12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 1 of 23

Main Document

BRYAN CAVE LLP Stephanie Wickouski (SW-5957) Michelle McMahon (MM-8130) Jamila Justine Willis (JW-2914) 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 541-2000 Facsimile: (212) 541-1943 Attorneys for the Debtor UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------------x : In re: : : Ampal-American Israel Corporation, : : Debtor. : : -----------------------------------------------------------------x

Chapter 11 Case Nos. 12-[_________](___)

DECLARATION OF IRIT ELUZ PURSUANT TO LOCAL BANKRUPTCY RULE 1007-2 AND IN SUPPORT OF THE DEBTORS CHAPTER 11 PETITION AND FIRST-DAY MOTIONS I, Irit Eluz, hereby declare: 1. I am a resident of the state of Israel. I am over the age of eighteen and am

competent to testify to the matters set forth herein. 2. I am the Chief Financial Officer, Senior Vice President Finance and Treasurer,

and a Director of Ampal-American Israel Corporation (the Debtor), and as such I have personal knowledge of the matters set forth herein. 3. I have been a director of the Debtor since May 5, 2010. I have been the Chief

Financial Officer and Senior Vice President Finance and Treasurer of the Debtor since October 2004. From May 2002 until October 2004, I was Chief Financial Officer and Vice President Finance and Treasurer of the Debtor. I also serve as a director of Gadot (defined below). Since

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 2 of 23

Main Document

July 2006, I have been an external director of Kamor Ltd. From January 2000 until April 2002, I was the Associate Chief Financial Officer of Merhav (M.N.F) Ltd. From June 1995 until December 1999, I was the Chief Financial Officer of Kamor group. I am a certified public accountant in Israel 4. This Declaration is submitted pursuant to Rule 1007-2 of the Local Rules of the

United States Bankruptcy Court for the Southern District of New York (the Local Bankruptcy Rules). Except as otherwise indicated, all facts set forth in this Declaration are based on my personal knowledge and materials provided by the Debtor and its officers, as well as information provided by retained professionals of the Debtor, or information obtained from my review of relevant documents. Additionally, the opinions asserted in this Declaration are based upon my experience and knowledge of the Debtors operations, assets and financial condition. If called upon to testify, I would competently testify to the facts set forth herein. I am authorized to submit this Declaration on behalf of the Debtor. 5. This Declaration is divided into three sections. Part I describes the Debtor, its

business, and the circumstances leading to the commencement of this bankruptcy case. Part II describes the relief sought by the Debtor in each of the motions filed contemporaneously herewith (the First-Day Motions). Part III contains additional information required by Local Bankruptcy Rule 1007-2. I. FACTUAL BACKGROUND. 6. As set forth in greater detail below, the Debtors cash flows and have been

significantly impacted by recent unforeseen circumstances due to political developments in Egypt circumstances that were exogenous and not under the Debtor's control, making the Debtor unable to meet upcoming scheduled principal payments on its pre-petition debentures.

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 3 of 23

Main Document

Unfortunately, the Debtors efforts to negotiate an out-of-court resolution of this issue with its debenture holders were unsuccessful after approximately eight months of negotiations with the delegations formed by the Debtor's debenture holders, as detailed below. The Debtor is seeking the relief available under Chapter 11 of the Bankruptcy Code in order bring all of its creditors together and enable the Debtor to restructure its liabilities and maximize the value of its assets for the benefit of all of its stakeholders. A. 7. Corporate Structure and Business of the Debtor. The Debtor, a New York corporation formed in 1942, is a holding company with

experience in acquiring interests in various businesses, focusing in recent years on the energy, chemical and related sectors. The Debtor has one class of equity securities outstanding Class A Stock, which is common stock - with 2,806,688 shares outstanding. The Debtors shares are publicly traded on NASDAQ and dual listed on the Tel Aviv Stock Exchange. 8. New York. 9. The Debtors senior management is comprised of the following individuals: The Debtor leases an office located at 555 Madison Avenue, 20th Fl., New York,

(i) Yosef A. Maiman, Chairman of the Board and President and Chief Executive Officer, (ii) Irit Eluz, Chief Financial Officer and Senior Vice President Finance and Treasurer, (iii) Yoram Firon, Secretary and Vice President Investments and Corporate Affairs, (iv) Amit Mantsur, Vice President Investments, and (v) Nir Bernstein, Vice President Accounting and Controller. A description of the responsibilities and experience of these individuals is attached hereto as Exhibit A. The Debtors senior management work out of the offices of its subsidiaries described below, located at 33 Havazelet Hasharon, Herzliya, Israel, and the Debtors books and records are located in such offices. The Debtor does not have any employees.

