SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 0-538
AMPAL-AMERICAN ISRAEL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-0435685
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1177 Avenue of the Americas, New York, New York 10036
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 782-2100
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 |_|
The number of shares outstanding of the issuer's Class A Stock, its only
authorized common stock, is 23,868,766 (as of April 30, 1998).
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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Index to Form 10-Q
Page
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Part I Financial Information
Consolidated Statements of Income...................... 1
Consolidated Balance Sheets............................ 2
Consolidated Statements of Cash Flows.................. 4
Consolidated Statements of Changes in Shareholders'
Equity................................................ 6
Notes to the Consolidated Financial Statements......... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10
Part II Other Information...................................... 14
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 1997
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(Dollars in thousands, except per share data) (Unaudited) (Unaudited)
(Note 2)
REVENUES
Equity in earnings of affiliates ..................... $ 3,179 $ 2,581
Manufacturing ........................................ 1,901 3,012
Interest:
Related parties ..................................... 618 2,503
Others .............................................. 246 480
Rental income ........................................ 1,757 2,051
Realized and unrealized gains on investments ......... 1,636 1,364
Other ................................................ 496 479
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Total revenues .................................. 9,833 12,470
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EXPENSES
Manufacturing ........................................ 1,987 3,021
Interest:
Related parties ..................................... 937 715
Others .............................................. 1,173 2,053
Rental property operating expenses ................... 854 985
Other ................................................ 1,216 1,860
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Total expenses .................................. 6,167 8,634
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Income before income taxes ........................... 3,666 3,836
Provision for income taxes ........................... 1,660 1,315
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NET INCOME ...................................... $ 2,006 $ 2,521
======= =======
Basic EPS
Earnings per Class A share .......................... $ .08 $ .11
======= =======
Shares used in calculation (in thousands) ........... 23,832 23,677
Diluted EPS
Earnings per Class A share .......................... $ .07 $ .09
======= =======
Shares used in calculation (in thousands) ........... 27,616 27,613
The accompanying notes are an integral part of the consolidated financial
statements.
1
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS AS AT 1998 1997
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(Dollars in thousands) (Unaudited) (Note 2)
Cash and cash equivalents ....................... $ 19,075 $ 45,457
Deposits, notes and loans receivable ............ 30,731 46,176
Investments (Note 3) ............................ 233,720 117,384
Real estate rental property, less accumulated
depreciation of $6,074 and $5,902 .............. 29,123 28,603
Property and equipment, less accumulated
depreciation of $2,660 and $2,596 .............. 3,741 3,899
Other assets .................................... 14,504 20,755
-------- --------
TOTAL ASSETS .................................... $330,894 $262,274
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
2
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
LIABILITIES AND March 31, DECEMBER 31,
SHAREHOLDERS' EQUITY AS AT 1998 1997
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(Dollars in thousands) (Unaudited) (Note 2)
LIABILITIES
Notes and loans payable (Note 3):
Related parties .................................. $ 53,182 $ 18,207
Others ........................................... 36,396 5,000
Debentures ......................................... 33,722 41,846
Accounts and income taxes payable, accrued
expenses and minority interests ................... 42,610 34,711
--------- ---------
Total liabilities .......................... 165,910 99,764
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SHAREHOLDERS' EQUITY
4% Cumulative Convertible Preferred Stock,
$5 par value; authorized 189,287
shares; issued and outstanding 178,232 and
179,672 shares .................................... 891 898
6-1/2% Cumulative Convertible Preferred Stock,
$5 par value; authorized 988,055
shares; issued and outstanding 958,407 and 968,288
shares ............................................ 4,792 4,842
Class A Stock, $1 par value; authorized
60,000,000 shares; issued 24,455,168 and
24,418,325 shares; outstanding 23,849,768 and
23,812,925 shares ................................. 24,455 24,418
Additional paid-in capital ......................... 57,511 57,491
Retained earnings .................................. 90,781 88,775
Treasury Stock, 605,400 shares of Class A Stock,
at cost ........................................... (3,829) (3,829)
Accumulated other comprehensive loss ............... (9,617) (10,085)
--------- ---------
Total shareholders' equity ................. 164,984 162,510
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 330,894 $ 262,274
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 1997
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(Dollars in thousands) (Unaudited) (Unaudited)
