ITEM 1.
BUSINESS
As used in this report on Form 10-K (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.
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. 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 in the following sectors: Energy, Chemicals, Real Estate, Project Development and Leisure Time. 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.
Significant Developments During 2007
Acquisition of Gadot Chemical Tankers and Terminals Ltd.
On December 3, 2007, Ampal completed the purchase of a 65.5% controlling interest (63.66% on a fully diluted basis) in Gadot Chemical Tankers and Terminals Ltd. (“Gadot”) through its wholly owned subsidiary Merhav Ampal Energy Ltd. (“MAE”), from Netherlands Industrial Chemical Enterprises B.V., for approximately NIS 348 million, or approximately $91.2 million, pursuant to an agreement dated November 20, 2007.
Gadot and its group of companies form Israel’s leading chemical distribution organization. Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to the local industry. Gadot’s shares are listed on the Tel Aviv Stock Exchange. For further information regarding Gadot, see “- Chemicals - Gadot Chemical Tankers and Terminals Ltd.”
Ampal funded the Gadot transaction with a combination of available cash and the proceeds of a new credit facility, dated November 29, 2007 (the “Credit Facility” , attached hereto as Exhibit 10ff), between MAE and Israel Discount Bank Ltd. (the “Lender”), for approximately $60.7 million. The Credit Facility is divided into two equal loans of approximately $30.35 million. The first loan is a revolving loan that has no principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan also matures in 2019, has no principal payments for the first two years, and shall thereafter be paid in equal installments over the remaining ten years of the term. Interest on both loans accrues at a floating rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has guaranteed all the obligations of MAE under the Credit Facility and Ampal’s interest in Gadot has also been pledged to the Lender as a security for the Credit Facility.
Yosef Maiman, the Chairman and CEO of Ampal and a member of the controlling shareholder group, has agreed with the lender to maintain ownership of a certain amount of the Company’s Class A Common Stock.
The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.
Sugarcane Ethanol Production Project
On December 25, 2007, Ampal entered into an Option Agreement (the “Option Agreement”) with Merhav M.N.F. Ltd. providing Ampal with the option to acquire up to a 35% equity interest in a sugarcane ethanol production project (the “Project”) in Colombia being developed by Merhav M.N.F. Ltd. The option expires on the earlier of December 25, 2008 or the date on which both (i) Merhav M.N.F. Ltd. has obtained third-party debt financing for the Project and (ii) an unaffiliated third party holds at least a 25% equity interest in the Project. The Option Agreement provides that the purchase price for any interest in the Project purchased by Ampal pursuant to the Option Agreement will equal (A) with respect to any portion of such interest being purchased by conversion of the outstanding balance of the Promissory Note referred to below, the lesser of (i) a price based on a currently agreed valuation model as updated from time to time to reflect changes in project, financing and other similar costs (the “Valuation Model”) as such updates are reviewed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. at the time of the option’s exercise or (ii) the lowest price paid by any unaffiliated third party for an interest in the Project, or (B) with respect to any portion of such interest in the Project being purchased in excess of the balance of the Promissory Note, the lowest price paid by an unaffiliated third party for its interest in the Project, unless no unaffiliated third party has purchased an interest in the Project, in which case the purchase price will be based on the Valuation Model.
Ampal has loaned Merhav M.N.F. Ltd. $10 million to fund the purchase of the 11,000 hectares of property in Colombia required for growing sugarcane and the construction of an ethanol production facility for the Project, pursuant to a Promissory Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor of Ampal (the “Promissory Note”). Ampal has agreed to advance up to an additional $10 million to fund the Project pursuant to the Promissory Note. The loan bears interest at an annual rate equal to LIBOR plus 2.25%, and will be convertible into all or a portion of the equity interest purchased pursuant to the option.
As security for the loan, Merhav M.N.F. Ltd. has pledged to Ampal, pursuant to a pledge agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal (the “Pledge Agreement”, attached hereto as Exhibit 10ii), all of the shares of Ampal’s Class A Stock, par value $1.00 per share, owned by Merhav.
Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholders group of Ampal, is the sole owner of Merhav M.N.F. Ltd. Because of the foregoing relationship, a special committee of the Board of Directors composed of Ampal’s independent directors negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which has been retained as financial advisor to the special committee, advised the special committee on this transaction.
Wind Energy Project
On November 25, 2007, MAE signed a joint venture agreement with Clal Electronics Industries Ltd. (“Clal”), an Israel-based holding company, for the formation of a joint venture that will focus on the new development and acquisition of controlling interests in wind energy projects outside of Israel. The joint venture, owned equally by Clal and the Company through MAE, will seek to either develop or acquire wind energy opportunities with a goal of establishing at least 150MW of installed capacity within the next 3.5 years.The joint venture’s initial project is the development of a wind farm in Greece. The Company has approved a $25 million budget for these projects.
East Mediterranean Gas Company
On November 29, 2007, Ampal and the Israel Infrastructure Fund (“IIF”), leading a group of institutional investors (the “Investors”), purchased a 4.3% interest in East Mediterranean Gas Co. S.A.E. (“EMG”), through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav M.N.F. Ltd. for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav M.N.F. Ltd., Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav M.N.F. Ltd.
Merhav M.N.F. Ltd. is a shareholder of Ampal and is wholly owned by Mr. Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholder group of Ampal.
The Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
Shelf Registration
On October 18, 2007, Ampal filed a “shelf” registration statement with the Securities and Exchange Commission. Under this registration statement, Ampal may, from time to time, sell Class A Stock, debt securities, warrants and units, from time to time in one or more offerings, up to a total public offering price of $150 million. The registration statement was declared effective on October 31, 2007.
Conversion of Promissory Note by Merhav M.N.F. Ltd.
On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the convertible promissory note issued to it as partial consideration for the purchase of a 5.9% interest in EMG by Ampal in December 2006, into 4,476,389 shares of Class A Stock of Ampal. See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters - Principal Shareholders of Ampal.”
Sale of Am-Hal Ltd.
On August 5, 2007, Ampal, through Ampal Industries Inc., a subsidiary of the Company, completed the sale of all of Ampal’s interest in Am-Hal Ltd. (“Am-Hal”), an indirect wholly owned subsidiary of Ampal, to Phoenix Holdings Ltd. (“Phoenix”) and Golden Meybar (2007) Ltd. (“Golden Meybar”), for an aggregate consideration of $29.3 million, pursuant to the terms of an agreement dated July 10, 2007.
As a result of the sale, Ampal recorded a gain of approximately $29.4 million (approximately $21.7 million, net of taxes) and a reduction in assets and liabilities of approximately $75.7 million and $74.5 million, respectively, a reduction in income of approximately $5.0 million and a reduction in pre-tax loss of approximately $0.5 million as of September 30, 2007. The sale of Am-Hal is presented as discontinued operations in the accompanying financial statements.
Listing of Series A Notes
On August 1, 2007, Ampal filed a final prospectus with the Israeli Securities Authority and the Tel Aviv Stock Exchange (“TASE”) for the resale and listing of its Series A Notes on the TASE. The Series A Notes were sold to Israeli institutional investors in a private placement in November 2006 in the aggregate principal amount of NIS 250 million (approximately $58 million). As of December 31, 2007, the amount of the principal of the notes is approximately $66.6 million.
According to the prospectus, on August 19, 2007, Ampal paid the Series A Notes holders additional interest of 0.10959% (0.5% annually) for the period commencing May 20, 2006 and ending on August 9, 2007, which is the date the Series A Notes were registered for trade. The additional interest was paid to the Series A Note holders whose names appear in the Series A Note holders register kept by Ampal as of August 7, 2007.
Sale of Carmel Containers Ltd.
On May 21, 2007, the Company sold all of its equity method interest in Carmel Containers Ltd. (“Carmel”), which was an affiliated company, for an aggregate sales price of approximately $4.6 million. No gain was recorded relating to the sale of Carmel since an impairment was recorded during the first quarter of 2007.
Investee Companies by Industry Segment
Listed below by industry segment are all of the substantial investee companies in which Ampal had ownership interests as of December 31, 2007, the principal business of each and the percentage of equity owned, directly or indirectly, by Ampal. Further information with respect to the more significant investee companies is provided after the following table. For industry segment financial information and financial information about foreign and domestic operations, see Note 16 to Ampal’s consolidated financial statements included in this Report for the fiscal year ended December 31, 2007.
(1) Based upon current ownership percentage. Does not give effect to any potential dilution.
(2) 8.2% of which are held directly and 4.3% of which are held through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership, which is a joint venture between Ampal, the Israel Infrastructure Fund and other institutional investors.
Chemicals
GADOT CHEMICAL TANKERS AND TERMINALS LTD. (“GADOT”)
General
On December 3, 2007, Ampal completed the purchase of a 65.5% controlling interest (63.66% on a fully diluted basis) in Gadot through its wholly owned subsidiary, Merhav Ampal Energy Ltd.
Gadot was founded in 1958 as a privately held Israeli company, with operations in distribution and marketing of liquid chemicals for raw materials used in industry. Since then, Gadot has expanded into a group of companies, which currently forms Israel’s leading chemical distribution organization. Through its subsidiaries, Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to countries across the globe, with an emphasis on Israel and Western Europe. In our description of Gadot’s business operations, the term “Gadot” refers to Gadot and its consolidated subsidiaries.
Gadot listed its shares for trade on the Tel Aviv Stock Exchange in 2003.
Gadot’s business is influenced by certain economic factors, which include (i) global changes in demand for chemicals used in raw materials for industry, (ii) price fluctuations of chemicals and raw materials, (iii) price fluctuations of shipping costs, ship leases and ship fuel, (iv) general global financial stability, and (v) currency fluctuations between the New Israeli Shekel and other currencies, primarily the U.S. dollar.
Gadot's operations are divided into four main service sectors:
- Importing, marketing and sale of chemicals and other raw materials;
- Shipping;
- Logistical operations in Europe; and
- Ancillary services, including chemical storage and land transport.
These service sectors are synergistic and complimentary, such that Gadot provides its customers with a full range of services, from acquiring chemicals based on a customer’s needs, logistical handling of shipping and transport, offloading, storage and delivery. Members of the Gadot group of companies also provide services for other members of the group, strengthening the group as a whole.
Importing, Marketing and Sale of Chemicals and Other Raw Materials
Gadot imports, markets and sells chemicals and other raw materials, primarily liquid chemicals which are imported in tanker ships. These chemicals and other materials are used as raw materials in the medical, cosmetics, paint, plastic, electronics, agriculture, food and other industries. Other activities of Gadot in this sector include:
- importing oils and other liquid products which are used as food additives in meat and poultry;
- operating a sales agency in Israel for many companies selling a wide range of products, including chemicals, active medicinal agents, electronic components, rubber, polymers, minerals and materials for the textile and paint industry;
- marketing fine chemical agents used in research laboratories and biochemical industries and marketing of laboratory equipment;
- marketing and selling of chemicals in Western Europe; and
- marketing of inorganic chemicals.
The chemicals that Gadot deals with are in many cases poisonous or hazardous and require Gadot to obtain permits for handling poisonous materials. Special permits are also obtained from environmental authorities, fire safety authorities and other governmental bodies for handling hazardous or flammable substances. Gadot conducts inspections and quality assurance testing and provides its employees with training and equipment necessary for working with hazardous and poisonous substances. Gadot has qualified for and received the ISO-9001:2000 quality standard for its quality assurance in chemical and liquid matter transport and distribution, as well as the ISO 14001:2004 quality standard for its environmental management system.
Gadot generally provides its services in this area of business to long-term customers in Israel that are mostly large industrial factories that use chemicals and other materials as raw materials in their manufacturing processes. These customers are spread over a wide variety of industries which reduces the risk of a downturn in any one type of industry having a significant effect on the revenues of Gadot. Gadot is not dependent on any single customer in this service sector. Nevertheless, the loss of any long-term customer may materially affect the short-term or even mid-term revenues and net profits of Gadot.
Sales, marketing and distribution are conducted by sales teams consisting of Gadot employees, who are constantly in touch with existing customers and who also actively seek out new markets and customers. Most sales are made by purchase orders which are supplied from the existing stock of Gadot. Gadot does not generally have backlog orders, as supply time is generally quick.
The chemical market is very competitive and Gadot has many competitors in Israel, Europe and other countries. Gadot’s competitors include sales agents of large chemical manufacturers, small importers and factories that import materials themselves for their own use. Competition is especially fierce in marketing chemicals packaged in barrels and sacks or in ISO-tanks (special containers used to transport liquid matter), since these do not require investment in special storage facilities, which makes it easier for competitors to enter the market. Gadot does not have information regarding its market share in the markets in which it operates.
Gadot's main advantages over its competition in the chemical market are due to:
- its ability to provide full door-to-door logistical services to its customers, from purchase, shipping and storage, to land transport to the customer’s factory;
- its ability to purchase and maintain surplus in large quantities ready for sale in a variety of packaging types and sizes;
- owning the only chemical loading dock capable of providing storage and transport in Israel;
- decades of experience in the field;
- stable, long term relationships with existing customers;
- the quality of products supplied by it and the reputation and good will of its suppliers; and
- professional support provided by suppliers and by Gadot for its products.
Gadot’s main disadvantages in the chemical market are (i) the market consisting of highly sophisticated customers that are very knowledgeable of product pricing and alternatives from competitors, which makes it hard to increase profitability and (ii) the high costs of purchasing and maintaining large quantities in surplus for immediate supply.
Most of the raw materials sold by Gadot are manufactured outside of Israel, in Europe, the United States, the Far East and South Africa. The variety of supply sources allows for increased availability in changing market conditions.
Gadot is not dependent on any one supplier in the chemicals market. There are numerous suppliers for each product sold by it, mostly located outside of Israel. Purchase of chemicals and raw materials is generally made directly from the manufacturer, by way of purchase orders.
Shipping
Gadot provides its customers (including subsidiaries within the Gadot group of companies) with shipping services, shipping liquid chemicals in tanker ships both to and from Israel. Gadot uses a fleet of 25 ships, which are either leased or owned by Gadot, with loading capabilities ranging from 5,000 tons to 25,000 tons. The total capacity of Gadot’s fleet as of December 31, 2007, was approximately 380,000 tons. The main shipping lines operated by Gadot are Israel - Northern Europe and Israel - United States, with many interim stops. Gadot also provides logistical support for ships anchored in the port of Haifa in Israel. These services include coordination of all technical procedures while in port, such as payment of port fees, care of the crew and providing ships with supplies.
Gadot’s ships are subject to strict international regulation with regard to safety of shipping hazardous chemicals and environmental protection of the seas which mainly provide standards for ship conditions and crew safety. In order to comply with these strict standards and to fulfill customer demand for compliance, all the ships used in Gadot’s fleet are double hulled and the tanks used for chemical storage are made of stainless steel, which reduces the danger of corrosion and leakage. All ships in the fleet are managed by companies with the experience and knowledge necessary to comply with such regulations and they are inspected by the relevant authorities at least once a year for deficiencies. If a ship is found not in compliance with the standards, it is not permitted to set sail until all deficiencies are remedied.
In recent years there has been a rise in demand for chemical shipping in tanker ships, which is mostly due to the growth of the Chinese economy and other emerging markets in Asia, and the growing trade between these countries with other countries. This trend tempered and even decreased during the last quarter of 2005 and the first quarter of 2006, due mainly to the natural disasters that occurred in the United States during that time. This affected Gadot’s Trans-Atlantic lines and caused a decrease in profitability during that period. In the first half of 2007 shipping prices generally rose, particularly in the ‘spot’ shipping assignments. In the second half of 2007 prices stabilized, however the price of ship fuel continued to rise, which caused gross profit to decline compared with the first half of 2007.
Gadot renewed its annual and long-term shipping contracts with its customers for the year 2007 at an average increase of 5% to 10% of its fees. However, this increase will mostly be off-set by the increase in ship leasing costs.
There are a number of critical factors necessary for succeeding in the chemical shipping business, including:
- managing a modern fleet of ships capable of transporting a variety of chemicals with a variety of different capacities in order to meet customer needs;
- availability of ships on the various shipping lines;
- professional operation of cargo, in order to increase efficiency and safety;
- having a strategy of buying or leasing ships at low prices, while entering into long-term shipping contracts with customers at high prices, in order to minimize exposure to changes in the shipping market and to increase profitability;
- creating and maintaining strategic relationships with key customers; and
- cooperation with other companies operating in the field, in order to increase the amount of ships working the same line or market and to penetrate new markets.
Competition in the field of shipping is concentrated mainly in the availability of ships and the price of transport. Larger shipping companies have an advantage over smaller ones because they have more and higher quality ships. Therefore, the large companies are usually chosen by customers with large scale shipping needs for long-term periods of time. The mid-size and small shipping companies usually compete for the ‘spot’ shipping assignments. Most of Gadot’s competitors in this service sector are shipping companies of the same size as Gadot. Gadot’s success is dependent to a large extent on the shipping fees it charges its customers and on its ability to lease ships at reasonable costs. Gadot’s main strengths over its competitors are its steady lines to Israeli ports, along the Mediterranean Sea and from Europe to Central America, and its new and modern fleet. Its main weakness is in international shipping lines, where its competitors have larger fleets capable of providing more frequent service.
Most of Gadot’s shipping contracts are for periods of between one to five years, some with options to extend the term. The remainder of its contracts are made on an ad hoc basis. Gadot has two open term contracts that terminate only by consent of the parties. These shipping contracts are drafted according to a global standard, called a “Tanker Voyage Charter Party” contract. These contracts state the shipping fee and quantity and provide other standard terms, such as type of goods, size, handling instructions, port of loading and off-loading, loading and off-loading time, late fees, time tables, jurisdiction and insurance. These contracts also incorporate by reference the provisions of certain standardized shipping contracts.
Gadot is not dependent on any single customer in this service sector.
Gadot leases the ships in its fleet according to “Time Charter Party” contracts, which provide for the lease of a ship together with its crew. These contracts are drafted according to a global standard, except for the specific terms, such as the lease period and fees. The average lease period of ships in the Gadot fleet is from one to five years, usually with an option to extend the term. The lease fee may fluctuate based on market conditions, or renewal or exit points in the contract. These contracts usually provide for the state of the ship upon delivery to the lessee, maintenance requirements, indemnification to the owners, permission to sub-lease, insurance, inspection rights, compliance with technical specifications and jurisdiction. Sometimes such contracts include an option to purchase the ship at previously agreed terms. Ships are operated commercially by the lessee, by designating shipping lines and cargo for the ship, while the lessor operates the technical aspects of running the ship and crew.
Logistical Operations in Europe
Since the end of 2007, Gadot has offered its customers logistical services for chemicals and hazardous materials in Western Europe, including off-loading and storage, filling barrels and containers, door-to-door transport and handling sensitive chemicals. Gadot provides full services to its customers throughout the whole supply chain.
The services provided by Gadot in this sector include:
- Delivery - import and export of goods to and from Europe to other destinations around the world, including contracting with shipping companies, dealing with tax authorities, port release and documentation.
- Storage - storage of customer’s materials in storage facilities, often under specialized conditions (such as temperature control, etc.).
- Transport - complete door-to-door service, from arrival of goods in port, storage, packaging and delivery to final destination.
- Packaging - packaging of dry and liquid chemicals in barrels, containers or sacks.
Gadot also provides one customer with paint mixing services.
Gadot has long-term leases over storage facilities in three countries for providing these services, with an aggregate area of 150,000 square meters. These storage facilities maintain very high standards and Gadot is the only entity within the storage sector in Europe with facilities in several countries. This gives Gadot a considerable advantage over its competitors in this field. Gadot also contracts with land and sea transport companies to facilitate its logistical services.
Operating in this sector requires Gadot to obtain appropriate licenses from authorities and to maintain strict European standards for handling hazardous materials and for operating storage facilities. Stored chemicals are categorized by their hazard level and each facility has in place the appropriate approvals and restrictions for the relevant type of material. Regulation in this field changes from time to time and Gadot needs to constantly conform itself to the existing requirements.
This sector has experienced growth in recent years in Western Europe, since an increasing number of companies and manufacturers prefer to outsource their logistical operations, due to the strict regulatory requirements. This has caused a rise in profitability in this service sector, as prices have risen due to rising demand.
Some of the main criteria for success in this service sector are: (i) location of storage facilities near industrial factories or seaports, (ii) wide geographic spread of facilities and (iii) ability to provide quality service at an all-inclusive manner.
The main entry barrier in operating in the logistics sector is compliance with licensing requirements. Applying for such licenses is an expensive and often long process, without certainty of the outcome. Another entry barrier is the necessity to maintain specialized storage facilities capable of storing chemicals and hazardous materials.
Gadot’s customers in this service sector include chemical manufacturers and distributors that import or export their goods in Europe. Gadot is not dependent on any one customer in this sector.
Most customers enter into a framework agreement with Gadot which stipulates the scope of services and fees for each service. Fees are generally adjusted annually. Most agreements do not have a minimum quantity requirement.
Gadot’s marketing and distribution efforts are conducted by Gadot’s sale people in each country whose goal is to locate potential customers for logistical services.
Most of Gadot’s competitors in this sector are local operators that have a limited spread of operations. Gadot estimates that it holds a 25% market share in the countries in which it operates. Gadot has an advantage over most of its competitors, due to the location and wide spread of its facilities and the scope and quality of its services.
Gadot takes great measures to protect the environment in its facilities in Western Europe. The storage facilities are equipped with cement or ceramic flooring, drainage systems and holding tanks to avoid ground contamination. Gadot has qualified for and received the ISO-9001:2000 quality standard for its quality assurance in this sector. Gadot’s facilities have also been inspected a number of times by the CEFIC (the European Chemical Industry Council) according to a safety and quality assessment plan of the CEFIC. The storage facilities are periodically tested by local authorities for ground contamination and fire safety.
Ancillary Services
The ancillary services provided by Gadot include:
- land transport;
- storage, loading and off-loading of materials;
- ISO-tank transportation;
- agency services for shipping companies and docked ships; and
- real property.
Land Transport
Gadot offers land transport services to its customers for chemicals and other materials from Israeli ports to the customer’s factory, and vice versa. In 2006, Gadot began supplying transport services to an Israeli gas company in immaterial amounts, but this business is expected to grow if Gadot is able to purchase additional tanker trucks adapted for this type of transport. Land transportation from chemical plants outside of Israel to Gadot’s ships is provided by subcontractors.
Gadot currently owns a fleet of 72 trucks and 68 tanker trucks (of which 55 tanker trucks are capable of transporting hazardous materials). The fleet of trucks is generally in full use by Gadot, and occasionally it also has to borrow trucks from other companies in order to fulfill demand. The fleet of tanker trucks is generally not in full use, due to the amount of tankers Gadot owns and the highly specialized purpose of each tanker.
Gadot faces much competition in this field, and it holds an estimated Israeli market share of 15% to 17%.
Storage, Loading and Off-Loading of Materials
Gadot provides storage, loading and off-loading services of chemicals and other materials to its customers (including to subsidiaries in the Gadot group of companies) in an area located near the southern terminal in the port of Haifa, which is the port used by Gadot’s ships.
Gadot is currently the only provider of chemical storage, loading and off-loading services in Israel. These services were declared a monopoly by the Israeli Antitrust Authority and are therefore subject to regulation, which includes a price list stipulated by the Antitrust Authority, and periodical inspections of profitability, the result of which may require Gadot to reduce its prices for these services. To date, Gadot has never received such an instruction. Gadot’s quality control process for storage and loading has qualified for and received the ISO-9001 quality standard.
Gadot’s facility currently has 80 storage tanks with capacities of between 30 to 2,650 cubic meters each, which are constantly maintained. The total storage capacity of these tanks is approximately 46,000 cubic meters. The facility also has a pipe loading system which allows for direct off-loading of liquid chemicals from a ship’s tank to a storage tank.
ISO-Tank Transportation
Gadot provides transportation services for liquid chemicals in ISO-tanks. ISO-tanks are transported in various ways, including by truck, train, ferry and ship. ISO-tank transport allows the customer to purchase liquid chemicals directly from the supplier, without requiring storage and off-loading. The quantities transported in ISO-tanks are usually significantly smaller than quantities transported by tanker.
Gadot currently owns 142 ISO-tanks and it leases additional ISO-tanks from external sources from time to time in order to meet customer demand. Gadot also leases ISO-tanks to third parties, which include heating systems and upper or lower off-loading apparatuses, as needed.
Agency Services for Shipping Companies and Docked Ships
Gadot acts as a general agent for shipping companies and for ships docked in Israel. It is also the exclusive representative in Israel of a large shipping company.
Gadot’s services to ships at port include logistical support for ships anchored in port in Israel. These services include coordination of all technical procedures while in port, such as payment of port fees, care for the needs of the ship’s crew and providing ships with supplies.
Gadot’s services to shipping companies include logistical support for cargo arriving in Israel, such as finding local storage facilities for a ship’s cargo, coordinating loading and off-loading of ships, locating and identifying cargo, replacement crews and other services.
Gadot has one significant customer in this service sector, with revenues that are immaterial in amount.
Real Property
Gadot leases out office space in Haifa and Tel Aviv. The rent paid for these leases are immaterial in amount.
Gadot Dividend policy
In November 2003 Gadot’s board of directors adopted a dividend policy according to which Gadot distributed 30% of its profits for each of the years 2004, 2005 and 2006, which amounted to NIS 17.0 million ($3.9 million), NIS 24.2 million ($5.4 million) and NIS 21.2 million ($4.8 million), respectively. In 2007 Gadot distributed cash dividends in an aggregate amount of NIS 38,823,529 ($9,621,692).
Energy
EAST MEDITERRANEAN GAS COMPANY (“EMG”)
EMG, an Egyptian joint stock company, organized in accordance with the Egyptian Special Free Zones system, has been granted the right to export natural gas from Egypt to Israel, other locations in the East Mediterranean basin and to other countries. EMG’s first project involves linking the Israeli energy market with the Egyptian national gas grid via an East Mediterranean pipeline. Fully financed and contracted, the pipeline and associated facilities have substantially completed construction with expected first gas delivery scheduled for the first quarter of 2008. EMG shall be the developer, owner and operator of the pipeline and its associated facilities on shore in both the point of departure at El Arish, Egypt and the point of entry in Ashkelon, Israel. In the Israeli market, EMG’s first contract was signed in late 2005 with the Israel Electric Corporation for a quantity of 2.1 BCM annually over 15-20 years. EMG is in the process of negotiating several additional agreements covering much of the anticipated 7.0 BCM annually earmarked for the Israeli market. This project is governed by an agreement signed between Israel and Egypt which designates EMG as the authorized exporter of Egyptian gas, secures EMG’s tax exemption in Israel and provides for the Egyptian government’s guarantee for the arrival of the gas to the Israeli market.
On November 29, 2007, Ampal and IIF, leading a group of institutional Investors, purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav M.N.F. Ltd. for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav M.N.F. Ltd., Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav M.N.F. Ltd.
As of December 31, 2007, the Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%). For more information concerning our interest in EMG please see “Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations” below.
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.
AM-HAL LTD. (“AM-HAL”)
Am-Hal was a wholly-owned subsidiary of the Company. Am-Hal develops and operates luxury retirement centers for senior citizens. In August 2007 the Company sold all of its interest in Am-Hal, which is presented as a discontinued operation in the accompanying financial statements. See “Item 1 - Business - Significant Developments During 2007.”
BAY HEART LTD. (“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 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. The Mall is currently undergoing extensive renovations, including the construction of a new complex of 23 movie theaters and entertainment facilities.
Leisure-Time
COUNTRY CLUB KFAR SABA LTD. (“KFAR SABA”)
Kfar Saba operates a country club facility (the “Club”) in Kfar Saba, a town north of Tel Aviv. Kfar Saba holds a long-term lease to the real estate property on which the Club is situated. The Club’s facilities include swimming pools, tennis courts and a clubhouse.
The Club, which has a capacity of 2,000 member families, operated at capacity for the 2007 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, occupies a 7-1/4 acre lot which is leased for a 49 year period. The lease expires in 2043. The H.H. Club has a capacity of 1,600 member families and has operated at capacity for the past three years. In 2007, the H.H. Club distributed $0.2 million to each of its partners. As of December 31, 2007, the Company holds a 50% direct interest in Hod Hasharon.
Capital Markets and Other Holdings
CARMEL CONTAINERS SYSTEMS LTD. (“CARMEL”)
Carmel is one of the leading Israeli companies in designing, manufacturing and marketing carton boards and packaging products. In May 2007 the Company sold all of its equity method interest in Carmel. The Company sold its interest in Carmel, which was accounted under the equity method. See “Item 1 - Business - Significant Developments During 2007.”
EMPLOYEES
The executive officers of Ampal are listed in “Item 11” below.
As of December 31, 2007:
- Ampal (Israel) Ltd. had 14 employees;
- Gadot, of which the Company owns a 65.5% interest, had 697 employees; and
- Country Club Kfar Saba Ltd., of which the Company owns a 51% interest, had 98 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. Hamas, an Islamist movement, won the majority of the seats in the Parliament of the PA in January 2006 and took control of the Gaza Strip in June 2007. These developments have further strained relations between Israel and the PA. During the summer of 2006, Israel waged a war with the Hezbollah movement in Lebanon, which involved thousands of missile strikes in Northern Israel. This conflict was the most violent outbreak of hostilities in which Israel has been involved during the past several years. This situation had an adverse effect on the economy, primarily in the relevant geographic areas, and increased the political and military uncertainty in Israel and the Middle East. See “Item 1A
ITEM 1A.
RISK FACTORS
An investment in our securities involves risks and uncertainties. These risks and uncertainties could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this Report or that we make in other filings with the SEC under the Securities and Exchange Act of 1934 or in other public statements. The risks described below are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. You should consider the following factors carefully, in addition to the other information contained in this Report, before deciding to purchase, sell or hold our securities.
Because most of the companies in which we invest conduct their principal operations in Israel, we may be adversely affected by the economic, political, social and military conditions in the Middle East.
Most of the companies in which we directly or indirectly invest have principal operations that are Israel-related. We may, therefore, be directly affected by economic, political, social and military conditions in the Middle East, including Israel’s relationship with the Palestinian Authority and Arab countries. In addition, many of the companies in which we invest are dependent upon materials imported from outside of Israel. We also have interests in companies that import and export significant amounts of products to and from Israel. Our existing 65.5% stake in Gadot (63.66% on a fully diluted basis), an Israeli publicly traded company, and our existing 16.8% stake in East Mediterranean Gas Company (8.6% of which is held by the Joint Venture, of which Ampal owns 50%), an Egyptian joint stock company, together represent a substantial portion of our investment portfolio and may be particularly sensitive to conditions in the Middle East. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities should continue or occur in the future in the Middle East or trade between Israel and its present trading partners should be curtailed, including as a result of acts of terrorism in the United States. Any such effects may impact our value and the value of our investee companies.
Hamas, an Islamist movement, won the majority of the seats in the Parliament of the PA in January 2006 and took control of the Gaza Strip in June 2007. These developments have further strained relations between Israel and the PA. During the summer of 2006, Israel was engaged in a military conflict with the Hezbollah movement in Lebanon. This conflict was the most violent outbreak of hostilities in which Israel has been involved during the past several years. This situation had an adverse effect on the economy, primarily in the relevant geographic areas. Although we do not believe that this situation has had a material adverse effect on our business or financial condition, if such situation resumes and/or escalates, the adverse economic effect may deepen and spread to additional areas and may materially adversely affect the Company and its subsidiaries’ business and financial condition.
Because of our significant investment in Gadot, we may be adversely affected by changes in the financial condition, business, or operations of Gadot.
As of December 31, 2007, the Company beneficially owns approximately 65.5% of Gadot (63.66% on a fully diluted basis) and we consolidate Gadot in the accompanying financial statements. This investment constitutes one of our largest holdings. As a result, changes in the financial condition, business or operations of Gadot (see “Risk Factors - Risks Relating to Gadot”) will significantly affect our financial condition and results of operations. Although Gadot has historically paid dividends to its shareholders, changes in Gadot’s operations may limit their ability to pay dividends in the future. Further, as a component of Ampal’s consolidated financial statements any dividends paid will not be reflected as income by Ampal. While the payment of dividends would not impact Ampal’s consolidated earnings, it could limit the financial resources available to operate the holding company which could adversely affect our operations and financial condition.
Because of our significant investment in EMG, we may be adversely affected by changes in the financial condition, business, or operations of EMG.
As of December 31, 2007, the Company beneficially owns approximately 16.8% of EMG (8.6% of which is held by the Joint Venture, of which Ampal owns 50%), a result of a series of transactions with our controlling shareholder, which was accounted as transaction between entities under common control. This investment constitutes one of our largest holdings. As a result, changes in the financial condition, business or operations of EMG, including, without limitation, unexpected delays in first gas delivery, the completion of the pipeline, and the ability of EMG to utilize the pipeline, whether as a result of environmental, regulatory or political issues or otherwise, may impact our ability to receive dividends from EMG which could adversely affect our operations and financial condition. Additionally, we have a minority interest in EMG, and therefore, do not have the ability to significantly influence or direct the affairs of EMG.
The SEC may re-examine, suspend or modify our exemption from the Investment Company Act of 1940, as amended.
In 1947, the SEC granted us 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 our operations. There can be no assurance that the SEC will not re-examine the exemptive order and revoke, suspend or modify it. A revocation, suspension or material modification of the exemptive order could materially and adversely affect us unless we were able to obtain other appropriate exemptive relief. In the event that we become subject to the provisions of the 1940 Act, we could be required, among other matters, to make changes, which might be material, to our management, capital structure and methods of operation, including our dealings with principal shareholders and their related companies.
As most of our investee companies conduct business outside of the United States, we are exposed to foreign currency and other risks.
We are subject to the risks of doing business outside the U.S., including, among other risks, foreign currency exchange rate risks, changes in interest rates, equity price changes of our investee companies, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. No assurances can be given that we will be protected from future changes in foreign currency exchange rates that may impact our financial condition or performance.
Foreign securities or illiquid securities in our portfolio involve higher risk and may subject us to higher price volatility. Investing in securities of foreign issuers involves risks not associated with U.S. investments, including settlement risks, currency fluctuations, local withholding and other taxes, different financial reporting practices and regulatory standards, high costs of trading, changes in political conditions, expropriation, investment and repatriation restrictions, and settlement and custody risks.
Changes in taxation requirements could affect our financial results.
We are subject to income tax in the numerous jurisdictions in which we generate revenues. Increases in income tax rates could reduce our after-tax income from affected jurisdictions.
We have had a history of losses which may ultimately compromise our ability to implement our business plan.
We have had losses in four of the past five fiscal years. We will continue to make investments opportunistically and to divest ourselves from certain assets which we believe lack growth potential. However, if we are not able to generate sufficient revenues or we have insufficient capital resources, we will not be able to implement our business plan of investing in, and growing, companies with strong long-term growth prospectus and investors will suffer a loss in their investment. This may result in a change in our business strategies.
The loss of key executives could cause our business to suffer.
Yosef A. Maiman, the Chairman of our board of directors, President & CEO, and other key executives, have been key to the success of our business to date. The loss or retirement of such key executives and the concomitant loss of leadership and experience that would occur could adversely affect us.
We are controlled by a group of investors, which includes Yosef A. Maiman, our Chairman, and this control relationship could discourage attempts to acquire us.
A group of shareholders consisting of Yosef A. Maiman, the Chairman of our board of directors, President & CEO, Ohad Maiman, Noa Maiman, and Yoav Maiman, and the companies Merhav M.N.F. Ltd., De Majorca Holdings Ltd. and Di-Rapallo Holdings Ltd. beneficially owns approximately 57.69% of the voting power of our Class A Stock. The group was formed in recognition of the Maiman family’s strong connection with the Company and in furtherance of the group’s common goals and objectives as shareholders, including the orderly management and operation of the Company. By virtue of its ownership of Ampal, this group is able to control our affairs and to influence the election of the members of our board of directors. This group also has the ability to prevent or cause a change in control of Ampal. Mr. Maiman owns 100% of the economic shares and one-quarter of the voting shares of De Majorca and Di-Rapallo. Merhav M.N.F. Ltd. is wholly owned by Mr. Maiman.
Because we are a “controlled company,” we are exempt from complying with certain listing standards of the NASDAQ Global Market (“NASDAQ”).
