FISCHBEIN BADILLO WAGNER HARDING
909 Third Avenue
New York, New York 10022
(212) 826-2000
July 1, 1999
VIA EDGAR
- ---------
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Genesis Development and Construction Ltd.
Annual Report on Form 20-F/A (File No. 0-29078)
----------------------------------------------
Ladies and Gentlemen:
On behalf of Genesis Development and Construction Ltd., enclosed herewith for
filing is an Annual Report on Form 20-F/A, for the year ended December 31, 1998.
This Annual Report was filed yesterday, via EDGAR, but, due to computer related
technical difficulties, was incomplete when it was received by the Commission.
At the suggestion of Mr. Herb Scholl of the Division of Corporate Finance, we
are filing this Annual Report a second time, as Amendment No. 1, so that this
filing will be deemed timely.
Please do not hesitate to call me if you have any questions.
Very truly yours,
Michael Sufott
Encl.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Conformed Copy ___________
FORM 20-F/A
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. Control of Registrant.............................................18
ITEM 5. Nature of Trading Market..........................................19
ITEM 6. Exchange Controls and Other Limitations
Affecting Security Holders.......................................20
ITEM 7. Taxation..........................................................21
ITEM 8. Selected Financial Data...........................................22
ITEM 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................24
ITEM 9A. Quantitative and Qualitative Disclosures
About Market Risk................................................31
ITEM 10. Directors and Officers of the Registrant..........................33
ITEM 11. Compensation of Directors and Officers............................36
ITEM 12. Options to Purchase Securities From
Registrant or Subsidiaries.......................................37
ITEM 13. Interest of Management In Certain Transactions....................37
Part II
ITEM 14. Description of Securities To Be Registered........................39
Part III
ITEM 15. Defaults Upon Senior Securities...................................39
ITEM 16. Changes In Securities, Changes
In Security For Registered Securities And Use Of Proceeds........39
Part IV
ITEM 17. Financial Statements..............................................40
ITEM 18. Financial Statements..............................................40
ITEM 19. Financial Statements and Exhibits.................................40
Signatures........................................................40
<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 a 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 prior to December 1998. 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 were 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.
26
<PAGE>
The differences between U.S. GAAP and Israeli GAAP for the year ended
December 31, 1997 are primarily in the accounting treatment of the release of
Program Shares from the Deferrence Program. For U.S. GAAP purposes, the release
of Program Shares held by officers, directors and employees of the Company from
the Deferrence Program is deemed compensatory, resulting in a compensation
expense of NIS 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.
27
<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.
28
<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.
29
<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.
30
<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 $25,000. 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 9A. 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.
31
<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.
32
<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.
33
<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.
34
<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.
35
<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.
36
<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, or the General
Managers Option Plan 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.
On November 16, 1998 the Company granted an option to Eli Aran to
purchase up to 1,200,000 Class B Ordinary Shares, at an exercise price of $2.875
per share, which will expire on November 15, 2001.
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. 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.
37
<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. In February 1997, Mr. Straus
purchased 4,500 Units in the Company's initial public offering.
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."
38
<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.
39
<PAGE>
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:
10.1 Employment Agreement between Genesis Development and
Construction Ltd. and Eli Aran.
10.2 Genesis Development and Construction Ltd. General Managers
Option Plan
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/A 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: July 1, 1999
40
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
ADJUSTED TO THE NIS OF DECEMBER 1998
INDEX
Page
------------------
Report of Independent Auditors F-2
Consolidated Financial Statements -
in Adjusted New Israeli Shekels (NIS):
- Balance Sheets F-3
- Statements of Operations F-5
- Statements of Changes in Shareholders' Equity F-6
- Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8
F-1
<PAGE>
[OBJECT OMITTED]
ERNST & YOUNG
KOST FORER & GABBAY
REPORT OF INDEPENDENT PUBLIC AUDITORS
To the Shareholders of
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Genesis
Development and Construction Ltd. ("the Company") and its Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of the foreign wholly owned subsidiaries of the Company
which statements reflect total assets constituting 20% and 20% as of December
31, 1998 and 1997, respectively, and total revenues constituting 1.5% and 26% of
the related consolidated revenues for the years ended December 31, 1998 and 1997
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to data included
for these subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards
in the United States and Israel, including those prescribed by the Israeli
Auditor's Regulations (Mode of Performance) 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
The aforementioned financial statements have been prepared on the basis of the
historical costs adjusted to reflect the changes in the general purchasing power
of the Israeli currency as required by Statements of the Institute of Certified
Public Accountants in Israel.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles in
Israel which differ in certain respects from those followed in the United States
(see Note 29 to the financial statements).
Haifa, Israel KOST, FORER & GABBAY
June 30, 1999 A member of Ernst & Young International
F-2
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Adjusted in NIS of December 1998
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- ----------------
Convenience
translation
(Note2b)
Adjusted NIS U.S.$
----------------------------- ----------------
(In thousands)
<S> <C> <C> <C>
ASSETS (Notes 20 and 22)
CURRENT ASSETS:
Cash and cash equivalents 15,149 13,698 3,293
Bank deposits and marketable securities in restricted deposits
(Note 3) 52,001 79,463 19,102
Contract receivables (Note 4) 10,656 6,896 1,657
Prepaid expenses and other accounts receivables (Note 5) 6,119 3,013 724
Related party receivables (Note 6) 6,793 13,200 3,173
Property and apartments for sale (Note 7) 655 7,940 1,909
Cost and estimated earnings in excess of billings on uncompleted
contracts (Note 8) 17,308 15,235 3,662
Loans to affiliated companies (Note 9) 3,676 4,790 1,151
------------- ------------- ----------------
Total current assets 112,357 144,235 34,671
------------- ------------- ----------------
LONG-TERM RECEIVABLES AND DEPOSITS
Related parties (Note 10) 3,937 4,263 1,025
Other (Note 10) 8,307 8,696 2,091
------------- ------------- ----------------
12,244 12,959 3,116
------------- ------------- ----------------
LONG-TERM INVESTMENTS
Equity in Joint Ventures (Note 11) 13,853 27,116 6,518
Land under development (Note 12) 18,390 19,000 4,567
------------- ------------- ----------------
32,243 46,116 11,085
------------- ------------- ----------------
FIXED ASSETS (Note 13):
Cost 3,607 69,054 16,599
Less accumulated depreciation (437) (979) (236)
----------------
------------- -------------
Total fixed assets 3,170 68,075 16,363
------------- ------------- ----------------
============= ============= ================
160,014 271,385 65,235
============= ============= ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Adjusted in NIS of December 1998
<TABLE>
December 31, December 31,
1997 1998 1998
------------- ------------- ----------------
Convenience
translation
(Note2b)
Adjusted NIS U.S.$
----------------------------- ----------------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank credits and short-term loans (Note 14) 19,465 122,193 29,373
Trade payables (Note 15) 40,791 39,422 9,476
Accrued expenses and other liabilities (Note 16) 3,530 10,117 2,432
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 8) 3,427 598 144
Related parties (Note 17) 123 - -
Current maturities of long-term debt 2,902 22,537 5,417
------------- ------------- ----------------
Total current liabilities 70,238 194,867 46,842
------------- ------------- ----------------
LONG-TERM LIABILITIES
Long-term loans, net of current maturities (Note 18) 21,636 2,142 515
Deferred tax liabilities (Note 23d) 3,841 4,160 1,000
------------- ------------- ----------------
25,477 6,302 1,515
------------- ------------- ----------------
SEVERANCE PAY, net (Note 19) 85 182 44
------------- ------------- ----------------
MINORITY INTEREST 3,301 3,575 860
------------- ------------- ----------------
SHAREHOLDERS' EQUITY
Share capital (Note 21)
Authorized: 42,000,000 Class A Ordinary Shares of
NIS 0.01 par value and 4,200,000 Class B Ordinary
Shares of NIS 0.10 par value (1997: 3,000,000 Class B Ordinary
Shares); Issued and outstanding: 2,311,000 Class A Ordinary
Shares and 2,989,000 Class B Ordinary Shares 626 626 150
Additional paid-in capital 36,139 36,139 8,687
Cumulative foreign currency translation adjustments - 3,103 746
Retained earnings 24,148 26,591 6,391
------------- ------------- ----------------
Total shareholders' equity 60,913 66,459 15,974
------------- ------------- ----------------
------------- ------------- ----------------
160,014 271,385 65,235
============= ============= ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
Adjusted in NIS of December 1998
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------
1996 1997 1998 1998
------------- ------------- ------------ ----------------
Convenience
translation
(Note 2b)
Adjusted NIS U. S. $
---------------------------------------------- ----------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues (Note 25a):
Contracting 25,306 97,356 91,182 21,919
Sale of real estate development rights - 14,716 25,407 6,107
Sale of real estate development rights to related parties - 20,360 - -
Consulting - 2,649 5,938 1,427
------------- ------------- ------------ ----------------
25,306 135,081 122,527 29,453
------------- ------------- ------------ ----------------
Cost of revenues (Note 25a):
Contracting Costs (22,221) (90,312) (85,265) (20,496)
Cost of sale of real estate development rights - (1,630) (21,511) (5,171)
Cost of sale of real estate development rights to related
parties - (4,453) - -
Consulting costs - - (425) (102)
------------- ------------- ------------ ----------------
(22,221) (96,395) (107,201) (25,769)
------------- ------------- ------------ ----------------
Gross profit 3,085 38,686 15,326 3,684
------------- ------------- ------------ ----------------
Operating expenses:
Selling, administrative and general expenses (Note 25c) (2,064) (7,726) (9,672) 2,325
Consulting fees to related party (369) - - -
------------- ------------- ------------ ----------------
Total operating expenses (2,433) (7,726) (9,672) 2,325
------------- ------------- ------------ ----------------
Operating income 652 30,960 5,654 1,359
Financial income (expenses), net (Note 25d) 289 855 (563) (135)
Amortization of Bridge Notes issuance costs (888) (917) - -
------------- ------------- ------------ ----------------
Income before income taxes 53 30,898 5,091 1,224
Income taxes (Note 23) - (5,689) (2,465) (593)
------------ ----------------
------------- -------------
Income after taxes 53 25,209 2,626 631
Loss from affiliated companies - - (183) (44)
============= ============= ============ ================
Net income 53 25,209 2,443 587
============= ============= ============ ================
Earnings per share 0.02 4.94 0.46 0.11
============= ============= ============ ================
Weighted average number of shares 3,000,000 5,085,754 5,300,000 5,300,000
============= ============= ============ ================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
F-5
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 1998
<TABLE>
<CAPTION>
Accumulated
foreign Retained
Additional currency Earnings
Share paid-in translation (Accumulated
Capital capital adjustments deficit) Total
------- --------- ------------ ------------ -------
Adjusted NIS (In thousands)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 116 719 - (1,114) (279)
Net income - - - 53 53
Issuance of ordinary shares (a) 238 (238) - - -
----------- ------------ ---------- ------------- -----------
Bridge warrants (Notes 21g) - 381 - - 381
Balance as of December 31, 1996 354 862 - (1,061) 155
Issuance of shares to public net of offering
expenses 272 35,277 - - 35,549
(Note 21 h)
Net income - - - 25,209 25,209
----------- ------------ ---------- ------------- -----------
Balance as of December 31, 1997 626 36,139 - 24,148 60,913
Foreign currency translation adjustments - - 3,103 - 3,103
Net income - - - 2,443 2,443
----------- ------------ ---------- ------------- -----------
Balance as of December 31, 1998 626 36,139 3,103 26,591 66,459
=========== ============ ========== ============= ===========
Convenience translation into U.S. Dollars
--------------------------------------------------------------------
(Note 2b)
--------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------
Balance as of January 1, 1998 150 8,687 - 5,804 14,641
Foreign currency translation adjustments - - 746 - 746
Net income - - - 587 587
----------- ------------ ---------- ------------- -----------
Balance as of December 31, 1998 150 8,687 746 6,391 15,974
=========== ============ ========== ============= ===========
</TABLE>
(a) Represents a 2.33 for one share dividend
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Adjusted to the NIS of December 1998
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------------
1996 1997 1998 1998
--------------------------------------------------------------------
Convenience
translation
Cash flows from operating activities: Adjusted NIS (In thousands) (Note 2b) U.S.$
-------------------------------------------------- -----------------
<S> <C> <C> <C> <C>
Net income 53 25,209 2,443 587
Adjustments required to reconcile net income (loss) to cash
flows from operating activities:
Gain on sale of marketable securities (237) (583) (1,730) (416)
Depreciation 116 292 542 130
Loss from affiliated companies - - 183 44
Amortization of Bridge Notes issuance costs 888 916 - -
Provision for severance pay 36 49 97 23
Erosion of principal of certain monetary items (79) (190) 1,604 386
Decrease (increase) in contract receivables (4,360) (6,296) 3,760 904
Decrease (increase) in prepaid expenses and other (1,474) (3,228) 3,106 747
accounts receivables
Increase in related party receivables - (6,793) (6,407) (1,540)
Increase in long-term receivables - (12,075) (678) (163)
Increase (decrease) in trade payables 7,780 32,978 (1,369) (329)
Increase in accrued expenses and other liabilities 653 2,504 4,257 1,023
Increase (decrease) in costs in excess of billings on 5,559 (21,796) (756) (182)
uncompleted contracts
Increase (decrease) in related parties liabilities - 123 (123) (30)
Increase in deferred tax liabilities - 3,842 319 77
-------------- -------------- ------------- -------------
Net cash provided by operating activities 8,935 14,952 5,248 1,261
-------------- -------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (881) (2,140) (63,117) (15,172)
Investment in cash and marketable securities in (28,884) (57,864) (56,770) (13,647)
restricted deposit
Proceeds from sale of marketable securities 12,401 23,835 31,038 7,461
Short-term loan to a related party 200 - - -
Loan to an affiliated company - (3,676) (1,114) (268)
Long-term deposits - (170) (37) (9)
Increase in Equity in Joint Ventures - (13,853) (13,263) (3,188)
Increase in Land Under Development - (18,390) (610) (147)
Increase in property for sale - - (7,468) (1,795)
-------------- -------------- ------------- -------------
Net cash used in investing activities: (17,164) (72,257) (111,341) (26,765)
-------------- -------------- ------------- -------------
Cash flows from financing activities:
Loan from shareholder repaid - (1,188) - -
Short-term loan from related parties, net (1,688) - - -
Issuance of share capital (including capital surplus) - 43,405 - -
Long-term loans received 646 24,141 1,376 331
Long-term loans paid (39) (152) (2,839) (682)
Capital contributed by minority interest - 3,301 274 66
Bank credits, net 7,855 11,244 102,728 24,694
Bridge Notes received 7,614 - - -
Bridge Notes repaid - (7,614) - -
Bridge notes issuance costs (1,804) - - -
Bridge warrants 381 - - -
Offering expenses (1,442) (6,413) - -
-------------- -------------- ------------- -------------
Net cash provided by financing activities 11,523 66,724 101,539 24,409
-------------- -------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents - - 3,103 746
-------------- -------------- ------------- -------------
Net increase in cash and cash equivalents 3,294 9,419 (1,451) (349)
Cash and cash equivalents at beginning of period 2,436 5,730 15,149 3,642
-------------- -------------- ------------- -------------
Cash and cash equivalents at the end of period 5,730 15,149 13,698 3,293
-------------- -------------- ------------- -------------
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest 560 61 67 16
============= ============= ============ =============
Income taxes - 135 1,423 342
============= ============= ============ =============
Non-cash transactions:
- ----------------------
Accounts payable related to fixed assets - - 2,330 560
============= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1:- GENERAL
a. Genesis Development and Construction Ltd. ("Genesis"), an Israeli
corporation, was incorporated in 1992 and was inactive until July
1, 1995, at which time it commenced its activity. Genesis and its
subsidiaries operate in Israel, United States, Germany and Russia
through its American and European subsidiaries (collectively the
"Company" unless the context otherwise requires).
b. Concentration of risks that may have a significant impact on the
Company are as follows:
1. Real Estate Industry
--------------------
The real estate industry in Israel is cyclical and
significantly affected by changes in general economic
conditions, such as employment levels, availability of debt
financing, interest rates, levels of immigration, government
fiscal policies, general and local economic conditions that
may affect the demand for public buildings and housing and
various other factors. In addition, there is a limited
quantities of land available for residential and public
development in Israel. The real estate industry is also
subject to the potential for significant variability and
fluctuations in real estate values. In addition, contractors
are subject to various risks, many of which are outside the
control of the contractor. Such risks include the conditions
of supply and demand in local markets, availability of
government projects, delays in construction schedules, cost
overruns and availability and cost of land, materials and
labor.
