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 June 30, 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
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 19,652,991 (as of July 31, 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 Operations
Six Months Ended June 30 ........................................... 1
Three Months Ended June 30 ......................................... 2
Consolidated Balance Sheets............................................. 3
Consolidated Statements of Cash Flows................................... 5
Consolidated Statements of Changes in Shareholders'
Equity................................................................ 7
Consolidated Statements of Comprehensive Loss........................... 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......................................................... 18
Part II Other Information....................................................... 19
ITEM 1. FINANCIAL STATEMENTS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 2001
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(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
REVENUES
Equity in earnings of affiliates ........... 1,040 2,298
Interest ................................... 614 578
Real estate income ......................... 3,656 4,954
Realized and unrealized losses on
investments ............................. (6,837) (2,051)
Gain on sale of real estate rental property 137 10,091
Other ...................................... 5,320 2,216
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Total revenues ........................ 3,930 18,086
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EXPENSES
Interest ................................... 4,178 7,324
Real estate expenses ....................... 3,780 5,035
Loss from impairment of investments ........ 6,080 3,153
Minority interests ......................... 197 (1,233)
Translation (gain) ......................... (957) (553)
Other ...................................... 3,483 4,227
---------- ----------
Total expenses ........................ 16,761 17,953
---------- ----------
(Loss) income before income taxes .......... (12,831) 133
Provision for income taxes ................. 2,502 3,584
---------- ----------
Net loss .............................. $ (15,333) $ (3,451)
========== ==========
Basic EPS
Loss per Class A share .................. $ (0.79) $ (0.19)
Shares used in calculation (in thousands) 19,435 19,157
Diluted EPS
Loss per Class A share .................. $ (0.79) $ (0.19)
Shares used in calculation (in thousands) 19,435 19,157
The accompanying notes are an integral part of the consolidated financial
statements.
1
ITEM 1. FINANCIAL STATEMENTS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 2001
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(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
REVENUES
Equity in (losses) earnings of affiliates .. (1,007) 1,455
Interest ................................... 277 363
Real estate income ......................... 1,817 1,831
Realized and unrealized losses on
investments ............................. (3,977) (1,185)
Gain on sale of real estate rental property -- 2,120
Other ...................................... 4,148 1,657
---------- ----------
Total revenues ........................ 1,258 6,241
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EXPENSES
Interest ................................... 1,653 3,126
Real estate expenses ....................... 1,858 2,026
Loss from impairment of investments ........ 2,188 1,903
Minority interests ......................... 674 (498)
Translation loss ........................... -- 289
Other ...................................... 1,868 2,076
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Total expenses ........................ 8,241 8,922
---------- ----------
Loss before income taxes ................... (6,983) (2,681)
Provision for income taxes ................. 2,175 1,130
---------- ----------
Net loss .............................. $ (9,158) $ (3,811)
========== ==========
Basic EPS
Loss per Class A share .................. $ (0.47) $ (0.20)
Shares used in calculation (in thousands) 19,557 19,170
Diluted EPS
Loss per Class A share .................. $ (0.47) $ (0.20)
Shares used in calculation (in thousands) 19,557 19,170
The accompanying notes are an integral part of the consolidated financial
statements.