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 4 of 23

Main Document

10.

The Debtors strategy has been to invest opportunistically in undervalued assets

with an emphasis in the following fields: energy, chemicals, real estate, project development and leisure-time. The Debtors investment focus is principally on companies or ventures where the Debtor can exercise significant influence, on its own or with investment partners, and use its management experience to enhance those investments. The Debtors principal assets are the stock of certain subsidiaries, none of which is a debtor in this case. The Debtor owns 100% of the stock of Ampal Energy, Ltd., which owns 100% of the stock of Merhav-Ampal Group, Ltd. (MAG), which owns approximately 99% of the stock of Gadot Chemical Tankers and Terminals Ltd. (Gadot) and 16.8% as reflected in the Debtor's financial statements (with 8.2% held by MAG and 8.6% held through an Israeli limited partnership of which MAG owns 50%) of the shares of East Mediterranean Gas Company, S.A.E., an Egyptian joint stock company (EMG). The Debtor also indirectly owns 50% of the stock of Global Wind Energy, Ltd. (GWE), 37% of the stock of Bay Heart Ltd. (Bay Heart), and 51% of Country Club Kfar Saba Ltd. (Kfar Saba). The Debtor emphasizes investments which have long-term growth potential over investments which yield short-term returns, and provides its investee companies with ongoing support through its involvement in the investees strategic decisions and introduction to the financial community, investment bankers and other potential investors both in and outside of Israel. EMG 11. EMG, which was organized in 2000 in accordance with the Egyptian Special Free

Zones system, has been granted the right to export 7.0 BCM1/year of natural gas from Egypt to Israel, other locations in the East Mediterranean basin and to other countries. EMG has linked

Billion cubic meters.

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 5 of 23

Main Document

the Israeli energy market with the Egyptian national gas grid via an East Mediterranean pipeline with the first gas delivery occurring in May 2008. EMG was one of the only two companies providing natural gas (one of the most important energy sources in Israel) to the Israeli energy market. EMG is the developer, owner and operator of the pipeline and its associated facilities on shore in both the point of departure of gas at El Arish, Egypt and the point of entry of gas in Ashkelon, Israel. This project is governed by an agreement signed between Israel and Egypt which designates EMG as the authorized exporter of Egyptian gas, secures EMGs tax exemption in Israel and provides for the Egyptian governments guarantee for the delivery of the said 7 BCM/year of gas to the Israeli market. EMG (as will be detailed below) had a gas purchase agreement with the Egyptian state gas company and has entered into gas supply contracts with several Israeli corporations including the Israel Electric Corp. for a total annual quantity of 4.8 BCM and options for another 1.5 BCM annually for periods of between 15 to 22 years. In addition EMG has been in the process of negotiating several additional agreements covering much of the anticipated 7.0 BCM annually earmarked for the Israeli market. Therefore it can be concluded that EMG has great potential and can be an extremely lucrative investment. At the end of 2010, EMG was on the brink of issuing internationally rated debentures in a substantial amount, to be guaranteed by the stream of expected income from the sale of gas, and the proceeds from such issuance were to upstream to EMG's shareholders, including the Debtor. Said planned issuance was led by worldwide leading investment bankers. 12. However, as described further below, EMG has been significantly affected by the

political changes in Egypt and by security issues in the Sinai Peninsula.

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 6 of 23

Main Document

Gadot 13. Gadot was founded in 1958 as a privately held Israeli company with operations in

distribution and marketing of liquid chemicals for raw materials used for industrial purposes. Since then, Gadot has expanded into a group of companies, which currently form Israels leading chemical distribution organization. Through its subsidiaries, Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to countries across the globe, with an emphasis on Israel and Western Europe. Gadot listed its shares for trading on the Tel Aviv Stock Exchange in 2003 and was delisted from trade on October 16, 2008, following the Debtor's subsidiarys successful tender offers to purchase Gadot's shares not already owned by the Debtor or its subsidiaries. Gadots operations are divided into three main service sectors: (i) importing, marketing and sale of chemicals and other raw materials in Israel and Europe; (ii) shipping, primarily between the European ports of the Atlantic Ocean and the Mediterranean seaport and agency services for shipping companies and docked ships; and (iii) logistical services in Israel and Europe. These service sectors are synergistic and complementary, so that Gadot provides its customers with a full range of services, including acquiring chemicals based on a customers needs, logistical handling including shipping and transport, offloading, storage and delivery. Members of the Gadot group of companies also provide services for other members of the group, strengthening the group as a whole. GWE 14. GWE, formed in November 2007, focuses on the new development and

acquisition of controlling interests in renewable energy, including wind energy projects outside of Israel. GWE seeks to either develop or acquire wind energy opportunities. GWEs current projects are the development of wind farms in Greece and Poland. As of today GWE holds

