SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________________to______________________
Commission file number 0-538
AMPAL-AMERICAN ISRAEL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-0435685
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
660 Madison Avenue, New York, New York 10021
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 593-9842
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Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the issuer's Class A Stock, its
only authorized common stock, is 19,934,040 (as of April 30, 2002).
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Index to Form 10-Q
Page
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Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Income............................. 2
Consolidated Balance Sheets................................... 3
Consolidated Statements of Cash Flows......................... 5
Consolidated Statements of Changes in Shareholders'
Equity...................................................... 7
Consolidated Statements of Comprehensive Income............... 9
Notes to the Consolidated Financial Statements................ 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risks.............................................. 16
Part II Other Information............................................. 17
ITEM 1. FINANCIAL STATEMENTS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2002 2001
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(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
REVENUES
Equity in earnings of affiliates ................. $ 2,047 $ 843
Interest ......................................... 337 215
Real estate income ............................... 1,839 3,123
Realized and unrealized (losses) on
investments ................................... (2,860) (866)
Gain on sale of real estate rental property ...... 137 7,971
Other ............................................ 1,172 559
-------- --------
Total revenues .............................. 2,672 11,845
-------- --------
EXPENSES
Interest ......................................... 2,525 4,198
Real estate expenses ............................. 1,922 3,009
Loss from impairment of investments .............. 3,892 1,250
Minority interests ............................... (477) (735)
Translation (gain) ............................... (957) (842)
Other ............................................ 1,615 2,151
-------- --------
Total expenses .............................. 8,520 9,031
-------- --------
(Loss) income before income taxes ................ (5,848) 2,814
(Benefit) provision for income taxes ............. 327 2,454
-------- --------
Net (loss) Income ........................... $ (6,175) $ 360
======== ========
Basic EPS
(Loss) Earnings per Class A share ............. $ (0.32) $ .02
Shares used in calculation (in thousands) ..... 19,277 19,142
Diluted EPS
(Loss) Earnings per Class A share ............. $ (0.32) $ .02
Shares used in calculation (in thousands) ..... 19,277 19,923
The accompanying notes are an integral part of the consolidated financial
statements.
2
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS AS AT 2002 2001
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(Dollars in thousands) (Unaudited)
Cash and cash equivalents ...................... $ 2,034 $ 7,973
Deposits, notes and loans receivable ........... 14,534 17,172
Investments .................................... 252,708 260,175
Real estate property, less accumulated
depreciation of $7,896 and $7,500 ........... 66,370 66,643
Other assets ................................... 25,028 31,870
-------- --------
TOTAL ASSETS ................................... $360,674 $383,833
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND March 31, December 31,
SHAREHOLDERS' EQUITY AS AT 2002 2001
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
LIABILITIES
Notes and loans payable ........................................................ $ 114,555 $ 122,805
Debentures ..................................................................... 21,499 23,096
Accounts and income taxes payable, accrued
expenses and minority interests ............................................. 85,210 86,712
--------- ---------
Total liabilities ......................................................... 221,264 232,613
--------- ---------
SHAREHOLDERS' EQUITY
4% Cumulative Convertible Preferred Stock, $5 par value; authorized 189,287
shares; issued 144,621 and 146,226 shares; outstanding 141,271
and 142,876 shares .......................................................... 723 731
6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized 988,055
shares; issued 715,827 and 726,680 shares; outstanding 593,291
and 604,144 shares .......................................................... 3,579 3,633
Class A Stock, $1 par value; authorized 60,000,000 shares; issued 25,448,524 and
25,407,940 shares; outstanding 19,287,860
and 19,247,276 shares ....................................................... 25,448 25,408
Additional paid-in capital ..................................................... 58,275 58,253
Retained earnings .............................................................. 105,565 111,740
Treasury stock, at cost ........................................................ (33,238) (33,238)
Accumulated other comprehensive loss ........................................... (20,942) (15,307)
