RNS Number : 6195C
Atia Group Limited
03 September 2008
ATIA GROUP LTD.
(Formerly: KIDRON INDUSTRIAL HOLDINGS LTD.)
CONDENSED INTERIM FINANCIAL STATEMENTS
30th June 2008
UNAUDITED
ATIA GROUP LTD.
(Formerly: KIDRON INDUSTRIAL HOLDINGS LTD.)
Condensed Interim Financial Statements
As at 30th June 2008
(UNAUDITED)
TABLE OF CONTENTS
Page
Report of the Board of Directors A - N
Auditor's Review Report 2
Condensed Interim Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Profit and Loss Accounts 4
Statements of Recognized Gains and Losses
Consolidated Statements of Changes in Shareholders' Equity 5 - 6
Consolidated Statements of Cash Flows 7 - 10
Notes to the Condensed Interim Financial Statements prepared 11 - 47
according to IFRS
ATIA GROUP LTD.
Report of the Board of Directors
as at 30 June 2008
Atia Group Ltd. (hereinafter - the "Company") takes pleasure in presenting the Report of the Board of Directors the affairs of the
Company for the six month period ended 30 June 2008.
This report reviews the major changes in the operations of the Company during the reported period. The report is presented in accordance
with the Securities Regulations (Periodic and Immediate Reports), 1970 (hereinafter - the "Securities Regulations") in a condensed format of
the affairs in which the Company is engaged and its is presented taking into account that the reader also has at his disposal the periodic
report including the report of the board of directors and the complete financial statements for 2007.
A. The Company and its business environment
1. The Company operates through a subsidiary in the field of residential construction in the U.S. and holds a real estate asset
through a subsidiary in Croatia.
2. On 2 November 2007, after obtaining the approval of the general shareholders meeting of the Company, the Company allotted
9,079,345 shares, as follows:
7,340,605 shares were allotted to Emvelco Corporation in consideration for 75,000 shares of Verge Living Corporation (hereinafter -
"Verge"), a company that manages a real estate project in the U.S. and 1,738,740 shares were allotted to AP Holdings in consideration for
20,000 shares of Sitnica D.o.o. (hereinafter - "Sitnica"), a company that has contractual rights in property in Croatia.
The allotted shares constitute 72% of the issued share capital of the Company.
Verge is a company incorporated under the laws of the State of Nevada, U.S., and it is engaged in property development in the U.S. The
major asset of Verge is land in Las Vegas, Nevada, on which it intends on building a project to include 318 condominium apartments (the
number of units may be changed due to changes in the Municipal Building Plan) covering an area of approximately 28,800 square meters and
commercial space covering an area of approximately 3,600 square meters, as well as underground parking for approximately 650 vehicles.
Sitnica is a company incorporated under the laws of Croatia and it is engaged in the development and sale of real estate in Croatia.
Sitnica is the owner of contractual rights in real estate covering an area of approximately 82,186 square meters in the central Croatian
city of Samobor.
3. The following is a description of the projects in which the Company is involved:
a. Investment real estate - Samobor, Croatia
1. The investment real estate, covering an area of 82,186 square meters, is in the advanced stages of having the municipal building
plan ("MBP") approved. The MBP submitted by the Company was approved by the Samobor planning institutions and the municipal council. On 30
June 2008, ads were publicized for a thirty day period in order to receive public comments on the plan that was filed.
On 30 July 2008, the 30-day period of publicizing the plan to the public ended, and during the period no objections were filed regarding
the proposed plan. In accordance with the customary statutory procedures of the Samobor Municipality in connection with the final approval
of a MBP and the issuance of a building permit, the plan is submitted to the director of engineering at the Samobor Municipality for final
processing and approval, following which the plan is approved in its final format on the basis of which the initiation company can obtain a
building permit.
The Company estimates that the procedures set out above, through the final approval of the plan, can be expected to be completed no
later than the end of October 2008.
2. An agreement was signed with the Porr Group, a large group of companies that are headquartered in Austria and that engage in
various real estate endeavours in Central Europe. Pursuant to the agreement, a company of the Porr Group purchased from the Company half of
its holdings in Sitnica and assist in procuring the financing needed to complete the purchase of the property in Samobor.
The Company expects the agreement with the banking institution regarding the funding of the project to be signed in the near future and
that the funding of the project will be received by the end of September 2008. (See also subsequent events.)
b. The sub-prime crisis and the re-planning of the Las Vegas Project
The financing of the construction project of the Verge subsidiary is contingent upon the future impact of the sub-prime crisis on the
financial institutions operating in the U.S. The sub-prime crisis may affect the ability of the Verge subsidiary to procure the financing
needed to complete the construction project and on the terms of the procured financing, should such be procured. In addition, the crisis may
affect the ability of the customers of the Company to obtain mortgages, should they be necessary, and on the terms of such mortgages.
In the second quarter of 2008, the Verge subsidiary, together with the management company of the project, carried out an engineering
re-assessment of the project. As a result of the re-assessment, the architect of the project was replaced and part of the plans were changed
(including restricting the number of apartments and changes regarding the issue of parking). As a result of these changes, Verge decided to
submit a request to the Municipality for approval.
Since Verge will not be able to complete the project and transfer title of the apartments to the purchasers at the original target date
set in the agreement with the purchasers (24 months after receipt of the advance from the purchasers), Verge agreed to cancel some of the
agreements and refund the advance paid by the purchasers. By 30 June 2008, 39 agreements were cancelled (as at the balance sheet date, the
subsidiary had 223 agreements with purchasers) and advances of $797 thousand were refunded to the purchasers. Subsequent to the balance
sheet date, 12 of the additional agreements were cancelled and as of the date of the report, there are 211 such agreements. Company
Management believes that Verge's exposure to suits on behalf of apartment purchasers is immaterial.