2
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS AS OF 2002 2001
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(Dollars in thousands) (Unaudited) (audited)
Cash and cash equivalents ............ 1,614 7,973
Deposits, notes and loans receivable . 10,643 17,172
Investments .......................... 238,213 260,175
Real estate property, less accumulated
depreciation of $8,315 and $7,500 . 66,234 66,643
Other assets ......................... 24,383 31,870
---------- ----------
TOTAL ASSETS ......................... $ 341,087 $ 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 June 30, December 31,
SHAREHOLDERS' EQUITY AS AT 2002 2001
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(Dollars in thousands) (Unaudited) (audited)
LIABILITIES
Notes and loans payable ........................................................ 111,260 122,805
Debentures ..................................................................... 21,989 23,096
Accounts and income taxes payable, accrued
expenses and minority interests ............................................. 82,296 86,712
--------- ---------
Total liabilities ......................................................... 215,545 232,613
--------- ---------
SHAREHOLDERS' EQUITY
4% Cumulative Convertible Preferred Stock, $5 par value; authorized 189,287
shares; issued 143,021 and 146,226 shares; outstanding 139,671
and 142,876 shares .......................................................... 715 731
6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized 988,055
shares; issued 706,450 and 726,680 shares; outstanding 583,914
and 604,144 shares .......................................................... 3,532 3,633
Class A Stock, $1 par value; authorized 60,000,000 shares; issued 25,484,655 and
25,407,940 shares; outstanding 19,652,991
and 19,247,276 shares ....................................................... 25,485 25,408
Additional paid-in capital ..................................................... 58,125 58,253
Retained earnings .............................................................. 96,407 111,740
Treasury stock, at cost ........................................................ (31,096) (33,238)
Accumulated other comprehensive loss ........................................... (27,626) (15,307)
--------- ---------
Total shareholders' equity ................................................ 125,542 151,220
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 341,087 $ 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
SIX MONTHS ENDED JUNE 30, 2002 2001
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(Dollars in thousands) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss ..................................... $ (15,333) $ (3,451)
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of affiliates ............ (1,040) (2,298)
Realized and unrealized losses
on investments ............................. 6,837 2,051
Gain on sale of real estate rental property . (137) (10,091)
Depreciation expense ........................ 1,078 1,151
Amortization expense ........................ 6 136
Loss from impairment of investments and loans 6,080 3,153
Translation gain ............................ (957) (553)
Minority interests .......................... 197 (1,233)
Decrease in other assets ..................... 7,318 5,093
Decrease in accounts and income taxes
payable, accrued expenses ................... 1,249 3,995
Investments made in trading securities ....... (16) --
Proceeds from sale of trading securities ..... 468 4,486
Dividends received from affiliates ........... 83 2,032
--------- ---------
Net cash provided by operating activities ... 5,833 4,471
--------- ---------
Cash flows from investing activities:
Deposits, notes and loans receivable collected 3,170 3,083
Deposits, notes and loans receivable granted . (913) (7,277)
Investments made in:
Available-for-sale securities ............... -- (1,256)
Affiliates and others ....................... (991) (9,316)
Proceeds from sale of investments:
Available-for-sale securities ............... -- 2,800
Others ....................................... -- 137
Proceeds from sale of real estate property,
net of commissions and transfer taxes ....... 250 34,848
Return of capital by partnership ............. 209 120
Capital improvements ......................... (905) (1,872)
--------- ---------
Net cash provided by investing
activities ................................. 820 21,267
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 2001
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(Dollars in thousands) (Unaudited) (Unaudited)
Cash flows from financing activities:
Notes and loans payable received ............ 967 7,309
Notes and loans payable repaid:
Related parties ............................ -- (641)
Others ..................................... (11,782) (33,932)
Proceeds from exercise of stock options ..... 1,973 --
Contribution to partnership by minority
interests ................................. -- 1,295
Debentures repaid ........................... (1,763) (1,894)
--------- ---------
Net cash (used in) financing
activities ................................ (10,605) (27,863)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents ............................ (2,407) (818)
--------- ---------
Net decrease in cash and cash equivalents ...... (6,359) (2,943)
Cash and cash equivalents at beginning of
period ...................................... 7,973 5,842
--------- ---------
Cash and cash equivalents at end of period ..... $ 1,614 $ 2,899
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest paid to others: .................... $ 5,279 $ 9,130
========= =========
Income taxes paid ........................... $ 204 $ 2,213
========= =========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Issuance of stock for charitable contribution
and services ................................ $ -- $ 55
========= =========
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