--------- ---------
Total shareholders' equity ................................................ 139,410 151,220
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 360,674 $ 383,833
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 2001
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(Dollars in thousands) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) income .............................. $ (6,175) $ 360
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of affiliates .............. (2,047) (843)
Realized and unrealized losses
on investments ............................... 2,860 866
Gain on sale of real estate rental property ... (137) (7,971)
Depreciation expense .......................... 555 715
Amortization expense .......................... (3) 96
Loss from impairment of investments and loans . 3,892 1,250
Translation (gain) ............................ (957) (842)
Minority interests ............................ (477) (735)
Decrease in other assets ....................... 7,007 4,059
(Increase) decrease in accounts and income taxes
payable, accrued expenses and minority
interests ..................................... (592) 2,608
Investments made in trading securities ......... (15) --
Proceeds from sale of trading securities ....... 468 2,965
Dividends received from affiliates ............. 43 48
-------- --------
Net cash provided by operating activities ..... 4,422 2,576
-------- --------
Cash flows from investing activities:
Deposits, notes and loans receivable collected . 1,846 2,369
Deposits, notes and loans receivable granted ... (709) (5,211)
Investments made in:
Available-for-sale securities ................. -- (752)
Affiliates and others ......................... (967) (7,604)
Proceeds from sale of investments:
Available-for-sale securities ................. -- 2,800
Others .................................. -- 134
Proceeds from sale of real estate property,
net of commissions and transfer taxes ......... 250 31,723
Return of capital by partnership ............... 107 --
Capital improvements ........................... (373) (1,253)
-------- --------
Net cash provided by investing
activities ................................... 154 22,206
-------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 2001
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(Dollars in thousands) (Unaudited) (Unaudited)
Cash flows from financing activities:
Notes and loans payable received ................ $ 621 $ 6,940
Notes and loans payable repaid:
Related parties ................................ -- (301)
Others ......................................... (8,478) (19,206)
Contribution to partnership by minority
interests .................................... -- 1,295
Debentures repaid ............................... (1,763) (1,894)
-------- --------
Net cash (used in) financing
activities ................................... (9,620) (13,166)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ................................ (895) (1,498)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,939) 10,118
Cash and cash equivalents at beginning of
period .......................................... 7,973 5,842
-------- --------
Cash and cash equivalents at end of
period ............................................ $ 2,034 $ 15,960
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest paid to others: ........................ $ 4,602 $ 7,223
======== ========
Income taxes paid ............................... $ 137 $ 12
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 2001
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(Dollars in thousands, except share amounts) (Unaudited) (Unaudited)
4% PREFERRED STOCK
Balance, beginning of year ..................... $ 731 $ 782
Conversion of 1,605 and 1,931 shares into
Class A Stock ............................... (8) (10)
--------- ---------
Balance, end of period ......................... $ 723 $ 772
========= =========
6-1/2% PREFERRED STOCK
Balance, beginning of year ..................... $ 3,633 $ 3,729
Conversion of 10,853 and 2,475 shares into
Class A Stock ............................... (54) (12)
--------- ---------
Balance, end of period ......................... $ 3,579 $ 3,717
========= =========
CLASS A STOCK
Balance, beginning of year ..................... $ 25,408 $ 25,303
Issuance of shares upon conversion of
Preferred Stock ............................. 40 17
--------- ---------
Balance, end of period ......................... $ 25,448 $ 25,320
========= =========
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year ..................... $ 58,253 $ 58,194
Conversion of Preferred Stock .................. 22 5
--------- ---------
Balance, end of period ......................... $ 58,275 $ 58,199
========= =========
RETAINED EARNINGS
Balance, beginning of year ..................... $ 111,740 $ 118,941
Net (loss) income .............................. (6,175) 360
--------- ---------
Balance, end of period ......................... $ 105,565 $ 119,301
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
7
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 2001
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(Dollars in thousands, except share amounts) (Unaudited) (Unaudited)
TREASURY STOCK
4% PREFERRED STOCK
Balance, end of period ........................... $ (84) $ (84)
-------- --------
