ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OF AMPAL-AMERICAN ISRAEL CORPORATION
PART I
ITEM 1. BUSINESS
| As used in this report (the “Report”), the term “Ampal” or “registrant” refers to Ampal-American Israel Corporation. The term “Company” refers to Ampal and its consolidated subsidiaries. Ampal is a New York corporation founded in 1942. | |
| For industry segment financial information and financial information about foreign and domestic operations, see Note 15 to the Company’s consolidated financial statements included elsewhere in this Report. The companies described below under – “Telecommunication,” “Energy,” “High Technology” and “Capital Markets and Other Holdings” are included in the Finance segment. The companies described under “Real Estate” are included in the Real Estate segment. The companies described under “Leisure-Time” are included in the Leisure-Time segment. | |
| The Company primarily acquires interests in businesses located in the State of Israel or that are Israel-related. Ampal’s investment focus is principally on companies or ventures where Ampal can exercise significant influence, on its own or with investment partners, and use its management experience to enhance those investments. An important objective of Ampal is to seek investments in companies that operate in Israel initially and then expand abroad. In determining whether to acquire an interest in a specific company, Ampal considers quality of management, potential return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners. | |
| The Company’s strategy is to invest opportunistically in undervalued assets with an emphasis on the following sectors: Telecommunications, Real Estate and Project Development, Leisure Time and High Technology. We believe that past experience, current opportunities and a deep understanding of the above-referenced sectors both domestically in Israel and internationally will allow the Company to bring high returns to its shareholders. The Company emphasizes investments which have long-term growth potential over investments which yield short-term returns. | |
| The Company provides its investee companies with ongoing support through its involvement in the investees’ strategic decisions and introduction to the financial community, investment bankers and other potential investors both in and outside of Israel. | |
| Listed below by industry segment are all of the substantial investee companies in which the Company had ownership interests during the fiscal year ended December 31, 2003, the principal business of each and the percentage of equity owned, directly or indirectly, by Ampal. The table below also indicates whether the investee’s securities are listed on the New York Stock Exchange (“NYSE”), NASDAQ National Market (“Nasdaq”), American Stock Exchange (“AMEX”), Tel Aviv Stock Exchange (“TASE”) or the Canadian Venture Exchange (“CDNX”). Further information with respect to the more significant investee companies is provided after the following table. For additional information concerning the investee companies, previously provided annual reports on Forms 10-K of Ampal are incorporated by reference herein. |
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| Industry Segment
|
Principal Business
|
Percentage
as of December 31, 2003(1) |
||
|---|---|---|---|---|
| Telecommunication | ||||
| MIRS Communications Ltd. | Wireless Communications Service Provider | 25.0 | ||
| Real Estate | ||||
| Am-Hal Ltd. | Chain of Senior Citizen Facilities | 100.0 | ||
| Ampal (Israel) Ltd. | Holding Company and Real Estate | 100.0 | ||
| Bay Heart Limited | Shopping Mall Owner/Lessor | 37.0 | ||
| Ophir Holdings Ltd. ("Ophir Holdings") | Holding Company | 42.5 | ||
| Industrial Buildings Corporation Ltd. (TASE) | Industrial Real Estate | 5.0 | (3) | |
| Lysh The Coastal High-way Ltd. | Commercial Real Estate | 10.6 | (3) | |
| Meimadim Investments Ltd. | Commercial Real Estate | 4.2 | (3) | |
| New Horizons (1993) Ltd. | Commercial Real Estate | 34.0 | (3) | |
| Shmey-Bar Group | Commercial Real Estate | 9.4 | (3) | |
| Leisure-Time | ||||
| Coral World International Limited | Underwater Observatories and Marine Parks | 50.0 | ||
| Country Club Kfar Saba Limited | Country Club Facility | 51.0 | ||
| Hod Hasharon Sport Center (1992) | ||||
| Limited Partnership | Country Club Facility | 50.0 | ||
| High-Technology and Communications | ||||
| Babylon Ltd. | Translation Software for the Internet | 1.3 | ||
| Bridgewave Communications, Inc. | Broadband Wireless Technology | 6.0 | ||
| Clalcom Ltd. | Communications | 0.7 | ||
| Courses Investment in Technology Ltd. | Venture Capital Fund | 3.2 | (3) | |
| CUTe Ltd. | Designs Intellectual Property Rights | 20.0 | ||
| Enbaya Ltd. | 3D Browser/Publisher | N/A | ||
| Identify Solutions Ltd. | Defect-Detecting Software | 2.4 | ||
| Modem Art Ltd. | Fabless Semiconductor Company | 4.5 | ||
| Netformx Ltd | Network Design Tools | 19.6 | (2) | |
| Oblicore Ltd. | Service Performance Tracking Software | 13.9 | ||
| Ophirtech Ltd. ("Ophirtech") | Holding Company | 42.5 | ||
| Cerel Ceramic Technologies Ltd. | Electrophoretic Deposition | 6.6 | (2) | |
| Expand Networks Ltd. | Internet Data Compression | 3.9 | (2) | |
| Mainsoft Corporation Ltd. | UNIX Tools | 0.8 | (2) | |
| Praxell, Inc. | Prepaid Charge Card Software | 3.5 | (2) | |
| Romidot Ltd. | Optical Checking Instruments | N/A | ||
| StoreAge Networking Technologies Ltd. | Data Storage Software | 4.6 | (2) | |
| Viola Networks | Computer Network Software | 6.8 | (2) | |
| Peptor Ltd. | Pharmaceutical Products | 0.5 | ||
| PowerDsine Ltd. | Telecommunications Components | 8.1 | ||
| ShellCase Ltd. (CDNX:SSD) | Packaging Process for Semiconductor Chips | 13.8 | ||
| Shiron Satellite Communications (1996) Ltd. | Satellite Modems and Fast Internet Access | 9.8 | ||
| Smart Link Ltd. | Software-Based Communications Products | 13.6 | ||
| Star Management of Investments No. II (2000) L.P. | Venture Capital Fund | 10.0 | ||
| VisionCare Ophthalmic Technologies | Advanced Optical Products | 1.2 | ||
| XACCT Technologies Ltd. | TCP/IP Network Software | 16.9 | ||
| Xpert Integrated Systems Ltd. | Software and Systems Integrator | 12.7 | ||
| Specializing in Systems Security | ||||
| Energy | ||||
| Granite Hacarmel Investments Ltd. (TASE) | Distribution of Refined Petroleum Products | 10.3 | ||
| Capital Markets and Other Holdings | ||||
| Ampal Development (Israel) Ltd. | Holding Company | 100.0 | ||
| Ampal Industries (Israel) Ltd. | Holding Company | 100.0 | ||
| Carmel Container Systems Limited | ||||
| (AMEX:KML) | Packaging Materials and Carton Production | 21.8 | ||
| Epsilon Investment House Ltd. | Portfolio Management and Underwriting Services | 20.0 | ||
| Renaissance Investment Company Ltd | Portfolio Management and Underwriting Services | 20.0 | ||
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(1) Based upon current ownership percentage. Does not give effect to any potential dilution.