SIX MONTHS ENDED JUNE 30, 2002 2001
---------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts) (Unaudited) (Unaudited)
4% PREFERRED STOCK
Balance, beginning of year ............... $ 731 $ 782
Conversion of 3,205 and 1,931 shares into
Class A Stock ......................... (16) (21)
--------- ---------
Balance, end of period ................... $ 715 $ 761
========= =========
6-1/2% PREFERRED STOCK
Balance, beginning of year ............... $ 3,633 $ 3,729
Conversion of 20,230 and 2,475 shares into
Class A Stock ......................... (101) (37)
--------- ---------
Balance, end of period ................... $ 3,532 $ 3,692
========= =========
CLASS A STOCK
Balance, beginning of year ............... $ 25,408 $ 25,303
Issuance of shares upon conversion of
Preferred Stock ....................... 77 43
--------- ---------
Balance, end of period ................... $ 25,485 $ 25,346
========= =========
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year ............... $ 58,253 $ 58,194
Conversion of Preferred Stock ............ 40 15
Issuance of additional shares ............ -- 18
Issuance of shares upon Exercise of
Stock options .......................... (168) --
--------- ---------
Balance, end of period ................... $ 58,125 $ 58,227
========= =========
RETAINED EARNINGS
Balance, beginning of year ............... $ 111,740 $ 118,941
Net loss ................................. (15,333) (3,451)
--------- ---------
Balance, end of period ................... $ 96,407 $ 115,490
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
7
2AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 2001
-----------------------------------------------------------------------------------------------------
(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)
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CLASS A STOCK
Balance, beginning of year - 6,160,664
and 6,168,164 shares, at cost ............... (31,301)
(31,338)
Issuance of additional shares .................. -- 37
Issuance of shares upon exercise of 329,000
Stock options ............................... 2,142 --
---------- ----------
Balance, end of period - 5,831,664 and 6,168,164
Shares at cost ............................... (29,159) (31,301)
---------- ----------
Balance, end of period ......................... $ (31,096) $ (33,238)
========== ==========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Cumulative translation adjustments:
Balance, beginning of year .................. (20,163) (17,217)
Foreign currency translation adjustment ..... (1,694) (1,112)
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Balance, end of period ...................... (21,857) (18,329)
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Unrealized gain on marketable securities:
Balance, beginning of year .................. 4,856 7,945
Unrealized (loss), net ...................... (9,944) (4,053)
Sale of available-for-sale securities ....... (681) (1,485)
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Balance, end of period ...................... (5,769) 2,407
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Balance, end of period ......................... $ (27,626) $ (15,922)
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
8
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SIX MONTHS ENDED JUNE 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited) (Unaudited)
Net loss ................................................. $(15,333) $ (3,451)
-------- --------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments .............. (1,694) (1,112)
Unrealized loss on securities ......................... (9,944) (4,053)
-------- --------
Other comprehensive loss .............................. (11,638) (5,165)
-------- --------
Comprehensive loss .................................... $(26,971) $ (8,616)
======== ========
Related tax benefit (expense) of other Comprehensive loss:
Foreign currency translation adjustments .............. $ 82 $ 452
Unrealized (loss) gain on securities .................. $ (1,782) $ 3,093
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. In May 2002, the FASB issued FAS 145, "Revision of FAS Nos. 4, 44 and
64, Amendment of FAS 13 and Technical Corrections as of April 2002".
FAS 145 is effective for fiscal periods beginning after May 15, 2002
(as applicable to the Company, January 1, 2003). The Company does not
believe that the adoption of FAS 145 will have any material effect on
its consolidated financial statements.
5. Segment information presented below results primarily from operations
in Israel.
SIX MONTHS ENDED JUNE 30, 2002 2001
--------- ---------
(Dollars in thousands)
Revenues:
Finance ................ (1,661) 654
Real estate ............ 3,793 15,045
Leisure-time ........... 796 850
Intercompany adjustments (38) (761)
--------- ---------
Total ............. $ 2,890 $ 15,788
========= =========
Pretax Operating Loss:
Finance ................ (13,770) (11,861)
Real estate ............ 39 8,410
Leisure-time ........... 57 53
--------- ---------
Total ............. $ (13,674) $ (3,398)
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
10
Total Assets:
Finance* ............... 260,923 327,084
Real estate ............ 69,295 70,529
Leisure-time ........... 15,220 14,146
Intercompany adjustments (4,351) (5,924)
--------- ---------
Total ............. $ 341,087 $ 405,835
========= =========
*Includes an investment in MIRS Communications Ltd. of $111 million.
Corporate office expense is principally applicable to the financing
operations and has been charged to that segment above. Revenues exclude
equity in earnings of affiliates and pretax operating loss 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).
6. The following table summarizes securities that were outstanding as of
June 30, 2002 and 2001, but not included in the calculations of diluted
loss per Class A share because such shares are antidilutive.