2. Dependence on Suppliers
-----------------------
The building industry may from time to time experience
fluctuating prices and supply for raw materials, as well as
shortages of labor and other materials. Cement is the
principal raw material utilized in the construction of
Israeli homes and buildings. Nesher Israel Cement
Enterprises Ltd. ("Nesher") is presently Israel's principal
producer of cement. Most other cement must be imported.
Accordingly, the Company's business is materially dependent
upon Nesher for its cement.
The construction industry employs mainly foreign labor
brought to Israel under government supervision. Although
there is currently no shortage of labor in Israel, there is
no assurance as to the continuing availability of such
foreign labor. A shortage of such labor would cause delays
in construction of projects and a decrease in the Company's
profitability.
3. Dependence on Engel
-------------------
During the years ended December 31, 1996, 1997 and 1998,
approximately 42%, 32% and 14%, respectively, of the
Company's revenues were derived through contracts with
Yaakov Engel Construction Enterprise Company Ltd. and its
subsidiaries ("Engel"), pursuant to which the Company acted
as subcontractor for projects awarded to Engel. Although
the Company intends to continue to work with Engel on
projects, and to continue focusing its efforts on directly
contracting for real-estate developments and construction
projects (See Note 25a).
F-8
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1:- GENERAL (continued)
c. The Year 2000:
The Year 2000 issue arises because many computerized systems use
two digits rather than four to identify the year. Data-sensitive
systems may recognize the Year 2000 as 1900 or some other date
resulting in errors when information using the Year 2000 is
processed.
In addition, similar problems may arise in some systems which use
certain dates in 1999 to represent something other than a date.
The effects of the Year 2000 issue may be experienced before, on,
or after January 1, 2000, and if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant system failure which could affect an entity ability
to conduct normal business operations.
It is not possible to be certain that all aspects of the Year
2000 issue affecting the entity, including those related to the
efforts of customers, suppliers or other third parties will be
fully resolved.
d. Reclassification:
The Company has reclassified certain 1997 amounts to conform to
the 1998 presentation. The reclassifications had no effect on
previously reported net gain, shareholders equity or cash flows.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Israel, which
differ in certain respects from those followed in the United States,
as described in Note 29. The significant accounting policies applied
on a consistent basis are as follows:
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and their accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in adjusted Israeli currency:
1.a) All figures in the accompanying financial statements are
presented in adjusted New Israeli Shekels (NIS) based upon
the changes in the Israeli Consumer Price Index (CPI) and
adjusted to the NIS of December 1998 (published in January
1999).
F-9
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
b) The financial statements are prepared in accordance
with the Opinions of the Institute of Certified Public
Accountants in Israel (the "Israeli Institute") and
based on the accounts of the Company maintained in
nominal NIS.
c) The adjusted amounts of non-monetary assets do not
necessarily represent realizable or current economic
value, but only the original historical cost of those
assets in terms of adjusted NIS. The term "cost" in
these financial statements signifies cost in adjusted
NIS.
2.a) Non-monetary items (mainly fixed assets, construction
costs and shareholders' equity items derived from cash
flow from shareholders) have been adjusted on the basis
of the CPI at the time the related transactions were
carried out. The components of the statement of income
relating to non-monetary items (mainly depreciation)
have been adjusted on the same basis used for the
adjustment of the related balance sheet items.
b) Investments in subsidiaries, jointly-controlled
entities and affiliates, and the share in their results
of operations for the reported periods are determined
on the basis of the adjusted financial statements of
those companies.
c) Monetary items (items whose amounts in the balance
sheet reflect current or realizable values) are
presented in the balance sheet as of December 31, 1998
in their nominal amounts (figures for the preceding
periods have been adjusted to the December 1998 CPI).
d) The components of the statements of operations (except
for financing) relating to transactions carried out
during the period - revenues, costs, etc., have been
adjusted on a monthly basis according to the basis of
the CPI at the time the related transactions were
carried out. Erosion of monetary balances relating to
the aforesaid transactions has been included in
financial income or expenses.
e) The components of the statement of operations relating
to provisions included in the balance sheet, such as
liability in respect of employee rights upon retirement
and provisions for vacation pay have been determined on
the basis of the changes in the balances of the related
balance sheet items after their relative cash flows are
taken into account.
f) The financing component represents financial income and
expenses in real terms, as well as the erosion of
monetary items during the year.
g) Current taxes on income include the expense resulting
from the erosion in value of advance payments on
account of income taxes from payment date to the end of
the year.
F-10
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Convenience translation into U.S. dollars:
The adjusted financial statements as of December 31, 1998 have
been translated into U.S. dollars using the representative
exchange rate of the U.S. dollar as at December 31, 1998 (U.S. $1
- NIS 4.16), as published by the Bank of Israel. The translations
were made solely for the convenience of the readers.
It should be noted that the adjusted New Israeli Shekel figures
do not necessarily represent the current cost amounts of the
various elements presented and that the translated U.S. dollar
figures should not be construed as a representation that the
Israeli currency amounts actually represent, or could be
converted into dollars.
4. Data regarding CPI, Israeli Building Cost Index ("BCI") and
exchange rate of foreign currency:
a) Most of the Company's contracts for construction are linked
to the Israeli BCI. Set forth below is certain information
concerning the CPI, the BCI and rate of exchange into U.S.
dollars:
<TABLE>
<CAPTION>
Exchange rate of
one U.S. dollar CPI*) BCI*)
-------------------- -------------- --------------
<S> <C> <C> <C>
At the end of the period:
December 1998 NIS 4.160 166.3 points 175.9 points
December 1997 NIS 3.536 153.1 points 165.7 points
December 1996 NIS 3.251 143.1 points 153.0 points
Changes during the period:
December 1998 (12 months) 17.65% 8.62% 6.16%
December 1997 (12 months) 8.77% 7.00% 8.30%
December 1996 (6 months) 3.70% 10.59% 8.05%
Real increase (decrease) in the CPI and BCI relative to the exchange rate
of the dollar during the period:
-------------- --------------
CPI*) BCI*)
-------------- --------------
December 1998 (12 months) (7.7%) (9.8%)
December 1997 (12 months) (1.6%) (0.4%)
December 1996 (6 months) 6.6% 4.2%
</TABLE>
*) According to the CPI and BCI index for the month ending
on balance sheet date on an average basis of 1993 = 100
and of 1992 = 100, respectively.
F-11
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
b) Assets and liabilities in foreign currency or linked thereto
are included in the financial statements according to the
representative exchange rate as published by the Bank of
Israel on balance sheet date (figures for the preceding
periods have been adjusted to the December 1998 CPI).
c) Assets and liabilities linked to the CPI are included in the
financial statements according to the index, last published
prior to December 31, 1998.
d) Assets and liabilities linked to the BCI are included in the
financial statements according to the index, last published
prior to December 31, 1998 (figures for the preceding
periods have been adjusted to the December 1998 CPI).
5. Adjustments of financial statements on the basis of the exchange
rate of foreign currency: The financial statements of the foreign
subsidiaries, which are operating independently of the Company,
are adjusted on the basis of the exchange rates of the relevant
foreign currency. The amounts included in the financial
statements of those companies have been included in the
consolidated financial statements as follows:
* At each balance sheet date, the balance sheet and the
results of operations for the year then ended are translated
into NIS at the rate of exchange prevailing at the end of
the year for each foreign currency (mainly the U.S. Dollar).
* Amounts for preceding years have been adjusted to the
December 1998 CPI. The differences arising from the
translation into NIS, which includes related changes in the
Israeli CPI, is carried to the "cumulative foreign currency
translation adjustments" component in shareholders' equity.
c. Principles of consolidation:
The consolidated financial statements include the financial
statements of Genesis and its wholly owned subsidiaries
listed below. Significant inter-company balances and
transactions are eliminated in consolidation. Subsidiaries
included in consolidation:
<TABLE>
<CAPTION>
December 31, 1998 and 1997
------------------------------
Voting Rights to
Rights Profits
------------ ---------------
%
------------------------------
<S> <C> <C>
Genesis Construction Performance (1994) Ltd. ("GCP"),
incorporated under the laws of Israel, and its
wholly-owned subsidiary 100 100
Schnapp TSLT Investments and Assets Ltd. incorporated
under the laws of Israel, and its subsidiary 100 100
Genesis Europe SPRL, incorporated under the laws of
Belgium, and its subsidiaries 100 100
A. B. Stone B.V., incorporated under the laws of
Netherlands, and its subsidiary 100 100
Genesis Development and Construction Inc. ("GDC USA"),
incorporated under the laws of the State of Delaware,
USA, and its subsidiary 100 100
</TABLE>
F-12
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Cash equivalents:
The Company considers all highly liquid investments originally
purchased with maturities of three months or less to be cash
equivalents.
e. Short-term deposits:
The Company classifies deposits with maturities of more than
three months and less than one year as short-term deposits. The
short-term deposits are presented at their cost, including
accrued interest.
f. Marketable securities:
Investments in marketable securities designated for sale in the
short term ("current investments") are presented at market value.
Investments in marketable securities not designated for sale in
the short-term ("permanent investment") are presented at cost
(debentures, including accumulated interest), as long as there
has not been a permanent decline in value.
Current investments that became permanent investment due to the
intention of the management not to realize them in the
short-term, are presented as long-term investments at market
value on the date this decision was made.
Permanent investments in marketable securities that became
current investments due to the intention of the management to
realize them in the short-term, are presented at their market
value. The difference between market value and cost is carried to
the statement of income in the period of transfer to current
investment.
g. Investments in affiliates:
The investments in companies, partnership and joint ventures,
over which the Company can exercise significant influence
(generally, entities in which the Company holds 20% to 50% of
ownership or voting rights) are presented using the equity method
of accounting.
The significant accounting policies of these affiliates are
substantially the same as those used by the Company.
F-13
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Fixed assets:
The assets are stated at cost. Cost of the Income Producing
Residential Property includes interest capitalized during the
period of renovation of the property, calculated at the specific
rates of interest on the sources used to finance the investment,
limited to the total amount of interest cost incurred by the
Company on a consolidated basis (See Note 13). Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets. The annual depreciation rates are as
follows:
%
----------------
Office space 4
Office furniture and equipment 7-20
Motor vehicles 15
i. Revenue recognition:
a. Revenue from fixed price contracts is recognized on the
percentage of completion method. The percentage of
completion method is also used for condominium projects in
which the Company is a real estate developer and all units
have been sold prior to the completion of the preliminary
stage and at least 25% of the project has been carried out.
Percentage of completion is measured by the percentage of
costs incurred to balance sheet date to estimated total
costs. Selling, general, and administrative costs are
charged to expense as incurred. Profit incentives are
included in revenues when their realization is reasonably
assured.
Provisions for estimated losses on uncompleted projects are
made in the period in which such losses are first
determined, in the amount of the estimated loss of the full
contract.
Differences between estimates and actual costs and revenues
are recognized in the year in which such differences are
determined.
The provision for warranties is provided at a certain
percentage of revenues, based on the past experience of the
Company's management
The asset "cost and estimated earnings in excess of billings
on uncompleted contracts" represents revenues recognized in
excess of amounts billed. The liability "billings in excess
of costs and estimated earnings on uncompleted contracts"
represents billings in excess of revenues recognized.
F-14
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Revenue recognition: (continued)
b. Revenue from projects built for sale is recognized on the
completed contract method when both of the following
conditions have been met:
o at least 90% of the project has been completed, and
o at least 75% of the units in the project have been sold
c. Consulting and financial services contracts to manage
construction activity of others, including financial
management, are recognized only to the extent of the fee
revenue. The fee revenue is based on the profits generated
by the project and is recognized upon completion of the
project when the profit is known.
d. Profit on sale of a partial interest in real estate is
recognized by the full accrual method when all of the
following criteria are met:
1. The sale is consummated.
2. The buyer's initial and continuing investments are
adequate to demonstrate a commitment to pay for the
property
3. The Company's receivable is not subject to future
subordination.
4. The Company has transferred to the buyer the usual
risks and rewards of ownership in a transaction that is
in substance a sale and does not require a substantial
continuing involvement in the property or the interest
sold.
5. The Company does not have an option to repurchase the
interest rights in the project and the purchaser cannot
require the Company to repurchase the interest rights
in the project.
j. Advertising costs:
The Company expenses advertising costs as incurred.
k. Deferred taxes:
1. Deferred taxes reflect the impact of temporary amounts
recognized for tax purposes as well as tax credit carry
forwards and loss carry forwards. These deferred taxes are
measured by applying currently enacted tax rates. A
valuation allowance reduces deferred tax assets when it is
"more likely than not" that some position or all of the
deferred tax assets will not be realized.
2. Since undistributed profits of Israeli subsidiaries can be
distributed tax free to the Company, no deferred income
taxes have been provided for the realization of investments
in subsidiaries.
F-14
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Deferred taxes: (continued)
3. Taxes that would apply in the event of the realization of
investments in foreign subsidiaries have been taken into
account in determining the deferred taxes.
4. The above treatment does not differ materially from the
principles of FAS Statement No,. 109, "Accounting for Income
Taxes".
l. Concentration of risks:
SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk", requires disclosure of any
significant off-balance-sheet and credit risk concentrations. The
Company has no significant of-balance-sheet concentration of
credit risks such as foreign exchange contracts, option contracts
or other foreign hedging arrangements.
Financial instruments that potentially subject the Company to
concentrations of credit risks consist principally of accounts
receivables derived from construction contracts of major customer
(see Note 25a), bank deposits and marketable securities and cash
and cash equivalents deposited in major banks in Israel and of
investment in joint venture. Management believes that the
financial institutions that hold the Company's investments are
financially sound, and accordingly, minimal credit risk exists
with respect to these investments.
The Company is exposed to credit-related losses in the event of
non-performance by the counterparties to financial instruments,
but it does not expect any counterparties to fail, since all
counterparties have investment credit ratings.
m. Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share is computed based on the weighted
average number of common shares outstanding during each year.
Diluted earnings per share is computed based on the weighted
average number of common shares outstanding during each year,
plus the dilutive potential of common shares considered
outstanding during the year, in accordance with opinion NO. 55 of
the Israeli Institute of Certified Public Accountants which does
not differ materially from FASB Statement No. 128, "Earnings Per
Share".
n. Segment reporting:
The Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", SFAS No. 131 supercedes
SFAS No. 14, replacing the industry segment approach with the
"management approach", whereby companies report financial and
descriptive information about their operating segments. Operating
segments are revenue - producing components of the enterprise for
which separate financial information is produced internally and
are subject to evaluation by the Chief operating decision-marker
in deciding how to allocate resources to segments (See Note 26).