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 7 of 23

Main Document

production licenses for two projects for a total capacity of approximately 60MW wind farms, and a 20MW photovoltaic project, all in Greece. Bay Heart 15. Bay Heart was established in 1987 to develop and lease a shopping mall by the

name of Cinemall (the Mall) in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall, which opened in May 1991, is a three-story facility with approximately 280,000 square feet of rentable space. The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment facilities. In 2008, the Mall completed extensive renovations, including the construction of a new complex of 23 movie theaters and entertainment facilities. Kfar Saba 16. Kfar Saba operates a country club facility (the Club) in Kfar Saba, a town north

of Tel Aviv. Kfar Saba holds a long-term lease to the real estate property on which the Club is situated. The Clubs facilities include swimming pools, tennis courts and a club house. B. Pre-Petition Indebtedness.

The Debentures: 17. The Debtor has been financed primarily through three issuances of debentures, all

issued publicly in the Israeli market and all of which trade on the Tel Aviv Stock Exchange: Series A Debentures, Series B Debentures and Series C Debentures. The Debtor issued its Series A Debentures on November 16, 2006. The Series A Debentures are in the approximate original principal amount of NIS2 250,000,000 (approximately $58 million according to the exchange rate as of November 16, 2006), carry an annual interest rate of 5.75% and mature in November

New Israeli Shekel. 7

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 8 of 23

Main Document

2015. Hermetic Trust (1975) Ltd. is the Trustee for the Series A Debentures. The Debtor issued the Series B Debentures on April 29, 2008. The Series B Debentures are in the approximate original principal amount of NIS 577,800,000 (approximately $165.7 million according to the exchange rate as of April 29, 2008), carry an annual interest rate of 6.60% and mature in January 2016. Reznik Paz Nevo R.P.N. Trusts 2007 Ltd. (formerly Clal Finance Trustees 2007 Ltd.) is the Trustee for the Series B Debentures. The Debtor issued the Series C Debentures on September 13, 2010. The Series C Debentures are in the approximate original principal amount of NIS 170,000,000 (approximately $45 million according to the exchange rate as of September 13, 2010), currently carry an annual interest rate of 7.95% and mature in September 2019.3 Mishmeret Trusts Company Ltd. (formerly Ziv Haft Trusts Company Ltd.) is the Trustee for the Series C Debentures. Prior to the Petition Date (defined below), the Debtor had a repurchase program of its Debentures that authorized the Debtor to repurchase Debentures up to a total amount, in New Israeli Shekel, equivalent to $30 million. Under this repurchase program and under a previous program from 2008, the Debtor purchased NIS 24,586,171 par value of Series A Debentures, NIS 115,430,868 par value of Series B Debentures and NIS 7,084,437 par value of Series C Debentures. 18. Principal payments are due on each of the Debentures on an annual basis pursuant

to the terms of the relevant indenture. On November 20, 2011, the Debtor made a scheduled principal payment to the holders of the Series A Debentures in the approximate amount of $15,221,568. However, due to events that occurred following the payment to the holders of the

The annual interest rate on the Series C Debentures since their issuance and until May 25, 2011 was 6.95%. Due to a downgrade of the ratings of the Series C Debentures, and according to the terms of the applicable debenture, the Series C Debenture holders are entitled to additional interest. The annual interest on the Series C Debentures is now 7.95%. 8

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 9 of 23

Main Document

Series A Debentures, a principal payment in the approximate amount of $34,058,022 due to the holders of the Series B Debenture holders on January 31, 2012 was not paid. Annual principal payments to the Series C Debentures are not scheduled to commence until September 2014. Guarantee to Israel Discount Bank Ltd. 19. In connection with the acquisition of Gadot, the Debtor guaranteed a credit

