(I) On June 30, 2004, two of our former senior employees filed a claim in
the Labor Court, seeking NIS 2,346,200 in the aggregate (nominal). The claim is
for various additional payments which, according to the claim, are due to them
in connection with the cessation of their employment in 2002 and pursuant to the
terms of their employment contracts. The payment of these additional payments
was not approved by the Supervisor of Wages of the Ministry of Finance, who was
also named in the claim as a defendant. The plaintiffs claim that in return for
these additional payments that were granted to them in their employment
contracts, they agreed to forfeit wage increases that were due to them at the
time. Therefore, the plaintiffs have alternatively petitioned the court to award
them the value of the wage increases that they agreed to forfeit. Despite the
fact that, according to the plaintiffs' claim, the value of the wage increases
is greater than the amount of the claim, in order to reduce court fees, they
have set their value equal to the amount of the claim. Following the notice of
the Supervisor of Wages of his consent to pay to the plaintiffs the settlement
that he offered them in the past, without conditioning this on their waiving
further claims, the plaintiffs motioned for a partial judgment, under which we
would pay to the two plaintiffs a total of approximately NIS 415,000, reflecting
the consent of the Supervisor of Wages. We objected to this motion and the Labor
Court has yet to give its decision. The Court partially granted the plaintiffs'
motion for discovery of documents and they have appealed this decision.
(J) On September 28, 2004, 27 financial institutions that hold our
participating preference C and/or CC and/or CC1 shares filed an action in the
Tel Aviv District Court, in which the court is petitioned, inter alia, to direct
us to pay to our shareholders a dividend similar in an amount and on such date
as we had paid until the payment of the last dividend for the second quarter of
2002. The plaintiffs claim, inter alia, that according to our articles of
incorporation, we are bound to pay to our preferred shareholders an annual
dividend in the amount of 7.5%, that such dividend is not in essence a dividend,
but rather a payment which is paid in full by the State of Israel with respect
to the perpetual deposits that we deposited with the Treasury and, therefore,
such distribution is not subject to distribution requirements proscribed by the
law, and that even if such requirements should be applied, we should be ordered
to pay the requested dividend because we meet the solvency requirement
proscribed by law , in light of the fact that the dividend is financed in full
by the State of Israel and is not deducted from our capital. Since the issue of
the dividend is connected, in the opinion of our management, to the issue of the
accruing of interest on the Bank's perpetual deposits with the Treasury, we
filed, on March 9, 2005, a motion for a declaratory judgment against the State
of Israel and the above financial institutions, stating that the interest on the
perpetual deposits does in fact accrue. The Court has decided to consolidate the
two motions for declaratory judgments. On December 27, 2005, the Finance
Minister filed his answer to the two motions. The Minister's position is that
the interest on the perpetual deposits does not accrue (neither to our benefit
nor the benefit of our shareholders), adding that in his opinion, in light of
our situation and despite the non-accrual of the interest, a distribution of a
dividend is not appropriate. On March 23, 2006, the Court decided that it will
first rule on the question of the accrual of interest on the perpetual deposits.
The Court scheduled oral arguments on this issue for November 15, 2006
87
(K) On December 19, 2004, a company called Hashachar Office Equipment Ltd.
and its shareholders filed an action against us in the amount of NIS 1,000,000.
We filed an action against the company and its shareholders in May 2004, in the
amount of NIS 1,702,000 and their action was filed as a counter-claim. They
claim that following our crisis in 2002, we reduced the company's credit line
and ceased the credits we had customarily provided, thus reducing the company's
activities and causing it damages and losses. They also claim that we charged
the account an excessive amount of interest. The amount of their counter-claim
is their evaluation of the damages above the amount they claim as a set-off
against our claim against them. On December 21, 2005, judgment was given against
us, in favor of Hashachar , due to non-filing of a statement of defense. On
February 20, 2006, the court approved an agreement that was reached between the
parties whereby the judgment against us would be struck out and our action would
be renewed. The parties also agreed as part of the agreement that our action
would carry a reduced rate of interest.
(L) On October 10, 2005, a company, that performs engineering and plumbing
work, filed a claim in the amount of NIS 1,356,459 against us, a receiver that
was appointed at our request to a residential and commercial project that
encountered difficulties, and against the owner of the land that at the time had
entered into a combination agreement with the promoter that had constructed the
project with our financing. The plaintiff company performed work on the project
at the request of the promoter, which had failed and did not repay its debt to
the plaintiff company. The claim states that the amount requested reflects the
amount the promoter still owes the plaintiff company in respect of the work it
executed on the project with the addition of interest and/or linkage
differences. The plaintiff company contends that due to the principles of
closed-banking financing and our having granted to the promoter bank financing
for construction of the project, we should be considered responsible for
repayment of the debt. Furthermore, it contends that at the time it had entered
into the agreement with the promoter, we should have brought to its attention
the information the plaintiff contends was in our possession, regarding the
difficult condition of the promoter and the project. The handling of the claim
was transferred to the care of an attorney acting on our behalf. On March 14,
2006, the action as it applied to the receiver was struck out IN LIMINE for lack
of a cause of action and the action is continuing, therefore, only against us
and the land-owner.
(M) On February 5, 2006, a company that had sold a property to one of our
customers, which property was later pledged in our favor, filed an action
against us, the receiver appointed, at our request, over the pledged property
and against the company that purchased the property from the receiver. The
plaintiff claims that it sold the land to our customer on which the shopping
center was built, with our funding, that according to their agreement, the
customer still owes it space in the shopping center valued at $260,000 + VAT and
that we confirmed to the plaintiff that our lien on the property would be
subject to the customer's undertaking to the plaintiff. The plaintiff petitioned
the court to stay the sale to the purchaser (in fact, the sale had already been
completed) and alternately to annul the sale or to order not to transfer the
consideration to us (in fact, the monies were already transferred) until it
receives a guarantee of its rights or its rights to receive $260,000 + VAT
together with liquidated damages of NIS 1,200,000 that was fixed in the contract
between the plaintiff and our customer in the case of a fundamental breach. At
the hearing on March 9, 2006, it was established that the responsibility to
uphold the undertaking to the plaintiff falls on the purchaser of the property,
and therefore there is no need for orders sought by the plaintiff, thus
terminating the action against us
88
(N) On March 23, 2006, a law firm filed an action against us in the amount
of NIS 1,457,474. During a number of years the plaintiffs performed legal
services for us, primarily relating to the collection of debts from our
customers. Their claim is for fees allegedly due to them in connection with two
cases. On July 5, 2006, a settlement was signed between the parties by which we
will pay the plaintiffs an amount of NIS 850,000 plus VAT in consideration for
their services with the above two cases and for many other cases which were
transferred from their office to other law firms.
In addition, we are party to various pending legal proceedings which we do
not expect will have a material adverse effect on our business, financial
condition or results of operations.
DIVIDEND POLICY
In the past, we paid an annual dividend on Ordinary A shares, Preferred
Ordinary shares, Ordinary B shares and Ordinary B1 shares, as well as on our
preferred shares. The B and B1 shares are held by the State of Israel. We
stopped paying dividends on these shares at the same time that we stopped paying
dividends on our Preferred shares. For a discussion regarding the cessation of
the payment of dividends, see "Item 3.D. Risk Factors" above and "Item 13.
Defaults, Dividend Arrearages and Delinquencies" below.
ITEM 9. THE OFFER AND LISTING
OFFER AND LISTING DETAILS
PRICE HISTORY OF LISTED STOCK
Our Ordinary Preferred Shares, and our cumulative participating preference
C Shares, CC Shares and CC1 Shares are listed on the Tel Aviv Stock Exchange.
The following table shows the high and low closing price in NIS for our Ordinary
Preferred Shares, and our cumulative participating preference C Shares, CC
Shares and CC1 Shares on the Tel Aviv Stock Exchange for the periods indicated:
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IN NIS
CLASS C CUMULATIVE CLASS CC CUMULATIVE CLASS CC1 CUMULATIVE
PARTICIPATING PARTICIPATING PARTICIPATING ORDINARY PREFERENCE
PREFERENCE SHARES PREFERENCE SHARES PREFERENCE SHARES SHARES
---------------- ------------------- ------------------ --------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
2001 446 339 4,070 3,379 4,458 3,370 2,592 1,905
2002 490 58 4,750 752 4,840 555 2,870 150
2003 123 58 1,142 700 990 550 229 143
2004
1st Quarter 158 95 1,590 1,020 1,449 925 1,174 194
2nd Quarter 134 105 1,249 1,000 1,290 720 841 481
3rd Quarter 130 117 1,220 1,190 1,230 1,100 642 540
4th Quarter 124 107 1,211 1,050 1,129 1,001 586 410
2005
1st Quarter 169 115 1,400 1,200 1,500 1,198 1,058 711
2nd Quarter 145 120 1,300 1,134 1,300 1,200 895 808
3rd Quarter 135 122 1,181 1,134 1,200 1,142 890 578
4th Quarter 111 107 1,200 960 1,123 1,089 688 580
2006
January 104 80 1,184 899 760 1,010 594 484
February 135 80 1,184 1,010 760 1,200 570 520
March 138 121 1,306 1,184 1,267 1,100 553 466
April 145 131 1,400 1,200 1,580 1,200 640 499
May 145 145 1,400 1,400 1,580 1,580 501 500
June 140 216 1,866 1,400 2,000 1,580 501 322
Neither our Class D Cumulative Participating Preference Shares nor our
Class DD Cumulative Participating Preference Shares, are listed or traded on the
Tel Aviv Stock Exchange. None of our securities are listed or traded on any
stock exchange in the United States.
PLAN OF DISTRIBUTION
Not applicable.
MARKETS
Our listed securities are traded only on the Tel Aviv Stock Exchange.
SELLING SHAREHOLDERS
Not applicable.
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DILUTION
Not applicable.
EXPENSES
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
MEMORANDUM OF ASSOCIATION
Under the Companies Law, a company may define its purposes as to engage in
any lawful business. Section 2 of our Memorandum of Association, which outlines
our objects and purposes, states that we may undertake the following activities,
among others:
(a) to establish a financial institution to be instrumental in the
encouragement of, and assistance to, the creation and expansion of
efficient, useful and economically sound enterprises in Israel;
(b) to grant and provide banking services of any kind or nature;
(c) to grant credits of any kind or nature whatsoever, financial and any
other assistance to any person in Israel and outside Israel, in such a
manner and way and on such terms as we may deem proper and fit;
(d) to deal in investment, underwrite, acquire and hold securities issued
or made by any company in Israel or abroad;
(e) to promote, further and encourage the issue of securities by
industrial and other enterprises and to promote and further the
investment and participation of capital in industrial and other
enterprises whatsoever;
(f) to promote and assist in the creation and issuance of securities of
all kinds;
(g) to lend money and to provide credit to any enterprises;
(h) to guarantee loans obtained or to be obtained by any industrial and
other enterprise ; and
(i) to borrow and raise money and secure the repayment thereof in the
manner and on the terms as we may deem advisable.
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ARTICLES OF ASSOCIATION
AMENDMENT OF ARTICLES OF ASSOCIATION. Under the Companies Law, a company
incorporated before the Companies Law went into effect (February 1, 2000) may
modify or amend its articles of association by a resolution adopted by 75% of
the shareholders at a General Meeting participating in the vote and excluding
abstainees, or by a different percentage if so provided in the company's
memorandum and articles of association. We were incorporated in 1957; our
memorandum and articles of association do not provide any percentage for
amendment of our Articles of Association and so we may amend the Articles with
the approval of 75% of the shareholders.
The Companies Law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not obligate the
shareholder without his prior consent.
RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION. Under the
Companies Law and its relevant regulations, for the purpose of a shareholder
vote, the record date for public companies, defined as companies traded on an
exchange or as companies whose shares were offered to the public by prospectus
and are held by the public, such as us, can be set between 4 and 21 days before
the date of the meeting. However, for certain subjects which, pursuant to the
Companies Law, can be voted on by ballot, the record date shall be no more than
40 days and no less than 28 days before the date of the meeting.
NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE. The Companies Law and
its relevant regulations provide that a public company, such as us, must give
notice of a general meeting to its shareholders of record at least twenty-one
days prior to the meeting, unless the company's articles of association provide
that a notice need not be sent. However if the agenda of the meeting includes
specific subjects which can be voted on by ballot, the notice must be given at
least 35 days prior to the meeting. Article 5 of our articles of association
provide that only the holders of Ordinary A shares and Ordinary Preferred
shares, will be entitled to receive notice of a General Meeting and that the
holders of all other classes of shares will not enjoy such right.
ANNUAL MEETINGS AND EXTRAORDINARY MEETINGS. Under the Companies Law, an
annual meeting of the shareholders should be held once in every calendar year
and not more than fifteen months from the last annual meeting. The Companies Law
provides that an extraordinary meeting of shareholders of a public company, such
as us, must be called by the board of directors upon the written request of (i)
two directors, (ii) one-fourth of the serving directors, (iii) one or more
shareholders who hold(s) at least five percent of the issued share capital and
at least one percent of the voting rights of the company, or (iv) one or more
shareholders who have at least five percent of the voting rights of the company.
Within twenty-one days of receipt of such demand, the board of directors is
required to convene the extraordinary meeting for a time not later than
thirty-five days after notice has been given to the shareholders (unless
otherwise provided regarding a meeting having on its agenda a subject which can
be voted on by ballot. Article 58 of our Articles of Association provides that
our board of directors may call an Extraordinary Meeting at any time it sees
fit. In addition, Article 61 of our articles of association provides that our
board of directors shall convene an Extraordinary Meeting upon the written
request of a holder or holders of not less than 1/10 of our paid up capital that
carries with it voting rights at General Meetings.
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QUORUM AT GENERAL MEETINGS. Under Article 65 of our Articles of
Association, the required quorum for any General Meeting of shareholders is two
or more shareholders present in person, by proxy or by attorney who collectively
hold Ordinary A shares representing at least thirty-three and one-third percent
(33(1)/3%) of the number of votes of the company. Article 68 of our Articles of
Association provides that if a quorom is not present within half an hour from
the time the meeting was set, then, if the meeting was called at the request of
the shareholders it will be cancelled, and otherwise it will be adjourned and
any shareholders present and entitled to participate in the adjourned meeting
shall constitute the required quorom.
ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS. Article 71 of our Articles of
Association and the Companies Law (with respect to public companies, such as us)
provide for voting by poll only. In addition, the Companies Law provides that a
declaration by the Chairman of the Meeting that a resolution has been carried or
rejected, unanimously or by a particular majority, shall be prima facie evidence
of the fact.
VOTING POWER; MODIFICATION OF CLASS RIGHTS. Article 77 of our Articles of
Association provides that every shareholder shall have one thousand votes for
each Ordinary A Share held by him and one vote for every Preferred Ordinary
Share held by him. Article 8 of our Articles of Association provides that if at
any time our share capital is divided into different classes of shares, the
rights attached to any class may be modified, abrogated or otherwise dealt with
by the company with the consent in writing of the holders of 75% of the issued
and outstanding shares of that class or by Special Resolution (a resolution
carried by at least 75% of the votes of those present and voting) in an
Extraordinary Meeting of the shareholders of that class. A shareholder may vote
in person, by proxy, by a duly authorized representative, or, regarding specific
subjects, by ballot.
BALLOTS. Under the Companies Law and its relevant regulations, a public
company, such as us, a shareholder may vote by ballot, regarding the following
matters:
1) the appointment and discharge of directors;
2) approval of acts and transactions that require approval by the
General Meeting pursuant to the provisions of sections 255 and
268 through 275;
3) approval of a merger pursuant to section 320;
4) any other subject in respect of which it is provided in the
by-laws or pursuant to them that decisions of the General Meeting
also be adopted by voting by ballot;
93
5) approval of a settlement or compromise between the company and
its shareholders or creditors.
ELECTION AND REMOVAL OF DIRECTORS. Under our Articles of Association, our
board of directors shall consist of not less than seven and not more than
fifteen directors. The appointment of our directors and their removal (except
for the "additional director" who is appointed by the other members of the board
of directors and who by virtue of his appointment becomes the chairman if the
board) shall be effected by the holders of our Ordinary A Shares.
Our Articles provide that each member or group of members shall be entitled
to appoint one director for every 1,015 Ordinary A Shares held. The appointer(s)
of a director may at any time remove the director appointed by him.
Under our Articles of Association, a director is not required to retire at
a certain age and need not hold our shares. Under the Companies Law, a person
cannot serve as a director if convicted of certain offenses or been declared
bankrupt. In the event the appointer of a director shall cease to hold the
requisite number of Ordinary A Shares, the director appointed by him shall cease
to be a director according to Article 88 of our Articles of Association.
QUALIFICATION OF DIRECTORS. Articles 96 and 97 of our Articles of
Association provide that no person shall be disqualified to serve as a director
by reason of him not holding shares in the Company or by reason of him having
served as director in the past. Our directors are not subject under the
Companies Law or our Articles of Association to an age limit requirement. Under
the Companies Law and in accordance with Article 100 of our Articles of
Association, a person cannot serve as a director if he has been convicted of
certain offenses, unless specifically authorized by the court, or has been
declared bankrupt. We implement both the directive of the Securities Authority
regarding directors having accounting and financial skills as instructed by the
Bank of Israel and the provisions of the Companies Law - 1999 and aforementioned
amendments with respect to directors having accounting and financial skills.
CHAIRMAN OF THE BOARD OF DIRECTORS. The board of directors may from time to
time appoint one additional director to serve as chairman of the Board of
Directors in accordance with Article 89A of our Articles of Association.
Alternatively, the board of directors may, in accordance with Article 112 of our
Articles of Association, elect one of its members to serve as the chairman of
the board.
CONFLICTS OF INTEREST. The Companies Law provides that a director, as well
as an officer, shall refrain from any act that involves a conflict of interest
between the performance of his function in the company and his performance of
any other function or his personal affairs. The Companies Law further provides
that if a director has a personal interest in the approval of a transaction
(other than a transaction that is not deemed to be exceptional and does not
relate to the director's terms of service or his employment in other
assignments) brought for approval by the audit committee or the board of
directors, then he shall not be present at the discussion and shall not
participate in the vote in the audit committee and at the board of directors.
94
DIRECTOR REMUNERATION. The Companies Law provides that director
remuneration must be approved by the audit committee, the board of directors and
the General Meeting of the shareholders.
PROCEEDINGS OF THE BOARD OF DIRECTORS. Article 106 of our Articles of
Association provides that the board of directors may meet and adjourn its
meetings and otherwise regulate such meetings and proceedings as the directors
think fit. A meeting of directors may be called on three days' notice according
to Article 110 of our Articles of Association.
Article 107 of our Articles of Association provides that 1/3 of the
directors then in office shall constitute a quorum for meetings of the board of
directors. No business shall be transacted at a meeting of the board of
directors unless the requisite quorum is present. At a twice adjourned meeting
(due to lack of the requisite quorom), two directors shall constitute a quorum
according to Article 107 of our Articles of Association.
Except as provided in the next sentence, all questions arising at any
meeting of our board of directors shall be decided by a majority of votes, and,
in the case of equal votes for and against, the Chairman of the Board of
Directors shall be granted one additional vote in accordance with Article 113.
Article 114 provides that the consent of a special majority (consisting of the
consent of (a) a majority of the then serving directors and (b) at least half of
the directors appointed by the State of Israel) is required to elect a chairman
or vice chairman of the board of directors, to appoint (in accordance with
Article 89A) an additional director (who upon his appointment becomes chairman)
or to appoint (in accordance with Article 122) a managing director.
BORROWING POWERS. The Companies Law authorizes the board of directors of a
company, among other things, to determine the credit limit of the company and to
issue bonds. Articles 51 and 52 of our Articles of Association state that our
board of directors may, from time to time, at its discretion, cause us to borrow
money and secure the payment of any sum or sums of money, and may secure or
provide for the repayment of such sum in such manner and upon such terms and
conditions as it deems fit.
TRANSFER OF SHARES. Article 37 of our Articles of Association provides that
no Ordinary A Shares may be transferred without the consent of the board of
directors.
ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS. The Companies Law provides
that, subject to the provisions stipulated therein, an acquisition of our shares
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of twenty-five percent or more of the voting
rights. This rule does not apply if there is already another holder of
twenty-five percent of the voting rights. Similarly, the Companies Law provides
that an acquisition of our shares must be made by means of a tender offer, if,
as a result of the acquisition, the purchaser would become a holder of more than
forty-five percent of the voting rights, unless there is another person holding
at that time, forty-five percent of the voting rights.
