RNS Number : 5861W
Atia Group Limited
12 June 2008
ATIA GROUP LTD.
(Formerly: KIDRON INDUSTRIAL HOLDINGS LTD.)
FINANCIAL STATEMENTS
31st DECEMBER 2007
ATIA GROUP LTD.
(Formerly: KIDRON INDUSTRIAL HOLDINGS LTD.)
FINANCIAL STATEMENTS AS AT 31st DECEMBER 2007
TABLE OF CONTENTS
Page
Report of the Board of Directors A - M
Auditor's Report 2 - 3
Balance Sheets 4
Statements of Net Assets in Liquidation 5
Consolidated Profit and Loss Accounts 6
Company Profit and Loss Accounts 7
Consolidated Statements of Recognised Gains and Losses 8
Statements of Changes in Shareholders' Equity (Deficit) 9 - 10
Consolidated Statements of Cash Flows 11 - 12
Company Statements of Cash Flows 13 - 14
Notes to the Financial Statements 15 - 74
Appendix - List of Group Companies 75
ATIA GROUP LTD.
Report of the Board of Directors
for the year ended 31st December 2007
We take pleasure in presenting the Report of the Board of Directors of the Atia Group Ltd. for the year ended 31st December 2007.
A. A condensed description of the Company and its business environment
- Atia Group Ltd. (formerly - Kidron Industrial Holdings Ltd.) (hereinafter - the "Company") is a public company, the major
activities of which until the beginning of 2007 were the manufacture, import and marketing of plastic products.
- During 2006, the Company experienced financial difficulties, as a result of which, in December 2006, the Company ceased fulfilling
its agreements with banks in connection with the repayment of its debts.
- On 4 February 2007, the Company was forced to cease its major activity - the manufacture and marketing of plastic products.
- On 7 February 2007, the Company issued termination notices to the vast majority of its employees.
- On 15 February 2007, at the request of the Company, the Nazareth District Court issued a stay of proceedings order.
The court appointed Alon Fredkin, CPA (Isr.) as special executive and trustee for the period of the stay and granted him the powers
of the board of directors.
- On 10 June 2007, the Nazareth District Court approved the creditors arrangement proposed by the trustee of the creditors
arrangement.
- On 5 July 2007, the general shareholders meeting ratified that creditors arrangement that was approved by the court.
- The trustee for the period of the stay confirmed that, commencing on 15 July 2007, all of the pre-conditions for the going into
effect of the creditors arrangement had been fulfilled.
- On 3 September 2007, 172,034,669 shares of the Company were allotted to Appswing Ltd. in a private placement, pursuant to an
agreement dated 19 July 2007, whereby Appswing Ltd. undertook to convert all of the amounts the Company owes it into 107,518,540 shares to
be allotted to it against the aforementioned debts.
In addition, the Company allotted Appswing 64,516,129 shares in return for a cash amount of NIS 8,570 thousand.
After the allotment of the shares to Appswing and further to the going into effect of the creditors agreement, the shareholders'
equity of the Company amounted to more than NIS 8 million.
- On 16 October 2007, the Company announced that it submitted to the Israel Securities Authority an initial draft of a prospectus to
raise capital from the public. On 20 November 2007, the Company announced that it had not yet completed the process of preparing the
prospectus and, therefore, it does not expect to issue the prospectus on the basis of the 30 June 2007 financial statements and that it
expects to issue the prospectus on the basis of the financial statements as at 30 September 2007.
- On 30 October 2007, the general shareholders meeting of the Company approved a placement of 907,934,502 shares as follows:
- 734,060,505 shares were allotted to Emvelco Corporation against the purchase of shares of a company that manages a real estate
project in the U.S.
- 172,873,997 shares were allotted to AP Holdings against the purchases of shares in a company that has contractual rights in
property in Croatia.
The aforementioned shares were allotted on 2 November 2007 in return for 75,000 shares of Verge Living Corporation (hereinafter -
"Verge") and 20,000 shares of Sitnica (hereinafter - "Sitnica"), which constitute 100% of the share capital of those companies,
respectively. The allotted shares constitute 72% of the issued shares 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
(number of units may be changed due to alignment) 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 70,700 square meters in the central Croatian
city of Samobor.
- Commencing on 1 November 2007, the Company hired Mr. Yosef Atia (controlling shareholder and CEO of Emvelco Corporation) and Mr.
Shalom Atia (controlling shareholder and CEO of AP Holdings Ltd.) as CEO and VP - European Operations, respectively, for a total cost to the
Company in respect of each one of $10,000. In addition, each of the above individuals will be entitled to an annual bonus of 2.5% of the
annual net pre-tax income of the Company in excess of NIS 8 million.
- On 2 November 2007, the Company granted a shareholders loan of $1.8 million to the Verge subsidiary for a period of 12 months. The
loan is in dollars and bears annual interest of 12%.
- The Company approved the granting of writs of indemnification and exemption to senior officers of the Company and the purchase of
senior officer indemnification insurance.
- On 15 November 2007, the Company changed its name to Atia Group Ltd.
- Commencement of work on the Las Vegas Project
On 12 December 2007, Verge Living Corporation, a wholly-owned subsidiary of the Company, commenced preparatory work on the Verge
Project in Las Vegas. The preparatory work includes demolition and removal of the building which is located on the property designated for
the project, and the moving of electricity cables and pipes that pass through the lot, so as to allow for construction of the project.
- Trading in the shares of the Company on the Tel Aviv Stock Exchange:
On 17 January 2005, the Company was given notice by the Tel Aviv Stock Exchange as to its lack of compliance with the preservation
rules set down in the Stock Exchange's Regulations and guidelines.
In September 2006, the board of directors of the Stock Exchange decided to transfer the securities of the Company to the
preservation list.
On 14 February 2007, trading of the shares of the Company on the Tel Aviv Stock Exchange was suspended, as a result of the
appointment of a receiver for a former subsidiary of the Company.
On 12 August 2007, the Company petitioned the Stock Exchange and the Israel Securities Authority to restart the trading of the
shares of the Company as part of the preservation list, in view of the going into effect of the creditors arrangement. In addition, the
Company requested that, in the event that the share allotment to Appswing Ltd. is completed by 3 September 2007 and the minimum
shareholders' equity requirements of the Company regarding the percentage of Company shares held by the public are met, the renewal of
trading of the shares of the Company on the regular list would be approved.
On 15 August 2007, trading of the shares of the Company was renewed on the preservation list.
Following the private placement on 3 September 2007 and the receipt of confirmation of the compliance of the Company with the
requirements of the Stock Exchange regarding minimum shareholders' equity and the percentage of Company shares held by the public, trading
in the shares of the Company was renewed on the regular list, commencing on 6 September 2007.
On 6 September 2007, the Company entered into a market making agreement with Excellence Nashua Stock Exchange Services Ltd.
B. Financial position as at 31 December 2007
As at 31 December 2007, the Group's cash amounted to NIS 1,249 thousand.
The Group has accounts receivable and debit balances of NIS 842 thousand as at 31 December 2007, which includes mainly advances to
services providers and prepaid expenses in connection with the construction project in Las Vegas.
Current assets of the Group as at 31 December 2007 amounted to NIS 72,407 thousand, including the buildings under construction and
restricted cash.
- The Group's buildings under construction as at 31 December 2007 amounted to NIS 53,010 thousand (we draw the attention of the
reader to the contents of Note 2Y of the financial statements regarding the restatement of the consolidated financial statements as at 31
December 2007 in order to reflect the recording of a liability in respect of commissions payable to real estate agents, against an increase
in the buildings under construction and in respect of the correction to cash flows from investment activity and current operations) and
includes the costs accrued as at 31 December 2007 in respect of the Las Vegas construction project.
- Cash that may not be withdrawn, in an amount of NIS 17,306 thousand, constitutes the deposits of the Group in a trust account in
respect of advances received from the purchasers of apartments in the Las Vegas Project.
The Group's investment real estate as at 31 December 2007 includes the fair value as at 31 December 2007 of the land in Samobor,
Croatia, in an amount of NIS 69,121 thousand, on the basis of a valuation carried out by an external appraiser. The cost of the
aforementioned land in an amount of NIS 50,827 thousand includes the tax applicable to the purchase of the land.
Current liabilities as at 31 December 2007 amounted to NIS 80,198 thousand and include mainly an amount of NIS 17,306 thousand in
respect of advances from apartment purchasers in the Las Vegas construction project, a liability to suppliers and other accounts payable of
NIS 3,677 thousand mainly in respect of the Las Vegas construction project, a provision for real estate agents in an amount of NIS 9,191
thousand. (The U.S. subsidiary entered into agreements with real estate agents for the payment of commissions in respect of the sales of
apartments in the Las Vegas projects. 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 31 December 2007, the subsidiary has a
liability of $2.4 million in respect of the apartment sales agreements signed as at that date. In connection with the provision for real estate agents, we draw the attention of the reader to the
contents of Note 2Y of the financial statements regarding the restatement of the consolidated financial statements as at 31 December 2007 in
order to reflect the recording of a liability in respect of commissions payable to real estate agents, against an increase in the inventory
of buildings under construction and in respect of the correction to cash flows from investment activity and current operations).
A liability to pay the balance of the consideration to the sellers of the land in Samobor, Croatia, in an amount of NIS 42,570 thousand,
and a liability to interested parties in an amount of NIS 7,454 thousand in respect of financing received from them in respect of the Las
Vegas and Samobor projects.
Long-term liabilities as at 31 December 2007 include a reserve for deferred taxes in an amount of NIS 3,035 thousand in respect of
deferred taxes, net.
The shareholders' equity of the Company as at 31 December 2007 amounted to NIS 58,420 thousand. The increase in shareholders' equity
derives from the following amounts: NIS 8.5 million from the issuance of shares to Appswing Ltd., NIS 39 million in respect of an allotment
of shares to companies controlled by the Atia family against the purchase of 100% of the shares of Sitnica d.o.o. and 100% of the shares of
Verge Living Corporation, NIS 11 million from the allotment of shares against the conversion of a liability to Appswing Ltd., and the net
income for the year in an amount of NIS 43,244 thousand.
C. Results of operations of the Group in 2007
Consolidated profit and loss accounts
Year ended
31 December
2007 2006
NIS'000 NIS'000
Change in fair value of investment real estate 18,294 -
Selling and marketing expenses 106 -
General and administrative expenses 2,175 -
_______ _______
Operating income before financing 16,013 -
Financing expenses, net (749) -
_______ _______
Operating income after financing and before taxes on income 15,264 -
Taxes on income (3,541) -
_______ _______
Income from continuing operations 11,723 -
Income (loss) from discontinued operations including income 31,521 (18,383)
from creditors arrangement
_______ _______
Net income (loss) for the year 43,244 (18,383)
_______ _______
_______ _______
D. Analysis of the results of operations for year ended 31 December 2007
Selling and marketing expenses
In the year ended 31 December 2007, the Group's selling and marketing expenses amounted to NIS 106 thousand. These expenses included the
selling and marketing costs of the Las Vegas construction project which cannot be capitalized.
General and administrative expenses
In the year ended 31 December 2007, the Group's general and administrative expenses amounted to NIS 2,175 thousand. In addition to the
costs of the Company in Israel, these expenses included expenses in respect of professional services, payroll and office costs of the
subsidiaries in Croatia and the U.S.
Financing expenses
In the year ended 31 December 2007, the Group's financing expenses amounted to NIS 749 thousand. These expenses included, among other
things, the financing required by the U.S. subsidiary for purposes of purchasing the land in Las Vegas and to finance the additional costs
of the project. They were included on the basis of the actual credit received by Verge.
Taxes on income
For the year ended 31 December 2007, income tax expenses amounted to NIS 3,541 thousand in respect of deferred taxes, net.
Income from discontinued operations including income from creditors arrangement
Further to the difficulties plaguing the Company and the stay of proceedings and the creditors arrangement that were approved for the
Company by the court, the Company ceased its plastics-related activities at the beginning of 2007. As a result, the results of the
discontinued operations and the creditors arrangement are presented in an item entitled "Income from discontinued operations including
income from creditors arrangement". The income from discontinued operations including income from creditors arrangement amounted to NIS
31,521 thousand, compared with a loss from discontinued operations of NIS 18,383 thousand last year. The increase in income derived from the
fact that the income from the erasure of liabilities as part of the creditors arrangement was included in the profit and loss accounts of
the Group in 2007.
E. Sources of financing
The Group financed its activity from the proceeds received from the issuance of shares to Appswing Ltd. in an amount of NIS 8.5 million.
The sources of financing in the financial statements as at 31 December 2007 also include the shareholders' equity of the Company deriving
from the investment in the shares of Verge and the shares of Sitnica, in consideration of an allotment of shares of the Company to companies
controlled by the Atia family, loans from interested parties in an amount of NIS 7.5 million, and advances from purchasers of apartments in
the Las Vegas project in an amount of NIS 17 million.
F. Qualitative report on the exposure to and management of market risks
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.
As at 31 December 2007, the Company has no positions in derivatives.
As at 31 December 2007, the Company's cash balances amounted to NIS 1,249 million, of which an amount of NIS 963 thousand was held in
unlinked shekel deposits, amount of NIS 211 thousand was linked to the dollar, an amount of NIS 39 thousand was linked to the pound sterling
and an amount of NIS 36 thousand was linked to the Croatian Kuna.
The following table presents sensitivity analyses of the fair value of the Group's financial instruments as at 31 December 2007 (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
factor
The sensitive instrument 10%+ 5%+ Asset (liability) 5%-
10%-
Cash and cash equivalents 21 11 211 (11)
(21)
Loans from interested parties (297) (149) (2,972) 149
297
Suppliers and other accounts (94) (47) (940) 47
94
payable
Provision for real estate (919) (459) (9,191) 459
919
agents
____ ____ ____ ____
____
Total financial instruments (1,289) (644) (12,892) 644
1,289
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
factor
The sensitive instrument 10%+ 5%+ Asset (liability) 5%-
10%-
Cash and receivables 29 14 293 (14)
(29)
Loans from interested parties (448) (224) (4,482) 224
448
Sellers of land (4,257) (2,128) (42,570) 2,128
4,257
Suppliers and service (189) (94) (1,887) 94
189
providers
____ ____ ____ ____
____
Total financial instruments (4,865) (2,432) (48,646) 2,432
4,865
not for hedging purposes
____ ____ ____ ____
____
____ ____ ____ ____
____
1. 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 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.
2. 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 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.
3. 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.
4. 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.
5. Legal and regulatory requirements
The subsidiaries are subject to the legal and statutory requirements in connection with issues involving the areas in which they
operate.
Linkage balances of the Company
The following table presents the linkage balance sheet of the Group as at 31 December 2007:
Linked Linked to the kuna Linked to Pound Unlinked Non-monetary assets Total
to US$ Sterling
NIS'000 NIS'000 NIS'000 NIS'000 NIS'000 NIS'000
Assets
Cash and cash equivalents 211 36 39 963 - 1,249
Accounts receivable and debit - 257 - 15 570 842
balances
Restricted cash 17,306 - - - - 17,306
Buildings under construction - - - - 53,010 53,010
Fixed assets, net - - - - 47 47
Other assets, net - - - - 78 78
Investment real estate - - - - 69,121 69,121
______ ______ ______ _____ _______ _______
Total assets 17,517 293 39 978 122,826 141,653
--------- --------- --------- -------- ----------- ----------
Liabilities
Loans from interested parties 2,972 4,482 - - - 7,454
Sellers of land - 42,570 - - - 42,570
Suppliers and service 434 1,883 45 157 - 2,519
providers
Accounts payable and credit 506 4 - 648 - 1,158
balances
Provision for real estate 9,191 - - - - 9,191
agents
Advances from customers 17,306 - - - - 17,306
Deferred taxes - - - - 3,035 3,035
______ ______ ______ _____ _______ _______
Total liabilities 30,409 48,939 45 805 3,035 83,233
--------- --------- --------- -------- ----------- ----------
______ ______ ______ _____ _______ _______
Excess of assets over (12,892) (48,646) (6) 173 119,791 58,420
liabilities (excess of
liabilities over assets)
______ ______ ______ _____ _______ _______
______ ______ ______ _____ _______ _______
G. Critical accounting estimates
When preparing financial statements in accordance with generally accepted accounting principles, Company Management is required to use
estimates and assessments in connection with transactions or matters, the final impact of which on the financial statements cannot be
accurately determined when the estimates or assessments are made. The major basis for the determination of the quantitative value of these
estimates are assumptions which management decides to adopt, taking into consideration certain circumstances in connection with the estimate
and the best knowledge available to Company Management at the time the assumption is made. By their very nature, due to the fact that these
estimates and assumptions are results of discretion used in an environment of uncertainty, sometimes very significant, changes in the
underlying assumptions as a derivative of changes which are not necessarily dependent upon Company Management, as well as additional
information in the future that was not in the possession of the Company when the estimates were made, may result in changes in the quantitative value of the estimate and also impact on the financial
position of the Company and the results of its operations. Therefore, even though estimates and assumptions may be made using the best
discretion of Management, the final quantitative impact on transactions and matters which require estimation may come to light only when
such transactions or matters have been completed. In certain circumstances, the final result of the matter involving the estimate may be
significantly different, especially from the quantitative amount that was determined at the time the estimate was made.
The following are the accounting estimates that have a potentially significant impact, which the Company has to address when preparing
its financial statements.
Estimate of the fair value of the investment real estate
The fair value of the property as at 31 December 2007 is NIS 69,121 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
Croatian Kuna 1,182.
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.
H. Donations
The Company has no explicit policy regarding donations. During the reporting period, the Company made no donations.
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. As of 31 December 2007, the American balance
on the books of Verge included an amount of $49 thousand in accounts receivable and debit balances (for the un-used portion of advances) and
approximately $56 thousand in accounts payable and credit balances for fees and expenses.
The Court set the trial for early January 2009, and also set a settlement conference for 31 July 2008.
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, denies 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, an attachment was registered in an amount of $1.2 million by a former consultant of Verge, without presenting
any of the documents needed to prove his demands. On 7 May 2008, the consultant notified Verge of his intention to register an additional
attachment in an amount of $7.35 million. According to Verge, by registering the attachments, the consultant caused damage which may very
well endanger the entire project. Therefore, Verge intends on filing a countersuit in respect of the false claim and the resultant damages.
J. Subsequent events
1. Investment agreement with Trafalgar
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 issue 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 2 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 69,375,000 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:
18,920,454 shares will be allotted immediately following receipt of approval of the stock exchange to the listing for trade of the
offered shares.
25,227,273 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 25,227,272 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 12,613,636 shares will be allotted to Trafalgar at that same
date.
Revision of the agreement between Trafalgar and Emvelco
On 30 April 2008, further to the immediate report of the Company dated 3 February 2008 regarding its entering into an investment
agreement with the international investment fund, Trafalgar, and further to the immediate report 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,
agreed to revise the agreement signed between them, whereby if the Company were not able to publicize a shelf prospectus, Emvelco would sell
to Trafalgar shares out of the available for trading shares held by it (when the shares are freed from the restrictions pursuant to article
15C of the Securities Law). According to the aforementioned revision, the share sales agreement will not apply to 69,375,000 ordinary shares
offered to Trafalgar and ATW, as set out in the allotment report.
2. Agreement for the management of the project in Las Vegas
In January 2008, the subsidiary, Verge Living Corporation, 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:
1. 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.
2. A monthly payment of $24,750.
3. 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. Agreement between Sitnica d.o.o., a subsidiary ("Sitnica"), and Mr. Shalom Atia, a controlling shareholder of the Company
Mr. Shalom Atia, a controlling shareholder of the Company, will furnish Sitnica, d.o.o., a subsidiary of the Company, credit in an
amount of EUR1.2 million as a bridge loan.
The bridge loan will be euro-denominated and will be non-interest bearing. The loan shall be repaid at the demand of Mr. Shalom
Atia, within 10 days following the furnishing of a payment demand.
The agreement to provide the loan is solely for the benefit of the Company.
The bridge loan is required by Sitnica to enable it to make a payment on account of the balance of the consideration for the
property in Samobor to third parties from whom the property was purchased, in accordance with the terms of the purchase agreement. At
present, Sitnica does not have liquid assets that would enable it to make the payment from its own resources and it requires external
financing. Financing through the bridge loan from a controlling shareholder will be the least expensive form of financing over any other
alternative and it will not place any restrictions or undertakings on the Company, except for the repayment of the loan principal.
The furnishing of the loan to the company by Mr. Shalom Atia is a transaction between a public company and its controlling
shareholder and, as such, it requires the approval of the audit committee of the Company.
4. Resignation and appointment of a director on behalf of the public
On 26 March 2008, Mr. Meir Matana, who served as an external director of the Company, tendered his resignation. Following Mr.
Matana's resignation, only one external director is on the board and, therefore, according to article 279 of the Companies Law, the audit
committee is unable to grant its required approval to the transaction, as set out in A5 above.
At an extraordinary meeting on 14 May 2008, it was decided to appoint Mr. Yossi Peled as an external director of the Company.
5. Negotiations for a partnership in a subsidiary in Croatia
On 14 May 2008, the Company announced that it was in the advanced stages of negotiations with the Porr Group, a large group of
companies with headquarters in Austria, engaged in various fields of real estate in Eastern and Central Europe. The negotiations are
expected to lead to an agreement whereby a company in the Porr Group will purchase half of the holdings in Sitnica, a company incorporated
in Croatia, which owns property in Samobor. The Porr Group will assist the Company in obtaining the financing necessary to complete the
purchase of the property in Samobor.
6. 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 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.
7. An agreement that may cause a change in control
The 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.
8. Progress in connection with the purchase of properties in Croatia
The subsidiary, Sitnica d.o.o. ("Sitnica"), is the holder of rights in property (the "asset in Samobor") which is comprised of 22
adjacent plots, covering a total area of 74,701 square meters in the city of Samobor, in the vicinity of Zagreb, the capital of Croatia.
Sitnica's rights in the asset in Samobor are based on an agreement between Sitnica and Atia Projekt d.o.o. (the "Atia Projekt"), the
former parent company of Sitnica and a company that is wholly-owned by Mr. Shalom Atia, one of the controlling shareholders of the Company.
Pursuant to the agreement, Atia Projekt undertook to transfer to Sitnica the plots that constitute the asset in Samobor in their entirety,
free of any third party rights.
For information pertaining to the asset in Samobor and the agreement with Atia Projekt, see section 7.1 (B) in the description of
the business affairs of the Company in the Company's periodic report for 2007, issued on 31 March 2008 (reference number 2008-01-094251).
The plots that constitute the asset in Samobor were purchased by Atia Projekt for a total amount of EUR 8,832,670 (NIS 45,930
thousand) (excluding transfer tax of 5% of the total consideration) from various sellers during the period March through May 2007.
According to the purchase agreements, Atia Projekt paid the sellers 10% of the total consideration in respect of the plots and
registered appropriate caveats in its name with the Land Registry in Samobor. The sellers deposited with a notary public documents that will
enable to purchaser to register the plots in its name with the Land Registry upon the payment of the balance of the consideration.
Sitnica and Atia Projekt agreed to have the agreement between the parties revised such that Atia Projekt would irrevocably assign
and transfer to Sitnica all of it rights pursuant to the purchase agreement and Sitnica would undertake to pay the sellers the unpaid
balance of the consideration and would bear the cost of the transfer tax in an amount of 5% of the total purchase consideration.
According to the purchase agreement, the dates for payment of the balance of the consideration were set for the period March through
May 2008.
To date, Sitnica paid a total of EUR441,634 (NIS 2,297 thousand) in respect of the 5% transfer tax on the total consideration.
To date, Sitnica paid a total of EUR1,421,090 (NIS 7,390 thousand) in respect of the consideration for 2 plots covering an area of
12,919 square meters and the ownership rights in these plots were registered in Sitnica's name.
Regarding 18 plots, covering an area of 52,073 square meters, Atia Projekt notified the Company that its took advantage of the
provisions of the purchase agreements relating to those plots, and postponed the payment date of the balance of the consideration, an amount
of EUR5,779,176 (NIS 30,052 thousand) by half a year, to October - November 2008.
Regarding 2 plots, covering an area of 9,709 square meters, Atia Projekt reached verbal agreements with the sellers of the plots
whereby the payment date of the balance of the consideration, an amount of EUR703,912 (NIS 3,660 thousand) would be postponed until the end
of June 2008.