(Note 2)
Cash flows from operating activities:
Net income ........................................ $ 2,006 $ 2,521
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of affiliates ................. (3,179) (2,581)
Realized and unrealized gains on investments ..... (1,636) (1,364)
Depreciation expense ............................. 333 377
Amortization expense ............................. 346 532
Translation (gain) loss .......................... (152) 196
Decrease in other assets .......................... 3,614 1,686
(Decrease) in accounts and income taxes
payable, accrued expenses and minority
interests ........................................ (2,994) (1,670)
Investments made in trading securities ............ (2,157) (1,560)
Proceeds from sale of trading securities .......... 1,156 1,589
Dividends received from affiliates ................ 3,144 70
--------- ---------
Net cash provided by (used in) operating
activities ...................................... 481 (204)
--------- ---------
Cash flows from investing activities:
Deposits, notes and loans receivable collected .... 14,809 8,745
Deposits, notes and loans receivable granted ...... (22) (860)
Investments made in affiliates and others ......... (112,367) (1,689)
Proceeds from sale of investments:
Available for sale ............................... -- 945
Others ........................................... 3,498 5,998
Deposit-sale of affiliate ......................... -- 4,177
Proceeds from sale of real estate rental
property ......................................... -- 15,030
Purchase of property and equipment ................ (47) (190)
Purchase of real estate rental property ........... (825) (110)
--------- ---------
Net cash (used in) provided by investing
activities ...................................... (94,954) 32,046
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 1997
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(Dollars in thousands) (Unaudited) (Unaudited)
(Note 2)
Cash flows from financing activities:
Notes and loans payable received:
Related parties .................................. $ 35,710 $ 452
Others ........................................... 32,088 152
Notes and loans payable repaid:
Related parties .................................. (712) (17,555)
Others ........................................... (609) (3,736)
Debentures repaid ................................. (7,936) (11,312)
Contribution to partnership by minority
interests ........................................ 9,765 --
-------- --------
Net cash provided by (used in) financing
activities ...................................... 68,306 (31,999)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents .................................. (215) (484)
-------- --------
Net (decrease) in cash and cash equivalents ........ (26,382) (641)
Cash and cash equivalents at beginning of
period ............................................ 45,457 20,633
-------- --------
Cash and cash equivalents at end of period ......... $ 19,075 $ 19,992
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest:
Related parties .................................. $ 72 $ 378
Others ........................................... 1,100 1,455
-------- --------
Total interest paid ............................ $ 1,172 $ 1,833
======== ========
Income taxes paid ................................. $ 1,744 $ 12
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 1997
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(Dollars in thousands, except share amounts) (Unaudited) (Unaudited)
(Note 2)
4% PREFERRED STOCK
Balance, beginning of year ......................... $ 898 $ 955
Conversion of 1,440 and 1,649 shares into
Class A Stock ..................................... (7) (8)
-------- --------
Balance, end of period ............................. $ 891 $ 947
======== ========
6-1/2% PREFERRED STOCK
Balance, beginning of year ......................... $ 4,842 $ 5,012
Conversion of 9,881 and 14,428 shares into
Class A Stock ..................................... (50) (72)
-------- --------
Balance, end of period ............................. $ 4,792 $ 4,940
======== ========
CLASS A STOCK
Balance, beginning of year ......................... $ 24,418 $ 24,257
Issuance of shares upon conversion of
Preferred Stock ................................... 37 51
-------- --------
Balance, end of period ............................. $ 24,455 $ 24,308
======== ========
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year ......................... $ 57,491 $ 57,410
Conversion of Preferred Stock ...................... 20 29
-------- --------
Balance, end of period ............................. $ 57,511 $ 57,439
======== ========
RETAINED EARNINGS
Balance, beginning of year ......................... $ 88,775 $ 74,943
Net income ......................................... 2,006 2,521
-------- --------
Balance, end of period ............................. $ 90,781 $ 77,464
======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year: ........................ $(10,085) $ (6,628)
Cumulative translation adjustments:
Balance, beginning of year ....................... (10,085) (6,530)
Foreign currency translation adjustment .......... (973) (1,418)
-------- --------
Balance, end of period ........................... (11,058) (7,948)
-------- --------
Unrealized loss on marketable securities:
Balance, beginning of year ....................... -- (98)
Unrealized gain (loss), net ...................... 1,441 (38)
-------- --------
Balance, end of period ........................... 1,441 (136)
-------- --------
Balance, end of period ............................. $ (9,617) $ (8,084)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. As used in these financial statements, the term the "Company" refers to
Ampal-American Israel Corporation ("Ampal") and its consolidated
subsidiaries.