6-1/2% PREFERRED STOCK
Balance, end of period ........................... (1,853) (1,853)
-------- --------
CLASS A STOCK
Balance, beginning of year - 6,160,664
and 6,168,164 shares, at cost ................. (31,301) (31,338)
-------- --------
Balance, end of period ........................... $(33,238) $(33,275)
======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Cumulative translation adjustments:
Balance, beginning of year .................... $(20,163) $(17,217)
Foreign currency translation adjustment ....... (1,339) (1,406)
-------- --------
Balance, end of period ........................ (21,502) (18,623)
-------- --------
Unrealized gain on marketable securities:
Balance, beginning of year .................... 4,856 7,945
Unrealized (loss), net ........................ (3,615) (6,182)
Sale of available-for-sale securities ......... (681) (1,485)
-------- --------
Balance, end of period ........................ 560 278
-------- --------
Balance, end of period ........................... $(20,942) $(18,345)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
8
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2002 2001
------------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited) (Unaudited)
Net (loss) income ................................................. $ (6,175) $ 360
-------- --------
Other comprehensive (loss), net of tax:
Foreign currency translation adjustments ....................... (1,339) (1,406)
Unrealized (loss) on securities ................................ (3,615) (6,182)
-------- --------
Other comprehensive (loss) ..................................... (4,954) (7,588)
-------- --------
Comprehensive (loss) ........................................... $(11,129) $ (7,228)
======== ========
Related tax benefit (expense) of other comprehensive (loss) income:
Foreign currency translation adjustments ....................... $ 109 $ 534
Unrealized (loss) gain on securities ........................... $ (1,102) $ 4,193
The accompanying notes are an integral part of the consolidated financial
statements.
9
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. As used in these financial statements, the term the "Company" refers to
Ampal-American Israel Corporation ("Ampal") and its consolidated
subsidiaries.
2. The December 31, 2001 consolidated balance sheet presented herein was
derived from the audited December 31, 2001 consolidated financial
statements of the Company.
Reference should be made to the Company's consolidated financial
statements for the year ended December 31, 2001 for a description of
the accounting policies, which have been continued without change.
Also, reference should be made to the notes to the Company's December
31, 2001 consolidated financial statements for additional details of
the Company's consolidated financial condition, results of operations
and cash flows. The details in those notes have not changed except as a
result of normal transactions in the interim. All adjustments (of a
normal recurring nature) which are, in the opinion of management,
necessary to a fair presentation of the results of the interim period
have been included.
3. On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and other Intangible Assets
(SFAS 142). The adoption of SFAS 142 does not have a material effect on
the financial statements.
4. Segment information presented below results primarily from operations
in Israel.
THREE MONTHS ENDED MARCH 31, 2002 2001
-------------------------------------------------------------
(Dollars in thousands)
Revenues:
Finance ....................... $ (1,613) $ 200
Real estate ................... 1,839 11,094
Leisure-time .................. 419 447
Intercompany adjustments ...... (20) (739)
--------- ---------
Total .................... $ 625 $ 11,002
========= =========
Pretax Operating Income (Loss):
Finance ....................... $ (8,356) $ (5,626)
Real estate ................... (63) 6,790
Leisure-time .................. 47 72
--------- ---------
Total .................... $ (8,372) $ 1,236
========= =========
Total Assets:
Finance* ...................... $ 281,054 $ 339,467
Real estate ................... 69,499 75,400
Leisure-time .................. 14,546 13,803
Intercompany adjustments ...... (4,425) (6,872)
--------- ---------
Total .................... $ 360,674 $ 421,798
========= =========
10
Corporate office expense is principally applicable to the financing
operation and has been charged to that segment above. Revenues exclude
equity in earnings of affiliates and pretax operating income excludes
equity in earnings of affiliates and minority interests.
The real estate segment consists of rental property owned in Israel and
the United States leased to related and unrelated parties and of the
operations of Am-Hal Ltd., the Company's wholly-owned subsidiary which
owns and operates a chain of senior citizens facilities located in
Israel. The leisure-time segment consists primarily of Coral World
International Limited (marine parks located around the world) and
Country Club Kfar Saba (the company's 51%-owned subsidiary located in
Israel).
*Includes an investment in MIRS Communications Ltd. of $111 million.
5. The following table summarizes securities that were outstanding as of
March 31, 2002 and 2001, but not included in the calculations of
diluted earnings per Class A share because such shares are
antidilutive.