The unpaid balance of the consideration for the asset in Samobor bears (kuna) interest at a rate of 15% per annum.
In addition to the above, Sitnica entered into an agreement in the period April - May 2008 to purchase 4 additional plots, bordering
on the asset in Samobor, covering an area of 7,492 square meters, for a total amount of EUR1,034,200 (NIS 5,378 thousand) (excluding
transfer tax of 5% of the consideration). Upon the signing of the agreements, Sitnica paid the owners of the properties insignificant
amounts, with the major part of the consideration under the agreements scheduled for payment on dates to commence between mid-June to
mid-July 2008.
9. Project under construction - Las Vegas, U.S.A.
According to the purchase contracts of the apartment units of the Las Vegas project, Verge undertook to complete most of the work no
later than 24 months after the signing of the contracts and to transfer possession of the apartments within 30 days after that date.
The time limitation set out in these agreements complies with the requirements of U.S. law, whereby agreements for the sale of
apartment units that stipulate a time limit of up to 24 months are exempt from obtaining the approval of the U.S. Department of Housing and
Urban Development (hereinafter - the "H.U.D.").
A significant portion of the contracts were signed in June 2007, when Verge expected that it would complete the construction by the
end of the time limit. Since the time limit was included in the contracts, no request was submitted for H.U.D. approval.
At present, Verge foresees that it will not be able to complete the construction by the end of the time limit. Therefore, Verge
commenced a process of changing the purchase agreements so as to exclude any time limit. Accordingly, Verge intends on submitting the
revised agreements and the rest of the documents related to the Las Vegas project, for their approval by the H.U.D. Verge Management
notified the Company that it expects to receive the approval within six months.
The assessment of Verge Management regarding receipt of approval for the project documents and the amount of time it will take to
obtain such approval constitutes forward looking information and it is based on Verge's experience in similar approval processes. The
assessment may very well not be realized, due to, among other things, delays on the part of the authorities or unexpected demands received
from them.
After receipt of the approval, Verge intends on contacting the apartment purchasers to offer them the option of signing the
alternative agreements without any time limit. The new agreements are contingent upon the consent of the apartment purchasers and Verge
Management foresees that 20% of the apartment purchasers will not elect to sign the alternative agreements and will terminate their
agreements with Verge.
The assessment of Verge Management regarding the percentage of apartment purchasers that will cancel their agreements with the
Company due to the change in the agreement format is forward looking information and it is based on discussions with apartment purchasers.
The assessment may very well not be realized, if the apartment purchasers change there minds, something which may very well happen due to,
among other things, changes in the economic situation in the U.S. or in the apartment market in Las Vegas.
J. 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 above and was granted a 6 month extension, until 30 June 2008 to comply with the rules.
K. Activities of the internal auditor of the Company
On 29 August 2007, Ms. Sharon Tabiv, CPA (Isr.) of the firm of Ziv Haft BDO was appointed to the position of internal auditor of the
Company. Ms. Tabiv (hereinafter - the "Internal auditor") has a bachelors degree in business administration from the College of Management,
a masters degree in public administration, majoring in internal auditing, and is a certified public accountant. The internal auditor is a
partner in the accounting firm of BDO and is not an employee of the Company.
The audit plan will be formulated together with Company Management and the audit committee, with the goal of having most of the issues
that are material to the Company audited, focusing at first on the issues that are high-risk. The considerations on which the audit plan was
determined include the following:
- Potential for savings and efficiency
- Risks that are inherent in the activities of the Company
- Regulations and ordinances that apply to the Company
- Weak points that management, the audit committee, or the internal auditor believe exist - on a regular basis.
The internal auditor will conduct the audit in accordance with generally accepted auditing standards. The auditor will be provided with
unrestricted and constant access to the information system and financial data for purposes of the audit.
The internal auditor will report directly to the chairman of the board of directors, in coordination with the audit committee.
To date, the internal auditor has not yet conducted any audit work at the Company. Nevertheless, the Company intends on starting
internal auditing during the first quarter of 2008. The first task of the auditor is to conduct a risk assessment, from which an intelligent
multi-year audit plan will be derived.
L. Sole authorized signatories
The Company does not have a sole authorized signatory. However, the subsidiaries, Verge Living Corporation and Sitnica d.o.o. have sole
authorized signatories as follows:
Verge has two sole authorized signatories - Yosef Atia, the CEO of the company and one of its controlling shareholders, and Mr. Darren C.
Dunckel, the business manager of Verge and a director of Emvelco Corp., the controlling shareholder of the Company.
Sitnica has one sole authorized signatory - Mr. Shalom Atia, the CEO of the company and one of its controlling shareholders.
M. Peer review
In July 2005, the Israel Securities Authority issued instructions requiring companies to provide disclosure of their consent to
participate in a "peer review", the goal of which is to advance a process of control pertaining to the work of the external auditors and an
assessment of the implementation of the procedures required during the course of their audit work, all with the goal of contributing to the
existence of a progressive capital market.
During 2006, the Company granted its in-principle consent to the transfer of the material required in the performance of a peer review.
N. Fee of the external auditors
The following is a breakdown of the fees of the external independent auditors of the Company:
2007 2006
Hours NIS'000 Hours NIS'000
Auditing services 1,510 375 1,480 178
Tax services 20 5 20 2
_____ _____ _____ _____
Total 1,530 380 1,500 180
_____ _____ _____ _____
_____ _____ _____ _____
O. Directors having financial accounting expertise
In accordance with the Companies Regulations (Conditions and Tests of a Director having Accounting and Financial Expertise and a
Director having Professional Qualifications) - 2005, the board of directors of the Company decided, in accordance with article 92(A) (12) of
the Companies Law and taking into consideration the nature and scope of the activities of the Company, that the minimum number of directors
having accounting and financial expertise would be two.
In the opinion of the board of directors, this minimum would permit it to meet its obligations under law and in accordance with the
articles of association of the Group, especially in connection with its responsibility to examine the financial position of the Group and to
prepare and approve the financial statements.
The directors having accounting and financial expertise that currently serve on the board of directors are: Yosef Atia, Gil Hod, and
Iftach Mazor
P. Adoption of International Financial Reporting Standards (IFRS)
In July 2006, the Israel Accounting Standards Board issued Accounting Standard No. 29 - "Adoption of IFRS" (hereinafter - "Standard No.
29"). Standard No 29 stipulates that companies subject to the Securities Law - 1968 and that report thereunder shall present their financial
statements in accordance with IFRS, commencing with reporting periods beginning on January 1, 2008.
According to the Standard, the Company has to include as part of the notes to the annual financial statements as at 31 December 2007 the
balance sheet data as of December 31, 2007 and the income statement data for the year then ended after subjecting such data to the rules of
recognition, measurement and presentation of IFRS standards. See Note 20 to the financial statements.
Q. 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 meetings of the board of directors at which the financial statements are discussed and approved are 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 or disapprove the financial statements.
Yosef Atia Shalom Atia Dan Ofer
CEO and Director, deputy chairman of the board, in accordance CFO
director with the authorization of the board given on 29 May
2008
29 May 2008
AUDITORS' REPORT
To the shareholders of
ATIA GROUP LTD.
(FORMERLY: KIDRON INDUSTRIAL HOLDINGS LTD.)
We have audited the accompanying Company and Consolidated balance sheets of Atia Group Ltd. (formerly: Kidron Industrial Holdings Ltd.)
(hereinafter - the "Company") as at 31 December 2007, and the statement of net assets in liquidation as at 31 December 2006, and the related
profit and loss accounts, statements of changes in shareholders' equity and statements of cash flows - of the Company and the Consolidated -
for each of the three years in the period ended 31 December 2007.
Respective Responsibilities of Directors and Auditors
These financial statements are the responsibility of the Company's board of directors and management. The financial statements are
presented in accordance with the accounting standards issued by the Israel Accounting Standard Board. Our responsibility is to express an
opinion on these financial statements based on our audit in accordance with the auditing standards issued by the Institute of Certified
Public Accountants in Israel
We did not audit the financial statements of a subsidiary, whose assets included in the consolidation constitute approximately 47% of
total consolidated assets as at 31 December 2007, and whose expenses included in the consolidation constitute approximately 34% of total
consolidated pre-tax expenses for the year then ended.
The financial statements of that company were audited by other auditors, whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for that company, is based on the reports of the other auditors.
Basis of Opinion
We conducted our audit in accordance with auditing standards issued by the Institute of Certified Public Accountants in Israel,
including those prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
Emphasis of Matter
As disclosed in Note 1B of the financial statements, in December 2006, the Company gave notice of its non-compliance with the repayment
dates of loans obtained from banking institutions, which gave the banking institutions cause to demand immediate repayment of the
liabilities of the Company. In February 2007, a stay of proceedings order was issued and a special manager was appointed for the period of
the stay. On 10 June 2007, the Nazareth District Court approved the creditors arrangement that was proposed by the trustee of the creditors
arrangement. On 15 July 2007, all of the pre-conditions were fulfilled for the entering into force of the creditors arrangement. As a result
of these processes, the Company changed its accounting policy as from 31 December 2006 and started reporting in accordance with accounting
principles for businesses in liquidation.
As detailed in Notes 1A(3) and 1A(4), upon consummation of the creditors arrangement and the allotment of shares to Appswing Ltd., the
Company returned to report in the format of a "going concern", commencing with the financial statements as at 30 September 2007.
Opinion
In our opinion, based on our audit and the aforementioned reports of other auditors, the financial statements referred to above present
fairly, in accordance with generally accepted accounting principles, including accounting principles applicable to a business in
liquidation, in reference to the statement on net assets in liquidation as at 31 December 2006, in all material respects, the financial
position - of the Company and the Consolidated - as at 31 December 2007, and the results of operations, changes in shareholders' equity and
cash flows - of the Company and the Consolidated - for each of the three years in the period ended 31 December 2007. Furthermore, in our
opinion, the financial statements referred to above are prepared in accordance with the Securities Regulations (Preparation of Annual
Financial Statements), 1993.
Pro Forma Information
In addition, we have audited the pro forma consolidated profit and loss accounts for 2007 and for the period from 13 February 2006 until
31 December 2006, presented in Note 20 to the financial statements. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on these financial statements based on our audit.
Our audit was conducted in accordance with the procedures outlined in the Basis of opinion above.
We did not audit the financial statements of a subsidiary, whose expenses included in the pro forma profit and loss accounts for 2007
and for the period from 13 February 2006 until 31 December 2006 constitute approximately 0% and 100%, respectively.
The financial statements of that company were audited by other auditors, whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for that company, is based on the reports of the other auditors.
Opinion on Pro Forma Information
In our opinion, based on our audit and the aforementioned reports of other auditors, the pro forma financial statements referred to
above present fairly, in accordance with generally accepted accounting principles in Israel, on the basis of the assumptions set out in Note
20 to the financial statements, in all material respects, the pro forma results of consolidated operations for the year ended 31 December
2007 and for the period from 13 February 2006 until 31 December 2006.
Emphasis of Matter
As explained in note 2A, the financial statements are presented in reported amounts in accordance with the accounting standards of the
Israel Accounting Standard Board.
We draw attention to Note 16B regarding the fact that the financing for 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 impact on the
ability of the Verge subsidiary to procure the financing required to complete the construction project and on the terms of such financing,
if procured, and may have an impact on the ability of the customers of the Company to procure mortgages, if necessary, and on the terms
under which such mortgaged will be procured.
In addition, we draw attention to Note 2C of the financial statements regarding the fact that the statements of operations for the year
2007 were presented in order to retroactively reflect the results of operations of the Sitnica subsidiary in accordance with a method
similar to the "Pooling of Interests" method of accounting.
In addition, we draw attention to Note 2Y regarding the restatement of the consolidated financial statements as at 31 December 2007 in
order to reflect therein the recording of a liability in respect of commissions payable to real estate agents against an increase in the
inventory of buildings under construction and in respect of a correction to the cash flows from investment activity and current operations.
Our opinion in this report is based on our opinion rendered in respect of the financial statements for the abovementioned years, the
last of which, referring to the year ended 31 December 2007, was rendered on 30 March 2008.
Fahn Kanne & Co.
Certified Public Accountants (Isr.)
29 May 2008
BALANCE SHEETS
Convenience translation
into � (Note 2)
Consolidated Company Consolidated
31 December 31 December 31 December
Note 2007 2007 2007
NIS' 000 NIS' 000 �' 000
A S S E T S
Current Assets
Cash and cash equivalents 1,249 1,002 162
Accounts receivable and debit 3 842 153 109
balances
Restricted cash 4 17,306 - 2,244
Buildings under construction 4 53,010(*) - 6,876(*)
_______ _______ _______
Total current assets 72,407 1,155 9,391
----------- ----------- -----------
Long-term Assets and
Investments
Investments in investee 5 - 58,115 -
companies
Fixed assets 6 47 - 6
Other assets 7 78 - 10
Investment real estate 8 69,121 - 8,965
_______ _______ _______
Total long-term assets and 69,246 58,115 8,981
investments
----------- ----------- -----------
_______ _______ _______
141,653 59,270 18,372
_______ _______ _______
_______ _______ _______
LIABILITIES AND SHAREHOLDERS
EQUITY
Current Liabilities
Loans from interested parties 18 7,454 - 967
Sellers of land 9 42,570 - 5,521
Suppliers and service 10 2,519 202 327
providers
Accounts payable and credit 11 1,158 648 150
balances
Provision for real estate 11A 9,191(*) - 1,192(*)
agents
Advances from customers 4 17,306 - 2,244
_______ _______ _______
Total current liabilities 80,198 850 10,401
----------- ----------- -----------
Long-term Liabilities
Deferred taxes 14 3,035 - 394
_______ _______ _______
Total long-term liabilities 3,035 - 394
----------- ----------- -----------
Commitments, liens and 15
contingent liabilities
Shareholders' Equity 13 58,420 58,420 7,577
----------- ----------- -----------
_______ _______ _______
141,653 59,270 18,372
_______ _______ _______
_______ _______ _______
(*) Restated - see Note 2Y.
Yosef Atia Shalom Atia Dan Ofer
CEO Director, deputy chairman of the board, in accordance CFO
with the consent of the board given on 29 May 2008
Date of approval of financial statements: 29 May 2008.
STATEMENT OF NET ASSETS IN LIQUIDATION
31 December
Note 2006
NIS' 000
A S S E T S
Assets attributed of discontinued operations 21 37,710
_______
_______
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities attributed of discontinued operations 21 80,231
----------
Shareholders' Deficit 13 (42,521)
----------
_______
37,710
_______
_______
Yosef Atia Shalom Atia Dan Ofer
CEO Director, deputy chairman of the board, in accordance CFO
with the consent of the board given on 29 May 2008
Date of approval of financial statements: 29 May 2008.
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Convenience
translation
into � (Note 2)
Year ended Year ended
31 December 31 December
Note 2007(*) 2006 2005 2007
NIS' 000 NIS' 000 NIS' 000 �' 000
Change in fair value of 18,294 - - 2,373
investment real estate
--------- --------- --------- ---------
Selling and marketing expenses 17A 106 - - 14
General and administrative 17B 2,175 - - 282
expenses
______ ______ ______ ______
2,281 - - 296
--------- --------- --------- ---------
______ ______ ______ ______
Operating income before 16,013 - - 2,077
financing
Financing expenses, net 17C (749) - - (97)
______ ______ ______ ______
Operating income after 15,264 - - 1,980
financing and before taxes on
income
Taxes on income 14 (3,541) - - (459)
______ ______ ______ ______
Income from continuing 11,723 - - 1,521
operations
Income (loss) from 21 31,521 (18,383) (14,993) 4,088
discontinued operations
including income from
creditors arrangement
______ ______ ______ ______
Net income (loss) for the year 43,244 (18,383) (14,993) 5,609
______ ______ ______ ______
______ ______ ______ ______
Earnings (loss) per share - in
NIS(**)
From continuing operations 3.02 - - 0.39
From discontinued operations 8.13 (10.26) (8.37) 1.06
______ ______ ______ ______
11.15 (10.26) (8.37) 1.45
______ ______ ______ ______
______ ______ ______ ______
Quantity of shares used in 3,878 1,792 1,792 3,878
calculating the earnings
(loss) per share in
thousands(**)
______ ______ ______ ______
______ ______ ______ ______
(*) See Note 2C regarding the accounting method used in respect of the investment in the Sitnica subsidiary.
(**) The calculation was made retroactively after taking into consideration the consolidation of the share capital effected on 21 May
2008. See also Notes 13H and 23A.
COMPANY PROFIT AND LOSS ACCOUNTS
Year ended
31 December
Note 2007 2006 2005
NIS' 000 NIS' 000 NIS' 000
General and administrative expenses 17B 1,520 - -
______ ______ ______
Operating loss before financing (1,520) - -
Financing expenses, net 17C (69) - -
______ ______ ______
Operating loss after financing (1,589) - -
Share of Company in income of investee 13,312 - -
companies, net(*)
______ ______ ______
Income from continuing operations 11,723 - -
Income (loss) from discontinued operations 21 31,521 (18,383) (14,993)
and creditors arrangement
______ ______ ______
Net income (loss) for the year 43,244 (18,383) (14,993)
______ ______ ______
______ ______ ______
Earnings (loss) per share - in NIS(**)
From continuing operations 3.02 - -
From discontinued operations 8.13 (10.26) (8.37)
______ ______ ______
11.15 (10.26) (8.37)
______ ______ ______
______ ______ ______
Quantity of shares used in calculating the 3,878 1,792 1,792
earnings (loss) per share in thousands(**)
______ ______ ______
______ ______ ______
(*) See Note 2C regarding the accounting method used in respect of the investment in the Sitnica subsidiary.
(**) The calculation was made retroactively after taking into consideration the consolidation of the share capital effected on 21 May
2008. See also Notes 13H and 23A.
CONSOLIDATED STATEMENTS OF RECOGNISED GAINS AND LOSSES
Convenience translation
into � (Note 2)
Year ended Year ended
31 December 31 December
2007 2006 2005 2007
NIS' 000 NIS' 000 NIS' 000 �' 000
Total recognized gains 43,244 (18,383) (14,993) 5,609
(losses) for the year
______ ______ ______ ______
______ ______ ______ ______
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Year ended 31 December 2007
Share Share premium Capital reserve Capital reserve from Adjustments deriving Accumulated deficit
Total
capital transactions with from the translation
controlling of the financial
shareholders statements of
investee companies
operating in foreign
currency
NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000
NIS' 000
Balance as of 1 January 2007 42,724 71,166 327 - - (156,738)
(42,521)
Changes in 2007:
Adjustments deriving from the - - - - (1,165) -
(1,165)
translation of the financial
statements of investee
companies operating in foreign
currency
Issuance of shares against - 11,000 - - - -
11,000
conversion of liabilities (1)
Issuance of shares against - 8,556(*) - - - -
8,556
cash (1)
Issuance of shares against - 38,910 - - - -
38,910
investment in shares of
subsidiaries (2)
Capital reserve from - - - 396(**) - -
396
transactions with controlling
shareholders
Net income for the year - - - - - 43,244
43,244
______ _______ ____ ____ ______ ________
______
Balance as of 42,724 129,632 327 396 (1,165) (113,494)
58,420
31 December 2007
______ _______ ____ ____ ______ ________
______
______ _______ ____ ____ ______ ________
______
(*) Net of issuance costs of NIS 14 thousand.
(**) See Note 1B(5)7.
(1) See Note 1C.
(2) See Notes 1D and 2C.
Year ended 31 December 2006
Share Share premium Capital reserve Accumulated deficit Total
capital
NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000
Balance as of 1 January 2006 42,724 71,166 327 (138,355) (24,138)
Changes in 2006:
Loss for the year - - - (18,383) (18,383)
______ ______ ____ _______ _______
Balance as of 31 December 2006 42,724 71,166 327 (156,738) (42,521)
______ ______ ____ _______ _______
______ ______ ____ _______ _______
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Year ended 31 December 2005
Share Share premium Capital reserve Accumulated deficit Total
capital
NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000
Balance as of 1 January 2005 42,724 71,166 327 (123,362) (9,145)
Changes in 2005:
Loss for the year - - - (14,993) (14,993)
______ ______ ____ _______ _______
Balance as of 31 December 2005 42,724 71,166 327 (138,355) (24,138)
______ ______ ____ _______ _______
______ ______ ____ _______ _______
Convenience translation into � (Note 2)
Year ended 31 December 2007
Share Share premium Capital reserve Capital reserve from Adjustments deriving Accumulated deficit
Total
capit transactions with from the translation
al controlling of the financial
shareholders statements of
investee companies
operating in foreign
currency
�'000 �'000 �'000 �'000 �'000 �'000
�'000
Balance as of 1 January 2007 5,541 9,230 42 - - (20,328)
(5,515)
Changes in 2007:
Adjustments deriving from the - - - - (151) -
(151)
translation of the financial
statements of investee
companies operating in foreign
currency
Issuance of shares against - 1,427 - - - -
1,427
conversion of liabilities (1)
Issuance of shares against - 1,110(*) - - - -
1,110
cash (1)
Issuance of shares against - 5,046 - - - -
5,046
investment in shares of
subsidiaries (2)
Capital reserve from - - - 51(**) - -
51
transactions with controlling
shareholders
Net income for the year - - - - - 5,609
5,609
_____ ______ ____ ____ _____ ______
_____
Balance as of 5,541 16,813 42 51 (151) (14,719)
7,577
31 December 2007
_____ ______ ____ ____ _____ ______
_____
_____ ______ ____ ____ _____ ______
_____
(*) Net of issuance costs of �2 thousand.
(**) See Note 1B(5)7.
(1) See Note 1C.
(2) See Notes 1D and 2C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Convenience
translation
into � (Note 2)
Year ended Year ended
31 December 31 December
2007 2006 2005 2007
NIS' 000 NIS' 000 NIS' 000 �' 000
Net cash flows from operating
activities
Net income (loss) for the year 43,244 (18,383) (14,993) 5,609
Adjustments required to (46,297)(*) - - (6,004)(*)
reconcile net cash from
continuing operating
activities (Appendix A)
Adjustments required to - 19,341 11,044 -
present cash flows from
discontinued operations
______ ______
Net cash used in continuing (3,053) - - (395)
operating activities
______ ______
Net cash provided by (used in) (45) 958 (3,949) (6)
discontinued operating
activities
______ ______ ______ ______
Net cash provided by (used in) (3,098) 958 (3,949) (401)
operating activities
--------- --------- --------- ---------
Cash flows from investment
activities
Amounts transferred to (8,022)(*) - - (1,040)(*)
investment real estate
Purchase of companies 273 - - 35
consolidated for the first
time (Appendix C)
______ ______ ______ ______
Net cash used in continuing (7,749) - - (1,005)
investment activities
Net cash provided by (used in) - (406) 955 -
discontinued investment
activities
______ ______ ______ ______
Net cash provided by (used in) (7,749) (406) 955 (1,005)
investment activities
--------- --------- --------- ---------
Cash flows for financing
activities
Receipt of loans from 3,801 - - 493
interested parties, net
Issuance of shares (**) 8,556 - - 1,110
______ ______ ______ ______
Net cash provided by 12,357 - - 1,603
continuing financing
activities
Net cash provided by (used in) - (1,637) 2,985 -
discontinued financing
activities
______ ______ ______ ______
Net cash provided by (used in) 12,357 (1,637) 2,985 1,603
financing activities
--------- --------- --------- ---------
Translation differences in (306) - - (40)
respect of cash balances of
autonomous investee companies
--------- --------- --------- ---------
______ ______ ______ ______
Increase (decrease) in cash 1,204 (1,085) (9) 157
and cash equivalents
Cash and cash equivalents, 45 1,130 1,139 5
beginning of the year
______ ______ ______ ______
Cash and cash equivalents, end 1,249 45 1,130 162
of the year
______ ______ ______ ______
______ ______ ______ ______
(*) Restated - See Note 2Y.
(**) Less issuance costs of NIS 14 thousand (�2 thousand).
