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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1993 Commission file number 0-538
AMPAL-AMERICAN ISRAEL CORPORATION
(Exact name of Registrant as specified in its Charter)
New York 13-0435685
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1177 Avenue of the Americas, New York, New York 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 782-2100.
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each class which Registered
------------------- ------------------------
Class A Stock American Stock Exchange
Warrants to purchase shares of Class A Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class A Stock
(Title of Class)
4% Cumulative Convertible Preferred Stock
(Title of Class)
6 1/2% Cumulative Convertible Preferred Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
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The number of shares outstanding of each of the issuer's classes of common
stock is Common -- 3,000,000; Class A -- 20,710,594 (as of March 23, 1994).
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant is $97,642,639 (as of March 23, 1994).
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OF AMPAL-AMERICAN ISRAEL CORPORATION
PART I
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Item 1. Business
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As used in this report (the "Report"), the term "Ampal" only refers to
Ampal-American Israel Corporation, the parent company; the term "Company"
refers to Ampal and its consolidated subsidiaries. Ampal is a New York
corporation founded in 1942.
For industry segment financial information, see Note 10 to the Company's
consolidated financial statements included elsewhere herein.
The Company acquires interests in businesses located in the State of
Israel or that are Israel-related. An important objective of Ampal is to make
investments in companies that take advantage of growth in Israel's domestic
economy. The Company has diversified interests in the following sectors:
hotels and leisure-time, real estate, energy distribution, basic industry and
high technology and communications.
The Company emphasizes long-term appreciation over short-term returns and
liquidity. The Company often makes equity investments accompanied by more
significant loans or loan guarantees with the intention that cash flow from
operations of the investee companies will repay these loans within a relatively
short period. In determining whether to acquire an interest in a specific
company, the Company considers quality of management, qualification of
investment partners, potential return on investment, projected cash flow,
market share and growth potential.
The Company generally seeks to acquire and maintain a sufficient equity
interest in a company to permit it, on its own or with investment partners, to
have a significant influence in the management and operation of that company.
The Company often seeks investment partners who have expertise in the business
in which an investment is being made or whose operations and associations
provide the investee company with additional markets, sources of supply,
financing or other competitive advantages. Frequently, the Company enters into
arrangements with its investment partners or with the company in which it is
investing in order to ensure board representation or other rights relating to
its investments. Bank Hapoalim B.M. ("Hapoalim"), the largest bank in Israel,
is Ampal's controlling shareholder and principal lender. The Company usually
makes investments with or through affiliated companies. Members of the
Hapoalim group of companies, including Investment Company of Bank Hapoalim
Ltd., sometimes invest jointly with the Company.
Ampal was founded prior to the establishment of the State of Israel as
part of the effort of the Jewish community in Palestine to provide resources
for and benefit from the growth of its economy. Ampal has participated in the
economic development of Israel by providing capital and management to
commercial, banking, credit, industrial and agricultural enterprises located in
Israel or that are Israel-related. Ampal intends to continue to adhere to its
historical policy of focusing its business interests primarily on long-term
holdings in Israel-related enterprises.
-1-
The growth of the Israeli economy, the recent success of a number of
Israeli-based companies, particularly in the area of high technology, the
privatization of government-owned companies and the recent acceleration of the
peace process, have prompted numerous potential investors to search for
investment opportunities in Israel and have made it possible for certain of
such companies to gain direct access to Israeli and foreign public securities
markets. The Company competes for investment opportunities with other
established and well-capitalized investing entities. There can be no assurance
that opportunities will continue to be available to the Company at valuations
and on terms which are favorable.
Prior to 1989, Ampal was primarily engaged in making loans to businesses
in Israel through its industrial banking subsidiaries and, to a lesser extent,
investing in Israeli companies. In 1989, the Company discontinued this lending
activity, and in 1990 substantially all of the loan portfolios of its
industrial banking subsidiaries were sold to Hapoalim.
-2-
Listed below by industry segment are the Company's most significant
investees, the principal business of each, the percentage of equity owned,
directly or indirectly, by Ampal and if listed on the American Stock Exchange
("AMEX"), or quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), NASDAQ National Market System ("NASDAQ NMS") or
Tel Aviv Stock Exchange ("TASE"). For further information with respect to the
investees, see below.
PERCENTAGE
AS OF
INDUSTRY SEGMENT PRINCIPAL BUSINESS DECEMBER 31, 1993
- - ---------------- ------------------ -----------------
HOTELS AND LEISURE-TIME
Moriah Hotels Ltd. ............... Hotel Chain 46.0%
Coral World International
Limited......................... Underwater Observatories 50.0
and Marine Parks
Country Club Kfar Saba Ltd........ Country Club Facilities 51.0
REAL ESTATE, FINANCE AND OTHER HOLDINGS
Industrial Buildings Corporation Ltd.
(Mivnei Taasiya Ltd.) (TASE).... Industrial Real Estate 5.4(1)
Bay Heart Limited (Lev Hamifratz
Limited)........................ Shopping Mall Owner/Lessor 37.0
Bank Hapoalim (Cayman) Ltd. ...... Commercial Bank Holding 49.0
Company
Etz Vanir Ltd. and Yakhin Mataim
Ltd. ........................... Citrus Groves 50.0
Am-Hal Limited.................... Senior Citizen Facility 50.0
Ampal (Israel) Ltd................ Holding Company 100.0
Ophir Holdings Ltd. .............. Holding Company 42.5
Ampal Development (Israel) Ltd.... Holding Company 100.0
Nir Ltd. ......................... Holding Company 99.9
Ampal Financial Services Ltd...... Holding Company 100.0
ENERGY DISTRIBUTION
Granite Hacarmel Investments Ltd.
(TASE) ......................... Distribution of Refined 21.6(2)
Petroleum Products
BASIC INDUSTRY
Pri Ha'emek (Canned and Frozen Food)
88 Ltd. ........................ Frozen and Canned Food 74.9(3)
Paradise Mattresses (1992) Ltd.... Mattresses and Fold-out Beds 85.1
Carmel Container Systems Limited
(AMEX: "KML")................... Packaging Materials and 20.0
Carton Production
Orlite Engineering Company Ltd.
(TASE) ......................... Composite Material Products 30.1(4)
Davidson-Atai Publishers Ltd...... Publications 22.5
HIGH TECHNOLOGY AND COMMUNICATIONS
Teledata Communication Ltd.
(NASDAQ NMS: "TLDCF")........... Telecommunications Systems 10.9(5)
Mercury Interactive Corporation
(NASDAQ NMS: "MERQ")............ Automated Software Quality 3.8
Products
DSP Group, Inc. (NASDAQ NMS:
"DSPG")......................... Digital Signal Processing 4.9(6)
Technologies
DSP Telecommunications Ltd........ Digital Signal Processing 1.9(7)
Technologies
Idan Software Industries I.S.I. Ltd.
(NASDAQ: "IDANF")............... Telecommunications Services 7.8
-3-
- - --------------
(1) Ampal's ownership reflects 42.5% of Ophir's 12.8% ownership of Industrial
Buildings.
(2) As a result of the exercise of warrants and conversion of debentures,
Ampal's ownership of Granite was diluted to 21.2% as of March 15, 1994.
(3) In March 1994, Ampal's ownership was reduced to 66.7% and may be further
reduced pending completion of Pri Ha'emek's public offering (see "Pri
Ha'emek").
(4) As a result of the exercise of options, Ampal's ownership of Orlite was
diluted to 29.5% as of March 15, 1994.
(5) Ampal's ownership includes 2.5% of Teledata owned directly and 42.5% of
Ophir's 19.7% ownership of Teledata.
(6) Ampal's ownership includes 3.6% of DSP Group owned directly and 42.5% of
Ophir's 3.1% ownership of DSP Group. Following the initial public offering of
DSP Group in February 1994, Ampal's ownership of DSP Group was reduced to 3.6%
including 2.6% of DSP Group owned directly and 42.5% of Ophir's 2.3% ownership
of DSP Group.
(7) Ampal's ownership reflects 42.5% of Ophir's 4.4% ownership of DSP
Telecommunications.
-4-
1994 Public Offering
On February 1, 1994, Ampal completed a public offering of 4.5 million
units, sold for $12.125 per unit, consisting of one share of Class A Stock and
one redeemable warrant to purchase one share of Class A Stock at $16.00 per
share. The warrants are exercisable until January 31, 1999 but are callable by
Ampal, in whole or in part, from and after February 1, 1996, without payment to
the holder. Net proceeds from the offering were approximately $50.8 million.
Since February 2, 1994, the Class A Stock and warrant components of the units
are trading separately.
Certain Pending Transactions
The Company, through Ophir Holdings Ltd. ("Ophir"), which is 42.5% owned
by Ampal, has recently agreed, subject to the receipt of certain approvals, to
make equity investments and loans totalling approximately $2.5 million, for a
16.7% interest in each of three new Israeli companies formed to acquire certain
commercial real estate holdings of a major Israeli cooperative wholesale supply
company. The aggregate purchase price for this commercial real estate is
expected to be approximately $52.5 million and is expected to be financed
principally with mortgage loans which may be guaranteed in whole or in part by
the shareholders. Development costs of the properties may also be paid or
guaranteed by the shareholders.
In Israel, cellular telephone service is currently operated solely by one
entity. The Israeli Ministry of Communications requested bids for a second
cellular telephone service in Israel. In February 1994, Cellphone, Ltd., in
which the Company holds an approximate 4.99% equity interest, filed an
application with the Israeli Ministry of Communications for the license to
provide this cellular service.
There is no assurance that any of these pending transactions or
prospective ventures will be completed or that the proposed terms of investment
will not be modified.
Recent Transactions
- - - In February, 1994, the Company established, together with an
affiliate of Hapoalim, a venture capital fund which will make
investments in high-technology ventures, including investments in
start-up entities. The Company and the Hapoalim affiliate are
expected to each invest up to $2.5 million in this fund. As of
March 15, 1994, the fund had made investments of $300,000.
- - - In January 1994, the Company invested approximately $66,000 for 50%
of the equity of, and made a loan of $1 million to, M.D.F. Boards
Industry Ltd. ("MDF"). MDF is a joint venture between the Company
and a subsidiary of Etz Lavud Ltd., a publicly-owned Israeli lumber
manufacturer. MDF intends to establish a plant in Israel to
manufacture medium density fiber products for the construction and
furniture industries.
- - - In August 1993, the Company invested approximately $3.5 million in
Idan Software Industries I.S.I. Ltd. ("Idan") for approximately
8.4% of Idan's shares. Idan provides telecommunications services
and markets telecommunications products in Israel and overseas.
Following Idan's private placement in October 1993, the Company
holds approximately 7.8% of Idan's shares.
- - - In February and June 1993, the Company invested an aggregate of
approximately $4.3 million in Paradise Mattresses (1992) Ltd.
("Paradise") for an aggregate of approximately 85.1% of the shares
of Paradise. Paradise is one of Israel's largest manufacturers and
distributors of mattresses and fold-out beds.
- - - In March 1993, the Company, through Ophir, participated in the
purchase from the Government of Israel of a controlling interest in
Industrial Buildings Corporation Ltd. ("Industrial Buildings"), the
largest owner/lessor of industrial properties in Israel. Ophir
purchased 12.8% of the shares of Industrial Buildings for
approximately $50 million. Ampal owns 42.5% of Ophir.