Because a group of investors who are acting together pursuant to an agreement hold more than 50% of the voting power of our Class A Stock, we are deemed to be a “controlled company” under the rules of NASDAQ. As a result, we are exempt from the NASDAQ rules that require listed companies to have (i) a majority of independent directors on the board of directors, (ii) a compensation committee and nominating committee composed solely of independent directors, (iii) the compensation of executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors and (iv) a majority of the independent directors or a nominating committee composed solely of independent directors elect or recommend director nominees for selection by the board of directors. Accordingly, our directors who hold management positions or who are otherwise not independent have greater influence over our business and affairs.
We do not publish the value of our assets.
It is our policy not to publish the value of our assets or our views on the conditions of or prospects for our investee companies. To the extent the value of our ownership interests in our investee companies were to experience declines in the future, our performance would be adversely impacted.
We do not typically pay cash dividends on our Class A Stock.
We have not paid a dividend on our Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected our policy to apply retained earnings, including funds realized from the disposition of holdings, to finance our business activities and to redeem or repay our outstanding debt, including our $65 million (as of December 31, 2007) unsecured notes on which principal payments commence in 2011. The payment of cash dividends in the future will depend upon our operating results, cash flow, working capital requirements and other factors we deem pertinent.
The market price per share of our Class A Stock on NASDAQ and TASE fluctuates and has traded in the past at less than our book value per share.
Stock prices of companies, both domestically and abroad, are subject to fluctuations in trading price. Therefore, as with a company like ours that invests in stocks of other companies, our book value and market price will fluctuate, especially in the short term. As of March 5, 2008 the market price on NASDAQ was $6.43 per share. However our shares have in the past traded below book value. You may experience a decline in the value of your investment and you could lose money if you sell your shares at a price lower than you paid for them.
Our Class A Stock may not be liquid.
Our Class A Stock is currently traded on NASDAQ and the TASE. The trading volume of our Class A Stock may be adversely affected due to the limited marketability of our Class A Stock as compared to other companies listed on NASDAQ and the TASE. Accordingly, any substantial sales of our Class A Stock may result in a material reduction in price of our Class A Stock because relatively few buyers may be available to purchase our Class A Stock.
Risks Associated with Gadot’s Business
Price Fluctuation. Gadot is exposed to fluctuations in chemical prices on the international market. It minimizes this risk by keeping surplus in stock only for its immediate needs, based on expected demand and past experience. Gadot is also exposed to fluctuations in shipping prices resulting from global supply and demand. Since Gadot’s ship leases are generally for long term periods, a downturn in shipping prices may impact the financial condition or performance of Gadot’s shipping business.
Price Fluctuation of Ship Fuel. Gadot is exposed to fluctuations in ship fuel prices, which have a direct affect on the profitability of its shipping operations. It minimizes this risk by using price adjustment mechanisms tracking the price of ship fuel in its shipping contracts with customers, especially in its long term contracts.
Exchange Rates. Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel (“NIS”) may negatively affect Gadot’s earnings. A substantial majority of Gadot’s revenues and expenses are denominated in U.S. dollars. However, a significant portion of the expenses associated with Gadot’s Israeli operations, including personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the dollar cost of Gadot’s operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar. In addition, if the value of the U.S. dollar decreases against the NIS, Gadot’s earnings may be negatively impacted. In 2007, the U.S. dollar depreciated against the NIS by 8.53% and inflation increased by 3.5%. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the U.S. dollar or of the U.S. dollar against the NIS. If the U.S. dollar cost of Gadot’s operations in Israel increases and if the current trend of depreciation of the U.S. dollar against the NIS continues, Gadot’s dollar-measured results of operations will be adversely affected. In addition, exchange rate fluctuations in countries other than Israel where Gadot operates and does business may also negatively affect its earnings.
Interest Rate Fluctuations. Gadot’s operations are funded mostly through short term and long term bank debt, which causes an exposure to interest rate fluctuations.
Ecological Concerns and Licensing Requirements. Some of Gadot’s products are characterized by high risk to those who might be exposed to them in the course of their handling and shipping. Some of the products may also potentially cause ecological damage and pollution, if not handled properly. The clean up and correction of such damage could cause Gadot to incur high costs.
Ongoing environmental pollution or contamination is not covered by Gadot’s insurance policies for ecological damage. These policies only cover pollution caused by sudden, accidental and unexpected occurrences. Gadot takes safety measures to avoid such risks, such as laying concrete buffers to protect soil, continuous maintenance of chemical tanks and periodical ground sampling in the vicinity of chemical tanks. However, these precautions cannot ensure total prevention of contaminating water sources or ground.
In addition, licensing requirements around the world are becoming stricter, due to growing ecological awareness. Gadot may have to invest increasing amounts of money and resources in order to fulfill all international licensing requirements necessary for its operations.
Storage Facility License. Gadot’s chemical storage facility is located on land owned by the Haifa port authority. A cancellation or termination of the licenses permitting Gadot to use the land would materially adversely affect Gadot’s ability to operate its chemical storage facility.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTY
We lease our headquarters located at 111 Arlozorov Street, Tel-Aviv. The lease is for a period of up to 2 years commencing on November 28, 2006. The annual rent for this lease is $186,000.
We also lease an office at 10 Abba Even St., Herzelia Pituach, which is currently under renovation. The lease is for a period of 10 years commencing on January 24, 2007. The annual rent for this lease is $130,000.
We also lease an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease is for a period of seven years commencing on October 15, 2002. The annual rent for this lease is $120,244. On March 31, 2004, the Company closed this office. The office space has been subleased.
Gadot leases an 11,000 square meter storage tank facility located in the Kishon port in Haifa from the port authority. The lease expires in 2022. Gadot also leases an additional 30,000 square meter area from the port authority located near the southern terminal in the port of Haifa in connection with its storage and loading services. See “Item 1 - Business - Chemicals - Gadot - Ancillary Services.” This lease expires in 2014.
Gadot leases an additional 18,000 square meters area located adjacent to the southern terminal land for its storage facility and for its analytical and quality assurance laboratory. Gadot also leases a 1,100 square meter building in Ohr Akiva, Israel, a 7,500 square meter area in the Ashdod, Israel, industrial zone and a 6,300 square meter area in Kiryat Atta, Israel.
Gadot owns a 60,000 square meter area of land in Greece, which was occupied by a chemical terminal. This terminal was destroyed by a fire in July 2006.
Gadot owns one ship, with a loading capability of 12,300 tons. Gadot also leases four ships, with an aggregate loading capability of 49,324 tons. The lease period for two of the ships is until 2011. The lease period for one of the ships is until 2009, with an option to extend the term for two additional one-year periods. The lease period for one of the ships is until October 2008, with an option to extend the term for three additional one-year periods. The aggregate lease fees for the four leased ships in 2007 amounted to $17 million. In 2008 the lease fees will amount to $13,004,833 and will decrease to $12,216,438 for the years 2009 and 2010 and thereafter will further decrease to $2,804,500 for 2011. Gadot has ordered four additional ships to be built with a loading capability of 17,000 each, for a consideration of approximately $28 million per ship. These ships will be delivered during 2009 and 2010.
Country Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba 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 2007 totaled $199,914.
Other properties of the Company are discussed elsewhere in this Report. See “Item 1 - Business.”
ITEM 3.
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 11,560,000 ($3 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 4,172,000 ($1,085,000) if a final judgment against the Company will be given.
On May 26, 2003, the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd. in the Tel Aviv District Court claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it. In March 2008 the dispute was submitted to mediation by order of the court, with the consent of the parties.
Claims Against Subsidiaries and Affiliates
Legal claims arising in the normal course of business have been filed against subsidiaries and affiliates of the Company.
Gadot has received third party notices in a number of lawsuits regarding pollution of the Kishon River in Israel. These lawsuits have been filed by various claimants who claim harm by the polluted water of the river, including soldiers from various units in the Israeli Defense Forces who trained in the river, fishermen who fished in the river, the Haifa rowing club and industrial companies that use the river. Some of the lawsuits are claims for monetary damages (some of the claims are unlimited in amount; one is for approximately $6 million) and some are for injunctions against further pollution of the river. Gadot denies liability in all these claims and has filed statements of defense for each claim. Gadot has not made any provisions in its financial statements against these claims.
Part of Gadot’s storage tank facility is leased from the Haifa port authority. In 2001 the port authority requested that Gadot participate in an offer to find a consultant to examine ground contamination in the area surrounding the facility. According to the estimate of the port authority, the cost of purifying the ground is estimated to be between $377,000 and $940,000. Gadot has responded, denying the existence of ground contamination and, in any case, that it is the source of such contamination. Gadot believes, that if there is contamination, its source is the contaminated waters of the Kishon River or the Mediterranean Sea. Gadot has not made any provisions in its financial statements with respect to this matter.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an annual meeting of shareholders called and convened on December 4, 2007, the following proposals were approved by the margins indicated below:
1. Proposal to elect the eight directors listed below to the Board of Directors of Ampal to hold office for one-year terms and until their respective successors shall be elected and qualified:
2. Proposal to ratify the appointment of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, as the independent registered public accounting firm of Ampal for the fiscal year ending December 31, 2007.
For Against Abstained
33,249,195 657,797 1,568
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES
PRICE RANGE OF CLASS A STOCK
Ampal’s Class A Stock is listed on NASDAQ Global Market 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 2007 and 2006, as reported by NASDAQ Global Market 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.
As of March 5, 2008, there were approximately 1,277 record holders of Class A Stock.
Ampal listed its Class A Stock on the Tel Aviv Stock Exchange on August 6, 2006, and since then it is a dually listed company.
VOTING RIGHTS
The holders of Class A Stock are entitled to one vote per share on all matters voted upon. The shares of Class A Stock do not have cumulative voting rights in relation to the election of the Company’s directors, which means that any holder of at least 50% of the Class A Stock can elect all of the members of Board of Directors of Ampal.
DIVIDEND POLICY
Ampal has not paid a dividend on its Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected the policy of Ampal to apply retained earnings, including funds realized from the disposition of holdings, to finance its business activities and to redeem debentures. The payment of cash dividends in the future will depend upon the Company’s operating results, cash flow, working capital requirements and other factors deemed pertinent by the Board. Ampal is subject to limitations on certain distributions and dividends to stockholders. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
For equity compensation plan information required by Item 2.01(d) of Regulation S-K, please see “Item 12” below.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended December 31, 2005, 2006 and 2007 and consolidated balance sheet data as of December 31, 2006 and 2007 have been derived from our audited consolidated financial statements included in this Report. The selected consolidated statement of operations data for the years ended December 31, 2003 and 2004 and the selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005 have been derived from our unaudited consolidated financial statements not included herein.
This data should be read in conjunction with our consolidated financial statements and related notes included herein and “Item 7
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We seek to maximize shareholder value through acquiring and investing in companies that we consider have the potential for growth. In utilizing our core competencies and financial resources, our investment portfolio primarily focuses on Israel-related companies engaged in various market segments including Chemicals, Energy, Real Estate, Project Development and Leisure Time.
Our investment focus is primarily on companies or ventures where we can exercise significant influence, on our own or with investment partners, and use our management experience to enhance those investments. We are also monitoring investment opportunities, both in Israel and abroad, that we believe will strengthen and diversify our portfolio and maximize the value of our capital stock. In determining whether to acquire an interest in a specific company, we consider the quality of management, return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners. We also provide our investee companies with ongoing support through our involvement in the investee companies’ strategic decisions and introductions to the financial community, investment bankers and other potential investors both in and outside of Israel.
For a description of significant developments during 2007, see “Item 1 - Business - Significant Developments during 2007.”
Our results of operations are directly affected by the results of operations of our investee companies. A comparison of the financial statements from year to year must be considered in light of our acquisitions and dispositions during each period.
The results of investee companies which are greater than 50% owned by us are included in the consolidated financial statements. We account for our holdings in investee companies over which we exercise significant influence, generally 20% to 50% owned companies (“affiliates”), under the equity method. Under the equity method, we recognize our proportionate share of such companies’ income or loss based on its percentage of direct and indirect equity interests in earnings or losses of those companies. The results of operations are affected by capital transactions of the affiliates. Thus, the issuance of shares by an affiliate at a price per share above our carrying value per share for such affiliate results in our recognizing income for the period in which such issuance is made, while the issuance of shares by such affiliate at a price per share that is below our carrying value per share for such affiliate results in our recognizing a loss for the period in which such issuance is made. We account for our holdings in investee companies, other than those described above, on the cost method or in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” In addition, we review investments accounted for under the cost method and those accounted for under the equity method periodically in order to determine whether to maintain the current carrying value or to write off some or all of the investment. For more information as to how we make these determinations, see “Critical Accounting Policies.”
For those subsidiaries and affiliates whose functional currency is considered to be the NIS or EURO, assets and liabilities are translated at the rate of exchange at the end of the reporting period and revenues and expenses are translated at the average rates of exchange during the reporting period. Translation differences of those foreign companies’ financial statements are included in the cumulative translation adjustment account (reflected in accumulated other comprehensive loss) of shareholders’ equity. Should the exchange rate of the NIS or EURO change against the U.S. dollar, cumulative translation adjustments are likely to be effected in the shareholders’ equity. As of December 31, 2007, the accumulated effect on shareholders’ equity was an increase of approximately $2.4 million. Upon the disposition of an investment, the related cumulative translation adjustment balance will be recognized in determining gains or losses.
CRITICAL ACCOUNTING POLICIES
The preparation of Ampal’s consolidated financial statements is in conformity with generally accepted accounting principles in the United States which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Ampal’s business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management’s subjective judgments. Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Ampal’s consolidated financial statements included in this Report for the fiscal year ended December 31, 2007 for a summary of all of Ampal’s significant accounting policies.
Business combinations
Business combinations have been accounted for using the purchase method of accounting. Under the purchase method of accounting the results of operations of the acquired business are included from the date of acquisition. The costs of acquiring companies, including transactions costs, have been allocated to the underlying net assets of each acquired company in proportion to their respective fair values. Any excess of the purchase price over estimated fair values of the identifiable net assets acquired has been recorded as goodwill.
Investment in EMG and other cost basis investments
The Company accounts for its 16.8% equity interest in EMG and a number of other investments on the basis of the cost method. EMG, which is one of the Company’s most significant holdings as of December 31, 2007, was acquired by Ampal and by a joint venture in which Ampal is a party in a series of transactions from Merhav M.N.F. Ltd. (“Merhav”), which is an entity controlled by one of the members of the Company’s controlling shareholder group. As a result, the transactions were accounted for as transfers of assets between entities under common control, which resulted in Merhav transferring the investment in EMG at carrying value. Due to the nature of Merhav’s operations, this entity would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. As a result, the 16.8% investment in EMG was transferred at carrying value, which equals fair value. Application of the cost basis method requires the Company to periodically review these investments in order to determine whether to maintain the current carrying value or to write off some or all of the investment. While the Company uses some objective measurements in its review, such as the portfolio company’s liquidity, burn rate, termination of a substantial number of employees, achievement of milestones set forth in its business plan or projections and seeks to obtain relevant information from the company under review, the review process involves a number of judgments on the part of the Company’s management. These judgments include assessments of the likelihood of the company under review to obtain additional financing, to achieve future milestones, make sales and to compete effectively in its markets. In making these judgments the Company must also attempt to anticipate trends in the particular company’s industry as well as in the general economy. There can be no guarantee that the Company will be accurate in its assessments and judgments. To the extent that the Company is not correct in its conclusion it may decide to write down all or part of the particular investment.
Marketable Securities
We determine the appropriate classification of marketable securities at the time of purchase. We hold marketable securities classified as trading securities that are carried at fair value. We classify investment in marketable securities as investment in trading securities, if those securities are bought and held principally for the purpose of selling them in the near term (held for only a short period of time). All the other securities are classified as available for sale securities.
SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, “Accounting for Noncurrent Marketable Equity Securities”, provides guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost; the financial health of the investee; and our intent and ability to hold the investment. Investments with an indicator are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary. If market, industry and/or investee conditions deteriorate, we may incur future impairments.
Long - lived assets
On January 1, 2002, Ampal adopted SFAS 144, “Accounting for the Impairment or Disposal of LongLived Assets.” SFAS 144 requires that long- lived assets, to be held and used by an entity, be reviewed for impairment and, if necessary, written down to the estimated fair values, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. The Company recognized an impairment of $0.4 million in the nine months period ended September 30, 2007, as a result of indication of decrease in one of the Company’s investment which was later sold.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. A valuation allowance is currently set against certain tax assets because management believes it is more likely than not that these deferred tax assets will not be realized through the generation of future taxable income. We also do not provide for taxes on undistributed earnings of our foreign subsidiaries, as it is our intention to reinvest undistributed earnings indefinitely outside the United States. In 2007, there were no undistributed earnings from foreign subsidiaries.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected.
We account for uncertain tax positions in accordance with FIN 48. The application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood of such tax positions being upheld if challenged by applicable regulatory authorities. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
Employee Stock-Based Compensation
Prior to January 1, 2006, we accounted for employees’ share-based payment under the intrinsic value model in accordance with Accounting Principles Board Opinion No “- 25. Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. In accordance with Statement of Financial Accounting Standards No. 123 - “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, we disclosed pro forma information assuming we had accounted for employees’ share-based payments using the fair value-based method defined in FAS 123.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-based Payment” (“FAS 123(R)”). FAS 123(R) supersedes APB 25 and related interpretations and amends Statement of Financial Accounting Standards No. 95", Statement of Cash Flows” (“FAS 95”). FAS 123(R) requires awards classified as equity awards to be accounted for using the grant-date fair value method. The fair value of stock options is determined based on the number of shares granted and the price of our common stock, and determined based on the Black-Scholes models, net of estimated forfeitures. We estimated forfeitures based on historical experience and anticipated future conditions.
In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides supplemental implementation guidance on FAS 123(R), including guidance on valuation methods, inventory capitalization of share-based compensation cost, income statement effects, disclosures and other issues. SAB 107 requires share-based payment to be classified in the same expense line items as cash compensation. We have applied the provisions of SAB 107 in our implementation of FAS 123(R).
We elected to adopt the modified prospective transition method, permitted by FAS 123(R). Under such transition method, FAS 123(R) was implemented as of the first quarter of 2006 with no restatement of prior periods. The valuation provisions of FAS 123(R) apply to new awards and to awards modified, repurchased, or cancelled after January 1. 2006, Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of January 1, 2006, is recognized over the remaining service period using the grant-date fair value of those awards as calculated for pro forma disclosure purposes under FAS123.
The cumulative effect of our adoption of FAS 123(R), as of January 1, 2006, was not material.
NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
SFAS No. 157 - Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). In February 2008, the FASB deferred for one additional year the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.
FAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FASB 159”). This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to Ampal, this statement will be effective as of the year beginning January 1, 2008. Ampal is currently evaluating the impact that the adoption of FAS 159 would have on its consolidated financial statements.
SFAS No. 141R - Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) which replaces SFAS No. 141, “Business Combination”. SFAS 141R establishes the principles and requirements for how an acquirer: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) discloses the business combination. This Statement applies to all transactions in which an entity obtains control of one or more businesses, including transactions that occur without the transfer of any type of consideration. SFAS 141R will be effective on a prospective basis for all business combinations on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is not allowed. The Company is in process of evaluating the impact, if any, the adoption of SFAS 141R will have on the Company’s consolidated results of operations or financial position.
SFAS No. 160 - Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" (“SFAS 160”). SFAS 160 amends ARB No. 51 and establishes accounting and reporting standards that require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be remeasured at fair value, with any gain or loss recognized in earnings. SFAS 160 will be effective for the Company commencing January 1, 2009, except for the presentation and disclosure requirements, which will be applied retrospectively. Early adoption is not allowed. The Company is in process of evaluating the impact, if any, that the adoption of SFAS 160 will have on the Company’s consolidated results of operations or financial position.
SAB No. 110
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”), relating to the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options. SAB 107 previously allowed the use of the simplified method until December 31, 2007. SAB 110 allows, under certain circumstances, to continue to accept the use of the simplified method beyond December 31, 2007. The Company believes that the adoption of SAB 110 will not have a material impact on its consolidated financial statements.
RESULTS OF OPERATIONS
Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006:
General
The Company recorded a consolidated net income of $7.8 million for the fiscal year ended December 31, 2007, as compared to a net loss of $7.1 million for the same period in 2006. The increase in earnings is primarily attributable to the gain on sale of discontinued operations, increase in interest income and including Gadot’s operation for the month of December 2007 for the year ended December 31, 2007, as compared to the same period in 2006. This increase in earnings was partially offset by decrease in net realized gains from investments, losses from affiliates, decrease in marketable securities gain, decrease in gain from sale of fixed assets, increase from impairment of investment and increase in interest expenses and translation loss.
On December 3, 2007, the Company completed the purchase of a 65.5% controlling interest (63.66% on a fully diluted basis) in Gadot. The results of operations of Gadot were included in the consolidated financial statements of the Company commencing November 30, 2007. The Company believes that the results of operations of Gadot will have an impact on its results in future periods.
Gadot’s revenues for the one month which was included in our results of operations for the year ended December 31, 2007, were approximately $31.9 million and its net income was approximately $2.8 million ($1.8 million net of Minority).
On August 5, 2007, the Company sold all of its interest in Am-Hal, a 100% wholly owned subsidiary, which accounted for a majority of the Company’s Real Estate Segment, for $29.3 million. The recorded gain relating to the sale is $29.4 million ($21.8 million net of taxes) and it was recorded as a gain on sale from discontinued operation. Loss for 2007 attributable to Am-Hal of $0.4 million compared to a $1.1 million loss for 2006 is recorded as a loss from discontinued operations.
Income from equity of affiliates decreased to a net loss of $1.5 million for the fiscal year ended December 31, 2007, compared to a net gain of $1.6 million for the same period in 2006. The decrease is primarily attributable to the sale of Coral World International Limited (“CWI”) in June 2006, which had recorded a gain of $1.6 million in 2006, the increase in losses from Bay-Heart Limited (“Bay Heart”) which recorded a loss of $1.5 million in 2007 compared to $0.7 million in 2006, the sale of Carmel in May 2007, which recorded earnings of $0.1 million in 2007, compared to earnings of $0.5 million in 2006 and loss from Chem-Tankers C.V. a 50% partnership held by Gadot.
In the fiscal year ended December 31, 2007, the Company recorded $0.6 million of net realized gain on investments, as compared to $4.4 million of net realized gain in the same period in 2006. On May 21, 2007, the company sold all of its investment in Carmel Containers Ltd. (“Carmel”) for $4.6 million. No gain was recorded relating to the sale of Carmel since an impairment was recorded during the first quarter of 2007. Additional sale of certain assets by FIMI Opportunity Fund L.P (“FIMI”) contributed most of the gain in 2007 ($0.5 million gain). The net gain recorded in 2006 was primarily attributable to the sale of CWI ($4.2 million gain), additional proceeds from the sale of Modem Art Ltd. (“Modem Art”) ($0.6 million gain), the sale of certain assets by PSINet Europe, one of the holdings of one of Ampal’s investee companies, Telecom Partners (“TP”) ($0.4 million gain) and the sale of certain assets by FIMI ($0.2 million gain). These gains were offset partially by a loss from the sale of Ophir Holdings Ltd. (“Ophir”) ($1.0 million loss).
The Company recorded realized and unrealized gain from marketable securities in the amount of $0.2 million in fiscal year ended December 31, 2007, compared to $1.1 million in the same period in 2006.
The Company recorded realized gain of $3.4 million from the sale of a ship by Chem-Tankers C.V. in fiscal year ended December 31, 2007, compared to $2.2 million gain from the sale of a real estate in the same period in 2006.
In the fiscal year ended December 31, 2007, the Company recorded $0.5 million of losses from the impairment of its investment in Carmel and Clalcom Ltd. ($0.1 million). In the same period in 2006, the Company recorded no such impairments.
In the fiscal year ended December 31, 2007, the Company recorded $10.1 million of interest expense, compared to $4.3 million for the same period in 2006. The increase in interest expense is primarily attributable to the notes issued to institutional investors in Israel, a loan payable at the amount $60.7 million received from Israel Discount Bank Ltd. and the convertible promissory note (the “Convertible Promissory Note”) issued to Merhav M.N.F. Ltd., which were issued in November and December 2006, respectively. On September 20, 2007, Merhav exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company.
In the fiscal year ended December 31, 2007, the Company recorded a $3.1 million translation loss, as compared to a $1.3 million translation gain for the same period in 2006. The increase in translation loss is related to a change in the valuation of the New Israeli Shekel as compared to the U.S. dollar.
The management of the Company currently believes that inflation has not had a material impact on the Company’s operations.
Result of Operations Analyzed by Segments
In the fiscal year ended December 31, 2007, the Company recorded $37.8 million in revenue which was comprised of $31.9 million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $4.9 million in the Finance segment, $2.5 million in the Leisure-Time segment and a $1.5 million loss in equity, as compared to $14.5 million for the same period in 2006 which was comprised of $4.2 million in the Finance segment, $2.4 million in the Real Estate segment, $6.3 million in the Leisure-Time segment and a $1.6 million gain in equity. The increase in the Finance segment revenue is primarily related to the increase in interest income offset by the decrease in realized and unrealized gains on marketable securities and the decrease in realized gain from investments relating to finance segment, which the Company recorded $0.6 million in 2007 compared to $1.2 million in the same period in 2006. The decrease in the Real Estate segment is related to the sale of Am-Hal, a wholly owned subsidiary. The decrease in the Leisure-Time segment is primarily related to the gain of $4.2 million from the sale of CWI which was recorded in 2006.
In the fiscal year ended December 31, 2007, the Company recorded $55.4 million in expenses which was comprised of $27.8 million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $25.2 million in the Finance segment and $2.4 million in the Leisure-Time segment, as compared to $17.9 million expense for the same period in 2006 which was comprised of $15.7 million in the Finance segment, $0.3 million in the Real Estate segment and $1.9 million in the Leisure-Time segment. The increase in expenses in the Finance segment is primarily attributable to the increase in interest expense relate to the notes issued to institutional investors in Israel, a loan payable at the amount $60.7 million received from Israel Discount Bank Ltd. and the Convertible Promissory Note issued to Merhav M.N.F. Ltd., which were issued in November and December of 2006, respectively. On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company.
Fiscal year ended December 31, 2006 compared to fiscal year ended December 31, 2005:
General
The Company recorded a consolidated net loss of $7.1 million for the fiscal year ended December 31, 2006, as compared to $6.0 million loss for the same period in 2005. The increase in net loss is primarily attributable to a decrease in earnings of affiliates and a decrease in other income. The increase in net loss was partially offset by an increase in net realized and unrealized gains from marketable securities and investments, gain on sale of real estate, a decrease in loss from impairment of investments and a decrease in translation losses in 2006, as compared to 2005.
On August 5, 2007, the Company sold all of its interest in Am-Hal, a 100% wholly owned subsidiary, which accounted for a majority of the Company’s Real Estate Segment, for $29.3 million. Loss for 2006 attributable to Am-Hal of $1.1 million compared to a $42 thousands loss for 2005, is recorded as a loss from discontinued operations.
Income from equity of affiliates decreased to $1.6 million for the fiscal year ended December 31, 2006 as compared to $6.7 million for the fiscal year ended in 2005. The decrease is primarily attributable to a decrease in the earnings of Ophir, which was sold during the second quarter of 2006 and did not record any earnings in the fiscal year ended December 31, 2006, as compared to a gain of $6.1 million recorded by Ophir in the same period in 2005.
In the fiscal year ended December 31, 2006, Ampal recorded a gain of $2.2 million on the sale of its building in Tel-Aviv (proceeds of $4.6 million).
In the fiscal year ended December 31, 2006, the Company recorded $0.4 million in other income, as compared to $7.6 million for the same period in 2005. The decrease in other income is primarily related to the committed dividend for 2005 which had been fully paid on October 3, 2005 by Motorola Israel Ltd. as part of the sale of its investment in MIRS Communications Ltd. last year.
In the fiscal year ended December 31, 2006, the Company recorded $4.4 million of net realized gain on investments, as compared to $2.7 million of net realized loss in the same period in 2005. The gain recorded in 2006 was primarily attributable to the sale of Coral World International ($4.2 million gain), additional proceeds from the sale of Modem Art ($0.6 million gain), the sale of certain assets by PSINet Europe, one of the holdings of Ampal’s investee company, TP ($0.4 million gain) and the sale of certain assets by FIMI ($0.2 million gain). These gains were partially offset by a loss recorded in connection with the sale of Ophir ($1.0 million loss).
The Company recorded realized and unrealized gains from marketable securities in the amount of $1.1 million in fiscal year ended December 31, 2006, compared to $3.2 million in the same period in 2005.
In the fiscal year ended December 31, 2005, the Company recorded $14.0 million of losses from the impairment of its investment in MIRS ($13.3 million), Shiron Ltd. ($0.6 million) and other loans ($0.1 million). In the same period in 2006, the Company recorded no such impairments.
In the fiscal year ended December 31, 2006, the Company recorded a $1.3 million translation gain, as compared to a $2.6 million translation loss for the same period in 2005. The decrease in translation loss is related to a change in the valuation of the New Israeli Shekel as compared to the U.S. dollar.
Result of Operations Analyzed by Segments
In the fiscal year ended December 31, 2006, the Company recorded $14.5 million in revenue which was comprised of $4.2 million in the Finance segment, $2.4 million in the Real Estate segment, $6.3 million in the Leisure-Time segment and $1.6 million in equity, as compared to $21.5 million for the same period in 2005 which was comprised of $12.4 millions in the Finance segment, $0.2 million in the Real Estate segment, $2.2 million in the Leisure-Time segment and $6.7 million in equity. The decrease in the Finance segment revenue is primarily related to the dividends payable by Motorola Israel Ltd. to the Company as part of the sale of its investment in MIRS Communications Ltd. which were fully paid on October 3, 2005, and no similar dividend was payable in 2006. The increase in revenue in the Real Estate segment is primarily related to the gain of $2.2 million from the sale of building on Arlozorov Street in Tel-Aviv (the “Arlozorov Building”) and the increase in revenue in the Leisure-Time segment is primarily related to the gain of $4.2 million from the sale of Coral World International.
In the fiscal year ended December 31, 2006, the Company recorded $17.9 million in expenses which was comprised of $15.7 million in the Finance segment, $0.3 million in the Real Estate segment and $1.9 million in the Leisure-Time segment, as compared to $35.0 million expense for the same period in 2005 which was comprised of $32.7 millions in the Finance segment, $0.3 million in the Real Estate segment and $2.0 million in the Leisure-Time segment. The decrease in Finance expense is primarily attributable to the $14.0 million losses from the impairment of its investments which the Company recorded in 2005 and did not record such impairment in 2006 and the decrease in translation loss to $1.3 million gain in 2006 compared to $2.6 million loss in 2005 which related to a change in the valuation of the New Israeli Shekel as compared to the U.S. dollar.
SELECTED QUARTERLY FINANCIAL DATA
(1) After deduction of dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2006 (in thousands) of $2,438.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
On December 31, 2007, cash, cash equivalents and marketable securities were $66.7 million, as compared with $37.1 million at December 31, 2006. The increase in cash, cash equivalents and marketable securities is primarily attributable to the sale of Am-Hal, Carmel and proceeds from the exercise of warrants. This increase in cash flow was partially offset by the investments in Gadot, EMG, Bay Heart and FIMI.
As of December 31, 2007, the Company had $22.5 million of marketable securities as compared to $0.4 million in 2006.
The Company may also receive cash from operations and investing activities and amounts available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current requirements of operations, capital expenditures, investing activities and other financial commitments of the Company for the next 12 months. However, to the extent that contingencies and payment obligations described below and in other parts of this Report require the Company to make unanticipated payments, the Company would need to further utilize these sources of cash. The Company may need to draw upon its other sources of cash, which may include additional borrowing, refinancing of its existing indebtedness or liquidating other assets, the value of which may also decline.
In addition, Ampal’s interest in Gadot has been pledged and cash equal to $12.0 million has been placed as a compensating balance for various loans provided to the Company and would therefore be unavailable if the Company wished to pledge them in order to provide an additional source of cash.
Cash flows from operating activities
Net cash used in operating activities totaled approximately $23.6 million for the fiscal year ended December 31, 2007, as compared to approximately $29.8 million provided by operating activities at the same period in 2006. The decrease in cash used in operating activities is primarily attributable to (1) the $5.8 million of net investment in marketable securities in 2007 ($23.8 million investment offset by $18.0 million proceeds) as compared to $39.6 million of net proceeds from the sale of marketable securities ($89.6 million proceeds offset by $50.0 million invested) in the same period of 2006; and (2) the increase in interest expense due to the notes issued to institutional investors in Israel and the Convertible Promissory Note issued to Merhav M.N.F. Ltd., which were issued in November and December of 2006, respectively.
Cash flows from investing activities
Net cash used in investing activities totaled approximately $149.7 million for the fiscal year ended December 31, 2007, as compared to approximately $107.3 million used in investing activities for the same period in 2006. The increase in cash used in is primarily attributable to the investment of $95.4 million in EMG (see Investments below), the investment of $91.2 million in Gadot ($78.2 million net of cash), investment in EMG ($5.8 million), investment in Bay Heart ($2.4 million) and capital improvement in Am-Hal. This increase was offset by the proceeds from the sale of Am-Hal, Carmel, FIMI, by the sale of a ship by Gadot in the amount of $6.9 million and by deposit collected of $3.6 million. The cash used in investing activities during 2006 is primarily attributable to the Company’s investments in EMG ($52.7 million), Bay-Heart ($1.4 million) and FIMI ($0.4 million) offset by the proceeds at the amount of $23.0 million from the sale of CWI, Ophir, Modem Art and certain assets of TP and FIMI.
Cash flows from financing activities
Net cash provided by financing activities was approximately $179.6 million for the fiscal year ended December 31, 2007, as compared to approximately $86.2 million of net cash provided by financing activities for the same period in 2006. In 2007, the Company received a $60.7 million loan from Israel Discount Bank Ltd. to finance the purchase of Gadot, received $15.2 million from Union Bank Of Israel Ltd. (“UBI”), received $95.4 million from partnership minority to finance the additional purchase of EMG, paid down notes payable to Bank Hapoalim Ltd. (“Bank Hapoalim”) in the amount of $37.0 million, received $27.2 million under a loan facility with Bank Hapoalim and from exercise of warrants in the amount of $18.0 million. In 2006, the Company paid down its existing notes payable to Bank Hapoalim in the amount of $6.0 million while using its own cash and borrowing an additional $0.7 million under a loan facility with Bank Hapoalim. In November 2006, the Company issued notes to institutional investors in Israel in the principal aggregate amount of approximately $58.0 million ($56.4 million after deducting related expense) in accordance with Regulation S under the Securities Act of 1933, as amended. In December 2006, the Company completed a private placement of the sale of 8,142,705 shares of its Class A Stock for aggregate proceeds of $37.8 million ($36.7 million after deducting related expenses) to certain non-U.S. institutional investors in accordance with Regulation S under the Securities Act of 1933, as amended. In 2006, the Company paid down its existing notes payable to banks in the amount of $11.2 million and paid a dividend to the holders of its preferred stock in the aggregate amount of $2.3 million while using its own cash and borrowed an additional $6.0 million.
Investments
On December 31, 2007, the aggregate fair value of trading and available-for-sale securities were approximately $22.4 million, as compared to $0.4 million at December 31, 2006. The increase in 2007 is mainly attributable to the purchase of Gadot and to the tradable securities held by Gadot.
a) In 2007, the Company made the following investments:
1. On December 3, 2007, Ampal completed its acquisition of 65.5% of the control and ownership (63.66% on a fully diluted basis) of Gadot Chemical Tankers and Terminals Ltd. (“Gadot”). The total consideration including direct transaction expenses was $91.2 million. The cash consideration was financed with Ampal’s own resources and with borrowings in the amount of $60.7 million.
Gadot and its group of companies is an Israeli chemical distribution organization. Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to the local industry.
The acquisition was accounted for by the purchase method. The results of operations of Gadot were included in the consolidated financial statements of Ampal commencing November 30, 2007. The consideration for the acquisition was attributed to net assets on the basis of fair value of assets acquired and liabilities assumed, based on an appraisal performed by management, which included a number of factors, including the assistance of independent appraisers.