(Shares in thousands) June 30,
-----------------------
2002 2001
----- -----
Options and Rights 1,835 3,106
6-1/2% Preferred Stock 584 620
4% preferred stock 140 151
7. Legal Proceedings
MIRS
A petition to certify a class action against MIRS and the other three
cellular operators in Israel in the total amount of NIS 600 million
($125 million) was filed in the Tel Aviv District Court in May 2002.
The claim involves the inter-connect fees that were collected from the
customers of the other operators with regard to phone calls that were
made to voice recorder applications through the cellular operators'
dialing numbers. At this stage, the Company cannot estimate the impact
this claim will have on it.
The accompanying notes are an integral part of the consolidated financial
statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Results of Operations
Six months ended June 30, 2002 compared to six months ended June 30, 2001:
Ampal-American Israel Corporation ("Ampal" or the "Company") and its
subsidiaries recorded a consolidated net loss of $15.3 million for the six
months ended June 30, 2002, as compared to a net loss of $3.5 million for the
same period in 2001. The increase in net loss is primarily attributable to gains
from the sale of real estate rental property in the first half of 2001, which
were insignificant in the same period in 2002, higher unrealized losses on
investments in marketable securities, higher loss from impairment of investments
and loans, gains from the sale of investments in 2001, which were absent in 2002
and decreases in equity in earnings of affiliates. These decreases were
partially offset by higher other income and lower interest expense.
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). On May 2, 2001, the Company sold its real estate rental property
located in Bnei Brak and recorded a pre-tax gain of approximately $2.1 million
($1.6 million net of taxes). There were no comparable gains in the first half of
2002.
In the six-month period ended June 30, 2002, Ampal recorded $6.8 million of
unrealized losses on investments, which consisted of $2.5 million of unrealized
losses on investments classified as trading securities and $4.3 million of
unrealized losses from the permanent impairment in value of investments in the
available-for-sale securities. In the same period in 2001, the Company recorded
$2 million of realized and unrealized losses on investments which consists of
$3.5 million of unrealized losses on investments and $1.5 million gains from
sale of investments. The unrealized losses on trading securities recorded in
2002 were primarily attributable to the Company's investment in shares of Bank
Leumi Le'Israel B.M. ("Leumi"), while the unrealized losses in 2001 were
primarily attributable to the investment in shares of Zeevi Computers and
Technology Ltd. ("Zeevi") and Leumi. The unrealized losses from the permanent
impairment in value of the Company's investments in the available-for-sales
securities in 2002 were primarily attributable to the investment in shares of
Sonic Foundry Inc. ("Sonic") ($1.8 million), Alvarion Ltd. ("Alvarion") ($2
million) and Compugen Ltd. ("Compugen") ($0.5 million). At June 30, 2002 and
June 30, 2001, the aggregate fair value of trading securities amounted to
approximately $6.5 million and $15 million, respectively.
Equity in earnings of affiliates decreased to $1 million for the six months
ended June 30, 2002, from $2.3 million for the same period in 2001, as a result
of decreased earnings of affiliates in 2002, whose earnings were affected by the
devaluation of the new Israeli shekel against the US dollar and by losses from
impairment of investments.
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.
12
The increase in other income for the six months ended June 30, 2002, as compared
to the same period in 2001, is attributable to the $3.6 million gross income
recorded in the first half of 2002, with respect to the guaranteed payment from
Motorola (Israel) Ltd., which was not recorded in the same period in 2001.
The Company recorded lower interest expense in the six months ended June 30,
2002, as compared to the same period in 2001, primarily as a result of loan
repayments.
In the six-month period ended June 30, 2002, the Company recorded $6.1 million
in losses from the impairment of its investments and loans in the following
companies: Bridgewave Communications, Inc. ("Bridgewave") ($2.6 million), Bay
Heart Limited ("Bay Heart")($1.5 million), Camelot Information Technologies Ltd.
("Camelot")($0.5 million), Netformx Ltd. ($0.5 million), Enbaya Inc. ($0.5
million), Shiron Satellite Communications (1996) Ltd. ("Shiron")($0.4 million)
and Tulip Ltd. ($0.1 million), while in the same period in 2001, the Company
recorded a $3.15 million loss from the impairment of its investments.