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
Appendix A - Adjustments required to reconcile net cash from continuing operating activities
Convenience translation
into � (Note 2)
Year ended Year ended
31 31 December
December
2007 2007
NIS'000 �' 000
Income and expenses not constituting a
current flow of funds:
Income from discontinued operations (31,521) (4,088)
including income from creditors
arrangement
Change in fair value of investment real (18,294) (2,373)
estate
Depreciation and amortization 10 2
Deferred taxes, net 3,541 459
______ ______
(46,264) (6,000)
--------- ---------
Changes in assets and liabilities:
Decrease in accounts receivable and debit 645 84
balances
Increase in restricted cash (572) (74)
Increase in buildings under construction (3,328)(*) (432)(*)
Increase in suppliers and service 2,127(*) 276(*)
providers
Decrease in accounts payable and credit (1,122) (145)
balances
Increase in provision for real estate 1,645(*) 213(*)
agents
Increase in advances from customers 572 74
______ ______
(33) (4)
--------- ---------
______ ______
(46,297) (6,004)
______ ______
______ ______
Appendix B - Non-cash transactions
Conversion of liability to Appswing Ltd. into share 11,000 1,427
capital
______ ______
______ ______
Transfer to capital reserve from transaction with 396 51
controlling shareholders
______ ______
______ ______
Conversion of loans of interested parties into the share 4,771 619
capital of a subsidiary
______ ______
______ ______
Investments in investment real estate against sellers of 42,690(*) 5,537(*)
land and suppliers and service providers
______ ______
______ ______
Appendix C - Purchase of Company consolidated for the first time
Working capital, net, excluding cash (33,731) (4,374)
Fixed assets (52) (7)
Other assets (83) (11)
Issuance of shares 34,139 4,427
______ ______
Net cash provided by purchase of company consolidated for 273 35
the first time
______ ______
______ ______
(*) Restated - See Note 2Y.
COMPANY STATEMENTS OF CASH FLOWS
Year ended
31 December
2007 2006 2005
NIS' 000 NIS' 000 NIS' 000
Net cash flows from operating activities
Net income (loss) for the year 43,244 (18,383) (14,993)
Adjustments required to reconcile net cash (43,632) - -
from continuing operating activities (Appendix
A)
Adjustments required to present cash flows - 19,415 13,031
from discontinued operations
______
Net cash used in continuing operating (388) - -
activities
______ ______
Net cash provided by (used in) discontinued (45) 1,032 (1,962)
operating activities
______ ______ ______
Net cash provided by (used in) operating (433) 1,032 (1,962)
activities
--------- --------- ---------
Cash flows from investment activities
Granting loan to a subsidiary (7,166) - -
______ ______ ______
Net cash used in continuing investment (7,166) - -
activities
Net cash used in discontinued investment - (406) (1,067)
activities
______ ______ ______
Net cash used in investment activities (7,166) (406) (1,067)
--------- --------- ---------
Cash flows for financing activities
Issuance of shares (*) 8,556 - -
______ ______ ______
Net cash provided by continuing financing 8,556 - -
activities
Net cash provided by (used in) discontinued - (1,637) 3,934
financing activities
______ ______ ______
Net cash provided by (used in) financing 8,556 (1,637) 3,934
activities
--------- --------- ---------
______ ______ ______
Increase (decrease) in cash and cash 957 (1,011) 905
equivalents
Cash and cash equivalents, beginning of the 45 1,056 151
year
______ ______ ______
Cash and cash equivalents, end of the year 1,002 45 1,056
______ ______ ______
______ ______ ______
(*) Less issuance costs of NIS 14 thousand.
COMPANY STATEMENTS OF CASH FLOWS (cont.)
Appendix A - Adjustments required to reconcile net cash from continuing operating activities
Year ended
31
December
2007
NIS'000
Income and expenses not constituting a current flow of funds:
Income from discontinued operations including income from creditors (31,521)
arrangement
Interest and erosion on loan to subsidiary 108
Company's share in income of investee companies (13,312)
______
(44,725)
---------
Changes in assets and liabilities:
Increase in accounts receivable and debit balances (153)
Increase in suppliers and service providers 202
Increase in accounts payable and credit balances 1,044
______
1,093
---------
______
(43,632)
______
______
Appendix B - Non-cash transactions
Investments in subsidiaries against allotment of shares 38,910
______
______
Conversion of debt to Appswing ltd. into share capital 11,000
______
______
Transfer to capital reserve from transaction with controlling 396
shareholders
______
______
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - GENERAL
A. Company activities
1. Atia Group Ltd (formerly: Kidron Industrial Holdings Ltd.) (hereafter - "the Company") is a public company which, until the
beginning of 2007, engaged primarily in the manufacture, importing, and marketing of plastic products.
Upon the completion of the allotment of shares against the purchase of the subsidiaries as detailed in Note 1D below, the Company
operates in the residential construction business in the U.S. through a subsidiary and holds real estate in Croatia through a subsidiary.
2. On 31 August 2004, the Company changed its name from "Technoplast Industries Ltd." to "Kidron Industrial Holdings Ltd."
On 11 November 2007, the Company changed its name from "Kidron Industrial Holdings Ltd." to its current name.
3. On 15 February 2007, at the request of the Company, the Nazareth District Court issued a stay of proceedings order (equivalent of
U.S. Chapter 11 protection).
The court appointed Alon Fredkin, CPA (Isr.) as special executive and trustee for the period of the stay and granted him the powers
of the board of directors (for details, see B below).
As a result of these processes, the Company changed its accounting policy commencing with the financial statements as at 31 December 2006
and started reporting in accordance with the accounting principles applicable to a business in liquidation.
On 10 June 2007, the Nazareth District Court approved the creditors arrangement proposed by the trustee of the creditors arrangement.
On 5 July 2007, the general shareholders meeting ratified the creditors arrangement that was approved by the court.
The trustee for the period of the stay confirmed that, commencing on 15 July 2007, all of the pre-conditions for the going into effect of
the creditors arrangement had been fulfilled.
4. The Company continued reporting in accordance with accounting principles for businesses in liquidation up to and including the
interim financial statements as at 30 June 2007 and for the six and three-month periods ended 30 June 2007. As detailed in length below, on
10 June 2007, the creditors arrangement was ratified by the Nazareth District Court and it went into effect in July 2007. During the month
of September 2007, the liabilities of the Company toward Appswing Ltd. were converted into capital, and shares were allotted to Appswing in
return for an amount of NIS 8 million (see Note 1C, below). Therefore, the Company once again began reporting as a "going concern"
commencing with the financial statements as at 30 September 2007 and for the nine and three-month periods ended on 30 September 2007.
Further to the entry of the creditors arrangement into force in July 2007 and further to the allotment of shares to Appswing Ltd. In
September 2007, all of the liabilities of the Company were erased and its shareholders' equity amounted to over NIS 8 million. In addition,
in view of the creditors arrangement, all of the liabilities (including contingent and including future) and commitments of the Company
which existed prior to the creditors arrangement are no longer valid.
5. On 30 October 2007, the general shareholders meeting of the Company ratified the allotment of 907,934,502 shares against the
purchase of the shares of Verge Living Corporation (hereinafter - "Verge"), a company that owns a real estate project in the U.S., and the
shares of Sitnica D.O.O. (hereinafter - "Sitnica"), a company that has contractual rights in property in Croatia. See also Note 1D below.
As detailed in Note 2C, the investment in Verge was treated as a reverse acquisition and the investment in Sitnica was treated in
accordance with the principles of Decision 2-10 of the Israel Securities Authority, "Treatment of Business Combination Transactions under
Common Control", in a method similar to the "Pooling of Interests" method of accounting.
NOTE 1 - GENERAL (cont.)
B. 2007 creditors arrangement
1. Non-compliance with the repayment dates of the loans received from banking institutions
On 20 December 2006, the Company announced that 14 December 2006 was one of the quarterly repayment dates of the refinanced loan in
an amount of NIS 420 thousand, due to Bank Leumi LeIsrael Ltd. (hereinafter - "Bank Leumi" or the "Bank"). The Company did not make the
aforementioned payment to Bank Leumi and, as at the same date, the Company reported that it was experiencing a real difficulty in making the
payment. The Company conducted negotiations with the Bank Leumi regarding the postponement of the payment date and a meeting was set for 14
January 2007. The reply of Bank Leumi dated 12 December 2006 (two days before the repayment date) was that the Company was requested to
comply with the provisions of the interbank agreement, including the payment of the aforementioned amount on time.
Since the receipt of that letter, the Company has been making efforts to postpone the payment date but, notwithstanding, the Bank
remained firm with the demands presented in its letter of 12 December 2006.
In view of the above and in accordance with the interbank agreement, Bank Leumi and/or any of the other banks have grounds to demand
the immediate repayment of the debts and liabilities of the Company, which grounds arose 14 days after receipt of the written notice from
Bank Leumi and/or any of the other banks regarding the breach.
Please note that the Company also did not meet the entire quarterly payment of the fourth quarter of 2006 in an amount of NIS 420
thousand to Discount Bank. However, regarding that payment, the Company obtained the consent of the bank to postpone the payment.
2. Freezing the business activity of the plastics division
On 4 February 2007, the Company announced that, in view of its difficult financial position and the lack of financial resources to
meet its liabilities on a regular basis, Company Management decided to freeze, for the time being, the business activity of the plastics
division which is engaged solely in the manufacturing of plastic products using the injection method, at the Company's site in Migdal
Haemek.
On 7 February 2007, the Company gave dismissal notices to the vast majority of its employees.
3. Demand for the immediate repayment of the liabilities of Kidron Plastics Marketing Ltd. to banking institutions
On 8 February 2007, the Company announced that in accordance with the agreement from 11 November 2004 and the addendum to the
agreement dated 22 February 2006 between Kidron Plastics Marketing Ltd. (hereinafter - "Plastics Marketing"), a wholly-owned subsidiary of
the Company at that time, and First International Bank of Israel Ltd. (hereinafter - "FIBI"), FIBI granted credit in favour of Plastics
Marketing, secured by a floating charge in favour of FIBI (hereinafter - the "Agreement").
In view of the difficult financial position of the Company and of Plastics Marketing and the lack of financial sources to meet their
liabilities on a regular basis, including the liability of Plastics Marketing to FIBI, on 7 February 2007, representatives of the Company
met with FIBI and reported to the bank regarding the financial positions of the Company and Plastics Marketing, on the functioning of the
two companies and on the possibility of seeking Chapter 11 protection.
On 7 February 2007, Plastics Marketing received a letter from FIBI demanding that Plastics Marketing comply with the provisions of
the Agreement. In view of the financial positions of the Company and of Plastics Marketing at that time and the ramifications thereof on the
assets pledged in favour of FIBI and in accordance with the provisions of the Agreement, grounds arose for FIBI to demand the immediate
repayment of the debts and liabilities of Plastics Marketing. In its letter, FIBI stated that it would take immediate steps to enforce its
rights.
On 7 February 2007, FIBI sent a letter to Mr. Michael Zuz, the former controlling shareholder in the Company and the guarantor for
the debts of Plastics Marketing, demanding immediate repayment of the debts of Plastics Marketing within 15 days of the date of the letter
or, alternatively, that FIBI be presented within that timeframe with a plan for the repayment of the debt.
NOTE 1 - GENERAL (cont.)
B. 2007 creditors arrangement (cont.)
3. Demand for the immediate repayment of the liabilities of Kidron Plastics Marketing Ltd. to banking institutions (cont.)
On 7 February 2007, Plastics Marketing received a letter from Bank Igud LeIsrael Ltd. (hereinafter - "Bank Igud") whereby, in
accordance with terms of the credit of the Company in Bank Igud and the loan agreement, Bank Igud has grounds to demand the immediate
repayment of the debts and liabilities of Plastics Marketing, within nine days of the sending of the letter.
On 8 February 2007, the Company announced that it believes that Plastics Marketing will be unable to meet its liabilities towards
FIBI and towards Bank Igud under the agreement and the loan agreement, respectively, and that Plastics Marketing will be unable to comply
with the demand for immediate repayment.
On 13 February 2007, the Company was served with an urgent request to appoint a temporary receiver for the assets of Plastics
Marketing. The request had been filed that same day to the Tel Aviv District Court on behalf of FIBI and Bank Igud (hereinafter - the
"Banks", the "Petition to Appoint a Temporary Receiver", respectively).
Concurrent with the filing of the request to appoint a temporary receiver, the Banks filed a petition with the Tel Aviv District
Court to enforce pledges and to appoint a receiver for the assets of Plastics Marketing.
On 13 February 2007, a decision was handed down on the petition to appoint a temporary receiver by the Honourable Justice D. Keret,
ordering the appointment of attorney Amir Bartov as the temporary receiver of the assets of Plastics Marketing.
4. Appointment of Special Managers for the shares of Kidron Plastics Ltd.
On 16 May 2005, FITE - First Israel Turnaround Enterprise (Delaware) L.P. and the limited partnerships in FITE (hereinafter -
together the "Fund") and the Company signed a loan agreement for a period of five years, whereby the Fund lent an amount of $3.5 million to
the Company (hereinafter - the "Loan" and the "Loan Agreement", respectively). For purposes of guaranteeing its commitments to the Fund, on
27 July 2005, the Company signed promissory notes in favour of the Fund, in an amount equal to the amount of the loan and placed a fixed,
first-degree pledge (hereinafter - the "Pledge"), unlimited in amount, on all of its shares in Kidron Plastics Ltd. (hereinafter -
"Plastics").
On 11 February 2007, the Company was served with a demand to enforce the fixed pledge, which had been filed on that same day with
the Tel Aviv District Court on behalf of the Fund (hereinafter - the "Demand"), claiming that the Company failed to meet its commitments
under the loan agreement.
In the Demand, the Fund requested that the Court issue an order for the enforcement and consolidation of the pledge and to permit
the Fund to sell the pledged shares.
In addition, on 11 February 2007, the Company was served with an urgent request to appoint a temporary receiver for the pledge,
which had been filed by the Fund (in a one-sided action) with the Tel Aviv District Court together with the Demand.
On 20 February 2007, the Tel Aviv District Court stayed the hearing on the motion of the FITE Fund for the enforcement of the fixed
pledge on the shares of Kidron Plastics Ltd. until receipt of the approval of the Nazareth District Court regarding the proceedings
instituted by the FITE Fund, in view of the stay of proceedings order issued on 15 February 2007 by the Nazareth District Court.
Further to the decision of the Tel Aviv District Court, on 21 February 2007, the FITE Fund filed a motion with the Nazareth District
Court to permit the Fund to realize the fixed pledge the Fund has on the shares of Kidron Plastics.
On 22 February 2007, the FITE Fund (hereinafter - the "Petitioner") and the trustee of the Company, Alon Fredkin, CPA, reached the
following agreements:
- The ongoing management of Kidron Plastics Ltd. will be carried out by a representative of the petitioner and a representative of
the trustee. In the event of a dispute between the two, the representative of the petitioner shall have the decisive vote.
NOTE 1 - GENERAL (cont.)
B. 2007 creditors arrangement (cont.)
4. Appointment of Special Managers for the shares of Kidron Plastics Ltd. (cont.)
- The trustee will appoint himself or someone on his behalf, and the petitioner will appoint Mrs. Neomi Enoch, unless they decide to
appoint someone else on their behalf.
- The trustee has the right to appeal to the court any decisions made by the representative of the petitioner.
- Regarding any matters that are not connected with the ongoing management of Kidron Plastics Ltd., including the realization of
Kidron Plastics or its shares, decisions will be made with the full consent of both the trustee and the petitioner, and will be subject to
court approval.
As a result of the aforementioned, in February 2007, Mrs. Neomi Enoch and Mr. David Shacham were appointed as special managers of
Kidron Plastics.
As part of the creditors arrangement detailed in 5 below, it was determined that the shares of Plastics are to be transferred to the
Fund.
5. The creditors arrangement (2007)
On 28 February 2007, an invitation was issued to the public on behalf of the trustee of the stay of proceedings of the Company, to
submit bids to purchase the Company and/or its shares and/or its activity and/or its assets, including its "stock market shell", equipment
from the plant located in the Ramat Gavriel industrial zone in Migdal Haemek and the property it owns in Migdal Haemek and in the "Barakan"
industrial zone.
On 10 June 2007, the Nazareth District Court approved the creditors arrangement proposed by the trustee of the creditors
arrangement. The major features of the approved creditors arrangement are as follows:
- Polymer Logistics (Israel) Ltd. (hereinafter - "Polymer") will purchase the fixed assets of the Company's Migdal Haemek plant
(except for moulds located at the Company's plant), including real estate in Migdal Haemek, for an amount of NIS 17 million plus VAT.
- Appswing Ltd. (hereinafter - "Appswing") will purchase a minimum of 126 million shares of the Company, representing at least 70% of
the issued and paid-in capital of the Company, fully diluted, for an amount of NIS 7.3 million. The purchase must be concluded by 15 July
2007.
- A company acting on behalf of Zuk Bazelet Investment Ltd. (hereinafter - "Zuk Bazelet") will purchase real estate in the Barakan
Industrial Zone and the moulds located in the Company's plant, for an amount of NIS 5.3 million, plus VAT.
- In accordance with the creditors arrangement, the shares of the following subsidiaries will not be sold: the shares of Kidron
Plastics will be transferred to the FITE Fund (see below); and a temporary receiver was appointed for Kidron Plastics Marketing Ltd. (see
B(3) above).
The following pre-conditions apply to the creditors arrangement:
The proposal is contingent on the fulfilment of all of the following conditions by 15 June 2007, or by dates set out below:
1. Receipt of the approval of the arrangement by the meeting of the various types of creditors of the Company and the meetings of the
shareholders of the Company, including the meeting of the public shareholders. The arrangement is to include, among other things, the sale
of the purchased assets as per the proposal;
2. The waiver of all of the rights of the holders of the existing options in the Company's issued share capital;
3. Receipt of the approval of the court to the creditors arrangement to include, among other things, approval of the sale of the
purchased assets and the relevant court orders:
Commencing from the date of the closing, as defined below, the Company will have no debt or liability towards any third parties
whatsoever.
NOTE 1 - GENERAL (cont.)
B. 2007 creditors arrangement (cont.)
5. The creditors arrangement (2007) (cont.)
3. (cont.)
The rights of the creditors of the Company which are not suppliers for VAT purposes (such as banking institutions), in respect of
any owed amount that is not settled in cash under the creditors arrangement, will be purchased by Appswing for a symbolic amount of NIS 1,
to be paid to the trustee upon the payment of the balance of the aforementioned consideration. This is subject to the condition that the
rights of the creditors in connection with the possible demand of a refund in respect of a "bad debt" toward the VAT Authority are not
impaired.
In accordance with the above, the trustee of the creditors arrangement announced that he estimates that the balance of the
liabilities of the Company toward Appswing Ltd. after the creditors arrangement is implemented will amount to between NIS 5 million - NIS 19
million.
On 2 December 2007, a letter was received from the trustee, whereby he estimates that the balance of the liabilities of the Company
to Appswing, as mentioned above, amount to NIS 11 million. The trustee announced that this amount is purely an estimate and the actual
amount may change in the future.
4. 70% of the issued shares of the Company will be sold to Appswing, at the closing date, subject to the provisions of section 2
above. The shares are to be free and clear of any third party right whatsoever.
5. Until the closing date, the Company will prepare and submit all of the reports it is required to by law, including a periodic
report for the reporting year ended 31 December 2006 and the quarterly financial statements for the quarter ended 31 March 2007.
6. a. The closing date of the transaction will be no later that 15 June 2007.
b. Appswing agrees that if there is a delay in the fulfilment of the pre-conditions until 12 July 2007, the amount it has to pay
will be reduced by an amount of NIS 400,000.
7. It should be made clear that Appswing and Zuk Bazelet undertook to pay all of the expenses needed to preserve the stock exchange
shell in Israel and abroad, including the costs of the accountant, attorney, etc., both in Israel and abroad, both in the past and in the
future.
In respect of the above, a capital reserve from a transaction with the controlling shareholder was recorded in the financial
statements as at 31 December 2007, in an amount of NIS 396 thousand. The reserve was recorded in respect of expenses borne by Appswing for
purposes of preserving the stock exchange shell in Israel and abroad.
8. Please note that Zug Bazelet and Appswing will not be guarantors and/or will not be responsible for the fulfilment of the second
part of the arrangement, even though the arrangement will be subject to the consummation of the transactions with the two bidders. Please
note further that the proposed arrangement is for the purchase of the purchased assets detailed above as a package deal and it does not
relate to any of the assets separately.
The major features of the creditors arrangement are as follows:
Secured creditors:
- Banking institutions will be paid an amount of NIS 22,350 thousand.
- The FITE Fund will receive the shares of Kidron Plastics Ltd. In the event that the transfer is taxed, the tax will not be borne by
Appswing (the company purchasing the shares). In any event, the FITE Fund will be able to file a debt claim in respect of the tax, as a
regular creditor.
In addition, as part of the arrangement, the option that the FITE Fund has to convert the debt it is owed into shares of the Company
will be cancelled, unless the parties reach another agreement.
Creditors in respect of priority:
Income tax and employees - Payment of 100% of the debt approved by the trustee.
NOTE 1 - GENERAL (cont.)
B. 2007 creditors arrangement (cont.)
5. The creditors arrangement (2007) (cont.)
National Insurance and municipal real estate tax - Payment of 50% of the debt approved by the trustee.
Ordinary creditors:
Payment of 5% to ordinary creditors. Regarding the creditors in the old arrangement (the creditors arrangement from 2004), the
amount is 5% of the total gross debt of this group.
Payment of NIS 1.5 million to creditor banks of Mr. Michael Zuz, the former controlling shareholder of the Company, which have
pledges on his holdings in the shares of the Company.
On 5 July 2007, the extraordinary general meeting of the shareholders of the Company approved the aforementioned creditors
arrangement, as approved by the Nazareth District Court on 10 June 2007.
In addition, on that date, the extraordinary general shareholders meeting passed a resolution that the shareholders of the Company
will have no more claims and/or demands of the Company and/or any of its subsidiaries, the grounds for which derive, in whole or in part,
from the period preceding the date that the arrangement was approved by the court.
In accordance with the notification of the trustee of the stay of proceedings period, on 15 July 2007 all of the pre-conditions were
fulfilled for the entering into force of the creditors arrangement.
Accordingly, at the date on which the conditions were fulfilled (after 15 June 2007) the consideration paid by Appswing was reduced
by an amount of NIS 400 thousand. Appswing and the trustee agreed between themselves regarding an additional postponement of the postponed
date for the fulfilment of the pre-conditions, as above.
C. Agreement in respect of the allotment of shares to Appswing
On 20 July 2007, the Company issued an invitation for a general shareholders meeting of the Company, on the agenda of which is the
approval of the agreement for the allotment of the shares of the Company to Appswing Ltd.
The details of the agreement are as follows:
On 19 July 2007, the Company entered into an agreement with Appswing, the controlling shareholder of the Company at that time (the
"allotment agreement"), whereby Appswing undertook to convert all of the amounts the Company owes it into 107,518,540 shares, to be allotted
to it against the aforementioned debts.
The amounts which the Company owes Appswing derive from the Company's creditors arrangement, as part of which Appswing purchased the
rights of the creditors of the Company which are not suppliers for VAT purposes (such as banking institutions), in respect of any amount due
that was not settled by cash as part of the creditors arrangement. The amount of such debts to Appswing is not known as of the date of this
report, since it will be determined finally after the trustee of the creditors arrangement decides in the matter of the proof of debt that
was submitted to him as part of the arrangement. The trustee submitted his assessment to Appswing and to the Company, whereby the volume of
the debts will be between NIS 5 million and NIS 19 million. The quantity of shares to be allotted to Appswing against the aforementioned
conversion of debts will remain constant, regardless of the final amount of the debt due Appswing, as will be determined on the basis of the
results of the creditors arrangement, with the entire debt being converted to capital.
On 2 December 2007, a letter was received from the trustee in which he stated that, in his opinion, the balance of the liabilities
of the Company to Appswing, as above, amounts to NIS 11 million. The trustee stipulated that this amount is solely an estimate and that the
actual amount could change in the future.
In addition, the allotment agreement stipulated that the Company will allot 64,516,129 shares to Appswing for an amount of NIS 8,570
thousand in cash.
The allotment agreement was approved by the audit committee and the board of directors of the Company and by the general
shareholders meeting of the Company.
NOTE 1 - GENERAL (cont.)