F-16
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
o. Derivative financial instruments:
(1) 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. Gains and losses on currency forward
contracts, and options that are designated and effective as
hedges of anticipated transactions, for which a firm
commitment has been attained, are deferred and recognized in
the statement of operations in the same period that the
underlying transactions are settled. Gains and losses on
currency forward contracts, options and swaps that are
designated and effective as hedges of existing transactions,
are recognized in income in the same period as gains and
losses on the underlying transactions are recognized and
generally offset. Gains and losses on options hedging
investments in non-marketable instruments are deferred and
recognized in the statement of operations in the same period
as the hedges mature or when the underlying instrument is
sold, whichever comes first. Income or expense on swaps is
accrued as an adjustment to the yield of the related
investments or debt they hedge.
The Company is exposed to credit-related losses in the event
of non-performance by the counterparties to financial
instruments, but it does not expect any counterparties to
fail, since all counterparties have investment credit
ratings.
(2) SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments", requires disclosures about the fair value of
financial instruments. The following disclosures of the
estimated fair value of financial instruments have been
determined by the Company using available market information
and valuation methodologies described below. However,
considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly,
the estimates presented herein may not be indicative of the
amounts that the company could realize in a current market
exchange. The use of different market assumptions or
valuation methodologies may have a material effect on the
estimated fair value amounts.
The carrying values of cash and cash equivalents,
receivables, bank overdrafts and accounts payable
approximate fair values due to the short-term maturities of
these instruments.
F-17
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
a. Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and
cash equivalents approximates its fair value.
b. Marketable securities in a restricted deposit:
The fair value for marketable securities in the restricted
deposits is based on quoted market price.
c. Long and short-term debt:
The carrying amounts of the Company's borrowings under its
short-term revolving credit arrangements and long-term debt
approximate their fair value, since they bear interest or linked
to CPI.
d. Related party receivable
The carrying amount was estimated by discounting the future cash
flows using rates currently available for cash deposits.
e. The carrying amounts and fair value of the Company's financial
instruments of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
------------ -------------
Adjusted NIS
(In thousands)
-----------------------------
<S> <C> <C>
Cash and cash equivalents 13,698 13,698
Cash and marketable securities in restricted deposits 79,463 79,463
Short-term loan 2,060 2,080
Related party receivable 2,982 3,120
Short-term debt 122,193 122,193
Long-term debt 2,142 2,142
</TABLE>
F-18
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (continued)
p. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities".
The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings,
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 1999, and must be applied to instruments
issued, acquired, or substantively modified after December 31,
1997. The Company does not expect the adoption of the accounting
pronouncement to have a material effect on its financial position
or results of operations.
NOTE 3:- CASH AND MARKETABLE SECURITIES IN RESTRICTED DEPOSITS
According to the construction loan agreements between the Company
and various banks, all receipts and revenues generated from
projects, financed by these various banks, are deposited in
special accounts. As of December 31, 1998, the restricted
deposits comprise bank time deposits and marketable securities
which are released to fund the development of the projects. The
hypothecation, exchange or transfer of the said deposits are
subject to the approval of the banks.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------ --------------
(In thousands)
<S> <C> <C> <C>
Bank time deposits 41,715 79,034 18,999
Marketable debt securities 10,169 322 77
Equity securities 117 107 26
------------- ------------- --------------
52,001 79,463 19,102
============= ============= ==============
</TABLE>
F-19
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4: - CONTRACT RECEIVABLES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------ --------------
(In thousands)
<S> <C> <C>
Billed
Completed contracts 1,778 - -
Contracts in progress 7,901 2,060 495
Unbilled 244 3,659 879
Notes receivable 733 1,177 283
------------- ------------- --------------
10,656 6,896 1,657
============= ============= ==============
NOTE 5: - PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE
December 31, December 31,
1997 1998 1998
------------- ------------ --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
----------------------------- --------------
(In thousands)
Short-term loans 2,724 - -
Short-term loan (a) 1,847 2,060 495
Loan, as short-term deposit 621 - -
Prepaid expenses and other receivables 462 953 229
Advances to suppliers 465 - -
------------- ------------ --------------
6,119 3,013 724
============= ============ ==============
a) A short-term loan was given to a third party and is linked to
the US dollar. The loan bears no interest and is presented at
its discounted value. The loan was fully paid by March 1999.
</TABLE>
F-20
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6:- RELATED PARTY RECEIVABLES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
-------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Unaffiliated Israeli Company:
- Sale of 50% of a subsidiary interest (a) 5,515 2,982 717
- Consulting and financial management fees
receivable (b) - 5,824 1,400
- Short-term loans (c) - 3,325 799
American Entity 1,278 - -
Shareholder (d) - 1,069 257
-------------- ------------- --------------
6,793 13,200 3,173
============== ============= ==============
</TABLE>
a) In September 1997, the Company sold 50% of its interest in a
subsidiary to an unaffiliated Israeli Company ("UIC"), in
consideration of $3,300,000 of which $1,800,000 was paid in
September 1997 and $750,000 in March 1998. The remaining
balance of $750,000 is to be paid by September 1999, bears
no interest and is presented at its discounted value which
amounts as of December 31, 1998 to NIS 2,982 thousands
(equivalent to $717,000).
(b) During the period from April to November 1998 the Company
provided consulting and financial management services to UIC
for the acquisition of an Income-Producing Residential
property in Rishon Le-Zion and for the achievement of a
long-term lease agreement with the Israeli Government's
Ministry of Absorption ("Ministry of Absorption") in
consideration of $1,400,000 which is fully paid by June
1999.
(c) The Company has been engaged to arrange credit lines to UIC
for the acquisition of the property in Rishon Le-Zion. The
Company was required to advance short-term loans for this
project. The loans are unlinked and bear interest of 16.6%
per annum, based on the prime rate interest as published by
the Bank of Israel. The loans were repaid by June 1999.
(d) This receivable includes legal fees paid by the Company on
behalf of its principal shareholder relating to his claim
against an Israeli Bank which failed to finance the winning
bid in a tender to acquire a controlling interest in one of
the three largest oil , energy and real estate holding
company in Israel. The amount receivable is linked to the
CPI and bears interest of 2% per annum. An amount of NIS 320
thousands was paid in June 1999 and the remaining balance
will be paid by December 1999.
F-21
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7:- PROPERTY AND APARTMENTS FOR SALE
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
-------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Property for sale (a) - 6,830 1,642
Apartments for sale (b) 655 1,110 267
-------------- ------------- --------------
655 7,940 1,909
============== ============= ==============
</TABLE>
(a) In January 1998, the Company through its subsidiary jointly
owned with Engel acquired interests in two properties
designated by the Company for renovations and long-term lease
to the Israeli Government's Ministry of Absorption ("Ministry
of Absorption"). The Company has entered into a five year
lease agreement with the Ministry of Absorption with respect
to one of these properties, granting options to the Ministry
of Absorption for additional five year-terms. The renovation
of one of these properties was almost fully completed and the
renovating of the second property is not yet commenced. After
balance sheet, the Company sold its subsidiary's interest to
Engel in consideration of approximately NIS 10.6 million.
(b) At cost, lower than market value.
NOTE 8:- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
-------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Cost incurred on uncompleted contracts 103,315 92,481 22,231
Estimated earnings 1,815 1,071 257
-------------- ------------- --------------
105,130 93,552 22,488
Less: Billings to date (91,249) (78,915) (18,970)
============== ============= ==============
13,881 14,637 3,518
============== ============= ==============
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts 17,308 15,235 3,662
Billing in excess of costs and estimated earnings on
uncompleted contracts (3,427) (598) 144
============== ============= ==============
13,881 14,637 3,518
============== ============= ==============
</TABLE>
F-22
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LOANS TO AFFILIATED COMPANIES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
-------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Short-term loan to Stipula B.V. (a) 3,437 4,790 1,151
Short-term loan to AS. (b) 239 - -
-------------- ------------- --------------
3,676 4,790 1,151
============== ============= ==============
</TABLE>
a) The loan was given to Stipula I B.V. (A.B. Stone subsidiary)
to finance the acquisition of a 21.87% interest in the share
capital of Engel (see not 27e). The loan is linked to U.S.
dollars , bears interest of 5% per annum, will mature no later
than December 31, 1999, and is secured by a pledge on Stipula
I B.V. as collateral.
b) The loan was given to Alir Schnapp Industrial Buildings Ltd.
("AS") to finance the acquisition of an industrial building in
Migdal Haemek. The loans was linked to CPI and matured in
December 1998.
The Company released its share in AS which was immaterial.
F-23
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10- LONG-TERM RECEIVABLES AND DEPOSITS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
-------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Notes receivables linked to U.S. dollar (a) 11,522 12,480 3,000
Unlinked notes receivables (b) 952 479 116
Long-term bank deposits ( c ) 170 207 50
-------------- ------------- --------------
12,644 13,166 3,166
Less: current portion (400) (207) (50)
============== ============= ==============
12,244 12,959 3,116
============== ============= ==============
The said balance was presented as follows:
Related parties 3,937 4,263 1,025
Other 8,307 8,696 2,091
============== ============= ==============
12,244 12,959 3,116
============== ============= ==============
Maturities:
Second year 226 207 50
Third year 226 113 27
Fourth year 101 - -
Thereafter until 2012 11,691 12,639 3,039
============== ============= ==============
12,244 12,959 3,116
============== ============= ==============
</TABLE>
One. The Company has long-term receivables (promissory notes) from
private US investors relating to the sale of 55% interest in the
Rehovot Project (Note 27c). The principal of these promissory
notes, which bear interest at the rate of 8.5% per annum, are
payable on December 31, 2003. Accrued interest is payable on the
last business day of each calendar quarter.
Two. Unlinked notes receivables are related to a completed project in
Lev-Hasharon and bear interest at an annual rate of 17%. The
unlinked notes receivables are payable in 39 monthly installments
of principal and interest, ending July 2001.
Three. Long-term bank deposits are linked to the CPI, and bear
interest at an annual rate of 4%. These deposits are registered
in the shareholders' name as a trustee for the Company and mature
in 2012.
F-24
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - EQUITY IN JOINT VENTURES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------ --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
----------------------------- --------------
(In thousands)
<S> <C> <C> <C>
Rehovot project (a) 493 10,268 2,468
Germany and Russian projects (b) 7,007 8,980 2,159
Southampton ( c ) 6,353 7,868 1,891
------------- ------------- --------------
13,853 27,116 6,518
============= ============= ==============
</TABLE>
a) The equity in Joint Venture in the Rehovot project represents
the Company's shares in the costs associated directly to the
project, fully financed by bank loans. (See Note 27c).
b) The Company has sold 50% of its interest in the German and
Russian projects to UIC. The remaining 50% represent the cost
of its investment in the joint venture for each project. The
German project is expected to be completed by December 2002.
The Russian project is in final stage of the construction and
being marketed.
c) GDC USA acquired on May 6, 1997, through its 51% registered
partnership, a parcel of land in Southampton, New York on
which to develop 33 single-family luxury homes. The project is
currently under site development.
NOTE 12- LAND UNDER DEVELOPMENT
In December 1997, the Company acquired from Engel the rights to a
parcel of land in North of Israel on which to develop 167
residential units, in consideration of approximately NIS 18.4
million. The Company is seeking permission for approximately 300
units. The project is currently under site development.
F-24
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13: - FIXED ASSETS
<TABLE>
<CAPTION>
Income-
Producing
Residential
Furniture Property Being
and office Office Renovated
Vehicles (1) Equipment Space (2)(3) Total
------------- ------------- ------------- --------------- ---------
Adjusted NIS
------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance as of
December 31, 1997:
Cost 2,223 784 600 - 3,607
Accumulated depreciation (315) (83) (39) - (437)
------------- ------------- ------------- ------------- -----------
Depreciated cost 1,908 701 561 - 3,170
============= ============= ============= ============= ===========
Balance as of
December 31, 1998:
Cost 2,792 1,142 600 64,520 69,054
Accumulated depreciation (668) (248) (63) - (979)
------------- ------------- ------------- -----------
=============
Depreciated cost 2,124 894 537 64,520 68,075
============= ============= ============= ============= ===========
Convenience Translation (Note 2a) U.S. $
------------------------------------------------------------------------------
Balance as of
December 31, 1998
Cost 671 274 144 15,510 16,599
Accumulated depreciation (161) (60) (15) - (236)
------------- ------------- ------------- ------------- -----------
Depreciated cost 510 214 129 15,510 16,363
============= ============= ============= ============= ===========
</TABLE>
(1) Including vehicles acquired under a long-term lease at the cost
of adjusted NIS 793 thousands (1997: NIS 762 thousands).
(2) In January 1998, the Company acquired interests in a property in
Tel Aviv designated for renovation and long-term lease to the
Ministry of Absorption. Such property is a group of apartment
buildings which will contain approximately 200 studio apartments
after renovation. The Company has entered into a five-year lease
agreement with the Ministry of Absorption granting option for
additional five year-terms, effective date of the completion of
the renovation.
The registration of the building at the title of the Company is
still pending due certain legal procedures to be completed,
mainly the cancellation of liens registered by third parties. In
the opinion of the Company's management after consultation with
outside legal counsel, the registration will be completed in
1999.
(3) Includes capitalized interest in the amount of NIS 1002 thousand
as of December 31, 1998.
(4) Depreciation expense amounted to NIS 116 thousand, NIS 292
thousands and NIS 542 thousands for the years ended December 31,
1996, 1997 and 1998 respectively.
F-25
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14: - BANK CREDITS AND SHORT-TERM LOANS
<TABLE>
<CAPTION>
a. Composed as follows: Annual Interest Rates December 31, December 31,
---------------------------
1997 1998 1997 1998 1998
----------- ------------ -------------- ------------- --------------
----------- ------------
Convenience
translation
% % (Note 2b)
Adjusted NIS U.S. $
----------- ------------ ------------------------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Bank credits - unlinked 15.2-17.5 9.6 - 15.2 11,653 33,261 7,995
Bank credits-linked to the U.S.$ (1) 6.5 6.4 -7.1 7,812 88,932 21,378
============== ============= ==============
19,465 122,193 29,373
============== ============= ==============
</TABLE>
(1) Includes a revolving short-term loan of NIS 42 million received for
the financing of the Income-Producing residential property (see note
13). After the balance sheet date the Bank authorized an equivalent
long-term line credit to be executed under certain conditions.
b. As to pledges to secure bank credits, see Notes 20 and 22
NOTE 15: TRADE PAYABLES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- ------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------ -------------
(In thousands)
<S> <C> <C> <C>
Accounts payable 36,013 26,479 6,366
Notes payable 4,778 12,943 3,110
------------- ------------- -------------
40,791 39,422 9,476
============= ============= =============
</TABLE>
NOTE 16:- ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- -------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------ -------------
(In thousands)
<S> <C> <C> <C>
VAT and income tax payable 1,855 3,992 960
Property betterment tax payable - 2,147 516
Other 1,055 1,512 364
Deferred income - 2,085 501
Wages and related benefits 574 152 36
Expenses payable 46 229 55
============= ============= =============
3,530 10,117 2,432
============= ============= =============
</TABLE>
F-26
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17:- RELATED PARTIES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998 1998
------------- ------------- -------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------ -------------
(In thousands)
<S> <C> <C> <C>
Salary payable (See Note 27a) 123 - -
============= ============= =============
</TABLE>
NOTE 18:- LONG-TERM DEBT
<TABLE>
<CAPTION>
a. Composed as follows: December 31, December 31,
1997 1998 1997 1998 1998
------------- ------------- ------------ ------------- -------------
Convenience
translation
Annual (Note 2b)
Interest rates % Adjusted NIS U.S. $
------------------------------ ----------------------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
From a leasing company - linked to
the U.S. dollar 3.8 - 7.5 3.8 -7.5 455 400 96
From a leasing company - linked to
the CPI 6.6 - 7.7 6.6 - 7.7 225 139 33
From bank - unlinked 17.2 17.2 149 76 18
From bank - linked to the U.S. dollar 6.3 - 8.3 6.5 - 8.3 20,866 22,339 5,370
From bank - linked to CPI*) 5.6-6.0 5.6 - 6.0 2,843 1,725 415
------------ -------------- ------------
24,538 24,679 5,932
Less current maturities (2,902) (22,537) (5,417)
============ ============== ============
21,636 2,142 515
============ ============== ============
</TABLE>
*) Includes NIS 346,647 (1997: 366,946) collateralized by a mortgage on
the Company's office space.
b. Aggregate maturities of long-term loans maturing serially from 1999 to
2011:
First year - current maturities 2,902 22,537 5,417
Second year 20,899 1,624 390
Third year 234 161 39
Fourth year 152 99 24
Fifth year 93 25 6
Thereafter 258 233 56
============= ============== =============
24,538 24,679 5,932
============= ============== =============
c. As to pledges to secure loans see Note 22.
d. As to capital lease commitments see Note 20k.