-5-
- - - In 1992 and 1993, Ampal purchased approximately $1.1 million from
an unrelated DSP Group shareholder, shares of DSP Group which
currently approximate 2.6% of DSP Group's equity. In 1992, Ophir
invested approximately $1.9 million for securities which it
exchanged for 2.3% of the shares of DSP Group. DSP Group is a
leading developer of cost effective, high performance digital
signal processing software and integrated circuits for digital
speech processing.
- - - In the first quarter of 1993, the Company invested approximately
$300,000 in Davidson-Atai Publishers Ltd. ("Davidson-Atai") for
22.5% of the shares of Davidson-Atai. Davidson-Atai is a recently-
established Israeli publishing house.
HOTELS AND LEISURE-TIME
MORIAH HOTELS LTD. ("MORIAH")
Moriah, which is 46%-owned by the Company is the largest hotel chain in
Israel based both upon the number of rooms and the number of locations.
The following chart provides certain information with respect to hotels
Moriah owns or operates:
NO. OF MORIAH'S
LOCATION CATEGORY ROOMS INTEREST
-------- -------- ------ --------
Jerusalem Luxury 295 Owns
Eilat Luxury 325 Owns
Dead Sea Luxury 200 Owns
Tel Aviv Luxury 350 Leases(1)
Tiberias Luxury 270 Leases(2)
Dead Sea First Class 195 Manages(3)
Zichron Yaakov Economy 110 Manages(4)
Nazareth Economy 110 Manages(4)
Maalot Economy 110 Manages(4)
- - ---------------
(1) Net lease which expires in 1996.
(2) Net lease which expires in 2001.
(3) Management agreement which expires in 1995.
(4) No formal management agreement has yet been signed.
Moriah's competitive position has been enhanced by operating out of more
locations than any other chain in Israel, improving its facilities and
providing high quality service to its guests. During 1993, Moriah spent
approximately $4 million on general improvements and renovations.
Tourist arrivals increased in Israel by approximately 10% in 1993 as
compared to 1992. Moriah's occupancy rate was 73% in 1993 and 74% in 1992
(which excluded the Moriah Eilat Hotel which was closed for renovation for part
of 1992) (in both years, excluding the three economy hotels which came under
Moriah management in 1993). The average occupancy rate in the Israeli hotel
industry during 1993 was 67% and during 1992 was 68%.
Moriah's competitive position could be adversely affected by economic
changes in foreign countries, construction of new hotels in locations which
compete with Moriah's hotels or unrest in Israel or other areas of the Middle
East. As a result of the significant rise in tourism in Israel, additional
hotels have been constructed and competition is expected to intensify.
-6-
Moriah employed approximately 1,750 persons as of December 31, 1993.
The Moriah-owned Dead Sea hotel is located on the shore of a pool adjacent
to the Dead Sea. Because of industrial activities at the pool, its water level
has been rising to levels that threaten the hotel structure. Moriah is
currently in litigation with respect to the costs of protective measures and
other related matters.
CORAL WORLD INTERNATIONAL LIMITED ("CORAL WORLD")
Coral World, which is 50%-owned by the Company, owns or controls marine
parks in Eilat (Israel), St. Thomas (United States Virgin Islands), Nassau
(Bahamas), which also includes a 22 villa luxury hotel and Perth and Manly
(Australia). In addition, Coral World provides consulting services to an
unrelated group of investors regarding construction of an underwater facility
in the Pacific Rim. The Company's marine parks, other than those in Australia,
are located within or next to coral reefs and visitors at these parks view
marine life in its natural coral habitat through large underwater windows.
Coral World's marine parks in Perth and Manly, Australia allow visitors to walk
through transparent acrylic tubes on the bottom of a man-made aquarium
surrounded by marine life.
In 1993 Coral World's parks had a total of approximately 1.3 million
visitors. In addition to admission charges, Coral World's food and beverage
concessions and retail outlets are a significant revenue source. Coral World
expects to build, acquire or manage new facilities in the future. Coral World
employed a total of 275 persons as of December 31, 1993.
COUNTRY CLUB KFAR SABA LTD. ("KFAR SABA")
Kfar Saba operates a country club facility (the "Club") in Kfar Saba, a
town north of Tel Aviv. Kfar Saba holds a long term lease to the real property
on which the Club is situated. The Club's facilities include swimming pools,
tennis courts and a clubhouse.
During 1992 and 1993, the Club had approximately 2,000 member families and
operated at capacity. The construction cost of the Club was $5.2 million,
which was financed principally with debt which is expected to be repaid by
1997. Kfar Saba's revenues are principally attributable to annual memberships.
The Company owns 51% of Kfar Saba and the remaining 49% is owned by an
unrelated party. Kfar Saba and another investor are each 50% owners of a
project to construct a second country club in nearby Hod Hasharon. Construction
began during 1993 and is expected to be completed in the first half of 1994.
Kfar Saba's investment is expected to be approximately $1.7 million.
REAL ESTATE, FINANCE AND OTHER HOLDINGS
In Israel, most land is owned by the Israeli Government. In this Report,
reference to ownership of land means either direct ownership of land or a
long-term lease from the Israeli Government, which is in most respects regarded
in Israel as the functional equivalent of ownership. It is the Israeli
Government's policy and practice to renew its long-term leases (which usually
have a term of 49 years) upon their expiration.
INDUSTRIAL BUILDINGS CORPORATION LTD. (MIVNEI TAASIYA LTD.) ("INDUSTRIAL
BUILDINGS")
Industrial Buildings, Israel's largest owner/lessor of industrial
property, is engaged principally in the development and construction of
buildings in Israel for industrial and commercial use and in project
management. Industrial Buildings carries out infrastructure development
projects for industrial and residential purposes, principally for a number of
government agencies and authorities. Industrial Buildings hires and
coordinates the work of contractors, planners and suppliers of various
engineering services.
Industrial Buildings owns approximately 10.4 million square feet of space
in industrial buildings throughout Israel (including approximately 10% in the
-7-
administered territories). It owns both multi-purpose buildings and
built-to-suit buildings which are constructed in accordance with the specific
requirements of tenants. In certain cases, there is an option in the tenant's
favor to purchase the leased property, and, in the case of most built-to-suit
properties, a commitment on the part of the tenant to purchase the property.
Industrial Buildings also owns approximately 118 acres of vacant land for
industrial purposes throughout Israel.
The buildings which are owned by Industrial Buildings are leased to
approximately 1,900 lessees under net leases having terms of up to ten years.
See "Conditions in Israel--Certain Israeli Real Estate Tax Matters" for a
discussion of Israeli real estate tax considerations that may be applicable to
certain real property leases of Industrial Buildings. The average vacancy rate
in buildings owned or leased by Industrial Buildings was approximately 7% at
December 31, 1993.
Industrial Buildings' plans include building a project in the Tel Aviv
area comprising approximately 400 apartments, a commercial center of
approximately 43,000 square feet, an office building of approximately 25,000
square feet and parking facilities of approximately 800,000 square feet.
Industrial Buildings has also entered into agreements with a fuel company and
an Israeli supermarket chain for the joint development of properties.
Industrial Buildings was founded as an Israeli Government company in 1961.
In 1988, Industrial Buildings first offered its shares to the public and its
shares are traded on the TASE. In 1993, the Government of Israel privatized
the company by selling its 51.3% stake in Industrial Buildings. Since the
privatization, Industrial Buildings has focused on improving results by
decreasing staff and overhead costs and aggressively negotiating lease renewal
terms. A holding company in which Ophir has a 25% interest purchased the
Government's interest in Industrial Buildings. Ophir's investment in the
holding company is approximately $50 million. Ampal owns 42.5% of Ophir.
Industrial Buildings has announced a policy to distribute as a dividend not
less than 60% of each year's earnings during the period 1993 through 1996. In
January 1994, Industrial Buildings distributed as a dividend approximately NIS
195 million to its shareholders, which was funded with a portion of NIS 244
million of long-term debt. This dividend represents an amount significantly in
excess of 60% of Industrial Buildings 1993 earnings.
Ophir's interest in the holding company and the holding company's interest
in Industrial Buildings are subject to foreclosure in the event of a default by
any of the investors under the bank credit agreements entered into in
connection with the acquisition. See "Certain Relationships and Related
Transactions." Any amounts distributed as a dividend by Industrial Buildings
are required to be applied first to pay then due borrowings.
Industrial Buildings had a staff of approximately 42 permanent employees
as of December 31, 1993.
BAY HEART LIMITED (LEV HAMIFRATZ LIMITED) ("BAY HEART")
Bay Heart was established in 1987 to develop and lease a shopping mall
(the "Mall") in the Haifa Bay area. Haifa is the third largest city in Israel.
The Mall, which opened in May 1991, is a modern three story facility with
approximately 279,760 square feet of rentable space. The Mall is located at
the intersection of two major roads and provides a large mix of retail and
entertainment facilities including seven movie theaters. Approximately 37,500
square feet of the Mall are occupied by Supersol Ltd., one of the two largest
Israeli supermarket chains, and the parent of a co-investor in Bay Heart.
Shekem Department Stores, a major Israeli department store, is the other anchor
tenant under a net lease for approximately 57,600 square feet of retail and
approximately 17,750 square feet of storage and other space expiring in 2001.
Approximately 98% of the Mall premises is now occupied, primarily under
two-year leases, except for anchor tenants. The total cost of the Mall was
approximately $53 million which was financed principally with debt.
-8-
Bay Heart is negotiating with the Port and Railway Authority for Bay Heart
to build a station for a suburban railway line adjacent to the Mall which will
provide direct access to the Mall. If negotiations are successful and necessary
approvals are obtained, Bay Heart's investment in that project is expected to
be approximately $1.2 million. Bay Heart is also negotiating the purchase, for
approximately $1.6 million, of a 50% interest in a partnership to purchase
property in the vicinity of the Mall for the purpose of developing a commercial
center. The Company owns 37% of the shares of Bay Heart.
An assessment was made against Bay Heart by the Israeli tax authorities
for the payment of approximately $11.5 million based on taxes claimed due on
certain long term leases entered into by Bay Heart. This assessment has been
dropped. See "Certain United States and Israeli Regulatory Matters--Certain
Israeli Real Estate Tax Matters" for a discussion of Israeli real estate tax
considerations that may be applicable to certain real property leases of Bay
Heart.
BANK HAPOALIM (CAYMAN) LTD. ("CAYMAN")
Cayman is a bank holding company which owns 50% of Hapoalim (Latin
America) Casa Bancaria S.A. ("Casa Bancaria"), an Uruguayan commercial bank,
invests in Israeli and other mutual funds and administers a small loan
portfolio. In 1994, Cayman sold to an unrelated bank 50% of Casa Bancaria at a
price based upon the net equity of Casa Bancaria at December 31, 1993. In
recent years, other than in 1992, Cayman has paid out a significant portion of
its retained earnings as dividends to its two shareholders, causing a
contraction in its size and volume of activity. It intends to continue to pay
dividends from its retained earnings in the future. Ampal owns 49% of the
outstanding shares of common stock of Cayman, and Hapoalim owns the remaining
51%. Each of them owns $2 million of 7% preferred shares of Cayman. See
"Certain Relationships and Related Transactions." In 1992, Cayman did not pay
a dividend on its common stock but paid the required dividend on its 7%
preferred shares. In 1993, Cayman paid a $4 million dividend on its common
stock and the required dividend on its 7% preferred shares.