2. The December 31, 1997 consolidated balance sheet presented herein was
derived from the audited December 31, 1997 consolidated financial
statements of the Company.
Reference should be made to the Company's consolidated financial
statements for the year ended December 31, 1997 for a description of the
accounting policies which have been continued without change. Also,
reference should be made to the notes to the Company's December 31, 1997
consolidated financial statements for additional details of the Company's
consolidated financial condition, results of operations and cash flows.
The details in those notes have not changed except as a result of normal
transactions in the interim. Certain amounts in the 1997 consolidated
financial statements have been reclassified to conform with the current
period's presentation. All adjustments (of a normal recurring nature)
which are, in the opinion of management, necessary to a fair presentation
of the results of the interim period have been included.
3. On January 22, 1998 (the "Closing Date"), the Company completed its
purchase of a one-third interest in the assets of the shared networks
operation of Motorola Communications Israel, Ltd. ("Motorola Israel") for
a purchase price of $110 million. The payment for the purchase price was
obtained from the Company's own resources as well as from two short-term
bridge loans ("Short-Term Loans"), one in the amount of $40 million from
Bank Leumi USA (of which $8 million plus interest was repaid on February
2, 1998) and a second in the amount of $35 million from Bank Hapoalim B.M.
("Hapoalim"). Each loan had a term of 90 days, bore interest at a rate of
LIBOR plus 1/2% and was repaid in full from the proceeds of the long-term
loans described below.
A new wireless communications service provider, MIRS Communication Company
Ltd. ("MIRS"), initially one-third owned by the Company and two-thirds
owned by Motorola Israel, coordinates and operates in Israel the digital
and analog public-shared two-way radio and other services previously
furnished by Motorola Israel. The digital wireless communication service
is based on Motorola's iDEN(TM) integrated wireless communication
technology, which is known as MIRS in Israel.
In March 1998, the Company transferred its interest in MIRS to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of
Ampal (the "General Partner") is the general partner of the Partnership
and owns 75.1% of the Partnership. The limited partners of the Partnership
purchased their interests in the Partnership from the Partnership and
include (i) an entity owned by Daniel Steinmetz and Raz Steinmetz
(directors of Ampal and the controlling persons of Ampal's principal
shareholder), which acquired a 9.1% interest in the Partnership for $10
million, (ii) Hapoalim, which acquired a 7.45% interest in the Partnership
for $8.195 million, (iii) an unrelated third party (The Israel Mezzanine
Fund L.P., a limited partnership whose general partner is First Israel
Mezzanine Investors Ltd.), which acquired a 7.45% interest in the
Partnership for $8.195 million, and (iv) an entity owned by Dr. Yehoshua
Gleitman, Ampal's Chief Executive Officer, which purchased a .9% interest
for $1 million. In addition to the purchase price, the limited partners
also reimbursed the Company for their pro rata share of the expenses
incurred by the Company in connection with the original purchase from
Motorola Israel (including interest from the Closing Date until the
purchase date of the limited partnership interests).