In view of the uncertainty regarding the ability of Verge to raise the necessary funding for the project, Verge estimates that its
chances of raises the funding for the project are less than probable. Therefore, it decided to set up a provision for a decline in value of
the project, down to the realizable value of the property as vacant property. Verge estimates that the value of the project as vacant
property as at 30 June 2008, based on a comparison of the market value of the property against similar assets having similar characteristics
in similar transactions, proximate to the performance of the valuation, is $3.8 million (NIS 12,738 thousand).
A provision for decline in value in an amount of NIS 8,196 thousand was carried to the profit and loss accounts of the second quarter of
2008.
Significant events occurring in connection with the Company since it commenced activities in its field of operations
1. Investment agreement with the Trafalgar investment fund
In January 2008, the Company entered into a Committed Equity Facility agreement with an international investment fund, Trafalgar Capital
Specialized Investment Fund (hereinafter - "Trafalgar") (hereinafter - the "Investment Agreement" or "CEF"), whereby Trafalgar undertook to
invest in the capital of the Company an amount of NIS 45,685 thousand over a three-year period, in return for an allotment of ordinary
shares of the Company. The major principles of the agreement were as follows:
a. The investment in the capital of the Company by Trafalgar will be done in stages, as required by the Company from time to time.
b. Against every amount invested by Trafalgar, the Company will allot to Trafalgar ordinary shares of the Company at a price equal to
94% of the average stock market price of the shares of the Company during the five days following the demand notification of the Company
that it requires funds pursuant to the investment agreement.
c. Unless agreed upon otherwise with Trafalgar, every amount invested shall be limited in such a way that the aggregate investment
amount during a calendar week does not exceed the lower of the following: (1) an amount that grants Trafalgar an allotment of shares equal
to 15% of the market trading volume in the Company's shares during the five consecutive day period preceding the investment amount demanded
by the Company; or (2) an amount that grants Trafalgar an allotment of the quantity of shares equal to 2.99% of the total number of shares
issued as of that date.
d. In return for its commitment to invest in the Company pursuant to the CEF, Trafalgar is entitled to an allotment of shares,
without consideration, with a value of up to $1,500 thousand, to be allotted to Trafalgar over a ten-month period, on the basis of the
market price of the share on the date the agreement was signed. 45% - 55% of the payment will be paid on the basis of the market price of
the share on the date of the signing of the agreement, and the balance will be paid on the basis of the average market price of the share
during the week preceding the date of the allotment. Notwithstanding the above, in the event that the approval of the publication of the
shelf-prospectus is not forthcoming from the Israel Securities Authority, all of the shares will not be allotted during the aforementioned
10 month period, and 32.5% of the payment will be paid through allotments to be made after receipt of approval of the aforementioned
authority.
e. The Company undertook to obtain all of the approvals required by law for the allotment, including to have the allotted shares
listed for trade.
f. Trafalgar will be entitled to receive from the Company a commission of 4% of all investment amounts demanded by the Company, which
commission shall be deducted from any investment amount transferred to the Company pursuant to the agreement.
g. A condition for the performance of any investment by Trafalgar is that the Company issues a shelf-prospectus whereby Trafalgar is
entitled to sell the shares it is allotted under the agreement during the course of trading on the stock market. The Company intends on
taking the steps to issue a shelf-prospectus on the basis of its 31 December 2007 financial statements. Trafalgar entered into an agreement
with Emvelco Corporation, one of the controlling shareholders of the Company, whereby in the event that the Company is unable to issue a
shelf-prospectus, Emvelco will sell Trafalgar shares from the available for trading shares held by Emvelco, of a quantity that is identical
to the quantity of the shares to be allotted to Trafalgar, against the shares to be allotted to Trafalgar which will be transferred to the
ownership of Emvelco.
h. Notwithstanding the above, it was agreed between the parties that, in the event that the shelf-prospectus is issued by the Company
no later than 30 June 2008, the discount rate to which Trafalgar will be entitled from the price of the share (as mentioned in b above) will
be 5% (instead of 6%) and the commission rate due Trafalgar as per item f above will be 3% (instead of 4%).
i. Trafalgar undertakes not to sell the shares of the Company short.
Concurrent with the signing of the investment agreement, as above, the Company entered into a loan agreement with Trafalgar whereby
Trafalgar would lend the Company an amount of $500 thousand, bearing interest at an annual rate of 8.5% to be repaid in installments in the
form of an allotment of shares in accordance with the mechanism set out in the investment agreement described above, until 30 April 2009.
Alternatively, the amount of the loan will be repaid in equal installments commencing in July 2008 through April 2009. Trafalgar shall be
entitled to a commission of 10% of each amount of the loan that is repaid in cash. The Company has the right to repay part of the loan in
cash and the rest of the loan in shares, in accordance with the CEF.
j. Further to the signing of the investment agreement with Trafalgar, the board of directors of the Company decided to allot
Trafalgar 693,750 ordinary shares of the Company, no par value each (the "offered shares") which, following the allotment, will constitute
5.22% of the capital rights and voting rights in the Company, both immediately following the allotment and fully diluted. For details of
this private placement, see the immediate filing dated 28 March 2008 (ref. no. 2008-01-087906).
The offered shares will be allotted piecemeal, at the following dates:
189,205 shares will be allotted immediately following receipt of approval of the stock exchange to the listing for trade of the offered
shares.
252,273 of the offered shares will be allotted immediately following receipt of all of the necessary approvals in order for the offered
shares to be swapped on 30 April 2008 against a quantity of shares equal to those held by Emvelco Corp. at that same date.
The balance of the offered shares, a quantity of up to 252,773 shares, will be allotted immediately after receipt of the approval of the
Israel Securities Authority for the issuance of a shelf prospectus. Notwithstanding, if the approval of the shelf prospectus is not granted
by the Israel Securities Authority by the beginning of May 2008, only 126,136 shares will be allotted to Trafalgar at that same date.