Three months ended June 30, 2002 compared to three months ended June 30, 2001:
The consolidated net loss increased to $9.2 million for the three months ended
June 30, 2002, as compared to a net loss of $3.8 million for the same period in
2001. The increase in net loss is primarily attributable to higher unrealized
losses on investments in marketable securities, the gain from the sale of real
estate rental property in the second quarter of 2001, which was absent in the
same period in 2002 and decrease in equity in earnings of affiliates. These
decreases were partially offset by higher other income and lower interest
expense.
In the three-month period ended June 30, 2002, Ampal recorded $4 million of
unrealized losses on investments as compared to $1.2 million in the same period
in 2001. The unrealized losses recorded in 2002 consisted of $0.7 million of the
unrealized losses on investments in various trading securities and $3.3 million
of the unrealized losses from the permanent impairment in value of Ampal's
investment in the available-for-sale securities. The unrealized losses in 2001
were primarily attributable to the investment in shares of Zeevi.
On May 2, 2001, the Company sold its real estate rental property located in Bnei
Brak and recorded a pre-tax gain of approximately $2.1 million ($1.6 million net
of taxes). There were no similar gains in the three months ended June 30, 2002.
Equity in earnings of affiliates decreased to a loss of $1 million for the three
months ended June 30, 2002, from income of $1.5 million for the same period in
2001. The decrease is primarily attributable to the decreased earnings of the
Company's 42.5%-owned affiliates Ophir Holdings Ltd. ("Ophir"), which recorded
lower gains on sale of investments in 2002, and Ophirtech Ltd. ("Ophirtech"),
which recorded higher losses from impairment of investments in 2002.
The increase in other income in the three months ended June 30, 2002, as
compared to the same period in 2001, is attributable to $3.6 million income
recorded with respect to the guaranteed payment from Motorola (Israel) Ltd.
The Company recorded lower interest expense in the three months ended June 30,
2002, as compared to the same period in 2001, primarily as a result of loan
repayments.
13
In the three-month period ended June 30, 2002, the Company recorded $2.2 million
in losses from the impairment of its investments in Bridgewave ($1.8 million)
and Shiron ($0.4 million), while in the same period in 2001, the Company
recorded a $1.9 million loss from the impairment of its investments in Shiron
($0.9 million), mPrest ($0.75 million) and Babylon ($0.25 million).
Liquidity and Capital Resources
On June 30, 2002, cash and cash equivalents were $1.6 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.
On June 30, 2002, the aggregate fair value of trading and available-for-sale
securities was approximately $26.5 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 on preferred stock 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.
14
The Company had in place an unused committed line of credit of $6 million at
June 30, 2002.
In connection with its investment in MIRS, the Company has two long-term loans
from Bank Hapoalim Ltd. ("Hapoalim") and Leumi in the amount outstanding of
$37.3 million and $34.9 million, respectively, as of June 30, 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, 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 31st 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 loan from Leumi 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)
Ltd. 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) Ltd. In addition, Leumi will have
recourse to the Company for an additional $0.5 million beginning in 2006 in
relation to the Company's repayment obligations under the loan.
As of June 30, 2002, the Company had $5.3 million in outstanding 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, as of June 30,
2002, the Company also had $18 million outstanding in 11% discount debentures.
These debentures mature in 2003. However, such 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 June 30, 2002 and December 31, 2001, the
amounts outstanding under these loans were $13.1 million and $14.3 million,
respectively. The loans are dollar linked, mature through 2002 and have interest
rates of LIBOR plus 1%. The Company generally repays these loans with the
proceeds received from deposits and other payments from the 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 June 30, 2002 and December 31, 2001
were 3.4% on $36.8 million and 3.23% on $31.1 million, respectively.
As of June 30, 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 Leumi with respect to the
Mirs loan as described above, and a guarantee of $5.8 million of indebtedness
incurred by Bay Heart ($2 million of which was recorded in the Company's
financial statements at June 30, 2002) in connection with the development of its
property. Bay Heart recorded increased losses in 2002 as a result of decreased
rental revenues, and increased financing expenses.
15
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.
The Company also issued guarantees in the amount of $5.4 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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report (including but not limited to factors discussed above, in
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Quarterly Report on
Form 10-Q) includes forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) and information relating to
the Company that are based on the beliefs of management of the Company as well
as assumptions made by and information currently available to the management of
the Company. When used in this Quarterly Report, the words "anticipate",
"believe", "estimate", "expect", "intend", "plan", and similar expressions, as
they relate to the Company or the management of the Company, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events or future financial performance of the
Company, the outcome of which is subject to certain risks and other factors
which could cause actual results to differ materially from those anticipated by
the forward-looking statements, including among others, the economic and
political conditions in Israel and the Middle East and in the global business
and economic conditions in the different sectors and markets where the Company's
portfolio companies operate.