7
The related parties purchased their limited partnership interests on the
same terms as the unrelated third party which were determined through
arm's length negotiations between the Company and the unrelated third
party.
Each of the limited partners paid 35% of their respective purchase price
in cash and assumed their pro rata share of Ampal's financing of the
original purchase (equal to 65% of their respective purchase prices) and
assumed their pro rata share of the Partnership's long-term financing. A
portion of Dr. Gleitman's entity's purchase price was obtained through two
loans aggregating $250,000 from the Company. One loan, in the amount of
$150,000, has a term of 10 years, an interest rate of LIBOR plus 0.8% and
is without recourse to Dr. Gleitman. The second loan, in the amount of
$100,000, has a term of 10 years, an interest rate of LIBOR plus 0.5% and
is with recourse to Dr. Gleitman. Both loans are secured by Dr. Gleitman's
interest in the Partnership.
The Partnership has been assigned all of the Company's rights under the
original purchase agreement with Motorola Israel and has assumed all of
its obligations.
On May 4, 1998, the Partnership received two long-term loans from Hapoalim
and Bank Leumi Le'Israel B.M. in the amount of $36.4 million, each. Both
loans are due on March 31, 2008 and bear interest at a rate of LIBOR plus
0.8%. The principal payments are due as follows: 10% on March 31, 2004,
15% on March 31, 2005 and 25% on each of the following dates - March 31,
2006, 2007 and 2008. Interest will be paid annually on March 31 of each
year from March 31, 2001 until and including March 31, 2008. The proceeds
from the long-term loans were used to repay the Short-Term Loans.
The Partnership owns all of the authorized preferred shares of MIRS and
Motorola Israel owns all of the authorized ordinary shares. Each share
issued by MIRS is entitled to one vote.
The Company accounts for its investment in MIRS using the cost method of
accounting. Under the cost method, the Company recognizes income from
dividends, as they are declared.
To the extent of available after-tax profits, MIRS is required to pay
dividends to the Partnership equal to at least $3,800,000 for fiscal year
2000 and $7,100,000 for each fiscal year thereafter, so long as the
financial stability of MIRS will not be impaired. MIRS shall endeavor to
pay dividends in the following amounts: for fiscal year 1998, $4,950,000,
for fiscal year 1999, $10,725,000 and for fiscal year 2000 and thereafter,
$23,430,000 (inclusive of the required payments), which all holders of an
interest in MIRS shall share on a pro rata basis. To the extent that any
of the above dividends are not paid by MIRS, they will accumulate. No
dividends will be paid by MIRS to Motorola Israel until the Partnership
has received all of its accumulated dividends. Any dividends which are
paid in excess of the above amounts for a given fiscal year will similarly
be paid pro rata to the Partnership and Motorola Israel based on their
shares in MIRS.
Pursuant to the original purchase agreement, Motorola Israel guaranteed
that the Partnership would receive from MIRS at least $3,800,000 for
fiscal year 2000 and $7,100,000 for each fiscal year between 2001 and 2005
inclusive, subject to an obligation of the Partnership to repay such
guarantee payments in amount equal to the excess of the amount actually
received by the Partnership from MIRS with respect to any subsequent year
over $7,500,000.
Motorola Israel has agreed to make certain payments to the Partnership in
the event that, prior to the thirteenth anniversary of the Closing Date,
there is a dissolution, liquidation, bankruptcy, winding up, or sale of
all or substantially all of the assets of MIRS and the total proceeds to
the shareholders of MIRS is less than $450 million.
The $110 million purchase price for the Partnership's one-third interest
in MIRS was based upon the Company's valuation of the SNO and its
prospects. The original purchase agreement provides that under specified
circumstances indicating that there has been an increase in the enterprise
value of MIRS, the
8
Partnership must pay Motorola Israel an additional amount (the "Bonus").