F-27
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19: - SEVERANCE PAY
The Company's liability for severance pay for its employees, pursuant to
Israeli Law, is fully provided for. Part of the liability is funded through
insurance policies and severance pay fund.
December 31, December 31,
1997 1998 1998
------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
----------------------------- --------------
(In thousands)
Severance pay 299 393 95
Less: amount funded* (214) (211) (51)
------------- ------------- --------------
85 182 44
============= ============= ==============
*) The amount funded can be withdrawn under the provisions of the Law for
Severance Pay.
Severance pay expense for the years ended December 31, 1996, 1997 and 1998
amounted to adjusted NIS 102, NIS 197, and NIS 97, respectively.
NOTE 20 :- CONTINGENT LIABILITIES AND COMMITMENTS
All the amounts described in the following projects are approximate amounts
and are linked to the Israeli BCI, unless stated otherwise.
a) Ministry of Defense
In January 1998, the Company was engaged as the general contractor for
the construction of a building in consideration of approximately NIS
16 million. The Company is required to complete construction in
January 2001, otherwise a penalty amount of NIS 2,100 will be payable
for each day of delay. The Company expects to complete the project on
time.
F-28
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20: CONTINGENT LIABILITIES AND COMMITMENTS (continued)
b) Rehovot:
In March 1997, the Company was awarded rights to develop a parcel of
land of approximately 77,000 sq.m. in consideration of approximately
NIS 2 million. The development plan requires evictions, a zoning
change and the approval by the municipal and regional authorities. The
Company has received in March 1998 the rezoning approval from the
regional council for the construction of approximately 900 units. The
Company is committed to complete the development by March 2002.
c) Kiryat Shmuel:
In November 1997, the Company was engaged as the general contractor
for the construction of 58 residential units in consideration of
approximately NIS 27 million. The Company has engaged a subcontractor
to complete the entire project in consideration of NIS 23 million. The
Company is required to complete construction of the project in
December 1999, otherwise a penalty amount of $ 500 for each unit will
be payable for each month of delay. The Company expects to complete
the project on time.
d) Guarantees:
The Company received an authorization to employ foreign workers by the
Ministry of Interior. In order to secure the fulfillment of the
authorization's condition, the Company deposited, with the Ministry of
Interior, notes payable in the amount of NIS 136,000.
e) Bank guarantees:
In order to guarantee the proceeds on apartments sold and on other
construction projects, the Company has provided bank guarantees
expiring upon the completion of the project.
Adjusted NIS
--------------------
(In thousands)
1. Bank guarantees under the Law of Apartment Sales 23,445
2. Bank guarantees as security for performance 20,890
F-29
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20: CONTINGENT LIABILITIES AND COMMITMENTS (continued)
f) Contractors registration:
GCP and its wholly owned subsidiary Genesis construction (1997) Ltd.
have been registered in the Contractors Registrar Office as building
contractors for projects involving unlimited financial scope and
unlimited size. The registration depends on employment of two
professional workers approved by the Contractors Registrar. This
condition was fully met.
i) Capital lease:
The Company leased vehicles for periods from May 1999 to September
2002. Following is a summary of future payments under capitalized
lease:
Adjusted NIS
(In thousand)
----------------
Year ending December 31, 1999 212
Year ending December 31, 2000 193
Year ending December 31, 2001 156
Year ending December 31, 2002 81
-----------
Total capitalized lease payment 642
Imputed interest 147
-----------
Present value of capitalized lease payments 495
Current portion 163
===========
Long-term capitalized lease obligations 332
===========
F-30
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20: CONTINGENT LIABILITIES AND COMMITMENTS (continued)
j) Lease Commitments
In December 1996, the Company leased additional office space as from
January 1, 1997, under long-term operating lease agreements. In
addition the Company has leased an office space in Rehovot, for the
supervision over its project, as from January 1998 until December
2003. Following is a summary of future payments for these leases:
Adjusted NIS
(In thousands)
----------------
Year ending December 31, 1999 111
Year ending December 31, 2000 50
Year ending December 31, 2001 50
Year ending December 31, 2002 25
Year ending December 31, 2003 25
-------------
261
=============
k) Litigation
(i) The Company is involved in legal and administrative proceedings
and claims of various types in the amount of approximately NIS
4.7 million which are being defended and handled in the ordinary
course of business. In the opinion of the Company's management
after consultations with outside legal counsel, the ultimate
disposition of such proceedings will not have a materially
adverse effect on the Company's consolidated financial position
or future results of operations over a provision of NIS 1.7
million recorded by the Company.
(ii) The Company filed several claims for approximately NIS 5.9
million against numerous contractors for damages caused in
several projects and against four families for eviction in the
Rehovot project. The litigation is still pending and no amounts
have been recorded for contingent payments.
F-31
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 :- SHARE CAPITAL
a. Share Capital is Composed as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
Authorized Issued & Authorized Issued &
Outstanding Outstanding
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Class A ordinary shares
NIS 0.10 par value 42,000,000 2,300,000 42,000,000 2,311,000
========== ========= ========== =========
Class B ordinary shares
NIS 0.10 par value 3,000,000 3,000,000 4,200,000 2,989,000
========== ========= ========== =========
</TABLE>
The Class A Ordinary Shares and the Class B Ordinary Shares
are essentially identical, except that each Class A Ordinary
Share is entitled to one vote and each Class B Ordinary Share
is entitled to five votes, and Class B Ordinary Shares have no
voting rights in regard to certain resolutions relating to the
amendment of the rights of the Class B Ordinary Shares.
b. Each Class B Ordinary share will automatically be converted into
one Class A Ordinary Share upon:
i. the death of the holder thereof (the "Original Holder") or,
if such shares are subject to a shareholders' agreement or
voting trust agreement granting the power to vote such
shares to another Original Holder, then upon the death of
such other Original Holder.
ii. the sale or transfer to any person other than the following
transferees:
a. a trust for the sole benefit of members of the
transferors immediate family and which is controlled by
the transferor; and
b. any other holder of Class B Ordinary Shares thereof; or
iii. the failure of the Company to achieve net income before
provision for income taxes and exclusive of extraordinary
earnings and charges to income resulting from the release
from the Deference Program of the Performance Shares (as
such terms are defined below) as audited and determined by
the Company's independent public accountants in accordance
with U.S. GAAP, as set forth in the reconciliation thereof
in the Company's consolidated financial statements ("Pretax
Income") of at least $1,000,000 (the "Target Pretax Income
Amount") for the year ending December 31, 1998, or for each
of the succeeding five years ending December 31, 2003 - the
failure of the Company to achieve Pretax Income exceeding
the Target Pretax Income for the previous year by at least
10%.
F-32
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21: SHARE CAPITAL (continued)
c. 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 "Deferrence Program"). Pursuant to
the Deferrence Program, the Performance Shares would convert into
"Deferred Shares" (having no rights other than the right to
receive an amount not in excess of the par value thereof (NIS
0.1) upon dissolution of the Company) if the Company does not
attain certain earnings levels. Such earnings levels were
attained in the Company's 1997 fiscal year and all of the
Performance Shares have been released from the Deferrence
Program.
d. Share Option Plans
The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Shares Issued to Employees"
(APB-25), and related interpretations in accounting, for its
employee shares potions because, as discussed below, the
alternative fair value accounting provided for under FASB
Statement No. 123, " Accounting for Share-Based Compensation",
requires the use of option valuation models that were not
developed for use in valuing employee shares options. Under
APB-25, since the exercise price of the Company's employee shares
options equals the market price of the underlying shares on the
date of grant, no compensation expense is recognized. The Company
intends to continue using the measurement prescribed by APB
Opinion No.25, and accordingly, this pronouncement will not
affect the Company's financial position or results of operations.
(1) In November 1996 and 1997 the Board of Directors of the
Company adopted Share Option Plans pursuant to which 700,000
Class A Ordinary shares were reserved for issuance upon the
exercise of options to be granted to employees of the
Company. The exercise price may not be less than 70% of the
average closing price, as reported by Nasdaq, of the Class A
Ordinary Shares during the 90 calendar days prior to the
date of grant. The Share Option Plans expire in 2016-2017.
As of December 31, 1998, the Company has not granted any
options to purchase Class A Ordinary Shares.
(2) In December 1998, the Board of directors of the Company
adopted a general managers option plan pursuant to which
1,000,000 Class A Ordinary Shares were reserved for issuance
upon the exercise of options to be granted to general
managers of the Company and any of its subsidiaries. The
exercise price shall not be less than 70% of the average
closing price of the Class A Ordinary Shares of the Company
during the 90 days which preceded the date of exercise. As
of December 31, 1998, the Company has not granted any
options to purchase Class A Ordinary Shares.
(3) Each director residing in the United States will receive a
five-year option to purchase up to 7,500 Class A Ordinary
Shares at an exercise price equal to 70% of the average
closing price of the Class A Ordinary Shares of the Company
during the 90 days which precedes the date of exercise. As
of December 31, 1998, two directors received an option to
purchase 30,000 Class A Ordinary Shares at an exercise price
of $5 per share.
F-33
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 21: SHARE CAPITAL (continued)
(4) In December 1998, the Company granted the Chairman of the
Board the right and the option (the "option") to purchase
all or any part of an aggregate of 1,200,000 Class B
Ordinary Share (the "Shares"). The purchase price of the
shares payable upon full or partial exercise of the option
is U. S. $ 2.875 per share. The option may be exercised at
any time prior to the earlier of (i) the third anniversary
of the date thereof and (ii) the date on which the Chairman
ceases to be involved in the operations of the Company. The
partial exercise of the Option shall not cause the
expiration, termination or cancellation of the remaining
unexercised portion thereof. Exercise of the Option shall be
for a whole number of shares and no functional shares shall
be issued or delivered upon exercise of the Option.
(5) Pro-forma information regarding net income and earnings per
share is required by Statement No. 123, and has been
determined assuming the Company had accounted for its
employee shares options under the fair value method
prescribed by that statement. The fair value for these
options was estimated at the date of grant using a
Black-Scholes option pricing model, with the following
weighted-average assumptions for 1998 and 1997,
respectively: risk-free interest rates of 5%, and 6%;
dividend yields of 0%; volatility factors of the expected
market price of the Company's common shares of 0.776; and a
weighted-average expected life of the option of 3 years.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions, including the expected shares
price volatility. Because the Company's employee shares
options have characteristics significantly different from
those of traded options, and since changes in the subjective
input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the
fair value of its employee shares options.
For purposes of pro-forma disclosures, the estimated fair
value of the options is amortized to expense over the
options' vesting period.
F-34
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21: SHARE CAPITAL (continued)
The Company's pro-forma information is as follows:
1998 1997
--------------- --------------
NIS in thousands (except per
share amounts)
------------------------------
Net income as reported 2,443 25,209
Pro-forma net income (loss) (583) 25,143
Pro-forma tax affect - -
Pro-forma earnings (loss) per share:
Basic (0.09) 4.93
A summary of the Company's shares option activity, and related
information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1998 1997
--------------------- ---------------------
Number of options in thousands
--------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
--------- -------- --------- ---------
$ $
-------- ---------
<S> <C> <C> <C> <C>
Outstanding - at the
beginning of year 15,000 5 - -
Granted:
Class A 15,000 5 15,000 5
Class B 1,200,000 2.875 - -
Outstanding - at the
end of year
Class A 30,000 5 15,000 5
Class B 1,200,000 2.875 - -
Exercisable options
Class A 30,000 5 15,000 5
Class B 1,200,000 2.875 - -
</TABLE>
F-35
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21: SHARE CAPITAL (continued)
The weighted average grant and date fair value of options granted for
the years ended December 31, 1997 and 1998, were $0.49 and $0.72
respectively.
The exercise prices on the grant date that exceed market price
were as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Weighted - average exercises price $ 5.00 $ 2.93
Weighted - average fair values on grant date $ 0.49 $0.72
</TABLE>
The options outstanding as of December 31, 1998, have been
separated into ranges of exercise prices, as follows:
Weighted
Options average,
outstanding as remaining Weighted
of December contractual average
Exercise Price 31, 1998 life exercise price
-------------- -------------- ----------- --------------
$ 5 30,000 3,5 years $ 5
$ 2.875 1,200,000 3 years $ 2.93
e. Bridge Warrants
In November 1996 the Company completed a bridge financing to which it
issued Bridge warrants. The Bridge Warrants, entitle the holders to
purchase one Class A Ordinary Share commencing one year from the date
of their issuance. Upon the Bridge Warrants were exchanged for the
Selling Securityholders' Warrants, each of which are identical to the
Class A Warrants included in the Units. The Selling Securityholders
have agreed, not to exercise and not to sell the Selling
Securityholders' Warrants for a period of one year from the closing of
the offering.
f. Issue of Shares within the framework of an IPO
On January 30, 1997, the Company completed an IPO consisting of
2,300,000 units, each unit consisting of Class A Ordinary Shares, one
redeemable Class A warrant at the price per unit price of $5. The net
proceeds from the issuance amounted to NIS 35,549 thousands.
F-36
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21: SHARE CAPITAL (continued)
g. Redeemable Warrants
Within the framework of the Company's IPO, the Company issued
2,300,000 Redeemable Class A warrants and 2,300,000 Redeemable Class B
warrants.
Class A Warrants
Each Class A Warrants entitles the registered holder to purchase one
Class A Ordinary share and one Class B Warrant, at an exercise price
of $6.50, until January 2002. Beginning one year from the date of the
IPO, the Class A Warrants are redeemable by the Company on 30 days'
prior written notice at a redemption price of $.05 per Class A
Warrant, if the "closing price" of the Company's Class A Ordinary
Shares for any 30 consecutive trading days ending within 15 days of
the notice of redemption averages in excess of $9.10 per share
(subject to adjustment by the Company, in the event of any reverse
stock split or similar events).
Class B Warrants
Each Class B Warrant entitles the registered holder to purchase one
Class A Ordinary Share at an exercise price of $8.75 per share at any
time after issuance until January 2002. Beginning one year from the
date of IPO, the Class B Warrants are redeemable by the Company on 30
days' prior written notice at a redemption price of $.05 per Class B
Warrant, if the closing price of the Company's Class A Ordinary Shares
for any 30 consecutive trading days ending within 15 days of the
notice of redemption averages in excess of $12.25 per share (subject
to adjustment by the Company, in the event of any reverse, stock split
or similar events). Through December 31, 1998, none of the Warrants
have been exercised.
NOTE 22:- CHARGES
a. As collateral for capital lease liabilities to a leasing company, a
fixed charge has been placed on motor vehicles and equipment.
b. As collateral for a liability to a mortgage bank, a pledge was
registered on the Subsidiary's office space.
c. As collateral for liabilities to banks, a charge has been placed on
short-term deposit, on marketable securities, on revenues from the
projects on motor vehicles, on income - producing residential
properties and on land rights.
