaces primarily for retail use to non-related parties and received approximately $4,154,000 in rent for such spaces in 1997. Other properties of the Company, and the Company's acquisition of a building located at 800 Second Avenue, New York, New York and the building's subsequent conversion into an office condominium, are discussed elsewhere in this Report. See "Business." ITEM 3. LEGAL PROCEEDINGS In February 1995, Yakhin Hakal and its affiliates commenced a legal proceeding in Tel Aviv District Court seeking to cause Etz Vanir and Yakhin Mataim to redeem the perpetual debentures owned by Ampal for approximately $700,000 and to require Ampal to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for their par value (which is a nominal amount), on the alleged grounds that the perpetual debentures are debt and not equity investments. It is Ampal's view that its investments in these companies, which were made in the 1950's, are equity investments and are not subject to redemption by these companies, other than upon liquidation. Ampal is contesting this legal proceeding. A hearing was held in the spring of 1996 though no judgment has yet been rendered. For a description of a claim for NIS 3.6 million asserted against Ampal Financial, see "Real Estate, Finance and Other Holdings-Ampal Development (Israel) Ltd., Nir Ltd. and Ampal Financial Services Ltd." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF CLASS A STOCK Ampal's Class A Stock is listed on the AMEX under the symbol "AIS.A." The following table sets forth the high and low sales prices for the Class A Stock, as reported on the consolidated transaction reporting system for each calendar quarter during the periods indicated: HIGH LOW ---- --- 1997: Fourth Quarter......................................... $ 5 3/4 $ 4 3/4 Third Quarter.......................................... 6 1/4 5 3/8 Second Quarter......................................... 6 1/8 4 3/4 First Quarter.......................................... 5 3/4 4 7/8 1996: Fourth Quarter......................................... $ 5 1/8 $ 4 9/16 Third Quarter.......................................... 5 1/8 4 3/8 Second Quarter......................................... 5 15/16 4 5/8 First Quarter.......................................... 7 1/8 5 1/8 As of March 20, 1998, there were 1,178 record holders of Class A Stock. Redeemable Warrants to purchase Class A Stock, issued in connection with Ampal's 1994 public offering, are listed on the AMEX under the symbol "AIS.WS." The warrants are exercisable until January 31, 1999, but became callable by Ampal, in whole or in part, on February 1, 1996 without payment to the holder. At their annual meeting held on May 28, 1997, Ampal's shareholders voted to eliminate Ampal's Common Stock, $1.00 par value (the "Common Stock"). 25 VOTING RIGHTS Unless dividends on any outstanding preferred stock are in arrears for three successive years as discussed below, the holders of Class A Stock are entitled to one vote per share on all matters voted upon. Notwithstanding the above, if dividends on any outstanding series of preferred stock are in arrears for three successive years, the holders of all outstanding series of preferred stock as to which dividends are in arrears shall have the exclusive right to vote for the election of directors until all cumulative dividend arrearages are paid. The shares of Class A Stock do not have cumulative voting rights, which means that any holder of at least 50% of the Class A Stock, can elect all of the members of Ampal's Board of Directors. DIVIDEND POLICY In 1995, Ampal paid a dividend of $.21 per share on its Class A Stock and Common Stock. From 1989 through 1994 and in 1996 and 1997, Ampal did not pay a dividend on the Class A Stock and Ampal has never paid a dividend on its Common Stock other than in 1995. Past decisions not to pay cash dividends reflected the policy of Ampal to apply retained earnings, including funds realized from the disposition of holdings, to finance its business activities and to redeem debentures. The payment of cash dividends in the future will depend upon the Company's operating results, cash flow, working capital requirements and other factors deemed pertinent by the Board. Dividends on all classes of Ampal's shares are payable as a percentage of par value. The holders of Ampal's presently authorized and issued 4% Preferred Stock and 61/2% Preferred Stock (each having a $5.00 par value) are entitled to receive cumulative dividends at the rates of 4% and 61/2% per annum, respectively, payable out of surplus or net earnings of Ampal before any dividends are paid on the Class A Stock. If Ampal fails to pay such dividend on the preferred stock in any calendar year, such deficiency must be paid in full, without interest, before any dividends may be paid on the Class A Stock. If after the payment of all cumulative dividends on the preferred stock and a non-cumulative 4% dividend on the Class A Stock, there remains any surplus, any dividends declared are to be participated in by the holders of 4% Preferred Stock and Class A Stock, pro rata. On December 10, 1997, Ampal announced that its Board of Directors had declared cash dividends on its preferred stock ($0.325 per share of its 61/2% Preferred Stock and $0.20 per share of its 4% Preferred Stock). RECENT SALES OF UNREGISTERED SECURITIES Pursuant to a Letter Agreement, dated as of March 1, 1997, among Ampal, Ampal Realty Corporation, a wholly-owned subsidiary of Ampal, and Emmes Asset Management Corp. ("Emmes"), Ampal agreed to issue to Mr. Andrew Davidoff, as custodian, 100 shares of Class A Stock for each of his three children each year for the duration of the effectiveness of the letter agreement. Emmes and Mr. Davidoff provide general asset management and property advisory services with respect to the building located at 800 Second Avenue. Emmes is a wholly-owned subsidiary of Emmes & Company LLC. Mr. Michael Sonnenfeldt, a director of Ampal, is the founder and managing director of Emmes & Company LLC. On January 20, 1998, Ampal issued 300 shares to Mr. Davidoff, as custodian, and anticipates issuing additional shares on April 1, 1998 and each April 1, thereafter. See "Certain Relationships and Related Transactions" for a complete description of the Company's agreement with Emmes. The issuance to Mr. Davidoff of such shares was exempted from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. 26 Item 6 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Revenues .................. $ 56,114 $ 44,360 $ 44,713 $ 43,745 $ 42,679 Net income (loss) ......... 14,183 (10,252)(3) 2,166(3) 7,334(3) 226(3)(4) Earnings (loss) per Class A share: Basic EPS ................ $ .58(1) $ (.45)(1)(3) $ .07(1)(3) $ .30(1)(3) $ (.01)(1)(3)(4) Diluted EPS .............. .50(2) (.38)(2)(3) .06(2)(3) .25(2)(3) (.01)(2)(3)(4) Total assets .............. 262,274 283,551 312,094 301,194 271,124 Notes, deposits and debentures payable ....... 65,053 102,414 115,881 95,995 124,745 Dividends declared per Class A share ............ $ -- $ -- $ .21 $ -- $ -- (1) Computation is based on net income (loss) after deduction of preferred stock dividends of $351, $364, $560, $406 and $440, respectively. (2) Computation is based on net income (loss) after deduction due to dilution in equity in earnings of affiliate of $258, $363, $402, $556 and $419, respectively. (3) Includes (loss) income from discontinued operations, as follows: YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------- (Loss) income from discontinued operations ............... $ -- $ (2,892) $ (4,315) $ 969 $ (214) (Loss) earnings per Class A share from discontinued operations: Basic EPS ................ $ -- $ (.12) $ (.18) $ .04 $ (.01) Diluted EPS .............. -- (.10) (.15) .04 (.01)
(4) Includes cumulative effect on prior years of change in accounting principle of $(4,982), equal to $(.27) and $(.21) per share, respectively, for Basic EPS and Diluted EPS. 27 Items 7 & 8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- GENERAL - ------- The "Company" (refers to Ampal-American Israel Corporation ("Ampal"), and its consolidated subsidiaries) acquires interests in businesses located in the State of Israel or that are Israel-related. The Company seeks to invest in companies which have long-term growth potential. The Company is involved in a broad cross-section of Israeli companies engaged in various fields including high technology and communications, hotels and leisure-time, real estate, finance, energy distribution and industry. The Company generally participates in the management of its investee companies through representation on boards of directors and otherwise. The Company emphasizes long-term appreciation over short-term returns and liquidity. The Company often makes equity investments accompanied by more significant loans or loan guarantees with the intention that cash flow from operations of the investee companies will repay these loans. The Company's results of operations are directly affected by the results of operations of its investees. The results of companies which are greater than 50%-owned are included in the consolidated financial statements of the Company. The Company accounts for its holdings in investees over which the Company exercises significant influence, generally 20%- to 50%-owned companies ("affiliates"), under the equity method. Under the equity method, the Company recognizes its proportionate share of such companies' income based on its percentage of direct and indirect equity interests in earnings of those companies. If the Company's interest in a subsidiary were to be reduced to 20%-50%, the investment would be recorded under the equity method. The Company's results of operations are affected by capital transactions of the affiliates. Thus, the issuance of shares by an affiliate at a price per share above the Company's carrying value per share for such affiliate results in the Company recognizing income for the period in which such issuance is made, while the issuance of shares by such affiliate at a price per share that is below the Company's carrying value per share for such affiliate results in the Company recognizing a loss for the period in which such issuance is made. The Company accounts for its holdings in investees, other than those described above, on the cost method or in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." A comparison of the Company's financial statements from year to year must be considered in light of the Company's acquisitions and divestitures during each period. For those subsidiaries and affiliates whose functional currency is considered to be the New Israeli Shekel ("NIS"), assets and liabilities are translated at the rate of exchange at the end of the reporting period and revenues and expenses are translated at the average rates of exchange during the reporting period. Translation differences of those foreign companies' financial statements are included in the cumulative translation adjustment account of shareholders' equity. Should the NIS be devalued against the dollar, cumulative translation adjustments are likely to result in reductions of shareholders' equity. As of December 31, 1997, the effect on shareholders' equity was a decrease of approximately $10.1 million. Upon disposition of an investment, the related cumulative translation adjustment balance will be recognized in determining gains or losses. 28 YEAR 2000 COMPLIANCE - -------------------- The Company is currently in the process of identifying, evaluating and implementing changes to computer programs necessary to address the year 2000 issue which is the result of computer programs having been written using two digits instead of four to define a year. This issue affects computer systems that have date sensitive programs that may recognize a date using "00" as 1900 rather than 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail, resulting in business interruption. The Company does not believe the cost of converting all internal systems to be year 2000 compliant will be material to its financial condition or results of operations. Costs related to the year 2000 issue are being expensed as incurred. The year 2000 issue is expected to affect the systems of various entities with which the Company interacts. However, there can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure by another company's systems to be year 2000 compliant would not have a material adverse effect on the Company. RECENTLY ISSUED ACCOUNTING STANDARDS - ------------------------------------ In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains, and losses) in a full set of general purpose financial statements. The Company will adopt SFAS No. 130 in the first quarter of 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. The Company will adopt SFAS No. 131 in its fiscal year 1998. DISCONTINUED OPERATIONS - ----------------------- On December 23, 1996, the Company sold all of its equity interest in Pri Ha'emek (Canned and Frozen Food) 88 Ltd. ("Pri Ha'emek") to Agrifarm International Limited ("Agrifarm"), a British company. Accordingly, the results of Pri Ha'emek have been presented as discontinued operations in the Company's 1996 and 1995 consolidated financial statements. In connection with the sale, the Company recorded a loss on disposition of $3.2 million and a tax benefit of $3.9 million, which was based on a total loss of its investment in Pri Ha'emek in the amount of $9.7 million. RESULTS OF OPERATIONS - --------------------- Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 - --------------------------------------------------------------------- Consolidated income from continuing operations increased to $14.6 million in 1997, from a $7.4 million loss in 1996. The increase resulted primarily from the increases in equity in earnings of affiliates, realized and unrealized gains on investments, net interest income in 1997 as compared to net interest expense in 1996, lower losses from impairment of investments, increase in other income, and the absence of an unrealized loss on rental property in 1997 which was recorded in 1996. These increases were partially offset by a decrease in net rental income and a restructuring charge recorded in 1997. Equity in earnings of affiliates increased from $6.3 million in 1996, to $18.7 million in 1997. The increase is primarily attributable to the significantly improved earnings of Ophir Holdings Ltd. ("Ophir"), the Company's 42.5%-owned affiliate, which is a holding company with interests in high technology and real estate companies, and to increased earnings of Coral World International Ltd. ("CWI"), the Company's 50%-owned affiliate, which owns and operates marine parks in Eilat (Israel) and Perth and Manly (Australia). The increase in Ophir's 1997 earnings resulted primarily from realized and unrealized gains on its investment in Teledata Communications Ltd. ("Teledata"), gains on sale of 29 office and commercial real estate and lower interest expense which resulted from repayments of loans. CWI reported earnings in 1997 as compared to losses in 1996. The losses recorded by CWI in 1996 were primarily attributable to the company's investments in marine parks in Nassau (Bahamas) and St. Thomas (U.S. Virgin Islands), which were sold in September 1996 and April 1997, respectively. The increases noted above were partially offset by the losses recorded by the Company's 50%-owned affiliate, Trinet Venture Capital Ltd. ("Trinet"), a high-technology venture capital fund, which recorded unrealized losses on its investments in 1997 as compared to unrealized gains in 1996, and losses of Carmel Container Systems Limited ("Carmel"), the Company's 20.7%-owned affiliate, which is a manufacturer of paper-board packaging and related products. Carmel recorded losses in 1997 as compared to earnings in 1996 primarily because of a decrease in sales volume as a result of the economic slowdown in Israel, a decrease in sales prices as a result of escalating competition, an increase in costs associated with the running-in of a new plant and the one-time expenses incurred with respect to the closing of old plants. Moriah Hotels Ltd. ("Moriah"), the Company's 46%-owned affiliate, which is one of the largest hotel chains in Israel, also recorded losses in 1997 primarily because of the decrease in occupancy rates (excluding the hotel in Tel Aviv) as a result of the decrease in tourism to Israel in 1997 and higher rental expenses pertaining to its hotel in Tel Aviv. In 1997 the Company recorded $4.5 million of gains on sale of investments, $2.9 million of which is attributable to its direct investment in Teledata, as compared to $2 million of gains on sale of investments, including $1.5 million with respect to Teledata, which was recorded in 1996. The Company also recorded $.9 million of unrealized gains on investments which are classified as trading securities as compared to $.1 million of unrealized losses on investments in trading securities in 1996. At December 31, 1997 and December 31, 1996, the aggregate fair value of trading securities amounted to approximately $7.5 million and $4.9 million, respectively. The Company recorded net interest income in 1997, as compared to net interest expense in 1996. The increase in net interest income is primarily attributable to debt reduction in connection with the sale of a condominium unit in an office building located at 800 Second Avenue, New York, New York ("800 Second Avenue"). See Liquidity and Capital Resources. Also, as a result of this transaction, the Company recorded a loss of $1.1 million ($.6 million net of taxes) in its December 31, 1996 financial statements. The decrease in rental income and rental property expenses are also attributable to the sale of the condominium unit. In 1997 the Company recorded $2.2 million of losses from impairment of its investment in its 21.9%-owned Israeli-based software company, U.D.S. - Ultimate Distribution Systems Ltd., and in Geotek Communications Inc., an international wireless telecommunications company. In 1996 the Company recorded a $10.1 million loss ($8.6 million net of taxes) from impairment of its investment in M.D.F. Industries Ltd. ("M.D.F."). On June 26, 1997, the main factory of the Company's 85%-owned manufacturing subsidiary, Paradise Industries Ltd. ("Paradise"), was heavily damaged by a fire. Paradise was, however, able to resume its activities at the end of the third quarter by assembling mattresses and sofa beds out of its newly-built assembly plant rather than manufacturing them. Paradise uses imported and domestically produced components in its assembly process. Paradise carried both fire damage and business interruption insurance covering the factory. In December 1997, Paradise settled with the insurance company and agreed to accept $7.1 million of compensation for the damage caused by the fire. Paradise received $6.8 million of the insurance proceeds in December 1997 and the balance in early 1998. The insurance recovery for the loss of profits caused by fire was $.8 million. This income is included in other income in the Company's 1997 consolidated income statement. Paradise was also compensated for the additional expenses it incurred as a result of the fire. The insurance proceeds covering these expenses were offset against the Company's manufacturing expenses in 1997. At December 31, 1997, Paradise deferred $.7 million with 30 respect to the proceeds received from the insurance company for the expenses incurred in early 1998 as a result of the fire. During 1997, in connection with management's plan to reorganize operations and reduce costs, the Company recorded a restructuring charge of $1.3 million ($.7 million was recorded in the quarter ended December 31, 1997). This restructuring, which will result in the elimination of certain corporate positions, will be completed in early 1998, and primarily relates to severance and other employee related costs. The change in the effective income tax rate in 1997 as compared to 1996, is mainly attributable to the losses of certain Israeli subsidiaries in 1996 for which no tax benefits were available, and to the utilization of foreign tax credits in 1997 which were previously not available. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 - --------------------------------------------------------------------- Consolidated income from continuing operations decreased from $6.5 million in 1995, to a loss of $7.4 million in 1996. The decrease in income in 1996 resulted primarily from the loss recorded with respect to the impairment of the Company's investment in M.D.F., decreases in equity in earnings of affiliates, unrealized losses on investments, losses incurred by Paradise, higher net interest expense and an unrealized loss on rental property. These decreases were partially offset by an increase in net rental income. M.D.F., the Company's 50%-owned affiliate, which established a plant in Israel for the production of medium density fiber boards, and which completed its running-in period on June 30, 1996, incurred significant losses in 1996. The losses were primarily attributable to the excess of cost of sales per production unit over the selling price. M.D.F.'s sales prices were affected by the decrease in worldwide prices of all wood-connected products, and to the establishment of nearly 30 new plants for the production of medium density fiber boards throughout the world. In view of the substantial losses incurred by M.D.F. and the continuing depressed prices with respect to its products, the Company believed that further substantial losses will be incurred by M.D.F. Consequently, because of the uncertainty with respect to M.D.F.'s future operations, the Company recorded a loss from impairment of this investment in December 1996 for its full remaining investment in and loans to M.D.F. in the amount of $8.8 million. This loss, in addition to the $1.3 million loss previously recorded by the Company in 1996 with respect to M.D.F., resulted in a total loss attributable to the operations of M.D.F. in the amount of $8.6 million, net of tax benefits. M.D.F. is no longer accounted for as an affiliate of the Company under the equity method of accounting; however, the Company continues to be contingently liable with respect to $5 million of guarantees given by the Company with respect to M.D.F.'s bank obligations. In addition, the owner of the other 50% interest in M.D.F. has agreed to provide additional funds in the amount of up to $2 million to M.D.F., if required for M.D.F. to meet its obligations. Equity in earnings of affiliates decreased from $7.4 million in 1995, to $6.3 million in 1996. The decrease was primarily attributable to losses recorded by the Company's 50%-owned affiliate, CWI. On September 27, 1996, a wholly-owned subsidiary of CWI sold its marine park in Nassau (Bahamas) to an unrelated party for $3.75 million and CWI recorded a loss on sale of approximately $5 million (the Company's share was $2.5 million, $1.7 million net of taxes). In addition, in May 1996, CWI's management made a decision to sell its marine park in St. Thomas (U.S. Virgin Islands), and CWI recorded a loss of approximately $2 million (the Company's share was $1 million, $.7 million net of taxes) to adjust the carrying value of its investment to net realizable value. Moriah, recorded lower earnings in 1996 primarily because its Tel Aviv hotel was closed for renovations for part of the year. Moriah also experienced decreases in room rates which resulted from the decrease in tourism to Israel in 1996. The Tel Aviv hotel, which had undergone a $16 million renovation, of which $4 million was provided by the landlord, partially reopened in April 1996, and its renovations were completed in the fourth quarter of 1996. The decreases noted above were partially offset by the increased earnings recorded by Trinet, a high technology venture capital fund, which recorded unrealized gains on its investments in Smart-Link Ltd. ("Smart-Link"), Imagenet Ltd. ("Imagenet") and Logal Software and Educational Systems Ltd. ("Logal"). Smart-Link, which is engaged in development of products in the field of multimedia and computers, issued 27.3% of its shares to various investors for $3 million in November 1996. Imagenet, which develops and markets computer-aided network engineering software products, completed a $2.5 million private placement for 26.7% of its shares in June 1996. Logal, which markets computerized educational systems for learning sciences in high schools and colleges, completed a $13 million public offering in February 1996 in the United States. In addition, Ophir the 31 Company's 42.5%-owned affiliate, reported improved results in 1996 which are primarily attributable to gains it recorded with respect to the initial public offering conducted by its affiliate, Memco Software, Ltd. on October 17, 1996, and to the increased earnings of its affiliate, Teledata. Teledata's earnings improved as a result of increased sales, mainly because of its more successful marketing efforts. Manufacturing revenues and expenses reflect the operations of Paradise, which recorded losses in 1996, primarily in the third quarter, because of increased advertising and promotional expenses in connection with a new marketing program. Interest income decreased in 1996 primarily as a result of lower balances of interest-earning assets and lower interest rates in 1996. Interest expense increased in 1996 mainly because of debt incurred in connection with the purchase of 800 Second Avenue. On June 28, 1995, the Company's then 94%-owned subsidiary purchased 800 Second Avenue for approximately $45 million. The approximately 290,000 rentable square-foot office building houses the Consulate of the Government of Israel (the "Government") in New York and other Israeli government offices as well as other tenants. The property was converted into a condominium in December 1996. On January 31, 1997, the Company sold to the Government the portion of the building which it occupies for $31 million. As a result of this transaction, the Company recorded a loss of $1.1 million ($.6 million net of taxes) in its December 31, 1996 financial statements. The increases in rental income and rental property expenses in 1996 were attributable to the operations of 800 Second Avenue. The Company recorded $.6 million of unrealized losses and $.3 million of unrealized gains on marketable securities and $2 million and $1.9 million of gains on sale of investments in 1996 and 1995, respectively. The realized gains recorded in 1996 were mainly attributable to the Company's investments in Teledata and M-Systems Flash Disk Pioneers Ltd. ("M-Systems"), whereas the gains recorded in 1995 were mainly attributed to the Company's investment in Mercury Interactive Corporation ("Mercury"). Unrealized losses in 1996 were attributed to the Company's investments in Idan Software Industries I.S.I., Ltd. ("Idan") and in Mercury. The change in the effective income tax rate in 1996 is mainly attributable to the losses of certain Israeli subsidiaries and affiliates (including M.D.F.) from which no tax benefits are available. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At December 31, 1997, cash and cash equivalents were approximately $45.5 million as compared with $20.6 million at December 31, 1996. During 1997, deposits, notes and loans receivable, notes and loans payable, and outstanding debentures decreased as a result of scheduled repayments. In 1997 the Company received dividends from affiliates amounting to $9.7 million. In January 1997, the Company sold a condominium unit in 800 Second Avenue to the Government of Israel (the "Government") for $31 million. At that time the Government paid $15 million and gave the Company a note for the remaining $16 million, of which $8 million was repaid in December 1997, and the remainder was repaid in January 1998. The decrease in real estate rental property and notes and loans payable are primarily attributable to this sale. The Company's cash position and debt obligations were affected by the transaction with Motorola Communications Israel, Ltd. in January 1998. See Subsequent Event noted below. In 1997, the Company made several new investments in the high-technology field aggregating $8.9 million, notably (1) a $1 million investment to acquire 7.3% of UNIC View Ltd., a manufacturer and marketer of a liquid screen display projector for video, large-screen television and computer projection systems and a developer of a new projector engine for home use, (2) a $.75 million investment for 2.2% of FundTech Ltd., a developer of software for worldwide banking institutions to facilitate fund transfers, (3) a $1 million investment for 3% of NKO, Inc., a developer of low-cost facsimile transmission services, (4) a $.4 million investment for approximately 12% (increased in 1998 by $.8 million to 18%) of XaCCt Technologies Ltd., a developer of billing, auditing and accounting software for TCP/IP networks which allows such networks to generate reports of network transactions and services by treating them exactly like telephone calls, (5) a $2 million investment 32 for 12.5% of PowerDsine, Ltd. a developer, manufacturer and marketer of innovative modules and components for the telecommunications industry, (6) a $.5 million investment for 24.99% of Ortek Ltd., a developer and manufacturer of electro-optical devices and systems for the military and civilian markets, (7) a $1.25 million investment to acquire approximately 12% of Shiron Satellite Communications (1996) Ltd., a developer of satellite modems which achieve high data rates, designed to answer the requirements of satellite data and voice applications, such as rural telephone, video conferencing and other applications and (8) a $2 million investment to acquire 11% of Shellcase Ltd., an Israeli company which has developed a packaging process for computer chips. As of December 31, 1997, the Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of $13.2 million, and has commitments issued to its investees of up to $12.7 million. In 1997 and 1996 Ampal paid dividends in the amount of $.20 and $.325 per share on its 4% and 6-1/2% Cumulative Convertible Preferred Stock, respectively. Total dividends paid in both years amounted to approximately $.4 million. SUBSEQUENT EVENT - ---------------- On January 22, 1998 the Company completed its purchase of a one-third interest in the assets of the shared networks operation of Motorola Communications Israel, Ltd. ("Motorola Israel") for a purchase price of $110 million. The payment for the purchase price was obtained from the Company's own resources as well as from two short-term bridge loans, one in the amount of $40 million from Bank Leumi USA (of which $8 million plus interest was repaid on February 2, 1998) and a second in the amount of $35 million from Bank Hapoalim. Each loan has a term of 90 days and bears interest at a rate of LIBOR plus 1/2%. The Company anticipates replacing the aforementioned short-terms loans with long-term financing. A new wireless communications service provider ("Provider" or "Corporation"), one-third owned by the Company and two-thirds owned by Motorola Israel, will coordinate and operate in Israel the digital and analog public-shared two-way radio and other services previously furnished by Motorola Israel. The digital wireless communication service is based on Motorola's iDEN(TM) integrated wireless communication technology, which is known as MIRS in Israel. The Company owns all of the authorized preferred shares of the Corporation and Motorola Israel owns all of the authorized ordinary shares. Each share issued by the Corporation will be entitled to one vote. To the extent of available after-tax profits, the Provider is required to pay distributions or dividends to the Company equal to at least $3,800,000 for fiscal year 2000 and $7,100,000 for each fiscal year thereafter so long as the financial stability of the Provider will not be impaired. The Provider shall endeavor to pay distributions or dividends in the following amounts: for fiscal year 1998, $4,950,000, for fiscal year 1999, $10,725,000 and for fiscal year 2000 and thereafter, $23,430,000 (inclusive of the required payments), which all holders of an interest in the Provider shall share on a pro rata basis. To the extent that any of the above distributions or dividends are not paid by the Provider, they will accumulate. No dividends will be paid by the Corporation to Motorola Israel until the Company has received all of its accumulated dividends. Any distributions or dividends which are paid in excess of the above amounts for a given fiscal year will similarly be paid pro rata to the Company and Motorola Israel based on their shares in the Provider. Pursuant to the purchase agreement, Motorola Israel guaranteed that the Company would receive from the Provider at least $3,800,000 for fiscal year 2000 and $7,100,000 for each fiscal year between 2001 and 2005 inclusive, subject to an obligation of the Company to repay such guarantee payments in amount equal to the excess of the amount actually received by the Company from the Provider with respect to any subsequent year over $7,500,000. The $110 million purchase price for the Company's one-third interest in the Provider was based upon the Company's current valuation of the SNO and its prospects. The purchase agreement provides that under specified circumstances indicating that there has been an increase in the enterprise value of the Corporation, the Company must pay Motorola Israel an additional amount (the "Bonus"). The formula for the Bonus varies depending upon whether an initial public offering of the Corporation's shares (an "IPO") has been consummated. If an IPO is consummated prior to December 31, 2002, the Company must pay Motorola Israel a Bonus based on an increase in the valuation of the Corporation for purposes of the IPO. In no event will such Bonus payment exceed $33 million multiplied by 1.16(n), where n represents the number of years (and any part thereof) between the closing date and the closing of the IPO. If an IPO is not consummated prior to December 31, 2002 and if all dividends accumulated with respect to the Company's preferred shares up to that time have been paid, then the Company must pay Motorola Israel a Bonus if (A) the present value of the actual after tax net income of the Corporation (as reported by the Corporation's auditors in compliance with generally accepted accounting principles in Israel, excluding capital gains derived from each transaction, not in the ordinary course of business, in which the consideration for the Corporation is more than $5 million) for fiscal years 1998 through 2002, discounted at the rate of 13%, exceed (B) $71 million. In this case, the amount of the Bonus, if any, will equal the lesser of (i) the amount of such excess multiplied by 2.3376, or (ii) $46 million. In March 1998, the Company transferred its interest in the Provider to a limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of the Company (the "General Partner") is the general partner of the Partnership and owns 75.1% of the Partnership. The limited partners of the Partnership purchased their interests in the Partnership from the Partnership and include (i) an entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the controlling persons of Ampal's principal shareholder), which acquired a 9.1% interest in the Partnership for $10 million, (ii) Hapoalim, which acquired a 7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third party, which acquired a 7.45% interest in the Partnership for $8.195 million, and (iv) an entity owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer, which purchased a .9% interest for $1 million. In addition to the purchase price, the limited partners also reimbursed the Company for their pro rata share of the expenses incurred by the Company in connection with the original purchase from Motorola Israel (including interest from the closing date until the purchase date of the limited partnership interests). The related parties purchased their limited interests on the same terms as the unrelated third party which were determined through arm's length negotiations between the Company and the unrelated third party. Each of the limited partners paid 35% of their respective purchase price in cash and assumed their pro rata share of Ampal's financing of the original purchase (equal to 65% of their respective purchase prices) and will assume their pro rata share of Ampal's long term financing. The Partnership is entitled to all of the Company's rights under the purchase agreement and has assumed all of its obligations. 33 Report of Independent Public Accountants To the Board of Directors and Shareholders of Ampal-American Israel Corporation: We have audited the accompanying consolidated balance sheets of Ampal-American Israel Corporation (a New York corporation) and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's 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 consolidated subsidiaries, which statements reflect assets and revenues of 18% and 32%, respectively, in 1997, 43% and 44%, respectively, in 1996, and revenues of 35% in 1995, of the related consolidated totals. Also, we did not audit the financial statements of certain affiliated companies, the investments in which are reflected in the accompanying financial statements using the equity method of accounting, or the financial statements of a discontinued operation. The Company's equity in net earnings of these affiliated companies and the loss from discontinued operations in 1995 represents $18,611,000, $10,443,000, and $4,376,000 of consolidated net income (loss) for the years ended December 31, 1997, 1996 and 1995, respectively. The statements of these subsidiaries, affiliated companies and the discontinued operation were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Ampal-American Israel Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York March 26, 1998 34 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) REVENUES: Equity in earnings of affiliates (Note 11)...... $18,703 $ 6,333 $ 7,424 Manufacturing................................... 12,127 10,891 10,159 Interest: Related parties................................ 6,988 9,918 10,811 Others......................................... 2,743 1,956 3,629 Rental income................................... 7,107 11,663 7,793 Realized and unrealized gains on investments (Notes 3 and 5)................................ 5,466 1,342 2,193 Gain on sale of real estate rental property (Note 3)....................................... - - 526 Other .......................................... 2,980 2,257 2,178 ------- -------- -------- Total revenues............................. 56,114 44,360 44,713 ------- -------- -------- EXPENSES: Manufacturing................................... 12,569 12,027 9,436 Interest: Related parties................................ 2,544 3,918 3,108 Others......................................... 6,719 10,163 9,813 Rental property operating expenses.............. 3,273 5,670 2,886 Loss from impairment of investments (Notes 3 and 11(c)) ........................................ 2,185 10,083 - Unrealized loss on rental property (Note 3)..... - 1,095 - Other........................................... 8,030 6,865 7,122 ------- -------- -------- Total expenses............................. 35,320 49,821 32,365 Restructuring charge (Note 15) ................. 1,300 - - ------- -------- -------- Income (loss) from continuing operations before income taxes.................................... 19,494 (5,461) 12,348 Provision for income taxes (Note 10)............ 5,311 1,899 5,867 ------- -------- -------- Income (loss) from continuing operations........ 14,183 (7,360) 6,481 ------- -------- -------- Discontinued operations (Note 2): Loss from operations........................... - (3,610) (4,315) Loss on disposition of $3,169, net of applicable tax benefit of $3,887.............. - 718 - ------- -------- -------- Loss from discontinued operations............... - (2,892) (4,315) ------- -------- -------- NET INCOME (LOSS).......................... $14,183 $(10,252) $ 2,166 ======= ======== ======== Basic EPS (Note 9) Earnings (loss) from continuing operations..... $ .58 $ (.33) $ .25 Loss from discontinued operations.............. - (.12) (.18) ------- ------- ------- Earnings (loss) per Class A share ............. $ .58 $ (.45) $ .07 ======= ======= ======= Shares used in calculation (in thousands)...... 23,742 23,549 23,677 Diluted EPS (Note 9) Earnings (loss) from continuing operations..... $ .50 $ (.28) $ .21 Loss from discontinued operations.............. - (.10) (.15) ------- ------- ------- Earnings (loss) per Class A share.............. $ .50 $ (.38) $ .06 ======= ======= ======= Shares used in calculation (in thousands) ..... 27,615 27,613 27,980 Dividends per Class A share..................... $ - $ - $ .21
The accompanying notes are an integral part of the consolidated financial statements. 35 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED BALANCE SHEETS DECEMBER 31, DECEMBER 31, ASSETS AS AT 1997 1996 - ------------------------------------------------------------------------------- (Dollars in thousands) (Note 1) Cash and cash equivalents....................... $ 45,457 $ 20,633 Deposits, notes and loans receivable (Note 4)... 46,176 57,041 Investments (Notes 5 and 11).................... 117,384 123,084 Real estate rental property, less accumulated depreciation of $5,902 and $6,215 (Note 3)..... 28,603 58,199 Property and equipment, less accumulated depreciation of $2,596 and $4,041.............. 3,899 5,571 Other assets.................................... 20,755 19,023 -------- -------- TOTAL ASSETS.................................... $262,274 $283,551 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 36 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED BALANCE SHEETS LIABILITIES AND DECEMBER 31, DECEMBER 31, SHAREHOLDERS' EQUITY AS AT 1997 1996 - -------------------------------------------------------------------------------- (Dollars in thousands) (Note 1) LIABILITIES Notes and loans payable: (Note 6) Related parties................................. $ 18,207 $ 34,005 Others.......................................... 5,000 10,538 Debentures (Note 7)............................... 41,846 57,871 Accounts and income taxes payable, accrued expenses and minority interests.................. 34,711 29,017 --------- -------- Total liabilities......................... 99,764 131,431 -------- -------- SHAREHOLDERS' EQUITY (Note 8) 4% Cumulative Convertible Preferred Stock, $5 par value; authorized 189,287 and 650,000 shares; issued and outstanding 179,672 and 190,936 shares................................... 898 955 6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized 988,055 and 4,282,850 shares; issued and outstanding 968,288 and 1,002,483 shares.................................. 4,842 5,012 Class A Stock, $1 par value; authorized 60,000,000 shares; issued 24,418,325 and 24,256,420 shares; outstanding 23,812,925 and 23,651,020 shares................................. 24,418 24,257 Additional paid-in capital........................ 57,491 57,410 Retained earnings................................. 88,775 74,943 Treasury Stock, 605,400 shares of Class A Stock, at cost.......................................... (3,829) (3,829) Cumulative translation adjustments................ (10,085) (6,530) Unrealized loss on marketable securities.......... - (98) -------- -------- Total shareholders' equity................ 162,510 152,120 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $262,274 $283,551 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 37 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------- (Dollars in thousands) (Note 1) (Note 1) Cash flows from operating activities: Net income (loss).............................. $ 14,183 $ (10,252) $ 2,166 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in earnings of affiliates.............. (18,703) (6,333) (7,424) Loss from discontinued operations............. - 2,892 4,315 Realized and unrealized gains on investments.. (5,466) (1,342) (2,193) Gain on sale of real estate rental property... - - (526) Unrealized loss on rental property............ - 1,095 - Depreciation expense.......................... 1,559 2,038 1,627 Amortization expense.......................... 1,754 3,587 4,446 Loss from impairment of investments........... 2,185 10,083 - Restructuring charge ......................... 1,300 - - Minority interests............................ (220) (551) (298) Decrease (increase) in other assets............ 565 (3,158) (1,331) Increase (decrease) in accounts and income taxes payable, accrued expenses and minority interests..................................... 4,810 (232) (2,371) Investments made in trading securities......... (9,143) (2,391) (6,403) Proceeds from sale of trading securities....... 8,359 3,254 13,379 Dividends received from affiliates............. 9,719 1,806 4,898 -------- -------- -------- Net cash provided by operating activities..... 10,902 496 10,285 -------- -------- -------- Cash flows from investing activities: Deposits, notes and loans receivable collected. 27,124 17,546 26,958 Deposits, notes and loans receivable granted... (1,024) (2,046) (5,426) Investments made in: Available-for-sale securities................. - (228) (1,369) Affiliates and others......................... (11,159) (11,497) (34,143) Proceeds from sale of investments: Available for sale securities................. 1,537 - - Affiliates and others......................... 25,212 14,934 36,391 Purchase of real estate rental property........ (1,034) (2,475) (45,408) Purchase of property and equipment............. (1,182) (380) (499) Proceeds from sale of real estate rental property...................................... 15,059 - 1,426 -------- -------- -------- Net cash provided by (used in) investing activities................................... 54,533 15,854 (22,070) -------- -------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 38 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------- (Dollars in thousands) (Note 1) (Note 1) Cash flows from financing activities: Notes and loans payable received: Related parties............................... $ 4,050 $ 2,187 $ 30,892 Others........................................ 931 8,201 1,056 Notes and loans payable repaid: Related parties............................... (20,091) (4,866) (5,890) Others........................................ (6,184) (1,950) (958) Debentures repaid.............................. (17,301) (22,180) (10,909) Proceeds from issuance of shares to minority interests..................................... - - 50 Dividends paid................................. (351) (364) (5,614) Purchase of treasury shares.................... - - (3,829) -------- -------- -------- Net cash (used in) provided by financing activities................................... (38,946) (18,972) 4,798 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents............................... (1,665) (2,479) (1,275) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.................................... 24,824 (5,101) (8,262) Cash and cash equivalents at beginning of year.. 20,633 25,734 33,996 -------- -------- -------- Cash and cash equivalents at end of year........ $ 45,457 $ 20,633 $ 25,734 ======== ======== ======== Supplemental Disclosure of Cash Flow Information Cash paid during the year: Interest: Related parties............................... $ 1,257 $ 2,384 $ 1,611 Others........................................ 2,820 3,309 3,084 -------- -------- -------- Total interest paid......................... $ 4,077 $ 5,693 $ 4,695 ======== ======== ======== Income taxes paid............................... $ 714 $ 3,729 $ 6,903 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 39 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------ (Dollars in thousands, except share amounts and per share data) 4% PREFERRED STOCK Balance, beginning of year ..................... $ 955 $ 995 $ 1,033 Conversion of 11,264, 8,094 and 7,578 shares into Class A Stock ............................ (57) (40) (38) -------- -------- -------- Balance, end of year ........................... $ 898 $ 955 $ 995 ======== ======== ======== 6-1/2% PREFERRED STOCK Balance, beginning of year ..................... $ 5,012 $ 5,263 $ 5,575 Conversion of 34,195, 50,116 and 62,328 shares into Class A Stock ............................ (170) (251) (312) -------- -------- -------- Balance, end of year ........................... $ 4,842 $ 5,012 $ 5,263 ======== ======== ======== CLASS A STOCK Balance, beginning of year ..................... $ 24,257 $ 21,066 $ 20,841 Issuance of shares upon exchange of Common Stock -- 3,000 -- Issuance of shares upon conversion of Preferred Stock ............................... 158 191 225 Issuance of shares as payment for services ..... 3 -- -- -------- -------- -------- Balance, end of year ........................... $ 24,418 $ 24,257 $ 21,066 ======== ======== ======== COMMON STOCK Balance, beginning of year ..................... $ -- $ 3,000 $ 3,000 Exchange for Class A Stock ..................... -- (3,000) -- -------- -------- -------- Balance, end of year ........................... $ -- $ -- $ 3,000 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL Balance, beginning of year ..................... $ 57,410 $ 57,310 $ 57,185 Conversion of Preferred Stock .................. 69 100 125 Issuance of shares as payment for services ..... 12 -- -- -------- -------- -------- Balance, end of year ........................... $ 57,491 $ 57,410 $ 57,310 ======== ======== ======== RETAINED EARNINGS Balance, beginning of year ..................... $ 74,943 $ 85,559 $ 89,007 Net income (loss) .............................. 14,183 (10,252) 2,166 Dividends: 4% Preferred Stock - $.20, $.20 and $1.05 per share .................................... (36) (38) (209) 6-1/2% Preferred Stock - $.325 per share ..... (315) (326) (351) Class A Stock - $.21 per share ............... -- -- (4,424) Common Stock - $.21 per share ................ -- -- (630) -------- -------- -------- Balance, end of year ........................... $ 88,775 $ 74,943 $ 85,559 ======== ======== ======== TREASURY STOCK Balance, beginning of year ..................... $ (3,829) $ (3,829) $ -- Purchase of 605,400 shares of Class A Stock at cost ....................................... -- -- (3,829) -------- -------- -------- Balance, end of year ........................... $ (3,829) $ (3,829) $ (3,829) ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 40 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------- (Dollars in thousands, except share amounts and per share data) CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year...................... $ (6,530) $ (4,354) $ (2,636) Foreign currency translation adjustment......... (3,555) (2,176) (1,718) -------- -------- -------- Balance, end of year............................ $(10,085) $ (6,530) $ (4,354) ======== ======== ======== UNREALIZED LOSS ON MARKETABLE SECURITIES Balance, beginning of year...................... $ (98) $ (595) $ (511) Unrealized gain, net............................ 98 - - Transfer to trading securities.................. - 67 - Write-down due to permanent impairment.......... - 511 - Unrealized loss, net............................ - (81) (84) -------- -------- -------- Balance, end of year............................ $ - $ (98) $ (595) ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 41 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Note 1 - Summary of Significant Accounting Policies (a) The Company As used in these financial statements, the term the "Company" refers to Ampal-American Israel Corporation ("Ampal") and its consolidated subsidiaries. A substantial portion of the Company's operations involves transactions with Bank Hapoalim B.M. ("Hapoalim"), the largest bank in Israel, and companies affiliated or related thereto. At December 31, 1997, Hapoalim and its wholly-owned subsidiary, Atad Hevra Lehashkaot Limited owned 24.7% of Ampal's outstanding Class A Stock. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Consolidation The consolidated financial statements include the accounts of Ampal and its subsidiaries. Certain prior year amounts have been reclassified to conform with the current year's presentation. Investments in which the Company exercises significant influence, generally 20%-to 50%-owned companies ("affiliates"), are accounted for by the equity method, whereby the Company recognizes its proportionate share of such companies' net income or loss. Goodwill, representing the excess of the purchase price over the fair value of the net assets of the acquired entities, is being amortized on a straight-line basis over the period of expected benefit of ten years. (c) Translation of Foreign Currencies For those subsidiaries and affiliates whose functional currency is considered to be the New Israeli Shekel, assets and liabilities are translated using year-end rates of exchange. Revenues and expenses are translated at the average rates of exchange during the year. Translation differences of those foreign companies' financial statements are included in the cumulative translation adjustment account of shareholders' equity. Assets and liabilities of foreign subsidiaries and companies accounted for by the equity method whose functional currency is the U.S. dollar are translated using year-end rates of exchange, except for property and equipment and certain investment and equity accounts which are translated at rates of exchange prevailing on the dates of acquisition. Revenues and expenses are translated at average rates of exchange during the year except for revenue and expense items relating to assets translated at historical rates which are translated on the same basis as the related asset. Translation gains and losses for these companies are reflected in the consolidated statement of income. (d) Investments Marketable equity securities, other than equity securities accounted for by the equity method, are reported at fair value. For those securities which are classified as trading securities, unrealized gains and losses are reported in the statement of income. Unrealized gains and losses from those securities which are classified as available-for-sale are reported as a separate component of shareholders' equity. (e) Property and Equipment The Company's policy is to record long-lived assets at cost, amortizing these costs over the expected useful life of the related assets. These assets are reviewed on a quarterly and annual basis for impairment whenever events or changes in circumstances 42 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) indicate that the carrying amounts of the assets may not be recoverable. Furthermore, the assets are evaluated for continuing value and proper useful lives by comparison to expected future cash flows. (f) Income Taxes The Company applies the deferred method of accounting for income taxes whereby deferred taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between financial statements carrying amounts and the tax bases of existing assets and liabilities. Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries adjusted for translation effect totalling approximately $28 million, since such earnings are currently expected to be permanently reinvested outside the United States. If the earnings were not considered permanently invested, approximately $10 million of deferred income taxes would have been provided. Deferred income taxes are provided on equity in earnings of affiliates, and gains on issuances of shares by affiliates, and unrealized gains on investments. Ampal's foreign subsidiaries file separate tax returns and provide for taxes accordingly. (g) Cash Equivalents Cash equivalents include time deposits and notes receivable with maturities at acquisition of 90 days or less. Note 2 - Discontinued Operations On December 23, 1996, the Company sold all of its equity interest in its food processing subsidiary, Pri Ha'emek (Canned and Frozen Food) 88 Ltd. ("Pri Ha'emek") to Agrifarm International Limited ("Agrifarm"), a British company. In connection with the sale, the Company recorded a loss on disposition of $3.2 million and a tax benefit of approximately $3.9 million, which was based on a total loss of its investment in Pri Ha'emek in the amount of $9.7 million. Accordingly, the results of Pri Ha'emek, were presented as discontinued operations in the Company's 1996 and 1995 consolidated financial statements. Note 3 - Acquisitions and Dispositions (a) In 1997, the Company made several new investments in the high-technology field aggregating $8.9 million, notably (1) a $1 million investment to acquire 7.3% of UNIC View Ltd., a manufacturer and marketer of a liquid screen display projector for video, large-screen television and computer projection systems and a developer of a new projector engine for home use, (2) a $.75 million investment for 2.2% FundTech Ltd., a developer of software for worldwide banking institutions to facilitate fund transfers, (3) a $1 million investment for 3% of NKO, Inc., a developer of low-cost facsimile transmission services, (4) a $.4 million investment for approximately 12% (increased in 1998 by $.8 million to 19.1%) of XaCCt Technologies Ltd., a developer of billing, auditing and accounting software for TCP/IP networks which allows such networks to generate reports of network transactions and services by treating them exactly like telephone calls, (5) a $2 million investment for 12.5% of PowerDsine, Ltd., a developer, manufacturer and marketer of innovative modules and components for the telecommunications industry, (6) a $.5 million investment for 24.99% of Ortek Ltd., a developer and manufacturer of electro-optical devices and systems for the military and civilian markets, (7) a $1.25 million investment to acquire approximately 12% of Shiron Satellite Communications (1996) Ltd., a developer of satellite modems which achieve high data rates, designed to answer the requirements of satellite data and voice applications such as rural telephone, video conferencing and other applications, and (8) a $2 million investment to acquire 11% of Shellcase Ltd., an Israeli company which has developed a packaging process for computer chips. (b) On May 8, 1997, the Company sold all of its direct holdings in Orlite Industries (1959) Ltd. ("Orlite") and a wholly-owned subsidiary which held a separate interest in 43 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Orlite to Investment Company of Bank Hapoalim for an aggregate sales price of $5.3 million. The Company recorded a gain on sale of $.3 million with respect to this transaction. (c) On February 27, 1997, the Company sold its 20.7% interest in Davidson-Atai Publishers Ltd. ("Davidson Atai"), a publishing company, to principals of Davidson Atai for approximately $.1 million. The transaction yielded a nominal profit to the Company. (d) On March 27, 1997, the Company sold its 7.9% interest in Idan Software Industries I.S.I. Ltd. ("Idan"), to Idan's principal shareholder for approximately $.9 million and recorded a gain on sale of approximately $.1 million with respect to this transaction. (e) On January 31, 1997, the Company sold to the Government of Israel (the "Government") the portion of the building at 800 Second Avenue, New York, New York ("800 Second Avenue") which it occupies for $31 million. As a result of this transaction, the Company recorded an unrealized loss of $1.1 million ($.6 million net of taxes) in its December 31, 1996 financial statements. (f) In 1997 and 1996, the Company received gross proceeds in the amount of $3.6 million and $2 million from the sale of 119,800 and 113,624 shares of Teledata Communications Ltd. ("Teledata") and realized gains on sale of $2.9 million and $1.5 million ($1.9 and $1 million after taxes), respectively. (g) In June 1996, the Company made a $1.5 million indirect investment in Geotek Communications Inc., an international wireless telecommunications company. In 1997, the Company recorded a $1.2 million loss due to the impairment in value of this investment. (h) In January 1995, the Company invested $1.5 million to acquire a 20% equity interest in Epsilon Investment House Ltd. ("Epsilon") and its affiliate, Renaissance Investment Company Ltd. ("Renaissance"). Epsilon is an investment bank which provides portfolio management and Renaissance provides underwritng services in Israel through its subsidiaries. (i) In September 1995, the Company invested $1.3 million to acquire a 21.9% equity interest and three-year options to acquire an additional 4.4% equity in U.D.S.-- Ultimate Distribution Systems Ltd. ("U.D.S."), an Israeli-based software company specializing in the management and optimization of a variety of logistic tasks for the distribution industry. In 1997, the Company recorded a $1 million loss from impairment of value of this investment and U.D.S. will no longer be accounted for as an affiliate of the Company under the equity method of accounting. (j) In 1995, the Company invested an aggregate of approximately $2.6 million for 13.6% of Breeze Wireless Communications Ltd. (8.3% at December 31, 1997), an Israeli company which develops, manufactures and markets wireless local area networks for computers, 4.1% of M-Systems Flash Disk Pioneers Ltd. (1.4% at December 31, 1997), an Israeli company which develops, manufactures and markets data storage media based on "flash memory," a silicon memory chip, and 5.8% of Comfy Interactive Movies Ltd., an Israeli company which develops and markets a computer keyboard and interactive movies specially designed for children ages 1-6. (k) On August 15, 1995, Ampal sold all of its Ordinary Shares and 7% Preferred Shares of Bank Hapoalim (Cayman) Ltd. ("Cayman"), which constituted 49% and 50% of each series, respectively, to Hapoalim. The sales price was approximately $20.3 million and the Company recorded a gain on sale of approximately $.4 million ($.2 million, net of taxes). The Company obtained an opinion from an independent investment consultant that the consideration received in the sale was fair to the Company. (l) On November 6, 1995, Ampal sold its property located at 174 North Michigan Avenue, Chicago, Illinois to an unrelated party for $.85 million. In connection therewith, Ampal received $.55 million from Hapoalim and Ampal, as landlord, and Hapoalim, as tenant, released each other from their respective obligations under a lease which was scheduled to expire in 2007. Ampal obtained an opinion from an independent real estate 44 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) consultant that the consideration received from Hapoalim was fair to Ampal. The Company recorded a total gain of approximately $.5 million ($.3 million, net of taxes). (m) In 1995 the Company received gross proceeds in the amount of $1.9 million from sales of 106,000 shares of DSP Group, Inc. ("DSP Group") and recorded a loss of $.1 million. (n) In 1995 the Company received gross proceeds in the amount of $4 million from sales of 237,000 shares of Mercury Interactive Corporation ("Mercury"), which the Company acquired in 1992, and recorded a gain of approximately $.9 million ($.6 million after taxes). Note 4 - Deposits, Notes and Loans Receivable Deposits, notes and loans receivable earn interest at varying rates depending upon their linkage provisions. The deposits are guaranteed by Hapoalim. Deposits have maturities of up to 8 years and notes and loans receivable have maturities of up to 4 years. At December 31, 1997 and 1996, deposits, notes and loans receivable from related parties were $36.7 million and $56.1 million, respectively. Note 5 - Investments in Marketable Securities The Company classifies investments in marketable securities as trading securities and available-for-sale securities and periodically re-evaluates such classifications. (a) Trading Securities ------------------ The cost and market values of trading securities at December 31, 1997 and 1996 are as follows: Unrealized Market December 31, 1997 Cost Gains/(Losses) Value - ----------------- -------------------------------------- Bonds $ 479 $ (122) $ 357 Equity Securities 5,433 1,663 7,096 ------ ----- ------ Total Trading Securities $5,912 $1,541 $7,453 ====== ====== ====== Unrealized Market December 31, 1996 Cost Gains/(Losses) Value - ----------------- -------------------------------------- Bonds $ 580 $ (85) $ 495 Equity Securities 3,592 841 4,433 ------ ------ ------ Total Trading Securities $4,172 $ 756 $4,928 ====== ====== ====== In the years ended December 31, 1997, 1996 and 1995, the Company recorded $.9 million, $(.1) million, and $.3 million of unrealized gains (losses), respectively, on trading securities in the statement of income. During 1997, 1996 and 1995 the Company invested approximately $9.1 million, $2.4 million, and $6.4 million, respectively, in marketable securities, which are classified as trading securities. (b) Available-For-Sale Securities ----------------------------- At December 31, 1997, the Company did not have any available-for-sale securities. In 1996, the aggregate fair value of available-for-sale securities was $1.4 million (cost - $2.1 million). 45 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) In the year ended December 31, 1996, the Company recorded an unrealized loss on available-for-sale securities in the statement of income of $.5 million, as a result of the permanent impairment in value. Note 6 - Notes and Loans Payable Notes and loans payable consist primarily of bank borrowings either in U.S. Dollars, linked to the Consumer Price Index in Israel or in unlinked shekels with interest rates varying depending upon their linkage provision and mature through 2006. On June 28, 1995, in connection with the purchase of the building located at 800 Second Avenue, New York, New York, the Company borrowed $30 million from Hapoalim at an interest rate based on London Interbank Offered Rates plus 1%. On January 31, 1997, in connection with the sale of a portion of the premises to the Government (see Note 3(e)), $15 million received from the Government was used to repay a portion of the loan to Hapoalim. The remaining balance of the loan of $15 million is due on February 28, 1999 and bears interest commencing January 6, 1998 at the rate of LIBOR plus .75% (at December 31, 1997 the rate was LIBOR plus 1/2%, or 6.4375%). The weighted average interest rates on the balances of short-term borrowings at year-end are as follows: 6.59% on $2.5 million and 9.05% on $20.6 million in 1997 and 1996, respectively. Note 7 - Debentures Debentures outstanding at December 31 consist of: 1997 1996 ------------------- Ampal: - ------ Various series with interest rates ranging from 10%-12%, maturing 1998-2003............................ $20,306 $31,458 Ampal Development (Israel) Ltd.: - -------------------------------- Various series with interest rates ranging from 6.2%-7.5%, linked to the Consumer Price Index in Israel, maturing 1998-2005, secured by assets of $30 million............................................ 29,211 35,559 ------- ------- 49,517 67,017 Less: Unamortized discounts............................. 7,671 9,146 ------- ------ Total.................................................. $41,846 $57,871 ======= ======= Certain debentures are presentable for early redemption. If presented for early redemption, maturities (including required obligations) for the five years ending December 31 would be: 1998............................. $18,137* 1999............................. 6,165 2000............................. 6,744 2001............................. 2,013 2002............................. 2,013 Thereafter....................... 6,137 * If no debentures are presented for early redemption, scheduled maturities will amount to $8,284. Note 8 - Shareholders' Equity Capital Stock 46 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The 4% and 6-1/2% preferred shares are convertible into 5 and 3 shares of Class A Stock, respectively. At December 31, 1997, a total of 8,424,124 shares of Class A Stock is reserved for issuance upon the conversion of the Preferred Stock and the exercise of 4.5 million warrants and 120,900 options. The 4% and 6-1/2% Preferred Stock are preferred as to dividends on a cumulative basis. Additional dividends out of available retained earnings, if declared, are payable on an annual non-cumulative basis as a percentage of par value as follows: (i) up to 4% on Class A Stock, then (ii) on 4% Preferred Stock and Class A Stock ratably. Preferred shares are nonvoting unless dividends are in arrears for three successive years. At December 31, 1997, there are no dividend arrearages. On December 11, 1996, Ampal issued 3,000,000 shares of Class A Stock in exchange for the 3,000,000 shares of Common Stock held by Hapoalim. Retained Earnings At December 31, 1997, retained earnings include $61 million for affiliates accounted for by the equity method, of which $31.3 million and an additional $45.8 million from subsidiaries is not available for the payment of dividends. In most cases this results from Israeli requirements that dividends may only be paid on the basis of shekel-denominated and not dollar-denominated retained earnings. Note 9 - Earnings Per Class A Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with SFAS No. 128, net earnings per Class A share ("basic EPS") were computed by dividing net earnings by the weighted average number of Class A shares outstanding and excluded any potential dilution. Net earnings per Class A share amounts, assuming dilution ("diluted EPS") were computed by reflecting potential dilution from the conversion of the 4% and 6-1/2% Preferred Stocks into Class A Stock. SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the face of the income statement. Earnings per share amounts for prior years have been restated to conform with the provisions of SFAS No. 128. A reconciliation between the basic and diluted EPS computations for net earnings is as follows: (In thousands, except per share data) Year Ended December 31, 1997 ----------------------------------- Per Share Income Shares Amounts ----------------------------------- Basic EPS: Net income attributable to Class A Stock $13,832(1) 23,742 $ .58 ========== ====== Effect of Dilutive Securities: Conversion of 4% and 6-1/2% Preferred Stocks.................................. 3,873 ------ Diluted EPS: Net income attributable to Class A Stock $13,925(2) 27,615 $ .50 ======= ====== ====== 47 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (In thousands, except per share data)
Year Ended December 31, 1996 ----------------------------------------- Per Share Income Shares Amounts ----------------------------------------- Basic EPS: Loss from continuing operations.......... $ (7,724)(1) 23,549(3) $ (.33) Loss from discontinued operations........ (2,892) (.12) -------- ------ Net loss attributable to Class A Stock... $(10,616) $ (.45) ======== ====== Effect of Dilutive Securities: Conversion of 4% and 6-1/2% Preferred Stocks.................................. 4,064 ------ Diluted EPS: Loss from continuing operations.......... $ (7,723)(2) $ (.28) Loss from discontinued operations........ (2,892) (.10) -------- ------ Net loss attributable to Class A Stock... $(10,615) 27,613 $ (.38) ======== ====== ====== Year Ended December 31, 1995 ----------------------------------------- Per Share Income Shares Amounts ----------------------------------------- Basic EPS: Income from continuing operations........ $ 5,921(1) 23,677(3) $ .25 Loss from discontinued operations........ (4,315) (.18) ------- ------ Net income attributable to Class A Stock. $ 1,606 $ .07 ======= ====== Effect of Dilutive Securities: Conversion of 4% and 6-1/2% Preferred Stocks.................................. 4,303 ------ Diluted EPS: Income from continuing operations........ $ 6,079(2) $ .21 Loss from discontinued operations........ (4,315) (.15) ------- ------ Net income attributable to Class A Stock. $ 1,764 27,980 $ .06 ======= ====== ======
(1) After deduction of Preferred Stock dividends of $351, $364 and $560, respectively. (2) Includes decrease in net income of $258, $363 and $402, respectively, due to dilution in equity in earnings of affiliate. (3) Includes 2,769 and 3,000 shares of Common Stock, respectively. 48 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Note 10 - Income Taxes
The components of current and deferred income tax expense (benefit) are: 1997 1996 1995 -------------------------------- Current: State and local............................... $ 66 $ 65 $ 65 Federal....................................... 2,945 912 6,239 Foreign....................................... 2,859 999 1,153 Deferred: State and local............................... (95) (214) 60 Federal....................................... 716 (60) (1,772) Foreign....................................... (1,180) 197 122 -------- -------- -------- Total...................................... $ 5,311 $ 1,899 $ 5,867 ======== ======== ======== The components of deferred income tax expense (benefit) are: Equity in earnings of affiliates............... $ 1,218 $ 404 $ (1,808) Net operating loss carryforwards............... (204) (577) - Unrealized (losses) gains..................... (516) 336 (30) Restructuring charge .......................... (455) - - Other.......................................... (602) (240) 248 -------- -------- -------- Total....................................... $ (559) $ (77) $ (1,590) ======== ======== ======== The domestic and foreign components of income (loss) from continuing operations before income taxes are: Domestic....................................... $ (363) $ (1,894) $ 1,571 Foreign........................................ 19,857 (3,567) 10,777 -------- -------- -------- Total....................................... $ 19,494 $ (5,461) $ 12,348 ======== ======== ======== A reconciliation of income taxes between the statutory and effective tax is as follows: Federal income tax at 35%, 34% and 35%......... $ 6,823 $ (1,857) $ 4,321 Taxes on foreign income (below) in excess of U.S. rate, net from tax credits................ (1,366) 4,040 1,516 Other.......................................... (146) (284) 30 -------- -------- -------- Total effective tax: 27%, (35%),and 48%........ $ 5,311 $ 1,899 $ 5,867 ======== ======== ========
Other assets include approximately $3.6 million ($3.2 million in 1996) of deferred tax assets which represent the tax benefit of the temporary differences between the carrying values of the fixed assets in the financial statements and their income tax bases and $2.5 million of income tax receivable recorded with respect to the losses incurred in Pri Ha'emek (received in 1998). Accounts and income taxes payable and accrued expenses include approximately $23.3 million ($22.2 million in 1996) of deferred tax liability provided on undistributed earnings of affiliates. Note 11 - Investments in Affiliates and Others The companies accounted for by the equity method and the Company's share of equity in those investees are:
1997 1996 1995 ----------------------------- Am-Hal Ltd................................... 50% 50% 50% Bay Heart Limited (a)........................ 37 37 37 Carmel Containers Systems Limited............ 20.7 20.7 20.4
49 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
Coral World International Limited(b)......... 50 50 50 Epsilon Investment House Ltd................. 20 20 20 Hod Hasharon Sport Center (1992) Limited Partnership................................. 50 50 50 Granite Hacarmel Investments Limited ("Granite") 21.5 21.5 21.3 M.D.F. Industries Ltd.(c).................... - - 50 Moriah Hotels Ltd............................ 46 46 46 Ophir Holdings Ltd.(d)....................... 42.5 42.5 42.5 Orlite Industries (1959) Ltd. ("Orlite") (See Note 3(b))............................. - 25.3 22.7 Ortek Limited (24.99% is also owned by a related party) ............................. 24.99 - - Renaissance Investment Company Ltd........... 20 20 20 Trinet Investment in High-Tech Ltd........... 37.5 37.5 37.5 Trinet Venture Capital Ltd.(e)............... 50 50 50 U.D.S. - Ultimate Distribution Systems Ltd. (See Note 3(i))............................. - 21.9 21.9
Combined summarized financial information for the above companies is as follows:
1997 1996 1995 -------------------------------- Revenues..................................... $776,034 $788,169 $748,170 Gross profit................................. 204,992 184,533 163,962 Net income................................. 53,083 36,346 23,439 Property and equipment....................... $332,514 $356,901 $329,150 Other assets................................. 500,670 503,255 426,581 -------- -------- -------- Total assets............................... $833,184 $860,156 $755,731 ======== ======== ======== Total liabilities, including bank borrowings. $516,627 $546,457 $457,408 ======== ======== ========
(a) At December 31, 1997 and 1996, the Company had a note receivable from Bay Heart Limited in the amount of $1 million and $5.8 million and recorded interest income in the amount of $339 and $294 respectively, for the above years. (b) On September 27, 1996, a wholly-owned subsidiary of Coral World International Limited ("CWI"), the Company's 50%-owned affiliate, sold its marine park in Nassau (Bahamas) to an unrelated party for $3.75 million and CWI recorded a loss on sale of approximately $5 million (the Company's share is $2.5 million, $1.7 million net of taxes). In addition, in May 1996, CWI's management made a decision to sell its marine park in St. Thomas (U.S. Virgin Islands), and CWI recorded a loss of approximately $2 million (the Company's share is $1 million, $.7 million net of taxes) to adjust the carrying value of its investment to net realizable value. In April 1997, CWI sold this investment to an unrelated party for $.8 million and recorded a gain of $.1 million. At December 31, 1997 and 1996, the Company had a note receivable from CWI in the amount of $.3 million and $.6 million and recorded interest income in the amount of $49 and $69 respectively, for the above years. (c) M.D.F. Industries Ltd. ("M.D.F."), the Company's 50%-owned affiliate, which established a plant in Israel for the production of medium density fiber boards, and which completed its running-in period on June 30, 1996, incurred significant losses in 1996. The losses were primarily attributable to the excess of cost of sales per production unit over the selling price. In view of the substantial losses incurred by M.D.F. and the continuing depressed prices with respect to its products, the Company believed that further substantial losses would be incurred by M.D.F. Consequently, because of the uncertainty with respect to M.D.F.'s future operations, the Company recorded a loss from impairment of this investment in December 1996 for its full remaining investment in and loans to M.D.F. in the amount of $8.8 million. This loss, in addition to the $1.3 million loss previously recorded by the Company in 1996 with respect to M.D.F., resulted in a total loss attributable to the operations of M.D.F. in the amount of $8.6 million, net of 50 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) tax benefits. M.D.F. is no longer accounted for as an affiliate of the Company under the equity method of accounting, however, the Company continues to be contingently liable with respect to $5 million of guarantees given by the Company with respect to M.D.F.'s bank obligations. (d) At December 31, 1996, the Company had a note receivable from Ophir in the amount of $4.5 million which matured in 1997 and recorded interest income in the amount of $56 in 1997 and $178 in 1996. Also at December 31, 1996, the Company had a non-interest bearing note payable to Ophir in the amount of $1.2 million, which matured on January 1, 1997. (e) At December 31, 1997 and 1996, the Company had a non-interest bearing note receivable from Trinet Venture Capital Ltd. in the amount of $3.6 million and $3.3 million, respectively. The carrying value of the Company's investments in shares of its publicly traded affiliates and others (including the Company's investments through Ophir Holdings Ltd.) at December 31, 1997, amounted to $85.3 million and had a market value of $90 million, based upon quoted market prices of shares traded on the American Stock Exchange, NASDAQ National Market and the Tel Aviv Stock Exchange. There is no assurance that any of these investments could be realized at the quoted market price. Note 12 - Segment Information Segment information presented below results primarily from operations in Israel.
YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------- Revenues: Finance................................ $ 16,738 $ 15,154 $ 17,982 Real estate rental..................... 8,080 11,405 8,344(d) Mattress manufacturing................. 12,129 10,892 10,174 Leisure-time........................... 1,667 1,671 1,514 Intercompany adjustments............... (1,204) (1,095) (725) -------- -------- -------- Total............................. $ 37,410 $ 38,027 $ 37,289 ======== ======== ======== Equity in Earnings (Losses) of Affiliates: Finance................................ $15,228(c) $ 2,278(c) $ 1,343(b) Real estate rental..................... (882)(c) (3,362)(c) (1,455)(c) Mattress manufacturing................. - - - Leisure-time........................... 472(a) (2,336)(a) 1,779(a) -------- -------- -------- Total............................. $ 14,818 $(3,420) $ 1,667 ======== ======= ======== YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------- Pretax Operating Income (Loss): Finance................................ $ (1,199) $ (12,076) $ 1,125 Real estate rental..................... 2,433 1,855(d) 3,803(d) Mattress manufacturing................. (264) (1,516) 428 Leisure-time........................... (400) (608) (730) -------- -------- -------- Total............................. $ 570 $ (12,345) $ 4,626 ======== ========= ======== Total Assets: Finance................................ $227,356 $230,318 $257,985 Real estate rental..................... 48,869 62,745 61,804 Mattress manufacturing................. 8,809 8,520 7,912 Leisure-time........................... 2,831 3,262 4,949 Intercompany adjustments............... (25,591) (21,294) (23,134) -------- -------- --------
51 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
Total............................. $262,274 $283,551 $309,516 ======== ======== ======== Investments in Affiliates: Finance................................ $ - $ - $ - Real estate rental..................... 13,724(c) 8,902(c) 9,768(c) Mattress manufacturing................. - - - Leisure-time........................... 34,638(a) 34,489(a) 37,108(a) -------- -------- -------- Total............................. $ 48,362 $ 43,391 $ 46,876 ======== ======== ======== Capital Expenditures: Finance................................ $ 190 $ 48 $ 26 Real estate rental..................... 1,035 2,475 45,408 Mattress manufacturing................. 893 262 368 Leisure-time........................... 98 70 105 ------- -------- -------- Total............................. $ 2,216 $ 2,855 $ 45,907 ======== ======== ======== Depreciation and Amortization: Finance................................ $ 1,675 $ 3,476 $ 4,322 Real estate rental..................... 756 1,291 809 Mattress manufacturing................. 620 581 650 Leisure-time........................... 262 277 292 -------- -------- -------- Total............................. $ 3,313 $ 5,625 $ 6,073 ======== ======== ========
Corporate office expense is principally applicable to the financing operation and has been charged to that segment above. Revenues and pretax operating income above exclude equity in earnings of affiliates and minority interests. Total assets exclude assets from discontinued operations. (a) Operations in Australia, Bahamas, Israel, U.S. Virgin Islands and the United States (see Note 11). (b) Operations in Cayman Islands and Israel. (c) Operations in Israel. (d) Includes loss and gain on sale of real estate rental property (see Note 3). The real estate rental segment consists of rental property owned in Israel and the United States leased to related and unrelated parties. The mattress manufacturing segment consists of Paradise Industries, Ltd., which is a leading manufacturer and distributor of mattresses and fold-out beds in Israel whose customer base consists of independent stores as well as hotel chains. The leisure-time segment consists primarily of Moriah Hotels Ltd. (hotel chain in Israel), Coral World International Limited (marine parks located around the world) and Country Club Kfar Saba (the company's 51%-owned subsidiary located in Israel). Note 13 - Disclosures about Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (a) Cash and Cash Equivalents For short-term investments, the carrying amount is a reasonable estimate of fair value. (b) Deposits, Notes and Loans Receivable The fair value of these deposits, notes and loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 52 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (c) Investments For financial instruments with maturities between 91 days and 1 year, and all marketable securities, the carrying amount is a reasonable estimate of fair value. (d) Commitments Due to the relatively short term of commitments discussed in Note 14, their contract value is considered to be their fair value. (e) Deposits, Notes and Loans Payable and Debentures The fair value of notes and loans payable, deposits payable and debentures outstanding is estimated by discounting the future cash flows using the current rates offered by lenders for similar borrowings with similar credit ratings and for the same remaining maturities. 1997 1996 -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Financial assets: Cash and cash equivalents..... $ 45,457 $ 45,457 $ 20,633 $ 20,633 Deposits, notes and loans receivable................... 46,176 44,480 57,041 56,752 Investments................... 7,453 7,453 20,829 20,829 -------- -------- -------- -------- $ 99,086 $ 97,390 $ 98,503 $ 98,214 ======== ======== ======== ======== Financial liabilities: Notes and loans payable....... $ 23,207 $ 22,317 $ 44,543 $ 44,514 Debentures outstanding........ 41,846 43,157 57,871 59,795 -------- -------- -------- -------- $ 65,053 $ 65,474 $102,414 $104,309 ======== ======== ======== ======== Note 14 - Commitments and Contingencies (a) The combined minimum annual lease payments on Paradise, Ampal's corporate offices, and Country Club Kfar Saba, without giving effect to future escalations, are $.8 million in 1998, $.3 million in 1999, $.4 million for the years 2000-2002, and $8 million in the aggregate, thereafter, totalling $10.3 million. The leases expire in 1998, 2009 and 2038, respectively. (b) For the years 1998 through 2002, the combined minimum lease receipts to be received by the Company from rental properties are approximately $5.1 million in 1998 ($2.9 million from related parties); $4.4 million in 1999 ($2.2 million from related parties); $3.8 million in 2000 ($1.7 million from related parties); $2.4 million in 2001 ($.3 million from related parties); $2.2 million in 2002 ($.1 million from related parties); and $13 million in the aggregate, thereafter (all from non-related parties), totalling $30.9 million ($7.2 million from related parties). (c) The Company has issued guarantees on bank loans to its investees and subsidiaries totalling $13.2 million (includes $5 million of guarantees with respect to M.D.F.). The Company's commitments to its investees amounted to $12.7 million. (d) Sonol, a subsidiary of the Company's investee, Granite, and "Delek" the Israel Fuel Corporation Ltd. ("Delek") jointly own the rights to the "Dalkan 2000," a computerized system for marketing fuel products (primarily to automobile fleets). On January 26, 1997 the Controller of Restrictive Trade Practices ruled that the joint marketing arrangement of the "Dalkan 2000" system by Sonol and Delek is a restrictive 53 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) trade agreement. As a result of the position taken by the Controller, both Sonol and Delek agreed to divide the "Dalkan 2000" system between themselves so that each company will operate an independent system in a manner that will enable customers, in accordance with their own preference, to enter into an agreement with either of the companies. The implementation of the separation agreement will be carried out in stages up to the end of March 1998. A private legislative proposal dealing with the shortening of the terms of exclusive agreements entered into between the fuel marketing companies and filling station owners and operators has passed its first reading in the Knesset, the Israeli parliament. The Economics Committee of the current Knesset has decided that the rule of "Continuity" will be in effect regarding this proposal which is before its second and third reading in the Knesset. A draft proposal of legislation by the Ministry of Energy and Infrastructure regarding the term of exclusive contracts between the fuel marketing companies and station owners has been forwarded to government ministries, the President of the Supreme Court and law faculties for their comments. At this time, it is too early to estimate the effects of the said developments on the overall Israeli fuel market in general, and on Granite in particular. (e) Prior to November 1997 a lease of real property with a term of more than 10 years was required to be reported to the Israeli Appreciation Tax Authorities and was subject to a land appreciation tax or an income tax and an acquisition tax. The Israeli Tax Commissioner had taken the position that certain arrangements for the lease of real property, including multiple leases, leases with renewal options and leases or options to lease between affiliated companies, which in the aggregate provided a term exceeding 10 years, were subject to the above reporting and taxes. In November 1997, the law was amended whereby a lease of real property with a term of up to 25 years is no longer subject to the above reporting and taxes. (f) In February 1995, Yakhin Hakal and its affiliates commenced a legal proceeding in Tel Aviv District Court seeking to cause Etz Vanir Ltd. ("Etz Vanir") and Yakhin Mataim Ltd. ("Yakhin Mataim") to redeem the perpetual debentures owned by Ampal for approximately $.7 million and to require Ampal to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for their par value, on the alleged grounds that these are debt and not equity investments. It is Ampal's view, that its investments in these companies, which were made in the 1950's, are equity investments and are not subject to redemption by these companies, other than upon liquidation. Ampal is contesting this legal proceeding. Though a hearing has been held no judgment in this case has been rendered as of the date. Note 15 - Restructuring Charge During 1997, in connection with management's plan to reorganize operations and reduce costs, the Company recorded a restructuring charge of $1.3 million ($.7 million was recorded in the quarter ended December 31, 1997). This restructuring, which will result in the elimination of certain corporate positions, will be completed in early 1998, and primarily relates to severance and other employee related costs. Note 16 - Subsequent Event On January 22, 1998 the Company completed its purchase of a one-third interest in the assets of the shared networks operation of Motorola Communications Israel, Ltd. ("Motorola Israel") for a purchase price of $110 million. The payment for the purchase price was obtained from the Company's own resources as well as from two short-term bridge loans, one in the amount of $40 million from Bank Leumi USA (of which $8 million plus interest was repaid on February 2, 1998) and a second in the amount of $35 million from Bank Hapoalim. Each loan has a term of 90 days and bears interest at a rate of LIBOR plus 1/2%. The Company anticipates to replace the aforementioned short-terms loans with long-term financing. A new wireless communications service provider ("Provider" or "Corporation") one-third owned by the Company and two-thirds owned by Motorola Israel will coordinate and operate in Israel the digital and analog public-shared two-way radio services previously furnished by Motorola Israel. The digital wireless communication service is based on Motorola's iDEN(TM) integrated wireless communication technology, which is known as MIRS in Israel. 54 AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES - -------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The Company owns all of the authorized preferred shares of the Corporation and Motorola Israel owns all of the authorized ordinary shares. Each share issued by the Corporation will be entitled to one vote. To the extent of available after-tax profits, the Provider is required to pay distributions or dividends to the Company equal to at least $3,800 for fiscal year 2000 and $7,100 for each fiscal year thereafter so long as the financial stability of the Provider will not be impaired. The Provider shall endeavor to pay distributions or dividends in the following amounts: for fiscal year 1998, $4,950, for fiscal year 1999, $10,725 and for fiscal year 2000 and thereafter, $23,430 (inclusive of the required payments), which all holders of an interest in the Provider shall share on a pro rata basis. To the extent that any of the above distributions or dividends are not paid by the Provider, they will accumulate. No dividends will be paid by the Corporation to Motorola Israel until the Company has received all of its accumulated dividends. Any distributions or dividends which are paid in excess of the above amounts for a given fiscal year will similarly be paid pro rata to the Company and Motorola Israel based on their shares in the Provider. Pursuant to the purchase agreement, Motorola Israel guaranteed that the Company would receive from the Provider at least $3,800 for fiscal year 2000 and $7,100 for each fiscal year between 2001 and 2005 inclusive, subject to an obligation of the Company to repay such guarantee payments in amount equal to the excess of the amount actually received by the Company from the Provider with respect to any subsequent year over $7,500. The $110 million purchase price for the Company's one-third interest in the Provider was based upon the Company's current valuation of the SNO and its prospects. The purchase agreement provides that under specified circumstances indicating that there has been an increase in the enterprise value of the Corporation, the Company must pay Motorola Israel an additional amount (the "Bonus"). The formula for the Bonus varies depending upon whether an initial public offering of the Corporation's shares (an "IPO") has been consummated. If an IPO is consummated prior to December 31, 2002, the Company must pay Motorola Israel a Bonus based on an increase in the valuation of the Corporation for purposes of the IPO. In no event will such Bonus payment exceed $33 million multiplied by 1.16(n), where n represents the number of years (and any part thereof) between the closing date and the closing of the IPO. If an IPO is not consummated prior to December 31, 2002 and if all dividends accumulated with respect to the Company's preferred shares up to that time have been paid, then the Company must pay Motorola Israel a Bonus if (A) the present value of the actual after tax net income of the Corporation (as reported by the Corporation's auditors in compliance with generally accepted accounting principles in Israel, excluding capital gains derived from each transaction, not in the ordinary course of business, in which the consideration for the Corporation is more than $5 million) for fiscal years 1998 through 2002, discounted at the rate of 13%, exceed (B) $71 million. In this case, the amount of the Bonus, if any, will equal the lesser of (i) the amount of such excess multiplied by 2.3376, or (ii) $46 million. In March 1998, the Company transferred its interest in the Provider to a limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of the Company (the "General Partner") is the general partner of the Partnership and owns 75.1% of the Partnership. The limited partners of the Partnership purchased their interests in the Partnership from the Partnership and include (i) an entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the controlling persons of Ampal's principal shareholder), which acquired a 9.1% interest in the Partnership for $10 million, (ii) Hapoalim, which acquired a 7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third party, which acquired a 7.45% interest in the Partnership for $8.195 million, and (iv) an entity owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer, which purchased a .9% interest for $1 million. In addition to the purchase price, the limited partners also reimbursed the Company for their pro rata share of the expenses incurred by the Company in connection with the original purchase from Motorola Israel (including interest from the closing date until the purchase date of the limited partnership interests). The related parties purchased their limited interests on the same terms as the unrelated third party which were determined through arm's length negotiations between the Company and the unrelated third party. Each of the limited partners paid 35% of their respective purchase price in cash and assumed their pro rata share of Ampal's financing of the original purchase (equal to 65% of their respective purchase prices) and will assume their pro rata share of Ampal's long term financing. The Partnership is entitled to all of the Company's rights under the purchase agreement and has assumed all of its obligations. 55 SELECTED QUARTERLY FINANCIAL DATA - --------------------------------- (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------------------------------------------------------------------ (Dollars in thousands, except per share data) Year Ended December 31, 1997 Revenues ................................. $ 12,470 $ 18,347(1) $ 15,896 $ 9,401 $ 56,114 Net interest income (expense) ............ 215 281 (13) (15) 468 Manufacturing operations ................. (9) (440) (330) 337 (442) Net income ............................... 2,521 4,769 4,608 2,285 14,183 Basic EPS: Earnings per Class A share .............. .11 .20 .19 .08(2) .58 Diluted EPS: Earnings per Class A share .............. .09 .17 .16 .08 .50 Year Ended December 31, 1996 Revenues ................................. $ 7,998 $ 14,690(1) $ 8,443(1) $ 13,229(1) $ 44,360 Net interest (expense) ................... (247) (416) (429) (1,115) (2,207) Manufacturing operations ................. (112) (139) (799) (86) (1,136) (Loss) income from continuing operations . $ (1,401) $ 2,953 $ (2,565) $ (6,347) $ (7,360) (Loss) from discontinued operations ...... (1,501) (1,074) (60) (257) (2,892) -------- -------- -------- -------- -------- Net (loss) income ........................ $ (2,902) $ 1,879 $ (2,625) $ (6,604) $(10,252) ======== ======== ======== ======== ======== Basic EPS: (Loss) earnings per Class A share: (Loss) earnings from continuing operations $ (.06) $ .13 $ (.12) $ (.28)(2) $ (.33) (Loss) from discontinued operations ..... (.06) (.05) -- (.01) (.12) -------- -------- -------- -------- -------- (Loss) earnings per Class A share ........ $ (.12) $ .08 $ (.12) $ (.29) $ (.45) ======== ======== ======== ======== ======== Diluted EPS: (Loss) earnings per Class A share: (Loss) earnings from continuing operations ............................ $ (.05) $ .10 $ (.10) $ (.23) $ (.28) (Loss) from discontinued operations ............................ (.06) (.03) -- (.01) (.10) -------- -------- -------- -------- -------- (Loss) earnings per Class A share ........ $ (.11) $ .07 $ (.10) $ (.24) $ (.38) ======== ======== ======== ======== ========
