SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
Conformed Copy
- --------------
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-29078
---------
GENESIS DEVELOPMENT AND
CONSTRUCTION LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
10 Hasikma Street
P.O. Box 70068
Haifa 31700, Israel
Tel: 972-4-824-4868
Fax: 972-4-824-5885
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act: None
Securities registered or to be registered pursuant to Section 12(g) of the
Act:
Units, each Unit consisting of one
Class A Ordinary Share, NIS 0.1 par value,
one Redeemable Class A Warrant and
one Redeemable Class B Warrant
(Title of Class)
Class A Ordinary Shares, NIS 0.1 par value
(Title of Class)
Redeemable Class A Warrants
(Title of Class)
Redeemable Class B Warrants
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Number of outstanding Class A Ordinary Shares as of December 31, 1997:
2,300,000
<PAGE>
Number of outstanding Class B Ordinary Shares as of December 31, 1997:
3,000,000
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 which financial statement item the Registrant has
elected to follow:
Item 17 X Item 18
--- ---
<PAGE>
TABLE OF CONTENTS
-----------------
Part I
------
Page
----
Item 1. Description of Business 1
Item 2. Description of Property 20
Item 3. Legal Proceedings 21
Item 4. Control of Registrant 21
Item 5. Nature of Trading Market 23
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders 24
Item 7. Taxation 25
Item 8. Selected Financial Data 27
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
Item 9A. Quantitative and Qualitative Disclosures About
Market Risk 37
Item 10. Directors and Officers of Registrant 37
Item 11. Compensation of Directors and Officers 40
Item 12. Options to Purchase Securities from Registrant
or Subsidiaries 41
Item 13. Interest of Management in Certain Transactions 42
Part II
-------
Item 14. Description of Securities to be Registered 43
Part III
--------
Item 15. Defaults Upon Senior Securities 43
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds 43
Part IV
-------
Item 17. Financial Statements 44
Item 18. Financial Statements 44
Item 19. Financial Statements and Exhibits 44
Signatures 45
----------
<PAGE> 1
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT, CONCERNING,
AMONG OTHER THINGS, THE ABILITY OF THE COMPANY TO COMPETE IN THE ISRAELI REAL
ESTATE INDUSTRY AND THE STRENGTH OF SUCH INDUSTRY, INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGES IN THE ISRAELI ECONOMY, CONTINUING
IMMIGRATION, THE AVAILABILITY OF LAND, AND THE CONTINUED AVAILABILITY OF RAW
MATERIALS AND LABOR. FURTHERMORE, THE COMPANY OPERATES IN AN INDUSTRY SECTOR
WHERE SECURITIES VALUES MAY BE VOLATILE AND MAY BE INFLUENCED BY ECONOMIC AND
OTHER FACTORS BEYOND THE COMPANY'S CONTROL. FURTHER INFORMATION REGARDING
THESE AND OTHER RISKS IS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE TRANSLATIONS OF CERTAIN NEW ISRAELI SHEKEL ("NIS") AMOUNTS INTO
DOLLARS APPEARING IN THIS REPORT HAVE BEEN MADE FOR THE CONVENIENCE OF THE
READER AT THE EXCHANGE RATE PREVAILING AT DECEMBER 31, 1997 (NIS 3.536 =
$1.00), AS PUBLISHED BY THE BANK OF ISRAEL. SUCH DOLLAR AMOUNTS HAVE BEEN
INCLUDED SOLELY FOR THE CONVENIENCE OF THE READER AND SHOULD NOT BE CONSTRUED
AS A REPRESENTATION THAT THE NIS AMOUNTS ACTUALLY REPRESENT SUCH DOLLAR
AMOUNTS OR COULD BE CONVERTED INTO DOLLARS AT THAT RATE.
Part I
------
ITEM 1. DESCRIPTION OF BUSINESS
- ------- -----------------------
General Overview:
- -----------------
Genesis Development and Construction Ltd. (the "Company") is engaged in
the business of real estate development and construction management for
residential and public properties primarily in Israel and to a limited extent,
through its foreign subsidiaries, in Russia, Germany and the United States.
The Company acts as a general contractor, subcontracting all of its
construction activities to independent subcontractors, and manages these
projects with on-site project managers and field engineers. In addition, the
Company engages in the sale of real estate development rights and provides
consulting, management and financial management services in connection with
real estate activities conducted by other developers and contractors. Since
the beginning of 1998, the Company has also engaged in the acquisition and
development of income-producing residential properties for long term lease by
the Company to agencies of the Israeli government.
Over 90% of the land in Israel is owned by the Government of the State of
Israel (the "Israeli Government"). As a result, the rate of new development
and construction is essentially determined by the Israeli Government. The
Israeli Government currently awards building projects primarily through a
competitive bidding process in which bidders must demonstrate, among other
things, the quality of their work and their ability to complete projects in
accordance with specifications and timing requirements. A substantial portion
<PAGE> 2
the Company's projects in Israel have been awarded through, and the Company
intends to continue to participate in, this competitive bidding process. The
Israeli Government also awards projects to developers through a raffle
process, where it predetermines the purchase price for rights in undeveloped
land and awards rights to developers pursuant to a raffle. See "--Residential
Development and Construction Awards."
The real estate industry in Israel has undergone rapid and significant
expansion in recent years. According to the Israeli Central Bureau of
Statistics (the "ICBS"), for the years 1990 through 1997, Israel experienced
an average population growth rate of approximately 3.3% per year, primarily as
a result of immigration from the countries formerly constituting the Soviet
Union. Although the rate of immigration decreased during 1997 and the
beginning of 1998, as reported by the ICBS, immigration has and continues to
provide the Israeli economy with a highly educated and cost competitive labor
force which has stimulated the country's economic growth. See "--Conditions in
Israel--Economic Conditions" below. This growth, together with an increasing
population, has led to an increase in demand for residential properties and
the need for additional public buildings.
Since 1996, the Israeli real estate market has experienced a slowdown,
resulting in a reduction in demand and prices and a decrease of construction
starts, especially in luxury and high-priced homes. The demand for moderately
priced housing, which is the Company's main area of activity, remains steady
and the Company believes it will not change materially in the near future.
Due to the increased population, there is also presently a demand for public
buildings such as, among others, education and community centers. Accordingly,
the Company is also presently focusing its construction efforts in the area of
public buildings. The Company intends to exploit this demand for new buildings
in Israel and to focus its efforts on the development and construction of
residential properties and public buildings in Israel and overseas. See "--
Conditions in Israel--Economic Conditions" below.
Israel's limited supply of land requires the Israeli Government to make
efficient use of the resources available in order to plan for its continuously
growing population. As the percentage of agriculture in Israel's gross
domestic product, exports and employment has fallen in recent years, the
Israeli Government is under pressure to re-zone agricultural land for urban
development. See "--Conditions in Israel--Political Conditions" below.
The policy of the Israeli Government has been to promote home ownership,
both by making new land available to developers through a competitive bidding
process and by offering various entitlement programs to purchasers of
residential properties. In addition, Israel's commercial mortgage banks have
become more competitive and sophisticated in recent years, offering flexible
residential mortgages to their customers as well as providing construction
loans and other financial arrangements to developers. However, the Israeli
banks are subject to certain limits imposed by directives issued by the
Israeli Examiner of Banks. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operation--Liquidity and Capital
Resources."
<PAGE> 3
The Company was incorporated in Israel in November 1992 and commenced
operations in July 1995. In November 1996, the Company changed its name from
Schnapp Equity Limited to Genesis Development and Construction Ltd. The
Company's principal executive offices are located at 10 Hasikma Street, Haifa
31700, Israel, and its telephone number is 972-4-824-4868. The Company
conducts its construction activities through its subsidiaries. All references
in this report to the "Company" shall include such subsidiaries unless the
context otherwise requires.
Business Strategy:
- ------------------
The Company has implemented a business strategy of focusing its efforts
on developing and managing the construction of moderately priced residential
properties, such as affordable, multi-family units, primarily targeted to
newly married couples and immigrants seeking to own their first home, and
public buildings, such as education and community centers. The Israeli real
estate industry is subject to changes resulting from, among other things,
economic and political conditions. Accordingly, the Company intends to adjust
its business strategies in the best interests of the Company to address such
changes and opportunities. The Company's business strategy includes the
following key elements:
* CONSERVATIVE BIDDING POLICIES. The Company intends to minimize the
risks associated with working primarily pursuant to contracts
awarded through a competitive bidding process by conducting
feasibility and market analyses covering all pertinent aspects of
its proposed commitment under a project prior to submitting a bid.
These studies include such technical aspects as title and zoning
characteristics, marketing studies that review population and
employment trends, schools, transportation access, buyer profiles,
sales forecasts, projected profitability, cash requirements and
other factors. Prior to acquiring rights in land, market studies
are completed to determine the needs of the targeted customers and
to determine whether the price of the underlying land rights
enables the Company to meet those needs at an affordable price. The
Company generally purchases rights in land only when it can project
the commencement of construction and sales within a reasonable time
period. The Company utilizes its engineers and project managers as
well as outside architects and consultants, under close
supervision, to help prepare its bid proposals.
* JOINT VENTURES AND OTHER OPPORTUNITIES. The Company utilizes joint
venture partnerships and other collaborative arrangements with
third parties as a means to both expand its market opportunities
and reduce the risks associated with its real estate activities.
Such arrangements include sales by the Company of all or part of
the rights to land which is being developed by the Company. The
Company intends to identify and cultivate a wide source of
potential joint venture or other partners.
<PAGE> 4
* FIXING COSTS. As a matter of policy, the Company will not begin
construction of a project until a significant portion of the
construction costs have been established through fixed
subcontractor fees and, where feasible, the Company has obtained a
substantial percentage of commitments to purchase the units to
satisfy itself that substantially all of the units in each phase of
construction will be sold. This minimizes the Company's risks by
enabling the Company to quantify with reasonable certainty its
ultimate income flow from the project before committing any of its
capital and resources.
* EXPANDING INTO INTERNATIONAL MARKETS. The Company is currently
involved in three development projects outside of Israel. Although
the Company will continue to concentrate its business activity in
Israel, the Company believes that looking beyond the Israeli market
to international markets may increase its opportunities for growth.
The Company is examining emerging international markets with high
growth potential in which it can implement its expertise. The rate
and timing of such expansion and the locations of such activities
will depend on the Company's evaluation of existing market
conditions, estimated profitability and other factors.
Residential Development and Construction Awards:
- ------------------------------------------------
The Company's residential development and construction projects in Israel
have been and are likely to continue to be obtained primarily through the
competitive bidding and raffle processes described below which are conducted
by the various authorities of the Israeli Government. With respect to the
small percentage of land (approximately 10%) not owned by the Israeli
Government and other land subject to long-term leases from the Israeli
Government, the Company may seek opportunities to purchase rights in such land
for development and resale directly from private owners.
COMPETITIVE BIDS FOR SELECTED HOMEBUYERS
In this competitive bidding process, the Israeli Government
establishes criteria for eligible homebuyers. Developers compete for
these projects either by submitting an average unit price at which they
will agree to sell the units to the homebuyers or by submitting a price
for the purchase of the rights to the land. Under the supervision of the
Israeli Government, the winning developer will conduct marketing
activities to sell the units to eligible homebuyers and will be required
to enter into contracts with each of the homebuyers to build a unit
within the general guidelines previously provided by the Israeli
Government to the developer. The developer retains all of the proceeds
from the sale of the units in the project, and the homebuyers own the
rights to the units and the developed land. The costs of any design or
other changes requested beyond the predetermined specifications will be
borne by the homebuyer based upon independent negotiations with the
developer.
<PAGE> 5
COMPETITIVE BIDS FOR LAND
In this competitive bidding process, the developers submit bids to
acquire rights in a specific undeveloped parcel of land. The winning
developer is generally required to pay the Israeli Government the
purchase price for the rights in the land within a specified time period
after winning the bid. With the exception of certain basic guidelines,
the developer will not be restricted as to the terms of its agreements
with the homebuyers but will be obligated to complete development and
construction by a specific date. The developer undertakes its own
marketing efforts to sell the units, and will determine the number of
units, the unit prices and the unit specifications, all within applicable
zoning regulations and the terms of the bid. The character of the
development of the land and the units will be determined by applicable
zoning regulations.
RAFFLE AWARDS
Another method for awarding residential real estate projects is
where the Israeli Government predetermines the purchase price for rights
in an developed parcel of land and awards it to developers pursuant to a
raffle. In this situation, there is no competitive bidding among
potential developers for the rights to develop the land. A winning bidder
will be subject to certain general guidelines as to the terms of its
arrangements with the homebuyers, and is restricted only in the character
of the development of the land and units in accordance with applicable
zoning regulations.
Public Building Development and Construction Awards:
- ----------------------------------------------------
Most of the Company's public building projects have been and are likely
to continue to be obtained through framed bidding conducted by the various
authorities of the Israeli Government. The Israeli Government and its
authorities and municipalities, in response to public demand for particular
types of buildings, such as art and science centers, schools or gymnasiums,
request bids from developers for the development and construction of such
buildings. The project may be for the development and construction of a
specific public building within a specific region of Israel, or even
throughout the entire country. The design and other specifications are either
set by the requisitioning governmental authority before the commencement of
the bidding process or by the winning developer in accordance with general
guidelines supplied by the requisitioning governmental authority. Accordingly,
developers are able to determine a fixed price to submit for the completion of
the project. Upon being awarded a bid, the developer will be required to enter
into a contract for the construction of the public buildings with the
governmental authority which requisitioned the project pursuant to the terms
of the award. The winning developer will be paid in advance or in a
combination of partial advance payment and installment payments of the balance
at various stages of the construction process, depending upon the terms of the
award.
<PAGE> 6
Principal Projects:
- -------------------
The following is a summary of the Company's principal projects that are
under construction or in various stages of the planning process.
RESIDENTIAL PROJECTS
Carmiel I: In March 1997, the Company was engaged as the general
---------
contractor for the construction of 31 residential units in the town of
Carmiel, in northern Israel. Pursuant to the terms of the engagement, the
Company is required to complete construction of the project in December 1998.
Kfar Yona I: In March 1997, the Company was engaged by The Engel Group
-----------
("Engel") as the general contractor for the construction of 65 residential
units in Kfar Yona, a small town in northern Israel. The schedule for
completion of this project has been extended from September 1997 to June 1998.
The penalty for late completion provided for in the initial agreement was not
assessed.
Kfar Yona II: In June 1996, the Company was awarded a project for the
------------
development and construction of 34 residential units in Kfar Yona. The
schedule for completion of this project has been extended from September 1997
to June 1998. The penalty for late completion provided for in the initial
agreement was not assessed.
Rehovot: In March 1997, the Company was awarded by the Israel Land
-------
Administration (the "ILA") rights to develop a parcel of approximately 19
acres in Rehovot, in central Israel. Approximately 1,000 residential units
will be built as well as public and commercial buildings. Pursuant to the
terms of the engagement, the Company is required to complete construction of
the project in March 2002.
Dovrat: In June 1997, the Company was engaged as the general contractor
------
for the construction of 64 residential units in the first phase of a 300 unit
project on privately owned land in Dovrat, a small town in northern Israel.
Pursuant to the terms of the engagement, the Company is required to complete
the first phase of construction of the project in December 1998.
Haifa: In September 1997, the Company acquired a 25% interest in a
-----
project for the development and construction of two apartment buildings
containing approximately 80 residential units on a parcel of land in Haifa,
located in the vicinity of the Technion Israel Institute. Construction will
commence upon the issuance of a construction permit by the municipality.
<PAGE> 7
Kiryat Shmuel: In November 1997, the Company was engaged as the general
-------------
contractor for the construction of 58 residential units in Kiryat Shmuel, a
town in northern Israel. Pursuant to the terms of the engagement, the Company
is required to complete construction of the project in December 1999.
Carmiel II: In December 1997, the Company entered into an agreement with
----------
Engel to purchase the rights to a parcel of land in Carmiel. Although the ILA
has recommended zoning to permit construction of approximately 167 residential
units on this parcel, the Company will seek permission to build approximately
300 residential units, 80 of which will be leased by the Company and the
remaining 220 of which will be sold. Construction is scheduled to commence in
July 1998 and will continue for approximately eighteen months.
Modi'in: In December 1997, the Company was engaged as general contractor
-------
for the construction of 85 land-attached residential units in Modi'in, a town
in central Israel. Construction commenced in December, 1997 and will continue
for approximately two years.
OVERSEAS PROJECTS
Rassnitz, Germany: In March 1997, the Company acquired a 36% interest in
-----------------
a project for the development and construction of a residential neighborhood
in Rassnitz, Germany. The Company anticipates that a total of 250 residential
units will be built in this project. In April 1997, 21.87% of the outstanding
shares of a subsidiary of Engel, the 64% partner in this project, were
purchased by the Company, giving the Company an aggregate interest of 50% in
this project. In September 1997, the Company sold 50% of its interest in this
project to Shay Bar Real Estate Investments Ltd., an Israeli company ("Shay
Bar"). Pursuant to the terms of the engagement, the Company is required to
complete construction of the project in December 2002. See "Interest of
Management in Certain Transactions."
Southampton, New York: In March 1997, the Company acquired a 50%
---------------------
interest in a project for the development and construction of 33 single family
homes situated in Southampton, New York. Construction is scheduled to commence
in the third quarter of 1998.
Moscow, Russia: In April 1997, the Company acquired a 25% interest in a
--------------
project for the renovation of an office building in Moscow and for additional
related construction. In September 1997, the Company sold 50% of its interest
in this project to Shay Bar. Construction is scheduled to be completed in the
fourth quarter of 1998. See "Interest of Management in Certain
Transactions."
<PAGE> 8
PUBLIC BUILDINGS PROJECTS
Mifal Hapayis Community Centers
-------------------------------
In February 1996, pursuant to a bid conducted by Mifal Hapayis, Engel and
four other companies were awarded projects for the construction of
approximately 75 identical art and science centers on the grounds of different
municipalities throughout Israel. Mifal Hapayis is a quasi-governmental
institution which runs the Israeli national lottery and uses its revenues for
the benefit of the public, particularly for financing the construction of
public facilities. Pursuant to the bid, each of the winning companies will
enter into a contract for the construction of an art and science center with
each municipality which approaches it pursuant to the terms of the award. In
August 1995, the Company entered into an agreement with Engel pursuant to
which Engel was required to engage the Company as subcontractor for each of
such projects for which it is retained, upon substantially the same terms as
the contract entered into between Engel and the municipality. To date, the
Company has been engaged by Engel to act as subcontractor for the construction
of five such centers. Two such centers have been completed and the schedule
for completion of construction of the remaining three centers has been
extended, due to delays in completion of related development work being
carried out by unrelated contractors. The penalty for late completion
provided for in the initial engagement was not assessed. In October 1996, the
Company modified its agreement with Engel and released Engel from its
commitment to engage the Company as a subcontractor for further Mifal Hapayis
projects, in exchange for which Engel has agreed to pay the Company NIS
300,000 ($84,842) for each contract Engel enters into with a municipality
under this award in return for the general supervision by the Company of the
project and other services to be provided by the Company in connection with
the project. To date, Engel has been retained for the construction of seven
additional art and science centers, for which the Company will provide the
agreed upon services. The Company intends to continue to reduce its
dependence upon Engel and to independently seek project awards. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Relationship with Engel."
Educational Buildings
---------------------
In November 1995, the Company was engaged by Engel as subcontractor for
the construction of a school building at a youth village in Petach Tikva,
which is near Tel Aviv. The first phase of this project was completed on
schedule in September 1997. The second phase of this project, consisting of
additional construction not included in the initial agreement, is scheduled
for completion in August 1998. This project was awarded to Engel pursuant to
a bid conducted by Local Government Economic Services Ltd. ("LGES"). Pursuant
to the bid, the winning contractors are to receive from time to time orders
which LGES receives from local authorities for the construction of public and
educational buildings within their municipalities.
<PAGE> 9
In July 1996, the Company received notice of its being one of the winners
in the bid conducted by LGES for the construction of public and educational
buildings in northern Israel. The bid is similar to the bid conducted by LGES
pursuant to which the Company is acting as a subcontractor for Engel. Pursuant
to the bid, the winning contractors are to receive from time to time orders
which the LGES receives from local authorities for the construction of public
and educational buildings within their municipalities. To date, the Company
has received two orders under this award. One such order was received in
November 1996, for the construction of additional classes for an elementary
school in Rechasim, located near Haifa in northern Israel. Construction of
this project was completed on schedule in August 1997. In June 1997, the
Company received an additional order under this bid, for the construction of
an electricity facility at a school in Haifa. Construction of this project was
completed on schedule in July 1997.
In December 1996, the Company received notice of its being one of the
winners in another similar bid conducted by LGES for the design and
construction of schools in northern Israel. Pursuant to the bid, the winning
contractors are to receive from time to time orders which the LGES receives
from local authorities for the construction of school buildings within their
municipalities. The revenues from the projects will depend upon the size of
the project, in accordance with the bid prices and planning specifications
submitted by the Company in the bid. The Company will be engaged for the
development of each of the projects at prices to be negotiated with the
municipalities. To date the Company has not received any orders under this
bid.
In February 1997, the Company was engaged as subcontractor by the winner
in another LGES bid, for the construction of an administration, science and
technology building in Lev Hasharon, in central Israel. The schedule for
completion of construction of this project has been extended from February
1998 to July 1998. The penalty for late completion provided for in the
initial agreement was not assessed.
Gymnasiums
----------
In August 1996, the Company received notice of its being one of the
winners in a bid conducted by LGES for the construction of gymnasiums in
central and northern Israel. Pursuant to the bid, the winning contractors are
to receive from time to time orders which the LGES receives from local
authorities for the construction of gymnasiums within their municipalities.
The revenues from the projects have been fixed at various levels depending
upon the size of the project, in accordance with the bid prices submitted by
the Company. In January 1997, the Company received orders for the
construction of four gymnasiums pursuant to this bid, two in Holon, one in Tel
Aviv and one in Lev Hasharon. Construction of the gymnasium in Lev Hasharon
was completed on schedule in October 1997. The schedule for completion of
construction of the gymnasiums in Holon has been extended from December 1997
to June 1998. The schedule for completion of construction of the gymnasium in
Tel-Aviv has been extended from January 1998 to August 1998, as a result of an
order for additional work which was not included in the initial engagement.
<PAGE> 10
In June 1997, the Company received an order for the construction of a
gymnasium in Haifa. Pursuant to the terms of this engagement, the Company is
required to complete construction of this project in August 1998.