(Shares in thousands) March 31,
----------------
2002 2001
------ ------
Options and Rights 2,822 3,013
6-1/2% Preferred Stock 593 621
4% preferred stock 141 151
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Results of Operations
Ampal-American Israel Corporation ("Ampal") and its subsidiaries (the "Company")
recorded a consolidated net loss of $6.2 million for the three months ended
March 31, 2002, as compared to a net income of $.4 million for the same period
in 2001. The decrease in net income is primarily attributable to gains from the
sale of real estate rental property in the first quarter of 2001, which were
insignificant in the same period in 2002, gains from the sale of investments in
the first quarter of 2001 which were absent in the same period in 2002, higher
loss from impairment of investments, higher unrealized losses on investments and
loans. These decreases in net income were partially offset by the increase in
equity in earnings of affiliates, lower interest expense, higher other income
and lower headquarters expenses.
Ampal recorded $2.9 million of unrealized losses on investments which are
classified as trading securities in the three-month period ended March 31, 2002,
as compared to $2.2 million in the same period in 2001. The unrealized losses
recorded in 2002 were primarily attributable to the Company's investment in
shares of Bank Leumi Le'Israel B.M. ("Leumi"), Alvarion Ltd. ("Alvarion") and
Arel Communications and Software Ltd., while the unrealized losses in 2001 are
primarily attributable to the investment in shares of Leumi. At March 31, 2002
and December 31, 2001, the aggregate fair value of trading securities amounted
to approximately $7.5 million and $9.9 million, respectively.
In the three months ended March 31, 2001, the Company recorded $1.3 million of
gains on the sale of investments, which were primarily attributable to its
investment in Alvarion. There were no similar gains in the quarter ended March
31, 2002.
Equity in earnings of affiliates increased to $2 million for the three months
ended March 31, 2002, from $0.8 million for the same period in 2001.
On March 28, 2001, the Company concluded the sale of its interest in a building
located at 800 Second Avenue ("800 Second Avenue") in New York City for $33
million and recorded a pre-tax gain of approximately $8 million ($4.3 million
net of taxes).
The decrease in real estate income and expenses in the first quarter of 2002 as
compared to the same period in 2001 is attributable to the sale of 800 Second
Avenue and the absence of a comparable event in the first quarter of 2002.
The increase in other income in the three months ended March 31, 2002, as
compared to the same period in 2001, is attributable to the officer's life
insurance proceeds received by the Company as a beneficiary.
The Company recorded lower interest expense in the three months ended March 31,
2002, as compared to the same period in 2001, primarily as a result of loan
repayments.
In the three-month period ended March 31, 2002, the Company recorded $3.9
million in losses from the impairment of its investments and loans in the
following companies: Bay Heart Limited ("Bay Heart")($1.5 million), Bridgewave
Communications, Inc. ($0.8 million), Camelot Information Technologies Ltd.
("Camelot")($0.5 million), Netformx Ltd. ($0.5 million), Enbaya Inc. ($0.5
million), Tulip Ltd. ($0.1 million), while in
12
the same period in 2001, the Company recorded a $1.25 million loss from the
impairment of its investment in RealM Technologies, Ltd.
Liquidity and Capital Resources
At March 31,2002, cash and cash equivalents were $2 million, as compared with $8
million at December 31, 2001. The decrease in cash and cash equivalents is
primarily attributable to the repayments of notes and loans payable. The
increase in accumulated other comprehensive loss is primarily attributable to
the unrealized currency translation losses and the unrealized losses on
available-for-sale securities.
At March 31, 2002, the aggregate fair value of trading and available-for-sale
securities was approximately $34.2 million, as compared to$40.6 million at
December 31, 2001, due both to sales and decreases in the market prices of such
securities.
On January 2, 2002, the Company made a $0.5 million loan to Camelot. In February
2002, the Company, together with other Camelot debtholders, acted to put Camelot
into liquidation proceedings. The Company has written off its investment in
Camelot.
On January 4, 2002, the Company made an additional investment of $0.5 million in
ShellCase Ltd., a developer and manufacturer of chip size packaging. The Company
currently holds an approximately 14% equity interest in ShellCase Ltd.
On January 28, 2002, the Company made an additional investment of $0.5 million
in PowerDsine Ltd., a leading designer and developer of software controlled
power solutions. The Company currently holds an approximately 8.1% equity
interest in PowerDsine Ltd.