D. Agreements for the purchase of companies in Croatia and the U.S. against an allotment of shares
On 19 July 2007, after receipt of approval of the audit committee (on the same date), the board of directors of the Company decided
to approve and recommend to the general meeting the implementation of a private placement and related agreements with Emvelco Corporation, a
public company, the shares of which are registered for trade in the U.S., and AP Holdings Ltd. (hereinafter - the "Investors"). In
accordance with the resolution, the Investors will sell the Company 75,000 shares of Verge Living Corporation (hereinafter - "Verge"),
constituting 100% of the issued capital of Verge, and 20,000 shares of Sitnica D.O.O. (LLC) (hereinafter - "Sitnica"), constituting 100% of
the issued capital of Sitnica, respectively, against a private placement of 907,934,502 shares of the Company, constituting 72% of the
issued capital of the Company following the completion of the aforementioned allotments.
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
(number of units may be changed due to alignment) 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 74,700 square meters in the central Croatian
city of Samobor.
The investors will be jointly referred to herein as the "Offerees".
Upon completion of the allotments detailed above, Appswing is entitled to receive a payment of US$ 1,000 thousand from the
Investors, in respect of consulting and initiation fees in connection with the allotment. Immediately prior to the date of approval of the
financial statements as at 30 June 2007, the Investors paid Appswing US$ 250 thousand, as an advance payment on account of the
abovementioned amount.
The board of directors of the Company approved the employment agreement between the Company and Mr. Yosef Atia, the controlling
shareholder and CEO of Emvelco Corporation. The agreement goes into effect on the date that the aforementioned allotments are consummated
and stipulates that Mr. Yosef Atia will serve as the CEO of the Company in return for a salary that costs the Company an amount of US$ 10
thousand a month. Mr. Atia is also entitled to reimbursement of expenses in connection with the affairs of the Company, in accordance with
Company policy, as set from time to time. In addition, Mr. Yosef Atia is entitled to an annual bonus of 2.5% of the net, pre-tax income of
the Company in excess of NIS 8 million.
In addition, the board of directors of the Company approved an employment agreement between the Company and Mr. Shalom Atia, the
controlling shareholder and CEO of AP Holdings Ltd. The agreement goes into effect on the date that the aforementioned allotments are
consummated and stipulates that Mr. Shalom Atia will serve as the VP - European Operations of the Company in return for a salary that costs
the Company an amount of US$ 10 thousand a month. Mr. Atia is also entitled to reimbursement of expenses in connection with the affairs of
the Company, in accordance with Company policy, as set from time to time. In addition, Mr. Shalom Atia is entitled to an annual bonus of
2.5% of the net, pre-tax income of the Company in excess of NIS 8 million.
The aforementioned agreements were ratified by the general shareholders meeting of the Company on 30 October 2007.
On 2 November 2007, the shares were allotted to the investors.
E. Non-compliance with the preservation rules of the Tel Aviv Stock Exchange (TASE)
On 17th January 2005, the Company was given notice by the Tel Aviv Stock Exchange as to its lack of compliance with the preservation
rules set down in the Stock Exchange's Regulations and in the guidelines enacted thereunder (hereinafter - the "Notice"), since the
Company's shareholders' equity in the last four financial statements that preceded the notice was below NIS 2 million. The Company was
granted an extension of 6 months, until 30 September 2005, to comply with the aforementioned preservation rules. The board of directors of
the Tel Aviv Stock Exchange, at its September 2005 meeting, decided to transfer the Company's shares to the "Preservation List".
NOTE 1 - GENERAL (cont.)
E. Non-compliance with the preservation rules of the Tel Aviv Stock Exchange (TASE) (cont.)
On 17th August 2006, the Company petitioned the Tel Aviv Stock Exchange to postpone the meeting of the board of directors of the
TASE on the matter of the delisting the Company's shares, until the first meeting to be held after 24 months have passed after the shares of
the Company ceased being traded on the TASE's regular list. In its letter to the TASE, the Company noted that it has been taking steps in
the past year and will continue to take further steps in its efforts to be in compliance with the terms stipulated in the regulations of the
TASE for the relisting of the Company's shares on the regular list and the transfer of the shares of the Company from the preservation list
to the regular list.
The TASE notified the Company that it decided to postpone the deliberations on the delisting of the shares of the Company to the
first meeting of the board of directors of the TASE to be held after 5 September 2007.
F. Suspension of trading of the Company's shares on the Tel-Aviv Stock Exchange
On 14 February 2007, trading of the shares of the Company on the Tel Aviv Stock Exchange was suspended, as a result of the appointment
of a receiver for a former subsidiary of the Company (see section B(3) above).
On 12 August 2007, the Company petitioned the Stock Exchange and the Israel Securities Authority to restart the trading of the shares of
the Company as part of the preservation list, in view of the going into effect of the creditors arrangement.
In addition, the Company requested that, in the event that the allotment of shares to Appswing Ltd. (as detailed in Note 1C above) is
consummated by 3 September 2007, and the requirements in respect of the minimum shareholders' equity of the Company and the percentage of
the holdings of the public in the shares of the Company are met, the Company's shares will be relisted for trading on the regular list.
On 15 August 2007, trading of the shares of the Company on the preservation list was renewed, as a result of the going into effect of
the creditors arrangement.
On 6 September 2007, trading of the shares of the Company was renewed on the regular list as a result of the allotment of the shares of
the Company to Appswing Ltd. and as a result of the fact that the minimum capital requirement and the requirement for the minimum percentage
of holdings of the public were met.
On 14 January 2008, the Company received notice from the Tel Aviv Stock Exchange as to its non-compliance with the preservation rules -
on the basis of data from 31 December 2007 - as a result of the fact that the percentage held by the public as at 31 December 2007 was 9.5%,
lower than the required 15%.
The Company was served notice as to its non-compliance with the preservation rules, as above, and it was granted an extension of 6
months, until 30 June 2008, to be in compliance with the rules.
NOTE 1 - GENERAL (cont.)
G. Definitions
The Company - Atia Group Ltd.
Subsidiaries - Companies over which the Company exerts direct or
indirect control and, accordingly, the financial
statements of which are consolidated with the Company's
financial statements.
Affiliated company - A company in which the Company exerts "material
influence" pursuant to Opinion No. 68 of the Institute
of Certified Public Accountants in Israel (hereinafter
- the "Institute"), other than subsidiaries, where the
Company's investment therein is included in the
financial statements on the equity basis.
Investee company - A subsidiary or affiliated company.
Group - Atia Group Ltd. (formerly Kidron Industrial Holdings
Ltd.) and its investee companies.
Interested parties - As defined in the Securities Regulations (Presentation
of Annual Financial Statements), 1993.
Related parties - As defined in Opinion No. 29 of the Institute.
Controlling parties - As defined by the Securities Regulations (Financial
Statements Presentation of Transactions between an
Entity and its Controlling shareholder), 1996.
Index, ICPI - The Israeli Consumer Price Index as publicized by the
Israeli Central Bureau of Statistics.
Euro - The currency of the European union.
Dollar - The U.S. dollar.
Kuna - The Croatian currency.
Pound Sterling - The currency of the U.K.
Adjusted amount - A nominal historical amount adjusted to the Index of
December 2003, in accordance with the provisions of
Opinions 23, and 36.
Reported amount - An adjusted amount as of December 31, 2003, plus
amounts in nominal values added subsequent to December
31, 2003, less amounts deducted subsequent to December
31, 2003.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements were prepared in accordance with accounting principles generally accepted in Israel and with the Securities
Regulations (Presentation of Annual Financial Statements) - 1993.
The following accounting principles were applied in the presentation of the financial statements:
A. The measurement basis for the financial statements
1. General
As mentioned in Note 1A(3), during the first quarter of 2007, the Company ceased it business operations. As a result, the
Company changed its accounting policies and reported in accordance with accounting principles applicable to businesses in liquidation, for
the financial statements as at 31 December 2006 until the financial statements as at 30 June 2007 and for the three and six month periods
then ended.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. The measurement basis for the financial statements (cont.)
1. General (cont.)
As more extensively detailed in Note 1 above, on 10 June 2007, the creditors arrangement was approved by the Nazareth District
Court and the creditors arrangement went into effect in July 2007. During September 2007, the liabilities of the Company toward Appswing
were converted in capital and shares were allotted to Appswing in return for a cash amount of NIS 8 million. Therefore, the Company once
again started reporting as a "going concern", commencing with the financial statements as at 30 September 2007 and for the three and years
ended 30 September 2007.
2. Measurement basis of the financial statements in respect of periods in which the Company reports as a going concern.
a. In 2001, the Israel Accounting Standards Board issued Accounting Standard No. 12 - "Discontinuance of Financial Statement
Adjustment". In December 2002, Accounting Standard No. 17 - "Postponement of the Discontinuance of Financial Statement Adjustment" was
approved. According to these standards, adjustment of financial statements for the effects of inflation was discontinued as of January 1,
2004. The adjusted amounts in the financial statements as at 31 December 2003 served as the point of departure for nominal financial
reporting commencing on 1 January 2004, until the date on which the Company commenced reporting in the format of a business in liquidation.
As expanded upon in Note 1 above, the Company was in the midst of a creditors arrangement which when completed, left the balance
sheet with cash and other monetary balances against share capital. Therefore, all of the components of financial reporting as at 31 December
2007 are nominal (in these financial statements, "reported amounts" refer to nominal amounts).
b. In the financial statements, the term "cost" refers to cost in reported amounts.
c. Condensed data in nominal historical values for tax purposes, which served as the basis of the aforementioned financial statements
in reported amounts, is presented in Note 24 below.
3. Principles of adjustment to realizable value in respect of the periods in which the Company reported pursuant to accounting
principles pertaining to a business in liquidation:
Statement of net assets in liquidation as at 31 December 2006
The statement is presented on the basis of realizable values, in accordance with the following principles:
1. Assets
1.1 Cash and cash equivalents
On the basis of the realizable balances as of the date of the statement.
1.2 Trade accounts receivable
Based on the balance that Management believes to be collectible.
1.3 Accounts receivable and debit balances
Based on the balance actually utilized.
1.4 Investment in investee companies
Investments in investee companies are presented on the basis of their expected realizable value under the arrangement.
1.5 Fixed assets
Fixed assets are presented on the basis of expected realizable value, as known on the balance sheet date.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. The measurement basis for the financial statements (cont.)
3. Principles of adjustment to realizable value in respect of the periods in which the Company reported pursuant to accounting
principles pertaining to a business in liquidation (cont.):
Statement of net assets in liquidation as at 31 December 2006 (cont.)
2. Liabilities
2.1 Credit from banking institutions and other credit providers
Based on the outstanding balance as of the balance sheet date. The balance includes interest accrued but not yet paid, in accordance
with the terms of the loans.
2.2 Suppliers and service providers
Based on the balance as of the balance sheet date.
2.3 Accounts payable and credit balances
a. Employees and payroll-related liabilities
Based on the balance owed as of the balance sheet date.
b. Institutions, accrued expenses and others
Based on the balance owed as of the balance sheet date.
4. The measurement basis for the financial statements as at 31 December 2006
1. General
a. On January 1, 2004, Accounting Standard No. 12, "Discontinuance of Financial Statement Adjustment" went into effect. In accordance
with the Standard, financial statements are no longer adjusted for inflation as from that date.
b. Until December 31, 2003 (the transition date), the Company presented its financial statements on the basis of historical cost,
adjusted for changes in the Israeli Consumer Price Index ("ICPI"). The adjusted amounts included in the financial statements as of the
transition date served as the point of departure for financial reporting commencing on January 1, 2004. Accordingly, amounts relating to
non-monetary assets (including the depreciation and amortization in respect thereof), deriving from the period prior to the transition date,
were based on inflation-adjusted amounts (on the basis of the ICPI of December 2003) as reported in the past.
c. The amounts of non-monetary assets do not necessarily reflect the economic or realizable value of such assets. Rather, they
reflect the reported value of the assets.
d. The term "cost" as used in the financial statements refers to cost in reported amounts.
2. Financial statements in reported amounts
Statement of profit and loss accounts
1. Revenues and expenses deriving from non-monetary items included in the balance sheet are derived from the difference between the
reported amount at the beginning of the period and the reported amount at the end of the period.
2. The remainder of the income statement items, except for the share of the Company in the results of investee companies, are
presented in nominal amounts.
3. The share of the Company in the results of operations of investee companies is based on the financial statements of such companies
in reported amounts.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
A. The measurement basis for the financial statements (cont.)
5. Translation of the financial statements of foreign operations
As of January 1, 2004, the Company has been implementing Israeli Accounting Standard No. 13, "The Effects of Changes in Foreign
Currency Exchange Rates". The Standard deals with the translation of transactions denominated in foreign currency and with the translation
of the financial statements of foreign operations and the consolidation thereof with the financial statements of the reporting entity. The
Standard also sets out rules for the classification of foreign operations as a "long-arm" or as a foreign autonomous unit.
When translating the financial statements of a subsidiary which operates abroad as a foreign autonomous unit, the Company
implemented the following procedures:
a. Assets and liabilities, both monetary and non-monetary, of the autonomous unit were translated using the closing rate.
b. Goodwill and the related original differences are treated as assets and liabilities of the autonomous unit.
c. Income and expense items of the autonomous unit abroad were translated on the basis of average exchange rates for the period.
d. All exchange rate differences generated as a result of the translation of the aforementioned autonomous unit, including in respect
of monetary items comprising part of the investment, were classified as a separate item in shareholders' equity, entitled "Adjustments
deriving from the translation of the financial statements of investee companies operating in foreign currency", until the sale of the net
investment.
B. Assets and liabilities linked to the Index or in foreign currency
1. Transactions denominated in foreign currency are recorded upon initial recognition at the representative rate of exchange on the
date of the transaction. Exchange rate differences deriving from the settlement of monetary items, at exchange rates that are different than
those used in the initial recording during the period, or than those reported in previous financial statements, are carried to the profit
and loss accounts.
2. Assets and liabilities denominated in or linked to foreign currency are presented on the basis of the representative rate of
exchange as of the balance sheet date.
3. Assets and liabilities linked to the Israeli Consumer Price Index are presented on the basis of the linkage terms of each balance.
Balances linked by agreement to the "known index" were presented on the basis of the "known index" as of the balance sheet date (the Index
for November).
4. Linkage and exchange rate differentials are recorded when incurred.
5. Data pertaining to the ICPI and to the foreign currency exchange rates are presented below:
31 December 13 February
2007 2006 2005 2006(*)
% % % %
Israeli Consumer Price Index (based on 191.15 184.87 185.05 184.51
1993)
Exchange rate of 1 U.S. dollar/NIS 3.846 4.225 4.603 4.704
Exchange rate of 1 Euro/NIS 5.6592 5.5643 5.4465 5.5928
Exchange rate of 1 Kuna/NIS 0.7744 0.7587 0.7400 0.7657
(*) The date of incorporation of the U.S. subsidiary.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
B. Assets and liabilities linked to the Index or in foreign currency (cont.)
6. Data pertaining to the change in the ICPI and foreign currency exchange rate:
Years ended 31 December Period from
13 February
2006 until
31 December
2007 2006 2005 2006
% % % %
Israeli Consumer Price Index 3.40 (0.10) 2.38 0.20
Exchange rate of 1 U.S. dollar (8.97) (8.21) 6.85 (10.18)
Exchange rate of 1 Euro 1.71 2.16 (7.32) (0.51)
Exchange rate of 1 Kuna 2.07 2.53 (8.03) (0.91)
C. Consolidation of financial statements and implementation of reverse acquisition accounting
The consolidated financial statements include the financial statements of the Company and its subsidiaries.
Material intercompany balances and transactions between the companies consolidated were cancelled in the consolidated financial
statements. In addition, income on sales between companies, which has not yet been realized outside of the Group, was also cancelled.
The purchase cost of a subsidiary is measured at fair value of the assets given, financial instruments issued and liabilities
generated, plus the direct purchase costs. The excess of the purchase cost over the share of the Company in the fair value of the
identifiable assets, less the fair value of the identifiable liabilities constitutes goodwill and is presented in the consolidated financial
statements as part of "Other assets"). The differences between the share of the Company in the fair value of the identifiable assets and
liabilities, as at the purchase date, and the share of the Company in their book value were included in the appropriate items in the balance
sheet.
For purposes of the consolidation, the amounts included in the financial statements of consolidated companies were taken into
account after the necessary adjustments required as a result of implementation of uniform accounting policies applied by the Group.
As part of the merger of the Company with Verge and Sitnica, the controlling shareholders in Verge and Sitnica obtained control of
the merged entity. Since the largest of the companies involved in the transaction is Verge, it was determined that from the accounting
standpoint, Verge is the accounting purchaser of the other companies, and therefore, the transaction was treated under the reverse
acquisition method.
Accordingly, the assets and liabilities of Verge, the accounting purchaser, were recorded in the pro forma consolidated financial
statements on the basis of their book values in the accounting records of Verge immediately prior to the reverse acquisition. In addition,
in view of the fact that the Company, which was the acquired company in the reverse acquisition transaction, constituted a stock exchange
shell at the date of purchase, no original differences or goodwill were generated in respect of the purchase.
In addition, the investment of the Company in Sitnica was handled pursuant to the principles of decision 2-10 of the Israel
Securities Authority, "The Handling of Transactions Involving Combinations of Businesses Under Mutual Control". Accordingly, the investment
in Sitnica was treated as a pooling of interests, as follows:
- The assets and liabilities of Sitnica were included at their book value proximate to the date of the business combination
transaction. The share capital and premium recorded as a result of the above were identical in amount.
- The consolidated financial statements of the Company and Sitnica reflect the financial position and results of operations of the
Company and Sitnica, as if the transaction had been carried out on the date the companies came under common control, i.e. on the date
Sitnica was founded (23 May 2007).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
D. Use of estimates in preparation of the financial statements
Preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets and liabilities presented in the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
E. Cash and cash equivalents
Cash and cash equivalents include highly liquid investments, which include short-term bank deposits (with original maturity dates of
up to three months from date of deposit) that are not restricted as to withdrawal or use, with original terms to maturity of not more than
three months.
F. Allowance for doubtful debt
The allowance for doubtful debts is computed specifically for debts, the collection of which is deemed by management to be doubtful.
G. Restricted cash
The balance of restricted cash includes amounts deposited by the Group to secure its liabilities toward apartment purchasers. See
Note 4 below.
H. Investments in investee companies
The investments in investee companies in the Company balance sheet are presented on the equity basis, which is determined on the
basis of the financial statements of those companies.
I. Fixed assets
1. Fixed assets are presented on the basis at cost, net of accumulated depreciation, but not exceeding recoverable value (see "J"
below), and where necessary, net of impairment losses. In addition to the purchase price, cost includes all of the costs that can be
directly attributed to bringing the item to the location and condition that enable it to operate in the manner intended by Management.
2. Depreciation is calculated on the straight-line method, on the basis of the estimated useful lives of the assets.
3. Annual depreciation rates are as follows:
%
Computers 20 - 33
J. Impairment of non-monetary assets
At every balance sheet date, the Company evaluates the recoverable value of its assets, if events occurred or if indications exist that
there was a possible decline in asset value.
When the value of an asset in the consolidated balance sheet exceeds its recoverable value, the Company recognizes a loss on decline in
value in an amount equal to the difference between the book value of the asset and its recoverable value. A loss in respect of a decline in
value that was recognized in the past is cancelable, except if it relates to goodwill, only if changes occurred in the estimates used to
determine the recoverable value of the asset, subsequent to the date on which the last loss on decline in value was recognized.
K. Other assets
Software costs are presented at cost and are amortized on the straight line method over a three year period commencing on the date of
utilization. The expense is recorded as part of general and administrative expenses.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
L. Deferred taxes
1. Deferred taxes are computed in respect of temporary differences between the amounts presented in the financial statements and the
amounts taken into consideration for income tax purposes. Deferred tax assets are recognized only up to the amount expected to be utilized
in the future. For information on the composition of deferred taxes and on the major items for which deferred taxes were calculated, see
Note 14F.
Deferred taxes were computed using the tax rates expected to be applicable when the deferred tax balances are carried to the profit
and loss accounts, based on the tax laws in effect at the balance sheet date. The amount of the deferred taxes included in the profit and
loss accounts derives from changes occurring in the balances during the current year.
2. In calculating deferred taxes, taxes which may apply in the event of a sale of an investment in investee companies were not taken
into account, since management intends on holding on to such investments and not realizing them in the foreseeable future.
3. The Company may bear an additional tax liability in the event of a distribution of a dividend from certain investee companies;
this additional tax was not included in the accounts in view of the policy of the Company not to initiate the distribution of a dividend
that would generate an additional tax liability in the foreseeable future.
4. Due to the uncertainty in connection with the utilization of the losses of the U.S. subsidiary, no deferred tax assets were
included in the financial statements.
M. Capitalization of credit costs and other direct costs
Credit costs directly attributable to the purchase or construction of qualifying assets are carried to the cost of such assets over the
construction period (the period in which actions are taken to prepare the asset for its designated purpose), in accordance with Accounting
Standard No. 3, Capitalization of Credit Costs. A qualifying asset is an asset under construction or preparation, the preparation of which
for intended us requires a significant period of time (mainly the buildings under construction).
Selling and marketing expenses and general and administrative expenses which can be attributed directly to specific construction
projects constitute direct costs of the project and are, therefore, capitalized to the cost of the project.
N. Buildings under construction
The buildings under construction are presented at the lower of cost or the estimated net usage value. Cost includes direct identifiable
costs (see M above), subcontractors costs, joint indirect costs, and capitalized credit costs.
In cases in which a loss is expected on buildings under construction, a provision for the full expected loss is recorded on the date the
loss was anticipated, based on the best estimate of Management regarding the expected loss. The amount of the decline in value or a
cancellation of a decline in value is reported in the profit and loss accounts as part of cost of sales.
O. Investment real estate
Investment real estate is defined as real estate (land or buildings - or part of a building - or both) held (by the owners or by a
lessee under a financing lease) for purposes of generating rental income or for increase in value or both, and not for purposes of
manufacturing or the provision of goods or services or for administrative purposes, or for sale in the ordinary course of business.
Investment real estate assets are initially measured at cost, including direct purchase costs. Subsequent to initial recognition, they
are measured at fair value which reflects market conditions at each balance sheet date. Changes in fair value are recognized in the profit
and loss accounts. Such real estate is not depreciated.
For purposes of determining fair value of investment property assets, the Company based itself on an appraisal carried out by external
independent appraisers who are experts in valuating real estate and who possess the necessary know-how and experience.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. Fair value of financial instruments
The fair value of financial instruments traded on active markets is based on quotes from those markets as at the relevant balance sheet
date. The fair value of financial assets not traded on active markets is based on the market value of similar financial instruments or on
other valuation methods. The valuation used by the Company included the capitalization of cash flows, economic models for valuation of the
value of options and other accepted valuation methods.
Q. Presentation of a transaction between an entity and its controlling shareholder
Until December 31, 2006, transactions between the Company and its controlling shareholders are treated in accordance with the Securities
Regulations (Financial Statement Presentation of Transactions between a Company and its Controlling Shareholder) - 1996. Since on January
1, 2007, the Company has been implementing Accounting Standard No. 23, Accounting Treatment of Transactions between an Entity and its
Controlling Shareholder, see Note 2W(5) below.
R. Revenue recognition
Revenues are recognized in the financial statements if the amount of the revenue can be measured reliably and as long as the revenue is
expected to be collectible, in accordance with the following principles:
1. Sale of apartments
Revenues from sales of apartments are recognized in accordance with the percentage of completion method pursuant to Accounting
Standard No. 2 of the Israel Accounting Standards Board. According to this method, revenues are recognized as the product of the proceeds of
the sale and the rate of completion of the project, but not until the proceeds of the sales in the project constitute at least 50% of the
total expected revenues and the rate of completion of the project is at least 25%. In view of the fact that the construction of the project
by the subsidiary in Las Vegas has not yet begun, no revenues on the sale of apartments were recognized in the profit and loss accounts for
all of the reported periods.
2. Rental income
Revenues from rents are carried to the profit and loss accounts using the straight-line method over the rental period.
S. Operating cycle
The normal operating cycle of the Group in the field of apartment construction contracting (construction contractor) usually exceeds one
year and is 3 years. Taking this into consideration, the current assets and current liabilities include items which the Group expects to
realize within its normal operating cycle.