95
Regulations under the Companies Law provide that the Companies Law's tender
offer rules do not apply to a company whose shares are publicly traded either
outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
REPURCHASE OF SHARES. The Companies Law, subject to certain limitations,
allows companies under certain circumstances to repurchase their own shares.
FOREIGN OWNERSHIP. Neither our Articles of Association nor Israeli law
restrict in any way the ownership of our shares by nonresidents of Israel, or
restrict the voting or other rights of nonresidents of Israel. Notwithstanding,
nationals or residents of countries that are in a state of war with Israel or
entities incorporated, established or managed in such countries may not transfer
and/or acquire ownership in shares in Israel, and/or receive dividends in
respect thereto, without a special government permit.
MERGERS. The Companies Law provides for mergers between Israeli companies,
if each party to the transaction obtains the appropriate approval of its board
of directors and (subject to certain exceptions) also the approval of the
General Meeting of shareholders. A "merger" is defined in the Companies Law as a
transfer of all assets and liabilities (including conditional, future, known and
unknown liabilities) of a target company to another company, the consequence of
which is the dissolution of the target company in accordance with the provisions
of the Companies Law. For purposes of the approval of the General Meeting of
shareholders of each merging entity, unless a court rules otherwise, the merger
will not be deemed approved, if the shareholders who hold the majority of the
voting rights among the participants in the vote (excluding abstainees) that are
not held by the other entity or are not held by any person who holds 25% or more
of the voting rights or the right to appoint 25% or more of the directors of the
other entity, and who had participated in the vote (excluding abstainers) had
objected to the merger. The Companies Law further provides that with respect to
companies incorporated prior to the commencement of the law (such as us), the
merger requires the approval of a majority of three-quarters of the voting
members present at the General Meeting (excluding abstainers).
DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS. Article 130 of our
Articles of Association provides that if we have sufficient profits, the board
of directors, (a) must recommend that dividends be paid to the holders of the
cumulative participating preference C, CC, and CC1 shares, the holders of
cumulative redeemable preference D and DD shares and the holders of ordinary
preference shares; and (b) may recommend the payment of any other dividend that
is payable on our share capital under our Articles of Association, provided that
if the payment of fixed cumulative preferred dividends on our preferred shares
or our ordinary preference shares, is in arrears, the board of directors must
recommend first the payment of the arrearage. In the event of the winding up of
our business, after satisfaction of liabilities to creditors, our assets will be
distributed in accordance with Article 7 of our Articles of Association.
96
Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors, subject to any other provision in the company's articles
of association.
Under the Companies Law, dividends may be paid by a company only out of its
balance of net profits or out of its net profits for the two years preceding the
distribution of the dividends, whichever is greater, calculated in the manner
prescribed in the Companies Law. Pursuant to the Companies Law, any distribution
of dividends is subject to the proviso that there is no reasonable concern that
the distribution of dividends will prevent the company from meeting its existing
and foreseeable obligations as they become due. Article 133 of our Articles of
Association provides that no dividends shall be paid otherwise than out of our
profits and that any such dividend shall carry no interest.
INTERESTED PARTIES TRANSACTIONS. The Companies Law requires that certain
transactions, actions and arrangements be approved by the audit committee as
well as by our board of directors. In certain circumstances, in addition to
audit committee and board of directors' approval, approval by our shareholders
at a general meeting is also required. Specifically, the approval of our audit
committee, board of directors and shareholders is required with respect to the
following:
(1) a director's terms of service and employment, including, among other
things, grant of exemptions, insurance and indemnification;
(2) exceptional transactions (as defined in the Companies Law) with (i) a
controlling shareholder or his relative, or (ii) another person or
entity in which transaction a controlling shareholder has a personal
interest, including a private placement which is an exceptional
transaction; and
(3) the terms of engagement or employment with a controlling shareholder,
or his relative, who is also an office holder (including a director)
or an employee of the Company.
The approval of our shareholders would be required in addition to the
approval of our board of directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings in our securities of a shareholder
that holds five percent or more of our outstanding share capital or our voting
rights or that will cause any person to become, as a result of the issuance, a
holder of five percent of our outstanding share capital or our voting rights, or
the controlling shareholder in the bank, if such private placement grants twenty
percent or more of the total voting rights in our company prior to its issuance,
and the consideration for it is not in cash or in securities registered for
trading in a stock exchange or is not at the market rate.
For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company, excluding such
ability that stems only from serving as a director or holding another office in
the company (for this purpose, any person holding one half or more of the voting
rights of the company or of the right to appoint one half or more of the
directors of the company or the right to appoint the General Manager of the
company, is presumed to have control of the company); or (ii) the holder of
twenty five percent or more of the voting rights at the general meeting of the
company, if there is no other person holding more than fifty percent of such
rights (for this purpose, two or more holders having a personal interest in the
same transaction shall be deemed to be joint holders).
97
The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders (excluding absentees) voting at the meeting who do not have a
personal interest in the transaction, or (b) the total number of opposing votes
from amongst the shareholders who do not have a personal interest in the
transaction does not exceed one percent of all of our voting power rights
The disclosure provisions of the Companies Law require certain disclosure
to be made to us in connection with interested parties transactions, as follows:
o an office holder (including a director) or a controlling shareholder
must promptly disclose any direct or indirect personal interest
(excluding personal interest that stems only from the personal
interest of a relative and where the transaction is not exceptional)
that he may have, and all material, related information or documents,
in connection with any existing or proposed transaction by us;
o in the event of a private placement that will increase the holdings in
our securities of a shareholder holding more than five percent of our
outstanding share capital or our voting rights, if such private
placement grants twenty percent or more of the total voting rights in
our company prior to its issuance, and the consideration for it is not
in cash or in securities registered for trading in a stock exchange or
is not at the market rate, or that will cause any person to become, as
a result of the issuance, a controlling shareholder such holder or
person must promptly disclose to us any personal interest he may have
in such private placement, including all material, related information
or documents; and
o any of our shareholders voting on any transaction concerning a
controlling shareholder as set forth above must inform us prior to the
voting, or on the proxy card if applicable, of any personal interest
he has in the transaction. The vote of a shareholder who does not
inform us with respect to any such interest shall not be counted.
In addition, a director who has a personal interest in a transaction
(whether with him or with another person), except a transaction that is not
exceptional, may not be present or vote at a meeting of the audit committee or
the board of directors, unless a majority of directors in the audit committee or
the board of directors, as applicable, have a personal interest in the
transaction.
EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS. The
Companies Law describes the fiduciary duty of an office holder (including a
director) as a duty to act in good faith and for the benefit of the company,
including by refraining from actions in which he has a conflict of interest or
that compete with the company's business, refraining from exploiting a business
opportunity of the company in order to gain a benefit for himself or for another
person, and disclosing to the company any information and documents which are
relevant to the company and that were obtained by him in his or her capacity as
an office holder. The Companies Law provides that an office holder (including a
director) owes a duty of care to the company, that requires the office holder,
among other things, to act at a level of competence at which a reasonable office
holder would have acted in the same position and under the same circumstances,
including by adopting reasonable means for obtaining information concerning the
profitability of the act brought for his approval or performed by him in the
scope of his office.
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Under the Companies Law, a company may not exempt an office holder
(including a director) from liability with respect to a breach of his fiduciary
duty, but may exempt in advance an office holder from his liability to the
company, in whole or in part, with respect to a breach of his duty of care,
except with respect to a distribution.
Pursuant to the Companies Law, a company may indemnify an office holder
(including a director) against a monetary liability imposed on him by a court,
including in settlement or arbitration proceedings that were approved by a
court, reasonable litigation costs, including attorneys' fees, incurred due to
an investigation or a proceeding by a competent authority to perform such
investigation or proceeding, and which terminated without the filing of an
indictment and without a monetary liability in place of a criminal proceeding,
or which terminated without the filing of an indictment but with a monetary
liability in place of a criminal proceeding for an offense which does not
require proof of criminal intent and reasonable litigation expenses, including
attorneys' fees, incurred in a civil proceeding or in a criminal proceeding in
which the office holder was found to be innocent or in which he was convicted of
an offense which does not require proof of a criminal intent. The
indemnification of an office holder must be expressly allowed in the articles of
association, under which the company may (i) undertake in advance to indemnify
its office holders (including directors) with respect to events that in the
board of director's opinion can be foreseen, in view of the actual activity of
the company, at the time of giving such undertaking and up to an amount or
specific criterion determined by the board of directors to be reasonable under
the circumstances, which events and which amount or criterion are to be
stipulated in the company's undertaking and with respect to expenses as
specified above; or (ii) provide indemnification retroactively.
Pursuant to the Companies Law, a company may also procure insurance of an
office holder's (including a director's) liability in consequence of an act
performed by him in the scope of his office, in the following cases: (a) a
breach of the duty of care of such office holder, (b) a breach of the fiduciary
duty, provided the office holder acted in good faith and had reasonable grounds
to believe that such act would not be detrimental to the company, or (c) a
monetary liability imposed on the office holder for the benefit of another
person.
A company may not indemnify an office holder (including a director)
against, nor enter into an insurance contract which would provide an office
holder (including a director) coverage for, nor exempt an office holder
(including a director) from:
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o a breach by the office holder of his fiduciary duty, except with
respect to indemnification against and insurance for a breach of
fiduciary duty where the office holder acted in good faith and had a
reasonable basis to believe that the act would not be detrimental to
the company;
o a breach by the office holder of his duty of care if such breach was
done intentionally or recklessly, except in the case of negligence;
o any act or omission done with the intent to derive an illegal personal
gain; or
o any fine or penalty levied against the office holder as a result of a
criminal offense.
In addition, under the Companies Law, exemption of, indemnification of, and
procurement of insurance coverage for a company's office holders, must be
approved by the company's audit committee and board of directors, and, with
regard to directors also, by the company's shareholders.
The provisions of the Companies Law described above include certain
amendments enacted in the Law during 2005. Our Articles of Association allow us
to exempt office holders (including directors), to indemnify them and to procure
insurance for them, in accordance with the provisions of the Companies Law, as
enacted prior to the above amendments, but require the additional approval of
our shareholders even with regard to exemption and undertaking to indemnify to
be granted to our office holders who are not directors.
C. MATERIAL CONTRACTS
The following is a summary of each material contract, other than contracts
entered into in the ordinary course of business and other than the run-off plan
and the special line of credit (which are described in "Item 4. Business
Overview - Proposed Sale of the Bank and Extension of Special Line of Credit by
Bank of Israel" and "Business Overview - Adoption of Run-Off Plan and Amendment
of the Special Line of Credit" above), and the indemnification agreement for
directors and senior officers (which is described in "Item 6. Compensation of
Directors and Officers") to which we are a party, for the two years preceding
publication of this annual report.
o Lease Agreement - On June 26, 2003, we signed a lease for new offices,
located at 82 Menachem Begin Road, Tel Aviv, Israel 67138. We lease
approximately 12,000 square feet, plus parking spaces and additional
storage space. We have recently exercised an option to extend the
lease until August 31, 2009. We pay rent of approximately $11,000 per
month for office space and approximately $4,800 more per month for
parking and storage space. In addition, we pay maintenance, municipal
property tax and other related expenses. The rental amounts are linked
to the cost-of-living index. the above rental charges will increase by
5%, plus any cost-of-living increases, beginning as of September 1,
2006.
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o Perpetual Deposit Agreement - Pursuant to agreements (by way of
exchange of letters) that were entered into at various times between
us and the Israeli Treasury, we deposited with the Israeli Treasury
the capital from the offerings of our preferred shares (C, CC, CC1, D
and DD). The total principal amount of perpetual deposits with the
Treasury was NIS 828.2 million, as of December 31, 2005, as compared
with NIS 806.5 million, as of December 31, 2004. Pursuant to these
agreements, we are entitled, regarding the amounts so deposited, to
receive dollar-interest at the annual rate of 7.5% of the dollar value
of the deposits (as of the date of their deposit), which will be paid
net to us by the Treasury, on the dates that we will declare the
payment of a dividend for the above preferred shares, in such manner
that after the payment of taxes and other charges, the net amount of
interest that we receive from the Treasury will be at the above rate
of 7.5%.
The deposit agreements do not expressly stipulate how the interest on
the perpetual deposits should be handled during periods in which the
Bank is prevented from distributing dividends on these preferred
shares, and whether the interest will accrue and be paid when the Bank
pays the accrued preferred dividends in arrears or upon liquidation.
See Note 15 to our financial statements in Item 17 of this annual
report for details on the cessation of dividend distribution and the
matter of the accrued interest on the perpetual deposits with the
Israeli Treasury.
The principal amounts that we so deposited will be returned to us by
the Israeli Treasury only upon our liquidation or for the purpose of
redemption of preferred D and DD shares (which were offered as
redeemable shares), with the principal amounts being linked to the
dollar from the date of their deposit with the Treasury and until
October 1987, and from October 1, 1987 until the date of their
repayment to us, linked to the Consumer Price Index or the dollar,
whichever is higher. The deposit agreements establish that the
Treasury shall not have a right of set-off as to amounts that we will
receive regarding the deposits thereby deposited.
o Computer Outsourcing Agreement - Pursuant to an agreement dated
December 23, 2003 between us and NESS A.T. Ltd. ("NESS"), NESS has
undertaken to provide us with IT Outsourcing services, including
ongoing management and operation of our Information Systems,
maintenance and operation of hardware, computers, peripheral
equipment, communications and software infrastructure (i.e. Databases,
Operations Systems, etc.), application operation and maintenance,
modification and adaptation of our applications, information security
services etc.
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The agreement is for an initial period of three years beginning from
January 1, 2004 and we recently extended it for an additional two
years. We are entitled to terminate the agreement by a prior notice of
a few months. In 2005, the cost of the service was NIS 3.3 million and
in 2006 it will amount to NIS 2.4 million. In 2007 and 2008 the cost
of the service for each year will amount to NIS 2.3 million. The above
service cost amounts are linked half to the Israeli consumer price
index and half to exchange rate of the U.S. Dollar.
During the term of the agreement, we are entitled to order from NESS
modifications to our information systems and/or development of new
applications and for such purpose, we have available to us a "bank of
hours".
o Special Collective Agreement With Employees - On December 26, 2002, a
collective agreement was signed between us, the General Federation of
Labor and our employee committee, which applies to those of our
workers to which collective agreements apply (and not to those who are
employed on personal employment contracts). The contract was for a
three-year period, and can be extended for an additional year. The
contract established, among other things: 1) the right of management
to terminate the employment of employees within the framework of the
reduction of our banking services, and the termination procedure; 2)
the special benefits and payments to which an employee is entitled if
his employment is terminated, including additional severance payments
beyond those set by law and the conversion of the right to additional
severance (for employees with particular seniority and with a
particular number of years until their reaching retirement age) into
early old-age pension rights; and 3) certain reductions to be made in
the salaries of the employees and the related benefits to which they
are entitled.
On March 14, 2005, the above parties signed a new collective agreement
which extended the term of the above agreement (dated December 26,
2002) until the termination date of our run-off plan (including any
modification or extension to the plan, approved by the government) or
until December 31, 2007, whichever is first. This new agreement also
established and clarified that employees who under the original
agreement are entitled to an early old-age pension due to the
termination of their employment, will be entitled to the pension until
they reach the age from which they will be entitled -in light of the
reform which took place in the pension field after the signing of the
original agreement- to receive a regular old-age pension from the
pension fund in which they are members, and it also established that
some of the concessions to which the employees agreed in the original
agreement and which had a time limit, will continue to apply also
during the period of the new agreement.
We have recorded appropriate provisions in our financial statements in
respect of these agreements. These agreements were approved by the
Ministry of Finance Commissioner of Wages.
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o Kibbutz Debt Agreement - Following the difficulties experienced by the
kibbutzim in Israel and the organizations affiliated with them during
the 1980's, several agreements were entered into between the years
1989-1999 in which the parties were the kibbutz movements, the
creditor-banks and the State of Israel.
The purpose of these agreements was to reorganize the debt of the
kibbutzim and the organizations affiliated with them and to conform it
to their actual repayment ability. The agreements include a detailed
and complex apparatus to handle these debts. Within this framework, it
was established that the kibbutzim that were defined as assisted
kibbutzim (those requiring assistance) shall be entitled to refunds of
certain interest differentials for unpaid credit which they were
granted by the banks who were parties to the agreement, to a waiver of
part of these credits and to long-term rescheduling of the remainder.
The government financed 35% of the waivers and deposited funds with
the banks to serve as a source for the rescheduling. Kibbutzim that
were defined as owners of real estate having the potential for
development, were required pursuant to these agreements to assign
their rights in the land in consideration for a portion of the waivers
that were approved for them.
See Note 4 to our financial statements in Item 17 of this annual
report for further details of the Kibbutz debt agreement.
o Credit to the Israel Electric Corporation Ltd. - Pursuant to a series
of agreements entered into at various times during the 1990's, we
granted long-term credits to the Israel Electric Corporation Ltd. in a
total amount of approximately 1.5 billion U.S. dollars. These credits
were granted from deposits which were deposited with us by the State
of Israel, in identical amounts and having identical maturity dates as
the credits. These credits are fully guaranteed (principal and
interest)_by the State of Israel. The outstanding balance of these
credits as of December 31, 2005 was approximately 1.39 billion U.S.
dollars, comprising approximately 83% of the total credit to the
public at that date.
D. EXCHANGE CONTROLS
There are no Israeli government laws, decrees or regulations that restrict
or affect our export or import of capital or the remittance of dividends,
interest or other payments to non-resident holders of our securities, including
the availability of cash and cash equivalents for use by us, except or otherwise
as set forth under "Item 10 - Foreign Ownership" above, or under "Item 10.
Additional Information - Taxation." below.
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E. TAXATION
ISRAELI TAXATION
The following is general information regarding Israeli tax laws to which
U.S. and other non-Israeli shareholders may be subject. It does not cover all
possible tax considerations and therefore you should not rely on this
information as legal or professional tax advice. You should consult your own tax
advisor as to the particular tax consequences of an investment in our shares and
notes including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws. The discussion is based on Israeli tax
laws in force as of June 30, 2006.
To the extent that the discussion is based on legislation yet to be
judicially or administratively interpreted, we cannot assure you that the views
we express herein will accord with any such interpretation in the future.
Under current Israeli law, individual or corporate shareholders or
noteholders that are foreign residents and that do not maintain a permanent
establishment in Israel are exempt from capital gains tax on the sale (including
redemption) of traded securities of Israeli companies. Subject to the following
paragraph, upon the sale of unlisted securities, an individual shareholder or
noteholder is subject to a 20% tax rate, and a corporate shareholder or
noteholder is subject to a 25% tax, on any capital gain accrued after January 1,
2003.
Foreign residents are exempt from tax on capital gains on the sale of
securities (traded or untraded) (provided the company does not hold rights in
Israeli real estate) acquired between July 1, 2005 and December 31, 2008 subject
to certain conditions, the principal ones being that: (a) the capital gain is
not attributable to a permanent establishment of the seller in Israel; (b) the
seller has been a resident of a country having a tax treaty with Israel for ten
years preceding the date of acquisition; and (c) the securities were not
purchased from a relative.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.
Pursuant to the convention between the Government of the United States of
America and the Government of Israel with respect to taxes on income, which we
refer to as the treaty or the U.S.-Israel tax treaty, the sale, exchange or
disposition of our shares or notes by a person who qualifies as a resident of
the United States under the treaty and who is entitled to claim the benefits
afforded to him by the treaty, will generally not be subject to Israeli capital
gains tax. This exemption does not apply to the sale of shares by a person who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12-month period preceding the sale,
exchange or disposition, subject to certain conditions. A sale, exchange or
disposition of our shares by a U.S. resident qualified under the treaty, who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company at any time during the preceding 12-month period would be
subject to Israeli tax, to the extent applicable; however, under the treaty,
this U.S. resident would be permitted to claim a credit for these taxes against
U.S. income tax due with respect to the sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits in accordance
with tax treaties.
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Non-residents of Israel are subject to income tax on passive income accrued
or derived from sources in Israel, such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel.
On distributions of dividends other than bonus shares (stock dividends) to
non-residents of Israel, we generally withhold at source income tax at a rate of
20%, unless a different rate applies under a treaty between Israel and the
shareholder's country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our shares who is a resident of the
United States will be 25% or 12.5% if certain conditions are met, including,
inter alia that the holder is a corporation which holds, directly or indirectly,
shares representing 10% or more of the voting power in our company during any
part of the 12-month period preceding the date of payment of the dividend.
