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, 1998
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 Hashikma 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, 1998:
2,361,000
Number of outstanding Class B Ordinary Shares as of December 31, 1998:
2,939,000
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...........................................17
ITEM 3. Legal Proceedings.................................................17
ITEM 4. Nature of Trading Market..........................................18
ITEM 5. Exchange Controls and Other Limitations
Affecting Security Holders.......................................20
ITEM 6. Taxation..........................................................20
ITEM 7. Selected Financial Data...........................................22
ITEM 8. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................23
ITEM 9. Quantitative and Qualitative Disclosures
About Market Risk................................................29
ITEM 10. Directors and Officers of the Registrant..........................30
ITEM 11. Compensation of Directors and Officers............................33
ITEM 12. Options to Purchase Securities From
Registrant or Subsidiaries.......................................34
ITEM 13. Interest of Management In Certain Transactions....................35
Part II
ITEM 14. Description of Securities To Be Registered........................36
Part III
ITEM 15. Defaults Upon Senior Securities...................................36
ITEM 16. Changes In Securities, Changes
In Security For Registered Securities And Use Of Proceeds........36
Part IV
ITEM 17. Financial Statements..............................................37
ITEM 18. Financial Statements..............................................37
ITEM 19. Financial Statements and Exhibits.................................37
Signatures........................................................37
<PAGE>
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 THE STRENGTH OF SUCH INDUSTRY, AS WELL AS A MERGER TRANSACTION
CONTEMPLATED BY THE COMPANY, INVOLVE RISKS AND UNCERTAINTIES, AND ARE SUBJECT,
AMONG OTHER THINGS, TO CHANGES IN THE ISRAELI ECONOMY, 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, 1998 (NIS 4.16 = $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. (together with its
subsidiaries, the "Company", unless the context requires otherwise) 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, through subsidiaries, in the acquisition and
development of income-producing residential properties for long term lease by
the Company to agencies of the Israeli government. In May 1999 the Company sold
part of its interests in such properties, thereby significantly reducing the
level of its activity in this area.
In May 1999 the Company entered into a Memorandum of Understanding
regarding a merger transaction with a company based in Charleston, South
Carolina, and engaged in the business of providing high-speed Internet cable
modem services. See "--Internet Cable Corporation Merger Transaction."
1
<PAGE>
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.
A. Real Estate Development and Construction Business
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 on
schedule and in accordance with specifications. A substantial portion the
Company's projects in Israel have been awarded through, and the Company intends
to continue to participate in, this competitive bidding process. See
"--Residential Development and Construction Awards."
The real estate industry in Israel has undergone rapid and significant
expansion during the years 1990 to 1996. According to the Israeli Central Bureau
of Statistics (the "ICBS"), during the years 1990 through 1998 Israel
experienced an average population growth of approximately 24%, primarily as a
result of immigration from the countries formerly constituting the Soviet Union.
Although the rate of immigration decreased since 1997, as reported by the ICBS,
immigration has and continues to provide the Israeli economy with a highly
educated and cost competitive labor force. See "--Conditions in Israel--Economic
Conditions" below.
Since 1997, the Israeli real estate market has experienced a
recession, resulting in a reduction in demand and prices and a decrease of
construction starts. The demand for moderately priced housing, which is the
Company's main area of activity, was also adversely affected by the economic
recession, although to a lesser extent than the demand for luxury homes. Due to
the increased population, the demand for public buildings, such as educational
and community centers, is relatively stable at this time. Accordingly, the
Company is presently focusing its construction efforts in the area of public
buildings and on its Rehovot project. See "--Real Estate Projects--Residential
Projects--Pending Projects" and "--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. The percentage of agriculture in Israel's gross domestic
product, exports and employment has fallen in recent years and 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."
2
<PAGE>
Real Estate 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 apartment buildings, 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 adjusts 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 attempts 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 the land being developed by
the Company. The Company intends to identify and cultivate a wide source of
potential joint venture or other partners.
* Fixing costs. As a matter of policy, the Company will not begin
construction of a project (unless otherwise committed due to the terms of
the bid) 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 real estate activity in Israel, the Company
believes that looking beyond the Israeli real estate 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.
3
<PAGE>
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 build and 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.
* 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 undeveloped 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.
4
<PAGE>
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 construction of such buildings. The project
may be for the development and construction of a specific type of public
building within a specific region of Israel or 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.
5
<PAGE>
Real Estate Projects:
Residential Projects - Completed Projects
To date the Company has participated, either as a developer, contractor
or consultant, in ten projects that have been completed, comprising 467
residential units. The following table sets forth information concerning these
projects:
<TABLE>
<CAPTION>
Construction
Project Location Total Units(1) Units Sold Completion Date
---- -------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
As a Developer or general contractor
Acre.................................. Acre 24 24 8/97
Derech Hayam(2)....................... Haifa 12 11 10/97
Kiryat Tiv'on......................... Kiryat Tiv'on 78 78 12/97
Kfar Yona............................. Kfar Yona 34 34 6/98
Carmiel............................... Carmiel 31 30 12/98
=== ===
Subtotal.................... 179 177
As a Subcontractor
Kiryat Yona........................... Kiryat Yona 65 n/a(4) 8/98
Modi'in(3)............................ Modi'in 85 n/a(4) 12/98
Dovrat................................ Afula 64 n/a(4) 3/99
===
Subtotal.................... 214
As a Consultant or as Part
of a Joint Venture
Yokne'am.............................. Yokne'am 50 50 12/97
Har Yona.............................. Nazareth 24 24 12/97
== ==
Subtotal.................... 74 74
== ==
TOTAL....................... 467 251
</TABLE>
(1) Units per project.
(2) Including five Units given to the owner of the land as consideration for
the right to develop the land.
(3) Performance of preliminary work only.
(4) The Company's participation as a subcontractor in these projects renders
this information insignificant.