As of the balance sheet date, the balance of liability collateralized
totals adjusted approximately NIS 124 million.
d. In order to cover legal fees relating to the claim of the Company and
its principal shareholders against an Israeli Bank (see note 27f), a
floating charge have been placed on all the rights of the claim
results, if any.
F-37
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 23:- TAXES ON INCOME
a. Taxation of contractors:
The Income Tax Ordinance (New Version) 1961 ("Ordinance")
distinguishes between two types of contractors performing work over
more than one year ("Progressive Works").
(i) a "customer contractor" initially reports income from progressive
works in the tax year in which at least 25% of the predicted
monetary scope or the quantitative scope of the work is
concluded.
(ii) a "development contractor" reports his income according to the
"completion of work" method, i.e. in the first tax year in which
the building receives a certificate of completion from the local
authority.
The ordinance provides rules for spreading financing, management and
general expenses as well as interest expense over the period of
construction.
b. Tax benefits under the law for encouragement of capital investment,
1959 ("Law of Encouragement"):
Income - producing rental properties were approved by the investment
center under the law of encouragement. The Company is entitled to
accelerated depreciation rate of 20% per annum until 2001 and of 10%
thereafter. The income derived for the entire or partly sale of the
property is subject to a corporate rate of 25%. The entitlement of the
above benefits is conditional upon the Company's fulfilling by leasing
the property for a minimum period of 5 years.
c. Measurement of results for tax purposes are made in accordance with
the Income Tax (Inflationary Adjustments) Law, 1985 (the "Inflationary
Adjustments Law").
In accordance with the Inflationary Adjustments Law, the results for
tax purposes are measured in real terms, in accordance with the
changes in the Israeli CPI.
F-38
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 23:- TAXES ON INCOME (continued)
d. Taxes on Income
Taxes on Income included in the statements of operation:
For the year ended December 31,
--------------------------------------------------------------
1996 1997 1998 1998
------------- ------------- ------------- -------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
----------------------------------------------- -------------
(In thousands)
Current:
Israel - 1,742 2,000 481
Europe - 106 146 35
Deferred:
Israel - 3,841 319 77
============= ============= ============= ============
- 5,689 2,465 593
============= ============= ============= ============
e. Deferred tax:
Deferred tax liabilities (assets) are composed of the following:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1997 1998 1998
------------- ------------- ------------- -------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
----------------------------------------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Tax applied in the event of the
distribution of income of foreign
subsidiaries - 3,841 4,160 1,000
Difference between the reported
income recognition and the tax
reporting 50 385 - -
Provision for severance pay,
vacation and recreation (35) (108) (68) (16)
Net operating loss carry forward (201) (492) (137) (33)
------------- ------------- ------------- -------------
(186) 3,626 3,955 951
Valuation allowance * 186 215 205 49
============= ============= ============= =============
- 3,841 4,160 1,000
============= ============= ============= =============
</TABLE>
*) The valuation allowances has been established for the full amount
of the related deferred tax asset until realization is assured.
F-39
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 23:- TAXES ON INCOME (continued)
f. Tax loss carry forwards:
At December 31,1998, a foreign subsidiary has net operating loss
carryforwards of approximately $169,000, which may be utilized against
future taxable income through 2019.
g. Tax assessments:
Final assessments have not yet been received by the Company and its
subsidiary since incorporation.
h. A reconciliation of the theoretical tax expense, assuming all income
is taxed at the statutory rate applicable to income of the Company and
the actual tax expense, is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------------
1996 1997 1998 1998
------------- ------------- ------------- --------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
---------------------------------------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Theoretical tax expense (benefit)
computed at rate of 36% 19 11,199 1,833 440
Nondeductible expenses and
others, net 18 1,218 846 204
Exempt income - (6,805) (351) (84)
Carryforward losses for which no
deferred taxes are recognized (37) 77 137 33
============= ============= ============== ============
Actual tax expense - 5,689 2,465 593
============= ============= ============== ============
</TABLE>
F-40
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 24:- LINKAGE TERMS OF MONETARY BALANCES
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
---------------------------------- ---------------------------------------
Foreign Linked to Foreign Linked to
Currency Israel CPI Unlinked Total Currency Israel CPI Unlinked Total
-------- ---------- -------- ----- -------- ---------- -------- -----
Adjusted NIS (In thousands)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents 12,948 - 2,201 15,149 12,749 918 31 13,698
Bank deposits and marketable
securities in restricted
deposits 41,209 - 10,792 52,001 56,351 22,661 451 79,463
Contracts receivable - - 10,656 10,656 - - 6,396 6,896
Other accounts receivables 1,847 - 3,810 5,657 2,060 - - 2,060
Related party receivable 6,793 - - 6,793 2,982 - 10,426 13,408
Loan to an affiliated company 3,676 - - 3,676 4,790 - - 4,790
------- -------- --------- ------- -------- ------- ------- --------
66,473 - 27,459 93,932 78,932 23,579 17,804 120,315
======= ======== ========= ======= ======== ======= ======= ========
Short-term loan and bank
credit 7,812 - 11,653 19,465 88,932 - 33,261 122,193
Trade payables - - 40,791 40,791 - - 39,422 39,422
Accrued expenses and other
liabilities - - 3,530 3,530 - - 10,117 10,117
Shareholder - 123 123 - - - -
-
Long-term liabilities
(including current 21,321 3,068 149 24,538 22,739 1,864 76 24,679
maturities)
Severance pay - - 85 85 - - 182 182
------- -------- --------- ------- -------- ------- ------- --------
29,133 3,191 56,208 88,532 111,671 1,864 83,058 196,593
======= ======== ========= ======= ======== ======= ======= ========
</TABLE>
F-41
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 25:- SELECTED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------
a. Major customers data: 1996 1997 1998 1998
------------- ------------- -------------- -------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------------------------ -------------
(In thousands)
Revenues from:
<S> <C> <C> <C> <C>
Engel (see Note 20) (1) 10,600 42,981 16,844 4,049
LGES (see Note 20) (2) - 18,685 7,351 1,767
American Entity (See Note 27d)(3) - 22,589 - -
UIC (See Note 27e)(4) - 12,487 - -
Others 14,706 38,339 98,332 23,637
-------------- -------------- -------------- ------------
25,306 135,081 122,527 29,453
============== ============== ============== ============
(1) Percentage of total revenues 41.9% 31.8% 13.7% 13.7%
============== ============== ============== ============
(2) Percentage of total revenues - 13.8% 6% 6%
============== ============== ============== ============
(3) Percentage of total revenues - 16.7% - -
============== ============== ============== ============
(4) Percentage of total revenues - 9.3% - -
============== ============== ============== ============
Contracting costs:
Engel projects (5) 9,658 38,789 17,127 4,117
LGES (6) - 16,165 7,028 1,689
American Entity (7) - 2,475 - -
UIC (8) - 3,607 - -
Others 14,479 35,359 83,046 19,963
-------------- -------------- -------------- -------------
24,137 96,395 107,201 25,769
============== ============== ============== =============
(5) Percentage of total revenues 38.1% 28.7% 16% 16%
============== ============== ============== =============
(6) Percentage of total revenues - 12.0% 6.5% 6.5%
============== ============== ============== =============
(7) Percentage of total revenues - 1.8% - -
============== ============== ============== =============
(8) Percentage of total revenues - 2.7% - -
============== ============== ============== =============
b. Revenues classified by geographical areas
Israel 25,306 100,005 122,527 29,453
Europe - 35,076 - -
-------------- -------------- -------------- -------------
25,306 135,081 122,527 29,453
============== ============== ============== =============
</TABLE>
F-42
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 25:- SELECTED STATEMENT OF OPERATIONS DATA (continued)
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------
1996 1997 1998 1998
------------- ------------- -------------- ------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
c. Selling, administrative and general
expenses include:
Advertising costs 17 65 189 45
============= ============= ============== =============
Rental expense 6 41 272 65
============= ============= ============== =============
d. Financial income (expenses)
Erosion of monetary items and other, net (218) (1,699) 5,147 1,237
Interest income, including gain on
marketable securities 1,071 5,402 17,705 4,256
Foreign exchange gain 113 484 3,370
810
Interest expenses:
Long-term loans (56) (116) (1,018) (245)
Short-term loans and bank credits (621) (3,216) (25,767) (6,193)
------------- ----------- ---------------- -------------
289 855 563 (135)
============= =========== ================ =============
</TABLE>
F-43
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 26:- OPERATING SEGMENTS DATA
The Company is engaged in three segments of the real estate industry:
(1) development and construction
(2) real estate sales transactions
(3) provision of consulting, management and financial management
services in connection with construction activity of others.
The following data present the revenues, expenditures and other
operating data of the Company's operating segments:
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------------------
Development Real estate
& sales
Construction transactions Services Total
------------ ------------ -------- ---------
Adjusted NIS in thousands
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers 91,182 25,407 5,938 122,527
========== ========== ========= ==========
Operating earnings according to segments 5,917 3,896 5,513 15,326
========== ========== =========
Joint general expenses 9,672
----------
Total operating expenses 5,654
==========
Financial expenses 26,785
==========
Financial income 26,222
==========
Loss from affiliated companies 183
==========
Taxes on income 2,465
==========
Gain for the year 2,443
==========
Joint segment assets 68,075
==========
Joint depreciation 542
==========
Investments in equity method investees 27,116
==========
Joint expenditure for segment assets 63,117
==========
</TABLE>
F-44
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 26:- OPERATING SEGMENTS DATA (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------------------------
Development Real estate
& sales
Construction transactions Services Total
------------ ------------ -------- ---------
Adjusted NIS in thousands
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers 97,356 35,076 2,649 135,081
========== ========== ========= ==========
Operating earnings according to segments 7,044 28,993 2,649 38,686
========== ========== =========
Joint general expenses 7,726
----------
Total operating expenses 30,960
==========
Financial expenses 5,031
==========
Financial income 5,886
==========
Amortization of Bridge note issuance 917
==========
Taxes on income 5,689
==========
Gain for the year 25,209
==========
Joint segment assets 3,170
==========
Joint depreciation 292
==========
Investments in equity method investees 13,853
==========
Joint expenditure for segment assets 2,139
==========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------------
Development Real estate
& sales
Construction transactions Services Total
------------ ------------ -------- ---------
Adjusted NIS in thousands
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers 25,306 - - 25,306
========== ========== ========= ==========
Operating earnings according to segments (22,221) - - (22,221)
========== ========== =========
Joint general expenses (2,433)
----------
Total operating expenses (24,654)
==========
Financial expenses (896)
==========
Financial income 1,185
==========
Amortization of Bridge notes issuance costs (888)
==========
Gain for the year 53
==========
Joint segment assets 1,322
==========
Joint depreciation 116
==========
Investments in equity method investees -
==========
Joint expenditure for segment assets 881
==========
</TABLE>
F-45
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES
a. Employment agreement with the Company's President
In November 1997, the Company entered into a three-year
employment agreement with its President, which is to become
effective upon the closing of Bridge Financing of the Company.
The agreement provides for an annual base salary of $200,000,
plus a $50,000 bonus during any year in which the Company
meets the minimum target for release of Program Shares (Note
21c) for such year. If such target for any given year is not
met, the president will be required to convert his Class B
ordinary shares with a market value of $ 50,000 into deferred
shares.
The Company has paid to the President and a member of his
family salaries and related charges amounting to adjusted NIS
367 thousands and NIS 1,076 thousands and NIS 1,104 thousands
for the years ended December 31, 1996, 1997 and 1998,
respectively.
b. Employment agreement with the Company's Chairman
In December 1998 the Company entered into an employment
agreement with its Chairman of the Board, effective as of
January 1, 1999, and expiring on December 31, 2003. The
agreement provides for an annual base salary of $350,000 and a
bonus compensation equal to $50,000, for each $1,000,000 of
net income for such fiscal year (determined according to U.S.
GAAP in the Company's audited financial statements). The
agreement contains customary confidentiality and non-complete
provisions. If there is a change in the control of the
Company, as defined in the agreement, and the employment of
the Chairman 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.
The Company, through its subsidiary, has paid to the Chairman
of the Board, salaries and related charges amounted to NIS
-none, NIS 451 thousands and NIS 763 thousands for the years
ended December 31, 1996, 1997 and 1998, respectively.
c. Rehovot project
In March 1997 the Company was awarded rights to develop a
parcel of land of approximately 77,000 sq.m. in consideration
of NIS 2 million. Under the development agreement signed in
July 1998 between the Company and the Israeli Land Authorities
(ILA), the Company is responsible of the evictions and is
committed to complete the development plan and the project by
March 2002. In June 1997, the Company, through its foreign
subsidiary, has sold to 13 private US investors ("American
Entity") a 55% interest of the project in consideration of
$6,000,000 of which $3,000,000 was paid in December 1997; the
remaining balance is covered by promissory notes, bearing an
annual interest rate of 8.5% and payable in December 2003. The
American Entity includes the Chairman of the Board and eight
members of the Company's U.S. Counsel, who acquired a 3.2% (in
consideration of $350,000) interest and a 15.6% (in
consideration of $1,700,000) interest in the total development
rights, respectively.
F-46
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES (continued)
c. Rehovot project (continued)
The Company and the American Entity signed also a joint
venture agreement ("the Partnership") for the construction of
the project. According to the joint venture agreement the
Company will receive 9.09% of the Partnership's profit as
entrepreneur's fee. The remaining partnership's profits will
be allocated as follows:
i. The first $9,000,000 of the net Partnership profits
shall be allocated to the American Entity.
ii. The remaining net Partnership profits shall be
allocated to the partners on a pro rata basis in the
Partnership.
Partnership losses shall be allocated to the partners on a pro
rata basis in the partnership. The American Entity is also
required to prepay the principal amount of the promissory
notes in an amount equal to their pro rata share of any
partnership distributions.
The above transaction was reflected in the 1997 consolidated
financial statements as a related party transaction.
d. Germany and Russian project
In April 1997 the Company acquired through its Dutch
subsidiary A.B. Stone B.V. ("AB Stone") all the shares of
STIPULA I B.V. ("STIPULA"), a Dutch company in consideration
of $2,000,000. STIPULA is engaged in a joint venture with
Engel in a project in Germany for the construction of
approximately 250 residential units and in another joint
venture with two Israeli companies in a project in Russia to
erect an office building. In 1997, the Company provided a loan
to STIPULA of $1,500,000 in order to complete the acquisition
of 50% interest in the project in Germany. In September 1997
AB Stone sold 50% of its share in STIPULA to an unaffiliated
Israeli Company ("UIC") traded on the Tel Aviv Stock Exchange
in consideration of $3,300,000 of which $1,800,000 was paid in
September 1997 and $750,000 in April 1998. The remaining
balance is to be paid by September 1999.
This transaction was executed with UIC in which the father of
the Company's CFO is holding approximately 25% interest in
UIC, is acting as Chairman of UIC Board and the Company's CFO
is a member of the Board of UIC.
The above transaction was also reflected in the 1997
consolidated financial statements as a related party
transaction.
F-47
<PAGE>
GENESIS DEVELOPMENT AND CONTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 27:- TRANSACTIONS WITH RELATED PARTIES (continued)
e. Consulting agreement with American Entity (see c above)
Pursuant to consulting agreement became effective January
1998, the Company retained the American Entity as a
consultant which possesses the know-how, experience and the
financial and economic ability to facilitate the successful
completion of the project in Rehovot, for the period of 6
years.
The Company shall pay to the American Entity a compensation
at the rate of $175 per hour for services rendered. The
minimum compensation payable shall be $20,000 per month.