The following table summarizes the final fair values of the assets acquired and liabilities assumed, with reference to Gadot balance sheet data as of November 30, 2007:
Under the purchase method of accounting, the total consideration of $91.2 million allocated to Gadot’s identifiable tangible and intangible assets and liabilities assumed based on their estimated fair values as of the date of the completion of the transaction.
Below are the unaudited pro forma combined statements of operations data for the years ended December 31, 2007 and 2006 as if the acquisition of Gadot had occurred on January 1, 2007 and 2006, respectively, after giving effect to: (a) purchase accounting adjustments, including amortization of identifiable intangible assets; and (b) estimated additional interest expense due to the loan granted to Ampal in connection with the acquisition. This pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisition taken place at the beginning of 2007 and 2006, respectively, nor is it necessarily indicative of future results.
2. During 2007, the Company made an additional investment in EMG as follows:
On June 4, 2007, EMG called for additional capital from its shareholders. As a result, Ampal paid an additional $5.8 million in order to maintain its pro rata beneficial interest in EMG.
On November 29, 2007, Ampal and IIF, leading a group of institutional Investors, purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav M.N.F. Ltd. for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav M.N.F. Ltd., Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav M.N.F. Ltd., which was accounted for as a transfer of assets between entities under common control, which resulted in Merhav M.N.F. Ltd. transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhav M.N.F. Ltd.‘s operations, Merhav M.N.F. Ltd. would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. On this basis, the said investment in EMG was transferred to Ampal at carrying value, which also equals fair value. Based on the terms stipulated in the shareholders agreement of the general partner of the Joint Venture, Ampal and Israel Infrastructure G.P. Ltd. have equal rights in governing the affairs of the Joint Venture. However, in certain events and under certain conditions, matters relating to decisions on how to vote the EMG shares held by the Joint Venture shall be decided by the directors of the general partner of the Joint Venture appointed by Ampal or by IIF. As such, Ampal has consolidated the results of the Joint Venture in its financial statements.
The Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
Yosef A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling shareholder group of the Company, is the sole owner of Merhav M.N.F. Ltd.
For more information regarding our interest in EMG, see “Item 13.”
3. Wind Energy Joint Venture
On November 25, 2007, MAE signed a joint venture agreement with Clal Electronics Industries Ltd. (“Clal”), an Israel-based holding company, for the formation of a joint venture that will focus on the new development and acquisition of controlling interests in wind energy projects outside of Israel. The joint venture, owned equally by Clal and the Company through MAE, will seek to either develop or acquire wind energy opportunities with a goal of establishing at least 150MW of installed capacity within the next 3.5 years.The joint venture’s initial project is the development of a wind farm in Greece. The Company has approved a $25 million budget for these projects.
4. Option Agreement for Sugarcane Ethanol Project in Colombia
On December 25, 2007, Ampal entered into an Option Agreement (the “Option Agreement”) with Merhav M.N.F. Ltd. providing Ampal with the option to acquire up to a 35% equity interest in a sugarcane ethanol production project (the “Project”) in Colombia being developed by Merhav M.N.F. Ltd. The option expires on the earlier of December 25, 2008 or the date on which both (i) Merhav M.N.F. Ltd. has obtained third-party debt financing for the Project and (ii) an unaffiliated third party holds at least a 25% equity interest in the Project. The Option Agreement provides that the purchase price for any interest in the Project purchased by Ampal pursuant to the Option Agreement will be (A) with respect to any portion of such interest being purchased by conversion of the outstanding balance of the Promissory Note referred to below, the lesser of (i) a price based on a currently agreed valuation model as updated from time to time to reflect changes in project, financing and other similar costs (the “Valuation Model”) as such updates are reviewed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. at the time of the option’s exercise or (ii) the lowest price paid by any unaffiliated third party for an interest in the Project, or (B) with respect to any portion of such interest in the Project being purchased in excess of the balance of the Promissory Note, the lowest price paid by an unaffiliated third party for its interest in the Project, unless no unaffiliated third party has purchased an interest in the Project, in which case the purchase price will be based on the Valuation Model.
Ampal has loaned Merhav M.N.F. Ltd. $10 million to fund the purchase of the 11,000 hectares of property in Colombia required for growing sugarcane and the construction of an ethanol production facility for the Project, pursuant to a Promissory Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor of Ampal (the “Promissory Note”). Ampal has agreed to advance up to an additional $10 million to fund the Project pursuant to the Promissory Note. The loan bears interest at an annual rate equal to LIBOR plus 2.25%, and will be convertible into all or a portion of the equity interest purchased pursuant to the option.
As security for the loan, Merhav M.N.F. Ltd. has pledged to Ampal, pursuant to a pledge agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal, all of the shares of Ampal’s Class A Stock, par value $1.00 per share, owned by Merhav.
Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholders group of Ampal, is the sole owner of Merhav M.N.F. Ltd. Because of the foregoing relationship, a special committee of the Board of Directors composed of Ampal’s independent directors negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which has been retained as financial advisor to the special committee, advised the special committee on this transaction.
For more information regarding our investment in Colombia, see “Item 13.”
5. Additional investment of $0.1 million in FIMI.
6. A loan to Bay Heart of $3.6 million, for a shopping mall in Haifa, Israel.
b) In 2007, Ampal made the following dispositions:
1. On May 21, 2007, the Company closed the sale of all of its holdings in Carmel, a packaging manufacturer affiliate based in Israel. Pursuant to this transaction, Ampal and its subsidiaries sold to Carmel an aggregate of 522,350 ordinary shares of Carmel for an aggregate sales price of approximately $4.6 million. The Company recorded no gain since impairment was recorded in the first quarter of 2007.
2. During 2007, the Company received proceeds in the total amount of $0.8 million from the sales of certain investments by FIMI.
3. On August 5, 2007, the Company completed the sale of its holdings in Am-Hal Ltd. for an aggregate consideration of $29.3 million and recorded a gain of approximately $29.4 million (approximately $21.7 million, net of taxes). The gain and Am-Hal’s results of operations until June 30, 2007, were recorded as discontinued operations for all periods presented.
Debt
Notes issued to institutional investors in Israel, the convertible note issued to Merhav M.N.F. Ltd. and other loans payable pursuant to bank borrowings are either in U.S. dollars, linked to the Consumer Price Index in Israel or in unlinked New Israel Shekels, with interest rates varying depending upon their linkage provision and mature between 2008-2019.
The Company finances its general operations and other financial commitments through bank loans from Bank Hapoalim, UBI and Israel Discount Bank Ltd. As of December 31, 2007, the outstanding indebtedness under these bank loans totaled $101.9 million and the loans mature through 2008-2019.
On February 26, 2007, the Company entered into a bank loan with UBI. Pursuant to the loan agreement, on April 2, 2007, UBI granted the Company a $10 million loan, which bears interest at the rate of LIBOR plus 2% to be repaid in six annual installments commencing on April 2, 2008. The loan is secured by a pledge of certain assets. On December 31, 2007, UBI granted the Company two loans of equal amount, for a total amount of NIS 20 million (approximately $5.2 million). These loans bear interest at the rate of 4.6% and 4.8%, respectively, linked to the Consumer Price Index in Israel. Both loans are for a term of two years and interest will be paid semi-annually.
On April 26, 2007, the Company repaid its existing loans from Bank Hapoalim and signed a new loan agreement. The new agreement provides for a secured $27 million dollar loan facility to the Company at the value as of March 30, 2007, to be used for general corporate purposes. On March 30, 2007, the Company borrowed the full $27 million under the loan facility. The funds borrowed under the loan facility are due in six annual installments commencing on December 31, 2007 and bear interest at an annual rate of LIBOR plus 2%. The Loan Agreement contains financial and other covenants including an acceleration of payment upon the occurrence of certain changes in the ownership of the Company’s Class A Stock. As of December 31, 2007, the Company is in compliance with its debt covenants.
On November 29, 2007, as part of the agreement between Ampal and IIF, leading a group of institutional Investors, the Company received $95.4 million to purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership, from Merhav. The loan is unlinked to the Consumer Price Index in Israel, bears no interest and is repayable upon agreement by both parties, but with a minimum term of one year.
A short term loan from Bank Hapoalim in the amount of $3.5 million bears interest of 7.1% and is to be repaid by March 31, 2008.
On November 20, 2006, the Company entered into a trust agreement with Hermetic Trust (1975) Ltd. pursuant to which the Company issued notes to institutional investors in Israel in the principal aggregate amount of NIS 250 million (approximately $58 million) with an interest rate of 5.75%, which is linked to the Israeli consumer price index. The notes shall rank pari passu with our unsecured indebtedness. The notes will be repaid in five equal annual installments commencing on November 20, 2011, and the interest will be paid semi-annually. As of December 31, 2007, the outstanding debt under the notes amounts to $66.6 million, due to the change in valuation of the New Israeli Shekel as compared to the U.S. dollar. The Company deposited an amount of $10,207,000 with Hermetic Trust (1975) Ltd. to secure the first three years worth of payments of interest on the debentures. As of December 31, 2007, the outstanding amount of the deposit was $7.5 million. Prior to the issuance of the debentures, Midroog Ltd., an affiliate of Moody’s Investors Service, rated the Company as A3.
On August 1, 2007, Ampal filed a final prospectus with the Israeli Securities Authority and the TASE for the resale and listing with the TASE of its Series A Notes. According to the prospectus, on August 19, 2007, Ampal paid the Series A Notes holders additional interest of 0.10959% (0.5% annually) for the period commencing May 20, 2006 and ending on August 9, 2007, which is the date the Series A Notes were registered for trade. The additional interest was paid to the Series A Note holders whose names appear in the Series A Note holders register kept by Ampal as of August 7, 2007. The debt offering was made solely to certain non-U.S. institutional investors in accordance with Regulation S under the U.S. Securities Act of 1933, as amended. The notes have not been and will not be registered under the U.S. securities laws, or any state securities laws, and may not be offered or sold in the United States or to United States persons without registration unless an exemption from such registration is available.
Ampal funded the Gadot transaction with a combination of available cash and the proceeds of a new credit facility, dated November 29, 2007 (the “Credit Facility”), between MAE and Israel Discount Bank Ltd. (the “Lender”), for approximately $60.7 million. The Credit Facility is divided into two equal loans of approximately $30.35 million. The first loan is a revolving loan that has no principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan also matures in 2019, has no principal payments for the first two years, and shall thereafter be paid in equal installments over the remaining ten years of the term. Interest on both loans accrues at a floating rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has guaranteed all the obligations of MAE under the Credit Facility and Ampal’s interest in Gadot has also been pledged to the Lender as a security for the Credit Facility. Yosef Maiman has agreed with the Lender to maintain ownership of a certain amount of the Company’s Class A Common Stock. The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.
In addition, as part of the EMG transaction in December 2006, the Company issued to Merhav M.N.F. Ltd. the Convertible Promissory Note in the principal amount of $20 million, which at the option of Merhav M.N.F. Ltd., was payable in cash, additional shares of Ampal Class A Stock (based on a price per share of $4.65 per share), or a combination thereof. The Convertible Promissory Note bore interest at 6 months LIBOR (5.375%) and matured on the earlier of September 20, 2007, or upon demand by Merhav M.N.F. Ltd. On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company. See “Changes in Shareholders Equity” below.
Other long term borrowings in the amount of $0.2 million are linked to the Consumer Price Index in Israel, mature between 2007 and 2010 and bear annual interest of 5.7%.
As of December 31, 2007, Gadot had $0.7 million outstanding under its convertible debentures. Gadot’s debentures were listed on the Tel Aviv Stock Exchange (“TASE”) in December 2003, are linked to the Consumer Price Index in Israel, bear annual interest at the rate of 6.5%, and are repayable in two equal annual installments on December 5, 2008 and 2009. The debentures are convertible into ordinary shares of Gadot, commencing from the date they were listed on the TASE until December 5, 2009, such that as of December 31, 2007, each incremental amount of NIS 3.53 of outstanding debentures (linked to the Consumer Price Index in Israel) is convertible into one ordinary share of Gadot of NIS 0.1 par value, subject to adjustments.
As of December 31, 2007, Gadot had $12.0 million outstanding under its other debentures. These debentures are not convertible into shares and are repayable in five equal annual installments on September 15, of each of the years 2008 through 2012. The unsettled balance of the principal of the debentures bears annual interest at the rate of 5.3%. The principal and interest of the debentures are linked to the Consumer Price Index in Israel and the interest is payable in semi-annual installments on March 15 and September 15 of each of the years 2006 through 2012.
As of December 31, 2007, Gadot, a 65.5% subsidiary of Ampal, has short term loans payable in the amount of $96.5 million and long term loans payable in the amount of $30.1 million. The various short term loans payable are either unlinked or linked to the Euro and bear interest at rates between 5.73% to 6.09%. The various long term loans payable are either unlinked, linked to the Consumer Price Index in Israel or linked to the Euro and bear interest at rates between 4.82% to 6.90%.
The weighted average interest rates and the balances of these short-term borrowings at December 31, 2007 and December 31, 2006 were 6.3% on $136.6 million and 6.3% on $21.2 million, respectively.
(1)
See Note 19(d) to Ampal’s consolidated financial statements included in this Report for the fiscal year ended December 31, 2007.
(2)
See Note 19(a) to Ampal’s consolidated financial statements included in this Report for the fiscal year ended December 31, 2007.
(3)
In calculating estimated interest payments on outstanding debt obligations, the Company assumed an exchange rate as at December 31, 2007 of NIS 3.846 to 1 U.S. dollar.
As of December 31, 2007, the Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of $27.4 million. This includes:
1. $5.2 million guarantee on indebtedness incurred by Bay Heart ($0.3 million of which is recorded as a liability in the Company’s financial statements at December 31, 2007) in connection with the development of its property. Bay Heart recorded losses in 2007 as a result of decreased rental revenues. There can be no guarantee that Bay Heart will become profitable or that it will generate sufficient cash to repay its outstanding indebtedness without relying on the Company’s guarantee.
2. $1.1 million guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.
3. $ 21.1 million guarantees of Gadot for outstanding loans.
Off-Balance Sheet Arrangements
Other than the foreign currency contracts specified below, the Company has no off-balance sheet arrangements.
Foreign Currency Contracts
The Company’s derivative financial instruments consist of foreign currency forward exchange contracts to purchase or sell U.S. dollars. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts have been designated as hedging instruments. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled, based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.
As of December 31, 2007, the Company had open foreign currency forward exchange contracts to purchase U.S. dollars and sell Euros in the amount of $9 million.
CHANGES IN SHAREHOLDERS EQUITY
During the second, third and fourth quarter of 2007, the shareholders’ equity changed as follows:
As of December 31, 2007, the Company issued 3,870,351 Class A Shares to investors that exercised warrants granted to them by the Company on December 28, 2006. The total proceeds from the exercise of warrants were $18.0 million.
On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the convertible promissory note issued to it as partial consideration for the purchase of a 5.9% interest in EMG by Ampal in December 2006, into 4,476,389 shares of Class A Stock of Ampal. The issuance of the 4,476,389 shares underlying the Convertible Promissory Note received the approval of the shareholders of the Company on February 7, 2007, as required by the marketplace rules of the NASDAQ Global Market.
ITEM 7A
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS AND SENSITIVITY ANALYSIS
The Company is exposed to various market risks, including changes in interest rates, foreign currency exchange rates and equity price changes. The following analysis presents the hypothetical loss in earnings, cash flows and fair values of the financial instruments which were held by the Company at December 31, 2007, and are sensitive to the above market risks.
During the fiscal year ended December 31, 2007, there have been no material changes in the market risk exposures facing the Company as compared to those the Company faced in the fiscal year ended December 31, 2006, other than exposure to the Euro exchange rate due to the Company’s acquisition of Gadot.
Interest Rate Risks
At December 31, 2007, the Company had financial assets totaling $44.6 million and financial liabilities totaling $403.3 million. For fixed rate financial instruments, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate financial instruments, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.
At December 31, 2007, the Company did not have fixed rate financial assets and had variable rate financial assets of $44.6 million. A ten percent decrease in interest rates would not increase the unrealized fair value of the fixed rate assets.
At December 31, 2007, the Company had fixed rate debt of $192.4 million and variable rate debt of $211.3 million. A ten percent decrease in interest rates would increase the unrealized fair value of the financial debts in the form of the fixed rate debt by approximately $1.5 million.
The net decrease in earnings and cash flow for the next year resulting from a ten percent interest rate increase would be approximately $1.3 million, holding other variables constant.
Foreign Currency Exchange Rate Sensitivity Analysis
The Company’s exchange rate exposure on its financial instruments results from its investments and ongoing operations. As of December 31, 2007, the Company had open foreign exchange forward contracts to purchase U.S. Dollars and sell Euros in the amount of $9 million. Holding other variables constant, if there were a ten percent devaluation of the foreign currency, the Company’s cumulative translation loss reflected in the Company’s accumulated other comprehensive loss would increase by $1.9 million, and regarding the statements of operations a ten percent devaluation of the U.S. Dollar exchange rate would be reflected in a net increase in earnings and cash flow would be $21.8 million, and a ten percent devaluation of the Euro exchange rate would be reflected in a net increase in earnings and cash flow would be $2.8 million.
Equity Price Risk
The Company’s investments at December 31, 2007, included marketable securities which are recorded at a fair value of $22.5 million, including a net unrealized gain of $0.2 million. Those securities have exposure to equity price risk. The estimated potential loss in fair value resulting from a hypothetical ten percent decrease in prices quoted on stock exchanges is approximately $2.2 million. There will be no impact on cash flow resulting from a hypothetical ten percent decrease in prices quoted on stock exchanges.
ITEM 8
ITEM 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 1 through 36 of the financial statements attached to this annual report.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). The Company’s management with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted, we have excluded from our evaluation the 2007 acquisitions of Gadot, which is included in our 2007 Consolidated Financial Statements and which represented 44.3% of consolidated total assets and 135.1% of consolidated shareholders’ equity as of December 31, 2007, and 84.5% of consolidated net revenues and $2.5 million gain out of $13.6 million loss from continuing operations for the year ended December 31, 2007. Based on that evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by Kessleman & Kesselman, a member of PricewaterhouseCoopers International Limited, an independent registered public accounting firm, as stated in their report attached hereto.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT
The following table sets forth certain information regarding Ampal’s directors and executive officers as of March 5, 2008:
The numbers listed below, which follow the names of some of the foregoing directors, designate committee membership:
(1) Member of the Executive Committee of the Board which meets as necessary between regularly scheduled Board meetings and, consistent with certain statutory limitations, exercises all the authority of the Board.
(2) Member of the Audit Committee of the Board which reviews functions of the outside auditors, auditors’ fees and related matters. Mr. Karni is the Chairman of the Audit Committee of the Board.
(3) Member of the Stock Option and Compensation Committee of the Board.
(4) Member of the Special Committee of the Board.
There are no family relationships between any of Ampal’s directors and executive officers.
In 2007, the Board met 14 times and acted twice by written consent; the Executive Committee acted once by written consent; the Audit Committee met 6 times and did not act by written consent. The Stock Option and Compensation Committee met once and acted once by written consent. The Special Committee met twice and did not act by written consent. All directors but one attended more than 75% of the aggregate of (1) the total number of Board meetings held during the period in 2007 for which such individual was a director and (2) the total number of meetings held by all committees of the Board on which such individual served in 2007 (during the period of such service). Each director of the Board is elected for a one year term and serves until his or her successor is duly elected and qualified.
The following sets forth the ages of all of the above-mentioned directors and executive officers, all positions and offices with Ampal or its subsidiaries held by each director and officer and principal occupations during the last five years.
YOSEF A. MAIMAN, 62, has been the Chairman of the Board of Ampal since April 25, 2002 and President and Chief Executive Officer of Ampal since October 1, 2006. Mr. Maiman has been President and Chief Executive Officer of Merhav M.N.F. Ltd. (“Merhav”), one of the largest international project development companies based in Israel, since its founding in 1975. Mr. Maiman is the Chairman of the Board of Directors of Gadot. Mr. Maiman is also the Chairman of the Board of Directors of Channel Ten, a commercial television station in Israel, a director of Eltek, Ltd. (“Eltek”), a developer and manufacturer of printed circuit boards and Honorary Consul to Israel from Peru. Mr. Maiman is also a member of the Board of Trustees of the Tel Aviv University, Chairman of the Israeli Board of the Jaffee Center for Strategic Studies at Tel Aviv University, a member of the Board of Governors of Ben Gurion University, and the Chairman of the Board of Trustees of the International Policy Institute for Counter Terrorism.
JACK BIGIO, 42 has been a director of Ampal since March 6, 2002. Mr. Bigio served as the President and Chief Executive Officer of Ampal between April 25, 2002 and September 30, 2006. From 1996 until April 2002, Mr. Bigio served as Senior Vice President - Operations and Finance of Merhav and from October 2006 Mr. Bigio serves as Senior Vice President of Merhav. Mr. Bigio is also a director of Eltek, a member of the Board of Israel-America Chamber of Commerce & Industry and a member of Young Presidents’ Organization.
LEO MALAMUD, 56, has been a director of Ampal since March 6, 2002. Since 1995 Mr. Malamud is Senior Vice President of Merhav M.N.F. Ltd. Mr. Malamud is also a Director of Gadot, Channel 10, 10 News Ltd. and Nana 10 Ltd.
Dr. JOSEPH YERUSHALMI, 70, has been a director of Ampal since August 16, 2002. Since 1995 Mr. Yerushalmi has been Senior Vice President - Head of Energy and Infrastructure Projects of Merhav M.N.F. Ltd. Mr. Yerushalmi is also a Director of Gadot.
Dr. NIMROD NOVIK, 62, has been a director of Ampal since September 19, 2006. Dr. Novik has been Senior Vice President of Merhav M.N.F. Ltd. since 1995, responsible for Middle East projects (including the MIDOR petroleum refinery in Egypt and the current EMG project for the export of Egyptian natural gas to Israel) as well as for corporate and government relations. He is a member of the board of EMG and of Channel 10 News Corp. Mr. Novik is an advisor to the Israeli National Security Council as well as to several members of the Israeli cabinet, and a former Special Ambassador of the State of Israel as well as Chief Advisor on Foreign Policy to Israel’s Prime Minister and Minister of Foreign Affairs.
YEHUDA KARNI, 79, has been a director of Ampal since August 16, 2002. Mr. Karni was a senior partner in the law firm of Firon Karni Sarov & Firon, from 1961 until his retirement in 2000.
EITAN HABER, 68, has been a director of Ampal since August 16, 2002. Mr. Haber was the Head of Bureau for the former Prime Minister of Israel, Yitzhak Rabin, from July 1992 until November 1995. Since 1996, Mr. Haber has been the President and Chief Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung Aircraft and Industries in Israel and the Middle East. Since 2001, Mr. Haber has also served as CEO of Kavim Ltd., a production and project development company. Mr. Haber is a member in the Board of Directors of Africa Israel Ltd. and “Israel Experience Co.”
MENAHEM MORAG, 57, has been a director of Ampal since January 27, 2004. From 1996 to 1999 Mr. Morag was the Head of Finance and Budget at the Israeli Prime Minister’s office in Tel Aviv. From 1999 to 2001, Mr. Morag was the Controller and Ombudsman at the Israeli Prime Minister’s office in Tel Aviv. From 2001 to 2003, Mr. Morag was the Head of Human Resources Department at the Israeli Prime Minister’s office in Tel Aviv. Since 2003 until 2006, Mr. Morag served as the Head of the Council of the Pensioners Association of the Israeli Prime Minister’s office in Tel Aviv. Mr. Morag has also served as a director in Palram Industries from 2004 until 2006, and from 2005 until 2006 he was the CEO of Keren-Shemesh Foundation for the Encouragement of Young Entrepreneurs. Since 2006 Mr. Morag serves as a Deputy General Manager - Head of Resources Division of Union Bank of Israel Ltd. and as a director in several of the subsidiaries of Union Bank of Israel Ltd.
IRIT ELUZ, 41, has been the Chief Financial Officer and Senior Vice President - Finance and Treasurer since October 2004. From May 2002 until October 2004, Ms. Eluz was Chief Financial Officer and Vice President - Finance and Treasurer. Ms. Eluz is a Director of Gadot. Since July 2006 Ms. Eluz is a Director of Kamor Ltd. From January 2000 until April 2002, Ms. Eluz was the Associate Chief Financial Officer of Merhav. From June 1995 until December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.
YORAM FIRON, 39, has been Secretary and Vice President - Investments and Corporate Affairs since May 2002. From 1998 until 2002, Mr. Firon was a Vice President of Merhav and before that a partner in the law firm of M. Firon & Co..
AMIT MANTSUR, 38, has been Vice President - Investments since March 2003. Since August 2006 Mr. Mantsur is a Director of Valor Computerized Systems Ltd. From September 2000 until December 2002, Mr. Mantsur served as Strategy & Business Development Manager at Alrov Group. From February 1997 until September 2000, Mr. Mantsur was a projects manager at the Financial Advisory Services of KPMG Somekh Chaikin.
OFER GILBOA, 43, has been Vice President - Investments since December 2007. Mr. Gilboa is a Director of Gadot. From 2003 until 2007, Mr. Gilboa served as Chief Financial Officer and Chief Operations Officer at MIRS Communications Ltd. From 1999 through 2002, Mr. Gilboa served as Controller and Financial Manager of Pelephone Communications Ltd.
GIORA BAR-NIR, 51, has been Vice-President - Accounting and Controller since October 2004. From March 2002 until October 2004 Mr. Bar-Nir was the Controller. From 1999 until 2004, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of Ampal.
AUDIT COMMITTEE
The Company has an Audit Committee of the Board consisting of Messrs. Karni, Haber and Morag, each of whom is an independent director as defined under the rules of the National Association of Securities Dealers, Inc. and the rules promulgated by the Securities and Exchange Commission. The Board has determined that Mr. Morag is an “audit committee financial expert” for purposes of the rules promulgated by the Securities and Exchange Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Ampal’s executive officers and directors, and persons who own more than 10% of a registered class of Ampal’s equity securities, to file with the Securities and Exchange Commission initial statements of beneficial ownership (Form 3), and statements of changes in beneficial ownership (Forms 4 and 5), of Class A Stock of Ampal. To the Company’s knowledge, based solely on its review of the copies of such forms received by it, all filing requirements applicable to its executive officers, directors and greater than 10-percent stockholders were complied with as of March 5, 2008.
CODE OF ETHICS
The Company has adopted a code of ethics (as defined in the rules promulgated under the Securities Exchange Act of 1934) that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or person performing similar functions. A copy of the Company’s code of ethics is available on the Company’s website at www.ampal.com (the “Company’s Website”).
CODE OF CONDUCT
The Company has adopted a code of conduct that applies to all of the Company’s employees, directors and officers. A copy of the code of conduct is available on the Company’s Website.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Objectives of Compensation Program
This section contains a discussion of the material elements of compensation awarded to, earned by or paid to the principal executive and principal financial officers of the Company, and the other three most highly compensated executive officers of the Company. These individuals are referred to as the “Named Executive Officers” in this Report on Form 10-K.
The objectives of our compensation program are (i) to attract and retain qualified personnel in the Israeli marketplace, (ii) to provide incentives and rewards for their contributions to the Company, and (iii) to align their interests with the long-term interests of the Company’s shareholders.
Our Named Executive Officers compensation has three primary components: salary, an annual cash incentive bonus and stock option awards. In addition, we provide our Named Executive Officers with benefits that are generally available to our salaried employees.
We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with a broad spectrum of companies in Israel and in the United States.
Due to the small size of our executive team and the need to tailor each Named Executive Officer’s compensation package for retention and recruitment purposes, we have not adopted any formal policies or guidelines for allocating compensation between long term and currently payable compensation, between cash and non cash compensation or among different forms of compensation.
Responsibilities
Prior to September 19, 2006, the Stock Option and Compensation Committee of the Board (the “Compensation Committee”) was responsible for determining all facets of executive compensation including annual base salary and bonuses for executive officers, administration of the Company’s 1998 Long Term Incentive Plan and the Company’s 2000 Incentive Plan (collectively, the “Option Plans”), and director compensation. The Compensation Committee is composed of independent directors as defined under the rules of NASDAQ and the SEC. The Compensation Committee does not operate pursuant to a written charter.
On September 19, 2006, the members of the Board engaged in discussions regarding the appropriate scope of the responsibilities of the Compensation Committee in light of the Company’s “controlled company” status under the rules of NASDAQ and the fact that Mr. Yosef A. Maiman was appointed as the Chief Executive Officer of Ampal. During these discussions, the Board decided to re-allocate certain of the responsibilities with regard to executive compensation to Yosef A. Maiman, the Chairman, President and Chief Executive Officer.
Effective as of September 19, 2006, the Board determined that the Compensation Committee will continue to be responsible for (i) administering the Option Plans and determining the officers and key employees who are to be granted options under the Option Plans and the number of shares subject to such options and (ii) determining the annual base salary and non-equity based annual bonus for Mr. Maiman in his capacity as Chairman, President and Chief Executive Officer.
Effective as of September 19, 2006, the Board also determined that Mr. Maiman will be responsible for (i) determining the annual base salary and non-equity based annual bonuses for all executive officers (other than the Chief Executive Officer) and for (ii) recommending to the Board director compensation and benefit programs. Mr. Maiman also may attend and participate in meetings of the Compensation Committee.
No outside compensation consultant is engaged by the Company at this time, although the Company may elect to do so in the future.
Elements of Compensation
The material elements of the Company’s executive compensation program for Named Executive Officers includes three primary components: salary, an annual cash incentive bonus and stock option awards, In addition, we provide our Named Executive Officers with benefits that are generally available to our salaried employees.
Base Salary
We set our salaries for our Named Executive Officers generally based on what we believe enables us to hire and retain individuals in the competitive environment in Israel and rewards individual performance and the contribution to our overall business goals. We also take into account the base salaries paid by similarly situated companies in Israel and in the United States with which we believe we generally compete for talent. There are no formal guidelines or formulas used by us to determine annual base salary for our Named Executive Officers, as annual salary determinations are made on a case by case basis from year to year to react to compensation market trends in Israel and to take into account the Named Executive Officer’s performance. Additionally, stock price performance has not been a factor in determining annual compensation because the price of the Company’s common stock is subject to a variety of factors outside our control. Our approach to annual base salary is designed to retain our Named Executive Officers so that they will continue to operate at high levels in the best interests of the Company.
Determinations for annual base salary for the fiscal year ended December 31, 2007, were made by the Compensation Committee in consultation with Mr. Maiman and other executive officers.
Annual Cash Incentive Bonus Compensation
The non-equity based annual bonus compensation is based on each Named Executive Officer’s individual performance for the Company over the fiscal year, which is measured in terms of overall effort, performance and contribution to the Company. In the past, bonuses were based on a multiple of the Named Executive Officer’s base salary, but in the interest of flexibility, we no longer exclusively utilize this approach. In 2007, we considered the performance of our Named Executive Officers with respect to certain material transactions and the amount of funds raised during the year and allocated an amount among the Named Executive Officers who were involved in those special efforts. We take into account the amount of annual base salary paid to each Named Executive Officers in determining such Named Executive Officers’ non-equity based annual bonus compensation. Determinations for non-equity based annual bonus compensation for the fiscal year ended December 31, 2007 were made by Mr. Maiman.
Long-Term Equity Incentive Compensation
At this time, we do not award long-term equity incentive compensation to our Named Executive Officers on an annual basis, however we may elect to award this form of compensation in the future. Following the April 2002 acquisition by Y.M. Noy Investments Ltd. of a controlling interest in the Company, we awarded long-term equity incentive compensation in April 2002 to provide the new management team with incentives aligned with shareholder interests and in December 2004, in recognition of the Named Executive Officers’ assistance to a Special Committee of the Board of Directors that had been appointed to consider alternatives available to the Company to maximize shareholder value. In December 2006, the Stock Option Committee granted Mr. Maiman an option to acquire 250,000 shares of our Class A Stock for his service as Chairman of the Board. The amount of this award was consistent with the amount of the option grant previously awarded to Mr. Maiman in August 2002, which became fully vested in August 2006.
While our current policy is to award option grants to our executive officers and directors, the awards granted under the Option Plans may be in the form of options, restricted stock, dividend equivalent awards and/or stock appreciation rights. There are no formal guidelines or formulas used by us to determine equity compensation awards for our Named Executive Officers.
As stated above, the Compensation Committee is responsible for determining long-term equity incentive compensation in accordance with the Option Plans. Such determinations are made in consultation with Mr. Maiman and other executive officers from time to time.
Perquisites
As is customary in Israel, we provide each Named Executive Officer with the use of a car, mobile phone, one meal per day, telephone expenses, economic newspapers, and stipends for traveling out of the country from time to time. The value of the specific car an employee receives varies according to his or her pay grade within the Company.
Additionally, consistent with practice in the Israeli marketplace, the Company reimburses the Named Executive Officers for a portion of the taxes associated with the use of the car and mobile phone.
Severance and Change of Control Benefits
Israeli labor laws and agreements require payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances, including retirement. The Company’s severance pay is calculated based upon length of service and the latest monthly base salary (one month’s salary for each year worked). Severance pay is paid from a fund into which the Company contributes up to 8 1/3% of the employee’s base salary each month, in accordance with Israeli law and the customary practice in Israel. The Company’s liability for severance pay pursuant to Israeli law is partly offset by insurance policies, where the Named Executive Officers are the beneficiaries of such insurance policies.
In addition to the above the Named Executive Officers are eligible to participate in a Pension Plan in which both the employee and the Company contribute up to 5% of the employee’s base salary each month. The Named Executive Officers are eligible to receive the fund upon termination of employment, including retirement.
In addition to the above benefits, each of the employment agreements of certain executive officers provide that such executive officer shall receive an additional payment of six months’ salary (together with all related benefits for the six month period including social benefits, use of a vehicle, mobile telephone and any other rights accompanying the executive officer’s employment by the Company) in the event (i) of a change of control of Ampal and (ii) such executive officer’s employment is terminated within six months from the date of the change of control of Ampal. These arrangements were designed to provide these key employees with an additional benefit consistent with Israeli practice for employees in comparable positions.
Pursuant to the terms of the employment agreements of each of the certain executive officers, following the termination of employment, such executive officers shall not be involved, directly or indirectly, with any business or entity that is in the field of the Company’s activities and/or is in direct competition in the field of the Company’s activities for a period of six months following the termination of employment. Furthermore, during the term of employment at the Company and for a period of twenty four months following the termination of employment, each of these executive officers shall abstain from providing services in any manner whatsoever, including consulting services, either paid or not paid, to any business or occupation in which the Company was involved.
Education Fund
The Named Executive Officers are eligible to participate in an education fund in which both the employee and the Company contribute up to 2.5% and 7.5% respectively of the employee’s base salary each month. The Named Executive Officers are eligible to receive the fund upon termination of employment, including retirement. The education fund contribution, which is customary in Israel, can be used by the Named Executive Officers at any time for professional education and every 6 years for any other purpose. As is customary in Israel, the Company also reimburses the Named Executive Officers for taxes associated with Company contributions to this fund beyond the maximum contributed amount allowed according to the Israel Tax law.
Vacation Provision and Recreation Pay
The Named Executive Officers are eligible to take one month vacation per year. Additionally, pursuant to Israeli employment laws, each Named Executive Officer is entitled to a certain amount of recreation pay to be used for any other purpose. Each Named Executive Officer is entitled to receive 13 days of recreation pay, which amounts to approximately $1,690 on an annual basis.
Stock Ownership and Retention Guidelines
The Company does not have any stock ownership or retention guidelines or policies.
Summary Compensation Table
For Fiscal Year Ended December 31, 2007
The following table sets forth all of the compensation awards to our Named Executive Officers for the year ended December 31, 2007.
(1) Mr. Maiman has been employed by Ampal since April 25, 2002 as Chairman of the Board; On September 19, 2006 Mr. Maiman was appointed as the President and CEO of Ampal.
(2) Ms. Eluz has been employed by Ampal since April 25, 2002.
(3) Mr. Firon has been employed by Ampal since April 25, 2002.