6
<PAGE>
Residential Projects - Projects Under Construction
As of May 31, 1999, the Company was involved in three residential
development projects in Israel, in different planning, zoning and construction
stages, in which the Company plans to build approximately 1,255 residential
units. Construction of 900 of such residential units is subject to the receipt
of various approvals and the Company does not anticipate their completion for
several years. There is no assurance that these pending projects will be
completed in the manner contemplated by the Company, or at all. The following
table sets forth information concerning these projects:
<TABLE>
<CAPTION>
Execution Date
Project Total Units(1) Units Sold of Agreement
------- ----------- ---------- ----------------
<S> <C> <C> <C>
Rehovot(1).......................... 900 12 3/97
Kiryat Shmuel ...................... 58 46 11/97
Carmiel(2).......................... 167 0 12/97
Rishon Lezion(3).................... 130 n/a 12/98
===== ===
TOTAL................ 1,255 58
</TABLE>
(1) In March 1997, the Company was awarded by the Israel Land
Administration rights to develop a parcel of approximately 19 acres in
Rehovot, in central Israel. The Company estimates that this project
will consist of approximately 900 residential units, in approximately
residential buildings, as well as public and commercial buildings. The
completion of this project is subject to the successful evacuation of
certain tenants that reside on portions of the land and to approvals
from governmental and municipal authorities. The Company is currently
offering 168 residential units for sale at this location, which are to
be built in the first phase of construction at this site. Pursuant to
the terms of the award, the Company is required to complete
construction of the project by March 2002.
(2) The Company is currently seeking approval from governmental authorities
to increase the number of units in this project to 300.
(3) In December 1998 the Company was engaged by Shay Bar Real Estate
Investments Ltd., an Israeli publicly traded company ("Shay Bar"), to
perform, as a "turn-key" contractor, certain construction and
renovation work on building purchased by Shay Bar in Rishon
Lezion, in connection with the proposed construction of 130 studio
apartments at the site. In addition, the Company received $1.4 million
for consulting and financial management services rendered to Shay Bar
in connection with this project. The completion of construction and
renovation of this project is expected to be in September 1999. See
"Item 13--Interest of Management in Certain Transactions."
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, the Company purchased 21.87%
of the outstanding shares of the 64% partner in this project, a subsidiary of
Engel, 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. Pursuant to the terms of the engagement, the Company is required to
complete construction of the project in December 2002. In addition, the Company
and Engel will each be entitled to 2% and 6%, respectively, of the revenues from
this project in return for management financial and marketing services in
connection with the development of the site. See "Item 13--Interest of
Management in Certain Transactions."
7
<PAGE>
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 of the necessary
infrastructure at this site is in its final stage.
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. The construction of the exterior of the building is in
its final stages and the Company anticipates that it will be completed within a
few months. The partners in this project are currently seeking tenants. After
tenants for a substantial portion of the building are secured, the parties will
commence work on the interior of the building according to the tenants'
specifications. See "Item 13--Interest of Management in Certain Transactions."
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 5 such centers,
four of which were completed prior to December 1998. The fifth project is
substantially completed and requires only minor additional work. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Relationship with Engel."
Educational Buildings
---------------------
In June 1998, the Company completed the construction, as a
subcontractor for Engel, of the second phase of a school building at a youth
village in Petach Tikva, which is near Tel Aviv. The first phase of this project
was completed in September 1997.
Gymnasiums
----------
Pursuant to a bid the Company won in August 1996, it constructed five
gymnasiums for different municipalities, the last of which is in its final
construction stages.
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." This
project is under construction and its completion is planned for June 2001.
8
<PAGE>
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.
Acquisition and Development of Income-Producing Residential Properties
----------------------------------------------------------------------
In January 1998, the Company acquired interest in two properties, one
in Bat-Yam and one in Tel-Aviv, through a former subsidiary in which the Company
owned a 50% interest. The Bat-Yam property was renovated and leased to the
Israeli Government's Ministry of Absorption ("Ministry of Absorption") pursuant
to a five-year lease agreement. The property in Tel-Aviv includes approximately
40 residential units and is designated for rental following completion of
renovation. In May 1999 the Company sold its interest in this project and in the
subsidiary, through which the Company's interest was held, to the holder of the
remaining 50% interest in such subsidiary.
In addition, the Company acquired rights to develop another property
in Tel-Aviv, where the Company intends to renovate an existing building to
create 200 to 225 small residential units, which the Company will lease to
persons referred by the Ministry of Absorption. Approximately 20% of the rent
will be collected from the tenants and the rest will be paid by the Ministry of
Absorption. The Ministry of Absorption will pay the Company rent for all of the
Units, whether or not they are occupied. The Company has entered into an
agreement with the Ministry of Absorption regarding this arrangement, with a
five-year term, and at the option of the Ministry of Absorption, an additional
five-year term. In January 1998, the Company sold a 20% interest in this
property to an unrelated party for total consideration of $7 million. As of the
date of this report, this property is undergoing renovation. The original date
set for completion of the renovation in the agreement with the Ministry of
Absorption was May 1, 1999. Due to certain delays, the parties reached a verbal
agreement, according to which the building will be leased in phases, the first
of which, consisting of 58 Units, was completed in June 1999, and the remainder
is planned to be completed by September 30, 1999. On June 30, 1999 the Company
executed an agreement with an unrelated party, granting such party the right to
access the property, during a 90 day period, for the purpose of assessing its
interest in acquiring rights in the property.
9
<PAGE>
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. 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.
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 is generally required to provide a downpayment with respect to a
specific percentage of the unit purchase price. The Company's policy, when
possible, 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 real property: 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.
10
<PAGE>
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.
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 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.
11
<PAGE>
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 Performance (1997) Ltd. and Genesis
Construction Performance (1994) Ltd., wholly owned subsidiaries of the Company,
possess a C-5 classification which enable 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."
Employees:
---------
At June 25, 1999, the Company had 29 full-time employees, including its
chief engineer, field engineers and 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.
12
<PAGE>
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 deposited as collateral
security certain amounts with the Ministry of the Interior as a condition to its
employment of foreign workers. Such collateral was deposited by a third party
that is handling all procedures related to foreign workers on behalf of the
Company. There can be no assurance that the Company will not experience labor
shortages in the future. In recent years, 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."