T. Geographic operating segments
Identification of the geographic segments is carried out in accordance with the principles of Accounting Standard No. 11, Segmental
Reporting. See Note 19 below.
U. Earnings per share
Earnings (loss) per share data are computed in accordance with the provisions of Accounting Standard No. 21 of the Israel Accounting
Standards Board. According to Standard No. 21, the base earnings per share are based on the income that is distributable to the ordinary
shareholders, divided by the weighted average number of ordinary shares in circulation during the period. For purposes of computing diluted
earnings per share, the income or loss attributable to the ordinary shareholders and the weighted average number of ordinary shares in
circulation have to be adjusted for the possible effects of potential ordinary shares which may derive from the exercise of convertible
financial instruments, which have a dilutive effect.
V. Discontinued operations
Discontinued operations are presented in accordance with the guidelines of Accounting Standard No. 8 of the Israel Accounting Standards
Board.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
W. First time implementation of Accounting Standards
1. Accounting Standard No. 26 - Inventory
Since January 1, 2007, the Company has been implementing Accounting Standard No. 26 - "Inventory" (hereinafter: the "Standard"), issued
in August 2006 by the Israel Accounting Standards Board. The Standard prescribes the accounting treatment for inventory.
The Standard stipulates, among other things, that inventory be measured at the lower of cost and net realizable value. Net
realizable value is the estimated sales price during the normal course of business, less the estimated costs of completion and the estimated
costs required to conduct the sale. The cost of the inventory includes purchase costs, production costs and other costs incurred in bringing
the inventory to its present location and condition.
The Standard mandates specific identification of the cost of inventory items that are irreplaceable and of merchandise or services
that were generated and separated for purposes of specific projects. The cost of other inventory should be determined on the basis of the
first-in-first out formula or on the basis of the weighted average. A specific formula should be used for all inventory having a similar
nature or use for the entity, unless some other costing formula is justified. Regarding allocation of inventory conversion costs, the
Standard stipulates that when in a specific period an entity does not manufacture at its normal output capacity, it should not include in
the cost of inventory additional fixed overhead costs in excess of the costs usually incurred in times of normal production. Such costs
which were not allocated should be expensed in the period in which they were incurred. In accordance with the Standard, in cases in which
the inventory was purchased on credit, and the arrangement contains a financing component, the inventory should be presented at the cash cost, and the financing component should be recognized as interest
expense over the duration of the financing period.
When inventory is sold, the book value of the sold inventory should be recognized as an expense in the period in which the revenue
from the sale was recognized. The amount of any decline in value of the inventory to its net realizable value and all losses in respect of
inventory should be recognized in the period in which they were incurred. The amount of the cancellation of a decline in value deriving from
an increase in the net realizable value should be recognized as a reduction in the amount of the inventory that is recognized as an expense
in the period in which the cancellation occurred.
Initial implementation of the Standard did not have a material impact on the results of operations, financial position, and cash
flows of the Company.
2. Accounting Standard No. 27 - Fixed assets
Since January 1, 2007 (the effective date), the Company has been implementing Accounting Standard No. 27 - Fixed Assets (hereinafter
- the "Standard") issued in September 2006 by the Israel Accounting Standards Board. The Standard prescribes the accounting treatment of
fixed assets.
The Standard stipulates that a fixed asset item that qualifies for recognition as an asset, be measured at its cost at the time of
its initial recognition. Cost includes the purchase price, all of the costs that can be directly attributed to bringing the item to its
present location and to the condition required to enable the item to operate in the manner intended by Company Management. Cost shall also
include an initial estimate of the present value of all of the costs required to dismantle and remove the asset and rehabilitate the site
upon which it was located, should the entity be committed to do so.
The Standard permits an entity to elect a measurement model as accounting policy once initial recognition has been achieved, either
the cost model or the revaluation model, which is based on the fair value of the fixed asset item at the date of the revaluation, with the
revaluation being carried to a capital reserve. According to the cost model, a fixed asset item should be presented at cost, net of
accumulated depreciation, and net of accumulated impairment losses. The Standard stipulates that the same measurement model must be applied
to an entire class of fixed assets. The Standard also stipulates that each component of a fixed asset item having a cost that is material
when compared to the cost of the whole item should be depreciated separately over its useful life. The depreciation method should reflect
the pattern in which the entity expects to derive economic benefits from the asset in the future. The useful life of an asset is defined in
terms of the forecasted benefit to be derived by the entity from the asset. The useful life of an asset may be shorter than its economic life.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
W. First time implementation of Accounting Standards (cont.)
2. Accounting Standard No. 27 - Fixed assets (cont.)
The book value of a fixed asset item should be derecognized when the item is disposed of, or when no future economic benefits are
expected from use or disposal of the asset. The gain or loss on the derecognition of the fixed asset item should be carried to the profit
and loss accounts when the item is derecognized. Such gains should not be classified as revenue.
The provisions of Accounting Standard No. 27 require retrospective implementation, except for a number of circumstances set out in
Accounting Standard No. 28�Revision of the Transition Provisions of Accounting Standards No. 27, Fixed Assets.
At the effective date, the Company elected to continue using the cost model and not to adopt any of the leniencies set out in IFRS
1which an entity is permitted to adopt in accordance with the transition provisions of the Standard. Accordingly, initial implementation of
the provisions of the Standard did not have a material impact in the results of operations, financial position or cash flows of the
Company.
3. Accounting Standard No. 16 - Investment Property
Since January 1, 2007, the Company has been implementing Accounting Standard No. 16 - "Investment Property" (hereinafter - the
"Standard"), issued in February 2007 by the Israel Accounting Standards Board, which sets out the accounting treatment for Investment Real
Estate and the related disclosure requirements.
Investment real estate is defined as real estate (land or buildings, part of a building, or both) held (by the owners or by a
financial lessee) for the purpose of generating rental income, generating an increase in value, or both, and not for use in the manufacture
or supply of goods or services, or for administrative purposes, or sale during the normal course of business.
The cost of investment real estate shall be recognized as an asset if, and only if it is expected that the future economic benefits
related to the investment real estate will flow to the entity and that the cost can be measured reliably. Investment real estate which
qualifies for recognition as an asset shall be measured at its cost upon initial recognition.
According to the Standard, a right to real estate, held by a lessee under an operational lease may be classified as investment real
estate. In such a case, the lessee is required to apply the fair value model to this right (and, therefore, it must apply the fair value
model to all investment real estate). The Standard permits the entity to elect to measure the investment real estate under the cost model or
the fair value model once initial recognition has been achieved.
According to the fair value model, investment real estate is measured, after initial recognition, at fair value, with changes in
fair value carried to the profit and loss accounts.
According to the cost model, investment real estate shall be presented at cost, less accumulated depreciation and less accrued
losses on decline in value (in accordance with the provisions of Accounting Standard No. 27, Fixed Assets). An entity that elects to use the
cost model shall make disclosure of the fair value of the investment real estate in the notes to the financial statements.
An entity must use the same model for all of its investment real estate. A change from one model to the other can be made only if
the result of the change is a fairer presentation. Investment real estate shall be presented as a separate item and not as part of fixed
assets.
Upon initial adoption of the Standard, the entity that elected the fair value model should report the impact of the adoption of the
Standard as of the effective date as an adjustment to the opening balance of retained earnings for the period in which the Standard was
initially adopted.
The Standard encourages but does not require any entity that made public disclosure of the fair value of its investment real estate
in prior periods, to adjust the opening balance of retained earnings of the earliest presented period in which disclosure was made of fair
value, and to restate comparative amounts for those periods. If the entity did not make disclosure in the past, the entity shall not restate
comparative amounts and shall make disclosure of this fact.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
W. First time implementation of Accounting Standards (cont.)
3. Accounting Standard No. 16 - Investment Property (cont.)
An entity that intends on adopting one or more of the leniencies set out in IFRS No. 1 with regard to investment real estate, in the
financial statements of periods commencing on January 1, 2008, can adopt the same leniency or leniencies in the financial statements of
periods commencing on January 1, 2007. An entity that elects to adopt the leniency of fair value as deemed cost, shall not restate
comparative amounts relating to such investment real estate. Such an entity should disclose this fact and the fair value as of January 1,
2007 of each asset treated in this manner.
Initial implementation of the provisions of the Standard did not have a material impact on the results of the operations, financial
position or cash flows of the Company.
4. Accounting Standard No. 30 - "Intangible Assets"
Since January 1, 2007, the Company has been implementing Accounting Standard No. 30 - "Intangible Assets" (hereinafter - the
"Standard"), issued in March 2007 by the Israel Accounting Standards Board, which prescribes the accounting treatment of intangible assets
which are not dealt with in other standards.
The Standard defines the conditions and criteria for the recognition of an intangible asset, including in respect of research and
development costs, how to measure the book value of such assets, and requires certain disclosures in respect thereof. According to the
Standard, an intangible asset is defined as an identifiable, non-monetary asset without physical substance.
According to the Standard, an entity shall assess whether the useful life of an intangible asset is defined or undefined. After
initial recognition, an intangible asset with a defined useful life shall be amortized over its useful life, subject to assessments for
impairment. Such an intangible asset should be presented at cost, less accumulated amortization and less accumulated impairment losses. An
intangible asset with an undefined useful life shall not be amortized. Instead, the entity should test for impairment of the asset at least
once a year, or more frequently if indications exist that there may have been a decline in value of the asset.
The Standard shall be applied retrospectively, except for circumstances which are irrelevant to the Company.
Initial implementation of the Standard did not have a material impact on the results of operations, financial position and cash
flows of the Company.
5. Accounting Standard No. 23 - "Accounting treatment of transactions between an entity and its controlling shareholder"
Since January 1, 2007, the Company has been implementing Accounting Standard No. 23 - "Accounting treatment of transactions between
an entity and its controlling shareholder" (hereinafter - "Standard No. 23" or the "Standard") issued in December 2006 by the Israel
Accounting Standards Board.
Standard No. 23 does not apply to an entity that is not subject to the Israeli Securities Law - 1968. The Standard applies to all
transactions between an entity and its controlling shareholder, except for a business combination transaction involving entities under
common control. The Standard sets out the accounting treatment for common types of transactions. The provisions of Standard No. 23 will
apply to all transactions (with the necessary changes) between an entity and its controlling shareholder, but, under certain circumstances,
it will also apply to transactions with shareholders who are not controlling shareholders.
Assets and liabilities which were involved in a transaction between the entity and its controlling shareholder shall be measured at
fair value as of the date of the transaction. The difference between the fair value of the asset and its book value at the date of transfer
shall be carried to the profit and loss accounts as income or loss, and the difference between the fair value and the consideration
stipulated in the transaction shall be carried to shareholders' equity. Any difference with a debit balance is in effect a dividend which
reduces retained earnings. Any difference with a credit balance constitutes an investment by the owners and shall be presented separately as
part of shareholders' equity under the title "Capital Reserve deriving from a transaction between the entity and its controlling
shareholder".
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
W. First time implementation of Accounting Standards (cont.)
5. Accounting Standard No. 23 - "Accounting treatment of transactions between an entity and its controlling shareholder" (cont.)
An intangible asset having no active market, that was transferred to an entity from its controlling shareholder shall be presented
in the entity's financial statements at the value in the financial statements of the controlling shareholder as of the date of transfer. Any
difference between the consideration stipulated for such intangible asset and its value in the financial statements of the controlling
shareholder shall be carried to shareholders' equity.
Upon initial recognition, a loan granted to or received from a controlling shareholder shall be presented in the financial
statements of the entity as an asset or liability, as applicable, at fair value. The difference between the amount of the loan granted or
received and its fair value on the date of initial recognition represents either an investment or a withdrawal of the owners and shall be
carried to shareholders' equity. During the reporting periods following the initial recognition, the loan shall be presented in the
financial statements of the entity at its amortized value, after implementation of the effective interest rate method, except for cases in
which according to generally accepted accounting principles it is presented at fair value. Standard No. 23 also sets out rules pertaining to
the possibility of early repayment or a change in the terms of the loan.
Amounts debited to retained earnings or credited to a capital reserve in the financial statements of the entity as a result of a
transaction with a controlling shareholder constitute, from the point of view of the controlling shareholder, an investment or withdrawal of
the owners and shall be reported in the financial statements accordingly.
Standard No. 23 applies to transactions between an entity and its controlling shareholder conducted subsequent to January 1, 2007.
In respect of a loan granted to or received from a controlling shareholder prior to the effective date, the Standard shall apply to such
loan as of the effective date.
See also section C above in connection with the treatment of combinations of businesses under common control.
X. Disclosure of the effects of new accounting standards in the period prior to implementation
Accounting Standard No. 29 - "Adoption of International Financial Reporting Standards (IFRS)"
In July 2006, the Israel Accounting Standards Board issued Accounting Standard No. 29 - "Adoption of International Financial
Reporting Standards (IFRS)" (hereinafter - the "Standard"). The Standard prescribes that entities that are subject to the Israeli Securities
Law - 1968 and that are required to file reports under the provisions of this law shall present their financial statements in accordance
with International Financial Reporting Standards (hereinafter - "IFRS Standards"). This stipulation applies to periods commencing on or
after January 1, 2008 (i.e., the interim financial statements for the first quarter of 2008), with the entity's first financial statements
in accordance with IFRS Standards being the annual financial statements of 2008.
See Note 22 below for explanations of the impact of IFRS on the balance sheets of the Company as of January 1, 2007 and December 31,
2007 and on the profit and loss accounts for the year ended December 31, 2007, and a reconciliation between the values of balance sheet
items as of those dates and the values of the items in the profit and loss accounts for the year ended December 31, 2007 as presented in
accordance with the present accounting principles and the values that would have been presented under IFRS.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
Y. Restatement
The Company restated its consolidated financial statements as at 31 December 2007 to reflect therein a liability in respect of
commissions payable to real estate agents against an increase in the inventory of buildings under construction and in respect of a
correction to the cash flows from investment activity and current operations.
The following table presents the effects of the restatement on the consolidated balance sheet as at 31 December 2007:
Prior to restatement Restatement Following restatement
NIS' 000 NIS' 000 NIS' 000
Inventory of buildings under 43,819 9,191 53,010
construction
Provision for real estate - 9,191 9,191
agents
The aforementioned correction did not impact on the shareholders' equity of the Company as at 31 December 2007 nor did it impact on the
profit and loss accounts of the Company for 2007.
The following table presents the effects of the restatement on the consolidated cash flows statement for 2007:
Prior to restatement Restatement Following
restatement
NIS' 000 NIS' 000 NIS' 000
Increase in sellers of land 42,256 (42,256) -
(adjustment required to
present cash flows used in
operating activities)
Increase in suppliers and 2,561 (434) 2,127
service providers (adjustment
required to present cash flows
used in operating activities)
Amounts transferred to (50,712) 42,690 (8,022)
investment real estate (net
cash used in investment
activities)
Increase in buildings under (1,683) (1,645) (3,328)
construction (adjustment
required to present cash flows
used in operating activities)
Increase in provision for real - 1,645 1,645
estate agents (adjustment
required to present cash flows
used in operating activities)
Z. Convenience translation
The financial statements at 31 December 2007 (including the profit and loss account and the balance sheet) have been translated into
Sterling using the representative exchange rate at that date (� 1 = NIS 7.7105). The translation has been made solely for the convenience of
the reader. The amounts presented in these financial statements should not be construed to represent amounts receivable or payable in
Sterling or convertible into Sterling, unless otherwise indicated in these statements.
NOTE 3 - ACCOUNTS RECEIVABLE AND DEBIT BALANCES
Composition:
Convenience Translation
Consolidated Company Consolidated
31 December 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Government institutions 272 15 35
Prepaid expenses 570 138 74
____ ____ ____
842 153 109
____ ____ ____
____ ____ ____
NOTE 4 - INVESTMENT IN BUILDINGS UNDER CONSTRUCTION AND RESTRICTED CASH
A. The major asset of the U.S. subsidiary, Verge - as a single asset entity - is the asset in Las Vegas, comprised of eleven adjacent
lots, covering an overall of 2.87 acres (13 thousand square meters). Part of the asset is empty and undeveloped, while the other part
contained a paved parking lot and a small structure which was used in the past as a garage (which was rented out for a short period during
2007 to a third party) and which is slated for demolition.
The subsidiary intends on constructing on the asset in Las Vegas a project to contain apartments in a cooperative apartment building
(condominiums in the US), as well as commercial space, a sports centre, theatre, and a playground for pets.
On 30 November 2005, approval was obtained from the Las Vegas municipal council to use the asset for development and the
construction of a project containing 296 dwelling units in a cooperative apartment building and 3 thousand square meters of commercial
space. The permit was granted for a limited time, so that the Company had to commence construction within a two-year period. The permit was
extended until November 2008. In December 2007, the subsidiary started preparatory work for the construction of the project which included
demolition and removal of the building that was on the lot designated for the project and the moving of electric cables and pipes that cross
the lot of the project, so as to facilitate the construction work.
The asset is located north of the Central Business District, not far from the Las Vegas strip. In close proximity to the project are
hotels and casinos, office buildings, courts and apartments housing a relatively low economic population.
The project is slated to contain one six-story building with studio apartments, two, three and four room apartments, and luxury loft
apartments. In addition to the dwelling units, the building is expected to contain commercial space, a sports centre, theatre, and a
playground for pets. The addresses of the lots are as follows:
NV 89101 604 N Main Street, Las Vegas
NV 89101 634 N Main Street, Las Vegas
NV 89101 601 1st Street, Las Vegas
NV 89101 603 1st Street, Las Vegas
NV 89101 605 1st Street, Las Vegas
NV 89101 607 1st Street, Las Vegas
NV 89101 625 1st Street, Las Vegas
NV 89101 617 1st Street, Las Vegas
NV 89101 701 1st Street, Las Vegas
NV 89101 703 1st Street, Las Vegas
NV 89101 705 1st Street, Las Vegas
The following table summarizes the book value of the buildings under construction:
Convenience
translation
Consolidated
31 December 31 December
2007 2007
NIS' 000 �' 000
Land purchased from a third party and 10,769 1,397
subsequently transferred to the
subsidiary, mainly against debt
Other capitalized costs (mainly direct 42,241 5,479
marketing costs)
_______ _______
Total buildings under construction 53,010 6,876
_______ _______
_______ _______
B. On 2 June 2007, the subsidiary started selling apartments in the project. As at 31 December 2007, the subsidiary signed contracts
for the sale of 258 apartments amounting to about $96 million. Deposits amounting to about $4.5 million (NIS 17,306 thousand) were placed in
trust as at 31 December 2007. The use of these deposits is restricted by law, and they will be transferred to the subsidiary upon completion
of the sale or after the apartment is registered in the name of the buyer. Accordingly, these deposits are presented as restricted cash and
as a liability (deferred income) in the balance sheet.
NOTE 4 - INVESTMENT IN BUILDINGS UNDER CONSTRUCTION AND RESTRICTED CASH (cont.)
C. According to the purchase contracts of the apartment units of the Las Vegas project, Verge undertook to complete most of the work
no later than 24 months after the signing of the contracts and to transfer possession of the apartments within 30 days after that date.
The time limitation set out in these agreements complies with the requirements of U.S. law, whereby agreements for the sale of
apartment units that stipulate a time limit of up to 24 months are exempt from obtaining the approval of the U.S. Department of Housing and
Urban Development (hereinafter - the "H.U.D.").
A significant portion of the contracts were signed in June 2007, when Verge expected that it would complete the construction by the
end of the time limit. Since the time limit was included in the contracts, no request was submitted for H.U.D. approval.
At present, Verge foresees that it will not be able to complete the construction by the end of the time limit. Therefore, Verge
commenced a process of changing the purchase agreements so as to exclude any time limit. Accordingly, Verge intends on submitting the
revised agreements and the rest of the documents related to the Las Vegas project, for their approval by the H.U.D. Verge Management
notified the Company that it expects to receive the approval within six months following the preparation of the financial statements.
After receipt of the approval, Verge intends on contacting the apartment purchasers to offer them the option of signing the
alternative agreements without any time limit. The new agreements are contingent upon the consent of the apartment purchasers and Verge
Management foresees that 20% of the apartment purchasers will not elect to sign the alternative agreements and will terminate their
agreements with Verge.
D. See also Note 15C.
NOTE 5 - INVESTMENTS IN INVESTEE COMPANIES
Investment in subsidiaries:
Composition in the Company balance sheet:
31 December
2007
NIS' 000
Cost of shares (1) 38,910
Share of Company in income accumulated since purchase 13,312
Adjustments deriving from the translation of the financial (1,165)
statements of investee companies
operating in foreign currency
_______
51,057
Loan to a subsidiary (2) 7,058
_______
58,115
_______
_______
(1) The cost of the investment in the shares of the subsidiaries, Verge and Sitnica, is based on their value in the books of the
controlling shareholder due to the fact that Verge was determined to be the accounting acquiring company as part of the merge of the Company
with the subsidiaries and due to the fact that the investment of the Company in Sitnica was treated using a method similar to the pooling of
interests method. See Note 2C above.
(2) Loan to the Verge subsidiary
In November 2007, the Company granted a loan to the Verge subsidiary in an amount of $1.8 million for a period of one year. The loan
is dollar-denominated and bears interest at a rate of 12% per annum. An amount of $1.5 million of the loan was used to repay the balance of
a loan granted by the controlling shareholder in Verge, Emvelco Corporation, and the share of which was converted into the shares of Verge.
NOTE 6 - FIXED ASSETS
Composition in the consolidated balance sheet:
Computers and peripheral equipment Convenience translation
NIS' 000 �' 000
Cost:
As at 1 January 2007 - -
Initial consolidation of a 63 8
subsidiary
_____ _____
As at 31 December 2007 63 8
-------- --------
Accumulated depreciation:
As at 1 January 2007 - -
Provision during the year 5 1
Initial consolidation of a 11 1
subsidiary
_____ _____
As at 31 December 2007 16 2
-------- --------
_____ _____
Depreciated cost:
As at 31 December 2007 47 6
_____ _____
_____ _____
As at 31 December 2006 - -
_____ _____
_____ _____
NOTE 7 - OTHER ASSETS
Composition in the consolidated balance sheet:
Software Convenience translation
NIS' 000 �' 000
Cost:
As at 1 January 2007 - -
Initial consolidation of a subsidiary 111 15
_____ _____
As at 31 December 2007 111 15
-------- --------
Accumulated amortization:
As at 1 January 2007 - -
Initial consolidation of a subsidiary 28 4
Amortization during the year 5 1
_____ _____
As at 31 December 2007 33 5
-------- --------
_____ _____
Amortized cost:
As at 31 December 2007 78 10
_____ _____
_____ _____
As at 31 December 2006 - -
_____ _____
_____ _____
NOTE 8 - INVESTMENT REAL ESTATE
Under an agreement dated 28 June 2007, the Croatian subsidiary obtained the contractual rights to the assets listed below (hereinafter -
the "Land" or the "Assets") from the company, Atia Projekt (hereinafter - "Atia Projekt") at the value of these assets on the books of the
Atia Projekt. In view of the fact that these real estate assets are held for an as yet undetermined future use, this real estate was
reported as investment real estate in accordance with Accounting Standard No. 16 of the Israel Accounting Standards Board. The subsidiary
elected to measure the investment real estate at fair value as its accounting policy. The differences between the cost of the assets and
their fair value derive mainly from the consolidation of individual assets into one large lot, the value of which as a single unit is
greater than the costs of its parts.
In accordance with the purchase agreements in respect of the property in Croatia, payment dates for the consideration not yet paid were
set for March through May 2008 (see also Note 9, below).
Regarding 18 plots, covering a total area of 52,073 square meters, Atia Project notified the Company that it took advantage of
provisions in the purchase agreements regarding such plots and extended the payment date for the balance of the consideration, in a total
amount of NIS 30,052 thousand, for a period of six months, to October - November 2008.
Regarding 2 plots, covering a total area of 9,709 square meters, Atia Project reached oral agreements with the sellers of the plots
whereby the payment date for the balance of the consideration, an amount of NIS 3,660 thousand, was postponed until the end of June 2008.
As at the date of the preparation of the financial statements, Sitnica had paid a total of NIS 2,297 thousand in respect of the 5%
transfer tax on the total purchase consideration.