(4) Mr. Mantsur has been employed by Ampal since February 2, 2003.
(5) Mr. Bar-Nir has been employed by Ampal since June 17, 1990.
(6) Comprised of Ampal (Israel’s) contribution pursuant to: (i) Ampal (Israel’s) pension plan and (ii) Ampal (Israel’s) education fund and (iii) use of car and (iv) use of mobile and (v) final account settlement and (vi) redemption of vacation provision and (vii) reimbursed for the payment of taxes.
(7) Eligible to receive an additional payment of up to six months salary (i) in the event of a change of control of the Company and (ii) such executive officer’s employment is terminated within six months from the date of the change of control of the Company.
(8) All cash compensation is paid in New Israeli Shekels. The amounts in the table are converted from the New Israeli Shekel to U.S. dollars based on the exchange rate of 4.0355, which represents the exchange rate as of December 31, 2007.
(9) Represents the compensation cost in 2007 in accordance with SFAS No. 123R for stock options, which includes amounts from awards granted in and prior to 2007.
(10) Mr. Bigio served as President and CEO from April 25, 2002 until September 30, 2006. The amounts include final account settlement. Mr. Bigio exercised 150,000 options on October 4, 2006.
(11) Of such amount, for services as director, $22,000 was paid in cash.
(12) Of such amount, for services as director, $4,500 was paid in cash.
Outstanding Equity Awards
For Fiscal Year Ended December 31, 2007
Option Awards
(1) Options expire 10 years from the grant date and vest in sixteen equal installments on the three month anniversary of the date of grant and each three month period thereafter.
Compensation of Directors
Directors of Ampal (other than Mr. Maiman) receive $1,500 per Board meeting attended. The Chairman of the Board receives $2,000 per Board meeting attended. Directors of Ampal also receive the same amount for attendance at meetings of committees of the Board, provided that such committee meetings are on separate days and on a day other than the day of a regularly scheduled Board meeting.
For attending Special Committee, Audit Committee and Executive Committee meetings Mr. Karni, the Chairman of the Special and the Audit Committee, is entitled to $30,000 per year. Each of Mr. Haber and Mr. Morag are entitled to $20,000 per year, for attending Special Committee and Audit Committee meetings.
In connection with the formation of the Special Committee on October 28, 2004, the Company entered into an Indemnification and Compensation Agreement with each of Messrs. Karni, Haber and Morag. In consideration for serving as a member of the Special Committee, the Company has agreed pursuant to the terms of the Indemnification and Compensation Agreement, among other things, to indemnify and hold harmless each Director with respect to his service on, and any matter or transaction considered by, the Special Committee to the fullest extent authorized or permitted by law. A copy of the form of this Indemnification and Compensation Agreement is attached as Exhibit 10j to this Report.
On September 3, 2007, the Stock Option and Compensation Committee of the Board approved the grant, pursuant to the Company’s 2000 Incentive Plan to each of Eitan Haber, Yehuda Karni and Menahem Morag, the Company’s non-employee directors, an option to purchase 90,000 shares of the Company’s Class A Stock. All of the foregoing options have an exercise price of $5.35 per share and will vest in equal installments beginning on December 12, 2007 and each three month anniversary thereafter. Additionally, the exercise price of these options may only be paid by the holders by having the Company withhold from the underlying option stock the number of shares having a fair market value equal to the exercise price.
Director Compensation
For Fiscal Year Ended December 31, 2007
(1) Represents the compensation cost in 2007 in accordance with SFAS 123(R) for stock options.
(2) In fiscal year 2007, Messrs. Karni, Morag and Haber were each granted an option to purchase 90,000 shares of our Class A Stock, each with a grant date fair value of $204,598. In fiscal 2006, Messrs. Karni, Morag and Haber were each granted an option to purchase 30,000 shares of our Class A Stock, each with a grant date fair value of $70.993.
(3) In fiscal 2002, Messrs. Karni and Haber were each granted an option to purchase 15,000 shares of our Class A Stock, each with a grant date fair value of $24,299.
(4) In fiscal 2004, Mr. Morag was granted an option to purchase 15,000 shares of our Class A Stock, with a grant date fair value of $31,935.
(5) In fiscal 2006, Mr. Malamud was granted an option to purchase 30,000 shares of our Class A Stock, with a grant date fair value of $70,993. In fiscal 2002, Mr. Malamud was granted an option to purchase 150,000 shares of our Class A Stock, with a grant date fair value of $242,994.
(6) In fiscal 2006, Mr. Yerushalmi was granted an option to purchase 80,000 shares of our Class A Stock, with a grant date fair value of $189,315. In fiscal 2002, Mr. Yerushalmi was granted an option to purchase 100,000 shares of our Class A Stock, with a grant date fair value of $161,996.
(7) In fiscal 2006, Mr. Novik was granted an option to purchase 180,000 shares of our Class A Stock, with a grant date fair value of $425,960.
(8) On December 12, 2006, the Stock Option and Compensation Committee of the Board approved the grant, pursuant to the Company’s 2000 Incentive Plan to (i) Yosef A. Maiman an option to purchase 250,000 shares of the Company’s Class A Stock (ii) Nimrod Novik an option to purchase 180,000 shares of the Company’s Class A Stock, (iii) Joseph Yerushalmi an option to purchase 80,000 options, (iv) Leo Malamud an option to purchase 30,000 shares of the Company’s Class A Stock and (v) each of Eitan Haber, Yehuda Karni and Menahem Morag, the Company’s non-employee directors, an option to purchase 30,000 shares of the Company’s Class A Stock. All of the foregoing options have an exercise price of $5.06 per share and will vest in equal installments beginning on March 12, 2007 and each three month anniversary thereafter. Additionally, the exercise price of these options may only be paid by the holders by having the Company withhold from the underlying option stock the number of shares having a fair market value equal to the exercise price.
The following table sets forth certain information regarding stock options granted to purchase our Class A Stock to our directors during the fiscal year ended December 31, 2007.
(1) Director since August 16, 2002.
(2) Director since January 27, 2004.
Stock Option Plan
In March 1998, the Board approved a Long-Term Incentive Plan (“1998 Plan”) permitting the granting of options to all employees, officers, directors and consultants of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of Class A Stock. The 1998 Plan was approved by a majority of the Company’s shareholders at the June 19, 1998 annual meeting of shareholders. The 1998 Plan remains in effect for a period of ten years. As of December 31, 2006, no options of the 1998 Plan are outstanding.
On February 15, 2000, the Compensation Committee approved a new Incentive Plan (“2000 Plan”), under which the Company has reserved 4 million shares of Class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board of Directors at a meeting held on March 27, 2000 and was approved by a majority of the Company’s shareholders at the June 29, 2000 annual meeting of shareholders. The 2000 Plan remains in effect for a period of ten years. As of December 31, 2007, 2,434,500 options of the 2000 Plan are outstanding.
The options granted under the 1998 Plan and the 2000 Plan (collectively, the “Plans”) may be either incentive stock options, at an exercise price to be determined by the Compensation Committee but not less than 100% of the fair market value of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Compensation Committee. The Compensation Committee may also grant, at its discretion, “restricted stock,” “dividend equivalent awards,” which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and “stock appreciation rights,” which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market value of the Class A Stock on the exercise date over the exercise price. The options granted under the Plans were granted either at market value or above.
Under each of the Plans, all granted but unvested options become immediately exercisable upon the occurrence of a change in control of the Company. Prior to January 1, 2006, the Company accounted for all plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2004 and 2005. If compensation cost for the options under the above Plans had been determined in accordance with SFAS No. 123, the Company’s net income (loss) would have been ($6.8 million) and ($19.0 million) for the years 2005 and 2004, respectively.
Effective January 1, 2006, the Company adopted SFAS No. 123R SFAS No. 123R, which revises SFAS No. 123, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, SFAS No. 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date, over the requisite service period. For the year ended December 31, 2007 the Company recorded $782,000 as compensation expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of Compensation Committee are Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menahem Morag, none of whom is an officer or employee or former officer or employee of the Company. During 2007, no executive officer of the Company served on the compensation committee or the Board of Directors of another entity whose executive officer(s) served on the Company’s Compensation Committee for the Board of Directors.
Effective as of September 19, 2006, the Board determined that Mr. Yosef A. Maiman, our President and CEO, shall be responsible for (i) determining the annual base salary and non-equity based annual bonuses for all executive officers (other than the Chief Executive Officer) and for (ii) recommending to the Board director compensation and benefit programs. The Stock Option and Compensation Committee shall continue to be responsible for (i) administering the Option Plans and determining the officers and key employees who are to be granted options under the Option Plans and the number of shares subject to such options and (ii) determining the annual base salary and non-equity based annual bonus for Mr. Maiman in his capacity as Chairman, President and Chief Executive Officer. Mr. Maiman also may attend and participate in meetings of the Stock Option Committee.
COMPENSATION COMMITTEE REPORT
The Stock Option and Compensation Committee and Yosef A. Maiman have reviewed and discussed the Compensation Discussion and Analysis required by Regulation S-K, Item 402(b) with management. Based on the review and discussions referred to in the preceding sentence, the Stock Option and Compensation Committee and Yosef A. Maiman recommended to the board of directors that the Compensation Discussion and Analysis be included in this Report.
Yehuda Karni
Eitan Harber
Menahem Morag
Yosef A. Maiman
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(1) All information provided as of December 31, 2007.
(2) The number of securities remaining available for future issuance under 1998 Plan is 388,000. The number of securities remaining available for future issuance under 2000 Plan is 1,138,625.
PRINCIPAL SHAREHOLDERS OF AMPAL
The following table sets forth information as of March 5, 2008, as to the holders known to Ampal who beneficially own more than 5% of the Class A Stock, the only outstanding series of voting securities of Ampal. As of March 5, 2008, there were 57,702,532 (not including treasury shares) shares of Class A Stock of Ampal outstanding.
Security Ownership of Certain Beneficial Owners
(1) Consists of 9,650,132 shares of Class A Stock held directly by Di-Rapallo Holdings Ltd. Yosef A. Maiman owns 100% of the economic shares and one-fourth of the voting shares of Di-Rapallo Holdings Ltd. In addition, Mr. Maiman holds an option to acquire the remaining three quarters of the voting shares of Di-Rapallo Holdings Ltd. (which are currently owned by Ohad Maiman, Noa Maiman and Yoav Maiman, the son, daughter and son, respectively, of Mr. Maiman).
(2) Consists of 18,850,153 shares of Class A Stock held directly by De-Majorca Holdings Ltd. Yosef A. Maiman owns 100% of the economic shares and one-fourth of the voting shares of De-Majorca Holdings Ltd. In addition, Mr. Maiman holds an option to acquire the remaining three quarters of the voting shares of De-Majorca Holdings Ltd. (which are currently owned by Ohad Maiman, Noa Maiman and Yoav Maiman, the son, daughter and son, respectively, of Mr. Maiman).
(3) Includes 328,125 shares of Class A Stock underlying options which are currently exercisable or exercisable within 60 days of March 5, 2008, by Mr. Maiman and 4,476,389 shares of Class A Stock held directly by Merhav M.N.F Ltd. Yosef A. Maiman owns 100% of Merhav M.N.F Ltd.
(4) Yosef A. Maiman owns 100% of Merhav M.N.F Ltd.
(5) Consists of 276,092 shares of Class A Stock beneficially owned by Clal Finance Ltd. (“Clal Finance”), of which 145,515 shares of Class A Stock are held for its own account; and 3,050,813 shares of Class A Stock beneficially owned by Clal Insurance Enterprises Holdings Ltd. (“Clal”), of which (i) 2,490,895 shares of Class A Stock are held for members of the public through, among others, provident funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries of Clal, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, (ii) 182 shares of Class A Stock are held by unaffiliated third-party client accounts managed by Clal Finance Batucha Investment Management Ltd. (“CFB”) as portfolio managers, each of which subsidiaries operates under independent management and makes investment decisions independent of Clal and has no voting power in such client accounts, and (iii) 559,736 shares of Class A Stock are beneficially held for its own account.
Clal Finance is a majority owned subsidiary of Clal. Through Clal Finance’s wholly owned subsidiary, CFB, Clal may be deemed to beneficially own 182 Common Stock (the “CFB Shares”). Clal may be deemed to beneficially own an aggregate of 3,050,813 Common Stock (the “Clal Shares”). The CFB Shares are included in the Clal Shares. Clal is a majority owned subsidiary of IDB Development Corporation Ltd., an Israeli public corporation (“IDB Development”). By reason of IDB Development’s control of Clal, IDB Development may be deemed to be the beneficial owner of, and to share the power to vote and dispose of, the shares of Class A Stock owned beneficially by Clal. IDB Development is a majority owned subsidiary of IDB Holding Corporation Ltd., an Israeli public corporation (“IDB Holding”). By reason of IDB Holding’s control (through IDB Development) of Clal, IDB Holding may be deemed beneficial owner of, and to share the power to vote and dispose of, the shares of Class A Stock owned beneficially by Clal. Mr. Nochi Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat may, by reason of their interests in, and relationships among them with respect to, IDB Holding, be deemed to control the corporations referred to in this footnote. By reason of the control of IDB Holding by Nochi Dankner, Shelly Bergman, Ruth Manor and Avraham Livnat, and the relations among them, Nochi Dankner, Shelly Bergman, Ruth Manor and Avraham Livnat may each be deemed beneficial owner of, and to share the power to vote and dispose of, the shares of Class A Stock owned beneficially by Clal.
The information regarding the holdings of Clal Finance and Clal, and the beneficial ownership thereof, is based upon a Schedule 13G filed by Clal with the SEC on February 14, 2008.
Security Ownership of Management
The following table sets forth information as of March 5, 2008 as to each class of equity securities of Ampal or any of its subsidiaries beneficially owned by each director and named executive officer of Ampal listed in the Summary Compensation Table and by all directors and named executive officers of Ampal as a group. All ownership is direct unless otherwise noted. The table does not include directors or named executive officers who do not own any such shares:
* Represents less than 1% of the class of securities.
(1)
Attributable to 9,650,132, 18,850,153 and 4,476,389 shares of Class A Stock held directly by Di-Rapallo Holdings Ltd., De-Majorca Holdings Ltd. and Merhav M.N.F Ltd., respectively. See “Security Ownership of Certain Beneficial Owners.” In addition, this represents 328,125 shares underlying options for Yosef Maiman which are presently exercisable or exercisable within 60 days of March 5 2008.
(2)
Represents shares underlying options which are presently exercisable or exercisable within 60 days of March 5, 2008.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
On December 25, 2007, Ampal entered into an Option Agreement (the “Option Agreement”) with Merhav M.N.F. Ltd. providing Ampal with the option to acquire up to a 35% equity interest in a sugarcane ethanol production project (the “Project”) in Colombia being developed by Merhav M.N.F. Ltd. The option expires on the earlier of December 25, 2008 or the date on which both (i) Merhav M.N.F. Ltd. has obtained third-party debt financing for the Project and (ii) an unaffiliated third party holds at least a 25% equity interest in the Project. The Option Agreement provides that the purchase price for any interest in the Project purchased by Ampal pursuant to the Option Agreement will be (A) with respect to any portion of such interest being purchased by conversion of the outstanding balance of the Promissory Note referred to below, the lesser of (i) a price based on a currently agreed valuation model as updated from time to time to reflect changes in project, financing and other similar costs (the “Valuation Model”) as such updates are reviewed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. at the time of the option’s exercise or (ii) the lowest price paid by any unaffiliated third party for an interest in the Project, or (B) with respect to any portion of such interest in the Project being purchased in excess of the balance of the Promissory Note, the lowest price paid by an unaffiliated third party for its interest in the Project, unless no unaffiliated third party has purchased an interest in the Project, in which case the purchase price will be based on the Valuation Model.
Ampal has loaned Merhav M.N.F. Ltd. $10 million to fund the purchase of the 11,000 hectares of property in Colombia required for growing sugarcane and the construction of an ethanol production facility for the Project, pursuant to a Promissory Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor of Ampal (the “Promissory Note”). Ampal has agreed to advance up to an additional $10 million to fund the Project pursuant to the Promissory Note. The loan bears interest at an annual rate equal to LIBOR plus 2.25%, and will be convertible into all or a portion of the equity interest purchased pursuant to the option.
As security for the loan, Merhav M.N.F. Ltd. has pledged to Ampal, pursuant to a pledge agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal, all of the shares of Ampal’s Class A Stock, par value $1.00 per share, owned by Merhav.
Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholders group of Ampal, is the sole owner of Merhav M.N.F. Ltd. Because of the foregoing relationship, a special committee of the Board of Directors composed of Ampal’s independent directors negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which has been retained as financial advisor to the special committee, advised the special committee on this transaction.
On November 29, 2007, Ampal and IIF, leading a group of institutional Investors, purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav M.N.F. Ltd. for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav M.N.F. Ltd., Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav M.N.F. Ltd., which was accounted for as a transfer of assets between entities under common control, which resulted in Merhav M.N.F. Ltd. transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhav M.N.F. Ltd.‘s operations, Merhav M.N.F. Ltd. would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. On this basis, the said investment in EMG was transferred to Ampal at carrying value, which also equals fair value.
The Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the convertible promissory note issued to it as partial consideration for the purchase of a 5.9% interest in EMG by Ampal in December 2006, into 4,476,389 shares of Class A Stock of Ampal. The issuance of the 4,476,389 shares underlying the Convertible Promissory Note received the approval of the shareholders of the Company on February 7, 2007, as required by the marketplace rules of the NASDAQ Global Market.
Yosef A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling shareholder group of the Company, is the sole owner of Merhav M.N.F. Ltd.
Review and Approval of Transactions with Management and Others
Pursuant to its written charter and the marketplace rules of the NASDAQ Global Market, the Audit Committee must review with management and approve all transactions or courses of dealing with parties related to the Company. In determining whether to approve a related person transaction, the Audit Committee will consider a number of factors including whether the related person transaction is on terms and conditions no less favorable to us than may reasonably be expected in arm’s-length transactions with unrelated parties. The Audit Committee has the authority to engage independent legal, financial and other advisors. A special committee of the Board of Directors composed of the Company’s independent directors, who also constitute all of the members of the Company’s Audit Committee, has reviewed and approved the terms of each of the transactions described above.
Director Independence
Because a “group” of shareholders (as defined under Rule 13d-5(b)(1) of the Securities Exchange Act of 1934, as amended) consisting of Yosef A. Maiman, Ohad Maiman, Noa Maiman, and Yoav Maiman, and the companies Merhav M.N.F. Ltd., De Majorca Holdings Ltd. and Di-Rapallo Holdings Ltd. beneficially owns more than 50% of the voting power in the Company, the Company is deemed to be a “controlled company” under the rules of the NASDAQ Global Market. As a result, we are exempt from the NASDAQ rules that require listed companies to have (i) a majority of independent directors on the Board of Directors, (ii) a compensation committee and nominating committee composed solely of independent directors, (iii) the compensation of executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors and (iv) a majority of the independent directors or a nominating committee composed solely of independent directors elect or recommend director nominees for selection by the Board of Directors. The Company has an Audit Committee of the Board consisting of Messrs. Karni, Haber and Morag, each of whom is an independent director as defined under the rules of the National Association of Securities Dealers, Inc. and the rules promulgated by the Securities and Exchange Commission. Other than the members of the Audit Committee, there are no other independent directors that serve on the Board of Directors.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
AUDIT FEES. The fees of Kesselman & Kesselman (“Kesselman”) CPA (ISR) for professional services rendered for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2007 and December 31, 2006 and reviewing the financial statements included in the Company’s quarterly reports on Form 10-Q were $ 477,000 and $276,000, respectively.
AUDIT - RELATED FEES . Kesselman’s fees for audit related services for the fiscal year ended December 31, 2007 was $44,000. There was no audit-related fees for the fiscal year ended December 31, 2006.
TAX FEES. Kesselman’s tax fees for the fiscal years ended December 31, 2007 and December 31, 2006, were $ 53,665 and $205,000, respectively.
ALL OTHER FEES - Kesselman’s fees for other services for the fiscal years ended December 31, 2007 and December 31, 2006, were $309,142 and $316,500, respectively
All of the services provided to Ampal by our principal accounting firm described above under the captions “Audit Fees”, “Tax Fees” and “All Other Fees” were approved by Ampal’s Audit Committee. The Audit Committee has determined that the rendering of professional services described above by Kesselman is compatible with maintaining the auditor’s independence.
Audit Committee Pre-Approval Policies
The Company’s Audit Committee Charter provides that the Audit Committee shall approve in advance all audit services and all non-audit services provided by the independent auditors based on policies and procedures developed by the Audit Committee from time to time. The Audit Committee will not approve any non-audit services prohibited by applicable SEC regulations or any services in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported by the Internal Revenue Code and related regulations.
Our Audit Committee requires that our independent auditor, in conjunction with our Chief Financial Officer, be responsible for seeking pre-approval for providing services to us and that any request for pre-approval must inform the Audit Committee about each service to be provided and must provide detail as to the particular service to be provided.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
Page
Reference
(1) Financial Statements and Supplementary Data
Ampal-American Israel Corporation and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005
(included as part of the Statements of Changes in Shareholders' Equity for the respective years)
Notes to Consolidated Financial Statements
Supplementary Data:
Selected quarterly financial data for the years ended December 31, 2007 and 2006 28 of
annual
report
(2) Financial Statement Schedules
(i) Schedule of Representative Rates of Exchange between the U.S. dollar and New Israeli Shekel for three years ended December 31, 2007:
Representative Rates of Exchange
Between the U.S. dollar and the New Israeli Shekel
For the Three Years Ended December 31, 2007
The following table shows the amount of New Israeli Shekels equivalent to one U.S. dollar on the dates indicated (or the nearest date thereto, if the exchange rate was not publicized on that date):
(ii) Consolidated financial statements filed pursuant to Rule 3-09 of Regulation S-X:
Bay Heart Ltd.
Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
Coral World International Ltd.
Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
Ophir Holdings Ltd.
Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
Ophirtech Ltd.
Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2005 and 2004
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Notes to Financial Statements
(iii) Reports of Other Certified Public Accountants filed pursuant to Rule 2-05 of Regulation S-X:
Bay Heart Ltd.
Carmel Container Systems Ltd.
C.D Packaging System Ltd.
Eurochem Maritime B.V.
Chem Tankers Management B.V.
Hod Hasharon Sport Center Ltd.
Hod Hasharon Sport Center (1992) Limited Partnership
Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
2a. Purchase and Sale Agreement, dated January 5, 1998, between Ampal Communications, Inc. and Motorola Communications Israel Ltd. (Includes as Exhibit A the form of Partnership Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. and as Exhibit B the form of Shareholders’ Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd.) (Filed as Exhibit 2 to a Current Report on Form 8-K, dated February 5, 1998, and incorporated herein by reference, File No. 0-538.)
2b. Amendment, dated January 22, 1998, to (i) Purchase and Sale Agreement, dated January 5, 1998, between Ampal Communications, Inc. and Motorola Communications Israel Ltd., (ii) Partnership Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. and (iii) form of Shareholders’ Agreement between Ampal Communications, Inc. and Motorola Communications Israel Ltd. (Filed as Exhibit 2a to a Current Report on Form 8-K, dated February 5, 1998, and incorporated herein by reference, File No. 0-538.)
Exhibit 3 - Articles of Incorporation and By-Laws
3a. Amended and Restated Certificate of Incorporation of Ampal-American Israel Corporation, dated May 28, 1997. (Filed as Exhibit 3a. to Form 10-Q, for the quarter ended June 30, 1997 and incorporated herein by reference, File No. 0-5380).
3b. Certificate of Amendment of Certificate of Incorporation, dated July 18, 2006 (Filed as Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and incorporated herein by reference).
3c. Certificate of Amendment of Certificate of Incorporation, dated July 18, 2006 (Filed as Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and incorporated herein by reference).
3d. Certificate of Amendment of Certificate of Incorporation, dated February 7, 2007 (Filed as Exhibit 3.4 to Form S-3, filed with the SEC on February 28, 2007, and incorporated herein by reference).
3e. By-Laws of Ampal-American Israel Corporation as amended, dated February 14, 2002 (incorporated by reference to Exhibit 3b. of Ampal’s Form 10-K filed on March 27, 2002).
Exhibit 4 - Instruments Defining the Rights of Security Holders, Including Indentures
4a. Form of Indenture dated as of November 1, 1984. (Filed as Exhibit 4a. to Registration Statement No. 2-88582 and incorporated herein by reference).
4b. Form of Indenture dated as of May 1, 1986. (Filed as Exhibit 4a. to Pre-Effective Amendment No. 1 to Registration Statement No. 33-5578 and incorporated herein by reference).
4c. English translation of the original Hebrew language Trust Deed dated November 20, 2006 between Ampal-American Israel Corporation and Hermetic Trust (1975) Ltd. for debt offering. (Filed as Exhibit 4c to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
Exhibit 10 - Material Contracts
10a. Agreement, dated March 22, 1993, between the Investment Company of Bank Leumi, Ltd., and Ophir Holdings Ltd., Mercazim Investments Ltd., Diur B.P. Ltd. and Mivnat Holdings Ltd. (Filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-51023 and incorporated herein by reference).
10b. Agreement, dated March 30, 1994, between Poalim Investments Ltd., Ampal (Israel) Ltd. and Ampal Industries (Israel) Ltd. (Translation). (Filed as Exhibit 10l, to Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference, File No. 0-538).
10c. Loan Agreement, dated April 27, 1998, between Bank Hapoalim Ltd. and Ampal Communications Limited Partnership (Filed as Exhibit 10.1 to Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-538).
10d. Form of Loan Agreement between Ampal Communications Limited Partnership and Bank Leumi Le-Israel B.M. (Filed as Exhibit 10.2 to Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-538).
10e. Sale and Purchase Agreement, dated November 8, 2000, between Ampal Realty Corporation and Second 800 LLC. (Filed as Exhibit 10I to Form 10-K for the fiscal year ended December 31, 2002, File No. 000-00538).
10f. The Company’s 1998 Long-Term Incentive Plan (Filed as Exhibit A to the Company’s Proxy Statement for the 1998 Annual Meeting of Shareholders).*
10g. The Company’s 2000 Incentive Plan (Filed as an exhibit to the Company’s Proxy Statement for the 2000 Annual Meeting of Shareholders).*
10h. Amendment to the Company’s 1998 Long Term Incentive Plan adopted by the Board of Directors on February 14, 2002.* (Filed as Exhibit 10h to the report on Form 10K. Filed on March 27, 2003).
10i. Amendment to the Company’s 2000 Incentive Plan adopted by the Board of Directors on February 14, 2002.* (Filed as Exhibit 10i to the report on Form 10K. Filed on March 27, 2003).
10j. Compensation and Indemnification Agreement, dated as of December 13, 2004, between Ampal-American Israel Corporation and each of Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menachem Morag. (Filed as Exhibit 10j to the report on Form 10K. Filed on March 15, 2005).
10k. Stock Option Cancellation Agreement, dated as of November 30, 2004, between Ampal-American Israel Corporation and Dafna Sharir. (Filed as Exhibit 10k to the report on Form 10K. Filed on March 15, 2005).
10l. Omnibus Agreement, dated as of December 1, 2005, between Merhav Ampal Energy Ltd. and Merhav M.N.F. Ltd. (Filed as Exhibit 10l to the report on Form 10K filed on March 29, 2006).
10m. Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola Israeli Ltd., Ampal Communications Limited Partnership and MIRS Communications Ltd. (Filed as Exhibit 99.1 of Form 8-K, filed with the SEC on October 3, 2005, and incorporated herein by reference).
10n. Form of Option Agreement pursuant to the 2000 Incentive Plan (Filed as Exhibit 99.1 of Form 8-K, filed with the SEC on October 11, 2005, and incorporated herein by reference).
10o. Form of Option Agreement for December 12, 2006 grants pursuant to the 2000 Incentive Plan. (Filed as Exhibit 10o to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
10p. Stock Purchase Agreement between Merhav Ampal Energy Ltd.and Merhav M.N.F. Ltd., dated August 1, 2006 (Filed as Exhibit 10 of Form 8-K, filed with the SEC on August 3, 2006, an incorporated herein by reference).
10q. Stock Purchase Agreement between Merhav Ampal Energy Ltd. and Merhav M.N.F. Ltd., dated November 28, 2006 (Filed as Exhibit 10.1 to Form 8-K, filed with the SEC on December 1, 2006, and incorporated herein by reference).
10r. Agreement of Certain Shareholders between Merhav Ampal Energy Ltd. and Merhav M.N.F. Ltd. dated August 1, 2006. (Filed as Exhibit 10r to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
10s. Form of Convertible Promissory Note between Ampal-American Israel Corporation and Merhav M.N.F. Ltd. (Filed as Exhibit 10.2 to Form 8-K, filed with the SEC on December 1, 2006, and incorporated herein by reference).
10t. Form of Securities Purchase Agreement, dated as of November 28, 2006, between Ampal-American Israel Corporation and certain investors (Filed as Exhibit 10.1 of 8-K, filed with the SEC on January 3, 2007, and incorporated herein by reference).
10u. Form of Warrant Agreement, dated as of December 28, 2006, between Ampal-American Israel Corporation and certain investors (Filed as Exhibit 10.2 of 8-K, filed with the SEC on January 3, 2007, and incorporated herein by reference).
10v. Form of Registration Rights Agreement, dated as of December 28, 2006, between Ampal-American Israel Corporation and certain investors (Filed as Exhibit 10.3 of 8-K, filed with the SEC on January 3, 2007, and incorporated herein by reference).
10w. Share Sale and Purchase Agreements dated May 22, 2006, between Ampal-American Israel Corporation and Red Sea Underwater Observatory Ltd. for the sale of Coral World International Ltd. shares and Ted Sea Marinland Holdings 1973 Ltd. (Filed as Exhibit 10w to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
10x. English translation of the original Hebrew language Form of Employment Agreement for each of Yosef A. Maiman, Jack Bigio, Irit Eluz, Yoram Firon and Amit Mantsur.* (Filed as Exhibit 10x to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
10y. English translation of the original Hebrew language Employment Agreement for Giora Bar-Nir.*(Filed as Exhibit 10y to Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 000-00538)
10z. English translation of the original Hebrew language Employment Agreement for Ofer Gilboa (incorporated by reference to Exhibit 10x. of Ampal’s Form 10-K filed on April 2, 2007).*
10aa. Understanding for the Repayment of a Foreign Currency Loan between Bank Hapoalim BM and Ampal (Israel) Ltd. Dated April 26, 2007 (Filed as Exhibit 10.1 to Report on Form 10-Q, filed with the SEC on May 15, 2007).
10bb. Letter of Understanding between Bank Hapoalim BM and Ampal Israel (Ltd), dated April 26 2007 (Filed as Exhibit 10.2 to Report on Form 10-Q, filed with the SEC on May 15, 2007).
10cc. Letter of Understanding between Bank Hapoalim BM and Ampal American Israel Corporation, dated April 26 2007 (Filed as Exhibit 10.3 to Report on Form 10-Q, filed with the SEC on May 15, 2007).
10dd. Agreement among Ampal Industries Inc., Phoenix Holdings Ltd. and Golden Meybar (2007) Ltd., dated July 10, 2007 (Filed as Exhibit 10.2 to Form 10-Q, filed with the SEC on August 8, 2007, and incorporated herein by reference).
10ee. Agreement between Merhav Ampal Energy Ltd. and Netherlands Industrial Chemical Enterprises B.V., dated November 20, 2007, to purchase a 65.5% controlling interest in Gadot Chemical Tankers and Terminals Ltd.
10ff. Credit Facility between Merhav Ampal Energy Ltd. and Israel Discount Bank Ltd., dated November 29, 2007, for the funding of the Gadot transaction.
10gg. Option Agreement between the Company and Merhav M.N.F. Ltd., dated December 25, 2007, providing Ampal with the option to acquire up to a 35% equity interest in a sugarcane ethanol production project in Colombia.
10hh. Promissory Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor of Ampal.
10ii. Pledge Agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal.
* Management contract, compensatory plan or arrangement.
Exhibit 11 - Statement re Computation of Earnings Per Share
Exhibit 12 - Statement re Computation of Ratios
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23 - Consents of Experts and Counsel:
23.1 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.1
23.2 Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu E-23.2
23.3 Kost Forer Gabbay & Kasierer Member of Ernst & Young Global E-23.3
23.4 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.4
23.5 Mazars Paardekooper Hoffman Accountants N.V E-23.5
23.6 Fahn, Kanne & Co. Certified Public Accountants (Isr.) E-23.6
23.7 Mazars Paardekooper Hoffman Accountants N.V E-23.7
23.8 KPMG Somekh Chaikin, Certified Public Accountants E-23.8
23.9 KPMG Somekh Chaikin, Certified Public Accountants E-23.9
23.10 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.10
23.11 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.11
Exhibit 31.1 - Certification of Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Yosef A. Maiman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification of Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of March, 2008.
AMPAL-AMERICAN ISRAEL CORPORATION
By: /s/ YOSEF A. MAIMAN
--------------
Yosef A. Maiman, Chief Executive
Officer and President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 17, 2008.
/s/ YOSEF A. MAIMAN
--------------
Yosef A. Maiman Chairman of the Board of
Directors, President & CEO March 17, 2008
/s/ LEO MALAMUD
--------------
Leo Malamud Director March 17, 2008
/s/ DR. JOSEPH YERUSHALMI
--------------
Dr. Joseph Yerushalmi Director March 17, 2008
/s/ DR. NIMROD NOVIK
--------------
Dr. Nimrod Novik Director March 17, 2008
/s/ JACK BIGIO
--------------
Jack Bigio Director March 17, 2008
/s/ YEHUDA KARNI
--------------
Yehuda Karni Director March 17, 2008
/s/ EITAN HABER
--------------
Eitan Haber Director March 17, 2008
/s/ MENAHEM MORAG
--------------
Menahem Morag Director March 17, 2008
/s/ IRIT ELUZ
--------------
Irit Eluz CFO, Senior Vice President
- Finance and Treasurer
(Principal Financial Officer) March 17, 2008
/s/ GIORA BAR - NIR
--------------
Giora Bar-Nir VP Accounting & Controller
(Principal Accounting Officer) March 17, 2008
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of
Ampal-American Israel Corporation
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows, changes in shareholders’ equity present fairly, in all material respects, the financial position of Ampal-American Israel Corporation and subsidiaries (the “Company”) at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9(A) of the 2007 Annual Report to Shareholders. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audit which was an integrated audit in 2007. We did not audit the financial statements of certain affiliated companies, the which statements reflect total assets of $7,417 thousands and $1,262 thousands as of December 31, 2007 and 2006, respectively, and total share in equity income (loss) of ($1,581), $1,620 and $88 for each of the three years in the period ended December 31, 2007. The financial statements of those affiliated companies were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for those companies, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed the manner in which it accounts for income tax uncertainties and in 2006 the Company changed the manner in which it accounts for stock-based compensation and defined benefit pension and other postretirement plans.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Gadot Chemical Tankers and Terminals Ltd. from its assessment of internal control over financial reporting as of December 31, 2007 because it was acquired by the Company in a purchase business combination on December 3, 2007.
/s/ Kesselman & Kesselman Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
March 17, 2008
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(1) Assets and liabilities purchased in Gadot - see Note 3
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)
*In thousands
The accompanying notes are an integral part of these condensed consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
(a) General
(1) Ampal-American Israel Corporation is a New York corporation founded in 1942. The Company primarily acquires interests in businesses located in the State of Israel or that are Israel-related.
(2) As used in these financial statements, the term the “Company” refers to Ampal-American Israel Corporation (“Ampal”) and its consolidated subsidiaries. As to segment information see “Note 17".
(3) The consolidated financial statements are prepared in accordance with accounting principals generally accepted in the United States of America.
(4) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Consolidation
The consolidated financial statements include the accounts of Ampal and its controlled and majority owned entities. Inter-company transactions and balances are eliminated in consolidation.
(c) Translation of Financial Statement in Foreign Currencies
For those subsidiaries and affiliates whose functional currency is other than the US Dollar, assets and liabilities are translated using year-end rates of exchange. Revenues and expenses are translated at the average rates of exchange during the year. Translation differences of those foreign companies’ financial statements are reflected in the cumulative translation adjustment accounts which are included in accumulated other comprehensive income (loss).