Conditions in Israel:
--------------------
The Company's operations are currently 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. Since such agreement, Israel and the PLO
reached several others agreements 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 with respect to
certain territories in the West Bank.
13
<PAGE>
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. 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 by a
right wing zealot opposing the peace process, which was promoted by Mr. Rabin.
To date, Israel has not entered into a peace treaty with either Lebanon
or Syria, although it has conducted certain negotiations with Syria towards a
solution of the hostility between them. Furthermore, notwithstanding the
agreements and declarations described above, the relations 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.
In the past few years there has been certain 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. On May 17, 1999,
Mr. Ehud Barak of the Labor Party was elected as Israel's Prime Minister.
According to Mr. Barak's declarations prior to his election, the new government
will attempt to speed up the peace process with the Palestinians and resume
negotiations with Syria.
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.
Economic Conditions
- -------------------
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s that reached
an annual peak of 445%, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest among the Palestinian
population. The Israeli government has, for these and other reasons, intervened
in the economy by utilizing, among other means, fiscal and monetary policies,
import duties, foreign currency restrictions and control of wages, prices and
exchange rates. The Israeli government's monetary policy contributed to relative
price and exchange rate stability during most of 1993 to 1997 despite
fluctuating rates of economic growth and unemployment. The Israeli government
has in the past periodically changed its policies in all these areas. During
1997, the monetary policy of the Bank of Israel changed in several respects.
These changes included a decision of the Bank of Israel to reduce interest rates
and a move by the Bank of Israel to reduce its intervention in the currency
markets to allow the NIS to trade more freely. In addition, the Bank of Israel
has adopted certain measures to liberalize foreign currency regulations. See
Item 6. An period of accelerated devaluation of the NIS has been one consequence
of these policy changes. Subject to further changes in policy, the NIS-US Dollar
exchange rate may fluctuate more widely in the future than it has in recent
years.
14
<PAGE>
Since the beginning of 1998, the Israeli economy has been experiencing
a recession, resulting, inter alia, in growing unemployment rates, a very low
inflation rate and high interest rates. According to the ICBS, from 1994 through
1998, Israel's GDP increased 6.8%, 7.1%, 4.7%, 2.7% and 2.0%, respectively,
although the GDP growth per capita for 1997 and 1998 was negative. In addition,
Israel has recently experienced an increase in its unemployment level. According
to data published by the ICBS, average unemployment rates have increased from
6.7% and 7.7% of the civilian labor force in 1996 and 1997, respectively, to
8.6% in 1998.
The following table sets forth, for the periods indicated, certain
information with respect to the CPI, the rate of inflation in Israel, the rate
of devaluation of the NIS in Israel and the rate of inflation adjusted for
devaluation.
<TABLE>
<CAPTION>
Israeli Inflation
Inflation Devaluation Adjusted for
Year Ended December 31, CPI(1) Rate%(2) Rate%(3) Devaluation%(4)
- ----------------------- --- --------- ----------- ---------------
<S> <C> <C> <C> <C>
1994...................... 289.8 14.5 1.1 13.3
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 (1.7)
1998...................... 402.6 8.6 17.7 (7.7)
</TABLE>
(1) For purposes of this table, the CPI figures use the 1987 CPI as a base
equal to 100. These figures are based on reports of the ICBS and are for
December 31 of the respective years.
(2) Inflation is the percentage change in the CPI between the last month of the
period indicated and December of the preceding year.
(3) Devaluation is the percentage increase in the value of the US Dollar in
relation to NIS during the period indicated.
(4) Inflation adjusted for devaluation is obtained by dividing the Israeli
inflation rate plus 100 by the annualdevaluation rate plus 100, multiplying
the result of such division by 100 and subtracting 100 from the result.
15
<PAGE>
NIS/U.S. DOLLAR EXCHANGE RATE
At end of Average
Period(1) Rate(2) High Low
--------- ------- ---- ---
1994.............. 3.02 3.01 3.06 2.96
1995.............. 3.14 3.01 3.18 2.94
1996.............. 3.25 3.20 3.30 3.08
1997.............. 3.54 3.60 3.61 3.53
1998.............. 4.16 3.80 4.37 3.54
(1) Exchange rate at period end is the Representative Rate as of December 31
of the year indicated, as reported by the Bank of Israel.
(2) Average rate is the average of the daily Representative Rates during the
year.
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. 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.
B. Merger with Cable Internet Corporation ("ICC")
In May 1999 the Company executed a Memorandum of Understanding (the
"MOU") with Internet Cable Corporation ("Internet Cable"), a broadband Internet
access provider incorporated under the laws of Nevada, whose shares are publicly
traded on the OTC/BB (symbol ICBL), contemplating a merger between the two
companies. Pursuant to the MOU the shareholders of Internet Cable will exchange
their stock for stock in a new US holding company to be formed by the Company
and to be called Internet Cable Corporation (the "New Genesis"). The
shareholders of Internet Cable, after giving effect to this transaction, will
own approximately 59% of the issued and outstanding common stock of the New
Genesis and, in addition, may receive warrants to purchase additional shares.
The transaction is subject to, among other things, appropriate due
diligence, execution of definitive agreements, approval of both boards of
directors, shareholders' meetings and fairness opinion letters. The MOU has been
presented to and approved by the boards of directors of Internet Cable and the
Company.
16
<PAGE>
Internet Cable, headquartered in Charleston, South Carolina, is in the business
of providing high-speed Internet cable modem services. The use of cable modems
for Internet access provides customers the ability to download and upload
multi-media at speeds hundreds of times faster than those of typical telephone
modems.
Negotiations regarding the structure of the transaction and the terms
of a definitive agreement are in progress.
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.