(1) Restated to reclassify the loss from impairment of investment. (2) After deduction of preferred stock dividends of $351 and $364, respectively. 56 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT The following table sets forth certain information regarding Ampal's directors and executive officers: Name Position - ---- -------- Daniel Steinmetz(5)................ Chairman of the Board of Directors and Director Raz Steinmetz(1)(5)................ Director and Chairman of the Executive Committee Yehoshua Gleitman(1)(5)............ Chief Executive Officer Lawrence Lefkowitz(1)*............. President and Director Alan L. Schaffer**................. Vice President-Finance and Treasurer Shlomo Meichor*** ................. Vice President-Finance and Treasurer Alla Kanter........................ Vice President-Accounting and Controller Isaiah Halivni..................... Vice President-Legal and Secretary Miri Lent Sharir................... Assistant Vice President-Israel Operations Arie Abend(2)(3)................... Director Michael Arnon(4)................... Director Benzion Benbassat(5)............... Director Yaacov Elinav(1)................... Director Kenneth L. Henderson(2)(3)......... Director Irwin Hochberg..................... Director Hillel Peled(4).................... Director Shimon Ravid....................... Director Evelyn Sommer(2)(3)(4)............. Director Michael W. Sonnenfeldt............. Director - ---------- * Mr. Lefkowitz resigned as President and Director of Ampal on March 26, 1998. ** Mr. Schaffer resigned as Vice President-Finance and Treasurer of Ampal effective April 1, 1998. *** Mr. Meichor will assume the positions of Vice President-Finance and Treasurer of Ampal effective April 1, 1998. The numbers listed below, which follow the names of some of the foregoing directors, designate committee membership: (1) Member of the Executive Committee of the Board which meets as necessary between regularly scheduled Board meetings and, consistent with certain statutory limitations, exercises all the authority of the Board. Mr. R. Steinmetz is the Chairman of the Executive Committee. Dr. Gleitman is a member of the Executive Committee ex officio. (2) Member of the Audit Committee of the Board which reviews functions of the outside auditors, auditors' fees and related matters. (3) Member of the Related Party Transactions Committee of the Board which reviews and passes upon the fairness of business transactions between Ampal and related parties. Ms. Sommer is the Chairwoman of the Related Party Transactions Committee. (4) Member of the Stock Option Committee of the Board which administers Ampal's 1993 Stock Option Plan and other grants of options. For a description of Ampal's 1993 Stock Option Plan, see "Executive Compensation - Stock on Option Plan." Mr. Peled is the Chairman of the Stock Option Committee. (5) Member of the MIRS Financing Committee, which was established to approve any financing required in connection with the purchase from Motorola Israel. Dr. Gleitman is a member of the MIRS Financing Committee ex officio. See "Significant Recent Developments Since Beginning Of Last Fiscal Year - Formation of a New Communication Provider in Israel." 57 In 1997, the Board of Directors met five times and did not act by written consent; the Executive Committee met three times and acted by written consent thirteen times; the Audit Committee met twice and did not act by written consent; the Related Party Transactions Committee met twice and acted by written consent one time; and the Stock Option Committee met twice and acted by written consent one time. Ampal does not have a nominating committee or compensation committee. Other than Ms. Sommer, Mr. Sonnenfeldt and Mr. Harry B. Henshel (who was a director of Ampal until May 28, 1997), all directors attended more than 75% of the aggregate of (1) the total number of Board of Directors meetings held during the period in 1997 for which such individual was a director and (2) the total number of meetings held by all committees of the Board on which such individual served in 1997 (during the period of such service). The following sets forth the ages of all of the above-mentioned directors and officers, all positions and offices with Ampal or its subsidiaries held by each director and officer and the term of office of each such director and officer. Daniel Steinmetz, 60, has managed family diamond trading businesses in Israel for more than the past five years. Mr. Steinmetz is the father of Raz Steinmetz. Raz Steinmetz, 34, has managed various investments for his family, including real estate, financial investments and others, since September 1994. From September 1993 through September 1994, he worked as a trainee at Republic National Bank of New York. From September 1991 through July 1993, he attended University of Pennsylvania, Wharton Business School, where he received a Masters Degree in Business Administration. He became a director of Ampal in June 1996 and Chairman of the Executive Committee in December 1996. Mr. Steinmetz is the son of Daniel Steinmetz. Yehoshua Gleitman, 48, has been Chief Executive Officer of Ampal since May 1997 and Managing Director of Ampal (Israel), head of Ampal's Israeli operations, since April 1, 1997. From August 1996 until February 1997, he was Director General of the Israeli Ministry of Industry and Trade and was Chief Scientist at the Ministry of Industry and Trade from January 1993 until February 1997. Prior to his tenure with Ministry of Industry and Trade, Mr. Gleitman was Director General of AIMS Limited, a trading company. Lawrence Lefkowitz, 60, was President and Chief Executive Officer of Ampal from November 1990 until May 1997. In May 1997, the By-laws of Ampal were changed to reassign the Chief Executive Officer role from the President to a new position of Chief Executive Officer; Mr. Lefkowitz continued as President, responsible for Ampal's activities in North America until his resignation as President and Director on March 26, 1998. Since August 1990 at the request of, and pursuant to the terms of his employment agreement with, Ampal, he has been Counsel to Hapoalim and rendered legal services to its United States branches. Alan L. Schaffer, 55, was Vice President-Finance and Treasurer of Ampal from August 1990 until his resignation effective April 1, 1998. Shlomo Meichor, 40, will assume the duties of Vice-President Finance and Treasurer of Ampal on April 1, 1998. For more than the past five years, Mr. Meichor was the Finance and Operations Manager of Digital Semi-Conductors Israel, a semi-conductor subsidiary of Digital Equipment Corporation. Alla Kanter, 40, has been Vice President-Accounting of Ampal since September 1995 and Controller of Ampal since August 1990. Isaiah Halivni, 31, has been Vice President-Legal and Secretary of Ampal since February 1997. From November 1993 until January 1997, he was an associate at Kronish, Lieb, Weiner & Hellman LLP. From October 1992 until May 1993, he was an attorney employed by the law firm of Yigal Arnon & Co., a Tel Aviv law firm. Miri Lent Sharir, 41, has been Assistant Vice President-Israel Operations of Ampal since July 1988 and has been employed by Ampal (Israel) for more than five years. She also serves as a director of Carmel Container Systems Limited (of which Ampal directly and indirectly owned 20.7% as of December 31, 1997). Arie Abend, 60, has been a Joint Managing Director of Hapoalim and Regional Manager, Western Hemisphere of Hapoalim since June 1994. From March 1991 until May 1994, he was a Senior Executive Vice President of Hapoalim. In 1984, 1985 and 1991, he served as a director of Ampal. He became a director again in 1994. 58 Michael Arnon, 73, was Chairman of the Board of Directors of Ampal from November 1990 to July 1994. From July 1986 until November 1990, he was President and Chief Executive Officer of Ampal. He became a director of Ampal in 1986. Benzion Benbassat, 60, has been the President and Chief Executive Officer of D.R.B. Investments Ltd., an investment company of which Messrs. D. Steinmetz and R. Steinmetz are controlling persons, for more than the past five years. Yaacov Elinav, 53, has been a Senior Deputy Managing Director of Hapoalim since August 1992. From October 1991 to August 1992, he was a Deputy Managing Director of Hapoalim. From October 1988 to October 1991, he was head of the Corporate Division of Hapoalim. He became a director of Ampal in 1992. Kenneth L. Henderson, 43, is an attorney and has been a partner at Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson") since 1987. Robinson provided legal services to Ampal during 1997. Irwin Hochberg, 69, has been a Senior Partner and President of Bloom Hochberg & Co., P.C., which provides accounting, auditing and tax service, professional and consulting services to commercial and individual clients, for more than five years. He became a director of Ampal in 1994. Hillel Peled, 50, has been President of Inveco International, Inc., a private investment company, since January 1990. From January 1982 to June 1986, he served as Vice President-Finance and Treasurer of Ampal. He became a director of Ampel in June 1996. Shimon Ravid, 61, has been a Joint Managing Director of Hapoalim since February 1994. From October 1989 until February 1994, he was a Senior Deputy Managing Director of Hapoalim. He became a director of Ampal in 1990. Evelyn Sommer, 59, has been President of Women's International Zionist Organization-USA, and a representative of Women's International Zionist Organization to the United Nations for more than five years, has been Chairman, American Section of the World Jewish Congress for more than five years and has been Chairman, North American Section of the World Jewish Congress since January 1996. She became a director of Ampal in 1982. Michael W. Sonnenfeldt, 42, is the founder of Emmes & Company LLC, a private real estate investment group headquartered in New York City and has been its Managing Director for more than the past five years. He became a director of Ampal in June 1996. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended requires Ampal's officers and directors, and persons who own more than 10% of a registered class of Ampal's equity securities, to file reports of ownership and changes in ownership with the SEC and the American Stock Exchange. These persons are required by regulation of the SEC to furnish Ampal with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, Ampal believes that during 1997, Ampal's officers, directors and greater than 10% beneficial owners complied with all applicable Section 16(a) filing requirements. 59 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The table below presents information regarding remuneration paid or accrued for services to Ampal and its subsidiaries by the executive officers named below during the three fiscal years ended December 31, 1997, 1996 and 1995. Annual Compensation ------------------------------------- Name and Principal Other Annual All Other Position Year Salary Bonus Compensation Compensation -------- ---- ------ ----- ------------ ------------ Yehoshua Gleitman(1) 1997 $179,756 $23,843(2) $ 37,444(3) (Chief Executive Officer) Lawrence Lefkowitz(4) 1997 221,324 8,720(2) 33,203(5) (President) 1996 220,851 8,123(2) 28,800(6) 1995 212,351 $16,335 9,088(2) 26,055(7) Moshe Mor(8) 1997 155,707 224,126(9) (Executive Vice 1996 193,751 35,834(10) President) 1995 145,880 37,185 27,267(11) Alan L. Schaffer(12) 1997 147,950 19,378(13) (Vice President-Finance 1996 147,950 19,527(14) and Treasurer) 1995 142,250 10,942 16,467(15) Miri Lent Sharir 1997 132,418 29,842(16) (Assistant Vice 1996 120,272 27,363(17) President-Israel 1995 111,767 29,880 24,932(18) Operations) Raz Steinmetz(19) 1997 100,342 5,599(2) 21,219(20) (Chairman of the Executive Committee) - ---------- (1) Dr. Gleitman was appointed Chief Executive Officer of Ampal on May 28, 1997. Effective April 1, 1997, he was named Managing Director of Ampal (Israel). Dr. Gleitman is employed by Ampal pursuant to an employment agreement dated May 28, 1997 and his salary is $240,000 (payable in Shekels) per annum, (plus benefits and the use of a company car) adjusted annually in accordance with changes in the United States consumer price index. Dr. Gleitman is paid by Ampal (Israel) Either party may terminate this agreement upon three months written notice for each year of Gleitman's employment up to a maximum of nine months. (2) Consists of amounts reimbursed for the payment of taxes. (3) Comprised of Ampal (Israel)'s contribution pursuant to (i) (Ampal Israel)'s pension plan of $23,962 and (ii) Ampal (Israel)'s education fund of $13,482. (4) By agreement between Ampal and Hapoalim, beginning in January 1996, Hapoalim reimburses Ampal $120,000 per year for Mr. Lefkowitz's legal services. (Previously, Hapoalim had reimbursed Ampal $100,000 per annum for Mr. Lefkowitz's services.) Mr. Lefkowitz is employed pursuant to an employment agreement, expiring September 12, 1998, providing for the payment of salary which shall not be less than the salary paid to him in 1992 ($191,961) (plus benefits and the use of a company car) and which salary is subject to annual review. Mr. Lefkowitz resigned as President and Director of Ampal on March 26, 1998 but will continue as an employee of Ampal until September 1998. (5) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of $16,592; (ii) Ampal's Supplementary Executive Retirement Plan of $12,111 and (iii) Ampal's 60 Savings Plan of $4,500. See "Other Benefits" below for a description of such plans. (6) Comprised of Ampal's contribution pursuant to (i) Ampal's pension plan of $15,476; (ii) Ampal's Supplementary Executive Retirement Plan of $8,899 and (iii) Ampal's Savings Plan of $4,425. (7) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of $15,562; (ii) Ampal's Supplementary Executive Retirement Plan of $9,993 and (iii) Ampal's Savings Plan of $500. (8) Mr. Mor resigned as Executive Vice President of Ampal, effective April 12, 1997, though he continued to be an employee of Ampal (Israel) until January 18, 1998. (9) Comprised of (i) a one-time severance payment of $195,713 made by Ampal (Israel) in January, 1998; (ii) an Ampal (Israel) contribution to its pension plan in the amount of $18,444 and (iii) an Ampal (Israel) contribution to its education fund in the amount of $9,969. (10) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $23,364 and (ii) Ampal (Israel)'s education fund of $12,470. (11) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $17,982 and (ii) Ampal (Israel)'s education fund of $9,285. (12) Mr. Schaffer resigned as Vice President-Finance and Treasurer of Ampal effective April 1, 1998. (13) Comprised of Ampal's contribution pursuant to (i) Ampal's Pension Plan of $14,963 and (ii) to Ampal's Savings Plan of $4,415. (14) Comprised of Ampal's contribution pursuant to (i) Ampal's pension plan of $15,117 and (ii) Ampal's Savings Plan of $4,410. (15) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of $15,562; (ii) Ampal's Supplementary Executive Retirement Plan of $405 and (iii) Ampal's Savings Plan of $500. (16) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $20,899 and (ii) Ampal (Israel)'s education fund of $8,943. (17) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $19,239 and (ii) Ampal (Israel)'s education fund of $8,124. (18) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $17,463 and (ii) Ampal (Israel)'s education fund of $7,469. (19) Mr. Steinmetz is employed by Ampal Industries (Israel) Limited, an indirect wholly-owned subsidiary of Ampal, on a part-time basis pursuant to an employment agreement effective as of January 1, 1997. Mr. Steinmetz receives a salary of $100,000 (payable in Shekels) per annum (plus benefits). His agreement can be terminated by either party upon thirty days notice. (20) Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension plan of $13,579 and (ii) Ampal (Israel)'s education fund of $7,640. Mr. Schlomo Meichor will become Vice President - Finance and Treasurer of Ampal, effective April 1, 1998. Pursuant to an employment agreement, dated March 5, 1998, Mr. Meichor will receive a base salary of $144,000 per annum, adjusted annually in accordance with the United States consumer price index (payable in shekels) plus benefits and use of a car. His agreement can be terminated upon two months' notice and after the two months' notice period expires Mr. Meichor is entitled to receive his salary for an additional four months. 61 FISCAL YEAR-END OPTION VALUES(1) Number of Securities Underlying Unexercised Options at Fiscal Year-End(2) ------------------------------- Name Exercisable Unexercisable - ---- ----------- ------------- Yehoshua Gleitman.................... 0 0 Lawrence Lefkowitz(3)................ 16,000 0 Moshe Mor(4)......................... 15,150 6 Alan L. Schaffer(5).................. 13,000 0 Miri Lent............................ 11,500 0 Raz Steinmetz........................ 0 0 - ---------- (1) No options were granted to or exercised by any named executive officer during 1997, and no options were in-the-money as of December 31, 1997. (2) This represents the total number of shares of Class A Stock subject to stock options held by the named executive officer at December 31, 1997. (3) Mr. Lefkowitz's options will expire in December 1998 (three months after the expiration of his employment agreement). (4) Mr. Mor's options will, because of the termination of his employment with the Company, expire in April 1998. (5) Mr. Schaffer's options will, because of his resignation from Ampal, expire in July 1998. At the next annual meeting of Ampal's shareholders' (the "Effective Date"), Ampal's shareholders will be asked to approve the grant of options and purchase rights to Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer. The terms of the options to be approved by the shareholders is as follows: No. Of Options Exercise Price Term - -------------------------------------------------------------------------------- 200,000 $6.75 4.25 years 300,000 $8 7 years 500,000 $10 10 years One-fourth of all such options will vest immediately (assuming that the Effective Date is prior to June 1, 1998) and the remaining options will vest at a rate of one-sixteenth of the total number of options every three months until March 2001. If the Effective Date occurs on or after June 1, 1998 an additional one-sixteenth of all such options will vest immediately for each June 1, September 1, December 1 and March 1 that will have elapsed between the date hereof and the Effective Date. The 200,000 shares with an exercise price of $6.75 will expire four years and three months after the Effective Date; the 300,000 shares with an exercise price of $8 will expire on the seventh anniversary of the Effective Date; and the 500,000 shares with an exercise price of $10 will expire on the tenth anniversary of the Effective Date. All options that have not vested prior to Dr. Gleitman no longer being an employee of Ampal or its subsidiary will terminate and not be exercisable. Dr. Gleitman will then have the greater of (i) two time the length of any applicable termination notice period and (ii) 30 days to exercise vested options. Dr. Gleitman was granted the right to exercise his options through a cashless exercise of options. Subject to shareholders' approval, Dr. Gleitman will also be granted the right to purchase up to 200,000 shares of Class A Stock at a price equal to 80% of the average closing sales prices of the Class A Stock during the 30 days prior to the exercise of the particular purchase right. The purchase rights will vest and terminate in blocks of 50,000. The first block will vest and become exercisable on the Effective Date and terminate on the day prior to the sixth month anniversary of the Effective Date. The second block will vest and become exercisable on September 1, 1998 and terminate on February 28, 1999. The third block will vest and becomes exercisable on March 1, 1999 and terminate on August 30, 1999. The fourth block will vest and become exercisable on September 1, 1999 and terminate on February 28, 2000. The above purchase rights may only be exercised as long as Dr. Gleitman is employee of Ampal. Any purchase rights not exercised during the periods referred to above shall terminate and shall no longer be exercisable. Dr. Gleitman may exercise his purchase rights by delivering a promissory note due and payable in thirty months, in a principal amount equal to up to 75% of the purchase price, together with payment in full of the purchase price not covered by such note. The interest rate on such notes shall equal the effective rate of interest incurred by Ampal from time to time for unsecured recourse borrowings. All shares of Class A Stock purchased on exercise of the purchase right or on exercise of the options or otherwise acquired by Dr. Gleitman will be pledged as collateral security for such notes. No shares of Class A Stock acquired by Dr. Gleitman on its exercise of any purchase rights may be sold for a period of two years from the date of acquisition. 62 Ampal will retain a right of first refusal for ten years in connection with the resale of any shares of Class A Stock that Dr. Gleitman acquired through the exercise of options or any purchase rights, other than in respect of (i) certain transfers to family members and certain affiliates and (ii) bona fide open market sales. Other Benefits Ampal maintains a money purchase pension plan ("Pension Plan") for its eligible employees. Eligible employees are all full-time employees of Ampal except non-resident aliens, night-shift employees and employees represented by a collective bargaining unit. Ampal's contribution is equal to 7% of each employee's compensation plus 5.7% of the compensation in excess of the Social Security taxable wage base for that year. Employees become vested in amounts contributed by Ampal depending on the number of years of service worked, as provided in the following table: Vested Years of Service Percentage ---------------- ---------- less than 2 years................................... 0% 2 but less than 3 years............................. 20% 3 but less than 4 years............................. 40% 4 but less than 5 years............................. 60% 5 but less than 6 years............................. 80% 6 or more years..................................... 100% Benefits under the Pension Plan are paid in a lump sum, in an annuity form or in installments. Ampal maintains a savings plan (the "Savings Plan") for its eligible employees pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Eligible employees are all employees of Ampal except non-resident aliens, night-shift employees and employees represented by a collective bargaining unit. Participation by employees in the Savings Plan is voluntary. Participating employees may direct that a specific percentage of their annual compensation (up to 15%) be contributed to a self-directed 401(k) savings account. The amount which any employee could contribute to his or her 401(k) savings account in 1997, was limited under the Code to $10,000. Effective January 1, 1996, the Savings Plan was amended so that Ampal matches 50% of each employee's contribution up to a maximum of 3% of the employee's compensation. Employees who were eligible to participate in the Savings Plan as of December 31, 1995 are 100% vested at all times in the account balances maintained in their 401(k) savings account and employees who became eligible to participate in the Savings Plan on or after January 1, 1996, become vested in amounts contributed by Ampal depending on the number of years of service worked, as provided in the following table: 63 Vested Years of Service Percentage ---------------- ---------- less than 2 years............................... 0% 2 but less than 3 years......................... 20% 3 but less than 4 years......................... 40% 4 but less than 5 years......................... 60% 5 but less than 6 years......................... 80% 6 or more years................................. 100% Benefits under the Savings Plan are required to be paid in a single, lump-sum distribution. Payment is usually made after termination of employment. In 1994, Ampal established a Supplementary Executive Retirement Plan ("SERP") for its eligible employees. Ampal's obligation under the SERP is to pay to affected employees the amount that would have been paid to them by the Pension Plan but for the operation of Section 401(a)(17) of the Code. Compensation of Directors Directors of Ampal (other than Mr. Lefkowitz and Mr. R. Steinmetz) receive $500 per Board meeting attended. The Chairman of the Board receives $2,000. Such persons also receive the same amount for attendance at meetings of committees of the Board, provided that such committee meetings are on separate days and on a day other than the day of a regularly scheduled Board meeting. Stock Option Plan In November 1993, the Board approved a stock option plan (the "Stock Option Plan") which provides for grants of options to purchase up to 200,000 shares of Ampal Class A Stock in the aggregate to employees, officers and directors of Ampal and certain subsidiaries of Ampal. Options granted under the Stock Option Plan may be either options which are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code ("ISOs"), or options that are not intended to so qualify ("Non-ISOs"). The Stock Option Plan was approved by Ampal's shareholders on September 22, 1994. The Stock Option Plan is administered by the Board or by a Stock Option Committee thereof (the "Committee") consisting exclusively of directors who are not to be granted options under the Stock Option Plan. The Board (or the Committee) determines, subject to the terms of the Stock Option Plan, the individuals to whom options are to be granted and the terms of the options, including the exercise price, number of shares subject to each option, whether the option is to qualify as an ISO and the vesting of rights to exercise each option. Currently, the Stock Option Committee is administered by a committee consisting of Mr. Peled (Chairman), Mr. Arnon and Ms. Sommer. The exercise price of each ISO granted under the Plan must not be less than the fair market value of the shares on the date of grant or 110% of the fair market value on the date of grant if the ISO grantee owns stock representing more than 10% of the voting power of Ampal's capital stock or value of all classes of stock of Ampal or a subsidiary corporation. The exercise price of each Non-ISO granted under the Stock Option Plan, which may be less than fair market value on the date of grant, will be fixed by the Board (or the Committee) at the time the Non-ISO is granted. The Board (or the Committee) shall determine the dates on which each option shall be exercisable and the conditions precedent to such exercise. However, all options, other than those granted to non-employee directors of Ampal, may not be exercisable prior to the second anniversary of their date of grant. Options granted to non-employee directors of Ampal shall be exercisable immediately upon grant. The terms of options granted under the Stock Option Plan may not exceed five years. To the extent that a grant of options results in the aggregate fair market value of 64 the shares of Class A Stock with respect to which ISOs are exercisable for the first time by an optionee during any calendar year exceeding $100,000, such options are treated as Non-ISOs. Pursuant to an amendment to the Stock Option Plan, dated March 23, 1994, optionees may pay the exercise price or their tax withholding obligation with the shares of Class A Stock which are to be delivered upon exercise. In January 1994, pursuant to the Stock Option Plan, Non-ISO Options to purchase 134,900 shares of Class A Stock were granted to employees, officers, and directors of Ampal and certain subsidiaries of Ampal. Currently, options, to purchase 110,900 shares of Class A Stock remain outstanding (not including options granted to a former employee which will expire in April, 1998 or options granted to former directors which will expire in May 1998). The remaining options expired upon the termination of the option holder's employment with the Company. No stock options were granted under the Stock Option Plan during 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1997, members of the Executive Committee of the Board of Directors which functions as the compensation committee of Ampal included: Mr. Lawrence Lefkowitz, President of Ampal (who resigned as Director and President of Ampal on March 26, 1998); Mr. Yaacov Elinav, Senior Deputy Managing Director of Hapoalim; and Mr. Raz Steinmetz (Chairman). Mr. Stanley I. Batkin was a member of the Executive Committee until May 28, 1997. For a description of business transactions between Ampal and Hapoalim, see "Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT PRINCIPAL SHAREHOLDERS OF AMPAL The following table sets forth information as of March 20, 1998 as to the holders known to Ampal who beneficially own more than 5% of the Class A Stock, the only outstanding series of voting securities. For purposes of computation of the percentage ownership of Class A Stock set forth in the table, conversion of any 4% Cumulative Convertible Preferred Stock (the "4% Preferred Stock") and 6 1/2% Cumulative Convertible Preferred Stock (the "6 1/2% Preferred Stock") owned by such beneficial owner has been assumed, without increasing the number of shares of Class A Stock outstanding by amounts arising from possible conversions of convertible securities held by shareholders other than such beneficial owner. As at March 20, 1998, there were outstanding 23,849,043 (not including treasury shares) shares of Class A Stock of Ampal. In addition, there were outstanding 958,407 non-voting shares of 6 1/2% Preferred Stock (each convertible into 3 shares of Class A Stock) and 178,377 non-voting shares of 4% Preferred Stock (each convertible into 5 shares of Class A Stock). Security Ownership of Certain Beneficial Owners Amount and Nature Name and Address of Beneficial Percent of Beneficial Owner Title of Class Ownership of Class - ------------------- -------------- --------- -------- Daniel Steinmetz................. Rebar Financial Corp. c/o Icaza, Gonzalez-Ruiz & Aleman (BVI) Ltd. Wickhams Cay, Road Town, Tortola, British Virgin Islands Class A Stock 10,115,952 shs. 42.4% Raz Steinmetz.................... Rebar Financial Corp. c/o Icaza, Gonzalez-Ruiz & Aleman (BVI) Ltd. Wickhams Cay, Road Town, Tortola, British Virgin Islands Class A Stock 10,115,952 shs. 42.4% 65 Rebar Financial Corp............. c/o Icaza, Gonzalez-Ruiz & Aleman (BVI) Ltd. Wickhams Cay, Road Town, Tortola, British Virgin Islands Class A Stock 10,115,952 shs. 42.4% Bank Hapoalim B.M................ 50 Rothschild Blvd. Tel Aviv, Israel Class A Stock 6,258,639 shs. 25.8% - ---------- (1) As reported by Mr. Daniel Steinmetz, Mr. Raz Steinmetz and Rebar on Amendment to Form 4, dated March 11, 1998, filed with the SEC. Consists of 10,115,952 shares of Class A Stock held directly by Rebar. Mr. Raz Steinmetz is the President of Rebar and Mr. Daniel Steinmetz is the Vice President. They are the sole directors of Rebar and beneficially own, directly and indirectly, 96% and 4% of the outstanding equity of Rebar, respectively. Certain of the shares of Class A Stock held by Rebar have been pledged to The First International Bank of Israel Ltd. (2) As reported by Hapoalim on Amendment No. 34 to Schedule 13-D, dated December 18, 1996, filed with the SEC. These shares represent all of the shares owned directly by its wholly-owned subsidiary Atad. Assumes conversion of 122,536 shares of 6 1/2% Preferred Stock and 3,350 shares of 4% Preferred Stock. Security Ownership of Management The following table sets forth information as of March 20, 1998 as to each class of equity securities of Ampal or any of its subsidiaries beneficially owned by each director and named executive officer of Ampal listed in the Summary Compensation Table and by all directors and named executive officers of Ampal as a group. All ownerships are direct unless otherwise noted. The table does not include directors or named executive officers who do not own any such shares:
Percent of Amount and Nature of Outstanding Beneficial Ownership Shares of Name of Class A Stock Class A Stock - ---- ---------------- ------------- Michael Arnon.................................. 7,500(1) * Irwin Hochberg................................. 3,000(2) * Lawrence Lefkowitz............................. 48,375(3) * Miri Lent Sharir............................... 16,630(4) * Alan L. Schaffer............................... 13,000(5) * Evelyn Sommer.................................. 5,000(1) * Daniel Steinmetz............................... 10,115,952(6) 42.4% Raz Steinmetz.................................. 10,115,952(6) 42.4% All Directors and Executive Officers as a Group 10,209,457(7) 42.7%
- ---------- * Represents less than 1% of the class of securities. (1) Consists of options to purchase shares of Class A Stock which are currently exercisable. (2) Includes 1,000 shares of Class A Stock held of record by Mr. Hochberg's wife. (3) Includes 23,100 shares of Class A Stock held by a trust under an estate as to which Mr. Lefkowitz is co-personal representative and options to purchase 16,000 shares of Class A Stock which are currently exercisable. Mr. Lefkowitz resigned as President and Director of Ampal effective March 26, 1998 and will continue to be an employee of Ampal until the expiration of his employment agreement in September 1998. His options will expire in December 1998. 66 (4) Includes options to purchase 11,500 shares of Class A Stock which are currently exercisable. (5) Consists of options to purchase 13,000 Shares of Class A Stock which, because of Mr. Schaffers resignation from Ampal, will expire in July 1998. (6) Attributable to 10,115,952 shares of Class A Stock held directly by Rebar. See "Certain Beneficial Owners." (7) Includes options to purchase 53,000 shares of Class A Stock which are currently exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Board of Directors of Ampal maintains a Related Party Transactions Committee comprised of independent directors which reviews and passes upon the fairness of any business dealings and arrangements (other than borrowings on then prevailing market terms or deposits made in the ordinary course of business) between Ampal and any affiliated party. With certain exceptions, Ampal may not enter into transactions with any officer, director or principal shareholder of Ampal, without first obtaining the approval of the Related Party Transactions Committee or a majority of the disinterested members of the Board of Directors or the shareholders. The management of Ampal believes that all of the following transactions were done on terms which were no less advantageous to Ampal than could have been obtained from unaffiliated third parties. Ampal borrows and receives deposits from Hapoalim and its subsidiaries. During 1997, the largest amount of such indebtedness outstanding at any one time was $32,375,000 and interest expense thereon was $2,540,000. Additionally, Ampal makes loans to and maintains deposits with Hapoalim and its subsidiaries. The largest amount of such loans and deposits at any one time during 1997 was $62,958,000 and interest income thereon was $4,543,000. As of December 31, 1997, the amount of borrowings and deposits from Hapoalim and its subsidiaries was $18,207,000 and the amount of loans to and deposits with Hapoalim and its subsidiaries was $62,958,000. Ampal is the beneficiary of a $2 million committed line of credit from Hapoalim which expires in October 1998. Borrowings under this line of credit bear interest at a variable rate of interest equal to LIBOR plus 0.5%. Such loans and borrowings are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated third persons and, in the opinion of the management of Ampal, do not involve more than normal risk of collectibility or present other unfavorable features. In connection with the Company's purchase of a one-third interest in the assets of the shared networks operation of Motorola Israel, the Company borrowed $35 million from Hapoalim. The loan has a term of 90 days and bears interest at a rate of LIBOR plus 0.5%. In addition, the Company borrowed $2 million from Hapoalim pursuant to the line of credit described above. In March 1998, the Company sold portions of its interest in the shared networks operations of Motorola Israel to, among others, (i) an entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the controlling persons of Ampal's principal shareholder), (ii) Hapoalim, and (iii) an entity owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer. The related parties purchased their limited interests on the same terms as an unrelated third party which were determined through arm's length negotiations between the Company and the unrelated third party. A portion of Dr. Gleitman's entity's purchase price was obtained through two loans aggregating $250,000 from the Company. One loan, in the amount of $150,000, has a term of 10 years, an interest rate of LIBOR plus .8% and is without recourse to Dr. Gleitman. The second loan, in the amount of $100,000, has a term of 10 years, an interest rate of LIBOR plus .5% and is with recourse to Dr. Gleitman. Both loans are secured by Dr. Gleitman' s interest in the shared networks operations. It is intended that the loans to Dr. Gleitman will mirror the terms of the long-term financing that Ampal anticipates obtaining in connection with the original purchase. Should the long-term financing terms differ from what Ampal currently anticipates, the terms of Dr. Gleitman's loans will be adjusted accordingly. See "Significant Recent Developments Since Beginning of Last Fiscal Year - Formation of a New Communications Service Provider in Israel." Ampal subleases 4,960 rentable square feet of office space leased by Hapoalim at 1177 Avenue of the Americas, New York City under a sublease which expires on August 30, 2009. The base rent which commenced in September 1994, is $169,000, subject to escalation. In 1997, Ampal's total payments to Hapoalim in connection with this lease totalled $155,000. (Pursuant to the sublease agreement, Ampal was entitled to one month's free rent in 1997.) The Company leases office space in various locations in Israel to Hapoalim and its subsidiaries, pursuant to leases which will generally expire in the years between 2000 and 2003, in exchange for total rental payments in 1997 of approximately $2,953,000. Generally, the annual payments are based upon 10% of the value of the property linked to the Israeli CPI. At the request of, and pursuant to the terms of an employment agreement with, Ampal, Mr. Lefkowitz has been counsel to Hapoalim and has rendered legal services to its United States branches since August 1990. In 1997, Hapoalim reimbursed Ampal $120,000 for the services of Mr. Lefkowitz under the arrangement. Pursuant to a Letter Agreement, dated as of March 1, 1997, among, Ampal, Ampal Realty 67 Corporation and Emmes Asset Management Corp., Emmes provides general asset management and property advisory services with respect to the building located at 800 Second Avenue. As compensation for such services, Ampal Realty pays Emmes a base fee equal to $60,000 per annum (of which $50,000 was paid in 1997). Emmes is also entitled to a sales incentive fee for assisting in sales of condominium units equal to $1.50 per rentable square foot sold and an incentive leasing fee equal to $.50 per annum per rentable square foot up to a maximum of $5.00 per rentable square foot. Ampal Realty entered into one lease in 1997 for 19,000 square feet. As a result, Emmes is entitled to an additional $9,500 per year of which $4,750 was earned in 1997 (since the lease was signed in the middle of the year). In addition, Ampal agreed to issue to Mr. Andrew Davidoff, as custodian, 100 shares of Class A Stock for each of his three children each year for the duration of the effectiveness of the Letter Agreement. On January 20, 1998, Ampal issued 300 shares to Mr. Davidoff, as custodian, and anticipates issuing additional shares in April, 1998 and each April, thereafter. Mr. Davidoff is a Vice President of Emmes. Emmes is a wholly-owned subsidiary of Emmes & Company LLC. Mr. Michael Sonnenfeldt, a director of Ampal, is the founder and managing director of Emmes & Company LLC. 68 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report:
Page Reference* ---------- (1) Financial Statements and Supplementary Data Ampal-American Israel Corporation and Subsidiaries Report of Independent Public Accountants........................ 34 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995....................................... 35 Consolidated Balance Sheets as at December 31, 1997 and 1996.... 36 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.............................. 38 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995.............. 40 Notes to Consolidated Financial Statements...................... 42 Supplementary Data: Selected quarterly financial data for the years ended December 31, 1997 and 1996............................................. 56 (2) Financial Statement Schedules Schedules which have been omitted are not applicable or the required information is shown in the financial statements or notes thereto. (i) Schedule of Representative Rates of Exchange between the U.S. dollar and New Israeli Shekel for three years ended December 31, 1997 ...... 74 (ii) Consolidated financial statements filed pursuant to Rule 3-09 of Regulation S-X Granite Hacarmel Investments Limited and Subsidiaries Report of Certified Public Accountants.................................. 75 Consolidated Balance Sheets as at December 31, 1997, and 1996........... 77 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995......................................................... 79 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995...................................... 80 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................................... 81 Notes to Consolidated Financial Statements.............................. 85 Ophir Holdings Ltd. Report of Independent Auditors.......................................... 129 Consolidated Balance Sheets as at December 31, 1997 and 1996............ 131 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995......................................................... 133 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995................................ 134 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................................... 135 Notes to Consolidated Financial Statements.............................. 137 (iii) Reports of Other Certified Public Accountants filed pursuant to Rule
69
Page Reference* ---------- 2-05 of Regulation S-X: AM-HAL Ltd............................................................ 177 Ampal Engineering (1994) Ltd.......................................... 178 Ampal Enterprises Ltd................................................. 180 Ampal Financial Services Ltd.......................................... 181 Ampal Holdings (1991) Ltd............................................. 182 Ampal Industries (Israel) Ltd......................................... 184 Ampal (Israel) Ltd.................................................... 185 Ampal Properties Ltd.................................................. 187 Bay Heart Ltd. ....................................................... 189 Carmel Container Systems Ltd. ........................................ 192 Coral World International Limited..................................... 193 Country Club Kfar Saba Limited........................................ 194 Epsilon Investment House Ltd.......................................... 196 Hod Hasharon Sport Center (1992) Limited Partnership.................. 197 Mivnat Holdings Ltd................................................... 199 Moriah Hotels Ltd. ................................................... 201 Nir Ltd............................................................... 202 Orlite Industries (1959) Ltd.......................................... 204 Ortek Ltd. ........................................................... 205 Paradise Industries Ltd. (U.S. Dollars)............................... 206 Pri Ha'emek (Canned and Frozen Food) 88 Ltd........................... 207 Red Sea Marineland Holding (1973) Ltd................................. 209 Red Sea Underwater Observatory Ltd.................................... 211 Renaissance Investment Co. Ltd........................................ 213 Shmey-Bar Real Estate 1993 Ltd........................................ 214 Shmey-Bar (T.H.) 1993 Ltd............................................. 216 Teledata Communications Ltd........................................... 218 Trinet Investment in High-Tech Ltd.................................... 219 Trinet Venture Capital Ltd. .......................................... 220 U.D.S.-Ultimate Distribution Systems Ltd.............................. 222 (3) List of Exhibits Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2a. -- Purchase and Sale Agreement, dated January 5, 1998, between Ampal Communications, Inc. and Motorola Communications Israel Ltd. (Includes as Exhibit A the form of Partnership Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. and as Exhibit B the form of Shareholders' Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd.) (Filed as Exhibit 2 to a Current Report on Form 8-K, dated February 5, 1998 and incorporated herein by reference. File No. 0-538.) 2b. -- Amendment, dated January 22, 1998, to (i) Purchase and Sale Agreement, dated January 5, 1998, between Ampal Communications, Inc. and Motorola Communications Israel Ltd., (ii) Partnership Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. and (iii) form of Shareholders' Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. (Filed as Exhibit 2 a to a Current Report on Form 8-K, dated February 5, 1998 and incorporated herein by reference. File No. 0-538.) Exhibit 3 - Articles of Incorporation and By-Laws 3a. Amended and Restated Certificate of Incorporation of Ampal-American Israel Corporation, dated May 28, 1997. (Filed as Exhibit 3a. to Form 10-Q, for the quarter ended June 30,
70
Page Reference* ---------- 1997, and incorporated herein by reference. File No. 0-5380). 3b. By-Laws of Ampal-American Israel Corporation as amended, dated September 10, 1997. (Filed as Exhibit 3b to Form 10-Q, for the quarter ended September 30, 1997 and incorporated herein by reference. File No. 0-538). Exhibit 4 - Instruments defining the rights of security holders, including indentures 4a. Form of Indenture dated as of November 1, 1984. (Filed as Exhibit 4a to Registration Statement No. 2-88582 and incorporated herein by reference). 4b. Form of Indenture dated as of May 1, 1986. (Filed as Exhibit 4a to Pre-Effective Amendment No. 1 to Registration Statement No. 33-5578 and incorporated herein by reference). Exhibit 10 - Material contracts 10a. Employment contract of Lawrence Lefkowitz, dated July 26, 1993. (Filed as Exhibit 10.2 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10b. Legal Services Agreement, dated as of August 1, 1990, between Bank Hapoalim B.M. and Ampal-American Israel Corporation. (Filed as Exhibit 10i to Form 10-K for fiscal year ended December 31, 1990 and incorporated herein by reference. File No. 0-538). 10c. Warrant Agreement between Ampal-American Israel Corporation and Chemical Bank, dated as of February 1, 1994. (Filed as Exhibit 10e to Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference. File No. 0-538). 10d. Agreement dated February 7, 1992 among Inertia-Energies Future Technologies Ltd., Yehuda (Yul (i)e) Offer, Offer Brothers (Management) Ltd., Offer Shipping Ltd., Offer Ship Holdings Ltd., L.I.N. (Holdings) Ltd., I.I.Z. European Enterprise B.V., AmnV, Amnion Leon, Ampal Industries Inc. and Yeshayahu Landau (Translation). (Filed as Exhibit 10.1 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10e. Ampal-American Israel Corporation's 1993 Stock Option Plan. (Filed as Exhibit 10.3 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10f. Amendment, dated as of March 23, 1994, to Ampal-American Israel Corporation's 1993 Stock Option Plan. (Filed as Exhibit 10h to Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference. File No. 0-538). 10g. Agreement, dated March 22, 1993, between the Investment Company of Bank Leumi, Ltd., and Ophir Holdings Ltd., Mercazim Investments Ltd., Diur B.P. Ltd. and Mivnat Holdings Ltd. (Filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10h. Committed Line of Credit Agreement, dated as of June 5, 1992, and amendments, dated October 31, 1992 and October 31, 1993. (Filed as Exhibit 10.5 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10i. Agreement, dated January 18, 1994, between Ampal Industries, Inc. and Inerta-Energies and Future Technologies Ltd. (Translation). (Filed as Exhibit 10.6 to Pre-Effective
71
Page Reference* ---------- Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference). 10j. Agreement, dated March 30, 1994, between Investment Company of Bank Hapoalim Ltd., Ampal (Israel) Ltd. and Ampal Industries (Israel) Ltd. (Translation). (Filed as Exhibit 10l, to Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. File No. 0-538). 10k. Share Purchase Contract, dated October 11, 1996, between Ampal Industries, Inc. and Agrifarm International Ltd. (Translation). (Filed as Exhibit 10 to Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. File No. 2-5061). 10l. Exchange Agreement, dated as of December 11, 1996, between Ampal-American Israel Corporation and Bank Hapoalim B.M. (Filed as Exhibit 2 to Amendment No. 34 of Schedule 13D filed by Bank Hapoalim B.M. on December 20, 1996 and incorporated herein by reference). 10m. Agreement of Sale, dated December 12, 1996, between Ampal Realty Corporation and The Government of Israel. (Filed as Exhibit 10p. to Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference. File No. 0-538)........................................................ 10n. Declaration Establishing a Plan for Condominium Ownership of Premises 800 Second Avenue, New York, New York, dated December 12, 1996. (Filed as Exhibit A to Exhibit 10m of this Form 10-K)......................................................... 10o. Employment Agreement, dated May 28, 1997, among Ampal-American Israel Corporation, Ampal (Israel) Ltd. and Yehoshua Gleitman. (Filed as Exhibit 10a. to Report on Form 10-Q, for the quarter ended June 30, 1997. File No. 0-538). 10p. Form of Stock Option and Stock Purchase Agreement between Ampal-American Israel Corporation and Yehoshua Gleitman. E-2 10q. Amendment No. 1, dated June 4, 1997, to that certain Legal Services Agreement between Bank Hapoalim B.M. and Ampal-American Israel Corporation. (Filed as Exhibit 10c. to Form 10-Q, for the quarter ended June 30, 1997. File No. 0-538). 10r. Agreement dated September 9, 1997, between Ampal Industries (Israel) Limited and Raz Steinmetz. (Filed as Exhibit 10 to Report on Form 10-Q for the quarter ended September 30, 1997. File No. 0-538). 10s. Agreement, dated as of March 1, 1997, among Emmes Asset Management Corp., Ampal-American Israel Corporation and Ampal Realty Corporation. E-13 Exhibit 11 - Computation of Earnings Per Share ............................... E-17 Exhibit 12 - Statement re Computation of Ratios............................... E-18 Exhibit 21 - Subsidiaries of the Registrant................................... E-19 Exhibit 23 - Consents of Auditors: AM-HAL Ltd.............................................................. E-20 Ampal-American Israel Corporation....................................... E-21 Ampal Engineering (1994) Ltd............................................ E-22 Ampal Enterprises Ltd................................................... E-23 Ampal Financial Services Ltd............................................ E-24 Ampal Holding (1991) Ltd................................................ E-25 Ampal Industries (Israel) Ltd........................................... E-26 Ampal (Israel) Ltd...................................................... E-27 Ampal Properties Ltd.................................................... E-28 Bay Heart, Ltd.......................................................... E-29 Carmel Container Systems Ltd............................................ E-31 Coral World International Ltd........................................... E-32
72
Page Reference* ---------- Country Club Kfar Saba Limited.......................................... E-33 Epsilon Investment House Ltd............................................ E-34 Granite Hacarmel Investments Limited.................................... E-35 Hod Hasharon Sport Center (1992) Ltd. Partnership....................... E-36 Mivnat Holdings Ltd..................................................... E-37 Moriah Hotels Ltd....................................................... E-38 Nir Ltd................................................................. E-39 Ophir Holdings Ltd...................................................... E-40 Orlite Industries (1959) Ltd............................................ E-41 Ortek Ltd............................................................... E-42 Paradise Industries Ltd................................................. E-43 Pri Ha'emek (Canned and Frozen Food) 88 Ltd............................. E-44 Red Sea Marineland Holding (1973) Ltd................................... E-45 Red Sea Underwater Observatory Ltd...................................... E-47 Renaissance Investment Co. Ltd.......................................... E-49 Shmey-Bar Real Estate 1993 Ltd.......................................... E-50 Shmey-Bar (T.H.) 1993 Ltd............................................... E-51 Teledata Communications Ltd............................................. E-52 Trinet Investment in High-Tech Ltd...................................... E-53 Trinet Venture Capital Ltd.............................................. E-54 U.D.S.-Ultimate Distribution Systems Ltd................................ E-55 Exhibit 24 - Powers of Attorney............................................... E-56