There can be no assurance that the Company will be successful in
completing its projects. Furthermore, if the Company is unable to complete its
projects within applicable deadlines or in accordance with specifications, the
Company may, in certain instances, be subject to significant liabilities
including, among other things, monetary penalties, losses due to forfeiture
and litigations for breach of contract, all of which may have a material
adverse effect on the Company.
Further, from time to time, the Company may be affected by disputes
between other parties who may seek to challenge certain projects granted to or
undertaken by the Company. There are currently two actions involving such
disputes pending, the outcome of which the Company cannot predict. The Company
does not believe, however, that an adverse outcome of such actions may have a
material adverse effect on the business or financial condition of the Company.
Military Construction
---------------------
In April 1998, the Company was awarded a construction project by the
Israeli Government's Ministry of Defense. In order to participate in this
project, the Company obtained a special security rating from the Ministry of
Defense which will enable it to participate in other classified military
projects in the future. See "Description of Business--Regulatory Matters."
Other Real Estate Activities:
- ----------------------------
CONSULTING, MANAGEMENT AND FINANCIAL MANAGEMENT SERVICES. The Company
provides consulting, management and financial management services for which it
generally receives a percentage of the net profits or the revenues generated
by the project. The Company may act as a finder for bank construction loans
and guarantees. The Company believes that the experience of its management
qualifies it to render a wide array of services in the real estate industry.
SALES OF REAL ESTATE DEVELOPMENT RIGHTS. The Company utilizes joint
venture partnerships and other collaborative arrangements with third parties
as a means to both expand its market opportunities and reduce the risks
associated with its real estate activities. Such arrangements include sales
by the Company of all or part of the rights to land which is being developed
by the Company. The Company intends to identify and cultivate a wide source
of potential joint venture or other partners.
OPTION TO ACQUIRE CONTROLLING INTEREST IN OIL, ENERGY AND REAL ESTATE
HOLDING COMPANY. In June 1998, Moshe Schnapp and Eli Aran, the Company's
principal shareholders and its Chairman and President, respectively, submitted
the winning bid in a tender to acquire a controlling interest in Granit
Hacarmel Investments Ltd. ("Granit Hacarmel"), one of the three largest oil,
energy and real estate holding company in Israel. Messrs. Schnapp and Aran
<PAGE> 11
participated in the tender in their individual capacities for purposes of
qualification eligibility. The Company believes that it will ultimately
acquire all or a portion of their interest in Granit Hacarmel. However, the
Company's role is not certain at this time and will depend upon numerous
factors including, without limitation, the financing of the transaction.
ACQUISITION AND DEVELOPMENT OF INCOME-PRODUCING RESIDENTIAL PROPERTIES.
In January 1998, the Company acquired interests in two properties designated
by the Company for renovation and long term lease to the Israeli Government's
Ministry of Absorption ("Ministry of Absorption"). One such property is a
building formerly used as a hotel in Bat-Yam, a city in central Israel, which,
after renovation, will contain approximately 76 studio apartments. The second
such property is a group of apartment buildings in Tel-Aviv which will contain
approximately 200 studio apartments after renovation. The Company has entered
into a five-year lease agreements with the Ministry of Absorption with respect
to each of these properties, granting options to the Ministry of Absorption
for additional five year-terms.
Subcontractors and Suppliers:
- ----------------------------
The Company functions as a general contractor, subcontracting all of its
construction activities. The Company manages these activities with on-site
supervisory employees such as project managers and field engineers. The
services of independent architectural, design, engineering and other
consulting firms are engaged to assist in project planning. The Company does
not have long-term contractual commitments with its subcontractors or
consultants, who are generally selected on a competitive basis. The Company
will retain primary responsibility for the overall project performance. The
Company will also be responsible for arranging the necessary bank financing,
for obtaining any necessary permits for construction, and for obtaining
adequate insurance for the project. See "Legal Proceedings." The
subcontractor is required to arrange for the necessary labor and supplies and
provide the necessary equipment for the completion of the project. The
Company is substantially dependent upon its subcontractors to complete its
projects in a timely manner and in accordance with specifications.
Accordingly, the Company is subject to risks such as performance delays,
substandard construction and the financial difficulties of the subcontractor.
Although the Company's contracts with its subcontractors generally require the
subcontractors to obtain performance guarantees with respect to projects, the
Company's present policy does not always require the subcontractors to provide
the Company with guarantees. To quantify project costs, the Company seeks to
fix its subcontracting costs prior to the commencement of construction and to
condition certain obligations on the receipt of related payments due to the
Company.
<PAGE> 12
The building industry may from time to time experience fluctuating prices
and supply for raw materials. Cement is the principal raw material utilized in
the construction of Israeli homes and buildings. Nesher Israel Cement
Enterprises Ltd. ("Nesher") is presently Israel's principal producer of
cement. Most other cement must be imported. Although the Israeli Government
regulates the services and prices charged by monopolies such as Nesher, the
lack of competition in the Israeli cement market may have an effect on cement
prices and, as a result, the costs of construction. The Company has no
contractual commitments with suppliers of materials. Other than Nesher, the
Company's business is not materially dependent upon any suppliers.
Marketing and Sales:
- -------------------
As soon as possible after winning a bid for a residential project, the
Company commences its marketing efforts to sell each of the units to be
constructed. The Company markets its residential units primarily to newly
married couples and immigrants seeking to own their first home. Each unit
purchaser generally is required to provide a downpayment with respect to a
specific percentage of the unit purchase price. The Company's policy is to
require sales commitments with respect to at least 50% of the units before
engaging a subcontractor or otherwise committing any significant capital to
any phase of a project. The deposits will typically provide the Company with
sufficient capital for the commencement of the project. The Company is
required under Israeli law to provide the unit purchasers with bank guarantees
which cover an amount equal to the funds received by the Company from such
purchasers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Mortgage Financing and Governmental Entitlement Programs:
- --------------------------------------------------------
There are two primary sources in Israel for obtaining financing for the
purchase of properties: traditional bank and insurance company mortgages and
government entitlement programs. Bank mortgages in Israel are typical of most
of the world, providing for a long-term loan requiring monthly payments and
secured by a lien on the property.
The Israeli Government has established entitlement programs for the
purpose of encouraging home ownership. Most entitlement programs relating to
home ownership are targeted to first time home buyers, usually newly married
couples and immigrants. These programs provide for low-interest loans and
small grants. The degree of assistance will depend upon the category of
population (e.g., married, immigrant, number of children) and the location of
the residential unit. Although the policies of the various entitlement
programs change from time to time, they are presently stable. However, there
can be no assurance that the Israeli Government's policies in this area will
not change due to political, economic or other considerations. Any such change
of policy could have a material adverse effect on the Company's results of
operations.
<PAGE> 13
Competition:
- -----------
The real estate industry in Israel is highly competitive, with developers
competing for customers, desirable properties and financing. The Company
competes with numerous other firms, ranging from regional and national firms
to small local companies. In addition, the Company competes with resales of
existing residential properties by individuals, financial institutions and
others.
As most land in Israel is owned by the Israeli Government, most of the
Company's projects in Israel are and will continue to be obtained primarily
through public bidding or raffle processes. The Company will be required to
place competitive bids for residential and public projects with the various
governmental authorities. Some of the Company's competitors have longer
operating histories and greater financial, marketing and sales resources than
the Company, all of which may be necessary to qualify or pre-qualify for
certain government project awards and may hinder the Company's ability to bid
for or participate in such projects. There can be no assurance that the
Company will be successful in winning projects for which it submits bids or
otherwise be successful in competing in the Israeli real estate industry.
Regulatory Matters:
- ------------------
There are two categories of land in Israel. "Freehold" land, which
constitutes approximately 10% of all land in Israel, is owned primarily by
individuals and private legal entities, as well as by municipal and
governmental entities. The Israeli Government and the Jewish National Fund own
all of the remaining land. Through its administrative body, the ILA, the
Israeli Government grants long-term leases for the use of its land. A basic
long-term lease is generally for 49 years, and may be extended by the lessee
for additional successive 49-year periods.
Real estate development and construction are heavily regulated in Israel.
The Company and its competitors are subject to rules and regulations
concerning zoning, building design, construction and similar matters which
impose restrictive zoning and density requirements. Development plans usually
require approval by three municipal and governmental bodies: the municipal
authorities, the regional authorities and the Israeli Government's Ministry of
the Interior. Once a plan is approved by all required levels, the developer
must apply for a construction permit for a specific project from the municipal
authorities. The application must be consistent with the development scheme
established by the Ministry of the Interior and be approved by the municipal
and regional authorities. Each lot is zoned for a specific purpose. An
applicant may request a zoning change. A betterment levy may be levied on
rezoned land. As experience in dealing with the extensive Israeli planning
process is thus a critical success factor in real estate development, the
Company believes the experience of its management provides it with the ability
to compete in its markets.
<PAGE> 14
The Israeli Government owns and leases both developed and undeveloped
land. Developed land is leased to the public by the ILA for an amortized or
annual fee. In order to lease undeveloped lands, a development agreement must
be entered into with the ILA pursuant to which the lessee undertakes to
develop the land in accordance with certain requirements, and to complete the
development within a specified time table. If the purported lessee fails to
satisfy the requirements within the time table, the land and any improvements
may be repossessed by the ILA. Lease fees for undeveloped land are payable to
the ILA for the full lease term in advance upon the signing of the development
agreement.
Transfers of rights in government-owned land are normally granted in the
ordinary course upon payment to the ILA of a transfer consent fee which is
calculated on the basis of the increase in value of the land, but without
taking into account any increase in value resulting from construction by the
lessee. Sales of land rights previously purchased for development are not
subject to transfer consent fees.
All Israeli general contractors are required to be registered with the
Housing Ministry, and their registrations are classified within the range of
C-1 to C-5. The financial scope of a contractor's activities as well as the
size of projects to be undertaken by it are subject to the limitations imposed
by its particular classification. Genesis Construction Performance (1994)
Ltd., formerly known as TSMG Construction Company Limited, a wholly owned
subsidiary of the Company, possesses a C-5 classification which enables the
Company to undertake projects of an unlimited financial scope and an unlimited
project size, as well as G-1 and B-1 classifications, which enable the Company
to undertake infrastructure development, road, sewage and drainage
construction projects. The registration is automatically renewed each year
unless there is cause for non-renewal, principally due to bankruptcy, certain
criminal offenses or the failure to maintain the requisite qualified
personnel. For purposes of maintaining such registration, the Company employs
two professional workers approved by the Israeli Contractor's Register.
In addition, the Company has obtained a special security rating from the
Israeli Government's Ministry of Defense, designated C-5*, which will enable
the Company to participate in classified military projects in the future. See
"--Principal Projects--Public Buildings Projects-- Military Construction."
The European Economic Community has established ISO 9002 standards for
minimal product quality, levels of production and management efficiency.
Companies meeting these standards receive a certificate from the Israeli
Standards Institution, a governmental institution which supervises the quality
and safety of products. In July 1996, the Company engaged a consulting company
to introduce to the Company working and managerial patterns that will enable
it to meet the standards. Although ISO 9002 is mostly relevant to industrial
companies, the Company believes that meeting such standards will contribute to
its efficiency.
<PAGE> 15
Employees:
- ---------
At June 28, 1998, the Company had fifty-four full-time employees,
including its chief engineer and field engineers and nine administrative
office employees. The Company also utilizes independent field engineers from
the localities of its various projects. The Company currently utilizes and
intends to continue to utilize an independent contractor as its projects
manager. The Company considers its relations with its employees to be good.
The Company believes that its current staff of employees is adequate to meet
its present needs. The Company's construction operations are conducted through
independent subcontractors, thereby limiting the number of its employees. None
of the Company's employees is represented by a union. See "--Subcontractors
and Suppliers" above.
Israeli law and orders of the Israeli Government's Ministry of Labor and
Welfare contain provisions concerning principally the length of the work day,
minimum daily wages, insurance for work-related accidents, determination of
severance pay, adjustments of wages in accordance with inflation and other
conditions of employment. The Company generally provides its employees with
benefits and working conditions above the required minimums. See "Compensation
of Directors and Officers" below.
There is currently no shortage of labor in Israel for the Company's
industry due to a readily available foreign labor force. As a result of
restrictions on the entry of Palestinian workers, it is the Company's policy
not to utilize subcontractors who employ any workers residing within the zones
typically restricted as such. The Company currently relies on subcontractors
who employ local and foreign workers. The Company has a license issued by the
Ministry of the Interior, to employ foreign workers and is required to deposit
as collateral security certain amounts with the Ministry of the Interior as a
condition to its employment of foreign workers. There can be no assurance that
the Company will not experience labor shortages in the future. Recently, the
Israeli Government has limited issuing new licenses for foreign workers
seeking employment in Israel. Although the Company believes that there is
presently a sufficient number of foreign laborers to satisfy the Company's
current demands, there can be no assurance that the Israeli Government will
not respond to political and social conditions with protectionist measures
such as the expulsion of existing foreign laborers, or that as the Company's
demand for workers increases there will be a sufficient number of foreign and
other workers available to satisfy such demands. The increased costs and
delays in construction of projects due to these factors could have an adverse
effect upon the Company's operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<PAGE> 16
Conditions in Israel:
- --------------------
The Company's operations are conducted primarily in Israel and
accordingly, the Company is directly affected by economic, political and
military conditions in that country. The operations of the Company could be
materially adversely affected if major hostilities involving Israel should
occur in the Middle East.
POLITICAL CONDITIONS
- --------------------
Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying as to degree and intensity, between Israel and
its Arab neighbors. Following the Six-Day War in 1967, Israel commenced
administering the territories of the West Bank and the Gaza Strip and, since
December 1987, increased civil unrest has existed in these territories. In
addition, Israel has been the target of terrorist activities and attacks, in
varying degrees of intensity. Although, as described below, Israel has
entered into various agreements with Arab countries and the Palestine
Liberation Organization ("PLO") and various declarations have been signed in
connection with efforts to resolve some of the aforementioned problems, no
prediction can be made as to whether a full resolution of these problems will
be achieved or as to the nature of any such resolution. To date, these
problems have not had a material adverse impact on the financial condition or
operation of the Company, although there can be no assurance that continuation
of these problems will not have such an impact in the future.
In 1979, a peace agreement between Israel and Egypt was signed under
which full political relations were established; however, economic relations
have been limited.
In September 1993, a breakthrough occurred in Israeli-Palestinian
relations. A joint Israeli-Palestinian Declaration of Principles was signed by
Israel and the PLO in Washington, D.C., outlining interim Palestinian
self-government arrangements.
In May 1994, Israel and the PLO signed an agreement in Cairo in which the
principles of the September 1993 Declaration of Principles were implemented.
In accordance with this agreement, Israel has transferred the civil
administration of the Gaza Strip, Jericho and other parts of the West Bank to
the Palestinian Self-Rule Authority and the Israeli army has withdrawn from
some of these areas. In September 1995, Israel and the PLO signed an Interim
Agreement to further implement the principles of the September 1993
Declaration of Principles. The Interim Agreement provides for the gradual
redeployment of Israeli military forces in the West Bank and the transfer of
certain powers and governmental responsibilities to a Palestinian elected
council.
<PAGE> 17
In October 1994, Israel and Jordan signed a peace treaty (the "Treaty").
Following the Treaty, full diplomatic relations between the two countries have
been established, including the exchange of ambassadors and consuls. In
addition, the Treaty expresses the mutual desire of the parties for economic
cooperation and calls for both parties to lift economic barriers and
discrimination against each other and to act jointly towards the removal of
any economic boycotts by third parties. In December, 1996, Israel and Jordan
signed a trade agreement designed to liberalize trade between the two
countries.
On November 4, 1995, Prime Minister Yitzhak Rabin was assassinated. In
the elections held on May 29, 1996, Benjamin Netanyahu of the Likud party was
elected prime minister of Israel.
To date, Israel has not entered into a peace treaty with either Lebanon
or Syria. Furthermore, notwithstanding the agreements and declarations
described above, the relations between Israel and Egypt and between Israel and
the PLO are not yet fully formalized.
From time to time hostilities break out on Israel's border with Lebanon
between Israel and guerilla groups based in South Lebanon. Although these
hostilities sometimes result in extensive damage to private property in
northern Israel, including areas within which the Company conducts its real
estate activities, the Company does not believe that the operations related to
these hostilities will have material effect on the Company's assets or results
of operations.
Recently there has been stagnation in the peace process in the Middle
East. No prediction can be made as to whether or how this process will
develop or what effect it may have on the Company.
ARMY SERVICE
- ------------
All male adult citizens of Israel under the age of 51 are, unless exempt,
obligated to perform approximately 30 days of military reserve duty annually.
Additionally, all such citizens are subject to being called to active duty at
any time under emergency circumstances. Some of the employees of the Company
are obligated to perform annual reserve duty. While the Company has operated
effectively under these requirements in the past, no assessment can be made of
the full impact of such requirements on the Company in the future,
particularly if emergency circumstances occur.
<PAGE> 18
ECONOMIC CONDITIONS
- -------------------
Israel's economy continued to grow in 1997, but at a considerably lower
pace than in recent years. Gross domestic product ( "GDP") rose in 1997 by
1.9% to NIS 338 billion ($96 billion) compared with a 4.4% increase in 1996
and an annual average growth rate of 6% from 1990 through 1995. The 1997 GDP
growth rate was less than the economy's potential, and lower than the 2.4%
increase in Israel's population, resulting in a 0.3% decrease in per capita
GDP. The Israeli Government's monetary policy contributed to relative price
and exchange rate stability during most of these years despite fluctuating
rates of economic growth and a high rate of unemployment. According to the
ICBS, the inflation rates for 1996 and 1997 were approximately 10.6% and 7.0%,
respectively, and in the first three months of 1998 was approximately 0.06%.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
currency reserves, fluctuations in world commodity prices, military conflicts
and civil unrest among the Palestinian population. The Israeli Government
intervenes in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and foreign currency exchange rates. The Israeli
Government frequently has changed its policies in all these areas.
The following tables sets forth, for the periods indicated, certain
information with respect to the Israeli Consumer Price Index ("CPI"), the rate
of inflation in Israel, the rate of devaluation in Israel and the rate of
inflation adjusted for devaluation.
<TABLE>
<CAPTION>
Annual
Inflation
Israel Annual Adjusted For
Israeli Inflation Devaluation Devaluation
Year Ended Consumer Rate(2) Rate(3) (4)
December 31, Price Index(1) % % %
- ------------ -------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
1990 176.3 17.6 4.3 12.7
1991 208.1 18.0 11.5 5.9
1992 227.6 9.4 21.1 (9.7)
1993 253.2 11.2 8.0 3.0
1994 289.8 14.5 1.1 13.2
1995 313.3 8.1 3.9 4.0
1996 346.4 10.6 3.7 6.7
1997 370.6 7.0 8.8 (1.65)
</TABLE>
<PAGE> 19
- ------------
(1) For purposes of this table, the CPI figures use 1987 as base equal to
100. These figures are based on reports of the ICBS.
(2) Annual inflation is the percentage change in the CPI between December of
the year indicated and December of the preceding year.
(3) Annual devaluation is the percentage increase in the value of the dollar
in relation to the Israeli currency during the year indicated.
(4) Annual inflation adjusted for devaluation is obtained by dividing the
Israeli inflation rate plus 100 by the annual devaluation rate plus 100,
multiplied by 100, minus 100.
NIS/U.S. Dollar Exchange Rates:
<TABLE>
<CAPTION>
At End of
Period(1) Average Rate(2) High Low
--------- --------------- ---- ---
(NIS per $1.00)
<S> <C> <C> <C> <C>
1991 2.28 2.28 2.46 1.99
1992 2.76 2.46 2.76 2.27
1993 2.99 2.66 3.00 2.72
1994 3.02 3.01 3.06 2.96
1995 3.14 3.01 3.18 2.94
1996 3.25 3.19 3.30 3.08
1997 3.54 3.45 3.59 3.24
</TABLE>
- ----------
(1) Exchange rate at period end is the rate of exchange between the Israeli
currency and the dollar as of December 31 of the year indicated, as
reported by the Bank of Israel.
(2) Average rate is the average of the daily exchange rates during the year.
DEMOGRAPHICS
- ------------
Since 1989, Israel has been experiencing a new wave of immigration,
primarily from the former Soviet Union. Approximately 845,000 new immigrants
arrived during the period from 1989 through the end of 1997, of which
approximately 66,000 arrived in 1997. This wave of immigration has increased
Israel's population by approximately 30%. Although the increased emigration
from the former Soviet Union may benefit Israel and its economy in the long
term by providing highly educated, cost-competitive labor and by stimulating
economic growth, it has placed an increased strain on government services and
natural resources. The Israeli Government has found it necessary to raise
additional revenue and to dedicate substantial funds to support programs,
including housing, education and job training, designed to assist in the
<PAGE> 20
absorption of the new immigrants. No prediction can be made as to the policies
that will be adopted in the future or their effect on these and other
government spending programs.
ASSISTANCE FROM THE UNITED STATES
- ---------------------------------
The State of Israel receives a significant amount of economic and
military assistance from the United States, averaging approximately $3 billion
annually over the last several years. In addition, in 1992, the United States
approved the issuance of up to $10 billion of loan guarantees during United
States fiscal years 1993-1998 to help Israel absorb a large influx of new
immigrants, primarily from the republics of the former Soviet Union. Under the
loan guarantee program, Israel may borrow up to $2 billion in principal amount
of guaranteed loans each year, subject to reduction in certain circumstances.
In January 1998, Israel issued $1.44 billion of 30-year U.S. Government-backed
bonds, which was the last issue conducted as part of the U.S. Government
guaranteed facility. Israel has used the funds it has borrowed in 1993-1998
to bolster its foreign exchange reserves and to fund increased investments,
mainly in infrastructure. There is no assurance that foreign aid from the
United States will continue at or near amounts received in the past. In
January 1998, Israeli and American officials began discussions concerning
gradually ending the annual civilian aid package of $1.2 billion. If the
grants for economic and military assistance or the United States loan
guarantees are eliminated or reduced significantly, the Israeli economy could
suffer material adverse consequences.