On 30 April 2008, further to the immediate filing of the Company dated 3 February 2008 regarding the signing of an investment agreement
with the international investment fund, Trafalgar, and further to the immediate filing in respect of the private placement to Trafalgar
dated 28 March 2008, the Company announced that on 29 April 2008, Trafalgar and the parent company of the Company, Emvelco, decided on
revising the agreement signed between them whereby in the event that the Company is unable to issue a shelf prospectus, Emvelco will sell
Trafalgar shares from the available for trade shares to be held by it (when its shares are released from the restrictions that apply to them
pursuant to article 15C of the Securities Law). According to the revision, the share sale agreement will not apply to 693,750 ordinary
shares that are being offered to Trafalgar and to ATW, as detailed in the allotment report.
As at the date of the drafting of the financial statement, no shares have been allotted to Trafalgar.
In view of the technical difficulties involved in the allotment of the Trafalgar shares, the Company and Trafalgar signed an amendment
to the agreement on 27 August 2008, whereby the parties admit the failure to allot the shares to Trafalgar and, therefore, the loan received
by the Company in an amount of $500 thousand will be repaid by 30 September 2008.
T.A.S. Holdings Limited (hereinafter - "TAS"), a third party that has business dealings with Emvelco Corp., will pay compensation of
$250 thousand in respect of the cancellation of the allotment of shares to Trafalgar. After repayment of the loan to Trafalgar and the
payment by TAS, the liability presented in the balance sheet as at 30 June 2008 will be written off directly against shareholders' equity.
2. Agreement for the management of the project in Las Vegas:
In January 2008, the subsidiary, Verge, entered into an agreement with TWG Consultants LLC (a third party, unrelated to the Company), a
project management company operating in Las Vegas (hereinafter - "TWG"), whereby TWG will provide management, consultancy, representation
and control services in connection with the Verge project in Las Vegas (hereinafter - the "Project"), during the entire duration of the
project, including handling the various aspects involving the general contractor, professional consultants, and the authorities, will cost
the project and will supervise the performance of its budget, monitor the project timetables, supervise the carrying out of various tasks
involving the project and assist in the bookkeeping of the project.
In return for the services to be provided by TWG under the agreement, it will be entitled to the following amounts:
a. Reimbursement of expenses, including the salary of an engineer and/or supervisor as required and an administrative employee in a
part-time position (at a total cost estimated at $12,500 a month) and reimbursement of office overhead expenses up to an amount of $20,000 a
month.
b. A monthly payment of $24,750.
c. An additional bonus of the higher of $1,000,000 or 5% of the earnings before taxes, depreciation and amortization (EBTDA). The
bonus will be paid on the basis of the progress of the work, commencing on the date that the accompanying loan is granted to the project,
with the final amount to be paid upon receipt of the temporary approvals for occupancy of 85% of the units in the project.
The term of the agreement was set at the earlier of 5 years or 6 months prior to the completion of the project. Notwithstanding the
above, each of the parties is entitled to terminate the agreement for any reason whatsoever, upon advance notice of 30 days.
3. Receipt of a loan from a third party
On 21 June 2008, the Verge subsidiary signed a promissory note in an amount of $1.66 million, to AFG, an unrelated third party. The
promissory note bears interest of 15% and is repayable on 21 June 2009. The promissory note is secured by a first degree pledge on Verge's
property in Las Vegas.
Part of the funds received against the promissory note were used to repay loans received in the past from Emvelco Corp., the former
controlling shareholder in the Company, which was granted in the past a first-degree pledge on Verge's property.
Emvelco Corp. notified the Company that Emvelco would bear interest of 3% (out of the 15%) in respect of the aforementioned promissory
note that replaced the loan received from Emvelco in the past.
4. The results of an extraordinary meeting on 14 May 2008
At an extraordinary meeting on 14 May 2008, the following resolutions were passed:
a. To appoint Mr. Yossi Peled (IDF General, reserves) as an external director of the Company and to approve payment to Mr. Peled of
an annual remuneration and a per meeting fee at amounts stipulated in the second and third appendices of the articles of the Company (rules
pertaining to remuneration and expenses to external directors) - 2000, as shall be from time to time.
b. To consolidate and redivide the share capital of the Company such that every one hundred (100) existing registered and issued
shares of the Company shall be consolidated into one (1) share.
The effective date for purposes of consolidating the capital is 21 May 2008 and commencing on 22 May 2008, the consolidated shares will
start being traded, as above.
Commencing 22 May 2008, the quantity of registered shares of the Company will be 50,000,000 shares and the quantities of paid in and issued
shares of the Company will be 12,591,667 shares.
5. An agreement that may cause a change in control
The former controlling shareholder of the Company, Emvelco, notified the Company on 16 May 2008 that it had entered into an agreement
whereby, subject to the fulfillment of certain conditions as set out in the immediate report dated 17 May 2008 (reference no.
2008-01-135339), it may transfer the shares it holds in the Company to a third party, C. Properties Ltd., a Barbados-registered company.
See also subsequent events below.
6. Trading of the Company's shares on the stock exchange - non-compliance with the preservation rules
On 14 January 2008, the Company was notified by the Tel Aviv Stock Exchange that it was in non-compliance with the preservation rules,
on the basis of the 31 December 2007 data, due to the fact that the percentage of Company shares held by the public as at 31 December 2007
was 9.5%, lower than the required 15%.
The Company was notified as to its non-compliance, as above, and was granted a 6 month extension, until 30 June 2008 to comply with the
rules.
See also subsequent events below.
B. Financial position
The Company applied International Financial Reporting Standards (IFRS) in these financial statements.
We present below the major changes occurring in the balance sheet items when compared with the financial statements of the Company as at
31 December 2007:
The total balance sheet as at 30 June 2008 amounted to NIS 96,921 thousand, compared with NIS 115,169 thousand as at 31 December 2007.
Current assets as at 30 June 2008 amounted to NIS 25,591 thousand, compared with NIS 45,923 thousand as at 31 December 2007. The major
changes in current assets were as follows:
Cash and cash equivalents amounted to NIS 45 thousand as at 30 June 2008, compared with NIS 1,249 thousand as at 31 December 2007.