(2) As of December 31, 2003, Ophirtech held the following percentage interests:
| Cerel Ceramic Technologies Ltd. | 15.5 | |||
| Expand Networks Ltd. | 9.3 | |||
| Mainsoft Corporation Ltd. | 1.9 | |||
| Netformx Ltd. | 5.5 | |||
| Romidot Ltd. | N/A | |||
| StoreAge Networking Technologies Ltd. | 10.9 | |||
| Viola Networks | 16.0 |
| The Company’s percentage interest in the above-referenced companies set forth in the chart reflects the Company’s 42.5% ownership of Ophirtech plus any direct holdings. | ||
| (3) | As of December 31, 2003, Ophir Holdings held the following percentage interests: |
| Courses Investment in Technology Ltd. | 3.5 | |||||
| Industrial Buildings Corporation Ltd. | 11.7 | |||||
| Lysh The Coastal High-way Ltd. | 25.0 | |||||
| Meimadim Investments Ltd. | 10.0 | |||||
| New Horizons (1993) Ltd. | 80.0 | |||||
| Shmey-Bar (I.A.) 1993, Ltd., Shmey-Bar (T.H.) | ||||||
| 1993 Ltd. and Shmey-Bar Real Estate (1993) Ltd. | 22.2 | |||||
| The Company’s percentage interest in the above-referenced companies set forth in the chart reflects the Company’s 42.5% ownership of Ophir Holdings plus any direct holdings. |
Significant Developments Since the Fiscal Year Ended December 31, 2003
In February 2004, the Company completed a private sale of its remaining holdings in Granite Hacarmel Investments Ltd. to a group of institutional and other investors. The sale of 14,158,891 shares at a price of approximately $1.42 (6.30 NIS) per share resulted in total proceeds to Ampal of approximately $20.1 million.
In December 2003, the Company entered into an agreement for the sale of all of its holdings in XAACT Technologies Ltd. (“XAACT”) to Amdocs Limited, which agreed to acquire all of the issued and outstanding shares of XACCT. On February 19, 2004, Ampal received approximately $3.8 million (partially in cash and partially in shares of Amdocs Limited) for its holdings in XACCT.
In February 2004, the Company entered into an agreement to invest EUR 4.5 million (approximately US $5.6 million) in Telecom Partners, a newly formed entity that will serve as a platform for investments in the telecommunication industry predominately outside of Israel. Ampal’s investment consists of a EUR 4 million convertible debenture, which converts into a one third partnership interest in the partnership, and a EUR 500,000 loan. The convertible debenture is converted according to the Company’s discretion. Telecom Partners currently holds investments in PSINet Europe B.V. and Grapes Communications N.V./S.A., two European telecom service providers.
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In 2004, Ophir Holdings (a 42.5% owned affiliate of the Company) sold 4,315,036 shares of Industrial Buildings Corporation Ltd. (“Industrial Buildings”) for the amount of approximately $4.6 million. As of December 31, 2003, Ophir Holdings owned an 11.7% interest in Industrial Buildings.
On January 4, 2004, the Company loaned $0.3 million to ShellCase Ltd. (“ShellCase”), the principal business of which is the packaging process of semiconductor chips.
Ampal currently leases an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease period is seven years commencing on October 15, 2002. The annual rent for this lease is $114,968. On March 31, 2004, the Company intends to close this office. The office space has been subleased.
Telecommunications
MIRS COMMUNICATIONS LTD. (“MIRS”)
MIRS is a wireless communications service provider and represents the largest investment in Ampal’s history. Ampal beneficially owns a 25% interest in MIRS. Ampal purchased its interest in MIRS from Motorola Israel for $110 million. Ampal currently holds its interest in MIRS through a limited partnership, of which Ampal owns a 75.1% interest and acts as general partner. MIRS is currently owned one-third by the limited partnership and two-thirds by Motorola Israel. MIRS operates a fully integrated wireless voice and data communication services, digital and analog public-shared two-way radio systems. The wireless communication network is based on iDEN(TM) integrated wireless communication technology, a unique radio technology developed by Motorola, and provides an integrated service platform of cellular, two-way radio and wireless data services. These services are targeted primarily to commercial customers.