AMPAL (ISRAEL) LTD. ("AMPAL (ISRAEL)")
Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an approximately
57,000 square foot commercial property located in Tel Aviv. A portion of this
property is net leased to Hapoalim and another portion is net leased to Moriah.
See "Certain Relationships and Related Transactions." Ampal (Israel) also acts
as a holding company for other investments discussed elsewhere in this Report.
OPHIR HOLDINGS LTD. ("OPHIR")
Ophir is a holding company that holds interests in Teledata, Industrial
Buildings, DSP Group and DSP Telecommunications. These companies are discussed
elsewhere in this Report. In addition, Ophir has also made investments in two
unaffiliated mutual funds and a newly-formed biotechnology company and has
recently agreed, subject to the receipt of certain governmental and other
approvals, to make an investment in each of three new Israeli companies formed
to acquire certain commercial real estate holdings of a major Israeli
cooperative wholesale supply company. The aggregate purchase price for this
commercial real estate is expected to be approximately $52.5 million and is
expected to be financed principally with mortgage loans which may be guaranteed
in whole or in part by the shareholders. Development costs of the properties
may also be paid or guaranteed by the shareholders.
Ophir owns, through a wholly owned subsidiary, nine real estate properties
located in Israel aggregating approximately 179,700 square feet. Three of
these properties are net leased to Hapoalim or its subsidiaries. See "Certain
Relationships and Related Transactions." For a discussion of Israeli real
estate tax considerations that may be applicable to certain real property
leases of Ophir, see "Certain United States and Israeli Regulatory
Matters--Certain Israeli Real Estate Tax Matters."
Until November 1993, Ampal owned 60% of the voting shares and 49.4% of the
equity interest in Ophir, and the balance was owned by a Hapoalim affiliate.
In November 1993, the two shareholders' interests in Ophir were equalized.
-9-
Subsequently, 15% of the shares in Ophir were issued to another Hapoalim
affiliate for approximately $10.2 million. As a result of these transactions,
Ophir is now 42.5%-owned by Ampal and its results are no longer consolidated in
the Company's financial statements and are now recorded by the equity method of
accounting. In 1993, the Company recorded a gain on issuance of shares of
approximately $3.2 million (approximately $2.1 million after taxes) as a result
of Ophir's sale of shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and
"Certain Relationships and Related Transactions."
Ophir intends to develop on property owned by it in Petach Tikva, Israel,
approximately 60,300 square feet of office and commercial space and
approximately 59,200 square feet of parking space. The estimated cost of this
project is $5 million.
Ophir owns a 60% interest in a partnership that recently purchased two
acres of land in an industrial park in Netanya, Israel for $2.7 million. On
this site, the partnership intends to develop a 120,000 square foot building
for both industrial and commercial uses. The estimated cost of development of
this project is $6 million.
ETZ VANIR LTD. ("ETZ VANIR") AND YAKHIN MATAIM LTD. ("YAKHIN MATAIM")
Both Etz Vanir Ltd. and Yakhin Mataim Ltd. cultivate orange, grapefruit,
clementine, lemon and avocado groves in Israel pursuant to various long-term
land leases which, including renewal options, do not expire until the mid-21st
century. These properties are located near the city of Netanya between an
existing and a proposed highway. Approximately 1,200 acres are presently under
cultivation by these two companies. The majority of their crops is exported.
Ampal owns 50% of the equity of Etz Vanir and Yakhin Mataim. The
remaining 50% of the equity of these companies is owned by Yakhin Hakal Ltd.
("Yakhin Hakal"), a company which is not related to Ampal, which manages their
operations. Because of a dispute between Ampal and Yakhin Hakal regarding the
operating agreement for the companies, the Company has requested that an
Israeli court declare the agreement null and void, and in its response Yakhin
Hakal has stated that the companies owe it approximately $4.0 million for
services it has rendered to the companies. This litigation is pending.
AM-HAL LIMITED ("AM-HAL")
Am-Hal has developed and operates a luxury senior citizens center in
Rishon Lezion, a city located approximately 10 miles from Tel Aviv. The
senior citizens center, which was completed in March 1992, includes 160
apartments of which 70% are occupied, an 80-bed geriatric ward which is fully
occupied, a swimming pool and other recreational facilities. The geriatric
ward is leased by Am-Hal to a non-affiliated health care provider until 2002.
Rental payments are based upon the profits of the geriatric ward.
The Company and a subsidiary of The Israel Corporation, a major Israeli
company, each own 50% of Am-Hal. The aggregate cost of the center was
approximately $21 million, and was financed principally by loans made or
guaranteed by the shareholders and refundable tenant deposits.
AMPAL DEVELOPMENT (ISRAEL) LTD. ("AMPAL DEVELOPMENT"), NIR LTD. ("NIR") AND
AMPAL
FINANCIAL SERVICES LTD. ("AMPAL FINANCIAL") TOGETHER, THE "HOLDING
COMPANIES")
Ampal Development, Nir and Ampal Financial, each of which is wholly-owned
by the Company, are engaged in the business of financing acquisitions by the
Company and holding and leasing commercial real estate in Israel. Prior to
1989, these companies had acted primarily as lenders, and their financing
activities were the principal activities of the Company. In 1990, the Holding
Companies sold substantially all their loan portfolios to Hapoalim, and they
relinquished their banking licenses. The Holding Companies still service
certain loans made by them prior to their ceasing lending activity which are
guaranteed by Hapoalim. See "Certain Relationships and Related Transactions."
Ampal Development owns five commercial properties located in Israel
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aggregating approximately 36,900 square feet. Four of these properties are net
leased to Hapoalim. Nir owns four commercial properties located in Israel
aggregating approximately 17,750 square feet. Three of these properties are
net leased to Hapoalim. Ampal Finance owns two commercial properties located
in Israel aggregating approximately 7,250 square feet. Both of these
properties are net leased to Hapoalim. See "Certain Relationships and Related
Transactions." For a discussion of Israeli real estate tax considerations that
may be applicable to certain real property leases of the Holding Companies, see
"Certain United States and Israeli Regulatory Matters--Certain Israeli Real
Estate Tax Matters."
The Holding Companies hold interests in other companies discussed
elsewhere in this Report and also make loans to these and other investees in
furtherance of their businesses.
Ampal Development issued debentures which are publicly traded on the TASE.
An aggregate of approximately $43.1 million of these debentures were
outstanding as of December 31, 1993. Ampal Development has deposited with
Hapoalim funds sufficient to pay all principal and interest on these
debentures.
ENERGY DISTRIBUTION
GRANITE HACARMEL INVESTMENTS LTD. ("GRANITE")
Granite owns the Sonol group of companies, the third largest Israeli
distributor of refined petroleum products. Supergas, a wholly-owned subsidiary
of Granite, is the third largest marketer and distributor in Israel of
liquified petroleum gas. Through its subsidiaries, Granite also manufactures
and markets lubricating oils and automotive batteries.
As of December 31, 1993, Sonol supplied gas to 149 gas stations in Israel,
of which 106 are owned by or leased on a long-term basis to Sonol. The Sonol
group sold approximately 1.8 million metric tons of refined petroleum products
and lubricating oils in each of 1992 and 1993, representing approximately 25.7%
and 24.8% of the total sales of such products in Israel by the three major fuel
companies in Israel in 1992 and 1993, respectively.
Prior to 1988, Sonol and the other two major fuel companies had a monopoly
in the importation of oil into and the distribution of gasoline, fuel oil and
diesel in Israel. Since 1988, the Israeli government has licensed new fuel
companies and also recently allowed Oil Refineries Ltd., the sole oil refinery
operator in Israel, and large industrial customers, such as Israel Electric
Corp., to engage in the importation of oil. As a result, Granite's sales volume
and share in the refined petroleum products market have declined and may
decline further. Beginning in 1992, the Israeli government also lifted price
controls on many of the fuel products sold by Sonol. Moreover, the Israeli
Ministry of Energy recently has declared its intention to permit new gas
stations to be licensed more quickly and in locations not previously permitted.
Although Granite is unable to determine the effect of these changes on future
sales volume and profits, their impact may be material.
In order to attempt to offset the possible adverse effects of reforms in
the energy market, Granite continues to emphasize improving efficiency through
modernization, selective expansion and staff reductions. Furthermore, Granite
expects to pursue a policy of diversification. Recently, Granite established a
subsidiary which will invest in real estate projects in Israel. The new
subsidiary has contracted to participate in two real estate projects and is
studying other opportunities. Granite is also conducting a strategic survey to
identify other potential areas of investment.
In 1993, warrants to purchase convertible debentures of Granite were
exercised for an aggregate of approximately $18.8 million. As a result of the
exercise of warrants and conversion of debentures, the Company's ownership of
Granite was diluted to 21.2% as of March 15, 1994. The Company also owns
warrants to purchase additional shares in Granite. Depending upon whether and
to what extent the Company and the public exercise their warrants and debenture
conversion rights, the Company's ownership of the equity of Granite could be
reduced to 12.9%. The Company is party to an agreement with the other
shareholders of Granite which expires February 8, 1998 and which entitles the
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Company to appoint three out of the eleven members of Granite's board. The
Company and these shareholders, who currently collectively own an aggregate of
83.1% of Granite, have also agreed to certain restrictions on transfer and to
vote together at general meetings of Granite's shareholders. This agreement is
terminable on 120 days' notice if a party (or a related group) acquires more
than 43% of Granite's share capital. Recently, one of the parties to the
agreement acquired the interest of another and now owns 54% of Granite's share
capital. The shareholder and the Company have agreed to negotiate a new or
amended agreement and have entered into an interim agreement which provides for
the Company's continuing right to designate three members of Granite's board
until February 8, 1998 (the stated expiration date of the current agreement),
provided that there is no change in control over Ampal. If Ampal ceases to
exercise "significant influence" over Granite under applicable accounting
principles (which the Company believes it continues to exercise by virtue of
its board representation), Ampal will no longer be permitted to account for its
holdings in Granite under the equity method of accounting, and the Company's
reported earnings could be adversely affected.
On June 29, 1993, the Controller of Restrictive Trade Practices of the
Israeli Ministry of Industry and Commerce issued a determination regarding the
exclusive agreements between the Israeli oil marketing companies and filling
station operators stating that these agreements violate Israeli antitrust law.
In his determination the Controller stated that his ruling would affect
approximately 77% of the Sonol stations (which are those stations not owned by
Sonol). The Controller postponed the effective date of his decision, and Sonol
has filed an appeal. Until there is a decision on the appeal, Granite has
slowed its investments in non-owned filling stations. If upheld in its current
form, the Controller's determination will be considered prima facie evidence in
legal proceedings between station operators and Sonol and may have a material
adverse effect on Granite.
BASIC INDUSTRY
PRI HA'EMEK (CANNED AND FROZEN FOOD) 88 LTD. ("PRI HA'EMEK")
Pri Ha'emek processes and packages frozen vegetables, canned juices and
other vegetable and citrus products in Israel and markets its products
primarily in Israel and Europe and, to a lesser extent, in North America. Pri
Ha'emek has facilities for processing frozen vegetables, citrus and other fruit
products and tomatoes and owns a cannery and a freezer plant. Pri Ha'emek also
uses a large freezer plant which is partially owned by the Company.
Pri Ha'emek sells to large retail chains. Its products are marketed in
Israel principally under its "Pri Ha'emek" and "Priman" names and elsewhere
principally under private label. Pri Ha'emek also does some food processing
for other food companies, mainly for export out of Israel. Pri Ha'emek intends
to expand its food product lines and to seek agreements for the marketing of
its products under private labels.