On payments of interest on listed notes to non-residents of Israel, we
generally withhold at source income tax at a rate of 20% when the noteholder is
an individual, the note was issued on or after May 8, 2000 and certain further
conditions are met; at a rate of 35% when the noteholder is an individual and
the note was issued before May 8, 2000; and at a rate of 25% when the noteholder
is a corporation, in each case unless a different rate applies under a treaty
between Israel and the noteholder's country of residence. Under the U.S.-Israel
tax treaty, the maximum tax on interest paid to a noteholder who is a resident
of the United States will be 17.5%, or 10% if the interest is derived from a
loan granted by a bank, savings institution, or insurance company or the like.
Alternatively, the noteholder may elect under the treaty to pay tax at the full
rate on the net profit deriving from the interest payment although this is
generally subject to filing a tax return in Israel.
U.S. TAXATION
The following is a summary of certain U.S. federal income tax consequences
applicable to the acquisition, ownership and disposition of our shares and notes
by a "U.S. Holder." This summary is based upon the Internal Revenue Code of
1986, as amended, which we refer to as the Code; Treasury Regulations; Internal
Revenue Service rulings; the U.S.-Israel tax treaty; and judicial decisions, all
as now in effect. All of these are subject to change, possibly with retroactive
effect, or different interpretations. For purposes of this summary, "U.S.
Holder" means the beneficial holder of a share or a note who or that, for U.S.
federal income tax purposes, is:
o an individual citizen or resident alien of the United States;
o a corporation, partnership or other entity treated as such formed in
or under the laws of the United States or any political subdivision of
the United States;
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
105
o a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or
more "U.S. persons" (within the meaning of the Code) have the
authority to control all substantial decisions of the trust, or if a
valid election is in effect to be treated as a U.S. person.
This summary does not cover all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax
provisions of the Code) or to investors that may be subject to special treatment
under U.S. federal income tax law, including:
o dealers in stocks, securities or currencies;
o securities traders that use a mark-to-market accounting method;
o banks and other financial institutions or financial services entities;
o insurance companies;
o tax-exempt organizations;
o persons holding our shares or notes as part of a hedging or conversion
transaction or a straddle;
o persons who or that are not U.S. Holders;
o persons whose functional currency is not the U.S. dollar; and
o direct, indirect or constructive owners of 10% or more of our
outstanding voting shares.
The summary also does not discuss any aspect of state, local or foreign
law, or U.S. federal estate and gift tax law as applicable to U.S. Holders. In
addition, it is limited to U.S. Holders who or that acquire and hold our shares
or notes as "capital assets" within the meaning of the Code - generally,
property held for investment and, in the case of our notes, who or that acquired
notes in connection with their original issuance. This discussion also does not
consider the tax treatment of persons or partnerships who or that hold our
shares or notes through a partnership or other "pass-through" entity.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR SHARES OR NOTES.
A U.S. Holder generally will be required to include in gross income, as
ordinary dividend income, the amount of any distributions paid on our shares,
including the amount of any Israeli taxes withheld, to the extent that those
distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
earnings and profits will be applied against and will reduce the U.S. Holder's
tax basis in our shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those shares. Our dividends will not
qualify for the dividends-received deduction applicable in certain cases to
dividends received by U.S. corporations.
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In general, a U.S. Holder generally will be required to include in gross
income, as ordinary interest income, the amount of stated interest, including
the amount of any Israeli taxes withheld, on our notes as that interest is
received or accrued under that U.S. Holder's usual method of tax accounting.
Dividends or interest paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in the income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend or interest
is includible in the income of the U.S. Holder to the date that payment is
converted into U.S. dollars will be treated as ordinary income or loss.
Any dividends or interest we pay to a U.S. Holder with respect to our
shares or notes generally will be treated as foreign source income for U.S.
foreign tax credit purposes. Subject to the limitations set forth in the Code,
as modified by the Treaty, U.S. Holders may elect to claim a foreign tax credit
against their U.S. federal tax liability for Israeli income tax withheld from
dividends or interest received in respect of our shares or notes. These
limitations include, among others, rules that limit foreign tax credits
allowable with respect to specific classes of income to the U.S. federal income
taxes otherwise payable with respect to each such class of income. The total
amount of foreign tax credits allowable to a U.S. Holder in any year cannot
exceed the regular U.S. tax liability for the year attributable to that U.S.
Holder's total foreign source taxable income (determined under the Code and, as
applicable, the U.S.-Israel tax treaty and other income tax conventions to which
the United States is a party). in certain cases, a U.S. Holder will be denied a
foreign tax credit with respect to Israeli income tax withheld from dividends
and interest received in respect of our shares and notes if the U.S. Holder has
not held those shares for a minimum period or to the extent the U.S. Holder is
under an obligation to make certain related payments with respect to
substantially similar or related property. U.S. Holders who or that do not elect
to claim a foreign tax credit may instead claim a deduction for Israeli income
tax withheld, but only for a tax year in which the U.S. Holder does the same
with respect to all foreign income taxes.
Upon a sale or other disposition of our shares or notes, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition (less amounts attributable to accrued but
unpaid dividends or interest, if any, which will be taxed as dividends or
interest, respectively) and the holder's adjusted tax basis in the shares or
notes sold or disposed of. A U.S. Holder using the cash method of accounting
must calculate the U.S. dollar value of the proceeds received on the sale date
as of the date that the sale settles, while a U.S. Holder using the accrual
method of accounting is required to calculate the value of the proceeds of the
sale as of the "trade date," unless the U.S. Holder has elected to use the
settlement date to determine the proceeds of sale. Gain or loss upon the
disposition of our shares or notes will be treated as long-term if, at the time
of the sale or disposition, the shares or notes disposed of were held for more
than one year. Long-term capital gains realized by individual U.S. Holders are
generally subject to a lower marginal U.S. federal income tax rate than ordinary
income. The deductibility of capital losses by a U.S. Holder is subject to
limitations.
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In general, any gain recognized by a U.S. Holder on the sale or other
disposition of our shares or notes will be U.S. source income for U.S. foreign
tax credit purposes. Pursuant to the treaty, however, gain from the sale or
other disposition of our shares by a holder who is a U.S. resident for treaty
purposes and who sells those shares within Israel may be treated as foreign
source income for U.S. foreign tax credit purposes. A loss on the sale or other
disposition of our shares may have to be allocated against foreign source income
for those purposes.
Special U.S. federal income tax rules apply to U.S. Holders owning shares
of a so-called "passive foreign investment company," or "PFIC." A foreign
corporation will be considered a PFIC for any taxable year in which either 75%
or more of its gross income consists of certain types of passive income, or 50%
or more of the average value of its assets consists of assets that generate
those types of passive income. These tests are applied annually, but once
classified as a PFIC a foreign corporation remains one with respect to its U.S.
Holders except to the extent that those U.S. Holders elect to purge their shares
of that classification, with a possible tax cost. If we were classified as a
PFIC, a U.S. Holder could be subject to increased tax liability, possibly
including an interest charge, upon the sale or other disposition of our shares
or upon the receipt of amounts treated as "excess distributions." Although
several elections may be available to alleviate that potential increased tax
liability, there can be no assurance that the conditions necessary for those
elections to be made with respect to our shares will be satisfied.
A U.S. Holder of our shares or notes may be subject to "backup withholding"
with respect to certain "reportable payments," including dividend payments and,
under certain circumstances, proceeds from the sale or disposition of our shares
or notes. These backup withholding rules apply if the U.S. Holder, among other
things:
o fails to furnish a social security number or other taxpayer
identification number (a "TIN") certified under penalty of perjury
within a reasonable time after the request for the TIN;
o furnishes an incorrect TIN;
o fails to report properly interest or dividends; or
o under certain circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is the
correct number and that such holder is not subject to backup
withholding.
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A U.S. Holder that does not provide us with its correct TIN also may be
subject to penalties imposed by the Internal Revenue Service (the "IRS"). Any
amount withheld from a payment to a U.S. Holder under the backup withholding
rules is creditable against the U.S. Holder's federal income tax liability,
provided that the required information is furnished to the IRS. Backup
withholding will not apply with respect to payments made to certain U.S.
Holders, including corporations and tax-exempt organizations, provided their
exemptions from backup withholding are properly established. We are required to
report to U.S. Holders and to the IRS the amount of any "reportable payments"
for each calendar year and the amount of tax withheld, if any, with respect to
these payments.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. AVAILABILITY OF DOCUMENTS
All documents referred to in this annual report may be inspected at our
offices at 82 Menachem Begin Road, Tel Aviv, Israel. Any reports and other
information that we file electronically with the U.S. Securities and Exchange
Commission may be found at WWW.SEC.GOV. They can also be inspected without
charge and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1580, 100 F Street,
N.E., Washington, D.C. 20549.
I. SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK
Our activities involve the taking of financial risks. The main financial
risks that we face are market risks and liquidity risks, which are accompanied
by operating and legal risks.
Our policy for managing our assets and liabilities is currently designed to
keep the linkage basis risks and interest risks within the exposure boundaries
established by the board of directors. Our financial risks committee, which
includes our General Manager and members of management, deliberates on the
implementation of this policy.
Details of the main areas of exposure, the limitations inherent therein,
and the manner and dates for reporting relating thereto, are presented below:
LINKAGE BASE EXPOSURE - The exposure to linkage base risk is measured by the
difference between the assets and liabilities (including the effect of forward
transactions) for each linkage base.
Similar to the entire Israeli banking industry, we have three main linkage
segments: CPI-linked, foreign currency denominated and linked, and non-linked
shekel. Linkage base exposure relates to the exposure to changes in the rate of
inflation as well as to changes in the exchange rates of the different
currencies.
For each of the aforementioned linkage segments, maximum permissible
surplus and deficit levels have been established. These limitations were
established on the basis of the composition of our capital and our current
activities.
The report on linkage basis exposure is included in the quarterly report on
our activities, which is reviewed by our financial risks committee and submitted
to our board of directors.
Beginning in the second half of 2002 we experienced significant changes in
the surplus/deficit of assets by linkage bases as a result of the withdrawal by
the public of its deposits with us. Because the special line of credit from the
Bank of Israel is granted in non-linked shekels, our ability to manage our
assets and liabilities was reduced.
The following table presents details of the excess of assets over
liabilities (or when presented in parentheses, excess of liabilities over
assets) classified by linkage segment, including off-balance sheet items:
IN MILLIONS OF NIS
FOREIGN
CURRENCY
NON-LINKED CPI-LINKED DENOMINATED/ NON-MONETARY
SHEKEL SEGMENT SEGMENT (*) LINKED ITEMS TOTAL
-------------- ----------- ------ ----- -----
December 31, 2005 (505.1) 956.4 13.6 62.5 527.4
December 31, 2004 (435.8) 863.6 20.0 60.5 508.3
* Including a perpetual deposit with the Treasury (as of December 31, 2005
-in an amount equal to NIS 828.2 million and as of December 31, 2004 -
806.5 million).
110
An examination that was made of the effect on the Bank's capital of a
change of 1% in the CPI or in the exchange rate indicates as follows:
An increase of 1% in the CPI - The addition to capital amounts to NIS 9.5
million. A decrease in the CPI at the same rate will result in a decrease in
capital in the same amount.
An increase of 1% in the representative exchange rate of a currency basket
in relation to the shekel (and assuming that all the currencies the Bank uses
increase at the same rate) will result in an increase in the Bank's capital in
the amount of NIS 140 thousand. A decrease of the same rate in the
representative exchange rate of a currency basket (appreciation of the shekel)
will result in a decrease in the Bank's capital in the same amount.
INTEREST EXPOSURE - The interest risk derives from the effect of future changes
in interest rates on the present value of our assets and liabilities. Such
changes may lead to erosion of our capital and profits. In order to reduce our
exposure to interest rate fluctuations, it is our practice, to coordinate, to
the extent possible, the dates of interest rate changes on assets with the
interest rate changes on liabilities.
Our exposure to interest rate risks is measured by the difference in the average
period to maturity (duration) in each linkage segment. Our board of directors
establishes the maximum allowable duration for each linkage segment. Until 2004
the frequency of our compliance reporting with such limitations was quarterly.
Following the decline in the Bank's volume of activity, the frequency of the
aforementioned compliance reporting was changed to twice a year (semi-annual
report).
The following table sets forth details relating to the average duration in
the various linkage segments (in years):
FOREIGN CURRENCY AND
FOREIGN CURRENCY LINKED
NON-LINKED SHEKEL SEGMENT CPI LINKED SEGMENT SEGMENT
------------------- ------------------- -----------------
DECEMBER 31
----------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Total assets 0.11 0.12 3.45 3.61 6.75 6.87
Total liabilities 0.08 0.09 3.29 3.50 6.92 6.90
Difference in years 0.03 0.03 0.16 0.11 (0.17) (0.03)
Our interest risk exists mainly in the CPI linked segment, since most of
the assets and liabilities in this segment are long-term and at a fixed interest
rate. As of December 31, 2005, the average duration of assets in this segment is
3.45 years while the average duration of liabilities is 3.29 years. A higher
average duration of assets creates exposure to increases in interest rates in
this segment. The said exposure to interest risk is within the limits determined
by our Board of Directors.
In the non-linked shekel segment, the average duration difference is
minimal and results from a short average duration of both assets and
liabilities, due to the fact that most of the assets and liabilities are at a
variable rate of interest.
In the foreign currency segment, the average duration is affected by a
considerable amount of credit that has low risk characteristics, and which
carries a fixed rate of interest. The average duration of liabilities in this
segment is higher by 0.17 years than the average duration of assets.
The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2005. The table includes the fair value of our
assets and liabilities, calculated as explained below:.
111
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2005
Reported amounts
DECEMBER 31, 2005
---------------------------------------------------------------------------------------------------------------------------------------
ON FROM FROM FROM FROM FROM WITHOUT
DEMAND ONE TO THREE TO ONE TO THREE TO FROM TEN TO OVER FIXED INTERNAL
AND UP TO THREE TWELVE THREE FIVE FIVE TO TWENTY TWENTY MATURITY FAIR RATE OF AVERAGE
ONE MONTH MONTHS MONTHS YEARS YEARS TEN YEARS YEARS YEARS DATE * TOTAL VALUE RETURN DURATION
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NIS millions % YEARS
------------------------------------------------------------------------------------------------------------------- ------- -------
ISRAELI CURRENCY - UNLINKED
TOTAL ASSETS 424.7 0.2 21.6 4.3 - - - - - 450.8 450.4 6.51 0.11
Total liabilities 1,121.2 0.7 14.7 - - - - - 0.1 1,136.7 1,136.6 4.54 0.08
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
DIFFERENCE (696.5) (0.5) 6.9 4.3 - - - - (0.1) (685.9) (686.2) 1.97 0.03
Effect of future
transactions 151.0 10.3 19.5 - - - - - - 180.8
Exposure to interest rate
fluctuations (545.5) 9.8 26.4 4.3 - - - - (0.1) (505.1)
Segment cumulative exposure (545.5) (535.7) (509.3) (505.0) (505.0) (505.0) (505.0) (505.0) (505.1) (505.1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 25.0 19.9 110.7 223.6 112.9 114.2 39.5 - 828.2 1,474.0 1,474.6 5.20 3.45
Total liabilities 15.2 21.3 97.9 133.1 88.0 115.3 1.9 - - 472.7 459.8 2.68 3.29
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 9.8 (1.4) 12.8 90.5 24.9 (1.1) 37.6 - 828.2 1,001.3 1,014.8 2.52 0.16
Effect of future
transactions (15.1) (10.3) (19.5) - - - - - - (44.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations (5.3) (11.7) (6.7) 90.5 24.9 (1.1) 37.6 - 828.2 956.4
Segment cumulative exposure (5.3) (17.0) (23.7) 66.8 91.7 90.6 128.2 128.2 956.4 956.4
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 123.0 193.4 542.6 1,158.7 989.3 1,917.3 1,807.4 - - 6,731.7 6,721.4 7.13 6.75
Total liabilities 12.0 172.4 510.6 1,162.8 993.0 1,918.5 1,812.9 - - 6,582.2 6,591.0 7.10 6.92
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 111.0 21.0 32.0 (4.1) (3.7) (1.2) (5.5) - - 149.5 130.4 0.03 (0.17)
Effect of future
transactions (135.9) - - - - - - - - (135.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations (24.9) 21.0 32.0 (4.1) (3.7) (1.2) (5.5) - - 13.6
Segment cumulative exposure (24.9) (3.9) 28.1 24.0 20.3 19.1 13.6 13.6 13.6 13.6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 572.7 213.5 674.9 1,386.6 1,102.2 2,031.5 1,846.9 - 828.2 8,656.5 8,646.4 6.77 5.84
Total liabilities 1,148.4 194.4 623.2 1,295.9 1,081.0 2,033.8 1,814.8 - 0.1 8,191.6 8,187.4 6.49 5.76
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference (575.7) 19.1 51.7 90.7 21.2 (2.3) 32.1 - 828.1 464.9 459.0 0.28 0.08
Exposure to interest rate
fluctuations (575.7) 19.1 51.7 90.7 21.2 (2.3) 32.1 - 828.1 464.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative exposure (575.7) (556.6) (504.9) (414.2) (393.0) (395.3) (363.2) (363.2) 464.9 464.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
General notes -
1. The data classified according to maturity date, presented above, represent
the present value of future flows, discounted at the internal rate of
return, for each balance sheet item. Such discounted future flows include
interest, which will accrue until the earlier of the maturity date or the
date of change in the interest rate.
2. The effect of hedging transactions is included in the total of assets or
liabilities, as the case may be.
3. The table does not include the effect of early repayments.
* The amounts stated in the "without fixed maturity date" column are the
amounts as stated in the balance sheet.
** Including shares, which are stated in the "without fixed maturity date"
column.
112
The fair value of our assets and liabilities as presented in the table
above was calculated in accordance with the following principles,
assumptions and methods:
o Since most of our assets and liabilities are not traded on active
markets, and thus market quotations are not available, the fair value
is arrived at by using accepted pricing models, such as the present
value of future cash flows discounted at interest rates, which reflect
the level of risk inherent in the assets and liabilities. Estimating
the fair value by way of determining the future cash flows and setting
the discount interest rate is subjective. Therefore, regarding most of
the assets and liabilities, the fair value estimate is not necessarily
an indication of their realizable value on balance sheet date. The
estimate of the fair value was made at interest rates prevailing at
balance sheet date and did not take interest rate fluctuations into
consideration. The use of other interest rates would result in
significantly different fair values. This is especially true in regard
to non-interest bearing assets and liabilities or those bearing fixed
interest rates. Furthermore, commissions receivable or payable
resulting from the business activity, were not taken into account,
neither was the tax effect considered. In view of the above, it should
be emphasized, that the data contained in the above table should not
be considered as an indication of our value as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques, which may be applied in arriving at fair values, caution
should be used in comparing the fair values arrived at by different
banks.
o As mentioned in Item 4, the Bank of Israel has granted us a special
line of credit, bearing interest equal to the Bank of Israel rate of
interest. The discount rate of the cash flows of our deposits is set
by us, for purposes of the fair value of the liabilities, on the basis
of the said interest rate.
o The fair value of deposits with banks and credit to the Government is
arrived at by use of the method of discounting future cash flows at
interest rates used by us in similar transactions proximate to balance
sheet date.
o Marketable securities are valued at market value. Shares for which no
market value is readily available are stated at cost.
o The fair value of the balance of credit to the public was arrived at
by using the method of the present value of future cash flows
discounted at an appropriate interest rate. The balance of such credit
was segmented into several categories. The future aggregate cash flows
of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level
of risk inherent in the credit. Generally, such interest rate was set
on the basis of the rate at which similar transactions were effected
by us proximate to balance sheet date. No additional disclosure is
given regarding the range of fair values in relation to the range of
discount rate values, which in our management's opinion, might reflect
the level of risk inherent in the debt. For short-term balances of
credit (for an initial period of up to three months), or balances at
variable market interest rates (prime, Libor, etc.), which change at
intervals of up to three months, their stated value is considered to
be their fair value.