Should any of those risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcome may vary from those
described therein as anticipated, believed, estimated, expected, intended or
planned. Subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere described
in this quarterly Report and other Reports filed with the Securities and
Exchange Commission.
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.
16
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, and 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.
OTHER DEVELOPMENTS
On April 25, 2002, Rebar Financial Corp., a corporation controlled by Raz
Steinmetz, the former President and Chief Executive Officer of the Company, and
Daniel Steinmetz, the former Chairman of the Board of Directors of the Company,
completed the sale of approximately 51% (on a fully-diluted basis) of the
outstanding shares of Class A Stock of the Company to Y.M. Noy Investments Ltd.
("Y.M.Noy"), a company controlled by Yosef A.Maiman, the current Chairman of the
Board of Directors of the Company.
Additionally, on April 25, 2002, certain of Ampal's employees sold an aggregate
of 329,000 shares of Class A Stock of the Company to Y.M. Noy.
17
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 June 30, 2002, and are
sensitive to the above market risks.
Interest Rate Risks
At June 30, 2002, the Company had financial assets totaling $11.5 million and
financial liabilities totaling $133.3 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 held
constant.
At June 30, 2002, the Company had fixed rate financial assets of $7.5 million
and variable rate financial assets of $4 million. Holding other variables
constant, a ten percent increase in interest rates would decrease the unrealized
fair value of the fixed financial assets by approximately $0.1 million.
At June 30, 2002, the Company had fixed rate debt of $30.8 million and variable
rate debt of $102.5 million. A ten percent decrease in interest rates would
increase the unrealized fair value of the fixed rate debt by approximately $0.2
million.
The net decrease in earnings for the next year resulting from a ten percent
interest rate increase would be approximately $0.5 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 June 30, 2002, the open foreign exchange forward purchase
contracts amounted to $12.5 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 $1.5 million and the net decrease in earnings would be
$0.1 million.
Equity Price Risk
The Company's investments at June 30, 2002 included marketable securities
(trading and available-for-sale) which are recorded at fair value of $26.5
million, including a net unrealized loss of $20.6 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 $2.7 million.
18
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 bars 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 and the parties are in the process of submitting the summaries of
their claims. The judgment hearing was scheduled for October 28, 2002, but was
postponed to a later date not yet determined. At this stage, the Company cannot
estimate the impact this claim will have on it.
MIRS
A petition to certify a class action against MIRS and the other three cellular
operators in Israel in the total amount of NIS 600 million ($125 million) was
filed in the Tel Aviv District Court in May 2002. The claim involves the
inter-connect fees that were collected from the customers of the other operators
with regard to phone calls that were made to voice recorder applications through
the cellular operators' dialing numbers. At this stage, the Company cannot
estimate the impact this claim will have on it.
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.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 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).
3.2 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).
11.1 Schedule Setting Forth Computation of Loss per Share
of Class A Stock.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the
Company's quarter ended June 30, 2002:
On May 2, 2002, the Company filed a Form 8-K under Item 1 in
connection with a change of control of the Company and under
Item 5 regarding changes in the composition of the Board of
Directors of the Company.
On June 20, 2002, the Company filed a Form 8-K under Item 4
regarding a change of the Company's independent auditors.
20
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 Bigio
-----------------------------------------
Jack Bigio
President and
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Irit Eluz
-----------------------------------------
Irit Eluz
CFO and Vice President - Finance
and Treasurer
(Principal Financial Officer)
By:/s/ Alla Kanter
-----------------------------------------
Alla Kanter
Vice President - Accounting
(Principal Accounting Officer)
By:/s/ Giora Bar-Nir
-----------------------------------------
Giora Bar-Nir
Controller
(Principal Accounting Officer)
Dated: August 13, 2002
21
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Exhibit Index
Exhibit No. Description
----------- -----------
3.1 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).
3.2 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).
11.1 Schedule Setting Forth Computation of Earnings Per Share of
Class A Stock
22