Pri Ha'emek's principal growth market is the domestic Israeli market.
Because of the increase in domestic Israeli sales, exports which had accounted
for a majority of sales in 1993 only accounted for approximately 55% of its
sales. Pri Ha'emek's main product lines have a significant share of the
Israeli market.
Historically Pri Ha'emek has not experienced substantial import
restrictions for its products in the overseas markets it serves, but there can
be no assurance that trade barriers will not be established in the future that
could materially and adversely affect Pri Ha'emek's export businesses.
Pri Ha'emek employed 97 persons on a full time basis as of December 31,
1993. Pri Ha'emek also employs workers on a temporary basis to assist it with
its seasonal needs.
At December 31, 1993, the Company owned 74.9% of the shares of Pri
Ha'emek. In February 1994, Pri Ha'emek's other shareholder purchased additional
shares in Pri Ha'emek at the same price the Company paid for its shares in
1991, diluting the Company's ownership to 66.7%. In March 1994, Pri Ha'emek
conducted an initial public offering in Israel on the TASE. The offering did
not meet the distribution requirement under the regulations of the TASE, and as
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a result, Pri Ha'emek's underwriters deposited for sale by a trustee shares
which are expected to be sold, at such prices as the trustee may realize, over
a thirty day period. The Company has agreed to pay to the trustee up to NIS 2
million (approximately $670,000) to fund its pro-rata share of the difference
between the proceeds of those sales and the amount which would have been
received if the shares were sold at the public offering price. The Company's
interest in Pri Ha'emek will be initially diluted to 51.3%, and upon exercise
of all options and convertible debentures, the Company's interest may be
diluted to 35.3%. If the Company's interest in Pri Ha'emek decreases below
50%, Pri Ha'emek's results will no longer be consolidated with the Company's
but will be recorded by the equity method of accounting.
Pri Ha'emek's assets were purchased from another operating entity in 1988
and 1990. The Company and Pri Ha'emek's other shareholder have agreed, among
other matters, to appoint directors in proportion to their respective share
holdings, to rights of first refusal, to certain restrictions on transfer and
to require approval for certain corporate actions.
PARADISE MATTRESSES (1992) LTD. ("PARADISE")
Paradise is a leading manufacturer and distributor of mattresses and
fold-out beds in Israel. Paradise manufactures and distributes its mattresses
under the brand names "Paradise," "Mefi" and "Sealy." "Sealy" mattresses are
manufactured and distributed by Paradise under a ten-year exclusive license
covering the Israeli market expiring in 2002 with an option for an additional
five-year term. Paradise owns its own manufacturing facilities and employs
approximately 100 persons. It distributes mattresses through independent
stores and by direct sales to hotels. Paradise commenced business in 1992 when
it purchased a 40-year old division of an unrelated company.
The Company currently owns approximately 85.1% of the share capital of
Paradise, approximately half of which was purchased in February 1993 and half
of which was purchased in June 1993 for $2 million and $2.3 million,
respectively.
CARMEL CONTAINER SYSTEMS LIMITED ("CARMEL")
Carmel is one of the leading Israeli designers and manufacturers of
paper-based packaging and related products. Carmel manufactures a varied line
of products, including corrugated shipping containers, moisture-resistant
packaging, consumer packaging, triple-wall packaging and wooden pallets and
boxes.
The Company estimates that Carmel manufactures approximately 25% of the
corrugated board, approximately 85% of the corrugated triple wall, and
approximately 35% of the corrugated board packaging in Israel. Carmel's
products are marketed to a wide variety of customers for diverse uses, but its
principal market is packaging for agricultural products and for the food and
beverage industry. Although sales of packaging products to exporters of
agricultural products have declined slightly, an increase in domestic sales has
compensated for this decline.
As of December 31, 1993, Carmel employed 670 persons. Carmel has in the
past experienced labor difficulties, including a two-week strike in 1992 at one
of its plants.
Recently, Carmel initiated measures to reduce its work force, consolidate
certain operations and upgrade certain equipment. Carmel expects to make
additional investment in equipment of approximately $12.5 million between 1993
and 1995 for these purposes, of which $5.5 million has already been committed.
Shares of Carmel are listed for trading on the AMEX under the symbol
"KML."
In July 1992, the Company acquired 20% of the shares of Carmel for
approximately $2.2 million. The Company, American Israel Paper Mills Ltd., the
largest paper producer in Israel, and Robert Kraft, a United States investor,
are parties to a shareholders' agreement with respect to their shareholdings
(which aggregate approximately 78% of the shares) in Carmel. The agreement
includes provisions governing board representation, required votes for
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specified corporate actions, matters on which the shareholders agree to
cooperate and rights of first refusal with respect to the shares owned by the
parties. Carmel has granted to International Forest Products Corporation, an
affiliate of Mr. Kraft, a right to supply up to 80% of Carmel's requirements
for imported paper and forest products in the ordinary course of Carmel's
business and on a competitive basis.
ORLITE ENGINEERING COMPANY LTD. ("ORLITE")
Orlite is one of Israel's largest manufacturer of composite material
products for military and civilian applications, including specialized
fireproof ammunition storage containers for the Israeli Merkava tank, ballistic
helmets for military and police use, outdoor storage boxes for
telecommunications, cable and electrical switching equipment and specialized
aerospace components.
Orlite's markets are changing due to spending cuts undertaken by the
Israeli Ministry of Defense ("MOD"). As a result, Orlite expects no growth in
sales to MOD, which at one point had represented almost 90% of Orlite's sales,
and is focusing on sales of its civilian products which have grown in recent
years and which Orlite believes will continue to constitute its most important
growth segment.
Orlite's largest growth products are its composite outdoor storage
cabinets which house electrical, cable and telecommunications equipment and
are less susceptible to adverse weather conditions than metal cabinets. In
1993, Israel Electric Corp. and Bezeq (the Israeli telephone company) accounted
for a substantial portion of Orlite's civilian sales. Orlite seeks to expand
its sales base by, among other methods, developing other applications for its
technology and exporting its products.
As of December 31, 1993, Orlite employed 144 permanent workers and 17
temporary workers. Orlite owns its manufacturing facilities.
As of December 31, 1993, the Company owned 30.1% of the shares of Orlite.
Due to exercise of options by the public, the Company's ownership of Orlite was
diluted to 29.5% as of March 15, 1994. Another Hapoalim affiliate owns an
identical interest. Depending upon whether and to what extent the Company and
the public exercise their options, the Company's ownership of the equity of
Orlite could be reduced to 24.9%.
DAVIDSON-ATAI PUBLISHERS LTD. ("DAVIDSON-ATAI")
Davidson-Atai is a recently-established publishing house. As its first
project, Davidson-Atai has begun publishing, in Hebrew, the initial volumes of
a multi-volume series entitled "The World of the Bible," an illustrated series
about the Bible. Davidson-Atai expects to translate this series and publish it
abroad. Davidson-Atai distributes its books through subscriptions and book
stores.
The Company owns 22.5% of Davidson-Atai, which it purchased for
approximately $300,000 in 1993 upon initial capitalization of this company.
HIGH TECHNOLOGY AND COMMUNICATIONS
TELEDATA COMMUNICATION LTD. ("TELEDATA")
Teledata designs, develops, manufactures, markets and supports
concentrators and multiplexers for integration in the "local loop" of telephone
networks (the portion of the network that links individual subscribers to a
local exchange). Multiplexers eliminate the requirement of a single, dedicated
connection extending the entire distance from each subscriber's premises to the
local exchange. This is accomplished by permitting groups of subscribers to be
connected by individual twisted pairs of copper wires to a remote terminal
which is connected, in turn, to a central terminal at the local exchange by
means of a single link (which may consist of copper cables, fiber optic cables,
radio or domestic satellite). A multiplexer can utilize this single link to
transmit many conversations simultaneously. Line concentrators enable telephone
operating companies to utilize the links from the remote terminal to the
central terminal more efficiently by allocating the capacity of these links
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among a greater number of subscribers. Teledata currently produces a single
line of multiplexers and line concentrators. Teledata is in the process of
developing three new lines of products including those for digital and wireless
platforms.
In 1993, Teledata invested $6.2 million in research and development as
compared to $4 million in 1992. In addition to Israel, Teledata markets its
products in Europe, Asia, South America, Central America and Oceania (Australia
and the surrounding islands). Teledata maintains marketing activities in 60
countries, and has installed its equipment in 37 countries. As of December 31,
1993, Teledata employed 187 persons, as compared to 138 at December 31, 1992.
The sector of the telecommunications industry in which Teledata operates
is highly competitive. Teledata competes directly with manufacturers of
equipment similar to Teledata's products. Teledata experiences competition
from providers of alternative solutions for local loop enhancement.
Teledata's shares are quoted on the NASDAQ NMS under the symbol "TLDCF."
In 1993, the Company recorded a gain of $1.5 million (approximately
$700,000 after taxes) from the sale of a portion of its shares of Teledata. As
a result of these transactions Ampal's ownership of Teledata was diluted to
2.5% and Ophir's remained at 19.7%.
MERCURY INTERACTIVE CORPORATION ("MERCURY")
Mercury develops, markets and supports a family of automated software
quality ("ASQ") products that automate testing and quality assurance for
developers of client/server software and systems. By using Mercury's ASQ
products, corporate software development organizations, system integrators and
independent software vendors can identify software errors, commonly referred to
as bugs, more quickly and efficiently than traditional methods allow. This
enables developers of software to compress software development cycles, reduce
costs and improve software quality.
Mercury's products are targeted to the workstation and personal computer
platforms. Mercury's current ASQ products include those for single-user
application testing for UNIX/X Windows, MS Windows and Windows NT as well those
for multi-user system testing. Its announced products include those for OS/2
and Macintosh. Mercury has licensed over 4,000 copies of its ASQ products to
over 300 customers worldwide in a broad range of industries.
The market for ASQ products is relatively new and undeveloped, and Mercury
faces competition from several companies in the United States and Europe.
Mercury is a Delaware corporation with its headquarters in California.
Mercury's research and development facility is located in Israel. In October
1993, Mercury completed an initial public offering of its shares. Its shares
are quoted on the NASDAQ NMS under the symbol "MERQ." Following the public
offering, the Company owns 3.8% of the shares of Mercury which it purchased in
March 1992 for approximately $1.5 million.
DSP GROUP, INC. ("DSP GROUP") AND DSP TELECOMMUNICATIONS LTD.("DSP
TELECOMMUNICATIONS")
DSP Group is a leading developer of high performance, cost effective,
digital signal processing ("DSP") software and integrated circuits for digital
speech products, targeted at the convergence of the personal computer,
communications and consumer electronics markets. Digital speech technology
provides fundamental advantages over analog speech technology and represents an
enabling technology for a broad range of major applications in these markets.
DSP Group pioneered the all-digital telephone answering machine market. DSP
Group has developed TrueSpeechTM, a proprietary digital speech compression
technology, which offers significant advantages over competing technologies and
is being positioned as an industry standard. DSP Group also has interests in
related companies engaged in telecommunications and video compression
technologies.
As of December 31, 1993, Ampal owned directly 3.6% of the equity of DSP
Group which it purchased from an unaffiliated DSP Group shareholder in 1993 for
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approximately $1.1 million and Ophir, which is 42.5% owned by the Company,
owned 2.3% of DSP Group for which it paid approximately $1.9 million in 1992.