The main goal of MIRS is to provide cellular service to the commercial, governmental, public and private sectors according to quality standards set by Motorola, in order to give a full and satisfying solution to all wireless communications needs. MIRS has over 260,000 subscribers mainly in the commercial, governmental, municipal, security and military sectors. MIRS has strongly positioned itself in the commercial sector, announcing an aggressive pricing strategy, resulting in an increase in its customer base. MIRS holds a more than 20% market share of the Israeli cellular commercial sector.
On February 5, 2001, MIRS was granted a full general operator license by the Israeli Ministry of Communications for portable radio and telephone services through its cellular system. This license is similar to the three existing cellular licenses previously granted to other Israeli operators. As part of the license, MIRS will be required to pay royalties to the Government of Israel and be subject to certain quality of service measurements to comply with industry standards. In connection with the issuance of the license, MIRS was obligated to make a preliminary payment to the Israeli Ministry of Communications in the amount of NIS 17,600,000 ($3.8 million) plus accrued interest. In addition, during the ten year period beginning July 1, 2001, MIRS will make quarterly payments to the Israeli Ministry of Communications in an amount equal to 1.3% of its income which is subject to royalties.
Real Estate
In Israel, most land is owned by the Israeli government. In this Report, reference to ownership of land means either direct ownership of land or a long-term lease from the Israeli Government, which in most respects is regarded in Israel as the functional equivalent of ownership. It is the Israeli government’s policy to renew its long-term leases (which usually have a term of 49 years) upon their expiration.
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AM-HAL LTD. (“AM-HAL”)
Am-Hal is a wholly-owned subsidiary of the Company, develops and operates luxury retirement centers for senior citizens.
In March 1992, the first center was opened in Rishon LeZion, a city located approximately 10 miles south of Tel-Aviv. This center, of about 120,000 square feet, includes 149 self-contained apartments, a 74-bed nursing care ward, a 21-bed assisted-living ward, a swimming pool, a health care center and other recreational facilities. The nursing care ward is leased to a non-affiliated health care provider until 2006.
In June 2000, the second center was opened in Hod Hasharon, a city located approximately 7 miles north of Tel Aviv. This center, which is approximately 250,000 square feet, includes 235 self-contained apartments, a 33-bed nursing care ward and a 22-bed assisted-living ward.
INDUSTRIAL BUILDINGS
Industrial Buildings (TASE), 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.
Ampal’s ownership interest in Industrial Buildings is held through its interest in Ophir Holdings. As of December 31, 2003, Ophir Holdings’ owned a 11.7% interest in Industrial Buildings.
Ophir Holdings’ interest in Industrial Buildings is subject to foreclosure in the event of a default by any of the investors under the bank credit agreements entered into in connection with the original acquisition of Industrial Buildings from the Government of Israel in 1993. Any amounts distributed as a dividend by Industrial Buildings are required to be applied first to pay then-due borrowings. For a discussion of Ophir Holdings’ recent sale of certain shares of Industrial Buildings, please see “Significant Developments Since the Fiscal Year Ended December 31, 2003” above.
AMPAL (ISRAEL) LTD. (“AMPAL (ISRAEL)”)
Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an approximately 40,000 square foot commercial property located in Tel Aviv which houses its principal offices. Total rental income in 2003 was $0.3 million. Ampal (Israel) also acts as a holding company for other investments discussed elsewhere in this Report.
OPHIR HOLDINGS
Ophir Holdings is a holding company that owns interests in real estate companies and is owned 42.5% by the Company. The Company and Polar Investments, which owns 57.5% of Ophir Holdings, are parties to a shareholders’ agreement regarding joint voting, directorships and rights of first refusal with respect to Ophir Holdings.
Ophir Holdings owns two acres of land in an industrial park in Netanya, Israel together with an unrelated party. These parties entered into a joint venture agreement regarding the site on which they developed a 326,000 square foot building (including parking) for both industrial and commercial use. Ophir Holdings has a 70% interest in the property and joint venture. Ophir Holdings’ lease revenues from the building were $1.6 and $1.7 million in 2003 and 2002, respectively.
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Ophir Holdings owns a 22.2% interest in the Shmey-Bar group of companies (“Shmey-Bar”). Shmey-Bar acquired 2.3 million square feet of real estate properties from Hamashbir Hamerkazi, Ltd. (“Hamashbir Hamerkazi”) for $27.7 million. In the same transaction, Shmey-Bar received an option to acquire, for $26.3 million, an additional 700,000 square feet of real estate properties from Hamashbir Hamerkazi. These properties are situated in various locations in Israel. Ophir Holdings’ interest in Shmey-Bar was acquired with an investment accompanied by a $5.7 million shareholder’s loan.
Ophir Holdings’ owns a 50% equity interest in Lysh The Coastal High-way Ltd. (“Lysh”). Lysh has a 50% holding in Beit Herut-Lysh Development Company Ltd. (“BHL”), which is constructing a 180,000 square foot commercial project for rental near Moshav Beit Herut on land owned by the Israeli Land Authority. The project, consisting of approximately 100,000 square feet, has been completed at a construction cost of $18 million, including the cost of the land. Ophir Holdings’ owns a 25% direct interest in BHL (its share in the project being 12.5%).