facility dated November 29, 2007 (the "IDB Credit Facility"), between MAG and Israel Discount Bank Ltd. ("IDB"), for approximately $60.7 million, which amount was increased by approximately $11.3 million on the same terms and conditions, on June 3, 2008 in order to fund the second stage of the acquisition transaction and on September 23, 2008, by approximately $15.4 million in order to fund the third stage of the acquisition transaction. The IDB Credit Facility is divided into two equal loans of approximately $43.7 million. The first loan is a revolving loan that has no periodic principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan matures in 2019, has no principal payments for the first one and a half years, and thereafter is required to be paid in equal installments over the remaining 9.5 years of the term. As of the Petition Date, the outstanding debt under the loan was $75.5 million. According to the original terms of the IDB Credit Facility, interest on both loans accrues at a floating rate equal to LIBOR plus 2% and is payable on a current basis. The Debtor has guaranteed, on an unsecured basis, all the obligations of MAG under the Credit Facility. MAGs obligations under the IDB Credit Facility are secured by a pledge of its shares in Gadot. On November 8, 2011, MAG and IDB signed an amendment to the IDB Credit Facility amending certain requirements under certain of the equity maintenance covenants. In connection with the amendments, the interest rate on both loans increased by 1% to LIBOR plus 3%. The Debtor determined that in

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 10 of 23

Main Document

connection with the preparation of its June 30, 2012 financial statements it would not meet certain required covenants due to the Debtor's other debts (mainly, to its debenture holders), and in accordance with the terms of the IDB Credit Facility, IDB may decide to accelerate the IDB Credit Facility and set it to immediate prepayment. The outstanding balance is classified as a current liability. As of the Petition Date, IDB has not requested early repayment of the loans. Intercompany Debt and Claims: 20. Given the nature of the Debtors business, there are also a number of debt

obligations owed among the Debtor and its subsidiaries and affiliates. In the aggregate, the Debtor owes obligations as of the Petition Date in the approximate principal amount of $33,682,268.41, and is owed by its subsidiaries and affiliates obligations as of the Petition Date in the approximate principal amount of $280,735,998.31. A list of these claims is attached hereto as Exhibit B. C. 21. Events Leading to Chapter 11 Filing. The Debtors ability to make the principal payments due on the Debentures is

predicated primarily on the anticipated flow of dividends to the Debtor from EMG. As a result of the Arab Spring and the resulting political and civil unrest in Egypt, this cash flow has been significantly disrupted. Between February 5, 2011 and September 27, 2011, there were five explosions along the Egyptian gas pipeline owned and operated by GASCO (the Egyptian gas transport company) due to alleged terror attacks, and on July 30, 2011, in the wake of violent incidents in El-Arish, Egypt, there was an attempt to cause damage to the EMG site near ElArish. The security forces on site returned fire, prevented any penetration of the EMG site and repelled the attack. Neither EMG's site nor EMG's pipeline were damaged in the attacks. Due to the alleged terror attacks, from February 5, 2011 to March 15, 2011, from April 27, 2011 to June

10

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 11 of 23

Main Document

9, 2011, from July 4, 2011 to July 5, 2011 and from July 12, 2011 to October 23, 2011, the supply of gas to EMG, and therefore to EMGs Israeli clients, was interrupted. EMG's only source of income is from the gas sales to its customers. This source of income is materially affected due to the gas disruptions. 22. As of the end of October 2011, the situation in Egypt appeared to have stabilized.

The supply of gas was resumed, and the group alleged to have been responsible for the terror attacks was captured, and there was relative peace in Egypt. In addition, the Egyptian government substantially reinforced security on the pipeline system. Furthermore, Egypt has played a significant role in the release of Israeli captive soldier Gilad Shalit, who was held by Hamas for more than five years. 23. Then, on November 10, 2011, there was an explosion along the Egyptian gas

pipeline, approximately 20 kilometers (about 12 miles) west of EMGs site at El-Arish, due to an alleged terror attack. The pipeline is owned and operated by GASCO, the Egyptian gas transport company, which is a subsidiary of EGAS, the Egyptian national gas company (EMG's gas supplier). Following the explosion EGAS initiated its standard shut down procedure affecting gas transportation throughout the Sinai area and gas supply to Jordan, Lebanon, and Syria, major Egyptian industries and gas consumers in the Sinai, and to EMG. Neither EMG's site nor EMG's pipeline was damaged as the affected GASCO pipeline is not a part of the EMG pipeline system. 24. Also due to the political situation in Egypt after the Arab Spring, which

included the strengthening of the Islamic movements in the Egyptian parliament, there has been political pressure to cancel or modify the gas supply agreement between the Egyptian gas supplier and EMG. In April 2012, EGAS notified EMG of its cancellation of the gas supply contract, claiming breaches by EMG. EMG considers the termination attempt unlawful and in

