Riding the Write-off Wave

Recently published second-quarter financial statements for 2002 show a continuing negative trend in the commercial activities of Israeli companies. However, they also showed a slight improvement in comparison to previous quarters. The wave of write-offs that washed over the stock market in 2001 allowed numerous firms, holding companies in particular, to present somewhat improved results for the second quarter of 2002.

On the face of it, the drop in holding companies' losses is encouraging. Yet from a glance at the financial reports, it does not appear as if the commercial and financial status of their affiliates has improved. Many companies continued to report heavy losses, with the recession, the global economic climate, the high-tech crisis and the ongoing security tension all reflected in the financials of such firms.

On top of the problems that have been gripping the Israeli economy for the past two years, there was a spate of frauds, embezzlement and financial trickery in the second quarter. In recent months, the shrinking business sector has experienced the collapse of two small banks (Trade Bank and the Industrial Development Bank) and of a series of publicly-traded companies that were part of the Peled-Givony group. The bottom lines of several other companies were in the red because of these affairs.

When it came to reporting ever-increasing losses or significant reductions in net profits, the banks made the big headlines. Etti Alon's huge embezzlement and the subsequent collapse of Trade Bank was a minor episode in relation to the reverberating collapse of the Industrial Development Bank a few days after former minister Ra'anan Cohen was appointed its chairman. Years of incompetent management, political appointments and a problematic credit portfolio dragged the bank into a loss of NIS 128 million for the quarter.

Huge losses were also recorded by Israel Discount Bank and the First International Bank of Israel, NIS 85 million and NIS 76 million respectively. In both cases, the reason for the bad results fall under the same heading: provisions for doubtful loans to three problematic borrowers, Gad Ze'evi, cable company Tevel and Gilat Satellite Networks.

The banks' results were also seriously affected by the collapse of the Peled-Givony group. Continental Bank, for example, afforded the company credit of NIS 190 million - 75 percent of its equity - and this was immediately evident in its second-quarter results, which showed losses of NIS 64 million.

Other big second-quarter losers were companies in the fields of real estate, infrastructure, construction and industry. Cementcal, for example, long considered one of the country's most stable infrastructure companies, recorded a second-quarter loss of NIS 43 million, on top of losses of NIS 16 million and NIS 19 million in the two previous quarters. In the wake of these losses, Cementcal has built up a deficit of NIS 57 million in its equity.

Eliezer Fishman's enterprises also suffered in the second quarter, once again as a result of a NIS 71 million loss by tire-maker Alliance, due to a significant fall-off in both local and foreign sales. Fishman decided to forgo his control of the company, selling it off to a group of investors in an effort to reduce his debt to the banks. Current merger talks between Fishman's ID Design and publicly-traded Betili appear to have a similar objective.

The multichannel television market continued to slumber this past quarter. The deep pockets of Bezeq are stilling breathing life into the Yes satellite company, but Yes recorded a loss of NIS 135 million, stemming primarily from content agreements signed in an effort to attract subscribers. Cable-provider Tevel saw heavy losses of NIS 82 million, although it did have slightly more encouraging financials.

Channel 10, which had been expected to open up the commercial television market to competition, recorded a loss of NIS 50 million. On the other hand, Channel Two franchisees Keshet and Telad saw an increase in both revenues and net earnings.

Technology companies, whose rapid growth was halted at the end of 2002, had a tough time coping with the dramatic changes in the markets, and the bottom lines of their second-quarter financial reports were bright red. Nevertheless, over the past year, the companies have come to realize that without the demand for rapid growth on the part of their investors, they could devote themselves to proper management. With this in mind, such companies have spent the past quarters implementing recovery programs, cutting back on expenses, collecting debts and reviewing too-generous financing plans for their customers.

This change in perception was very evident in the financials of many companies. M-Systems, for example, which in second-quarter 2001 recorded a huge loss of $22.3 million, saw only a $1.4 million loss in the second quarter of this year.

Orckit and Alvarion also rode the waves of the 2000 bubble. Then, their managements were concerned primarily with growth and did not stop to think about expense structures. Today, however, the situation has changed and these companies recorded relatively small losses - although the transition to profit still appears far off.

Orckit ended the second quarter with a loss of $2.6 million - a significant improvement over the $8.9 million loss in the corresponding quarter of last year. Alvarion recorded a loss of $5 million, but this was still better than the $21 million it lost in second-quarter 2001.

The title of the biggest loser of the second quarter goes, surprisingly, to Amdocs. The Israeli flagship saw its first negative quarter since going public, taking a $27 million loss, and the company expects further losses in the quarters to come.

Another Israeli giant, Comverse, is also about to record its first loss in the past four years, going over to negative cash flow from ordinary activities. The company, which will publish its financials in a week's time, is expected to report a loss of more than 11 cents per share.