Accounts receivable and debit balances amounted to NIS 397 thousand as at 30 June 2008, compared with NIS 842 thousand as at 31 December
2007. The balance mainly includes advances to service providers and prepaid expenses in connection with the Croatian construction project.
Restricted cash amounted to NIS 12,411 thousand as at 30 June 2008, compared with NIS 17,306 thousand as at 31 December 2007. This
balance constitutes the Group's deposits in a trust account in the U.S. in respect of advances received from purchasers of apartments in the
Las Vegas project.
Buildings under construction amounted to NIS 12,738 thousand as at 30 June 2008, compared with NIS 26,526 thousand as at 31 December
2007, and it includes the costs accrued until 30 June 2008 in respect of the construction of the project in Las Vegas. As at the date of the
drafting of the financial statements, the Company estimates that its chances of procuring financing for the project are less than probable
and, accordingly the Company wrote down the value of the project to the value of the vacant property.
Investment real estate amounted to NIS 71,242 thousand as at 30 June 2008, compared with NIS 69,121 thousand as at 31 December 2007. The
balance relates to property in Samobor, Croatia, which is classified as investment real estate. This property is presented at fair value
which was determined on the basis of, among other things, an appraisal performed by an external appraiser in July 2007.
Current liabilities as at 30 June 2008 amounted to NIS 76,893 thousand, compared with NIS 80,198 thousand as at 31 December 2007. The
major changes in current liabilities were as follows:
Short-term loan amounted to NIS 5,920 thousand as at 30 June 2008, compared with no such liability as at 31 December 2007. On 21 June
2008, the Verge subsidiary signed a promissory note in an amount of $1.66 million to AFG, an unrelated third party.
Loans from interested parties as at 30 June 2008 amounted to NIS 8,511 thousand, compared with NIS 7,454 thousand as at 31 December
2007. This balance derived from the financing received from interested parties in respect of the Las Vegas and Samobor projects.
Current maturity of a long-term loan as at 30 June 2008 amounted to NIS 1,735 thousand, compared with no liability as at 31 December
2007. This amount derives from the long-term loan received from the Trafalgar Fund.
Sellers of land as at 30 June 2008 amounted to NIS 40,535 thousand, compared with NIS 42,570 thousand as at 31 December 2007. The amount
derives from the balance of the commitment to pay the consideration to the sellers of the property in Samobor, Croatia.
Suppliers and service providers as at 30 June 2008 amounted to NIS 2,270 thousand, compared with NIS 2,519 thousand as at 31 December
2007, mainly in respect of the Las Vegas construction project. Accounts payable and credit balances amounted to NIS 3,290 thousand as at 30
June 2008, compared with 1,158 thousand as at 31 December 2007.
The provision for real estate agents was cancelled as at 30 June 2008, compared with NIS 9,191 thousand as at 31 December 2007. The U.S.
subsidiary entered into agreements with real estate agents for the payment of commissions in respect of the sale of apartments in the Las
Vegas project. According to the agreement, the Company will pay commissions of between 3.8% - 5.8% in respect of every apartment sold. 50%
of the amount of the commission is paid to the agent upon the signing of the agreement and the other 50% will be paid to the real estate
agents upon the transfer of title of the apartment to the purchaser. As at 30 June 2008, in view of the fact that Verge Management believes
that its chances of raising funds to finance the project are less than probable and in view of the fact that in the second quarter of 2008,
Verge recorded a provision for a decline in the value of the project down to the value of the vacant property, the provision for real estate
agents that was to have been paid at the end of the project upon the transfer of title of the apartments to the purchasers was also written off.
Liabilities in respect of share allotment agreement as at 30 June 2008 amounted to NIS 2,221 thousand, deriving from the commitment of
the Company to allot shares to the Trafalgar investment fund, the quantity of which has not yet been determined (in consideration for an
amount of $625 thousand). The Company recorded the liability against a reduction in its shareholders' equity in the same amount. As at the
date of the drafting of the financial statements, no shares have been allotted to Trafalgar.
Advances from purchasers of apartments as at 30 June 2008 amounted to NIS 12,411 thousand, compared with NIS 17,306 thousand as at 31
December 2007. This balance constitutes the deposits of the Group in a trust account in the U.S., in respect of advances received from
purchasers of apartments in the Las Vegas project.
Long-term liabilities as at 30 June 2008 include a reserve for deferred taxes in an amount of NIS 2,839 thousand, compared with NIS
3,035 thousand as at 31 December 2007, in respect of investment real estate and loss carryforwards in Sitnica.
Shareholders' equity as at 30 June 2008 amounted to NIS 17,189 thousand, compared with NIS 31,936 thousand as at 31 December 2007. The
decrease in this balance derives from the following: the loss for the period in an amount of NIS 12,167 thousand (deriving mainly from the
fact that the U.S. subsidiary wrote down the value of the project to the value of the vacant property in the second quarter of 2008),
issuance costs in an amount of NIS 2,221 thousand in respect of the share allotment agreement with Trafalgar, adjustments deriving from
differentials on the translation of financial statements of investee companies in an amount of NIS 359 thousand.
C. Results of operations of the Group
The Company applied International Financial Reporting Standards (IFRS) in these financial statements.