The formula for the Bonus varies depending upon whether an initial public
offering of MIRS' shares (an "IPO") has been consummated. If an IPO is
consummated prior to December 31, 2002, the Partnership must pay Motorola
Israel a Bonus based on an increase in the valuation of MIRS for purposes
of the IPO. In no event will such Bonus payment exceed $33 million
multiplied by 1.16n, where n represents the number of years (and any part
thereof) between the Closing Date and the closing of the IPO.
If an IPO is not consummated prior to December 31, 2002 and if all
dividends accumulated with respect to the Partnership's preferred shares
up to that time have been paid, then the Partnership must pay Motorola
Israel a Bonus if (A) the present value of the actual after tax net income
of MIRS (as reported by MIRS' auditors in compliance with generally
accepted accounting principles in Israel, excluding capital gains derived
from each transaction, not in the ordinary course of business, in which
the consideration for MIRS is more than $5 million) for fiscal years 1998
through 2002, discounted at the rate of 13%, exceeds (B) $71 million. In
this case, the amount of the Bonus, if any, will equal the lesser of (i)
the amount of such excess multiplied by 2.3376, or (ii) $46 million.
4. Effective March 31, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full
set of general-purpose financial statements. Total comprehensive income
for the three months ended March 31, 1998 and March 31, 1997 was $2.5
million and $1.1 million, respectively.
9
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Consolidated net income decreased to $2 million for the three-month period ended
March 31, 1998, from $2.5 million for the same period in 1997. The decrease in
net income is primarily attributable to net interest expense in 1998 as compared
to net interest income in 1997, which was partially offset by the increase in
equity in earnings of affiliates, greater unrealized and realized gains on
investments, and lower other expenses in 1998.
Ampal-American Israel Corporation ("Ampal") and its subsidiaries ("the Company")
recorded net interest expense in the amount of $1.2 million in the three months
ended March 31, 1998, as compared to net interest income of $.2 million in the
same period in 1997. The net interest expense is primarily attributable to bank
borrowings in connection with the Company's investment in MIRS Communication
Company Ltd. ("MIRS").
Equity in earnings of affiliates increased to $3.2 million for the three months
ended March 31, 1998, from $2.6 million for the same period in 1997. The
increase is primarily attributable to the improved earnings of Ophir Holdings
Ltd. ("Ophir"), the Company's 42.5%-owned affiliate, which is a holding company
with interests in high technology and real estate companies. Ophir reported
higher earnings in 1998 primarily due to gains realized on the sale of several
commercial real estate properties and shares of Memco Software Ltd., and lower
interest expense, which resulted from a decrease in the Consumer Price Index
("CPI") in Israel in 1998. Bay Heart Limited, the Company's 37%-owned affiliate,
which leases and operates a shopping mall near Haifa, recorded higher earnings
as a result of decreased interest expense on its CPI-linked bank borrowings.
Carmel Container Systems Limited, the Company's 20.7%-owned affiliate, which is
a manufacturer of paper-board packaging and related products, also recorded
higher earnings in the first quarter of 1998 due to the improved efficiency at
that company's new manufacturing plant in Caesarea and increased sales of
containers to the local market, despite the economic slowdown in Israel.
The increases noted above were partially offset by the losses recorded by Moriah
Hotels Ltd. ("Moriah"), the Company's 46%-owned affiliate, which is one of the
largest hotel chains in Israel. Moriah recorded higher losses in the first
quarter of 1998 primarily because of a significant decrease in occupancy rates
as a result of the decrease in tourism to Israel.
In the quarter ended March 31, 1998, the Company recorded $1.1 million of gains
on sale of investments, which are attributable to its investments in Mercury
Interactive Corporation, Shikun U'Fituach le-Israel Ltd., and Fundtech Ltd.