As at the date of the preparation of the financial statements, Sitnica had paid a total of NIS 7,390 thousand in respect of the balance
of the consideration for 2 plots covering an area of 12,919 square meters and the ownership rights to these plots were registered in its
name.
The unpaid balance of the consideration in respect of the asset in Samobor bears interest (in kuna) at a rate of 15% per annum.
In addition to the above, in April and May 2008, Sitnica entered into agreements to purchase four additional plots, adjacent to the
asset in Samobor, covering an area of 7,492 square meters, for a total amount of NIS 5,378 thousand (not including transfer tax of 5% of the
consideration). At the time of the signing of the agreements, Sitnica paid the owners of the properties insignificant amounts, with the
major part of the consideration as per the agreements to be paid at dates in the months of June and July 2008.
NOTE 8 - INVESTMENT REAL ESTATE (cont.)
As at 31 December 2007, the contractual rights of the subsidiary in these assets included the following rights in land in Samobor,
Croatia:
Detail Sq.m.
3782 1,574
3783 1,965
3780 1,554
3783 1,965
3777 5,927
3778 6,289
3779 6,992
3723 3,257
3724/1 3,227
3724/2 3,007
3722/2 3,420
3732/1 2,454
3743 1,664
3740 2,604
3737 3,038
3738 1,562
3742 1,612
3731 5,224
3744 2,588
3726 899
3727/2 714
3727/1 1,947
3737 3,038
3738 1,562
3776 6,618
______
74,701
______
______
The cost of the real estate as at 31 December 2007 includes 5% purchase tax on the real estate, for a total amount of NIS 50,827
thousand.
The fair value of the real estate as at 31 December 2007 amounted to NIS 69,121 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 by the appraiser to the area of the property in Samobor, Croatia. Additional information was
obtained from 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.
In the opinion of Company Management, based on, among other things, the position of the appraiser, the fair value of the property is
influenced by changes in exchange rates of the euro and the kuna (the Croatian currency) that are relevant to Croatia and less influenced 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 not impact on the fair value of the property.
In addition, in the opinion of Company Management, there was no material change in the fair value of the investment real estate as at 31
December 2007 versus the fair value that was appraised in July 2007.
NOTE 8 - INVESTMENT REAL ESTATE (cont.)
Ownership rights to the land in Croatia are registered in the names of the sellers of the land and not in the name of the Croatian
subsidiary. The sellers deposited with a notary public documents that will enable the Croatian subsidiary to register the ownership rights
to the land on the date on which the sellers are paid the balance of the consideration. The Atia Projekt registered a caveat on these
properties in the land registry office in the Samobor municipal court.
NOTE 9 - SELLERS OF LAND
The Atia Projekt (a related party) paid the sellers of the land 10% of the agreed-upon amount in respect of the land. The balance of the
debt, in an amount of Kuna 54,971 thousand (NIS 42,570 thousand), has to be paid by the subsidiary to the sellers of the land directly. The
subsidiary has to make the payments by May 2008.
NOTE 10 - SUPPLIERS AND SERVICE PROVIDERS
Composition:
Convenience Translation
Consolidated Company Consolidated
31 December 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Open debts 2,519 202 327
______ ______ ______
______ ______ ______
NOTE 11 -ACCOUNTS PAYABLE AND CREDIT BALANCES
Composition:
Convenience Translation
Consolidated Company Consolidated
31 December 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Employees and payroll-related 4 - 1
institutions
Institutions 50 50 6
Legal claim settlement fees 260 - 34
Accrued expenses and others 844 598 109
______ ______ ______
1,158 648 150
______ ______ ______
______ ______ ______
NOTE 11A - PROVISION FOR REAL ESTATE AGENTS
The U.S. subsidiary entered into agreements with real estate agents for payments of commissions in respect of the sale of apartments in
the Las Vegas project. According to the agreements, the Company pays commissions at rates of between 3.8% - 5.8% for each apartment sold.
50% of the commission is paid to the agent upon the signing of the agreement and the other 50% is to be paid when title is transferred to
the purchaser of the apartment. As at 31 December 2007, the subsidiary has a liability in an amount of $2.4 million in respect of agreements
for the sale of apartments that had been signed as at that date.
NOTE 12 - LIABILITY FOR EMPLOYEE TERMINATION BENEFITS, NET
As at 31 December 2007, the Company has no employer-employee relationships whatsoever and, therefore, it has no liability for employee
termination benefits.
NOTE 13 -SHAREHOLDERS' EQUITY
A. Composition of share capital:
Registered Issued and paid-in
Quantity of shares Quantity of shares
31 December 31 December
2007 2006 2007 2006
Ordinary no par value shares 5,000,000,000 450,000,000 1,259,166,770 179,197,588
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
B. The ordinary shares grant their owners voting rights and the right to participate in the shareholders meetings, the right to share
in income and the right to participate in the surplus of the assets upon liquidation.
C. The shares of the Company are registered by name and are listed for trading on the Tel Aviv Stock Exchange and the London Stock
Exchange - Main Market.
D. As part of the compromise agreement signed with the banks in 2005, in connection with the Company's creditors arrangement, the
Company allotted to the banks 8,131,053 option warrants. The exercise price of each option was set at $0.0178 per share. The option warrants
are supposed to be exercisable until 12 May 2009.
E. As part of the agreement signed between the Company and the FITE Fund, the Company allotted the FITE Fund 44,771,404 option
warrants which proximate to the date on which the creditors arrangement went into effect constituted 19.9% of the issued share capital of
the Company. The exercise price of each option was set at $0.041 per share. The option warrants are supposed to be exercisable from January
2007 until July 2009.
F. Further to the going into effect of the creditors arrangement, the existing option holders waived all of their rights under these
options.
G. Increasing the registered capital of the Company
On 30 October, 2007, the general shareholders meeting of the Company authorized the Company to increase the registered share capital
of the Company to 5,000,000,000 ordinary shares, no par value.
The increase in the registered share capital will be effected on 2 November 2007.
See also Notes 1C, 1D and 15.
H. Consolidation of share capital
On 6 April 2008, it was decided to convene a special meeting of the shareholders of the Company for 14 May 2008. On the agenda of
the meeting was a decision to consolidate and redivide the share capital of the Company such that each 100 existing shares of the Company's
registered and issued capital of the Company will be consolidated into one share. At the special meeting which took place on 14 May 2008, it
was resolved to consolidate the share capital and it was further decided that the effective date of the consolidation is 21 May 2008 and
that commencing from 22 May 2008, the shares would be traded as the consolidated shares, as above.
NOTE 14 -TAXES ON INCOME INCLUDED IN THE PROFIT AND LOSS ACCOUNTS
A. Taxation of companies in Israel
General
The Company is taxed in Israel under the provisions of the Israel Tax Ordinance (New Version) - 1961 (hereinafter - the
"Ordinance").
Income Tax Law (Inflationary Adjustments) - 1985
Until 31 December 2007, the Company was subject to the Income Tax Law (Inflationary Adjustments) - 1985, whereby the results of
operations for tax purposes are measured on a "real" basis" by adjusting the income for changes in the ICPI. Commencing on 1 January 2008,
this law has been cancelled and transition provisions were set out. Accordingly, the results of operations will be measured for tax purposes
on a nominal basis.
Tax rates applicable to the income of the Company
On July 25, the Israeli parliament passed an amendment to the Income Tax Ordinance (No. 147) - 2005 (hereinafter - the "Amendment")
which stipulates, among other things, that the corporate tax rate will be gradually reduced to the following tax rates: 2006 - 31%; 2007 -
29%; 2008 - 27%; 2009 - 26%; 2010 and thereafter - 25%.
B. Benefits pursuant to the Law for the Encouragement of Capital Investment
In the past, as part of its discontinued operations (see Note 21 below), the Company had expansion plans for its plant, which were
approved as an "approved enterprise" pursuant to the Law for the Encouragement of Capital Investment - 1959 (hereinafter - the "Law"). These
plans granted the Company tax benefits which were contingent upon compliance with the conditions set out in the law, in the regulations
enacted thereunder, and in the letter of approval. According to the law, in the event that the Company did not meet the terms set out in the
law and in the letters of approval, it would have to refund the investment grants received, plus interest and linkage differentials and, in
addition, the tax benefits from which the Company benefited under the law would be cancelled. Company Management believes that it is not
exposed to the risk of a demand being made to repay the amounts received in the past.
As at 31 December 2007, the Company has no valid plans for approved enterprises.
C. Benefits pursuant to the Law for the Encouragement of Industry
In the past, the Company was an "Industrial Company" pursuant to the Law for the Encouragement of Industry (Taxes) - 1969.
Pursuant to this law, as part of its discontinued operations (see Note 21 below), the Company was entitled in the past to
accelerated depreciation, as set out in the regulations enacted under the Income Tax Law (Inflationary Adjustments).
D. Taxes on income included in the profit and loss accounts - Consolidated and Company:
Convenience Translation
Consolidated Company Consolidated
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
In respect of deferred taxes, 3,541 - 459
net
_______ _______ _______
Taxes on income 3,541 - 459
_______ _______ _______
_______ _______ _______
NOTE 14 -TAXES ON INCOME INCLUDED IN THE PROFIT AND LOSS ACCOUNTS (cont.)
E. Tax reconciliations
The difference between the amount of the tax computed on the pre-tax income at the regular tax rate and the amount of tax reported
in the statement of operates is explained as follows:
Convenience
Translation
Consolidated Company Consolidated
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Pre-tax income as reported in 15,264 11,723 1,980
the profit and loss accounts
(including the income from
discontinued operations and
creditors arrangement)
______ ______ ______
______ ______ ______
Ordinary tax rate 29% 29% 29%
______ ______ ______
______ ______ ______
Taxes on income computed at the 4,427 3,400 574
ordinary tax rate
Increase (decrease) in tax
burden:
Non-deductible expenses 12 12 1
Amounts in respect of which (898) (3,412) (116)
deferred taxes, net, were not
generated and utilization of
tax losses of prior years
______ ______ ______
Taxes on income as reported in 3,541 - 459
the profit and loss accounts
______ ______ ______
______ ______ ______
F. Deferred taxes - consolidated as at 31 December 2007
In respect of investment real In respect of tax loss carryforwards Total
estate
NIS'000 NIS'000 NIS'000
(3,133) 98 (3,035)
______ ______ ______
______ ______ ______
�' 000 �' 000 �' 000
(407) 13 (394)
______ ______ ______
______ ______ ______
Deferred taxes were calculated at a rate of 20%.
G. Assessments and losses for tax purposes
1. Final tax assessments were received by the Company up to and including the 2003 tax year. Other subsidiaries have not been
assessed since inception.
2. The Company has tax loss carryforwards as at 31 December 2007 in an amount of NIS 70 million.
Due to the uncertainty regarding the future existence of taxable income, no deferred tax assets were recorded on the books of the
Company.
NOTE 14 -TAXES ON INCOME INCLUDED IN THE PROFIT AND LOSS ACCOUNTS (cont.)
H. On 10 February 2008, the Tax Authority issued a notification (hereinafter the - "Notification") of the setting up of a joint forum
together with professional organizations, the goal of which is to work out various standard related issues that arose as part of the
implementation of IFRS in Israel and the practical application thereof in tax returns. It was also decided by the Tax Authority that taxable
income will continue to be computed pursuant to the guidelines that were in effect in Israel prior to the adoption of IFRS (except for
Accounting Standard No. 29, Adoption of IFRS). The calculation of taxable income, as above, will be carried out during an interim period
until it is decided how to apply IFRS to Israeli tax laws.
I. Taxation in Croatia
1. Corporate tax
Regular income is taxed in Croatia (hereinafter - "Croatian Corporate Tax") at a rate of 20%. Therefore, income from construction,
sale or rental of real estate in Croatia is liable for Croatian Corporate Tax at this rate. Tax losses may be carried forward over a
five-year period but they cannot be carried back to prior periods. There is no limit to the amount of the loss that can be carried forward.
2. Recognition of financing expenses for tax purposes
Financing expenses are tax deductible in Croatia. However, a distinction is made between loans from third parties and loans granted
or guaranteed by related parties.
According to the thin financing rules in Croatia, the company may not take into account for tax purposes interest charges on loans
received from foreign shareholders holding at least 25% of the share capital or voting rights in the Company, if the amount of the loan is
four times the share of the shareholder in the capital of the borrower at any given point in time during the tax period. This law applied to
loans granted by a third party but guaranteed by a shareholder.
3. VAT and purchase tax
The sale of apartments and commercial properties is subject to VAT of 22%. However, the part of the purchase price attributed to
land is exempt from VAT, but is subject to purchase tax of 5%. According to Croatian law, the purchaser is required to pay the purchase tax
and the VAT.
This law is also applicable to the sale of buildings for business purposes.
J. Taxation in Nevada, USA
Corporate tax in the U.S. amounts to 35% (progressive).
To the best of the knowledge of the Company, as at the date of the signing of the financial statements, Nevada has no state tax.
NOTE 15 -COMMITMENTS, LIENS AND CONTINGENT LIABILITIES
A. Investment agreement with Trafalgar
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 up to 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:
1. The investment in the capital of the Company by Trafalgar will be done in stages, as required by the Company from time to time.
2. 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.
NOTE 15 -COMMITMENTS, LIENS AND CONTINGENT LIABILITIES (cont.)
A. Investment agreement with Trafalgar (cont.)
3. Unless agreed upon otherwise with Trafalgar, every amount invested shall be limited in such a way that the aggregate investment
amount during any given 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 trading 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.
4. In return for its commitment to invest in the Company pursuant to the CEF, Trafalgar is entitled to a payment of $1,500 thousand,
to be paid by way of an allotment of shares (hereinafter - the "Remuneration Shares"), to be carried out in stages, as detailed below:
Part of the remuneration shares will be allotted to ATW Holdings Ltd. (hereinafter - "ATW") which acted as a broker in the
transaction between the Company and Trafalgar.
Out of the remuneration shares, a quantity of 69,375,000 shares will be allotted on the basis of the market share price at the date
of the signing of the investment agreement (the "Proposed Shares").
The value of the proposed shares constitutes 45% - 55% of the total value of the remuneration shares to which Trafalgar is entitled.
Of these shares, a quantity of up to 50,454,546 shares will be allotted to Trafalgar and a quantity of 18,920,454 shares will be allotted to
ATW, subject to receipt of approvals and at the dates set out below.
The balance of the remuneration shares will be allotted between Trafalgar and ATW as set out in the investment agreement, piecemeal,
according to the timetable and subject to the terms set out in the investment agreement, as detailed below. The Company will issue an
immediate filing regarding the allotment to Trafalgar and/or ATW which will be done on account of the remuneration shares, as above.
According to the investment agreement, remuneration shares will be allotted to Trafalgar and ATW as a commission, in a total amount
of $1,500 thousand, at prices and at dates as follows:
- ATW will be allotted shares of the Company at an amount equal to 15% of the commission (i.e., $225 thousand), at a weighted average
market share price on the date of the signing of the investment agreement - NIS 0.04 per share;
- At the earliest possible time, Trafalgar will be allotted shares of the Company at an amount equal to 20% of the commission (i.e.,
$300 thousand), at a weighted average market share price on the date of the signing of the investment agreement - NIS 0.04 per share. These
shares are scheduled to be sold to Emvelco, pursuant to an agreement signed between Emvelco and Trafalgar, as described below:
At the date of approval of the issuance of a shelf prospectus by the Company, Trafalgar will be allotted shares of the Company at an
amount equal to 20% of the commission (i.e., $300 thousand), at a weighted average market share price on the date of the signing of the
investment agreement - NIS 0.04 per share. However, if the Company does not receive approval for the issuance of the shelf prospectus,
whereby Trafalgar will be permitted to sell its shares without restriction, it will be allotted at the beginning of May 2008 half of the
quantity of shares as above (i.e., shares at a value of $150 thousand at a share price of NIS 0.04). These shares are also scheduled to be
sold to Emvelco pursuant to the agreement between Emvelco and Trafalgar, as described below. Upon the approval of the issuance of a shelf
prospectus, Trafalgar will be immediately allotted the second half of the aforementioned shares;
Within 6 months of the later of the date of the signing of the investment agreement or the receipt of approval of the issuance of
the shelf prospectus, Trafalgar will be allotted shares of the Company at a value equal to 10% of the amount of the commission (i.e., $150
thousand), at a weighted average market price of the share during the week that preceded the date of the allotment. However, if the Company
does not obtain approval for the issuance of a shelf prospectus whereby Trafalgar will be permitted to sell its shares without restriction,
it will be allotted at the beginning of August 2008 half of the quantity of shares as above (i.e., shares at a value of $75 thousand at the
aforementioned share price). These shares are also scheduled to be sold to Emvelco pursuant to the agreement between Emvelco and Trafalgar,
as described below. Upon the approval of the issuance of a shelf prospectus, Trafalgar will be immediately allotted the second half of the
aforementioned shares;
NOTE 15 -COMMITMENTS, LIENS AND CONTINGENT LIABILITIES (cont.)
A. Investment agreement with Trafalgar (cont.)
4. (cont.)
Within 10 months of the later of the date of the signing of the investment agreement or the receipt of approval of the issuance of
the shelf prospectus, Trafalgar will be allotted shares of the Company at a value equal to 10% of the amount of the commission (i.e., $150
thousand), at a weighted average market price of the share during the week that preceded the date of the allotment. However, if the Company
does not obtain approval for the issuance of a shelf prospectus whereby Trafalgar will be permitted to sell its shares without restriction,
it will be allotted at the beginning of August 2008 half of the quantity of shares as above (i.e., shares at a value of $75 thousand at the
aforementioned share price). These shares are also scheduled to be sold to Emvelco pursuant to the agreement between Emvelco and Trafalgar,
as described below. Upon the approval of the issuance of a shelf prospectus, Trafalgar will be immediately allotted the second half of the
aforementioned shares;
At the end of each month during the 10 month period commencing from the date of the signing of the investment agreement, ATW will be
allotted shares of the Company at a value equal to 25% of the amount of the commission (i.e., $375 thousand), at a weighted average market
price of the share during the week that preceded the date of the allotment. However, if the Company does not obtain approval for the
issuance of a shelf prospectus whereby ATW will be permitted to sell its shares without restriction, it will be allotted over the period
half of the quantity of shares as above (i.e., shares at a value of $187.5 thousand at the aforementioned share price). These shares are
also scheduled to be sold to Emvelco pursuant to the agreement between Emvelco and Trafalgar, as described below. Upon the approval of the
issuance of a shelf prospectus, ATW will be immediately allotted the second half of the aforementioned shares;
5. The Company undertook to obtain all of the approvals for the allotment, as required by law, including for purposes of registering
the allotted shares for trade.
6. Trafalgar will be entitled to receive from the Company a commission of 4% of all investment amounts demanded from it by the
Company, which commission shall be deducted from any investment amount transferred to the Company pursuant to the agreement.
7. A condition for the performance of any investment by Trafalgar is that the Company issue 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.
8. 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 2 above) will
be 5% (instead of 6%) and the commission rate due Trafalgar as per item 6 above will be 3% (instead of 4%).
9. 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.
In January 2008, the Company received the aforementioned loan.
Further to the signing of the investment agreement with Trafalgar, the board of directors of the Company decided to allot Trafalgar
69,375,000 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.
NOTE 15 -COMMITMENTS, LIENS AND CONTINGENT LIABILITIES (cont.)
A. Investment agreement with Trafalgar (cont.)
The offered shares will be allotted piecemeal, at the following dates:
18,920,454 shares will be allotted immediately following receipt of approval of the stock exchange to the listing for trade of the
offered shares.
25,227,273 of the offered shares will be allotted immediately following receipt of the approval of the shelf prospectus by the
Israel Securities Authority. However, in the event that such approval is not forthcoming by the beginning of May 2008, Trafalgar will be
allotted at that date only 12,613,636 shares.
On 29 April 2008, the agreement between Emvelco and Trafalgar was revised, with the consent of both parties, whereby the share sale
agreement will not apply to the 69,375,000 ordinary shares offered to Trafalgar and to ATW.
25,227,273 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.
In respect of the commitment of the Company to allot shares in a quantity that has not yet been determined (in consideration of $625
thousand), the Company recorded a liability in its financial statements as at 31 March 2008 in an amount of NIS 2,221 thousand against a
reduction in shareholders' equity in the same amount.
As at the date of the preparing of the financial statements, no shares have been allotted to Trafalgar.
B. Agreement for the management of the project in Las Vegas
In January 2008, the subsidiary, Verge Living Corporation, 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
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:
1. 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.
2. A monthly payment of $24,750.
3. 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.
C. 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 agents, 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. As of 31 December 2007, the American balance
on the books of Verge included an amount of $49 thousand as a receivable (for the un-used portion of advances) and approximately $56,000 as
credit for fees and expenses.
The Court set the trial for early January 2009, and also set a settlement conference for 31 July 2008.
NOTE 15 -COMMITMENTS, LIENS AND CONTINGENT LIABILITIES (cont.)
C. Litigation (cont.)
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, denies 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, an attachment was registered in an amount of $1.2 million by a former consultant of Verge, without presenting
any of the documents needed to prove his demands. On 7 May 2008, the consultant notified Verge of his intention to register an additional
attachment in an amount of $7.35 million. According to Verge, by registering the attachments, the consultant caused damage which may very
well endanger the entire project. Therefore, Verge intends on filing a countersuit in respect of the false claim and the resultant damages.
NOTE 16 -FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
A. Linkage balance sheets:
1. Composition in the Consolidated:
The following table presents the linkage balance sheet of assets and liabilities as at 31 December 2007:
Linked to the dollar Linked to the Kuna Linked to the pound Unlinked Non-monetary assets Total
sterling
NIS'000 NIS'000 NIS'000 NIS'000 NIS'000
NIS'000
Assets
Cash and cash equivalents 211 36 39 963 -
1,249
Accounts receivable and debit - 257 - 15 570
842
balances
Restricted cash 17,306 - - - -
17,306
Buildings under construction - - - - 53,010
53,010
Fixed assets, net - - - - 47
47
Other assets, net - - - - 78
78
Investment real estate - - - - 69,121
69,121
_______ _______ _______ _______ _______
_______
Total assets 17,517 293 39 978 122,826
141,653
----------- ----------- ----------- ----------- -----------
-----------
Liabilities
Loans from interested parties 2,972 4,482 - - -
7,454
Sellers of land - 42,570 - - -
42,570
Suppliers and service 434 1,883 45 157 -
2,519
providers
Accounts payable and credit 506 4 - 648 -
1,158
balances
Provision for real estate 9,191 - - - -
9,191
agents
Advances from customers 17,306 - - - -
17,306
Deferred taxes - - - - 3,035
3,035
_______ _______ _______ _______ _______
_______
Total liabilities 30,409 48,939 45 805 3,035
83,233
----------- ----------- ----------- ----------- -----------
-----------
_______ _______ _______ _______ _______
_______
Excess of assets over (12,892) (48,646) (6) 173 119,791
58,420
liabilities (liabilities over
assets)
_______ _______ _______ _______ _______
_______
_______ _______ _______ _______ _______
_______
NOTE 16 -FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont.)
A. Linkage balance sheets (cont.):
1. Composition in the Consolidated (cont.):
The following table presents the linkage balance sheet of assets and liabilities as at 31 December 2007:
Convenience Translation
Linked to the dollar Linked to the Kuna Linked to the pound Unlinked Non-monetary assets Total
sterling
�' 000 �' 000 �' 000 �' 000 �' 000 �'
000
Assets
Cash and cash equivalents 27 5 5 125 -
162
Accounts receivable and debit - 33 - 2 74
109
balances
Restricted cash 2,244 - - - -
2,244
Buildings under construction - - - - 6,876
6,876
Fixed assets, net - - - - 6
6
Other assets, net - - - - 10
10
Investment real estate - - - - 8,965
8,965
_______ _______ _______ _______ _______
_______
Total assets 2,271 38 5 127 15,931
18,372
----------- ----------- ----------- ----------- -----------
-----------
Liabilities
Loans from interested parties 386 581 - - -
967
Sellers of land - 5,521 - - -
5,521
Suppliers and service 56 244 6 21 -
327
providers
Accounts payable and credit 66 1 - 83 -
150
balances
Provision for real estate 1,192 - - - -
1,192
agents
Advances from customers 2,244 - - - -
2,244
Deferred taxes - - - - 394
394
_______ _______ _______ _______ _______
_______
Total liabilities 3,944 6,347 6 104 394
10,795
----------- ----------- ----------- ----------- -----------
-----------
_______ _______ _______ _______ _______
_______
Excess of assets over (1,673) (6,309) (1) 23 15,537
7,577
liabilities (liabilities over
assets)
_______ _______ _______ _______ _______
_______
_______ _______ _______ _______ _______
_______
NOTE 16 -FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont.)