ITEM 2. DESCRIPTION OF PROPERTY
- ------- -----------------------
In addition to rights in real estate currently held for development and
sale, the Company owns office space for its corporate headquarters, located in
Haifa in northern Israel. The Company purchased the rights to such space in
May 1996 for $126,250 and has since obtained a 15-year mortgage on the
property in the amount of approximately NIS 355,200 ($100,452). Such mortgage
bears interest at the rate of 5.5% and requires equal monthly payments of
principal and interest in the amount of approximately NIS 2,700 ($830),
subject to adjustments in accordance with the CPI. The Company has also leased
office space in a neighboring building. The term of such lease is for 60
months, commencing January 1997, with an option for the Company to extend the
lease for an additional 12 months. The payments under the lease are $550 per
month. In addition, the Company has leased office space in Tel-Aviv. The
term of such lease is for 12 months, commencing December, 1997. The monthly
payments under this lease are NIS 12,680 ($3,586). The Company's U.S.
subsidiary, Genesis Development and Construction, Inc., has leased office
space in New City, New York. The term of such lease is for one year,
commencing March 1997, with an option to extend such term for two additional
years. The payments under the lease are $1,275 per month. The Company's
office space is adequate for its anticipated future needs.
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
There are no material legal proceedings pending to which the Company or
any of its property is subject, and to the knowledge of the Company, there are
no such proceedings threatened.
Substantially all of the Company's construction contracts relating to the
Company's projects for which it acts as the general contractor provide that
the Company is responsible for maintaining and supervising each construction
site. As general contractor, the Company is liable for any damages to a
project and any injury sustained by any person on a construction site, and is
required to obtain sufficient insurance, including insurance for property
damage, personal injury and workers compensation. Although the Company
currently maintains liability and workers compensation insurance that it
believes is adequate as to both risk and amounts for each of its projects,
successful claims could exceed the limits of the Company's insurance and could
have a material adverse effect on the Company's business, financial condition
or operating results. Moreover, there can be no assurance that the Company
will be able to obtain such insurance on commercially reasonable terms in the
future or that any such insurance will provide adequate coverage against
potential claims. In addition, a claim asserted against the Company could be
costly to defend, could consume management resources and could adversely
affect the Company's reputation and business, regardless of the merit or
eventual outcome of such claim.
ITEM 4. CONTROL OF REGISTRANT
- ------- ---------------------
The following table sets forth certain information as of June 28, 1998
with respect to the beneficial ownership of the Company's outstanding Class A
Ordinary Shares, NIS 0.1 par value (the "Class A Ordinary Shares"), and Class
B Ordinary Shares, NIS 0.1 par value (the "Class B Ordinary Shares" and
together with the Class A Ordinary Shares, collectively the "Ordinary
Shares") by (i) any shareholder known to the Company to beneficially own more
than ten percent of such outstanding shares and (ii) the Company's directors
and officers as a group.
<PAGE> 22
<TABLE>
<CAPTION>
Percentage
of
Vote as a
Class A Class B Single
Ordinary Shares Ordinary Shares Class(1)
--------------- --------------- ----------
Name Number % Number %
- ---- ---------- ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Moshe Schnapp -- -- 3,000,000(2) 100 83.2
Eli Aran 15,000(3) * 1,110,000(4) 37 30.9
Dashwood International -- -- 600,000 20 16.6
S.A.
All officers and
directors
as group 755,000(5) 24.7 3,000,000(2) 100 87.4
(4)
</TABLE>
- -----------------------
* Less than 1%.
(1) For purposes of this calculation, the Class A Ordinary Shares and the
Class B Ordinary Shares are treated as a single class. The Class B
Ordinary Shares are entitled to five votes per share, whereas the
Class A Ordinary Shares are entitled to one vote per share.
(2) Includes 1,200,000 Class B Ordinary Shares held by Ageret Sixteen (93)
Ltd., an Israeli corporation which is wholly-owned and controlled by
Moshe Schnapp. Also includes 1,800,000 Class B Ordinary Shares held by
the Company's other existing shareholders (Dashwood International S.A.
("Dashwood") (600,000 shares), Eli Aran, as trustee for his wife
(1,110,000 shares) and Allied Capital Services, LLC (90,000 shares)).
Mr. Schnapp has sole voting authority over such shares pursuant to
voting agreements and is deemed to beneficially own such shares. Such
voting arrangements will expire upon the earlier to occur of
(i) September 30, 2001 with respect to the Dashwood shares, or
October 23, 2001 with respect to the other shares, and (ii) the date on
which Mr. Schnapp ceases to be the chief executive officer of the
Company.
(3) Represents shares issuable upon currently exercisable options granted to
non-employee directors of the Company residing in the United States. See
"Options to Purchase Securities from Registrant or Subsidiaries."
(4) Includes 1,110,000 Class B Ordinary Shares held by Mr. Aran as trustee
of a trust for the benefit of his wife, Irit Aran. Such shares are
subject to a voting agreement described in footnote 2 above.
<PAGE> 23
(5) Includes (i) 700,000 shares issuable upon currently exercisable options
granted to officers of the Company pursuant to the Company's employee
stock option plans, (ii) 30,000 shares issuable upon currently
exercisable options granted to non-employee directors of the Company
residing in the United States, see "Options to Purchase Securities from
Registrant," and (iii) 25,000 Class A Ordinary Shares issuable upon
exercise of the redeemable Class A Warrants (the "Class A Warrants")
acquired by Gary J. Strauss in a private placement completed by the
Company in November 1996.
PERFORMANCE SHARES
The Company's Articles of Association provide that 2,660,000 Class B
Ordinary Shares (the "Performance Shares") are subject to a share deferrence
program (the "Deferrence Program"). Pursuant to the Deferrence Program, the
Performance Shares would convert into "Deferred Shares" (having no rights
other than the right to receive an amount not in excess of the par value
thereof (NIS 0.1) upon dissolution of the Company) if the Company does not
attain certain earnings levels. Such earnings levels were attained in the
Company's 1997 fiscal year and all of the Performance Shares have been
released from the Deferrence Program. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Charge to Income
as a Result of Release of Performance Shares from Deferrence Program."
ITEM 5. NATURE OF TRADING MARKET
- ------- ------------------------
The Company's (i) Units, each consisting of one Class A Ordinary Share,
one Class A Warrant and one redeemable Class B Warrant (the "Class B
Warrants"), (ii) Class A Ordinary Shares, (iii) Class A Warrants and (iv)
Class B Warrants (collectively the "Securities") have been quoted separately
on The Nasdaq SmallCap Market ("Nasdaq") under the symbols GDCUF, GDCOF, GDCWF
and GDCZF, respectively, since the effective date of the Company's initial
public offering (the "Offering") on January 30, 1997. The following table sets
forth the high and low sales prices of the Company's Securities for the
periods indicated as reported by Nasdaq:
<PAGE> 24
<TABLE>
<CAPTION>
Quarters Ended:
Class A
Ordinary Class A Class B
------- -------- -------- -------
Units Shares Warrants Warrants
------- -------- -------- --------
High Low High Low High Low High Low
------- ------ -------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997 6 1/2 4 3/4 4 13/64 3 11 11/16 1 25/32 3/4
September 30, 1997 8 1/4 5 3/8 5 1/4 3 5/8 2 1/4 1 3/8 7/8 1/2
December 31, 1997 8 5 1/8 4 3/4 3 2 1/4 1 1/4 7/8 3/4
March 31, 1998 8 3/4 4 3/4 6 5/8 3 2 1 1 5/8
</TABLE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
- ------- ----------------------------------------------------------
HOLDERS
-------
The Bank of Israel recently adopted measures to liberalize foreign
currency regulations. The implementation of certain of these measures is
subject to further legislation. The Company can not currently assess the
impact of such steps on its shareholders. In connection with these measures,
the Bank of Israel amended the general permit issued under the Currency
Control Law, 1978, (the "General Permit") to permit non-residents of Israel to
convert Israeli currency into freely repatriable U.S. dollars or other non-
Israeli currency and transfer such currency out of Israel, including
converting dividends (if any) on the Ordinary Shares, and any amounts payable
upon the dissolution, liquidation or winding up of the affairs of the Company
at the exchange rate prevailing at the time of conversion, provided that
Israeli income tax has been paid or withheld with respect to such amounts to
the extent applicable, or an exemption from such payment or withholding
requirements has been obtained.
Non-residents of Israel may freely hold and trade the Company's
Securities pursuant to the General Permit. With the exception of residents of
countries which are in a state of war with Israel, the ownership or voting of
the Company's Securities by non-residents of Israel is not restricted in any
way by the Memorandum of Association or Articles of Association of the Company
or by the laws of the State of Israel.
There can be no assurance that the above laws and regulations will not be
altered or replaced in the future. Any changes in the laws and regulations
described above could have a material adverse effect on the holders of
Ordinary Shares.
<PAGE> 25
ITEM 7. TAXATION
- ------- --------
Israeli law generally imposes a capital gains tax on the sale of
securities and any other capital assets. Commencing January 1, 1996, the basic
tax rate applicable to companies is 36%. The maximum tax rate for individuals
is 50%. These rates are subject to the provisions of any applicable bilateral
tax treaty. The treaty concerning taxation between the United States and
Israel (the "U.S.-Israel Tax Treaty") is discussed below. Under Israeli law,
the gain attributable to inflation, as opposed to real economic gain, is
exempt from capital gains tax.
Individuals who are non-residents of Israel are subject to a graduated
income tax on income derived or accrued from sources in Israel or received in
Israel. Dividend distributions, other than bonus shares (share dividends), are
subject to a 25% withholding tax, unless a different rate is provided in a
treaty between Israel and the shareholder's country of residence. The withheld
tax is the final tax in Israel on dividends paid to non-residents. See "--
U.S.-Israel Tax Treaty" below.
A non-resident of Israel who has dividend income derived from or accrued
in Israel, from which tax was withheld at source, is generally exempt from the
duty to file tax returns in Israel in respect of such income, provided such
non-resident's only income from Israel was dividend income and such dividend
income was not derived from a business conducted in Israel by the taxpayer.
Residents of the United States generally will have withholding tax in
Israel deducted at source. They may be entitled to a credit or deduction for
United States federal income tax purposes in the amount of the taxes withheld,
subject to detailed rules contained in United States tax legislation. See
"U.S.-Israel Tax Treaty" below.
Israel currently has no estate or gift tax.
U.S.-ISRAEL TAX TREATY
----------------------
Pursuant to the U.S.-Israel Tax Treaty, the sale, exchange or disposition
of Class A Ordinary Shares by a person who qualified as a resident of the
United States within the meaning of, and who is entitled to claim the benefits
afforded such resident by, the U.S.-Israel Tax Treaty, which generally
includes United States corporations, United States citizens, and permanent
residents who maintain a permanent home or habitual abode in the United States
and who are not resident in Israel for purposes of Israeli tax ("Treaty U.S.
Resident") will not be subject to the Israeli capital gains tax unless such
Treaty U.S. Resident, being an individual, is present in Israel for periods
aggregating 183 days or more during the taxable year, or, whether or not the
Treaty U.S. Resident is an individual, holds, directly or indirectly, shares
representing 10% or more of the voting power of the Company during any part of
the 12-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of Class A Ordinary Shares
by a Treaty U.S. Resident who holds, directly or indirectly, shares
representing 10% or more of the voting power of the Company at any time during
<PAGE> 26
such preceding 12-month period or who is present in Israel for 183 days or
more during the taxable year would be subject to such Israeli tax, to the
extent applicable; however, under the U.S.-Israel Tax Treaty, if such gain is
taxable by Israel because of ownership of 10% or more of the voting power of
the Company, the gain would be treated as foreign source income for United
States foreign tax credit purposes and such Treaty U.S. Resident would be
permitted to claim a credit for such taxes against the United States income
tax imposed on such sale, exchange or disposition, subject to the limitations
under the United States federal income tax laws applicable to foreign tax
credits. If the gain is taxable in Israel because the selling Treaty U.S.
Resident is an individual who was present in Israel for 183 days or more
during the taxable year, such United States foreign tax credit will only be
available if the sale of the Class A Ordinary Shares took place in Israel.
Under the U.S.-Israel Tax Treaty, sales by Treaty U.S. Residents of Warrants
will not be taxable by Israel unless the selling Treaty U.S. Resident, being
an individual, is present in Israel for 183 days or more during the taxable
year.
Under the U.S.-Israel Tax Treaty, the maximum Israeli tax on dividends
paid to a Treaty U.S. Resident is 25%. The U.S.-Israel Tax Treaty further
provides for a maximum tax rate of 12.5% on dividends paid to a U.S.
corporation owning 10% or more of the paying Israeli company's voting stock
for, in general, the current and the immediately preceding tax years of the
Israeli company, provided the paying Israeli company meets certain limitations
concerning the amount of its dividend and interest income. The lower 12.5%
rate applies only on dividends from income not derived from certain
enterprises eligible for Israeli tax incentives in the applicable period;
otherwise, a 15% or 25% rate will apply.
POTENTIAL FOR TAXATION AS A PASSIVE FOREIGN INVESTMENT COMPANY
--------------------------------------------------------------
In the event that the Company was deemed to be a passive foreign
investment company (a "PFIC") for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), special provisions of the Code would apply to
certain shareholders of the Company and could impose adverse tax consequences
on such shareholders. Generally speaking, a PFIC is defined as a foreign
corporation that meets either of the following conditions for any taxable
year: (i) 75% or more of its gross income, including the pro rata share of
the gross income of any corporation (U.S. or foreign) in which it owns an
interest of at least 25% (by value), is passive income; or (ii) at least 50%
of its assets (averaged over the year and determined based upon fair market
value), including the pro rata share of the assets of any corporation in which
it owns an interest of at least 25% (by value), are considered to be held for
the production of, or produce, passive income.
The Company believes that it was not a PFIC in 1997, and it will evaluate
its status for 1998. The tests for determining PFIC status are applied
annually and it is difficult to make accurate predictions of future income and
assets, each of which are relevant to this determination. Accordingly, there
can be no assurance that the Company will not become a PFIC.
<PAGE> 27
ITEM 8. SELECTED FINANCIAL DATA
- ------- -----------------------
The following selected consolidated financial data for the period from
July 1, 1995, the commencement of the Company's operations, to December 31,
1995 and for the years ended December 31, 1996 and 1997 have been derived from
the audited financial statements of the Company included elsewhere in this
report. Such consolidated financial data have been prepared in accordance with
Israeli GAAP which differs in certain respects from U.S. GAAP. The following
selected financial data should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information
appearing elsewhere in this report. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 29 of Notes to
Consolidated Financial Statements.
Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
July 1, 1995
(commencement
of operations) Year Convenience
to December 31, Ended December 31, Translation
1995 1996 1997 ($)
----------- ----------- ----------- -----------
Adjusted NIS
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 132,534 23,297,148 124,359,135 35,169,439
Cost of Revenues -- (20,457,407) (88,743,589) (25,097,169)
Gross profit 132,534 2,839,741 35,615,546 10,072,270
Operating expenses (1,123,705) (2,240,109) (7,112,980) (2,011,589)
Operating income
(loss) (991,171) 599,632 28,502,566 8,060,681
Net income (loss) (1,024,496) 48,646 23,208,432 6,563,471
Earnings (loss)
per share(1) (0.43) 0.02 4.56 1.29
Weighted average
number of
shares(1) 2,401,644 3,000,000 5,085,754 5,085,754
</TABLE>
<PAGE> 28
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, Convenience
Translation
1995 1996 1997 ($)
----------- ----------- ----------- -----------
Adjusted NIS
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Working capital
(deficit) (682,883) (1,739,793) 38,776,767 10,966,281
Total assets 4,860,400 34,213,947 147,313,184 41,660,968
Total liabilities 5,117,113 34,070,855 91,233,473 25,801,321
Retained earnings
(accumulated
loss) (1,024,496) (975,850) 22,232,582 6,287,495
Total shareholders'
equity (deficit) (256,714) 143,092 56,079,711 15,859,647
</TABLE>
- -------------
(1) Includes the Performance Shares. For U.S. GAAP financial reporting
purposes, the Performance Shares would be excluded. Accordingly, the
loss per share for U.S. GAAP reporting purposes would be NIS 3.76
($1.06) for the period from July 1, 1995 (commencement of operations) to
December 31, 1995, the earnings per share would be NIS 0.70 ($0.20) for
the year ended December 31, 1996, and the loss per share would be NIS
0.93 ($0.26) for the year ended December 31, 1997. See Note 29 of Notes
to Consolidated Financial Statements for an explanation of the
determination of the weighted average number of shares outstanding used
in computing net loss per share.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this report.
<PAGE> 29
General:
- -------
The Company operates its business primarily in three segments of
the Israeli real estate industry: (i) development and construction,
(ii) the provision of services for construction projects and (iii) the
sale of real estate development rights. Since the beginning of 1998, the
Company has also engaged in the acquisition and development of income-
producing residential properties for long term lease by the Company to
agencies of the Israeli government. To date, the Company's revenues
have been derived primarily from real estate development and
construction activities and, to a lesser extent, from the sale of real
estate development rights and from consulting, management and financial
management services in connection with construction projects. Revenues
with respect to the Company's development and construction activities
have been derived pursuant to fixed price contracts, for which the
Company recognizes revenue on a percentage of completion basis. Revenues
with respect to the sale of real estate development rights are
recognized by the full accrual method when the sale is consummated.
Revenues with respect to consulting, management and financial management
services are recognized to the extent of fee revenue. See Note 2i of
Notes to Consolidated Financial Statements.
The Consolidated Financial Statements are prepared in accordance
with Israeli GAAP which, as described in detail in Note 29 of Notes to
Consolidated Financial Statements, differ in certain respects from U.S.
GAAP. In particular, under Israeli GAAP, revenue derived from projects
is recognized when at least 90% of the project is completed and at least
75% of the units in the project are sold or 25% of the project is
completed and all units in the project are sold. Under U.S. GAAP, the
Company would be able to recognize revenues for a project when the
project expenditures are predictable and there is a reasonable
likelihood of completion. Accordingly, for U.S. GAAP financial reporting
purposes, the Company may be able to report revenues with respect to
certain projects earlier than it would in accordance with Israeli GAAP.
Most of the Company's current real estate projects in Israel have
been awarded to the Company or to third party contractors for whom the
Company acts as subcontractor through competitive bidding and raffle
processes conducted by the Israeli Government. The Company acts as a
general contractor, subcontracting all of its construction work to
independent subcontractors. The Company typically negotiates an upfront
flat fee with each of its subcontractors prior to the commencement of a
project. Accordingly, the Company is then able to estimate the gross
profit, before operating expenses, to be derived from a given project,
subject to the Company's ability to complete the project on schedule or
at the anticipated cost and, in certain cases, to sell the units at the
estimated unit sales prices. Further, most of the Company's contracts
contain penalty provisions in the event of a delay in the completion of
a particular project. Such penalty provisions require the Company to pay
<PAGE> 30
various amounts according to the extent of the delay. Penalty payments
may reduce or eliminate the Company's projected gross profit on a
particular project or result in a loss. See "Description of Business-
Principal Projects." In addition, the Company may experience variability
in revenues on a quarterly basis as a result of the timing of completion
of new projects and the recording of revenues anticipated to be derived
from such projects for financial reporting purposes.
The Company maintains its accounts and presents its financial
statements in NIS. All NIS amounts reflect the historical amounts
adjusted for changes in the general purchasing power of the NIS as
measured by changes in the CPI and compiled in the manner explained in
Note 2b of Notes to Consolidated Financial Statements. For convenience
purposes, the financial data presented herein for the period from
July 1, 1995 (commencement of operations) to December 31, 1995 and the
for the years ended December 31, 1996 and 1997, have been translated
into dollars using the representative exchange rate on December 31, 1997
of NIS 3.536 = $1.00, as published by the Bank of Israel. See
"Description of Business--Conditions in Israel--Economic Conditions."
Relationship With Engel:
- -----------------------
Approximately 32% of the Company's revenues for the year ended
December 31, 1997 were derived from projects awarded to Engel, for which
the Company was engaged by Engel to act as a general contractor. Moshe
Schnapp, the Company's President and Chief Executive Officer, is the
former chief executive officer of Engel. Yaron Yenni, a director of the
company and its Chief Financial Officer and Secretary, was a director of
Engel until December 1997. As a result of this relationship, the
Company was in a position to enter into agreements with Engel under
which the Company would act as general contractor for contracts awarded
to Engel. Engel, whose shares are publicly traded on the Tel-Aviv Stock
Exchange and on The Nasdaq National Market, is one of the major real
estate development and construction companies in Israel. The Company
recognized that Engel was in a better position to win bids for the
projects sought by the Company due to Engel's past operating history and
capital resources, both of which are important factors considered by
Israeli governmental agencies in awarding real estate development and
construction projects. Accordingly, Engel would participate in the
bidding process and engage the Company as the general contractor to
manage the construction of the project and to make subcontracting
arrangements with respect to the construction activity, with Engel
receiving a portion of the revenues or profits from the project.
Although the Company intends to continue to do business with Engel, the
Company does not expect that subcontracting with Engel will continue to
comprise such a significant portion of the Company's future revenue. As
indicated by the most recent projects awarded to the Company, the Company
believes that it now has independent capabilities to qualify for project
awards. See "Description of Business--Principal Projects." The Company also
<PAGE> 31
believes that the increase in liquidity provided by the proceeds of the
Offering has reduced its dependence upon Engel in qualifying for such awards.
The Company intends to continue focusing its efforts on directly contracting
for real estate development and construction projects, and the Company will
seek to obtain such projects by participating directly in the competitive
bidding processes conducted by the Israeli Government. However, there can be
no assurance that the Company will be successful in competing for future bids
independently of Engel. The Company's failure to obtain such bids would
adversely effect its financial results.
Furthermore, Engel, although also engaged in real estate activities
relating to both residential units and public buildings, concentrates
primarily on the construction of higher-scale residential units. The Company
also concentrates and intends to continue to evenly balance its efforts
between residential units and public buildings. However, with respect to
residential units, the Company focuses on moderately priced multi-family
units, and the Company's public building projects are on a substantially
smaller scale than those projects undertaken by Engel. Furthermore, unlike
Engel's projects, the Company's projects are located primarily in developing
areas of northern Israel and outlying suburbs. Accordingly, although Engel
could compete with the Company for its projects, the Company does not believe
that Engel will compete for the type of projects bid for by the Company in the
near future, nor does the Company have any present plan to compete with Engel
for the type of projects typically sought by Engel. However, in the event that
the Company and Engel compete for projects in the future, it is the opinion of
management that such competition would not have a material adverse effect on
the Company's business or on the Company's ability to continue to do business
with Engel in the future. See "Description of Business--Principal Projects."