Consolidated profit and loss accounts:
Six month period Three month period Year ended
ended 30 June ended 30 June 31
December
2008 2007 2008 2007 2007
NIS'000 NIS'000 NIS'000 NIS'000 NIS'000
(Unaudited) (Unaudited) (Audited)
Change in fair value of - 18,294 - 18,294 18,294
investment real estate
---------- ---------- ---------- ---------- ----------
Selling and marketing expenses 427 19,060 - 14,575 29,621
General and administrative 2,682 1,266 1,409 634 3,023
expenses
Provision for decrease in 8,196 - 8,196 - -
value of buildings in
construction
_______ _______ _______ _______ _______
11,305 20,326 9,605 15,209 32,644
---------- ---------- ---------- ---------- ----------
_______ _______ _______ _______ _______
Operating income (loss) before (11,305) (2,032) (9,605) 3,085 (14,350)
financing
Financing income 9 - - - 33
Financing expenses (1,004) (1,013) (735) (1,013) (1,831)
_______ _______ _______ _______ _______
Operating income (loss) after (12,300) (3,045) (10,340) 2,072 (16,148)
financing and before tax
Tax benefit (expense) 133 (3,499) 123 (3,499) (3,541)
_______ _______ _______ _______ _______
Loss for the period (12,167) (6,544) (10,217) (1,427) (19,689)
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
D. Analysis of the results of operations
Selling and marketing expenses
In the six month period ended 30 June 2008, selling and marketing expenses amounted to NIS 427 thousand, compared with NIS 19,060
thousand in the same period last year and NIS 29,621 thousand in 2007. These expenses relate mainly to the advertising and marketing
expenses of the Las Vegas construction project which cannot be capitalized to the project in accordance with IFRS.
General and administrative expenses
In the six month period ended 30 June 2008, general and administrative expenses amounted to NIS 2,682 thousand, compared with NIS 1,266
thousand in the same period last year and NIS 3,023 thousand in 2007. In addition to the costs of the Company in Israel, these expenses
included expenses in respect of professional services, and payroll and office costs of the subsidiaries in Croatia and the U.S.
Provision for decrease in value of buildings under construction
In the six month period ended 30 June 2008, the provision for the decrease in value of buildings under construction amounted to NIS
8,196 thousand, compared with no such provision in the same period last year and in all of 2007. The provision derived from the fact that
the U.S. subsidiary wrote down the value of the project to the value of the vacant property in the second quarter of 2008.
Financing income
In the six month period ended 30 June 2008, financing income amounted to NIS 9 thousand. In the same period last year, the Group had no
financing income and in 2007, it had financing income of NIS 33 thousand. Financing income includes, among other things, interest in
deposits of Atia Group Ltd.
Financing expenses
In the six month period ended 30 June 2008, financing expenses amounted to NIS 1,004 thousand, compared with an amount of NIS 1,013
thousand in the same period last year and NIS 1,831 thousand in all of 2007.
Taxes on income
In the six month period ended 30 June 2008, the tax benefit amounted to NIS 133 thousand in respect of deferred taxes, net, compared
with a tax expense of NIS 3,499 thousand in the same period last year, while in 2007, the Company had tax expenses of NIS 3,541 thousand in
respect of deferred taxes, deriving mainly from the change in fair value of investment real estate in Croatia.
E. Cash and sources of financing
Cash used by the Group for current operations in the six month period ended 30 June 2008 amounted to NIS 4,923 thousand, compared with
NIS 17,841 thousand in the same period last year and NIS 26,332 thousand in 2007. The negative cash flow derived mainly from payments made
by the Group in respect of the construction project in Las Vegas.
Cash used by the Group for investment activities in the six month period ended 30 June 2008 amounted to NIS 5,210 thousand, compared
with NIS 1,897 thousand in the same period last year and compared with cash flows provided by investment activity in 2007 in an amount of
NIS 5,025 thousand. Most of the cash was used in the investment in investment real estate in Croatia.
Cash provided by financing activities in the six month period ended 30 June 2008 amounted to NIS 6,450 thousand, compared with NIS 8,318
thousand in the same period last year and compared with an amount of NIS 22,545 thousand in 2007. The cash deriving from financing activity
derived from three sources: net loans received from interested parties, a short-term loan received by the Verge subsidiary from AFG, and a
long term loan received from the Trafalgar investment fund.
The balance of cash and cash equivalents as at 30 June 2008 amounted to NIS 45 thousand, compared with NIS 16 thousand as at 30 June
2007 and NIS 1,249 thousand as at 31 December 2007.
F. Qualitative report on the exposure to and management of market risks
During the reporting period, there were no significant changes in the exposure of the Company to market risks and the management of
such risks (as per the guidelines of the Securities Authority), when compared with the report of the Company on this issue for the year
ended 31 December 2007.
1. Names of the persons in charge
The person responsible for management of market risks in the Company is Mr. Yosef Atia, the CEO of the Company. He is assisted by the
Deputy CEO of the Company, Mr. Shalom Atia, in respect of market risks in Croatia, and by the VP - Finance of the Company, Mr. Danny Ofer,
in respect of the market risks in Israel.
2. Detailed description of the market risks to which the Company is exposed
a. The sub-prime crisis
The mortgage credit markets in the U.S. have been experiencing difficulties as a result of the
fact that many debtors are finding it difficult to obtain financing (hereinafter - the "Sub-prime crisis"). The sub-prime crisis derived
from a number of factors, as follows: the increase in the volume of repossessions of houses and apartments, the increase in the volume of
bankruptcies of mortgage companies, the significant decrease in accessible resources for purposes of mortgage financing, and the decrease in
the prices of dwelling units.
The fact that the financing of the construction project of the Verge subsidiary is contingent upon the future impact of the sub-prime
crisis on the financial institutions operating in the U.S. The sub-prime crisis may affect the ability of the Verge subsidiary to procure
the financing needed to complete the construction project and on the terms of the procured financing, should such be procured. In addition,
the crisis may affect the ability of the customers of the Company to obtain mortgages, should they be necessary, and on the terms of such
mortgages. As at the date of the drafting of the financial statements, the Company believes that its changes of procuring funding for the
project are less than probable and, accordingly, it set up a provision for a decline in value of the project.
b. Estimate of fair value of investment real estate
In the opinion of Company management, based on, among other things, the position of the appraiser, the fair value of real estate in
Samobor is affected by changes in the exchange rates of the euro and the kuna (Croatian currency) that are relevant in Croatia and less
affected by changes in the exchange rate of the dollar. Therefore, in the opinion of Company Management, a decline in the exchange rate of
the dollar will have no effect on the fair value of the real estate in Croatia.
c. Changes in exchange rates
A significant portion of the activity of the Company is expected to be conducted in various currencies, including the U.S. dollar and
the Croatian kuna (which is affected by the euro) and, as such, the Company is exposed to the risks of changes in exchange rates.
d. The economic condition in countries in which the subsidiaries operate
The demand for housing in the areas in which the subsidiaries operate is affected to a great extent from the local economic condition
and may have a negative impact on the operations of the companies.
e. Legal and regulatory requirements
The subsidiaries are subject to legal and regulatory requirements in various issues in the areas in which they operate.