A. Linkage balance sheets (cont.):
2. Composition in the Company:
The following table presents the linkage balance sheet of assets and liabilities as at 31 December 2007:
Linked to the pound Unlinked Non-monetary assets Total
sterling
NIS'000 NIS'000 NIS'000 NIS'000
Assets
Cash and cash equivalents 39 963 - 1,002
Accounts receivable and debit - 15 138 153
balances
Investments in investee - - 58,115 58,115
companies
______ ______ ______ ______
Total assets 39 978 58,253 59,270
--------- --------- --------- ---------
Liabilities
Trade accounts payable 45 157 - 202
Accounts payable and credit - 648 - 648
balances
--------- --------- --------- ---------
______ ______ ______ ______
Total liabilities 45 805 - 850
______ ______ ______ ______
______ ______ ______ ______
Excess of assets over (6) 173 58,253 58,420
liabilities (liabilities over
assets)
______ ______ ______ ______
______ ______ ______ ______
The following table presents the linkage balance sheet of assets and liabilities as at 31 December 2006:
Linked to the dollar Linked to the euro Unlinked Non-monetary assets Total
NIS'000 NIS'000 NIS'000 NIS'000 NIS'000
Assets
Total assets attributed to 94 - 577 37,039 37,710
discontinued operations
--------- --------- --------- --------- ---------
Liabilities
Total liabilities attributed 40,061 508 39,516 146 80,231
to discontinued operations
--------- --------- --------- --------- ---------
______ ______ ______ ______ ______
Excess of assets over (39,967) (508) (38,939) 36,893 (42,521)
liabilities (liabilities over
assets)
______ ______ ______ ______ ______
______ ______ ______ ______ ______
B. Credit risks
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 resulted from a number of factors, as follows: an
increase in the volume of repossessions of houses and apartments, an in crease in the volume of bankruptcies of mortgage companies, a
significant decrease in the available resources for purposes of financing through mortgages, and in the prices of apartments.
The financing of the 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 have an impact on the ability of the Verge subsidiary to procure the financing
required to complete its construction project and on the terms of the financing, if procured, and it may also impact in the ability of the
customers of the Company to procure mortgages, if necessary, and on the terms under which the mortgages will be obtained.
NOTE 16 -FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont.)
C. As at 31 December 2007, the balances of cash and cash equivalents and the short-term deposits of the Group are mostly on deposit
with banking institutions in Israel and in the United States. Accordingly, in the opinion of Company Management, the credit risk in respect
of these balances is remote.
NOTE 17 - ADDITIONAL INFORMATION REGARDING PROFIT AND LOSS ACCOUNTS ITEMS
A. Selling and marketing expenses
Convenience Translation
Consolidated Company Consolidated
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Miscellaneous 106 - 14
______ ______ ______
______ ______ ______
B. General and administrative expenses
Convenience Translation
Consolidated Company Consolidated
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Salaries and related expenses 167 7 22
Directors fees 41 41 5
Professional fees 1,302 899 169
Management fees to an 160 160 21
interested party
Other management fees 101 101 13
Others 404 312 52
______ ______ ______
2,175 1,520 282
______ ______ ______
______ ______ ______
C. Financing income (expenses), net
Convenience
Translation
Consolidated Company Consolidated
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Interest income in respect of a - 135 -
loan to a subsidiary
Exchange rate differentials in (243) (243) (32)
respect of a loan to a
subsidiary
Valuation of monetary items and (506) 39 (65)
other financing income
(expenses), net
______ ______ ______
(749) (69) (97)
______ ______ ______
______ ______ ______
NOTE 18 - INTERESTED PARTIES
A. Balances of interested parties
Consolidated Company Convenience Translation
31 December 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Accrued expenses to interested 160 160 21
parities
______ ______ ______
______ ______ ______
Loan to subsidiary - 7,058 -
______ ______ ______
______ ______ ______
The highest debit balance 376 376 49
during the year
______ ______ ______
______ ______ ______
Loans received from interested 7,454 - 967
parties (*)
______ ______ ______
______ ______ ______
(*) The balance of loans from interested parties is comprised of the following two components:
1. A loan in an amount of $773 thousand (NIS 2,972 thousand) granted by Emvelco Corporation, the controlling shareholder in the
Company, to Verge, and partially converted into shares of Verge.
The loan is dollar-denominated and bears interest of 12% per annum. The loan is scheduled to be repaid by the end of 2008.
2. A loan in an amount of Kuna 5,788 thousand (NIS 4,482 thousand) does not bear interest and is Kuna - denominated. The repayment
date has not yet been determined.
B. Transactions with interest parties
Consolidated Company Convenience
Translation
Year ended 31 December
2007 2007 2007
NIS'000 NIS'000 �' 000
Management fees to interested 160 160 21
parties
______ ______ ______
______ ______ ______
Interest income in respect of a - 135 18
loan to a subsidiary
______ ______ ______
______ ______ ______
Exchange rate differentials in 243 243 32
respect of a loan to a
subsidiary
______ ______ ______
______ ______ ______
NOTE 18 - INTERESTED PARTIES (cont.)
C. Benefits to interested parties
Convenience Translation
Number of people in Year ended 31 Year ended 31 December
December
2007 2007 2007
NIS'000 �' 000
Interested parties who render
services to the Company (*)
Vice President and director, 1 80 10
;Mr. Yosef Atia
CEO and director, Mr. Shalom 1 80 10
Atia
Fees of directors who are not 3 41 6
employed by the Company:
Mr. Meir Matana 13 2
Mr. Iftach Mazar 12 2
Mr. Ramzi Gabay 16 2
(*) Including through management companies owned by them.
See Note 10 regarding the management fee agreements with Mr. Yosef Atia and Mr. Shalom Atia and the private placements to the related
parties.
There was no granting of share options or long term incentive schemes to the directors of the Company.
D. Replacement of the Company's By-Laws, granting indemnification and exemption of officer and purchase of insurance for offices
1. On 30 October 2007, the general shareholders meeting of the Company approved the replacement of the by-laws of the Company with a
new set of by-laws that define, among other things, the volume of the permitted indemnification of directors and officers. The proposed
by-laws permit the Company, among other things, to insure the liability of directors and officers and grant them indemnification of the
maximum amount allowed by law, and permit the Company to exempt the directors and officers from their fiduciary responsibilities, all
subject to the existing restrictions by law.
2. After receipt of approval from the audit committee and the board of directors of the Company, the general shareholders meeting of
the Company approved the granting of a writ of indemnification for all of the officers currently serving at the Company and all of the
officers that will serve the Company from time to time in the future.
3. After receipt of approval from the audit committee and the board of directors of the Company, the general shareholders meeting of
the Company approved the purchase of an insurance policy for the liability of directors and officers of the Company, for all of the officers
that will serve in the Company, including officers who are not employees of the Company, including officers who may be considered to be
controlling shareholders of the Company, within the limits of liability of up to $3 million per event and $6 million per period, at an
annual premium of up to $15 thousand and a deductible that will not exceed $15 thousand per event.
The policy will not include known suits and/or circumstances which may result in suits deriving from or related to the
non-compliance of the Company with the preservation rules or suspension of trading on the stock market.
4. After receipt of approval from the audit committee and the board of directors of the Company, the general shareholders meeting of
the Company approved the granting of an a priori exemption from damage liability due to a breach of the fiduciary responsibility on the part
of directors or officers serving with the Company or who will serve the Company in the future from time to time, from damage liability to be
caused and/or that was caused by them to the Company, as a result of a breach in their fiduciary relationship with the Company, except for a
breach of the fiduciary responsibility in distribution (as defined in the Companies Law), on condition that their actions were taken by
virtue of their being directors and/or officers at the Company. The said exemption is in effect commencing on the date of their appointment
as directors and/or officers at the Company.
NOTE 18 - INTERESTED PARTIES (cont.)
E. Commitments of controlling shareholders in respect of applicable tax payments, should they apply, in subsidiaries.
1. Emvelco sent a letter to the Company in which it undertook to indemnify the Company in respect of any tax to be paid by Verge,
deriving from the difference between (a) Verge's taxable income from the Las Vegas project, up to an amount of $21.7 million and (b) the
book value of the project in Las Vegas for tax purposes on the books of Verge, at the date of the closing of the transfer of the shares of
Verge to the Company. Accordingly, the amount of the indemnification is expected to be the amount of the tax in respect of the
aforementioned difference, up to a maximum difference of $11 million.
2. A/P Bookkeeper Holdings sent a letter to the Company in which it undertook to indemnify the Company in respect of any tax to be
paid by Sitnica, deriving from the difference between (a) Verge's taxable income from the Samobor project, up to an amount of $5.14 million
and (b) the book value of the project in Samobor for tax purposes on the books of Sitnica, at the date of the closing of the transfer of the
shares of Sitnica to the Company. Accordingly, the amount of the indemnification is expected to be the amount of the tax in respect of the
aforementioned difference, up to a maximum difference of $0.9 million.
3. The Atia Projekt undertook to bear any additional purchase tax (if any is applicable) that Sitnica would have to pay in respect of
the transfer of the contractual rights in investment real estate in Croatia, from the Atia Projekt to Sitnica.
F. See also Note 15.
NOTE 19 - GEOGRAPHIC SEGMENTS - CONSOLIDATED
1. Profit and loss data
Year ended 31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
NIS' 000 NIS' 000 NIS' 000 NIS' 000
Change in fair value of - - 18,294 18,294
investment real estate
______ ______ ______ ______
______ ______ ______ ______
Segmental results (1,520) (283) 17,816 16,013
Net financing expenses (69) (680) - (749)
Taxes on income - - (3,541) (3,541)
______ ______ ______ ______
Income (loss) for the year (1,589) (963) 14,275 11,723
from continuing operations
Income from discontinued 31,521 - - 31,521
operations including income
from creditors arrangement
______ ______ ______ ______
Net income (loss) for the year 29,932 (963) 14,275 43,244
______ ______ ______ ______
______ ______ ______ ______
(1) Management and head office
(2) Constitutes a real estate promotion segment
(3) Constitutes an investment real estate segment
NOTE 19 - GEOGRAPHIC SEGMENTS - CONSOLIDATED (cont.)
1. Profit and loss data (cont.)
Convenience translation
Year ended 31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
�' 000 �' 000 �' 000 �' 000
Change in fair value of - - 2,373 2,373
investment real estate
______ ______ ______ ______
______ ______ ______ ______
Segmental results (197) (37) 2,311 2,077
Net financing expenses (10) (87) - (97)
Taxes on income - - (459) (459)
______ ______ ______ ______
Income (loss) for the year (207) (124) 1,852 1,521
from continuing operations
Income from discontinued 4,088 - - 4,088
operations including income
from creditors arrangement
______ ______ ______ ______
Net income (loss) for the year 3,881 (124) 1,852 5,609
______ ______ ______ ______
______ ______ ______ ______
2. Other data
31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
NIS' 000 NIS' 000 NIS' 000 NIS' 000
Segmental assets 1,155 71,084 69,414 141,653
______ ______ ______ ______
______ ______ ______ ______
Segmental liabilities 850 31,859 50,524 83,233
______ ______ ______ ______
______ ______ ______ ______
Convenience translation
31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
�' 000 �' 000 �' 000 �' 000
Segmental assets 150 9,219 9,003 18,372
______ ______ ______ ______
______ ______ ______ ______
Segmental liabilities 110 4,132 6,553 10,795
______ ______ ______ ______
______ ______ ______ ______
(1) Management and head office
(2) Constitutes a real estate promotion segment
(3) Constitutes an investment real estate segment
NOTE 19 - GEOGRAPHIC SEGMENTS - CONSOLIDATED (cont.)
2. Other data (cont.)
Year ended 31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
NIS' 000 NIS' 000 NIS' 000 NIS' 000
Purchase cost of long-term - - 8,022(*) 8,022
general assets
______ ______ ______ ______
______ ______ ______ ______
Depreciation and amortization - 10 - 10
______ ______ ______ ______
______ ______ ______ ______
Convenience translation
Year ended 31 December 2007
Israel(1) USA(2) Croatia(3) Total Consolidated
�' 000 �' 000 �' 000 �' 000
Purchase cost of long-term - - 1,040(*) 1,040
general assets
______ ______ ______ ______
______ ______ ______ ______
Depreciation and amortization - 2 - 2
______ ______ ______ ______
______ ______ ______ ______
(*) Restated - See Note 2Y.
(1) Management and head office
(2) Constitutes a real estate promotion segment
(3) Constitutes an investment real estate segment
NOTE 20 - PRO FORMA DATA
A. General
As mentioned in Note 1A of the financial statements, in the fourth quarter of 2007, an allotment of Company shares was made against
an investment in the shares of the subsidiaries in Croatia and the United States.
The pro forma data reflect the results of operations of the Company under the assumption that the aforementioned share allotment was
effected on the date of incorporation of the subsidiaries. The pro forma data were prepared on the basis of the data from the audited
financial statements of the subsidiaries in Croatia and the U.S. on the basis of the assumptions detailed in item B below and in accordance
with the reporting principles and accounting policies set out in Note 2.
B. The assumptions used for purposes of presenting the pro forma consolidated profit and loss accounts:
1. The pro forma consolidated profit and loss accounts were prepared to reflect the situation whereby, in all reporting periods, the
Company is in its current position, i.e., after the going into effect of the creditors arrangement which was approved by the court on 10
June 2007. Accordingly, the former activities of the Company were presented in the pro forma profit and loss accounts for 2007 and 2006 as
discontinued operations, in accordance with the principles of Accounting Standard No. 8 of the Israel Accounting Standards Board.
NOTE 20 - PRO FORMA DATA (cont.)
B. The assumptions used for purposes of presenting the pro forma consolidated profit and loss accounts (cont.):
2. The allotment of shares to AP Holdings and Emvelco, in return for 100% of the share capital of Sitnica and Verge Living
Corporation held by them, respectively, occurred on the date that those companies were incorporated by their former owners. In other words,
in return for the shares of Verge Living Corporation, the allotment took place on 13 February 2006 and in return for the shares of Sitnica,
the allotment took place on 23 May 2007. Accordingly, the operations of the subsidiaries are reflected in the pro forma statements of
income, commencing from the date of inception of the operations of those companies. In other words, the results of operations of Verge
Living Corporation are reflected commencing on 13 February 2006 and thereafter, and the results of Sitnica commencing on 1 March 2007 and
thereafter.
3. The Company paid management fees of $10,000 a month to the CEO of the Company, Mr. Yosef Atia, commencing in February 2006 and to
the Deputy CEO of the Company, Mr. Shalom Atia, commencing in March 2007.
4. The increase in value of the land in Samobor, Croatia, in accordance with the valuation conducted by the external appraiser,
occurred until 11 July 2007.
C. Consolidated pro forma profit and loss accounts
Convenience translation
into � (Note 2)
Year ended 31 December
2007 2006 2007 2006
NIS' 000 NIS' 000 �' 000 �' 000
Change in fair value of investment 18,294 - 2,373 -
real estate
Rental revenue - 13 - 2
______ ______ ______ ______
Total revenues 18,294 13 2,373 2
Selling and marketing expenses (658) - (86) -
General and administrative (4,318) (782) (560) (102)
expenses
______ ______ ______ ______
Operating income (loss) 13,318 (769) 1,727 (100)
Financing expenses (3,957) (1,271) (513) (165)
______ ______ ______ ______
Income (loss) before tax 9,361 (2,040) 1,214 (265)
Taxes on income (3,484) - (452) -
______ ______ ______ ______
Income (loss) from continuing 5,877 (2,040) 762 (265)
operations
Income (loss) from discontinued 31,521 (18,383) 4,088 (2,384)
operations including income from
creditors arrangement
______ ______ ______ ______
Net income (loss) 37,398 (20,423) 4,850 (2,649)
______ ______ ______ ______
______ ______ ______ ______
NOTE 21 - DISCONTINUED OPERATIONS AND INCOME FROM CREDITORS ARRANGEMENT
Until 2007, the Company was engaged in the manufacture, importing, and marketing of plastic products. As a result of the difficulties
experienced by the Company and the stay of proceedings and the creditors arrangement, which were approved by the court, the Company ceased
its activity in the area of plastics. For details, see Note 1A and 1B.
Commencing in November 2007, the Company is engaged in the field of residential real estate in Las Vegas, Nevada, U.S.A, and it holds
the contractual rights to investment real estate in Croatia.
According to Accounting Standard No. 8 of the Israel Accounting Standards Board, the previous activities of the Company and the results
of the creditors arrangement were presented as discontinued operations.
The following financial information pertains to the discontinued operations of the Company:
A. Condensed Statement of Net Assets in Liquidation
31 December
2006
NIS' 000
A S S E T S
Current Assets
Cash and cash equivalents 45
Trade accounts receivables 63
Accounts receivable and debit balances 658
Investment in investee company 14,644
Fixed assets 22,300
_______
Total Assets 37,710
_______
_______
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Credit from banking institutions 23,519
Suppliers and service providers 7,752
Accounts payable and credit balances 18,516
Loans from investment funds 14,644
Liabilities, the repayment of which is conditional 12,905
Loans from interested party 1,095
Liabilities attributed to the discontinued operation 1,800
_______
Total Liabilities 80,231
----------
Shareholders' Deficit (42,521)
----------
_______
37,710
_______
_______
NOTE 21 - DISCONTINUED OPERATIONS AND INCOME FROM CREDITORS ARRANGEMENT (cont.)
B. Condensed profit and loss accounts
Year ended 31 December Convenience
translation Year
ended 31 December
2007 2006 2005 2007
NIS' 000 NIS' 000 NIS' 000 � 000
Sales 5,022 109,343 108,385 651
Cost of sales 6,259 107,192 102,804 811
______ ______ ______ ______
Gross profit (loss) (1,237) 2,151 5,581 (160)
--------- --------- --------- ---------
Selling expenses 32 3,075 5,214 4
General and administrative 554 9,322 10,258 72
expenses
______ ______ ______ ______
586 12,397 15,472 76
--------- --------- --------- ---------
______ ______ ______ ______
Operating loss (1,823) (10,246) (9,891) (236)
Financial expenses, net (891) (483) (5,164) (116)
______ ______ ______ ______
Loss after finance (2,714) (10,729) (15,055) (352)
Gain on erasure of liabilities - - 1,398 -
to banking institutions
Other income, net 198 277 598 26
______ ______ ______ ______
Loss before taxes on income (2,516) (10,452) (13,059) (326)
Taxes on income - (913) (1,785) -
______ ______ ______ ______
Loss after taxes on income (2,516) (11,365) (14,844) (326)
Group's share in profit (loss) - 54 (149) -
of investee company
Net loss on presentation of - (7,072) - -
assets on the basis of
realizable values
______ ______ ______ ______
Loss from discontinued (2,516) (18,383) (14,993) (326)
operations before income from
creditors arrangement
Income from creditors 34,037 - - 4,414
arrangement
______ ______ ______ ______
Net income (loss) for the year 31,521 (18,383) (14,993) 4,088
______ ______ ______ ______
______ ______ ______ ______
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In July 2006, the Israel Accounting Standards Board issued Accounting Standard No. 29, Adoption of International Financial Reporting
Standards (IFRS) (hereinafter - the "Standard") which stipulates that an entity that is subject to the Securities Law- 1968 and is required
to report in accordance with the regulations of the law, shall present its financial statements in accordance with International Financial
Reporting Standards (hereinafter - "IFRS Standards"). This stipulation applies to periods commencing on or after 1 January 2008 (i.e., the
interim financial statements for the first quarter of 2008), with the transition date being 1 January 2007 (hereinafter - the "transition
date"). The first financial statements of an entity in accordance with IFRS Standards shall be considered the annual financial statements
for 2008.
IFRS are standards and clarification that were adopted by the International Accounting Standards Committee and they include:
A. International Financial Reporting Standards (IFRS)
B. International Auditing Standards (IAS)
C. Clarifications made by the International Financial Reporting Interpretations Committee (IFRIC) or by the committee that preceded
the IFRIC regarding interpretations of international accounting standards (SIC).
An entity that presented its financial statements not in accordance with IFRS and is either required or elected to present its financial
statements according to IFRS, is required to implement the provisions of IFRS 1, First time Adoption of International Financial Reporting
Standards, for Transitional Purposes.
IFRS 1 sets out guidelines as to how to make the transition from reporting on the basis of former accounting principles (accounting
principles generally accepted in Israel) to reporting on the basis of IFRS. Among other things, IFRS 1 mandates that the financial
statements presented for the first time in accordance with IFRS contain comparative data for at least one year. Accordingly, the financial
statements for the year ended 31 December 2008 shall contain as comparative data the balance sheet as of 31 December 2007 and the profit and
loss accounts, statement of changes in shareholders' equity and statement of cash flows for the year then ended.
IFRS 1 stipulates that an entity implement the same accounting policy in its opening balance as of 1 January 2007 (hereinafter -
"Opening Balance" or "Transition Date") in accordance with the IFRS that are in effect on the reporting date of the first annual financial
statements. All comparative amounts presented in the financial statements must also be presented accordingly. In other words, the IFRS in
effect on the reporting date of the first annual financial statements must be applied retrospectively. Changes and adjustments to balances
to be included in the balance sheet that is presented for the first time in accordance with IFRS as opposed to the balances included in
accordance with previously accepted accounting principles, should be carried directly to retained earnings (or, if appropriate, another
category of equity).
The Group elects to follow the following exemptions as allowed by IFRS 1:
Business combinations and investments in investee companies
The Company elected to implement the provisions of IFRS 3, Business Combinations, only in respect of business combinations occurring
after 1 January 2007 (the transition date).
Accumulated translation differences
Translation differences in respect of autonomous investees in respect of periods that preceded the implementation date shall be carried
to retained earnings on the date of the initial implementation of IFRS.
We present below data regarding the expected impact of implementation of IFRS on the financial statements of the Company for the year
ended 31 December 2007, including on the opening balance sheet (1 January 2007). The data was prepared in accordance with the disclosure
requirements of Standard No. 29 and the additional disclosure requirements publicized by the Israel Securities Authority as part of a
question and answer file (FAQ 6) "The Required Disclosure in the Financial Statements for the year ended 31 December 2007 in Connection with
Adoption of IFRS". Please note that there may be changes in these estimates upon the preparation of full financial statements in accordance
with IFRS for 2008.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS
Statement of net assets in liquidation (balance sheets) and shareholders' deficit as at 1 January 2007
1 January 2007
Israeli GAAP Impact of IFRS
transition(*)
Note NIS' 000 NIS' 000 NIS' 000
A S S E T S
Current Assets
Cash and cash equivalents A - 131 131
Accounts receivable and debit A - 1,082 1,082
balances
Buildings under construction A - 21,480 21,480
Assets attributed to A 37,710 (37,710) -
discontinued operations
_______ _______ _______
37,710 (15,017) 22,693
----------- ----------- -----------
Long-term Assets and
Investments
Fixed assets A - 42 42
Other assets A - 97 97
_______ _______ _______
- 139 139
----------- ----------- -----------
_______ _______ _______
37,710 (14,878) 22,832
_______ _______ _______
_______ _______ _______
LIABILITIES AND SHAREHOLDERS'
DEFICIT
Current Liabilities
Suppliers, accounts payable A - 1,931 1,931
and credit balances
Liabilities attributed to A 80,231 (80,231) -
discontinued operations
_______ _______ _______
80,231 (78,300) 1,931
----------- ----------- -----------
Loans from Interested Parties A - 23,064 23,064
----------- ----------- -----------
Shareholders' Deficit
Share capital and premium 113,890 (113,045) 845
Capital reserve 327 (327) -
Accumulated deficit (156,738) 153,730 (3,008)
_______ _______ _______
Total Shareholders' Deficit A, C, D (42,521) 40,358 (2,163)
----------- ----------- -----------
_______ _______ _______
37,710 (14,878) 22,832
_______ _______ _______
_______ _______ _______
(*) See Note A below regarding the reconciliation in respect of the accounting treatment of the reverse acquisition.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS (cont.)
