Going Concern' Warnings Hit High-flyers

The potpourri of urgent reports to the Tel Aviv Stock Exchange, the publications in the media, the deals that have been made and canceled, and the names that have been raised and dropped in connection with the impressive group of publicly-traded companies established over the past year by Rafi Peled and Aryeh Givony now indicate a mass of heavy losses. Some of these losses were recorded in the 2001 financial reports and some, mainly the capital losses from the acquisition of controlling stakes in other companies, are still "on paper" and will be registered sooner or later.

Following a delay of several weeks due to the evaluations conducted at Iscal, the companies of the Peled-Givony group are now publishing their financial reports for 2001. Last Wednesday, after the bourse took punitive steps against them and suspended trade in the group's shares, the two companies that spearhead the group, Hayl Holdings and Keren Peled Investments, published their reports, both of which included "going concern" warnings from their accountants.

A "going concern" warning is issued when there is serious doubt as to a company's future as a going concern, usually due to heavy losses, high debts and shareholders' equity deficit. Hayl's losses in 2001 totaled NIS 58.6 million, compared to losses of NIS 15.8 million in 2000 and 12.3 million in 1999. Hayl has an equity deficit of NIS 11.3 million.

Hayl's controlling shareholder, Keren Peled, lost NIS 46.8 million in 2001 and has an equity deficit of NIS 28.3 million. Feuchtwanger Investments, which published its financial reports on Tuesday, reported losses of NIS 51.5 million in 2001, compared to profits of NIS 1.8 million in 2000. Feuchtwanger's cash on hand and assets were used to purchase Iscal and Formula shares. Hayl and Karen have a combined shareholders' equity debt of NIS 32 million and NIS 295 million in working capital.

In an effort to improve this situation, the managements of Hayl and Keren claim they are planning financing activities to raise NIS 20 million in capital.

The heavy losses stemmed from the sharp drop in the shekel/dollar exchange rate, to which some of the group's loans are linked, and from a one-time write-off of the value of the Iscal shares it had purchased. The group is apparently planning to sell some of its real estate holdings, thereby bringing the shareholders' equity back into the black.

The first signs of the collapse of the takeover were already evident about six months ago, when the first disputes erupted against the minority shareholders in Feuchtwanger, Iscal and Formula. Then there was the withdrawal from the purchase deal for Danny Goldstein's controlling stake in Formula, which incurred substantial capital losses.

The surest indication of Hayl's difficult financial situation came a few weeks ago, when the company did not meet its NIS 15-million partial payment to bond holders. Hayl ultimately paid this debt, but with a delay and in installments, after it received an advance payment from the purchaser of two of its real estate properties and revealed its problems to the banks.

The group that signed generous purchasing agreements with the companies' controlling shareholders is now facing increasing liquidity problems itself and is having difficulty meeting even its own current commitments. Last week, for example, the lawyers for a bank to which Hayl owes money demanded repayment of NIS 10 million within a week. The lawyers noted that if Hayl did not make this payment, they would initiate legal proceedings against Hayl and would realize the securities and liens held as collateral for the debt.

Sources at Hayl say they are negotiating with the bank for the repayment of NIS 1.2 million of the debt within two weeks and the remainder in installments, according to the original repayment schedule. Another loan, from First International Bank of Israel (FIBI), to the amount of $3.6 million, has also not been repaid despite the granting of a two-month postponement of the payment. Hayl is currently negotiating with FIBI for the rescheduling of this loan.

The share prices of the companies in the group have lost tens of percentage points of their value and are being seriously affected by the whole affair. Iscal's share price, for example, has shed 90 percent of its value since Feuchtwanger's purchase of the controlling stake. Feuchtwanger and Formula have also suffered sharp drops in their share prices over the past year. The agreements for the purchase of Iscal shares have not yet been fully implemented and Feuchtwanger is obligated to buy the remainder of Iscal's controlling shareholders' shares at NIS 65.6 per share - this, when Iscal is currently trading for just NIS 4.2 per share.

Feuchtwanger lost NIS 41.5 million from its 25 percent holdings in Iscal. Even after the write-off, Iscal's shares are registered in Feuchtwanger `s books at a price higher than that on the bourse - NIS 29. The purchase of the remainder of the shares, in keeping with its commitment, will cause Feuchtwanger additional heavy losses.

The high point of Peled and Givony's purchasing plans, which were ultimately shelved, was the acquisition of the controlling stake in Formula. In the first quarter of 2002, the group will record the losses caused by the return of some of the shares to Goldstein - NIS 26 million. Even so, Iscal's major losses from its Formula holdings are still on paper.

Some 12.2 percent of Formula's shares, which are held by Iscal, are listed on its books at a value of NIS 134 million. The value of these shares on the stock exchange last week, even after a sharp rise of 4.7 percent, was NIS 55 million. In addition, Iscal signed an agreement to purchase 2.7 percent of Formula's shares from Mihshuv Yashir for $ 6.4 million, so the paper losses stemming from these purchases are close to NIS 100 million. At this point the group has decided not to record the drop in value of its Formula holdings.