The Company's sources of cash include cash and cash equivalents, marketable
securities, cash from operations, cash from 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, dividends and other financial
commitments of the Company for the next 12 months. However, to the extent that
the contingencies and payment obligations described below and in other parts of
this Report including the proceedings described in "Part II - Item 1. Legal
Proceedings", require the Company to make unanticipated payments, the Company
would need to further utilize these sources of cash. To the extent that the
Company intends to rely on the sale of marketable securities in order to satisfy
its cash needs, it is subject to the risk of a shortfall in the amount of
proceeds from any such sale as compared with the anticipated sale proceeds due
to a decline in the market price of those securities. In the event of a decline
in the market price of its marketable securities, the Company may need to draw
upon its other sources of cash, including by increasing its borrowings or by
refinancing its indebtedness or liquidating other assets, the value of which may
also decline. In addition, some of the Company's assets have already been
pledged as security for specific loans or guarantees and would therefore be
unavailable if the Company wished to sell or pledge them in order to provide an
additional source of cash.
The Company had in place an unused committed line of credit of $6 million at
March 31, 2002.
In connection with its investment in MIRS, the Company has two long-term loans
from Hapoalim and Leumi in the amount outstanding of $37.3 million and $34.9
million, respectively, as of March 31, 2002. Both loans are due on March 31,
2008 and bear interest at a rate of LIBOR plus 0.8%. Other than as described in
this paragraph,
13
the loans are non-recourse to the Company and are secured by the Company's
shares in MIRS. The principal payments are due as follows: 10% on March 31,
2004, 15% on March 31, 2005 and 25% on each of the following dates - March 31,
2006, 2007 and 2008. Interest will be paid annually on March 31 of each year
from March 31, 2002 until and including March 31, 2008. These loans are subject
to the compliance by MIRS with covenants regarding its operations and financial
results. In March 2002, some of the covenants in the Leumi loan were amended to
reflect changes in MIRS' business. In connection with these amendments, the
Company agreed that Leumi will have recourse to the Company for an amount of up
to $3.5 million if Motorola Israel does not make a guaranteed payment to the
Company in March 2003 as is required by the terms of the agreement under which
the Company purchased its interest in MIRS from Motorola Israel. In addition,
Leumi will have recourse to the Company for another $0.5 million beginning in
2006 in relation to the Company's repayment obligations under the loan. The
Company anticipates that similar amendments will be required in the Hapoalim
loan. In the event that any such amendments are made to the Hapoalim loan, the
terms of the security provided by the Company under that loan may also be
changed. Any such changes may result in the Company directly guaranteeing part
of this loan too.
As of March 31, 2002, the Company had outstanding $5.3 million in debentures
with interest rates of 7.5%. These debentures, which mature in 2005, are secured
by $5.5 million in cash held in a secured account. In addition, the Company also
had outstanding as of March 31, 2002, $18 million in 11% discount debentures.
These debentures mature in 2003. However, the debentures also allow for early
redemption by their holders in 2002, provided that in the event of early
redemption the Company would not be required to pay $2 million in unamortized
discounts. In the event that these debentures are redeemed early, the Company
may need to draw upon various sources of cash, including by increasing its
borrowings or by refinancing its indebtedness or liquidating assets in order to
pay the $16 million owed.
The Company financed a portion of the development of its Am-Hal facilities
through bank loans from Hapoalim. At March 31, 2002 and December 31, 2001 the
amounts outstanding under these loans were $13.5 million and $14.3 million,
respectively. The loans are dollar linked, mature through 2002 and have interest
rates of zero to LIBOR plus 1%. The Company generally repays these loans with
the proceeds received from the sale of apartments in Am-Hal facilities. The
loans are secured by a lien on Am-Hal's properties.
The Company also finances its general operations and other financial commitments
through short-term borrowings, mainly from Hapoalim. The term of these
borrowings is up to one year. The weighted average interest rates and the
balances of these short-term borrowings at March 31, 2002 and December 31, 2001
were 3.6% on $39.5 million and 3.23% on $31.1 million, respectively.