In subsidiaries where the primary currency is the U.S. Dollar, accounts maintained in currencies other than the U.S. Dollar are remeasured into U.S. Dollars using the representative foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations.
(d) Foreign Exchange Forward Contracts
The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts qualify for hedge accounting. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.
At December 31, 2007, the Company had open foreign exchange forward contracts to purchase U.S. Dollars and sell Euros in the amount of $9 million.
(e) Investments
(i) Investments in Affiliates
Investments in which the Company exercises significant influence, generally 20% to 50% owned companies (“affiliates”), are accounted for by the equity method, whereby the Company recognizes its proportionate share of such companies’ net income or loss and in other comprehensive income its proportional share in translation difference on net investments and in other comprehensive income (loss). The Company reduces the carrying value of its investment in an affiliate if an impairment in value of that investment is deemed to be other than temporary.
(ii) Cost Basis Investments
Equity investments of less than 20% in non-publicly traded companies are carried at cost subject to impairment.
(iii) Investments in Marketable Securities
Marketable equity securities, other than equity securities accounted for by the equity method, are reported based upon quoted market prices of the securities. For those securities, which are classified as trading securities, realized and unrealized gains and losses are reported in the statements of operations. Unrealized gains and losses net of taxes from those securities that are classified as available-for-sale, are reported as a separate component of shareholders’ equity and are included in accumulated other comprehensive income (loss) until realized. Decreases in value determined to be other than temporary on available-for-sale securities are included in the statements of income (loss).
(f) Business combinations
Business combinations have been accounted for using the purchase method of accounting. Under the purchase method of accounting the results of operations of the acquired business are included from the date of acquisition. The costs of acquiring companies, including transactions costs, have been allocated to the underlying net assets of each acquired company in proportion to their respective fair values. Any excess of the purchase price over estimated fair values of the identifiable net assets acquired has been recorded as goodwill.
(g) Inventories
Inventories - mainly chemicals and other materials intended for sale, are valued at the lower of cost or market. Cost is determined based on the moving average basis.
(h) Risk Factors and Concentrations
Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents, bank deposits, marketable securities and notes and loans receivable. The Company invests cash equivalents and short-term investments through high-quality financial institutions. The Company’s management believes that the credit risk in respect of these balances is not material.
The company performs ongoing credit evaluations of its receivables allowance for doubtful accounts.
(i) Long - Lived Assets
The assets are recorded at cost, depreciating these costs over the expected useful life of the related assets.
Fixed assets of subsidiaries which existed at the time of the subsidiary’s acquisition by the company, are included at their fair value as that date.
Financial expenses incurred during the construction period have been capitalized to the cost of the land and building.
The Company applies the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived assets” (“SFAS 144”). SFAS 144 requires that long-lived assets, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values.
(j) Discontinued operations
Under SFAS 144, when a component of an entity, as defined in SFAS 144, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on its disposal should be classified as discontinued operations. That is, provided that the operations, assets and liabilities and cash flows of the component have been eliminated from the Company’s consolidated operations and the Company will no longer have any significant continuing involvement in the operations of the component. In 2007 the Company sold its interest in Am-Hal, a wholly owned subsidiary, and classified Am-Hal as discontinued operations.
(k) Fixed assets
(i) These assets are stated at cost. Fixed assets of subsidiaries, which existed at the time of the subsidiary’s acquisition by the Company, are included at their fair value as of that date.
(ii) Depreciation is computed by the straight-line method, on the basis of the estimated useful life of the assets.
Annual rates of depreciation are as follows:
* As per the rental years remaining.
Leasehold improvements are amortized by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.
(iii) Ships are depreciated over their estimated economic lives. For the purpose of computing the depreciation, an estimation of the salvage value was deducted from the depreciable base of the ships.
(iv) Vehicles leased by the companies under capital leases are presented as the companies’ assets and are recorded, at the inception of the lease, at the lower of the asset’s fair value or the present value of the minimum lease payments (not including the financial component).
(l) Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is not amortized but is subject to impairment tests annually on December 31 or more often when events or circumstances indicate that the carrying amount of goodwill may not be recoverable. A goodwill impairment loss is recognized to the extent the carrying amount of goodwill exceeds the implied fair value of goodwill. In accordance with SFAS 144, the Company assesses intangible assets subject to amortization, when events or circumstances indicate that the carrying amount of those assets may not be recoverable. Impairments of intangible assets are recognized when the carrying value of the assets are less than the expected cash flows of the assets on an undiscounted basis. All amortizable assets are amortized over their estimated useful lives.
(m) Income Taxes
The Company applies the asset and liability method of accounting for income taxes, whereby deferred taxes are recognized for the tax consequences of “temporary differences” by applying estimated future tax effects of differences between financial statements carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are created to the extent management believes that it is more likely than not that it will be utilized, otherwise a valuation is provided for those assets that do not qualify under this term.
The Company does not record deferred income taxes on undistributed earnings of foreign subsidiaries adjusted for translation effect since such earnings are currently expected to be permanently reinvested outside the United States. As of December 31, 2007 and 2006 there were no undistributed earnings of foreign subsidiaries.
Income taxes are provided on equity in earnings of affiliates, gains on issuance of shares by affiliates and unrealized gains on investments. Ampal’s foreign subsidiaries file separate tax returns and provide for taxes accordingly.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides recognition criteria and a related measurement model for tax positions taken by companies. In accordance with FIN 48, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood greater than 50 percent), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement.
(n) Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104 - “Revenue Recognition”. Revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery has occurred and the Company has determined that collection of the fee is probable.
Rental income is recorded over the rental period. Revenues from services provided to tenants and country-club subscribers are recognized ratably over the contractual period or as services are performed. Revenue from amortization of tenant deposits is calculated at a fixed periodic rate based on the specific terms in the occupancy agreement signed with the tenants.
Chemical income is measured at the fair value of the consideration received or the consideration that the Company is entitled to receive, taking into account trade discounts and/or bulk discounts granted by the Company.
Revenue from sale of goods is recognized when all the following conditions have been satisfied: (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the Company and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
The Company recognized revenues arising from the provision of marine transport services proportionally over the period of the marine transport services. As to voyages uncompleted in which a loss is expected, a full provision is made in the amount of the expected loss.
Revenue from the provision of services is recognized by reference to the stage of completion of the transaction at the balance sheet date, and only when the stage of completion of the transaction at the balance sheet date can be measured reliably.
Revenues from chemical brokerage commissions are recognized when the right to receive them is created.
(o) Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments that have original maturity dates of three months or less and that are readily convertible into cash.
Cash equal to $12.0 million has been placed as a compensating balance for various loans provided to the Company.
(p) Earning (loss) per share (EPS)
Basic and diluted net earning (loss) per share are presented in accordance with SFAS No. 128 “Earnings per share” (“SFAS No. 128”) and with EITF 03-06 “participating securities and the two-class method under FAS 128". In 2007, 2006 and 2005, all outstanding stock options for 2006 and 2005 and also the preferred shares have been excluded from the calculation of the diluted loss per share because all such securities are anti-dilutive for these periods presented. Also, participating 4% Convertible Preferred Stock was not taken into account in the computation of the basic EPS in 2006 and 2005, since its shareholders do not have contractual obligation to share in the losses of the Company.
(q) Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income”, (“SFAS No. 130”) established standards for the reporting and display of comprehensive income (loss), its components and accumulated balances in a full set of general purpose financial statements. The Company’s components of comprehensive income (loss) are net income (losses), net unrealized gains or losses on available for sale investments and foreign currency translation adjustments, which are presented net of income taxes.
(r) Employee Stock Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R, using the Modified Prospective Approach. SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date, or the date of later modification, over the requisite service period. In addition, SFAS No. 123R requires unrecognized cost (based on the amounts previously disclosed in the pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized in the financial statements over the remaining requisite service period.
Under the Modified Prospective Approach, the amount of compensation cost recognized includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 and (ii) compensation cost for all share-based payments that will be granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Upon adoption, the Company recognizes the stock based compensation of previously granted share-based options and new share-based options under the straight-line method over the requisite service period.
The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. The Company recognizes no income tax benefit on its stock compensation expense and will not be able to utilize them to offset future income taxes.
Prior to January 1, 2006, the Company accounted for the stock-based compensation plans in accordance with the provisions of APB No. 25, as permitted by SFAS No. 123, and accordingly did not recognize compensation expense for stock options since the exercise price was equal to the market price of the underlying stock at the date of grant. If compensation cost for the options under the plans in effect been determined in accordance with SFAS No. 123, the Company’s net income (loss) and EPS for the year 2005 would have been reduced as follows:
(1) After deduction of accrued Preferred Stock Dividend of $191 thousands.
(2) The effect of the conversion of the 4% and 6.5% Preferred Stock was excluded from the basic and diluted EPS calculation due to its anti-dilutive effect.
(s) Treasury stock
These shares are presented as a reduction of shareholders’ equity at their cost to the Company. The Company does not have a policy to repurchase its shares.
(t) Newly Issued and Recently Adopted Accounting Pronouncements
SFAS No. 157 - Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). In February 2008, the FASB deferred for one additional year the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.
FAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FASB 159”). This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to Ampal, this statement will be effective as of the year beginning January 1, 2008. Ampal is currently evaluating the impact that the adoption of FAS 159 would have on its consolidated financial statements.
SFAS No. 141R - Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) which replaces SFAS No. 141, “Business Combination”. SFAS 141R establishes the principles and requirements for how an acquirer: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) discloses the business combination. This Statement applies to all transactions in which an entity obtains control of one or more businesses, including transactions that occur without the transfer of any type of consideration. SFAS 141R will be effective on a prospective basis for all business combinations on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is not allowed. The Company is in process of evaluating the impact, if any, the adoption of SFAS 141R will have on the Company’s consolidated results of operations or financial position.
SFAS No. 160 - Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends ARB No. 51 and establishes accounting and reporting standards that require noncontrolling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be remeasured at fair value, with any gain or loss recognized in earnings. SFAS 160 will be effective for the Company commencing January 1, 2009, except for the presentation and disclosure requirements, which will be applied retrospectively. Early adoption is not allowed. The Company is in process of evaluating the impact, if any, that the adoption of SFAS 160 will have on the Company’s consolidated results of operations or financial position.
SAB No. 110
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”), relating to the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options. SAB 107 previously allowed the use of the simplified method until December 31, 2007. SAB 110 allows, under certain circumstances, to continue to accept the use of the simplified method beyond December 31, 2007. The Company believes that the adoption of SAB 110 will not have a material impact on its consolidated financial statements.
(u) Reclassifications
Certain comparative figures have been reclassified to conform to the current year presentation.
Note 2 - Investments
a. Non-current investments
The balance of investments as of December 31, 2007 and 2006, are composed of the following items:
b. Marketable securities
The Company’s investments in Marketable securities are mainly in government debentures and the Company classifies such investments as trading securities or available-for-sale securities.
(a) Trading Securities
The cost and market values of Trading securities at December 31, 2007 and 2006 are as follows:
(b) Available-For-Sale Securities
In 2006 there were no available-for-sale securities.
Note 3 - Acquisitions, Dispositions and Impairments
a) In 2007, the Company made the following investments:
1. On December 3, 2007, Ampal completed its acquisition of 65.5% of the control and ownership (63.66% on a fully diluted basis) of Gadot Chemical Tankers and Terminals Ltd. (“Gadot”). The total consideration including direct transaction expenses was $91.2 million. The cash consideration was financed with Ampal’s own resources and with borrowings in the amount of $60.7 million.
Gadot and its group of companies is an Israeli chemical distribution organization. Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to the local industry.
The acquisition was accounted for by the purchase method. The results of operations of Gadot were included in the consolidated financial statements of Ampal commencing November 30, 2007. The consideration for the acquisition was attributed to net assets on the basis of fair value of assets acquired and liabilities assumed, based on an appraisal performed by management, which included a number of factors, including the assistance of independent appraisers. The following table summarizes the final fair values of the assets acquired and liabilities assumed, with reference to Gadot balance sheet data as of November 30, 2007:
Under the purchase method of accounting, the total consideration of $91.2 million allocated to Gadot’s identifiable tangible and intangible assets and liabilities assumed based on their estimated fair values as of the date of the completion of the transaction.
Below are the unaudited pro forma combined statements of operations data for the years ended December 31, 2007 and 2006 as if the acquisition of Gadot had occurred on January 1, 2007 and 2006, respectively, after giving effect to: (a) purchase accounting adjustments, including amortization of identifiable intangible assets; and (b) estimated additional interest expense due to the loan granted to Ampal in connection with the acquisition. This pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisition taken place at the beginning of 2007 and 2006, respectively, nor is it necessarily indicative of future results.
2. During 2007, the Company made an additional investment in EMG as follows:
On June 4, 2007, EMG called for additional capital from its shareholders. As a result, Ampal paid an additional $5.8 million in order to maintain its pro rata beneficial interest in EMG.
On November 29, 2007, Ampal and IIF, leading a group of institutional Investors, purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav M.N.F. Ltd. for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav M.N.F. Ltd., Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav M.N.F. Ltd., which was accounted for as a transfer of assets between entities under common control, which resulted in Merhav M.N.F. Ltd. transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhav M.N.F. Ltd.‘s operations, Merhav M.N.F. Ltd.would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. On this basis, the said investment in EMG was transferred to Ampal at carrying value, which also equals fair value. Based on the terms stipulated in the shareholders agreement of the general partner of the Joint Venture, Ampal and Israel Infrastructure G.P. Ltd. have equal rights in governing the affairs of the Joint Venture. However, in certain events and under certain conditions, matters relating to decisions on how to vote the EMG shares held by the Joint Venture shall be decided by the directors of the general partner of the Joint Venture appointed by Ampal or by IIF. As such, Ampal has consolidated the results of the Joint Venture in its financial statements.
The Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
Yosef A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling shareholder group of the Company, is the sole owner of Merhav M.N.F. Ltd.
3. Wind Energy Joint Venture
On November 25, 2007, Merhav Ampal Energy Ltd. (“MAE”) signed a joint venture agreement with Clal Electronics Industries Ltd. (“Clal”), an Israel-based holding company, for the formation of a joint venture that will focus on the new development and acquisition of controlling interests in wind energy projects outside of Israel. The joint venture, owned equally by Clal and the Company through MAE, will seek to either develop or acquire wind energy opportunities with a goal of establishing at least 150MW of installed capacity within the next 3.5 years.The joint venture’s initial project is the development of a wind farm in Greece. The Company has approved a $25 million budget for these projects
4. Option Agreement for Sugarcane Ethanol Project in Colombia
On December 25, 2007, Ampal entered into an Option Agreement (the “Option Agreement”) with Merhav M.N.F. Ltd. providing Ampal with the option to acquire up to a 35% equity interest in a sugarcane ethanol production project (the “Project”) in Colombia being developed by Merhav M.N.F. Ltd. The option expires on the earlier of December 25, 2008 or the date on which both (i) Merhav M.N.F. Ltd. has obtained third-party debt financing for the Project and (ii) an unaffiliated third party holds at least a 25% equity interest in the Project. The Option Agreement provides that the purchase price for any interest in the Project purchased by Ampal pursuant to the Option Agreement will be (A) with respect to any portion of such interest being purchased by conversion of the outstanding balance of the Promissory Note referred to below, the lesser of (i) a price based on a currently agreed valuation model as updated from time to time to reflect changes in project, financing and other similar costs (the “Valuation Model”) as such updates are reviewed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. at the time of the option’s exercise or (ii) the lowest price paid by any unaffiliated third party for an interest in the Project, or (B) with respect to any portion of such interest in the Project being purchased in excess of the balance of the Promissory Note, the lowest price paid by an unaffiliated third party for its interest in the Project, unless no unaffiliated third party has purchased an interest in the Project, in which case the purchase price will be based on the Valuation Model.
Ampal has loaned Merhav M.N.F. Ltd. $10 million to fund the purchase of the 11,000 hectares of property in Colombia required for growing sugarcane and the construction of an ethanol production facility for the Project, pursuant to a Promissory Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor of Ampal (the “Promissory Note”). Ampal has agreed to advance up to an additional $10 million to fund the Project pursuant to the Promissory Note. The loan bears interest at an annual rate equal to LIBOR plus 2.25%, and will be convertible into all or a portion of the equity interest purchased pursuant to the option.
As security for the loan, Merhav M.N.F. Ltd. has pledged to Ampal, pursuant to a pledge agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal, all of the shares of Ampal’s Class A Stock, par value $1.00 per share, owned by Merhav.
Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholders group of Ampal, is the sole owner of Merhav M.N.F. Ltd. Because of the foregoing relationship, a special committee of the Board of Directors composed of Ampal’s independent directors negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which has been retained as financial advisor to the special committee, advised the special committee on this transaction.
5. Additional investment of $0.1 million in FIMI Opportunity Fund, L.P. (“FIMI”).
6. A loan to Bay Heart of $3.6 million, for a shopping mall in Haifa, Israel.
b) In 2007, Ampal made the following dispositions:
1. On May 21, 2007, the Company closed the sale of its equity method holdings in Carmel, a packaging manufacturer affiliate based in Israel. Pursuant to this transaction, Ampal and its subsidiaries sold to Carmel an aggregate of 522,350 ordinary shares of Carmel for an aggregate sales price of approximately $4.6 million. The Company recorded no gain since impairment was recorded in the first quarter of 2007.
2. During 2007, the Company received proceeds in the total amount of $0.8 million from the sales of certain investments by FIMI.
3. On August 5, 2007, the Company completed the sale of its holdings in Am-Hal Ltd. for an aggregate consideration of $29.3 million and recorded a gain of approximately $29.4 million (approximately $21.7 million, net of taxes). The gain and Am-Hal’s results of operations until June 30, 2007, were recorded as discontinued operations for all periods presented.
4. On December 2007 Chem-Tankers C.V. sold a ship for $6.9 million (capital gain of $3.4 million).
c) In 2006, the Company made the following investments:
1. During 2006, the Company made an additional investments of $229.9 million in EMG as follows:
The Company, through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary of the Company, entered into an agreement with Merhav (M.N.F.) Ltd. (“Merhav”) for the purchase from Merhav a portion of its interest in East Mediterranean Gas Co. S.A.E., an Egyptian joint stock company (“EMG”). The sole owner of Merhav is Yosef A. Maiman, who is also the Chairman, President and CEO of the Company and a member of the controlling shareholder group of Ampal.
On August 1, 2006 the Company acquired the beneficial ownership of 4.6% of the outstanding shares of EMG’s capital stock from Merhav. The transaction was accounted for as a transfer of assets between entities under common control, which resulted in Merhav transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhav’s operations, this entity would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. On this basis, the 4.6% investment in EMG was transferred to Ampal at carrying value, which also equals fair value. The purchase price for the shares was $100.0 million, of which, $50.0 million was paid in cash and the balance was paid in 10,248,002 shares of the Company Class A Stock (based on a purchase price of $4.88 per share) that was accounted for at a fair value of $49.0 million (the fair value was determined based on the average price per share from 2 days before the agreement press release through 2 days after the agreement press release). The issuance of the shares of Class A Stock received the approval of the shareholders of the Company as required by the marketplace rules of the NASDAQ Global Market. As a result of this transaction, the Company beneficially owned 6.6% of the total outstanding shares of EMG. Through August 2008, the purchase price may be adjusted downward should Merhav sell any of its remaining shares of EMG to a third-party purchaser at a purchase price per share lower than the price per share paid by the Company pursuant to the agreement. Additionally, pursuant to the agreement, the Company was granted an option for a period of up to two years to have the right to acquire up to an additional 5.9% of the total outstanding shares of EMG stock.
Yosef A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing relationships, a special committee of the Board of Directors composed of the Company’s independent directors, who also constitute all of the members of the Company’s Audit Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which was retained as financial advisor to the special committee, delivered a fairness opinion to the special committee regarding the transaction.
On August 22, 2006, EMG called for additional capital from all of its shareholders. As a result, the Company paid an additional $2.7 million in order to maintain its pro rata beneficial interest in this investment.
On December 21, 2006, the Company acquired the beneficial ownership of an additional 5.9% of the outstanding shares of EMG’s capital stock pursuant to an option granted by Merhav in August 2006. The transaction was accounted for as a transfer of assets between entities under common control, which resulted in Merhav transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhav’s operations, Merhav would be treated as an investment company under US GAAP, and as such, the carrying value of the investment in EMG would equal fair value. On this basis, the 5.9% investment in EMG was transferred to Ampal at carrying value, which also equals fair value.
The purchase price for the shares was approximately $128.3 million, of which approximately $68.3 million was paid in cash, $40 million was paid in 8,602,151 shares of the Company’s Class A Stock and the balance was satisfied by the issuance of a promissory note in the principal amount of $20 million (the “Convertible Promissory Note”), which, at the option of Merhav, will be paid in cash, additional shares of the Company Class A Stock (based on a price per share of $4.65 per share), or a combination thereof. As permitted under the stock purchase agreement, Merhav assigned its right to the 8,602,151 Shares to De Majorca Holdings Limited as part of Merhav’s restructuring process. The Convertible Promissory Note bore interest at 6 months LIBOR (5.375%) and matured on the earlier of September 20, 2007 or upon demand by Merhav. On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company. As a result of this transaction, Ampal beneficially owns 16.8% of the total outstanding shares of EMG (8.6% of which is held by the Joint Venture, of which Ampal owns 50%). The issuance of the 8,602,151 shares and the shares underlying the Convertible Promissory Note received the approval of the shareholders of the Company on February 7, 2007, as required by the marketplace rules of the NASDAQ Global Market. Due to the agreement of the controlling shareholder group to vote in favor of the issuance of these shares to Merhav as of the closing date of the EMG transaction (which ensured that the proposal would be adopted by the requisite shareholder vote on February 7, 2007), the Company classified for accounting purposes the sale of these shares as part of the exchange with Merhav on December 21, 2006, and recognized the $40 million within shareholders’ equity as “Receipt on account of unallocated shares.” The investment in EMG is included in the energy segment.
Yosef A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing relationships, a special committee of the Board of Directors composed of the Company’s independent directors, who also constitute all of the members of the Company’s Audit Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which was retained as financial advisor to the special committee, advised the special committee on these transactions.
2. Additional investment of $0.4 million in FIMI.
3. A loan to Bay Heart of $1.7 million, for a shopping mall in Haifa, Israel
d) In 2006, Ampal made the following dispositions (none of which were discontinued operations):
1. In June and December 2006, the Company received proceeds in the total amount of $0.6 million from the sales of certain investments by FIMI.
2. On June 13, 2006, the Company sold its holdings in Coral World International for $21.0 million and recorded a gain of $4.2 million. The gain is included in the leisure-time segment.
3. In March 2006, the Company received an additional proceeds from the sale of Modem Art Ltd. in the amount of $0.6 million.
4. In April 2006, the Company received additional proceeds in the amount of $0.4 million from the sale of certain assets by PSINet Europe, one of the holdings of Ampal’s investee company, TP.
5. On May 8, 2006, the Company sold its holdings in Ophir Holdings Ltd. for $1.1 million and recorded a loss of $1.0 million.
6. In September 2006, the Company sold the building in Tel-Aviv containing its headquarters for a proceeds of $4.6 million and recorded a gain of $2.2 million. The new owner has agreed to lease to the Company the office space containing the Company’s headquarters for a period of up to 2 years commencing on November 28, 2006. The annual rent for this lease is $162,000. The gain from the sale is included in the real-estate segment.
e) In 2005, the Company made the following investments:
1. On December 1, 2005, the Company acquired a 2% interest in EMG from Merhav. EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG. Under the terms of the transaction, the Company acquired a 2% beneficial ownership in EMG for a purchase price of $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.
Yosef A. Maiman, the chairman of the Company’s Board of Directors, is the sole owner of Merhav. The transaction was approved by a special committee of the Board of Directors composed of the Company’s independent directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.
2. Additional investment of $0.7 million in FIMI.
3. A loan to Bay Heart Ltd. of $0.9 million.
f) In 2005, the Company made the following dispositions:
1. During the third and fourth quarter of 2005, one of the holdings of Ampal’s investee companies, TP, received proceeds at the amount of $1.1 million from selling all its assets in Grapes Communications N.V./S.A. and its holdings in PSINet Europe B.V.
2. On October 3, 2005, the Company, through Ampal Communications L.P., completed the sale to Motorola Israel Ltd. of all of its 25% holdings of MIRS pursuant to the Agreement. In connection with the sale of its holdings of MIRS, Ampal Communications L.P. received approximately US $89 million of total proceeds, composed of US $67.7 million for the purchase price and an additional US $21.3 million related to guaranteed dividend payments. During the third quarter of 2005, the Company recorded a $13.3 million loss from impairment relating to this investment.
3. On September 7, 2005, a third-party Israeli based venture fund and certain of its affiliated companies invested $2.65 million in the Company’s high-tech and communications portfolio. Ampal received $2.5 million in connection with this transaction. The Company treated this investment as a disposition for accounting purposes and recorded a loss of $7.3 million ($4.6 million after taxes).
4. On August 15, 2005, the Company sold its holdings in Epsilon Investment House Ltd. and Renaissance Investment Company Ltd. for $2.0 million and recorded a $1.4 million gain.
5. On July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million and recorded a loss of $0.2 million.
6. On March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4 million and recorded a gain of $3.3 million.
g) In 2005, the Company recorded loss from impairment of investments and loans of $14.0 million as follows:
1. MIRS Communications Ltd. ($13.3 million)
2. Shiron Ltd. ($0.6 million)
3. Other loans ($0.1 million)
Note 4 - Intangible assets
The balance of intangible assets as of December 31, 2007, is comprised as follows:
The annual estimated amortization expense relating to Ampal’s amortizable intangible assets existing as of December 31, 2007, for each of the five years in the period ending December 31, 2012, is approximately $1.3 million.
Note 5 - Goodwill
As part of the purchase of Gadot on the December 3, 2007, the Company recorded the goodwill and as such it is part of the chemical segment.
Note 6 - Fixed assets
The balance of fixed assets as of December 31, 2007 and 2006 is comprised as follows:
During 2007 the company added $70,456 thousands of net assets from the purchase of Gadot and disposed of $69,319 thousands of net assets from the sale of Am-Hal.
Depreciation expenses amounted to approximately $417, $208 and $235 (in thousands) for the years ended December 31, 2007, 2006 and 2005, respectively.
Note 7 - Notes and Loans Payable
Notes issued to institutional investors in Israel, the convertible note issued to Merhav M.N.F. Ltd. and other loans payable pursuant to bank borrowings are either in U.S. dollars, linked to the Consumer Price Index in Israel or in unlinked New Israel Shekels, with interest rates varying depending upon their linkage provision and mature between 2008-2019.
The Company finances its general operations and other financial commitments through bank loans from Bank Hapoalim Union Bank Of Israel (“UBI”) and Israel Discount Bank Ltd. As of December 31, 2007, the outstanding indebtedness under these bank loans totaled $101.9 million and the loans mature through 2008-2019.
On February 26, 2007, the Company entered into a bank loan with UBI. Pursuant to the loan agreement, on April 2, 2007, UBI granted the Company a $10 million loan, which bears interest at the rate of LIBOR plus 2% to be repaid in six annual installments commencing on April 2, 2008. The loan is secured by a pledge of certain assets. On December 31, 2007, UBI granted the Company two loans of equal amount, for a total amount of NIS 20 million (approximately $5.2 million). The loans bear interest at the rate of 4.6% and 4.8%, respectively, linked to the Consumer Price Index in Israel. Both loans are for a term of two years and interest will be paid semi-annually.
On April 26, 2007, the Company repaid its existing loans from Bank Hapoalim and signed a new loan agreement. The new agreement provides for a secured $27 million dollar loan facility to the Company at the value as of March 30, 2007, to be used for general corporate purposes. On March 30, 2007, the Company borrowed the full $27 million under the loan facility. The funds borrowed under the loan facility are due in six annual installments commencing on December 31, 2007 and bear interest at an annual rate of LIBOR plus 2%. The Loan Agreement contains financial and other covenants including an acceleration of payment upon the occurrence of certain changes in the ownership of the Company’s Class A Stock. As of December 31, 2007, the Company is in compliance with its debt covenants.
On November 29, 2007, as part of the agreement between Ampal and IIF, leading a group of institutional Investors, the Company received $95.4 million to purchased a 4.3% interest in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership, from Merhav. The loan is unlinked to the Consumer Price Index in Israel, bears no interest and is repayable upon agreement by both parties, but with a minimum term of one year.
A short term loan from Bank Hapoalim in the amount of $3.5 million bears interest of 7.1% and is to be repaid by June 28, 2008.
Ampal funded the Gadot transaction with a combination of available cash and the proceeds of a new credit facility, dated November 29, 2007 (the “Credit Facility”), between MAE and Israel Discount Bank Ltd. (the “Lender”), for approximately $60.7 million. The Credit Facility is divided into two equal loans of approximately $30.35 million. The first loan is a revolving loan that has no principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan also matures in 2019, has no principal payments for the first two years, and shall thereafter be paid in equal installments over the remaining ten years of the term. Interest on both loans accrues at a floating rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has guaranteed all the obligations of MAE under the Credit Facility and Ampal’s interest in Gadot has also been pledged to the Lender as a security for the Credit Facility. The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.
In addition, as part of the EMG transaction in December 2006, the Company issued to Merhav M.N.F. Ltd. the Convertible Promissory Note in the principal amount of $20 million, which at the option of Merhav M.N.F. Ltd., was payable in cash, additional shares of Ampal Class A Stock (based on a price per share of $4.65 per share), or a combination thereof. The Convertible Promissory Note bore interest at 6 months LIBOR (5.375%) and matured on the earlier of September 20, 2007, or upon demand by Merhav M.N.F. Ltd. On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company.
As of December 31, 2007, Gadot, a 65.5% subsidiary of Ampal, has short term loans payable in the amount of $96.5 million and long term loans payable in the amount of $30.1 million. The various short term loans payable are either unlinked or linked to the Euro and bear interest at rates between 5.73% to 6.09%. The various long term loans payable are either unlinked, linked to the Consumer Price Index in Israel or linked to the Euro and bear interest at rates between 4.82% to 6.90%.
Other long term borrowings in the amount of $0.2 million are linked to the Consumer Price Index in Israel and mature between 2008 and 2010 bears an annual interest of 5.7%.
The weighted average interest rates and the balances of these short-term borrowings at December 31, 2007 and December 31, 2006 were 6.3% on $136.6 million and 6.3% on $21.2 million, respectively.
Payments due as of December 31, 2007:
Note 8 - Debentures
On November 20, 2006, the Company entered into a trust agreement with Hermetic Trust (1975) Ltd. pursuant to which the Company issued notes to institutional investors in Israel in the principal aggregate amount of NIS 250,000,000 (approximately $58 million) with an interest rate of 5.75%, which is linked to the Israeli consumer price index. The notes shall rank pari passu with the Company’s unsecured indebtedness. The notes will be repaid in five equal annual installments commencing on November 20, 2011, and the interest will be paid semi-annually. As of December 31, 2007, the outstanding debt under the notes amounts to $66.6 million, due to the change in valuation of the New Israeli Shekel as compared to the U.S. dollar. The Company deposited an amount of $10,207 thousands with Hermetic Trust (1975) Ltd. to secure the first three years worth of payments of interest on the debentures. As of December 31, 2007, the outstanding amount of the deposit was $7.5 million. Prior to the issuance of the debentures Midroog Ltd., an affiliate of Moody’s Investors Service, rated the Company as A3.
On August 1, 2007, Ampal filed a final prospectus with the Israeli Securities Authority and the TASE for the resale and listing with the TASE of its Series A Notes. According to the prospectus, on August 19, 2007, Ampal paid the Series A Notes holders additional interest of 0.10959% (0.5% annually) for the period commencing May 20, 2006 and ending on August 9, 2007, which is the date the Series A Notes were registered for trade. The additional interest was paid to the Series A Note holders whose names appear in the Series A Note holders register kept by Ampal as of August 7, 2007. The debt offering was made solely to certain non-U.S. institutional investors in accordance with Regulation S under the U.S. Securities Act of 1933, as amended. The notes have not been and will not be registered under the U.S. securities laws, or any state securities laws, and may not be offered or sold in the United States or to United States persons without registration unless an exemption from such registration is available.
As of December 31, 2007, Gadot had $0.7 million outstanding under its convertible debentures. Gadot’s debentures were listed on the Tel Aviv Stock Exchange (“TASE”) in December 2003, are linked to the Consumer Price Index in Israel, bear annual interest at the rate of 6.5%, and are repayable in two equal annual installments on December 5, 2008 and 2009. The debentures are convertible into ordinary shares of Gadot, commencing from the date they were listed on the TASE until December 5, 2009, such that as of December 31, 2007, each incremental amount of NIS 3.53 of outstanding debentures (linked to the Consumer Price Index in Israel) is convertible into one ordinary share of Gadot of NIS 0.1 par value, subject to adjustments.
As of December 31, 2007, Gadot had $12.0 million outstanding under its other debentures. These debentures are not convertible into shares and are repayable in five equal annual installments on September 15, of each of the years 2008 through 2012. The unsettled balance of the principal of the debentures bears annual interest at the rate of 5.3%. The principal and interest of the debentures are linked to the Consumer Price Index in Israel and the interest is payable in semi-annual installments on March 15 and September 15 of each of the years 2006 through 2012.
Note 9 - Accounts payable accrued expenses and others
(a) The balance of accounts payable accrued expenses and others as of December 31, 2007 and 2006 is comprised as follows:
(b) Accrued severance liabilities
Israeli labor laws and agreements require payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. Ampal severance pay liability in Israel, which reflects the undiscounted amount of the liability as if it was payable at each balance sheet date, is calculated based upon length of service and the latest monthly salary (one month’s salary for each year worked).
The Company’s liability for severance pay pursuant to Israeli law is partly covered by insurance policies. The accrued severance pay liability of $12.7 million, is included in accounts payable, accrued expenses and other liabilities - others.
The Company expects that the payments relating to future benefits to its employees upon their retirement at normal retirement age in the next 10 years will be immaterial. These payments are determined based on recent salary rates and do not include amounts that might be paid to employees that will cease working with the Company, before their normal retirement age or amount paid to employees that their normal retirement age extends beyond the year 2017.
Note 10 - Minority Interest, net
The minority interest as of December 31, 2007, is mostly attributable to the public holding of 34.52% of Gadot’s shares.
The minority interest as of December 31, 2006, is mostly attributable to the warrants granted by Am-Hal to Phoenix Insurance Company. As part of the loan agreement which was signed on December 1, 2005 between Am-Hal and Phoenix Insurance Company, the lender is granted a warrant to purchase 19.9% (on fully diluted basis) of the issued and paid capital of Am-Hal (the “Warrant”). The value of the Warrant was estimated at approximately $1.3million and recorded as deferred expenses (Note 4). On August 5, 2007, the company sold all of its interest in Am-Hal (see Note 3).
Note 11 - Shareholders’ Equity
During the second, third and fourth quarter of 2007, the shareholders’ equity changed as follows:
As of December 31, 2007, the Company issued 3,870,351 Class A Shares to investors that exercised warrants granted to them by the Company on December 28, 2006. The total proceeds from the exercise of warrants were $18.0 million.
On September 20, 2007, Merhav M.N.F. Ltd. exercised its option to convert the outstanding balance of $20.8 million (which includes accrued interest of $0.8 million) on the convertible promissory note issued to it as partial consideration for the purchase of a 5.9% interest in EMG by Ampal in December 2006, into 4,476,389 shares of Class A Stock of Ampal. The issuance of the 4,476,389 shares underlying the Convertible Promissory Note received the approval of the shareholders of the Company on February 7, 2007, as required by the marketplace rules of the NASDAQ Global Market.
Set forth below is our treasury stock as of December 31, 2007, 2006 and 2005:
Note 12 - Stock Options
In March 1998, the Board approved a Long-Term Incentive Plan (“1998 Plan”) permitting the granting of options to all employees, officers, directors and consultants of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of Class A Stock. The 1998 plan was approved by the majority of the Company’s shareholders at the June 19, 1998, annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2007, no options of the 1998 Plan are fully vested and outstanding.