113
o The fair value of problematic debts was calculated by using discount
rates reflecting their inherent high credit risk. In any event, such
discount rates were not less than the highest interest rate used by us
in our operations proximate to balance sheet date. The future cash
flows of problematic debts were calculated net of the specific
allowances for doubtful debts. The general and supplementary
allowances for doubtful debts in an aggregate amount of NIS 57.6
million (as of December 31, 2005), were not deducted from the balance
of credit to the public for cash flows purposes in assessing the fair
value.
o Regarding perpetual deposits with the Israeli Treasury, the accepted
pricing models cannot be applied to such deposits. Therefore, their
book value is considered to be their fair value. See "Item 3.D.- Risk
Factors" above for details of the terms of these deposits.
o The fair value of deposits, debentures and capital notes was arrived
at by the method of discounting the future cash flows at the interest
rate paid by us in obtaining similar deposits, or the interest rate we
would expect to pay on similar debentures and capital notes if they
were issued by us, as of balance sheet date.
o Regarding deposits from the Bank of Israel, the balance in the balance
sheet is a close approximation of the fair value since the deposits
are at variable rates of interest.
o Regarding financial instruments (other than marketable financial
instruments) having an initial period not exceeding three months and
bearing variable market interest rates, the amount stated in the
balance sheet represents an approximation of the fair value subject to
changes in credit risks and our interest margins in transactions at
variable interest rates.
In conjunction with the limitations on the rate of exposure to changes in
interest rates, limitations were also established with respect to the change in
the calculated value of the Bank's assets and liabilities in the event of a 1%
change in interest in comparison with the accepted interest rates as at the date
of the report. The aforementioned calculation is based on the accepted
calculations for measuring the average duration of assets, meaning the
discounting of future cash flows, including interest that will accrue until
maturity, or until the date the interest rate changes, whichever is earlier. The
aforementioned calculation of the change in the value of assets and liabilities
relates only in respect of a given change in interest rates, without effects of
the aforementioned change in interest on other factors (such as the forecasted
rate of inflation, etc.).
114
Presented below is the effect of the aforementioned changes on the
calculated value of the assets and liabilities as of December 31, 2005 (in NIS
millions):
SEGMENT INCREASE OF 1% IN INTEREST RATE DECREASE OF 1% IN INTEREST RATE
- ------- ------------------------------------ ----------------------------------
DECREASE IN DECREASE IN INCREASE IN INCREASE IN
VALUE OF VALUE OF NET DECREASE VALUE OF VALUE OF NET INCREASE
ASSETS LIABILITIES IN VALUE ASSETS LIABILITIES IN VALUE
------ ------ ---- ----- ----- ----
CPI-linked (23.7) (12.1) (11.6) 25.5 12.8 12.7
Foreign currency
denominated or linked (511.0) (510.1) (0.9) 568.3 568.0 0.3
It should be noted that the aforementioned calculation measures only the
effect of the change in interest and does not relate to credit risks. The change
in the calculated value of assets and liabilities in foreign currency as a
result of a given change of 1% is high, as it is affected mainly by long-term
credit in foreign currency from a deposit of the State and guaranteed by the
State. The change affects both the assets and the liabilities and, as shown
above, the net differences are small.
The rate of the net changes in all the linkage segments is low in
comparison with the volume of assets of each segment.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of our policy for asset and liability
management, we conduct transactions in financial derivatives. As a result of the
events that occurred in the second half of 2002, our activities in financial
instruments were reduced to a minimum and at present they are mainly limited to
forward transactions, swap transactions and foreign currency option purchases
for the purpose of closing our position exposure.
The risk to which we are exposed due to the derivative financial
instruments is not material to our financial position.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
115
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
CESSATION OF DIVIDEND DISTRIBUTION.
Our issued and outstanding share capital includes, among others, our
Cumulative Participating Preference C shares, CC shares and CC1 shares and our
Cumulative Redeemable Preference D shares and DD shares. The C, CC and CC1
shares entitle the holders thereof to a cumulative preferred dividend of 6% per
annum plus a participating dividend. The D and DD shares entitle the holders
thereof to a cumulative preferred dividend of 7.5% per annum.
According to Article 6 of our articles of association, the C, CC, CC1, D
and DD shares rank first (pari passu with each other) and prior to all of our
other classes of shares, in any distribution of dividends, provided, however,
that if there are arrears of any fixed cumulative preferential dividends, then
according to Article 130 of our articles of association, our board of directors
is bound to recommend to the general meeting of shareholders the payment of
arrears prior to any other distribution. The payment of cumulative preferential
dividends to the holders of our ordinary preferred shares, totaling
approximately $20 per annum, is prior to the dividend on our ordinary A and B
shares.
According to Article 7 of our articles of association, upon liquidation of
the bank, the assets available for distribution to the shareholders will be
first distributed to pay cumulative preferred dividends in arrears to all
classes of preference shares, i.e. the C,CC,CC1,D and DD shares.
According to the Companies Law - 1999 (Israel), a company may distribute
dividends only from its profits (adjusted to the changes in the CPI). Under
certain circumstances, however, a company may seek court approval to pay
dividends in the absence of profits. Under the Directives of Proper Banking
Procedures, the Supervisor of Banks has prohibited banking corporations from
distributing dividends, without his prior approval, if, among other things, such
banking corporations have losses in one or more of the last three calendar years
or if the aggregate results of three quarters ending in the interim period for
which the last interim financial statements were issued reflect a loss.
We ended the years 2002, 2003 and 2005 with losses and in the year 2004
with a modest profit and, beginning in the first quarter of 2002, we have not
had profits from which we could distribute dividends. The last quarterly
dividend that we paid in respect of our C shares, our CC shares, our CC1 shares,
our D shares and our DD shares was the dividend for the second quarter of 2002,
which payment of dividends was made with court approval and approval of the
Supervisor of Banks.
The proceeds of the issuance of our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, were deposited by us with the Ministry
of Finance of the State of Israel pursuant to deposit agreements. In our
financial statements, we refer to our deposits with the Ministry of Finance as
the perpetual deposit. According to the deposit agreements, our perpetual
deposit with the Ministry of Finance earns interest at a rate of 7.5% per annum
(plus differentials of linkage to the U.S. dollar), which interest must be paid
by the Ministry of Finance to us on the payment dates for the dividends to be
paid by us on our C shares, our CC shares, our CC1 shares, our D shares and our
DD shares.
116
When we ceased making dividend payments on our C shares, our CC shares, our
CC1 shares, our D shares and our DD shares, the Ministry of Finance also ceased
making the interest payments on the perpetual deposits to us. The deposit
agreements do not expressly stipulate how the interest on our perpetual deposits
with the Ministry of Finance should be handled during periods in which we are
prevented from distributing dividends on our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, and whether the interest will accrue and
be paid if we ultimately pay accrued dividends on such shares in arrears, or
upon liquidation.
Immediately prior to the publication of our financial statements for the
third quarter of 2002, our board of directors, assisted by legal advice, decided
not to distribute, for the time being, a dividend for the third quarter of 2002.
The decision was reached after considering, among other things, the following
issues:
o our results of operations of the third quarter of 2002 and the
liquidity crisis which affected us during the third quarter of 2002;
o our lack of distributable profits (as required by the Companies Law);
o the prohibition on the distribution of dividends according to our
Articles of Association when there are no profits, not even nominal
profits;
o the prohibition on distribution of dividends according to the
Directives of Proper Banking Procedures, as long as the Supervisor of
Banks did not permit the distribution; and
o the possibility that the interest on our perpetual deposits with the
Ministry of Finance would continue to accrue even if not actually
paid, if no dividend is distributed.
We submitted a request to the Supervisor of Banks for guidance relating to
the distribution of dividends for the third quarter of 2002. On December 1,
2002, the Supervisor of Banks, in response to our request for guidance,
indicated, among other things, that under the circumstances, it would be
inappropriate for us to distribute a dividend for the third quarter of 2002.
Nevertheless, the Supervisor of Banks noted that it was still not completely
clear as to (a) the legal aspects of various questions connected with the
distribution of the dividends and (b) the accrual of interest on the perpetual
deposits, and the position of the State of Israel on this issue. The Supervisor
of Banks, in the interest of resolving the open issues, sent a copy of our
request for guidance to the Government Companies Authority and the Accountant
General in the Treasury and sought their input.
Because it was unclear whether or not interest is accruing on the perpetual
deposits during the period in which we are prevented from distributing dividends
and in consideration of the possible ramifications of the interest accrual on
the distribution of dividends in respect of the preferred shares, the board of
directors consulted legal counsel and concluded that the interest not paid on
the perpetual deposits , as a result of our failure to distribute dividends,
should accrue to us and, accordingly, in the event of our liquidation, the
interest should be paid into the liquidation fund. In a letter dated January 22,
2003, we requested from the Ministry of Finance and the Government Companies
Authority that they promptly issue their respective positions in this matter.
117
In its reply dated March 13, 2003, the Ministry of Finance stated, among
other things, that the monies paid on the perpetual deposits for purposes of
distributing the dividend will be transferred to us solely for purposes of
redeeming the aforementioned redeemable preference shares (Classes D and DD), or
upon liquidation. In order to clarify matters and to avoid doubt, we once again
petitioned the Ministry of Finance to confirm that it accepts the position of
our board of directors as described in the preceding paragraph. Despite
reminders that were sent by the Bank to the Ministry of Finance regarding this
issue, the requested clarification has still not been obtained. The Bank made
further requests regarding this issue in 2004, but as yet has not received a
satisfactory response. The Board of Directors has deliberated the matter of the
dividend on the said preferred shares several times, and after taking into
account all of the considerations and circumstances described above, has decided
to abide by its previous decision and to refrain from distributing any further
dividend for the time being.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has ceased paying to the Bank the interest on its
perpetual deposits.
The accrued amount of the dividend, at the annual rate of 7.5%, in respect
of the aforementioned preferred shares (including a 1.5% participating dividend
for C, CC and CC1 shares) that has not been paid since the Bank ceased paying
the dividend, amounts to NIS 141.8 million as at December 31, 2005. This amount
was not recorded in the financial statements and it is equal to the amount of
the accrued interest on the perpetual deposits of the Bank with the Israeli
Treasury, which was also not recorded in the financial statements.
The accrued amount of NIS 141.8 million is comprised as follows: NIS 86.7
million is in respect of non-participating shares (D and DD) and NIS 55.1
million is in respect of participating shares (C, CC and CC1). Of this amount,
an amount of NIS 40.1 million is in respect of 2005 and is comprised as follows:
NIS 24.8 million is in respect of non-participating D and DD shares and NIS 15.3
million is in respect of participating C, CC and CC1 shares. See "Item 3 - Risk
Factors" above for a discussion.
On September 28, 2004 various financial entities that hold our class C,
class CC and/or class CC1 shares filed with the Tel Aviv District Court an
originating motion in which the Court is requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until the second quarter of 2002. As of March 31, 2006, this would amount
to approximately NIS 105.1 million. The petitioners contend, among other things,
that, according to our Articles of Association, we are required to pay to the
holders of our preferred shares an annual dividend at the rate of 7.5%, and that
this annual dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits we maintain
with the State. The petitioners contend that the annual dividend is not subject
to the distribution conditions provided by law, since the dividend is not paid
from our profits but rather by a third party (the State of Israel) and therefore
its payment does not lessen our assets. Moreover, they contend that even if the
distribution conditions should be applied to the annual dividend, we should
still be ordered to distribute the annual dividends, because we have met the
repayment ability test because the annual dividend is being fully financed by
the State of Israel and not being deducted from our capital.
118
Whereas management believes the matter relating to dividends distribution
is connected to the question of whether under the circumstances of a
non-distribution of dividends, the interest on our perpetual deposits with the
Israeli Treasury is accrued in our favor, and whereas the answers received as of
the date of this annual report from the Ministry of Finance in this matter have
been unclear and insufficient, we have requested from the Tel Aviv District
Court a declaratory judgment against the State, by which the interest on the
perpetual deposits is indeed accrued in our favor, as is the position of our
Board of Directors on this matter. Following the requests of our bank and the
aforementioned financial entities, the Court ordered that the hearing on the two
originating motions be consolidated. In the reply of the Minister of Finance to
the originating motions prior to a preliminary hearing that was held on January
12, 2006, the Minister of Finance announced that his position is that the
interest on the perpetual deposits does not accrue in our favor when we do not
distribute a dividend, and that even so, in light of our circumstances, there is
no justification for our distributing a dividend. On March 23, 2006, the court
ruled that it will first hear arguments and give its decision regarding the
issue of the accrual of the interest on our deposits with the Treasury, since
such a decision will advance the hearing and the decisions regarding the other
relevant issues. The fundamental position of our Board of Directors is that if
the interest does not accrue on the perpetual deposits, the Board of Directors
will reconsider its position regarding renewal of the dividend distribution,
subject to the legal and regulatory restrictions applicable to the Bank in this
respect, including the need to receive approvals and to amend the our articles.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES
We have evaluated, with the participation of our General Manager and
Comptroller the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") as of the end of the period covered
by this annual report on Form 20-F. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon our evaluation, our General Manager and Comptroller concluded that
our disclosure controls and procedures, as of December 31, 2005, were effective
to provide reasonable assurance that information required to be disclosed by us
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the applicable
rules and forms, and that it is accumulated and communicated to our management,
including our General Manager and Comptroller, as appropriate to allow timely
decisions regarding required disclosure. There were no changes in our internal
control over financial reporting (as defined in Rule 13a-15 or 15d-15 under the
Exchange Act) that occurred during the period covered by this annual report,
except for those changes cited below, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
119
In connection with the audit of our financial statements for the fiscal
year ended December 31, 2005, our management has identified certain issues
relating to the processing and reporting of information as required by the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In
particular, our system of financial reporting was not designed to reconcile our
financial statements (which are prepared in accordance with Israeli GAAP) with
U.S. GAAP in accordance with the requirements of Form 20-F. This issue primarily
resulted from our lack of qualified financial and accounting personnel with
knowledge and expertise in U.S. GAAP and the requirements of the SEC and the
Public Company Accounting Oversight Board (the "PCAOB"). In addition, the severe
liquidity crisis that we faced in 2002 and the subsequent implementation of the
run-off plan negatively affected our ability to address and correct this issue.
Our accounting personnel have outlined the issues relevant to the
reconciliation of our financial statements to U.S. GAAP and the methods of
preparing such a reconciliation. In addition, we have retained U.S. counsel to
advise as to the requirements of Form 20-F and related SEC rules and
regulations. In preparing the U.S. GAAP reconciliation of our financial
statements, our accounting personnel were guided by the experience they acquired
in the previous annual reports. Our accounting personnel have indicated that
they will regularly consult with, and seek the assistance of, outside accounting
advisors in connection with the required reconciliation of our financial
statements to U.S. GAAP. Moreover, they will periodically seek from such outside
accounting advisors relevant updates regarding SEC and PCAOB rules and
regulations relating to reconciliation to U.S. GAAP.
Another matter that was identified concerned the management and routine
monitoring of customers' accounts, the monitoring of customers' ability to pay
their debts to us and the early discovery of signs indicating customers having
difficulties. These problems were manifested, among other things, when in
certain cases updated financial statements were not found in customer's files
(even though such statements had been prepared at the time), we did not receive
alternate information when updated financial statements were not found, real
estate appraisals were not updated and routine information about valuations of
pledged inventory and debtors was not received. Prior to December 31, 2005, we
were using alternate means to monitor our customers' accounts and their
financial condition, and as of December 31, 2005 we have substantially reduced
the number of cases in which there is a delay in receiving updated financial
statements.
Another matter that was identified was in connection with authorizations
into our internal credit management computer system. It was found that our IT
manager had wide authorization capabilities within the system, including
authorizations to view, input and update data. Most of these authorizations were
of a technical nature only, for the maintenance of the system. The IT manager no
longer has authorizations for recording entries in accounts. As of December 31,
2005, he continues to hold authorizations for limited functions, required for
maintaining the system.
120
In addition, our management has identified certain other matters in
connection with the audit of our financial statements for the fiscal year ended
December 31, 2005. In many instances, the credit lines of our clients were not
renewed until after such credit lines expired. Such late renewal resulted in the
accrual of penalty-rate interest, which penalty-rate interest would then be
eliminated once the renewal was effected. The recording of the penalty-rate
interest temporarily distorted our income data, until the subsequent elimination
of such penalty-rate interest was effected. Prior to December 31, 2005, we
improved our controls and procedures in order to avoid this problem in the
future.
Another matter that was identified concerned recording of retroactive
transactions in certain instances. Prior to December 31, 2005, in order to
reduce the risk involved in retroactively recording transactions, we implemented
certain control procedures, including, without limitation, significantly
limiting the number of personnel authorized to retroactively record
transactions.
ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that we have two audit committee
financial experts (as defined in Item 16A of Form 20-F) and that Mr. Yacob
Aizner and Ms. Shulamit Eshbol are our "audit committee financial experts"
serving on the audit committee of our board of directors. Mr. Aizner is an
appointee of Bank Leumi Le-Israel B.M and Ms. Eshbol is an appointee of the
State of Israel. Both Mr. Aizner and Ms. Eshbol are "independent" (as defined by
NASDAQ Rules 4200(a)(15) and 4350(d)(c).
ITEM 16B - CODE OF ETHICS
We have adopted a code of ethics (as defined in Item 16B of Form 20-F) that
applies to all our directors, officers and employees. We have filed a copy of
this code of ethics as Exhibit 11.1 to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2003.
ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
According to the Companies Law-1999 (Israel), the remuneration of the
independent auditor for auditing work shall be established by the shareholders
at the general meeting, by the board of directors if the shareholders so
authorize, or, if the matter is prescribed in the articles of association, as
prescribed therein. Our shareholders authorized our board of directors to
establish the remuneration of the independent auditors for auditing work done in
2004 and 2005, subject to the fee schedule of the Government Companies
Authority.
Furthermore, the Companies Law-1999 (Israel) stipulates that the
remuneration of the independent auditors for services other than auditing work
shall be established by the board of directors unless the articles of
association state that remuneration for such services shall be established by
the shareholders at the general meeting.
121
Pursuant to the above, the remuneration of our independent auditors for
audit work and other services in 2004 and 2005 was established by our board of
directors.
KPMG - Somekh Chaikin, Certified Public Accountants (Isr.), has served as
our independent public accountant for each of the fiscal years in the three-year
period ended December 31, 2005, for which audited financial statements appear in
this annual report on Form 20-F. For the years ended December 31, 2005 and 2004,
the aggregate fees billed and/or agreed to by KPMG and its affiliates are as
follows:
2005 2004
----- -----
(IN THOUSANDS OF NIS)
-------------------
Audit Fees(1) 935 1,277
Audit-related Fees(2) 70 59
Tax Fees(3) 29 23
----- -----
TOTAL 1,034 1,359
===== =====
(1) Audit Fees consist of fees billed for the annual audit of the company's
consolidated financial statements or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements. They also include fees billed for services that only the
external auditor reasonably can provide, and include the provision of
comfort letters and consents and the review of documents filed with the
SEC.
(2) Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the company's financial statements or that are traditionally
performed by the external auditor, and include consultations concerning
financial accounting and reporting standards.
(3) Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with tax
audits and appeals, and requests for rulings or technical advice from
taxing authorities; tax planning services; consultation and planning
services
ITEM 16D - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not applicable.
122
PART III
ITEM 17. FINANCIAL STATEMENTS
The following financial statements are filed as part of this annual report:
Our audited balance sheets as of December 31, 2005 and December 31, 2004
and the statements of income, deficit and cash flows for the years ended
December 31, 2005, 2004 and 2003, including the notes thereto and together with
the auditors' report thereon, are included at pages F-1 to F- 86 to this annual
report.
OUR FINANCIAL STATEMENTS CONFORM WITH ISRAELI GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND THE INSTRUCTIONS OF THE SUPERVISOR OF BANKS (ISRAEL) ("ISRAELI
GAAP"), WHICH DIFFER IN CERTAIN RESPECTS FROM THOSE GENERALLY ACCEPTED IN THE
UNITED STATES ("U.S. GAAP) AS DESCRIBED BELOW IN NOTE 31 TO THE FINANCIAL
STATEMENTS.
ITEM 18. FINANCIAL STATEMENTS
See Item 17 above.
ITEM 19. EXHIBITS
Exhibit
Number Description
------ -----------
1.1 Memorandum and Articles of Association of Israel Development Bank
of Israel Ltd. (translation) (incorporated by reference to the
applicable exhibit to the Annual Report on Form 20-F of
Industrial Development Bank of Israel Limited for fiscal year
ended December 31, 2003).