Ophir Holdings has also undertaken to provide guarantees in an amount equivalent to 25% of the construction costs. As of December 31, 2003, BHL had taken out bank loans of approximately $14.2 million, by drawing on a credit line extended by a financial institution in connection with the project.
Ophir Holdings owns a 10% interest in a joint venture which had agreed to purchase 4.4 million square feet of land near Haifa for approximately $15 million, on which the parties intend to develop a commercial real estate project for rent. Ophir Holdings has obligated itself to invest up to $1.5 million in the first stage of this project and its share of development costs is estimated to be as much as $17 million.
During 2003, Ophir Holdings recognized a gain on the sale of six properties for a total amount of $7.5 million.
BAY HEART LIMITED (“BAY HEART”)
Bay Heart was established in 1987 to develop and lease a shopping mall (the “Mall”) in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall, which opened in May 1991, is a modern three-story facility with approximately 280,000 square feet of rentable space. The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment facilities including seven movie theaters. Approximately 37,500 square feet of the Mall are occupied by Supersol Ltd., one of the two largest Israeli supermarket chains, and the parent of a co-investor in Bay Heart. The total cost of the Mall was approximately $53 million, which was financed principally with debt instruments. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information regarding the debt financing of Bay Heart. A train station on the west side of the Mall was completed on September 2001. A transportation complex, in conjunction with a subsidiary of Egged Bus Corporation, was opened in January 2002. The Company owns 37% of Bay Heart. Bay Heart is negotiating a financial structuring and renovation of the Mall.
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Leisure-Time
CORAL WORLD INTERNATIONAL LIMITED (“CORAL WORLD”)
Coral World, which is 50%-owned by the Company, owns and controls three marine parks in Eilat (Israel), Perth (Australia) and Maui (Hawaii).
Coral World’s Eilat marine park is located next to the coral reefs and visitors to this park view marine life in its natural coral habitat through a unique underwater observatory. Coral World’s marine parks in Perth and Maui allow visitors to walk through a transparent acrylic tube on the bottom of a man-made aquarium surrounded by marine life. In addition to admission charges, Coral World’s food and beverage facilities and retail outlets are a significant revenue source.
Coral World’s parks hosted approximately 948,000 visitors during 2003. Coral World has approximately 250 full-time equivalent positions as of December 31, 2003.
Coral World has entered into a joint development project for a new marine park in Palma de Majorca. Coral World has also entered into a joint venture called ’Vista Historica’, which participated in a tender for the development of a multimedia attraction near the ancient city of Pompeii and which is in the process of developing a new ’Vista Historica’ attraction in the cities of Prague and Istanbul.
COUNTRY CLUB KFAR SABA LIMITED (“KFAR SABA”)
Kfar Saba operates a country club facility (the “Club”) in Kfar Saba, a town north of Tel Aviv. Kfar Saba holds a long-term lease to the real estate property on which the Club is situated. The Club’s facilities include swimming pools, tennis courts and a clubhouse. The Club currently is seeking to obtain building permits for an additional 30,000 square feet of commercial development on the Club grounds.
The Club, which has a capacity of 2,000 member families, had approximately 1,900 member families for the 2003 season. The Company owns 51% of Kfar Saba.
HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP (“HOD HASHARON”)
Hod Hasharon operates a country club facility (the “H.H. Club”) in Hod Hasharon, a town north of Tel Aviv. The H.H. Club, which opened in July 1994 and has a capacity of 1,600 member families, has operated at capacity for the past three years.In 2003, the H.H. Club repaid owner’s loans of $0.2 million to each of the partners. As of December 31, 2003, the Company holds a 50% direct interest in Hod Hasharon.7
High Technology
IDENTIFY SOLUTIONS LTD. (“IDENTIFY”)
Identify (formally Mutek Ltd.), develops and markets the AppSight solution suite based on Identify’s Black Box technology that captures, communicates and identifies the root cause of failures in applications. AppSight is used throughout the application life cycle to increase application reliability and availability and reduce application deployment and support costs.
As of December 31, 2003, the Company had invested $3.7 million in Identify, and had written off $2.4 million of its investment. As of December 31, 2003, the Company holds a 2.4% equity interest in Identify.
MODEM ART LTD. (“MODEM-ART”)
Modem-Art Ltd. is a privately held fabless semi-conductor company specializing in developing system-on-a-chip solutions for wideband and broadband communications systems focusing on baseband processes for 3G terminals/headsets.
As of December 31, 2003, the Company had invested $2.0 million in Modem-Art and had written off $1.0 million of its investment during 2002. As of December 31, 2003, the Company holds 4.5% equity interest in Modem-Art.
NETFORMX, LTD. (“NETFORMX”)
Netformx develops and markets the award winning CANE(R) family of network design, analysis and simulation tools. Netformx’s strategy is to help its customers design and maintain sophisticated computer networks. Using CANE, network and system integrators and network managers design, simulate and analyze efficient, reliable networks quickly and easily. CANE is designed to resolve network chaos and manage the accelerating pace of network change while reducing network equipment, consulting and staff costs.
As of December 31, 2003, the Company had a 19.6% equity interest in Netformx, directly and indirectly through Ophir Holdings. As of December 31, 2003, the Company had written off all of its investment in Netformx.
OPHIRTECH
Ophirtech, the Company’s 42.5%-owned affiliate, has invested in various companies in the high -technology sector. During 2003, Ophirtech invested $0.7 million in start-up companies and made provisions for impairment of the value of its start-up investments in the amount of $0.3 million. At December 31, 2003, the book value of Ophirtech’s start - up investments was $8.3 million.