On February 15, 2000, the Stock Option Committee approved a new Incentive Plan (“2000 Plan”), under which the Company has reserved 4 million shares of Class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board of Directors of Ampal (the “Board”) at the meeting held on March 27, 2000 and was approved by a majority of the Company’s shareholders at the June 29, 2000 annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2007, 2,434,500 options under the 2000 Plan are outstanding.
The option term is for a period of five years from the grant date for the options granted under the 1998 Plan and ten years from the grant date for the options granted under the 2000 Plan. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration.
The options granted under the 1998 Plan and the 2000 Plan (collectively, the “Plans”) may be either incentive stock options, at an exercise price to be determined by the Stock Option Compensation Committee (the “Committee”) but not less than 100% of the fair market value of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Committee. The stock options granted under the plans were granted either at market value or above. Under the Plans, the Committee may also grant, at its discretion, “restricted stock”, “dividend equivalent awards”, which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and “stock appreciation rights,” which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market value of the Class A Stock on the exercise date over the exercise price. During 2007, no such compensation instruments were granted by the Committee.
Under each of the Plans, all granted but unvested options become immediately exercisable upon the occurrence of a change in control of the Company.
The weighted average grant date fair value of options granted during 2007, 2006 and 2005 was 2.273, 2.366 and 1.682, respectively.
The following table summarizes the activity of both Plans for the years 2007, 2006 and 2005 respectively:
Valuation and Expenses under 123R
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted below. As permitted by SAB 107 the Company used the simplified method to compute the expected option term. Expected volatility is based on the historical volatility of the Class A common stock. The risk free rate is based on the U.S. Treasury yield curve for a term consistent with the expected life of the award, in effect at the date of grant.
The fair value of options granted during the years ended December 31, 2007, 2006 and 2005 were estimated using the following weighted average assumptions: (1) expected life of options of 6, 6 and 5 years, respectively; (2) dividend yield of 0%; (3) volatility of 35.64%, 41.11% and 46.07%, respectively; and (4) risk free interest of 4.30%, 4.42% and 4.08%, respectively.
Total stock-based compensation expense recognized under SFAS No. 123R, was approximately $783,000 and $720,000 for the years 2007 and 2006, respectively. No share-based compensation was capitalized in the consolidated financial statements.
The total intrinsic value (market value on date of exercise less exercise price) of options exercise during 2006 was $ 260,000.
At December 31, 2007, there was $1.99 million of total unrecognized, pre-tax compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of approximately four years. The Company settles employee stock options exercises primarily with newly issued common shares and occasionally with treasury shares.
Note 13 - Earnings (Loss) Per Class A Share
Basic net loss per share is computed by dividing net loss after deduction of preferred stock dividends by the weighted-average number of common stock shares outstanding for the period. In 2007, 2006 and 2005, all outstanding stock options and preferred shares have been excluded from the calculation of the diluted loss per share because all such securities are anti-dilutive for these periods presented. Also, participating 4% Convertible Preferred Stock were not taken into account in the computation of the basic EPS for those years (in the period in which it was outstanding) since its shareholders did not have contractual obligation to share in the losses of the Company. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share follows (in thousands, except per share amounts):
The following table summarized securities that were not included in the calculations of diluted earnings per class A shares for the years ended December 31, 2007, 2006 and 2005 because such shares are anti-dilutive.
Note 14 - Income Taxes
As a result of the adoption by the Company of FIN 48, on January 1, 2007, the Company recognized, as a cumulative effect of change in accounting principle, a $2 million increase in its liability for unrecognized tax benefits, which was accounted for as a decrease in the January 1, 2007 balance of retained earnings. Furthermore, the Company recognized an increase in deferred tax assets of approximately $2.0 million, which was accounted for as an increase in the January 1, 2007 balance of retained earnings. Also, upon adoption of FIN 48 the company recorded during 2007 an additional $2.8 million tax liability from which $ 2.1 million where recorded as tax expenses expense.
The following table summarizes the activity related to the Company’s unrecognized tax benefit liability:
All of the Company’s unrecognized tax benefit liability would affect the Company’s effective tax rate if recognized. Because of the existence of net operating loss carryforwards, the resultant unfavorable resolution of any of the Company’s uncertain tax positions would not result in the imposition of interest or penalties. Accordingly, the Company did not record any interest or penalties related to the unrecognized tax benefit liability. The Company does not expect its unrecognized tax benefit liability to change significantly over the next 12 months
A summary of open tax years by major jurisdiction is presented below:
(1) Includes federal, state, and provincial (or similar local jurisdictions) tax positions.
As of December 31, 2007, valuation allowance is provided against tax benefits on foreign net operating loss carryforwards of $24.5 million.
As of December 31, 2007, the Company has foreign tax credits of $7.3 million that will expire in the years 2009 through 2014.
As of December 31, 2007, the Company has U.S. Federal net operating loss carryforwards of approximately $11.4 million that will expire in the years 2023 through 2026. The utilization of net operating loss carryforwards may be subject to substantial annual limitations if there has been a significant “change in ownership”. Such a “change in ownership”, as described in Section 382 of the Internal Revenue Code, may substantially limit the Company’s utilization of the net operating loss carryforwards.
Note 15 - Discontinued operations
On August 5, 2007 the Company completed the sale of Am-Hal Ltd. Am-Hal was a wholly owned subsidiary which owns and operates a chain of senior citizens facilities located in Israel. Accordingly, Am-Hal has been reported as a discontinued operation for all periods presented.
Summary income statement and condensed balance sheet information for Am-Hal is set forth below.
Am-Hal
Note 16 - Investments in Affiliates
The companies accounted for by the equity method and the Company’s share of equity in those investees are:
Combined summarized financial information for the above companies is as follows:
Note 17 - Operating Segments Information
SFAS 131 “Disclosure about Segments of an Enterprise and Related Information” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Segment information presented below results primarily from operations in Israel.
The chemical segment consists of the investment in Gadot, an Israeli Company, which operate in distribution and marketing of liquid chemicals for raw materials used in the chemical industry.
The energy segment consists of the investment in EMG, an Egyptian Joint Stock Company, which holds the right to supply natural gas to Israel through a pipe line to be constructed from Egypt to Israel.
The real estate rental segment consists of rental property owned in Israel and the United States leased to unrelated parties, and operations of Am-Hal Ltd., a wholly-owned subsidiary which owns and operates a chain of senior citizens facilities located in Israel. The real estate owned by the Company was sold in September 2006 and on August 5, 2007, the Company sold all of its interest in Am-Hal (see note 3).
The leisure-time segment consists of Coral World International Limited (marine parks located around the world) and Kfar Saba, the Company’s 51%-owned subsidiary located in Israel. In June 2006, the Company sold all of its interest in Coral World International Limited (see “Note 3”).
The finance segment consists of all other activity which are not part of the above segments.
Corporate office expense is principally applicable to the financing operation and has been charged to that segment above. Revenues and pretax operating gain above exclude equity in earnings of affiliates.
Note 18 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
(a) Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value (see “Note 1(o)”).
(b) Deposits, Notes and Loans Receivable
The fair value of these deposits, notes and loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
(c) Investments
For financial instruments with maturities between 91 days and 1 year, and all marketable securities, the carrying amount is a reasonable estimate of fair value.
(d) Financial Instruments
The fair value of the financial instruments included in other assets, accounts payable, and accrued expenses presented at a fair value.
(e) Commitments
Due to the relatively short term of commitments discussed in “Note 18", the contract value is considered to be at fair value.
(f) Financial Assets and Financial Liabilities
The fair value of notes and loans payable, deposits payable and debentures outstanding is estimated by discounting the future cash flows using the current rates offered by lenders for similar borrowings with similar credit ratings and for the same remaining maturities. Capital notes in the amount of $95.3 million that were issued to IIF have no maturity date, bear no interest and are not linked to any index. Assuming maturity dates of 5 and 10 years, the fair value of those capital notes for such dates will be $68.2 million and $48.8 million, respectively.
Note 19 - Commitments and Contingencies
(a) The combined minimum annual lease payments on Ampal’s corporate offices in New York and in Israel and its subsidiary Country Club Kfar Saba Ltd. in 2007 were $0.6 million. The lease of the corporate office in New York expires in 2009, the lease of the office in Tel Aviv expires in 2008, the lease of the office in Herzelia Pituach expires in 2017 and the Kfar Saba lease expires in 2038. In the years 2008-2012, the combined annual lease payments on those premises will be in an aggregate amount of $2.7 million, and thereafter, an amount totaling $6.2 million.
In 2007 the Company paid annual lease payments of $13,685,000. In the years 2008-2012, the combined annual lease payments on those premises will be in an aggregate amount of $28.03 million.
(b) Gadot leases four ships, with an aggregate loading capability of 49,324 tons. The lease period for two of the ships is until 2011. The lease period for one of the ships is until 2009, with an option to extend the term for two additional one-year periods. The lease period for one of the ships is until October 2008, with an option to extend the term for three additional one-year periods. The aggregate lease fees for the four leased ships in 2007 amounted to $17 million. In 2008, the lease fees will amount to $13,004,833 and will decrease to $12,216,438 for the years 2009 and 2010 and thereafter will further decrease to $2,804,500 for 2011. Gadot has ordered four additional ships to be built with a loading capability of 17,000 each, for a consideration of approximately $28 million per ship. These ships will be delivered during 2009 and 2010.
(c) The combined minimum annual lease payments of Gadot’s offices and other land used in its operations is expected to amount to approximately $314,000.
(d) Gadot leases an 11,000 square meter storage tank facility located in the Kishon port in Haifa from the port authority. The lease expires in 2022. Gadot also leases an additional 30,000 square meter area from the port authority located near the southern terminal in the port of Haifa in connection with its storage and loading services. This lease expires in 2014. Gadot leases an additional 18,000 square meters area located adjacent to the southern terminal land for its storage facility and for its analytical and quality assurance laboratory. The lease payments for the land in the southern port leased from the Haifa port authority in 2007 was approximately $2.8 million. These lease fees are calculated according to the amount of space utilized by Gadot and by the amount and type of materials transported. Gadot has provided the port authority with bank guarantees in the amount of approximately $1.8 million, linked to the Israeli Consumer Price Index, in order to secure payments under these leases.
(e) Gadot grants senior employees that are not interested parties performance bonuses in addition to their monthly salary. These bonuses are calculated as a percentage of profits, ranging between 5% and 8%.
(f) Gadot is party to consulting and management agreements with some of its subsidiaries. These agreements are extended automatically for a term of one year, unless terminated by one of the parties.
(g) One of Gadot’s subsidiaries is party to an agreement from October 2005 to receive consulting, management and operating services from a former minority shareholder for a period of 5 years, in consideration of approximately $62,400 per month.
(h) The Company has issued guarantees on bank loans to its investees and subsidiaries totaling $27.4 million as follows:
(1) The Company provided a $5.2 million guarantee on indebtedness incurred by Bay Heart.
(2) The Company provided a $1.1 million guarantee to Galha (1960) Ltd, for the payment of the Company’s subsidiary of a final judgment, if entered against the Company’s subsidiary. (See below)
(3) $21.1 million guarantees of Gadot for outstanding loans.
(i) The Company made a commitment to invest $2.8 million in Star II (2000) L.P.
(j) Legal Proceedings:
(1) 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 11,560,000 ($3 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 4,172,000 ($1,085,000) if a final judgment against the Company will be given.
(2) On May 26, 2003 the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd., in the Tel Aviv District Court, claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it. In March 2008 the dispute was submitted to mediation by order of the court, with the consent of the parties.
(3) Gadot has received third party notices in a number of lawsuits regarding pollution of the Kishon River in Israel. These lawsuits have been filed by various claimants who were harmed by the polluted water of the river, including soldiers from various units in the Israeli Defense Forces who trained in the river, fishermen who fished in the river, the Haifa rowing club and industrial companies that use the river. Some of the lawsuits are claims for monetary damages (some of the claims are unlimited in amount; one is for approximately $6 million) and some are for injunctions against further pollution of the river. Gadot denies liability in all these claims and has filed statements of defense for each claim. Gadot has not made any provisions in its financial statements against these claims.
(4) Part of Gadot’s storage tank facility is leased from the Haifa port authority. In 2001 the port authority requested that Gadot participate in an offer to find a consultant to examine ground contamination in the area surrounding the facility. According to the estimate of the port authority, the cost of purifying the ground is estimated to be between $377,000 and $940,000. Gadot has responded, denying the existence of ground contamination and, in any case, that it is the source of such contamination. Gadot believes, that if there is contamination, its source is the contaminated waters of the Kishon River or the Mediterranean Sea. Gadot has not made any provisions in its financial statements with respect to this matter.
BAY HEART LTD.
FINANCIAL STATEMENTS - CONSOLIDATED AND COMPANY
AS OF DECEMBER 31, 2006
BAY HEART LTD. FINANCIAL STATEMENTS - CONSOLIDATED AND COMPANY
AS OF DECEMBER 31, 2006
Contents
Page
Independent auditors' report 1 - 2
Financial statements:
Balance sheets - consolidated
Balance sheet - Company
Statements of operations - consolidated
Statements of operations - Company
Statement of changes in shareholders' deficiency
Statements of cash flows - consolidated 8 - 9
Statements of cash flows - Company 10 - 11
Notes to the financial statements 12 - 45
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
BAY HEART LTD.
We have audited the accompanying balance sheets of Bay Heart Ltd. (“the Company”) as of December 31, 2006 and 2005, and the consolidated balance sheets as of those dates, and the related statements of operations, changes in shareholders’ deficiency and cash flows - of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position - of the Company and on a consolidated basis - as of December 31, 2006 and 2005, and the results of operations, changes in shareholders’ deficiency and cash flows - of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in Israel.
Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. With respect to these financial statements, the difference in the application of the latter is described in Note 19.
As described in Note 2A, the financial statements are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.
The condensed consolidated financial information in U.S. dollars presented in Note 18 to the financial statements, prepared at the request of an investor, represents a translation of the Company’s financial statements in nominal values, as stated in Note 18A. In our opinion, such translation into U.S. dollars was appropriately performed on the basis stated in Note 18A.
As described in Note 1C to the financial statements regarding the Company’s business condition, the Company has ongoing losses, a working-capital deficit, shareholders’ deficiency and negative cash flows from operating activities. As stated in that note, the continuance of the Company’s operations and its ability to satisfy its short-term liabilities is contingent upon the attainment of financing from the shareholders and/or bank financing arrangements.
Brightman Almagor & Co.
Certified Public Accountants
Member firm of Deloitte Touche Tohmatsu
Haifa, Israel, February 6, 2007.
BAY HEART LTD.
CONSOLIDATED BALANCE SHEETS
(in thousand NIS)
The accompanying notes are an integral part of these financial statements.
Nitzan Ariel Uri Dori Anat Nursella
Chief Executive Officer Chairman of the Board Controller
Approval date of the financial statements: February 6, 2007
BAY HEART LTD.
BALANCE SHEETS - COMPANY
(in thousand NIS)
The accompanying notes are an integral part of these financial statements.
BAY HEART LTD.
STATEMENTS OF OPERATIONS - CONSOLIDATED
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENTS OF OPERATIONS - COMPANY
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENTS OF CASH FLOWS - CONSOLIDATED
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENTS OF CASH FLOWS - CONSOLIDATED
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENTS OF CASH FLOWS - COMPANY
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
STATEMENTS OF CASH FLOWS - COMPANY
(in thousand NIS)
The accompanying notes are an integral part of the financial statements.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 -
General
A. Activity
Bay Heart Ltd. is a private company which owns a shopping center (“the Mall”) located in Haifa bay, known as “Lev Hamifratz”. The Subsidiary has been engaged since its inception in the planning and construction of a commercial-center project near the Mall (see Note 11B).
B. Definitions
The Company - Bay Heart Ltd.
The Subsidiary - Bay Heart Properties (1994) Ltd. (wholly owned).
Proportionally Consolidated joint venture - a jointly controlled partnership, whose financial statements are proportionally consolidated in the Company's financial statements.
Interested party - as defined in the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.
Related parties - as defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel.
Controlling shareholder - as defined in the Israeli Securities Regulations (Disclosure of Transactions Between a Company and its Controlling Shareholders in the Financial Statements), 1996.
CPI - the Israeli consumer-price index.
C. Company’s business condition
(1) At December 31, 2006 the Group had ongoing losses, a working capital deficit of NIS 27.6 million mainly due to short-term bank borrowings and the Company also had a shareholders’ deficiency of NIS 48.3 million. In addition, for the year ended December 31, 2006 the Group had losses in the amount of NIS 7.7 million and negative cash flows from operations totaling NIS 3 million.
(2) The Company’s shareholders provided guarantees totaling NIS 65 million for bank loans. In addition, during 2005 the management signed an agreement with the bank converting short-term credit into a long-term loan in the amount of NIS 150 millions to be paid over a period of 15 years. According to terms of agreement, the long-term loan is to be paid in 60 quarterly installments of NIS 3.9 million each starting April 2005.
The shareholders guarantee the quarterly payments to the bank up to NIS 65 million. In addition, the loan under the agreement, the Company’s land is security for the loan.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 -
General (Cont.)
C. Company’s business condition (Cont.)
(2) (Cont.)
As part of the negotiation, the bank has agreed to give the Company an additional credit line in the amount of NIS 18.5 million to be used towards the renovation of the mall, whereby the main expense would be due to the construction of the Assuta Hospital. The credit line will be initially set up as short-term credit for the duration of the renovation project. The Company’s shareholders provided full guarantees to the bank for that additional short-term credit.
(3) Company management is contemplating significant efficiency-improvement measures consisting primarily of achieving full occupancy of the mall while changing its tenant composition. Management believes that these steps, together with obtaining of financing sources and financing arrangement with the banks, may improve operating cash flows and enable the Company to fulfill its obligations.
In light of the above outline, the continuation of the Company’s activities and the fulfillment of its obligations are contingent upon the receipt of financing from its shareholders in a manner facilitating the repayment of its short-term liabilities and/or reaching financing agreements with its banks.
(4) During December 2006, the rental contract, between the Company and Supersol Ltd. (party at interest) for renting an area of 3,400 square meters which yield annually income due to rental and managing fees of total 2.4 million dollars, ended. The Company’s management plans to redivide the area and rent it to small shops in return of higher rental and managing fees. Till the financial statements approval date, the company hasn’t found yet an alternative rentals for the area as mentioned above.
(5) Starting mid July, 2006 and continuing through mid August, 2006, the state of Israel was in a military conflict with the Hezbollah organization in Lebanon - a conflict that included missile attacks on civilian populations in the northern region of Israel. The mall, located in the Haifa bay region, was alternately open and operating according to the instructions of the home front command. The military conflict affected the 3rd quarter operational results of 2006.
D. Use of estimates
The preparation of the financial statements in accordance with generally accepted accounting principles requires that management makes estimates and assumptions pertaining to transactions and matters whose ultimate effect on the financial statements cannot be precisely determined at the time of financial statement preparation. Although these estimates are made on the basis of the best judgment, actual results may differ from these estimates.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Significant Accounting Policies
A. Ceasing the adjustment of financial statements and financial reporting in reported amounts
1. Definitions:
Adjusted amount - a nominal, historical amount adjusted to the CPI of December 2003 in accordance with Opinion No. 36 of the Institute of Certified Public Accountants in Israel.
Reported amount - an adjusted amount plus nominal values added, and of net of any amounts deducted, subsequent to December 31, 2003.
2. Accounting Standard No. 12 (“Ceasing the Adjustment of Financial Statements”) went into effect on January 1, 2004, following which the Company discontinued, starting January 1, 2004, the adjustment of its financial statements based on the changes in the general purchasing power of the Israeli currency. Starting in 2004 the Group’s financial statements are prepared in “reported amounts”, with the comparative figures pertaining to periods up to (and including) December 31, 2003 included in “adjusted amounts”.
The reported and/or adjusted amounts of non-monetary items reflect their cost in terms of reported amounts and/or amounts adjusted to the changes in the consumer-price index (CPI) until December 2003 while not necessarily reflecting these items’ market value or value to the business.
3. Method for determining the reported amounts in the annual financial statements of 2005 and 2006.
Balance sheet:
- Monetary items (whose balance-sheet amount reflects current or realizable value at the balance-sheet date) have been included at their nominal values at the financial statements date.
- Non-monetary items have been included at their “adjusted amount” plus nominal amounts added during the reported period and less amounts deducted during the reported period.
- Investments in subsidiaries have been included on the basis of these companies’adjusted financial statements.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
A. Ceasing adjustment of financial statements and financial reporting in reported amounts (Cont.)
4. Method for determining the reported amounts in the annual financial statements of 2005 and 2006 (Cont.)
Statement of operations:
- Income and expenses, including financing, have been included in nominal values.
- Income and expenses stemming from non-monetary items (mainly depreciation) have been computed concurrently with the computation of their corresponding balance-sheet amounts.
B. Principles of consolidation
The consolidated financial statements include full consolidation of the Subsidiary. Material transactions between the Company and its Subsidiary as well as balance and intercompany balance have been fully eliminated.
The consolidated data is based on the audited financial statements of the Subsidiary, which has been fully consolidated following the adaptation of its accounting policies with those of the Company.
C. Cash equivalents
Cash equivalents include unrestricted bank demand and time deposits with original maturity dates not exceeding three months.
D. Allowance for doubtful accounts
The allowance is computed specifically in respect of amounts, the collection of which in management’s opinion is doubtful.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
E. Fixed assets
Fixed assets are stated at cost, net of accumulated depreciation and net of a provision for impairment in value. Impairment has been computed on the basis of Israeli Accounting Standard No. 15 (see Note 2G). Depreciation is computed by the straight-line method, based on the estimated useful lives of the assets, at the following annual rates:
F. Other assets
Other assets, which constitute costs incurred by the Company as part of its participation in the construction of a railway terminal which is connected to its owned commercial center, are stated at cost, net of accumulated amortization computed at an annual rate of 10% and a provision for impairment in value. The latter is computed on the basis of Israel Accounting Standard No. 15 (see Note 2G and Note 2G).
G. Provision for impairment of assets
Pursuant to Accounting Standard No. 15 of the Israel Accounting Standards Board, the Company examines the recoverable amount of its long-lived assets whenever there exists any indication of their potential impairment. If an asset’s book value exceeds its recoverable amount, which is established by the higher of the net selling price and its value in use, the Company recognizes the loss from this impairment in asset value. An impairment recognized in the past may be reversed only if a change occurs in the estimates used in determining the recoverable amount from the date of last loss recognition. The book value following that reversal may not exceed the value assigned to that asset had this impairment loss not been recorded in prior years (see Notes 5 and 6).
H. Revenue recognition
Service revenues are recognized over the period of the service.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
I. Earnings (loss) per share
Earnings (loss) per share are computed based on the weighted average number of shares outstanding during the year.
J. Transactions with a controlling party
An interest-bearing capital note issued to the Company by its Subsidiary has been accounted for in accordance with the Israeli Securities Regulations (Disclosure of Transactions Between a Company and its Controlling Shareholder), 1996.
K. Fair value of financial instruments
The financial instruments of the Company and its Subsidiary mainly include non-derivative assets and liabilities.
Non-derivative assets include: cash and cash equivalents, trade accounts receivable, receivables and other current assets. Non-derivative liabilities include short-term bank borrowings, trade accounts payable, payables and other current liabilities, long-term bank loans, amounts due to interested parties and tenant deposits. Due to the nature of these financial instruments, their fair value is usually identical or close to the value at which they are presented in the financial statements.
L. Exchange rate and linkage
CPI and the dollar exchange-rate data:
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
M. Effect of new accounting standards
Accounting Standard No. 22 - Financial Instruments - Disclosure and Presentation:
In July 2005, the Israel Accounting Standards Board (IASB) issued Accounting Standard No. 22 - “Financial Instruments - Disclosure and Presentation” (hereinafter - the “Standard”). The Standard sets down the presentation provisions for financial instruments and the fair disclosure required thereof in the financial statements. The presentation provisions address the rules for the allocation and classification of financial instruments into financial assets, financial liabilities or equity instruments, the classification of interest, dividends, and losses and gains related thereto, and the conditions that are required for the offset of financial assets against financial liabilities. The Standard requires disclosure of information pertaining to the factors that impact on the amount, timing, and certainty of the Company’s future cash flows related to financial instruments and the accounting policy implemented in connection with such instruments. The Standard also requires disclosure of information pertaining to the nature and scope of the use that the Company makes of financial instruments, the business needs they serve, the risks connected thereto, and management policy pertaining to controlling such risks. The Standard supersedes Opinion No. 48 “the Accounting Treatment of Option Warrants” and Opinion No. 53 “the Accounting Treatment of Convertible Liabilities” of the Institute of Certified Public Accountants in Israel. The Standard applies to the financial statements for periods commencing on or after January 1, 2006. Accounting Standard No. 22 requires prospective application of its provisions. Accordingly, comparative amounts presented in the financial statements of periods commencing on the effective date of the Standard will not be restated.
In the opinion of the Company, the effect of the new standard on the results of operations, financial position, and cash flows of the Company will be immaterial.
Accounting Standard No. 24 - Stock-Based Payment:
In September 2005 the Israel Accounting Standards Board issued Accounting Standard No. 24 , “Stock-Based Payment”. The Standard requires the recognition in the financial statements of stock-based-payment transactions, including those with employees or other parties and which are to be settled in cash, other assets or equity instruments. As a result, among other things, expenses pertaining to grants of shares and options to employees are to be allocated over the grants’ vesting periods based on each grant’s fair value at the grant date. The Standard establishes measurement rules, and distinct requirements for transactions which are to be settled by equity instruments, transactions which are to be settled by cash, and transactions whose terms enable one of the parties to elect between settlement in cash or by an equity instrument.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
M. Effect of new accounting standards (cont.)
Accounting Standard No. 24 - Stock-Based Payment (cont.):
The Standard also describes various disclosure requirements as to the share-based-payment payments. Standard No. 24 will go into effect for periods beginning January 1, 2006 or thereafter, with earlier implementation recommended.
The Standard’s guidance with respect to share-based payment to be settled by an equity instrument are to be implemented in regard to any grant made subsequent to March 15, 2005 but not yet vested by January 1, 2006. Since this Standard will be implemented in regard to periods commencing January 1, 2006, no expenses are allocated in the 2005 financial statements in respect of grants made subsequent to March 15, 2005. Nevertheless, in the 2006 financial statements, the 2005 financial statements are to be restated to reflect the expenses for that period.
The effect of the Standard on the Company’s financial statements is not expected to be material.
Accounting Standard No. 21 - Earnings per Share:
In February 2006 the Israel Accounting Standards Board issued Accounting Standard No. 21, “Earnings per Share” (“the Standard”). Upon the introduction of this Standard, Opinion No. 55 of the Institute of Certified Public Accountants in Israel on Earnings per Share will be superseded.
The Standard establishes that an entity is to compute its basic earnings per share in regard to income or loss attributable to ordinary shareholders of the reporting entity, and that the entity shall compute its basic EPS with respect to income or loss from continuing operations attributable to the ordinary shareholders of the reported entity, should such be presented.
Basic earnings per share is to be computed by dividing income or loss attributed to holders of ordinary shares of the reporting entity (numerator), by the weighted average of the outstanding ordinary shares (denominator) during the period.
In its computation of diluted earnings per share, the entity must adjust its income or loss attributable to the ordinary shareholders of the reporting entity and the weighted average of the outstanding shares for the effects of all the dilutive potential ordinary shares.
In accordance with the Standard’s guidance, the Standard will apply to financial statements for periods starting January 1, 2006 and thereafter. The Standard further establishes that its guidance is to be applied retroactively in respect of comparative earnings per share data relating to prior periods.
The Company believes that the effect of the Standard on its earnings (loss) per share is not expected to be material.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
M. Effect of new accounting standards (cont.)
Standard No. 25 -Revenues:
In February 2006 the Israel Accounting Standards Board published Accounting Standard No.25 (“Revenues”), which establishes rules for the recognition, measurement and presentation of revenues arising from the:
sale of goods; rendering of services; and use by others of entity assets yielding interest, royalties and dividends. The standard states that an entity should measure its revenues based on the fair value of the proceeds received and/or entitled to. Assets and liabilities included in the balance sheet on December 31, 2005 in amounts different than those recognized before this standard’s implementation will be adjusted on January 1, 2006 to the amounts recognized based on this standard, with the effect of this adjustment recognized as a cumulative effect of an accounting change.
Management believes that the effect of this new standard on the Company’s financial position, results of operations and cash flows is not expected to be material.
Standard No. 25 will apply to financial statements covering periods beginning January 1, 2006 and onwards.
N. Asset’s rental contracts
The company classifies asset rental contracts either as a financial or operational lease according to the requirements detailed in IAS Standard No. 17 (international standard). According to the international standard, the lease will be classified as financial if it actually transfers all included risks and benefits to the lessee. The lease will be classified as operational if there is no actual transfer of all risks and benefits included in ownership.
The international standard classifies the lease according to the financial nature of the transaction. The standard presents a number of examples which can be used each on its own, or as a combination, to indicate whether the lease is financial as follows: transferring actual ownership of the asset to the lessee; giving the option of acquisition to the lessee at an opportune cost; verifying that the time period of the lease is consistent with the majority of the financial lifetime of the leased; verifying that the present value of the cash flow is equal to the fair value of the leased; verifying that the leased is unique in character such that only the lessee will be able to use the leased without any substantial adjustments.
The company examined the rent transaction of an asset in the mall to “Asuta”according to the nature of the transaction and the examples as described above. The company views the financial nature of the Asuta transaction as a long term lease.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 -
Significant Accounting Policies (Cont.)
N. Asset’s rental contracts (cont.)
According to the rental contract between the company and Asuta, the legal and proprietary ownership of the rented does not transfer to Asuta. The time period of the rent, as written in the contract, is fifteen years, with no option for extension, and does not constitute the majority of the lifetime of the rented. The present value of the expected cash flow to be received during the time period of the rented is not close to the fair value of the rented. As a result of the multi-purpose construction of the rented, at the end of the contractual time-period of the rented, the renter will be able to use it for other purposes, and rent to alternative renters without any significant cost adjustments compared to the fair value of the rented.
According to the nature of the transaction and the whole of the examples as described above, the transaction was classified as an operational lease.
Note 3 -
Additional Details Concerning Current Assets
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands of NIS)
Note 3 -
Additional Details Concerning Current Assets (cont.)
B.
Other receivables and current assets
Note 4 -
Investments, Long-Term Loans and Receivables
(*) Investment in shares of the Subsidiary in an amount less than NIS 1.00.
(**) In respect of a transaction carried out between the Company and a controlled company.
A. The balance of the loan, which provided by the Company to the joint venture for constructing the commercial center\ cinema center (see Note 11B). The loan is unlinked and does not bear interest.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 4 -
Investments, Long-Term Loans and Receivables (cont.)
B. This loan was provided to the Subsidiary for acquiring land and constructing the commercial-center project.
Starting January 1, 1999 this loan was converted into a capital note. Starting January 1, 2002 it was linked to the CPI and bearing interest of 5%. Pursuant to the Israel Securities Regulations (Disclosure of Transactions Between a Company and Its Controlling Shareholder in the Financial Statements), 1996, a capital reserve has been presented in shareholders’ deficiency in respect of that capital note.
The Company will set the repayment date of the capital note by advance notice of fifteen months.
C. Information pertaining to an investment in a joint venture
The following is summarized data concerning the joint venture whose financial statements have been proportionately consolidated in these financial statements:
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 5 -
Fixed Assets, Net
A. Composition
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 5 -
Fixed Assets (Cont.)
B. Additional details
(1) The Company has ownership rights to the land.
(2) The investment in the construction of the commercial center includes Company land at a cost of NIS 6 million, and the Subsidiary’s share in the land at a cost of NIS 8,452 thousand as well as planning and construction costs totaling NIS 2,992 thousand. The Subsidiary’s land has not yet been registered in the name of the Subsidiary at the Land Registry Office due to various procedures not yet concluded by the seller. To secure the registration, a second-ranking mortgage was recorded on the land in favor of the Subsidiary.
The Subsidiary’s financing expenses up to December 31, 2000 have been capitalized to the cost of the land.
(3) Based on the management’s expectation of operations, they concluded that the fixed assets is presented at fair value, and there is no need to make an additional provision for the year 2006.
Based on appraiser’s valuation made in January 2006, the net book values of the fixed assets and other assets were written down by NIS 923 thousand at December 31, 2005.
(4) As for liens on assets - see Note 11.
Note 6 -
Other Assets
A. Composition (Consolidated and Company)
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 6 -
Other Assets (Cont.)
B. As for the provision for impairment in value of assets - see Note 5B (3).
C. Additional details
On April 13, 1999 the Company signed an agreement with the Ports and Railroad Authority (“PRA”) for the construction of a railway station to be financed by the Company. Upon its completion, the station was transferred to the ownership of the PRA for no consideration.
The construction of the station near the Mall was designed to increase the number of visitors there and hence promote sales. The station facilitates quick and easy access to the Mall and to nearby sites.
The train station’s cost will be amortized over the period of economic benefit, which, in management’s estimate, is expected to be 10 years.
Note 7 -
Additional Details Concerning Current Liabilities
A. Short-term bank borrowings
As for an agreement with a bank regarding the conversion of short-term loans to a long-term loan - see Note 16.
B. Trade accounts payable (consolidated and Company)
* Includes an amount of NIS 1,123 thousand due to interested parties as of December 31, 2005
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 7 -
Additional Details Concerning Current Liabilities (Cont.)
C. Other payables and current liabilities
* Includes an amount of NIS 748 thousand due to interested parties as of December 31, 2006
Note 8 -
Long-Term Banks Loans
A. Composition
B. Repayment schedule at December 31, 2006
C. The liabilities are secured by liens (see Note 11).
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 9 -
Long-Term Liabilities to Interested Parties
The loans received from interested parties are linked to the CPI and bear no interest. The repayment dates have not yet been established.
Note 10 -
Accrued Severance Pay, Net (Consolidated and Company)
A. Composition
B. Additional details
The Company’s obligations for severance pay is covered by deposits with managers’insurance policies and provident funds. The amounts accumulated at the insurance companies are not under the Company’s custody or management and, accordingly, not reflected in the balance sheet. The deposited fund includes accrued earnings and may be withdrawn subject to the provisions of the Severance Pay Law, 1963.
Note 11 -
Commitments and Contingent Liabilities
A. Liabilities secured by liens
As security for its bank loans the Company registered a fixed lien on its share capital, goodwill, rights in land and rights to assets. In addition, it registered a floating lien on all existing assets as well as present and future rights. As of December 31, 2006 these bank loans secured by those liens amounted to NIS 161,364 thousand (Company).
B. Commitments
The Subsidiary acquired a 50%-interest in land rights (by purchasing half of the shares of the companies owning the land) in an area of 8,300 sq.m. of land adjacent to the Mall. During 1997 the Subsidiary and the sellers entered into a joint-venture agreement to plan, construct, lease and manage a lower-cost commercial center for leasing larger commercial space, as well as a gas station.
A total of NIS 3.8 million had been accumulated by the balance-sheet date, in respect of the project, including costs of a gas station, which had been constructed at a cost of NIS 1.5 million and commenced operation during 2000.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 11 -
Commitments and Contingent Liabilities (Cont.)
B. Commitments (cont.)
As of December 31, 2006, the plans of constructing a shopping center are on hold. Nevertheless, the Company is negotiating to establish the joint-venture as planned. During 2005 a Memorandum of Understanding was signed between the Company and the Israeli Theaters Ltd, a company witch operates cinemas is Israel.
C. Long-term leases
The minimum future, CPI-linked, rental revenues from all long-term leases exceeding one year at December 31, 2006, follows:
Note 12 -
Share Capital
A. Composition
B. The ordinary shares grant their holders the right to attend and vote in General Meetings, participate in distribution of earnings and, in the event of liquidation, participate in the distribution of excess assets.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 13 -
Supplementary Information Concerning Income and Expenses
E. Other expenses, net
Other expenses of NIS 923 thousand (consolidated and Company) pertain to a provision for impairment in the value of assets (see Note 5(b) (3)). In 2004 other expenses of NIS 9,411 thousand pertain to a provision for impairment in the value of assets.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 14 -
Income Taxes (Consolidated and Company)
A. Effective tax rate
The difference between the theoretical tax computed by the ordinary rates and the provision for income taxes follows:
B. The Company and the Subsidiary have received final tax assessments up to, and including, the 2002 tax-year.
C. At December 31, 2006, the Company had carry-forward tax losses amounting to NIS 89 million.
D. As of December 31, 2006 the Company did not record a deferred-tax asset of approximately NIS 27.5 million since its realization is not expected.