4.1 Summary of run-off plan
4.2 Summary of Lease Agreement
4.3 Summary of the Special Line of Credit from the Bank of Israel.
4.4 Summary of Perpetual Deposit Agreement.
4.5 Summary of Computer Services Outsourcing Agreement.
4.6 Summary of Special Collective Agreement with Employees.
4.7 Summary of Indemnification Agreement for Directors and Senior
Officers.
4.8 Summary of Kibbutz Debt Agreement.
4.9 Summary of Credit to the Israel Electric Corporation Ltd.
11.1 Code of Ethics (incorporated by reference to the applicable
exhibit to the Annual Report on Form 20-F of Industrial
Development Bank of Israel Limited for fiscal year ended December
31, 2003).
12.1 Certification of Uri Galili, General Manager of Industrial
Development Bank of Israel Ltd., pursuant to 15 U.S.C. Section
78(m)(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
12.2 Certification of Rimon Shmaya, Comptroller of Industrial
Development Bank of Israel Ltd., pursuant to 15 U.S.C. Section
78(m)(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
123
13.1 Certification of Uri Galili, General Manager of Industrial
Development Bank of Israel Ltd., pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
13.2 Certification of Rimon Shmaya, Comptroller of Industrial
Development Bank of Israel Ltd., pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
124
SIGNATURES
The Registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
By: /s/ Uri Galili By: /s/ Natan Atlas
- ------------------ -------------------
Uri Galili, General Manager Natan Atlas, General Secretary
Dated: July 13, 2006.
125
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2005
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2005
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Report F-1
Balance Sheets F-3
Statements of Income F-4
Statement of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000
PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444
Tel-Aviv 61006 17 Ha'arba'a Street
Israel Tel Aviv 61070
Israel
AUDITORS' REPORT TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
We have audited the accompanying financial statements of Industrial Development
Bank of Israel Limited (the Bank), detailed hereunder:
a. Balance sheets as at December 31, 2005 and 2004
b. Statements of income, shareholders' equity, and cash flows, for each of the
three years, the last of which ended December 31, 2005
These financial statements are the responsibility of the Bank's Board of
Directors and of its Management. Our responsibility is to express an opinion on
these financial statements, based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audits to obtain reasonable assurance that 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 by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank as at December 31,
2005 and 2004 and the results of its operations, the changes in the
shareholders' equity and its cash flows for each of the three years, the last of
which ended December 31, 2005 in conformity with accounting principles generally
accepted in Israel. Furthermore, these statements, in our opinion, have been
prepared in accordance with the directives and guidelines of the Supervisor of
Banks in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respect from accounting principles generally accepted in the United States.
Information relating to the nature and effect of such differences is presented
in Note 31 to the financial statements.
As explained in Note 1C, the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board and the directives and guidelines of the Supervisor of Banks in Israel.
The financial statements for dates and reporting periods that ended through the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel and the directives and guidelines of the Supervisor of
Banks in Israel.
The accompanying financial statements have been prepared assuming that the Bank
will continue as a going concern. As discussed in Note 1 and 15A to the
financial statements we draw attention to the following:
A. The severe liquidity problems the Bank experienced in August 2002, which
were caused by increased withdrawals of public deposits. Following these
liquidity problems, on August 22, 2002, the Bank turned to the Governor of
the Bank of Israel with a request for a special line of credit.
B. The special line of credit granted to the Bank by the Bank of Israel, as
discussed in Note 1.
C. The decision of the Bank's Board of Directors to adopt a "Run-Off" plan for
the supervised sale of the Bank's credit assets, and to extend the plan
until July 31, 2008, and the decision of the Ministerial Committee for
Social and Economic Affairs (The Social Economic Cabinet) to extend the
"Run Off" plan (hereunder - the Government's decision extending the "Run
Off" plan), as discussed in Note 1.
D. The agreement of the Bank's Board of Directors to restrict the license of
the Bank and to limit its duration so that upon the end of the "Run-Off"
plan the Bank will no longer have a license, and the announcement of the
Governor of the Bank of Israel regarding the restriction of the Bank's
license and its being revoked as from August 1, 2008, as discussed in Note
1.
E. The minimum capital ratio of the Bank as at December 31, 2005, that has
fallen below the minimum of 9% set by the Supervisor of Banks in Israel in
Proper Banking Procedures Regulations.
The foregoing factors listed above raise substantial doubts as to the ability of
the Bank to continue operating as a going concern. The ability of the Bank to
repay its liabilities is contingent upon the continuation of the special line of
credit from the Bank of Israel and the implementation of the "Run-Off" plan, in
addition to the continued forbearance by the Bank of Israel. We further note
that when the banking license of the Bank is revoked, the Bank will cease
operating as a banking entity.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
As well, we call attention to Note 20 to the financial statements regarding the
litigation pending against the Bank and its executive officers, as detailed in
the said Note.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 27, 2006, except for Note 31, as to which the date is July 13, 2006.
F-1
The Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts*
2005 2004
------- -------
NOTE NIS MILLIONS NIS MILLIONS
---- ------------ ------------
ASSETS
Cash and deposits with banks 2 72.9 117.9
Securities 3 63.2 60.0
Credit to the public 4 7,680.7 7,993.4
Credit to governments 5 59.0 72.7
Fixed assets 6 1.2 1.9
Other assets 7 15.6 26.0
Perpetual deposits with the Israeli Treasury 8 828.2 806.5
------- -------
Total assets 8,720.8 9,078.4
======= =======
* See Note 1C.
- ----------------------------------------
Dr. Raanan Cohen - Chairman of the Board
- ----------------------------------------
Uri Galili - General Manager
- ----------------------------------------
Rimon Shmaya - Comptroller
Date of approval of the financial statements: February 27, 2006, except for Note
31, as to which the date is July 13, 2006.
The accompanying notes are an integral part of the financial statements.
F-2
The Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts*
2005 2004
------- -------
NOTE NIS MILLIONS NIS MILLIONS
---- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 9 178.2 405.3
Deposits of banks 10 1,048.8 1,428.0
Deposits of the Government 6,883.0 6,654.6
Perpetual deposit 11 0.1 0.1
Capital notes 12 26.9 25.3
Other liabilities 13 56.4 56.8
------- -------
Total liabilities 8,193.4 8,570.1
Non-participating shares 14 330.3 309.1
Shareholders' equity 15 197.1 199.2
------- -------
Total liabilities and shareholders' equity 8,720.8 9,078.4
======= =======
* See Note 1C.
The accompanying notes are an integral part of the financial statements.
F-3
The Industrial Development Bank of Israel Limited
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts*
2005 2004 2003
----- ----- ---------
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- ---------
Profit from financing operations
before allowance for doubtful debts 22 61.6 66.2 70.1
Allowance for doubtful debts 4C 44.2 70.2 129.8
----- ----- ---------
Profit (loss) from financing operations
after allowance for doubtful debts 17.4 (4.0) (59.7)
----- ----- ---------
OPERATING AND OTHER INCOME
Operating commissions 23 2.2 4.1 6.5
Gains from investments in shares 24 11.3 41.5 10.3
Other income 25 4.7 4.6 5.5
----- ----- ---------
Total operating and other income 18.2 50.2 22.3
----- ----- ---------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 26 18.2 19.7 33.7
Expenses (income) in respect of employee
retirement 5.5 (0.8) (1.5)
Maintenance and depreciation of premises
and equipment 3.8 5.7 11.8
Other expenses 27 16.5 20.4 20.7
----- ----- ---------
Total operating and other expenses 44.0 45.0 64.7
----- ----- ---------
Operating profit (loss) before taxes on income (8.4) 1.2 (102.1)
Erosions and adjustments** - - (4.5)
----- ----- ---------
Operating profit (loss) before taxes on income (8.4) 1.2 ***(106.6)
Tax savings 28 - - *** (2.7)
----- ----- ---------
Operating profit (loss) after taxes on income (8.4) 1.2 ***(103.9)
----- ----- ---------
OTHER ITEMS
Share in losses of affiliates, net
of related tax - - *** (0.4)
Capital gain (loss), net - 0.2 *** (0.1)
----- ----- ---------
- 0.2 *** (0.5)
----- ----- ---------
NET EARNINGS (LOSS) FOR THE YEAR (8.4) 1.4 ***(104.4)
===== ===== =========
EARNINGS (LOSS) PER SHARE (SEE NOTE 1Q)
NET EARNINGS (LOSS) PER SHARE
---------------------------------
2005 2004 2003
----- ----- ---------
NIS NIS NIS
----- ----- ---------
Per an amount equal to
US$1 of the par value
of -
"C", "CC" and "CC1"
preference shares (0.14) 0.02 (1.79)
"A" ordinary shares (0.14) 0.02 (1.79)
Preferred ordinary shares (0.14) 0.02 (1.79)
* See Note 1C.
** Erosions and adjustments to the effect of inflation according to the CPI of
December 2003 of income and expenses that were included in the operating
profit before taxation in reported amounts.
*** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
The accompanying notes are an integral part of the financial statements.
F - 4
The Industrial Development Bank of Israel Limited
STATEMENT OF SHAREHOLDERS' EQUITY*
- --------------------------------------------------------------------------------
ADJUSTMENTS
ACCUMULATED ACCUMULATED FROM
DIFFERENCE DIFFERENCE PRESENTATION OF
ON ON AVAILABLE-
TRANSLATION TRANSLATION FOR-SALE
OF OF SECURITIES TOTAL
ORDINARY PREFERENCE DOLLAR LINKED CPI LINKED AT FAIR ACCUMULATED SHAREHOLDERS'
SHARES SHARES DEPOSIT(**) DEPOSIT(**) VALUE LOSS EQUITY
----- ------- ----- ----- ---- ----- -----
NIS MILLIONS
---------------------------------------------------------------------------------------------
BALANCE AS AT
JANUARY1, 2003 131.4 1,068.0 (697.5) 171.5 4.8 (402.5) 275.7
CHANGES DURING 2003
Net loss - - - - - (104.4) (104.4)
Adjustments from
presentation of
available- for-
sale securities at fair
value - - - - 5.6 - 5.6
Translation
differences
relating to CPI-linked
perpetual deposit (**) - - - 18.7 - 18.7
----- ------- ------ ----- ---- ------ -----
BALANCE AS AT
DECEMBER 31, 2003 131.4 1,068.0 (697.5) 190.2 10.4 (506.9) 195.6
CHANGES DURING 2004
Net earnings - - - - - 1.4 1.4
Adjustments from
presentation of
available- for-
sale securities at fair
value - - - - (10.1) - (10.1)
Translation differences
relating to CPI-linked
perpetual deposit (**) - - - 12.3 - - 12.3
----- ------- ------ ----- ---- ------ -----
BALANCE AS AT
DECEMBER 31, 2004 131.4 1,068.0 (697.5) 202.5 0.3 (505.5) 199.2
CHANGES DURING 2005
NET LOSS - - - - - (8.4) (8.4)
ADJUSTMENTS FROM
PRESENTATION OF
AVAILABLE-FOR-SALE
SECURITIES AT FAIR VALUE - - - - 5.8 - 5.8
TRANSLATION DIFFERENCES
RELATING TO CPI-LINKED
PERPETUAL DEPOSIT (**) - - - 0.5 - - 0.5
----- ------- ------ ----- ---- ------ -----
BALANCE AS AT
DECEMBER 31, 2005 131.4 1,068.0 (697.5) 203.0 6.1 (513.9) 197.1
===== ======= ====== ===== ==== ====== =====
* The balances and changes relating to 2003 are in amounts adjusted to the
effect of inflation according to the CPI of December 2003. The balances and
changes relating to 2004 and 2005 are in reported amounts (see Note 1C).
** See Note 8 to the financial statements.
The accompanying notes are an integral part of the financial statements.
F - 5
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
2005 2004 2003
------- ------- -------
AMOUNTS
ADJUSTED TO THE
EFFECT OF
INFLATION
ACCORDING TO THE
REPORTED REPORTED CPI OF
AMOUNTS* AMOUNTS* DECEMBER 2003
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the year (8.4) 1.4 (104.4)
Adjustments to reconcile net earnings (loss) to net cash flows
generated by operating activities:
Bank's share in losses of an affiliate, net of related taxes - - 0.4
Depreciation on equipment 1.1 2.9 5.3
Allowance for doubtful debts 44.5 71.1 130.0
Gain on sale of available-for-sale securities (11.3) (38.5) (9.1)
Capital gain (loss) - (0.2) 0.3
Provision for severance pay and pensions, net 0.3 (7.0) (12.5)
Inflationary erosion of capital notes and perpetual deposit 1.6 (2.3) (2.2)
------- ------- -------
Net cash inflow generated by operating activities 27.8 27.4 7.8
------- ------- -------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net 3.0 6.1 60.0
Available-for-sale securities, net 13.9 53.8 24.9
Credit to the public, net 269.2 1,124.5 1,567.4
Credit to governments, net 13.7 32.5 82.9
Other assets, net 10.4 2.2 23.6
Acquisition of fixed assets (0.4) (0.1) (0.2)
Proceeds from sale of fixed assets - 0.2 0.1
------- ------- -------
Net cash inflow generated by activities
related to assets 309.8 1,219.2 1,758.7
------- ------- -------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes - (0.6) (4.9)
Deposits of the public, net (227.1) (214.7) (671.4)
Deposits of banks, net (379.2) (744.7) (297.9)
Deposits of the Government, net 228.4 (294.7) (762.2)
Other liabilities, net (1.7) (11.8) (69.8)
------- ------- -------
Net cash outflow generated by activities
relating to liabilities and shareholders' equity (379.6) (1,266.5) (1,806.2)
------- ------- -------
DECREASE IN CASH (42.0) (19.9) (39.7)
BALANCE OF CASH AS AT BEGINNING OF YEAR 95.4 115.3 155.0
------- ------- -------
BALANCE OF CASH AS AT END OF YEAR 53.4 95.4 115.3
======= ======= =======
* See Note 1C.
F - 6
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. THE "RUN OFF" PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF
ISRAEL
Due to increased withdrawals of deposits of the public during the third
quarter of 2002, the Bank experienced severe liquidity problems, following
which the Bank turned to the Governor of the Bank of Israel (hereinafter -
the "Governor") on August 22, 2002, with a request for a special line of
credit.
DECISIONS OF THE MINISTERIAL COMMITTEE FOR SOCIAL AND ECONOMIC AFFAIRS
REGARDING APPROVAL AND EXTENSION OF THE RUN-OFF PLAN
On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (the Social Economic Cabinet) approved the extension of the Bank's
"Run-Off" plan, after two years earlier, on July 29, 2003, it had decided
to adopt it. The main principles of the Committee's decision from October
10, 2005 are as follows:
> The assets of the Bank are to be sold of in a supervised process
and over a period ending by July 31, 2008, in the framework of
the "Run-Off" plan approved by the Bank's Board of Directors and
with the changes to be determined by the Accountant General and
the Government Companies Authority.
> The maximum amount of the special line of credit will at no time
exceed NIS 1.25 billion and over the period of executing the
Run-Off plan it will not exceed the amounts approved by the Bank
of Israel.
> The Bank will not use the special line of credit or other sources
for the purpose of providing new credit.
> The Government is responsible for the repayment of the special
line of credit as from July 1, 2005, on the condition that the
interest on the credit line until the end of the plan shall not
exceed the Bank of Israel interest rate.
> If at the end of the Run-Off plan there remains an unpaid balance
of the special line of credit, the Government will repay the
balance to Bank of Israel until July 31, 2008. The Government has
noted before it the notice of the Governor of Bank of Israel that
in exchange for its repayment of the credit balance, the
collateral that was provided by the Bank for repayment of the
credit line will be assigned in its favor (the debenture dated
November 14, 2002 by which the Bank created a general floating
lien in favor of the Bank of Israel).
It is the understanding of the Bank that the Government's assuming
responsibility for the repayment of the special line of credit does not
derogate from the primary obligation of the Bank to repay the balance of
the special line of credit to the Bank of Israel.
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
F - 7
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
Following the liquidity problems encountered by the Bank in the third
quarter of 2002, the Bank of Israel had provided it a special line of
credit, which was recently extended until July 31, 2008 in accordance with
the letter of the Governor from October 30, 2005. The terms of the special
line of credit were determined by the Governor of the Bank of Israel and
over time they underwent changes. The present terms of the special line of
credit are specified in the letter of the Governor from October 30, 2005,
and the principal terms are as follows:
> The credit line will be in effect until no later than July 31, 2008.
> The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline in accordance with a forecast that was
attached to the notice of the Governor of the Bank of Israel regarding
extension of the line until July 31, 2008.
> The Bank will be allowed to continue to use the credit line in order
to meet the liquidity needs it has for fulfilling its current banking
obligations.
> The interest on the utilized credit will be the "Bank of Israel
interest rate" (it is noted that before July 29, 2003 the utilized
credit bore a higher rate of interest).
> Any significant administrative expense that deviates from the Bank's
ordinary course of business and has an effect on its business results
will require the approval of the Bank of Israel.
> Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
In his letter from October 30, 2005, the Governor of the Bank of Israel
clarified that if the Bank of Israel should see fit, and to the extent
required at its sole discretion, additional restrictions regarding the
Bank's operations besides those specified in the aforementioned letter will
be considered, whether or not as a result of non-conformity with the
objectives of the "Run-Off" plan.
The utilized balance of the special line of credit of the Bank of Israel
(not including accrued interest) was NIS 1,028 million as at December 31,
2005 (compared with NIS 1,389 million as at December 31, 2004).
THE COMPONENTS OF THE RUN-OFF PLAN
The principal components of the "Run-Off" plan that was approved by the
Bank's Board of Directors are a supervised sale of the Bank's assets by the
end of the plan period and a significant reduction in manpower and in
operating expenses, subject to the continued granting of the special line
of credit by the Bank of Israel. As a part of this process the Bank also
implemented an extensive and detailed efficiency plan.
In accordance with the "Run-Off" plan and the efficiency plan implemented
by the Bank, the Bank refrains from granting new credit and concentrates
its activities on collecting the existing credit.
F - 8
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
As part of the implementation of its plans, the Bank has significantly
reduced or completely discontinued the following activities: foreign
currency and foreign trade activity, maintenance of a dealing room (for
customers), maintenance of current accounts and securities accounts,
processing grants, operating cash and clearing facilities (independently)
and credit cards. The Bank also refrains from accepting new deposits and it
has recently stopped (subject to certain exceptions) renewing existing
deposits that reach maturity.
The reduction in the Bank's operations was also accompanied by a reduction
in the Bank's staff.
On July 26, 2005 the Bank's Board of Directors discussed a document that
had been prepared regarding the extension of the "Run-Off" plan. In light
of the document's conclusion regarding the advantages of extending the
plan, the Board of Directors approved extension of the plan until July 31,
2008. The Bank's Board of Directors also decided on the same occasion that
due to the reduction in the Bank's activity according to the "Run-Off" plan
and the date to which the plan was extended, the Bank would notify the
Governor of the Bank of Israel that it agrees that its banking license be
restricted in a manner that reflects its reduced activity as derived from
the "Run-Off" plan, including the non-acceptance of new deposits and the
non-renewal of existing deposits that have reached maturity, and to the
restricted license specifying that it is valid until the end of the plan
(July 31, 2008) after which the Bank will no longer have a license. The
Bank's agreement to the restriction of its license and limiting its
validity was also noted in the decision of the Ministerial Committee for
Social and Economic Affairs regarding extension of the Run-Off plan and
also in the notice of the Governor of the Bank of Israel regarding
extension of the special line of credit, as described above.
In his letter from January 29, 2006 the Bank was notified by the Governor
of the Bank of Israel as follows:
> The banking license the Bank received on June 4, 1989 will be
restricted so that the Bank cannot engage in any business it did
not engage in prior to the date of the license (until the date of
the license the Bank engaged in financing investments) and
without derogating from the generality of the aforementioned, the
Bank will not receive new deposits and will not renew deposits
reaching their current date of maturity, other than from the
shareholders.
> The Bank's banking license will be revoked as from August 1,
2008.
The ability of the Bank to repay its liabilities is contingent upon the
continuation of the special line of credit from the Bank of Israel and
implementation of the decision of the Ministerial Committee for Social and
Economic Affairs regarding the "Run-Off" plan.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed when the Bank
ceases operating as a banking entity.
B. DEFINITIONS
In these financial statements -
ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
the changes in the general purchasing power of the Israeli currency in
accordance with the opinions of the Institute of Certified Public
Accountants in Israel.
F - 9
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
B. DEFINITIONS (CONT'D)
REPORTED AMOUNT - The adjusted amount as at the date of transition with the
addition of amounts in nominal values that were added after the date of
transition and less amounts subtracted after the date of transition.