(b) No reports on Form 8-K were filed during the last quarter of 1997. A Current Report on Form 8-K was filed by the Registrant on February 5, 1998, which described on Item 2 event, the acquisition from Motorola Communications Israel Ltd. of the assets of its shared networks operations. See "Significant Recent Developments Since Beginning of Last Fiscal Year - Formation Of A New Communications Service Provider in Israel". * Page reference preceeded by the letter "E" refer to the separately bound volumes of exhibits. 73 Representative Rates of Exchange Between the U.S. Dollar and the New Israeli Shekel For the Three Years Ended December 31, 1997 The following table shows the amount of New Israeli Shekels equivalent to one U.S. Dollar on the dates indicated: 1997 1996 1995 ---- ---- ---- March 31.............................................. 3.361 3.111 2.968 June 30............................................... 3.587 3.203 2.951 September 30.......................................... 3.497 3.220 2.995 December 31........................................... 3.536 3.251 3.135 74 [Somekh Chaikin Letterhead] Tirat HaCarmel, March 11, 1998 INDEPENDENT AUDITORS' REPORT To the Board of Directors and the Shareholders of Granite Hacarmel Investments Limited We have audited the accompanying consolidated balance sheets of Granite Hacarmel Investments Limited and its subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and 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 Vulcan Batteries Ltd., a consolidated subsidiary, whose assets constitute 3.6% of the total consolidated assets as of December 31, 1997 and 1996, and whose revenues constitute 3%, 3% and 2.7% of the total consolidated revenues for the years ended December 31, 1997, 1996 and 1995, respectively. Those statements were audited by other auditors whose report thereon was furnished to us. Our opinion expressed herein, insofar as it relates to the amounts included for such subsidiary, is based solely on the report of the other auditors. Furthermore, the data included in the financial statements relating to the net asset value of the Company's investments in affiliates and to its equity in their operating results is based on the financial statements of such affiliates, some of which were audited by other auditors. We conducted our audits in accordance with generally accepted auditing standards, including standards prescribed by the Auditors Regulation (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 and the reports of other auditors provide a reasonable basis for our opinion. The above mentioned financial statements were prepared on the basis of the historical cost convention, in historical values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with opinions of the Institute of Certified Public Accountants in Israel. 75 In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Furthermore, these statements have, in our opinion, been prepared in accordance with the Securities Regulation (Preparation of Annual Financial Statements) 1993. Consolidated financial statements, stated in U.S. dollars are included in Note 28 to the financial statements. Without qualifying our opinion, we would like to bring attention to Note 26 to the financial statements regarding the Controller of Restrictive Trade Practices' ruling of the existence of a restrictive arrangement in regard to the refueling system for automobile fleets; the proposal to shorten agreements made by a consolidated company with filing station operators and owners; and with legislation proposed by the Ministry of Energy dealing with the fuel market. At this time, it is not possible to estimate the effect of the above on the fuel market in general and on the Company in particular. /s/ Somekh Chaikin Certified Public Accountants (Israel) 76 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Adjusted to the Index of December 1997 -------------------------------------- N December 31, o ------------------------- t 1997 1996 e ---- ---- - Adjusted NIS. (thousands) ------------------------- Current assets Cash and cash equivalents 7,856 10,866 Marketable securities 4 4,355 5,201 Trade receivables 5 488,469 521,364 Accounts receivable 5 77,112 *34,411 Inventories 6 269,104 320,189 --------- --------- 846,896 892,031 --------- --------- Investments, long-term loans and debit balances Subsidiaries, affiliated companies and others 7 150,252 *141,588 Long-term loans 8 76,053 54,401 --------- --------- 226,305 195,989 --------- --------- Fixed assets 9 Cost 1,376,921 1,321,335 Less: Accumulated depreciation 736,924 672,662 --------- --------- 639,997 648,673 --------- --------- Intangible assets and deferred charges, net 10 49,894 32,755 --------- --------- 1,763,092 1,769,448 ========= ========= * Reclassified The accompanying notes are an integral part of the financial statements. 77 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Adjusted to the Index of December 1997 -------------------------------------- N December 31, O ------------------------- t 1997 1996 e ---- ---- - Adjusted NIS. (thousands) ------------------------- Current liabilities Credits from banks and others 11 450,079 269,895 Current portion of convertible debentures 14 41,298 40,619 Trade payables 12 46,179 191,737 Accounts payable 13 90,432 *133,237 --------- --------- 627,988 635,488 --------- --------- Long-term liabilities Long-term loans 14 89,696 67,925 Debentures convertible into shares of the Company 14 156,315 192,158 Debentures convertible into shares of a subsidiary 14 -- 2,187 Customers' deposits 15 61,972 64,438 Liabilities for employee rights upon retirement, net 16 10,903 9,872 Deferred taxes, net 24 -- 2,830 Capital notes issued by a consolidated company 215 230 --------- --------- 319,101 339,640 --------- --------- Minority interest 10,830 10,182 --------- --------- Collaterals, commitments and contingent liabilities 25,26 Shareholders' equity 805,173 784,138 --------- --------- 1,763,092 1,769,448 ========= ========= * Reclassified /s/ J. Rosen - --------------------------------- J. Rosen - Chairman of the Board /s/ M. Mor - --------------------------------- M. Mor - Director /s/ M. Erez - --------------------------------- M. Erez - Managing Director Date: March 11, 1998. The accompanying notes are an integral part of the financial statements. 78 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Adjusted to the Index of December 1997 -------------------------------------- N Year ended December 31, o ------------------------------------- t 1997 *1996 *1995 e ---- ---- ---- - Adjusted NIS, (thousands) ------------------------------------- Sales 3,089,715 3,110,105 2,886,250 Less: Government imposts 1,249,931 1,206,001 1,003,082 --------- --------- --------- Net sales 1,839,784 1,904,104 1,883,168 Cost of sales 19 1,429,737 1,492,467 1,498,100 --------- --------- --------- Gross profit 410,047 411,637 385,068 --------- --------- --------- Selling and marketing expenses 20 259,516 254,981 219,493 General and administrative expenses 21 56,613 51,618 55,409 --------- --------- --------- 316,129 306,599 274,902 --------- --------- --------- Income and operations 93,918 105,038 110,166 --------- --------- --------- Financing expenses, net 22 (23,895) (19,782) (11,787) Other income, net 23 13,515 7,933 2,862 --------- --------- --------- (10,380) (11,849) (8,925) --------- --------- --------- Income before taxes on income 83,538 93,189 101,241 Taxes on income 24 32,410 38,164 42,567 --------- --------- --------- Income after taxes on income 51,128 55,025 58,674 Company's share in income (loss) of affiliates, net (125) 712 (3,307) Minority interest in consolidated subsidiaries 87 (1,574) (672) --------- --------- --------- Net income for the year 51,090 54,163 54,695 ========= ========= ========= Earnings per ordinary share (in adjusted NIS.): Primary 0.42 0.44 0.45 ==== ==== ==== Fully diluted 0.39 0.30 0.29 ==== ==== ==== * Reclassified. The accompany note are an integral part of the financial statements. 79 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Adjusted to the Index of December 1997 -------------------------------------- Capital Premium Retained Total Earnings ------- ------- ------- ------- Adjusted NIS. (thousands) ----------------------------------------- Balance as of January, 1995 215,539 122,495 396,030 734,064 Changes in 1995: Net income for the year -- -- 54,695 54,695 Dividend paid, net(*) -- -- (28,859) (28,859) ------- ------- ------- ------- Balance as at December 31, 1995 215,539 122,495 421,866 759,900 Changes in 1996: Net income for the year -- -- 54,163 54,163 Dividend paid -- -- (29,925) (29,925) ------- ------- ------- ------- Balance as at December 31, 1996 215,539 122,495 446,104 784,138 Changes in 1997: Net income for the year -- -- 51,090 51,090 Dividend paid -- -- (30,055) (30,055) ------- ------- ------- ------- Balance as of at December 31, 1997 215,539 122,495 467,139 805,173 ======= ======= ======= ======= (*) Net of erosion of dividend declared in previous year. The accompanying notes are an integral part of the financial statements. 80 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Adjusted to the Index of December 1997 -------------------------------------- Year ended December 31, --------------------------------- 1997 1996 1995 -------- -------- ------- Adjusted NIS. (thousands) --------------------------------- Cash flows from operating activities Net income 51,090 54,163 54,695 Adjustments to reconcile net income to operating cash flows (A): (74,366) 13,982 114,319 -------- -------- ------- Net cash (used for) provided by operating activities (23,276) 68,145 169,014 -------- -------- ------- Cash flows from investing activities Acquisition of fixed assets (97,054) (94,455) (90,888) Proceeds from sale of fixed assets 31,482 3,642 1,881 Dividend received from affiliates -- 1,560 -- Long-term loans granted (1) (21,953) (14,617) (3,651) Collection of long-term loans 14,127 10,881 7,372 Investment in intangible and deferred charges (19,477) (15,380) (5,956) Investment in affiliated companies (16,243) (73,257) (6,118) Proceeds from redemption of compulsory government loan 160 781 792 Proceeds from (investments in) marketable securities, net 2,359 (4,101) 6,026 Proceeds from short-term deposit -- -- 39,864 Investment in companies carried on the cost basis (3,595) -- -- Acquisition of shares in a subsidiary company -- (1,735) -- Repayment of capital notes of interested parties -- 11,849 33,157 Acquisition of initially consolidated companies (B) -- (39) 2 -------- -------- ------- Net cash used for investing activities (110,194) (174,871) (17,519) -------- -------- ------- C/F (133,470) (106,726) 151,495 ======== ======== ======= 81 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Adjusted to the Index of December 1997 -------------------------------------- Year ended December 31, --------------------------------- 1997 1996 1995 -------- -------- -------- Adjusted NIS. (thousands) --------------------------------- B/F (133,470) (106,726) (151,495) -------- -------- -------- Cash flows from financing activities: Dividend paid (30,055) (29,925) (79,855) Dividend paid to minority shareholders in a consolidated subsidiary (485) (326) (366) Short-term credit from banks, net 122,595 90,984 (37,286) Short-term loans from others, net (8,123) 10,699 (6,376) Long-term loans received 86,923 64,432 -- Long-term loans repaid (2) (1,208) (1,013) (1,472) Redemption of capital notes issued by a consolidated company -- (82) -- Customers' deposits received 2,535 2,225 2,038 Customers' deposits repaid (560) (671) (841) Redemption of debentures (41,162) (40,626) (13,197) -------- -------- -------- Net cash provided by (used for) financing activities 130,460 95,697 (137,355) -------- -------- -------- (Decrease) Increase in cash and cash equivalents (3,010) (11,029) 14,140 Cash and cash equivalents at beginning of year 10,866 21,895 7,755 -------- -------- -------- Cash and cash equivalents at the end of year 7,856 10,866 21,895 ======== ======== ======== The accompanying notes are an integral part of the financial statements. 82 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Adjusted to the Index of December 1997 -------------------------------------- Year ended December 31, --------------------------------- 1997 1996 1995 ------- -------- -------- Adjusted NIS. (thousands) --------------------------------- (A) Adjustments to reconcile net income to operating cash flows: Income and expenses not requiring cash flows: Depreciation and amortization 76,873 73,686 68,136 Deferred taxes, net (7,544) (2,970) (7,728) Increase (Decrease) in liabilities for employee rights upon retirement, net 1,473 977 (1,779) Minority interest in (loss) income of consolidated subsidiaries (87) 1,574 672 Company's share in loss (less undistributed income) of affiliates, net 3,012 942 5,318 Capital gains (6,426) (332) (470) Erosion of investments in capital notes, net (385) (184) (487) Erosion of long-term loans, debentures and capital notes issued 5,000 (17,220) (12,402) Erosion of loans granted 324 1,297 780 Increase in value of compulsory Government loan and securities, net (1,504) (1,023) (227) Erosion of customers' deposits (4,441) (4,046) (2,586) Erosion of short-term deposit -- -- (1,328) Write-off of investment in an affiliated company carried on cost basis 3,441 -- -- Write-off loan to an affiliated company 4,947 -- 3,550 Changes in assets and liabilities: (Increase) Decrease in trade and accounts receivable (1)(2) (3,060) (144,042) 15,073 Decrease in inventories 51,175 18,655 55,521 (Decrease) Increase in trade and accounts payable (197,164) 86,668 (7,724) -------- ------ ------- 74,366 13,982 114,319 ======== ====== ======= The accompanying notes are an integral part of the financial statement. 83 GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Adjusted to the Index of December 1997 -------------------------------------- Year ended December 31, --------------------------- 1997 1996 1995 ------ ------ ------ Adjusted NIS. (thousands) --------------------------- (B) Acquisition of initially consolidated companies Assets and liabilities of the consolidated companies as at the acquisition date: Working capital (not including cash and cash equivalents) 671 28 (102) Fixed assets, net (197) (6) (801) (Assets) long-term debt, net (404) -- 905 Reserve for the loss of the affiliated company as of the day of changeover to a consolidated company -- -- 434 Goodwill created at acquisition (108) (1,100) (434) Minority interest as of the acquisition date 38 1,039 -- ---- ------ ---- -- (39) 2 ==== ====== ==== Activities not requiring cash flow: (1) In the 1997, current receivables from customers were converted into long-term loans in the amount of NIS. 15,457 thousand (1966 - NIS. 29,566 thousand, 1995 - NIS. 11,661 thousand). (2) In 1996, the redemption of a loan received from an affiliated company in the amount of NIS. 4,815 thousand was offset against a receivable from the affiliated company. The accompanying notes are an integral part of the financial statements. 84 GRANITE HACARMEL INVESTMENT LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS IN ADJUSTED VALUES A. General 1. Granite Hacarmel Investments Ltd. (hereafter "the Company") (P.C. 520037177) and the other companies of the group maintained their financial records on a current basis in historical New Israel Shekels. In accordance with Opinions issued by the Institute of Certified Public Accountants in Israel, the consolidated financial statements are stated in terms of December 1997 New Israel Shekels ("adjusted shekels") which reflect a uniform purchasing power. Such shekel statements are henceforth referred to as "adjusted statements". The comparative figures (including the monetary items) in the adjusted statements - (balance sheets, statements of income, statements of changes in shareholders' equity, statements of cash flows) - are also stated in terms of December 1997 adjusted shekels. 2. The adjusted values presented in the adjusted statements do not necessarily reflect realizable value or current economic value, but rather the original historical value or the value including excess of cost over net asset value related to specific assets, adjusted for the changes in the general purchasing power of Israel currency, to permit comparison of the data on a uniform basis. 3. The term "cost" used in the adjusted statements means cost in adjusted shekels unless otherwise stated. B. Basis of Adjustment - Consumer Price Index The adjusted amounts are expressed in New Israel Shekels, the purchasing power of which reflects the average price level of the month of December 1997, based on the Consumer Price Index published by the Central Bureau of Statistics ("Index"), on January 15, 1998 (see Note 2.G.1.) C. Principals of Adjustment 1. Balance Sheet ------------- a. The non-monetary items were adjusted for the changes in the Index since their acquisition or creation and until the balance sheet date. The following items were the main items which were treated as non-monetary items: fixed assets and related accumulated depreciation, investments carried at cost, inventories, except for inventories of crude oil and refined products, (see Note 2.C.2) deferred charges and the related accumulated amortization, and shareholders' equity. 85 NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS IN ADJUSTED VALUES (CONTINUED) b. The value of the investments in affiliated companies carried on the equity basis was computed on the basis of the adjusted statements of the affiliated companies. c. Deferred taxes, net were computed on the basis of the adjusted data. d. Monetary items are stated in the adjusted statements at their nominal values. 2. Statement of Income The items of the statement of income were adjusted in accordance with the changes in the consumer price index as follows: a. Amounts relating to non-monetary items in the balance sheet (e.g. depreciation and amortization), or provisions included in the balance sheet (e.g. severance indemnities, vacation pay) were adjusted in accordance with the changes in the corresponding balance sheet items. b. Other amounts in the statement of income (e.g. sales, purchases, other current expenses), except for financing expenses (income) net, are stated at their adjusted amounts based on the index for the month of the related transactions. c. The net financing item, which cannot be independently calculated, is derived from the other items in the statement of income. The item includes, inter alia, amounts required for the adjustment of various items in the statement of income in respect of the inflationary component of the financing included therein. d. The Company's equity in the operating results of the affiliated companies and the minority interest in the results of consolidated subsidiaries were determined on the basis of the adjusted statements of the investee companies. e. Current taxes are composed of payments on account during the year in addition to amounts payable as of the balance sheet date (or net of refunds claimed as of the balance sheet date). The payments on account were adjusted based on the prevailing index on the date of each payment, while the amounts payable (or claimed as refund) are included without adjustment. Accordingly, the current taxes include the expenses arising from the erosion of the payments on account of taxes from the date of payments to the balance sheet date. Deferred taxes - see Note 2.J. 86 NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES A. Principles of consolidation 1. The consolidated financial statements of the Company include the consolidated financial statements of the Company and its subsidiaries. The list of subsidiaries which are included in the consolidated financial statements and the percent of ownership and control therein are included in a separate schedule to the financial statements. 2. Intercompany balances and transactions of consolidated companies have been eliminated. B. Investments in subsidiary and affiliated companies 1. The investments in subsidiaries and affiliated companies are reflected in the financial statements in accordance with their adjusted equity at the balance sheet date, together with the balance of the excess cost or net of the balance of deferred credits. Other investments are stated at cost or under which does not exceed equity as of the balance sheet date. Subsidiary companies own several other inactive and/or insignificant subsidiaries and therefore are not consolidated and are carried at cost, which does not exceed their equity as at the balance sheet date. 2. The excess of cost of investments in consolidated subsidiaries, which is not related to specific assets, over the value of net assets acquired ("Goodwill"), is included in "Intangible assets and deferred charges, net" and is amortized on the straight-line method over a period of ten years. The excess value of net assets acquired over cost of investments in affiliated companies, which is not related to specific assets, is offset against the excess of cost included in "Intangible assets and deferred charges, net" and is amortized on the straight line method over a period of ten years. 3. The investments of the Company in capital notes of affiliated companies are presented in the financial statements of the Company in accordance with the requirements of the Securities Authority regarding transactions between the Company and its interested parties. 4. A list of affiliated companies is included in a schedule attached to the financial statements. 87 NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED) C. Valuation of inventories 1. Inventory of crude oil and refined products The major part of the crude oil and refined product inventories consists of Emergency inventories. The Emergency inventories are valued based on current value, which does not exceed market value in accordance with the lower of the changes in the exchange rate determined by the Fuel Authority ("Fuel Authority rate") or the dollar exchange rate. In all instances, the recovery of the value of the Emergency inventories valued at the Fuel Authority rate are guaranteed by the Government in accordance with the Commodities and Services Control Order (Arrangements in the Oil Economy - 1988). The commercial inventories (crude oil and refined products) are stated at the lower of cost or market. The cost is determined by the first-in, first-out method. 2. Other inventories The inventories of luboils, spare parts and others are stated at the lower of cost or market. The cost is determined by the first-in, first-out method except for spare parts, which are valued by the moving average method. D. Fixed assets Fixed assets are carried at cost, net of investment grants, or at cost together with the addition of excess of cost over net asset value related to specific assets. Betterments and improvements are charged to assets while maintenance and repair expenses are charged as incurred to income. E. Depreciation and Amortization Depreciation is computed on the straight line method at annual rates considered to be sufficient for depreciating the assets over their estimated useful lives. The annual rates of depreciation are as follows: % --- Buildings (including temporary and rental buildings) 2 - 6.5 Machinery and equipment 5 - 15 Vehicles 15 - 20 Computers 20 - 33 Furniture and office equipment (reflected in machinery and equipment) 6 - 10 88 NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED) The excess of cost over net asset value related to specific assets is depreciated over the remaining useful life as determined at the time the excess of cost was related to those assets. Leasehold rights are amortized over the term of the lease. F. Debentures convertible into shares 1. Convertible debentures are presented in accordance with the Opinion No. 53 of the Institute of Certified Public Accountants in Israel on the basis of the probability of their conversion into shares. Debentures are reflected in the financial statements at their liability value. 2. Costs relating to the issuance of convertible debentures are amortized over the period remaining until their maturity. G. Foreign currency and linkage basis 1. Assets (other than securities) and liabilities in foreign currencies or linked thereto are stated at the exchange rates in effect for the balance sheet date. Assets (other than securities) and liabilities linked to the Index, are stated according to the linkage conditions applied to each balance. The Index, the exchange rates and the rate of changes therein were as follows:
December 31, Changes in % ---------------------- --------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Index 153.1 143.1 129.4 7.0 10.6 8.1 Exchange rate of the U.S. dollar 3.536 3.251 3.135 8.8 3.7 3.9
2. Income and expenses in foreign currencies or linked thereto are included in the appropriate items of the statements of income based on the exchange rate in effect when such items were recorded. 3. Exchange rate or linkage differences resulting from the adjustment of assets and liabilities in foreign currency or of assets and liabilities linked to the Index are included in the statements of income in the appropriate items at the time incurred. H. Marketable Securities The marketable securities are carried at their market value on the date of the balance sheet. The changes in the value of the securities are reflected in the statements of income. 89 NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED) I. Provision for doubtful receivables The Company provides specifically for receivables the collection of which is doubtful according to management's opinion. J. Deferred taxes Deferred taxes are computed for the purpose of the adjusted financial statements in respect of those components which create the difference between results measured in the adjusted financial statements and the results measured for income tax purposes. The deferred taxes are calculated according to the liability method at tax rates that will be in effect when the deferred taxes will be utilized, using tax rates that are known at the time of preparation of the financial statements (See note 24.b.). 1. The main factors in respect of which deferred taxes have been included are as follows: a. Differences in depreciation and amortization for accounting and tax purposes; b. Differences between the value of inventories for accounting and tax purposes; c. Timing differences in recognition of income and expense items for accounting and tax purposes (mainly linkage differences on customers' deposits and provisions for employee rights upon retirement). 2. The main factors in respect of which deferred taxes have not been computed: a. Amount of the adjustment for the change in the purchasing power of the New Israel Shekels relating to buildings and private motor cars, in accordance with the rules determined by the Institute of Certified Public Accoutants in Israel. b. Investments in subsidiaries and affiliates, where it is the Company's intention to hold these investments rather than to sell them. K. Recognition of income 1. Product sales - Income from the sale of products is recorded upon dispatch to the customer. 2. Rental income - Rental income is recorded upon receipt of payment, proportionately to the relevant period. 3. Construction project - Income from construction project is recorded in accordance with the Opinion No. 6 of the Institute of Certified Public Accountants in Israel. 90 NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED) L. Provision for linkage increments on customers' deposits The wholly-owned subsidiary, Supergas Israel Gas Distribution Company Ltd. ("Supergas") is obligated under a Government decree to pay customers terminating their gas purchasing agreement an amount equal to the latest approved deposit authorized by the Ministry of Trade and Industry, together with linkage increments from the date of the last approval to the date of payment. In periods subsequent to the last approval, Supergas provides for adjusting the amounts of the deposits on the basis of the expected next updating that it plans to request. Supergas provides for this liability on a discounted present value basis. M. Earnings per share 1. Primary earnings The earnings per share are computed in accordance with Opinion No. 55 of the Institute of Certified Public Accountants in Israel, based on the weighted average of shares outstanding. 2. Fully diluted earnings The fully diluted earnings per share are computed on the basis of the computation of the primary earnings per share taking into consideration theoretical conversion of the convertible securities, subject to an anti dilutive test as stated in the aforementioned Opinion. N. Foreign currency futures transactions Sonol Israel Limited entered into a "free dollar transaction" with a bank by which Sonol acquired U.S. dollars bearing interest at variable rates, against an unlinked shekel loan, bearing interest at variable rates. The transaction may be closed at any time by netting the liability against the asset. The accumulated effect of the transaction is reflected in the statements of income. O. Fair value of financial instruments There is no significant difference between the fair value of the financial instruments of the Company and their value as stated in the balance sheet, except for debentures convertible into shares (see note 14). 91 NOTE 3 - ACCOUNTING WITH THE FUEL AUTHORITY AND THE REFORM IN THE ENERGY SECTOR A. Sonol 1. Amounts due to or from the Fuel Authority, to the extent still provisional, are included each year in the accounts according to estimates prepared by Sonol based on past experience. Differences which subsequently arise are reflected in the results of the year in which such differences are determined. 2. All costs and expenses related to the holding of Emergency inventories are fully recoverable from the Government while the holding of Commercial inventories is at the risk of the oil marketing companies. 3. Government retail price controls have been lifted from all fuel products marketed through public stations with the exception of benzine 95 and 96 octane. 4. In addition to the recommendations of the committee previously appointed by the Minister of Energy and Infrastructure, the Minister of Energy has announced his intention to change the policy regarding the holdings of Emergency inventories of crude oil and refined products and to separate them from the operating inventories of the oil companies. To date, ownership of Emergency inventories of heavy fuel oil held at the Israel Electric Corporation has been transferred to the Israel Electric Corporation. For the period which commenced November 1996 and ended February 1997, the requirement to hold Emergency inventories of heavy fuel oil was graduelly cancelled. Also, the Government intends, to separate the storage of refined products included in the Emergency inventories from the storage of refined products used in current operations, and in the future, to issue tender to determine the party who will hold the Emergency inventories in warehouses specially designated by the Ministry of National Infrastructure. Subsequent to the balance sheet date, the Ministry of National Infrastructure published a tender for holding of part of the crude oil Emergency inventories which are currently held by the major oil marketing companies. In the opinion of the Company, no negative effect on the financial position and profitability of the subsidiary company, Sonol, is expected as a result of the above changes. 92 NOTE 3 - ACCOUNTING WITH THE FUEL AUTHORITY AND THE REFORM FOR THE ENERGY SECTOR (CONTINUED) 5. In accordance with a Government ordinance issued by the Minister of the Treasury and the Minister of National Infrastructures regarding the supplying of aviation kerosene (hereinafter "ATK") to the airline companies at Ben-Gurion Airport, as of September 1, 1996, Aviation Services Ltd. (an affiliated company) (hereinafter "Aviation Services") ceased to be the sole supplier of ATK. Sonol was one of the suppliers of ATK to Aviation Services for many years. As a result of the cancellation of the right of Aviation Services to supply ATK, Sonol has, like other fuel companies, become a direct supplier of ATK to the airline companies at Ben-Gurion airport. The decree also determined the prices for refueling services and for infrastructure services provided to the airline companies at Ben-Gurion airport. In accordance with agreements signed with the budget division of the Finance Ministry and with the Airports Authority, Aviation Services will provide the refueling services and its subsidiary (50% owned), Aviation Properties Ltd., will provide the infrastructure services. The agreements do not provide Aviation Services with exclusivity in providing refueling services at Ben-Gurion airport. At this time, it is too early to determine the effect of these changes on the fuel market in general and on Sonol, in particular. 6. On September 1, 1995 the Government published a decree the purpose of which was to regulate infrastructure rates in the fuel economy Decree for the Stability of Products and Services (Temporary Order) (Infrastructure Rates in the Fuel Economy) 1995. The decree establishes, inter alia, the various types of infrastructure services and the maximum prices allowed, as well as the method for updating the tariffs. B. Supergas In January 1995, a convention was signed between the Ministry of Energy and several gas companies, among them Supergas, establishing standards of service to their clients. In May 1995, price controls in effect on the price of gas were lifted. Concurrently, the companies who are parties to the convention undertook not to deviate, when setting their prices to the consumer, from an agreed upon formula for an interim period ending on December 31, 1996. 2. Supergas lodged a claim in the District Court for a declarative judgement against the Ministry of Energy and Infrastructure, the Fuel Authority, regarding two matters relating to the period before the Gas Reform (commencing on August 1,1989). In its ruling, the Court accepted Supergas' claim on one matter and rejected the second claim. The Government and Supergas submitted an appeal to the Supreme Court and concurrently they negotiated to compromise the dispute. In December 1996, the parties reached a compromise agreement which received the status of a Supreme Court ruling and under whose terms the Government paid Supergas the amount of NIS. 5.6 million, net, which has been netted against "Government imposts" in statements of income. 93 NOTE 4 - MARKETABLE SECURITIES Consist of:
December 31, ------------------------- 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Shares 4,295 5,090 Convertible debentures 60 111 ----- ---- 4,355 5,201 ===== ====
NOTE 5 - TRADE RECEIVABLES AND ACCOUNTS RECEIVABLE
December 31, ------------------------- 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- A. Trade receivables Consist of: Customers - open accounts 393,561 429,278 Checks and notes receivable 44,257 40,288 Credit card companies 53,147 52,239 Short-term loans and current portion of long-term loans granted 9,754 11,075 Less - provision for doubtful receivables(*) (12,250) (11,516) ------- ------- 488,469 521,364 ======= ======= B. Accounts receivable Consist of: Fuel Authority 10,976 - Government Institutions 335 232 Income receivable 26,764 7,791 Employees 825 864 Prepaid expenses 10,156 6,445 Income tax receivable 8,783 4,932 Future tax benefits, net(**) 6,066 4,670 Compulsory Government loan - 169 Others 13,207 9,308 ------- ------- 77,112 34,411 ======= =======
(*) See note 2.I. (**) See note 24. 94 NOTE 6 - INVENTORIES Consist of:
December 31, ------------------------- 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Crude oil and raw materials 48,695 56,929 Finished products 211,145 253,563 Materials and supplies 9,264 9,697 ------- ------- 269,104 320,189 ======= =======
NOTE 7 - SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS
December 31, ------------------------- 1997 *1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Affiliated companies: Share in equity 32,341 23,871 Goodwill and excess cost attributed, net 88,352 82,397 Less: accumulated amortization (4,715) (4,175) ------- ------- Book value (1)(3) 115,978 102,093 Long-term loans, net (3) 7,047 11,946 Capital note and capital reserve, net of provision for loss (2) 7,419 7,895 ------- ------- 130,444 121,934 Others - cost less amortization (4) 19,808 19,654 ------- ------- 150,252 141,588 ======= ======= December 31, ------------------------- 1997 *1996 ---- ---- Adjusted NIS. (thousands) ------------------------- (1) Cost of shares including retained earning as of December 31, 1991 6,763 6,763 Changes, beginning 1.1.92: Cost of shares acquired (3) 117,247 101,404 Retained earnings (**) (8,398) (6,440) Changes in capital reserves 366 366 ------- ------- Book value (***) 115,978 102,093 ======= ======= (**) Dividend received in the current year 3,287 3,214 ======= ======= (***) Including securities quoted on the Tel-Aviv Exchange: Book value 80,199 - ======= ======= Market value 38,992 - ======= =======
* Reclassified 95 NOTE 7 - SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS (CONTINUED) (2) Capital note is unsecured and non-negotiable, linked to the Index, bears no interest and matures in the year 2001. (3) A. The loans granted by a subsidiary to the affiliated company Otzem Promotion and Investments (1991) Ltd. ("Otzem") are mostly index linked and partly index linked bearing interest at the rate of 5.5% p.a. The date of maturity is subject to the financial capabilities of Otzem. B. In the current year the Company through its subsidiary companies invested in various other companies. The main investment was in 10% of the share capital of Orpak Industries (1983) Ltd. at a cost of NIS. 9,098 thousand. (4) See note 23.(3)a. (5) See also Note 3.A.5. NOTE 8 - LONG-TERM LOANS a. Consist of: December 31, ------------------------- 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Loans to customers 85,674 62,965 Loans to employees 133 124 ------ ------ 85,807 63,089 Less: current portion 9,754 8,688 ------ ------ 76,053 54,401 ====== ====== The years of maturity of the loans: First year - current portion 9,754 8,688 Second year 11,609 10,623 Third year 15,691 6,868 Fourth year 5,039 3,832 Fifth year and thereafter and without maturity date 43,714 33,078 ------ ------ 85,807 63,089 ====== ====== 96 NOTE 8 - LONG-TERM LOANS (CONTINUED) b. Breakdown of loans by level of borrowers' balances:
December 31, 1997 December 31, 1996 Borrowers' ----------------- ----------------- balances Number of Total Number of Total (NIS. thousands) loans NIS.thousands loans NIS.thousands ---------------- ----- ------------- ----- ------------- Less than 100 131 5,987 99 5,206 100 - 500 25 7,428 35 8,462 500 - 1,000 11 7,602 10 8,071 Above 1,000 27 64,790 15 41,350 --- ------ --- ------ 194 85,807 159 63,089 === ====== === ======
c. Linkage terms and interest rates: December 31, 1997 ---------------------------------------------------- Unlinked Linked to Linked to Total index foreign currency ------------ ------------ ---------- ------ Interest rates: 0% 10-20% 0-4% 4-10% 0% 5-9% -- ----- --- ---- -- ---- Adjusted NIS. (thousands) ------------------------- Loans to: Customers 349 2,796 41,532 30,243 5,443 5,311 85,674 Employees - - 133 - - - 133 ---- ----- ------ ------ ----- ----- ------ 349 2,796 41,665 30,243 5,443 5,311 85,807 ==== ===== ====== ====== ===== ===== Less: current portion 9,754 ------ 76,053 ====== December 31, 1996 ---------------------------------------------------- Unlinked Linked to Linked to Total index foreign currency ------------ ------------ ---------- ------ Interest rates: 0% 10-20% 0-4% 4-10% 0% 5-9% Adjusted NIS. (thousands) ------------------------- Loans to: Customers 2,177 4,373 26,365 22,241 2,570 5,239 62,965 Employees - - 124 - - - 124 ---- ----- ------ ------ ----- ----- ------ 2,177 4,373 26,489 22,241 2,570 5,239 63,089 ===== ===== ====== ====== ===== ===== Less: current portion 8,688 ------ 54,401 ====== d. Regarding credit risks see note 25.E. 97 NOTE 9 - FIXED ASSETS a. Consist of:
Land Machinery and and Buildings Equipment Vehicles Others Total --------- --------- -------- ------ ----- Adjusted NIS. (thousands) -------------------------------------------------- Cost Balance at beginning of year 510,585 697,578 48,219 64,953 1,321,335 Additions 33,736 50,704 5,948 8,320 98,708 Disposals ** (28,504) (5,496) (6,186) (2,936) (43,122) ------- ------- ------ ------ ---------- Balance at end of year 515,817 742,786 47,981 70,337 *1,376,921 ------- ------- ------ ------ ---------- Accumulated depreciation Balance at beginning of year 142,923 460,890 28,960 39,889 672,662 Depreciation charged 13,432 47,830 5,991 4,896 72,149 Depreciation in respect of disposals (62) (1,195) (4,655) (1,975) (7,887) ------- ------- ------ ------ ---------- Balance at end of year 156,293 507,525 30,296 42,810 736,924 ------- ------- ------ ------ ---------- Depreciated balance as of December 31, 1997 359,524 235,261 17,685 27,527 639,997 ======= ======= ====== ====== ========== Depreciated balance as of December 31, 1996 367,662 236,688 19,259 25,064 648,673 ======= ======= ====== ====== ==========
(*) Net of investment grants in the amount of NIS. 14,778 thousand. (**) See note 23. b. Land and buildings include buildings on lease-hold lands, the cost of which is NIS. 202,600 thousand, for various original periods of 49 - 98 years, ending in the years 1998 - 2072. Land and buildings at a cost of NIS. 205,440 thousand have not yet been registered in the name of the Company or consolidated subsidiaries in the Land Registry Office. The main reason for the lack of registration is that the land settlement and sub-division process has not yet been arranged. c. Commitments and contingent liabilities - See note 25. 98 NOTE 10 - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET Consist of: Balance to be amortized as of December 31, ------------------------- 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Intangible assets: Deferred rent 26,237 19,585 Goodwill in consolidated subsidiaries (1) 6,454 4,607 Others 10,958 5,175 ------ ------ 43,649 29,367 Deferred charges: Expenses incurred in the issuance of debentures by the Company (2) 3,980 5,622 Expenses incurred in the issuance of debentures by a consolidated subsidiary (2) 73 106 ------ ------ 47,702 35,095 Less: Deferred credit in a consolidated subsidiary (1) 1,552 2,340 ------ ------ 46,150 32,755 Long-term future tax benefits (see note 24) 3,744 - ------ ------ 49,894 32,755 ====== ====== (1) For amortization see note 2.B.2 (2) For amortization see note 2.F. 99 NOTE 11 - CREDITS FROM BANKS AND OTHERS Linkage terms and interest rates:
December 31, 1997 --------------------------------------------- Unlinked linked Linked to Total to foreign Index currency ---------- ------- -------- ----- Interest rates: 13.7-17.9% 2-4.75% 6.2-7.2% ---------- ------- -------- Adjusted NIS. (thousands) --------------------------------------------- Overdrafts 1,558 - - 1,558 Short-term loans 347,152 - 32,885 380,037 Current portion of long-term loans 20 65,308 580 65,908 ------- ------ ------ ------- Total credits from banks 348,730 65,308 33,465 447,503 Credits from others (related party) - 2,576 - 2,576 ------- ------ ------ ------- 348,730 67,884 33,465 450,079 ======= ====== ====== ======= December 31, 1996 --------------------------------------------- Unlinked linked Linked to Total to foreign Index currency ---------- ------- -------- ----- Interest rates: 14.3-20% 4.8% 6.4-7.5% ---------- ------- -------- Adjusted NIS. (thousands) --------------------------------------------- Overdrafts 2,484 - - 2,484 Short-term loans 238,561 - 17,391 255,952 Current portion of long-term loans - 601 159 760 ------- --- ------ ------- Total credits from banks 241,045 601 17,550 259,196 Credit from others (related party) 10,699 - - 10,699 ------- --- ------ ------- 251,744 601 17,550 269,895 ======= === ====== =======
NOTE 12 - TRADE PAYABLES The liabilities represent open amounts and include NIS. 2,381 thousand (1996 - NIS. 2,652 thousand) balances of related parties. 100 NOTE 13 - ACCOUNTS PAYABLE December 31, December 31, ------------ ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------------------- Fuel Authority - 44,640 Liabilities to employees and other salary related liabilities 22,685 21,703 Institutions 36,234 39,763 Accrued expenses 19,308 9,874 Others 12,205 17,257 ------- ------- 90,432 133,237 ======= ======= NOTE 14 - LONG-TERM LIABILITIES A. Long-term loans Rate of December 31, December 31, interest 1997 1996 % Adjusted NIS. (thousands) -------- ------------------------- U.S. Dollar loans from banks 6.2-7.5 1,674 282 Index linked loans from banks 4.6-4.8 150,812 64,795 Customers' deposit - linked to the index 2,748 3,311 Customers' deposit - linked to foreign currency 61 58 Unlinked loans from banks 67 - Other loans - linked to the Index - 242 239 ------- ------ 155,604 68,685 Less: current portion 65,908 760 ------- ------ 89,696 67,925 ======= ====== Yearly installments: December 31, December 31, ------------ ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) -------------------------- First year - current portion 65,908 760 ------- ------ Second year 85,561 64,283 Third year 229 25 Fourth year 206 9 Fifth year 206 - No due date 3,494 3,608 ------- ------ 89,696 67,925 ------- ------ 155,604 68,685 ======= ====== Accrued interest is included in "Accounts payable" in Current liabilities. 101 NOTE 14 - LONG-TERM LIABILITIES (CONTINUED) B. Debentures convertible into shares of the Company December 31, December 31, ------------- ------------- 1997 1996 ------- ------- Adjusted NIS. (thousands) ------------- ------------- Debentures (Series 1)(*) 52,906 62,435 Debentures (series 2)(**) 142,488 168,155 ------- ------- 195,394 230,590 Less - current position 39,079 38,432 ------- ------- 156,315 192,158 ======= ======= Yearly installments: December 31, 1997 December 31, 1996 ------------------- ------------------- Series 1 Series 2 Series 1 Series 2 -------- -------- -------- -------- Adjusted NIS. (thousands) ----------------------------------------- First year - current portion 10,581 28,498 10,406 28,026 ------ ------- ------ ------- Second year 10,581 28,498 10,406 28,026 Third year 10,581 28,498 10,406 28,026 Fourth year 10,581 28,497 10,406 28,026 Fifth year 10,582 28,497 10,406 28,026 Subsequent years -- -- 10,405 28,025 ------ ------- ------ ------- 42,325 113,990 52,029 140,129 ------ ------- ------ ------- 52,906 142,488 62,435 168,155 ====== ======= ====== ======= (*) Registered debentures (Series 1) NIS. 1. - par value each. Every NIS. 55. - par value of debentures are convertible into 10 ordinary shares of NIS. 1. - par value each. The debentures bear interest at an annual rate of 0.1%. The principal, interest and the price for conversion into ordinary shares are linked to the representative rate of exchange of the U.S. dollar and are payable in 5 equal annual installments on November 30 in each of the years commencing in 1998 and ending in 2002. As of the balance sheet date, there were 34,374,877 outstanding debentures. The market value of the debentures, as their price was quoted on the Stock Exchange, was NIS. 46,406 thousand at the balance sheet date. (**) Registered debentures (Series 2) NIS. 1. - par value each. Every NIS. 5 par value of debentures are convertible into an ordinary share of NIS. 1. par value. The debentures bear interest at an annual rate of 2.5%. The principal, interest and the price of conversion into ordinary shares are linked to the representative rate of exchange of the U.S. dollar and are payable in 5 equal annual installments on November 30 in each of the years commencing in 1998 and ending in 2002. As of the balance sheet date, there were 100,838,880 outstanding debentures. The market value of the debentures, as their price was quoted on the Stock Exchange, was NIS. 133,107 thousand at the balance sheet date. Accrued interest is included in "Accounts Payable" in current liabilities. Regarding collaterals see Note 25. 102 NOTE 14 - LONG-TERM LIABILITIES (CONTINUED) C. Debentures convertible into shares of a subsidiary December 31, December 31, ------------ ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) -------------------------- Debentures (Series 1) 2,219 4,374 Less - current portion 2,219 2,187 ----- ----- -- 2,187 ===== ===== Yearly installments: December 31, December 31, ------------ ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) -------------------------- First year - current portion 2,219 2,187 Second year -- 2,187 ----- ----- 2,219 4,374 ===== ===== Pursuant to a public offering prospectus in May 1990, the subsidiary company, Vulcan Batteries Ltd. ("Vulcan"), issued 4,516,750 convertible debentures (Series 1) at par value. The debentures are linked to the Index for April 1990, and bear interest at an annual rate of 0.1%. From the date of issue until December 31, 1997, 755,560 debentures have been converted into shares. As of the balance sheet date there were 940,300 outstanding debentures (Series 1). The market value of the debentures, as their price was quoted on the Stock Exchange, was NIS. 2,078 thousand at the balance sheet date. The balance of debentures is payable on December 31, 1998 and is convertible at any time until December 26, 1998 into Vulcan's ordinary shares of NIS. 1. - par value at a conversion rate of 200% (1 share for every NIS. 2. - par value of debentures converted, subject to adjustments). The conversion of the debentures into shares may dilute Sonol's holding in Vulcan to 81.4% (instead of 83.9% as of the balance sheet date). Regarding collaterals - see Note 25. D. All the aforementioned debentures are listed for trading on the Tel-Aviv Stock Exchange. 103 NOTE 15 - CUSTOMERS' DEPOSITS a. Customer deposits as of December 31, 1997 are calculated on the basis of the expected rate of price updating. Since the previous price update (January 1997), estimated prices of customer deposits increased by 5% (previous year - 4.1%). The deposits are calculated on the basis of their present value at the annual discount rate of 1.75% (previous year - 1.25%). b. Customers' deposits include NIS. 41,276 thousand (1996 - NIS. 44,770 thousand) of linkage increments accrued on those deposits (Note 2.L.). NOTE 16 - LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT, NET December 31, December 31, ------------- ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------- ------------ Provision for severance pay, net (a) 5,580 5,621 Less: deposits in approved funds (*) 1,711 1,539 ------ ----- 3,869 4,082 Provision for early retirement pension (**)(b) 5,118 3,892 Provision for redemption of unutilized sick leave (c) 1,916 1,898 ------ ----- 10,903 9,872 ====== ===== (*) The deposits can be withdrawn subject to law. Accrued income on the deposits is included in the statement of income. (**) Excluding NIS. 1,756 thousand (1996 - NIS. 1,292 thousand) current early retirement pension payable which is included in "Accounts payable". a. The liabilities of the Company and its subsidiaries in respect of pension and severance indemnities are fully covered by provisions for severance indemnities, by deposits in approved funds and in managers' insurance policies. The deposits in approved funds and in manager's insurance plans are not included in the financial statements as they are not under the control of the Company. b. The provision for pension benefits for early retirement of employees is computed at the discounted present value of the future liabilities of the Company for such retired employees. The Company's liability for early retirement is up to the time when the employee reaches retirement age and is measured as a fixed percentage of the amount due to the employee from the pension fund upon retirement. The rate of capitalization for computing the provision is 4.5% per annum. c. In accordance with the labor agreements between subsidiaries and their employees, retiring employees (men at age 65 and women at age 60 - 65) are entitled to receive a partial redemption of unutilized sick leave, subject to a ceiling of 50 days. A provision based on an actuarial calculation has been made in the financial statements for covering the aforesaid liability. The actuarial calculation is based, inter alia, on a capitalization rate of 3%. 104 NOTE 17 - LINKAGE OF MONETARY BALANCES
December 31, 1997 December 31, 1996 --------------------------- --------------------------- Linked Linked Linked to Linked to to foreign Unlinked to foreign Unlinked index currency (*) index currency (*) ------- ------- ------- ------- ------- ------- Adjusted to NIS. (thousands) Adjusted to NIS. (thousands) --------------------------- --------------------------- Assets: Cash and cash equivalent -- 4,224 3,632 -- 7,083 3,783 Marketable securities 60 -- 4,295 111 -- 5,090 Trade receivables 7,275 31,816 449,378 3,395 51,917 446,052 Accounts receivable 16,021 12,844 32,025 5,828 922 16,546 Investment in capital notes and loans 12,502 -- 1,964 19,841 -- -- Long-term loans 63,436 9,851 2,766 42,446 6,849 5,106 ------- ------- ------- ------- ------- ------- 99,294 58,735 494,060 71,621 66,771 496,577 ======= ======= ======= ======= ======= ======= Liabilities: Credits from banks and others -- 35,461 348,710 -- 17,391 251,744 Trade payables 2,690 5,488 38,001 4,196 138,988 48,553 Accounts payables 19,846 6,648 63,938 16,297 45,364 71,576 Long-term liabilities (including current portion) and debentures 156,021 197,129 67 72,719 230,930 -- Customers' deposits (**) 61,972 -- -- 64,438 -- -- Capital notes -- -- 215 -- -- 230 ------- ------- ------- ------- ------- ------- 240,529 244,726 450,931 157,650 432,673 372,103 ======= ======= ======= ======= ======= =======
(*) Partly bearing interest. (**) Against the customers' deposit amount, Supergas holds fixed assets on loan to its customers, which are adjusted to the Index in the financial statements. Regarding the linkage of Customers' deposits - see Note 15. Against the excess of foreign currency linked liabilities over assets in the amount of NIS. 185,991 thousand, Sonol holds fuel and refined products inventory amounting to NIS. 218,238 thousand, which is mainly Emergency inventory valued according to the changes in the rate of exchange of the U.S. dollar as explained in note 2.C.1. As of December 31, 1997 the balance from free dollar acquisitions from a bank amounted to NIS. NIL thousand (1996 - NIS. 121,739 thousand) - see note 2.N. 105 NOTE 18 - CAPITAL a. Nominal values. Consist of: Authorized Issued and Paid ---------- --------------- December 31, December 31, -------------- --------------- 1997 1996 1997 1996 ---- ---- ---- ---- NIS. (thousands) NIS. (thousands) ----------------- ------------------ 225,000,000 Ordinary shares of NIS. 1. - each 225,000 225,000 122,674 122,674 ======= ======= ======= ======= b. Earnings per ordinary share 1. The net income used in computing earnings per NIS. 1. - par value of shares: Year ended December 31, ---------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ---------------------------- The net income used in computing primary earnings per share 51,090 54,163 54,695 Add (Deduct) - theoretical income (loss) deriving from: Exercise of options (series 2)(*) -- 10,094 6,045 Conversion of debentures (series 1) 1,235 (2,401) (1,535) Conversion of debentures (series 2) 5,510 (3,974) (843) ------ ------ ------ Net income used in computing diluted earnings per share 57,835 57,882 58,362 ====== ====== ====== * Expired on February 28, 1997. (The balance of stock options outstanding on December 31, 1996 and 1995 is 39,984,108 options). 106 NOTE 18 - CAPITAL (CONTINUED) 2. The par value of shares used in computing earnings per NIS. 1. - par value share: Year ended December 31, --------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) --------------------------- Share capital used in computing primary earnings per share 122,674 122,674 122,674 Add - theoretical share capital that may derive from: Exercise of options (series 2) (see 1. above) -- 39,984 39,984 Conversion of debentures (series 1) 6,250 7,500 8,750 Conversion of debentures (series 2) 20,168 24,201 28,235 ------- ------- ------- The total shares used in computing diluted earnings per share 149,092 194,359 199,643 ======= ======= ======= 3. For examining the probability of conversion or exercise of convertible securities, the present value was computed using a discount rate of (12.96 - 4.5%, 12.95 - 4.5%) for securities linked to the Index and 6% (12.96 - 5.5%, 12.95 - 6%) for securities linked to the exchange rate of the U.S. dollar. NOTE 19 - COST OF SALES Consist of:
Year ended December 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ------------------------------------- Materials used: --------------- Crude oil and refined petroleum products (*) 1,270,501 1,350,364 1,357,068 Raw materials and auxiliary materials 36,092 39,049 44,286 Finished luboil products purchased 4,078 7,164 3,636 --------- --------- --------- 1,310,671 1,396,577 1,404,990 --------- --------- --------- Labor and sub-contract work --------------------------- Labor (including related expenses) 13,445 14,073 13,701 Sub-contract work (refining and terminal charges) 3,479 3,365 7,070 --------- --------- --------- 16,924 17,438 20,771 --------- --------- --------- Production costs 84,658 59,030 56,966 --------- --------- --------- Depreciation 3,819 3,563 3,459 --------- --------- --------- Batteries 13,665 15,859 11,914 --------- --------- --------- Total cost of sales 1,429,737 1,492,467 1,498,100 ========= ========= ========= Decrease in inventories (50,652) (19,129) (55,521) ========= ========= =========