Statement of net assets in liquidation (balance sheets) and shareholders' deficit as at 1 January 2007 (cont.)
Convenience translation into �
1 January 2007
Israeli GAAP Impact of IFRS
transition(*)
Note � 000 � 000 � 000
A S S E T S
Current Assets
Cash and cash equivalents A - 17 17
Accounts receivable and debit A - 140 140
balances
Buildings under construction A - 2,786 2,786
Assets attributed to A 4,890 (4,890) -
discontinued operations
_______ _______ _______
4,890 (1,947) 2,943
----------- ----------- -----------
Long-term Assets and
Investments
Fixed assets A - 5 5
Other assets A - 13 13
_______ _______ _______
- 18 18
----------- ----------- -----------
_______ _______ _______
4,890 (1,929) 2,961
_______ _______ _______
_______ _______ _______
LIABILITIES AND SHAREHOLDERS'
DEFICIT
Current Liabilities
Suppliers, accounts payable A - 250 250
and credit balances
Liabilities attributed to A 10,405 (10,405) -
discontinued operations
_______ _______ _______
10,405 (10,155) 250
----------- ----------- -----------
Loans from Interested Parties A - 2,991 2,991
----------- ----------- -----------
Shareholders' Deficit
Share capital and premium 14,771 (14,661) 110
Capital reserve 42 (42) -
Accumulated deficit (20,328) 19,938 (390)
_______ _______ _______
Total Shareholders' Deficit A, C, D (5,515) 5,235 (280)
----------- ----------- -----------
_______ _______ _______
4,890 (1,929) 2,961
_______ _______ _______
_______ _______ _______
(*) See Note A below regarding the reconciliation in respect of the accounting treatment of the reverse acquisition.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS (cont.)
Balance sheets and shareholders' equity as at 31 December 2007
31 December 2007
Israeli GAAP Impact of transition IFRS
Note NIS' 000 NIS' 000 NIS' 000
A S S E T S
Current Assets
Cash and cash equivalents 1,249 - 1,249
Accounts receivable and debit 842 - 842
balances
Restricted cash 17,306 - 17,306
Buildings under construction C, D 53,010 (26,484) 26,526
_______ _______ _______
Total current assets 72,407 (26,484) 45,923
----------- ----------- -----------
Long-term Assets and
Investments
Fixed assets 47 - 47
Other assets 78 - 78
Investment real estate 69,121 - 69,121
_______ _______ _______
Total long-term assets and 69,246 - 69,246
investments
----------- ----------- -----------
_______ _______ _______
141,653 (26,484) 115,169
_______ _______ _______
_______ _______ _______
LIABILITIES AND SHAREHOLDERS
EQUITY
Current Liabilities
Loans from interested parties 7,454 - 7,454
Sellers of land 42,570 - 42,570
Suppliers and service 2,519 - 2,519
providers
Accounts payable and credit 1,158 - 1,158
balances
Provision for real estate 9,191 - 9,191
agents
Advances from customers 17,306 - 17,306
_______ _______ _______
Total current liabilities 80,198 - 80,198
----------- ----------- -----------
Long-term Liabilities
Deferred taxes 3,035 - 3,035
----------- ----------- -----------
Shareholders' Equity
Share capital and premium 172,356 (118,087) 54,269
Capital reserve 327 (327) -
Capital reserve from 396 (396) -
transactions with controlling
shareholders
Adjustments deriving from the (1,165) 1,529 364
translation of the financial
statements of investee
companies operating in foreign
currency
Accumulated deficit (113,494) 90,797 (22,697)
_______ _______ _______
Total Shareholders' Equity A, C, D 58,420 (26,484) 31,936
----------- ----------- -----------
_______ _______ _______
141,653 (26,484) 115,169
_______ _______ _______
_______ _______ _______
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS (cont.)
Balance sheets and shareholders' equity as at 31 December 2007 (cont.)
Convenience translation into �
31 December 2007
Israeli GAAP Impact of transition IFRS
Note � 000 � 000 � 000
A S S E T S
Current Assets
Cash and cash equivalents 162 - 162
Accounts receivable and debit 109 - 109
balances
Restricted cash 2,244 - 2,244
Buildings under construction C, D 6,876 (3,435) 3,441
_______ _______ _______
Total current assets 9,391 (3,435) 5,956
----------- ----------- -----------
Long-term Assets and
Investments
Investments in investee - - -
companies
Fixed assets 6 - 6
Other assets 10 - 10
Investment real estate 8,965 - 8,965
_______ _______ _______
Total long-term assets and 8,981 - 8,981
investments
----------- ----------- -----------
_______ _______ _______
18,372 (3,435) 14,937
_______ _______ _______
_______ _______ _______
LIABILITIES AND SHAREHOLDERS
EQUITY
Current Liabilities
Loans from interested parties 967 - 967
Sellers of land 5,521 - 5,521
Suppliers and service 327 - 327
providers
Accounts payable and credit 150 - 150
balances
Provision for real estate 1,192 - 1,192
agents
Advances from customers 2,244 - 2,244
_______ _______ _______
Total current liabilities 10,401 - 10,401
----------- ----------- -----------
Long-term Liabilities
Deferred taxes 394 - 394
----------- ----------- -----------
Shareholders' Equity
Share capital and premium 22,354 (15,316) 7,038
Capital reserve 42 (42) -
Capital reserve from 51 (51) -
transactions with controlling
shareholders
Adjustments deriving from the (151) 198 47
translation of the financial
statements of investee
companies operating in foreign
currency
Accumulated deficit (14,719) 11,776 (2,943)
_______ _______ _______
Total Shareholders' Equity A, C, D 7,577 (3,435) 4,142
----------- ----------- -----------
_______ _______ _______
18,372 (3,435) 14,937
_______ _______ _______
_______ _______ _______
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS (cont.)
Profit and loss accounts for the year ended 31 December 2007
Israeli GAAP Impact of transition IFRS
Note NIS' 000 NIS' 000 NIS' 000
Change in fair value of 18,294 - 18,294
investment real estate
--------- --------- ---------
Selling and marketing expenses A, C 106 29,515 29,621
General and administrative A 2,175 848 3,023
expenses
______ ______ ______
2,281 30,363 32,644
--------- --------- ---------
______ ______ ______
Operating income (loss) before 16,013 (30,363) (14,350)
financing
Financing income A, G 45 (12) 33
Financing expenses A, D, G (794) (1,037) (1,831)
______ ______ ______
Operating income after 15,264 (31,412) (16,148)
financing and before taxes on
income
Taxes on income (3,541) - (3,541)
______ ______ ______
Income (loss) from continuing 11,723 (31,412) (19,689)
operations
Income from discontinued A 31,521 (31,521) -
operations and from creditors
arrangement
______ ______ ______
Net income (loss) for the year 43,244 (62,933) (19,689)
______ ______ ______
______ ______ ______
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Reconciliation between reporting under accounting principles generally accepted in Israel and reporting under IFRS (cont.)
Profit and loss accounts for the year ended 31 December 2007 (cont.)
Convenience translation into �
Israeli GAAP Impact of transition IFRS
Note � 000 � 000 � 000
Change in fair value of 2,373 - 2,373
investment real estate
--------- --------- ---------
Selling and marketing expenses A, C 14 3,828 3,842
General and administrative A 282 110 392
expenses
______ ______ ______
296 3,938 4,234
--------- --------- ---------
______ ______ ______
Operating income (loss) before 2,077 (3,938) (1,861)
financing
Financing income A, G 6 (2) 4
Financing expenses A, D, G (103) (134) (237)
______ ______ ______
Operating income after 1,980 (4,074) (2,094)
financing and before taxes on
income
Taxes on income (459) - (459)
______ ______ ______
Income (loss) from continuing 1,521 (4,074) (2,553)
operations
Income from discontinued A 4,088 (4,088) -
operations and from creditors
arrangement
______ ______ ______
Net income (loss) for the year 5,609 (8,162) (2,553)
______ ______ ______
______ ______ ______
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Notes to the adjustments to the balance sheets as at 1 January 1, 2007 and 31 December 2007 and to the statement of operations for the
year ended 31 December 2007:
A. Reverse acquisition
In the financial statements presented in accordance with accounting principles generally accepted in Israel, the principles of reverse
acquisition were applied to a business combination transaction that occurred during 2007, as follows:
- The assets and liabilities of the accounting purchaser (the Verge subsidiary) were recorded in the consolidated financial
statements at their book values immediate prior to the reverse acquisition transaction.
- In view of the fact that the accounting acquiree (the Company) constituted a stock market shell as at the date of acquisition, no
goodwill or original difference was generated in respect thereof.
- The retained earnings and other equity items of the consolidated entity following the merger are those of the Company, with the
effect of the recording of the net assets and liabilities of the accounting acquirer being reflected in an increase to share capital and
premium on shares.
- The comparative amounts of the merged entity are those that were publicized in the past as part of the financial statements of the
Company, and accordingly, the former activity of the Company was presented as discontinued operations in accordance with Accounting Standard
No. 8 of the Israel Accounting Standards Board.
In implementing IFRS, in accordance with the principles of IFRS 3, there is no change in the economic concept - Verge was identified as
the accounting acquirer and, therefore, the principles of reverse acquisition were applied. Accordingly, the assets and liabilities of
Verge, the accounting acquirer, were recorded in the consolidated financial statements on the basis of their value in the books of the
accounting acquirer immediately prior to the reverse acquisition transaction. According to IFRS 3, consolidated financial statements
prepared after the reverse acquisition are described as the continuation of the financial statements of the legally acquired company (the
accounting acquirer) and therefore, the following differences exist between the accounting treatment and the treatment used under accounting
principles generally accepted in Israel:
- Retained earnings and other equity items of the consolidated entity following the merger are those of the accounting acquirer,
which is the legal subsidiary, Verge, immediately prior to the business combination (although the legal capital structure, i.e., type and
number of shares, remains that of the legal parent company).
- Comparative amounts of the merged entity are those of the legal subsidiary, Verge. Accordingly, there is no expression given to the
former activity of the Company as part of the financial statements.
Based on the above, and in view of the fact that the business combination transaction in 2007, as part of which the Company was
purchased by the Verge subsidiary by way of reverse acquisition, was carried out in accordance with the principles of IFRS 3, the balance
sheet of the Company as of 1 January 2007, which is presented in the financial statements presented in accordance with IFRS, is based on the
balance sheets of the accounting acquirer, Verge, as at 1 January 2007.
In this content, please note that, due to the fact that the financial statements of the Company as at 1 January 2007 (the statement of
net liquidated assets as at 31 December 2006), which were presented in accordance with accounting principles generally accepted in Israel,
were presented at realization values in accordance with accounting principles of businesses in liquidation, no change would be needed in
these financial statements were they required to be presented in accordance with IFRS.
In the statements of operations for 2007 presented in accordance with IFRS, there were changes in the following items, in view of the
fact that the results of Verge were presented in them from the beginning of the year and not from the date of acquisition:
- An increase in selling and marketing expenses in an amount of NIS 547 thousand.
- An increase in general and administrative expenses in an amount of NIS 1,401 thousand.
- An increase in financing expenses in an amount of NIS 3,173 thousand.
- Write-off of income from discontinued operations and from creditors agreement in the amount of NIS 31,521 thousand.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Notes to the adjustments to the balance sheets as at 1 January 1, 2007 and 31 December 2007 and to the statement of operations for the
year ended 31 December 2007 (cont.):
A. Reverse acquisition (cont.)
The above amounts are before the effect of items C and D below.
In addition, the results of the Company (solo) were taken into consideration only after the date of purchase. The impact of the above
was a reduction in general and administrative expenses in an amount of NIS 556 thousand and a reduction in financing income in an amount of
NIS 7 thousand.
B. Combinations of businesses under common control
In the financial statements presented under accounting principles generally accepted in Israel, the transaction as part of which the
Company acquired the Sitnica subsidiary was treated in accordance with Israel Securities Authority Decision 2-10 dated April 2007, The
Treatment of Transactions of Combinations of Businesses under Common Control. According to the decision of the authority, combinations of
businesses under common control are to be handled in accordance with a method that is similar to the Pooling of Interests method.
According to this method, in the financial statements of the Company, the assets and liabilities of Sitnica were recorded at their book
value in Sitnica's financial statements and the financial statements were presented in order to reflect the financial position and results
of operations of the Company and of Sitnica (after the effect of the treatment of the reverse acquisition as per "A" above) as if the
transaction had been conducted on the same day that the businesses came under the same control.
IFRS 3, Business Combinations, excludes combinations of businesses under common control. Moreover, there is no other international
standard that deals with the issue. On the basis of the preference order for accounting treatment under international standards, in the
absence of an international standard or interpretation, the Company implemented the pooling of interests method even though the financial
statements are presented in accordance with IFRS. The source for this method is the U.S. body of standards, and it is also the common
practice under international standards. Therefore, the transition to IFRS had no impact on the Company's accounting treatment of the
aforementioned transaction.
C. Capitalization of costs directly to buildings under construction
According to accounting principles generally accepted in Israel, general and administrative expenses and selling and marketing expenses
that can be specifically attributed to a specific building project constitute direct costs of the project and are carried to the cost of the
project. According to IFRS, these costs are expensed when incurred. The impact of the transition to IFRS as at 1 January 2007 and 31
December 2007 is a decrease in the inventory of buildings under construction in an amount of NIS 2,742 thousand and NIS 30,230 thousand,
respectively, against a decrease in retained earnings. In addition, in the statement of operations for the year ended 31 December 2007,
there was an increase in selling and marketing expenses of NIS 28,968 thousand.
D. Capitalization of credit costs
According to Accounting Standard No. 3 of the Israel Accounting Standards Board, Capitalization of Credit Costs, credit costs can be
capitalized in respect of assets, the period of construction of which exceeds three years or the period of construction of which or volume
of investment in which deviates from the accepted construction period or accepted volume of investment in respect of assets of this type in
the same business. In connection with real estate assets, the commencement of capitalization is from the earlier of the date of submission
of the request to obtain a building permit or the date of commencement of work.
Under IFRS, capitalization of credit costs is treated in accordance with IAS 23 whereby it is possible to capitalize credit costs which
are directly attributed to the acquisition or construction of a qualifying asset. A qualifying asset is an asset, in respect of which the
period of time required for preparation for its intended use or sale is significant. The capitalization period will start when expenses were
incurred in respect of the asset, credit costs were incurred in respect of the asset and the steps necessary for preparation of the asset
for its intended use or for sale were taken.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Notes to the adjustments to the balance sheets as at 1 January 1, 2007 and 31 December 2007 and to the statement of operations for the
year ended 31 December 2007 (cont.):
D. Capitalization of credit costs (cont.)
Upon the transition to IFRS, credit costs that could not previously be capitalized were capitalized. Accordingly, the Company recorded
an increase to the inventory of buildings under construction as at 1 January 2007 and 31 December 2007 in an amount of NIS 1,204 thousand
and NIS 3,119 thousand, respectively, against an increase in retained earnings and a decrease in financing expenses in the statement of
operations for 2007 in an amount of NIS 2,162 thousand.
E. Functional currency of the Company and its investees
The accounting treatment for the effects of changes in foreign currency exchange rates under IFRS is pursuant to IAS 21, whereby the
Company has to assess the functional currency of every component of the Company (on the basis of the Company and each component separately -
subsidiary, branch, or other activity that constitutes part of any unit of the consolidated entity). The Company should measure the results
of its operations and financial position or the results of its component on the basis of this currency. The functional currency is the
currency of the major economic environment in which the Company or its component operates (the major economic environment from which the
Company is influenced) and it constitutes the major currency in which the Company (or the component) generates and expends its cash flows.
After assessing the criteria, it was determined that the functional currency of the Company is the New Israeli shekel and the functional
currency of the subsidiaries is the currency of the local environment in which those companies operate. Therefore, the transition to
international standards is not expected to have an impact.
The Company elected to adopt the leniency in IFRS 1, Initial Adoption of IFRS, whereby translation differences in respect of autonomous
investee units in respect of periods that preceded the date of implementation will be carried at the date of initial implementation of IFRS
to retained earnings.
F. Recognition of revenues from the sale of apartments
Under IFRS, recognition of revenues from the sale of constructed buildings is pursuant to IAS 18, whereby the revenue will be recognized
only when the work has been completed (the finished work method) and the rest of the conditions for revenue recognition have been met (all
of the risks have been transferred to the buyer). According to accounting principles generally accepted in Israel, recognition of revenues
from the sale of buildings is done pursuant to the percentage of completion method, but not before the proceeds from the sale of the project
constitute at least 50% of the total expected revenues from the project and the percentage completed has reached at least 25%.
As mentioned in Note 2 above, the construction of the Verge subsidiary's construction project has not yet commenced and, therefore, no
revenues have been recognized in respect thereof in the statements of operations that were presented in accordance with accounting
principles generally accepted in Israel. Accordingly, there was no impact of the transition to IFRS.
G. Presentation of financing income and expenses
In accordance with accounting principles generally accepted in Israel, financing income and expense are presented in one net amount in
the statement of operations. According to international standards, financing income and financing expenses have to be presented separately
in statement of operations.
H. Business combinations and investments in investee companies
The Group intends in adopting the leniency in IFRS 1 whereby it will apply the provisions of IFRS 3 only in respect of business
combinations that occurred subsequent to 1 January 2007 (the transition date) and also in respect of the purchase transactions of affiliated
companies and rights in joint ventures.
NOTE 22 - ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (cont.)
Notes to the adjustments to the balance sheets as at 1 January 1, 2007 and 31 December 2007 and to the statement of operations for the
year ended 31 December 2007 (cont.):
I. The following table presents the impact of the above adjustments on the se of the Company:
As at As at
1 January 31 December
2007 2007
NIS'000 NIS'000
Cancellation of the shareholders' equity in the 42,521 -
Company prior to the allotment of shares to Verge
(reverse acquisition)
Inclusion of shareholders' equity of Verge instead of (2,163) -
that of the Company (reverse acquisition)
Cancellation of the capitalization of direct costs to - (29,599)
the inventory of buildings under construction (mainly
selling and marketing expenses)
Capitalization of the credit costs to the inventory - 3,115
of buildings under construction
_______ _______
Total adjustments to shareholders' equity 40,358 (26,484)
_______ _______
_______ _______
NOTE 23 - SUBSEQUENT EVENTS
A. Consolidation of share capital
On 6 April 2008, it was decided to convene a special meeting of the shareholders of the Company for 14 May 2008. On the agenda of
the meeting was a decision to consolidate and redivide the share capital of the Company such that each 100 existing shares of the Company's
registered and issued capital of the Company will be consolidated into one share. At the special meeting which took place on 14 May 2008, it
was resolved to consolidate the share capital and it was further decided that the effective date of the consolidation is 21 May 2008 and
that commencing from 22 May 2008, the shares would be traded as the consolidated shares, as above.
B. Loan from a controlling shareholder
Mr. Shalom Atia, a controlling shareholder of the Company, will place at the disposal of Sitnica credit in an amount of EUR1.2
million, as a bridge loan. The bridge loan will be euro-denominated and shall bear no interest whatsoever. The loan will be returned on the
demand of Mr. Shalom Atia, within 10 days from the date of such demand.
The agreement regarding the placement of the bridge loan is solely for the benefit of the Company. Sitnica requires the bridge loan
to make payments on account of the consideration of the property in Samobor, to the third parties from which the property was purchased, in
accordance with the purchase agreement. At present, Sitnica has no liquid assets to enable it to make such payments and it has to rely on
external financing. Financing through the bridge loan from the controlling shareholder is the least expensive alternative and does not place
on Sitnica any restriction or commitment, except to repay the principal of the loan.
C. Negotiations regarding the sale of the shares of a subsidiary
Subsequent to the balance sheet date, the Company announced that it was in the advanced stages of negotiations with the Porr Group,
a large group of companies with headquarters in Austria, engaged in various fields of real estate in Eastern and Central Europe. The
negotiations are expected to lead to an agreement whereby a company in the Porr Group will purchase half of the holdings in Sitnica, a
company incorporated in Croatia, which owns property in Samobor. The Porr Group will assist the Company in obtaining the financing necessary
to complete the purchase of the property in Samobor.
NOTE 24 -CONDENSED DATA IN NOMINAL HISTORICAL VALUES FOR TAX PURPOSES
A. Condensed balance sheet
31 December
2007
NIS' 000
A S S E T S
Current Assets
Cash and cash equivalents 1,002
Accounts receivable and debit balances 153
_______
Total current assets 1,155
-----------
Investments in investee companies 58,115
-----------
_______
59,270
_______
_______
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Suppliers and service providers 202
Accounts payable and credit balances 648
_______
Total current liabilities 850
-----------
Shareholders' Equity 58,420
-----------
_______
59,270
_______
_______
B. Condensed statement of net assets in liquidation
31 December
2006
NIS' 000
A S S E T S
Assets attributed of discontinued operations 37,710
_______
_______
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities attributed of discontinued operations 80,231
----------
Shareholders' Deficit (42,521)
----------
_______
37,710
_______
_______
NOTE 24 -CONDENSED DATA IN NOMINAL HISTORICAL VALUES FOR TAX PURPOSES (cont.)
C. Condensed profit and loss accounts
Year ended
31 December
2007 2006 2005
NIS' 000 NIS' 000 NIS' 000
General and administrative expenses 1,520 - -
______ ______ ______
Operating loss before financing (1,520) - -
Financing expenses, net (69) - -
______ ______ ______
Operating loss after financing (1,589) - -
Share of Company in income of investee 13,312 - -
companies, net(*)
______ ______ ______
Income from continuing operations 11,723 - -
Income (loss) from discontinued operations and 31,521 (14,926) (14,862)
creditors arrangement
______ ______ ______
Net income (loss) for the year 43,244 (14,926) (14,862)
______ ______ ______
______ ______ ______
(*) See Note 2C regarding the accounting method used in respect of the investment in the Sitnica subsidiary.
NOTE 24 -CONDENSED DATA IN NOMINAL HISTORICAL VALUES FOR TAX PURPOSES (cont.)
D. Condensed statement of changes in shareholders' equity (deficit)
Share Share premium Capital reserve Capital reserve from Adjustments deriving Accumulated deficit
Total
capital transactions with from the translation
controlling of the financial
shareholders statements of
investee companies
operating in foreign
currency
NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000
NIS' 000
Balance as at 33,584 57,284 309 - - (103,910)
(12,733)
1 January 2005
Changes in 2005:
Loss for the year - - - - - (14,862)
(14,862)
______ ______ ____ _____ _______ _______
_______
Balance as at 33,584 57,284 309 - - (118,772)
(27,595)
31 December 2005
Changes in 2006:
Loss for the year - - - - - (14,926)
(14,926)
______ ______ ____ _____ _______ _______
_______
Balance as at 33,584 57,284 309 - - (133,698)
(42,521)
31 December 2006
Changes in 2007:
Adjustments deriving from the - - - - (1,165) -
(1,165)
translation of the financial
statements of investee
companies operating in foreign
currency
Issuance of shares against - 11,000 - - - -
11,000
conversion of liabilities (1)
Issuance of shares against - 8,556(*) - - - -
8,556
cash (1)
Issuance of shares against - 38,910 - - - -
38,910
investment in shares of
subsidiaries (2)
Capital reserve from - - - 396(**) - -
396
transactions with controlling
shareholders
Net income for the year - - - - - 43,244
43,244
______ ______ ____ _____ _______ _______
_______
Balance as of 33,584 115,750 309 396 (1,165) (90,454)
58,420
31 December 2007
______ ______ ____ _____ _______ _______
_______
______ ______ ____ _____ _______ _______
_______
(*) Net of issuance costs of NIS 14 thousand.
(**) See Note 1B(5)7.
(1) See Note 1C.
(2) See Notes 1D and 2C.
Appendix
List of Group Companies as at 31 December 2007
Voting rights Ownership rights
% %
Subsidiaries
Verge Living Corporation 100 100
Sitnica d.o.o. 100 100
================================
=====================
This information is provided by RNS
The company news service from the London Stock Exchange
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