("Fundtech"). In the quarter ended March 31, 1997, the Company recorded $1.2
million of gains on sale of investments, $.7 million of which is attributable to
its direct investment in Teledata Communications Ltd.
The Company also recorded $.5 million of unrealized gains on investments which
are classified as trading securities in the three-month period ended March 31,
1998, as compared to $.1 million in the same period in 1997. At March 31, 1998
and December 31, 1997, the aggregate fair value of trading securities amounted
to approximately $7.5 million.
Manufacturing revenues and expenses, which reflect the operations of Paradise
Industries Ltd., the Company's 85.1%-owned subsidiary, which is a manufacturer
and distributor of mattresses and fold-out beds in Israel, decreased as a result
of the slowdown in the Israeli economy during the first quarter of 1998.
10
The decreases in rental income and rental property operating expenses are
attributable to the sale of a condominium unit in an office building located at
800 Second Avenue, New York, New York, in January 31, 1997.
Other expenses decreased for the three months ended March 31, 1998 as compared
to the same period in 1997, primarily as a result of translation gains recorded
by the Company in 1998, as compared to the translation losses in 1997.
The increase in the effective income tax rate in 1998 as compared to 1997 is
mainly attributable to the increased deferred tax provisions of certain Israeli
subsidiaries due to the reduction of available tax benefits.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998, cash and cash equivalents were $19.1 million as compared with
$45.5 million at December 31, 1997. The decrease in cash and cash equivalents
and increases in investments, notes and loans payable and minority interests are
primarily attributable to the investment in MIRS (See "Investment in MIRS"). The
decreases in deposits, notes and loans receivable and debentures are primarily
attributable to scheduled repayments.
In March 1998, Fundtech, the Company's then 2.2%-owned investee, which develops
software for worldwide banking institutions, completed a public offering of its
shares. As a result of the offering, the Company's equity interest in Fundtech
was reduced to 1.6% and the Company recorded a realized gain of $.2 million (net
of tax) and an unrealized gain of $1.4 million (net of tax) in its consolidated
statement of income and in accumulated other comprehensive loss, respectively.
In addition to the investment in MIRS (see below), the Company made the
following investments in the high-technology field during the first quarter of
1998, notably; (1) a $.8 million investment to acquire an additional 7.3% (total
equity interest in 1998 - 19.1%) of XaCCT Technologies Ltd., a developer of
billing, auditing and accounting software for TCP/IP networks; (2) a $.5 million
investment to acquire 15.4% of Medco Electronics Systems Ltd., a developer of
special devices used to detect cardiac problems in fetuses and (3) a $.3 million
investment in its existing investee, Qronus Interactive Israel (1994) Ltd., a
developer and marketer of software testing tools.
Investment in MIRS
- ------------------
On January 22, 1998 (the "Closing Date"), the Company completed its purchase of
a one-third interest in the assets of the shared networks operation of Motorola
Communications Israel, Ltd. ("Motorola Israel") for a purchase price of $110
million. The payment for the purchase price was obtained from the Company's own
resources as well as from two short-term bridge loans ("Short-Term Loans"), one
in the amount of $40 million from Bank Leumi USA (of which $8 million plus
interest was repaid on February 2, 1998) and a second in the amount of $35
million from Bank Hapoalim B.M. ("Hapoalim"). Each loan had a term of 90 days,
bore interest at a rate of LIBOR plus 1/2% and was repaid in full from the
proceeds of the long-term loans described below.
A new wireless communications service provider, MIRS, initially one-third owned
by the Company and two-thirds owned by Motorola Israel, coordinates and operates
in Israel the digital and analog public-shared two-way radio and other services
previously furnished by Motorola Israel. The digital wireless communication
service is based on Motorola's iDEN(TM) integrated wireless communication
technology, which is known as MIRS in Israel.