DATE OF TRANSITION - December 31, 2003.
ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
the effect of the changes in the general purchasing power of the Israeli
currency in accordance with the opinions of the Institute of Certified
Public Accountants in Israel.
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
GENERAL
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel.
In October 2001 the Israel Accounting Standards Board published Accounting
Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
Pursuant to this standard and in accordance with Accounting Standard No. 17
that was published in December 2002, the adjustment of financial statements
will be discontinued as atJanuary 1, 2004. Until December 31, 2003, the
Bank continued to prepare adjusted financial statements in accordance with
the directives of the Supervisor of Banks, on the basis of the principles
of the Opinion No. 36 of the Institute of Certified Public Accountants in
Israel. The adjusted amounts presented in the financial statements as at
December 31, 2003 are the basis for the financial statements in reported
amounts. Any additions made during the period are included according to
their nominal values.
BALANCE SHEET
Non-monetary items are stated at reported amounts.
Monetary items are stated in the balance sheet at their nominal historical
values as at balance sheet date.
Amounts of non-monetary assets do not necessarily reflect their realizable
value or current economic value, but only the reported amounts of such
assets.
The term "cost" in these financial statements means the reported amount of
cost.
STATEMENTS OF INCOME
1. Income and expenses deriving from non-monetary items or from
provisions included in the balance sheet are derived from the
difference between the reported amount of the opening balance and the
reported amount of the closing balance.
2. All other operating items are stated at their nominal historical
values.
F - 10
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT'D)
COMPARATIVE DATA
STATEMENT OF INCOME - In light of the significance attributed by the
Supervisor of Banks to the income and expenses from financial instruments
that are included in the operating results of banking entities, and so that
the readers of the financial statements will be able to examine the annual
data for 2004 in comparison with the data for 2003 (hereinafter - the
comparative financial statements), the Supervisor of Banks issued
transitional directives regarding the financial statements of 2004 in
reported amounts. In accordance with these transitional directives the
statements of income for the years ended December 31, 2005 and 2004 were
prepared in reported amounts, as provided in Standard 12 of the Israel
Accounting Standards Board regarding discontinuance of the adjustment of
financial statements.
The statement of income for the year ended December 31, 2003 is presented
as follows:
The statement of income items up to and including the operating profit
before taxes on income are adjusted to the effect of inflation according to
the CPI of December 2002.
Erosions and adjustments to the effect of inflation according to the CPI of
December 2003 of income and expenses included in the operating profit
before taxes on income are presented as one amount in a separate line
before the item of the operating profit before taxes on income.
The statement of income items included after the operating profit before
taxes on income in reported amounts are adjusted to the effect of inflation
according to the CPI of December 2003.
BALANCE SHEET AND STATEMENT OF SHAREHOLDERS' EQUITY - The comparative
figures of the balance sheet and the statement of shareholders' equity
items are presented adjusted to inflation according to the CPI of December
2003.
D. STATEMENT OF SHAREHOLDERS' EQUITY
The difference generated until May 6, 1996 between the adjustment of the
special deposit with the Israeli Treasury which, up to May 6, 1996, was
linked to the exchange rate of the US dollar, in respect of the
participating preference shares similarly linked to the exchange rate of
the US dollar, and the adjustment of the said deposit on the basis of the
CPI, is reflected in the statement of shareholders' equity in the item
entitled "Accumulated difference on translation of a dollar linked deposit"
(see Note 8).
The difference generated from May 7, 1996, between the adjustment of the
special deposit with the Israeli Treasury, linked from that date to the CPI
(which in no event will be less than its dollar value as it was on October
1, 1987) and the adjustment of the non-participating shares linked to the
exchange rate of the dollar, is reflected in the statement of shareholders'
equity in the item entitled "Accumulated difference on translation of
CPI-linked deposit" (see Note 8).
F - 11
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. EXCHANGE RATES AND LINKAGE
(1) Assets and liabilities denominated in, or linked to, foreign currency,
except for investments in securities, are stated on the basis of the
representative exchange rates, published by Bank of Israel, in effect
on balance sheet date or on a date relevant to the particular
transaction.
(2) Assets and liabilities linked to the CPI are stated according to the
contractual linkage terms of each balance.
(3) Assets and liabilities, which are optionally linked to the CPI or to
foreign currency, are stated in the financial statements using the
relevant basis under the terms of the respective transactions.
(4) Interest and linkage differences accrued in respect of assets and
liabilities are included in the balance sheet under the items to which
they relate.
(5) Following are details of exchange rates and the CPI and the rates of
change therein:
DECEMBER 31 RATE OF CHANGE DURING
------------------------------------- ----------------------------
2005 2004 2003 2005 2004 2003
----- ----- ----- ---- ---- ----
% % %
--- ---- ----
Representative
exchange rate
of US$1
(in NIS) 4.603 4.308 4.379 6.8 (1.6) (7.6)
CPI in points
for:
December 185.0 180.7 178.6 2.4 1.2 (1.9)
November 185.4 180.6 178.9 2.7 1.0 (2.0)
F. SECURITIES
In accordance with the directives of the Supervisor of Banks securities are
to be classified into three groups, and principles of measurement were
provided for each group as follows:
HELD-TO-MATURITY DEBENTURES
Such debentures are stated at their adjusted value as at balance sheet
date. Such value represents the par value plus linkage increments and
interest accrued since acquisition. It also includes the unamortized
discount or premium, generated upon acquisition. Income from
held-to-maturity debentures is recognized on the accrual basis.
AVAILABLE-FOR-SALE SECURITIES
Such securities are stated at their fair value. Income therefrom is
recognized on the accrual basis. The difference between the fair value and
adjusted value of available-for-sale securities, net of the related tax
effect, is recorded as a capital reserve. Non-marketable shares are stated
at their reported cost.
F - 12
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
F. SECURITIES (CONT'D)
SECURITIES FOR TRADING
Such securities are stated at their fair value, and income resulting from
such adjustment is recognized on a current basis. The fair value of
securities for trading is determined based on their stock market prices as
at balance sheet date.
IMPAIRMENT IN VALUE OF INVESTMENTS
From time to time the bank examines whether there has been an impairment in
the value of its investments in securities which is not of a temporary
nature. This examination is performed when there are signs that may
indicate the possibility of an impairment in the value of an investment,
including a decline in their stock market prices, the business of the
investee, the industry in which the investee operates and additional
parameters. Provisions for the adjustment in value of these investments,
which in accordance with the opinion of the Management are based on an
examination of the overall relevant aspects and the significance of each,
and which are not of a temporary nature, are recorded in the statement of
income.
G. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts,
which, in Management's opinion, fairly present the anticipated loss on the
credit portfolio, including off-balance sheet credit.
In determining the adequacy of the allowances, Management based itself upon
the evaluation of the risk involved in the credit portfolio using available
information on the customers' financial position, volume of activity, past
record and adequacy of the collaterals received.
The directives of the Supervisor of Banks require that, commencing with
1992, banks include, in addition to the specific allowance for doubtful
debts, a supplementary allowance for doubtful debts, which replaces the
general allowance, which had been required up to that time. The
supplementary allowance for doubtful debts is based upon excessive credit
balances, measured according to specified quality characteristics of the
credit portfolio, as provided in the directives of the Supervisor of Banks.
In accordance with the aforementioned requirements, a portion of the
general allowance, as at December 31, 1991, equal to 1% of the total debt
to which it was related at that date, is to be maintained in inflation
adjusted values. According to a directive of the Supervisor of Banks the
adjustment to inflation of the general allowance will be discontinued as at
January 1, 2005.
According to Directive 315 of Proper Banking Procedures, a banking
corporation must record a supplementary allowance for doubtful debts in
respect of debts of customers which deviate from limits stipulated by the
Supervisor of Banks, which are calculated as a certain percentage of the
Bank's capital, as stipulated for purposes of calculating the minimum
capital ratio. These limits relate to the indebtedness of an individual
borrower or a borrower group, to the indebtedness in respect of financing
the acquisition of means of control of corporate entities and to the
indebtedness of related parties.
F - 13
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
As a result of the decline in the "first tier capital" of the Bank and the
limitation on the amount of "second tier capital" that may be taken into
consideration, a large part of the customers' debts to the Bank exceed the
amounts of the aforementioned limits.
Furthermore, Directive 315 of the Proper Banking Procedures provides that a
banking corporation is required to make a supplementary allowance for
doubtful debts if the total liabilities of a certain sector to the banking
corporation exceed 20% of the total liabilities of the public to the
banking corporation (hereinafter - "the limit on sector indebtedness").
Since the Bank has stopped providing new credit and is focusing on the
collection of the existing credit to its customers, its ability to spread
the indebtedness of its customers between the various sectors has decreased
and it may on occasion deviate from the limit on sector indebtedness.
The Bank applied to the Bank of Israel requesting an exemption from
recording the supplementary allowance for doubtful debts deriving from
deviations from the aforementioned various debt limits.
In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
Banks exempted the Bank from the requirement to increase the supplementary
allowance for doubtful debts in its financial statements as at March 31,
2003 and June 30, 2003, in respect of deviations from the debt limits of an
individual borrower and a borrower group and in respect of deviations from
limits in respect of financing means of control in corporate entities.
In his letter of November 26, 2003, the Supervisor of Banks announced that
in light of the Government's decision on the affairs of the Bank, the
Bank's plan to reduce its activity and the commitment of the Government to
repay the special line of credit, which was granted to the Bank by the Bank
of Israel and which is being used by the Bank to repay its liabilities to
its depositors, he approves the following relief with respect to
implementation of the Proper Banking Procedures:
A. As from the financial statements as at September 30, 2003 and
thereafter, the Bank is exempt from increasing the supplementary
allowance for doubtful debts in respect of deviations from debt limits
of an individual borrower and a borrower group and deviations from
debt limits in respect of financing means of control in corporate
entities, and in respect of deviations from the limit of sector
indebtedness.
B. The Bank is allowed to reduce the supplementary allowance it recorded
in respect of the deviation from the aforementioned limits in the last
quarter of 2002.
C. The Bank is allowed to reduce the supplementary allowance it recorded
in the past in respect of the deviation from indebtedness of related
parties.
Accordingly, in the Bank's financial statements as at December 31, 2003,
the Bank did not record a supplementary allowance for doubtful debts in
respect of deviations from the aforementioned limits, and the supplementary
allowance for doubtful debts in the amount of NIS 7.5 million that was
included in the financial statements of the Bank on December 31, 2002 and
thereafter, in respect of the deviation from these limits, was cancelled in
the third quarter of 2003.
F - 14
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to record a supplementary allowance in
significant amounts in respect of these deviations, which would have had a
material impact on its financial results.
The aggregate balance of the general allowance and the supplementary
allowance for doubtful debts in accordance with the directives of the Bank
of Israel, as at December 31, 2005, constitutes 3.81% of the credit to the
public risk, which includes credit risk and off-balance sheet credit risk
less credit covered by collateral that is allowed to be deducted for
purposes of individual borrower and group of borrowers limitations
(December 31, 2004 - 3.27%).
The Bank's policy is not to write-off doubtful debts until all collection
efforts, with respect thereto, have been exhausted. If Management concludes
that recovery of a debt is no longer possible, then cases involving
significant amounts are brought before the authorized bodies of the Bank,
which decide upon their being written-off.
H. FIXED ASSETS
Fixed assets are stated at cost net of accumulated depreciation.
Depreciation is calculated using the "straight-line" method, at rates
deemed adequate to write off the assets over their estimated useful lives.
I. CONTINGENT LIABILITIES
The accounting treatment of contingent legal claims is based on an opinion
received by management of the Bank from its legal counsel, on which
management of the Bank relies, which provides the probability of occurrence
of the exposure to risk relating to contingent claims. The claims were
classified in accordance with the probability ranges of occurrence of the
exposure to risk as follows:
1) Probable - when the probability is over 70%.
2) Reasonably possible - when the probability is over 20% and less than
or equal to 70%.
3) Remote - when the probability is less than or equal to 20%.
There are cases in which a bank is allowed to state in the financial
statements that in the opinion of the bank's management, based upon its
legal counsel's opinion, it is unable to evaluate the probability of
realization of the risk exposure to risk in respect of an ordinary claim
and a claim that was certified as a class action, this in the four
financial statements that are published after the filing of the claim and
the request to have it certified as a class action.
The Bank has provided disclosure with respect to material legal proceedings
pending against the Bank.
Note 20D provides disclosure regarding contingencies in respect of which
the risk of occurrence of the exposure is not remote and for which no
provision was made. The financial statements include appropriate provisions
in respect of claims which in the opinion of management of the Bank will
not be rejected or cancelled and the risk of their occurrence is probable.
F - 15
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
J. BASIS OF RECOGNITION OF INCOME AND EXPENSES
(1) Income and expenses are recognized on the accrual basis.
(2) As to basis of recognition of income and expenses with respect to
trading securities and derivative financial instruments defined as
other transactions, see F and L, respectively.
K. EMPLOYEE RIGHTS
Appropriate provisions cover the Bank's liability for payment of severance
pay and other benefits to its employees, according to labor agreements.
In December 2002, the Bank, the General Federation of Labor and the Bank's
employee committee signed a special collective agreement regarding a
reduction in the number of the Bank's employees. According to this
agreement some of the employees are entitled to a pension as from the date
of termination of their employment. In respect of such employees, the Bank
signed an agreement with a pension fund which arranges the payment of the
pensions. In accordance with the agreements, on the date on which the
employment of each such employee is terminated, the Bank deposits with the
pension fund the amount required in order to purchase the pension rights
for the employee. The Bank included a provision in respect of the
anticipated cost of acquisition of the pension rights, as calculated in an
opinion prepared by a pension expert.
L. DERIVATIVE FINANCIAL INSTRUMENTS
Beginning with January 1, 2003, the Bank implements the directives of the
Supervisor of Banks regarding derivative financial instruments and hedging
activities that were provided in a circular issued by the Supervisor of
Banks on January 1, 2001. The directives in the circular are based on the
principles stipulated in U.S. Accounting Standard FAS 133. In accordance
with these directives, beginning with January 1, 2003 the Bank presents all
the derivative instruments, including certain derivative instruments
embedded in other contracts, as assets or liabilities in the balance sheet
and measures them according to fair value. The change in the fair value of
a derivative instrument is recorded in the statement of income or included
in the shareholders' equity as a component of other comprehensive income,
according to the designated purpose of the instrument.
M. OFF-SETTING OF FINANCIAL INSTRUMENTS
Pursuant to the directives, amounts of designated deposits, the repayment
of which to the depositor is contingent on the collection of the loans
granted therefrom, are offset against the amounts of the related loans and,
therefore, are not reflected in the balance sheet. Income earned from such
collection-based loan operations is classified as operating commissions.
In accordance with the instructions of the Supervisor of Banks, assets and
liabilities in respect of financial instruments with the same counter party
are set-off against one another and presented net in the balance sheet when
the following cumulative conditions are fulfilled:
(1) In respect of such liabilities the Bank has the legal right to enforce
the set-off of the liabilities from the assets.
(2) The Bank intends to pay the liabilities and realize the assets on a
net basis or simultaneously.
F - 16
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
N. TAXES ON INCOME
The provision for taxes on the income of the Bank, which is defined as a
"financial institution" for Value Added Tax (hereinafter - VAT) purposes,
includes VAT on profit in accordance with the Value Added Tax Law. VAT
levied on salaries paid by financial institutions is included in the
statement of income under "Salaries and related expenses". In the years
2002 through 2005, "Salaries and related expenses" included a provision in
respect of salary VAT receivable, due to losses for purposes of VAT on
profit.
O. STATEMENT OF CASH FLOWS
Cash flows from activity in assets and liabilities are presented net,
except for securities, fixed assets, investments in affiliates, capital
notes and debentures. "Cash", for purposes of the cash flow statement,
includes cash balances and cash deposits with banks for an initial period
not exceeding three months.
P. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of income and expenses during
the reported period. Actual results may differ from such estimates.
Q. EARNINGS PER SHARE
Earnings per share have been computed on the basis of the number of
outstanding participating shares, which remained unchanged during the
reported years. In view of the fact that the share capital of the Bank is
composed of several classes of shares, a situation which does not allow for
a fair comparison of the per share data of the various classes of shares,
and as certain of these classes of shares are linked to the US dollar while
other classes participate in earnings on an equal basis with the linked
shares, the per share earnings data is given in relation to an amount which
equals US$1 of the par value of the shares, according to the basic exchange
rate to which they are linked. See T(2) hereunder regarding Accounting
Standard No. 21 "Earnings per Share", which will apply to financial
statements for periods beginning on January 1, 2006 and thereafter.
R. IMPAIRMENT OF ASSETS
In February 2003, the Israel Accounting Standards Board issued Accounting
Standard No. 15, which deals with the impairment in value of assets. The
standard stipulates the procedures to be implemented by the corporation in
order to ensure that its assets are not presented at amounts higher than
their recoverable value. Such value is the higher of the net selling price
and the present value of the estimated future cash flows expected to be
generated from the use and disposal of the asset. The Standard also
stipulates principles of presentation and disclosure regarding assets which
have been impaired. The Standard is effective as regards financial
statements for periods beginning on January 1, 2003.
F - 17
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
S. BUSINESS SEGMENTS
In accordance with an approval received from Bank of Israel, the Bank is
not required to report according to business segments.
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION
1. In August 2005 the Israel Accounting Standards Board published
Accounting Standard No. 22, "Financial Instruments: Disclosure and
Presentation". The standard provides rules for presenting financial
instruments in the financial statements and specifies the proper
disclosure required in respect thereto. Furthermore, the standard
provides the method for classifying financial instruments as financial
liabilities and as shareholders' equity, for classifying the interest,
dividends, losses and gains related to them and the circumstances for
offsetting financial assets and financial liabilities. The new
standard will apply to financial statements for periods beginning on
January 1, 2006 or thereafter.
The standard provides that it is to be adopted on a prospective basis.
The comparative data presented in the financial statements for periods
beginning on the date the standard comes into effect will not be
restated.
Following implementation of the standard, as from January 1, 2006
preference shares of classes C, CC and CC1 that are included in the
shareholders' equity will be reclassified as liabilities in respect of
profit-participating preference shares. Following this
reclassification, the Bank's shareholders' equity will decrease as at
January 1, 2006 by the amount of NIS 204.1 million and will become a
shareholders' deficit in the amount of NIS 7.0 million.
2. In February 2006 the Israel Accounting Standards Board published
Accounting Standard No. 21, "Earnings per Share" (hereinafter - the
Standard). The Standard provides that an entity should calculate basic
earnings per share with respect to the earnings or loss attributable
to the ordinary shareholders of the reporting entity and that the
entity should calculate basic earnings per share with respect to the
earnings or loss from continuing operations attributable to the
ordinary shareholders of the reporting entity if such earnings or loss
is presented. The basic earnings per share will be calculated by
dividing the earnings or loss attributable to the ordinary
shareholders of the reporting entity (the numerator) with the weighted
average number of ordinary shares outstanding (the denominator) during
the period. In order to calculate the diluted earnings per share an
entity will adjust the earnings or loss attributable to the ordinary
shareholders of the reporting entity, and the weighted average number
of outstanding ordinary shares in respect of the effects of all the
dilutive potential ordinary shares. The Standard will apply to
financial statements for periods beginning on January 1, 2006 or
thereafter. The instructions of the Standard regarding earnings per
share are to be implemented retroactively on comparative data for
prior periods. As mentioned in Q above, the per share earnings data is
given in relation to an amount which equals US$1 of the par value of
the shares, according to the basic exchange rate to which they are
linked. After implementation of the Standard the earnings per share
will be calculated per an ordinary share and not per the dollar par
value of the shares.
F - 18
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION (CONT'D)
3. In September 2005 the Israel Accounting Standards Board published
Accounting Standard No. 24, "Share-Based Payments". The standard
requires that share-based payment transactions, including transactions
with employees or other parties that are to be settled by equity
instruments, cash or other assets, be recognized in the financial
statements. In accordance with the standard, share-based payment
transactions in which goods or services are received will be
recognized at their fair value.
Furthermore, the standard provides various disclosure requirements
regarding the nature and extent of the share-based payment
arrangements that existed during the period, and regarding the method
by which the fair value of such arrangements was determined. The
standard will apply to financial statements for periods beginning as
from January 1, 2006 but early implementation is recommended.