Included among Ophirtech’s investments are the following four companies:
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CEREL CERAMIC TECHNOLOGIES LTD. (“CEREL”)
Cerel is using its proprietary Electrophoretic Deposition (“EPD”) process to develop production technology and design tools for Functional Electronic Packages.
EPD is a method for deposition of electrically charged solid particles held in a liquid suspension under the influence of an applied electric field.EPD can be used to deposit laminated and graded microstructures on shaped or patterned substrates.
As of December 31, 2003, Ophirtech had invested $0.9 million in Cerel for a 15.5% equity interest.
EXPAND NETWORKS LTD. (“EXPAND”)
Expand specializes in bandwidth expansion products for enterprises and Internet service providers. These products are based on Expand’s revolutionary combination of the hardware and software technology, Adaptive Acceleration.
As of December 31, 2003, Ophirtech had written off $1.3 million of its $3.2 million investment in Expand. Ophirtech’s equity interest in Expand is 9.3% as of December 31, 2003.
STOREAGE NETWORKING TECHNOLOGIES LTD. (“STOREAGE”)
StoreAge is an innovative developer and provider of enterprise storage management solutions that centralize and simplify storage network administration. StoreAge network-based solutions provide a uniform, SAN-wide method for provisioning storage, ensuring business continuity, enabling cost-effective disaster recovery, and centrally managing cross-platform, multi-vendor storage environments.
StoreAge offers worldwide sales, service and support, with principal offices in Irvine, CA and Nesher, Israel, and is privately held company spun-off from IIS, Intelligent Information Systems. As of December 31, 2003, Ophirtech had invested $3.0 million in StoreAge for a 10.9% equity interest.
VIOLA NETWORKS LTD. (“VIOLA”)
Viola, (formerly Omegon Networks Ltd.), develops performance assurance software solutions for real-time multi-media applications (voice, video, data) running over converged IP networks.
As of December 31, 2003, Ophirtech had invested $3.2 million in Viola and had written off $1.9 million of its investment. In August 2003, Ophirtech lent Viola $0.2 million for which Viola issued a convertible note to Ophirtech. The note has not been converted as of December 31, 2003. Ophirtech’s equity interest in Viola is 16.0% as of December 31, 2003.
POWERDSINE LTD. (“POWERDSINE”)
PowerDsine develops and sells Power over Ethernet (PoE) technology, which allows power to be transmitted over the same network cable as data.
The company first developed the Power over Ethernet technology in 1998 and delivered its solutions through communications giants such as Avaya, 3Com, Nortel, Siemens and Ericsson, as well as marketing its own PowerDsine midspan solutions to Power over Ethernet- enable legacy networks.
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As of December 31, 2003, the Company’s total investment in PowerDsine was $6 million and its equity interest was 8.1%.
SHELLCASE
ShellCase has developed a proprietary, patented wafer level chip size packaging (CSP) technology for silicon devices using a wafer-level process. Hand-held electronics, wireless communication products, image sensors for digital cameras for cellular phones and medical disposables are just part of the growing list of applications that benefit from the unique properties of ShellCases’s technology. ShellCase was publicly traded on the Toronto Stock Exchange (“TSX”) in 2003. In 2004, a majority of the shareholders of ShellCase approved the delisting of the company from the TSX.
During February 2003, ShellCase concluded an internal private placement of $13 million in which ShellCase has, in return issued Preferred C Shares. Out of the total amount raised, $8.5 million was new money and $4.5 million was a conversion of convertible debentures and the accrued interest into Preferred C Shares. As of December 31, 2003, the Company’s investment of $6.4 million in ShellCase represented a 13.8% equity interest. As of December 31, 2003, the Company had written off $2.4 million of its investment in ShellCase.
SHIRON SATELLITE COMMUNICATIONS (1996) LTD. (“SHIRON”)
Shiron is engaged in the development, manufacturing and marketing of a satellite communication product known as InterSKY(TM). Shiron provides easily deployable two-way, “always-on” broadband satellite communications to corporate businesses, Internet service providers and small office/home office in places where broadband infrastructure is insufficient or does not currently exist.
As of December 31, 2003, the Company had invested $2.1 million in Shiron and had made a $0.1 million loan to Shiron, and had written off $1.8 million of its investment in Shiron. As of December 31, 2003, the Company’s equity interest in Shiron is 9.8%.
SMART LINK LTD. (“SMART LINK”)
Smart Link is a developer and supplier of software-based communications products that provide internet access and communication to the residential markets. Its proprietary technology enables customers to replace traditional hardware-based communications products with high-quality, user friendly software-based solutions that are less costly. Products include software and chips that are easily integrated into personal computers and information appliances. As of December 31, 2003, the Company had invested $2.9 million in Smart Link, constituting a 13.6% equity interest in Smart Link.
STAR MANAGEMENT OF INVESTMENTS NO. II (2000) L.P. (“STAR”)
As of December 31, 2003, the Company had invested $2.2 million in Star, a venture capital fund that focuses on investments in communications, Internet infrastructure, enterprise software, industrial technologies and medical devices, for a 10% interest in Star. The Company has committed to invest an additional $2.8 million in Star. The Company has written off $0.6 million of its investment in Star during 2002.
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XACCT TECHNOLOGIES LTD. (“XACCT”)
XACCT provides a network data management platform for global communications service providers such as network backbone providers, mobile operators, cable operators, and managed services providers. XACCT’s carrier-class Network-to-Business (N2B™) platform helps make service providers profitable by harnessing network information to create new value-based services and lower operational costs. XACCT offers the industry’s first and only platform that enables real-time data capture and enhancement; seamless integration with any business or operations application; and instantaneous, flow-through service provisioning.