Such mortgage bears interest at the rate of 5.5% and requires equal monthly
payments of principal and interest, linked 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 Rehovot, in close proximity to its residential project located there. See
"Item 1--Real Estate Projects--Residential Projects." The term of such lease is
for 12 months, commencing on December 1999, with an option for the Company to
extend the lease for an additional 60 months. The monthly payments under this
lease are $500. The Company's U.S. subsidiary, Genesis Development and
Construction, Inc., has leased office space in New City, New York. This lease is
on a monthly basis and the payments under the lease approximate $1,500 per
month. The Company's office space is adequate for its anticipated future needs.
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, except as described below.
On October 22, 1998 Moshe Schnapp, the Company's president, Eli Aran,
the Company's chairman, and the Company filed a Statement of Claim against
Israel Discount Bank Ltd. (the "Bank") in the Tel Aviv District Court, seeking
damages in the amount of $100 million. The suit relates to negotiations, between
Messrs. Schnapp and Aran and the Bank, concerning the financing of a proposed
acquisition of a controlling interest in a large Israeli energy and real estate
holding company. In June 1999, following the Company's notice to Messrs. Schnapp
and Aran that it would not bear any of the cost of prosecuting this claim, it
was agreed that the Company would remain a party to the suit but would not bear
any of such costs and would be entitled to only 5% of the net amount of any
recovery.
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.
17
<PAGE>
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 May 31, 1999
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.
<TABLE>
<CAPTION>
Class A Class B
Ordinary Shares Ordinary Shares Percentage of
--------------- --------------- Vote as a
Name Number % Number % Single Class(1)
- ---- ------- --- -------- -- ----------------
<S> <C> <C> <C> <C> <C>
Moshe Schnapp -- -- 1,829,000 (2) 44.2 38.1
Eli Aran 22,500 (3) * 2,310,000 (4) 55.8 48.3
Dashwood International S.A. __ __ 550,000 13.3 11.5
All officers and directors
as group 74,500 (5) 2.3 4,139,000(2)(4) 100 86.8
</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 wholly-owned and controlled by Moshe
Schnapp. Also includes (i) 550,000 Class B Ordinary Shares held by
Dashwood International S.A. ("Dashwood") and (ii) 79,000 Class B
Ordinary Shares held by Allied Capital Services, LLC. 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
Allied Capital Services, LLC shares, and (ii) the date on which Mr.
Schnapp ceases to be the chief executive officer of the Company.
18
<PAGE>
(3) Represents shares issuable upon currently exercisable options granted
to Mr. Aran in his capacity as a non-employee director 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, and 1,200,000 Class
B Ordinary Shares issuable to Mr. Aran upon the exercise of an option
granted to him. See "Item 12--Options to Purchase Securities from the
Registrant or Subsidiaries."
(5) Includes (i) 45,000 shares issuable upon currently exercisable options
granted to non-employee directors of the Company residing in the United
States. See "Item 12--Options to Purchase Securities from Registrant,"
(ii) 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 and (iii) 4,500 Class A Ordinary Shares acquired by Mr. Strauss in
the Company's initial public offering in January 1997. Options to
purchase up to 700,000 Class A Ordinary Shares that were issued in
January 1998 were not exercised and therefore cancelled.
As of May 31, 1999 the Company had 3,237,087 Class A Ordinary Shares
outstanding, following a private placement of 850,000 Class A Ordinary Shares in
May 1999 and the issuance of 26,087 Class A Ordinary Shares to Rodmand &
Renshaw, Inc., a financial advisor engaged by the Company in connection with its
contemplated merger with ICC, See "Item 8- Management Discussion and Analysis of
Financial Conditions and Results of Operations Public Offering and Private
Placements."
In connection with the litigation between the Company, Messrs. Schnapp
and Aran and Israel Discount Bank Ltd., the Bank claims to have a lien on
2,200,000 of the Company's Class B Ordinary Shares (1,200,000 owned by Agaret
Sixteen (93) Ltd. and 1,000,000 held by Eli Aran as trustee for his wife, Irit
Aran), which are deposited with a bank in New York. Messrs. Schnaap and Aran
maintain that such lien is not, and never was, in force. See "Item 3-Legal
Proceedings."
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 deference
program (the "Deference Program"). Pursuant to the Deference 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 Deference
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 Deference Program."
ITEM 5. NATURE OF TRADING MARKET
- ------ ------------------------
The Company's (i) Units, each consisting of one Class A Ordinary
Share, one Class A Warrant (the "Class A Warrants") 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:
19
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended: Class A
Units Ordinary Shares Class A Warrants Class B Warrants
------------------ ---------------------- ---------------------- ---------------------
High Low High Low High Low High Low
-------- --------- ----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998 9 1/2 3 7/8 6 1/4 4 3/8 2 9/16 1 1/2 3/4 7/16
September 30, 1998 8 1/2 3 3/4 5 1/2 2 7/8 2 7/16 1 1/16 2 5/32 1 7/32
December 31, 1998 5 1/4 3 3 7/8 1 5/8 1 9/16 1 5/32 3/16
March 31, 1999 4 1/2 1 3/4 2 5/8 1 1/8 1 7/16 5/16 3/16
</TABLE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
- ------- ------------------------------------------------------------------
The Bank of Israel adopted in 1998 measures to liberalize foreign
currency regulations. The implementation of certain of these measures may be
subject to further legislation. Changes in the Israeli tax regulations may occur
as a result of these measures. Pursuant to the Currency Control Law, 1978, and
its regulations, as amended, non-residents of Israel are permitted to convert
Israeli currency into freely repatriable U.S. US 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 Ordinary Shares.
The ownership or voting of securities of the Company by non-residents of Israel
is not restricted in any way by the Memorandum of Association or Amended and
Restated Articles of Association of the Company or by the laws of Israel, except
with respect to transfer of shares to residents of countries which are in a
state of war with Israel.
There can be no assurance that the above laws and regulations will not
be altered or replaced in the future. Such changes could have a material adverse
effect on the holders of Ordinary Shares.
20
<PAGE>
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 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.
21
<PAGE>
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.
ITEM 8. SELECTED FINANCIAL DATA
- ------- -----------------------
The following selected consolidated financial data for the years ended
December 31, 1996, 1997 and 1998 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.