Results of Operations:
- ----------------------
The Company commenced its business activities on July 1, 1995. For the
period from July 1, 1995 to December 31, 1995, the Company had consulting
revenues of NIS 132,534 ($37,481). The Company incurred operating expenses,
including selling, general and administrative expenses, of NIS 1,123,705
($317,790) during such period, consisting primarily of start-up costs
associated with the Company's executive offices, resulting in an operating
loss of NIS 991,171 ($280,308) for the period.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
For the year ended December 31, 1997, the Company had total revenues of
NIS 124,359,135 ($35,169,439), an increase of NIS101,061,987 ($28,580,879), or
434%, compared to NIS 23,297,148 ($6,588,560) for the year ended December 31,
1996, primarily as a result of increased development and construction
activities and the sale of real estate development rights. Revenues from
contracting were NIS 89,628,729 ($25,347,491), an increase of NIS66,331,581
($18,758,931), or 285%, compared to NIS 23,297,148 ($6,588,560) for the year
ended December 31, 1996. This increase is primarily a result of the Company's
ability to qualify to participate in tenders independently and its ability to
<PAGE> 32
participate in more tenders in 1997, due to its increased capital resources
and longer operating history. During the initial phases of its operations in
1996, the Company was limited in its ability to participate in tenders
independently, due to its limited operating history and capital resources.
Accordingly, the Company acted as general contractor for Engel and other
larger contractors, who submitted winning bids in tenders in which the Company
was not eligible to participate, and shared the revenues from these projects
with such other contractors. The Company also had revenues of NIS 13,547,318
($3,831,255) from the sale of real estate development rights, NIS 18,744,334
($5,301,000) from the sale of real estate development rights to related
parties, and NIS 2,438,754 ($689,693) from consulting, activities from which
the Company did not derive any revenues for the year ended December 31, 1996.
Total costs of revenues amounted to NIS 88,743,589 ($25,097,169), an
increase of NIS 68,286,182 ($19,311,703), or 334%, compared to NIS 20,457,407
($5,785,466) for the year ended December 31, 1996. Gross profit, as a
percentage of total revenues, increased to 28.6% for the year ended December
31, 1997, from 12.2% for the year ended December 31, 1996, primarily as a
result of sales of real estate development rights which generate higher profit
margins than contracting. Gross profit margins for contracting decreased to
7.2% for the year ended December 31, 1996, from 12.2% for the year ended
December 31, 1997, primarily as a result of certain projects that generated
relatively lower profit margins in 1997.
Total operating expenses, including selling, general and administrative
expenses, were NIS 7,112,980 ($2,011,589) for the year ended December 31,
1997, an increase of NIS 4,872,871 ($1,378,074), or 218%, compared to NIS
2,240,109 ($633,515) for the year ended December 31, 1996, primarily as a
result of the cost of additional rented office space, professional and other
fees incurred in connection with new operations and start-up costs associated
with foreign operations.
As a result of the foregoing, the Company had net income of NIS
23,208,432 ($6,563,471) for the year ended December 31, 1997, an increase of
NIS 23,159,786 ($6,549,713), or 47,609%, as compared to the year ended
December 31, 1996 and earnings per share of NIS 4.56 ($1.29) for the year
ended December 31, 1997, an increase of NIS 4.54 ($1.28) as compared to the
year ended December 31, 1996.
The differences between U.S. GAAP and Israeli GAAP for the year ended
December 31, 1997 are primarily in the accounting treatment of the release of
Program Shares from the Deferrence Program. For U.S. GAAP purposes, the
release of Program Shares held by officers, directors and employees of the
Company from the Deferrence Program is deemed compensatory, resulting in a
compensation expense of NIS 28,217,280 ($7,980,000). As a result, under U.S.
GAAP the Company had a net loss of NIS 4,753,684 ($1,344,368) and a net loss
per share of NIS 0.93 ($0.26). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Charge to Income as a Result
of Release of Performance Shares from Deferrence Program."
<PAGE> 33
Public Offering:
- ---------------
In February 1997, the Company completed its initial public offering of
2,300,000 units, consisting of 2,300,000 Class A Ordinary Shares, 2,300,000
redeemable Class A Warrants and 2,300,000 redeemable Class B Warrants. The
gross proceeds amounted to $11,500,000 and the net proceeds after offering
expenses amounted to approximately $9,500,000.
Liquidity and Capital Resources:
- -------------------------------
The Company's business is capital intensive and requires substantial up-
front expenditures for land development contracts and construction.
Accordingly, the Company requires a substantial amount of cash on hand and
lines of credit from banks to conduct its business. The Company has to date
financed its working capital needs on a project-by-project basis, primarily
from construction loans from banks, private fundings of equity and debt, with
the proceeds of the Offering and with proceeds from the sale of real estate
development rights. At December 31, 1997, the Company had working capital of
NIS 38,776,767 ($10,966,281) and retained earnings of NIS $22,232,582
($6,287,495).
The Company typically finances residential projects through customer
deposits and construction loans. Under its existing policy, the Company
generally will not commence substantial construction of a project until a
substantial portion of the units have been sold to homebuyers and the Company
has received downpayments or complete payments from the unit purchasers.
Under Israeli law, the Company is required to secure the payments received
from unit purchasers with guarantees until the project is completed. The
banks will generally require the Company to deposit with the bank, promptly
upon receipt, all such funds received from unit purchasers, and the bank will
then release such amounts to the Company from time to time as are needed for
the completion of the project in accordance with the determination of a
project supervisor appointed by the bank. The financing banks generally will
also require a lien on all of the Company's rights with respect to a project.
Such bank financing may cover only a specific percentage of the project costs.
Accordingly, the Company may be required to obtain additional funds to
complete the project.
The Company also obtains bank financing for its public works projects.
For certain of these projects, the Company will receive payments from time to
time over the course of project completion from the entity requisitioning the
work. In such cases, the Company is generally required to deposit such
amounts with a bank which provides the entity with a guarantee for such
amount. Funds are released from the bank as needed in accordance with the
determination of a bank supervisor. In addition, the bank may issue
construction loans necessary for the completion of the project. The bank will
also require a general lien on the Company's rights with respect to the
project.
<PAGE> 34
The Israeli Examiner of Banks has issued directives that are intended to
limit the overall amount of credit extended to contractors and real estate
developers to up to 20% of all loans issued by the bank. This directive has
created difficulties for developers, such as the Company, in obtaining bank
financing for real estate projects. The Company believes that this limitation
requires banks to carefully select developers to whom they will provide
financing.
At December 31, 1997, the Company had outstanding indebtedness in the
aggregate amount of approximately NIS 17,920,000 ($5,068,000) which is secured
by the Company's rights under its projects, including all receivables relating
to the projects and the Company's right in the land and all improvements
thereon. Such outstanding indebtedness bears interest at rates ranging from
the prime rate plus 0.6% to prime rate plus 2.6% and, for indebtedness which
is linked to the U.S. dollar, at the rate of 6.25% per annum. Substantially
all of the Company's present outstanding indebtedness to banks with respect to
its projects is guaranteed by Moshe Schnapp, the Company's President and Chief
executive Officer.
In August 1995, the Company entered into an agreement with Engel pursuant
to which Engel was required to engage the Company as the subcontractor for
each project it was awarded in connection with the Mifal Hapayis project, as
described under "Description of Business--Principal Projects." In October
1996, the Company modified its agreement with Engel and released Engel from
its commitment to engage the Company as subcontractor in each Mifal Hapayis
project awarded in the future to Engel. In consideration for such release,
Engel is required to pay the Company NIS 300,000 ($84,842) for each future
Mifal Happayis project entered into by Engel in exchange for certain limited
services to be provided by the Company. See "Description of Business--
Principal Projects" and Note 20 of Notes to Consolidated Financial Statements.
The Company has purchased for nominal consideration an equity interest of
approximately 18% in Alir-Schnapp Industrial Building Ltd. ("AS"), an Israeli
corporation organized for the purpose of engaging in a specific real estate
venture with the Company and certain other third parties. The Company has
committed to loan up to $100,000 to AS upon request without interest for
working capital purposes upon such terms as may be mutually agreed upon
between the Company and AS. To date, one loan of NIS 220,000 ($62,217) has
been extended to AS pursuant to this commitment.
In March 1998, the Company sold a 25% interest in its project for the
renovation of a group of apartment buildings in Tel-Aviv to an unrelated group
of investors, for total consideration of $7 million.
The Company's offices in Haifa are subject to a 15-year mortgage in the
amount of NIS 355,200 ($100,452). The mortgage bears interest at the rate of
5.5% and requires payments in equal monthly installments in the amount of
approximately NIS 3,100 ($877), subject to adjustments in accordance with the
CPI. In December 1996, the company leased additional office space in a
neighboring building in Haifa, as of January 1997 for a term of five years.
The Company is committed to an annual payment of NIS 1,945 ($550) under this
lease. In November 1997, the Company leased additional office space in Tel-
Aviv as of December 1, 1997 for a term of one year. The Company is committed
<PAGE> 35
to monthly payments of NIS 12,680 ($3,586) under this lease. The Company's
U.S. subsidiary, Genesis Development and Construction, Inc., has leased office
space in New City, New York. The term of such lease is for one year,
commencing March, 1997, with an option to extend such term for two additional
years. The Company is committed to monthly payments of NIS 4,508 ($1,275)
under this lease.
The Company is required to provide certain amounts as collateral security
to the Ministry of the Interior as a condition to employment of foreign
workers. At December 31, 1997, the Company had provided collateral security
in the amount of NIS 136,000 ($38,462) for this purpose.
The Company from time to time provides guarantees on behalf of and loans
to third parties in connection with borrowings relating to projects undertaken
by such third parties, for which the Company will be entitled to a fee. At
December 31, 1997, the Company had outstanding loans and guarantees to third
parties in the aggregate principal amount of NIS 1,512,611 ($427,775). In
addition, at such date the Company provided for a fee the necessary guarantees
to secure the payments made by unit purchasers in a project undertaken by a
third party. The total payments estimated to be received by such third party
from the unit purchasers is NIS 9,415,000 ($2,662,613). See "Description of
Business--Other Real Estate Activities--Yokne'am."
CHARGE TO INCOME AS A RESULT OF RELEASE OF PERFORMANCE SHARES FROM DEFERRENCE
- -----------------------------------------------------------------------------
PROGRAM:
- -------
In the year ended December 31, 1997 the Company attained the earnings
thresholds required for the release of all of the Performance Shares from the
Deferrence Program. The release of Performance Shares held by Company
officers, directors, employees or consultants is treated, for U.S. GAAP
financial reporting purposes, as a compensation expense of the Company.
Accordingly, the Company recognized in its U.S. GAAP reconciliation for the
year ended December 31, 1997, a non-cash charge to earnings of NIS 28,217,280
($7,980,000), resulting in a net loss of NIS 4,753,684 ($1,344,368) for U.S.
GAAP financial reporting purposes for the year ended December 31, 1997. The
amount of this charge was equal to the fair market value of the released
Performance Shares held by Company officers, directors, employees and
consultants on December 31, 1997, the date of release from the Deferrence
Program. Although the amount of compensation expense recognized by the
Company in its U.S. GAAP reconciliation does not affect the Company's total
shareholders' equity, it may have a depressive effect on the market price of
the Company's Securities.
<PAGE> 36
IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS;
- -------------------------------------------------------------
IMPACT ON MONETARY ASSETS AND LIABILITIES:
- ------------------------------------------
For many years prior to 1986, the Israeli economy was characterized by
high rates of inflation and devaluation of the Israeli currency against the
dollar and other currencies. However, since the institution of the Israeli
Economic Program in 1985, inflation, while continuing, has been significantly
reduced and the rate of devaluation has been substantially diminished. For
the calendar year 1996, the annual rate of inflation in Israel was
approximately 10.6%, and in 1997 was approximately 7%. The Company's expenses
are primarily incurred in the Israeli currency. Because governmental policies
in Israel linked exchange rates to a weighted basket of foreign currencies,
the exchange rate between the NIS and the dollar has remained more stable in
recent years than in prior years. The Bank of Israel recently adopted measures
to liberalize foreign currency regulations. The implementation of certain of
these measures is subject to further legislation. See "Exchange Controls and
Other Limitations Affecting Security Holders."
Substantially all of the Company's contracts for the purchase of raw
materials and for construction are linked to the Israeli Building Cost Index
("BCI"). The BCI is an index which reflects the costs of raw materials in the
building industry, and the changes in such index reflect the fluctuations of
such costs. The Company's agreements to pay subcontractors as well as most
arrangements providing for payments to the company are also generally linked
to the BCI. Accordingly, an increase in the rate of inflation in Israel would
not significantly affect the Company's financial results. To the extent the
Company enters into agreements for payments by or to the Company which are
instead linked to the CPI, the difference in fluctuations of the two indexes
may adversely affect the Company's financial results.
SEASONALITY:
- -----------
As a result of various factors, including reduced work hours, vacations
and travel abroad, Israel experiences a traditional slow down of business
activities during the summer months and a recurring decrease in real estate
activities. In addition, the BCI is usually higher during the summer months
than the rest of the year. This decrease in real estate activity is generally
corrected by an increase in activity in the autumn and winter months.
Year 2000
- ---------
The Company has performed a review of its Year 2000 preparedness, its
accounting systems and billing arrangements. The Company believes that it
will not incur material costs in connection with becoming Year 2000 compliant.
<PAGE> 37
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
Not applicable.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -------- ----------------------------------------
The following table sets forth certain information concerning the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Eli Aran 47 Chairman of the Board, President of
the United States Subsidiary and
Director
Moshe Schnapp 35 President, Chief Executive Officer
and Director
Yaron Yenni 36 Chief Financial Officer, Secretary
and Director
Shalom Rozenberg 36 Director
Gary J. Strauss 44 Director
</TABLE>
The directors of the Company are appointed by its shareholders in the
annual general meeting (the "Ordinary General Meeting") and hold office until
the next Ordinary General Meeting which is held at least once in every
calendar year but not more than fifteen months after the holding of the last
preceding Ordinary General Meeting. In the intervals between Ordinary General
Meetings of the Company, the Board of Directors may appoint new directors to
fill vacancies on or increase the number of members of the Board of Directors.
The appointment and terms of office of all executive officers of the Company
are determined by the Board of Directors. The terms of any employment
arrangement with respect to directors, as well as officers who are also
directors of the Company, must be approved pursuant to a meeting of
shareholders. Pursuant to the terms of the Articles of Association of the
Company, a majority of the Board of Directors and executive officers of the
Company must be residents of Israel.
The Company has agreed for a period of five years from the date of the
Offering, if requested by the underwriter of the Offering (the "Underwriter"),
to nominate a designee of the Underwriter to the Board of Directors. To date,
the Underwriter has not selected such a designee.
<PAGE> 38
Eli Aran, a founder of the Company, has served as a director of the
Company since the commencement of its operations in July 1995 and as the
Chairman of the Board since November 1997. Mr. Aran has also served as a
director and the President of Genesis Development and Construction, Inc., the
Company's United States subsidiary, since its formation in February 1997. In
addition, Mr. Aran serves as a director of Genesis Europe S.P.R.L., the
Company's Belgian subsidiary, A.B. Stone B.V. and Stipula I.B.V. ( "Stipula"),
the Company's Dutch subsidiaries. Since March 1991, Mr. Aran has served as
the Vice President of Apollon Contractors International, a United States real
estate development and construction company with Israeli and other
international operations, with headquarters in New York City. From March 1991
to May 1994, Mr. Aran was the manager of Enpollon and Company, L.P., a real
estate development and construction company with operations in Israel. During
such time, Mr. Aran also served as a director of Hatishbe A.L. Holdings Ltd.,
a developer of a commercial shopping center in Israel.
Moshe Schnapp, a founder of the Company, has served as the Company's
President, Chief Executive Officer and a director since the commencement of
its operations in July 1995. Mr. Schnapp also served as the Chairman of the
Board until November 1997. From October 1992 to June 1995, Mr. Schnapp served
as the Chief Executive Officer of Engel, and served as the Chief Financial
Officer and a director of Engel from September 1990 to November 1992.
Yaron Yenni has served as the Company's Chief Financial Officer and
Secretary since October 1996. Mr. Yenni has also served as a director of the
Company from October 1996 to January 1998 and since May 1998. In January 1998
Mr. Yenni was appointed chief executive officer of Genesis Construction
Performance (94) Ltd., a subsidiary of the Company. Mr. Yenni has served as a
director of Shay Bar Real Estate Investments Ltd., an Israeli public company
trading on the Tel Aviv Stock Exchange, since August 1997. Mr. Yenni served
as a director of Engel from November 1992 until December 1997, and from
January 1995 to February 1997 he served as a director of Baumel Moshe & Sons
Ltd. Mr. Yenni, a certified public accountant, served as Internal Auditor for
Myrag Development Israel Ltd., a public holding company with investments in
various Israeli enterprises, from March 1993 to October 1996. In addition, he
served as an independent financial consultant for various Israeli companies
until October 1996.
Shalom Rozenberg has served as a director of the Company since
January 1997. Since June 1997 Mr. Rozenberg has served as an independent
consultant to Carmel Container Systems Limited, an Israeli packing company
trading on the American Stock Exchange, and until November 1994 served as its
manager of sales, marketing and development in its industrial and agricultural
divisions. From April 1987 to October 1994, Mr. Rozenberg was a marketing
manager at Molet Hogla, an Israeli chemicals company, with responsibility for
northern Israel and chain stores throughout Israel.
Gary J. Strauss has served as a director of the Company since January
1997. Mr. Strauss has been engaged in the practice of real estate law in the
New York City area for approximately 18 years. Mr. Strauss's areas of practice
include real estate financing, leasing and acquisitions. Mr. Strauss has been
a sole practitioner for more than the past five years.
<PAGE> 39
There are no family relationships among the officers or directors of the
Company.
Alternate Directors:
- -------------------
The Company's Articles of Association provide that any director may
appoint, by written notice to the Company, another director or any other
individual approved by the Board of Directors, to serve as an alternate
director for a specified period of time. Such other director or individual may
act as an alternate director, and the same person may act as the alternate for
several directors, and have a corresponding number of votes. Any alternate
director possesses all of the power and authority of the director or directors
who appointed such alternate, subject to the provisions of the instrument of
appointment.
Independent Directors; Approval of Certain Transactions; Audit Committee:
- ------------------------------------------------------------------------
The Israeli Companies Ordinance (New Version) 1983 (the "Companies
Ordinance") provides that "Publicly Held" Israeli companies (as such term is
defined therein) are required to appoint at least two independent directors
(the "Independent Directors") who have been approved by a statutory committee
consisting of the Chairman of the Israeli Securities Authority, the Chairman
of the Tel Aviv Stock Exchange and a member of the Israeli judiciary who acts
as Chairman of the Committee. The Companies Ordinance details certain
standards of independence and obligations of the Independent Directors. The
Independent Directors must be residents of Israel and unaffiliated with the
company, its principals or affiliated companies. They are entitled to obtain
all information relating to the company's management and assets and to receive
assistance, in special cases, from outside experts at the expense of the
company. The Companies Ordinance imposes an obligation on these directors to
report infringements of law and good business practice as well as improper
conduct to the chairman of the board of directors of the company and in some
cases to the Israeli Securities Authority. Under the Companies Ordinance, any
committee of the board of directors must include at least one Independent
Director. The Independent Directors are appointed for a five year term and may
not be reappointed as Independent Directors for the same company until two
years have passed since the conclusion of their term or for any other office
of the same company until one year has passed since such conclusion.
Under the Companies Ordinance, such "Publicly Held" companies are also
required to establish an audit committee of the Board of Directors consisting
of at least three members, two of whom are the Independent Directors, and to
appoint an internal auditor. The role of the internal auditor is to examine,
among other things, whether the Company's acts comply with the law, proper
conduct and good business practice.
<PAGE> 40
The District Court of Tel Aviv, Israel, has ruled that companies
registered under the laws of Israel whose shares have been offered to the
public only outside of Israel are also required to comply with the above
requirements. An appeal was subsequently filed with the Israeli Supreme Court
and, pursuant to an agreement between the parties, the Supreme Court
overturned the District Court decision in February 1997. However, the Supreme
Court expressed no opinion regarding the subject matter of the appeal. If the
Company is required to comply with the above requirements, the Company will
appoint such Independent Directors, will conform the composition of its audit
committee to comply with the Companies Ordinance requirements and will
otherwise comply with such requirements.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
- -------- --------------------------------------
During 1997, the Company paid compensation in an aggregate amount of NIS
990,931 ($280,241) to all of its directors and officers. See "Certain
Transactions."
Under current Company policy, directors who are employees of the Company
receive no compensation for serving on the Board, and non-employee directors
residing in Israel receive only de minimus compensation pursuant to the
minimum prescribed by Israeli law. Each non-employee director residing in the
United States receives $500 plus reimbursement of out-of-pocket expenses for
each Board meeting in which he participates. In addition, subject to
compliance with the Companies Ordinance, non-employee directors are not
precluded from serving the Company in any other capacity and receiving
compensation therefor. As directors are not eligible to participate in the
Company's share option plans, it is the policy of the Company that each
non-employee director residing in the United States receives each year as an
annual retainer fee a five-year option to purchase up to 7,500 Class A
Ordinary Shares at an exercise price equal to the fair market value thereof on
the date of grant. As of the date of this report, each of Messrs. Aran and
Strauss has received an option, to purchase 15,000 Class A Ordinary Shares at
an exercise price of $5 per share.
Israeli law generally requires severance pay, which may be funded by
Managers' Insurance, described below, upon the retirement or death of an
employee or termination of employment without cause (as defined in the law).
The payments thereto amount to approximately 8.3% of wages paid during the
employment period. Furthermore, Israeli employees and employers are required
to pay predetermined sums to the National Insurance Institute, which is
similar to the United States Social Security Administration. Since January 1,
1995, such amounts also include payments for national health insurance. The
payments to the National Insurance Institute are approximately 12% of wages
(up to a specified amount), a portion of which are contributed by the Company
pursuant to Israeli law requirements.
A general practice followed by the Company, although not legally
required, is the contribution of funds on behalf of certain of its employees
to a fund known as "Managers' Insurance." This fund provides a combination of
savings plan, insurance and severance pay benefits to the employee, giving the
<PAGE> 41
employee a lump sum payment upon retirement and securing the severance pay, if
legally entitled, upon termination of employment. The Company decides whether
each employee is entitled to participate in the plan, and each employee who
agrees to participate contributes an amount equal to 5% of such employee's
salary and the Company contributes between 13.3% and 15.8% of the employee's
salary.