In March 1998, the Company transferred its interest in MIRS to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of Ampal (the
"General Partner") is the general partner of the Partnership and owns 75.1% of
the Partnership. The limited partners of the Partnership purchased their
interests in the Partnership from the Partnership and include (i) an entity
owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the
controlling persons of
11
Ampal's principal shareholder), which acquired a 9.1% interest in the
Partnership for $10 million, (ii) Hapoalim, which acquired a 7.45% interest in
the Partnership for $8.195 million, (iii) an unrelated third party (The Israel
Mezzanine Fund L.P., a limited partnership whose general partner is First Israel
Mezzanine Investors Ltd.), which acquired a 7.45% interest in the Partnership
for $8.195 million, and (iv) an entity owned by Dr. Yehoshua Gleitman, Ampal's
Chief Executive Officer, which purchased a .9% interest for $1 million. In
addition to the purchase price, the limited partners also reimbursed the Company
for their pro rata share of the expenses incurred by the Company in connection
with the original purchase from Motorola Israel (including interest from the
Closing Date until the purchase date of the limited partnership interests).
The related parties purchased their limited partnership interests on the same
terms as the unrelated third party which were determined through arm's length
negotiations between the Company and the unrelated third party.
Each of the limited partners paid 35% of their respective purchase price in cash
and assumed their pro rata share of Ampal's financing of the original purchase
(equal to 65% of their respective purchase prices) and assumed their pro rata
share of the Partnership's long-term financing. A portion of Dr. Gleitman's
entity's purchase price was obtained through two loans aggregating $250,000 from
the Company. One loan, in the amount of $150,000, has a term of 10 years, an
interest rate of LIBOR plus 0.8% and is without recourse to Dr. Gleitman. The
second loan, in the amount of $100,000, has a term of 10 years, an interest rate
of LIBOR plus 0.5% and is with recourse to Dr. Gleitman. Both loans are secured
by Dr. Gleitman's interest in the Partnership.
The Partnership has been assigned all of the Company's rights under the original
purchase agreement with Motorola Israel and has assumed all of its obligations.
On May 4, 1998, the Partnership received two long-term loans from Hapoalim and
Bank Leumi Le'Israel B.M. in the amount of $36.4 million, each. Both loans are
due on March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%. The
principal payments are due as follows: 10% on March 31, 2004, 15% on March 31,
2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.
Interest will be paid annually on March 31 of each year from March 31, 2001
until and including March 31, 2008. The proceeds from the long-term loans were
used to repay the Short-Term Loans.
The Partnership owns all of the authorized preferred shares of MIRS and Motorola
Israel owns all of the authorized ordinary shares. Each share issued by MIRS is
entitled to one vote.
The Company accounts for its investment in MIRS using the cost method of
accounting. Under the cost method, the Company recognizes income from dividends,
as they are declared.
To the extent of available after-tax profits, MIRS is required to pay dividends
to the Partnership equal to at least $3,800,000 for fiscal year 2000 and
$7,100,000 for each fiscal year thereafter, so long as the financial stability
of MIRS will not be impaired. MIRS shall endeavor to pay dividends in the
following amounts: for fiscal year 1998, $4,950,000, for fiscal year 1999,
$10,725,000 and for fiscal year 2000 and thereafter, $23,430,000 (inclusive of
the required payments), which all holders of an interest in MIRS shall share on
a pro rata basis. To the extent that any of the above dividends are not paid by
MIRS, they will accumulate. No dividends will be paid by MIRS to Motorola Israel
until the Partnership has received all of its accumulated dividends. Any
dividends which are paid in excess of the above amounts for a given fiscal year
will similarly be paid pro rata to the Partnership and Motorola Israel based on
their shares in MIRS.
Pursuant to the original purchase agreement, Motorola Israel guaranteed that the
Partnership would receive from MIRS at least $3,800,000 for fiscal year 2000 and
$7,100,000 for each fiscal year between 2001 and 2005 inclusive, subject to an
obligation of the Partnership to repay such guarantee payments in amount equal
to the excess of the amount actually received by the Partnership from MIRS with
respect to any subsequent year over $7,500,000.