22
<PAGE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------------------- ---------------- --------------------------
Adjusted NIS Convenience
Thousands Translation to
(Except Share and Per Share Data) $ Thousands
------------------------------------------------- ---------------
<S> <C> <C> <C> <C>
Revenues.................................... 25,306 135,081 122,527 29,453
Cost of Revenues............................ 22,221 96,395 107,201 25,769
Gross profit................................ 3,085 38,686 15,326 3,684
Operating expenses.......................... 2,433 7,726 9,672 2,325
Operating income............................ 652 30,960 5,654 1,359
Net income.................................. 53 25,209 2,626 631
Earnings (loss) per share(1)................ 0.02 4.94 0.46 0.11
Weighted average number of shares(1)........ 3,000,000 5,085,754 5,300,000 5,300,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1996 1997 1998
-------------------- ---------------- ---------------------------
(1)
(2)
Convenience
Translation to
Adjusted NIS Thousands $ Thousands
-------------------------------------------------- --------------
<S> <C> <C> <C> <C>
Working capital (deficit)...................... (1,890) 42,119 (50,632) (12,171)
Total assets................................... 37,164 160,014 271,385 65,235
Total liabilities.............................. 37,008 99,101 204,926 49,261
Retained earnings (accumulated loss)........... (1,060) 24,148 26,591 6,391
Total shareholders' equity..................... 155 60,913 66,459 15,974
</TABLE>
- --------------
(1) Includes the Performance Shares. For U.S. GAAP financial reporting
purposes, the Performance Shares would be excluded. Accordingly, the
earnings per share for U.S. GAAP reporting purposes would be NIS 0.76
($0.18) for the year ended December 31, 1996, the loss per share would
be NIS 1.02 ($0.24) for the year ended December 31, 1997, and the
earnings per share would be NIS 0.36 ($0.09) for the year ended December
31, 1998. See Note 21 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.
23
<PAGE>
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 "Item 8--Selected Financial Data" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this report.
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 some 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, from which the Company recognizes
revenue based upon the percentage of completion method. 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 2(j) 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 the 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 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 up-front 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 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 presently 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 2(b) of Notes to Consolidated
Financial Statements. For convenience purposes, the financial data presented
herein for the years ended December 31, 1996, 1997 and 1998, have been
translated into dollars using the representative exchange rate on December 31,
1998 of NIS 4.16 = $1.00, as published by the Bank of Israel. See "Description
of Business--Conditions in Israel--Economic Conditions."
24
<PAGE>
Relationship With Engel:
- -----------------------
Approximately 14% of the Company's revenues for the year ended December
31, 1998 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.
Although the Company intends to continue to do business with Engel,
subcontracting for Engel does no longer comprise such a significant portion of
the Company's revenue as it did in the past. 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 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.
Results of Operations During the Year Ended December 31, 1998 Compared to Fiscal
Year Ended December 31, 1997:
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, the Company had total revenues of
approximately NIS 122.5 million ($29.5 million), a decrease of NIS 12.5 million
($3.0 million), or 9%, compared to approximately NIS 135.0 million ($32.5
million) for the year ended December 31, 1997, primarily as a result of a
decrease in sales of real estate. Revenues from contracting in 1998 were
approximately NIS 91.2 million ($21.9 million), a decrease of NIS 6.2 million
($1.5 million), or 6%, compared to NIS 97.4 million ($23.4 million) for the year
ended December 31, 1997. This decrease is primarily a result of the completion
of projects during 1998. The Company also had revenues of approximately NIS 25.4
million ($6.1 million) from the sale of real estate development rights and NIS
5.9 million ($1.4 million) from consulting activities.
Total cost of revenues amounted to approximately NIS 107.2 million
($25.8 million), an increase of NIS 10.8 million ($2.6 million), or 11%,
compared to NIS 96.4 million ($23.2 million) for the year ended December 31,
1997. Gross profit, as a percentage of total revenues, decreased to 12.5% for
the year ended December 31, 1998, from 28.6% for the year ended December 31,
1997, primarily as a result of an increase in the cost of sale of real estate
rights. Gross profit margins for contracting increased to 9.7% for the year
ended December 31, 1998, from 7.2% for the year ended December 31, 1997.
25
<PAGE>
Total operating expenses, including selling, general and administrative
expenses, were approximately NIS 9.6 million ($2.3 million) for the year ended
December 31, 1998, an increase of NIS 1.9 million ($0.5 million), or 22.5%,
compared to NIS 7.7 million ($1.9 million) for the year ended December 31, 1997,
primarily as a result of an increase the cost of vehicles and of professional
services.
As a result of the foregoing, the Company had net income of
approximately NIS 2.6 million ($0.7 million) for the year ended December 31,
1998, a decrease of approximately NIS 22.6 million ($5.4 million), or 89%, as
compared to NIS 25.2 million for the year ended December 31, 1997 and earnings
per share of NIS 0.46 ($0.11) for the year ended December 31, 1998, a decrease
of NIS 4.48 ($1.08) as compared to the year ended December 31, 1997.
The differences between U.S. GAAP and Israeli GAAP for the year ended
December 31, 1998 are primarily in the accounting treatment of revenue
recognition and the presentation of severance rights. As a result, under U.S.
GAAP the Company had a net income of approximately NIS 1.9 million ($0.5
million) and net earnings per share of NIS 0.36 ($0.09). See Note 29 of the
Notes to the Consolidated Financial Statements.
Results of Operations During the Year Ended December 31, 1997
Compared to Fiscal Year Ended December 31, 1996
- -------------------------------------------------------------
For the year ended December 31, 1997, the Company had total revenues
of NIS 135.1 million ($32.5 million), an increase of NIS 109.8 million ($26.4
million) compared to NIS 25.3 million ($6.1 million) 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 wre NIS 97.3 million ($23.4 million), an increase of NIS 72.0
million ($17.3 million) compared to NIS 25.3 million ($6.1) 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
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 14.7 million ($3.5 million)
from the sale of real estate development rights, NIS 20.4 million ($4.9 million)
from the sale of real estate development rights to related parties, and NIS 2.6
million ($0.6 million) from consulting, activities from which the Company did
not derive any revenues for the year ended Decembe 31, 1996.