Employment Agreement:
- --------------------
The Company has entered into a three-year employment agreement with its
President, Moshe Schnapp, which expires on December 31, 1999. The agreement
provides for an annual base salary of $200,000, plus a $50,000 bonus during
any year in which the Company attains the minimum target for release of
Performance Shares from the Deferrence Program for such year. See "Control of
Registrant--Performance Shares." The targets for release of all of the
Performance Shares from the Deferrence Program were attained in the Company's
1997 fiscal, entitling Mr. Schnapp to the $50,000 bonus for each of the three
years covered by his employment agreement. Mr. Schnapp's compensation may not
be increased during the initial three-year term without the consent of the
Underwriter. The agreement contains customary confidentiality and non-compete
provisions.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
- -------- --------------------------------------------------------------
In November 1996, the Board of Directors of the Company adopted the
Schnapp Equity Limited Share Option Plan (the "First Option Plan") pursuant to
which 300,000 Class A Ordinary Shares were reserved for issuance upon the
exercise of options granted to employees of the Company. In November 1997,
the shareholders of the Company approved the adoption of the Genesis
Development and Construction Ltd. Employee Share Option Plan (the "Second
Share Option Plan" and, together with the First Share Option Plan,
collectively the "Option Plans"), pursuant to which 400,000 Class A Ordinary
Shares were reserved for issuance upon the exercise of options granted to
employees of the Company. All of the options provided for pursuant to the
Option Plans, as well as options to purchase up to 30,000 additional Class A
Ordinary Shares granted other than pursuant to the Option Plans, are held by
directors and officers of the Company. Options granted pursuant to the Option
Plans expire on July 31, 1998. Of the 30,000 options granted other than
pursuant to the Option Plans, 15,000 options expire on February 22, 2002 and
the remaining 15,000 options expire on November 9, 2002.
<PAGE> 42
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
- -------- ----------------------------------------------
During the initial phases of the Company's operations, Moshe Schnapp, the
Company's President, provided personal guarantees to secure the Company's
obligations to banks for construction loans and guarantees provided by such
banks with respect to projects. At December 31, 1997, the Company had
outstanding indebtedness in the amount of approximately NIS 5,984,000
($1,692,000) which was guaranteed by Mr. Schnapp. Mr. Schnapp has also
provided a personal guarantee with respect to the mortgage on the Company's
executive offices in the amount of NIS 320,000 ($98,000). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
In September 1997, the Company sold a 50% interest in Stipula, the
Company's Dutch subsidiary through which the Company holds its interests in
its Rassnitz and Moscow construction projects, to Shay Bar. Yaron Yenni, a
director of the Company and its Chief Financial Officer and Secretary, has
served as a director of Shay Bar since August 1997 and is the owner of 10.15%
of its outstanding share capital. His father, David Yenni, is chairman and
the chief executive officer of Shay Bar and is the owner of 17.20% of its
outstanding share capital. Shay Bar paid $3,300,000 for its interest, of
which $1,800,000 was paid in September 1997, $750,000 was paid in April 1998
and the balance of $750,000 is due in December 1998. See Note 27(e) of Notes
to Consolidated Financial Statements. David Yenni has served as an
independent consultant to Stipula from August 1994 until December 1997.
In June 1997, the Company agreed to sell a 54.9% limited partnership
interest in its Rehovot construction project to a group of individual
investors, which included the Company's Chairman, Eli Aran. Mr. Aran acquired
a 3.2% indirect interest in the project for total consideration of $350,000.
Mr. Aran paid $58,334 and delivered a promissory note in the principal amount
of $175,000 on October 14, 1997 and paid the balance of $116,666 on December
31, 1997. The promissory note bears interest at an annual rate of 8.5% and is
payable on December 31, 2003. See Note 27(d) of Notes to Consolidated
Financial Statements.
In November 1996, Gary J. Strauss, a director of the Company, purchased
$50,000 principal amount of Bridge Notes and 25,000 bridge warrants ("Bridge
Warrants") in the Company's November 1996 private placement. The Bridge Notes
were repaid in full with the proceeds of the Offering, and the Bridge Warrants
were exchanged on the closing of the Offering for an equal number of the
Company's redeemable Class A Warrants.
In October 1996, Moshe Schnapp entered into an agreement with each of the
other existing shareholders of the Company providing Mr. Schnapp with the
right to vote and a right of first refusal, with respect to all of their
shares until the earlier of October 23, 2001 or the cessation of Mr. Schnapp
to act as the chief executive officer of the Company.
<PAGE> 43
In December 1995, Dashwood, a principal shareholder of the Company,
purchased 600,000 Class B Ordinary Shares for a purchase price of $200,000 and
made a no-interest loan to the Company in the principal amount of $300,000.
Such loan, which was payable on June 30, 1997, was repaid out of the proceeds
of the Offering. Under the original terms of such indebtedness to Dashwood,
Dashwood had the option to convert such indebtedness into additional Class B
Ordinary Shares representing 20% of the outstanding Ordinary Shares of the
Company. In September 1996, the Company and Dashwood entered into an agreement
providing that such option could not be exercised until the maturity date of
the loan, and the option was canceled upon the completion of the Offering.
Pursuant to the agreement, Dashwood granted Moshe Schnapp the sole right to
vote all of its Class B Ordinary Shares until the earlier of September 30,
2001 or the cessation of Mr. Schnapp to act as chief executive officer of the
Company. In addition, Dashwood has granted Mr. Schnapp a right of first
refusal with respect to any transfer of such Class B Ordinary Shares during
such period. Pursuant to such right of first refusal, Mr. Schnapp will be
entitled to purchase from Dashwood for a 30-day period after the giving of
notice by Dashwood, any shares proposed to be sold by Dashwood. Pursuant to
the agreement, any proposed transfer of shares by Dashwood must be on an
arms-length basis and for fair value.
See "Options to Purchase Securities from Registrant or Subsidiaries" and
"Compensation of Directors and Officers--Employment Agreement" for a
discussion of the options granted to the Company's non-employee directors
residing in the United States and the employment agreement between the Company
and Moshe Schnapp.
Part II
-------
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
- -------- ------------------------------------------
Not applicable.
Part III
--------
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
- -------- -------------------------------
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
- -------- ---------------------------------------------------------
SECURITIES AND USE OF PROCEEDS
------------------------------
None.
<PAGE> 44
Part IV
-------
ITEM 17. FINANCIAL STATEMENTS
- -------- --------------------
See page F-1.
ITEM 18. FINANCIAL STATEMENTS
- -------- --------------------
Not Applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
- -------- ---------------------------------
(a) Financial Statements:
See page F-1.
(b) Exhibits:
23(a) Consent of Kost Levary and Forer
<PAGE> F-1
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
ADJUSTED TO THE NIS OF DECEMBER 1997
INDEX
Page
--------
Report of Independent Auditors F-2
Consolidated Financial Statements -
in Adjusted New Israeli Shekels (NIS):
- Balance Sheets F-4
- Statements of Operations F-6
- Statements of Changes in Shareholders' Equity F-7
- Statements of Cash Flows F-8
Notes to the Consolidated Financial Statements F-10
<PAGE> F-2
Kost Levary & Forer
A Member of
Ernst & Young International
REPORT OF INDEPENDENT PUBLIC AUDITORS
TO THE SHAREHOLDERS OF
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Genesis
Development and Construction Ltd. and Subsidiaries ("the Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1997 and for the period from July 1,
1995 (Commencement of Operations) to December 31, 1995. 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 1997 financial statements of the foreign
wholly owned subsidiaries of the Company which statements reflect total assets
constituting 20% as of December 31, 1997 and total revenues constituting 26%
of the related consolidated totals for the year ended December 31, 1997.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to 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 Auditor's 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 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 financial statements have been prepared on the basis of the
historical costs adjusted to reflect the changes in the general purchasing
power of the Israeli currency as measured by the changes in the Israeli
Consumer Price Index, in accordance with Opinions No. 36 and 50 of the
Institute of Certified Public Accountants in Israel.
<PAGE> F-3
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 the Company at
December 31, 1997 and 1996, and the consolidated results of their operations
and cash flows for each of the two years in the period ended December 31, 1997
and for the period from July 1, 1995 to December 31, 1995, in conformity with
generally accepted accounting principles in Israel which differ in certain
respects from those followed in the United States (see Note 29 to the
financial statements).
Haifa, Israel KOST, LEVARY and FORER
March 23, 1998 Certified Public Accountants (Israel)
A member of Ernst & Young International
<PAGE> F-4
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
ADJUSTED IN NIS OF DECEMBER 1997
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997 1997
------------- ------------- -------------
CONVENIENCE
TRANSLATION
(NOTE2A)
ADJUSTED NIS U.S.$
----------------------------- -------------
<S> <C> <C> <C>
ASSETS (Notes 20 and 22)
CURRENT ASSETS:
Cash and cash equivalents 5,275,578 13,946,797 3,944,230
Bank deposits and marketable securities in
restricted deposits (Note 3) 16,008,801 47,873,401 13,538,858
Contract receivables (Note 4) 4,014,036 9,810,276 2,774,399
Prepaid expenses and other accounts
receivables (Note 5) 3,505,055 5,633,300 1,593,127
Related party receivables (Note 6) - 6,254,030 1,768,675
Cost and estimated earnings in excess of
billings on uncompleted contracts (Note 7) 2,865,784 16,537,042 4,676,765
Loan to affiliated companies (Note 8) - 3,383,895 956,984
------------- ------------- -------------
Total current assets 31,669,254 103,438,741 29,253,038
------------- ------------- -------------
LONG-TERM RECEIVABLES AND DEPOSITS
Related parties (Note 9) - 7,647,943 2,162,880
Other (Note 9) - 3,624,400 1,025,000
------------- ------------- -------------
- 11,272,343 3,187,880
------------- ------------- -------------
LONG-TERM INVESTMENTS
Equity in Joint Ventures (Note 10) - 12,753,547 3,606,772
Land under development (Note 11) - 16,930,000 4,787,896
------------- ------------- -------------
- 29,683,547 8,394,668
------------- ------------- -------------
FIXED ASSETS (Note 12):
Cost 1,350,801 3,321,139 939,236
Less accumulated depreciation (133,478) (402,586) (113,854)
------------- ------------- -------------
Total fixed assets 1,217,323 2,918,553 825,382
------------- ------------- -------------
OTHER ASSETS 1,327,370 - -
------------- ------------- -------------
34,213,947 147,313,184 41,660,968
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> F-5
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
ADJUSTED IN NIS OF DECEMBER 1997
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997 1997
------------- ------------- -------------
CONVENIENCE
TRANSLATION
(NOTE2A)
ADJUSTED NIS U.S.$
----------------------------- -------------
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank credits and short-term loans (Note 13) 7,568,148 17,919,896 5,067,844
Bridge Notes (Note 14) 7,009,426 - -
Trade payables (Note 15) 7,192,527 37,552,822 10,620,142
Accrued expenses and other liabilities (Note 16) 994,358 3,249,951 919,104
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 7) 9,549,242 3,154,827 892,202
Related parties (Note 17) 1,093,282 112,777 31,894
Current maturities of long-term debt 52,064 2,671,701 755,571
------------- ------------- -------------
Total current liabilities 33,409,047 64,661,974 18,286,757
------------- ------------- -------------
LONG-TERM LIABILITIES
Long-term loans, net of current maturities
(Note 18) 628,759 19,919,039 5,633,212
Deferred tax liabilities (Note 23c) - 3,536,000 1,000,000
------------- ------------- -------------
628,759 23,455,039 6,633,212
------------- ------------- -------------
SEVERANCE PAY, net (Note 19) 33,049 77,802 22,003
------------- ------------- -------------
MINORITY INTEREST - 3,038,658 859,349
------------- ------------- -------------
SHAREHOLDERS' EQUITY
Share capital (Note 21)
Authorized: 42,000,000 Class A Ordinary
Shares of NIS 0.01 par value and 3,000,000
Class B Ordinary Shares of NIS 0.10 par value;
Issued and outstanding: 2,300,000 Class A
Ordinary Shares and 3,000,000 Class B Ordinary
Shares (1996:3,000,000 Class B Ordinary Shares) 325,513 576,523 163,044
Additional paid-in capital 793,429 33,270,606 9,409,108
Retained earnings (accumulated loss) (975,850) 22,232,582 6,287,495
------------- ------------- -------------
Total shareholders' equity 143,092 56,079,711 15,859,647
------------- ------------- -------------
34,213,947 147,313,184 41,660,968
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> F-6
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
ADJUSTED IN NIS OF DECEMBER 1997
<CAPTION>
For the period
from July 1, 1995
(commencement of
operations) to
December 31, For the year ended December 31,
---------------------------------------------
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues (Note 25a):
Contracting - 23,297,148 89,628,729 25,347,491)
Sale of real estate development
rights - - 13,547,318 3,831,255
Sale of real estate development
rights to related parties - - 18,744,334 5,301,000
Consulting 132,534 - 2,438,754 689,693
------------- ------------- ------------- -------------
132,534 23,297,148 124,359,135 35,169,439
------------- ------------- ------------- -------------
Cost of revenues (Note 25a)
Contracting Costs - (20,457,407) (83,143,683) (23,513,485)
Cost of sale of real estate
development rights - - (1,500,478) (424,343)
Cost of sale of real estate
development rights to related
parties - - (4,099,428) (1,159,341)
------------- ------------- ------------- -------------
- (20,457,407) (88,743,589) (25,097,169)
------------- ------------- ------------- -------------
Gross profit 132,534 2,839,741 35,615,546 10,072,270
------------- ------------- ------------- -------------
Operating expenses
Selling, administrative and
general expenses (Note 25c) (314,740) (1,900,486) (7,112,980) (2,011,589)
Consulting fees to related party (808,965) (339,623) - -
------------- ------------- ------------- -------------
Total operating expenses (1,123,705) (2,240,109) (7,112,980) (2,011,589)
------------- ------------- ------------- -------------
Operating income (loss) (991,171) 599,632 28,502,566 8,060,681
Financial income (expenses),
net (Note 25d) (33,325) 266,106 786,715 222,487
Amortization of Bridge Notes
issuance costs - (817,092) (843,438) (238,529)
------------- ------------- ------------- -------------
Income (loss) before taxes
on income (1,024,496) 48,646 28,445,843 8,044,639
Taxes on income (Note 23) - - (5,237,411) (1,481,168)
------------- ------------- ------------- -------------
Income (loss) for the period (1,024,496) 48,646 23,208,432 6,563,471
============= ============= ============= =============
Earnings (loss) per share (0.43) 0.02 4.56 1.29
============= ============= ============= =============
Weighted average number of shares 2,401,644 3,000,000 5,085,754 5,085,754
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> F-7
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ADJUSTED TO THE NIS OF DECEMBER 1997
<CAPTION>
Retained
Additional Earnings
Share paid-in (Accumulated
Shares capital capital deficit) Total
------------- ------------- ------------- ------------- -------------
Adjusted NIS
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 176,000 25,950 - - 25,950
Issuance of ordinary shares 44,000 5,205 736,627 - 741,832
Issuance of ordinary shares(a) 680,000 75,328 (75,328) - -
Loss for the period - - - (1,024,496) (1,024,496)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 900,000 106,483 661,299 (1,024,496) (256,714)
Income for the year - - - 48,646 48,646
Issuance of ordinary shares(b) 2,100,000 219,030 (219,030) - -
Bridge warrants (Notes 13
and 20e) - - 351,160 - 351,160
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 3,000,000 325,513 793,429 (975,850) 143,092
Issuance of shares to public
net of offering expenses 2,300,000 251,010 32,477,177 - 32,728,187
Income for the year - - - 23,208,432 23,208,432
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 5,300,000 576,523 33,270,606 22,232,582 56,079,711
============= ============= ============= ============= =============
Convenience translation into U.S. dollars
(Note 2a)
---------------------------------------------------------------
Balance at January 1, 1997 92,057 224,386 (275,976) 40,467
Issuance of share to public net of
offering expenses 70,987 9,184,722 - 9,255,709
Income for the year - - 6,563,471 6,563,471
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 163,044 9,409,108 6,287,495 15,859,647
============= ============= ============= ============= =============
</TABLE>
(a) Represents a 3.09 for one share dividend.
(b) Represents a 2.33 for one share dividend
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> F-8
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ADJUSTED TO THE NIS OF DECEMBER 1997
<CAPTION>
For the period
from July 1, 1995
(commencement of
operations) to
December 31, For the year ended December 31,
---------------------------------------------
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) (1,024,496) 48,646 23,208,432 6,563,471
Adjustments required to reconcile
net income (loss) to cash
flows from operating activities:
Gain on sale of marketable
securities - (218,143) (536,986) (151,863)
Depreciation and amortization 27,050 106,428 269,108 76,105
Amortization of Bridge Notes
issuance costs - 817,092 843,438 238,529
Provision for severance pay - 33,049 44,753 12,656
Erosion of principal of certain
monetary items (12,924) (72,849) (174,894) (49,461)
Increase in contract receivables - (4,014,036) (5,796,240) (1,639,208)
Increase in prepaid expenses and
other accounts receivables (1,291,406) (1,357,288) (2,971,682) (840,407)
Increase in related party receivables - - (6,254,030) (1,768,675)
Increase in long-term receivables - - (11,116,176) (3,143,715)
Increase in trade payables 30,176 7,162,351 30,360,295 8,586,056
Increase in accrued expenses and
other liabilities 292,551 601,980 2,305,593 652,034
Increase (decrease) in costs in
excess of billings on uncompleted
contracts 1,565,901 5,117,557 (20,065,673) (5,674,681)
Increase in related parties
liabilities - - 112,777 31,894
Increase in deferred tax liabilities - - 3,536,000 1,000,000
------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities (413,148) 8,224,787 13,764,715 3,892,735
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (539,451) (811,350) (1,970,338) (557,223)
Investment in cash and marketable
securities in restricted deposit (616,422) (26,591,074) (53,271,153) (15,065,371)
Proceeds from sale of marketable
securities - 11,416,838 21,943,539 6,205,752
Short-term loan to a related party (184,240) 184,240 - -
Loan to an affiliated company - - (3,383,895) (956,983)
Long-term deposits - - (156,167) (44,165)
Increase in Equity in Joint Ventures - - (12,753,547) (3,606,772)
Increase in Land Under Development - - (16,930,000) (4,787,896)
------------- ------------- ------------- -------------
Net cash used in investing
activities: (1,340,113) (15,801,346) (66,521,561) (18,812,658)
------------- ------------- ------------- -------------
</TABLE>
<PAGE> F-9
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ADJUSTED TO THE NIS OF DECEMBER 1997
<CAPTION>
For the period
from July 1, 1995
(commencement of
operations) to
December 31, For the year ended December 31,
---------------------------------------------
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Loan from shareholder 1,142,253 - - -
Loan from shareholder repaid - - (1,093,282) (309,186)
Short-term loan from related
parties, net 1,653,527 (1,553,872) - -
Issuance of share capital (including
capital surplus) 741,832 - 39,959,735 11,300,830
Long-term loans received 122,270 594,590 22,225,027 6,285,358
Long-term loans paid - (36,037) (140,216) (39,654)
Capital contributed by minority
interest - - 3,038,658 859,349
Bank credits, net 336,380 7,231,769 10,351,748 2,927,531
Bridge Notes received - 7,009,426 - -
Bridge Notes repaid - - (7,009,426) (1,982,304)
Bridge notes issuance costs - (1,660,529) - -
Bridge warrants - 351,159 - -
Offering expenses - (1,327,370) (5,904,179) (1,669,734)
------------- ------------- ------------- -------------
Net cash provided by financing
activities 3,996,262 10,609,136 61,428,065 17,372,190
------------- ------------- ------------- -------------
Net increase in cash and cash
equivalents 2,243,001 3,032,577 8,671,219 2,452,267
Cash and cash equivalents at
beginning of period - 2,243,001 5,275,578 1,491,963
------------- ------------- ------------- -------------
Cash and cash equivalents at the
end of period 2,243,001 5,275,578 13,946,797 3,994,230
------------- ------------- ------------- -------------
Supplemental disclosure of cash
flows information:
Cash paid during the year for:
Interest 61,309 515,347 56,489 15,975
============= ============= ============= =============
Income taxes - - 124,321 35,159
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> F-10
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL
a. Genesis Development and Construction Ltd. ("Genesis"), an Israeli
corporation, was incorporated in 1992 and was inactive until July 1,
1995, at which time it commenced its activity. Genesis and its
subsidiaries operate in Israel, United States, Germany and Russia
through its American and European subsidiaries (collectively the
"Company" unless the context otherwise requires).
The Company is engaged in three segments of the real estate industry:
(i) development and construction, (ii) real estate sales transactions
and (iii) provision of consulting, management and financial management
services in connection with construction activity of others.
b. Concentration of risks that may have a significant impact on the
Company are as follows:
1. Real Estate Industry
--------------------
The real estate industry in Israel is cyclical and significantly
affected by changes in general economic conditions, such as
employment levels, availability of debt financing, interest rates,
levels of immigration, government fiscal policies, general and
local economic conditions that may affect the demand for public
buildings and housing and various other factors. In addition,
there is a limited quantities of land available for residential
and public development in Israel. The real estate industry is
also subject to the potential for significant variability and
fluctuations in real estate values. In addition, contractors are
subject to various risks, many of which are outside the control of
the contractor. Such risks include the conditions of supply and
demand in local markets, availability of government projects,
delays in construction schedules, cost overruns and availability
and cost of land, materials and labor.
2. Dependence on Suppliers
-----------------------
The building industry may from time to time experience fluctuating
prices and supply for raw materials, as well as shortages of labor
and other materials. Cement is the principal raw material
utilized in the construction of Israeli homes and buildings.
Nesher Israel Cement Enterprises Ltd. ("Nesher") is presently
Israel's principal producer of cement. Most other cement must be
imported. Accordingly, the Company's business is materially
dependent upon Nesher for its cement.
The construction industry employs mainly foreign labor brought to
Israel under government supervision. Although there is currently
no shortage of labor in Israel, there is no assurance as to the
continuing availability of such foreign labor. A shortage of such
labor would cause delays in construction of projects and a
decrease in the Company's profitability.
<PAGE> F-11
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL (Continued)
3. Dependence on Engel
-------------------
During the years ended December 31, 1996 and 1997, approximately
42% and 32%, respectively, of the Company's revenues were derived
through contracts with Yaakov Engel Construction Enterprise
Company Ltd. and its subsidiaries ("Engel"), pursuant to which
the Company acted as subcontractor for projects awarded to Engel.
Although the Company intends to continue to work with Engel on
projects, the Company expects to reduce its dependence on Engel
and increasingly focus on contracting directly with government
entities in the future. (See Note 25a).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in Israel, which differ in certain
respects from those followed in the United States, as described in Note 29.