As of December 31, 2003, the Company’s total investment in XACCT was $3.8 million and its equity interest was 16.9%. In December 2003, the Company entered into an agreement for the sale of all of its holdings in XAACT to Amdocs Limited, which agreed to acquire all of the issued and outstanding shares of XACCT. On February 19, 2004, Ampal received approximately $3.8 million (partially in cash and partially in shares of Amdocs Limited) for its holdings in XACCT.
XPERT INTEGRATED SYSTEMS LTD. (“XPERT”)
Xpert is a leading international developer and provider of business continuity, security and infrastructure solutions. Xpert has over 400 customers from leading financial, telecommunications, industry, technology and governmental organizations. Xpert, whose headquarters are in Israel, has additional offices in Madrid and Barcelona.
As of December 31, 2003, the Company had invested $2.75 million in Xpert, and its equity interest is 12.7%.
Energy
GRANITE HACARMEL INVESTMENTS LTD. (“GRANITE”)
Granite is one of Israel’s largest holding companies. Granite was established in 1981 and went public on the Tel Aviv Stock Exchange in 1992.
Granite owns and controls the following major companies: Sonol Israel Ltd. (“Sonol”), Tambour Ltd. (“Tambour”) and Supergas Israel Gas Distribution Company Ltd. (“Supergas”) which are all well recognized as national brand names with national marketing and distribution networks in Israel. In addition, Granite owns Granite Hacarmel Holdings which is engaged in real estate, Allied Oils & Chemicals which produces lubricants and greases and Granite Hacarmel Development Holding, which deals with other activities within Granite. Through its subsidiaries, Granite markets and distributes refined petroleum products, liquefied petroleum gas, chemicals, paints, lubricants, greases and related products, as well as water purification and desalination, oil and gas exploration, real estate investments, and tourism projects.
During 2003, Ampal sold 13,821,450 shares of Granite at a price of $1.40 (6 NIS) per share resulting in total proceeds of approximately $19.5 million. In February 2004, Ampal sold its remaining holdings in Granite for approximately $20.1 million. See “Significant Developments Since the Fiscal Year Ended December 31, 2003” above.
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Capital Markets And Other Holdings
AMPAL DEVELOPMENT (ISRAEL) LTD. (“AMPAL DEVELOPMENT”)
Ampal Development, a wholly owned subsidiary of the Company, issued debentures which are publicly traded on the TASE. An aggregate of approximately $3.9 million of these debentures were outstanding as of December 31, 2003. Ampal Development has deposited funds with Bank Hapoalim sufficient to pay all principal and interest on these debentures.
AMPAL INDUSTRIES (ISRAEL) LTD. (“AMPAL INDUSTRIES”)
Ampal Industries, a wholly-owned subsidiary of Ampal, holds interests in various investee companies described in the high-technology section in this Report. Ampal Industries also has a portfolio of marketable securities which are valued at approximately $43.9 million at December 31, 2003.
CARMEL CONTAINERS SYSTEMS LIMITED (“CARMEL”)
Carmel (KML) is one of the leading Israeli companies in designing, manufacturing and marketing carton boards and packaging products. Carmel and its subsidiaries manufacture a varied line of products, including corrugated shipping containers, moisture-resistant packaging, consumer packaging, triple-wall packaging and wooden pallets and boxes.
The Company entered into an agreement in January 2003 pursuant to which Ampal and its subsidiary, Ampal Enterprises Ltd. (“Ampal Enterprises”), will sell their shareholdings in Carmel. Ampal will sell in this transaction 18,000 ordinary shares of Carmel and Ampal Enterprises will sell another 504,000 ordinary shares of Carmel, at a price per share of $6.75 for an aggregate purchase price of $3,523,500.
The consummation of the aforementioned transaction is contingent upon certain conditions, including the consummation of a merger transaction between Carmel and Best Carton Ltd. (“Best”) pursuant to which all shares of Best will be purchased by Carmel in consideration of shares of Carmel which will be issued to Best’s shareholders, and the authorizations required by law for the aforementioned transaction.
In June 2003, the Company announced that its agreement to sell its holdings in Carmel had been cancelled because the Israeli Antitrust Authority objected to the merger between Carmel and Best.
The Company’s equity interest in Carmel is 21.5%. As of December 31, 2003, the Company marks its investment to market value at $3.5 per share, for a total of $1.8 million, and recorded loss from impairment in the amount of $2.1 million.
EPSILON INVESTMENT HOUSE LTD. (“EPSILON”) AND RENAISSANCE INVESTMENT COMPANY LTD. (“RENAISSANCE”)
The Company had invested $1.5 million for 20% of Epsilon and its affiliate, Renaissance as of December 31, 2003. Epsilon is an investment bank which provides portfolio management services and Renaissance provides underwriting services in Israel through its subsidiaries.
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EMPLOYEES
As of December 31, 2003, Ampal had two employees, Ampal Industries (Israel) Ltd. had 15 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 175 employees and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 112 employees.
Relations between the Company and its employees are satisfactory.