Another Hapoalim affiliate also owned 3.6% of DSP Group. In February 1994, DSP
Group completed an initial public offering of its shares. It shares are quoted
on the NASDAQ NMS under the symbol "DSPG." Following the offering Ampal, Ophir
and the Hapoalim affiliate own 2.6%, 2.3% and 2.6%, respectively, of DSP Group.
Ophir also owns 4.4% of DSP Telecommunications, a DSP Group investee, for
which it paid $1 million in 1992. DSP Telecommunications is a leading
developer of cost effective, high performance DSP software and integrated
circuits for digital communications products targeted at the emerging wireless
communications market.
IDAN SOFTWARE INDUSTRIES I.S.I. LTD. ("IDAN")
Idan, through its direct and indirect subsidiaries, is a provider of
telecommunications services and products. To date, Idan has provided these
services and products in Israel, although during 1994 Idan plans to begin
marketing certain of its services and products in Europe and selected countries
elsewhere.
Idan's subsidiary, Elitec Industries 77 Ltd. ("Elitec"), installs and
operates coin-operated pay telephones, installs and provides bedside telephone
service to hospital patients and provides tenant communication services to
office buildings and other facilities. Elitec, through a subsidiary, provides
outbound international telephone and facsimile services to Israeli business
customers and issues a telephone calling card to Israeli business executives,
professionals and others for use primarily in placing direct-dial inter-country
calls. In January 1994, this subsidiary reduced its prices for these services
in response to a price reduction for these services implemented by Bezek, the
Israeli national telephone company. This price reduction has had an adverse
impact on this subsidiary, Elitec and Idan. Elitec, through another
subsidiary, provides paging services in central Israel. Elitec shares are
publicly traded on the TASE.
During the past two years, Idan's subsidiaries have sought to benefit from
the Israeli Government's decision to open up segments of the telecommunications
industry to competition. These companies have focused on obtaining Israeli
Government licenses to enable them to provide certain telecommunications and
value-added services and products in Israel and to commence the operation of
businesses which provide these services and products. Idan faces substantial
competition for the services and products it offers. Idan is dependent on
short-term licenses from the Israeli Ministry of Communications for the
services it offers.
In February 1994, Olam 1 Advanced Communications Ltd., in which Idan holds
an approximate 9% equity interest filed an application with the Israeli
Ministry of Communications for a license to provide the second cellular
telephone service in Israel.
The Company has entered into a shareholders' agreement pursuant to which
it has agreed to vote all of its shares in favor of all of Idan's nominees to
its board of directors, and for so long as it holds at least 70% of the shares
it purchased in the private placement from Idan, the other shareholders have
agreed to vote in favor of the Company's nominee to Idan's board of directors.
In July 1993, the Company purchased 8.4% of Idan's shares for
approximately $3.5 million. In October 1993, Idan completed a private
placement of 6.7% of its shares for $3.2 million. As a result of this
placement, the Company's ownership of Idan was reduced to 7.8%.
Idan is quoted on NASDAQ under the symbol "IDANF."
EMPLOYEES
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As of December 31, 1993, Ampal had 12 employees plus 4 employees whose
compensation is reimbursed to Ampal by Moriah and 1 employee whose compensation
is shared with Hapoalim. Ampal (Israel) had 9 employees and Ampal Industries
(Israel) Ltd. had 4 employees as of that date. Relations between Ampal and its
employees are satisfactory.
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CONDITIONS IN ISRAEL
Most of the companies in which Ampal directly or indirectly invests,
conduct their principal operations in Israel and are directly affected by the
economic, political, military, social and demographic conditions there. The
following information is included in order to describe certain of these
conditions in Israel. All figures and percentages are approximate. A
substantial portion of the information with respect to Israel presented
hereunder has been taken from Annual Reports of the Bank of Israel, the Israeli
Central Bureau of Statistics and from economic reports of Hapoalim. No
independent verification has been made of such information.
Operations in Israel
A state of hostility has existed, varying as to degree and intensity,
between Israel and the Arab countries. In addition, Israel, and companies doing
business with Israel, have been the subject of an economic boycott by the Arab
countries since Israel's establishment. Following the Six-Day War in 1967,
Israel has administered the territories of the West Bank and the Gaza Strip. A
peace agreement between Israel and Egypt was signed in 1979 under which full
political relations have been established, but economic relations have been
very limited. Beginning in December 1987, increased civil unrest has existed
in the administered territories. To date, the ongoing civil unrest has not had
a material adverse impact on the financial condition or operations of the
Company's investees. No prediction can be made whether a resolution of these
problems will be achieved or the nature thereof, or whether the continuation of
the civil unrest in these territories may have a material adverse impact on the
operations of the investees in the future.
The Persian Gulf crisis, which took place in 1990 and 1991, had an adverse
effect on the Israeli economy as a whole and on the operations of the Company.
A decline in tourism during this period decreased revenues for Moriah. and
Coral World. In January 1991, a direct hit by an Iraqi scud missile caused
damage to a shopping mall under construction by Bay Heart. Pri Ha'emek, a food
processing company, also experienced a downturn in business as a result of this
crisis.
Since 1991, negotiations have taken place between Israel, its Arab
neighbors and the Palestinians to end the state of hostility in the region. In
September 1993, a breakthrough occurred in Israeli-Palestinian relations. A
joint Israeli-Palestinian Declaration of Principles was signed by Israel and
the Palestine Liberation Organization ("PLO") in Washington, D.C., outlining
interim Palestinian self-government arrangements. These arrangements include
implementation of Palestinian self-rule in the Gaza Strip and Jericho, proposed
elections of a Palestinian council and plans for extensive economic
cooperation. In addition, PLO Chairman Arafat sent a letter to Israeli Prime
Minister Rabin in which the PLO recognized Israel's right to exist in peace and
security, renounced terrorism and violence and affirmed that the clauses of the
PLO Covenant denying Israel's right to exist are no longer valid. In reply,
Israel recognized the PLO as the representative of the Palestinians in the
peace negotiations. Since then, Israel and the PLO have conducted a series of
discussions, which have been periodically interrupted due to events in the
region, designed to implement the Declaration of Principles.
All male adult permanent residents of Israel under the age of 54 are,
unless exempt, obligated to perform up to 44 days of military reserve duty
annually. Additionally, all such residents are subject to being called to
active duty at any time under emergency circumstances. Some of the employees
of the Company and its investees are currently obligated to perform annual
reserve duty. While the Company and its investees have operated effectively
under these and similar requirements, no assessment can be made of the full
impact of such requirements on the Company or its investees.
Industrial Buildings, a major owner/lessor of industrial properties in
Israel, owns approximately 1.0 million square feet of industrial buildings in
the administered territories (approximately 10% of its total holdings). The
future status of buildings owned and property leased by Industrial Buildings in
the administered territories is uncertain, but historically the Government of
Israel has compensated property owners for forfeitures resulting from
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government actions.
Demographics
Since the beginning of 1990, Israel has been experiencing a new wave of
immigration, primarily from the former Soviet Union. Approximately 77,000 new
immigrants arrived through the end of 1993. During the period 1990 through
1993, Israel's population increased by approximately 16.7%. Although the
increased immigration from the former Soviet Union may benefit Israel and its
economy in the long-term by providing highly educated, cost competitive labor
and by stimulating its economic growth, it has placed an increased strain on
government services and national resources. A sustained decrease in
immigration would alleviate some of the strain, but a decrease may also have a
negative effect on those investees whose revenue is derived mainly from the
sale of products and services in Israel. The impact of a significant change in
the flow of immigration on the operations of the investees is unclear.
The Israeli Government has found it necessary to raise additional revenue
and to dedicate substantial funds to support programs, including housing,
education and job training, designed to assist in the absorption of the new
immigrants. No prediction can be made as to the policies that will be adopted
in the future or the effect thereof on these and other government spending
programs.
Assistance from the United States
The State of Israel receives approximately $3 billion of annual grants for
economic and military assistance from the United States and has received
approximately $10 billion of United States Government loan guarantees, subject
to reduction in certain circumstances. The Government loan guarantees were
granted over a period of five years ($2 billion per annum) commencing in 1993.
The Israeli economy could suffer material adverse consequences were such aid or
guarantees to be significantly reduced. There is no assurance that foreign aid
from the United States will continue at or near amounts received in the past.
Inflation and Devaluation
Over the past four years, Israel's economy has experienced very high rates
of growth, exceeding 6% in 1990-92 (an average of 7.5% a year in the business
sector) and amounting to 3.5% in 1993. The lower growth rate of 1993 was due
to an anticipated 27% drop in investment in residential construction. Economic
growth in Israel over the past two years has been fueled by the export sector.
Exports of goods and services rose by 14.4% in 1992 and amounted to 20.8
billion dollars and increased by an additional 11.8% in 1993 to reach an
estimated 22 billion dollars. The Israeli Government's monetary policy
contributed to relative price and exchange rate stability during most of the
year despite fluctuating rates of economic growth during the year and a high
rate of unemployment.
In 1993, the number of tourists who arrived in Israel increased to
approximately 2 million from approximately 1.5 million and 1 million in 1992
and 1991, respectively.
Israel's average unemployment rate was reduced to 10% at the end of 1993
from 11.2% at the end of 1992 and 10.6% at the end of 1991.
The Israeli Government's primary economic policy objective has been to
increase business sector employment, and the Government has adopted several
economic policy measures in order to stimulate public and private sector
investment and expand business activity. In this respect, in early 1993 there
were reductions in the corporation tax and value added tax and the elimination
of marginal taxes that were viewed as interfering with economic activity. The
overseas travel tax and the levy on some imported services were abolished in
January 1993. Earlier, in May 1992, the payroll tax on businesses was
abolished. A customs agreement with the European Free Trade Association
countries was implemented in January 1993.
During 1993, the New Israeli Shekel ("NIS") was devalued by 8% relative to
the dollar from NIS 2.764 to NIS 2.986. This devaluation resulted primarily
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from the overall appreciation of the dollar in world money markets.
To offset the effects of inflation on the purchasing power of the Israeli
currency, the Government of Israel has instituted "linkage" policies which have
also been followed by most private organizations. Through linkage, the amount
of an obligation or payment is increased from time to time by an amount related
to changes in an index which may be the exchange rate of a foreign currency or
a price index. The payee is thus compensated for the relative decline in the
purchasing power of the NIS. Linkage adjustments may be based upon the total
or only a specified percentage of the change in the index being used. Many
obligations or payments in Israeli currency are linked to the dollar or the
CPI, including payment obligations and receivables of many of the Companies'
investees.
The following table sets forth for the periods indicated the effects of
annual inflation on linkage adjustments and annual devaluations, as discussed
in the preceding paragraph.
ISRAEL ANNUAL U.S.
ANNUAL CLOSING INFLATION ANNUAL
INFLATION EXCHANGE ANNUAL ADJUSTED FOR INFLATION
YEAR ENDED DEC. 31, RATE(1) RATE(2) DEVALUATION(3) DEVALUATION(4) RATE(5)
- - ------------------- --------- ------- -------------- -------------- --------
1984............................... 444.9% 0.640 492.7% (8.06)% 4.3%
1985............................... 185.2 1.499 134.8 21.49 3.8
1986............................... 19.6 1.486 (0.9) 20.65 1.9
1987............................... 16.1 1.539 3.5 12.16 3.8
1988............................... 16.4 1.807(6) 17.4 (0.86) 4.1
1989............................... 20.7 1.963 8.7 11.08 4.6
1990............................... 17.6 2.048 4.3 12.72 5.4
1991............................... 18.0 2.283 11.5 5.85 4.2
1992............................... 9.4 2.764 21.1 (9.64) 3.0
1993............................... 11.2 2.986 8.0 2.93 2.7
- - --------------
(1) "Israel Annual Inflation Rate" is the percentage increase in the Israeli
CPI between December of the year indicated and December of the preceding
year.