As of March 31, 2002, the Company had issued guarantees on certain outstanding
loans to its investees and subsidiaries in the aggregate principal amount of
$9.8 million. This includes a $4 million guarantee to bank Leumi with respect to
the Mirs loan as described above, and a guarantee of $5.8 million of
indebtedness incurred by Bay Heart ($2.5 million of which was recorded in the
Company's financial statements at March 31, 2002) in connection with the
development of its property. Bay Heart recorded increased losses in 2002 as a
result of decreased rental revenues, increased financing expenses and a higher
provision for income taxes. Bay Heart's decreased rental revenues were due to
lower average rental rates on its properties caused, in part, by the general
recession in Israel which affected the real estate sector and by the surplus of
mall properties in the Haifa area. 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.
14
The Company also issued guarantees in the amount of $5.5 million in favor of
clients of Am-Hal in order to secure their deposits.
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 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.
CRITICAL ACCOUNTING POLICIES
The Company accounts for a number of its investments, including many of its
investments in the high-technology and communications industries, on the basis
of the cost method. Application of this 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.
SUBSEQUENT EVENT
On April 25, 2002, Rebar Financial Corp., a corporation owned and controlled by
Raz and Daniel Steinmetz, had completed the sale of approximately 51% (on a
fully-diluted basis) of the outstanding shares of Ampal-American Israel
Corporation to Y.M. Noy Investments Ltd. ("Y.M.Noy"), a company controlled by
Yosef A.Maiman, for an aggregate purchase price of approximately $83 million.
All regulatory approvals necessary for the closing of the transaction have been
received.
As part of the sale, Ampal's employees sold to Y.M. Noy 329,000 Ampal Class A
shares at $7.46 per share which were issued to them upon their exercise of the
stock options.
15
ITEM 3. 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 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 March 31, 2002, and are
sensitive to the above market risks.
Interest Rate Risks
At March 31, 2002, the Company had financial assets totaling $16.2 million and
financial liabilities totaling $136.1 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 held
constant.
At March 31, 2002, the Company had fixed rate financial assets of $10.9 million
and variable rate financial assets of $5.3 million. Holding other variables
constant, a ten percent increase in interest rates would decrease the unrealized
fair value of the variable financial assets by approximately $.1 million.
At March 31, 2002, the Company had fixed rate debt of $31.7 million and variable
rate debt of $104.4 million. A ten percent decrease in interest rates would
increase the unrealized fair value of the variable rate debt by approximately
$.1 million.
The net decrease in earnings for the next year resulting from a ten percent
interest rate increase would be approximately $.5 million, holding other
variables constant.
Exchange Rate Sensitivity Analysis
The Company's exchange rate exposure on its financial instruments results from
its investments and ongoing operations in Israel. To partially hedge this
exposure, the Company sometimes enters into various foreign exchange forward
purchase contracts. At March 31, 2002, the open foreign exchange forward
purchase contracts amounted to $5 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 $1.6 million. Conversely, if there were a
10% revaluation of the foreign currency, the net decrease in earnings would be
$.3 million.
Equity Price Risk
The Company's investments at March 31, 2002 included marketable securities
(trading and available-for-sale) which are recorded at fair value of $34.2
million, including a net unrealized loss of $13.6 million. Those securities have
exposure to price risk. The estimated potential loss in fair value resulting
from a hypothetical 10% decrease in prices quoted by stock exchanges is
approximately $3.4 million.
16
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Kaniel
On December 2, 1997, Kaniel, the Israeli Company for Tin Containers Ltd.
("Kaniel") filed a suit against the Company in the Tel Aviv District Court, in
the amount of NIS 3,623,058 ($0.8 million). The suit relates to eight loans
given to Kaniel by the Company in 1984. Kaniel claimed that the Company's
actions in connection with the loans were forbidden under the Israeli Interest
Law. On November 19, 1998, the Tel Aviv District Court ruled that the statute of
limitations applies to the majority of the plaintiff's claim, and thereby
rejected such claims. The plaintiff filed an appeal with the Israeli Supreme
Court, and withdrew the remainder of its claim until the Supreme Court's ruling.