(*) Financing income deriving from the erosion of dollar linked credit used as a source of financing purchases of oil inventories is included in Cost of Sales. 107 NOTE 20 - SELLING AND MARKETING EXPENSES Consist of: Year ended December 31, --------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) --------------------------- Salaries 69,423 64,502 50,432 Advertising and promotion 14,598 13,707 14,009 Depreciation and amortization 65,006 62,668 57,368 Maintenance of buildings, plants and filling stations 27,962 29,515 31,161 Rent 37,195 37,641 21,062 Other expenses 45,332 46,948 45,461 ------- ------- ------- 259,516 254,981 219,493 ======= ======= ======= NOTE 21 - GENERAL AND ADMINISTRATIVE EXPENSES Consist of: Year ended December 31, -------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) -------------------------- Salaries 29,464 29,148 30,073 Depreciation and amortization 3,827 3,514 3,475 Consulting, legal and audit 6,335 5,943 4,891 Provision for doubtful accounts and Bad debts 5,406 2,345 4,359 Other expenses 11,581 10,668 12,611 ------ ------ ------ 56,613 51,618 55,409 ====== ====== ====== NOTE 22 - FINANCING INCOME (EXPENSES), NET Consist of: Year ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ------------------------------ From dollar linked debentures convertible to shares (9,600) 10,904 4,805 Long-term debt 3,265 3,424 2,725 Profit from securities, net 1,504 1,023 227 Financing income from other receivables 13,126 15,286 22,976 Erosion of other monetary assets and liabilities, net (32,190) (50,419) (42,520) ------- ------- ------- (23,895) (19,782) (11,787) ======= ======= ======= 108 NOTE 23 - OTHER INCOME, NET Consists of: Year ended December 31, ---------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ---------------------------- Rent 5,131 4,305 2,497 Dividends received 967 899 1,947 Management fee 6,538 2,037 803 Income from construction project: Financial income (1) 2,560 -- -- Income from the project (2) 6,618 -- -- Investment in and loan to affiliated companies written off (3) (8,388) -- (3,550) Others 89 692 1,165 ------ ----- ----- 13,515 7,933 2,862 ====== ===== ===== (1) The income results as a consideration for a guarantee given by a consolidated subsidiary in favour of a bank that granted a loan to a third party for financing a building project of residential housing. The income is taken into account concurrently with the progress of the project which is at its final stages of completion. (2) In the current year an agreement was signed between a consolidated subsidiary together with its partners in the project known as "Rubinstein Towers" and Revadim (Properties) Ltd. (hereafter - Revadin) a subsidiary of Bank Hapoalim Ltd., according to which Revadim acquired a material part of the land and building in the project. The building is in its final stages and has been transferred to Revadim as of the balance sheet date (the registration in the Land Registry Office has not yet been completed). The subsidiary company included in its financial statements the above income after taking into account provisions needed, according to the opinion of the management of the company, for completion of the project. (3) Consists of: a. Write-off of investment on cost basis in an affiliated company (14%) in the amount of NIS. 3,441 thousand resulting from a permanent decrease in value. b. Provision for the decrease in value of loans granted to an affiliated company (50%) in the amount of NIS. 4,947 thousand (1996 - NIL) (1995 - NIS. 3,550 thousand). 109 NOTE 24 - TAXES ON INCOME a. The Company and most of its subsidiaries are taxed under the Income Tax Law (Inflationary Adjustments) - 1985, effective as of the tax year 1985, which introduced the measurement of results for income tax purposes in real terms. The various adjustments required by the above mentioned law are made in order to align taxation to a real income basis. Nevertheless, the adjustments of the nominal income according to the Income Tax Law are not always identical to the inflationary adjustments made in the financial statements in accordance with the opinion of the Institute of a Certified Public Accountants in Israel. As a result, differences arise between the adjusted income in the statement of income and the adjusted income for income tax purposes. Regarding deferred taxes for these differences, see Note 2.J. The subsidiary, Vulcan, having the status of an approved enterprise, is entitled to a reduced income tax rate in accordance with the Law for the Encouragement of Capital Investments - 1959. The period of benefits relating to a part of its production facilities has ended and for the remaining facilities, the period of benefits will end in the year 2001. As of the date of the financial statements, Vulcan received final letters of approval for all the investment plans which it has carried out. b. Deferred taxes The deferred taxes are regarding:
Depreciable Deductions Liabilities Others Total fixed assets and losses for employee carry forward rights upon for tax retirement purposes ----------- ------------- ------------ ------ ----- Adjusted NIS (Thousands) ----------------------------------------------------------- Balance as of January 1, 1996 (25,365) 1,912 7,183 15,140 (1,130) Changes in 1996 4,710 (1,617) 497 (620) 2,970 ------- ----- ----- ------ ------ Balance as of December 31, 1996 (20,655) 295 7,680 14,520 1,840 Changes in 1997: Current* 5,384 405 964 (567) 6,186 Regarding previous years 1,784 -- -- -- 1,784 ------- ----- ----- ------ ------ Balance as of December 31, 1997 (13,487) 700 8,644 13,953 9,810 ======= ===== ===== ====== ======
* Includes NIS. 426 thousand accumulated as of the date of acquisition of an initially consolidated subsidiary. 110 NOTE 24 - TAXES ON INCOME (CONTINUED) The deferred taxes presented in the balance sheet as follows: December 31, December 31, ------------- ------------ 1997 1996 ---- ---- Adjusted NIS. (thousands) ------------- ------------ Deferred taxes in long-term liabilities -- (2,830) Future tax benefits in current assets 6,066 4,670 Future tax benefits - long-term -in "intangible assets and deferred charges, net" 3,744 -- ----- ----- 9,810 1,840 ===== ===== c. The provision for taxes on income in the statements of income consists of: Year ended December 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ------------------------------------- Current taxes including inflationary erosion of advance tax payments 41,130 41,482 48,132 Deferred taxes, net (7,544) (2,970) *(7,728) ------ ------ ------ 33,586 38,512 40,404 Provisions (Overprovisions) pertaining to prior years (1,176) (348) *2,163 ------ ------ ------ 32,410 38,164 42,567 ====== ====== ====== (*) These provisions were included in deferred taxes. d. Final tax assessments Sprint has received final tax assessment through the tax year 1996, Supergas has received final tax assessment through the tax year 1994 and Vulcan has received final tax assessments through the tax year 1993. The Company, Aloc, Sonapco, Chem Ami and Yad Mordechai have received final tax assessments through tax year 1991. Sonol has received final tax assessments through the tax year 1990. 111 NOTE 24 - TAXES ON INCOME (CONTINUED) e. Reconciliation between the theoretical tax on the reported income and the tax on income included in the statements of income. Year ended December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Statutory rate of tax 36% 36% 37% ==== ==== ==== Adjusted NIS. (thousands) ------------------------------- The theoretical tax at the applicable tax rate 30,074 33,548 37,459 Erosion of advanced tax payments 955 1,561 2,253 Differences in definition of capital and assets for tax purposes and others, net 2,557 3,403 2,855 Overprovisions in respect of prior years (1,176) (348) -- ------ ------ ------ 32,410 38,164 42,567 ====== ====== ====== 112 NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES A. Floating and fixed charges
December 31, 1997 Collateralized by ------------------------- ------------------------------- Adjusted NIS. (thousands) ------------------------- Short-term bank credits 1,558 Floating charges on current assets of the main subsidiaries Short-term Loans from banks 380,037 Floating charges on current assets of Sonol. Accounts payable and credit Floating charges on current balances including accrued 3,054 assets of Sonol. interest on short-term bank loans Long-term bank loans 152,553 Floating charge on current assets of Sonol, Sonol Shani Agencies Ltd., fixed charges on all the assets of Vulcan and fixed charges on part of the fixed assets of Milchen Sonol Agency Ltd., Sonol Dan Ltd. and Motoricka Ltd. Investment grants - Floating charges on all Vulcan's assets guaranteeing the fulfillment of the terms related to the receipt of such grants. Although final approval has been received the charges have not yet been cancelled. Convertible debentures of a Senior floating charge equal in subsidiary 2,219 standing to all other senior floating charges on all the assets of Vulcan. Convertible debentures Floating charge subordinated (Including interest) 195,695 to other floating charges on all the assets of the Company.
113 NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) B. Liabilities and contingencies 1. Indemnification and Insurance of directors and senior officers The Articles of Association of the Company enable the indemnification and insurance of directors and senior officers according to the law. The Company insures, subject to provisions of the law, the directors' and senior officers' liability. 2. Pending litigation a. Claims (mainly legal claims) arising in the normal course of business have been lodged against subsidiaries and affiliated companies. Regarding part of the said claims appropriate provisions have been made. In the opinion of the companies' management, based on the opinions of legal counsels, the provisions made are sufficient to cover the reasonable costs. b. A claim has been submitted against Sonol by a customer owning land leased to Sonol on which a filling station was built, the substance of which is the cancellation of all agreements between Sonol and the plaintiff and a monetary claim against Sonol in the amount of approximately NIS. 5.5 million. In the opinion of Sonol's legal counsel the claim's prospects (as far as the monetary claims is concerned) are weak. c. As a result of arbitration proceedings between the Fuel Authority and the Agents' organization and station owners, in which Sonol was not a party, the arbitrator ruled that the Fuel Authority is to reimburse the station owners for the depreciation on their investments in stations. The arbitrator's ruling has been confirmed by the district court. The Fuel Authority has, in turn, demanded that the fuel marketing companies pay for the depreciation (to the extent payable) to the station owners since it claims that the depreciation component was previously recognized by the Fuel Authority within the framework of the Price Structure. In the opinion of Sonol's legal counsel, there is no basis for the Fuel Authority's demand. In accordance with the arbitration ruling twenty five third party proceedings have been filed by the Government against Sonol regarding claims filed against the Government by station owners for the reimbursement of the investment in the construction of stations. The total amounts to NIS. 36.1 million and it is the opinion of the company's legal counsel, that there is no basis for these claims as far as they related to Sonol. 114 NOTE 25 - COLLATERALS, COMMITMENT AND CONTINGENT LIABILITIES (CONTINUED) d. Three claims were lodged against an affiliated company and against its shareholders, which include Sonol. The total amount of the claims is approximately NIS. 55 million pertain to the sale of fuel products pursuant to restrictive trade practices (as the plaintiff alleges) among the fuel companies. In the opinion of the legal counsels of Sonol and the affiliated company, the companies have found a sound defense against the claims. e. A filling station operator, who received operating rights within the framework of the invalid arrangement between the invalids and the rehabilitation department of the Ministry of Defense, the Israel Lands Authority and the fuel companies, has filed a claim in court against Sonol for a ruling declaring the cancellation of agreements between him and Sonol claiming them to be restrictive trade agreements in accordance with the Law for Restrictive Trade Agreements. In the opinion of Sonol's legal counsel, it is too early to determine the defense's prospects at this early state of deliberations. f. In August 1994, Vulcan received a purchase tax assessment in the amount of approximately NIS. 1.7 million, net of the income tax effect, representing tax differences, linkage increments, interest and penalties for the period of January 1990 through May 1994. In September 1994, Vulcan submitted a protest against the aforesaid assessment, which in July 1995, was dismissed. In the Vulcan's opinion, based on the opinion of its legal counsel, there is a reasonable chance that Vulcan's position will be accepted by the Court. Should Vulcan's protest be dismissed by the District Court, Vulcan will also be assessed for tax differences for the period from June 1994 and thereafter. No provision has been provided in Vulcan's financial statements for the above. g. A competing fuel company has filed a claim in the district court requesting a ruling that all of Sonol's agreements with filling stations are restrictive trade agreements and therefore, invalid. The court dismissed the claim and an appeal to the supreme court has been filed. 115 NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) C. The consolidated subsidiary companies are committed as of the balance sheet date as follows: 1. Commitments: Adjusted NIS. (thousands) ------------------------- Acquisition of fixed assets 133,732 Suppliers of fuel, luboils and parts 83,949 Rental leases and obligations in accordance with signed agreements with agencies for the use of their outlets for marketing Sonol's products over various periods (*) 382,570 Lease obligation for a computer and other equipment over periods of up to five years 744 (*) The rental liability for each of the years following December 31, 1997 as follows: 1998 31,704 1999 31,445 2000 29,593 2001 25,116 2002 20,535 2003 and thereafter 244,177 ------- 382,570 ======= 2. Commitments for investments: a. In 1996 a consolidated company signed a conditional agreement for its participation in a limited partnership to establish a tourist attraction. The investment by the consolidated subsidiary (including loans and guarantees) is expected to reach an amount of up to NIS.15,000 thousands linked to the representative rate of the U.S. dollar, for which it will obtain a 35% share in the limited partnership. b. In 1996, a consolidated subsidiary entered into a contractual agreement with the company, A.P.S.K. Hom Tov (1993) Ltd. (hereafter A.P.S.K.). Subject to pre-conditions not yet fulfilled, the consolidated subsidiary intends to invest approximately NIS. 5,600 thousands linked to the representative rate of the U.S. dollar in return for 50.1% of A.P.S.K.'s share capital. Non fulfillment of the pre-existing conditions may cause the retroactive cancellation of the agreement. c. In 1997, the Company, through a consolidated subsidiary signed an agreement to invest in a venture capital fund the amount of NIS. 4,400 thousand. As of the balance sheet date, the Company invested approximately NIS. 1,300 thousand. d. In 1997, a consolidated subsidiary signed an agreement to acquire rights in land and building to be erected, in which its offices will be located. The consolidated subsidiary committed itself to invest NIS. 20,000 thousand of which NIS. 5,700 thousand has been paid as of the balance sheet date. e. In 1997, the Company committed itself to grant a loan in the amount of NIS. 1,414 thousand to an affiliated company. As of the balance sheet date, the amount of NIS. 431 has not yet been granted. 116 NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) D. The consolidated subsidiaries have contingent liabilities as of the balance sheet date in respect of: Adjusted NIS. (thousands) ------------------------- 1. Acquisition of crude oil and refined products - open letters of credit. 2,616 2. The consolidated subsidiary Supergas has given a guarantee in favor of a bank regarding a loan given by the bank to a partnership (in which Supergas is a partner). 496 3. Various guarantees. 5,370 4. Sonol is a guarantor to a bank for loans granted by the bank to a filling station owner who has leased the station to Sonol. 2,935 5. Sonol is a guarantor to a bank on account of a loan granted by the bank to one of Sonol's agencies. 898 6. Sonol has given a guarantee to one of its customers on account of a tender for the supply of fuel products. 2,000 7. Vulcan has given a guarantee to a government agency assuring the supply of its products. The guarantee is collateralized by a floating charge on all the assets of Vulcan 1,300 8. Sonol is a guarantor to a bank on account of a loan granted by the bank to an affiliated company for financing acquired equipment. 796 9. Sonol has guaranteed compensation to one of its suppliers for any damages caused to the supplier as a result of the temporary remedy given to Sonol by the court, if it becomes evident that there was no basis for Sonol's request from the court. 1,081 10. The consolidated subsidiary Granite Properties is a guarantor to a bank regarding a loan granted by the bank to an affiliated company. The guarantee is unlimited but should not exceed the share of each shareholder in the total amount of loan granted to the affiliated company. 4,195 11. Guarantees given to Customs and Excise Department for payment of customs duty, purchase and other taxes that may be due to that Department by the Company, Sonol and a related Company. Unlimited amount 117 NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) E. Credit Risks 1. The maximal credit risks of the Company regarding its financial assets do not exceed the book value of the financial assets less the existing collaterals held by the Company. 2. Concentration of credit risks are created by the fact, that the consolidated company's customers and long-term debtors (long-term loans granted) are of similar character (fuel agencies). The highest balance due from any agent is NIS. 51 million included partly in current assets - customers - and partly in long-term loans. Against amounts due from customers, the Company has some collaterals as are acceptable in the industry. The financial statements include specific provisions for receivables the collection of which is doubtful in the opinion of the management. NOTE 26 - RULING BY THE CONTROLLER OF RESTRICTIVE TRADE PRACTICES AND PROPOSED LAW FOR THE FUEL SECTOR A. Sonol and Delek the Israel Fuel Corporation Ltd. (hereinafter "Delek") jointly own the rights to the "Dalkan 2000", a computerized system for marketing fuel products (primarily to automobile fleets). On January 26, 1997 the Controller of Restrictive Trade Practices ruled that the joint marketing arrangement of the "Dalkan 2000" system by Sonol and Delek is a restrictive trade agreement. As a result of the position taken by the Controller, both Sonol and Delek agreed to separate the "Dalkan 2000" system between themselves so that each company will operate an independent system in a manner that will enable customers, in accordance with their own preference, to enter into an agreement with either of the companies. The implementation of the separation agreement will be carried out in stages up to the end of March 1998. B. A private legislative proposal dealing with the shortening of the terms of exclusive agreements entered into between the fuel marketing companies and filling station owners and operators passed its first reading in the previous Knesset. The Economics Committee of the current Knesset has decided that the rule of "Continuity" will be in effect regarding this proposal which is awaiting its second and third reading in the Knesset. C. A draft proposal of legislation by the Ministry of Energy and Infrastructure regarding the term of exclusive contracts between the fuel marketing companies and station owners has been forwarded to government ministries, the president of the Supreme Court and law faculties for their initial comments. At this stage, it is too early to estimate the effects of the said developments on the overall Israeli fuel market in general and on Sonol in particular. 118 NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES a. Income and expenses from interested and related parties. 1. Consist of:
Year ended December 31, ------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Adjusted NIS. (thousands) ------------------------------------------------------------------- Interested Related Interested Related Interested Related parties parties parties parties parties parties ------- ------- ------- ------- ------- ------- Finance expenses 1,120 131 77 -- 261 -- Finance income -- 450 -- 502 320 686 Income from Management Services -- 6,305 -- 2,146 -- 772
2. Transactions with interested and related parties are conducted in the normal course of business and according to normal credit terms and do not exceed 10 % of the company's transactions. The Company has been granted an exemption in accordance with paragraph 64(3)D of the Securities Regulations (Preparation of Annual Financial Statements (correction)] - 1995 from the requirement to disclose transactions with interested parties and affiliated companies made during the normal course of business of the Company. 3. Sonol purchases most of the fuel products from the Oil Refineries Ltd. which is obligated to supply its products to the fuel marketing companies at the refineries gate price which is under Government control. b. Benefits to interested parties Year ended December 31, ------------------------- Number 1997 1996 1995 of ---- ---- ---- persons Adjusted NIS. (thousands) ------- ------------------------- 1. Interested party employed by the company 1 1,406 1,305 * 2,248 2. Directors 13 663 ** 487 780 * Includes former interested party who completed his term during 1995. ** Includes NIS. 201 thousand cancellation of over provision from 1995. 119 NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES (CONTINUED) c. Balances with interested and related parties
December 31, 1997 December 31,1996 ------------------- ----------------- Adjusted NIS. (thousands) ------------------------------------------ Interested Related Interested Related parties parties parties parties ---------- ------- ---------- ------- Current assets: Trade receivables 9,023 2,613 454 3,586 Accounts receivable -- 693 -- 243 ------ ------ ------ ------ 9,023 3,306 454 3,829 ====== ====== ====== ====== Loans and capital notes to subsidiary companies -- 14,466 -- 19,032 ====== ====== ====== ====== The highest balance with interested parties during the year 9,491 13,295 ====== ====== Current liabilities: Credits from banks and others -- 2,575 10,699 -- Trade payables -- 2,381 -- 2,652 Accounts payable -- 258 1,176 262 ------ ------ ------ ------ -- 5,214 11,875 2,914 ====== ====== ====== ====== The highest balance with interested parties during the year 15,454 11,875 ====== ======
120 NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS The financial records of the Company and its consolidated subsidiaries are maintained on a current basis in historical nominal New Israel Shekels. The translated consolidated financial statements, stated in U.S. dollars, have been prepared in accordance with generally accepted accounting principals for use in connection with the preparation of the financial statements of a U.S. shareholder. The functional currency of the Company is the U.S. Dollar. Despite the significant reduction in Israel's rate of inflation, the Company has continued to prepare its consolidated financial statements in U.S. Dollars in accordance with translation principles identical to those prescribed by Statement of Financial Accounting Standards No. 52 ("F.A.S.B. 52"), based on the historical nominal amounts. CONSOLIDATED BALANCE SHEETS (In thousands) Translated to U.S. Dollars December 31, -------------------------- 1997 1996 ---- ---- Current assets Cash and cash equivalents 2,220 3,122 Marketable securities 1,232 1,512 Trade receivables 138,228 149,908 Accounts receivable 21,991 *10,074 Inventories 76,737 92,511 ------- ------- 240,408 257,127 ------- ------- Investments, long-term loans and debit balances Subsidiaries, affiliated companies and others 36,766 *34,475 Long-term loans 21,509 15,640 Future tax benefits (II) 623 186 ------- ------- 58,898 50,301 ------- ------- Fixed assets Cost 246,381 229,688 Less: Accumulated depreciation 112,240 99,173 ------- ------- 134,141 130,515 ------- ------- Intangible assets and deferred charges, net 12,564 8,749 ------- ------- 446,011 446,692 ======= ======= * Reclassified 121 NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED) CONSOLIDATED BALANCE SHEETS (In thousands) Translated to U.S. Dollars -------------------------- December 31, -------------------------- 1997 1996 ---- ---- Current liabilities Credits from banks and others 127,285 77,595 Current portion of convertible debentures 11,387 11,387 Trade payables 13,066 55,125 Accounts payable 25,729 *38,397 ------- ------- 177,467 182,504 ------- ------- Long-term liabilities Long-term loans 25,365 19,527 Debentures convertible into shares of the company (I) 43,161 53,657 Debentures convertible into shares of a subsidiary -- 629 Customers' deposits 17,526 18,526 Liabilities for employee rights upon retirement, net 3,084 2,838 Capital notes issued by a consolidated company 61 66 ------- ------- 89,197 95,243 ------- ------- Minority interest 2,813 2,618 ------- ------- Shareholders' equity 176,534 166,327 ------- ------- 446,011 446,692 ======= ======= * Reclassified 122 NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED) CONSOLIDATED STATEMENTS OF INCOME (In thousands) Translated to U.S. Dollars ------------------------------------ Year ended December 31, ------------------------------------ 1997 *1996 *1995 ---- ---- ---- Revenues: Sales 873,668 871,091 769,066 Less: Government imposts 352,963 337,685 266,939 ------- ------- ------- Net sales 520,705 533,406 502,127 Other income, net 5,137 2,777 811 ------- ------- ------- 525,842 536,183 502,938 ------- ------- ------- Costs and expenses: Cost of sales 403,680 417,201 398,125 Selling, general and administrative expenses 70,695 68,804 58,139 Depreciation and amortization 14,251 12,756 10,874 Financing expenses, net 7,558 6,033 3,212 ------- ------- ------- 496,184 504,794 470,350 ------- ------- ------- Operating income before taxes on income 29,658 31,389 32,588 Taxes on income 10,494 10,554 11,663 ------- ------- ------- Operating income after taxes on income 19,164 20,835 20,925 Company's share in income (loss) of affiliates, net (865) 2 (759) Minority interest in income of consolidated subsidiaries 10 (557) (285) ------- ------- ------- Net income for the year 18,309 20,280 19,881 ======= ======= ======= Earnings per ordinary share: Primary 0.15 0.17 0.16 ======= ======= ======= Fully diluted 0.13 0.14 0.14 ======= ======= ======= * Reclassified. 123 NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Translated to U.S. Dollars ---------------------------------------------- Unrealized Gain on Retained Capital Securities Reserves(II) Earnings Total ------- ---------- ------------ -------- ----- Balance as at January 1, 1995: 55,735 -- 36,006 64,052 155,793 Changes in 1995: Net income for the year -- -- -- 19,881 19,881 Dividend paid (III) -- -- -- (21,107) (21,107) ------ ----- ------ ------ ------- Balance as at December 31, 1995 (III) 55,735 -- 36,006 62,826 154,567 Changes in 1996: Net income for the year -- -- -- 20,280 20,280 Dividend paid -- -- -- (8,520) (8,520) ------ ----- ------ ------ ------- Balance as at December 31, 1996 55,735 -- 36,006 74,586 166,327 Changes in 1997: Net income for the year -- -- -- 18,309 18,309 Net unrealized gain on securities available for sale -- 379 -- -- 379 Dividend paid -- -- -- (8,481) (8,481) ------ ----- ------ ------ ------- Balance as at December 31, 1997 55,735 379 36,006 84,414 176,534 ====== ===== ====== ====== =======
124 NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED) (I) During 1992, the Company completed an initial public offering of shares, options and debentures, as well as a second public offering of debentures and options to purchase debentures. The proceeds of the public offerings have been allocated to the securities issue on the basis of their fair market prices at the beginning of trading on the stock exchange. As a result, the debentures are carried at their discounted values as follows: U.S. Dollars (thousands) ------------------------ December 31, ------------------------ 1997 1996 ---- ---- Debentures (Series 1 and 2) - face value 55,258 66,295 Discount (Series 1) (*) 1,339 1,880 ------ ------ 53,919 64,415 Less current portion 10,758 10,758 ------ ------ 43,161 53,657 ====== ====== (*) The discount is being amortized over the remaining period until maturity. See note 14.B. (II) In the said public offering the Company issued stock options to employees. The excess of the value of the options granted over the cost to the employees in the amount $ 1,296 thousand was charged to the statement of income and credited to capital reserves. On this amount the Company recorded deferred tax benefits in the amount of $ 548 thousand which is recognized for tax purposes when such options are transferred to the employees and income tax is paid thereon. As of the balance sheet date, the balance of deferred tax benefits is $ NIL (1996 - $ 120 thousand). (III) As mentioned in the 1994 Financial Statements, the Board of Directors, subsequent to that balance sheet date, passed a resolution regarding the payment of an interim dividend. The dividend of $ 13,263 thousand which was paid in 1995, while reflected in the 1994 Israel Shekel Financial Statements is included together with the $ 7,844 thousand dividend paid for 1995 in the translated dollar statements in accordance with Generally Accepted Accounting Principles. (IV) The Company's policy is to record long-lived assets at cost, amortizing these costs over the expected useful life of the related assets. In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", these assets are reviewed on a quarterly and annual basis for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be reasonable. Furthermore, the assets are evaluated for continuing value and proper useful lives by comparison to expected future cash flows. For the year ended December 31, 1997, the adoption of SFAS 121 did not have a material effect on the Company. 125 LIST OF THE MAIN SUBSIDIARIES AND AFFILIATES Holding and Control at balance sheet date --------------------- Consolidated Subsidiaries % - ------------------------- ----- Sonol Israel Ltd. 100 Vulcan Batteries Ltd. 84 Sprint Motors Ltd. 100 Sprint Motors Agencies (1995) Ltd. 100 Milchen Sonol Agency Ltd. 67 Sonol J-M Ltd. 70 Sonol Dan Ltd. 100 Allied Oils and Chemicals Ltd. 100 Sonol Yad Mordechai (1972) Ltd. 59 Chem Ami Ltd. 100 Sonapco Bank Street Corporation 100 Supergas Israel Gas Distribution Company Ltd. 100 Supergas Hanegev Ltd. 65 Supergas Rehovot 89 Ltd. 90 Supergas Heating (1984) Ltd. 100 Granite Hacarmel Holdings (1993) Ltd. 100 Granite Hacarmel Properties (1993) Ltd. 100 Granite Hacarmel O.Y. Holdings Ltd. 100 Granite Hacarmel Development Holdings Ltd. 100 Granite Hacarmel Development Ltd. 100 Granite Hacarmel Industries Holdings Ltd. 100 Granite Hacarmel Industries Ltd. 100 Granite Hacarmel Y.A. Holdings Ltd. 100 Granite Hacarmel NZV Holdings Ltd. 100 Granite Hacarmel Motoricka Holdings Ltd. 100 Granite Hacarmel Energy (1997) Ltd. 100 Granite Hacarmel Energy Holding Ltd. 100 Motoricka Ltd. 51 Sonol Agencies Shovas (1996) Ltd. 60 Sonol Cnaan Ltd. 51 Sonol Shani Agencies Ltd. 51 Affiliated Companies - -------------------- Aviation Services Ltd. 22.5 Tanker Services Ltd. 25 United Petroleum Export Company Ltd. 25 Otzem Promotion and Investments Ltd. 50 Texma Chemicals Ltd. 50 Yarok Az Ltd. 22.9 Etzion Gas Products Ltd. 50 Lev Magor Management and Services Ltd. 50 Park Cible Management and Holdings Ltd. 50 Nitzba Holdings (1995) Ltd. 10 Orpak Industries (1983) Ltd. 10 The above list does not include inactive and/or immaterial affiliated companies and other companies. 126 OPHIR HOLDINGS LTD. (An Israeli corporation) 1997 ANNUAL REPORT 127 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) 1997 ANNUAL REPORT TABLE OF CONTENTS
PAGE --------- AUDITORS' REPORT.......................................................................................... 129 FINANCIAL STATEMENTS--OF THE COMPANY AND CONSOLIDATED --IN ADJUSTED NEW ISRAELI SHEKELS (NIS): Balance sheets.......................................................................................... 131 Statements of income.................................................................................... 133 Statements of changes in shareholders' equity........................................................... 134 Statements of cash flows................................................................................ 135 Notes to financial statements........................................................................... 137
128 [LOGO] REPORT OF INDEPENDENT AUDITORS To the shareholders of OPHIR HOLDINGS LTD. We have audited the financial statements of Ophir Holdings Ltd. (hereafter--the Company) and the consolidated financial statements of the Company and its subsidiaries: balance sheets as of December 31, 1997 and 1996 and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 22% and 25% of total consolidated assets as of December 31, 1997 and 1996, respectively, and whose revenues constitute approximately 11%, 13% and 25% of total consolidated revenues and gains for the years ended December 31, 1997, 1996 and 1995, respectively. We did not audit the financial statements of certain associated companies, the Company's interest in which as reflected in the balance sheets as of December 31, 1997 and 1996 is adjusted NIS 182,157,000 and adjusted NIS 106,965,000, respectively, and the Company's share in excess of profits over losses of which is a net amount of adjusted NIS 7,592,000 in 1997, adjusted NIS 10,361,000 in 1996 and adjusted NIS 2,313,000 in 1995. The data for the year ended December 31, 1995 have been restated, as explained in note 1o. The financial statements of those subsidiaries and associated companies were audited by other independent auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based solely on the reports of the other independent auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, either due to error or to intentional misrepresentation. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other independent auditors provide a fair basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect the changes in the general purchasing power of Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data of the Company, on the basis of which its adjusted financial statements were prepared, are presented in note 13. 129 [LOGO] In our opinion, based upon our audits and the reports of the other independent auditors, the aforementioned financial statements present fairly, in all material respects, the financial position--of the Company and consolidated--as of December 31, 1997 and 1996 and the results of operations, changes in shareholders' equity and cash flows--of the Company and consolidated--for each of the three years in the period ended December 31, 1997, in conformity with accounting principles generally accepted in Israel. Also, in our opinion, the abovementioned financial statements have been prepared in accordance with the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of nominal historical net income or loss and shareholders' equity to the extent summarized in note 14. The special condensed consolidated financial statements which are presented in note 14 have been translated into U.S. dollars for the convenience of one of the Company's shareholders, in accordance with the principles set forth in Statement of Financial Accounting Standard No. 52 of the Financial Accounting Standards Board of the United States. In our opinion, the translation has been properly made. /s/ KESSELMAN & KESSELMAN -------------------------------------- Kesselman & Kesselman Certified Public Accountants (Isr.) Tel-Aviv, Israel March 16, 1998 130 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) BALANCE SHEETS IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- NOTE 1997 1996 1997 1996 --------- --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS ASSETS 7c CURRENT ASSETS:............................................. 11 Cash and cash equivalents................................. 39,156 2,108 38,863 2,097 Short-term loans receivable from associated companies (the Company--and from subsidiaries)......................... 10b 12,216 9,616 37,501 54,225 Short-term investments.................................... 12a 5,327 5,587 5,327 5,587 Accounts receivable....................................... 12b 3,626 3,401 555 1,092 Buildings under construction, net of advances from purchaser............................................... 5b 8,682 15,860 8,682 Capital notes from shareholders........................... 10b 8,559 8,559 Deferred income taxes..................................... 9b 1,895 3,973 1,895 --------- --------- --------- --------- Total current assets.................................. 70,902 49,104 92,823 71,560 --------- --------- --------- --------- LAND--BUSINESS INVENTORY.................................... 7a(4) 12,514 11,773 --------- --------- INVESTMENTS: Subsidiaries.............................................. 2 40,485 35,202 Associated companies...................................... 3 229,298 252,918 182,638 202,457 Other companies........................................... 4 8,001 12,140 8,001 12,140 Long-term bank deposit.................................... 11;12c 10,353 10,353 --------- --------- --------- --------- 247,652 265,058 241,477 249,799 --------- --------- --------- --------- FIXED ASSETS, net of accumulated depreciation............... 5 78,448 112,193 34,882 67,765 --------- --------- --------- --------- 409,516 438,128 369,182 389,124 --------- --------- --------- --------- --------- --------- --------- ---------
/s/ DR. Y. GLEITMAN - ------------------------------------------- Dr. Y. Gleitman CHAIRMAN OF THE BOARD OF DIRECTORS /s/ Y. KAPLAN - ------------------------------------------- Y. Kaplan MANAGING DIRECTOR Date of approval of the financial statements: March 16, 1998 131
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- NOTE 1997 1996 1997 1996 ----------- --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS LIABILITIES AND SHAREHOLDERS' EQUITY 7c CURRENT LIABILITIES:..................................... 11 Bank credit............................................ 12d 21,879 45,112 20,100 42,968 Short-term loans from shareholders..................... 10b 37,332 37,332 Accounts payable and accruals.......................... 12e 12,341 12,301 11,924 4,103 Dividend payable....................................... 25,000 25,000 Deferred income taxes.................................. 9b 948 --------- --------- --------- --------- Total current liabilities.......................... 59,220 94,745 57,024 85,351 --------- --------- --------- --------- LONG-TERM LIABILITIES: Bank loans (net of current maturities)................. 6;11 114,520 132,947 89,556 106,499 Payables in respect of acquisition of land-- business inventory--related parties........................... 7a(4);10b 12,026 11,773 Deferred income taxes.................................. 9b 1,148 1,389 --------- --------- --------- --------- Total long-term liabilities........................ 127,694 146,109 89,556 106,499 --------- --------- --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES................... 7 --------- --------- --------- --------- Total liabilities.................................. 186,914 240,854 146,580 191,850 SHAREHOLDERS' EQUITY..................................... 8 222,602 197,274 222,602 197,274 --------- --------- --------- --------- 409,516 438,128 369,182 389,124 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. 132 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) STATEMENTS OF INCOME IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY ------------------------------- ------------------------------- NOTE 1997 1996 1995 1997 1996 1995 ---------- --------- --------- --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS REVENUES AND GAINS: From lease of buildings.......................... 10a 5,540 5,495 5,533 Share in profits of associated companies-- net... 3 8,608 11,209 *3,481 6,938 9,846 *2,619 Profits of subsidiaries--net..................... 2 5,482 1,424 1,709 Gain on dilution of holding in associated companies resulting from issuance of shares to a third party--net............................. 3 6,743 20,113 665 6,743 20,113 665 Gain from sale of investments in associated companies...................................... 3 117,813 13,886 788 117,813 13,886 788 Gain from sale and increase in value of quoted shares......................................... 6,517 7,963 6,517 7,963 Dividend received from another company........... 354 112 296 354 112 296 Management fees from associated company (the Company--and from a subsidiary)................ 10a 1,272 1,192 1,017 1,182 1,103 1,105 Capital gain from sale of building under construction................................... 9,351 --------- --------- --------- --------- --------- --------- 156,198 52,007 19,743 145,029 46,484 15,145 --------- --------- --------- --------- --------- --------- EXPENSES AND LOSSES: Depreciation of buildings........................ 940 958 1,005 Write-down of investments in other companies..... 4 5,731 2,675 1,217 5,731 2,675 1,217 Loss from decrease in value of quated shares..... 2,659 2,659 General and administrative expenses.............. 10a;12h 4,483 2,177 1,822 1,860 478 391 Capital loss from sale of fixed assets........... 416 Financial expenses--net.......................... 10a;12i 5,584 8,089 6,614 3,368 6,568 5,181 --------- --------- --------- --------- --------- --------- 16,738 16,974 10,658 10,959 12,380 6,789 --------- --------- --------- --------- --------- --------- INCOME BEFORE TAXES ON INCOME...................... 139,460 35,033 9,085 134,070 34,104 8,356 TAXES ON INCOME.................................... 9 31,007 6,143 3,462 25,617 5,214 2,733 --------- --------- --------- --------- --------- --------- NET INCOME FOR THE YEAR............................ 108,453 28,890 5,623 108,453 28,890 5,623 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * Restated, see note 1o. The accompanying notes are an integral part of the financial statements. 133 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY IN ADJUSTED NEW ISRAELI SHEKELS
DIFFERENCES FROM TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS OF A SUBSIDIARY AND ASSOCIATED SHARE CAPITAL RETAINED COMPANIES CAPITAL SURPLUS EARNINGS (NOTE 1B(4)) TOTAL ----------- --------- --------- ------------------- --------- IN THOUSANDS BALANCE AT JANUARY 1, 1995.................................. 2,428 51,935 118,016 (3,668) 168,711 CHANGES DURING 1995: Net income................................................ *5,623 *5,623 Erosion of capital notes issued to the Company by shareholders............................................ (770) (770) Company's share in erosion of capital note issued by an associated company to a subsidiary...................... (137) (137) Differences from translation of foreign currency financial statements of a subsidiary and associated companies..... (1,407) (1,407) ----- --------- --------- ------ --------- BALANCE AT DECEMBER 31, 1995................................ 2,428 51,935 122,732 (5,075) 172,020 CHANGES DURING 1996: Net income................................................ 28,890 28,890 Erosion of capital notes issued to the Company by shareholders............................................ (906) (906) Company's share in erosion of capital note issued by an associated company to a subsidiary...................... (191) (191) Differences from translation of foreign currency financial statements of a subsidiary and associated companies..... (2,539) (2,539) ----- --------- --------- ------ --------- BALANCE AT DECEMBER 31, 1996................................ 2,428 51,935 150,525 (7,614) 197,274 CHANGES DURING 1997: Net income................................................ 108,453 108,453 Company's share in erosion of capital note issued by an associated company to a subsidiary...................... (132) (132) Differences from translation of foreign currency financial statements of a subsidiary and associated companies..... 7,389 7,389 Dividend.................................................. (90,382) (90,382) ----- --------- --------- ------ --------- BALANCE AT DECEMBER 31, 1997................................ 2,428 51,935 168,464 (225) 222,602 ----- --------- --------- ------ --------- ----- --------- --------- ------ ---------
- ------------------------ * Restated, see note 1o. The accompanying notes are an integral part of the financial statements. 134 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) STATEMENTS OF CASH FLOWS IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY ------------------------------- ------------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS ---------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income for the year................................... 108,453 28,890 **5,623 108,453 28,890 **5,623 Adjustments required to reflect the cash flows from operating activities*................................... (114,716) (28,040) (5,851) (112,806) (30,447) (7,004) --------- --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities....... (6,263) 850 (228) (4,353) (1,557) (1,381) --------- --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in associated companies (including capital notes and loans)........................................ (5,739) (5,338) (5,739) (81,950) Investment in other companies............................. (2,126) (3,220) (2,160) (2,126) (3,220) (2,160) Investment in fixed assets and in buildings under construction............................................ (26,005) (30,154) (40,777) (24,072) (25,840) (30,027) Long-term bank deposit.................................... (10,353) (10,353) Short-term bank deposit................................... (5,385) (5,385) Increase in land--business inventory...................... (488) Proceeds from sale of short-term investments, net of related taxes........................................... 11,162 19,411 11,162 19,411 Proceeds from sale of shares in associated companies, net of related taxes........................................ 141,920 14,786 1,674 141,920 14,786 1,674 Proceeds from sale of investment in another company....... 568 568 Proceeds from sale of fixed assets........................ 763 19,411 Proceeds from sale of building under construction, net of related taxes........................................... 20,703 Decrease (increase) in short-term loans granted to associated companies (the Company--and subsidiaries).... (2,600) (723) (1,219) 16,724 3,460 58,271 Collection of capital notes from an associated company.... 7,987 1,149 1,552 3,215 1,149 1,552 Advances from purchasers of building under construction... 48,195 10,119 48,195 --------- --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities....... 177,839 (7,280) (26,857) 174,109 (9,665) (33,229) --------- --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Discharge of long-term bank loans......................... (17,279) (5,877) (10,222) (16,109) (695) (3,350) Increase (decrease) in short-term loans from shareholders--net....................................... (37,332) 6,575 (554) (37,332) 6,575 (554) Discharge of capital notes from shareholders.............. 8,559 8,559 Dividend paid............................................. (65,382) (65,382) Increase (decrease) in short-term bank credit--net........ (23,094) 6,846 19,636 (22,726) 6,471 20,266 --------- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities....... (134,528) 7,544 8,860 (132,990) 12,351 16,362 --------- --------- --------- --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 37,048 1,114 (18,225) 36,766 1,129 (18,248) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,108 994 19,219 2,097 968 19,216 --------- --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... 39,156 2,108 994 38,863 2,097 968 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
135 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) STATEMENTS OF CASH FLOWS IN ADJUSTED NEW ISRAELI SHEKELS
CONSOLIDATED THE COMPANY ------------------------------- ------------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS ---------------------------------------------------------------- * ADJUSTMENTS REQUIRED TO REFLECT THE CASH FLOWS FROM OPERATING ACTIVITIES: Income and expenses not involving cash flows: Share in profits of associated companies--net.......... (8,608) (11,209) **(3,481) (6,938) (9,846) **(2,619) Less--dividends received from associated company....... 1,999 5,081 5,976 1,499 3,807 4,680 Profits of subsidiaries--net........................... (5,482) (1,424) (1,709) Depreciation........................................... 1,035 1,012 1,014 78 52 8 Deferred income taxes--net............................. 1,837 (4,894) (600) (2,843) (234) (735) Gain on dilution of holding in associated companies resulting from issuance of shares to a third party... (6,743) (20,113) (665) (6,743) (20,113) (665) Gain from sale of investment in associated companies... (117,813) (13,886) (788) (117,813) (13,886) (788) Gain from sale of investment in other companies........ (34) (34) Capital loss from sale of fixed assets................. 416 Capital gain from sale of building under construction.. (9,351) Loss (gain) from sale and decrease (increase) in value of marketable securities--net........................ (6,517) 2,659 (7,963) (6,517) 2,659 (7,963) Write-down of investments in other companies........... 5,731 2,675 1,217 5,731 2,675 1,217 Erosion of principal of long-term bank loans--net...... (1,287) (522) (2,522) (976) (506) (389) Accrued interest on capital notes of associated company--net......................................... (126) (182) (263) (126) (182) (263) --------- --------- --------- --------- --------- --------- (139,877) (38,963) (8,075) (140,164) (36,998) (9,226) --------- --------- --------- --------- --------- --------- Changes in operating asset and liability items: Decrease (increase) in accounts receivable............. 6,123 (2,631) 1,663 537 (517) 1,794 Increase in accounts payable and accruals.............. 19,038 13,554 561 26,821 7,068 428 --------- --------- --------- --------- --------- --------- 25,161 10,923 2,224 27,358 6,551 2,222 --------- --------- --------- --------- --------- --------- (114,716) (28,040) (5,851) (112,806) (30,447) (7,004) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ ** Restated, see note 1o. Supplementary information on investing and financing activities not involving cash flows: 1. In December 1996, a subsidiary purchased property for adjusted NIS 11,773,000. The property is presented in "land--business inventory". The purchase was financed by credit from the vendor and is given recognition in these statements only upon payment. 2. In December 1997, the Company declared a dividend of adjusted NIS 25,000,000. This dividend was paid on January 1, 1998. The accompanying notes are an integral part of the financial statements. 136 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, applied on a consistent basis, are as follows (see also o.below): A. GENERAL: 1) Ophir Holdings Ltd. (hereafter--the Company) is a holding company which also owns commercial buildings under construction designated for rent and sale. The subsidiary, Ophir Financing Ltd., is engaged in granting and receiving loans (mainly to and from interested parties and related parties), see note 10a. The subsidiary, Merkazim Investments Ltd., is a holding and investment company engaged in the renting of commercial buildings. The subsidiary, New Horizons (1993) Ltd., holds a number of properties (designated for sale), which were purchased from an interested party. See also note 7a(4). The Company and its subsidiaries receive management services from shareholders in consideration of management fees. As to the activities of the associated companies, see note 3d. 2) Definitions: Subsidiary - a company controlled or owned to the extent of over 50%, the financial statements of which have been consolidated with the financial statements of the company. Associated company - a company controlled to the extent of 20% or over (which is not a subsidiary), or a company less than 20% controlled which complies with the condition relating to "material influence", as prescribed by Opinion 68 of the Institute of Certified Public Accountants in Israel (hereafter--the Israeli Institute), the investment in which is presented by the equity method. Another company - a company controlled to the extent of 20% or less and to which the conditions specified in the preceding paragraph do not apply. The group - the Company and its subsidiaries and associated companies. Interested parties - as defined in the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993. Related parties - as defined in Opinion 29 of the Israeli Institute.