In 1998, the Company paid $360,000 for the services rendered
by the American Entity.
f. Rishon Le-Zion project:
During the period from April to November 1998 the Company
provided consulting and financial management services to UIC
for the acquisition of an Income-Producing Residential
property in Rishon Le-Zion and for the achievement of a
long-term lease agreement with the Ministry of Absorption in
consideration of $1,400,000.
The above transaction was reflected in the 1998 financial
statements as a related party transaction (see d above).
The Company was also engaged to renovate the above property
to be executed in 1999 in consideration of $2,500,000.
g. Claim against an Israeli Bank:
The Company and its principal shareholders filed a claim
against an Israeli Bank which failed to finance the winning
bid in a tender to acquire a controlling interest in one of
the three largest oil, energy and real estate holding
company in Israel. As agreed with the principal
shareholders, the Company will not participate in legal
costs and will be entitled to 5% of the claim results, if
any.
F-48
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 28:- SUBSEQUENT EVENTS
a. Loan to UIC:
On March 25, 1999, the Company has granted to UIC a loan of
$3,000,000 bearing interest of the Libor and payable in March
2004. The loan is secured by a guarantee of UIC's foreign
subsidiary, by a lien on shares of STIPULA in which UIC's
foreign subsidiary is holding 50% interest and by a floating
charge on UIC's assets.
UIC is entitled to pre-pay at any time the entire loan or
partly without penalty. The Company shall request the early
pre-payment under certain events. In this case, the Company
will be entitled to convert the loan into ordinary shares of
UIC at the rate of one ordinary share for one dollar.
b. Allotment of 850,000 Class A Ordinary shares:
On May 4, 1999 the Board of Directors decided that the Company
will issue 850,000 Class A Ordinary shares as a private
placement at a price per share equal to $ 1 per share. The
shares will be issued as soon as practicable and will be
registered for trading within 120 days of the date hereof.
c. Merger:
On May 20, 1999 the Company and Internet Cable Corporation
("ICC"), a broadband internet provider, announced the
execution of a memorandum of understanding pursuant to which
the shareholder of ICC 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 Shareholders of ICC, after giving effect to this
transaction, will own approximately 59% of issued and
outstanding common stock of the Company and, in addition, will
receive warrants to purchase our additional 8 million shares
exercisable at $2.375.
The transaction is subject to, among other things, appropriate
due diligence, execution of definitive agreements, approval of
both board of directors and shareholders meeting and fairness
opinion letters. The memorandum of understanding has been
presented to and approved by the board of directors of ICC and
the Company.
d. Option to Engel
On June 30, 1999, the Company has granted to Engel the option
to acquire the entire shares or partly of a subsidiary which
owned the Income-Producing Residential Property which will
contain approximately 200 studio apartments (See note 13). The
consideration was not negotiated. The option is valid for 90
days until September 30, 1999.
F-49
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
e. Issuance of shares related to the Merger
In May 1999 the Company entered into an agreement with
consultants for the financial advisory services in connection
with the Company's proposed merger with ICC, pursuant to which
the consultants will be issued additional 34,783 Class A
Ordinary Shares upon the occurrence of certain events, in
addition to 26,087 Class A Ordinary Shares issued in May 1999.
In June 1999 the Company entered into an agreement with an
unrelated company, which initiated the merger transaction
between the Company and ICC, pursuant to which 200,000 Class A
Ordinary Shares will be issued to such unrelated company upon
consummation of the merger.
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON THE
FINANCIAL STATEMENTS
a. The consolidated financial statements of the Company conform
with accounting principles generally accepted in Israel, which
differ in certain significant respects from those followed in
the United States, as described below:
1. Effect of inflation:
The Company, in accordance with the Israeli GAAP,
comprehensively includes the effects of price level changes
in the accompanying financial statements as described in
Note 2a. Such Israeli accounting principles measure the
effects of price level changes in the inflationary Israeli
economy and, as such, this is considered a more meaningful
presentation than financial reporting based on historical
cost for Israeli and U.S. accounting purposes. As permitted
by the U.S. Securities and Exchange commission rules for
foreign private issuers whose financial statements
comprehensively include the effects of inflation, price
level adjustments have not been reversed in the
accompanying reconciliation of Israeli accounting
principles to U.S. accounting principles.
2. Revenue recognition:
According to the Israeli GAAP, the Company recognizes
revenue as follows:
a) Completed contract method
Revenue from projects built for sale is recognized on
the completed contract method when both of the
following conditions have been met:
- at least 90% of the project has been completed, and
- at least 75% of the units in the project have
been sold.
F-50
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
ON THE (continued)
Under the U.S. GAAP the completed contract accounting
is acceptable:
-When financial position and results of operations
would not differ significantly from those that would
result from using percentage-of-completion accounting.
-When there are inherent hazards relating to contract
conditions or general factors that would raise
questions about a company's ability to accurately
estimate a contract.
b) Percentage of completion method:
Revenue from fixed prices construction contracts, and
from buildings where all units have been sold, is
recognized on the percentage of completion method.
Revenue is recognized where at least 25% of the project
has been carried out.
According to U.S. GAAP, the percentage-of-completion method
is applicable when all of these conditions are met:
- The contractor can make reasonably dependable estimates
- The contract includes provision that specify both
parties' enforceable rights regarding goods and
services to be provided as received, consideration to
be exchanged, and the manner and terms of settlements.
- Both buyer and contractor can be expected to satisfy
their obligation under the contract terms.
Earned revenue is the amount of gross profit earned on a
contract for a period plus the costs incurred on the
contract during the period. Cost of earned revenue is the
cost incurred during the period. Gross profit earned on a
contract is computed by multiplying the total estimated
gross profit on the contract by the percentage of
completion. The percentage of completion is determined by
measuring progress toward completion in terms of cost
incurred to date to estimated total contract costs. When
the current estimates of total contract revenues and
contract cost indicate a loss, a provision for the entire
loss on the contract is recognized.
The percentage-of-completion is also applicable if
individual units in condominium projects are being sold
separately and all following criteria are met:
- Construction is beyond a preliminary stage
(construction is not beyond a preliminary stage if
engineering and design work, execution of construction
contracts, site clearance and preparation, excavation and
completion of the building foundation are incomplete).
- The buyer is committed to the extent of being unable
to require a refund except for non-delivery of the unit.
- Sufficient units have already been sold to assure
that the entire property will not revert to rental
property.
- Sales prices are collectible.
- Aggregate sales proceeds and costs can be reasonably
estimated.
F-51
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON THE
FINANCIAL STATEMENTS (continued)
Certain Company's projects are beyond the preliminary
stage, but not beyond the completion of 25% of those
projects.
3. Accrued severance pay, net:
The amounts funded in regard to liabilities in respect of
employee rights upon retirement are presented as a
deduction from the liabilities in Note 14. Whereas
according to U.S. GAAP, such amounts funded would be
presented in the balance sheet as long-term assets.
4. Treatment of Program Shares under Deference Program
Under Israeli accounting principles, the Deference Program
(see Note 21c) does not require the recognition of
compensation expense. The Company has decided not to adopt
the measurement requirements of FAS No. 123 for purposes of
this reconciliation. However, for the purpose of this
reconciliation between Israeli GAAP and U.S. GAAP (APB
Opinion No. 25), the Deference Program arrangement is
accounted for as a variable stock award plan. Therefore,
the release from the Deference Program of the Program
Shares held by officers, directors and employees of the
Company is deemed compensatory. Accordingly, compensation
expenses will be measured based on the fair value of the
shares at each balance sheet date for the period or periods
during which such shares are, or become probably of being,
released from Deference program. The total compensation
expense will be amortized over the vesting period.
The Company attained in 1997 all of the earnings thresholds
required for such release of all Performance shares. The
compensation expense was calculated on the basis of the
market price of the Company's stock as of December 31,
1997.
5. Consideration of Foreign subsidiaries
Under Israeli GAAP, the results of operations for the year
are translated into NIS at the rate of exchange prevailing
at the end of the year for each foreign currency.
Under U.S. GAAP, such translation into NIS is calculated
using the annual average rate of exchange for each foreign
currency.
F-52
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON THE
FINANCIAL STATEMENTS (continued)
6. Treatment of marketable securities:
Marketable securities designated for sale in short-term are
carried at market value, which is not materially different
from their cost.
Under U.S. GAAP, these investments have been designated as
marketable securities available for sale and recorded in
the balance sheet at their current market value. Unrealized
gains and losses are recorded in a separate component of
shareholders' equity.
7. Earnings (Loss) per share:
Under Israeli GAAP, earning (loss) per share is computed
based on the weighted average number of Ordinary shares
outstanding during the period, including Program Shares.
Under U.S. GAAP, the Program Shares under the Deferrence
Program are excluded from the weighted average number of
shares outstanding during each period presented. For
purposes of computing earnings per share, the Program
shares are treated as unissued shares through December 31,
1997 as their issuance is contingent upon the Company's
attainment of specified earning levels.
As stated above, the Performance shares were released and
the computation of earning per share for the year ended
December 31, 1997 is based on the weighted average number
of ordinary shares outstanding including Program shares
released.
8. Extraordinary item
Under Israeli GAAP, the authorization of Bridge notes
issuance costs is included in financial expenses.
Under U.S. GAAP the above amortization should be presented
as an extraordinary item and the 1997 figures were
reclassified.
9. Comprehensive income
Comprehensive income included all transactions, events and
circumstances that cause a change in equity from sources
other than investments by owners or distribution to owners.
F-53
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29: - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON
THE FINANCIAL STATEMENTS (continued)
b. The effect of the material differences between the Israeli and
the U.S. GAAP of the above mentioned items on the financial
statements is as follows:
1. On consolidated statements of income.
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------------------
1996 1997 1998 1998
------------ ------------ ----------- ---------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
------------------------------------------ ---------------
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Net income as reported,
according to the Israeli GAAP 53 25,209 2,443 587
Unrealized gain on marketable
securities (107) (201) 305 73
Estimated earnings on projects beyond
a preliminary stage and less 25% of
the construction wage 287 479 (888) (213)
Compensation expense related to
performance shares released - (30,650) - -
Reclassification of amortization of
Bridge notes issuance costs - 916 - -
Adjustments from foreign currency
translation - - 28 7
------------ ------------ ----------- ---------------
Net income (loss) according to the U.S.
GAAP before extraordinary items 258 (4,247) 1,888 454
Extraordinary item:
Amortization of Bridge Notes issuance
costs - (916) - -
============ ============ =========== ===============
Net income (loss) according to the
U.S .GAAP 258 (5,163) 1,888 454
============ ============ =========== ===============
Basic earnings (loss) per ordinary share:
As reported, according to the Israeli
GAAP 0.02 4.94 0.46 0.11
============ ============ =========== ===============
As per the U.S. GAAP
Income (loss) before extraordinary
item 0.76 (0.84) 0.36 0.09
Extraordinary item - (0.18) - -
------------ ------------ ----------- ---------------
Net income (loss) 0.76 (1.02) 0.36 0.09
============ ============ =========== ===============
Weighted average number of shares
outstanding under the U.S. GAAP 340,000 5,085,754 5,300,000 5,300,000
============ ============ =========== ===============
</TABLE>
F-54
<PAGE>
<TABLE>
<CAPTION>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29: - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON
THE FINANCIAL STATEMENTS (continued)
2. On Balance Sheet Items.
December 31, 1997 December 31, 1998 December 31,
1998
----------------------------------- ------------------------------ -------------
Convenience
As As per As As per translation
reported Adjustment U.S. GAAP Reported Adjustment U.S. GAAP (Note 2b)
-------- ---------- --------- -------- ---------- ---------- ------------
Adjusted NIS (In thousands) U.S.$
-------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost and estimated earnings in excess of
billings on uncompleted contracts (1) 17,963 (153) 17,810 15,235 (81) 15,154 3,643
Severance pay funds (2) - 214 214 - 211 211 51
Total assets 160,014 61 160,075 271,385 130 271,515 65,268
Billings in excess of costs and estimated
earnings on uncompleted contracts (1) 3,427 (764) 2,663 598 - 598 144
Severance pay liability (2) 85 214 299 182 211 393 95
Share capital and Paid-in capital (3) 36,765 30,650 67,415 36,765 30,650 67,415 16,206
Unrealized gain on marketable securities - 308 308 - 13 13 3
Accumulative foreign currency translation
adjustments (4) - - - 3,103 (28) 3,075 739
Retained earnings (accumulated loss) 24,148 (30,347) (6,199) 26,591 (30,716) (4,125) (992)
Total Shareholders' Equity 60,913 611 61,524 66,459 (81) 66,378 15,956
(1) Recognition of estimated earnings on projects beyond a preliminary
stage, but not beyond the completion of 25% of those projects.
(2) Amounts invested with severance pay funds shown separately.
(3) Compensation expense related to performance shares released.
(4) Adjustment of foreign currency translation.
</TABLE>
F-55
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29: - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON
THE FINANCIAL STATEMENTS (continued)
3. Additional disclosure regarding comprehensive income:
a. Comprehensive income
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------
1996 1997 1998 1998
------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Convenience
translation
(Note 2b)
Adjusted NIS U.S.$
---------------------------------------------- ----------------
(In thousands)
Net income (loss) according to
U.S. GAAP 258 (5,163) 1,888 454
------------- ------------- ------------ ----------------
Other comprehensive income, after tax:
Adjustments from translations of
financial statements of investees - - (28) (7)
Unrealized gains from security 107 201 (305) (73)
Related tax effect allocated to other
comprehensive income - - 100 -
------------- ------------- ------------ ----------------
Total other comprehensive income,
after tax 107 201 (233) (80)
------------- ------------- ------------ ----------------
Total comprehensive income (loss) 365 (4,962) 1,655 374
============= ============= ============ ================
b. Related tax effects allocated to each component of other
comprehensive income:
Tax
Before-tax benefit Net-of-tax
amount (expense) amount
-------------- -------------- --------------
Adjusted NIS in thousands
-----------------------------------------------------
For the year ended 1998:
------------------------
Foreign currency translation adjustments (28) 10 (18)
-------------- -------------- --------------
Unrealized holding gains arising during
the period 13 (4) 9
Less: reclassification adjustment for gains
realized in net income (318) 94 (224)
-------------- -------------- --------------
Net unrealized gains (305) 90 (215)
-------------- -------------- --------------
Other comprehensive income (333) 100 (233)
============== ============== ==============
</TABLE>
F-56
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29: - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON
THE FINANCIAL STATEMENTS (continued)
b. Related tax effects allocated to each component of other
comprehensive income (continued)
<TABLE>
<CAPTION>
Tax
Before-tax benefit Net-of-tax
amount (expense) amount
-------------- -------------- --------------
Adjusted NIS in thousands
-----------------------------------------------------
<S> <C> <C> <C>
For the year ended 1997:
-----------------------
Foreign currency translation adjustments - - -
-------------- -------------- --------------
Unrealized holding gains arising during
the period 308 - 308
Less: reclassification adjustment for gains
realized in net income (107) - (107)
Net unrealized gains 201 - 201
-------------- -------------- --------------
Other comprehensive income 201 - 201
============== ============== ==============
Tax
Before-tax benefit Net-of-tax
amount (expense) amount
-------------- -------------- --------------
Adjusted NIS in thousands
-----------------------------------------------------
For the year ended 1996:
-----------------------
Foreign currency translation adjustments - - -
-------------- -------------- --------------
Unrealized holding gains arising during
the period 107 - 107
Less: reclassification adjustment for gains
realized in net income - - -
Net unrealized gains 107 - 107
-------------- -------------- --------------
Other comprehensive income 107 - 107
============== ============== ==============
</TABLE>
F-57
<PAGE>
GENESIS DEVELOPMENT AND CONSTRUCTION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 29: - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON
THE FINANCIAL STATEMENTS (continued)
c. Accumulated other comprehensive income balances:
<TABLE>
<CAPTION>
Accumulated
Foreign Unrealized other
currency gains on comprehensive
items securities income
------------- -------------- ----------------
Adjusted NIS in thousands
---------------------------------------------
<S> <C> <C> <C>
Balance (deficit) as of January 1, 1996: - - -
Current period change - 107 107
---------- ----------- -----------
Balance (deficit) as of December 31, 1996: - 107 107
Current period change - 201 201
---------- ----------- -----------
Balance (deficit) as of December 31, 1997: - 308 308
Current period change (18) (215) (233)
---------- ----------- -----------
Balance (deficit) as of December 31, 1998 (18) 93 75
========== =========== ===========
</TABLE>
4. Additional disclosure regarding marketable securities:
The following is a summary of available-for-sale securities as
presented on December 31, 1998 pursuant to provisions of FASB Statement No. 115:
<TABLE>
<CAPTION>
As reported As reported
Gross in these in these
unrealized financial Estimated financial
Cost gain statements fair value statements
------ ---------- ------------ ---------- ------------
Convenience
translation
(Note 2b)
Adjusted NIS U.S. $
-------------------------------------------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Available-for-sale
securities:
Short-term debentures 131 (9) 322 322 77
Shares 132 22 154 154 37
------- ------ ------- ------ -----
463 13 476 476 114
======= ====== ======= ======
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Sequential Page No.