11

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 12 of 23

Main Document

bad faith, and consequently demanded withdrawal of the termination notice. The Egyptian gas suppliers declined to withdraw their termination notice. EMG informed the Egyptian gas suppliers that their attempt to terminate was wrongful and, both in isolation and in combination with their other conduct, constituted repudiation of the gas supply contract, permitting EMG to exercise its right to terminate the gas supply contract at common law. Currently, EMG is continuing with its arbitration which EMG commenced in October 2011. In addition, certain international shareholders of EMG, including the Debtor, commenced arbitration proceedings against Egypt under applicable bilateral investment treaties between their countries and Egypt. Such procedures may ultimately result in arbitration of claims under the various treaties, the company's gas supply agreement or other agreements, but it is anticipated that any such recovery could take around two years. 25. In addition, Gadots business has suffered as a result of the global economic

uncertainty, particularly in Europe. Gadots business is influenced by certain economic factors, which include (i) global changes in demand for chemicals used as raw materials for industrial purposes, (ii) price fluctuations of chemicals and raw materials, (iii) price fluctuations of shipping costs, ship leases and ship fuel, (iv) general global financial stability, and (v) currency fluctuations between the NIS and other currencies. During the last year the Debtor has taken measures aimed to partially realize value on its holdings of Gadot stock through new investor(s) or an initial public offering. In the current market, it is not an advantageous time to procure a new investor(s) or conduct an initial public offering. The Debtor continues actively to pursue its alternatives, including negotiations with an international investor to invest in Gadot and to purchase a minority equity stake in Gadot from the Debtor and negotiations to sell the Debtor's stake in Gadot.

12

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 13 of 23

Main Document

26.

The Debtor also anticipates that for the next two years substantially all of the

resources of EMG and Gadot will be needed to address the issues identified above and that the Debtor will not receive dividends during this period. The Debtor projects that dividends from EMG will resume in 2014 through resumption of gas supply and/or a recovery on its arbitration claims. The Debtor also anticipates that Europe will stabilize in 2013 and the Debtor will be able to realize value on its Gadot stock through one or more alternatives. 27. As a result of these events, the Debtor was unable to make the payment to the

Series B Debenture holders that was due on January 31, 2012, and anticipates that it will not be able to make the principal payments due to the Debenture holders for the next two years. The Debtor anticipates that it will be able to continue making the interest payments due on the Debentures. 28. On January 1, 2012, the Debtor held a meeting with the holders of the

Debentures. During this meeting, the Debtor proposed to restructure (the Proposal) the Debentures to postpone all principal payments due thereunder for the next two years, during which period the Debtor would continue to make the interest payments as scheduled. Under the Proposal, the principal amount of the Debentures would not be reduced, and after the two year period the principal payment schedule for the Debentures would return to the original terms. The Debtor asked the holders of the Debentures to appoint one delegation (a committee of representatives) of holders to discuss the proposed restructure. 29. On January 9, 2012, the holders of the Debentures held a vote and appointed a

delegation of holders to discuss the Proposal. On January 18, 2012, the Debtor announced that two separate committees were formed to represent the holders of the Debentures: one representing the Series B Debentures (the Series B Committee) and the other representing the

13

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 14 of 23

Main Document

Series A Debentures and Series C Debentures (the Series A/C Committee; and, together with the Series B Committee, the Delegation). The Delegation is comprised of a mix of representatives of large institutional investors, independent professional and Israeli lawyers. The Debtor and the Delegation have been in discussions over the last eight months regarding a potential restructuring of the Debtor. On March 6, 2012, the Series B Holders elected to accelerate the debt due under the Series B Debentures, but enforcement of such acceleration was delayed until March 20, 2012. The Debtor announced that unless it was clear the acceleration of the Series B Debentures would be further postponed, the Debtor would not make an interest payment on the Series C Debentures due on March 7, 2012. On March 29, 2012, the interest payment of approximately $1.845 million (the Series C Interest Payment) on the Series C Debentures which was originally due on March 7, 2012 was made upon a vote of the Series C Debenture holders by transferring funds that had been on deposit with the trustee for the Series C Debenture holders. On May 22, 2012, the Debtor deposited an amount equal to the Series C Interest Payment with the Series C Trustee. This deposit was made in an effort by the Debtor to continue the negotiations with the holders of the Debentures. In April 2012, the Series B Committee and the Debtor reached an agreement on a term sheet setting forth the basis for a negotiated restructuring of the Debentures. This agreement was contingent on reaching an agreement with the Series A/C Committee and subsequent approval by the holders of the Debentures. The discussions have broken down primarily because of disagreements among the three series of Debenture Holders. On June 12, 2012, the Series B Debenture Holders' trustee (Reznik Paz Nevo R.P.N. Trusts 2007 Ltd. formerly Clal Finance Trustees 2007 Ltd.) publicly announced that it intends to enforce the acceleration of the debt due under the Series B Debentures on June 21, 2012, should no agreements be reached by said date. The date of this