CONDITIONS IN ISRAEL
Most of the companies in which Ampal directly or indirectly invests conduct their principal operations in Israel and are directly affected by the economic, political, military, social and demographic conditions there. A state of hostility, varying as to degree and intensity, exists between Israel and the Arab countries and the Palestinian Authority (the “PA”). Israel signed a peace agreement with Egypt in 1979 and with Jordan in 1994. Since 1993, several agreements have been signed between Israel and Palestinian representatives regarding conditions in the West Bank and Gaza. While negotiations have taken place between Israel, its Arab neighbors and the PA to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their eventual effect on Ampal and its investee companies. Since September 2000, there have been increased hostilities between the Israeli government and Palestinian groups. It is possible that the situation may deteriorate further and may impact the value of Ampal and its investee companies. See “-Economic and Financial Developments” below and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the possible impact of this situation on the Company.
All male adult citizens and permanent residents of Israel under the age of 48 are obligated, unless exempt, to perform military reserve duty annually. Additionally, all these individuals are subject to being called to active duty at any time under emergency circumstances. Some of the officers and employees of Ampal’s investee companies are currently obligated to perform annual reserve duty. While these companies have operated effectively under these requirements since they began operations, Ampal cannot assess the full impact of these requirements on their workforce or business if conditions should change. In addition, Ampal cannot predict the effect on its business in a state of emergency in which large numbers of individuals are called up for active duty.
Economic and Financial Developments
In 2003, unemployment in Israel increased to 10.7%. The rate of unemployment in 2002 averaged 10.4% as compared to 9.3% in 2001. This increase resulted mainly from the Hi-Tech crisis which brought about a wave of layoffs in this industry.
The deflation rate in 2003 was 1.9% compared to an inflation rate of 6.5% in 2002.
CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS
SEC Exemptive Order
In 1947, the SEC granted Ampal an exemption from the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to an Exemptive Order. The Exemptive Order was granted based upon the nature of Ampal’s operations, the purposes for which it was organized, which have not changed, and the interest of purchasers of Ampal’s securities in the economic development of Israel. There can be no assurance that the SEC will not reexamine the Exemptive Order and revoke, suspend or modify it. A revocation, suspension or material modification of the Exemptive Order could materially and adversely affect the Company unless Ampal were able to obtain other appropriate exemptive relief. In the event that Ampal becomes subject to the provisions of the 1940 Act, it could be required, among other matters, to make changes, which might be material, to its management, capital structure and methods of operation, including its dealings with principal shareholders and their related companies.
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TAX INFORMATION
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 2003, Israeli companies were taxed on their income at a rate of 36%.
On July 24, 2002, the Israeli Parliament enacted legislation (“tax reform legislation”) approving a tax reform bill based on a ministerial committee report published in June 2002. This legislation, which introduces fundamental changes in certain areas, generally became effective on January 1, 2003, although alterations in certain taxation areas will be introduced over a number of years and certain provisions will come into effect on other specified dates.
The tax reform legislation focuses, inter alia, a transition from a primarily territorial based tax system to a personal based tax system of Israeli tax residents (which mainly applies on the Company’s Israeli subsidiaries) had been introduced. Consequently, Israeli tax residents would be taxed on their worldwide income;
A tax treaty between Israel and the United States became effective on January 1, 1995. This treaty has not substantially changed the tax position of the Company in the United States or in Israel.
Ampal had income from interest, rent and dividends resulting from its investments in Israel. Under Israeli law, Ampal has been required to file reports with the Israeli tax authorities with respect to such income. In addition, as noted below, Ampal is subject to a withholding tax on dividends received from Israeli companies at a rate of either 25%, 15% or 12.5%, depending on the percentage ownership of the investment and the type of income generated by that company (as opposed to dividends payable to Israeli companies which are exempt from tax or subject to a tax rate of 25%, when stem from income generated out of Israel, or for the dividends paid by an approved enterprise to either residents or non-residents, the tax on which is withheld at a rate of 15%). Under an arrangement with the Israeli tax authorities, such income has been taxed based on principles generally applied in Israel to income of non-residents. Ampal has filed reports with the Israeli tax authorities through 2001 and has tax assessments which considered to be final through tax year 1998 (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 1998, 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 in the United States on interest, rent 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, rent and dividend income been derived by Ampal from United States sources. There can be no assurance that this arrangement will continue in the future. This arrangement does not apply to taxation of Ampal’s Israeli subsidiaries.
Generally, under the provisions of the Israeli Income Tax Ordinance, taxable income paid to non-residents of Israel by residents of Israel is generally subject to withholding tax at the rate of 25%. However, withholding rates on income paid to United States residents by residents of Israel are subject to the United States-Israel tax treaty. No withholding has been made on interest and rent payable to Ampal under an exemption which Ampal has received from the income tax authorities on an annual basis. There can be no assurance that this exemption will continue in the future. The continued tax treatment of Ampal by the Israeli tax authorities in the manner described above is based on Ampal continuing to be treated, for tax purposes, as a non-resident of Israel that is not doing business in Israel.
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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, and rights in non-resident entities that mainly represent ownership and rights to assets located in Israel, with regard to such assets). Since January 1, 1994, the portion of the gain attributable to inflation prior to that date is taxable at a rate of 10%, while the portion since that date is exempt from tax. 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 remainder of the profit (“Real Capital Gain”), if any, is taxable to corporations at the rate of 25%. However, Real Capital Gains arising from the sale of capital assets that had been purchased prior to January 1, 2003 shall be apportioned on a linear basis to the periods before and after the same date, namely - the portion of the gain attributed to the period before January 1, 2003 shall be subject to 36% (for corporations), whereas the portion of the gain attributed to the period after January 1, 2003 shall be taxed at the preferential rate of 25%.