- ------------- ----------- -------------------
10.1 Employment Agreement
10.2 General Managers Option Plan
23(a) Consent of Independent Auditors
EMPLOYMENT AGREEMENT
This Agreement, is entered into in Hnifa, Israel as of December 24, 1998
between
GENESIS DEVELOPMENT AND CONSTRUCTION LTD.
of 10 Hashikana Street, Haifa
(hereinafter referred to as "the Company")
and
MR. ELI ARAN
residing at 248 Ridge Road,
New City, New York 10956
(hereinafter referred to as "the Employee")
WHEREAS the Company is engaged in the business of development and construction
of private and public properties; and
WHEREAS the Employee possesses knowledge and experience in the fields in which
the Company is engaged; and
WHEREAS the Employee has been engaged in the management and operation of the
Company as its Chairman of the Board; and
WHEREAS the Company wishes to enter into an agreement with the Employee
governing the terms and conditions of his employment; and
WHEREAS the Employee is willing to be employed on the conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements herein
contained and set forth, and for other good and valuable consideration, made
over by each party to the other, the receipt of which is hereby acknowledged, it
is covenanted and agreed as follows:
1. Employment
----------
The Company hereby employs the Employee as Chairman of the Board of
the Company, and the Employee shall have such other commensurate
responsibilities, duties and authority as may from time to time be
assigned to him by the Company's Board of Directors, and the Employee
hereby accepts such employment with the Company in accordance with the
terms and conditions set forth in this Argreement.
2 Terms of Agreement
------------------
The term of this Agreement shall commence January 1, 1999 and end on
December 31, 2003, subject to the provisions for termination as set
forth in Section 12 hereinbelow (hereinafter referred to as "the
Employment Term").
<PAGE>
3. Obligations of the Employee
---------------------------
3.1 During the Employment Term, the Employee shall perform his duties and
exercise his authority as Chairman of the Board of the Company, and
the Employee shall have such other commensurate responsibilities,
duties and authority as may from time to time be assigned to him by
the Company's Board of Directors, including responsibility for the
operation of the Company and its daily management, in accordance with
the policies, procedures and directors of the Board of Directors of
the Company, and subject to any applicable law and the Company's
Articles of Association.
3.2 During the Employment Term, the Employee will devote substantially all
of his productive time, efforts, ability and attention toward
devotedly and fulfilling his obligations and duties to the Company in
accordance with the objectives of the Company, as they are defined by
the Company's Board of Directors, from time to time.
4. Place of Employment
--------------------
4.1 The Employee's regular place of employment shall be in the area of New
City. New York, United States of America, and will include travel and
periods of stay abroad according to the requirements of the Company as
determined by the Company' s Board of Directors, and other
requirements resulting from the Company being headquartered in Haifa,
Israel.
5. Compensation
------------
5.1 Annual Salary
-------------
During the Employment Term, the Employee will be compensated at
an annual gross base salary of U.S, $350,000 (three hundred fifty
thousand U .S. dollars) (hereinafter: "Base Salary"), payable in
U.S. dollars. The Employee's salary is subject to such increases
during the Employment Term as may be approved at any time or from
time to time by the Company, according to Companies Ordinance and
the Company's Articles of Association.
Until otherwise resolved by the Company's Board of Directors, the
Employment annual salary for each year of the Employment Term
shall be paid in 12 consecutive and equal monthly payments (each
payment for the proceeding month).
5.2 Bonus
-----
The Employee shall receive upon the publication of the Company's
annual financial statements for the preceding year, commencing
with the fiscal year ending December 31, 1999 and terminating
after the publication of the Company's annual financial
statements for the fiscal year ending December 31, 2003, bonus
compensation equal to U.S. $50,000 (fifty thousand U.S. dollars),
payable in U.S. dollars, for each U.S. $1,000.000 of net income
for such fiscal year (determined according to U.S. GAAP in the
Company's audited financial statements).
The exclusive decision as to the amount of net income in the
Company's audited financial statements shall be made by the
Company's independent accountants, as they may be from time to
time, and their decision shall be final and binding on the
Company and the Employee.
2
<PAGE>
6. Automobile
----------
The Company shall provide the Employee with two automobiles of a make and
model similar to that which he is using at the time of the execution of
this Agreement for his exclusive use for business and personal travel. The
Company will pay all expenses of maintenance and use of the automobiles
excluding traffic violation fines. The Employee's Base Salary shall be
grossed up so as to include any tax applicable to the Employee because of
the use of the automobiles, resulting in no adverse affect on the employees
net income.
At the termination of the employment, the Employee shall be entitled to
purchase such automobiles for a consideration equal to its depreciated
value at the Company's books.
7. Employee's Insurance
--------------------
7.1 The Company will pay on the Employee's behalf at the Company's sole
cost and expense a sum equal to thirteen and one-third percent ( 13
1/3%) of the Employee's current monthly Base Salary each month for
executives' insurance which will be allocated as follow:
8 1/3% for a severance pay fund. 5% for a provident fund.
7.2 The Employee will contribute a sum equal to five percent (5%) of his
current monthly Base Salary for the insurance for the provident fund
in accordance with custom and practice.
7.3 The Company will pay at its sole cost and expense a reasonable sum
equal to the percent of the Employee's current monthly Base Salary as
determined by the insurance company for disability insurance.
7.4 All payments provided for in this Section 7 will be made in such
amounts and in such timely fashion as to guarantee the Employee the
full rights and benefits of such insurance at all times during the
Employment Term and thereafter in accordance with law and practice.
7.5 During the Employment Term, ownership of all accounts and insurance
policies provided in this Section 7 shall be in the name of the
Company.
7.6 Anything contained herein to the contrary notwithstanding, if the
employee-employer relationship is terminated by either party,
including termination resulting from death or severe disability of the
Employee as stated in Section 12.2 herein, the accounts and/or
policies provided for in this Section 7, including the provident and
severance pay funds, will be released to the Employee and transferred
to his name, effective as of the date of such termination, provided
that in cases where under Israeli applicable law or court rulings the
Employee is not entitled to severance pay the Company may choose not
to transfer to the Employee such severance pay funds. The amount of
severance pay to which the Employee shall be entitled shall be the
greater of (a) the amount accumulated in the policy account for
severance pay and (b) the amount resulting from multiplying (i) the
Employee's years of service to the Company, by (ii) the Employee's
last monthly salary (including all benefits and incentive
compensation). The transfer to the Employee of the amount accumulated
in the policy account for severance pay shall be in lieu of severance
pay which the Employee is entitled to receive from the Company under
the Severance Pay law, 1963, provided that the Company shall
supplement and pay the Employee any difference between the amount
accumulated in the severance pay policy and the amount he is actually
owed as set forth in this subsection 7.6.
3
<PAGE>
7.7 The Employee's Base Salary shall be grossed up so as to include any
tax applicable to the Employee because of the benefits included in
this Section 7, resulting in no adverse affect on the Employee's net
income.
8. Vacation and Sick Leave
-----------------------
8.1 The Employee shall be entitled to an annual vacation of one (1) month
per year with full salary. Annual vacations may be accumulated to the
extent permitted by law.
8.2 The Employee shall be entitled to one (1 ) month per year of sick
leave. Sick leave may be accumulated to the extent permitted by law.
9. Expense Account and Telephone
-----------------------------
9.1 The Employee shall be entitled to receive payment and/or reimbursement
of his reasonable ordinary and necessary business expenses which are
incurred by him on behalf of the Company or in the promotion of its
interests in Israel or abroad based upon receipts for such expenses
delivered to the Company by the Employee.
9.2 The Company shall pay the Employee's reasonable telephone bills,
including fax and mobile phones.
9.3 The Employee's Base Salary shall be grossed up so as to include any
tax applicable to the Employee because of the above benefits,
resulting in no adverse affect on the Employee's net income.
10. Medical Insurance
-----------------
The Company will pay in full at the Company's sole cost and expense all
medical insurance expenses of the Employee in accordance with a customary
medical insurance plan of the Employee's choice. The Employee's Base Salary
will be Crossed up so as to include any tax incurred by the Employee with
regard to such payment, if any.
11. Change In Control
-----------------
11.1 For purposes hereof, a "change in control" shall be defined as:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13D-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then
outstanding Class A Ordinary Shares of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of Directors (the "Outstanding Company
Voting Securities"); provided. however. that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (1) any acquisition directly from the Company, (2)
any acquisition by the Company, (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (4) any acquisition by
any corporation pursuant to a transaction which complies with clauses
(A), (B) and (C) of subsection (iii) below; or
4
<PAGE>
(ii) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Incumbent Board;
provided, however, that any individual becoming a director subsequent
to the date hereof whose election or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Incumbent Board;
or
(iii) Consummation of a reorganization, merger, consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly more than 60% of
respectively, the then outstanding Ordinary Shares (or its equivalent)
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership
immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the
case may be, (B) no Person (excluding any employee benefit plan (or
related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20%
or more of, respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed
prior to the Business Combination, and (C) at least a majority of the
members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of
the Incumbent Board, providing for such Business Combination; or (iv)
approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
11.2 Upon the occurrence of a Change in Control and the Company ceases to
use Employee's services specified in Section 3 above, the Company
shall pay the Employee, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum
equal to the greater of the payments due for the remaining term of the
Agreement or three (3) times the Employee's then current annual
compensation as an employee of the Company. Such annual compensation
shall include any bonuses, incentive compensation, pension and profit
sharing plan benefits, severance payments, retirement benefits.
director or committee fees and fringe benefits paid or to be paid to
the Employee for the current fiscal year. At the election of the
Employee, which election is to be made within thirty (30) days of the
Change in Control, such payment may be made in a lump sum or paid in
equal monthly installments during the thirty-six (36) months following
the Employee's termination. In the event that no election is made,
payment to the Employee will be made on a monthly basis during the
thirty-six (36) months following the Employee's termination.
5
<PAGE>
11.3 All restrictions on restricted stock of the Company then held by the
Employee will lapse immediately, incentive stock options and stock
appreciation rights then held by the Employee will become immediately
exercisable, and any performance shares or units then held by the
Employee will vest immediately, in full, in the event of a Change in
Control.
11.4 Upon the occurrence of a Change in Control, the Employee will be
entitled to receive benefits due him under or contributed by the
Company on his behalf pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Company on the Employee's behalf to the extent such
benefits are not otherwise paid to the Employee under a separate
provision of this Agreement.
11.5 Upon the occurrence of a Change in Control followed by the Employee's
termination of employment, the Company will cause to be continued
life, medical, dental and disability coverage substantially identical
to the coverage maintained by the Company for the Employee prior to
his severance, except to the extent that such coverage may be changed
in its application for all Company employees on a nondiscriminatory
basis. Such coverage and payments shall cease upon the expiration of
thirty-six (36) full calendar months following the Date of
Termination.
11.6 Any and all payments to be made to the Employee under this Agreement
or otherwise as a result of a Change in Control whether in the nature
of severance payments, liquidated damage payments, compensation or
other payments (all of the foregoing being hereinafter referred to as
"Change in Control Payments"), shall be made free and clear of, and
without deduction or withholding for or on account of, any tax which
may be payable under Section 4999 of the Internal Revenue (the "Code")
Code of 1996 or similar provision under Israeli law, now of hereafter
imposed. levied, withheld or assessed (such amounts being hereinafter
referred to as the "Excise Taxes"). If notwithstanding the foregoing
provision. any Excise Taxes are withheld from any Change in Control
payments made or to be made to the Employee the amounts so payable to
the Employee shall be increased to the extent necessary to yield to
the Employee (after payment of any tax which may be payable under
Section 4999 of the Code, or similar provision under Israeli law) the
full amount which he is entitled to receive pursuant to the terms of
this Agreement or other wise without regard to liability for any
Excise Taxes and any other Federal, State, FICA/Medicare and
unemployment taxes thereon, or similar Israeli measures. In the event
any Excise Taxes are now or hereafter imposed, levied, assessed, paid
or collected with respect to the Change of Contro1 payments made or to
be made to the Employee, Excise Taxes and any other Federal, State,
FICA/Medicare and unemployment taxes thereof shall be paid by the
Company or, if paid by the Employee, shall be reimbursed to the
Employee by the Company upon its receipt of satisfactory evidence of
such payment having been made.
12. Termination of Agreement
------------------------
12.1 In the event that the Board of Directors of the Company terminates
this Agreement prior to the end of the Employment Term, other than (i)
for ground entitling the Company under Israeli law or court rulings to
terminate this Agreement without paying the Employee severance pay,
(ii) for willful misconduct or acts in bad faith performed by the
Employee with respect to his employment to the Company, (iii) for
conviction of the Employee of committing a felony or fraud resulting
in adverse financial effect on the Company, (iv) for conviction of a
felony involving moral turpitude or (v) pursuant to Section 11 of this
Agreement; the Company shall pay to the Employee an amount equal to
three (3) times the Base Salary. At the election of the Employee,
which election is to be made within thirty (30) days of the date of
termination, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following the
Employee's termination. In the event no election is made, payment to
the Employee will be made on a monthly basis during the thirty-six
(36) months following the Employee's termination.
6
<PAGE>
12.2 In case of the death of the Employee or in case the Employee suffers
severe disability preventing him from performing his duties under this
Agreement, this Agreement will automatically be terminated.
12.3 At the end of the Employment Term, the Employee shall transfer his
position to his replacement in an orderly fashion and shall deliver to
the Company all documents, information and all other materials in his
possession or that were prepared by him relating to his work up to the
date that he ceases to be employed by the Company.
13. Confidentiality of Information
------------------------------
During the Employment Term and for all unlimited period of time subsequent
to the end of the Employment Term, the Employee shall preserve the
confidentiality of all information related to the business and activities
of the Company, and shall not reveal any such information to a third party
of any kind.
14. Non-Competition
---------------
14.1 The Employee agrees that so long as he is actively employed by the
Company, and for the twelve (12) month period following the date of
termination of employer-employee relationship between the Employee and
the Company (hereinafter: "the Non-Compete Period"), he will not
compete, in person or via any other entity, with the business of the
Company as it is constituted from time to time.
14.2 During the Non-Compete Period the Employee will not employ, whether
directly or indirectly, any individual employed at such time by the
Company, nor shall he employ or retain the services of any of the
Company's subcontractors, suppliers or advisors in a way competing
directly with the business of the Company.