14

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 15 of 23

Main Document

acceleration was then extended to July 2, 2012. During July 2012, a number of Debenture holders meetings were held, and on July 17, 2012 as further amended on July 30, 2012 , the Company announced that it published a new proposed outline for arrangement (the "New Term Sheet") to be voted on by the Debenture holders by ballot on August 30, 2012. The New Term Sheet, reflecting the ongoing negotiations between committees formed by Holders, set out the proposed guiding principles for a detailed agreement to modify the terms of all outstanding Debentures. After its publication, the Debtors and the Delegation, with its recent increase in membership, attempted to negotiate additional amendments to the New Term Sheet. However, the parties could not come to a consensus and the negotiations were unfruitful. The Debenture holders are scheduled to vote by ballot on August 30, 2012, and the Debtor, through its negotiations and discussions with several significant holders, has learned that the New Term Sheet will not be approved in the voting, and therefore the Series B Debenture holders resolution to set the entire debt to the Series B Debenture holders will come into effect immediately after the voting. During the last eight month period, the Debtor was unable to reach an agreement for the restructuring of its Debentures mainly due to the size and composition of the Delegation. The Debtor would have preferred an out-of-court restructuring, but the foregoing circumstances have rendered that infeasible. 30. Upon careful consideration of other alternatives, the Debtor determined that

commencing a Chapter 11 bankruptcy, continuing to operate its business and pursuing a plan of reorganization is in the best interests of the Debtors creditors and other stakeholders. The bankruptcy process will bring all of the Debtors creditors together and enable the Debtor to restructure its liabilities and maximize the value of its assets for the benefit of all of its stakeholders. Given the breakdown of the negotiations with and among the Debenture holders as

15

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 16 of 23

Main Document

described above, the legal alternatives in Israel do not provide an adequate forum or structure to achieve a successful reorganization of the Debtor. The Debtor would be forced to wind down and liquidate, which would not provide sufficient value to pay all creditors in full and would wipe out the interests of the Debtors equity holders. Although section 350 of the Israeli Company Law provides an alternative for an Israeli incorporated company to seek a moratorium and adopt a restructuring plan, such an alternative is only a theoretical possibility for the Debtor for the following reasons: a. Section 350 of the Israeli Company Act is applicable only to Israeli incorporated companies, and third parties (such as shareholders) can claim that the Israeli courts are not the proper forum; and b. Israeli courts usually refuse under Section 350 of the Israeli Company Act to provide holding companies, such as the Debtor, the opportunity to restructure as provided under Chapter 11 of the Bankruptcy Code, and have forced such holding companies to liquidate. 31. On August 29, 2012 (the Petition Date), the Debtor filed a voluntary petition for

relief under Chapter 11 of title 11 of the United States Code (the Bankruptcy Code) commencing this Chapter 11 case (the Case).

II.

FIRST-DAY MOTIONS. 32. In an effort to further the smooth and efficient administration of the Case, and to

preserve and maximize the value of its estate, the Debtor is filing five First-Day Motions and one Application concurrently herewith: A. Debtors Motion for an Order Authorizing Debtor to Maintain and Use Existing Bank Accounts, Checks and Business Forms (the Bank Account Motion);

16

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 17 of 23

Main Document

B. Debtors Motion Requesting a Waiver of the Requirements to File an Equity List and Provide Notice to Equity Security Holders (the Equity Security Holder Notice Motion); C. Motion For An Order Pursuant To Sections 105(A) And 366 of The Bankruptcy Code (i) Prohibiting Utilities From Altering, Refusing or Discontinuing Service, And (ii) Deeming Utilities Adequately Assured of Future Performance (the Utility Motion); and D. Application for an Order Pursuant to Section 327(a) of the Bankruptcy Code and Bankruptcy Rule 2014(a) Authorizing the Employment and Retention of Bryan Cave LLP as Attorneys for the Debtor (the BC Retention Application); E. Debtors Motion For An Order Enforcing The Automatic Stay (the Automatic Stay Motion); and

33.