12
Motorola Israel has agreed to make certain payments to the Partnership in the
event that, prior to the thirteenth anniversary of the Closing Date, there is a
dissolution, liquidation, bankruptcy, winding up, or sale of all or
substantially all of the assets of MIRS and the total proceeds to the
shareholders of MIRS is less than $450 million.
The $110 million purchase price for the Partnership's one-third interest in MIRS
was based upon the Company's valuation of the SNO and its prospects. The
original purchase agreement provides that under specified circumstances
indicating that there has been an increase in the enterprise value of MIRS, the
Partnership must pay Motorola Israel an additional amount (the "Bonus"). The
formula for the Bonus varies depending upon whether an initial public offering
of MIRS' shares (an "IPO") has been consummated. If an IPO is consummated prior
to December 31, 2002, the Partnership must pay Motorola Israel a Bonus based on
an increase in the valuation of MIRS for purposes of the IPO. In no event will
such Bonus payment exceed $33 million multiplied by 1.16n, where n represents
the number of years (and any part thereof) between the Closing Date and the
closing of the IPO.
If an IPO is not consummated prior to December 31, 2002 and if all dividends
accumulated with respect to the Partnership's preferred shares up to that time
have been paid, then the Partnership must pay Motorola Israel a Bonus if (A) the
present value of the actual after tax net income of MIRS (as reported by MIRS'
auditors in compliance with generally accepted accounting principles in Israel,
excluding capital gains derived from each transaction, not in the ordinary
course of business, in which the consideration for MIRS is more than $5 million)
for fiscal years 1998 through 2002, discounted at the rate of 13%, exceeds (B)
$71 million. In this case, the amount of the Bonus, if any, will equal the
lesser of (i) the amount of such excess multiplied by 2.3376, or (ii) $46
million.
Year 2000 Compliance
- --------------------
The Company is currently in the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue which is the result of computer programs having been written using two
digits instead of four to define a year. This issue affects computer systems
that have date sensitive programs that may recognize a date using "00" as 1900
rather than 2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail, resulting in business
interruption. The Company does not believe the cost of converting all internal
systems to be year 2000 compliant will be material to its financial condition or
results of operations. Costs related to the year 2000 issue are being expensed
as incurred.
The year 2000 issue is expected to affect the systems of various entities
with which the Company interacts. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure by another company's systems to be year 2000
compliant would not have a material adverse effect on the Company.
13
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None.
-----------------
Item 2. Changes in Securities and Use of Proceeds - None.
-----------------------------------------
Item 3. Defaults upon Senior Securities - None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None.
---------------------------------------------------
Item 5. Other Information - None.
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 10 - Employment Agreement, dated March 5, 1998, between Ampal
Industries (Israel) Ltd. and Shlomo Meichor (Translation).
Exhibit 11 - Schedule Setting Forth Computation of Earnings Per Share
of Class A Stock.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K. A Current Report on Form 8-K was filed by the
Registrant on February 5, 1998, which described an Item 2 Event, the
acquisition from Motorola Communications Israel Ltd. of the assets of
its shared networks operations.
14
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMPAL-AMERICAN ISRAEL CORPORATION
By:/s/ Yehoshua Gleitman
------------------------------
Yehoshua Gleitman
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Shlomo Meichor
------------------------------
Shlomo Meichor
Vice President - Finance
and Treasurer
(Principal Financial Officer)
By:/s/ Alla Kanter
------------------------------
Alla Kanter
Vice President - Accounting
and Controller
(Principal Accounting Officer)
Dated: May 15, 1998
15
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
Exhibit Index
Exhibit No. Description
10 Employment Agreement, dated March 5, 1998,
between Ampal Industries (Israel) Ltd. and
Shlomo Meichor (Translation).................... Page 17
11 Schedule Setting Forth Computation of Earnings
Per Share of Class A Stock...................... Page 24
27 Financial Data Schedule.
16