G. Linkage bases of the Company
The following table presents the linkage balance sheet as at 30 June 2008:
Linked Linked to the Kuna Unlinked Non-monetary assets Total
to US$
NIS'000 NIS'000 NIS'000 NIS'000 NIS'000
Assets
Cash and cash equivalents 3 - 42 - 45
Accounts receivable and debit - 356 23 18 397
balances
Restricted cash 12,411 - - - 12,411
Buildings under construction - - - 12,738 12,738
Fixed assets, net - - - 34 34
Intangible assets - - - 54 54
Investment real estate - - - 71,242 71,242
______ ______ _____ _______ _______
Total assets 12,414 356 65 84,086 96,921
______ ______ _____ _______ _______
______ ______ _____ _______ _______
Liabilities
Short-term loan 5,920 - - - 5,920
Loans from interested parties 2,329 6,182 - - 8,511
Sellers of land - 40,535 - - 40,535
Suppliers and service 1,154 962 154 - 2,270
providers
Accounts payable and credit 1,911 8 1,371 - 3,290
balances
Advances from purchasers of 12,411 - - - 12,411
apartments
Current maturity of long-term 1,735 - - - 1,735
loan
Liability in respect of share 2,221 - - - 2,221
allotment agreement
Deferred taxes - - - 2,839 2,839
______ ______ _____ _______ _______
Total liabilities 27,681 47,687 1,525 2,839 79,732
______ ______ _____ _______ _______
______ ______ _____ _______ _______
Excess of assets over (15,267) (47,331) (1,460) 81,247 17,189
liabilities (excess of
liabilities over assets)
______ ______ _____ _______ _______
______ ______ _____ _______ _______
The following table presents sensitivity analyses of the fair value of the Group's financial instruments to changes in market factors
to which they are exposed, as at 30 June 2008 (in NIS thousands):
Sensitivity analysis of changes in the exchange rate of the U.S. dollar
Profit (loss) on the change in market Fair value of asset, Profit (loss) on the change in market
factor base rate of NIS factor
3.553 to the dollar
The sensitive instrument 10% increase in 5% increase in Asset 5% decrease in 10% decrease in
dollar vs. shekel dollar vs. shekel (liability) dollar vs. shekel dollar vs. shekel
Restricted cash 1,241 621 12,411 (1,241)
(621)
Loans from interested parties (233) (116) (2,329) 233
116
Short-term loan (592) (296) (5,920) 592
296
Suppliers and service (115) (58) (1,154) 115
58
providers
Accounts payable and credit (191) (96) (1,911) 191
96
balances
Advances from purchasers of (1,241) (621) (12,411) 1,241
621
apartments
Current maturity of long-term (174) (87) (1,735) 174
87
loan
Liabilities in respect of (222) (111) (2,221) 222
111
share allotment agreement
______ ______ ______ ______
______
Total financial instruments (1,527) (764) (15,270) 1,527
764
not for hedging purposes
______ ______ ______ ______
______
______ ______ ______ ______
______
Sensitivity analysis of changes in the exchange rate of the Croatian Kuna
Profit (loss) on the change in market Fair value of asset, Profit (loss) on the change in market
factor base rate of NIS factor
0.7689 to the kuna
The sensitive instrument 10% increase in kuna 5% increase in kuna Asset (liability) 5% decrease in kuna 10% decrease in
kuna
vs. shekel vs. shekel vs. shekel vs. shekel
Accounts receivable and debit 36 18 356 (36)
(18)
balances
Loans from interested parties (618) (309) (6,182) 618
309
Sellers of land (4,054) (2,027) (40,535) 4,054
2,027
Suppliers and service (96) (48) (962) 96
48
providers
Accounts payable and credit (1) - (8) 1
-
balances
______ ______ ______ ______
______
Total financial instruments (4,733) (2,366) (49,331( 4,733
2,366
not for hedging purposes
______ ______ ______ ______
______
______ ______ ______ ______
______
H. Critical accounting estimates
When preparing financial statements in accordance with IFRS, Company Management is required to use estimates and assessments that impact
on the amounts presented in the financial statements.
These estimates often require the use of discretion in an environment of uncertainty and have a significant impact on the presentation
of data in the financial statements.
The following are the key assumptions and significant accounting estimates that were used in preparing the financial statements of the
Company. When formulating such assumptions and estimates, Company Management has to make assumptions regarding circumstances and events that
involve a significant degree of uncertainty. In using its discretion when determining the estimates, Company Management bases itself on past
experience, various facts, external factors, and assumptions regarding the reasonableness of the circumstances that suit each estimate.
Actual results may differ from Management estimates.
Provision for decrease in value of buildings under construction
Buildings under construction are presented at the lower of cost or estimated net usage value. Cost includes direct identifiable costs,
subcontracting costs, joint indirect costs and capitalized credit costs. Joint indirect costs were allocated to work in progress on the
basis of various allocation keys. The net usage value is the estimated sale price during the normal course of business, less the estimated
costs to completion and the estimated costs of carrying out the sale. In cases in which a loss is expected on buildings under construction,
a provision for the entire amount of the expected loss is recorded at the date the loss is already forecasted, based on the best estimate of
Management regarding the expected loss, based on, among other things, a comparison of the market price of the inventory of buildings under
construction against similar assets having similar characteristics in similar transactions, proximate to the date of the valuation.
Estimate of the fair value of the investment real estate
The fair value of the property as at 30 June 2008 is NIS 71,742 thousand.