(2) "Closing Exchange Rate" is the rate of exchange of one dollar for the NIS
at December 31 of the year indicated as reported by the Bank of Israel.
(3) "Annual Devaluation" is the percentage increase in the value of the dollar
in relation to the NIS during the calendar year.
(4) "Annual Inflation Adjusted for Devaluation" is obtained by dividing the
December Israeli CPI by the Closing Exchange Rate, thus first obtaining a
dollar-adjusted Israeli CPI, and then calculating the yearly percentage
changes in this adjusted index.
(5) "U.S. Annual Inflation Rate" is obtained by calculating the percentage
change in the United States Consumer Price Index for All Urban Consumers,
as published by the Bureau of Labor Statistics of the United States
Department of Labor.
(6) The official closing exchange rate on December 31, 1988, was NIS 1.685 to
the dollar. On January 1, 1989, a devaluation of the NIS was declared and
a new exchange rate of NIS 1.807 to the dollar was determined.
Israeli Investment
Since the establishment of the State of Israel in 1948, the Government of
Israel has promoted the development of industrial and agricultural projects
through a variety of methods including tax abatements and tax incentives.
Industrial research and development projects in Israel may qualify for
government aid if they deal with the development of commercial products to be
made in Israel for sale abroad. Direct incentives usually are provided in the
forms of grants, regulated in accordance with the Law for Encouragement of
-19-
Industrial Research and Development 1984.
Since 1988, the Government of Israel's policy has been one of
privatization aimed at reducing its direct ownership interest in enterprises,
and the Government of Israel has sold or is planning to sell all or part of its
stake in many Government-owned companies.
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade which provides for reciprocal lowering of trade barriers
among its members.
Israel became associated with the European Economic Community by an
agreement concluded on July 1, 1975 which confers certain advantages with
respect to Israeli exports to most European countries and obliges Israel to
lower its tariffs with respect to imports from those countries over a number of
years.
In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area ("FTA") which is intended ultimately to eliminate
all tariff and certain nontariff barriers on most trade between the two
countries. Under the FTA agreement, most products received immediate duty-free
status in 1985, stated reductions are taking place on others and reductions in
tariffs relative to a third category may be accelerated between 1990 and 1995,
by which year all tariffs are to have been eliminated.
The end of the Cold War has enabled Israel to establish commercial and
trade relations with a number of nations, including Russia, China and the
nations of Eastern Europe, with which Israel had not previously had such
relations.
Economic Factors
Israel's defense expenditures, debt service and expenditures for the
absorption of immigrants are very high. As a result, the share of Israeli
resources available for other national purposes is limited. The defense
burden, debt service and expenditures for the absorption of immigrants,
development of the economy and the provision of a minimum standard of living,
particularly for the members of the lower income segments of the community, and
the maintenance of a minimum level of net foreign reserves, have resulted in
high balance of payments deficits for many years. This deficit has been
covered primarily by military and economic aid from the United States, personal
remittances from abroad, sales of Israel Government bonds, primarily in the
United States, institutional and free market loans and contributions from the
Jewish community worldwide.
Israel does not have an abundance of raw materials, including oil, and
therefore it is dependent to a large degree on the import of such raw
materials.
At December 31, 1991, December 31, 1992 and September 30, 1993, Israel's
outstanding net foreign debt was approximately $15.1 billion, $14.7 billion and
$16.4 billion, respectively. Israel had approximately $6.4 billion of foreign
exchange reserves at the end of 1993 compared to $5.1 billion at the end of
1992 and $6.3 billion at the end of 1991.
Economic and Monetary Policies
In order to stimulate economic growth, the Israeli Government has
continued a more liberal monetary policy adopted in 1989 aimed at reducing
interest rates and increasing the availability of investment capital. This
policy increased the availability of such capital by loosening restrictions on
the importation of foreign capital into the country and freeing additional
foreign currency deposits held in Israeli banks for domestic lending by
reducing bank liquidity requirements.
In an effort to stimulate exports and economic growth, the Israeli
-20-
Government abandoned the fixed exchange rate policy which was followed in
previous years. Commencing in 1989 the rate of exchange was allowed to
fluctuate, within a range of 3% (later changed to 5%) up or down, after an
initial devaluation of 13.4%. Further fluctuations and devaluations have
occurred or have been declared since then, including a 13.3% devaluation in the
fourth quarter of 1992. The current exchange rate mechanism adopted in
December 1991 allows the exchange rate to fluctuate around a diagonal mid-band
rate which will rise by up to 9% per annum and would allow for a total nominal
depreciation of the NIS of up to 18% for 1993.
In the past several years the Israeli Government has also liberalized
regulations relating to the Israeli securities market.
-21-
CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS
S.E.C. Exemptive Order
In 1947, the Securities and Exchange Commission (the "Commission") granted
Ampal an exemption from the Investment Company Act of 1940, as amended (the
"1940 Act") pursuant to an Exemptive Order. The Exemptive Order was granted
based upon the nature of Ampal's operations, the purposes for which it was
organized, which have not changed, and the interest of purchasers of Ampal's
securities in the economic development of Israel. There can be no assurance
that the Commission will not reexamine the Exemptive Order and revoke, suspend
or modify it. A revocation, suspension or material modification of the
Exemptive Order would materially and adversely affect the Company. In the
event that Ampal becomes subject to the provisions of the 1940 Act, it could be
required, among other matters, to make material changes to its management,
capital structure and methods of operation, including its dealings with
Hapoalim and related companies.
Certain Israeli Real Estate Tax Matters
Under Israeli law, a lease of real property with a term of more than 10
years is required to be reported to the Israeli Appreciation Tax Authorities
and is subject to a land appreciation tax or an income tax and an acquisition
tax. The Israeli Tax Commissioner has recently taken the position that certain
arrangements for the lease of real property, including multiple leases, leases
with renewal options and leases or options to lease between affiliated
companies, which in the aggregate provide a term exceeding 10 years, are
subject to the above reporting and taxes.
Certain of the investees, including Ophir, Industrial Buildings and
Carmel, are parties (mostly as lessors) to lease transactions which, under the
Commissioner's interpretation, may be deemed leases for terms in excess of 10
years. These investees have all reported their lease income as taxable income
and have recently reported such transactions to the tax authorities. Should
the tax authorities decide to enforce their position and prevail, these
investees would be in breach of Israeli law, and could be subject to material
taxes and to civil and criminal penalties. An assessment made against Bay
Heart in this regard by the tax authorities has been dropped.
The Company's investees have taken the position, which the Company
believes is shared by many of the other affected taxpayers in Israel, that the
Commissioner's position in this matter is incorrect. The Company cannot
predict whether the Commissioner's position will be upheld or, if upheld, the
effect on the Company and its investees.
Israeli Banking Regulations
In October 1993, the Bank Share Settlement Act (Temporary Provisions) 1993
(the "Bank Shares Act") was enacted by the Knesset, the Israeli parliament.
Under the Bank Shares Act, in October 1993, the shares of several Israeli
banks, including a majority of the shares of Hapoalim, were transferred to the
State of Israel. The purpose of the Bank Shares Act is to facilitate the sale
by the Government of Israel of shares in Israeli banks. In addition, the Bank
Shares Act is intended to limit the Government's interference in the day-to-day
operations of the banks. Control over such shares of each bank will be
exercised by a supervisory committee appointed for that bank by a public
advisory committee which is in turn approved by the Israeli Government. These
supervisory committees will appoint directors for each of the banks.
In May 1993, the Government of Israel sold a total of approximately 8% of
the shares of Hapoalim in a public offering and also sold options to purchase
an additional approximately 10% of the shares of Hapoalim. In November 1993,
the Government of Israel sold 5.4% of the shares of Hapoalim in a public
offering and an additional 1% of Hapoalim's shares in an offering to its
employees.
-22-
A provision of the Banking (Licensing) Law, 1981 (the "Banking Law")
imposes limitations on the purchase and holding of means of control of
non-banking corporations by Israeli banks. The Banking Law does not permit
Hapoalim to acquire additional means of control in Ampal. Additionally, not
more than 25% of the capital of Hapoalim may be invested in non-banking
business corporations, including Ampal. Under the Banking Law, the Company may
not use financing directly or indirectly provided by Hapoalim to make
acquisitions of means of control in non-banking corporation. Hapoalim may not
extend credit to the Company except in the ordinary course of business and on
terms similar to those on which credit is extended to other customers of the
same class.
In March, 1994, an amendment to the Banking Law was enacted by the
Knesset. Under the amendment, banks, including Hapoalim, are required to
reduce their holdings of individual non-banking business corporations,
including Ampal, to 25% or less by and not later than December 31, 1996. In
addition, it has been proposed by the Government, that the Minister of Finance
form a committee to examine the overall economic implications of a further
reduction in the permitted holdings of banking corporations in non-banking
business corporations.
From time to time, the Company engages in transactions with Hapoalim and
its affiliates. Currently, the Company maintains substantial deposits with
Hapoalim and its subsidiaries. See "Certain Relationships and Related
Transactions."
United States Banking Regulations
Due to its status as a subsidiary of Hapoalim which is subject, through
the United States International Banking Act of 1978 ("IBA"), to the provisions
of the United States Bank Holding Company Act of 1956 ("BHC"), there may be
limitations upon the direct or indirect investment activities of Ampal in the
United States. While Ampal itself is a "grandfathered" investment of Hapoalim
under the IBA for purposes of the BHC, Ampal may not invest in more than 5% of
the voting shares or 25% of the equity of United States corporations or
non-United States corporations which have a majority of their assets in or
revenues derived from the United States, subject to certain exceptions.
Management of the Company does not believe that these limitations contained in
the BHC and the regulations of the Board of Governors of the Federal Reserve
System thereunder have had or will have any material adverse impact upon the
Company or its operations.
Israeli Foreign Exchange Regulations
Foreign exchange regulations are in effect in Israel. The regulations are
administered by the Controller of Foreign Currency, an official of the Bank of
Israel, who is appointed by the Minister of Finance. The Company's capital
investments in Israeli enterprises and the payment in U.S. dollars of dividends
on such investments do not require prior approval by the Controller. Under
Israeli law, foreign investors who make foreign currency investments in Israeli
companies are entitled to receive payments of dividends and proceeds upon
resale of the investment in that foreign currency.
To the extent that loans or investments have been or will be made by Ampal
or any of its subsidiaries in or to Israeli enterprises, substantially all such
loans or investments have been, and will be, made in such manner as to permit
the payment of dividends, interest and principal and proceeds of resale thereon
in U.S. dollars.
-23-
TAX INFORMATION
Israeli Taxation Of Ampal
Ampal (to the extent that it has income derived in Israel) and Ampal's
Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax
Ordinance. For 1993, Israeli companies are taxed on their income at a rate of
39%. For 1994 through 1996, this tax rate will be reduced to 38%, 37% and 36%,
respectively. These reductions represent the final stage of reforms begun in
1987. These reforms consisted of combining two separate types of taxes on
company income, company tax and income tax, into one tax, and reducing the
effective tax rate on company income in 1987 from 61% to 45%, with further
reductions to 43.5%, 41%, 40% and 39% in 1990 through 1993.