Adoption of the standard is not anticipated to have an effect on the
financial statements of the Bank.
NOTE 2 - CASH AND DEPOSITS WITH BANKS
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Cash and deposits with Bank of Israel (1) 12.8 12.6
Deposits with commercial banks (2) 48.4 90.0
Deposits in special banking corporations 11.7 15.3
----- -----
Total 72.9 117.9
===== =====
Including cash, deposits with Bank of Israel
and with banks for an initial period not
exceeding three months 53.4 95.4
===== =====
(1) This serves as collateral for deposits received from the Bank of Israel -
see Note 16 below.
(2) As to pledge on deposits with commercial banks - see Note 16 below.
F - 19
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
A. COMPOSITION
DECEMBER 31, 2005
----------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
----- --------- ---------- ---------- -----
REPORTED AMOUNTS
----------------------------------------------------------
NIS MILLIONS
----------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 2.6 2.6 - - 2.6
Shares of others 60.6 54.5 6.1 - (3) 60.6
---- ---- ------- ---- --------
Total available-
for-sale securities 63.2 57.1 (4) 6.1 - 63.2
---- ---- ------- ---- --------
Total securities 63.2 57.1 6.1 - (3) 63.2
==== ==== ======= ==== ========
DECEMBER 31, 2004
--------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS ADJUSTMENTS TO FAIR
VALUE VALUE (1) TO FAIR VALUE FAIR VALUE VALUE (2)
------- ------- ------- ------- -------
REPORTED AMOUNTS
--------------------------------------------------------------
NIS MILLIONS
--------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 3.7 3.6 0.1 - 3.7
Shares of others 56.3 56.1 0.6 (0.4) (3)56.3
------- ------- ------- ------- -------
Total available-
for-sale securities 60.0 59.7 (4)0.7 (4)(0.4) 60.0
------- ------- ------- ------- -------
Total securities 60.0 59.7 0.7 (0.4) (3)60.0
======= ======= ======= ======= =======
(1) In the case of shares - cost less provision for impairment in value,
where required.
(2) Fair value data are based, generally, on stock market prices, which do
not necessarily reflect the price which would be received on the sale
of a large quantity of shares.
(3) Includes shares, the fair value of which is not readily determinable,
which are stated at cost in the amount of NIS 29.6 million (December
31, 2004 - NIS 30.5 million).
(4) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
B. See Note 4E regarding the classification of a customer's debt to the
securities item.
NOTE: For detail regarding results of investments in debentures - see Note
22E, and for detail regarding results of investments in shares - see
Note 24.
F - 20
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)
A. COMPOSITION
DECEMBER 31 DECEMBER 31
2005 2004
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Credit 7,738.3 8,062.1
General and supplementary allowances for
doubtful debts (1) 57.6 68.7
------- -------
Total 7,680.7 7,993.4
======= =======
B. CREDIT TO THE PUBLIC INCLUDES:
1. CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED AMOUNTS
--------------------
NIS MILLIONS NIS MILLIONS
----- -----
a. Non-income bearing credit to problematic borrowers -
Unlinked Israeli currency 180.3 296.7
Israeli currency linked to the CPI 27.9 20.2
Denominated in or linked to foreign currency 22.0 49.9
----- -----
230.2 366.8
===== =====
b. Credit restructured during the year, without waiver of income -
Unlinked Israeli currency 47.5 40.3
Israeli currency linked to the CPI 18.1 25.3
Denominated in or linked to foreign currency 19.9 19.0
c. Credit to borrowers regarding which there is an as-yet
unimplemented Management decision to restructure
their debt 9.2 17.6
d. Credit temporarily in arrears 60.5 114.5
Interest income recorded in respect thereof 6.1 9.6
e. Credit under special supervision 221.3 293.2
(1) The specific allowance for doubtful debts was deducted from the
relevant credit categories.
(2) The balance of problematic debts, less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 21
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR
In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
the banks, the Government and the Kibbutz movements. This Arrangement
includes the implementation of a rehabilitation program prepared by the
borrowers, the waiver by the Bank of part of the loans granted by it,
Government grants designated for the early repayment of a part of the
Kibbutz debts, and a rescheduling of another portion of the debts for a
period of up to 25 years, in respect of which the Government provided less
costly financing which leaves the Bank with a margin of 2% p.a.
During 1991 through 1996, the Bank received from the Government the grants
under the Kibbutz Arrangement of 1989, designated for the early repayment
of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
debt accordingly. Furthermore, the Bank also received from the Government,
the deposits required for the rescheduling of part of the Kibbutz debts in
accordance with the Bank's proportionate share of the overall arrangement.
In 1993, the Bank commenced the implementation of the Arrangement at the
individual Kibbutz level for some Kibbutzim, reflecting the results thereof
on its books.
During 1996, a supplementary arrangement was signed by the banks, the
Government and the Kibbutz movements for the arrangement of the debts of
the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
was signed by the said parties. The main principles of the supplementary
arrangement, including the amendment thereto, are as follows:
- The arrangement relates to a part of the Kibbutzim and organizations
included in the first arrangement, in respect thereof it has become
evident that after full execution of the financial arrangement
contemplated by the first arrangement, debts remain regarding which
the repayment ability envisioned, with respect thereto, under that
agreement, does not allow them to fulfill their obligations (the
"balloon" debt). Such "balloon" debt is to be written off.
- In respect of most of the "balloon" debts, the writing-off shall be
covered as to 65% from bank sources and as to 35% from Government
sources.
- Kibbutzim will assign part of their rights in land to the Israel Lands
Administration. Upon each Kibbutz joining the arrangement, its land,
which was found in the land survey to have an alternative value
compared to agricultural use, will revert to the Israel Lands
Administration, without attaching to it an obligatory price tag. A
caveat is to be registered in favor of the banks with respect to such
land. In the future, when the land is sold, part of the net proceeds
to be received, which represents the value of the original rights of
the Kibbutz in the land, will be paid over to the banks and the
Government in proportion to their share in the writing-off of the
debt, as stated above. The funds transferred by the Government for the
purpose of the writing-off of the debts of each Kibbutz, as stated
above, are conditional upon the consent of each individual Kibbutz to
the said arrangement and its subsequent joining as a party to the
supplementary arrangement, including the reversion of the land to the
Israel Lands Administration. The abovementioned payments will be made
in five annual installments: the first - an immediate payment and the
remaining payments to be linked to the CPI with annual interest at a
rate of 1.5%.
F - 22
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
- Until a real estate Kibbutz joins as party to the supplementary
arrangement on the basis of the said land arrangement, the Kibbutz, at
its own initiative, may enter into interim property transactions, the
consideration for which, whether in cash or cash equivalents, will
partially or fully serve as a substitute to the said land arrangement.
The "balloon" debt balance of a potential real estate Kibbutz which is
not repaid by the proceeds of such interim transactions or land
arrangement, will be treated in accordance with the financial
arrangement, as mentioned above.
In the opinion of the Bank, in view of the above, uncertainty exists
as to the real estate proceeds anticipated in the said arrangement.
The Bank has recorded allowances for doubtful debts for all the
amounts it considered necessary in light of that mentioned above.
Composition of the credit to the agricultural sector:
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED AMOUNTS
--------------------
NIS MILLIONS NIS MILLIONS
----- -----
Kibbutzim (including regional enterprises and organizations) 245.0 278.3
Moshavim 9.2 13.2
----- -----
Total credit for kibbutzim and moshavim 254.2 291.5
Private agriculture 2.5 2.7
----- -----
Total credit to the agricultural sector 256.7 294.2
===== =====
F - 23
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED AMOUNTS
---------------------
NIS MILLIONS NIS MILLIONS
----- -----
a. Non-income bearing loans to problematic borrowers -
Unlinked Israeli currency 2.0 -
Israeli currency linked to the CPI 34.5 33.4
Denominated in or linked to foreign currency 0.3 -
----- -----
36.8 33.4
===== =====
b. Restructured credit to borrowers-
1. Credit restructured during the current
year with waiver of income -
Israeli currency linked to the CPI 9.9 12.3
Average repayment period (years) 4.0 4.5
Expected interest margin from the credit 2% 2%
2. Credit restructured in prior years
with waiver of income -
Israeli currency linked to the CPI 2.5 9.5
c. Credit to borrowers in respect of which
there is an as-yet unimplemented
management decision to restructure their debt 4.3 6.7
d. Credit temporarily in arrears 3.7 3.4
Interest income recorded in the income statements
in respect thereof 0.3 0.2
e. Credit under special supervision 61.5 60.6
f. Credit not included in above credit to problematic borrowers 138.0 168.3
Interest income recorded in the income statements in respect
thereof 10.0 9.7
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
(2) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 24
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
3. CREDIT TO LOCAL AUTHORITIES
Following is the composition of credit to local authorities:
DECEMBER 31 DECEMBER 31
2005 2004
------------ ------------
REPORTED AMOUNTS
---------------------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Balance of credit to local authorities at
balance sheet date 9.9 13.1
CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:
a. Credit restructured during the year without waiver
of income - CPI linked - 1.9
b. Credit not included in above credit to problematic borrowers 9.9 11.2
Interest income recorded in income statements with respect of
such credit 0.9 0.8
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 25
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS
2005
------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ----- -----
REPORTED AMOUNTS
------------------------------------
NIS MILLIONS
------------------------------------
Balance of allowance at beginning of year 714.4 69.6 784.0
----- ----- -----
Current allowances 82.9 - 82.9
Reduction in allowances (26.4) (12.0) (38.4)
Collection of debts written-off in previous years (0.3) - (0.3)
----- ----- -----
Amount charged to the income statement 56.2 (12.0) 44.2
----- ----- -----
Debts written-off (95.3) - (95.3)
----- ----- -----
Balance of allowance at end of year 675.6 57.6 733.2
===== ===== =====
Amount of allowance not deducted from credit
to public 1.0 - 1.0
----- ----- -----
2004
------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ----- -----
REPORTED AMOUNTS
------------------------------------
NIS MILLIONS
------------------------------------
Balance of allowance at beginning of year 732.5 78.5 811.0
----- ----- -----
Current allowances 96.5 3.4 99.9
Reduction in allowances (16.5) (12.3) (28.8)
Collection of debts written-off in previous years (0.9) - (0.9)
----- ----- -----
Amount charged to the income statement 79.1 (8.9) 70.2
----- ----- -----
Debts written-off (98.1) - (98.1)
----- ----- -----
Balance of allowance at end of year 714.4 69.6 784.0
===== ===== =====
Amount of allowance not deducted from credit
to public 0.9 0.9 1.8
----- ----- -----
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as at December 31,
2004 - NIS 38.9 million; as at December 31, 2003 - NIS 38.9 million).
F - 26
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
2003
------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ----- -----
ADJUSTED AMOUNTS
------------------------------------
NIS MILLIONS
------------------------------------
Balance of allowance at beginning of year 617.3 82.4 699.7
----- ----- -----
Current allowances 144.3 3.5 147.8
Reduction in allowances (10.4) (7.4) (17.8)
----- ----- -----
Amount charged to the income statement 133.9 (3.9) (3)130.0
----- ----- -----
Debts written-off or transferred (see E hereunder) (31.3) - (31.3)
Erosion and inflationary adjustments 12.6 - 12.6
----- ----- -----
Balance of allowance at end of year 732.5 78.5 811.0
===== ===== =====
Amount of allowance not deducted from credit
to public 1.5 0.9 2.4
----- ----- -----
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as at December 31,
2004 - NIS 38.9 million; as at December 31, 2003 - NIS 38.9 million).
(3) Amount of NIS 129.8 million was recorded in the statement of income in
reported amounts.
F - 27
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER
DECEMBER 31, 2005
--------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------------- ---------- --------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- ----------------------------- --------------------------------------
NIS THOUSANDS NIS MILLIONS
- ----------------------------- --------------------------------------
Up to 10 114 1.0 -
From 10 to 20 87 1.2 -
From 20 to 40 43 1.2 -
From 40 to 80 63 3.4 0.2
From 80 to 150 40 4.3 0.2
From 150 to 300 61 12.4 1.4
From 300 to 600 81 32.6 2.4
From 600 to 1,200 102 87.1 5.3
From 1,200 to 2,000 63 94.0 6.0
From 2,000 to 4,000 63 161.9 13.6
From 4,000 to 8,000 45 232.9 12.0
From 8,000 to 20,000 25 283.1 43.4
From 20,000 to 40,000 6 143.1 11.4
From 40,000 to 200,000 5 275.1 99.3
From 3,200,000 to 6,405,000 1 (4)6,405.0 -
--- ------- -------
799 7,738.3 195.2
=== ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
F - 28
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER (CONT'D)
DECEMBER 31, 2004
---------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------------- ---------- --------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- ----------------------------- ---------------------------------------
NIS THOUSANDS NIS MILLIONS
- ----------------------------- ---------------------------------------
Up to 10 189 1.2 -
From 10 to 20 107 1.6 -
From 20 to 40 74 2.1 0.1
From 40 to 80 61 3.4 0.1
From 80 to 150 61 6.0 0.5
From 150 to 300 84 17.8 0.8
From 300 to 600 89 37.5 1.8
From 600 to 1,200 121 103.3 2.6
From 1,200 to 2,000 82 121.7 6.6
From 2,000 to 4,000 81 214.4 15.7
From 4,000 to 8,000 58 305.2 10.4
From 8,000 to 20,000 35 428.2 16.5
From 20,000 to 40,000 12 248.4 71.5
From 40,000 to 200,000 8 404.0 129.6
From 3,200,000 to 6,167,300 1 (4)6,167.3 -
----- ------- -------
1,063 8,062.1 256.2
===== ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
E. CUSTOMER'S DEBT RECLASSIFIED TO THE "SECURITIES" ITEM
In his letter of July 15, 2003, regarding a debt of a customer in respect
of which a receiver was appointed to realize shares pledged in favor of the
Bank, the Supervisor of Banks stated that it is no longer proper to treat
the outstanding balance of the debt, due to be repaid through the
realization of the said shares by the receiver, as a credit item.
Accordingly, the balance of the debt was reclassified on June 30, 2003, and
stated as shares included in the item "Available-for-sale securities",
presented at their market value at that date.
Beginning with June 30, 2003, these shares are included in the "Securities"
item and from that date the changes in the market value of these shares are
recorded in a capital reserve.
In view of the inability of the customer to honor his debt, the Bank in the
past classified this debt as non-income bearing and recorded the allowances
required from such classification. The supplementary allowance for doubtful
debts recorded in respect of the classification of the debt as non-income
bearing was cancelled in 2005.
F - 29
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT TO GOVERNMENTS
DECEMBER 31 DECEMBER 31
2005 2004
---- ----
REPORTED REPORTED
AMOUNTS AMOUNTS
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Deposits in foreign currency out of loans received 15.0 24.1
Amounts receivable in connection with exchange
rate insurance of capital notes 26.9 25.3
Credit to foreign governments 6.9 10.9
Other credit 10.2 12.4
---- ----
Total credit to governments 59.0 72.7
==== ====
NOTE 6 - FIXED ASSETS
A. This item includes equipment, computers, furniture and motor vehicles
as follows:
AT CHANGES DURING THE YEAR AT
JANUARY 1 -------------------------- DECEMBER 31
2005 ADDITIONS DISPOSALS 2005
------------ ------------ ------------ ------------
REPORTED AMOUNTS
------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------ ------------
Cost 56.9 0.4 - 57.3
Accumulated depreciation (55.0) (1.1) - (56.1)
----- -----
Net book value 1.9 1.2
===== =====
B. The average rate of depreciation is 28% (2004 - 31%).
F - 30
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 7 - OTHER ASSETS
DECEMBER 31 DECEMBER 31
2005 2004
---- ----
REPORTED REPORTED
AMOUNTS AMOUNTS
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Excess of income tax advances over current
provisions 1.0 1.3
Prepaid expenses 2.5 3.6
Payroll VAT receivable 6.1 8.1
Sundry receivables and debit balances 2.5 2.1
Debit balances in respect of derivative financial
instruments 3.5 10.9
---- ----
Total other assets 15.6 26.0
==== ====
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the U.S. dollar (B) 316.4 308.0
Deposit in respect of the "D" redeemable non-participating
preference shares linked to the U.S. dollar (C) 116.6 113.6
Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the U.S. dollar (C) 395.2 384.9
----- -----
Total perpetual deposits with the Treasury 828.2 806.5
===== =====
F - 31
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
A. On May 6, 1996, an agreement was signed between the Bank and the
Treasury of the State of Israel regarding changes in the method of
computing the linkage on perpetual deposits, which the Bank had
deposited with the Israeli Treasury with respect to the Bank's
preference shares (C, CC, CC1, D, and DD).
Until the signing of the agreement the aforementioned deposits were
linked to the exchange rate of the dollar. In addition, the deposits
bear dollar-linked interest at a rate, which, after the payment of VAT
on profit imposed on the Bank's earnings (which is paid to the Bank by
the Treasury of the State of Israel), leaves the Bank with an amount
comprising net interest at a rate of 7.5% per annum, the same as the
dividend the Bank used to pay on the aforementioned preference shares.
Pursuant to an Order of the Income Tax Authorities, the interest and
linkage differentials paid on the deposits are exempt from tax, except
for VAT on profit on the interest. The deposits will be repaid to the
Bank at the time of the redemption of the relevant shares or upon
liquidation of the Bank.
Pursuant to the deposit agreements, the aforementioned interest will
be paid to the Bank on the payment dates of the dividends on the
aforementioned preference shares. According to the agreement signed on
May 6, 1996, the deposits have become, in effect, linked to the CPI,
with retroactive effect from October 1, 1987. However, in no case
shall their amount be less than their dollar value as computed prior
to the date of the agreement. Namely, the linkage on the deposits as
at October 1, 1987 is based on the CPI or the dollar, whichever is
higher. The interest continues to be computed based on a dollar
calculation.
The deposit agreements do not explicitly state what will happen to the
interest on the perpetual deposits in the period during which the Bank
is prevented from distributing the aforementioned dividends on the
aforementioned preference shares, and whether the interest will accrue
and be paid when the Bank pays the accrued preferred dividends in
arrears or upon liquidation. The Bank's Board of Directors reached the
conclusion that the interest, which is not claimed due to the
non-payment of the dividend, would accrue to the Bank's credit and,
accordingly, upon liquidation, it would become part of the liquidation
assets. The amount of the accrued interest, which has not yet been
drawn as above, totals NIS 141.8 million and is not recorded in the
financial statements. This amount is equal to the amount of the
accrued dividend in arrears, which is also not recorded in the
financial statements. See Note 15F for further details regarding the
discontinued distribution of dividend and the requests made to the
Ministry of Finance and the Government Companies Authority with
respect to the above matter as well as regarding the legal proceedings
being held on this matter.
Concurrent with the signing of the above-mentioned agreement, the
Bank's Articles of Association were amended in May 1996. According to
the amendment, one ordinary "B" share out of the total number of
ordinary "B" shares was converted into an ordinary "B1" share
(presently held by the State of Israel). The holder of the ordinary
"B1" share is entitled to receive, upon liquidation of the Bank, the
difference, if any, arising from the change in the method of computing
the linkage of the said deposits, as discussed above. However, the
right attached to the ordinary "B1" share ranks after the settlement
in full of all amounts due in the present and future to creditors of
the Bank, and after repayment of the paid-up share capital to the
holders of the Bank's preferred ordinary shares, ordinary "A" shares
and ordinary "B" shares and after repayment of the paid-up share
capital, including linkage differentials, to the holders of the Bank's
linked preferred shares of the "C", "CC", "CC1", "D" and "DD" classes,
in accordance with the Bank's Articles of Association.
F - 32
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
The above-mentioned agreement resulted in an increase in the amounts
of the deposits with the Treasury as well as in the Bank's
shareholders' equity. Such increase, as at the date of the signing of
the agreement, amounted to NIS 279.6 million.
This aforementioned increase of NIS 279.6 million in shareholders'
equity was reflected in the statement of shareholders' equity under
the item of "change in capital due to change in rights of "B1"
ordinary share". Out of the above-mentioned amount, NIS 106.7 million,
relating to differences in respect of the participating shares, was
credited to the "accumulated difference on translation of dollar
linked deposits", which was also not included in the financial
statements. The rest of the increase in capital, in the amount of NIS
172.9 million, which relates to deposits in respect of
non-participating shares, was credited to the "accumulated difference
on translation of CPI linked deposits".