14.3 Should any of the non-competition provisions contained in this Section
14 be determined as unreasonable by an Israeli court, such Section
shall not be completely cancelled, but its terms shall be narrowed in
a manner considered reasonable by such court.
15. Miscellaneous
-------------
15.1 The Employee shall not have the right to transfer his rights and
obligations under this Agreement to any third party whatsoever, except
to a corporation wholly owned by the Employee, or any other entity
controlled by him, so long as the corporation or other entity makes
the Employee' s services available to the Company on its behalf in
order to fulfill the Employee's commitments pursuant to this Agreement
and provided the Employee retains full autonomy in making resolutions
relating to his services to the Company.
15.2 All of the Employee's Base Salary and other payments owed to him in
accordance with this Agreement, as they exist at the time of his
death, will be paid, in the event of his death, to his heirs,
executors, administrators and/or assigns.
7
<PAGE>
15.3 The Employee shall cooperate with the Company in all matters relating
to the issuance of a key-man life insurance policy regarding the
Employee for the benefit of the Company.
15.4 This Agreement shall be governed by the laws of New York, United
States of America.
Dated effective this _____ of _____________, 1998.
- ------------------------------- -----------------
GENESIS DEVELOPMENT AND MR. ELI ARAN
CONSTRUCTION LTD.
8
GENESIS DEVELOPMENT AND CONSTRUCTION LTD.
GENERAL MANAGERS OPTION PLAN
A. NAME AND PURPOSE
1. Name: This plan, as amended from time to time, shall be known as the
Genesis Development and Construction General Managers Option Plan (the
"Plan").
2. Purpose: The purpose and intent of the Plan is to provide incentives
and rewards to general managers of Genesis Development and
Construction Ltd. (the "Company") and any of its subsidiaries, to
encourage them to enter into and continue in the employ of the
Company, by providing them with opportunities to purchase Class A
Ordinary Shares, nominal value 0.1 New Israeli Shekels each (the
"Shares") of the Company, pursuant to this Plan, which was approved by
the Board of Directors of the Company (the "Board"), and thus as to
acquire an interest in the long term success of the Company.
Board believes that as such, the Plan will promote the interests of
the Company and its stockholders.
B. GENERAL TERMS AND CONDITIONS OF THE PLAN
1. Administration:
1.1 The Plan will be administered by the Board or by a committee appointed
by the Board (the "Committee"), which, if appointed, will consist of
such number of Directors of the Company as may be fixed, from time to
time, by the Board. If a Committee is not appointed, the term
"Committee", whenever used herein, shall mean the Board, unless
otherwise determined by the Company's Articles of Association. The
Board shall appoint the members of the Committee, may from time to
time remove members from, or add members to, the Committee and shall
fill vacancies in the Committee however caused.
1.2 The Committee shall select one of its members as its Chairman and
shall hold its meetings at such times and places as it shall
determine. Actions taken by a majority of the present members of the
Committee, at a meeting at which a majority of its members is present,
or approved in writing by all members of the Committee, shall be the
valid acts of the Committee. The Committee may appoint a Secretary,
who shall keep records of its meetings and shall make such rules and
regulations for the conduct of its business as it shall deem
advisable.
1
<PAGE>
1.3 Subject to the general terms and conditions of this Plan, the
Committee shall, have the full authority in its discretion, from time
to time and at any time, to administer the Plan and to exercise all
the powers and authorities either specifically granted to it under the
Plan or which it deems necessary, or advisable, or incidental, to the
administration of the Plan, including, without limitation, the
authority to determine (i) the persons ("Grantees") to whom options to
purchase Shares Option(s)") shall be granted and the number of Options
granted to each Grantee, (ii) the number of Shares to which an Option
may relate, (iii) the time or times at which the same shall be
granted, (iv) the schedule and conditions on which such Options may be
exercised and on which such Shares shall be paid for, including the
exercise price of an Option, (v) to what extent and under what
circumstances an Option may be settled, cancelled, forfeited,
exchanged or surrendered and (vi) to construe and interpret the Plan
and any Option.
1.4 The Committee may determine that any options granted pursuant to this
Plan would be non-transferable and non-assignable, or limit such
restriction to a period of time which will not exceed three (3) years
from the Date of Grant, and/or that the Shares underlying the Options
would not be transferable or assignable during a period of time which
will not exceed the later of (i) three (3) years from the Date of
Grant or (ii) one (1) year from the date of exercise of the Option.
Such restrictions, if any, must be described in the Grant Instrument
(as defined herein).
Subject to the terms of an Option, no transfer of an Option shall be
effective and bind the Company unless the Company shall have been
furnished with (i) a written notice of the transfer and (ii) a written
agreement by the transferee to comply with the obligations and duties
imposed on the Grantee according to this Plan and the applicable Grant
Instrument. The term "Grantee" shall include, mutatis mutandis, such a
transferee.
1.5 Subject to applicable laws, the Committee may, at any time and from
time to time, suspend, terminate, revise or amend the Plan in any
respect. In no event may any action of the Company alter or impair the
fights of a Grantee, without the Grantee's consent under any Option
previously granted to the Grantee.
2
<PAGE>
1.6 The Committee may, in its sole and absolute discretion, without
amendment to the Plan, accelerate the date on which any Option granted
under the Plan becomes exercisable, waive or amend the application of
Plan provisions with respect to exercise after termination of
employment or otherwise adjust any of the terms of such Option.
1.7 No member of the Board or of the Committee shall be liable for any act
or omission or determination made in good faith with respect to the
Plan or any Option granted thereunder.
1.8 The interpretation and construction by the Committee of any provision
of the Plan or of any Option thereunder shall be final and conclusive
unless otherwise determined by the Board.
2. Eligible Grantees:
The Committee, at its sole discretion, may grant Options to any general
manager of Company and/or its subsidiaries; provided that no Option shall
be granted to Eli Aran and Moshe Schnapp. Anything in this Plan to the
contrary notwithstanding, all grants of Options to shareholders, Directors
or "Office Holders" - as such term is defined in the Israeli Companies
Ordinance (New Version), 1983, as amended from time to time (the "Companies
Ordinance"), shall be authorized and implemented only in accordance with
the provisions of the Companies Ordinance or any other applicable law.
The grant of an Option to a Grantee hereunder, shall neither entitle such
Grantee to participate, nor disqualify him from participating, in any other
grant of options pursuant to this Plan or any other stock plan or stock
option plan of the Company or its subsidiaries.
3. Shares Subject to the Plan:
3.1 Shares Available for Options
The Company has reserved 1,000,000 authorized but unissued Shares for
purposes of the Plan subject to adjustments as provided in Section 3.2
hereof.
All Shares under the Plan, in respect of which the right hereunder of
a Grantee to purchase the same shall, for any reason, terminate,
expire or otherwise cease to exist, shall again be available for grant
through Options under the Plan.
3
<PAGE>
3.2 Adjustment Upon Changes in Capitalization
Upon the Occurrence of any increase or decrease in the number of
issued shares of the Company resulting from a stock split, reverse
stock split, combination or reclassification of shares or the payment
of a stock dividend (bonus shares) with respect to the Company's
shares, or rights offering or other substantially similar corporate
transaction or event, the Company shall make any and all equitable
changes or adjustments necessary and appropriate in order to prevent
dilution or enlargement of the rights of Grantees under the Plan,
relating to any or all of (1) the number and kind of Shares issued or
issuable in respect of outstanding Options, and (2) the number of
Shares which have been authorized for issuance under the Plan but as
to which no Options have yet been granted or which have been returned
to the Plan upon cancellation or expiration of an Option, and (3) the
Exercise Price relating to any Option. Such adjustments shall be made
by the Committee, whose determination in that respect shall be final,
binding and conclusive.
4. Grant of Options:
4.1 The Committee in its discretion may award to Grantees Options to
purchase Shares in the Company available under the Plan.
4.2 The effective date of the grant of an Option (the "Date of Grant")
shall be the date specified by the Committee in its determination
relating to the award of such Option. The Committee shall promptly
give the Grantee written notice of the grant of an Option.
4.3 Each Option Granted under the Plan shall be evidenced by a written
instrument signed by the Company and accepted by the Grantee, which
shall be accompanied by a copy of this Plan and shall contain such
provisions as the Committee, in its sole discretion, may deem
necessary or desirable (the "Grant Instrument").
By accepting an Option, a Grantee thereby agrees that the Option on
shall be subject to all the terms and provisions of this Plan and the
applicable Grant Instrument.
4.4 The Grant Instrument shall state, inter alia, the number of Shares
covered thereby, the dates when the Option may be exercised, the
Exercise Price, and such other terms and conditions as the Committee
at its discretion may prescribe, provided that they are consistent
with this Plan.
4
<PAGE>
5. Exercise Price:
The Committee, at its sole discretion, shall determine the exercise price
per share of the Options; provided that the exercise price per share shall
not be less than 70% of the average closing price, as reported by The
Nasdaq Stock Market, Inc., of the Class A Ordinary Shares during the 90
calendar days prior to the date of grant.
6. Exercise of Options:
6.1 Options shall be exercisable pursuant to the terms and conditions of
the Plan and the applicable Grant Instrument
6.2 The exercise of an Option shall be made by a written notice of
exercise (the "Notice of Exercise") delivered by the Grantee to the
Company at its principal executive office, to the attention of its
Secretary, no less than one business day in advance of the date of the
proposed exercise. The Notice of Exercise shall be accompanied by the
relevant Grant Instrument and shall specify the number of Shares with
respect to which the Option is being exercised, the date of the
proposed exercise and such other terms and conditions as the Committee
shall prescribe from time to time, and shall be signed by the Grantee.
Payment for the Shares purchased upon the exercise of an Option shall
be made on the date of such exercise by either of the following means:
in cash, by certified check or bank cashier's check payable to the
order of the Company or wire transfer to a bank account specified by
the Company, or such other method of payment acceptable and approved
by the Company.
6.3 An Option may be exercised for all or any portion of the Shares to
which it is exercisable at the time of such exercise. The partial
exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining unexercised portion thereof.
6.4 Exercise of an Option shall be for a whole number of Shares and no
fractional Shares shall be issued or delivered upon exercise of an
Option. The Committee shall determine whether cash, other Options, or
other property shall be issued or paid in lieu of such fractional
shares, if any, or whether such fractional shares or any fights
thereto shall be forfeited or otherwise eliminated.
6.5 Certificates for Shares purchased upon exercise of an Option should be
issued in the name of the Grantee and delivered to the Grantee as soon
as practicable following the date on which the Option is exercised.
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6.6 Without derogating from the rights and powers of the Committee under
Section 4 hereof, unless otherwise specified in the Grant Instrument,
each Option under the Plan shall be for a term of four (4) years
commencing on the Date of Grant.
Anything herein to the contrary notwithstanding, but without
derogating from the provisions of Section 7 hereof, if any Option has
not been exercised and the Shares covered thereby not paid for within
four (4) years after the Date of Grant (or any other period set forth
in the Grant Instrument), such Option and the right to acquire such
Shares shall terminate, and all interests and rights of the Grantee in
and to the same shall ipso facto expire.
6.7 In the event of the proposed dissolution or liquidation of the
Company, each Option shall be considered exercised prior to such
action, subject to the payment of the Exercise Price by the Grantee
within 30 days of receiving notice of such action from the Company or
in its behalf. In the event of a consolidation or the merger of the
Company with or into another corporation, each Option shall be
substituted by an equivalent option or stock of the Company's
successor corporation or a parent or subsidiary of such successor
corporation, or any other compensation determined by the Committee.
7. Termination of Employment:
7.1 In the event that the employment of a Grantee with the Company or its
subsidiaries shall be terminated for any reason other than those
specified in section 7.2 hereunder, then the Options granted to such
Grantee shall expire upon such termination,
7.2 In the event that the employment of a Grantee with the Company or its
subsidiaries shall be terminated by the Company without Cause (as
defined hereinafter) or for reason of Retirement, Disability (as
defined hereinafter) or death, then the Options granted to such
Grantee shall remain exercisable for the remainder of the term of the
Option.
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7.3 "Cause" shall mean (i) the willful and the continued failure by the
Grantee to perform his duties (including the duty of care and the
fiduciary duty as set forth in the Companies Ordinance) and
obligations to the Company or its subsidiaries (other than any such
failure resulting from Retirement or Disability as hereinafter
defined) or (ii) the willful engaging by the Grantee in misconduct
which is injurious to the Company. For the purpose of this section, no
act, or failure to act, on a Grantee's part shall be considered
"willful" unless done, or omitted to be done, by the Grantee in a
manner inconsistent with the standard of care which a reasonable
officer at his position would have applied in the circumstances,
and/or with lack of good faith and not in the best interest of the
Company. Notwithstanding the above, an act or omission by a Grantee
shall not be deemed "willful" if the Company had approved the action
or omission of the Grantee, in accordance to the provisions of the
Companies Ordinance including Sections 96-41 and 96-44 thereof.
"Disability" shall mean any physical or mental condition which
qualifies a Grantee for a disability benefit under the National
Insurance Law [Consolidated Version], 1995, as amended, and which
prevents the Grantee from continuing the work in his, or a comparable
position. Determination of a Disability shall be made by a physician
selected by the Grantee and approved by the Committee.
"Retirement" shall mean the termination of a Grantee's employment as a
result of his reaching the legal age for retirement or the age for
retirement specified in his employment agreement,
8. Rights as a Shareholder:
8.1 No person shall have any rights as a shareholder with respect to any
Shares covered by or relating to any Option, until the date of the
allotment of such Shares.
8.2 All Shares issued upon the exercise of Options granted under the Plan
shall entitle the Grantee thereof to receive dividends with respect
thereto, and to vote the same at any meeting of the shareholders of
the Company, and all other fights attached to the Class A Ordinary
Shares of the Company as set in the Articles of Association of the
Company.
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9. Term of Plan:
The Plan shall become effective on the date on which it will be authorized
by the general meeting of the shareholders of the Company, and shall expire
on December 21, 2008, except as to Options outstanding on that date.
10. Tax Consequences:
All tax consequences under any applicable law arising from the grant or
exercise of any Option, from the payment for, or the subsequent disposition
of, Shares covered thereby or from any other event or act (of the Company
or the Grantee) in connection with any of the foregoing, shall be borne
solely by the Grantee, and the Grantee shall indemnify the Company and hold
it harmless against and from any and all liability for any such tax or
interest or penalty thereon, including without limitation, liabilities
relating to the necessity to withhold or to have withheld, any such tax
from any payments made to the Grantee.
11. Miscellaneous:
11.1 Continuance of Employment: Neither the Plan nor the grant of an Option
thereunder shall impose any obligation on the Company to continue the
employment of any Grantee, and nothing in the Plan or in any Option
granted pursuant thereto shall be deemed as conferring upon any
Grantee any fight to continue in the employ of the Company, or
restrict the fight of the Company to terminate such employment at any
time.
11.2 Governing Law: The Plan and all instruments issued thereunder or in
connection therewith, shall be governed by, and interpreted in
accordance with the laws of the State of Israel.
11.3 Multiple Agreements: There is no obligation for uniformity of
treatment for Grantees, and the terms of each Option may differ from
other Options granted under the Plan at the same time, or at any other
time. The Committee may also grant more than one Option to a given
Grantee during the term of the Plan, either in addition to, or in
substitution for, one or more Options previously granted to the
Grantee. The grant of multiple Options may be evidenced by a single
Notice of Grant or multiple Notices of Grant as determined by the
Committee.
11.4 Non-Exclusivity of the Plan: The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any
previously approved incentive arrangement or as creating any
limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific
cases.
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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