Ampal has income from interest, rent and dividends resulting from its
investments in Israel. Under Israeli law, Ampal has been filing reports with
the Israeli tax authorities with respect to such income. In addition, as noted
below, Ampal is subject to withholding tax on dividends received from Israeli
companies at a rate of 25%. Under an arrangement with the Israeli tax
authorities, such income has been taxed based on principles generally applied
in Israel to income of non-residents. Ampal has filed reports with the Israeli
tax authorities through 1991 and has received "final assessments" with respect
to such reports (which final assessments are, under Israeli law, subject to
reconsideration by the tax authorities only in certain limited circumstances,
including fraud). Based on the tax returns filed by Ampal through 1991, it has
not been required to make any additional tax payments in excess of the
withholding on its dividends. In addition, under Ampal's arrangement with the
Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and the
United States on interest, rental and dividend income derived from Israeli
sources has not exceeded the taxation which would have been payable by Ampal in
the United States had such interest, rental and dividend income been derived by
Ampal from United States sources. There can be no assurance that this
arrangement will continue in the future. This arrangement does not apply to
taxation of Ampal's Israeli subsidiaries.
Under the provisions of the Income Tax Ordinance, income paid to
non-residents of Israel by residents is generally subject to withholding tax at
the rate of 25%. No withholding has been made on interest and rent payable to
Ampal under an exemption which Ampal has received from the income tax
authorities on an annual basis. There can be no assurance that this exemption
will continue in the future. With regard to dividends, however, payments to
Ampal are withheld at the 25% rate (as opposed to dividends payable to Israeli
companies, which are exempt from tax). The continued tax treatment of Ampal by
the Israeli tax authorities in the manner described above is based on Ampal
continuing to be treated, for tax purposes, as a non-resident of Israel that is
not doing business in Israel.
Under Israeli law, a tax is payable on capital gains of residents and
non-residents of Israel. With regard to non-residents, this tax applies to
gains on sales of assets either located in Israel or which represent a right to
assets located in Israel (including gains arising from the sale of shares of
stock in companies resident in Israel). The portion of the gain attributable
to inflation is taxable at 10%, while the remainder of the profit, if any, is
taxable to corporations at 39% in 1993 (and is scheduled to be reduced to 38%
and further to 36% in stages during 1994 through 1996). Non-residents of
Israel are exempt from the 10% tax on the inflationary gain derived from the
sale of shares in companies that are considered Israeli residents if they
choose to compute the inflationary portion of the gain based on the change in
the rate of exchange between Israeli currency and the foreign currency in which
the shares were purchased from the date the shares were purchased until the
date the shares were sold.
The Income Tax Law (Adjustment for Inflation), 5745-1985, which applies to
companies which have business income in Israel or which claim a deduction in
Israel for financing costs, has been in force since the 1985 tax year. The law
provides for the preservation of equity whereby certain corporate assets are
classified broadly into Fixed (inflation resistant) and Non-Fixed
(non-inflation resistant) Assets. Where shareholders' equity, as defined
therein, exceeds the depreciated cost of Fixed Assets, a tax deduction which
takes into account the effect of the annual inflationary change on such excess
-24-
is allowed, subject to certain limitations. If the depreciated cost of Fixed
Assets exceeds shareholders' equity, then such excess, multiplied by the annual
inflation change, is added to taxable income.
A proposed tax treaty between Israel and the United States was signed in
1975, and amended by protocols signed in 1980 and January 1993. Ratification
of the treaty is pending in both countries. The Company believes that this
treaty will not have a substantial impact on the taxation of the Company in the
United States or in Israel.
Individuals and companies in Israel pay VAT at a rate of 17% of the price
of assets sold and services rendered. They can deduct VAT paid on goods and
services acquired by them.
United States Taxation Of Ampal
Ampal and its United States subsidiaries (in the following tax discussion,
generally "Ampal") are subject to United States taxation on their consolidated
taxable income from foreign and domestic sources. The gross income of Ampal
for tax purposes includes or may include (i) income earned directly by Ampal,
(ii) Ampal's share of "subpart F income" earned by certain foreign corporations
controlled by Ampal, (iii) Ampal's share of income earned by certain electing
"passive foreign investment companies" or (under a pending tax bill) "passive
foreign corporations" of which Ampal is a stockholder and (iv) an amount (if
any) generally equal to Ampal's share of a controlled foreign corporation's
"excess passive assets." Subpart F income includes dividends, interest and
certain rents and capital gains. Excess passive assets of a controlled foreign
corporation for a taxable year are the excess of the average of the amounts of
passive assets held by the corporation as of the close of each quarter of a
taxable year over 25% of the average of the amounts of total assets held by the
corporation at such times. For calendar years 1993 and 1994, the maximum rate
applicable to domestic corporations is 35%.
Ampal is entitled to claim as a credit against its United States income
tax liability all or a portion of income taxes, or of taxes imposed in lieu of
income taxes, paid to foreign countries. If Ampal receives dividends from a
foreign corporation in which it owns 10% or more of the voting stock, in
determining total foreign income taxes paid by Ampal for purposes of the
foreign tax credit, Ampal is treated as having paid the same proportion of the
foreign corporation's post-1986 foreign income taxes as the amount of such
dividends bears to the foreign corporation's post-1986 undistributed earnings.
In general, the total foreign tax credit that Ampal may claim is limited
to the proportion of Ampal's United States income taxes that its foreign source
taxable income bears to its taxable income from all sources, foreign and
domestic. The Internal Revenue Code of 1986, as amended (the "Code"), also
limits the ability of Ampal to offset its United States tax liability with
foreign tax credits by subjecting various types of income to separate
limitations. Source of income and deduction rules may further limit the use of
foreign taxes as an offset against United States tax liability. As a result of
the operation of these rules, Ampal may choose to take a deduction for foreign
taxes in lieu of the foreign tax credit.
Ampal may be subject to the alternative minimum tax ("AMT") on
corporations. Generally, the tax base for the AMT on corporations is the
taxpayer's taxable income increased or decreased by certain adjustments and tax
preferences for the year. The resulting amount, called alternative minimum
taxable income, is then reduced by an exemption amount and subject to tax at a
20% rate. As with the regular tax computation, AMT can be offset by foreign tax
credits (separately calculated under AMT rules and generally limited to 90% of
AMT liability as specially computed for this purpose).
In connection with the transfer in 1992 of its stock in Granite to a
foreign subsidiary, Ampal entered into a gain recognition agreement with the
Internal Revenue Service. Under this agreement, if the foreign subsidiary
sells all or a portion of its stock in Granite before 2003, Ampal generally
will be required to recognize for tax purposes a proportionate amount of gain
based upon the fair market value of the stock in Granite on the date of the
transfer to the foreign subsidiary, and to pay tax due in respect of such gain
-25-
together with interest accrued on such tax since the date of the gain
recognition agreement.
RETURN ON EQUITY AND ASSETS
- - ---------------------------
The following table sets forth information regarding the return on equity and
assets of the Company for the years indicated:
Year Ended December 31,
-----------------------------
1993 1992 1991
-----------------------------
Return on Assets (net income divided
by average total assets).............. .06%* 2.88% .27%
Return on Equity (net income divided
by average shareholders' equity)...... .19%* 8.91% 1.04%
Dividend Payout Ratio Per Class A
Share (dividends declared per share
divided by net income per share)...... - - -
Equity to Assets Ratio (average equity
divided by average total assets)...... 33.17% 32.29% 26.31%
* Includes cumulative effect on prior years of change in accounting principle
of $(4,982,000).
Item 2. PROPERTY
--------
Ampal currently occupies executive office space leased by Hapoalim at 1177
Avenue of the Americas, New York City and will pay Hapoalim base rent of
approximately $168,000 per year commencing in September 1994, subject to
escalation. Ampal has space located at 10 Rockefeller Plaza subleased until
September 30, 1994 from Hapoalim for an annual rental, subject to escalation.
The rental payments for 1993 amounted to approximately $178,000. Until
November, 1990 Ampal occupied the entire floor, constituting 10,710 square
feet. At that time, Ampal modified the sublease to return 65% of that space to
Hapoalim, which then subleased it to an unrelated party subject to Ampal's
guarantee of total rent payments equivalent to the rent previously paid under
Ampal's sublease in the event the third party defaults.
The Company leases office space in various locations in the United States and
Israel to Hapoalim and its subsidiaries in exchange for total annual rental
payments of approximately $3,251,000. These lease transactions consist of the
following:
Hapoalim leases a portion of premises owned by Ampal located at 105 Arlozoroff
Street, Tel Aviv under a lease which expires March 9, 2003, with annual rental
payments based upon 11% of the cost of the property. In 1993, Ampal received
$352,000 as rental payments for these premises.
Hapoalim leases premises owned by Ampal (Israel) Ltd
., an Ampal subsidiary,
located at 111 Arlozoroff Street, Tel Aviv under a lease which expires on
September 30, 2000, with annual rental payments based upon 10% of the value of
the property linked to the CPI. In 1993, Ampal (Israel) received $220,000
as rental payments for these premises.
Hapoalim leases two premises owned by Ampal Development (Israel) Ltd
., an Ampal
subsidiary, located at 65 Allenby Street and 99 Ben Yehuda Street, Tel Aviv.
These leases expire December 31, 1996 (with options to extend the lease term
through December 31, 2002) with annual rental payments based upon 10% of the
value of the property linked to the CPI. In 1993, Ampal Development (Israel)
received $326,000 as rental payments for these premises.
-26-
Hapoalim leases two premises owned by Ampal Development (Israel) Ltd
. located
at 39 Shenker Street, Holon and 111 Yaffe Nof Street, Haifa. These leases
expire on September 30, 2000, with annual rental payments approximately equal
to 10% of the cost of the property linked to the CPI. In 1993, Ampal
Development (Israel) received $705,000 as rental payments for these premises.
Hapoalim and its affiliates lease two premises owned by Mercazim Investments
Ltd., a subsidiary of a company 42.5% owned by Ampal. These leases expire on
May 30, 2000, November 30, 2002 and July 30, 2003, respectively, with the
annual rental payments at market rates. In 1993, Mercazim received $662,000 as
rental payments for these premises.
Hapoalim leases two premises owned by Ampal Financial Services Ltd
., an Ampal
subsidiary, in Ramat Hasharon and Rosh Pina. These leases expire on September
30, 2000, with the annual rental payments based upon 10% of the cost of the
premises, linked to the CPI. In 1993, Ampal Financial Services received
$469,000 as rental payments for these premises.
Hapoalim leases two premises owned by Nir Ltd., an Ampal subsidiary, one
in Tel Aviv and one in B'nai Brak, with the annual rental payments based upon
10% of the cost of the premises, linked to the CPI. The lease on the premises
in Tel Aviv expires on September 30, 2000, and the lease on the premises in
B'nai Brak expires on July 10, 1997 (on June 10, 2002, if an option is
exercised). In 1993, Nir received $377,000 as rental for these premises.
Hapoalim leases an office building owned by Ampal located at 174 North
Michigan Avenue, Chicago, Illinois. This lease expires on in 2007 for a net
rental of $140,000 per year. At the conclusion of the term, Ampal has the
option of requiring Hapoalim to purchase the building at its then fair market
value. In 1993, Ampal received $140,000 as rental payments for these premises.