Total costs of revenues amounted to NIS 96.4 million ($23.2 million),
an increase of NIS 74.2 million ($17.8 million) compared to NIS 22.2 million
($5.3 million) 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, 1997, 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, 1997, from 12.2% for the year ended December 31, 1996,
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 7.7 million ($1.9 million) for the year ended
December 31, 1997, an increase of NIS 5.3 million ($1.3 million) compared to NIS
2.4 million ($0.6 million) 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 25.2
million ($6.1 million) for the year ended December 31, 1997, an increase of NIS
25.2 million ($6.0 million) as compared to the year ended December 31, 1996 and
earnings per share of NIS 4.9 ($1.2) for the year ended December 31, 1997, an
increase of NIS 4.9 ($1.2) as compared to the year ended December 31, 1996.
The differences between U.S. GAAP and Israeil 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 30.6 million ($7.4 million). As a result, under U.S. GAAP the
Company had a net loss of NIS 5.2 million ($1.2 million) and a net loss per
share of NIS 1.0 million ($0.2 million). See "--Charge to Income as a Result of
Release of Performance Shares from Deferrence Program."
Public Offering and Private Placements:
- --------------------------------------
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.
In May 1999, the Company issued to a group of investors 850,000 Class
A Ordinary Shares for total consideration of $850,000 which was the fair market
value of such shares on the date of issuance. In addition, in May 1999, the
Company issued to a financial advisor, which the Company retained in connection
with its contemplated merger with ICC, 26,087 Class A Ordinary Shares, as part
of such financial advisor's compensation.
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, 1998, the Company had working deficit of
approximately NIS 50.6 million ($12.2 million) and retained earnings of NIS 26.6
million ($6.4 million).
The Company's working deficit for December 31, 1998 included a
revolving short-term bank loan of NIS 42 million received for the financing of
the Income-Producing residential property in Tel-Aviv. Upon the occurrence of
certain conditions, including the completion of the renovation of such property,
such short-term loan will be converted to an equivalent long-term credit line.
See "Item 1 - Real Estate Development and Construction Activities-Other Real
Estate Activities - Acquisition and Development of Income-Producing Residential
Properties" and "Item 2-Description of Property."
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 (unless
the term of the bid demands otherwise). 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.
26
<PAGE>
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.
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, 1998, the Company had outstanding indebtedness in the
aggregate amount of approximately NIS 122.2 million ($29.4 million) 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 minus 4.9% to prime rate plus 0.7% and, for
indebtedness which is linked to the U.S. dollar, at the rate of 6.8% 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 was
required to pay the Company approximately NIS 326,000 ($78,000) for each
subsequent 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 25 of Notes to Consolidated Financial
Statements.
27
<PAGE>
In March 1998, the Company sold a 20% 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 approximately $6 million.
The Company's offices in Haifa are subject to a 15-year mortgage in
the amount of approximately NIS 386,000 ($93,000). The mortgage bears interest
at the rate of 5.5% and is linked to adjustments in accordance with the CPI. In
December 1996, the Company leased additional office space in a neighboring
building in Haifa, for a term of five years commencing January 1997, for monthly
payments of NIS 2,000 ($500). In addition, the Company has leased office space
in Rehovot, for the purpose of having close supervision over its residential
project located there (see "Item 1--Real Estate Projects--Residential
Projects"). The term of such lease is for 12 months with an option for 60
additional months, commencing December 1998. The monthly payments under this
lease are $500. The Company's U.S. subsidiary, Genesis Development and
Construction, Inc., has leased office space in New City, New York. This lease is
renewed on a monthly basis. The Company is committed to monthly payments of
$1,500 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. A Portion of said collateral was provided by a third party that handles
all procedures related to the foreign workers on behalf of the Company.
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, 1998, the Company had outstanding guarantees to third
parties in the aggregate principal amount of approximately NIS 44.3 million ($11
million).
Charge to Income as a Result of Release of Performance
Shares from Deference 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
Deference 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 did not recognize any a non-cash charge to earnings in its U.S. GAAP
reconciliation for the year ended December 31, 1998.
28
<PAGE>
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 years 1996, 1997 and 1998 the annual rate of inflation in Israel was
approximately 10.6%, 7% and 8.6%, respectively. The Company's expenses are
primarily incurred in 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, except for an approximately 8.0% devaluation of the NIS in
the fourth quarter of 1998. In 1998 the Bank of Israel adopted measures to
liberalize foreign currency regulations. 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.
29
<PAGE>
Year 2000:
- ----------
The Company is aware of its obligation to ensure that its operations
(including the operations of its subsidiaries) will not be adversely affected as
a result of the anticipated Year 2000 computer problems, which may be caused by
the use of date-sensitive programs that utilize only two digits to represent the
year.
The Company has completed a review of the Year 2000 preparedness of
its internal information technology systems, such as its accounting and billing
systems. As a result of the nature of the Company's activities, its exposure to
the Year 2000 issue is limited solely to internal information systems used in
the Company's operations. The Company has also obtained certifications,
concerning the Year 2000 readiness of critical computerized systems affecting
the Company's operations, from the vendors of such systems.
To date, no material problems in the Company's computerized systems
have been detected. Any of the Company's computerized systems requiring
adjustment in preparation for Year 2000 can be adjusted without incurring
material additional cost. Taking the aforementioned into consideration, the
Company has not yet developed a contingency plan for the possible adverse
effects of the Year 2000 issue on its internal systems. If the Company is forced
to change all of its information technology systems, hardware and software in
order to achieve Year 2000 readiness, management estimates that the total cost
will not exceed $________. The above notwithstanding, it is not possible to be
certain that the Year 2000 issue will not have an effect on the Company's
information technology systems.