The parties agreed at the Supreme Court session that the claim shall be returned
to the Tel Aviv District Court. On May 6, 2002 the evidentiary hearings were
completed. The judgment hearing is scheduled for October 28, 2002. At this
stage, the Company cannot estimate the impact this claim will have on it.
Galha
On January 1, 2002, Galha (1960) Ltd. ("Galha") filed a suit against the Company
and other parties, including directors of Paradise Industries Ltd. ("Paradise")
appointed by the Company, in the Tel Aviv District Court, in the amount of NIS
8,121,456 ($1.8 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 under liquidations proceedings. At this stage,
the Company cannot estimate the impact this claim will have on it.
Am-Hal
The Israeli Income Tax Authority conducted a review of Am-Hal Ltd., the
Company's wholly-owned subsidiary, in 2000 and 2001. Following the review, the
Income Tax Authority assessed Am-Hal for additional taxes for the years
1995-1999. Am-Hal disputed the assessment, based on its disagreement with the
Income Tax Authority concerning the proper methodology for calculating nursing
home revenues. The assessment is appealable and Am-Hal intends to file such an
appeal. Am-Hal believes that there is a reasonable chance that its appeal will
be accepted. Based on the assessment, Am-Hal would have a tax obligation of NIS
5.9 million for the years 1995-1999. In addition, its tax loss carry forward
brought forward from 1999 to 2000 would have been reduced from NIS 9 million to
NIS 0.8 million. If the principles applied by the Tax Authority to the
calculation of nursing home revenue would be applied for the tax years 2000 and
2001 (which were not reviewed), Am-Hal would have a tax obligation of $0.9
million and $0 for 1999 and 2000, respectively.
The effect of the assessment, if upheld, would be an acceleration of tax
payments which Am-Hal had accrued for on an ongoing basis. There was no net tax
expense in 2001 as a result of this issue. However, a payment of $2.2 million
will be due if the assessment is upheld in full.
17
Ampal (Israel)
In May 2002, the Israeli Income Tax Authority issued an assessment to Ampal
(Israel) Ltd., the Company's wholly-owned subsidiary, for payment of
approximately NIS 34 million for the tax years 1998-2000. Ampal (Israel) intends
to file an appeal regarding this assessment and believes that there is a very
good chance that its appeal will be accepted. In addition, the Company has
previously established a reserve in the amount of NIS 10 million in connection
with potential tax liabilities for these tax years.
Item 2. Changes in Securities and Use of Proceeds -- None.
Item 3. Defaults upon Senior Securities -- None.
Item 4. Submission of Matters to a Vote of Security Holders -- None.
Item 5. Other Information -- None.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - Certificate 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. 0-538).
3b. By-Laws of Ampal-American Israel Corporation as amended, dated
February 14, 2002. (Filed as Exhibit 3b. to Form 10-K, for the year
ended December 31, 2001 and incorporated herein by reference.
File No. 0-538).
Exhibit 11 -- Schedule Setting Forth Computation of Earnings per
Share of Class A Stock.
(b) Reports on Form 8-K:
The issuer filed a current report on Form 8-K dated May 2, 2002,
reporting under Item 1 a change in control of the registrant and
under Item 5 changes in the composition of the Board of Directors.
19
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMPAL-AMERICAN ISRAEL CORPORATION
By:/s/ Jack (Tato) Bigio
----------------------------------------
Jack (Tato) Bigio
President and
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Shlomo Meichor
----------------------------------------
Shlomo Meichor
Vice President - Finance
and Treasurer
(Principal Financial Officer)
By:/s/ Alla Kanter
----------------------------------------
Alla Kanter
Vice President - Accounting
and Controller
(Principal Accounting Officer)
By:/s/ Giora Bar-Nir
----------------------------------------
Giora Bar-Nir
Controller
(Principal Accounting Officer)
Dated: May 15, 2002
20
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Exhibit Index
Exhibit No. Description
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. 0-538).
3b. By-Laws of Ampal-American Israel Corporation as amended, dated
February 14, 2002. (Filed as Exhibit 3b. to Form 10-K, for the
year ended December 31, 2001 and incorporated herein by
reference. File No. 0-538).
11 Schedule Setting Forth Computation of Earnings Per
Share of Class A Stock............................ Page *
21