The significant accounting policies applied on a consistent basis are as
follows:
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and their accompanying notes. Actual results could
differ from those estimates.
b. Financial statements in adjusted Israeli currency:
1.a) All figures in the accompanying financial statements are presented
in adjusted New Israeli Shekels (NIS) which have a constant
purchasing power (NIS of December 1997, which was published in
January 1998), based upon the changes in the Israeli Consumer
Price Index (CPI). The Government of Israel publishes the CPI
each month.
b) The financial statements are prepared in accordance with the
Opinions of the Institute of Certified Public Accountants in
Israel (the "Israeli Institute") and based on the accounts of
the Company maintained in nominal NIS.
c) The adjusted amounts of non-monetary assets do not necessarily
represent realizable or current economic value, but only the
original historical cost of those assets in terms of adjusted NIS.
The term "cost" in these financial statements signifies cost in
adjusted NIS.
<PAGE> F-12
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
2.a) Non-monetary items (mainly fixed assets, construction costs and
shareholders' equity items derived from cash flow from
shareholders) have been adjusted on the basis of the CPI at the
time the related transactions were carried out. The components of
the statement of income relating to non-monetary items (mainly
depreciation) have been adjusted on the same basis used for the
adjustment of the related balance sheet items.
b) Monetary items (items whose amounts in the balance sheet reflect
current or realizable values) are presented in the balance sheet
as of December 31, 1997 in their nominal amounts (figures for the
preceding periods have been adjusted to the December 1997 CPI).
c) The components of the statements of operations (except for
financing) relating to transactions carried out during the period
- revenues, costs, etc., have been adjusted on a monthly basis
according to the basis of the CPI at the time the related
transactions were carried out. Erosion of monetary balances
relating to the aforesaid transactions has been included in
financial income or expenses.
d) The components of the statement of operations relating to
provisions included in the balance sheet, such as liability in
respect of employee rights upon retirement and provisions for
vacation pay have been determined on the basis of the changes in
the balances of the related balance sheet items after their
relative cash flows are taken into account.
e) The financing component represents financial income and expenses
in real terms, as well as the erosion of monetary items during the
year.
3. Convenience translation into U.S. dollars:
The adjusted financial statements as of December 31, 1997 have
been translated into U.S. dollars using the representative
exchange rate of the U.S. dollar as at December 31, 1997 (U.S. $1
- NIS 3.536), as published by the Bank of Israel. The
translations were made solely for the convenience of the readers.
It should be noted that the adjusted New Israeli Shekel figures do
not necessarily represent the current cost amounts of the various
elements presented and that the translated U.S. dollar figures
should not be construed as a representation that the Israeli
currency amounts actually represent, or could be converted into
dollars.
<PAGE> F-13
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
4. Data regarding CPI, Israeli Building Cost Index ("BCI") and
exchange rate of foreign currency:
a) Most of the Company's contracts for construction are linked
to the Israeli BCI. Set forth below is certain information
concerning the CPI, the BCI and rate of exchange into U.S.
dollars:
<TABLE>
<CAPTION>
Exchange
rate of one
U.S. dollar CPI*) BCI*)
------------- ------------- -------------
<S> <C> <C> <C>
At the end of the period:
December 1997 NIS 3.536 153.1 points 165.7 points
December 1996 NIS 3.251 143.1 points 153.0 points
December 1995 NIS 3.135 129.4 points 141.6 points
Changes during the period:
December 1997 (12 months) 8.77% 7.00% 8.30%
December 1996 (12 months) 3.70% 10.59% 8.05%
December 1995 (6 months) 6.24% 5.46% 1.51%
Real increase (decrease) in the CPI and BCI
relative to the exchange rate of the dollar
during the period:
<CAPTION>
CPI*) BCI*)
------------- -------------
<S> <C> <C>
December 1997 (12 months) (1.6%) (0.4%)
December 1996 (12 months) 6.6% 4.2%
December 1995 (6 months) (0.3%) (4.5%)
*) According to the CPI and BCI index for
the month ending on balance sheet date
on an average basis of 1993 = 100 and
of 1992 = 100, respectively.
</TABLE>
b) Assets and liabilities in foreign currency or linked
thereto are included in the financial statements according
to the representative exchange rate as published by the
Bank of Israel on balance sheet date (figures for the
preceding periods have been adjusted to the December 1997
CPI).
c) Assets and liabilities linked to the CPI are included in
the financial statements according to the index, last
published prior to December 31, 1997.
d) Assets and liabilities linked to the BCI are included in
the financial statements according to the index, last
published prior to December 31, 1997 (figures for the
preceding periods have been adjusted to the December 1997
CPI).
<PAGE> F-14
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
5. Adjustments of financial statements on the basis of the exchange
rate of foreign currency:
The financial statements of the foreign subsidiaries, which are
operating independently of the Company, are adjusted on the basis
of the exchange rates of the relevant foreign currency. The
amounts included in the financial statements of those companies
have been included in the consolidated financial statements
according to Interpretation No. 8 of Opinion No. 36 of the Israeli
Institute. Under this interpretation, at each balance sheet date,
the balance sheet and the results of operations for the year then
ended are translated into NIS at the rate of exchange prevailing
at the end of the year for each foreign currency. Figures for
preceding years are adjusted to year end Israeli CPI. The
differences arising from the translation into NIS, which includes
related changes in the Israeli CPI, is carried to the "cumulative
translations adjustment" in shareholders' equity. In the current
year, the cumulative transactions adjustments, which are to be
related to foreign subsidiaries firstly consolidated, were
immaterial and, therefore, were not recognized.
c. Principles of consolidation:
The consolidated financial statements include the financial statements
of Genesis and its wholly owned subsidiaries listed below. Significant
inter-company balances and transactions are eliminated in
consolidation.
Subsidiaries included in consolidation:
Israeli subsidiaries
--------------------
* Genesis Construction Performance (1994) Ltd. ("GCP"), formerly
T.S.M.G. Construction Company Ltd. and its wholly owned
subsidiaries
* Shnapp TSLT Investment and Assets Ltd. - and its wholly owned
subsidiary.
Foreign subsidiaries
--------------------
* Genesis Development and Construction Inc. ("GDC USA")
(incorporated under the laws of the state of Delaware, U.S.A.) and
its subsidiary (51% interest)
* Genesis Europe SPRL - (incorporated under the laws of Belgium)
* AB Stone B.V. (incorporated under the laws of Netherlands) and its
subsidiary (50% interest).
d. Cash equivalents:
Cash equivalents are short-term, highly liquid investments that are
readily convertible into cash with maturities at the date acquired of
three months or less, such as short-term deposits.
<PAGE> F-15
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Investments in debt and equity securities:
Investments in marketable debt and equity securities, designated for
sale in the short term are presented at market value. Variations in
market value are carried to the statement of operations.
f. Investments in affiliates:
The investments in companies, partnership and joint ventures, over
which the Company can exercise significant influence (generally,
entities in which the Company holds 20% to 50% of ownership or voting
rights) are presented using the equity method of accounting.
The significant accounting policies of these affiliates are
substantially the same as those used by the Company.
g. Allowance for doubtful accounts:
The allowance for doubtful accounts is determined with respect to
specific accounts receivables that are doubtful of collection.
h. Fixed assets:
The assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
The annual depreciation rates are as follows:
%
---------
Office space 4
Office furniture and equipment 7-20
Motor vehicles 15
i. Revenue recognition:
a. Revenue from fixed price contracts is recognized on the percentage
of completion method. The percentage of completion method is also
used for condominium projects in which the Company is a real
estate developer and all units have been sold prior to the
completion of the preliminary stage and at least 25% of the
project has been carried out.
Percentage of completion is measured by the percentage of costs
incurred to balance sheet date to estimated total costs. Selling,
general, and administrative costs are charged to expense as
incurred. Profit incentives are included in revenues when their
realization is reasonably assured.
<PAGE> F-16
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Provisions for estimated losses on uncompleted projects are made
in the period in which such losses are first determined, in the
amount of the estimated loss of the full contract.
Differences between estimates and actual costs and revenues are
recognized in the year in which such differences are determined.
The provision for warranties is provided at a certain percentage
of revenues, based on the past experience of the Company's
management.
The asset "cost and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess
of amounts billed. The liability "billings in excess of costs
and estimated earnings on uncompleted contracts" represents
billings in excess of revenues recognized.
b. Revenue from projects built for sale is recognized on the
completed contract method when both of the following conditions
have been met:
* at least 90% of the project has been completed, and
* at least 75% of the units in the project have been sold
c. Consulting and financial services contracts to manage construction
activity of others, including financial management, are recognized
only to the extent of the fee revenue. The fee revenue is based
on the profits generated by the project and is recognized upon
completion of the project when the profit is known.
d. Profit on sale of a partial interest in real estate is recognized
by the full accrual method when all of the following criteria are
met:
1. The sale is consummated.
2. The buyer's initial and continuing investments are adequate to
demonstrate a commitment to pay for the property.
3. The Company's receivable is not subject to future subordination.
4. The Company has transferred to the buyer the usual risks and
rewards of ownership in a transaction that is in substance a sale
and does not require a substantial continuing involvement in the
property or the interest sold.
5. The Company does not have an option to repurchase the interest
rights in the project and the purchaser cannot require the Company
to repurchase the interest rights in the project.
<PAGE> F-17
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Deferred taxes:
1. Deferred taxes are computed in respect of temporary differences
between the amounts included in these financial statements and
those considered for tax purposes.
2. Since undistributed profits of Israeli subsidiaries can be
distributed tax free to the Company, no deferred income taxes have
been provided for the realization of investments in subsidiaries.
3. Taxes that would apply in the event of the realization of
investments in foreign subsidiaries have been taken into account
in determining the deferred taxes.
k. Concentration of risks:
Financial instruments that potentially subject the Company to
concentrations of credit risks consist principally of accounts
receivables derived from construction contracts of major customer (see
Note 25a), bank deposits and marketable securities and cash and cash
equivalents deposited in major banks in Israel and of investment in
joint venture. Management believes that the financial institutions
that hold the Company's investments are financially sound, and
accordingly, minimal credit risk exists with respect to these
investments.
l. Earnings (Loss) per share:
Earnings (Loss) per share are computed based on the weighted average
number of ordinary shares outstanding during each year, in accordance
with Opinion No. 55 of the Israeli Institute.
m. Segment reporting:
The Company is engaged ,by itself and through its wholly owned
subsidiaries, in three segments of the real estate industry:
(a) development and construction
(b) real estate sales transactions
(c) provision of consulting, management and financial management
services in connection with construction activity of others.
<PAGE> F-18
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Continued)
n. Impact of recently issued accounting standards:
In June 1997, the FASB issued the Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosure About Segments of an Enterprise and Related Information".
These statements are effective for fiscal years beginning after
December 15, 1997. These statements do not have measurement effects on
the financial statements, however they do require additional
disclosures.
NOTE 3:- CASH AND MARKETABLE SECURITIES IN RESTRICTED DEPOSITS
According to the construction loan agreements between the Company and
various banks, all receipts and revenues generated from projects,
financed by these various banks, are deposited in special accounts. As
of December 31, 1997, the restricted deposits comprise cash and
marketable securities which are released to fund the development of the
projects. The hypothecation, exchange or transfer of the said deposits
are subject to the approval of the banks.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Bank time deposits 4,917,676 38,403,780 10,860,798
Marketable debt securities 11,091,125 9,362,069 2,647,644
Equity securities - 107,552 30,416
------------- ------------- -------------
16,008,801 47,873,401 13,538,858
============= ============= =============
</TABLE>
<PAGE> F-19
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: - CONTRACT RECEIVABLES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Billed
Completed contracts 448,146 1,636,927 462,932
Contracts in progress 2,664,189 7,273,746 2,057,055
Unbilled 672,549 224,808 63,577
Notes receivable 229,152 674,795 190,835
------------- ------------- -------------
4,014,036 9,810,276 2,774,399
============= ============= =============
</TABLE>
NOTE 5: - PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Short-term loans (a) 1,170,656 2,507,918 709,253
Short-term loan (b) - 1,700,000 480,769
Loan, as short-term deposit (c) 996,883 571,610 161,654
VAT and income tax receivable
(See Note 16) 362,397 - -
Prepaid expenses and other
receivables 84,768 425,698 120,390
Advances to suppliers 46,914 428,074 121,061
Deferred Bridge Notes issuance
costs (d) 843,437 - -
------------- ------------- -------------
3,505,055 5,633,300 1,593,127
============= ============= =============
</TABLE>
<PAGE> F-20
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: - PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE (Continued)
(a) The Company has been engaged to arrange construction loans
or credit lines for certain projects and to provide the
necessary security required by the lender. The Company was
required to advance a short-term loan to the contractor for
these projects. The loans were repaid in February 1998.
(b) A short-term loan was given to a third party and is linked
to the US dollar. The loan matures in August 1998 and is
secured by a lien on a parcel of land. The loan bears no
interest and is presented at its discounted value.
(c) An unlinked loan, at the prime interest rate (which derives
from the base interest rate determined by the Bank of
Israel), was given to a third party, involved in a trade-
off deal and construction services contract. The loan
functioned as a short-term deposit to guarantee the
construction services provided by the Company to the third
party, which is the owner of 40% interest in the lot
situated on privately owned land in Derech Hayam. The loan
and accumulated interest was repaid in March 1998.
(d) The Company completed a bridge financing in November 1996.
Bridge Notes were payable on the earlier of one year from
the issuance of the Bridge Notes and the closing of the
Company's IPO. The IPO was completed on February 4, 1997
and issuance costs were amortized within the period from
November 26, 1996 to February 4, 1997.
NOTE 6:- RELATED PARTY RECEIVABLES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Unaddiliated Israeli Company (a) - 5,077,374 1,435,910
American Entity (b) - 1,176,656 332,765
------------- ------------- -------------
- 6,254,030 1,768,675
============= ============= =============
</TABLE>
<PAGE> F-21
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6:- RELATED PARTY RECEIVABLES (Continued)
(a) In September 1997, the Company sold 50% of its interest in a
subsidiary to an unaffiliated Israeli Company ("UIC"), in
consideration of $3,300,000 of which $1,800,000 was paid in
September 1997. The remaining balance is receivable in two equal
installments of $750,000 each in April and December 1998. The
remaining balance bears no interest and is presented at its
discounted value (See Note 27e).
(b) This receivable represents the share in expenses incurred by the
Rehovot Joint Venture and to be reimbursed to the joint venture by
the American Entity, U.S. investors in the Rehovot Project (See
Note 27d).
NOTE 7:- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Cost incurred on uncompleted
contracts 24,623,282 95,717,317 27,069,376
Estimated earnings 2,310,415 1,670,794 472,511
------------- ------------- -------------
26,933,697 97,388,111 27,541,887
Less: Billings to date (33,617,155) (84,005,896) (23,757,324)
------------- ------------- -------------
(6,683,458) 13,382,215 3,784,563
============= ============= =============
Included in the accompanying
balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts 2,865,784 16,537,042 4,676,765
Billing in excess of costs and
estimated earnings on
uncompleted contracts (9,549,242) (3,154,827) (892,202)
------------- ------------- -------------
(6,683,458) 13,382,215 3,784,563
============= ============= =============
</TABLE>
<PAGE> F-22
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LOAN TO AFFILIATED COMPANIES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Short-term loan to
Stipula B.V. (a) - 3,163,895 894,767
Short-term loan to AS. (b) - 220,000 62,217
------------- ------------- -------------
- 3,383,895 956,984
============= ============= =============
</TABLE>
a) The loan was given to Stipula I B.V. (A.B. Stone subsidiary) to
finance the acquisition of a 21.87% interest in the share capital
of Engel (see not 27e). The loan is linked to U.S. dollars and
will mature no later than December 31, 1998. The interest rate has
not yet been determined.
b) The loan was given to Alir Schnapp Industrial Buildings Ltd.
("AS") to finance the acquisition of an industrial building in
Migdal Haemek. The loan is linked to CPI and will mature in
December 1998. (See Note 20p). The Company's share in AS equity
is immaterial.
<PAGE> F-23
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9- LONG-TERM RECEIVABLES AND DEPOSITS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Notes receivables linked to
U.S. dollar (a) - 10,608,000 3,000,000
Unlinked notes receivables (b) - 876,241 247,806
Long-term bank deposits ( c ) - 156,167 44,165
------------- ------------- -------------
- 11,640,408 3,291,971
Less: current portion - (368,065) (104,091)
------------- ------------- -------------
- 11,272,343 3,187,880
============= ============= =============
The said balance was presented
as follows:
Related parties - 7,647,943 2,162,880
Other - 3,624,400 1,025,000
------------- ------------- -------------
- 11,272,343 3,187,880
Maturities:
Second year - 207,625 58,717
Third year - 207,625 58,717
Fourth year - 92,926 26,280
Thereafter until 2003 - 10,764,167 3,044,166
------------- ------------- -------------
- 11,272,343 3,187,880
============= ============= =============
</TABLE>
a. The Company has long-term receivables (promissory notes) from the
American Entity relating to the sale of 55% interest in the Rehovot
Project (Note 27d). The principal of these promissory notes, which
bear interest at the rate of 8.5% per annum, are payable on December
31, 2003.
Accrued interest is payable on the last business day of each calendar
quarter commencing March 31, 1998.
<PAGE> F-24
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9- LONG-TERM RECEIVABLES AND DEPOSITS (Continued)
b. Unlinked notes receivables are related to a completed project in Lev-
Hasharon and bear interest at an annual rate of 17%. The unlinked
notes receivables are payable in 39 monthly installments of principal
and interest, ending in July 2001.
c. Long-term bank deposits are linked to the CPI, and bear interest at an
annual rate of 4%. These deposits are registered in the shareholders'
name as a trustee for the Company and mature in 2012.
NOTE 10 - EQUITY IN JOINT VENTURES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Rehovot project (a) - 453,534 128,262
Germany and Russian projects (b) - 6,450,592 1,824,262
Southampton ( c ) - 5,849,421 1,654,248
------------- ------------- -------------
- 12,753,547 3,606,772
============= ============= =============
</TABLE>
a) The equity in Joint Venture in the Rehovot project represents the
Company's shares in the costs associated directly to the project.
(See Note 27d).
b) The Company has sold 50% of its interest in the German and Russian
projects to UIC. The remaining 50% represent the cost of its
investment in the joint venture for each project. The German
project is expected to be completed by December 2002 and the
Russian project in September 1998. (See Note 27c).
c) GDC USA acquired on May 6, 1997, through its 51% owned subsidiary,
a parcel of land in Southampton, New York on which to develop 33
single-family luxury homes. The project is currently under site
development.
<PAGE> F-25
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- LAND UNDER DEVELOPMENT
In December 1997, the Company acquired from Engel the rights to a
parcel of land in Carmiel on which to develop 167 residential units, in
consideration of NIS 16.9 million. The Company is seeking permission
for approximately 300 units of which approximately 220 are designated
for rental. The project is currently under site development.
NOTE 12: - FIXED ASSETS
<TABLE>
<CAPTION>
Furniture
and office Office
Vehicles equipment Space Total
------------- ------------- ------------- -------------
Adjusted NIS
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996:
Cost (1)(2) 635,834 181,891 533,076 1,350,801
Accumulated depreciation (108,708) (11,241) (13,529) (133,478)
------------- ------------- ------------- -------------
Depreciated cost 527,126 170,650 519,547 1,217,323
============= ============= ============= =============
Balance as of December 31, 1997:
Cost (1) (2) 2,046,488 722,657 551,994 3,321,139
Accumulated depreciation (290,149) (76,907) (35,530) (402,586)
------------- ------------- ------------- -------------
Depreciated cost 1,756,339 645,750 516,464 2,918,553
============= ============= ============= =============
Convenience Translation
Balance as of December 31, 1997
Cost 578,758 204,371 156,107 939,236
Accumulated depreciation (82,056) (21,750) (10,048) (113,854)
------------- ------------- ------------- -------------
Depreciated cost 496,702 182,621 146,059 825,382
============= ============= ============= =============
</TABLE>
(1) Including vehicles at the cost of adjusted NIS 476,832 registered
in the shareholders' name, and a director's name as trustees for
the Company, and vehicles acquired under a long-term lease at the
cost of adjusted NIS 701,716 (1996: NIS 185,991).
(2) For charges, see Notes 20 and 22.
<PAGE> F-26
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: - BANK CREDITS AND SHORT-TERM LOANS
<TABLE>
<CAPTION>
a. Composed as follows: Annual Interest Rates December 31, December 31,
-----------------------
1996 1997 1996 1997 1997
---------- ---------- ------------- ------------- -------------
Convenience
translation
(Note 2a)
% % Adjusted NIS U.S. $
---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Bank credits - unlinked 19.6 15.5-17.5 7,568,148 10,728,164 3,033,983
Bank credits - linked to
the U.S.$ - 6.25 - 7,191,732 2,033,861
------------- ------------- -------------
7,568,148 17,919,896 5,067,844
============= ============= =============
</TABLE>
b. As to pledges to secure bank credit (see Notes 20 and 22)
NOTE 14: - BRIDGE NOTES
In November 1996, the Company completed the bridge financing pursuant
to which it issued $2,000,000 aggregate principal amount of Bridge
Notes and Bridge Warrants to purchase 1,000,000 Class A ordinary shares
(see Note 21e), in which it received net proceeds of NIS 5,437,816
($1,537,844). The Bridge Notes are payable, together with interest at
the rate of 10% per annum, on the earlier of one year from the issuance
of the Bridge Notes and the closing of the Company's initial public
offering ("IPO"). The IPO was completed in February 1997 and the
Bridge Notes were fully paid.
NOTE 15: TRADE PAYABLES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Accounts payable 2,590,660 33,154,341 9,376,228
Notes payable 4,601,867 4,398,481 1,243,914
------------- ------------- -------------
7,192,527 37,552,822 10,620,142
============= ============= =============
</TABLE>
<PAGE> F-27
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16:- ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
VAT and income tax payable
(See Note 5) - 1,707,770 482,966
Other 139,205 971,055 274,620
Wages and related benefits 272,939 528,694 149,518
Expenses payable 532,214 42,432 12,000
------------- ------------- -------------
994,358 3,249,951 919,104
============= ============= =============
</TABLE>
NOTE 17:- RELATED PARTIES
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Loan from shareholder* 1,043,454 - -
Salary payable (See Note 27a) 49,828 112,777 31,894
------------- ------------- -------------
1,093,282 112,777 31,894
============= ============= =============
</TABLE>
<PAGE> F-28
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17:- RELATED PARTIES (Continued)
* Pursuant to an Investment Agreement with a shareholder, the
Company received on December 30, 1995 a loan of $300,000 bearing
no interest and payable in full on June 30, 1997. The Company has
also granted to the shareholder an option exerciseable at any time
prior to the maturity date, to convert the loan into a number of
Class B Ordinary Shares which represents 20% of the total Ordinary
Shares then outstanding. In September 1996, the Company agreed to
pre-pay in full the outstanding amount of the loan on the
thirtieth day after the closing of the IPO of the Company with the
above option canceled upon the completion of the IPO. The
shareholder also agreed not to exercise the option prior to the
maturity date. The IPO was completed in January 1997, the option
was canceled and the loan was repaid in March 1997.