The Chief Financial Officer of the Company is responsible for
addressing year 2000 issues. As substantially all of the Company's subsidiaries
use the Company's facilities and information technology systems, the Company
does not foresee any material year 2000 problems in any of its subsidiaries.
There can be no assurance that the computer systems of third-party
service providers which affect the Company's operations, including those of the
Israel Electric Corporation, the banks and the telephone company, will be Year
2000 compliant.
ITEM 9. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is routinely exposed to market risk, primarily changes in
interest rates, inflation rates and fluctuations in the NIS/US Dollar exchange
rates, which may adversely affect its results of operations and financial
condition. The Company seeks to minimize these risks through its regular
operating and financing activities. From time to time, the Company utilizes
derivative financial instruments to reduce its exposure to financial market
risks. These instruments are used to hedge foreign currency, equity and interest
rate market exposures relating to underlying assets, liabilities and other
obligations. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include its effectiveness in risk reduction and one-to-one
matching of derivative instruments to underlying transactions. See Note 2o of
the Consolidated Financial Statements.
30
<PAGE>
The Company is exposed to potential credit related losses in the event
of default by other parties to certain financial instruments, but it does not
expect any such defaults, since all such parties have investment grade credit
ratings.
As the Company's financial statements are prepared in NIS and in
accordance with Israeli GAAP, with a convenience translation to US Dollars,
Exchange rate fluctuations and large periodic devaluation have an impact on the
US Dollar equivalent and period-to-period comparisons of the Company's financial
results. A devaluation of the NIS in relation to the US Dollar will have the
effect of decreasing the dollar value of any assets of the Company which consist
of NIS or receivables payable in NIS (unless such receivables are linked to the
US Dollar). Such a devaluation would also have the effect of reducing the US
Dollar amount of any liabilities of the Company which are payable in NIS (unless
such payables are linked to the US Dollar). Conversely, any increase in the
value of the NIS in relation to the US Dollar would have the effect of
increasing the US Dollar value of any unlinked NIS assets of the Company and the
US Dollar value of any unlinked NIS liabilities of the Company. See "Item
1--Description of Business--Conditions in Israel--Economic Conditions" and "Item
9--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Inflation and Devaluation on Results of Operations."
When the rate of inflation exceeds the rate of devaluation of the NIS
as compared to the US Dollar, the US Dollar value of the Company's revenues and
expenses are increased by an amount determined by the amount by which the rate
of inflation exceeds the rate of devaluation of the NIS as compared to the US
Dollar. During years when the rate of devaluation of the NIS as compared to the
US Dollar exceeds the rate of inflation the opposite influence occurs.
The Company's expenses and revenues are primarily incurred in NIS.
Some of the Company's contracts from which revenues are derived are linked to
the CPI. Most of the Company's construction related liabilities as well as a
portion of the Company's accounts receivable are generally linked to the Israeli
Building Cost Index (the "BCI"). The difference in fluctuations of the two
indexes may materially adversely affect the Company's financial results. In
addition, yearly increases in the US Dollar value of the items used to describe
the results of operations of the Company that are derived from CPI linked (or
BCI linked) contracts affect year to year comparisons. To the extent the
Company's cash and cash equivalents exceed its short-term funding requirements,
the Company may invest its excess cash and cash equivalents in longer-term
high-quality financial instruments. Such investments, if made, will be subject
to changes in interest rates.
For the different linkage terms of the Company's monetary balances on
December 31, 1998, as compared to December 31, 1997, see Note 24 of the Notes to
the Consolidated Financial Statements.
31
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -------- ----------------------------------------
The following table sets forth certain information concerning the
directors and executive officers of the Company.
Name Age Positions
- ---- --- ---------
Eli Aran 48 Chairman of the Board, President of the
United States Subsidiary and Director
Moshe Schnapp 37 President, Chief Executive Officer and
Director
Yaron Yenni 37 Chief Financial Officer, Secretary and
Director
Shalom Rozenberg 37 Director
Gary J. Strauss 45 Director
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.
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.
32
<PAGE>
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 been serving
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, a director
of Israel Credit Lines Financial Services Ltd. from August 1997 until July 1998,
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. Mr. Rozenberg engages in different private businesses and Since June 1997
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.
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. Under a new Companies Law, which will replace the Israeli Companies
Ordinance on February 1, 2000, a person already serving as a director of the
Company may not act as an alternate director, nor may one person act as an
alternate director for more than one director of the Company.
33
<PAGE>
Independent Directors; Approval of Certain Transactions; Audit Committee:
- ------------------------------------------------------------------------
Pursuant to the listing requirements of the Nasdaq National Market, the
Company has appointed two independent directors and established an audit
committee comprised of three directors, including both independent directors.
Under the Companies Ordinance, Publicly Held companies (as such term is
defined therein) are required to appoint at least two public directors (the
"Public Directors") who have been approved by a statutory committee consisting
of the Chairman of the ISA, the Chairman of the Tel-Aviv Stock Exchange and a
member of the Israeli judiciary who acts as a chairman of the committee (the
"Committee"). The Companies Ordinance details certain standards for the
independence of the Public Directors. These directors must be residents of
Israel and unaffiliated with the company, its principals or affiliated
companies.
According to the Companies Ordinance, a company that is required to
nominate Public Directors must also appoint an audit committee, comprised of at
least three directors, and including all of the Public Directors (the "Audit
Committee"), as well as an internal controller (in accordance with the proposal
of the Audit Committee). The role of the internal controller, among other
things, is to examine whether the Company's actions comply with applicable law,
proper conduct and orderly business procedures.
The District Court of Tel Aviv, Israel, had ruled that companies
registered under the laws of Israel whose shares were offered to the public only
outside of Israel were nevertheless required to comply with the above
requirements pursuant to the Company's Ordinance. An appeal was subsequently
filed with the 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, and therefore, it is unclear whether a court would require the
Company to appoint "public directors."