I have reviewed each of the First-Day Motions (including the exhibits attached

thereto) and can attest to the truth of the facts set forth therein. I believe the relief sought in each of the First-Day Motions (a) is necessary to preserve and enhance the value of the Debtors estate, (b) is integral to the success of the Case, and (c) serves the best interests of the Debtor, and the Debtors estate and creditors. A. 34. The Bank Account Motion Pursuant to the Bank Account Motion, the Debtor is requesting authorization to

maintain and use its existing bank accounts, checks and business forms. 35. Prior to the Petition Date, in the ordinary course of its business the Debtor has

utilized three bank accounts: (a) a bank account at Israel Discount Bank NY (account ending in numbers 153-5), (b) a bank account at Bank Hapoalim B.M. (account ending in numbers 95-01), and (c) a bank account at Bank Hapoalim Ltd. (account ending in numbers 1593) (collectively, the Bank Accounts) for most of its banking transactions.

17

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 18 of 23

Main Document

36.

On a postpetition basis, the Debtor intends to continue using the Bank Accounts

in essentially the same manner as they were used on a prepetition basis, in accordance with the terms of the Debtors proposed order. 37. The Debtor seeks authority to continue using the Bank Accounts on a postpetition

basis because it will permit the Debtor to continue operating its business and managing its payments and deposits efficiently and effectively, to the benefit of all parties-in-interest. If the Debtor is forced to close the Bank Accounts and open new accounts, the Debtor will likely suffer serious delays in the collection and disbursement of funds, impeding its ability to function effectively in carrying out its normal business operations and adversely affecting the Debtors estate. 38. Additionally, the Debtor requests a 45-day extension of the time period in which

to either come into compliance with section 345(b) of the Bankruptcy Code or to make other arrangements that would be acceptable to the United States Trustee for the Southern District of New York (the U.S. Trustee). Although the banks at which the Bank Accounts are located are not on the list of those approved by the U.S. Trustee (the Non-Approved Bank Accounts), they are each a large, internationally respected financial institution. These Non-Approved Bank Accounts contain more than $250,000 in cash, the amount currently insured by the Federal Deposit Insurance Corporation (the FDIC). Additionally, some of the Bank Accounts are located in banks outside of the United States. Accordingly, the Debtor proposes to engage in discussions with the U.S. Trustee to determine what modifications to the Bank Accounts, if any, are necessary under the circumstances. To enable such discussions, if they become necessary, the Debtor requests a 45-day extension (or such additional time to which the U.S. Trustee may agree) of the time period in which to either come into compliance with section 345(b) of the

18

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 19 of 23

Main Document

Bankruptcy Code or to make other arrangements that would be acceptable to the U.S. Trustee. The Debtor believes that the benefits of the requested extension far outweigh any harm to the estate. B. 39. The Equity Security Holders Notice Motion Pursuant to the Equity Security Holders Notice Motion, the Debtor is requesting

relief from the requirement of Fed. R. Bank. P. 2002(d) that the Debtor provide notice of the Case to all of the Debtors equity security holders held by more than 1200 investors. As set forth above, the Debtor has approximately 2,806,688 shares outstanding held by more than 1200 investors. Obtaining a list of all of the current holders of these shares and providing notice to such parties would be expensive and time consuming, and would serve little or no beneficial purpose. It is anticipated that media coverage, here and in Israel, and the Debtors filing of a Form 8-K report with the Securities and Exchange Commission will provide sufficient and timely notice of the Case. In addition, the Debtor anticipates issuing a press release announcing the filing of this Case. C. 40. Utility Motion As set forth in the Utility Motion, the Debtor is seeking entry of an order pursuant

to Sections 105(a) and 366 of the Bankruptcy Code (i) prohibiting utilities from altering, refusing or discontinuing service, and (ii) deeming utilities adequately assured of future performance, as described more fully in the Utility Motion. 41. In connection with the operation of its business, the Debtor obtains telephone

service and internet service at its office located at 555 Madison Avenue, New York, New York, from Verizon and Time Warner Cable, respectively, and cellular telephone and data service for the Debtors officers from AT&T Mobility (collectively, the Utility Services). Exhibit B to the

19

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 20 of 23

Main Document

Utility Motion is an accurate list of the accounts pursuant to which the Debtor obtains Utility Services (the Utility Accounts List). Also included on the Utility Accounts List is a breakdown of the proposed deposit amounts with respect to the Debtors accounts. 42. In general, the Debtor has established an excellent payment history with respect to

their Utility Services, consistently making payments on a regular and timely basis. To the Debtors knowledge, there are no defaults or arrearages of any significance with respect to undisputed invoices related to Utility Services, other than the payment interruptions that may be caused by the commencement of this Case. The Debtor intends and has the ability to pay its undisputed postpetition obligations to the Utility Companies on a timely basis, in accordance with its prepetition practices. 43. The Debtor proposes to adequately assure the Utility Companies of future

payment for services by providing a deposit for each Utility Company in an amount not to exceed the average cost of charges equal to one month of Utility Services (each, an Adequate Assurance Deposit). The Adequate Assurance Deposit shall be deposited in a segregated bank account designated for the Adequate Assurance on behalf of each Utility Company as provided in the Utility Motion. 44. Uninterrupted Utility Services are vital to the continued operation of the Debtors

business, consequently, to the success of this Case, and the relief requested in the Utility Motion is necessary to avoid immediate and irreparable harm and is in the best interests of the Debtors estate and its creditors.