NOTE 18:- LONG-TERM DEBT
<TABLE>
<CAPTION>
a. Composed as follows: December 31, December 31,
1996 1997 1996 1997 1997
---------- ---------- ------------- ------------- -------------
Convenience
translation
Annual (Note 2a)
Interest rates % Adjusted NIS U.S. $
---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
From a leasing company
- linked to the U.S.
dollar - 7.5 - 418,901 118,467
From a leasing company
- linked to the CPI 7.00 6.6 - 7.7 90,397 207,823 58,773
From bank - unlinked - 17.15 - 136,847 38,701
From bank - linked to
the U.S. dollar - 6.31 - 8.25 - 19,210,042 5,432,704
From bank - linked
to CPI*) 5.55 5.3 - 5.5 350,463 2,617,127 740,138
Notes payable - - 239,963 - -
------------- ------------- -------------
680,823 22,590,740 6,388,783
Less current maturities (52,064) (2,671,701) (755,571)
------------- ------------- -------------
628,759 19,919,039 5,633,212
============= ============= =============
</TABLE>
*) Includes NIS 337,820 (1996: 350,463) collateralized by a mortgage
on the Company's
office space.
b. Aggregate maturities of long-term loans maturing serially from 1998 to
2011:
<PAGE> F-29
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18:- LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
First year - current maturities 52,064 2,671,701 755,571
Second year 295,394 19,240,194 5,441,231
Third year 34,966 215,831 61,038
Fourth year 19,372 139,503 39,452
Fifth year 20,475 85,801 24,265
Thereafter 258,552 237,710 67,226
------------- ------------- -------------
680,823 22,590,740 6,388,783
============= ============= =============
</TABLE>
c. As to pledges to secure loans see Note 22.
d. As to capital lease commitments see Note 20r.
NOTE 19: - SEVERANCE PAY
The Company's liability for severance pay for its employees, pursuant to
Israeli Law, is fully provided for. Part of the liability is funded through
insurance policies and severance pay fund.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997 1997
------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
---------------------------------------------
<S> <C> <C> <C>
Severance pay 94,032 274,553 77,645
Less: amount funded* (60,983) (196,751) (55,642)
------------- ------------- -------------
33,049 77,802 22,003
============= ============= =============
</TABLE>
<PAGE> F-30
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: - SEVERANCE PAY (Continued)
*) The amount funded can be withdrawn under the provisions of the Law
for Severance Pay.
Severance pay expense for the six month period ended December 31,
1995 and for the years ended December 31, 1996 and 1997 amounted
to adjusted NIS - none NIS 94,032 and NIS 180,521, respectively.
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS
All the amounts described in the following projects are approximate amounts
and are linked to the Israeli BCI, unless stated otherwise.
a. Mifal Hapayis Community Centers
The Company has entered into an agreement with Engel pursuant to which
Engel is required to engage the Company as the subcontractor for the
construction of each of the identical art and science centers in
different municipalities throughout Israel awarded to Engel ("the
Mifal Hapayis projects"). The Company will receive 95%, approximately
NIS 8.6 million, of the revenues actually received by Engel for each of
the projects. Through September 1996, Engel entered into agreements
for the construction of five Mifal Hapayis Centers. Orders for the
construction of these projects have been issued. The Company has
engaged subcontractors to complete a portion of three projects in
consideration of 80% - 88% of the gross project revenues. The Company
is committed to complete all the projects by April 1998, otherwise a
penalty amount of NIS 2,500 will be payable for each day of delay. The
Company expects to complete the projects on time.
In October 1996, the Company agreed to release Engel from its
commitment to engage the Company as a subcontractor in further Mifal
Haypayis projects. The compensation payable to the Company for each
released project will amount to NIS 300,000.
b. Kfar Yona:
In June 1997, the Company was awarded a project for the
development and construction of 34 residential units. The price
per unit has been set pursuant to the tender at approximately NIS
185,000. The Company is committed to complete the project by May
1998 otherwise a penalty amount of $300 for each unit will be
payable for each month of delay. The Company expects to complete
the project on time.
<PAGE> F-31
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
c. Petah Tikva Youth Village:
In November 1995, the Company entered into an agreement with Engel
for the construction of an agricultural Youth Village in
consideration of NIS 3.1 million. The Company has engaged a
subcontractor to complete the entire project in consideration of
NIS 2.9 million. The Company is committed to complete the project
by August 1998, otherwise a penalty in the amount of NIS 4,000
will be payable for each day of delay. The Company expects to
complete the project on time.
d. Gymnasiums:
In January 1997, the Company received additional project awards
for the construction of two gymnasiums in Holon and one gymnasium
in Tel-Aviv, in consideration of approximately NIS 11.5 million.
An order for the construction has been issued. The Company is
committed to complete the project by June 1998 otherwise a penalty
in the amount of NIS 4,000 will be payable for each day of delay.
The Company expects to complete the project on time.
e. Carmiel:
In March 1997, the Company acquired a parcel of the land for the
construction of 31 residential units, in consideration of
approximately NIS 2 million. The Company is committed to complete
the project by December 1998 otherwise a penalty in the amount of
NIS 1,000 will be payable for each month of delay. The Company
expects to complete the project on time.
f. Kfar Yona:
In March 1997, the Company agreed to complete an Engel project in
Kfar Yona (65 residential units) in consideration of NIS 7.2
million. The Company is committed to complete the project by June
1998, otherwise a penalty amount $300 for each unit will be
payable for each month of delay. The Company expects to complete
the project on time.
g. Rehovot:
In March 1997, the Company was awarded rights to develop a parcel
of land of approximately 77,000 sq.m. in consideration of NIS 2
million. The development plan requires evictions, a zoning change
and the approval by the municipal and regional authorities. The
Company has received in March 1998 the rezoning approval from the
regional council for the construction of approximately 1000 units.
<PAGE> F-32
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
g. Rehovot: (Continued)
The Company is committed to complete the development by March
2002.
h. Kiryat Shmuel:
In November 1997, the Company acquired a 50% interest in a project
for the construction of 58 residential units in consideration of
approximately NIS 5 million. The remaining rights are held by a
local contractor. Construction is scheduled to commence at the
beginning of 1998 and to be completed within 18 months. The
construction permits were received after the balance sheet date.
The Company expects to complete the project on time.
i. Dovrat:
In June 1997, the Company was engaged to act as the general
contractor for the construction of up to 250 semi-detached
residential units in the town of Dovrat. The Company has entered
into a joint venture agreement with another contractor for the
construction of this project, with each party holding a 50%
interest. The first phase of construction has commenced and
consists of 52 units to be completed in 1998. The Company expects
to complete the first phase of the project on time.
j. Nofim:
In June 1997, the Company was awarded a project for the
construction of a gymnasium by the municipality of Haifa, as one
of the winners in a bid conducted by the Local Government Economic
Services Ltd. ("LGES"). The Company is committed to complete
the project in August 1998 otherwise a penalty in the amount of
NIS 4,000 will be payable for each day of delay. The Company
expects to complete the project on time.
k. Haifa
In September 1997, the Company entered into a project together
with a local contractor and a third party for the development of
two apartment buildings containing approximately 80 moderately
priced residential units on a parcel of land in Haifa, located in
the vicinity of the Technion Israel Institute. The Company has
acquired a 25% interest in the project in consideration of
$376,000. Construction will commence upon the issuance of the
construction permit by the municipality.
<PAGE> F-33
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
l. Modi'in:
In December 1997, the Company was awarded a project to serve as
general contractor for a project for the construction of 85
residential units in Modi'n. The Company is committed to complete
the project by December 1999. The Company expects to complete the
project on time.
m. Guarantees:
The Company received an authorization to employ foreign workers by
the Ministry of Interior. In order to secure the fulfillment of
the authorization's condition, the Company deposited, with the
Ministry of Interior, notes payable in the amount of NIS 136,000.
n. Bank guarantees:
In order to guarantee the proceeds on apartments sold and on other
construction projects, the Company has provided bank guarantees
expiring upon the completion of the project.
Adjusted NIS
-------------------
1. Bank guarantees under the Law of Apartment Sales 9,415,000
2. Bank guarantees as security for performance 31,749,000
o. Contractors registration:
GCP has been registered in the Contractors Registrar Office as a
building contractor for projects involving unlimited financial
scope and unlimited size. The registration depends on employment
of two professional workers approved by the Contractors Registrar.
This condition was fully met by GCP.
p. Investment in Alir Schnapp Industrial Buildings Ltd. ("AS"):
The Company owns 18.8% interest in AS. According to the agreement
between the Company and the remaining AS shareholders, the Company
is committed to loan a total amount of up to $100,00 without
changes in ownership interest. (See Note 8).
q. Capital lease:
The Company leased vehicles for periods expiring from May 1999 to
September 2002. Following is a summary of future payments under
capitalized lease:
<PAGE> F-34
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS (Continued)
<TABLE>
<CAPTION>
ADJUSTED NIS
------------
<S> <C>
Year ending December 31, 1998 219,120
Year ending December 31, 1999 195,166
Year ending December 31, 2000 178,064
Year ending December 31, 2001 143,911
Year ending December 31, 2002 75,204
------------
Total capitalized lease payment 811,465
Imputed interest 184,741
------------
Present value of capitalized lease payments 626,724
Current portion 161,935
------------
Long-term capitalized lease obligations 464,789
============
</TABLE>
r. Lease Commitments
In December 1996, the Company leased additional office space as
from January 1, 1997, under long-term operating lease agreements.
Following is a summary of future payments for this lease:
<TABLE>
<CAPTION>
ADJUSTED NIS
------------
<S> <C>
Year ending December 31, 1998 217,981
Year ending December 31, 1999 78,500
Year ending December 31, 2000 23,338
Year ending December 31, 2001 23,338
------------
343,157
============
</TABLE>
<PAGE> F-35
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL
a. Share Capital is Composed as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Authorized Issued & Authorized Issued &
Outstanding Outstanding
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Class A ordinary shares
NIS 0.10 par value 42,000,000 - 42,000,000 2,300,000
Class B ordinary shares
NIS 0.10 par value 3,000,000 3,000,000 3,000,000 3,000,000
</TABLE>
The Class A Ordinary Shares and the Class B Ordinary Shares are
essentially identical, except that each Class A Ordinary Share is
entitled to one vote and each Class B Ordinary Share is entitled to
five votes, and Class B Ordinary Shares have no voting rights in regard
to certain resolutions relating to the amendment of the rights of the
Class B Ordinary Shares.
b. Each Class B Ordinary share will automatically be converted into one
Class A Ordinary Share upon:
i. the death of the holder thereof (the "Original Holder") or, if
such shares are subject to a shareholders' agreement or voting
trust agreement granting the power to vote such shares to another
Original Holder, then upon the death of such other Original
Holder.
ii. the sale or transfer to any person other than the following
transferees:
a. a trust for the sole benefit of members of the transferors
immediate family and which is controlled by the transferor;
and
b. any other holder of Class B Ordinary Shares thereof; or
iii. the failure of the Company to achieve net income before provision
for income taxes and exclusive of extraordinary earnings and
charges to income resulting from the release from the Deference
Program of the Performance Shares (as such terms are defined
below) as audited and determined by the Company's independent
public accountants in accordance with U.S. GAAP, as set forth in
the reconciliation thereof in the Company's consolidated financial
statements ("Pretax Income") of at least $1,000,000 (the
"Target Pretax Income Amount") for the year ending December 31,
<PAGE> F-36
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL (Continued)
1998, or for each of the succeeding five years ending December 31,
2003 - the failure of the Company to achieve Pretax Income
exceeding the Target Pretax Income for the previous year by at
least 10%.
c. As of January 30, 1997 (effective date of IPO) 2,660,000 Class B
Ordinary Shares ("Program Shares") are subject to a share
deference program ("Deference Program"). The Program Shares
include 1,064,000 Class B Ordinary Shares held by the President of
the Company through his wholly owned corporation and 984,200 Class
B Ordinary Shares held by a director as trustee of a trust for the
benefit of his wife.
As long as the Program Shares are subject to the Deference
Program, they shall not be assignable, transferable or convertible
into Class A Ordinary Shares as stated above.
(a) 866,667 of the Program Shares will be automatically
released from the Deference Program, on a pro-rata basis,
if one or more of the following conditions are met:
i. the Company's net income before provision for income
taxes and exclusive of any extraordinary earnings as
audited and determined by the Company's independent
public accountants in accordance with U.S. GAAP (the
"Minimum Pretax Income"), as set forth in the
reconciliation thereof in the Company's consolidated
financial statements, amounts to at least $5.3
million for the fiscal year ending December 31, 1997,
or December 31, 1998; or
ii. the Minimum Pretax Income amounts to at least $7.0
million for the fiscal year ending December 31, 1999;
or
iii. the Minimum Pretax Income amounts to at least $9.3
million for the fiscal year ending December 31, 2000.
If none of the above conditions are met, the said 866,667
Program Shares will be converted into deferred shares,
entitling their Holders to no rights other than the right
to receive an amount not in excess of the par value (NIS
0.1) of the deferred shares upon the dissolution of the
Company.
<PAGE> F-37
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL (Continued)
(b) An additional 433,333 of the Program Shares will be
released from the Deference Program, on a pro-rata basis,
if one or more of the following conditions is met:
i. the Minimum Pretax Income amounts to at least $6.8
million for the fiscal year ending December 31, 1997,
or December 31, 1998; or
ii. the Minimum Pretax Income amounts to at least $8.9
million for the fiscal year ending December 31, 1999;
or
iii. the Minimum Pretax Income amounts to a least $11.9
million for the fiscal year ending December 31, 2000.
If none of the above conditions are met, the said 433,333 Program
Shares will be converted into deferred shares, entitling their
Holders to no rights other than the right to receive an amount not
in excess of the par value (NIS 0.1) of the deferred shares upon
the dissolution of the Company.
(c) The remaining 1,360,000 Program Shares will be released
from the Deference Program, on a pro-rata basis, if one or
more of the following conditions are met:
i. the Minimum Pretax Income amounts to at least $8.0
million for the fiscal year ending December 31, 1997,
or December 31, 1998; or
ii. the Minimum Pretax Income amounts to at least $10.5
million for the fiscal year ending December 31, 1999;
or
iii. the Minimum Pretax Income amounts to a least $14.0
million for the fiscal year ending December 31, 2000.
If none of the above conditions are met, the said 1,360,000
Program Shares will be converted into deferred shares,
entitling their Holders to no rights other than the right
to receive an amount not in excess of the par value (NIS
0.1) of the deferred shares upon the dissolution of the
Company.
(d) The Minimum Pretax Income amounts set forth above:
i. shall be calculated exclusive of any extraordinary
earnings and any charge to income resulting from
release or the Program Shares and
<PAGE> F-38
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL (Continued)
ii. shall be increased proportionately, with certain
limitations, in the event additional Ordinary Shares
or securities convertible into, exchangeable for or
exercisable into Ordinary Share without payment of
additional consideration are issued after completion
of the IPO; provided, however, that, with respect to
any Class A Ordinary Shares issued upon exercise of
the Warrants not previously called for redemption by
the Company underlying the Units offered hereby, so
long as any portion of the net proceeds received by
the Company upon such exercise is not utilized by the
Company, but such proceeds ("Invested Proceeds")
are instead invested in short-term high interest
bearing securities or accounts, then the adjustment
to the Minimum Pretax Income amounts set forth above
shall be an amount (net of taxes) equal to 8% per
annum multiplied by such amount of Invested Proceeds
from the date of exercise.
Any money, securities, rights or property distributed
in respect of the Program Shares, including any
property distributed as dividends or pursuant to any
stock split, merger, recapitalization, dissolution or
total or partial liquidation of the Company, shall be
subject to the Deference Program until release of the
Program Shares.
(e) The conversion of the Program Shares to deferred shares as
described above shall not require any resolution of the
general meeting of the Company's shareholders.
(f) Since the above conditions were fully met, in the reporting
year the 2,660,000 Class B Ordinary Shares are released
from the Deference Program.
d. Share Option Plan
In November 1996, the Board of Directors of the Company adopted a share
option plan (the "Share Option Plan") pursuant to which 300,000 Class
A Ordinary shares were reserved for issuance upon the exercise of
options to be granted to employees of the Company. During the 18
months following the completion of the Offering, such exercise price
will be equal to the greater of (i) the IPO price of the Units and (ii)
the fair market value of the Class A Ordinary Shares at the time of
grant. Thereafter, such exercise price may not be less than 70% of the
average closing price, as reported by Nasdaq, of the Class A Ordinary
Shares during the 90 calendar days prior to the date of grant.
<PAGE> F-39
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL (Continued)
In November 1997, the Board of directors of the Company adopted a new
share option pursuant to which 400,000 Class A Ordinary Shares were
reserved for issuance upon the exercise of options to be granted to
employees and officers of the Company. The exercise price per share
shall be as follows: (i) for all options exercised before July 30,
1998, the exercise price per Share shall be equal to the greater of the
IPO per share price or the fair market value of the common stock of the
Company on the Date of Grant; (ii) for all Options exercised more than
18 months after the Effective Date, the exercise price shall be 70% of
the average closing price of the Class A Ordinary Shares of the Company
during the 90 days which preceded the date of exercise.
As of December 31, 1997, the Company has not granted any options to
purchase Class A Ordinary Shares, (See also Note 28b).
e. Bridge Warrants
The Bridge Warrants (Note 14), entitle the holders to purchase one
Class A Ordinary Share commencing one year from the date of their
issuance. Upon the Bridge Warrants were exchanged for the Selling
Securityholders' Warrants, each of which are identical to the Class A
Warrants included in the Units. The Selling Securityholders have
agreed, not to exercise and not to sell the Selling Securityholders'
Warrants for a period of one year from the closing of the offering.
f. Issue of Shares within the framework of an IPO
On January 30, 1997, the Company completed an IPO consisting of
2,300,000 Units, each Unit consisting of Class A Ordinary Shares, one
redeemable class A warrant at the price per Unit price of $5. The net
proceeds from the issuance amounted to NIS 32,477,177.
g. Redeemable Warrants
Within the framework of the Company's IPO, the Company issued 2,300,000
Redeemable Class A warrants and 2,300,000 Redeemable Class B warrants.
CLASS A WARRANTS
Each Class A Warrants entitles the registered holder to purchase one
Class A Ordinary share and one Class B Warrant, at an exercise price of
$6.50, until January 2002. Beginning one year from the date of the
IPO, the Class A Warrants are redeemable by the Company on 30 days'
prior written notice at a redemption price of $.05 per Class A Warrant,
if the "closing price" of the Company's Class A Ordinary Shares for
any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $9.10 per share (subject to adjustment
by the Company, in the event of any reverse stock split or similar
events).
<PAGE> F-40
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 :- SHARE CAPITAL (Continued)
CLASS B WARRANTS
Each Class B Warrant entitles the registered holder to purchase one
Class A Ordinary Share at an exercise price of $8.75 per share at any
time after issuance until January 2002. Beginning one year from the
date of IPO, the Class B Warrants are redeemable by the Company on 30
days' prior written notice at a redemption price of $.05 per Class B
Warrant, if the closing price of the Company's Class A Ordinary Shares
for any 30 consecutive trading days ending within 15 days of the notice
of redemption averages in excess of $12.25 per share (subject to
adjustment by the Company, in the event of any reverse, stock split or
similar events).
Through December 31, 1997, none of the Warrants have been exercised.
NOTE 22:- CHARGES
a. As collateral for capital lease liabilities to a leasing company,
a fixed charge has been placed on motor vehicles and equipment.
b. As collateral for a liability to a mortgage bank, a pledge was
registered on the Subsidiary's office space.
c. As collateral for liabilities to banks, a charge has been placed
on short-term deposit, on marketable securities, on revenues from
the projects and on motor vehicles.
As of the balance sheet date, the balance of liability
collateralized totals adjusted approximately NIS 41 million.
NOTE 23:- TAXES ON INCOME
a. Taxation of contractors:
The Income Tax Ordinance (New Version) 1961 ("Ordinance")
distinguishes between two types of contractors performing work
over more than one year ("Progressive Works").
(i) a "customer contractor" initially reports income from
progressive works in the tax year in which at least 25% of the
predicted monetary scope or the quantitative scope of the work is
concluded.
(ii) a "development contractor" reports his income according to
the "completion of work" method, i.e. in the first tax year in
which the building receives a certificate of completion from the
local authority.
The ordinance provides rules for spreading financing, management and
general expenses as well as interest expense over the period of
construction.
<PAGE> F-41
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23:- TAXES ON INCOME (Continued)
b. Measurement of results for tax purposes are made in accordance
with the Income Tax (Inflationary Adjustments) Law, 1985 (the
"Inflationary Adjustments Law").