The fair value of the property was determined on the basis of a valuation conducted by Dr. Ali Kreisberg, a partner in the firm of Giza,
Zinger Even, a professional appraiser in Israel, as at 11 July 2007. The appraisal was based on the method of comparing the market value of
the assets with similar assets having similar characteristics in similar transactions, all at the time the appraisal was made.
This information was based on a visit to the area of the property in Samobor, Croatia. Additional information was provided by other
appraisers and real estate sites on the Internet. According to the valuation, the value of a square meter of property which was purchased is
1,182 Croatian Kuna.
In making his evaluation, the appraiser assumed the following:
A. There are no rental agreements in respect of the property.
B. Since the property is comprised of adjacent lots, the property was appraised as a single lot.
I. Litigation
Verge, a subsidiary of the Company, has been conducting legal proceedings against three different parties, as follows:
1. In December 2007, American LLC (hereinafter - "American"), which served as the company listing agent, filed a complaint in
Bankruptcy Court (as American entered in 2007 into Chapter 11 in the Nevada Bankruptcy Court) and an Order to Show Cause to Require Turnover
of Funds.
In January 2008, Verge filed an answer denying wrong doing as well as a counterclaim. On 23 May 2008, Verge entered into a settlement
and release of claims agreement and was approved by the court, whereby Verge will pay American an amount of $125 thousand. This amount was
presented in the consolidated balance sheet of the Company under the heading "accounts payable and credit balances".
2. On 21 November 2007, LM Construction filed a demand for an arbitration proceeding against Verge in connection with amounts
allegedly due for general contracting services provided by them during the construction of Verge's Sales Center. Verge agreed to enter into
arbitration, denied any wrong doing and filed a counterclaim for damages.
The amount of the suit is approximately $68 thousand and as part of the Group's conservative approach is included in accounts payable
and credit balances in the consolidated balance sheet.
3. On 25 April 2008, a former consultant of Verge who was disengaged by Verge recorded liens on the property in an amount of over
$1.2 million without submitting documentation to prove his demands. On 7 May 2008, the consultant notified Verge about his intention to
record additional liens amounting to $7.35 million. Verge's position is that by recording the liens, the said consultant caused damages that
might jeopardize the entire project, and therefore, on 18 June 2008, Verge filed a complaint with the Nevada State Board of Architecture
against the consultant for clouding title as well as damages. Upon the filing, the board notified Verge that the consultant is under its
investigation.
J. Subsequent events
1. Compliance with the preservation rules
Further to the aforementioned notifications of the Stock Exchange on 14 January 2008, on 30 July 2008, notification was received from
the Stock Exchange regarding the non-compliance of the Company with the requirement involving the minimum holdings by the public. The
Company was informed that the Stock Exchange checked the data as at 30 June 2008 and the results of their tests indicate that the percentage
of the Company held by the public is greater than 15%. Therefore, the board of directors of the Stock Exchange did not discuss transferring
the securities of the Company to the preservation list.
The next test regarding compliance of the Company with the preservation rules will be conducted at the beginning of January 2009, on the
basis of the data as at 31 December 2008.
2. Agreement with Porr
The Company, together with Sitnica and Atia Projekt D.o.o. (hereinafter - "Atia Projekt"), the former parent company of Sitnica which is
under the control of Mr. Shalom Atia, one of the controlling shareholders of the Company, entered into an agreement with Austrian companies
of the Porr Group (hereinafter - "Porr"). The major features of the agreement are as follows:
a. Pursuant to the agreement, Porr will be allotted shares in Sitnica, granting Porr a 50% share of the post-allotment issued capital
of Sitnica, in return for an investment of 10,888,500 Croatian Kuna (EUR1.5 million) to be made by Porr in the capital of Sitnica.
b. It was agreed that Sitnica would develop a real estate project (hereinafter - the "Samobor Project") on property that it will
purchase, partially directly and partially indirectly, through Atia Projekt. For details of the Samobor Prject and details of the agreement
between Sitnica and Atia Projekt, whereby Atia Projekt undertook to transfer to Sitnica property to be included in the Samobor Project, see
item 7.1(b) of the description of the business affairs of the corporation in the periodic report for 2007 which was issued on 31 March
2008.
c. It was further agreed that the funding for the completion of the purchase of the property and the construction of the Samobor
Project would come from, in addition to the shareholders' equity of Sitnica, a loan with a principal amount of EUR26 million that a
commercial bank will lend to Sitnica under the agreement. In the event that additional funding is needed for the project, it would be
furnished by the Company or by Porr, either by guaranteeing loans to be granted to Sitnica, or by an influx of shareholders' equity or by
any other means. In the event that one of the shareholders is unable to furnish its share in the additional funding, the other shareholder
shall be entitled to furnish the additional funding in its stead and in such a case, the parties will take steps to adjust the ratio of the
holdings in the capital of Sitnica to the ratio of the amounts of the funding furnished by each of the parties to Sitnica.
d. The agreement stipulated that a company of the Porr Group will be employed as the head contractor to carry out the Samobor
Project, with the consideration for the contracting services being computed on the basis of a cost + 15% mechanism.
e. The Company is entitled to a payment of EUR1.5 million from Sitnica in respect of services rendered in connection with the
investment of Porr in Sitnica, including the preparation and development of the Samobor project. The payment will be made to the Company as
a dividend, out of the distributable income of Sitnica, to the extent that Sitnica will have such income. Accordingly, the agreement
contained a provision whereby, in addition to the right of the Company to the dividend on the basis of its relative share in the issued
capital of Sitnica, the Company will be entitled to an additional dividend (the "Additional Dividend") in an amount of EUR1.5 million, which
would have been distributed to Porr if not for the aforementioned provision.
Immediately following Sitinica's signing of a bank financing agreement and the registration of the property in the name of Sitnica,
Sitnica will place at the disposal of the Company a loan in an amount of EUR1.5 million. To the extent that it is legally possible, the loan
will not bear interest and Sitnica will bear any tax consequence deriving from the loan.