E. On July 25, the Knesset passed an Amendment to the Income Tax Ordinance (No. 147), 2005 which stipulated, among other things, that the corporate tax rate is to be gradually reduced to the following tax rates: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 15 -
Interested and Related Parties (Consolidated and Company)
A. Balances with related parties
As for long-term liabilities to interested parties - see Note 9.
B. Benefits granted to, and transactions with, interested parties:
4. Pursuant to the decision of the Company’s board of directors, starting in 2002, long-term loans due to interested parties are linked to the CPI and bear no interest. The interest rate on loans from interested parties in 2001 stood at 5.2% above the CPI. It was also decided that - starting in 2002 - management fees would no longer be allocated to the interested parties.
(*) An area of 3,400 sq. m. is leased to Super-Sol Ltd. (an interested party).
(**) Construction work made by a company related to an interest party.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 16 -
Linkage Terms of Monetary Balances
A. Consolidated balance sheet
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 16 -
Linkage Terms of Monetary Balances (Cont.)
B. Company balance sheet
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 17 -
Condensed Financial Statements in Nominal Terms (Cont.)
A. Balance sheets
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands of NIS)
Note 17 -
Condensed Financial Statements in Nominal Terms (Cont.)
B. Statements of operations
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 17 -
Condensed Financial Statements in Nominal Terms
C. Statements of changes in shareholders’ deficiency
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars
A. Principles of translation
The Company’s statutory financial statements were originally prepared in adjusted NIS, with its nominal NIS data (presented in Note 17) translated into US dollars, in accordance with the guidelines received from the investor, as follows:
(1) Up to, and including, December 31, 1992:
(a) Balance sheet
Non-monetary items were translated at the exchange rate in effect on the transaction date.
All other assets and liabilities were translated at the exchange rate in effect on the balance-sheet date.
(b) Statement of operations
Revenues and expenses were translated at the representative exchange rate in effect on the transaction date.
Differences arising from translation were included in financing expenses, net.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
A. Principles of translation (Cont.)
(2) Commencing January 1, 1993
Commencing January 1, 1993, the Company’s financial data in nominal NIS was translated into dollars based on Statement No. 52 (“Foreign Currency Translation”) of the US Financial Accounting Standards Board. In this regard, in accordance with a pronouncement issued by the Emerging Issues Task Force (“EITF”), effective January 1, 1993, Israel was no longer considered to have a hyperinflationary economy and, accordingly, effective January 1, 1993, the translation was performed as described below:
Opening balances on January 1, 1993 were derived from the December 31, 1992 financial statements in dollars (translated pursuant to the guidelines mentioned above), which were translated back into NIS based on the representative exchange rate on that date and became the new, nominal basis in NIS. At the end of all reported periods subsequent to January 1, 1993, the nominal NIS financial data has been translated as follows:
(a) Balance sheet
Assets and liabilities have been translated into dollars based on the representative exchange rate in effect as of the respective balance sheet dates. Amounts relating to share capital and receipts on account of shares have been translated into dollars based on the representative exchange rate in effect as of the date of the transaction.
(b) Statement of operations
Revenues and expenses have been translated at average exchange rates during the respective reporting periods.
(c) Differences arising from translation have been recorded as a separate component of shareholders’ deficiency.
(3) See Note 2L for data relating to the representative exchange rate of the dollar.
(4) Dollar amounts herein should not be construed, except where otherwise indicated in the financial statements, as a representation that NIS amounts actually represent or could be converted into dollars.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
A. Principles of translation (Cont.)
(5) NIS amounts in this note are presented for comparative purposes only, and represent the opening balances on January 1, 1993 in NIS as per (2) above, after giving effect to the recording of all transactions since that date in nominal NIS.
B. Condensed consolidated balance sheets
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
C. Condensed consolidated statements of operations
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
D. Condensed statements of changes in shareholders’ deficiency
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
E. Condensed consolidated statements of cash flows
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
Appendix A: -
Adjustments required To Present Cash Flows from Operating Activities
Appendix B -
Non-cash transactions
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 18 -
Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
F. Comparison of shareholders’ deficiency
(1) Translated into dollars using the representative exchange rate as of each balance sheet date.
BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 19 -
Material Difference Between Israeli GAAP and US GAAP
The Company’s consolidated financial statements conform to accounting principles generally accepted in Israel (“Israeli GAAP”), which differ in certain respects from those generally accepted in the United States of America (‘US GAAP”). With respect to these financial statements, the difference between Israeli and US GAAP relates to accounting for the effect of inflation.
In accordance with Israeli GAAP, the Company’s consolidated financial statements through December 31, 2003 are expressed in terms of a uniform monetary unit - the inflation-adjusted new Israeli shekel - which follows an adjustment in respect of the changes in the Israeli CPI. (see Note 2A). This inflation adjustment was required under pronouncements of the Institute of Certified Public Accountants in Israel and reflects the effect of changes in the general price level in the Israeli economy. Such adjustment is not required under US GAAP.
In accordance with Israeli GAAP, the Company’s liability for severance pay is presented in net value, not including liability that is covered by the employees insurance policies. In addition, the Company does not present the deposited funds as an asset in the balance sheet.
In accordance with the US GAAP, the Company’s liability for severance pay should be presented in the amount of NIS 835 thousand and the employees deposited funds should be acknowledged in the Company’s financial statement as of December 31, 2006 as a asset in the amount of NIS 835 thousand.
CORAL WORLD INTERNATIONAL LTD.
Consolidated Financial Statements
as of December 31, 2006
CORAL WORLD INTERNATIONAL LTD.
Consolidated financial statements
as of December 31, 2006
Page
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Balance Sheets
Statements of Income
Statements of Changes in Shareholders’ Equity
Statements of Cash Flows
6 - 7
Notes to the Consolidated Financial Statements
8 - 25
Appendix
List of Subsidiaries and Associated Companies
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS
OF CORAL WORLD INTERNATIONAL LTD.
We have audited the accompanying consolidated balance sheets of “Coral World International Ltd.” (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Board of Directors and management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Board of Directors and management of the Company, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coral World International Ltd. as of December 31, 2006 and 2005, and the results of its operations, changes in shareholders’ equity and changes in cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
- 2 -
CORAL WORLD INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
CORAL WORLD INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
Benjamin Kahn
Benzi Dolev
Member of the Board
CFO
Date: March 22, 2007
The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
CORAL WORLD INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
CORAL WORLD INTERNATIONAL LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(*) See Note 1B.
The accompanying notes are an integral part of the consolidated financial statements.
- 5 -
CORAL WORLD INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
- 6 -
CORAL WORLD INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
Appendix A: Acquisition of subsidiary
Supplementary disclosure of cash flow information
The accompanying notes are an integral part of the consolidated financial statements.
- 7 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES
A.
General
1.
Coral World International Ltd. (hereinafter - “CWI”) was incorporated on December 3, 1987 under the laws of the Island of Guernsey, Channel Islands, for purposes of owning and operating marine parks in various locations. Until May 2006, CWI was owned 50% by Ampal-American Israel Corporation and 50% by Marine Parks Holding Ltd. During May 2006, the subsidiary Red Sea Underwater Observatory Ltd. (hereunder: “RSUO”), paid an amount of NIS 94,500 thousand (US$ 21 million) to Ampal-American Israel Corporation in respect of its shares.
In 2005, the subsidiary held 40% of the shares in Palma Aquarium Holdings B.V. (hereinafter: “Palma”) during the third quarter of 2006 purchased an additional 15% of Palma in an amount of 852 thousand. Since that date, the financial statements of Palma are consolidated with those of the Company.
As used in these financial statements, the term “Company” refers to Coral World International Ltd. and its subsidiaries.
A list of the Company’s investees can be found in the Appendix at the end of these financial statements.
2.
Functional currency
The accompanying financial statements have been prepared in US dollars (“dollars” or “$”). Substantially all of the revenues of CWI’s subsidiaries are received, and substantially all of their operating costs are incurred, in local currencies. The functional currency of CWI is the US dollar and the functional currencies of its subsidiaries are the local currencies in which each such entity operates. The financial statements of the subsidiaries are translated into US dollars in accordance with the principles set forth in Statement of Financial Accounting Standards (“FAS”) No. 52 of the Financial Accounting Standards Board of the United States (“FASB”). Assets and liabilities are translated from the local currencies to dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year.
Gains or losses resulting from translation are included under the caption “accumulated other comprehensive loss”.
3.
Accounting principles
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (US GAAP).
4.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
- 8 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (cont.)
B.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. In these financial statements, the term “subsidiary” refers to a company in which the Company exerts control of more than 50% and the financial statements of which are consolidated with those of the Company. Significant intercompany transactions and balances were eliminated in the consolidation; profits from intercompany sales, not yet realized outside the Group, were also eliminated.
C.
Cash and cash equivalents
The Company considers all highly liquid investments to be cash equivalents. These include short-term (up to three month) bank deposits that are not restricted as to withdrawal or use, and short-term debentures, with original periods to maturity of not more than three months.
D.
Concentration of credit risks - allowance for doubtful accounts
Most of the Company’s revenues are earned in Israel, Australia and Hawaii, and derive from a large number of customers.
In general, the exposure to the concentration of credit risks relating to trade receivables is limited, due to the relatively large number of customers and their wide geographic distribution.
The allowance for doubtful debts is calculated specifically for each debt, the collection of which is considered by management to be doubtful.
E.
Inventories
Inventories are mainly jewelry, souvenirs and other goods, and are stated at the lower of cost or market. Cost is determined on the “first-in first-out” basis.
F.
Investment in affiliated company
Investments in companies in which the Company has significant influence (ownership interest of between 20% and 50%) but less than a controlling interest, which are not subsidiaries, are accounted for by the equity method. Revenues from intercompany sales, not yet realized outside of the Company, were eliminated.
G.
Property and equipment
Property and equipment are stated at cost, net of related investment grants. The assets are depreciated by the straight-line method, on the basis of their estimated useful life.
The Company’s property and equipment are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
- 9 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (cont.)
H.
Deferred income taxes
Deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the tax rates expected to be in effect at the time when these differences reverse. Valuation allowances in respect of the deferred tax assets are provided if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred income tax assets will not be realized.
As stated in Note 18D, the Israeli subsidiary has been granted “approved enterprise” status and, accordingly, upon distribution of dividends by this subsidiary to the Company, such dividends may be subject to tax. The Company does not intend on causing dividend distribution from this subsidiary. Accordingly, no additional tax has been taken into account in respect of such dividends.
Taxes which would apply in the event of disposal of investments in subsidiaries (all foreign subsidiaries) have not been taken into account in computing the deferred taxes, as it is the Company’s policy to continue holding these investments, not to realize them.
I.
Revenue recognition
1.
Revenue from admission fees is recognized upon entrance of visitors to sites managed by the Company’s subsidiaries.
2.
Revenue from sales of merchandise is recognized when merchandise is supplied to the customer.
3.
Revenue from commissions is recognized upon sale of the “attraction” in respect of which the commission is received.
J.
Advertising expenses
Advertising expenses are charged to income as incurred.
K.
Foreign currency transactions and balances
Balances denominated in, or linked to, foreign currency are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statement of income, the exchange rates at transaction dates are used. Transaction gains or loses arising from changes in the exchange rates used in the translation of such balances are carried to financial income or expenses.
L.
Earnings per share
Basic earnings per share are computed by dividing net income by the weighted average number of all management and preferred shares outstanding during the year.
Diluted earnings per share are not presented, since the Company has no potential shares.
M.
Reclassifications
Certain comparative figures have been reclassified to conform to the current year presentation.
- 10 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (cont.)
N.
Comprehensive income (loss)
Comprehensive income (loss), presented in shareholders’ equity, includes, in addition to net income (loss), translation adjustments of financial statements of subsidiaries and affiliated companies.
O.
Recently issued accounting pronouncements
FAS 155 “Accounting for Certain Hybrid Financial Instruments”
In February 2006, the FASB issued FAS 155, Accounting for certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140. This statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.
This statement shall be effective for all financial instruments acquired or issued, or subject to remeasurement (new basis) after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided that no interim period financial statements have been issued for the financial year.
The Company does not expect the adoption of this Statement to have a material impact on its financial position and results of operations.
FAS 156 “Accounting for Servicing of Financial Assets”
In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets” (FAS 156). The statement amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. Consistent with FAS No. 140, FAS 156 requires companies to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract. However, the Statement permits a company to choose either the amortized cost method or fair value measurement method for each class of separately recognized servicing assets. The Statement is effective as of the beginning of a company’s first fiscal year after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements. The Company plans to adopt FAS 156 at the beginning of 2007 and does not expect the adoption of this Statement to have a material impact on its financial position and results of operations.
FIN 48 “Accounting for Uncertainty in Income Taxes-an interpretation of
FASB Statement No. 109”
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.
The Company does not expect the adoption of this Statement to have a material impact on its financial position and results of operations.
- 11 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (cont.)
O.
Recently issued accounting pronouncements (cont.)
FAS 157 “Fair Value Measurements”
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements”. This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. FAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact, if any, the adoption of this statement will have on its financial position and results of operations.
FAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FAS Statements No. 87, 88, 106 and 132(R)”
In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FAS Statements No. 87, 88, 106 and 132(R)”. FAS No. 158 requires the recognition of the funded status of a defined benefit plan in the statement of financial position, requires that changes in the funded status be recognized through comprehensive income, changes the measurement date for defined benefit plan assets and obligations to the entity’s fiscal year end and expands disclosures. The recognitions and disclosures under FAS No. 158 are required as of the end of the fiscal year ending after June 15, 2007, for non-public entities. A non-public entity is also required to certain disclosures in the notes to the financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007. The new measurement date is effective for fiscal years ending after December 15, 2008. The Company is in the process of evaluating the impact of FAS No. 158 on its financial position and results of operations.
FAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS No. 159”)
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This pronouncement permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. The company is currently assessing the impact of SFAS No. 159 on its consolidated financial position and results of operations.
NOTE 2 -
CASH AND CASH EQUIVALENTS
Composition:
- 12 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 3 -
TRADE ACCOUNTS RECEIVABLE
Composition:
NOTE 4 -
OTHER ACCOUNTS RECEIVABLE
B.
See Note 17 regarding an affiliated company held by the Company in the past.
- 13 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
D.
Liens - See Note 12B.
- 14 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
B.
Presented in the balance sheet as follows:
C.
Carryforward tax losses
Carryforward tax losses of an Israeli subsidiary as of December 31, 2006 amount to US$ 2 million.
- 15 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
- 16 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10 -
LONG-TERM LOANS (cont.)
A.
(cont.)
1.
A Euro loan in an amount of  13,464 thousand, repayable in 39 equal quarterly installments commencing in March 2008, and one quote of 20% of the total on the date of expiration. In connection with this loan, a subsidiary undertook the following conventions: - Debt service cover ratio (RCSD):1.25 during the entire period of operations.
2.
A dollar loan in an amount of US$6,000 thousand, payable in equal monthly installments commencing in November 2006. The Credit Agreement requires the subsidiary to comply with certain financial conditions, including (a) Debt Service Coverage Ratio of not less than 3.0 to one; (b) Adjusted Equity of not less than $6,000,000 as of December 31, 2006 and $7,000,000 as of December 31, 2007 and thereafter; (c) Net Cash Reserve of not less than $1,000,000. As of December 31, 2006, the Company has complied with the financial covenants contained in the Credit Agreement. An ALTA-insured first mortgage and a first lien on all leases, rents, other income, and tangible property are pledged as collateral under the terms of this Agreement.
3.
A dollar loan in an amount of US$10,000 thousand, repayable in four equal annual installments commencing in September 2007. In connection with this loan, the subsidiary undertook that during the initial loan utilization period, its total tangible shareholders’ equity (as defined below) would not fall below NIS 100 million (US$23.7 million) and that it would not fall below 25% of the Company’s consolidated balance sheet, as presented in the Company’s consolidated financial statements.
The term “tangible shareholders’ equity” is defined as its paid-in capital, plus retained earnings, plus capital notes and various capital reserves, plus the balance of shareholder loans to the Company and/or loans granted to the Company on behalf of shareholders (including loans taken by the Company from the bank against deposits made by shareholders or anyone on behalf of the shareholders), less the balance of loans granted to shareholders, less the value of intangible assets such as goodwill, patents, etc., less investments in the Company.
The subsidiary undertook that during the initial utilization period of the loan, it will be in possession of a shareholders loan in an amount of US$6 million that was placed/will be placed at the disposal of the Company, including funds deriving from interest and linkage on these loans. For purposes of this item, a loan taken by the Company against deposits made in Union Bank by shareholders or parties on their behalf will be considered as a shareholders loan.
As of the date of the financial statements, the subsidiary was in compliance with the aforementioned undertaking.
B.
Maturity dates:
C.
Liens - see Note 12B.
- 17 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 11 -
LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENTS
A.
Israeli labor laws generally require payment of severance pay upon dismissal of an employee or upon termination by the employee of employment in certain other circumstances. The severance pay liability of the Company to their employees, which reflects the undiscounted amount of the liability, is based upon the number of years of service and the latest monthly salary (one month’s salary for each year worked), and is partly funded by insurance policies and by regular deposits with recognized severance pay funds.
The Company may make withdrawals from the amounts funded only for the purpose of paying severance pay.
Consolidated subsidiaries in Australia deposit 8% of their employees’ salaries into recognized pension funds. This is the minimum required by Australian law.
B.
The liability for employee severance pay includes, as of December 31, 2006, an amount of US$ 569 thousand, which represents the liability to a former employee.
This debt is being paid-off in fixed monthly installments and is expected to be totally repaid through 2017.
C.
Retirement plan
On January 1, 2003, the Hawaiian subsidiary adopted a 401(k) retirement savings plan for all eligible employees who satisfy age and length of service requirements. Eligible employees may make annual contributions limited to the total amount deductible under applicable provisions of the Internal Revenue Code.
On January 1, 2005, the Hawaiian subsidiaries amended the 401(k) retirement savings plan to include a Cash or Deferred Profit Sharing Plan as authorized under the Internal Revenue Code. Employer contributions to this plan amounted to US$ 36,306 and US$ 34,597 for 2006 and 2005, respectively.
NOTE 12 -
CONTINGENT LIABILITIES, COMMITMENTS AND LIENS
A.
Commitments
1.
Agreement with the Israel Nature Reserve Authority
RSUO entered into an agreement with the Israel Nature Reserve Authority (hereafter: “the Authority”) on February 26, 1973, whereby the RSUO received sole rights to build a tourist site in the Eilat Nature Reserve and the right of first refusal should the Authority grant permission to set up another underwater observatory in the Red Sea. The agreement has been amended several times, in light of RSUO’s requests to expand the park and to add additional attractions. The last such amendment was on December 1, 1992.
RSUO’s agreement with the Authority is subject to the lease agreement between the Company and the Israel Lands Administration regarding the area in which the site is located (see Note 6B).
Under the agreement, RSUO undertook to implement reasonable steps to ensure that nothing would be done at the site that would cause damage to or be of a nuisance to the public. RSUO is responsible for any third party damage inflicted in the area of the site and for any damage or injury caused to the Authority, any of its employees or agents at the site or at any other place as a result of performance of RSUO’s work at the site or resulting from the operation of the site, if the damages were caused by RSUO, its employees or agents or by any visitors to the site.
- 18 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 12 -
CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)
A.
Commitments (cont.)
1.
Agreement with the Israel Nature Reserve Authority (cont.)
Under the agreement, RSUO has to operate a site in the Eilat park seven days a week.
The agreement is unlimited in time and leaves no room for the Authority to initiate any changes in the consideration RSUO is required to pay for its license under the agreement. Should RSUO wish to add certain activity to its activities in the Eilat park, it will have to obtain permission to do so from the Authority.
In consideration for the license under the agreement, RSUO pays the Authority, as of the balance sheet date, the following:
a.
5.0% of the price of net admission revenue to the Eilat park.
b.
2.5% of the receipts from restaurants and souvenir sales.
c.
4% of the receipts from cruises.
d.
US$ 25,000 per annum as participation in the expenses of the Authority to employ a marine biologist engaged in the field of nature conservation.
2.
Agreements to sell “attractions”
A subsidiary entered into agreements to set up “attraction counters” (hereinafter - “usage rights agreements”). Under the usage rights agreements, the subsidiary rents space in which it will set up an attraction counter in the lobby of a hotel or a shopping mall, at which it will sell tickets to the Eilat Park and to other attractions in and around Eilat. The rental fee is computed as a percentage of sales, a flat fee, or some combination of the two methods. The subsidiary receives a commission on the sale of tickets to attractions.
B.
Liens
1.
A floating charge in an unlimited amount was registered by RSUO on all of its assets and on all income from the mortgaged assets, in favor of the State of Israel, to secure the repayment of investment grants received under the terms of the Israeli Law for the Encouragement of Capital Investment - 1959.
2.
A specific charge was registered on all RSUO’s property rights in the “Oceanarium” project within the underwater observatory in Eilat, block 40032, part of parcel 2, lot “a”, in favor of the First International Bank of Israel.
3.
A floating charge was registered on all the assets of Maui Ocean Center, Inc. (MOC), on the income from all the mortgaged assets and on all the subsidiary’s rights under agreements and insurance policies, in favor of Bank of Hawaii, in respect of a loan granted by the bank to MOC. As of December 31, 2006, the balance of the loan secured by this charge was $ 5,933 thousand.
4.
A fixed charge, unlimited in amount, was registered on all the equipment, documents, securities and intangible property rights of the Australian subsidiaries and a floating charge, unlimited in amount on all the assets of those companies, in favor of a bank, to secure the repayment of loans from that bank. As of December 31, 2006, the balance of the loans secured by these charges was $ 554 thousand.
- 19 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 12 -
CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)
C.
Contingent liabilities
Investment grant
Certain of RSUO’s installations have received “approved enterprise” status under the Law for the Encouragement of Capital Investment - 1959. Should RSUO not be able to prove that the investments it made were carried out in accordance with the terms of the approved plans, the Israel Investment Center is entitled to demand repayment of the investment grants received, plus interest and linkage differentials from the date the grants were received. Furthermore, RSUO will have to repay any tax benefits it received (accelerated depreciation and lower tax rates). As of the date of the preparation of the financial statements, RSUO has not received all the final permits from the Investment Center. In the opinion of RSUO management, RSUO is in compliance with the stipulated terms.
NOTE 13 -
SHAREHOLDERS’ EQUITY
A.
The “A” and “B” management shares are the only voting shares and hold equal voting rights. The holders of a majority of the “A” management shares elect one-half of the Board and the holders of a majority of the “B” management shares elect the other half. The “C” Preference Shares have no rights except to receive dividends, if declared.
B.
See Note 1A.
NOTE 14 -
COST OF SALES
(*)
See Note 12A1.
NOTE 15 -
SELLING EXPENSES
- 20 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 16 -
GENERAL AND ADMINISTRATIVE EXPENSES
NOTE 17 -
OTHER EXPENSES, NET
(*)
In 1999, RSUO, together with others, established a company named Amazing World Ltd. (hereinafter - “Amazing”), which set up a tourist attraction in Eliat. RSUO held 33% of the share capital of Amazing.
During 2004, Amazing was liquidated. In 2005 and 2004, RSUO paid amounts of US$ 145 thousand and US$ 46 thousand, respectively, in excess of its investment in Amazing.
As at December 31, 2005, RSUO does not have any liabilities or guarantees in respect to Amazing.
NOTE 18 -
TAXES ON INCOME
A.
Composition:
- 21 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 18 -
TAXES ON INCOME (cont.)
B.
Reconciliation of income tax presented in the financial statements to the theoretical tax computed at the average tax rate in the countries in which the Company operates:
C.
Tax assessments
RSUO has received tax assessments that are considered final, for the years up to and including the 2002 tax year. The other subsidiaries have not been assessed since incorporation.
D.
The provision in RSUO’s balance sheet was computed based on the fact that some of RSUO’s installations were recognized as “approved enterprises” and are entitled to reduced tax rates and accelerated depreciation for stipulated periods of time, in accordance with the Israeli Law for the Encouragement of Capital Investments - 1959. The following is a tabulation of the benefits granted under the approved plan:
1.
Approved plan
2.
Accelerated depreciation
RSUO was entitled to accelerated depreciation in respect of buildings and equipment of approved enterprises at rates of 400% and 200% of the ordinary depreciation rates on these assets, respectively, for the first five years of the operation of the assets.
3.
Reduced tax rates
RSUO was liable for corporate tax at a rate of 10% (instead of 35%) on the taxable income attributable to the approved enterprises under the “grants” track for the entire benefits period, subject to the percentage of RSUO held by foreign investors.
- 22 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 19 -
TRANSACTIONS WITH RELATED AND INTERESTED PARTIES
A.
Balances
B.
Transactions
NOTE 20 -
ADDITIONAL INFORMATION REGARDING FINANCIAL INSTRUMENTS
A.
The Company has financial assets which include, inter alia, cash and cash equivalents and accounts receivable and other debit balances, and financial liabilities which include, inter alia, short and long-term credit from banking institutions and other accounts payable.
The fair value of the financial instruments included in the financial statements of the Company does not materially differ from their value as presented in the financial statements.
B.
The interest risk is the risk involved in changes in interest rates and the effect of such changes on the financial instruments presented as part of the short and long-term liabilities. See Notes 8 and 10.
C.
The Company operates internationally, which gives rise to exposure to risks from changes in foreign exchange rates in relation to the functional currencies of the applicable subsidiaries.
- 23 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 21 -
SEGMENT DATA
Geographic segments:
(*)
Including Palma Aquarium Holding B.V. See Notes 5 and 18.
- 24 -
CORAL WORLD INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 21 -
SEGMENT DATA (cont.)
Geographic segments (cont.):
Assets serving the segments:
- 25 -
CORAL WORLD INTERNATIONAL LTD.
Appendix to the Financial Statements
List of Investee
- 26 -
OPHIR HOLDINGS LTD.
(An Israeli Corporation)
2006 ANNUAL REPORT
OPHIR HOLDINGS LTD.
2006 ANNUAL REPORT
Page
REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3-4
Statements of income (loss)
Statements of changes in shareholders' equity
Statements of cash flows 7-8
Notes to financial statements 9-29
REPORT OF INDEPENDENT AUDITORS To the shareholders of
OPHIR HOLDINGS LTD.
We have audited the consolidated financial statements of Ophir Holdings Ltd. and its subsidiaries (the “Company”): balance sheets as of December 31, 2006 and 2005 and the related statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005 and the consolidated results of operations and cash flows of the Company for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in Israel.
As explained in note 1b, the financial statements referred to above are presented in new Israeli shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board.
Accounting principles generally accepted in Israel vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 13 to the consolidated financial statements.
Tel-Aviv, Israel
29 March, 2007
Kesselman & Kesselman
Certified Public Accountants (Isr.)
OPHIR HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
(
--------------
(
DIRECTORS (
(
--------------
(
Date of approval of the financial statements: March 29, 2007
The accompanying notes are an integral part of the consolidated financial statements.
OPHIR HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
The accompanying notes are an integral part of the consolidated financial statements.
OPHIR HOLDINGS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
(Continued) - 1
OPHIR HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded) - 2
OPHIR HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(b) Additional information with respect to investing and financing activities not involving cash flows
a. Receivables include amounts of NIS 861,000 and NIS 515,000 that have been deposited in trust accounts. These amounts relate to the consideration received from the sale of buildings sold in 2005 and 2003 respectively. These amounts did not appear in the statements of cash flows for the above-mentioned years, and will be reflected in the statement of cash flows when the deposits are repaid. During the course of the reported period, the respective amounts of NIS 6.128 million and NIS 3.309 million were received from the above trust accounts; these amounts were reflected in the statement of cash flows from investing activities.
b. In the wake of a resolution by the Board of Directors dated February 15, 2006, the Company paid a dividend of NIS 55 million during the first quarter of 2006. The dividend paid was offset against the shareholders’ outstanding debit balances.
The accompanying notes are an integral part of the consolidated financial statements.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis,are as follows:
a. General:
1) Ophir Holdings Ltd. (“the Company”) is a holding and investment company. The subsidiary Merkazim Investments Ltd. is engaged in the renting of commercial buildings. In 2003, this company sold all its holdings in the commercial buildings that were designated for rent.
The subsidiary, New Horizons (1993) Ltd., holds a number of real estates (designated for sale), which were purchased from a previous related party, see also note 7(2).
As to the activities of the associated companies, see note 3c.
2) Definitions:
Subsidiary - a company controlled or owned to the extent of over 50%, the financial statements of which have been consolidated with the financial statements of the Company.
Associated company - a company controlled to the extent of 20% or over (which is not a subsidiary), or a company less than 20% controlled which complies with the condition relating to “significant influence”, as prescribed by Opinion 68 of the Institute of Certified Public Accountants in Israel (the “Israeli Institute”), the investment in which is presented by the equity method.
Other company -
a company to which the conditions specified in the preceding paragraphs do not apply.
The Group - the Company, its subsidiaries and its associated companies.
Related parties - as defined in Opinion 29 of the Israeli Institute.
3) Principles of accounting
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 13.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
b. Financial statements presentation basis
The company draws up and presents its financial statements in Israeli currency (hereafter - shekels or NIS), in accordance with the provisions of Israel Accounting Standard No. 12 - “Discontinuance of Adjusting Financial Statements for Inflation”- of the IASB, which establishes principles for transition to nominal reporting, commencing January 1, 2004 (hereafter - the transition date). Accordingly, amounts that relate to non-monetary assets (including depreciation and amortization thereon)/ investments in associated companies / “permanent” investments/ and equity items, which originate from the period that preceded the transition date, are based on the adjusted-for-inflation data (based on the CPI for December 2003), as previously reported. All the amounts originating from the period after the transition date are included in the financial statements at their nominal values.
c. Principles of consolidation:
1) The consolidated financial statements include the accounts of the Company and its subsidiaries. The companies included in consolidation are listed in note 2.
2) Intercompany balances and transactions have been eliminated.
d. Short term investments - marketable securities
These securities are stated at market value.
The changes in value of the above securities are carried to income.
e. Land - business inventory
The land is presented at cost, which - in managements’ estimation - is lower than market value.
According to the agreements for the purchase of land, the Company might pay additional costs of up to 90% of the net sale proceeds, see also note 7(2).
f. Investments:
1) Associated companies:
(a) The investments in these companies are accounted for by the equity method. The company reviews - at each balance sheet date - whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of its investment in associated companies. The balance of the investment as of December 31, 2006 is presented net of a provision for the impairment in value of an associated company, see i. below and note 3.
(b) The excess of cost of the investment in associated companies over the Company’s share in their equity in net assets at date of acquisition (“excess of cost of investment”) represents the amount attributed to land and buildings. The amount attributed to buildings is amortized in equal annual installments of 4% per year. The above associated companies were sold during the course of 2005.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Other companies
The investments in the shares of these companies, are stated at cost, net of impairment for decrease in value, which is not of a temporary nature.
g. Deferred income taxes:
1) Deferred taxes were computed in respect of differences between the amounts presented in these statements and those taken into account for tax purposes. As to the factors in respect of which deferred taxes have been included - see note 9b.
Deferred tax balances were computed at the tax rate expected to be in effect at time of release to income from the deferred tax accounts. The amount of deferred taxes presented in the income statement reflects changes in the above balances during the year.
2) Taxes which would apply in the event of disposal of investments in subsidiaries and associated companies have not been taken into account in computing the deferred taxes, since as of the date of approval of these financial statements it is the Company’s policy to hold these investments, not to realize them.
h. Revenue recognition
Income from leasing of buildings was recognized on the accrual basis, in accordance with the terms of the agreements with tenants.
i. Impairment of assets:
The company reviews - at each balance sheet date - whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of fixed assets and identifiable intangibles, including goodwill. When such indicators of impairment are present, the company evaluates whether the carrying value of the asset in the company’s accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records an impairment provision up to the amount needed to adjust the carrying amount to the recoverable amount.
The recoverable value of an asset is determined according to the higher of the net selling price of the asset or its value in use to the company. The value in use is determined according to the present value of anticipated cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal.
The impairment loss is carried directly to income. Where indicators are present that beneficial events have occurred or beneficial changes in circumstances have taken place, the impairment provision in respect of the asset (other than goodwill) may be cancelled or reduced in the future, so long as the recoverable value of the asset has increased, as a result of changes in the estimates previously employed in determining such value.
During 2006 the Company recorded an impairment charge on its investment in other companies of NIS 452 thousand, see also note 4 (2005 - NIS 4,571 thousand).
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
j. Cash equivalents
The Group considers all highly liquid investments, which include short-term bank deposits (up to three months from date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents.
k. Loss per NIS 1 of par value of shares
The financial statements do not include data regardingloss per NIS 1 of par value of shares, since the data would not provide significant additional information to that otherwise provided by the financial statements.
l. Format of income statements
In view of the nature of the Company’s activities - holding of companies which operate in different fields - the Company is of the opinion that concentrated presentation of all revenue and gain items as a group, and of all expense and loss items in a separate group is more suitable to reflect its activities.
m. Linkage basis
Balances the linkage arrangements in respect of which stipulate linkage to the last index published prior to date of payment are stated on the basis of the last index published prior to the latest balance sheet date (the index for November).
n. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates.
o. Dividend declared subsequent to balance sheet date
Liabilities relating to dividends declared subsequent to balance sheet date are included in the accounts for the period in which the declaration was made. The amount declared is appropriated, however, from retained earnings, and reported as a separate item in the shareholders’ equity - “Dividend declared subsequent to balance sheet date”.
p. Recently issued accounting pronouncements in Israel:
1) Israel Accounting Standard No. 29 - “Adoption of International Reporting Financial Standards (IFRS)"
In July 2006, the Israel Accounting Standards Board issued Israel Accounting Standard No. 29 - “Adoption of International Reporting Financial Standards (IFRS)” (hereafter - Standard 29). Standard 29 stipulates that companies, which are subject to the Securities Law, 1968 and are required to report pursuant to regulations issued thereunder, shall draw up their financial statements under International Financial Reporting Standards (IFRS) with effect from reporting periods commencing on January 1, 2008 (i.e.. commencing the financial statements for the first quarter of 2008). Pursuant to the provisions of Standard 29, such companies and other companies may elect early adoption of the Standard, and prepare their financial statements under IFRS, commencing with the financial statements that are published subsequent to July 31, 2006.
OPHIR HOLDINGS LTD.NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
The standard prescribes that companies, which currently do not draw up their financial statements under IFRS, and are required or elect, as stated above, to prepare their financial statements for the first time under IFRS, shall apply the provisions specified in International Financial Reporting Standard No. 1 (“IFRS 1”) - “First-Time Adoption of International Financial Reporting Standards” in making the transition. IFRS 1, which deals with first-time transition to reporting under IFRS, provides that, in the first annual financial statements that are drawn up under IFRS (including the interim financial statements for that year), all the latest IFRS standards in effect at the end of the reporting year in which the company reports under IFRS for the first time, shall be applied retrospectively (with the exception of certain exemptions and prohibitions, as referred to below). IFRS 1 specifies two groups of exceptions to the principle of retrospective application: (1) exemptions from mandatory retrospective application with regard to certain topics, while providing the option to utilize all or part of those exemptions, and (2) prohibitions concerningmandatory retrospective application with regard to defined topics. Pursuant to the provisions of IFRS 1, the first financial statements drawn up under IFRS shall include at least one year’s comparative data. Accordingly, a company that draws up its financial statements under IFRS for the first time for periods commencing after January 1, 2008, and elects to present comparative data for one year only, shall be required, pursuant to IFRS 1, to prepare an opening balance sheet as of January 1, 2007, which shall be drawn up under IFRS. In preparing this opening balance sheet, all the latest IFRS standards, as referred to above, with regard to recognition, non-recognition, classification and measurement of all the company’s assets, liabilities and shareholders’ equity items, shall be applied. IFRS 1 also establishes certain disclosure requirements that apply to the annual financial statements that are drawn up for the first time under IFRS. Pursuant to these disclosure requirements, companies applying IFRS for the first time are required to explain what effect the transition from the previous generally accepted accounting principles to IFRS has had on the reported financial position, operating results and cash flows. Also, companies are required to include notes providing reconciliations of the data reported under the previous accounting principles, to the data reported under IFRS, in respect of their shareholders’ equity and statements of income (loss) as of certain dates and for certain prior periods.