In accordance with the Inflationary Adjustments Law, the results
for tax purposes are measured in real terms, in accordance with
the changes in the Israeli CPI.
c. Taxes on Income
Taxes on Income included in the statements of operation:
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Israel - - 1,603,740 453,546
Europe - - 97,671 27,622
Deferred:
Israel - - 3,536,000 1,000,000
------------- ------------- ------------- -------------
- - 5,237,411 1,481,168
============= ============= ============= =============
</TABLE>
<PAGE> F-42
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23:- TAXES ON INCOME (Continued)
d. Deferred tax:
Deferred tax liabilities (assets) are composed of the following:
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax applied in the event of
the distribution of income
of foreign subsidiaries - - 3,536,000 1,000,000
Difference between the reported
income recognition and the
tax reporting - 45,776 354,443 100,238
Provision for severance pay,
vacation and recreation - (32,470) (99,302) (28,083)
Net operating loss carryforward - (184,875) (452,608) (128,000)
- (171,569) 3,338,533 944,155
Valuation allowance * - 171,569 197,467 55,845
- - 3,536,000 1,000,000
</TABLE>
*) The deferred tax asset valuation allowances are primarily
related to deferred tax assets of foreign operations.
e. Tax loss carryforwards:
At December 31,1997, a foreign subsidiary has net operating loss
carryforwards of approximately $128,000, which may be utilized
against future taxable income through 2012.
f. Tax assessments:
Final assessments have not yet been received by the Company and
its subsidiary since incorporation.
g. A reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income of the
Company and the actual tax expense, is as follows:
<PAGE> F-43
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23:- TAXES ON INCOME (Continued)
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
Translation
(Note 2a)
Adjusted NIS U.S.$
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Theoretical tax expense (benefit)
computed at rate of 36% (379,063) 17,513 10,310,459 2,915,854
Nondeductible expenses and
others, net 23,136 17,317 1,121,656 317,210
Exempt income - - (6,265,792) (1,772,000)
Carryforward losses for which no
deferred taxes are recognized 355,927 (34,830) 71,088 20,104
------------- ------------- ------------- -------------
Actual tax expense - - 5,237,411 1,481,168
============= ============= ============= =============
</TABLE>
NOTE 24:- LINKAGE TERMS OF MONETARY BALANCES
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Foreign Linked to
Currency Israel CPI Unlinked Total
------------- ------------- ------------- -------------
Adjusted NIS
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents 5,275,578 - - 5,275,578
Bank deposits and marketable
securities in restricted
deposits 1,087,118 - 14,921,683 16,008,801
Contracts receivable - 3,784,883 229,153 4,014,036
Prepaid expenses and other
accounts receivables - 1,408,879 2,096,176 3,505,055
Related party receivable - - - -
Loan to an affiliated company - - - -
------------- ------------- ------------- -------------
6,362,696 5,193,762 17,247,012 28,803,470
============= ============= ============= =============
Short-term loan and bank credit - - 7,568,148 7,568,148
Bridge Notes 7,009,426 - - 7,009,426
Trade payables - - 7,192,527 7,192,527
Accrued expenses and other
liabilities 98,381 12,167 833,810 944,358
Related parties - - 49,828 49,828
Shareholder 1,043,454 - - 1,043,454
Long-term liabilities
(including current maturities) - 440,860 239,972 680,832
Severance pay - - 33,049 33,049
------------- ------------- ------------- -------------
8,151,261 453,027 15,917,334 24,521,622
============= ============= ============= =============
</TABLE>
<PAGE> F-44
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24:- LINKAGE TERMS OF MONETARY BALANCES
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Foreign Linked to
Currency Israel CPI Unlinked Total
------------- ------------- ------------- -------------
Adjusted NIS
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents 11,920,685 - 2,026,112 13,946,797
Bank deposits and marketable
securities in restricted
deposits 37,938,364 - 9,935,037 47,873,401
Contracts receivable - - 9,810,276 9,810,276
Prepaid expenses and other
accounts receivables 1,700,000 - 5,109,956 6,809,956
Related party receivable 5,077,374 - - 5,077,374
Loan to an affiliated company 3,383,895 - - 3,383,895
------------- ------------- ------------- -------------
60,020,318 - 26,881,381 86,901,699
============= ============= ============= =============
Short-term loan and bank credit 7,191,732 - 10,728,164 17,919,896
Bridge Notes - - - -
Trade payables - - 37,552,822 37,552,822
Accrued expenses and other
liabilities - - 3,249,951 3,249,951
Related parties - - - -
Shareholder - 112,277 - 112,277
Long-term liabilities
(including current maturities) 19,628,943 2,824,950 136,847 22,590,740
Severance pay - - 77,802 77,802
------------- ------------- ------------- -------------
26,820,675 2,937,227 51,745,586 81,503,488
============= ============= ============= =============
</TABLE>
<PAGE> F-45
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25:- SELECTED STATEMENT OF OPERATIONS DATA
a. Major customers data
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
translation
(Note 2a)
Adjusted NIS U.S. $
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues from:
Engel (see Note 20) (1) 89,776 9,758,367 39,569,787 11,190,551
LGES (see Note 20) (2) - - 17,201,693 4,864,732
American Entity (See Note 27d)(3) - - 20,796,118 5,881,255
UIC (See Note 27e)(4) - - 11,495,534 3,251,000
Others 42,758 13,538,781 35,296,003 9,981,901
------------- ------------- ------------- -------------
132,534 23,297,148 124,359,135 35,169,439
============= ============= ============= =============
(1) Percentage of total revenues 67.7% 41.9% 31.8% 31.8%
============= ============= ============= =============
(2) Percentage of total revenues - - 13.8% 13.8%
============= ============= ============= =============
(3) Percentage of total revenues - - 16.7% 16.7%
============= ============= ============= =============
(4) Percentage of total revenues - - 9.3% 9.3%
============= ============= ============= =============
Contracting costs:
Engel projects (5) - 8,185,940 35,710,343 10,099,079
LGES (6) - - 14,881,337 4,208,523
American Entity (7) - - 2,279,207 644,572
UIC (8) - - 3,320,698 939,111
Others - 12,271,467 32,552,004 9,205,884
------------- ------------- ------------- -------------
- 20,457,407 88,743,589 25,097,169
============= ============= ============= =============
(5) Percentage of total revenues - 35.1% 28.7% 28.7%
============= ============= ============= =============
(6) Percentage of total revenues - - 12.0% 12.0%
============= ============= ============= =============
(7) Percentage of total revenues - - 1.8% 1.8%
============= ============= ============= =============
(8) Percentage of total revenues - - 2.7% 2.7%
============= ============= ============= =============
b. Revenues classified by
geographical areas
Israel 132,535 23,297,148 92,067,483 26,037,184
Europe - - 32,291,652 9,132,255
------------- ------------- ------------- -------------
132,535 23,297,148 124,359,135 35,169,439
============= ============= ============= =============
</TABLE>
<PAGE> F-46
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25:- SELECTED STATEMENT OF OPERATIONS DATA (Continued)
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
translation
(Note 2a)
Adjusted NIS U.S. $
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
c. Selling, administrative and general expenses include:
Bad debt* 153,700 - - -
============= ============= ============= =============
Rental expense - 5,266 37,356 10,565
============= ============= ============= =============
* Uncollectible payment in advance to a subcontractor which did not perform the required
construction.
d. Financial income (expenses)
Erosion of monetary items and
other, net 56,972 (200,943) (1,563,710) (442,226)
Interest income, including gain
on marketable securities - 986,688 4,972,253 1,406,180
Foreign exchange gain - 103,673 444,460 125,696
Interest expenses:
Long-term loans - (51,861) (106,583) (30,142)
Short-term loans and bank
credits (90,297) (571,451) (2,959,705) (837,021)
------------- ------------- ------------- -------------
(33,325) 266,106 786,715 222,487
============= ============= ============= =============
</TABLE>
NOTE 26:- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
a. Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
b. Marketable securities in a restricted deposit:
The fair value for marketable securities in the restricted deposits is
based on quoted market price.
c. Long and short-term debt:
The carrying amounts of the Company's borrowings under its short-term
revolving credit arrangements and long-term debt approximate their fair
value, since they bear interest or linked to CPI.
<PAGE> F-47
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26:- FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
d. The carrying amounts and fair value of the Company's financial
instruments of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Fair Value
Amount
------------- -------------
Adjusted NIS
-----------------------------
<S> <C> <C>
Cash and cash equivalents 13,946,797 13,946,797
Cash and marketable securities in
restricted deposits 47,873,401 47,873,401
Short-term debt 17,919,896 17,919,896
Long-term debt 22,590,740 22,590,740
</TABLE>
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES
a. Employment agreement
In November 1997, the Company entered into a three-year employment
agreement with its President, which is to become effective upon the
closing of Bridge Financing of the Company. The agreement provides for
an annual base salary of NIS 707,200, plus a NIS 176,800 bonus during
any year in which the Company meets the minimum target for release of
Program Shares (Note 21c) for such year. If such target for any given
year is not met, the president will be required to convert his Class B
ordinary shares with a market value of NIS 176,800 into deferred
shares.
The Company has paid to the President and a member of his family
salaries and related charges amounting to adjusted NIS 337,760 and NI
990,931 for the years ended December 31, 1996 and 1997, respectively.
b. For a transaction of the loan from a shareholder, see Note 17.
c. The Company, through its subsidiary, has paid to the Chairman of the
Board, salaries and related charges amounted to NIS - none and NIS
415,480 for the years ended December 31, 1996 and 1997, respectively.
d. Rehovot project
In March 1997 the Company was awarded rights to develop a parcel of
land of approximately 77,000 sq.m. in consideration of NIS 2 million.
Under the development agreement signed in July 1997 between the Company
and the Israeli Land Authorities (ILA), the Company is responsible of
the evictions and is committed to complete the development plan and the
project by March 2002.
<PAGE> F-48
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES (Continued)
d. Rehovot project (continued)
In June 1997, the Company, through its foreign subsidiary, has sold to
13 private US investors ("American Entity") a 55% interest of the
project in consideration of $6,000,000 of which $3,000,000 was paid in
December 1997; the remaining balance is covered by promissory notes,
bearing an annual interest rate of 8.5% and payable in December 2003.
The American Entity includes the Chairman of the Board and eight
members of the Company's U.S. Counsel, who acquired a 3.2% (in
consideration of $350,000) interest and a 15.6% (in consideration of
$1,700,000) interest in the total development rights, respectively.
The Company and the American Entity signed also a joint venture
agreement ("the Partnership") for the construction of the project.
According to the joint venture agreement the Company will receive 9.09%
of the Partnership's profit as entrepreneur's fee. The remaining
partnership's profits will be allocated as follows:
i. the first $9,000,000 of the net Partnership profits shall be
allocated to the American Entity.
ii. the remaining net Partnership profits shall be allocated to the
partners on a pro rata basis in the Partnership.
Partnership losses shall be allocated to the partners on a pro rata
basis in the partnership.
The American Entity is also required to prepay the principal amount of
the promissory notes in an amount equal to their pro rata share of any
partnership distributions.
The above transaction was reflected in the consolidated financial
statements as a related party transaction. Revenues of NIS 7,105,340,
profit of NIS 6,326,611 and notes receivable of NIS 3,624,400 have been
presented separately.
e. Germany and Russian project
In April 1997 the Company acquired through its Dutch subsidiary A.B.
Stone B.V. ("AB Stone") all the shares of STIPULA I B.V. ("STIPULA"), a
Dutch company in consideration of $2,000,000. STIPULA is engaged in a
joint venture with Engel in a project in Germany for the construction
of approximately 250 residential units and in another joint venture
with two Israeli companies in a project in Russia to erect an office
building. In 1997, the Company provided a loan to STIPULA of
$1,500,000 in order to complete the acquisition of 50% interest in the
project in Germany. In September 1997 AB Stone sold 50% of its share
in STIPULA to an unaffiliated Israeli Company ("UIC") traded on the Tel
Aviv Stock Exchange in consideration of $3,000,000 of which $1,800,000
<PAGE> F-49
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES (Continued)
e. Germany and Russian project (Continued)
was paid in September 1997 and the remaining balance is to be paid in
two installments of $750,000 each in April and December 1998.
This transaction was executed with UIC in which the father of the
Company's CFO is holding approximately 25% interest in UIC, is acting
as Chairman of UIC Board and the Company's CFO is a member of the Board
of UIC.
The above transaction was also reflected in the consolidated financial
statements as a related party transaction. Revenues of NIS 11,495,534,
profit of NIS 8,174,836 and current receivable of NIS 5,077,374 have
been presented separately.
NOTE 28:- SUBSEQUENT EVENTS
a. New Subsidiaries
After balance sheet date, the Company through its foreign subsidiary
established the following subsidiaries:
* 50% interest in ENSIS LTD. - was founded in Israel and engaged in
rental real estate projects
* EDGE HAARGAZIM Ltd., wholly owned - was founded in Israel and engaged
in rental real estate project.
b. Grant of Options
On January 20, 1998, the Company has granted under the Share Option
Plan (Note 21d) to the Company's CFO 200,000 options exercisable units
up to 200,000 Class A Ordinary Shares and to an officer of a foreign
subsidiary 400,000 options exercisable units up to 400,000 Class A
Ordinary Shares. Each option may be exercised no later than July 30,
1998 and in return for the payment of an exercise price of $5. Options
not exercised by July 30, 1998, shall automatically expire on August 1,
1998.
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS
a. The consolidated financial statements of the Company conform with
accounting principles generally accepted in Israel, which differ in
certain significant respects from those followed in the United States,
as described below:
<PAGE> F-50
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
1. Effect of inflation:
The Company, in accordance with the Israeli GAAP, comprehensively
includes the effects of price level changes in the accompanying
financial statements as described in Note 2a. Such Israeli
accounting principles measure the effects of price level changes
in the inflationary Israeli economy and, as such, this is
considered a more meaningful presentation than financial reporting
based on historical cost for Israeli and U.S. accounting purposes.
As permitted by the U.S. Securities and Exchange commission rules
for foreign private issuers whose financial statements
comprehensively include the effects of inflation, price level
adjustments have not been reversed in the accompanying
reconciliation of Israeli accounting principles to U.S. accounting
principles.
2. Revenue recognition:
According to the Israeli GAAP, the Company recognizes revenue as
follows:
a) Completed contract method:
Revenue from projects built for sale is recognized on the
completed contract method when both of the following
conditions have been met:
* at least 90% of the project has been completed, and
* at least 75% of the units in the project have been sold.
Under the U.S. GAAP the completed contract accounting is
acceptable:
* When financial position and results of operations would
not differ significantly from those that would result from
using percentage-of-completion accounting.
* When there are inherent hazards relating to contract
conditions or general factors that would raise questions
about a company's ability to accurately estimate a
contract.
b) Percentage of completion method:
Revenue from fixed prices construction contracts, and from
buildings where all units have been sold, is recognized on
the percentage of completion method. Revenue is recognized
where at least 25% of the project has been carried out.
According to U.S. GAAP, the percentage-of-completion method
is applicable when all of these conditions are met:
<PAGE> F-51
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
* The contractor can make reasonably dependable estimates
* The contract includes provision that specify both parties'
enforceable rights regarding goods and services to be
provided as received, consideration to be exchanged, and
the manner and terms of settlements.
* Both buyer and contractor can be expected to satisfy their
obligation under the contract terms.
Earned revenue is the amount of gross profit earned on a
contract for a period plus the costs incurred on the contract
during the period. Cost of earned revenue is the cost
incurred during the period. Gross profit earned on a
contract is computed by multiplying the total estimated gross
profit on the contract by the percentage of completion. The
percentage of completion is determined by measuring progress
toward completion in terms of cost incurred to date to
estimated total contract costs. When the current estimates of
total contract revenues and contract cost indicate a loss, a
provision for the entire loss on the contract is recognized.
The percentage-of-completion is also applicable if individual
units in condominium projects are being sold separately and
all following criteria are met:
* Construction is beyond a preliminary stage (construction is
not beyond a preliminary stage if engineering and design
work, execution of construction contracts, site clearance
and preparation, excavation and completion of the building
foundation are incomplete).
* The buyer is committed to the extent of being unable to
require a refund except for non-delivery of the unit.
* Sufficient units have already been sold to assure that the
entire property will not revert to rental property.
* Sales prices are collectible.
* Aggregate sales proceeds and costs can be reasonably
estimated.
Certain Company's projects are beyond the preliminary stage,
but not beyond the completion of 25% of those projects.
3. Accrued severance pay, net:
The amounts funded in regard to liabilities in respect of employee
rights upon retirement are presented as a deduction from the
liabilities in Note 14. Whereas according to U.S. GAAP, such
amounts funded would be presented in the balance sheet as long-
term assets.
<PAGE> F-52
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
3. Accrued severance pay, net: (Continued)
The amount funded in regard to liabilities in respect of employee
rights upon retirement as of December 31, 1996, and December 31,
1997 is in adjusted NIS 0 and NIS 57,000 respectively.
4. Treatment of Program Shares under Deference Program
Under Israeli accounting principles, the Deference Program (see
Note 21c) does not require the recognition of compensation
expense. The Company has decided not to adopt the measurement
requirements of FAS No. 123 for purposes of this reconciliation.
However, for the purpose of this reconciliation between Israeli
GAAP and U.S. GAAP (APB Opinion No. 25), the Deference Program
arrangement is accounted for as a variable stock award plan.
Therefore, the release from the Deference Program of the Program
Shares held by officers, directors and employees of the Company is
deemed compensatory. Accordingly, compensation expenses will be
measured based on the fair value of the shares at each balance
sheet date for the period or periods during which such shares are,
or become probably of being, released from Deference program. The
total compensation expense will be amortized over the vesting
period.
In the reporting year, the Company attained all of the earnings
thresholds required for such release of all Performance shares.
The compensation expense was calculated on the basis of the market
price of the Company's stock as of December 31, 1997.
5. Consideration of Foreign subsidiaries
Under Israeli GAAP, the results of operations for the year are
translated into NIS at the rate of exchange prevailing at the end
of the year for each foreign currency.
Under U.S. GAAP, such translation into NIS is calculated using the
annual average rate of exchange for each foreign currency.
This difference was not material in the reporting year.
6. Treatment of marketable securities:
Marketable securities designated for sale in short-term are
carried at market value, which is not materially different from
their cost.
<PAGE> F-53
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
6. Treatment of marketable securities: (Continued)
Under U.S. GAAP, these investments have been designated as
marketable securities available for sale and recorded in the
balance sheet at their current market value. Unrealized gains and
losses are recorded in a separate component of shareholders'
equity.
7. Earnings (Loss) per share:
Under Israeli GAAP, earning (loss) per share is computed based on
the weighted average number of Ordinary shares outstanding during
the period, including Program Shares.
Under U.S. GAAP, the Program Shares under the Deferrence Program
are excluded from the weighted average number of shares
outstanding during each period presented. For purposes of
computing earnings per share, the Program shares are treated as
unissued shares through December 31, 1997 as their issuance is
contingent upon the Company's attainment of specified earning
levels.
As stated above, the Performance shares were released and the
computation of earning per share for the year ended December 31,
1997 is based on the weighted average number of ordinary shares
outstanding including Program shares released.
b. The effect of the material differences between the Israeli and the U.S.
GAAP of the above mentioned items on the financial statements is as
follows:
<PAGE> F-54
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
1. On consolidated statements of income.
<TABLE>
<CAPTION>
For the six
months ended
December 31, For the year ended December 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
Convenience
translation
(Note 2a)
Adjusted NIS U.S. $
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) as reported,
according to the Israeli GAAP (1,024,496) 48,646 23,208,432 6,563,471
Unrealized gain on marketable
securities - (98,159) (185,448) (52,446)
Estimated earnings on projects beyond a
preliminary stage and less 25% of the
construction wage - 287,265 440,612 124,607
Compensation expense related to
performance shares released - - (28,217,280) (7,980,000)
Reclassification of amortization of
Bridge notes issuance costs - - 843,438 238,529
------------- ------------- ------------- -------------
Net income (loss) according to the U.S.
GAAP before extraordinary items (1,024,496) 237,752 (3,910,246) (1,105,839)
Extraordinary item:
Amortization of Bridge Notes issuance
costs - - (843,438) (238,529)
------------- ------------- ------------- -------------
Net income (loss) according to the
U.S .GAAP (1,024,496) 237,752 (4,753,684) (1,344,368)
============= ============= ============= =============
Basic earnings (loss) per
ordinary share:
As reported, according to the
Israeli GAAP (0.43) 0.02 4.56 1.29
============= ============= ============= ============
As per the U.S. GAAP
Income (loss) before extraordinary item (3.76) 0.70 (0.77) (0.22)
Extraordinary item - - (0.16) (0.04)
------------- ------------- ------------- ------------
Net income (loss) (3.76) 0.70 (0.93) (0.26)
============= ============= ============= ============
Weighted average number of shares
outstanding under the U.S. GAAP 272,186 340,000 5,085,754 5,085,754
============= ============= ============= ============
</TABLE>
The Minimum Pretax Income as defined in Note 21c for the year ended December
31, 1997 amounted to NIS 29,544,445 ( $8,355,329).
<PAGE> F-55
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
2. On Balance Sheet Items.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1997
-------------------------------------------------------------------------------------------------------------
Convenience
Translation
As per As per (Note 2a)
As re[prted Adjustment U.S.GAAP As reported Adjustment U.S.GAAP U.S.$
------------- ------------- ------------- ------------- ------------- ------------- -------------
Adjusted NIS
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost and estimated
earnings in excess
of billings on
uncompleted
contracts (1) 2,865,784 68,240 2,934,024 16,537,042 (141,032) 16,396,010 4,636,881
Total assets 34,213,947 68,240 34,282,187 147,313,184 (141,032) 147,172,152 41,621,084
Billings in excess
of costs and estimated
earnings on uncompleted
contracts (1) 9,549,242 (219,025) 9,330,217 3,154,827 (703,291) 2,451,536 693,308
Share capital and
Paid-in capital (2) - - - 33,847,129 28,217,280 62,064,409 17,552,152
Unrealized gain on
marketable securities - 98,159 98,159 - 283,607 283,607 80,206
Retained earnings
(accumulated loss) (975,850) 189,106 (786,744) 22,232,582 (27,938,628) (5,706,046) (1,613,701)
Total Shareholders'
Equity 143,092 189,106 332,198 56,079,711 562,259 56,641,970 16,018,657
</TABLE>
(1) Recognition of estimated earnings on projects beyond a preliminary stage,
but not beyond the completion of 25% of those projects.
(2) Compensation expense related to performance shares released.
3. Additional disclosure regarding marketable securities:
The following is a summary of available-for-sale securities as
presented on December 31, 1997 pursuant to provisions of FASB
Statement No. 115:
<PAGE> F-56
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND
U.S. GAAP ON THE
FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As reported As reported
Gross in these in these
unrealized financial Estimated financial
Cost gain statements fair value statements
------------- ------------- ------------- ------------- -------------
Convenience
translation
(Note 2a)
Adjusted NIS U.S. $
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available-for-sale
securities:
Short-term debentures 9,082,734 279,335 9,362,069 9,362,069 2,647,644
Shares 103,280 4,272 107,552 107,552 30,416
------------- ------------- ------------- ------------- -------------
9,186,014 283,607 9,469,621 9,469,621 2,678,060
============= ============= ============= ============= =============
</TABLE>
<PAGE> 45
SIGNATURES
----------
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENESIS DEVELOPMENT AND CONSTRUCTION LTD.
By: /s/Moshe Schnapp
----------------------------------------
Moshe Schnapp
President
Dated: June 30, 1998
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
registration statement (Post-Effective Amendment No. 2 on Form F-3 to Form F-
1, Registration Number 333-6136) and related prospectus and in the
registration statement (Form S-8, Registration Number 333-8592) and related
prospectus of our report dated March 23, 1998 with respect to the consolidated
financial statements of Genesis Development and Construction Ltd. included in
its Annual Report (Form 20-F) for the year ended December 31, 1997. We also
consent to the reference to our firm under the caption "Experts" in the
prospectuses.
KOST LEVARY and FORER
Certified Public Accountants (Israel)
A member of Ernst & Young International
Haifa, Israel
June 30, 1998