The loan will be repaid in the form of an offset of the right of Sitnica in the loan, against the right of the Company to the
additional dividend. Notwithstanding, it was stipulated in the agreement that in the event that the offset cannot be carried out due to a
lack of distributable income or to an insufficient amount of the dividend, the Company will have to repay the loan to Sitnica.
f. In the event that the bank financing agreement is not signed by August 30, 2008, and a similar agreement for external financing of
the Samobor project is not signed, both the Company and Porr will be granted the right to demand that the Company purchase from Porr all of
Porr's share in the issued capital of Sitnica, for an amount of EUR1.5 million.
It was further stipulated in the agreement that in the event that Sitnica is not registered as the owner of the property by 31 December
2008, or if the outline plan for the project is not approved by that date, Porr will have the right to demand that the Company purchase from
Porr its entire share in the issued capital of Sitnica for an amount of EUR1.5 million.
The agreement stipulated that under certain circumstances (such as a breach of payment or the insolvency of one of the parties), one of
the parties will purchase the shares of the other shareholder in Sitnica for an amount equal to the fair market value, to be determined by
an independent accountant, the identity of which will be determined in accordance with a mechanism set out in the agreement.
g. The Company is a guarantor toward Porr, in an amount of up to EUR1.5 million, for the fulfillment of the commitments of the
Company and of Sitnica to Porr under the agreement, for the payment of the consideration of the shares in the event that any of Porr's
rights are exercised, and in the event that the agreement is cancelled in accordance with its provisions.
h. Upon the closing of the agreement, in July 2008, the Company recorded a gain on the issuance to a third party in an amount of
EUR0.3 million (NIS 1.6 million). The recognition of income in an amount of EUR0.3 million will be deferred until such time at which Porr no
longer has a PUT option for the sale of the shares of Sitnica to the Company for an amount of EUR1.5 million.
3. Change in the controlling structure of the Company
Emvelco and Mr. Joseph Atia, a controlling shareholder in Emvelco, notified the Company that on 19 August 2008, the following
agreements were signed:
a. An agreement between Emvelco and CP whereby the parties agreed that notwithstanding the stipulations of the Gas Agreement
regarding the prior demands for the transfer of the shares of the Company to CP, Emvelco will transfer to CP all of its shares in the
Company, i.e., 7,340,605 shares, valid as from 1 January 2008.
b. An agreement between CP and KSD Pacific LLC ("KSD") whereby CP would transfer to KSD, upon the signing of the agreement between
them, 7,340,605 shares of the Company, in return for 1,505,644 shares of Emvelco held by KSD.
As the Company was informed by Joseph Atia, KSD is a company incorporated in Nevada, USA, which Israel Corporation wholly-owned and
controlled by Joseph Atia and his wife, Anat Atia, through a family trust.
As a result of the signing of these agreements, Emvelco ceased being a controlling shareholder in the Company, while Joseph Atia became
a direct controlling shareholder. Previously, he had been a controlling shareholder through his control over Emvelco.
K. Activities of the internal auditor of the Company
On 29 August 2007, Ms. Sharon Tabib, CPA (Isr.) of the firm of Ziv Haft BDO was appointed to the position of internal auditor of the
Company.
In the first quarter of 2008, the internal auditor commenced performance of a risk assessment as the first phase of the internal audit
work process of the Company. An intelligent 5-year multi-year audit plan will be derived from the risk assessment. The auditor concluded his
risk assessment work at the Company and a discussion was held on the issue at the meeting of the audit committee.
L. Adjustment to IFRS
The financial statements as at 30 June 2008 are presented in accordance with IFRS. Prior to adoption of IFRS, the Company presented its
financial statements in accordance with accounting principles generally accepted in Israel. The last financial statements of the Company
presented in accordance with accounting principles generally accepted in Israel were those as at 31 December 2007 and for the year then
ended. In Note 9 of the financial statements, the Company presented reconciliations between reporting under accounting principles generally
accepted in Israel and reporting under IFRS for the balance sheets as at 1 January 2007, 30 June 2007 and as at 31 December 2007 and for the
profit and loss accounts of the six and three month periods ended 30 June 2007 and the year ended 31 December 2007.
M. Changes in the exposure to changes in exchange rates
Commencing from 1 January 2008 and through 30 June 2008, the shekel underwent an upward revaluation against the dollar and the Croatian
Kuna of 12.84% and 5.15% respectively.
From 1 July 2008 and until the date of the release of the financial statements, the shekel was devalued versus the dollar and the
Croatian Kuna by 6.5% and 2.6% respectively.
For information pertaining to the impact of the changes of the foreign currency exchange rates on the surplus assets of the Company, see
section G of the report of the board of directors.
An upward revaluation and/or a devaluation of the rate of the dollar and/or the Croatian Kuna may impact on the results of operations of
the Company and on its balance sheet as a result of the translation of the financial statements of subsidiaries which are reported in the
dollar and the Croatian Kuna.
N. The process of approval of the Company's financial statements
The board of directors of the Company is the organ that holds deliberations on the financial statements of the Company and approves
them, after the members of the board receive the draft of the financial statements a few days prior to the meeting at which financial
statements are to be approved.
The meeting of the board of directors at which the financial statements are discussed and approved is attended by representatives of the
Company's external auditors and representatives of the Company's legal counsel. These representatives usually add clarifications, as
required, regarding the issues that arise in connection with the financial statements to be approved and are at the disposal of the members
of the board regarding any questions or clarifications that may be needed prior to the approval of the financial statements.
Following the discussions and responses to the questions that were either prepared in advance by the directors or that arise during the
meeting, the members of the board of directors vote to approve the financial statements.
Yosef Atia Shalom Atia Dan Ofer
CEO and Director, deputy chairman of the board, in CFO
Director accordance with the authorization of the board
given on 28 August 2008
28 August 2008
This information is provided by RNS
The company news service from the London Stock Exchange
END
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