B. ADJUSTED FINANCIAL STATEMENTS: 1) The financial statements have been prepared on the basis of historical cost adjusted to reflect the changes in the general purchasing power of Israeli currency, in accordance with Opinions of the Israeli Institute. All figures in the financial statements are presented in adjusted new Israeli shekels (NIS) which have a uniform purchasing power (December 1997 adjusted NIS)--based upon the changes in the Israeli consumer price index; hereafter--the Israeli CPI (see also note 11b). 137 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The adjustment of the financial statements is based on the accounts of the Company and its Israeli subsidiaries, maintained in nominal NIS. Condensed nominal Israeli currency data of the Company, on the basis of which its adjusted financial statements were prepared, are presented in note 13. The components of the income statements were, for the most part, adjusted as follows: the components relating to transactions carried out during the year were adjusted on the basis of the index for the month in which the transaction was carried out, while those relating to non-monetary balance sheet items (mainly--depreciation) were adjusted on the same basis as the related balance sheet item. The financing component represents financial income and expenses in real terms and the erosion of balances of monetary items during the year. 2) As mentioned in (1) above, these financial statements have been drawn up in accordance with the principles of adjustment prescribed by Opinions of the Israeli Institute, on the basis of the changes in the Israeli CPI. As to subsidiary and associated companies whose financial statements are drawn up in foreign currency, see (4) below. 3) The adjusted amounts of non-monetary assets do not necessarily represent realization value or current economic value, but only the original historical values, adjusted to reflect the changes in the general purchasing power of Israeli currency. In these financial statements, the term "cost" signifies cost in adjusted Israeli currency. 4) A subsidiary and associated companies whose financial statements are drawn up in foreign currency For purposes of consolidation or inclusion on the equity basis, the amounts (in foreign currency terms) included in the statements of the above companies were treated as follows: Balance sheet items at the end of the year and the results of operations for the year were translated at the exchange rate of the U.S. dollar (hereafter--the dollar) as compared to Israeli currency at the end of the year. Balance sheet items at the beginning of the year and changes in shareholders' equity items during the year were translated at the relevant exchange rate at the beginning of the year or at the date of each change and then adjusted on the basis of the changes in the Israeli CPI through the end of the year. Differences resulting from the above treatment are carried as a separate item under adjusted shareholders' equity ("differences from translation of foreign currency financial statements of a subsidiary and associated companies"). C. PRINCIPLES OF CONSOLIDATION: 1) The consolidated financial statements include the accounts of the Company and its subsidiaries. The companies included in consolidation are listed in note 2a. 2) Intercompany balances and transactions have been eliminated. 138 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): D. MARKETABLE SECURITIES These securities (except for investment in shares constituting "permanent investment", see f(3), are stated at market value. The changes in value of the above securities are carried to income. E. LAND--BUSINESS INVENTORY The land is presented at cost which--in managements' estimation--is lower than market value. F. INVESTMENTS: 1) Subsidiaries In the Company's accounts, the investments in these companies are accounted for by the equity method. 2) Associated companies: a) The investments in these companies are accounted for by the equity method. b) The excess of cost of the investment in associated companies over the Company's share in their equity in net assets at date of acquisition ("excess of cost of investment") represents an amount not attributed to specific assets (goodwill). The amount attributed to goodwill is amortized in equal annual instalments over a period of 10 years, commencing in the year of acquisition. 3) Other companies The investments in the shares of these companies, including investments in quoted shares, which the Company intends to hold for a long period ("permanent investment"), are stated at cost, net of write-down for decrease in value which is not of a temporary nature. G. FIXED ASSETS: 1) These assets are stated at cost. 2) Cost of fixed assets includes the Company's share in joint ventures engaged mainly in construction of buildings. 3) Financial expenses in respect of loans and credit applied to finance the construction of buildings--incurred until construction is completed--are charged to cost of such buildings. 4) The assets are depreciated by the straight-line method, on basis of their estimated useful life. 139 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Annual rates of depreciation are as follows: % --------- Buildings leased out 2-4 Vehicles 15 Office furniture and equipment (including computer and peripheral equipment) 6-33 Machinery and equipment 7-15 H. DEFERRED INCOME TAXES: 1) Deferred taxes are computed in respect of differences between the amounts present in these statements and those taken into account for tax purposes. As to the factors in respect of which deferred taxes have been included--see note 9b. Deferred tax balances are computed at the tax rate expected to be in effect at time of release to income from the deferred tax accounts. The amount of deferred taxes presented in the income statement reflects changes in the above balances during the year. 2) Taxes which would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing the deferred taxes, as it is the Company's policy to hold these investments, not to realize them. The Company will incur an additional tax liability at the rate of 15% in the event of distribution of dividend from income derived from "approved enterprises" of certain associated companies. This additional tax liability was not taken into account, since it is the Company's policy not to cause such additional tax liability upon distribution of dividends. If the Company resolves to distribute dividends to its shareholders, it will distribute them from dividends it receives from the abovementioned associated companies, the income of which is derived from "approved enterprises", so that the Company will not incur any additional tax liability in respect of receipt of the dividend. I. CAPITAL NOTES ISSUED TO OR BY INTERESTED PARTIES AND RELATED PARTIES The erosion of such capital notes, which are not linked and most of which do not bear interest, is carried to retained earnings in the statements of changes in shareholders' equity. J. REVENUE RECOGNITION: 1) Revenues from buildings sold are recognized by the "completed contracts" method. Under this method, revenue is recognized when the work required to complete the building is insignificant (up to 10% of total cost), provided most of the building is sold. 2) Income from leasing of buildings is recognized on the accrual basis, in accordance with the terms of the agreements with tenants. 140 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): K. CASH EQUIVALENTS The group considers all highly liquid investments, which include short-term bank deposits (up to 3 months from date of deposit), to be cash equivalents. L. NET INCOME PER NIS 1 OF PAR VALUE OF ORDINARY SHARES The financial statements do not include data regarding net income per NIS 1 of par value of ordinary shares, since that data would not provide significant additional information to that otherwise provided by the financial statements. M. FORMAT OF INCOME STATEMENTS In view of the nature of the Company's activities--holding of companies which operate in different fields--the Company is of the opinion that concentrated presentation of all revenue and gain items as a group, and of all expense and loss items in a separate group is more suitable to reflect its activities. N. LINKAGE BASIS Balances the linkage arrangements in respect of which stipulate linkage to the last index published prior to date of payment are stated on basis of the last index published prior to the latest balance sheet date (the index for November). O. RESTATEMENT The financial statements for 1995 were restated in order to reflect, with retroactive effect, the changes in the method of recognition of revenue by an associated company. The effect of this restatement on the net income for 1995 is as follows:
CONSOLIDATED AND THE COMPANY ----------------- ADJUSTED NIS IN THOUSANDS Net income, as previously reported.......................................... 8,516 Effect of restatement--share in profits of associated companies--net................................................. (2,893) ------ Net income, as reported in these financial statements....................... 5,623 ------ ------
NOTE 2--SUBSIDIARIES: A. SUBSIDIARIES CONSOLIDATED ARE AS FOLLOWS: Wholly-owned: Ophir Financing Ltd. Maoz Financial Investments Ltd.--inactive (hereafter--Maoz) Merkazim Investments Ltd. (a wholly-owned subsidiary of Maoz; hereafter--Merkazim) Merkazim New York, Inc. (a wholly-owned subsidiary of Merkazim; hereafter--Merkazim New York) 141 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUBSIDIARIES: (CONTINUED) 80% owned-- New Horizons (1993) Ltd. (hereafter--New Horizons). B. THE INVESTMENTS ARE COMPOSED AS FOLLOWS:
THE COMPANY -------------------- DECEMBER 31 -------------------- 1997 1996 --------- --------- ADJUSTED NIS IN THOUSANDS -------------------- Cost of shares............................................................. 199 199 Accumulated undistributed profits.......................................... 40,377 34,895 Differences from translation of foreign currency financial statements...... (107) (100) Erosion of capital note issued to a subsidiary by an associated company.... 16 208 --------- --------- 40,485 35,202 --------- --------- --------- ---------
C. THE CHANGES IN INVESTMENTS IN 1997 ARE AS FOLLOWS:
THE COMPANY ------------- ADJUSTED NIS IN THOUSANDS ------------- Balance at beginning of year.................................................... 35,202 Changes during the year: Profits of subsidiaries--net.................................................. 5,482 Erosion of capital note issued to a subsidiary by an associated company.......................................................... (192) Differences from translation of foreign currency financial statements........................................................ (7) ------ Balance at end of year.......................................................... 40,485 ------ ------
142 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES: A. THE INVESTMENTS ARE COMPOSED AS FOLLOWS:
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------- Equity in net assets: Cost of shares...................................................... 12,964 8,464 11,925 7,425 Less--amortization of excess of cost of investment (1).............. (1,622) (903) (1,622) (903) Share in accumulated undistributed profits (including accumulated erosion of capital notes) (2)..................................... 42,667 69,437 42,121 69,902 Differences from translation of foreign currency financial statements of associated companies............................................. (225) (7,614) (118) (7,514) --------- --------- --------- --------- 53,784 69,384 52,306 68,910 Capital notes of Mivnat Holdings Ltd. (including accrued interest) (3)................................................................. 175,055 183,044 130,332 133,547 Capital note of Teledata Communications Ltd. (4)...................... 459 490 --------- --------- --------- --------- 229,298 252,918 182,638 202,457 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) The excess cost of investment represents goodwill. The original amount of the goodwill was adjusted NIS 4,954,000 and its unamortized balance at December 31, 1997 is adjusted NIS 3,332,000. (2) Including gain on dilution of holding in an associated company resulting from sale and issuance of shares to a third party. (3) Capital notes (including accrued interest), with a total par value of NIS 111,804,000--consolidated and NIS 81,877,000--the Company, are unlinked, do not bear interest, and are redeemable upon demand, part not later than March 23, 2015 and part--not later than March 23, 2018. (4) This capital note is unlinked, bears interest of NIS 1 per annum and is redeemable on call, but not before July 1, 2008. 143 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): B. THE INVESTMENTS IN 1997 ARE AS FOLLOWS:
CONSOLIDATED THE COMPANY ------------ ------------- ADJUSTED NIS IN THOUSANDS ------------------------- Balance at beginning of year......................................................... 252,918 202,457 Changes during the year: Investments in shares.............................................................. 5,739 5,739 Proceeds from sale of investments.................................................. (159,920) (159,920) Share in profits of associated companies--net...................................... 8,608 6,938 Dividend received.................................................................. (1,999) (1,499) Differences from translation of foreign currency financial statements of associated companies........................................................................ 7,389 7,396 Collection of capital note......................................................... (7,987) (3,215) Interest accrued on capital note................................................... 126 126 Share in erosion of capital note issued to a subsidiary by an associated company... (132) 60 Gain on dilution of holding in associated companies resulting from issuance to a third party--net................................................................. 6,743 6,743 Gain from sale of investments in associated companies.............................. 117,813 117,813 ------------ ------------- Balance at end of year............................................................... 229,298 182,638 ------------ ------------- ------------ -------------
C. INVESTMENTS IN ASSOCIATED COMPANIES--GROUPED BY MAJOR CLASSIFICATIONS--ARE AS FOLLOWS:
CONSOLIDATED THE COMPANY ------------------------- ------------------------- TOTAL TOTAL INVESTMENT INVESTMENT SHARE IN AS OF SHARE IN AS OF NET PROFITS DECEMBER 31, NET PROFITS DECEMBER 31, FOR 1997 1997 FOR 1997 1997 ----------- ------------ ----------- ------------ ADJUSTED NIS IN THOUSANDS ADJUSTED NIS IN THOUSANDS ------------------------- ------------------------- Construction and real estate................................. 6,690 187,744 5,020 141,084 Computers, communications and software....................... 1,918 41,554 1,918 41,554 ----- ------------ ----- ------------ 8,608 229,298 6,938 182,638 ----- ------------ ----- ------------ ----- ------------ ----- ------------
D. FOLLOWING ARE DETAILS RELATING TO THE ASSOCIATED COMPANIES: 1) Memco Software Ltd. (hereafter--Memco): a) In September 1994, the Company purchased shares conferring upon it 10% holding in Memco, which is engaged in development, production and marketing of computer software to secure UNIX computer systems. b) In July 1995, the Company exercised its option to purchase additional shares in Memco, conferring upon it an additional 10% of the holding therein in consideration of adjusted NIS 144 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): 4,598,000. As a result of the increase in holding, the Company commenced accounting for its investment in Memco by the equity method. c) In July 1995, Memco issued share capital to others. As a result, the Company's holding in Memco was reduced to 18% and the Company derived a gain of approximately adjusted NIS 803,000. d) Memco has initiated a key employee stock option plan. As a result of exercise of some of the options issued under that plan, the Company's holding in Memco was further diluted. In 1997 and 1996, the Company had a gain of approximately adjusted NIS 76,000 and adjusted NIS 198,000, respectively, as a result of exercise of the options. In 1995, the Company incurred losses of adjusted NIS 167,000 as a result of the dilution in its holding in Memco. e) In October 1996, Memco offered in an initial public offering ("IPO") in the United States 3,000,000 shares, together with 365,000 shares offered by its shareholders (including the Company), at $15 per share. The underwriters of this IPO exercised their option to purchase 450,000 shares from Memco and 54,750 shares from its shareholders. The net proceeds in this IPO were approximately $46 million (adjusted NIS 160,981,000). Following this IPO, the Company's holdings in Memco decreased from approximately 17.7% to approximately 13.1%; the capital gain resulting from the IPO of Memco shares and from the sale of the Company's shares therein, approximately adjusted NIS 23,538,000, is included in 1996 income. Future sale of Memco shares by the Company is restricted by U.S. law and by the underwriting agreement. To the date of the IPO, the Company had the power to appoint two out of the seven directors of Memco. Close to the date of the IPO, the Company and other shareholders of Memco reached an agreement for cooperation at Memco's shareholders' meetings. Moreover, a voting agreement has been signed with most Memco shareholders, whereunder the Company is entitled to recommend a director on its behalf. In view of the above, the investment in Memco is still presented by the equity method. f) In 1997, the Company sold 200,000 ordinary shares of Memco and derived a gain of approximately adjusted NIS 12,603,000. The sale of the shares and exercise of options by Memco's employees as per (d) above diluted the Company's holdings in Memco to approximately 11.6%. g) Memco's shares are traded in the United States on the Nasdaq National Market. The market value of Memco's shares held by the Company at December 31, 1997 and 1996 is adjusted NIS 130,777,000 and adjusted NIS 120,683,000, respectively. The carrying value of the investment in Memco shares at those dates is adjusted NIS 29,632,000 and adjusted NIS 28,653,000, respectively. h) Subsequent to December 31, 1997, the Company sold 182,000 ordinary shares of Memco for approximately $3,900,000 (NIS 14,177,000); as a result, the Company had a net gain of approximately adjusted NIS 6,543,000. As a result, the Company's holdings in Memco were diluted to approximately 10.5%. 145 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): i) Following are condensed data from the consolidated financial statements of Memco, presented in U.S. dollars:
DECEMBER 31 -------------------- 1997 1996 --------- --------- U.S. DOLLARS IN THOUSANDS -------------------- Balance sheets: Assets: Current assets......................................................... 73,549 62,770 Fixed assets--net...................................................... 2,528 1,222 Other assets--net...................................................... 1,656 523 --------- --------- 77,733 64,515 --------- --------- --------- --------- Liabilities and shareholders' equity: Current liabilities.................................................... 12,166 7,652 Long-term liabilities--net............................................. 2,238 3,923 Shareholders' equity................................................... 63,329 52,940 --------- --------- 77,733 64,515 --------- --------- --------- ---------
Statements of income (loss):
1997 1996 *1995 --------- --------- --------- U.S. DOLLARS IN THOUSANDS ------------------------- Revenues....................................................... 30,591 15,312 1,549 --------- --------- --------- --------- --------- --------- Net income (loss) for the year................................. 9,076 3,384 (2,463) --------- --------- --------- --------- --------- ---------
- ------------------------ * Restated, see note 1a. 2) Mivnat Holdings Ltd. (hereafter--Mivnat): a) Mivnat was established in March 1993, by the Company, the subsidiary Merkazim and others, some of which are interested parties, for the purpose of acquiring the Israeli Government's shares in Industrial Buildings Company Ltd.; hereafter -Industrial Buildings. Mivnat purchased the said shares in March 1993 for approximately adjusted NIS 886 million. At December 31, 1997 and 1996, Mivnat holds approximately 52.2% of the issued and paid shares of Industrial Buildings (fully diluted--approximately 44% of the issued and paid share capital of Industrial Buildings), see also (h) below. Industrial Buildings is engaged in initiation, and construction, of buildings for industry, designated for rental and sale, and in the management of land development and infrastructure preparation for residence and industry. b) The shares of Industrial Buildings are traded on the Tel-Aviv Stock Exchange. The market value of the holdings of the Company and Merkazim in the shares of Industrial Buildings (which 146 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): are held through Mivnat and which are Mivnat's only asset) at December 31, 1997 and 1996 is approximately adjusted NIS 225.5 million and adjusted NIS 133.4 million, respectively. c) The percentages of holding in Mivnat at December 31, 1997 and 1996 are as follows:
% --------- Consolidated--the Company and Merkazim................................................ 25.00 --------- --------- The Company........................................................................... 18.75 --------- ---------
d) Claims have been filed in 1989-1997 against Industrial Buildings by insurance companies, a bank, contracting companies and others for a total amount of approximately NIS 39 million (effective as of the date of filing of the claims). In the opinion of the management of Industrial Buildings, based--in most cases--on the opinions of its legal counsel, Industrial Buildings has good defense against the claims. Therefore, provisions were made only in respect of a part of those claims in the financial statements of Industrial Buildings. In 1996, Industrial Buildings instituted legal proceedings for the collection of debts in arrears in the approximate amount of adjusted NIS 14.4 million. No allowance for doubtful accounts has been made in respect of these debts. e) Mivnat has guaranteed repayment of long-term loans received by the Company and Merkazim. f) Mivnat has registered liens on all its assets and rights in favor of those who granted long-term loans to all its shareholders. g) As to the pledge in respect of the investment of the Company and Merkazim in Mivnat, see note 7c(4). h) As part of the public offering of securities by Jersualem Economic Corporation Ltd., Industrial Buildings and Mivnat, which took place in May 1997, Industrial Buildings and Mivnat offered warrants and purchase options exercisable in purchase of ordinary shares of Industrial Buildings. The net proceeds of Industrial Buildings from the offering of warrants was approximately adjusted NIS 0.97 million, and the net proceeds of Mivnat from the offering of purchase options was approximately adjusted NIS 10 million. On September 18, 1997, under a prospectus published by Jerusalem Economic Corporation Ltd. and Industrial Buildings, Industrial Buildings offered the public NIS 200,000,000 par value of debentures, 10,000,000 warrants exercisable in purchase of shares of Industrial Buildings and 1,000,000 warrant exercisable in purchase of NIS 100,000,000 par value of debentures. Assuming exercise of all the warrants issued by Industrial Buildings and all the purchase options, the Company's indirect holdings in Industrial Buildings through Mivnat will decrease from approximately 13.1% to approximately 11%. 147 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): i) Following are condensed data from the consolidated financial statements of Mivnat:
DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- ADJUSTED NIS IN THOUSANDS ---------------------- Balance sheets: Assets: Current assets.................................................. 402,808 231,977 Investments and long-term receivables........................... 224,585 239,322 Fixed assets--net............................................... 2,395,608 2,170,150 Other assets--net............................................... 9,501 1,586 ---------- ---------- 3,032,502 2,643,035 ---------- ---------- ---------- ---------- Liabilities and shareholders' equity: Current liabilities............................................. 527,951 433,490 Long-term liabilities--net...................................... 1,706,235 1,483,939 Minority interest............................................... 468,937 469,237 Shareholders' equity............................................ 329,379 256,369 ---------- ---------- 3,032,502 2,643,035 ---------- ---------- ---------- ----------
Statements of income:
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- Revenues................................................... 203,885 191,112 172,661 --------- --------- --------- --------- --------- --------- Net income for the year.................................... 26,434 21,920 20,721 --------- --------- --------- --------- --------- ---------
3) Teledata Communications Ltd. (hereafter--Teledata): a) Teledata, which is an associated company of Investment Company of Bank Hapoalim Ltd. (a major shareholder of the Company)--is engaged in design, development, production, marketing and servicing of telecommunications equipment. The percentages of holdings in Teledata are as follows:
DECEMBER 31 -------------------- 1997 1996 --------- --------- % % --- --- The Company..................................................................... 2.6 16.2 --- --- --- --- Investment Company of Bank Hapoalim Ltd. - directly............................. 18.3 29.2 --- --- --- ---
b) In 1997, the Company sold 1,402,000 ordinary shares of Teledata. 860,000 of them were sold in the public offering (see (d) below). As a result of the public offering, the exercise of options by 148 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): employees and the sale of shares, the Company's holding in Teledata was diluted from approximately 15.64% to approximately 2.72%. In 1997, the net gain from the issuance and sale of shares was approximately adjusted NIS 111,852,000. In 1996, the Company sold 250,000 ordinary shares of Teledata and derived a gain of adjusted NIS 9,668,000. In 1995, the Company sold 51,000 ordinary shares of Teledata and derived a gain of adjusted NIS 788,000. c) Teledata has adopted a plan to grant share options to key employees and directors. During 1997, 1996 and 1995, some of the options were exercised and the Company had a gain of adjusted NIS 25,000, adjusted NIS 595,000 and adjusted NIS 29,000, respectively. d) In 1997, Teledata offered 1,514,000 ordinary shares to the public in the United States, together with 1,660,000 ordinary shares offered by its shareholders (including the Company), at $ 24 per share. Net proceeds from that offering approximated $36 million (adjusted NIS 131,625,000). e) Teledata's shares are traded in the United States on the Nasdaq National Market. The market value of the Teledata shares held by the Company at December 31, 1997 and 1996 is adjusted NIS 22,092,000 and adjusted NIS 139,565,000, respectively. The carrying value of the investment in Teledata shares at those dates is adjusted NIS 10,983,000 and adjusted NIS 33,257,000, respectively. 149 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): f) Following are condensed data from the consolidated financial statements of Teledata-- presented in U.S. dollars:
DECEMBER 31 -------------------- 1997 1996 --------- --------- U.S. DOLLARS IN THOUSANDS -------------------- Balance sheets: Assets: Current assets....................................................... 95,851 62,514 Investments and long-term receivables................................ 32,499 7,389 Fixed assets--net.................................................... 8,136 6,112 Other assets--net.................................................... 163 195 --------- --------- 136,649 76,210 --------- --------- --------- --------- Liabilities and shareholders' equity: Current liabilities.................................................. 18,786 15,485 Long-term liabilities--net........................................... 1,461 974 Minority interest.................................................... 2,210 599 Shareholders' equity................................................. 114,192 59,152 --------- --------- 136,649 76,210 --------- --------- --------- ---------
1997 1996 1995 --------- --------- --------- U.S. DOLLARS IN THOUSANDS ------------------------------- Statements of income (loss): Revenues....................................................... 84,149 57,089 32,127 --------- --------- --------- --------- --------- --------- Net income (loss) for the year................................. 14,985 6,991 (1,188) --------- --------- --------- --------- --------- ---------
4) Shmey-Bar Real Estate 1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd. and Shmey-Bar (I.A.) 1993 Ltd. (hereafter--Shmey-Bar companies) The Company, along with a group of companies, one of which is an interested party, established the Shmey-Bar companies on December 9, 1993. These companies were established for the purpose of dealing in real estate. They purchased rights to real estate and options to purchase real estate in Tel-Aviv, Haifa, Beer-Sheva, Kiryat Shemona, Eilat, etc., all from Hamashbir Hamerkazi Israel Cooperative Wholesale Society Ltd. The Shmey-Bar companies commenced operations in 1994. The Company holds 1/6 of the ownership and control in each of the Shmey-Bar companies. 5) Derdan (Financing) Ltd. (hereafter--Derdan) Derdan was established in June 1993 by the Company along with a group of companies, one of which is an interested party, for the purpose of financing the purchase of rights in real estate which Hamashbir 150 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED): Hamerkazi Israel Cooperative Wholesale Society Ltd. has granted the associated company Shmey-Bar (I.A.) 1993 Ltd. (see (4) above). Derdan commenced operations in 1994. The Company's share in Derdan is 25%. 6) Clark/67 Associates L.P.--limited partnership In August 1994, the subsidiary Merkazim New York and others established a limited partnership in the United States (hereafter -the partnership). The U.S. subsidiary's share in the partnership is 50%. The partnership acquired a commercial building in New Jersey, U.S.A. for a total cost of approximately $2.3 million. The partnership invested approximately $1 million in renovating the building. In November 1997, Merkazim New York granted an option to a third party for acquisition of its share in the partnership. In February 1998, the option was exercised and as a result, Merkazim New York had a capital gain of approximately $800,000 (NIS 2,828,000). 7) Memadim Investments Ltd. (hereafter--Memadim) Memadim was established in the last quarter of 1995 by the Company, along with a group of companies one of which is an associated company, for the purpose of trading in real estate. The Company directly holds 10% of the ownership and control of Memadim and an associated company holds 40% of the ownership and control of Memadim. 8) Soliton Ltd. (hereafter--Soliton) Soliton, a private Israeli company, was established in January 1997, with the aim of developing a protection program as a solution to safeguarding data on the internet and intranet. In December 1997, the Company invested adjusted NIS 2,649,000 in Soliton. The associated company Memco, that plans to act as an OEM distributor for Soliton products, invested a similar amount. The Company holds 16.6% of the ownerhsip and control of Soliton. 9) Secure Video Sysetms Ltd. (hereafter--SVIS) SVIS, a private Israeli company was established in 1995 and is engaged in developing technology for video coding and reconstruction of data. In 1997, the Company invested approximately adjusted NIS 920,000 in SVIS; consequently, the Company holds 23% of the ownership and control of that company. 10) INFIT Ltd. (hereafter--INFIT) INFIT is a private Israeli company specializing in communications protocols and data compression on the internet, as well as the development of edge to edge communications solutions. In December 1997, the Company invested adjusted NIS 2,170,000, in INFIT; consequently, the Company holds approximately 13.6% of the ownership and control of INFIT. 151 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--INVESTMENTS IN OTHER COMPANIES:
CONSOLIDATED AND THE COMPANY -------------------- DECEMBER 31 -------------------- 1997 1996 --------- --------- ADJUSTED NIS IN THOUSANDS -------------------- Dovrat, Shrem--Keren Shakim 92 Ltd. -"Keren Shakim" (a)..................... 1,165 2,183 Mahalachim Investment in Technology Ltd.--"Mahalachim" (b).................. 1,254 3,204 Carmel Biosensor Ltd.--"Carmel"(c).......................................... 458 810 Industrial Buildings--quoted shares (d)..................................... 4,327 4,287 Mainsoft Corporation--"Mainsoft" (e)........................................ 86 1,656 Myriad Ultra Systems Ltd.--"Myriad" (f)..................................... 711 --------- --------- 8,001 12,140 --------- --------- --------- ---------
- ------------------------ (a) The Company holds 2.9% of the shares offered by Keren Shakim. The main activity of Keren Shakim is investment in business and securities. Its investments consist mainly of long and medium term investments, primarily in Israel. The investment as of December 31, 1997 presented net of write-down of adjusted NIS 1,018,000. (b) Mahalachim is a venture capital fund. The Company holds shares conferring upon it a 5% holding in this company. The investment as of December 31, 1997 is presented net of write-down of adjusted NIS 1,950,000. (c) The Company holds preferred shares convertible into ordinary shares, conferring upon it a 21.36% holding in this company. Carmel is engaged in development of products for measurement of the concentration of glucose in the blood without using the present mechanical methods. At December 31, 1997 and 1996, the investment is presented net of write-down of adjusted NIS 3,174,000 and adjusted NIS 2,822,000, respectively. (d) The Company holds shares conferring upon it 0.2% in Industrial Buildings. The Company does not account for these shares by the equity method because of immateriality (see also note 3d(2)). (e) The Company holds shares conferring upon it 4.3% in Mainsoft. Mainsoft is engaged in the development, production and marketing of software and development tools for developers of software. At December 31, 1997 and 1996, the investment is presented net of write-down of adjusted NIS 2,640,000 and adjusted NIS 1,070,000, respectively. (f) In April 1997, the Company purchased shares conferring upon it 4.4% in Myriad and received an option to purchase additional 2.2% for adjusted NIS 1,552,000. Myriad is engaged in the development, production and marketing of instruments for the measuring, by ultra-sound, of bone density and elasticity. At December 31, 1997, the investment is presented net of write-down of adjusted NIS 841,000. 152 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5--FIXED ASSETS: A. COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, AND CHANGES THEREIN DURING 1997, ARE AS FOLLOWS:
COST ACCUMULATED DEPRECIATION ---------------------------------------------------- ------------------------------------- IN RESPECT OF BALANCE AT ADDITIONS RETIREMENTS BALANCE BALANCE AT ADDITIONS BALANCE BEGINNING DURING DURING THE AT END BEGINNING DURING AT END OF YEAR THE YEAR YEAR OF YEAR OF YEAR THE YEAR OF YEAR ----------- ----------- ------------- ----------- ----------- ----------- ----------- ADJUSTED NIS IN THOUSANDS ------------------------------------------------------------------------------------------- CONSOLIDATED: Building--leased out (including land)......... 61,719 61,719 17,370 940 18,310 Buildings under construction (including land)*................... 93,292 30,375 27,819 95,848 Machinery and equipment.... 433 254 687 42 59 101 Vehicles................... 83 99 182 4 17 21 Office furniture and equipment (including computer and peripheral equipment)............... 85 37 122 22 19 41 ----------- ----------- ------ ----------- ----------- ----- ----------- 155,612 30,765 27,819 158,558 17,438 1,035 18,473 ----------- ------ ----------- ----- ----------- ----------- ------ ----------- ----- ----------- Less--buildings under construction designated for sale, see b. below......... 25,981 61,637 ----------- ----------- 129,631 96,921 ----------- ----------- ----------- ----------- THE COMPANY: Building under construction (including land)**....... 67,311 28,541 95,852 Machinery and equipment.... 433 254 687 42 59 101 Office furniture and equipment (including computer and peripheral equipment)............... 85 37 122 22 19 41 ----------- ----------- ----------- ----------- ----- ----------- 67,829 28,832 96,661 64 78 142 ----------- ----------- ----------- ----- ----------- ----------- ----------- ----------- ----- ----------- Less--building under construction designated for sale, see b. below... 61,637 ----------- 35,024 ----------- ----------- DEPRECIATED BALANCE AT DECEMBER 31 -------------------- 1997 1996 --------- --------- ADJUSTED NIS IN THOUSANDS -------------------- CONSOLIDATED: Building--leased out (including land)......... 43,409 44,349 Buildings under construction (including land)*................... 95,848 93,292 Machinery and equipment.... 586 391 Vehicles................... 161 79 Office furniture and equipment (including computer and peripheral equipment)............... 81 63 --------- --------- 140,085 138,174 Less--buildings under construction designated for sale, see b. below......... 61,637 25,981 --------- --------- 78,448 112,193 --------- --------- --------- --------- THE COMPANY: Building under construction (including land)**....... 95,852 67,311 Machinery and equipment.... 586 391 Office furniture and equipment (including computer and peripheral equipment)............... 81 63 --------- --------- 96,519 67,765 Less--building under construction designated for sale, see b. below... 61,637 --------- 34,882 67,765 --------- --------- --------- ---------
- ------------------------ * Including financial expenses capitalized at December 31, 1997 and 1996 -adjusted NIS 2,192,000 and adjusted NIS 2,721,000, respectively. * Including financing expenses capitalized at December 31, 1997 and 1996 -adjusted NIS 2,192,000 and adjusted NIS 1,595,000, respectively. 153 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5--FIXED ASSETS (CONTINUED): B. THE COMPANIES' RIGHTS IN REAL ESTATE ARE AS FOLLOWS:
COST ACCUMULATED -------------------- DEPRECIATION DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------------------ The Company: Land jointly leased with another company for 44 years ending October 31, 2037--the Company's share--70%(1)............................... 34,215 20,444 Building under construction, jointly owned with an interested party and another company--the Company's share-33%(2)..................... 61,637 46,867 --------- --------- Total--the Company.................................................. 95,852 67,311 --------- --------- Merkazim: Buildings (including under construction) on freehold land............. 10,133 36,118 3,221 3,029 Buildings jointly owned with an interested party--Merkazim's share--50%.......................................................... 10,152 10,152 2,429 2,260 Buildings on land leased for 49 years ending March 24, 2022-- 80% of lease fees are capitalized.......................................... 25,932 25,932 6,972 6,575 Buildings on land leased for 49 years ending March 31, 2025-- 80% of lease fees are capitalized.......................................... 5,217 5,217 1,442 1,371 Buildings on land leased for 49 years ending March 31, 2021........... 10,281 10,281 4,246 4,135 --------- --------- --------- --------- Total--Merkazim..................................................... 61,715 87,700 18,310 17,370 --------- --------- --------- --------- Total--consolidated................................................. 157,567 155,011 18,310 17,370 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) As to commitments relating to continuation of construction, see note 7a(1). (2) In February 1997, the Company entered into an agreement with an interested party regarding sale of the Company's share in a building under construction for approximately NIS 75 million. Since the construction has not yet been completed and the eventual costs of completion are not known, it is not possible to estimate the anticipated capital gain the Company will derive from this transaction. This building is presented among current assets, net of advances from purchaser--adjusted NIS 48,195,000. The registration of the Company's land in its name in the Land Registry has not yet been completed. The buildings of Merkazim are leased out for long periods (up to 8 years); the lessees of some of these buildings have been granted a purchase option realizable during, or at termination of, the lease period. 154 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6--LONG TERM BANK LOANS: A. THE LOANS ARE LINKED TO THE ISRAELI CPI AND BEAR INTEREST AT THE ANNUAL RATE OF 3.25%-4.4%. B. THE LOANS MATURE IN THE FOLLOWING YEARS AFTER THE BALANCE SHEET DATES:
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------------------ First year--current maturities........................................ 17,657 17,796 15,888 16,030 --------- --------- --------- --------- Second year........................................................... 21,794 19,479 20,012 17,995 Third year............................................................ 7,130 21,278 5,348 19,794 Fourth year........................................................... 7,130 6,774 5,348 5,289 Fifth year............................................................ 7,130 6,774 5,348 5,289 Sixth year and thereafter (through 2012).............................. 71,336 78,642 53,500 58,132 --------- --------- --------- --------- 114,520 132,947 89,556 106,499 --------- --------- --------- --------- 132,177 150,743 105,444 122,529 --------- --------- --------- --------- --------- --------- --------- ---------