The Income Tax Law (Adjustment for Inflation), 1985, which applies to companies which have business income in Israel or which claim a deduction in Israel for financing costs, has been in force since the 1985 tax year. The law provides for the preservation of equity, whereby certain corporate assets are classified broadly into Fixed (inflation resistant) and Non-Fixed (non-inflation resistant) Assets. Where shareholders’ equity, as defined therein, exceeds the depreciated cost of Fixed Assets, a tax deduction which takes into account the effect of the annual inflationary change on such excess is allowed, subject to certain limitations. If the depreciated cost of Fixed Assets exceeds shareholders’ equity, then such excess, multiplied by the annual inflation change, is added to taxable income.
Individuals and companies in Israel pay VAT at a rate of 18% of the price of assets sold and services rendered (according to a Temporary Order issued by the state of Israel the VAT rate was increased from 17% to 18% for the period commencing on June 15, 2002 and ending on December 31, 2003. This period was extended by an additional two months and was terminated on February 29, 2004. The Company can deduct VAT paid on goods and services acquired for the purpose of the business. Nir, a subsidiary of Ampal is considered a Financial Institute under the VAT Law, and as such is subject to wage and profit tax rather than VAT.
United States Taxation of Ampal
Ampal and its United States subsidiaries (in the following tax discussion, generally “Ampal U.S.”) are subject to United States taxation on their consolidated taxable income from foreign and domestic sources. The gross income of Ampal U.S. for United States tax purposes includes or may include (i) income earned directly by Ampal U.S., (ii) Ampal U.S.’s share of “subpart F income” earned by certain foreign corporations controlled by Ampal U.S. and (iii) Ampal U.S.’s share of income earned by certain electing “passive foreign investment companies” of which Ampal U.S. is a stockholder. Subpart F income includes dividends, interest and certain rents and capital gains. Since 1993, the maximum rate applicable to domestic corporations is 35%.
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Ampal U.S. 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 U.S. 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 U.S. for purposes of the foreign tax credit Ampal U.S. 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. Certain of Ampal’s non-U.S. subsidiaries have elected to be treated as partnerships for U.S. tax purposes. As a result, the income of these subsidiaries is subject to U.S. taxation, as it is earned.
In general, the total foreign tax credit that Ampal U.S. may claim is limited to the proportion of Ampal U.S.’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 U.S. 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 U.S. may choose to take a deduction for foreign taxes in lieu of the foreign tax credit.
Ampal U.S. 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).
FORWARD-LOOKING STATEMENTS
This Report (including but not limited to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Report on Form 10-K) includes forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this Report, the words “anticipate,” “believe,” estimate,” “expect,” “intend,” “plan,” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events or future financial performance of the Company, the outcome of which is subject to certain risks and other factors which could cause actual results to differ materially from those anticipated by the forward-looking statements, including among others, the economic and political conditions in Israel, the Middle East, including the situation in Iraq, and in the global business and economic conditions in the different sectors and markets where the Company’s portfolio companies operate.
Should any of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcome may vary from those described therein as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere described in this Report and other Reports filed with the Securities and Exchange Commission.
ITEM 2. PROPERTY
Ampal’s corporate headquarters in Israel, which is owned by the Company, is located at 111 Arlozorov Street in Tel Aviv.
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Ampal currently leases an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease period is seven years commencing on October 15, 2002. The annual rent for this lease is $114,968. As discussed earlier in this Report, on March 31, 2004, the Company intends to close this office. The office space has been subleased.
Kfar Saba, which operates a country club in the town of Kfar Saba, occupies a 7-1/4 acre lot which will be leased for five consecutive ten-year periods, at the end of which the land returns to the lessor. The lease expires on July 14, 2038, and lease payments in 2003 totaled $177,670.
Other properties of the Company are discussed elsewhere in this Report. See “Item 1. Business.”
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ITEM 3. LEGAL PROCEEDINGS
On January 1, 2002, Galha (1960) Ltd. (“Galha”) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd. (“Paradise”) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 8,974,401 ($1.9 million). Galha claimed that the Company,which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down. Paradise is currently involved in liquidation proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up to NIS 4,000,000 ($913,450) if a final judgment against the Company will be given. At this stage, the Company cannot estimate the impact this claim will have on it.
In May 2002, the Israeli Income Tax Authority issued an assessment to Ampal (Israel) Ltd., the Company’s wholly-owned subsidiary, for payment of approximately NIS 34 million ($7,655,933) for the tax years 1997-2000. Ampal (Israel) filed an appeal regarding this assessment. In October, 2003, Ampal and the Israeli Income Tax Authority signed a settlement agreement pursuant to which Ampal paid the sum of NIS 6 million ($1,351,047) as a final payment for the tax years 1997-2000. The reserve previously established to cover the Company’s estimated exposure has been adjusted accordingly.
As discussed elsewhere in this Report, in February 2004, the Company sold all of its remaining holdings of Granite. For a description of the legal proceedings relating to Granite, please refer to Item 3 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF CLASS A STOCK
Ampal’s Class A Stock is listed on Nasdaq under the symbol “AMPL”. The following table sets forth the high and low bid prices for the Class A Stock, by quarterly period for the fiscal years 2003 and 2002, as reported by Nasdaq and representing inter-dealer quotations which do not include retail markups, markdowns or commissions for each period, and each calendar quarter during the periods indicated. Such prices do not necessarily represent actual transactions.
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| High | Low | |||||
|---|---|---|---|---|---|---|
| 2003: | ||||||
| Fourth Quarter | 4.05 | 2.80 | ||||
| Third Quarter | 3.20 | 2.50 | ||||
| Second Quarter | ||||||