D. 45.

BC Retention Application As set forth in the BC Retention Application, the Debtor is seeking to retain and

employ Bryan Cave LLP (Bryan Cave) as its general bankruptcy counsel in the Case. Bryan 20

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 21 of 23

Main Document

Cave has an extensive corporate restructuring practice and extensive experience in handling Chapter 11 cases, as well as expertise in numerous other areas of practice that will be important to the Case. Bryan Cave has acted as counsel to the Debtor for over ten years, and during that period and in preparing for the Case, Bryan Cave has become familiar with the Debtors business and the legal issues that may arise in the Case. Bryan Cave is well qualified and uniquely able to represent the Debtor in the Case. E. 46. Automatic Stay Motion As set forth in the Automatic Stay Motion, the Debtor seeks entry of an order

stating that upon commencement of this Case the automatic stay was imposed and setting forth the relevant language of section 362(a) of the Bankruptcy Code. 47. The Debtor received a letter, dated August 3, 2012, from Meitav Provident and

Pension Ltd. and Maitav Mutual Funds Ltd., two of the Debtors Debenture holders. The letter indicates that the Debenture holders intend to take action against the Debtor with respect to any payments made to shareholders prior to the Petition Date. 48. The Debtor intends to provide the order to foreign parties and courts to inform

them of the commencement of this Chapter 11 Case and the imposition of the automatic stay. The Debtor has numerous creditors located outside of the United States, including the Debenture holders. Additionally, a substantial amount of the Debtors assets are located outside of this country. The Debtor is concerned that not all parties affected or potentially affected by the commencement of the Case are aware of the automatic stay or its significance and impact. Without the enforcement of the automatic stay, the Debtor may not be able to preserve the value of the Debtors assets and ensure all creditors are treated equally and in accordance with the Bankruptcy Code.

21

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 22 of 23

Main Document

III.

ADDITIONAL INFORMATION REQUIRED BY LOCAL BANKRUPTCY RULE 1007-2 49. Set forth below is certain additional information required to be disclosed under

Local Bankruptcy Rule 1007-2: a. To the Debtors knowledge, no prepetition committee of creditors has been organized, other than the delegation of holders elected to discuss the Proposal with the Debtors on behalf of the Debenture holders as set forth in paragraph 29 above. b. A list of the Debtors 16 unsecured creditors is attached hereto as Exhibit C. c. The Debtor does not have any secured creditors.4 d. A summary of the Debtors assets and liabilities is attached hereto as Exhibit D. e. A list of the amount of Class A shares held by each of the Debtors officers and directors is attached hereto as Exhibit E. f. Funds in an amount equal to the interest payments due under the Series B Debentures during the grace period of the principal payments due thereunder are held in an account at Bank Discount, Tel Aviv, Israel designated as Account Name: Clal Finance. g. Funds in an amount equal to the interest payments due under the Series C Debentures during the grace period of the principal payments due thereunder are held in an account at Bank Leumi, Tel Aviv, Israel designated as Account Name: Mishmeret - trust company. h. The Debtor is not involved in any action or proceeding, threatened or pending, where a judgment against the Debtor or a seizure of its property may be imminent. i. The estimated schedule of cash receipts and disbursements, net cash gain or loss, obligations and receivables expected to accrue, but remain unpaid other than professionals fees during the 30 days following the Petition Date is set forth in detail in the schedule attached hereto as Exhibit F. j. Amounts to be paid to the Debtors officers, directors and stockholders are as follows: i. Revital Degani, a director of the Debtor, is expected to receive a $4,500 payment within the next 30 days, as part of her annual directors fee.

Pursuant to the terms of the Debentures, the Debtor established the deposit accounts described in subparagraphs f and g below. The Debtor does not believe that these deposit accounts constitute security for the Debentures.

22

12-13689-smb

Doc 2

Filed 08/29/12

Entered 08/29/12 15:21:41 Pg 23 of 23

Main Document