C. AS TO PLEDGES TO SECURE THE LOANS AND LIMITATIONS RELATING TO THEM, SEE NOTE 7C. NOTE 7-- COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES: A. COMMITMENTS: 1) In August 1994, the Company and a third party established a joint venture for the erection of an industrial and commercial building on jointly purchased land. The Company's share in the joint venture is 70%. The estimated cost of the erection of the building is approximately $15 million, see note 5b. 2) In 1994, the Company and an interested party acquired 50% of a lot for the purpose of construction of an office building. The Company's share in this land is 33%. The construction was carried out as a joint venture between the parties. In February 1997, the Company and the other parties to the joint venture entered into an agreement for sale of the building, see note 5b(2). After the agreement was signed, the Company received notice from a third party, claiming that the Company had undertaken to lease premises in the building to that third party. The Company rejected this claim, since, in the opinion of the Company's legal counsel, the negotiations with the third party were not concluded and no legal obligation was created. 3) The Company is committed to invest approximately adjusted NIS 5,324,000 in a joint venture (see also note 3d(7)) with interested parties and others (the Company's share is 10%). The joint venture will acquire land for construction of buildings for lease. The Company's share in the cost of the buildings is approximately $30 million. 155 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-- COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES (CONTINUED): 4) In December 1996, the subsidiary New Horizons acquired real estate (intended for sale) from an interested party which holds 20% of New Horizons' shares. The selling company will be entitled to 90% of the profits from the subsequent sale of the real estate, with the balance accruing to New Horizons. The registration of the real estate in New Horizons' name in the Land Registry has not yet been completed. B. CONTINGENT LIABILITIES: 1) The Company and Merkazim have each provided guarantees to secure the long-term bank loans of the other. 2) The Company has provided a guarantee to a bank to secure a long-term loan received by Merkazim. 3) In August 1997, the Company received a land appreciation tax assessment in the amount of approximately adjusted NIS 6.8 million in respect of sale of its share in a building being erected by a joint venture to which the Company is a party. The Company is contesting this assessment. Since the difference between the amount of tax under the Company's own assessment and the assessment of the tax authorities is mainly due to non-recognition of future construction expenses, management is of the opinion that the Company will not incur additional expenses in respect of this assessment. Therefore, the Company did not make any further provision in its accounts in respect of this assessment. 4) In June 1997, Merkazim received an assessment from the land appreciation tax authorities for adjusted NIS 1,661,000 in respect of sale of an asset in Kiryat Arieh in Petah Tikva. Merkazim is contesting this assessment. Since the difference between the amount of tax under Merkazim's own assessment and the assessment of the tax authorities is mainly due to non-recognition of future construction expenses, management is of the opinion that Merkazim will not incur additional expenses in respect of this assessment. Therefore, Merkazim did not make any further provision in its accounts in respect of this assessment. 5) In March 1995, a lawsuit for a commission of approximately adjusted NIS 640,000 in respect of acquisition of real estate was brought against the Company. In management's opinion, this suit is without merit, so that the Company will not incur any expenses in respect thereof. Therefore, the Company did not make any provision in respect of the claim. 6) The Company has provided guarantees for 10% of the debts of an associated Company to banks. The guarantee is limited to adjusted NIS 106 million ($ 30 million), see a(3) above and note 3d(7). C. PLEDGES AND RESTRICTIONS IN RESPECT OF LIABILITIES: 1) To secure repayment of long-term and short-term loans from a bank in a total amount at Decmber 31, 1997 of adjusted NIS 106,964,000--consolidated and adjusted NIS 80,221,000--the Company, the Company and Merkazim have undertaken the following obligations towards the bank: a) Any amount due the Company or Merkazim from their investment in the associated company, Mivnat, will be first used to repay the loans. 156 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-- COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES (CONTINUED): b) The Company's shareholders' equity will not fall below adjusted NIS 65 million, the total consolidated liabilities will not go over 3.25 times the shareholders' equity and the annual net income will not fall below an average of adjusted NIS 6.3 million for the three preceding years. 2) Limitations similar to those mentioned in (1) (b) above, but with different amounts, were also imposed on other shareholders of Mivnat in respect of the loans they received. If they do not uphold the limitations, the lenders will consider it a breach of the terms of the loans by the Company as well. 3) Furthermore, the Company, Merkazim and other shareholders in Mivnat (interested parties) have assured the bank that their holdings in Mivnat will not at any time fall below 50% of the issued and paid share capital of Mivnat. They also agreed, among other things to ensure that Mivnat holds directly, at all times, not less than 50.1% of the issued share capital of Industrial Buildings. The bank agreed that, subject to certain conditions, the holding of Mivnat in Industrial Buildings may fall, but not below 37% (fully diluted). 4) To further secure repayment of the loans, the Company and Merkazim have mortgaged all their assets and rights in Mivnat. 5) To secure repayment of long and short-term bank loans, designated for financing a building under cosntruction in Netanya, the balance of which is adjusted NIS 4,212,000 as of December 31, 1997, the Company mortgaged its rights in the building. NOTE 8--SHARE CAPITAL Composed at December 31, 1997 and 1996 as follows:
NUMBER OF SHARES AMOUNT IN NIS ---------------------- ----------------------- ISSUED ISSUED AUTHORIZED AND PAID AUTHORIZED AND PAID ----------- --------- ----------- ---------- Ordinary shares of NIS 0.001 par value............................ 160,000 100,000 160.0000 100.0000 ----------- --------- ----------- ---------- ----------- --------- ----------- ---------- Deferred shares of NIS 0.0001 par value*.......................... 3 3 0.0003 0.0003 ----------- --------- ----------- ---------- ----------- --------- ----------- ----------
- ------------------------ * The deferred shares confer upon their holders the right to receive their par value upon liquidation of the Company. NOTE 9--TAXES ON INCOME: A. MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985 Under this law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli CPI. The Company and its Israeli subsidiaries are taxed under this law. 157 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--TAXES ON INCOME (CONTINUED): B. DEFERRED INCOME TAXES: 1) The composition of the deferred taxes, and the changes therein during the reported years, are as follows:
CONSOLIDATED THE COMPANY ------------------------------------------------------ ---------------------------- BUILDINGS BUILDINGS UNDER UNDER CONSTRUCTION, MARKETABLE CONSTRUCTION, MARKETABLE NET OF SECURITIES NET OF SECURITIES DEPRECIABLE ADVANCES CLASSIFIED ADVANCES CLASSIFIED FIXED FROM AS "FIXED FROM AS "FIXED ASSETS* PURCHASERS ASSETS" TOTAL PURCHASERS ASSETS" ------------- ------------- ------------- --------- ------------- ------------- ADJUSTED NIS IN THOUSANDS ------------------------------------------------------------------------------------ Balance at January 1, 1996............ 1,128 1,182 2,310 1,182 Changes in 1996--amounts carried to income.............................. 261 (4,921) (234) (4,894) (234) ----- ------ ----- --------- ----- Balance at December 31, 1996.......... 1,389 (4,921) 948 (2,584) 948 Changes in 1997--amounts carried to income.............................. (241) 161 1,917 1,837 (4,760) 1,917 ----- ------ ----- --------- ------ ----- Balance at December 31, 1997.......... 1,148 (4,760) 2,865 (747) (4,760) 2,865 ----- ------ ----- --------- ------ ----- ----- ------ ----- --------- ------ ----- TOTAL --------- Balance at January 1, 1996............ 1,182 Changes in 1996--amounts carried to income.............................. (234) --------- Balance at December 31, 1996.......... 948 Changes in 1997--amounts carried to income.............................. (2,843) --------- Balance at December 31, 1997.......... (1,895) --------- ---------
- ------------------------ * Taking into account the provisions of Opinion 40 of the Israeli Institute, see c. below. 2) Deferred taxes are presented in the balance sheets as follows:
CONSOLIDATED THE COMPANY -------------------- ---------------------- DECEMBER 31 DECEMBER 31 -------------------- ---------------------- 1997 1996 1997 1996 --------- --------- --------- ----- ADJUSTED NIS IN THOUSANDS -------------------------------------------- Among current liabilities (current assets)................. (1,895) (3,973) (1,895) 948 Among long-term liabilities................................ 1,148 1,389 --------- --------- --------- --- Balance--net*.............................................. (747) (2,584) (1,845) 948 --------- --------- --------- --- --------- --------- --------- ---
- ------------------------ * Realization of this deferred tax balance is conditional upon earning, in the coming years, taxable income in an appropriate amount. 3) The deferred taxes are computed at the rate of 36%. C. UNDEPRECIATED BALANCE OF COST OF FIXED ASSETS--THE PORTION IN RESPECT OF WHICH DEFERRED TAXES HAVE NOT BEEN PROVIDED The balance of undepreciated cost of certain depreciable fixed assets includes the amounts detailed below which will not be allowed for tax purposes by way of depreciation or as cost upon realization of 158 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--TAXES ON INCOME (CONTINUED): the assets. These amounts are regarded as permanent differences (in respect of which no deferred taxes are to be provided) in accordance with Opinion 40 of the Israeli Institute:
CONSOLIDATED -------------------- 1997 1996 --------- --------- ADJUSTED NIS IN THOUSANDS -------------------- Balance at beginning of year............................................... 22,998 23,502 Decrease in the above balance due to depreciation charge for the year...... (4,301) (504) --------- --------- Balance at end of year..................................................... 18,697 22,998 --------- --------- --------- ---------
D. TAXES ON INCOME INCLUDED IN THE INCOME STATEMENTS: 1) As follows:
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- Consolidated: Current......................................................... 29,170 11,037 4,062 Deferred, see also b. above..................................... 1,837 (4,894) (600) --------- --------- --------- 31,007 6,143 3,462 --------- --------- --------- --------- --------- --------- The Company: Current......................................................... 28,460 5,448 3,468 Deferred, see also b. above..................................... (2,843) (234) (735) --------- --------- --------- 25,617 5,214 2,733 --------- --------- --------- --------- --------- ---------
Current taxes are computed at the tax rates applicable to companies: 1997 and 1996--36%; 1995-- 37%. 2) Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see (1) above), and the actual tax expense:
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- Consolidated: Income before taxes on income as reported in the income statements................. 139,460 35,033 9,085 Less--share in profits of associated companies--net................................ 8,608 11,209 3,481 --------- --------- --------- Balance--income.................................................................... 130,852 23,824 5,604 --------- --------- --------- --------- --------- --------- Theoretical tax expense............................................................ 47,107 8,577 2,073 Increase (decrease) in taxes resulting from permanent differences--the tax effect: Disallowable deductions.......................................................... 2,113 3,626 628
159 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--TAXES ON INCOME (CONTINUED):
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- Taxes on dividends received from associated company.............................. 276 1,767 896 Income taxed at different tax rates: Gain from sale of a building................................................... 1,919 Gain on sale of shares in an associated company................................ (18,005) (1,582) Tax exempt income--decrease in shareholding in associated companies following issuance of their shares to a third party...................................... (2,427) (7,239) (245) Sundry--net*..................................................................... 24 994 (67) Increase in taxes in respect of inflationary deduction and tax losses incurred in the reported year for which deferred taxes were not provided..................... 177 --------- --------- --------- Taxes on income for the reported year.............................................. 31,007 6,143 3,462 --------- --------- --------- --------- --------- --------- The Company: Income before taxes on income, as reported in the income statements................ 134,070 34,104 8,356 Less--profits of subsidiaries and share in profits of associated companies--net.... 12,420 11,270 4,328 --------- --------- --------- Balance--income.................................................................... 121,650 22,834 4,028 --------- --------- --------- --------- --------- --------- Theoretical tax expense............................................................ 43,794 8,220 1,490 Increase (decrease) in taxes resulting from permanent differences--the tax effect: Disallowable deductions.......................................................... 2,063 2,538 452 Taxes on dividends received from associated company.............................. 207 1,308 701 Income taxed at different tax rate--gain from sale of associated company......... (18,005) (1,582) Tax exempt income--decrease in shareholding in associated companies following issuance of their shares to a third party...................................... (2,427) (7,239) (245) Sundry--net*..................................................................... (15) 1,969 65 Increase in taxes in respect of inflationary deduction and tax losses incurred in the reported year for which deferred taxes were not provided..................... 270 --------- --------- --------- Taxes on income for the reported year.............................................. 25,617 5,214 2,733 --------- --------- --------- --------- --------- ---------
- ------------------------ * Resulting mainly from the difference in computation of linkage to the Israeli CPI for financial statement and tax purposes. 160 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--TAXES ON INCOME (CONTINUED): E. TAX LIABILITY RELATING TO LONG-TERM LEASE OF BUILDINGS In March 1993, Merkazim notified the tax authorities that it has leased buildings for a ten year period and that options to extend the leases for a further ten year period or to purchase the property at the end of the original lease period were granted to companies related to the original lessees at the time of signing the leases. The Company received a legal opinion stating that the above leases are subject to income tax and not land appreciation tax. Merkazim reported to the tax authorities on this basis. Based on the abovementioned legal opinion, management of Merkazim is of the opinion that no additional tax liability will arise in respect of this matter. F. TAX ASSESSMENTS The Company has received final tax assessments through tax year 1995. Maoz has received final tax assessments through tax year 1990. Ophir Financing Ltd. has received final tax assessments through tax year 1987. Merkazim has received final tax assessments through tax year 1995. New Horizons has not been assessed for tax purposes since incorporation. 161 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES: A. TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES:
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- Income (expenses): Consolidated: Lease fees for buildings--from interested parties (1).............................. 3,180 3,243 3,174 --------- --------- --------- --------- --------- --------- Interest accrued on a capital note of an associated company........................ 126 181 263 --------- --------- --------- --------- --------- --------- Management fees from an associated company......................................... 1,272 1,192 1,017 --------- --------- --------- --------- --------- --------- General and administrative expenses: Management fees to shareholders (2 companies) (2) (3).......................... (1,076) (9,884) (984) --------- --------- --------- --------- --------- --------- Lease fees in respect of Validor Hotel in Herzlia (1)............................ (164) (779) Less--income from sublease of the above hotel to a bank-interested party (1)..... 164 779 --------- --------- --------- --------- -,- -,- --------- --------- --------- --------- Financial expenses--to a bank-interested party--net................................ 398 (369) (140) --------- --------- --------- --------- --------- --------- Salary to related party employed by the Company.................................... 1,006 --------- --------- 1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- The Company: Interest accrued on a capital note of an associated company.......................... 126 181 263 --------- --------- --------- --------- --------- --------- Management fees from a subsidiary and an associated company.......................... 1,182 1,103 1,105 --------- --------- --------- --------- --------- --------- General and administrative expenses: Lease fees in respect of Validor Hotel in Herzlia (1).............................. (164) (779) Less--income from sublease of the above hotel to a bank-interested party (1)....... 164 779 --------- --------- -,- -,- --------- --------- --------- --------- Financial expenses--to a bank-interested party--net.................................. (407) (369) (140) --------- --------- --------- --------- --------- --------- Salary to related party employed by the Company...................................... 1,006 --------- ---------
- ------------------------ (1) In management's opinion, the lease fees are similar to those generally prevailing for similar leases. (2) See also note 1a(1). (3) The management fees are paid at the end of each quarter in a fixed amount linked to the Israeli CPI in accordance with a shareholders' agreement. As to agreement for sale of building to an interested party, see note 5b(2). 162 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES (CONTINUED): As to other transactions with, and commitments to, interested parties, see note 7. B. BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES: 1) Current receivables:
DECEMBER 31 -------------------- 1997 1996 --------- --------- ADJUSTED NIS IN THOUSANDS -------------------- Consolidated: a) Cash and cash equivalents: Balance at balance sheet date.......................................................... 35,559 145 --------- --------- --------- --------- Highest balance during the year.............................................................. 68,905 4,334 --------- --------- --------- --------- b) Short-term loans to associated companies*............................................. 12,216 9,616 --------- --------- --------- --------- The Company: a) Cash and cash equivalents: Balance at balance sheet date.......................................................... 35,319 138 --------- --------- --------- --------- Highest balance during the year.............................................................. 68,828 4,270 --------- --------- --------- --------- b) Short-term loans to associated companies and subsidiaries*............................ 37,501 54,225 --------- --------- --------- ---------
- ------------------------ As to current balances with associated companies, see note 12b. * The loans are linked to the Israeli CPI and bear annual interest at the rate of 4%-5%. 2) Capital notes from shareholders The capital notes were unlinked and bore annual interest of NIS 1. They were repaid on January 1, 1997. 3) Current liabilities--short-term loans from shareholders At December 31, 1996, the loans were linked to the Israeli CPI and bore interest at the annual rate of 2.9%-4%. The loans were repaid during 1997. 4) Long-term liabilities--payables in respect of acquisition of land--business inventory--the liability is linked to the Israeli CPI and bears no interest. C. As to the land designated for building--jointly owned with an interested party, see note 5b. D. As to investments in associated companies, some of which are interested parties, see note 3. E. As to investments in quoted shares of an interested party, see note 12a. F. In the ordinary course of business, the Company carries out transactions with entities that are, or could be, included in the definition of interested parties because of their connection with a bank that is an 163 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES (CONTINUED): interested party in the Company. In view of the above, it is impractical to record the transactions with such entities separately and, therefore, no information thereon is given in these financial statements. Management is of the opinion, in view of Company procedures and their implementation, that such transactions were carried out in the ordinary course of business and at prices and credit terms that do not differ from those generally prevailing on the market. NOTE 11--LINKAGE OF MONETARY BALANCES: A. AS FOLLOWS:
DECEMBER 31, 1997 ---------------------------------------------- IN, OR LINKED TO LINKED THE TO THE U.S. DOLLAR ISRAELI CPI UNLINKED TOTAL ----------- ----------- --------- --------- ADJUSTED NIS IN THOUSANDS ---------------------------------------------- Consolidated: Assets: Current assets: Cash and cash equivalents.................................... 9,896 29,260 39,156 Short-term loans receivable from associated companies........ 12,216 12,216 Short-term investments....................................... 5,177 150 5,327 Accounts receivable.......................................... 3,626 3,626 Long-term bank deposit......................................... 10,353 10,353 ----------- ----------- --------- --------- 9,896 27,746 33,036 70,678 ----------- ----------- --------- --------- ----------- ----------- --------- --------- Liabilities: Current liabilities: Short-term bank credit....................................... 4,222 4,222 Accounts payable and accruals................................ 7,206 7,206 Dividend payable............................................. 25,000 25,000 Long-term liabilities: Payables in respect of acquisition of land--business inventory.................................................. 12,026 12,026 Long-term bank loans (including current maturities).......... 132,177 132,177 ----------- --------- --------- 148,425 32,206 180,631 ----------- --------- --------- ----------- --------- ---------
164 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11--LINKAGE OF MONETARY BALANCES (CONTINUED):
DECEMBER 31, 1997 ---------------------------------------------- IN, OR LINKED TO LINKED THE TO THE U.S. DOLLAR ISRAELI CPI UNLINKED TOTAL ----------- ----------- --------- --------- ADJUSTED NIS IN THOUSANDS ---------------------------------------------- The Company: Assets: Current assets: Cash and cash equivalents.................................... 9,896 28,967 38,863 Short-term loans receivable from associated companies and from subsidiaries.......................................... 37,501 37,501 Short-term investments....................................... 5,177 150 5,327 Accounts receivable.......................................... 555 555 Long-term bank deposit......................................... 10,353 10,353 ----------- ----------- --------- --------- 9,896 53,031 29,672 92,599 ----------- ----------- --------- --------- ----------- ----------- --------- --------- Liabilities: Current liabilities: Short-term bank credit......................................... 4,212 4,212 Accounts payable and accruals.................................. 6,789 6,789 Dividend payable............................................... 25,000 25,000 Long-term bank loans (including current maturities).............. 105,444 105,444 ----------- --------- --------- ----------- --------- --------- 109,656 31,789 141,445 ----------- --------- --------- ----------- --------- ---------
B. DATA REGARDING THE EXCHANGE RATE AND THE ISRAELI CPI:
EXCHANGE RATE OF ONE ISRAELI U.S.DOLLAR CPI* --------------- -------------- At end of year: 1997........................................................................... NIS 3.536 153.1 points 1996........................................................................... NIS 3.251 143.1 points 1995........................................................................... NIS 3.135 129.4 points 1994........................................................................... NIS 3.018 119.7 points Increase during the year: 1997........................................................................... 8.8% 7.0% 1996........................................................................... 3.7% 10.6% 1995........................................................................... 3.9% 8.1%
- ------------------------ * Based on the index for the month ending on each balance sheet date, on the basis of 1993 average = 100. 165 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: BALANCE SHEETS:
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------------------- A. SHORT-TERM INVESTMENTS: DSP Group, Inc. -quoted shares........................................... 5,485 5,485 Quoted shares of an interested party..................................... 150 102 150 102 Bank deposit*............................................................ 5,177 5,177 --------- --------- --------- --------- 5,327 5,587 5,327 5,587 --------- --------- --------- --------- --------- --------- --------- --------- B. ACCOUNTS RECEIVABLE: Associated companies..................................................... 134 671 134 671 Other.................................................................... 3,492 2,730 421 421 --------- --------- --------- --------- 3,626 3,401 555 1,092 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * The deposit is linked to the Israeli CPI and bears annual interest at the rate of 4.55%. C. LONG-TERM BANK DEPOSIT The deposit is linked to the Israeli CPI, bears annual interest at the rate of 4.5% and is repayable in twelve equal quarterly payments beginning September 1999.
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------------------ D. BANK CREDIT: Short-term credit*....................................................... 4,222 27,316 4,212 26,938 Current maturities of long-term loans, see note 6........................ 17,657 17,796 15,888 16,030 --------- --------- --------- --------- 21,879 45,112 20,100 42,968 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * The interest rate at December 31, 1997 is 5.32%. 166 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (CONTINUED): E. ACCOUNTS PABYABLE AND ACCRUALS:
CONSOLIDATED THE COMPANY -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------------------ Trade...................................................................... 1,578 2,081 1,578 1,571 Accrued expenses........................................................... 1,457 167 1,040 64 Government of Israel....................................................... 222 3,826 222 2,430 Other...................................................................... 9,084 6,227 9,084 38 --------- --------- --------- --------- 12,341 12,301 11,924 4,103 --------- --------- --------- --------- --------- --------- --------- ---------
F. CONCENTRATIONS OF CREDIT RISKS The group's cash and cash equivalents, short-term investments and long-term deposit at December 31, 1997 and 1996 were deposited with Israeli banks. G. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the group consist of non-derivative assets and liabilities (including shareholders' equity items, long-term bank deposits and long-term liabilities). In view of their nature, the fair value of financial instruments included in the working capital of the group is usually identical or close to their carrying value. The fair value of long-term liabilities also approximates the carrying value, since they bear interest at rates close to prevailing market rates. As to the fair value of investments in associated companies the securities of which are marketable, see note 3. STATEMENTS OF INCOME:
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- H. GENERAL AND ADMINISTRATIVE EXPENSES: Consolidated: Management fees (mainly to shareholders)........................................... 1,076 1,021 1,064 Payroll and related expenses....................................................... 2,168 Office rent and maintenance........................................................ 263 444 235 Professional fees.................................................................. 702 227 286 Other.............................................................................. 274 485 237 --------- --------- --------- 4,483 2,177 1,822 --------- --------- --------- --------- --------- --------- The Company: Payroll and related expenses....................................................... 1,006 Office rent and maintenance........................................................ 263 323 144 Professional fees.................................................................. 490 108 158 Other.............................................................................. 101 47 89 --------- --------- --------- 1,860 478 391 --------- --------- --------- --------- --------- ---------
167 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (CONTINUED):
1997 1996 1995 --------- --------- --------- ADJUSTED NIS IN THOUSANDS ------------------------------- I. FINANCIAL EXPENSES--NET: Consolidated: Expenses: In respect of long-term loans.................................................... 7,923 6,427 6,299 In respect of short-term bank credit............................................. 1,739 2,455 1,603 In respect of short-term loans from shareholders................................. 171 1,444 1,134 Other............................................................................ 141 Less--financial expenses capitalized to cost of buildings under construction..... (597) (1,412) (1,159) --------- --------- --------- 9,377 8,914 7,877 --------- --------- --------- Income: In respect of long-term bank deposit............................................... 418 In respect of and short-term loans to associated companies......................... 2,518 569 773 Other.............................................................................. 857 256 490 --------- --------- --------- 3,793 825 1,263 --------- --------- --------- 5,584 8,089 6,614 --------- --------- --------- --------- --------- --------- The Company: Expenses: In respect of long-term bank loans............................................... 5,116 5,190 4,959 In respect of short-term bank credit............................................. 1,729 2,420 1,603 In respect of short-term loans from shareholders................................. 171 1,444 1,032 Other............................................................................ 913 843 727 Less--financial expenses capitalized to cost of buildings under construction..... (597) (904) (691) --------- --------- --------- 7,332 8,993 7,630 --------- --------- --------- Income: In respect of long-term bank deposit............................................... 418 In respect of short-term loans to subsidiaries and associated companies............ 3,546 2,425 2,449 --------- --------- --------- 3,964 2,425 2,449 --------- --------- --------- 3,368 6,568 5,181 --------- --------- --------- --------- --------- ---------
168 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (continued) NOTE 13--NOMINAL DATA OF THE COMPANY: A. BALANCE SHEET DATA:
NOMINAL NIS IN THOUSANDS -------------------- DECEMBER 31 -------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents................................................................. 38,863 1,960 Short-term loans receivable from associated companies and subsidiaries.................... 37,501 50,683 Short-term investments.................................................................... 5,327 5,222 Accounts receivable....................................................................... 555 1,021 Building under construction, net of advances from purchaser............................... 9,157 Capital notes from shareholders........................................................... 8,000 --------- --------- 91,403 66,886 --------- --------- Investments: Associated companies...................................................................... 122,206 139,557 Other companies........................................................................... 4,379 8,213 Long-term bank deposit.................................................................... 10,353 --------- --------- 136,938 147,770 --------- --------- Fixed assets, net of accumulated depreciation............................................... 32,474 59,140 --------- --------- 260,815 273,796 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank credit............................................................................... 20,100 40,161 Short-term loans from shareholders........................................................ 34,894 Accounts payable and accruals............................................................. 11,924 3,971 Dividend payable.......................................................................... 25,000 Deferred income taxes..................................................................... 2,865 884 --------- --------- 59,889 79,910 --------- --------- Long-term liabilities: Bank loans (net of current maturities).................................................... 89,556 99,545 Excess of Company share in losses of subsidiaries over the investment therein............. 20,190 26,304 --------- --------- 109,746 125,849 --------- --------- Total liabilities....................................................................... 169,635 205,759 Shareholders' equity, see c. below.......................................................... 91,180 68,037 --------- --------- 260,815 273,796 --------- --------- --------- ---------
169 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13--NOMINAL DATA OF THE COMPANY: (CONTINUED) B. OPERATING RESULTS DATA:
NOMINAL NIS IN THOUSANDS ------------------------------- 1997 1996 1995 --------- --------- --------- Revenues and gains: Share in profits of associated companies--net..................................... 9,812 7,723 *2,177 Profits of subsidiaries--net...................................................... 6,102 Gain on dilution of holding in associated companies resulting from issuance of shares to a third party--net.................................................... 6,539 18,356 1,160 Gain from sale of investments in associated companies............................. 121,787 12,883 Gain from sale and increase in value of marketable securities--net................ 7,102 8,078 Dividend received from another company............................................ 351 104 241 Management fees from associated company and from a subsidiary..................... 1,161 994 896 --------- --------- --------- 152,854 40,060 12,552 --------- --------- --------- Expenses and losses: Losses of subsidiaries--net....................................................... 4,082 2,353 Write-down of investment in other companies....................................... 5,600 2,500 1,000 General and administrative expenses............................................... 1,828 432 316 Loss from decrease in value of quoted shares--net................................. 1,748 Financial expenses--net........................................................... 6,362 14,622 10,315 --------- --------- --------- 13,790 23,384 13,984 --------- --------- --------- Income (loss) before taxes on income................................................ 139,064 16,676 (1,432) Taxes on income..................................................................... 25,921 5,000 2,500 --------- --------- --------- Net income (loss) for the year--nominal............................................. 113,143 11,676 (3,932) --------- --------- --------- --------- --------- ---------
- ------------------------ * Restated, see note 1o. 170 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13--NOMINAL DATA OF THE COMPANY: (CONTINUED) C. CHANGES IN SHAREHOLDERS' EQUITY:
NOMINAL NIS IN THOUSANDS ------------------------------------------------ SHARE CAPITAL RETAINED CAPITAL SURPLUS EARNINGS TOTAL ------ --------- ---------- ---------- Balance at January 1, 1995.............................................. * 31,084 29,209 60,293 Changes during 1995--loss............................................... **(3,932) **(3,932) - --------- ---------- ---------- Balance at December 31, 1995............................................ * 31,084 25,277 56,361 Changes during 1996--net income......................................... 11,676 11,676 - --------- ---------- ---------- Balance at December 31, 1996............................................ * 31,084 36,953 68,037 Changes during 1997: Net income............................................................ 113,143 113,143 Dividend.............................................................. (90,000) (90,000) - --------- ---------- ---------- Balance at December 31, 1997............................................ * 31,084 60,096 91,180 - - --------- ---------- ---------- --------- ---------- ----------
- ------------------------ * Represents an amount less than nominal NIS 1,000. ** Restated, see note 1o. NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: A. GENERAL: 1) As stated in note 1b, the primary financial statements of the Company are drawn up in Israeli currency adjusted for the changes in the Israeli CPI. For incorporation in the financial statements of the Company's U.S. shareholder, Ampal-American Israel Corporation ("Ampal"), the Company also prepared these special condensed consolidated financial statements (hereafter--the special statements), see below. 2) Through December 31, 1992, Ampal translated the nominal Israeli currency data of the Company on the basis of which the primary financial statements were prepared into dollars for the purpose of inclusion in its financial statements. The translation was made in accordance with the principles of remeasurement set forth in Statement of Financial Accounting Standard ("SFAS") No. 52 of the Financial Accounting Standards Board of the United States ("FASB") for entities operating in a highly inflationary economy. The rate of inflation in Israel has decreased considerably in recent years. In view of the above, in 1993, Ampal decided that translation into dollars should be made in accordance with the principles applicable to economies no longer considered highly inflationary. 3) These special statements have been prepared for the purpose of translation into dollars and inclusion in the Ampal consolidated financial statements in accordance with instructions of Ampal, as follows: (a) The special statements are drawn up in Israeli currency (NIS) terms. 171 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED) (b) For determining the applicable Israeli currency balances as of January 1, 1993, non-monetary assets and shareholders' equity items at December 31, 1992 were remeasured into dollars and translated into Israeli currency at the dollar exchange rate as of that date ($1 = NIS 2.764). (c) Transactions that took place after January 1, 1993 are reflected in the special statements in their original nominal NIS values. (d) The financial data of associated companies, the financial statements of which are drawn up in dollars, were translated into Israeli currency at the exchange rate at December 31 of each year. (e) Adjustments required to make the data to conform with U.S. generally accepted accounting principles ("GAAP") have been made. 4) For the convenience of Ampal, these special statements have been translated into dollars in accordance with the principles set forth in SFAS 52. 172 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED) B. FOLLOWING ARE THE SPECIAL STATEMENTS: 1) Consolidated balance sheets at December 31, 1997 and 1996
TRANSLATED INTO U.S. DOLLARS, NEW ISRAELI SHEKELS SEE A(4) ABOVE -------------------- -------------------- DECEMBER 31 DECEMBER 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- IN THOUSANDS IN THOUSANDS -------------------- -------------------- ASSETS Current assets: Cash and cash equivalents............................................. 39,156 1,970 11,074 606 Short-term loans receivable from associated companies................. 12,216 8,988 3,455 2,765 Short-term investments................................................ 27,419 5,222 7,754 1,606 Accounts receivable................................................... 3,626 3,179 1,026 978 Building under construction, net of advances from purchaser........... 57,225 10,465 16,183 3,219 Capital notes from shareholder........................................ 8,000 2,461 Deferred income taxes................................................. 3,716 1,143 --------- --------- --------- --------- 139,642 41,540 39,492 12,778 --------- --------- --------- --------- Land--business inventory................................................ 12,514 3,539 --------- --------- Investments: Associated companies.................................................. 139,987 171,594 39,589 52,782 Other companies....................................................... 4,379 8,213 1,238 2,526 Bank deposit.......................................................... 10,353 2,928 --------- --------- --------- --------- 154,719 179,807 43,755 55,308 --------- --------- --------- --------- Fixed assets, net of accumulated depreciation........................... 6,757 82,259 1,911 25,303 --------- --------- --------- --------- 313,632 303,606 88,697 93,389 --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank credit........................................................... 21,879 42,166 6,188 12,970 Short-term loans from shareholders.................................... 34,894 10,733 Accounts payable and accruals......................................... 7,207 11,644 2,038 3,580 Dividend payable...................................................... 25,000 7,070 Deferred income taxes................................................. 10,490 2,967 --------- --------- --------- --------- 64,576 88,704 18,263 27,283 --------- --------- --------- --------- Long-term liabilities: Payables in respect of acquisition of land--business inventory........ 12,026 11,004 3,401 3,385 Bank loans (net of current maturities)................................ 114,520 124,265 32,387 38,223 Deferred income taxes................................................. 8,638 7,947 2,443 2,447 --------- --------- --------- --------- 135,184 143,216 38,231 44,055 --------- --------- --------- --------- Total liabilities................................................... 199,760 231,920 56,494 71,338 Shareholders' equity.................................................... 113,872 71,686 32,203 22,051 --------- --------- --------- --------- 313,632 303,606 88,697 93,389 --------- --------- --------- --------- --------- --------- --------- ---------
173 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED) 2) Consolidated income statements for the years ended 1997, 1996 and 1995:
TRANSLATION INTO U.S. DOLLARS NEW ISRAELI SHEKELS SEE A(4) ABOVE ------------------------------- ------------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- --------- ADJUSTED NIS IN THOUSANDS IN THOUSANDS ------------------------------- ------------------------------- Revenues and gains: From lease of buildings..................................... 5,505 5,072 4,453 1,596 1,591 1,438 Share in profits of associated companies--net............... 7,323 9,773 *2,774 2,123 2,264 *169 Gain from sale of building.................................. 23,196 6,725 Gain on dilution of holding in an associated companies resulting from sale and issuance of shares to a third party--net................................................ 118,402 30,395 1,160 32,954 9,536 385 Gain from sale and increase in value of marketable securities--net........................................... 31,729 8,078 9,196 2,682 Dividend received from another company...................... 351 104 241 102 33 80 Management fees from associated companies................... 1,250 1,074 100 363 337 33 --------- --------- --------- --------- --------- --------- 187,756 46,418 16,806 53,059 13,761 4,787 --------- --------- --------- --------- --------- --------- Expenses and losses: Depreciation of buildings................................... 15 5 Write-down of investment in other companies................. 5,547 2,500 1,000 1,608 784 331 Loss from decrease in value of quoted shares................ 1,748 549 General and administrative expenses......................... 4,699 2,100 1,477 1,362 659 490 Financial expenses--net..................................... 11,562 22,762 16,008 3,352 7,141 5,327 --------- --------- --------- --------- --------- --------- 21,808 29,110 18,500 6,322 9,133 6,153 --------- --------- --------- --------- --------- --------- Income (loss) before taxes on income.......................... 165,948 17,308 (1,694) 46,737 4,628 (1,366) Taxes on income............................................... (33,762) (11,637) (3,000) (9,788) (3,651) (953) --------- --------- --------- --------- --------- --------- Net income (loss) for the year................................ 132,186 5,671 (4,694) 36,949 977 (2,319) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * Restated, see note 1o. 174 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED) 3) Statements of changes in shareholders' equity for the years ended December 31, 1997, 1996 and 1995:
NEW ISRAELI SHEKELS ---------------------------------------------- SHARE SHARE RETAINED CAPITAL PREMIUM EARNINGS TOTAL ----------- ----------- --------- --------- IN THOUSANDS ------------ Balance at January 1, 1995.............................................. 434 31,220 39,055 70,709 Changes during 1995--loss............................................... *(4,694) *(4,694) --- ----------- --------- --------- Balance at December 31, 1995............................................ 434 31,220 34,361 66,015 Changes during 1996--net income......................................... 5,671 5,671 --- ----------- --------- --------- Balance at December 31, 1996............................................ 434 31,220 40,032 71,686 Changes during 1997: Net income............................................................ 132,186 132,186 Dividend.............................................................. (90,000) (90,000) --- ----------- --------- --------- Balance at December 31, 1997............................................ 434 31,220 82,218 113,872 --- ----------- --------- --------- --- ----------- --------- ---------
- ------------------------ * Restated, see note 1o.