In addition, Standard 29 requires companies, which draw up their financial statements under IFRS for the first time for periods commencing after January 1, 2008, to disclose, in a note to their financial statements for 2007, the balance sheet data as of December 31, 2007 and income statement data for the year ended December 31, 2007, as they would appear after applying IFRS recognition, measurement and presentation rules.
IFRS differ from general accounting principles accepted in Israel and, accordingly, financial statements drawn up under IFRS might reflect a financial position, operating results and cash flows that are significantly different from those presented in these financial statements. Application of IFRS requires a proper arrangement from the company, including making certain decisions relating to the manner of determining assets and liabilities at the transition date and with regard to setting an accounting policy for various topics. The company is currently assessing the implications of the transition to reporting under IFRS, including the date for first-time adoption of IFRS by the company. At this stage, the company is unable to estimate the effect that the adoption of IFRS will have on its financial statements
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Israeli Accounting Standard No. 23 - “Accounting Treatment Applied to Transactions between an Entity and its Controlling Shareholder”.
In December 2006, the IASB issued Accounting Standard No. 23 - “Accounting Treatment Applied to Transactions between an Entity and its Controlling Shareholder”
The standard, which does not obligate entities that are not subject to the Securities Law, 1968, provides that assets and liabilities, in respect of which a transaction was carried out between an entity and its controlling shareholder, shall be measured at the date of transaction at their fair value, and the difference between fair value and the consideration set in the transaction shall be carried to shareholders’ equity.
Those provisions replace the requirements of the Securities Regulations (Presentation of Transactions between an Entity and its Controlling Shareholder in Financial Statements), 1996, whereunder, assets transferred as above would be measured at their carrying amount in the transferor’s accounts, while the difference between this value and the consideration set in those transactions is carried to shareholders’ equity.
Under the provisions of the standard, in case the difference between fair value and the consideration arises from a benefit granted by the controlling shareholder to the entity controlled thereby, the said difference shall be credited to capital surplus within the entity’s shareholders’ equity; while in case the said difference arises from a benefit granted by the entity to its controlling shareholder, such difference shall be carried to the entity’s retained earnings.
In addition, the difference between the fair value of the asset and its carrying amount in the transferor’s accounts shall be recognized as a gain or loss in the transferor’s accounts.
Under the standard, differences as above, arising in the financial statements of an entity as a result of a transaction with its controlling shareholder, and carried to retained earnings or capital surplus, shall constitute, from the controlling shareholder’s point of view , an owners’ withdrawal or an owners’ investment, respectively, and shall be presented accordingly in the financial statements of the controlling shareholder.
The standard includes specific provisions pertaining to assets transfers, assuming liabilities, indemnification and waiver and the grant or receipt of loans. The standard also sets a hierarchy for the measurement of fair value and includes disclosure requirements as to the nature and scope of transactions between an entity and its controlling shareholder, occurring during the reported period, as well as to the effect of these transactions on the entity’s income or loss for the reported period and its financial position.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
The standard shall apply to all transactions taking place between an entity and its controlling shareholder, except for a business combination under common control, that would be carried out subsequent to January 1, 2007. In addition, the standard would apply to a loan granted to a controlling shareholder or received therefrom, prior to the abovementioned effective date of the standard; the standard would apply to such a loan commencing the standard’s effective date.
At this stage, the company is examining the effect of the application of the standard on the financial statements. In the opinion of the company, the application of the standard is not expected to have a material effect on the financial statements in the coming periods.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 -
INVESTMENTS IN SUBSIDIARIES
Following is a list of the subsidiaries consolidated in Ophir’s financial statements:
Wholly-owned:
Ophir Financing Ltd. - inactive;
Maoz Financial Investments Ltd. ("Maoz") - inactive;
Merkazim Investments Ltd. ("Merkazim") a wholly-owned subsidiary of Maoz. During 2005 Merkazim ceased its activity.
80%-owned - New Horizons (1993) Ltd. ("New Horizons").
NOTE 3 -
INVESTMENTS IN ASSOCIATED COMPANIES:
a. The investments are composed as follows:
(1) Including accumulated erosion of capital notes and gains on dilution of holding in associated companies resulting from issuance of shares to a third party.
(2) As of December 2006 the loans are linked to the Israeli CPI, bear interest at annual rates of 12% -6.5% and have no fixed maturity date.
b. The changes in the investments in 2006 are as follows:
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -
INVESTMENTS IN ASSOCIATED COMPANIES (continued):
c. Following are details relating to the associated companies:
1) Mivnat Holdings Ltd. (“Mivnat”)
Mivnat was established in March 1993 by the Company, the subsidiary Merkazim and others, some of whom were interested parties, in order to acquire the Israeli Government’s shares in Industrial Buildings Ltd. (“Industrial Buildings”). During March 1993, Mivnat acquired these shares in consideration of NIS 1,053 million. Ophir holds 18.75% interest in Mivnat directly, and 25% interest jointly with Merkazim.
On December 31, 1998, Mivnat sold its holdings in Industrial Buildings to its shareholders (including the Company). Upon the consummation of the transaction, Mivnat ceased to have any rights in the shares of Industrial Buildings.
During 2005, the Company realized all of its shares in Industrial Buildings.
2) Lysh The Coastal High-way Ltd. (“L1”)
In June 1999, the Company entered into an investment agreement with Lysh Commercial and Road Services Ltd. (“L2”), a company controlled by Polar Investments Ltd. - an interested party in the Company, and with L1, a wholly-owned subsidiary of L2.
L1 has a 50% holding in Beit Herut-Lysh Development Company Ltd. (“BHL”), which has invested in a project for the leasing of commercial premises near Moshav Beit Herut (the “project”).
BHL developed 16,850 square meters of land owned by the Israel Lands Administration (the “Administration”), in accordance with resolution 717 of the Administration. A commercial project occupying approximately 10,000 square meters was constructed on that land initially, and there is an option to construct an additional 4,000 square meters at a later stage. The Company’s share in L1 is approximately 25% (its share in the project being approximately 12.5%). The project commenced in March 2000. As of December 31, 2006 and 2005, the Company invested in L1 approximately NIS 5.5 million.
The Company has also undertaken to provide guarantees in an amount equivalent to 25% of the construction costs. As of December 31, 2005, the Company’s share in the guarantees refer to the loans made to BHL amounts to approximately NIS 16 million.
The auditors of L1, while not qualifying their opinion on L1‘s financial statements for 2005, drew attention to the financial position of BHL, whose financial statements presented a loss of approximately NIS 3.5 million (net of financial expenses in the amount of NIS 5.6 million) and negative working capital amounting to approximately NIS 3.7 million at December 31, 2006.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 -
INVESTMENTS IN ASSOCIATED COMPANIES (continued):
In 2006, Laish Coastal Road Ltd. granted Laish Freedom House Ltd. shareholders' loans totaling approximately NIS 2.6 million (2005 - approximately NIS 2 million).
During the course of 2005, the bank agreed to defer the capital repayments for 2005 and to spread these repayments over a period ending no later than March 31, 2006. The remaining outstanding balance will become repayable over a seventeen-year period ending on December 31, 2022.
BHL’s management believes that the execution of the aforementioned arrangements will guarantee the continuance of BHL’s regular operations.
In 2004, the Company wrote down its investment in BHL Company by NIS 950,000.
NOTE 4 -
INVESTMENTS IN OTHER COMPANIES:
a. Memadim was established in 1995 by the Company, along with a group of companies, one of which is Industrial Buildings, for the purpose of real estate development. The Company directly holds 10% of the ownership and control of Memadim. see also note 7(1).
During the course of 2006, the Company recorded a provision for an impairment of investment which has been occured this year in an amount of NIS 373,000 (2005 - NIS 4.571 million).
In July 2006, the Company entered into an agreement with Industrial Structures whereby the Company assigned to Industrial Structures for a consideration of NIS 1, all of its rights in Maimadim, including the shareholders’ loans but excluding its holding in the shares of that company. It was also agreed that Industrial Structures would take over the obligation of the Company with respect to the guarantees provided to banks in connection with the above investment, and would endeavor to persuade the banks to agree to the proposed change of guarantor (see also note 7(1)). As of the date of the above financial statements, the procedures for introducing a substitute guaranties had not yet been completed.
OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 -
INVESTMENTS IN OTHER COMPANIES (continued):
b. Mahalachim is a venture capital fund; the Company holds approximately 3.5% of shares therein. In 2004, the Company received a dividend in the amount of NIS 3,255,000 from Mahalachim. The share of the dividend that was carried to income amounted to NIS 1,320,000. The balance of the amount was used to reduce the amount of the investment.
During the reported year, Mahalachim realized its investment in Valor Ltd. for approximately NIS 59.4 million, thereby completing the sale of all its significant shareholdings. In June 2006, the Board of Directors of Mahalachim resolved upon the payment of a dividend of approximately NIS 36.4 million. The Company’s share of this dividend amounted to approximately NIS 1.3 million, which sum was offset against the cost of the investment in Mahalachim.
During the course of the reported year, the Company made a provision for impairment of value with respect to the balance of its investment in Mahalachim.
NOTE 5 -
LONG-TERM BANK LOANS:
a. The loans are linked to the Israeli CPI and bear interest at the annual rate of 4%.
b. An early repayment of 26.3 million (the balance of the said loans) was made in January and February 2006.
NOTE 6 -
CAPITAL NOTES:
a. On December 31, 1998, the Company and a subsidiary, Merkazim, issued capital notes to Mivnat with a par value of NIS 113,770,000 and NIS 37,831,000, respectively. The capital notes are unlinked and interest-free.
Capital notes with an aggregate par value of NIS 151,351,000 are repayable at par, upon demand of Mivnat, on January 1, 2005 and only on that date. After balance sheet date, the shareholders of Mivnat decided to extend the repayment date until January 1, 2007. The balance of the capital notes, NIS 250,000 par value, is repayable annually under the terms stipulated in the agreement.
b. On December 31, 1998 and on June 30, 2004, the Company issued capital notes to its subsidiary with a par value of NIS 37,769,000 and NIS 25,409,000, respectively. The capital notes are unlinked and interest-free, and are repayable at par, upon demand, on January 1, 2005 and only on that date. After balance sheet date, the shareholders of Merkazim decided to extend the repayment date until January 1, 2007.
c. In 2002, the subsidiary New Horizons issued capital notes with a par value of NIS 119,000 and NIS 1,069,000 to the Company and the minority shareholder in the subsidiary, respectively. the Company and the minority shareholder in the subsidiary are entitled to receive from New Horizons the principal of the note, without interest or linkage, this after a period of not less than one year.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 -
COMMITMENTS, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES:
1) The Company has undertaken to invest in Memadim (see note 4b) approximately 10% of the cost of land and construction of a rental project which is constructed by Memadim on the Carmel shore. The investment was made partly through investment in Memadim (mainly shareholders’ loans), and partly by way of a guarantee provided. As of December 31, 2006, the Company had provided guarantees totaling approximately NIS 9 million in respect of bank loans made available to Maimadim. With respect to the assignment of the rights in Maimadim, including the shareholders’ loans made to that company, to Industrial Structures, and the removal of the Company from the list of guarantors, see note 4b.
2) In December 1996, the subsidiary New Horizons acquired real estate (designated for sale) from a then interested party, which holds 20% of New Horizons’ shares. The selling company will be entitled to 90% of the profits from the subsequent sale of the real estate, with the balance accruing to New Horizons. The registration of the real estate in New Horizons’ name in the Land Registry has not yet been completed.
On December 4, 2005, the subsidiary was granted an irrevocable option to sell all the rights in the real estate inventory that it owns for a consideration of 17,330 thousands dollar. The option period is limited to June 15, 2006. The subsidiary had not exercised the option granted to it.
3) As to the Company’s commitment to grant guarantees to BHL, see note 3c(2).
4) The Company and a subsidiary receive various services from the shareholders in Ophir, including management services, head office services, bookkeeping and legal services. As to the expenses recorded in respect of such services, see note 10.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 -
SHARE CAPITAL:
a. Composed at December 31, 2006 and 2005 as follows:
* The deferred shares confer upon their holders the right to receive their par value upon liquidation of the Company.
b. In February 2005 the Company’s board of directors resolved to distribute its shareholders the balance of the shares of Industrial Buildings (amounting to NIS 80,930 thousands) as a dividend in kind. Also, the Company distributed its shareholders a cash dividend of NIS 9,990 thousands.
Also, on October 16, 2005, the Company’s board of directors resolved to distribute the shareholders a dividend in the total amount of NIS 82 million. For the purpose of distributing this dividend, the Company requested the Court to approve a deduction of capital for the Company in an amount of up to NIS 64 million. On November 29, 2005, the Court approved the said request.
At a later date, in order to clarify the board of directors’ resolution dated October 16, 2005 and the Company’s shareholders’ resolution dated November 6, 2005 to approve a certain amount out of which the Company would distribute its shareholders a dividend in the total amount of up to NIS 82 million for the years 2005 and 2006 and in light of the Tel-Aviv District Court’s resolution to approve a distribution of dividend that does not meet the criteria of the “profit test” as required under Section 303 of the Companies Law, 1999 and also since in December 2005 the owners of the Company resolved that the declaration and distribution of the dividend will take place in 2005 and 2006, the board approved in February 2006 the declaration and distribution of dividend to the shareholders, as follows: a total of NIS 20 million paid in cash on December 28, 2005 and a total of NIS 55 million on January 8, 2006.
c. On January 17, 2007, the Company’s Board of Directors approved the payment of a dividend of approximately NIS 10.3 million. In connection with the payment of this dividend, the Company applied for the consent of the court to a capital reduction of approximately NIS 10 million (under Section 302 of the Companies Law, the Company was, in any event, entitled to pay a dividend out of capital of NIS 0.3 million). On February 27, 2007, the court issued its consent to the reduction of capital.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 -
TAXES ON INCOME:
a. Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments ) Law, 1985 (hereafter - the inflationary adjustments law)
Under the inflationary adjustments law, results for tax purposes are measured in real terms, having regard to the changes in the Israeli CPI. The Company and its Israeli subsidiaries are taxed under the inflationary adjustments law.
b. Deferred income taxes:
The composition of the deferred taxes, and the changes therein during the reported years, are as follows:
Deferred taxes are presented in the balance sheets as long-term liabilities.
c. Taxes on income included in the income statements:
1) As follows:
For tax rates amendment see (e) below.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 -
TAXES ON INCOME (continued):
2) Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see (1) above), and the actual tax expense:
d. Tax assessments
The Company has received final assessments through tax year 2001.
Subsidiaries:
Merkazim - final assessments has been received through tax year 2003.
New Horizons -assessments that are considered as final through tax year 2001.
Ophir Financing Ltd. - assessments that are considered as final through tax year 2001.
e. Tax rates
The Company’s income in Israel is subject to the regular corporate tax rate; until December 31, 2003, a corporate tax rate of 36% was applied. In July 2004, an Amendment to the Income Tax Ordinance was published, which determined, inter alia, that the rate of corporate tax will be gradually reduced from 36% to 30%, in the following manner: the rate for 2004 will be 35%, in 2005 - 34%, in 2006 - 32%, and in 2007 and thereafter - 30%.
In August 2005, a further amendment (No. 147) was published, which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as follows: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 -27%, 2009 - 26% and for 2010 and thereafter - 25%.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 -
TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
a. Transactions with related parties:
As to other transactions with, and commitments to, interested parties, see note 7.
b. Balances with related parties:
1) Receivables:
(1) The loan is linked to the Israeli CPI and bears no interest.
During the reported year, the Company repaid approximately NIS 7.3 million to the interested party.
(2) The loans are linked to the Israeli CPI and bear annual interest at the rate of 12% - 6.5%.
As to current balances with associated and other companies, see note 12a.
2) Long-term liability in respect of acquisition of land - business inventory - is linked to the Israeli CPI and bears no interest.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 -
LINKAGE OF MONETARY BALANCES:
a. As follows:
b. Data regarding the exchange rate and the Israeli CPI:
* Based on the index for the month ending on each balance sheet date, on the basis of 1993 average = 100.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 -
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
Balance sheets:
d. Concentrations of credit risks
The Group’s cash and cash equivalents and short-term investments at December 31, 2006 and 2005 are deposited with Israeli banks. The Company is of the opinion that the credit risk in respect of these balances is remote.
e. Fair value of financial instruments
The fair value of financial instruments included in the working capital of the Group is usually identical or close to their carrying value. The fair value of long-term loans to associated and other companies and long-term bank loans also approximates their carrying value, since they bear interest at rates close to prevailing market rates. The determination of the fair value of the capital notes to an associated company and a subsidiary and long-term liabilities in respect of acquisition of land - business inventory is not practical.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 -
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
f. Financial expenses (income) - net:
NOTE 13 -
EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A.:
a. General:
1) The Company prepares its financial statements in accordance with Israeli GAAP. As applicable to these financial statements, Israeli GAAP and U.S. of America GAAP vary in certain significant respects, as described below:
2) Effect of inflation
In accordance with Israeli GAAP, through December 31, 2003, the Company comprehensively included the effect of the changes in the general purchasing power of Israeli currency in these financial statements, as described in note 1b. In view of the past inflation in Israel, this was considered a more meaningful presentation than financial reporting based on historical cost.
Under US GAAP Israel is not considered to be a highly inflationary country, thus the measurement currency should be in nominal NIS.
The adjustments to reflect the changes in the general purchasing power of Israeli currency have been reversed in the reconciliation of Israeli GAAP to U.S. GAAP.
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE13 -
EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A.:
3) Investment in marketable securities
In accordance with Israeli GAAP, since the Company’s intent was to hold some of the investment as an investment for a long period, it was partly stated at cost, net of impairment for decrease in value, which was other than temporary decline in their value. During 2005 the company sold its investment.
Under U.S. GAAP, this investment was classified as an investment in available for sale and was reported at fair value with unrealized gains and losses, recorded as a separate component of other comprehensive income (loss) in shareholders’ equity until realized in 2005.
b. The effect of the material GAAP differences, as described in a. above, on the consolidated financial statements is as follows:
1) Operating results:
OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 -
EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A.:
2) Shareholders’ equity:
3) The effect of the foregoing GAAP difference on reporting comprehensive income, is as follows:
OPHIRTECH LTD.
(An Israeli Corporation)
2005 ANNUAL REPORT
OPHIRTECH LTD.
2005 ANNUAL REPORT
Page
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS - IN NEW ISRAELI SHEKELS (NIS):
Balance sheets
Statements of operations
Statements of changes in shareholders’ equity
Statements of cash flows
Notes to financial statements
7-19
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
OPHIRTECH LTD.
We have audited the financial statements of Ophirtech Ltd. (hereafter - the Company): balance sheets as of December 31, 2005 and 2004 and the related statements of income, changes in shareholders’ equity and cash flows for the three years ended December 31, 2005. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the results of operations and cash flows of the Company for the three years ended December 31, 2005, in conformity with accounting principles generally accepted in Israel.
As explained in note 1b, the financial statements, as of dates and for reporting periods subsequent to December 31, 2003, are presented in new Israeli shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board. The financial statements as of dates and for reporting periods ended prior to, or on, the above date are presented in values that have been adjusted for the changes in the general purchasing power of the Israeli currency through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 7 to the financial statements.
Tel-Aviv, Israel
Kesselman & Kesselman
March 27, 2006
Certified Public Accountants (Isr.)
OPHIRTECH LTD.
BALANCE SHEETS
)
Avi Israel
)
)
DIRECTORS
)
Shlomo Shalev
)
Date of approval of the financial statements: March 27, 2006
The accompanying notes are an integral part of the financial statements.
OPHIRTECH LTD.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
OPHIRTECH LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of the financial statements.
OPHIRTECH LTD.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis, are as follows:
a.
General:
1)
Ophirtech Ltd. (the “Company”), invests in start-up companies in various stages of development, from newly established enterprises to companies that have reached advanced development stage.
On March 30, 2000, the Company purchased investments in high-tech companies engaged in various fields of activity (communications, software, security, etc.) from Ophir Holdings Ltd. (“Ophir Holdings”), which at that time was a company under common control, for approximately adjusted NIS 76 million. The difference between the proceeds and the carrying value of those investments on the books of Ophir Holdings was carried to the Company’s accumulated deficit, in accordance with the Israeli Securities (Presentation in Financial Reports of Acts between Body Corporate and its Controlling Member) Regulations, 1996.
2)
Related parties - as defined in Opinion 29 of the Israeli Institute.
3)
Principles of accounting
The financial statements have been prepared in accordance with accounting principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 7.
b.
Financial statements presentation basis:
The company draws up and presents its financial statements in Israeli currency (hereafter - shekels or NIS).
1)
Transition to nominal financial reporting in 2004
With effect from January 1, 2004, the company has adopted the provisions of Israel Accounting Standard No. 12 -“Discontinuance of Adjusting Financial Statements for Inflation” - of the Israel Accounting Standards Board (hereafter -the IASB) and, pursuant thereto, the company has discontinued, from the aforesaid date, the adjustment of its financial statements for the effects of inflation in Israel.
The amounts adjusted for the effects of inflation in Israel, presented in the financial statements as of December 31, 2003 (hereafter - “the transition date”), were used as the opening balances for the nominal financial reporting in the following periods. Additions made after the transition date have been included in the financial statements at their nominal values.
Accordingly, the amounts reported for 2003, as well as reported amounts for subsequent
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
b.
Financial statements presentation basis (continued):
periods, that relate to non-monetary assets including “permanent” investment and equity items, which originate from the period that preceded the transition date, are based on the adjusted-for-inflation data (based on the CPI for December 2003), as previously reported. All the amounts originating from the period after the transition date are included in the financial statements at their nominal values.
Through December 31, 2003, the company prepared its financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of Israeli currency (“NIS”), based upon changes in the consumer price index (hereafter - the CPI), in accordance with pronouncements of the Institute of Certified Public Accountants in Israel (hereafter - the Israeli Institute).
In 2003, the components of the income statements were, for the most part, adjusted as follows: the components relating to transactions carried out during the reported period were adjusted on the basis of the index for the month in which the transaction was carried out, while those relating to non-monetary balance sheet items were adjusted on the same basis as the related balance sheet item. The financing component represents financial income and expenses in real terms and the erosion of balances of monetary items during the year.
2)
The amounts of non-monetary assets do not necessarily represent realization value or current economic value, but only the reported amounts of such assets, as described in (1) above. In these financial statements, the term “cost” signifies cost in reported amounts.
c.
Investments in companies
The investments in the shares of these companies are presented at cost net of write down for decrease in value, which is not of a temporary nature.
The Company performs from time to time fair value evaluations of its investments in start-up and development companies and includes, when necessary, a write-down for decrease in value which is not of a temporary nature, see also d. hereafter.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
d.
Impairment of assets:
1)
The company reviews - at each balance sheet date - whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of fixed assets and identifiable intangibles. When such indicators of impairment are present, the company evaluates whether the carrying value of the asset in the company’s accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records an impairment provision up to the amount needed to adjust the carrying amount to the recoverable amount.
The recoverable value of an asset is determined according to the higher of the net selling price of the asset or its value in use to the company. The value in use is determined according to the present value of anticipated cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal.
2)
During 2005, the company has written-down its investments in companies in the total amount of 2,814 thousands NIS (2004- NIS 0; 2003- NIS 1,239 in thousand).
e.
Loss per NIS 1 of par value of shares
The financial statements do not include data regarding loss per NIS 1 of par value of shares, since the data would not provide significant additional information to that otherwise provided by the financial statements.
f.
Linkage basis
Balances the linkage arrangements in respect of which stipulate linkage to the last index published prior to date of payment are stated on basis of the last index published prior to balance sheet date (the index for November).
g.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
i.
Recently issued accounting pronouncements in Israel:
1)
In August 2005, the Israel Accounting Standards Board issued Israel Accounting Standard No. 22 - “Financial Instruments: Disclosure and Presentation”, which is based on International Accounting Standard No. 32. This standard prescribes the rules for the presentation of financial instruments and the proper disclosure required therefor. The standard sets forth the rules for classifying financial instruments, the rules for splitting and classifying compound financial instruments and the rules for offsetting financial assets and financial liabilities. The standard also prescribes the rules for classifying interest, dividends, losses and gains relating to financial instruments. This accounting standard applies to financial statements for periods commencing on or after January 1, 2006. The standard is to be applied prospectively and, accordingly, comparative data that are presented in the financial statements for periods commencing from the effective date of the standard will not be re-presented. Financial instruments issued before the standard’s effective date are to be classified and presented in conformity with the provisions of the standard from its effective date. Compound financial instruments (that include both an equity component and a liability component), which were issued in periods prior to the standard’s effective date, and which had not yet been converted or redeemed at that date, are to be classified according to their component parts and are to be presented in conformity with the provisions of the standard, commencing from the effective date of the standard.
When the standard becomes effective, the Israeli institute’s Opinion 48 - “Accounting Treatment of Option Warrants”, and Opinion 53 - “Accounting Treatment of Convertible Liabilities” will be revoked.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1 -
SIGNIFICANT ACCOUNTING POLICIES (continued):
i.
Recently issued accounting pronouncements in Israel (continued):
In the Company’s opinion, implementation of this standard is not expected to have a material effect on its financial statements in future periods.
2)
In February 2006, the IASB issued Israel Accounting Standard No. 25 - “Revenue”, which is based on International Accounting Standard No. 18. This standard prescribes recognition, measurement, presentation and disclosure criteria for revenues originating from the sale of goods purchased or manufactured by the company, the provision of services, as well as revenues deriving from the use of the company’s assets by others (interest income, royalties or dividends).
The principal issue in accounting for revenue is determining the timing of revenue recognition. Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied: (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the company; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
A clarification of said standard was issued by the IASB in February 2006: Clarification No. 8 - “Reporting of Revenue on a Gross or Net Basis”. According to the clarification, a company acting as an agent or an intermediary without bearing the risks and rewards resulting from the transaction, will present its revenue on a net basis (as profit or commission). However, a company that acts as a principal supplier and bears the risks and rewards resulting from the transaction will present its revenue on a gross basis, distinguishing the turnover from the related expenses.
Standard 25 shall be applicable to financial statements for periods commencing on or after January 1, 2006. The standard is to be applied prospectively; nevertheless, in accordance with the transitional provisions of the standard, the classification and presentation of revenue on a gross or net basis, as above, shall be applied with retroactive effect, including the restatement of revenues and expenses appearing in the comparative figures in the financial statements for periods commencing on the effective date of the standard.
Until the publication of said standard and the related clarification, there were no accounting pronouncements in Israel concerning revenue, and the accounting treatment of this issue was mostly based on generally accepted accounting practices and foreign accounting pronouncements; nevertheless, as the principles applied by the company do not differ materially from the directives of the standard, its implementation is not expected to have a material effect on the financial statements of the company in future periods.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 2 -
INVESTMENTS IN COMPANIES:
The composition of the investments is as follows:
(a)
Pelican is engaged in the development of solutions to the problem of safeguarding information on the Internet against viruses and hackers.
In February 2003, Pelican sold the know-how that it had developed and owned.
Pelican was appointed an outside liquidator who, in 2005, had transferred to the company an aggregate of NIS 626,000 out of the liquidation monies.
(b)
Expand is engaged in the development of technology designed to accelerate communications over diverse network infrastructures (including E1, T1 and frame relay lines) and improve broadband efficiency.
In June 2003, as part of a Capital raise from existing shareholders in Expand, the Company invested an addition amount of $ 250,000 (NIS 1,084,000) in Expand.
During April 2005, the Company gave a bridging loan to Expand in the amount of $ 150,000 (NIS 653,000).
(c)
Mainsoft is engaged in the development of software and tools for software developers.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 4 -
TAXES ON INCOME (continued):
c.
Losses for tax purposes, carried forward to future years
Carryforward losses aggregate approximately NIS 2 million at December 31, 2005. Under the Inflationary Adjustments Law such carryforward tax losses are linked to the Israeli CPI. No deferred tax asset has been included in respect of such losses. In addition, no deferred tax asset has been included in respect of the impairment provision created for the investments in companies.
d.
Tax assessments
The company has received final tax assessments through tax year 2001.
NOTE 5 -
“RELATED PARTIES” - TRANSACTIONS AND BALANCES:
a.
Transactions:
b.
Balances:
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 -
EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A:
a.
General:
1)
The Company prepares its financial statements in accordance with Israeli GAAP. As applicable to these financial statements, Israeli GAAP and U.S. of America GAAP vary in certain significant respects, as described below:
2)
Effect of inflation
In accordance with Israeli GAAP, through December 31, 2003, the Company comprehensively included the effect of the changes in the general purchasing power of Israeli currency in these financial statements, as described in note 1b. In view of the past inflation in Israel, this was considered a more meaningful presentation than financial reporting based on historical cost.
Under US GAAP Israel is not considered to be a highly inflationary country, thus the measurement currency should be in nominal NIS.
The adjustments to reflect the changes in the general purchasing power of Israeli currency have been reversed in the reconciliation of Israeli GAAP to U.S. GAAP.
OPHIRTECH LTD.
NOTES TO FINANCIAL STATEMENTS (continued)
2)
Shareholders’ equity:
3)
The company has no other comprehensive income (loss) components other than net loss for the reported periods.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
BAY HEART LTD.
We have audited the accompanying balance sheets of Bay Heart Ltd. (“the Company”) as of December 31, 2007 and 2006, and the consolidated balance sheets as of those dates, and the related statements of operations, changes in shareholders’ deficiency and cash flows - of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position - of the Company and on a consolidated basis - as of December 31, 2007 and 2006, and the results of operations, changes in shareholders’ deficiency and cash flows - of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in Israel.
Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. With respect to these financial statements, the difference in the application of the latter is described in Note 19.
As described in Note 2A, the financial statements are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The condensed consolidated financial information in U.S. dollars presented in Note 18 to the financial statements, prepared at the request of an investor, represents a translation of the Company’s financial statements in nominal values, as stated in Note 18A. In our opinion, such translation into U.S. dollars was appropriately performed on the basis stated in Note 18A.
As described in Note 1C to the financial statements regarding the Company’s business condition, the Company has ongoing losses, a working-capital deficit, shareholders’ deficiency and negative cash flows from operating activities. As stated in that note, the continuance of the Company’s operations and its ability to satisfy its short-term liabilities is contingent upon the attainment of financing from the shareholders and/or bank financing arrangements.
Brightman Almagor & Co.
Certified Public Accountants
Member firm Deloitte Touche Tohmatsu
Haifa, Israel, January 28, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
CARMEL CONTAINER SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Carmel Container Systems Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows - for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of a certain subsidiary, whose assets constitute approximately 10% of total consolidated assets as of December 31, 2005 and whose revenues constitute approximately 10% and 9% of total consolidated revenues for the years ended December 31, 2005 and 2004, respectively. The financial statements of this subsidiary were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for this subsidiary, is based on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations, changes in shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2006, in conformity with Israel generally accepted accounting principles, which differ in certain respects from those followed in the United States, as described in Note 22 to the consolidated financial statements.
As described in Note 2, the financial statements referred to above are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.
March 5, 2007 Haifa, Israel, KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
To the shareholders of
C.D. PACKAGING SYSTEMS LTD.
We have audited the financial statements of C.D. Packaging Systems Ltd. (hereafter - the Company) and the consolidated financial statements of the Company and its consolidated subsidiary: balance sheets as of December 31, 2005 and 2004 and statements of income (loss), changes in shareholders’equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Israel and in the standards of the Public Company Accounting Oversight Board (United States), including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the results of operations, changes in shareholders’ equity and cash flows - of the Company and consolidated -for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted (“GAAP”) in Israel. Also, in our opinion, except for failure to meet the requirements of the Securities Regulations (Presentation of Transactions between a Corporation and its Controlling Shareholder in the Financial Statements), 1996, as explained in note 11, and except for the exclusion of certain specifications, as explained in that note, the abovementioned financial statements have been prepared in accordance with the Securities (Preparation of Annual Financial Statements) Regulations, 1993.
As explained in note 1b, the financial statements, as of dates and for reporting periods subsequent to December 31, 2003, are presented in new Israeli shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board. The financial statements as of dates and for reporting periods ended prior to, or on, the above date are presented in values that have been adjusted for the changes in the general purchasing power of the Israeli currency through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.
Haifa,
March 6, 2006
/s/ KESSELMAN & KESSELMAN CPAs (ISR)
A member of PricewaterhouseCoopers International Limited
To the board of directors and
supervisory board of
Eurochem Maritime B.V.
AUDITORS’ REPORT
We have audited the financial statements for consolidation purposes 2007 of Eurochem Maritime B.V., Amsterdam, which comprise the balance sheet as at 31 December, 2007 and 2006, the profit and loss account, the statement of changes in shareholder’s equity and the statements of cash flows for each of the two years in the period ended December 31, 2007 and the notes.
Management’s responsibility
Management is responsible for the preparation and fair presentation of the financial statements for consolidation purposes in accordance with international accepted accounting principles and accounting principles generally accepted in the Netherlands. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements in question that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
auditor’s responsibility
Our responsibility is to express an opinion on the afore mentioned financial statements based on our audit. We conducted our audit in accordance with Dutch law and the Public Company Accounting Oversight Board (PCOAB, United States of America). Dutch Law as well as PCAOB requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the afore mentioned financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to give a true and fair view of the financial position of Eurochem Maritime B.V. as at 31 December, 2007 and 2006 and of its results, statement of changes in shareholder’s equity and statement of cash flows for each of the two years in the period ended December 31, 2007 in accordance with international accepted accounting principles and accounting principles generally accepted in the Netherlands.
Rotterdam, 27 February
MAZARS PAARDEKOOPER HOFFMAN ACCOUNTANTS N.V.
A.G. de Nijs RA
To the board of directors of
Chem-Tankers C.V.
AUDITORS’ REPORT
We have audited the financial statements for consolidation purposes 2007 of Chem-Tankers C.V., Maarssen, which comprise the balance sheet as at 31 December, 2007 and 2006, the profit and loss account and the statements of cash flows for each of the two years in the period ended December 31, 2007 and the notes.
MANAGEMENT’S RESPONSIBILITY
Management is responsible for the preparation and fair presentation of the financial statements for consolidation purposes in accordance with international accepted accounting principles and accounting principles generally accepted in the Netherlands. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements in question that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on the afore mentioned financial statements based on our audit. We conducted our audit in accordance with Dutch law and the Public Company Accounting Oversight Board (PCOAB, United States of America). Dutch Law as well as PCAOB requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the afore mentioned financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the financial statements referred to give a true and fair view of the financial position of Chem-Tankers C.V. as at 31 December, 2007 and 2006 and of its results and statement of cash flows for each of the two years in the period ended December 31, 2007 in accordance with international accepted accounting principles and accounting principles generally accepted in the Netherlands.
Rotterdam, 25 February
MAZARS PAARDEKOOPER HOFFMAN ACCOUNTANTS N.V.
A.G. de Nijs RA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
Hod Hasharon Sport Center Limited
We have audited the balance sheets of Hod Hasharon Sport Center Limited (the “Company”) as of December 31, 2007 and 2006 and the related statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America) and with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006 and the results of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Somekh Chaikin
Certified Public Accountants (Isr)
Tel Aviv, Israel
February 26, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
Hod Hasharon Sport Center (1992) Limited Partnership
We have audited the balance sheets of Hod Hasharon Sport Center (1992) Limited Partnership (the “Company”) as of December 31, 2007 and 2006 and the related statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America) and with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006 and the results of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Somekh Chaikin
Certified Public Accountants (Isr)
Tel Aviv, Israel
February 26, 2008