The new Companies Law, which will become effective on February 1, 2000,
unequivocally requires the Company to appoint two independent directors, who
must be residents of Israel having no affiliation with the Company, its
principals or controlling shareholders for a period of at least two years. Such
independent directors will be appointed by a special majority of the general
meeting, for a period of three years and may be extended for an additional
period of three years. The Companies Law also requires the appointment of an
audit committee, comprised of at least three directors and including all
independent directors, as well as an internal auditor.
34
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
- ------- --------------------------------------
During 1998, the Company paid compensation in an aggregate amount of
NIS 1,867,000 ($448,798) 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 22,500 Class A Ordinary Shares exercisable as follows: 7,500 options
expire on February 22, 2002 and are exercisable for $5 per share , 15,000
options expire on November 9, 2002 and are exercisable for $4.25 per share, and
the remaining 15,000 options expire on June 23, 2004 and are exercisable for
$5.25 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
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 Deference Program for such year. See "Control of
Registrant--Performance Shares." 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.
35
<PAGE>
In December 1998 the Company entered into an employment agreement with
its Chairman of the Board, Eli Aran, effective as of January 1, 1999, and
expiring on December 31, 2003. The agreement provides for an annual base salary
of $350,000. The agreement contains customary confidentiality and non-compete
provisions. If there is a change in the control of the Company, as defined in
the agreement, and Mr. Aran's employment is subsequently terminated, he will be
entitled, among other things, to the greater of the payments due for the
remaining term of the agreement or three times his annual compensation. In
addition, Mr. Aran was granted options to and options to purchase up to
1,200,000 Class B Ordinary Shares at an exercise price of $2.875 per share.
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 "Employee
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.
In December 1998 the Company adopted the Genesis Development and Construction
Ltd. General Managers Option Plan (the "General Managers Option Plan"), pursuant
to which 1,000,000 Class A Ordinary Shares were reserved for issuance upon the
exercise of options granted to general managers of the Company or its
subsidiaries. All options granted under these option plans have expired after
none of them were exercised, and all of them are currently reserved for future
grant.
Options to purchase up to 45,000 Class A Ordinary Shares have been
granted other than pursuant to the Employee Option Plans, to
non-executive directors and officers of the Company. See "Item 11--Compensation
of Directors and Officers."
In May 1999 the Company entered into an agreement with Rodman &
Renshaw, Inc. ("Rodman") for financial advisory services in connection with the
Company's proposed merger with ICC (See Item 1B-Description of Business-Merger
with Cable Internet Corporation"), pursuant to which Rodman will be issued
34,783 Class A Ordinary Shares upon the occurrence of certain events, in
addition to 26,087 Class A Ordinary Shares issued to Rodman in May 1999. In
addition, in June 1999 the Company entered into an agreement with an unrelated
company registered in Liberia, which initiated the merger transaction between
the Company and ICC, pursuant to which 200,000 Class A Ordinary Shares will be
issued to such Liberian company upon consummation of the merger.
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, 1998, the Company had
outstanding indebtedness in the amount of approximately NIS 1,846,008 ($443,752)
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 346,647 ($83,328). 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, one of
the Company's Dutch subsidiary through which the Company holds its interests in
its Rassnitz and Moscow construction projects, to Shay Bar Real Estate
Investments Ltd.("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 17.76% 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 capital. Shay Bar paid $2,550,000
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 September 1999. See
Note 27d of Notes to Consolidated Financial Statements. David Yenni has served
as an independent consultant to Stipula from August 1994 until December 1996.
36
<PAGE>
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 27c of Notes to Consolidated Financial Statements.
The Company is owed monies by its President and Chief Executive
Officer, Moshe Schnaap. These amounts are linked to the CPI and bear interest at
the rate of 2% per annum. As of December 31, 1998 the amount owed by Mr. Schnaap
was approximately NIS 1.1 million, of which NIS 0.32 million was paid in June
1999 and the balance will be by December 1999.
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.
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 agreements between the Company
and Moshe Schnapp and Eli Aran.
The Company received an option from its controlling shareholders,
Messrs. Eli Aran and Moshe Schnapp, to participate in the purchase of one of the
largest energy holding companies in Israel, pursuant to a winning bid submitted
by such shareholders in a tender for the acquisition of such energy holding
company. The transaction was not consummated due to a default on the part of the
bank that had agreed to finance a portion of the purchase price. Consequently,
Messrs. Aran and Schnaap, together with the Company, filed a law suit against
such bank. See "Item 3-Legal Proceedings." In June 1999, the Company notified
Messrs. Aran and Schnaap that it does not wish to bear any of the costs
associated with these legal proceedings, and therefore the claimants agreed that
the Company will not bear any such costs but will be entitled to 5% of the net
amounts, if any, recovered by the claimants in these proceedings.
In March 1999, the Company extended to Shay Bar a five year loan of
$3,000,000 bearing interest at the Libor rate. The loan is secured by a
guarantee of Shay Bar's foreign subsidiary, secured by a lien on 50% of
Stipula's outstanding shares, which are held by a subsidiary of Shay Bar. If the
Company exercises its right to demand the immediate repayment of loan prior to
its maturity date, it will have the right to convert the repayment of the loan
to shares of Shay Bar at a price of $1 per share. A charge on Shay Bar's
registered and not-issued share capital was registered in the Company's name to
secure such issuance. Under certain conditions, the loan agreement allows Shay
Bar to repay the loan by transferring its 50% interest in Stipula's shares to
the Company. Yaron Yenni, a director of the Company and its Chief Financial
Officer, hold over 17% of Shay Bar's shares, is a director of Shay Bar and the
son of its Chairman of the Board. See "Item 10-Directors and Officers of the
Registrant."
In June 1999, Shay Bar engaged the Company to perform construction and
renovation work on a building in Rishon Lezion. The Company was paid $3.9
million for these services and as finder's fees, as well as for consulting and
financial management services regarding this project. See "Item 1A--Real Estate
Development and Construction Business--Real Estate Projects--Pending Projects."
37
<PAGE>
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.
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 Forer and Gabbai
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 and Chief Executive Officer
Dated: June 30, 1999
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 June 30, 1999 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, 1998. 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, 1999