TRANSLATED INTO U.S. DOLLARS, SEE A(4) ABOVE ----------------------------------------------------------- SHARE SHARE RETAINED TRANSLATION CAPITAL PREMIUM EARNINGS DIFFERENCES TOTAL ----------- ----------- --------- ----------- --------- IN THOUSANDS ------------ Balance at January 1, 1995.................................. 157 10,477 13,351 (556) 23,429 Changes during 1995: Loss...................................................... *(2,319) *(2,319) Translation differences................................... (53) (53) --- ----------- --------- ----------- --------- Balance at December 31, 1995................................ 157 10,477 11,032 (609) 21,057 Changes during 1996: Net income................................................ 977 977 Translation differences................................... 17 17 --- ----------- --------- ----------- --------- Balance at December 31, 1996................................ 157 10,477 12,009 (592) 22,051 Changes during 1997: Net income................................................ 36,949 36,949 Dividend.................................................. (25,028) (25,028) Translation differences................................... (1,769) (1,769) --- ----------- --------- ----------- --------- Balance at December 31, 1997................................ 157 10,477 23,930 (2,361) 32,203 --- ----------- --------- ----------- --------- --- ----------- --------- ----------- ---------
- ------------------------ * Restated, see note 1o. 175 OPHIR HOLDINGS LTD. (AN ISRAELI CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED) 4) Reconciliation of nominal/historical net income and shareholders' equity under Israeli generally accepted accounting principles (GAAP) to U.S. GAAP:
NEW ISRAELI SHEKELS ------------------------------- 1997 1996 1995 --------- --------- --------- IN THOUSANDS ------------ (a) Net income (loss) for the year: Net income (loss)--historical/nominal amount (see note 13)................ 113,143 11,676 *(3,932) --------- --------- --------- Reconciliation to U.S. GAAP: Effect of application of principles applicable to economies no longer considered highly inflationary: Depreciation.......................................................... (456) (405) (384) Share in profits of associated companies.............................. 5,573 1,193 (378) Deferred income taxes................................................. (3,939) (6,793) Other: Gain from increase in value of shares which are presented as trading securities while in the Israeli GAAP financial statements the investment in those shares are accounted for by the equity method..... 11,109 Gain from sale of building--net......................................... 6,756 --------- --------- --------- 19,043 (6,005) (762) --------- --------- --------- Net income (loss) for the year, as per (2) above............................ 132,186 5,671 *(4,694) --------- --------- --------- --------- --------- --------- (b) Shareholders' equity at December 31, 1997, 1996 and 1995: Shareholders' equity--historical/ nominal amount (see note 13)............ 91,180 68,037 *56,361 Reconciliation to U.S. GAAP: Effect, at beginning of year, of application of principles applicable to economies no longer considered highly inflationary.................... 3,649 9,654 10,416 Effect of reconciliation of net income for the year to U.S. GAAP (see(a) above)................................................................ 19,043 (6,005) (762) --------- --------- --------- Shareholders' equity, as per (3) above...................................... 113,872 71,686 66,015 --------- --------- --------- --------- --------- ---------
- ------------------------ * Restated, see note 1o. 176 [Letterhead of Deloitte Touche Tohmatsu-Igal Brightman & Co.] AUDITORS' REPORT TO THE SHAREHOLDERS ------------------------------------ OF AM-HAL LTD. -------------- We have audited the accompanying balance sheets of Am-Hal Ltd. ("the Company") as of December 31, 1997 and 1996 and the consolidated balance sheet as of December 31, 1997, and the related statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and on a consolidated basis for the year ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a partnership, whose assets constitute approximately 11% of consolidated total assets as of December 31 1997. The financial statements of the partnership were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included in respect of the aforementioned partnership is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance) - 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost, adjusted for changes in the general purchasing power of the Israeli currency in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. In our opinion, based on our audits and the reports of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and on a consolidated basis as of December 31, 1997 and the results of its operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and on a consolidated basis for the year ended December 31, 1997, in accordance with generally accepted accounting principles. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all of the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. /s/ Igal Brightman & Co. Igal Brightman & Co. Certified Public Accountants 177 [LETTERHEAD of Shlomo Ziv & Co.] AUIDITORS' REPORT TO THE SHAREHOLDERS OF AMPAL ENGINEERING (1994) LTD. --------------------------------------- We have audited the balance sheets of Ampal Engineering (1994) Ltd. as at December 31, 1996 and 1995, the related statements of income, statements of changes in shareholders' equity and the statements of cash-flows for each of the three years, the latest ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Israeli Auditors Regulations (Auditor's Mode of Performance), 1973 and accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency, in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 7 to the financial statements. 178 In our opinion, the above mentioned financial statements present fairly, in conformity with generally accepted accounting principles, in all material respects, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, the changes in its shareholders' equity and cash-flows for each of the three years, the latest ended December 31, 1996 in conformity with accounting principles generally accepted in the United States and in Israel (as applicable to the financial statements of the Company, such accounting principles are practically identical). Pursuant to Section 211 of of the Companies Ordinance (New Versions) 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the above statements is given according to the best of our information and the explanations received by us and as shown by the Company's books. /s/ SHLOMO ZIV & Co. Tel-Aviv, March 18, 1997 SHLOMO ZIV & Co. Certified Public Accountants (Isr.) 179 [Letterhead of Cohen, Eyal, Yehoshua & Co.] AMPAL ENTERPRISES LTD. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- SPECIAL PURPOSE STATEMENT ------------------------- We have audited the balance sheets of Ampal Enterprises Ltd. as at December 31, 1996 and 1995, the related statements of profit and loss, the statement of changes in shareholders' equity and the statement of cash flows for each of the three years in the period ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether originating in an error in the financial statements or misstatement contained therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data on the basis of which the adjusted financial statements were prepared, are presented in Note 5. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, in accordance with generally accepted accounting principles. Also, in our opinion, the financial statements based on nominal data (Note 5) present fairly, in nominal terms, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all of the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. /s/ Cohen, Eyal, Yehoshua & Co. Cohen, Eyal, Yehoshua & Co. Certified Public Accountants (Isr.) 180 [Letterhead of Fahn, Kanne & Co.] Number: 52 Tel-Aviv, March 10, 1997 AUDITORS' REPORT TO THE SHAREHOLDERS OF AMPAL FINANCIAL SERVICES LTD. --------------------------------------- We have audited the balance sheets of AMPAL FINANCIAL SERVICES LTD. as of December 31, 1996 and 1995 and the related statements of income and shareholders' equity and cash flows for the three years in the period ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for changes in the general purchasing power of the Israeli currency, in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note l3 to the financial statements. In our opinion, the abovementioned financial statements present fairly the financial position of the Company as of December 31, 1996 and 1995 and the results of its operations, the changes in its shareholders' equity and its cash flows for each of the three years in the period ended December 1996, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the financial statements based on nominal data (Note 13) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as of December 31, 1996 and 1995, the results of its operations, the changes in shareholders' equity, and its cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The data regarding this difference is summarized in Note 13 to the financial statements. /s/ Fahn, Kanne & Co. Fahn, Kanne & Co. Certified Public Accountants (Isr.) 181 [LETTERHEAD of Shlomo Ziv & Co.] AUIDITORS' REPORT TO THE SHAREHOLDERS OF AMPAL HOLDINGS (1991) LTD. ---------------------------------------- We have audited the balance sheets of Ampal Holdings (1991) Ltd. as at December 31, 1996 and 1995, the related statements of income, statements of changes in shareholders' equity and the statements of cash-flows for each of the three years, the latest ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Israeli Auditors Regulations (Auditor's Mode of Performance), 1973 and accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency, in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 8 to the financial statements. 182 In our opinion, the above mentioned financial statements present fairly, in conformity with generally accepted accounting principles, in all material respects, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, the changes in its shareholders' equity and cash-flows for each of the three years, the latest ended December 31, 1996 in conformity with accounting principles generally accepted in the United States and in Israel (as applicable to the financial statements of the Company, such accounting principles are practically identical). Pursuant to Section 211 of of the Companies Ordinance (New Versions) 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the above statements is given according to the best of our information and the explanations received by us and as shown by the Company's books. Tel-Aviv, March 6, 1997 SHLOMO ZIV & Co. /s/ SHLOMO ZIV & Co. Certified Public Accountants (Isr.) 183 [LETTERHEAD FAHN, KANNE & CO.] AUDITORS' REPORT TO THE SHAREHOLDERS OF AMPAL INDUSTRIES (ISRAEL) LTD. --------------------------------------- We have audited the balance sheets of AMPAL INDUSTRIES (ISRAEL) LTD. as of December 31, 1997 and 1996 and the related statements of income, shareholders' equity and cash flows for the three years in the period ended December 31, 1997, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The data included in the Company's financial statements relating to the equity in investee companies and relating to the Company's share in the results of their operations are based on financial statements which were audited by other auditors. The above statements have been prepared on the basis of historical cost as adjusted for changes in the general purchasing power of the Israeli currency, in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 18 to the financial statements. In our opinion, based on our audit and the reports of other auditors, the abovementioned financial statements present fairly the financial position of the Company as of December 31, 1997 and 1996 and the results of its operations, the changes in its shareholders' equity and its cash flows for each of the three years in the period ended December 1997, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the financial statements based on nominal data (Note 18) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as of December 31, 1997 and 1996, the results of its operations, the changes in shareholders' equity, and its cash flows for each of the three years in the period ended December 31, 1997, on the basis of the historical cost convention. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United Suites. The data regarding this difference is summarized in Note 19 to the financial statements. /s/ Fahn, Kanne & Co. Fahn, Kanne & Co. Certified Public Accountants (Isr.) 184 [LETTERHEAD OF HAFT & HAFT & CO INCL. STRAUSS, LAZER & CO.] AMPAL (ISRAEL) LTD. ------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- SPECIAL PURPOSE STATEMENT ------------------------- We have audited the accompanying consolidated balance sheets of Ampal (Israel) Ltd. as of December 31, 1996 and 1995, and the related statements of profit and loss, changes in shareholders' equity and cash flows for each of the two years ended on those dates, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance) - 1973. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether originating in an error in the financial statements or in a misrepresentation included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and the Company's management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost, adjusted to reflect changes in the general purchasing power of the Israeli currency in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements of the Company were prepared, is presented in Note 25. We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 31% and 32% of consolidated total assets as of December 31, 1996 and 1995, respectively, and whose revenues constitute approximately 48% and 34% of consolidated total revenues for the years ended on those dates respectively. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included in respect of the aforementioned subsidiaries, is based solely on the reports of the other auditors. Also, the financial statements of included companies which were presented at their book equity, were examined by other auditors. 185 In our opinion, based on our audits and the reports ofthe other auditors, the financial statments present fairly, in all material respects, the financial position of the Company on a consolidated basis as of December 31, 1996 and 1995, and the results of operations, changes in shareholders' equity and cash flows of the Company on a consolidated basis for each of the two years ended on December 31, 1996 and 1995, in accordance with generally accepted accounting principles in Israel. Also, in our opinion, the unconsolidated financial statements based on nominal data (Note 25) present fairly, in nominal terms, the unconsolidated financial position of the Company as at December31, 1996 and 1995, and the results of its operations, the changes in shareholders' equity , and its cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The data regarding the method of translation to U.S. dollars and the abovementioned differences are summarized in Note 25F to the financial statements. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all of the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. /s/ H.H.S.L. Haft & Haft & Co. H.H.S.L. Haft & Haft & Co. Certified Public Accountants (Isr.) March 10, 1997 186 AMPAL PROPERTIES LTD. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- SPECIAL PURPOSE STATEMENT ------------------------- We have audited the balance sheets of Ampal Properties Ltd. as at December 31, 1996 and 1995, the related statements of profit and loss, the statement of changes in shareholders' equity and the statement of cash flows for each of the two years in the period ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether originating in an error in the financial statements or misstatement contained therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data on the basis of which the adjusted financial statements of the Company were prepared, is presented in Note 8. The data in the financial statement relating to investment in an unconsolidated subsidiary and to the Company's share in the losses of included companies, amounting to N.I.S. 8,194 thousand are based on financial statements audited by other auditors. In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company at December31, 1996 and 1995, and the results of its operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996, in accordance with generally accepted accounting principles. Also, in our opinion, the financial statements based on nominal data (Note 8) present fairly, in nominal terms, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, changes in shareholders' equity, and its cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. 187 Without qualifying our opinion, we call attention to the Company's accumulated losses, which substantially exceed its capital. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The data regarding the method of translation to U.S. dollars and the abovementioned differences are summarized in Note 8E to the financial statements. Pursuant to Section 211 of the Companies Ordinance (New Version) - l983, we hereby state that we received all of the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. /s/ Cohen, Eyal, Yehoshua & Co. Cohen, Eyal, Yehoshua & Co. Certified Public Accountants (Isr.) March 10, 1997 188 [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU Brightman Bar-levav Friedman & Co.] AUDITORS' REPORT TO THE SHAREHOLDERS OF BAY HEART LTD. AND SUBSIDIARY We have audited the accompanying balance sheet of Bay Heart Ltd. ("the Company") as of December 31, 1997, and the consolidated balance sheet as of such date, and the related statements of operations, changes in shareholders' equity and cash flows - of the Company and on a consolidated basis - for the year then ended. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audit. Comparative figures in the financial statements as of December 31, 1996, and for the years ended December 31, 1996 and 1995, were audited by other auditors whose report, dated February 10, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance) - 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost, adjusted to reflect changes in the general purchasing power of the Israeli currency in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements were prepared, is presented in Note 24. In our opinion, the financial statements present fairly, in all material respects, the financial position - of the Company and on a consolidated basis - as of December 31, 1997, and the results of operations, changes in shareholders' equity and cash flows - of the Company and on a consolidated basis - for the year then ended in accordance with generally accepted accounting principles. Furthermore, in our opinion, the financial statements are prepared in accordance with the Israeli Securities Regulations (Preparation of Annual Financial Statements) - 1993. The condensed consolidated financial information in U.S. dollars presented in Note 25 to the financial statements, prepared at the request of an affiliate, represents a translation of the Company's nominal Israeli currency financial data in accordance with the basis stated in Note 25A. In our opinion, such translation into U.S. dollars was properly made in accordance with the basis stated in Note 25A. /s/ Igal Brightman & Co. Igal Brightman & Co. Certified Public Accountants Haifa, February 15, 1998 189 [Letterhead of Ronel Stettner & Co.] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of BAY HEART LTD. We have audited the balance sheets of Bay Heart Ltd. ("the Company") as of December 31, 1996 and 1995, and the consolidated balance sheets of the Company and its subsidiary ("the consolidated") as of December 31, 1996 and 1995, and the related statements of income, statements of changes in shareholders' equity and statements of cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly, we has performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israeli currency in accordance with opinion issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements, appear in Note 23 to the financial statements. These amounts have been translated into U.S. dollars using the method described in Note 24. In our opinion, based on our audit, the above mentioned consolidated financial statements present fairly the financial position consolidated and Company - as of December 31, 1996 and 1995, the results of its operations, the changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the condensed - consolidated and the Company's financial statements based on nominal data as presented in Note 24 present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 1996 and 1995, and the results of operations, changes in shareholder's equity, and its cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. 190 [Letterhead of Ronel Stettner & Co.] Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of historical net income (loss) and shareholder's equity to the extent summarized in Note 24(g) to the financial statements. Haifa, Israel, /s/ RONEL STETTNER & CO. February 10, 1997 Certified Public Accountants (Israel) 191 [LETTERHEAD OF KOST LEVARY & FORER A MEMBER OF ERNST & YOUNG INTERNATIONAL] REPORT OF INDEPENDENT AUDITORS To the Shareholders of CARMEL CONTAINER SYSTEMS LTD. We have audited the accompanying consolidated balance sheets of Carmel Container Systems Ltd. and its subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of subsidiaries, which statements reflect total assets constituting 21% and 21% as of December 31, 1996 and 1997, respectively, and total revenues constituting 30%, 32% and 34% of the related consolidated totals for each of the three years in the period ended December 31, 1997. These financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for these subsidiaries is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards in the United States and Israel, including those prescribed by the Israeli Auditors' Regulations (Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. The aforementioned consolidated financial statements have been prepared on the basis of historical cost adjusted to reflect the changes in the general purchasing power of the Israeli currency, as required by Statements of the Institute of Certified Public Accountants in Israel. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carmel Container Systems Ltd. and its subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel which differ in certain respects from those followed in the United States (see Note 22 to the consolidated financial statements). /s/ KOST, LEVARY and FORER Tel-Aviv, Israel KOST, LEVARY and FORER March 9, 1998 Certified Public Accountants (Israel) A Member of Ernst & Young International 192 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Coral World International Ltd.; We have audited the accompanying consolidated balance sheets of Coral World International Ltd. (a Guernsey corporation) and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain consolidated subsidiaries, which statements reflect total assets and total revenues of 47% and 60%, respectively, in 1996, 52% and 49%, respectively, in 1995, and revenues of 40% in 1994, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Coral World International Ltd. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. March 26, 1997 /s/ Arthur Andersen LLP New York, New York 193 [LETTERHEAD OF PORAT & CO.] Report of Independent Public Accountants ---------------------------------------- To The Shareholders ------------------- of -- COUNTRY CLUB KFAR-SABA LIMITED ------------------------------ We have audited the financial statements of Country Club Kfar-Saba Limited (hereinafter - the Company), as follows: o Balance sheets of the Company as of December 31, 1997, December 31, 1996. o Statements of Income, shareholders equity and cash flow for the company for the two years ended December 31, 1997 and December 31, 1996. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance) 1973 and, accordingly we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 18 to the financial statements. These amounts have been translated into U.S. dollars using the method described in Note 2G. 194 [LETTERHEAD OF PORAT & CO.] Report of Independent Public Accountants ---------------------------------------- To The Shareholders ------------------- of -- COUNTRY CLUB KFAR-SABA LIMITED ------------------------------ In our opinion, based on our audit, the above mentioned financial statements present fairly the financial position of the Company as at December 31, 1997 and 1996, the results of its operations, the changes in shareholders' equity and cash flows for each of the years in the period ended December 31, 1997, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the financial statements based on nominal data (Note 18) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 1997 and 1996, and the results of its operations, the changes in shareholders' equity, and its cash flows for each of the three years in the period ended December 31, 1997, on the basis of the historical cost convention. Pursuant to section 211 of the companies ordinance (new version) 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the aforementioned financial statements is given to the best of our information and the explanations received by us and as shown by the books of the company. Accounting priciples generally accepted in Israel differ in certain respects from generally accepted in the United States. The application of the latter would have affected the determination of nominal/historical net income (loss) and shareholders' equity to the extent summarized in Note 19 to the financial statements. Porat & Co. /s/ Porat Certified Public Accountants (Isr.) Ramat Gan, February 16, 1998 195 [LETTERHEAD OF FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO.] Report of Independent Public Accountants ---------------------------------------- To the Shareholders of EPSILON INVESTMENT HOUSE LTD. We have audited the Consolidated Balance Sheets of EPSILON INVESTMENT HOUSE LTD., (an Israeli corporation) (hereinafter - "the Company") and its subsidiary as of December 31, 1997 and 1996, and the related Consolidated Statements of Income and the Changes in Shareholders' Equity for each of the 3 years in the period ended December 31, 1997, translated into U.S. Dollars. These Financial Statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these Financial Statements, based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall Financial Statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Statement of Cash Flows for the period has not been included in the Financial Statements. In our opinion, the above mentioned excepted, the nominal Financial Statements in N.I.S., which were the base of the translation of the Financial Statements as referred to above, present fairly, in all material respects, the financial position of the Company and its subsidiary, as of December 31, 1997 and 1996 and the results of their operations and the changes in their shareholders' equity, for each of the 3 years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the translated amounts in the accompanying Consolidated Financial Statements translated into U.S. Dollars have been computed on the basis set forth in Note 2.2 to the Consolidated Financial Statements. /s/ FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO. FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO. Certified Public Accountants Tel-Aviv, 9 March, 1998 196 [LETTERHEAD OF PORAT & Co.] Report of Independent Public Accountants ---------------------------------------- of -- Hod Hasharon Sport Center (1992) Limited Partnership ---------------------------------------------------- We have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited Partnership as at December 31, 1997 and 1996, the related statements of income, partners' capital and cash flows for each of the two years in the period then ended, expressed in New Israel Shekels. These financial statements are the responsibility of the partnership management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 19 to the financial statements. These amounts have been translated into U.S. dollars using the method described in Note 2D. 197 [LETTERHEAD OF PORAT & Co.] Report of Independent Public Accountants ---------------------------------------- of -- Hod Hasharon Sport Center (1992) Limited Partnership ---------------------------------------------------- In our opinion, based on our audit the above mentioned financial statements present fairly the financial position of the partnership as at December 31, 1997 and 1996, the results of its operations, the changes in partners' capital and cash flows for each of the two years in the period ended December 31, 1997, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the financial statements based on nominal data (Note 18) present fairly, in conformity with generally accepted accounting principles, the financial position of the partnership as at December 31, 1997 and 1996, and the results of its operations, the changes in partners' capital and its cash flows for each of the three years in the period ended December 31, 1997, on the basis of the historical cost convention. Pursuant to section 211 of the companies ordinance (new version) 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the aforementioned financial statements is given to the best of our information and the explanations received by us and as shown by the books of the company. Porat and Co. /s/ Porat and Co. Certified Public Accountants (Isr.) Ramat Gan, March 4, 1998 198 [KOST LEVARY & FORER LETTERHEAD] REPORT OF INDEPENDENT AUDITORS To the Shareholders of MIVNAT HOLDING LTD. We have audited the balance sheets of Mivnat Holding Ltd. ("the Company") as of December 31, 1997 and 1996 and the consolidated balance sheets ("the Consolidated") for the same dates and the related statements of income, changes in shareholders' equity and cash flows - the Company and the Consolidated for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Isrel, including those prescribed by the Israeli Auditors' Regulations (Mode of Performance), 1973, which do not differ is any significant respect from United States generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audits also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of the historical cost adjusted to reflect the changes in the general purchasing power of the Israeli currency, as required by Statements of the Institute of Certified Public Accountants in Israel. A summary of the Company's financial statements in nominal (historical) Israeli shekels which served as a basis for the Company's adjusted financial statements, is presented in Note 30. The Company has restated its financial statements for the years ended December 31, 1996 and 1995, in order to retroactively reflect the change in the accounting treatment of the proportionate consolidation of an investee and capitalization of financial expenses related to construction of resident units, as indicated in Note 2p. 199 [KOST LEVARY & FORER LETTERHEAD] In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of - the Company and the Consolidated - as of December 31, 1997 and 1996, and the related results of income, changes in shareholders' equity and cash flows - the Company and the Consolidated - for each of three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel. Also, in our opinion, the Consolidated financial statements based on nominal data (Note 28) present fairly, in all material respects, the Consolidated financial position as of December 31, 1997 and 1996, and the related Consolidated results of income, changes in shareholders' equity, and this consolidated cash flows for the each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel, on the basis of the historical cost convention. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. Financial statements based on the application of the latter and their translation into U.S. dollars based on the principles set forth in SFAS - 52, are presented in Note 28 to the financial statements. Pursuant to Section 211 of the Companies Ordinance (New Version), 1983, we hereby state that we have received all the information and explanations which we have requested and that our opinion on the above financial statements is given based on the best of our information and explanations which we received and as reflected in the books of the Company. /s/ Kost, Levary and Forer Kost, Levary and Forer Tel-Aviv, Israel Certified Public Accountants (Israel) March 10, 1998 A Member of Ernst & Young International 200 HAGGAI WALLENSTEIN DOV & Co. CPA (1sr.) AUDITORS' REPORT ---------------- To the shareholders of MORIAH HOTELS LTD. ------------------ We have audited the accompanying consolidated balance sheets of Moriah Hotels Ltd. (an Israeli corporation) (hereinafter - the company) and its subsidiaries as at December 31, 1997 and 1996, and the related consolidated statements of income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 3l, 1997, expressed in US dollars. These financial statements are the responsibility of the board of directors and company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the company's board of directors and management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Moriah Hotels Ltd. and its subsidiaries as at December 31, 1997 and 1996, and the results of their operations, changes in their shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel, which differ in certain respects from those followed in the United States (see note 1 to the consolidated financial statements). Also, in our opinion, the translated amounts in the accompanying consolidated financial statements translated into US dollars have been computed on the basis set forth in note 1a. to the consolidated financial statements. /s/ Haggai Wallenstein, Dov & Co. HAGGAI WALLENSTEIN, DOV & CO. Certified Public Accountants (Isr.) Ramar-Gan, March 15, 1998 201 [LETTERHEAD HAFT & HAFT & Co.] [LETTERHEAD NEXIA INTER-NATIONAL] NIR LTD. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- SPECIAL PURPOSE STATEMENT ------------------------- We have audited the accompanying balance sheets of Nir Ltd. as at December 31, 1996 and 1995, the related statements of profit and loss, the statement of changes in shareholders' equity and the statement of cash flows for each of the three years in the period ended December 31, 1996, expressed in New Israeli Shekels. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether originating in an error in the financial statements or misstatement contained therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements were prepared, is presented in Note 17. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995, the results of its operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, in accordance with generally accepted accounting principles. Also in our opinion, the financial statements based on nominal data (Note 17) present fairly, in nominal terms, the financial position of the Company as at December 31, 1996 and 1995, and the results of it operations, the changes in shareholders' equity, and its cash flows for each of the three years in the period ended December 31, 1996, on the basis of the historical cost convention. 202 Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The data regarding the method of translation to U.S. dollars and the abovementioned differences are summarized in Note 17E to the financial statements. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all of the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. /s/ H.H.S.L. Haft & Haft & Co. ---------------------------------- H.H.S.L. Haft & Haft & Co. Certified Public Accountants (Isr.) March 10, 1997 203 [LETTERHEAD OF KPMG BRAUDE Bavly] AUDITORS' REPORT TO THE SHAREHOLDERS OF ORLITE INDUSTRIES (1959) LTD We have audited the balance sheets of Orlite Industries (1959) Ltd (hereinafter - - the Company) at 31 December 1996 and 1995 and the related statements of income, shareholders' equity and cash flows for each of the three years ended 31 December 1996, 1995 and 1994, expressed in New Israeli Shekels (hereinafter NIS). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973, and, accordingly we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the US. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israeli currency in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. In our opinion, based on our audit, the above mentioned financial statements present fairly the financial position of the Company at 31 December 1996 and 1995 and the results of its operations, the changes in shareholders' equity and cash flows for each of the three years ended 31 December 1996, 1995 and 1994, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, based on our audit, the financial statements of the company, on the basis of historical cost convention, present fairly the financial position of the Company at 31 December 1996 and 1995 and the results of its operations, the changes in shareholders' equity for each of the three years ended 31 December 1996, 1995 and 1994, in conformity with accounting principles generally accepted in Israel, consistently applied. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of historical net income and shareholders' equity to the extent summarized in Note 23 to the financial statements. These financial statements have been prepared in accordance with the Securities Regulations (Preparation of Financial Statements), 1993. /s/ Braude Bravly BRAUDE BAVLY CPA 24 February 1997 204 [LETTERHEAD OF KPMG BRAUDE Bavly] -1- AUDITORS' REPORT TO THE SHAREHOLDERS OF ORTEK LIMITED We have audited the accompanying balance sheets of Ortek Limited ("the Company") as at December 31, 1997 and 1996, and the statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including standards prescribed by the Auditors (Modes of Operation) Regulations, 1973, which auditing standards are identical in all material respects to generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error in the financial statements or anything misleading therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the board of directors and the management, as well as evaluating the overall financial statetment presentation. We believe that our audits provide a fair basis for our opinion. The above financial statements are prepared on the historical cost basis adjusted for changes in the general purchasing power of the Israeli currency according to Opinions of the Institute of Certified Public Accountants in Israel. Condensed nominal data, on the basis of which the adjusted financial statements were prepared, are presented in Note 24. These amounts have been translated into U.S. dollars using the method describe in the Note to the accompanying financial statements In U.S. dollars. In our opinion, the above financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1997 and 1996 and the results of operations, the changes in shareholders' equity and the cash flows for each of the years then ended, in conformity with generally accepted accounting principles in Israel, which differ in one respect from generally accepted accounting principles in the United States (see Note 3 to these financial statements). Pursuant to Section 211 of the Companies Ordinance (New Version), 1983, we state that we have obtained all the information and explanations we required and that our opinion on the above financial statements is given according to the best of our information and the explanations received by us and as shown by the records of the Company. /s/ Braude Bravly BRAUDE BAVLY Tel Aviv, March 1, 1998 205 [LETTERHEAD OF SHLOMO ZIV & CO.] AUDITORS' REPORT To the Shareholders of PARADISE INDUSTRIES LTD. ------------------------ We have audited the balance sheets of Paradise Industries Ltd. ("the Company") as of December 31, 1997 and 1996 and the related statements of operation, statements of changes in shareholders' equity and the statements of cash flows for each of the three years, the latest ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Israeli Auditors' Regulations, (Auditor's Mode of Performance) - 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Condensed statements in historical values which formed the basis of the adjusted statements appear in Note 26 to the financial statements In our opinion, the abovementioned financial statements present fairly, in accordance with generally accepted accounting principles, in all material respects, the financial position of the Company as at December 31, 1997 and 1996 and the results of its operations, the changes in its shareholders' equity and cash flows for each of the three years, the latest ended December 31, 1997. Similarly, in our opinion, the abovementioned Financial Statements have been prepared in accordance with the Israeli Securities Regulations (Preparation of Annual Financial Statements) 1993. Without qualifying our aforementioned opinion, we draw your attention to Note 24, regarding a fire which broke out in the Company's factory and the action of the Company's management in connection with the reconstruction of the factory and renewal of operations. Shlomo Ziv & Co. /s/ Marder Menackam Tel-Aviv, February 24, 1998 Certified Public Accountant (Isr.) 206 [LETTERHEAD OF REUVENI, HARTUV, TEPPER & CO.] AUDITOR'S REPORT TO THE SHAREHOLDERS OF --------------------------------------- PRI HA'EMEK (CANNED AND FROZEN FOOD) 88 LTD. -------------------------------------------- We have audited the accompanying balance sheets of Pri Ha'emek (Canned and Frozen Food) 88 Limited (hereinafter the Company) as at December 31, 1995 and 1994, the consolidated balance sheets as at December 31, 1995 and 1994, and the statements of profit and loss, changes in shareholders' equity and cash flows of the Company and consolidated for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's Board of Directors and of its Management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Generally Accepted Auditing Standards, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require us to plan and perform the audit with the aim of obtaining a reasonable degree of assurance that the financial statements are free of material misstatement, whether caused by an error in the financial statements or caused by misleading information included therein. An audit includes examining, on a test basis, evidence supporting the amounts and information in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and Management, as well as evaluating the fairness of the overall presentation of the financial statements. We are satisfied that our audit provides a fair basis for our opinion. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. The above mentioned financial statements have been prepared in New Israeli Shekels and remeasured into U.S. Dollars in accordance with the principles of remeasurement set forth in Statement No. 52 of the Financial Accounting Standards Board of the U.S.A. (See Note 1). In our opinion, based on our audit, the above mentioned financial statements present fairly, in conformity with Generally Accepted Accounting Principles in all material respects the financial position of the Company and consolidated as at December 31, 1995 and 1994, and the results of the operations, the changes in shareholders' equity and the cash flows of the Company and consolidated for each of the three years in the period ended December 31, 1995. Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of nominal/historical net income (loss) and shareholders' equity to the extent summarized in Note 20 to the financial statements. 207 AUDITOR'S REPORT TO THE SHAREHOLDERS OF PRI HA-EMEK (CANNED AND FROZED FOOD) 88 LTD. (CONTINUED) Pursuant to Section 211 of the Companies Ordinance (New Edition) 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the above financial statements is given according to the best of our information and the explanations received by us and as shown by the books of the Company. Without qualifying our above opinion, we draw attention to note 1(2) to the financial statements, concerning the potential importance of matters reflected in this note on the continuance of the Company's activities as a going concern and its ability to pay its debts as they fall due. /s/ Reuveni, Hartuv, Tepper & Co. Certified Public Accountants (Isr). Tel-Aviv, March 24, 1996. 208 [LETTERHEAD OF FAHN, KANNE & Co.] AUDITORS' REPORT TO TIE SHAREHOLDERS OF RED SEA MARINELAND HOLDING (1973) LTD. -------------------------------------- We have audited the balance sheet of Red Sea Marineland Holding (1973) Ltd. as of December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. Information as to the effect of the changes in the general purchasing power of the Israeli currency on the financial statements in accordance with opinions of the Institute of Certified Public Accountants in Israel, has not been Included in the above statements. In our opinion, except for the omission of the information referred to in the preceding paragraph, the above Balance Sheet present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 1997, on the basis of the historical cost convention. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the above Balance Sheet is given according to the best of our information and the explanations received by us and as shown by the books of the Company. /s/ Fahn, Kanne & Co. Fahn, Kanne & Co. Certified Public Accountant (Isr. Tel Aviv, Israel, March 21, 1998 209 [LETTERHEAD of DOV KAHANA & CO.] Auditors' Report to the Shareholders ------------------------------------ of -- Red Sea Marineland Holding (1973) Ltd. -------------------------------------- We have examined the Balance Sheets of Red Sea Marineland Holding (1973) Ltd. as at December 31, 1995 and 1994. Our examination was made in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance) 1973, and accordingly we have applied such auditing procedures as we considered necessary in the circumstances. Information as to the effect of the changes in the general purchasing power of the Israeli currency on the financial statements in accordance with opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above statements. In our opinion, except for the omission of the information referred to in the preceding paragraph, the above Balance Sheets present fairly, in conformity with generally accepted accounting principles, the financial position of the company as at December 31, 1995 and 1994, on the basis of the historical cost convention. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we state that we have obtained all the information and explanations we have required and that our opinion on the above Balance Sheets is given according to the best of our information and the explanations received by us and as shown by the books of the company. Ramat-Gan, Israel, March 11, 1996 /s/ Dov Kahana & Co. Dov Kahana & Co. Certified Public Accountants (Isr.) 210 [LETTERHEAD OF FAHN, KANNE & CO.] INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF RED SEA UNDERWATER OBSERVATORY LTD. We have audited the balance sheets of "Red Sea Underwater Observatory Ltd." (the "Company") and the consolidated balance sheets of the Company and its subsidiaries as of December 31, 1997 and 1996 and the related Company and consolidated statements of income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the board of directors and the management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits. The statements of income and changes in shareholders' equity for the two years ended December 31, 1995 and the statement of cash flows for the year then ended were audited by other auditors. We did not audit the financial statements of the consolidated subsidiaries whose assets constitute approximately 73% and 62% of total consolidated assets as of December 31, 1997 and 1996 respectively and whose income constitutes approximately 32% and 37% of the total consolidated income of the Company for the years then ended, respectively. The financial statements of those subsidiaries were audited by other auditors whose reports have been furnished to us. Our opinion, as it relates to the amounts included in respect of these subsidiaries, is based solely on the said reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Auditors' Regulations (Auditors Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement, whether accidental or intentional. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the board of directors and by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The abovementioned financial statements were prepared on the basis of historical cost, adjusted to reflect changes in the general purchasing power of the Israeli currency in accordance with opinions of the Institute of Certified Public Accountants in Israel. Condensed financial statements in nominal shekels, which served as the basis for the adjusted statements, are presented in Note 28. These amounts were translated into U.S. dollars using the method described in Note 29. In our opinion, based on our audits and on the reports of the other auditors, the aforementioned financial statements present fairly, in all material respects, the consolidated and Company financial position as of December 31, 1997 and 1996, and the Company and consolidated results of operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1997, in accordance with generally accepted accounting principles in Israel, consistently applied. Also, in our opinion, the financial statements based on nominal data (Note 28) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as of December 31, 1997 and 1996 and the results of its operations for the two years in the period ended December 31, 1997, on the basis of the historical cost convention. Furthermore, in our opinion, the abovementioned financial statements were prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements) - 1993. In addition, in our opinion, the condensed financial statements translated into U.S. dollars (Note 29) are presented fairly in conformity with S.F.A.S. 52. Fahn, Kanne & Co. Tel-Aviv, Israel Certified Public Accountants (Isr.) March 21, 1998 211 [LETTERHEAD OF DOV KAHANA & CO.] AUDITORS' REPORT ---------------- TO THE SHAREHOLDERS OF ---------------------- RED SEA UNDER WATER OBSERVATORY LTD. ------------------------------------ We have audited the Balance Sheets of Red Sea Under Water Observatory Ltd. (hereinafter "the Company") and the Consolidated Balance Sheet of the Company and its subsidiaries as at December 31, 1995 and 1994, the related statements of income and shareholders' equity and cash flows of the Company for each of the three years, Consolidated for each of the two years, in the period ended December 31, 1995, expressed In New Israeli Shekels. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors Regulations (Auditor's Mode of Performance), 1973 and, accordingly, we have performed such auditing procedures as we considered necessary in the circumstances. For purposes of these financial statements, there is no material difference between generally accepted Israeli auditing standards and auditing standards generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed statements of the Company in historical values which formed the basis of the adjusted statements appear in Note 14 to the financial statements. These amounts have been translated into U.S. dollars using the method described in Note 15. The Financial Statements of subsidiaries operating abroad, whose assets constitute app. 41% of the total assets contained In the Consolidated Balance Sheet (31.12.94: app. 42%) and whose sales constitute app. 38% of the total sales contained in the Consolidated Statement of Income for the year ended December 31, 1995 (1994: app. 43%), have been audited by other auditors. In our opinion, based on our audit and the reports of other auditors, as above mentioned, the financial statements present fairly the financial position of the Company and Consolidated as at December 31, 1995 and 1994, the results of operations, the changes in shareholders' equity and cash flows of the Company for each of the three years, Consolidated for each of the two years, in the period ended December 31, 1995, in conformity with accounting principles generally accepted in Israel, consistently applied. Also, in our opinion, the condensed financial statements based on nominal data (Note 14) present fairly, in conformity with generally accepted accounting principles in Israel and in the US., the financial position of the Company as at December 31, 1995 and 1994, and the results of its operations for each of the three years in the period ended December 31, 1995, on the basis of the historical cost convention. As applicable to these condensed financial statements, such accounting principles are substantially identical in all material respects. Also in our opinion the Condensed Translated Statements into U.S. Dollars (Note 15) are presented fairly in conformity with S.F.A.S. 52. /s/ D. Kahana & Co. Ramat Gan, Israel, March 21, 1996 Dov Kahana & Co. Certified Public Accountants (Isr.) 212 [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU] Report of Independent Public Accountants ---------------------------------------- To the Shareholders of RENAISSANCE INVESTMENT CO. LTD. We have audited the Balance Sheet of RENAISSANCE INVESTMENT CO. LTD., (an Israeli corporation) (hereinafter -- "the Company") as at December 31, 1997 and the Consolidated Balance Sheet of the Company and its subsidiary as at December 31, 1996, and the related Consolidated Statements of Income and the Changes in Shareholders' Equity for each of the 3 years in the period ended December 31, 1997, translated into U.S. dollars. These Financial Statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these Financial Statements, based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall Financial Statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Statement of Cash Flows for the period has not been included in the Financial Statements. In our opinion, the above mentioned excepted, the Nominal Financial Statements in N.I.S., which were the base of the translation of the Financial Statements as referred to above, present fairly, in all material respects, the financial position of the Company, as at Decanter 31, 1997 and the financial position of the Company and its subsidiary, as at December 31, 1996 and the results of their operations and the changes in their shareholders' equity, for each of the 3 years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the translated amounts in the accompanying Consolidated Financial Statements translated into U.S. Dollars have been computed on the basis set forth in Note 2.2 to the Consolidated Financial Statements. /s/ Friedman, Shapira, Goldstein & Co. FRIEDMAN, SHAPIRA, GOLDSTEIN & CO. Certified Public Accountants Tel-Aviv, 9 March, 1998 213 [LETTERHEAD OF KOST LEVARY & FORER] Messrs. Ampal Ltd. - ------------------ Re: Financial statements of Shmay-Bar Real Estate 1993 Ltd. ("the Company") translated into U.S. dollars ------------------------------------------------------- As you know, the Company publishes in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 1997 and 1996, which were audited by us, and on which we expressed our opinion on February 18, 1998, have been provided to you. We have audited the accompanying translated U.S. dollar balance sheets of the Company as of December 31, 1997 and 1996, and the related translated U.S. dollar statements of income for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors Regulations (Mode of Performance) (Israel), 1973, which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned translated U.S. dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above mentioned statements. Full financial statement disclosures and statements of cash flows that are as required by generally accepted accounting principles have not been presented and as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual audited financial statements of the Company, as of December 31, 1997 and their accompanying Notes. 214 [LETTERHEAD OF KOST LEVARY & FORER] In our opinion, except for the effects of the matters discussed in the preceding paragraphs, the translated U.S. dollar financial statements referred to above present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 1997 and 1996, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel. As applicable to the Company's financial statements, accounting principles generally excepted in the United States and in Israel are substantially identical in all material respects. Also, in our opinion, the translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52, see Note 2. The aforementioned financial statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others. Sincerely, /s/ KOST, LEVARY and FORER Tel-Aviv, Israel KOST, LEVARY and FORER February 18, 1998 Certified Public Accountants (Israel) 215 [LETTERHEAD OF KOST LEVARY & FORER] Messrs. Ampal Ltd. - ------------------ Re: Financial statements of Shmay-Bar (T.H) 1993 Ltd. ("the Company") translated into U.S. dollars ------------------------------------------------- As you know, the Company publishes in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 1997 and 1996, which were audited by us, and on which we expressed our opinion on February 18, 1998, have been provided to you. We have audited the accompanying translated U.S. dollar balance sheets of the Company as of December 31, 1997 and 1996, and the related translated U.S. dollar statements of income for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors Regulations (Mode of Performance) (Israel), 1973, which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned translated U.S. dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above mentioned statements. Full financial statement disclosures and statements of cash flows that are as required by generally accepted accounting principles have not been presented and as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual audited financial statements of the Company, as of December 31, 1997 and their accompanying Notes. 216 [LETTERHEAD OF KOST LEVARY & FORER] In our opinion, except for the effects of the matters discussed in the preceding paragraphs, the translated U.S. dollar financial statements referred to above present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 1997 and 1996, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in Israel. As applicable to the Company's financial statements, accounting principles generally excepted in the United Sates and in Israel are substantially identical in all material respects. Also, in our opinion, the translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52, see Note 2. The aforementioned financial statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others. Sincerely Tel-Aviv, Israel /s/ KOST, LEVARY and FORER February 18, 1998 KOST, LEVARY and FORER Certified Public Accountants (Israel) 217 [LETTERHEAD OF ALMAGOR & Co. CPA (ISR)] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Teledata Communications Ltd. We have audited the accompanying consolidated balance sheets of Teledata Communications Ltd. (the "Company") at December 31, 1996 and 1995 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a consolidated subsidiary, whose assets constitute approximately 5% and 2% of the total consolidated assets at December 31, 1996 and 1995, respectively, and whose total revenues constitute approximately 11%, 13% and 22% of the consolidated total revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Those statements were audited by other accountants whose reports have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the abovementioned subsidiary, is based solely on the reports of such other auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Auditors' (Mode of Performance) Regulations (Israel), 1973. Such auditing standards are substantially identical to generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of other independent auditors as stated above, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with accounting principles generally accepted in the United States. /s/ BDO Almagor & Co. BDO Almagor & Co. Certified Public Accountants Ramat-Gan, Israel, February 16, 1997 218 [LETTERHEAD OF Deloitte Touche Tohmatsu-Igal Brightman & Co.] AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TRINET INVESTMENTS IN HIGH-TECH LTD. --------------------------------------------- We have audited the accompanying balance sheets of Trinet Investments in High-Tech Ltd. as of December 31, 1997 and 1996, and the related statements of operations, changes in shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997, expressed in Israeli currency. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed under the Auditors' Regulations (Auditor's Mode of Performance) - 1973, which, for purposes of these financial statements, are substantially identical to generally accepted auditing standards in the U.S. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost, adjusted for changes in the general purchasing power of the Israeli currency in accordance with opinions issued by the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements of the Company were prepared, is presented in Note 10. In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations, changes in shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997, in conformity with accounting principles generally accepted in Israel. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all of the information and explanations which we required and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. The financial information presented in U.S. dollars and in accordance with generally accepted accounting principles in the United States is based on nominal historical amounts in Israeli currency and is presented in Note 11 to the financial statements. /s/ Igal Brightman & Co. Igal Brightman & Co. Certified Public Accountants Tel Aviv, March 9, 1998 219 [LETTERHEAD OF Deloitte Touche Tohmatsu Brightman Bar-Levav Friedman & Co.] AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TRINET VENTURE CAPITAL LTD. We have audited the accompanying balance sheets of Trinet Venture Capital Ltd. ("the Company") as of December 31, 1997 and 1996, and the related statements of operations, changes in shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Auditors' Regulations (Auditor's Mode of Perfonnance) - 1973, which, for purposes of these financial statements, are substantially identical to generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We did not audit the financial statements of certain subsidiaries and affiliates, the investments in which are recorded using the equity method of accounting. These financial statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for the foregoing subsidiaries and affiliates, is based solely upon the reports of the other auditors. The aforementioned financial statements have been prepared on the basis of historical cost, adjusted to reflect changes in the general purchasing power of the Israeli currency in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements of the Company were prepared, is presented in Note 11. 220 [LETTERHEAD OF Deloitte Touche Tohmatsu Brightman Bar-Levav Friedman & Co.] The Company has not prepared consolidated financial statements. Consolidated financial statements are required in accordance with Opinion No. 57 of the Institute of Certified Public Accountants in Israel. In our opinion, based on our audits and the reports of other auditors, except for omission of consolidated financial statements as mentioned in the preceding paragraph, the aforementioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of operations, changes in shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997, in accordance with generally accepted accounting principles in Israel. Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we hereby state that we received all the information and explanations which we requested and that our opinion on the financial statements is given based on the best of the information and explanations which we received and as reflected in the books of the Company. The financial information in U.S. dollars and in accordance with generally accepted accounting principles in the United States is based on nominal historical amounts in Israeli currency and is presented in Note 12. Such financial information includes investments valued at $l0,740,000 and $12,858,000 as of December 31, 1997 and 1996, respectively (97% and 92% of total assets, respectively), whose values have been estimated by the Board of Directors and management in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors and management in arriving at their estimates of value of such investments and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. /s/ Igal Brightman & Co. Igal Brightman & Co. Certified Public Accountants Tel Aviv, March 9, 1998. 221 [LETTERHEAD OF Kesselman & Kesselman] AUDITORS' REPORT To the shareholders of U.D.S. ULTIMATE DISTRIBUTION SYSTEMS LTD. We have audited the financial statements of U.D.S. Ultimate Distribution Systems Ltd. (hereafter - the Company) and the consolidated financial statements of the Company and its subsidiary: balance sheets at December 31, 1996 and 1995 and statements of loss, change in shareholders' equity and cash flows for each of the years ended on those dates. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. Our audits were performed in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by an error in the financial statements or by misleading information included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect the changes in the general purchasing power of Israeli currency, in accordance with Opinions of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of which the adjusted financial statements were prepared, are presented in note 11. In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position - of the Company and consolidated - at December 31, 1996 and 1995 and the results of operations, changes in shareholders' equity and cash flows - of the Company and consolidated - for each of the years ended on those dates, in conformity with generally accepted accounting principles in Israel. 222 [LETTERHEAD OF Coopers & Lybrand] Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. The application of the latter would have no effect on the determination of nominal/historical net income and shareholders' equity, see note 12. The nominal Israeli currency consolidated data which are presented in note 12 have been translated into U.S. dollars for the convenience of one of the Company's shareholders, in accordance with the principles set forth in Statement No. 52 of the Financial Accounting Standards Board of the United States. The translation has been properly made. Tel-Aviv, Israel March 5, 1997 /s/ Kesselman & Kesselman 223 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment No. 1 to its Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of May, 1998. AMPAL-AMERICAN ISRAEL CORPORATION By: /s/ Yehoshua Gleitman ------------------------------------------ Yehoshua Gleitman, Chief Executive Officer /s/ Shlomo Meichor ------------------------------------------ Shlomo Meichor, Vice President-Finance and Treasurer (Principal Financial Officer) /s/ Alla Kanter ------------------------------------------ Alla Kanter, Vice President-Accounting and Controller (Principal Accounting Officer) 224 -----END PRIVACY-ENHANCED MESSAGE-----