Under agreements initially made in 1984 and extended in 1989, Ophir
separately leases a hotel and parking area in Herzelia, Israel from an
unrelated party. Ophir subleases these properties to Hapoalim on terms
identical to those it pays. In 1993, Ophir received $250,000 as rental
payments for these premises.
Ampal-Israel, Ampal Development, Nir and Mercazim own several properties in
Jerusalem, Kfar Saba, Kiryat Aryeh, Tel Aviv, Beersheva and B'nai Brak,
including industrial plants, four supermarkets, and other properties which are
leased to various parties. The rent received by these companies for all of
these properties in 1993 totalled $1,171,000.
Other properties of the Company are discussed elsewhere in this Report
.
Item 3. Legal Proceedings
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
-27-
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
PRICE RANGE OF CLASS A STOCK
Ampal's Class A Stock is listed on the AMEX under the symbol "AIS.A." The
following table sets forth the high and low sales prices for the Class A Stock,
as reported on the American Stock Exchange Composite Tape for each calendar
quarter during the periods indicated:
HIGH LOW
---- ---
1992:
First Quarter........................................... 5 7/8 3 1/3
Second Quarter.......................................... 6 7/8 4 1/2
Third Quarter........................................... 6 1/4 5 1/8
Fourth Quarter.......................................... 6 1/4 4 3/4
1993:
First Quarter........................................... 9 7/8 5 1/4
Second Quarter.......................................... 9 1/2 7 1/4
Third Quarter........................................... 12 1/4 7 5/8
Fourth Quarter.......................................... 13 10 1/4
As of March 23, 1994, there were 1,459 record holders of Class A Stock.
DIVIDEND POLICY
Ampal has not paid cash dividends on its Class A Stock since 1989 and has
no present intention of declaring a cash dividend on the Class A Stock. Past
decisions not to pay cash dividends reflected the policy of Ampal to apply
retained earnings, including funds realized from the disposition of holdings,
to finance its business activities and to redeem debentures. The payment of
cash dividends in the future will depend upon the Company's operating results,
cash flow, working capital requirements and other factors deemed pertinent by
its board of directors.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------------------------------------------------------
(Dollars in thousands, except per share data)
Revenues.............. $ 73,243 $ 85,302 $ 71,519 $ 110,401 $ 127,537
Net income............ 226* 10,324 1,126** 1,116 1,509
Earnings per Class A share...... $.01* $.44 $.05** $.05 $.06
Total assets.......... 304,060 333,267 404,466 436,024 1,100,756
Deposits and debentures
outstanding......... 94,362 107,674 174,727 225,603 870,878
Dividends declared per Class A
share............... - - - - $.06
* Includes cumulative effect on prior years of change in accounting
principle of $(4,982), equal to $(.21) per
share.
** Includes extraordinary income of $726, equal to $.03 per share.
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- - -------
The Company acquires interests in businesses located in the State of Israel or
that are Israel-related. An important objective of Ampal is to make
investments in companies that take advantage of growth in Israel's domestic
economy. The Company has diversified interests in the following sectors:
hotels and leisure-time, real estate, energy distribution, basic industry and
high technology and communications. Ampal generally seeks to acquire and
maintain a sufficient equity interest in a company to permit it, on its own or
with investment partners, to have a significant influence in the management and
operation of that company. In determining whether to acquire an interest in a
specific company, the Company considers quality of management, qualifications
of investment partners, potential return on investment, projected cash flow,
market share and growth potential.
The Company emphasizes long-term appreciation over short-term returns and
liquidity. The Company often makes equity investments accompanied by more
significant loans or loan guarantees with the intention that cash flow from
operations of the investee companies will repay these loans within a relatively
short period. The Company believes that recent progress in peace negotiations
between Israel, the Palestinians and certain Arab states may improve the
economic climate in the region, benefit the Company's investees and create
additional investment opportunities.
The Company's results of operations are directly affected by the results of
operations of its investees.
Companies which are greater than 50%-owned are included in the consolidated
financial statements of the Company. The Company accounts for its holdings in
investees over which the Company exercises significant influence, generally
20%- to 50%-owned companies, under the equity method. Under the equity method,
the Company recognizes its proportionate share of such companies' income based
on its percentage of direct and indirect equity interests in earnings of those
companies. If the Company's interest in a subsidiary were to be reduced to
20%-50%, the investment would be recorded under the equity method. The
Company's results of operations may be affected by capital transactions of
investee companies which are 20%- to 50%-owned. Thus, the issuance of shares
by an investee company which is accounted for under the equity method at a
price per share above the Company's carrying value per share for such investee
company results in the Company recognizing income for the period in which such
issuance is made, while the issuance of shares by such an investee at a price
per share that is below the Company's carrying value per share for such
investee company results in the Company recognizing a loss for the period in
which such issuance is made. The Company accounts for its holdings in
investees, other than those described above, on the cost method. Under the
cost method, the Company accounts for its investment at the lower of cost or
market.
A comparison of the Company's financial statements from year to year must be
considered in light of the Company's acquisitions and divestitures during the
period.
The Company's effective tax rates have been and in the future may be above
United States statutory rates, in part, because of taxes paid in foreign
jurisdictions by investees for which Ampal does not fully receive tax credits
in the United States.
Effective January 1, 1993, the Company was required to adopt Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
which requires a change from the deferred method to the liability method of
accounting for income taxes. The cumulative effect on prior years of this
change in accounting principle was reflected as a nonrecurring reduction of net
income and an increase in deferred income tax liability of approximately $5
million. This was reported separately in the consolidated statement of income
for the year ended December 31, 1993. This change required no payments to any
taxing jurisdiction and had no material effect on the current year's provision
for income taxes and on income before cumulative effect of change in accounting
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principle. Prior years' financial statements have not been restated to apply
the provisions of SFAS No. 109.
Based on the guidelines of SFAS No. 52, "Foreign Currency Translation," the
economy in Israel is no longer considered hyper-inflationary as a result of
changes in the economic conditions and the decrease in the rate of inflation in
Israel. During 1993, for those subsidiaries and affiliates whose functional
currency is considered to be the New Israeli Shekel ("NIS"), assets and
liabilities are translated at the rate of exchange at the end of the reporting
period and revenues and expenses are translated at the average rates of
exchange during the reporting period. Translation differences of those foreign
companies' financial statements are included in the cumulative translation
adjustment account of shareholders' equity at December 31, 1993. Prior to
1993, translation gains and losses for these subsidiaries and affiliates were
reflected in the Company's consolidated statements of income.
Should the NIS continue to be devalued against the dollar, such cumulative
translation adjustments are likely to result in reductions of shareholders'
equity. As of December 31, 1993, the effect on shareholders' equity was a
decrease of approximately $2.2 million. Upon disposition of an investment, the
related cumulative translation adjustment balance will be recognized in
determining gains or losses.
Moriah Hotels Ltd. ("Moriah") and Orlite Engineering Company Ltd. ("Orlite")
report their financial statements on a three-month lag. Consequently, their
results for the 12-month period ended September 30, 1993 were incorporated into
the Company's 1993 consolidated annual financial statements.
RESULTS OF OPERATIONS
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Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Consolidated net income before the cumulative effect of a change in accounting
principle decreased to $5.2 million in 1993 from $10.3 million in 1992. In
1993 and 1992, there were special factors which impacted both years' reported
net income. 1993 net income included approximately $3 million of gains on
issuance of shares by affiliates and gains on sales of investments (net of
minority interests and income taxes), whereas 1992's net income included
approximately $6.2 million of similar gains. Furthermore, in 1993 the Company
was required to record a nonrecurring charge of approximately $5 million with
respect to its adoption of SFAS No. 109 which resulted in net income of $.2
million as compared with $10.3 million in 1992.
The decrease in net interest earnings in 1993 as compared to 1992 resulted from
additional interest income earned by the Company from a prepayment of a deposit
receivable in 1992, and additional interest expense in 1993 resulting from
Ophir's bank borrowings to finance its investment in Industrial Buildings Ltd.
("Industrial Buildings"). In the first quarter of 1993, Ophir Holdings Ltd.
("Ophir"), which is now 42.5%-owned by the Company, participated in the
purchase from the Government of Israel of 51.3% of the shares in Industrial
Buildings, the largest owner/lessor of industrial buildings in Israel. The
remainder of the shares of this company are held by the public. Ophir's
approximately $50 million investment in Industrial Buildings was financed
primarily by borrowings from two unrelated banks. Ophir owns an equivalent of
12.8% of the equity of Industrial Buildings.
Equity in earnings of affiliates decreased for the year ended December 31, 1993
as compared to the same period in 1992. The decrease was mainly attributable
to the Company's share of losses of its real estate affiliates which recorded
high finance expenses on their borrowings linked to the Consumer Price Index in
Israel ("CPI"). In the past, these finance expenses were substantially offset
by the translation gains resulting from the devaluation of the Israeli shekel
to the U.S. dollar. In 1993, based on the guidelines of SFAS No. 52 (see
General), these companies changed the method of translating their shekel
financial statements to U.S. dollars, and the translation gains are no longer
reflected in the statement of income but are included in the cumulative
translation adjustment account of shareholders' equity. The losses from real
estate affiliates were partially offset by the Company's share of the earnings
of the Moriah Group of companies which increased in 1993 as a result of higher
occupancy reflecting the rise in tourism to Israel as well as the Company's
share of earnings of newly acquired affiliates.
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Food processing revenues which reflect sales of the Company's then 74.9%-owned
subsidiary, Pri Ha'emek (Canned and Frozen Food) 88 Ltd. ("Pri Ha'emek"),
decreased because sales were affected by foreign currency fluctuations. In
February 1994, Pri Ha'emek's other shareholder purchased additional shares in
Pri Ha'emek at the same price the Company paid for its shares in 1991, diluting
the Company's ownership to 66.7%. In March 1994, Pri Ha'emek conducted an
initial public offering in Israel on the Tel Aviv Stock Exchange ("TASE"). The
offering did not meet the distribution requirement under the regulations of the
TASE and as a result, Pri Ha'emek's underwriters deposited for sale by a
trustee shares which are expected to be sold, at such prices as the trustee may
realize, over a thirty-day period. The Company has agreed to pay to the
trustee up to NIS 2 million (approximately $670,000) to fund its pro-rata share
of the difference between the proceeds of those sales and the amount which
would have been received if the shares were sold at the public offering price.
The Company's interest in Pri Ha'emek will be initially diluted to 51.3% and
upon exercise of all options and convertible debentures, the Company's interest
may be diluted to 35.3%. If the Company's interest in Pri Ha'emek decreases
below 50%, Pri Ha'emek's results will no longer be consolidated with the
Company's but will be recorded by the equity method of accounting.
In February and June 1993, the Company invested an aggregate of approximately
$4.3 million in Paradise Mattresses Industries (1992) Ltd. ("Paradise") for
approximately 85.1% of the shares of Paradise. Paradise's assets and
liabilities were consolidated commencing June 30, 1993; its manufacturing and
distribution operations were included in equity in earnings of affiliates for
the six months ended June 30, 1993 and consolidated for the six months ended
December 31, 1993. Paradise is a company which manufactures and markets
mattresses and fold-out beds in Israel and is a licensee of the Sealy
Posturepedic Mattress name and manufacturing proce