B. As noted, up to May 6, 1996, the above-mentioned deposits were linked
to the dollar. The difference which arose up to May 6, 1996, between
the adjustment of the deposit on the basis of the dollar linkage, in
respect of the participating, preference "C", "CC" and "CC1" shares,
which are also dollar-linked, and the adjustment thereof to the CPI,
was credited in the statement of shareholders' equity to "accumulated
difference on translation of dollar linked deposits."
C. Up to May 6, 1996, the above-mentioned deposits were linked to the
dollar. The difference which arose up to May 6, 1996, between the
adjustment of the deposit on the basis of the dollar linkage in
respect of the non-participating preference "D" and "DD" shares, which
do not constitute shareholder's equity and which are also linked to
the dollar, and the adjustment of the above-mentioned deposit to the
CPI, was recorded in the statement of income, as was recorded the
difference arising from the liabilities in respect of these shares. As
a result of signing the above-mentioned agreement, differences arose
from the date of signing between the adjustment of the deposits with
the Treasury (linked to the higher of the CPI or the dollar), and the
adjustment of the non-participating dollar-linked preference shares.
Such differences are recorded in the statement of shareholder's equity
under "accumulated difference on translation of CPI linked deposits."
NOTE 9 - DEPOSITS OF THE PUBLIC
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
On-demand deposits 27.0 42.0
Fixed-term and other deposits 124.2 301.7
Savings deposits 27.0 61.6
----- -----
Total deposits from the public 178.2 405.3
===== =====
F - 33
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 10 - DEPOSITS OF BANKS
DECEMBER 31 DECEMBER 31
2005 2004
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Fixed-term deposits 15.1 24.1
Special line of credit from the Bank of Israel (1) 1,033.7 1,403.9
------- -------
Total deposits of banks 1,048.8 1,428.0
======= =======
(1) See Note 16 regarding a pledge provided as security for credit
received from the Bank of Israel.
NOTE 11 - PERPETUAL DEPOSIT
This deposit of the Israeli Treasury is unlinked and is convertible at any
time, at the request of the Israeli Treasury, into ordinary "B" shares of
the Bank, at their par value.
The deposit is perpetual, but the Israeli Treasury has the right to demand
its redemption in the event that the State's voting power in the Bank falls
below 20%. The redemption would thereupon be effected in twenty-five equal
annual installments, beginning ten years after the date of the demand for
redemption. The Bank has agreed to issue capital notes to the State of
Israel in place of the deposit, on identical terms and conditions.
NOTE 12 - CAPITAL NOTES
This series of capital notes of a par value of $ 49,976,000 bears interest
at the rate of 7.5% per annum and was due on December 31, 1998. The terms
of the above capital notes provide that the redemption date of notes for
which the holders did not give notice of their intention to redeem, will be
deferred by an additional 18 months each time. Over the last seven years,
notes of a par value of $ 44,141,755 were redeemed. Accordingly, the
balance of notes still outstanding as at December 31, 2005 amounts to $
5,834,245 which constitute NIS 26.9 million (December 31, 2004 - $
5,875,000 which constitute NIS 25.3 million). The next redemption date for
the capital notes is June 30, 2006. The Bank is entitled to redeem the
unredeemed capital notes at a premium of 5%. See Note 5 regarding amounts
receivable with respect to exchange rate insurance on the capital notes.
F - 34
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 13 - OTHER LIABILITIES
DECEMBER 31 DECEMBER 31
2005 2004
---- ----
REPORTED REPORTED
AMOUNTS AMOUNTS
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Excess of provision for severance pay and pensions over
amounts funded (see Note 17) 27.1 26.8
Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 17) 5.4 5.7
Prepaid income 1.9 1.3
Credit balances in respect of derivative financial instruments 0.5 2.5
Allowance for doubtful debts in respect of an off-balance sheet item 1.0 0.9
Sundry creditors and credit balances 20.5 19.6
---- ----
Total other liabilities 56.4 56.8
==== ====
NOTE 14 - NON-PARTICIPATING SHARES
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
"B" ordinary shares - -
"D" preference shares linked to the US dollar (1) 75.3 70.4
"DD" preference shares linked to the US dollar (1) 255.0 238.7
----- -----
Total non-participating shares 330.3 309.1
===== =====
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
F - 35
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)
B. ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
NUMBER ---- --------------------
OF SHARES CLASS OF SHARES 2005 2005 2004
- --------- --------------- ---- ---- ----
NIS NIS NIS
---- ---- ----
135,399 "B" ordinary shares of NIS 0.1
each 13,539.9 13,489.9 13,489.9
164,000 7.5% cumulative "D" preference
shares of NIS 0.03 each, linked to the
US dollar at the rate of
$1 = NIS 0.0003, redeemable
at a premium of 5 5/8 %
(redemption dates will be
determined by the Bank subject
to approval by the Israeli Treasury) 4,920 4,904 4,904
60,000 7.5% cumulative "DD" preference
shares of NIS 2.1 each, linked to the
US dollar at the rate of
$1 = NIS 0.0021 redeemable (without
premium) (redemption dates will be
determined by the Bank, subject to
approval by the Israeli Treasury) 126,000 116,359 116,359
----------- ----------- -----------
Total shares 144,459.9 134,752.9 134,752.9
=========== =========== ===========
C. For rights in dividend distributions - see Note 15E.
D. For cessation of dividend distributions - see Note 15F.
E. For rights upon liquidation - see Note 15G.
F. All the non-participating shares are not traded on the Tel-Aviv Stock
Exchange.
F - 36
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY
A. The share capital is composed of registered shares, which are traded
on the Tel-Aviv Stock Exchange. The following are details regarding
the nominal value of the share capital and the principal rights
attached thereto:
AUTHORIZED ISSUED AND PAID
NUMBER ---- --------------------
OF SHARES TYPE OF SHARES 2005 2005 2004
- --------- -------------- ---- ---- ----
NIS NIS NIS
---- ---- ----
16,000 "A" ordinary shares of NIS 0.1
each 1,600 (*)1,510 (*)1,510
1 "B1" ordinary share of
NIS 0.1 0.1 (*) 0.1 (*) 0.1
1,000,000 8% cumulative participating
preferred ordinary shares of
NIS 0.001 each 1,000 1,000 1,000
17,000,000 6% cumulative participating
"C" preference shares of
NIS 0.00018 each linked to the
US dollar at the rate of $1 =
NIS 0.00018 3,060 3,060 3,060
1,000,000 6% cumulative participating
"CC" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 3,000 3,000 3,000
1,740,000 6% cumulative participating
"CC1" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 5,220 5,204 5,204
50,100 Unclassified shares of NIS 0.1
each 5,010 - -
-------- -------- --------
Total shares 18,890.1 13,774.1 13,774.1
======== ======== ========
(*) Not traded on the Tel Aviv Stock Exchange.
F - 37
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
B. Following are details on the annual dividend:
The last quarterly dividend that was paid by the Bank on the preference
shares was in respect of the second quarter of 2002. No dividend was
distributed in respect of the second half of 2002 and the years 2003, 2004
and 2005. See F below regarding the cessation of dividend distribution.
C. VOTING RIGHTS
Only "A" class ordinary shares and ordinary preferred shares grant their
holders the right to receive notification regarding general shareholders'
meetings of the Bank, to participate and to vote in the general meetings of
the Bank. Every "A" class ordinary share has 1000 votes and every ordinary
preferred share has one vote.
D. RIGHT TO APPOINT DIRECTORS
According to the Bank's Articles of Association, the Board of Directors is
comprised of no less than 7 and no more than 15 directors. The directors of
the Bank (except for the Chairman of the Board) are appointed solely by
holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
grant the right to appoint one director. The other shares in the Bank do
not grant rights to appoint directors of the Bank. The appointment of
external directors is done in accordance with an agreement that was signed
in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
Ltd., and the decision of the Government from March 2001. In accordance
with the aforementioned agreement and Government decision, one external
director is appointed by the general meeting on account of the rights to
appoint directors of the three banking groups that are party to the
aforementioned agreement (as proposed by one of them and supported by the
others) and an additional external director is appointed by the general
meeting on account of the State's rights to appoint directors.
The Chairman of the Board, who is the extra director (the fifteenth
director), is appointed by all the other members of the Board who were
appointed, as above, by the holders of "A" class ordinary shares.
E. RIGHTS TO RECEIVE A PREFERENCE DIVIDEND
According to the Bank's Articles of Association, in the event that there
are sufficient profits, the Bank shall first distribute a preferred
dividend of 6% per annum (plus necessary adjustments due to linkage to the
dollar) on the paid-in capital of "C" class preference shares, the paid in
capital of "CC" class preference shares and the paid-in capital of "CC1"
class preference shares, and of 7 1/2% per annum (plus necessary
adjustments due to linkage to the dollar) on the paid-in capital of "D"
class preference shares, and the paid-in capital of "DD" class preference
shares, all dividends being pari-passu and pro-rata to the paid-in capital
of the aforementioned shares, and then will distribute an 8% cumulative
preferred dividend on the paid in capital of ordinary preferred shares.
F - 38
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION
The issued share capital of the Bank includes preference shares of classes
C, CC, CC1, D, and DD to which the Bank used to pay quarterly 25% of the
annual preferred dividend (the "quarterly dividend"). The Bank deposited
the proceeds of issue of these preferred shares with the Israeli Treasury
in perpetual deposits, which will be returned to the Bank only upon
liquidation or for the purpose of redeeming the preference D and DD shares
(hereinafter - the "perpetual deposits"). According to the deposit
agreements, the interest on the perpetual deposits, at a rate of 7.5% (plus
differentials of linkage to the dollar), is paid to the Bank on the payment
dates of the dividends to the aforementioned preferred shares. The deposit
agreements do not expressly stipulate how the interest on the perpetual
deposits should be handled during periods in which the Bank is prevented
from distributing dividends on these preferred shares, and whether the
interest will accrue and be paid when the Bank pays the accrued preferred
dividends in arrears or upon liquidation.
According to the Companies Law - 1999 (hereinafter - "the Companies Law"),
a company is entitled to distribute dividends only from its profits (as
defined therein), on condition that there is no reasonable fear that such
distribution would prevent the company from meeting its existing
liabilities and its expected liabilities when they come due (hereinafter -
the "repayment ability test"). Nevertheless, the Court is permitted to
approve the distribution of a dividend not from the company's profits, if
it is convinced that the company meets the "repayment ability test".
According to the Directives of Proper Banking Procedures, the Supervisor of
Banks prohibited distribution of dividends by a banking institution if,
among other things, one or more of the last three calendar years ended in a
loss, or the aggregate results of the three quarters ending on the last day
of the interim period for which the last financial statements were issued
reflected a loss.
The Bank ended the years 2001 through 2003 with a loss, the year 2004 with
earnings and the year 2005 with a loss. Commencing with the financial
statements for the first quarter of 2002, the Bank had no profits from
which it could distribute a dividend under the Companies Law.
In accordance with the Bank's Articles it can distribute a dividend only
out of earnings of the Bank. As from the second quarter of 2002 the Bank
does not even have any nominal earnings.
The last quarterly dividend paid by the Bank in respect of the
aforementioned preferred shares was the second quarterly dividend of 2002,
and in order to distribute that dividend, the Bank obtained Court approval
and the approval of the Supervisor of Banks.
Immediately prior to the publication of the financial statements of the
Bank for the third quarter of 2002, the Board of Directors of the Bank
decided, at that stage, not to distribute a dividend for the third quarter
of 2002. The decision was taken upon the advice of legal counsel and taking
into consideration, among other things, the following issues:
o The results of operations of the third quarter of 2002 and the crisis
which affected the Bank during that quarter.
o Non-existence of distributable profits under the Companies Law.
o The prohibition on distribution of dividends according to the Bank's
Articles of Association when there are no profits, even in nominal
terms.
o The prohibition on distribution of dividends according to Proper
Banking Procedure, as long as the Supervisor of Banks has not replied
to the Bank's request and has not permitted such distribution.
F - 39
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
o The possibility that the interest on the Bank's perpetual deposits
with the Israeli Treasury will continue to accrue to the credit of the
Bank even if not actually paid, as long as no dividend is distributed.
On December 1, 2002, the Bank received the reply of the Supervisor of Banks
to its request for the position of the Supervisor on the matter of
distributing a dividend in respect of the third quarter of 2002. The
Supervisor's answer stipulated, among other things, that in the existing
circumstances (as detailed in the letter), the Supervisor of the Banks
believes that "it is inappropriate to distribute a dividend at this time".
Nevertheless, the Supervisor of Banks noted that it was still not
completely clear as to the legal aspects of various questions connected
with the distribution of the dividend and the accrual of the interest on
the perpetual deposits, and as to what the position of the State of Israel
is on this issue. The Supervisor of Banks added that a copy of the letter
had been sent to the Government Companies Authority and the Accountant
General, and that following receipt of clarifications from them and from
the Bank to the questions raised, the Supervisor will notify the Bank as to
his position.
In view of the lack of clarity as to the matter of the accrual of interest
on the perpetual deposits during the period in which the Bank is prevented
from distributing a dividend (the lack of clarity to which the Supervisor
of Banks referred to in his letter) and in view of the possible
ramifications of this matter on the distribution of the dividends in
respect of the preferred shares, the Board of Directors deliberated the
matter, taking into consideration a comprehensive legal opinion presented
to the Board. The Board reached the conclusion that the interest not paid
to the Bank due to the non-distribution of the dividend should accrue to
the Bank's credit and, accordingly, in the event of the Bank's liquidation,
the interest will be paid to the receiver. In a letter dated January 22,
2003, the Bank requested from the Ministry of Finance and the Government
Companies Authority to issue their positions on this matter as soon as
possible.
In its reply dated March 13, 2003, the Ministry of Finance stated (among
other things) that the monies paid on the perpetual deposits for purposes
of distributing the dividend should be transferred to the Bank solely for
purposes of redeeming the aforementioned redeemable preference shares
(Classes D and DD), or upon liquidation. In order to clarify matters and to
avoid doubt, the Bank once again petitioned the Ministry of Finance to
confirm that it accepts the position of the Bank's Board of Directors as
described above. Despite the reminders that were sent by the Bank on this
matter, the requested clarification has still not been obtained. The Bank
made further requests on this matter during 2004, but as yet has not
received a satisfactory response. The Board of Directors has deliberated
the matter of the dividend on the said preference shares several more
times, and after taking into account all of the considerations and
circumstances described above has decided to abide by its previous decision
and to refrain from distributing any further dividend for the time being.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has stopped paying to the Bank the interest on
its perpetual deposits.
The accrued sum of the dividend, at the annual rate of 7.5%, in respect of
the aforementioned preference shares (including a 1.5% participating
dividend for C, CC and CC1 shares) that has not been paid since the Bank
ceased paying the dividend amounts to NIS 141.8 million. This amount was
not recorded in the financial statements and it is equal to the amount of
the accrued interest on the perpetual deposits, which was also not recorded
in the financial statements.
F - 40
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
The total amount of NIS 141.8 million is comprised as follows: NIS 86.7
million is in respect of non-participating shares (D and DD) and NIS 55.1
million is in respect of participating shares (C, CC and CC1). Of this
amount, an amount of NIS 40.1 million is in respect of 2005 and is
comprised as follows: NIS 15.3 million in respect of participating C, CC
and CC1 shares and NIS 24.8 million in respect of non-participating D and
DD shares.
On September 28, 2004 various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
originating motion in which the Court is petitioned to instruct the Bank to
pay to its shareholders a dividend at the rates and dates it was paid until
the second quarter of 2002.
Since in the opinion of the Bank, the matter of the dividend distribution,
which is the issue of the aforementioned originating motion, is connected
to the question of whether under the circumstances of a non-distribution of
dividend, the interest on the perpetual deposits of the Bank with the
Israeli Treasury is accrued in its favor, and since the answers received so
far from the Ministry of Finance were not clear enough and were
insufficient, the Bank filed an originating motion with the Court on March
9, 2005 against the Minister of Finance and the aforementioned financial
entities, in which it requested a ruling declaring (among other things)
that the interest on the perpetual deposits is indeed accrued in favor of
the Bank. Following the request of the Bank and the aforementioned
financial entities the Court ordered that the hearing on the two
originating motions be consolidated. In the reply of the Minister of
Finance to the originating motions prior to a preliminary hearing that was
held on January 12, 2006, the Minister of Finance announced that his
position is that the interest on the perpetual deposits does not accrue in
favor of the Bank when it does not distribute a dividend, and that even so,
in light of the Bank's circumstances, there is no justification for the
distribution of a dividend by the Bank (see Note 20D hereunder).
G. RIGHTS UPON LIQUIDATION
Upon liquidation of the Bank, all available assets will be distributed to
shareholders. Following are the first seven stages of distribution in
accordance with the priorities appearing in the Bank's Articles of
Association:
o First - to pay cumulative preferred dividends in arrears, including
dollar linkage differentials, to all classes of preference shares (C,
CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
capital of the aforementioned shares. As at December 31, 2005 the
accrued amount of the preferred dividend in arrears is NIS 129.6
million (As at December 31, 2004 - NIS 86.6 million).
o Second - to pay cumulative preferred dividends in arrears to preferred
ordinary shares. As at December 31, 2005 the dividends in arrears in
respect of the preferred ordinary shares amount to NIS 280 (As at
December 31, 2004 - NIS 200).
F - 41
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
G. RIGHTS UPON LIQUIDATION (CONT'D)
o Third - to refund paid in capital (plus dollar linkage differentials)
of "C" class preference shares, to refund paid in capital (plus dollar
linkage differentials) of "CC" class preference shares, to refund paid
in capital (plus dollar linkage differentials) of "CC1" class
preference shares, to refund paid in capital (plus dollar linkage
differentials) of "D" class preference shares, to refund paid in
capital (plus dollar linkage differentials) of "DD" class preference
shares - all being pari-passu and pro-rata to the paid in capital of
the aforementioned shares. As at December 31, 2005 the aforementioned
amounts to NIS 534.4 million (As at December 31, 2004 - NIS 500.2
million).
o Fourth - to refund paid in capital of preferred ordinary shares. As at
December 31, 2005 the aforementioned amounts to NIS 1,000 (As at
December 31, 2004 - NIS 1,000).
o Fifth - to refund paid in capital of class "A" ordinary shares, to
refund paid in capital of class "B" ordinary shares, and to refund
paid in capital of class "B1" ordinary shares - all being pari passu
and pro-rata to the paid in capital of the aforementioned shares. As
at December 31, 2005 the aforementioned amounts to NIS 14 thousand (As
at December 31, 2004 - NIS 14 thousand).
o Sixth - the remainder (if at all) of the differences to be paid to the
Bank by the State of Israel upon liquidation as a result of the rate
of increase in the CPI as compared with the increase in the
representative exchange rate of the dollar, in respect of the deposits
made by the Bank with the State, shall be paid to the holder or
holders of the class "B1" ordinary share. As at December 31, 2005 the
aforementioned difference amounts to NIS 293.7 million (As at December
31, 2004 - NIS 306.3 million).
o Seventh - the remainder of ordinary assets will be distributed between
the holders of the class "A" ordinary shares, the holders of the
preferred ordinary shares, and the holders of the C, CC and CC1
preference shares, according to the paid in capital of these shares
and at the ratio of ten per each agora of paid in class "A" ordinary
shares, ten per each agora of paid in preferred ordinary shares, ten
per each agora of paid in class "C" preference shares, six per each
agora of paid in class "CC" preference shares and six per each agora
of paid in class "CC1" preference shares - all being pari-passu and
pro-rata to the paid in capital of the aforementioned shares.
F - 42
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS
Following is the calculation of capital adequacy in accordance with
Directives Nos. 311 and 341 of the Supervisor of Banks, regarding "Minimal
Capital Ratio" and "Capital Allocation with respect to Exposure to Market
Risks":
A. CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
First tier capital (13.1) 7.5
Second tier capital (1) - 7.5
----- -----
Total capital (13.1) 15.0
===== =====
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
F - 43
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
B. WEIGHTED-BALANCES OF CREDIT RISK
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------ ------------------------
WEIGHTED CREDIT WEIGHTED CREDIT
BALANCES(2) RISK BALANCES BALANCES(2) RISK BALANCES
------- ------- ------- -------
REPORTED AMOUNTS
----------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
ASSETS
Cash and deposits with banks 72.9 12.0 117.9 21.1
Securities 63.2 63.2 60.0 60.0
Credit to the public (1) 7,680.7 1,256.0 7,993.4 1,782.1
Credit to governments and
perpetual deposits with the
Israeli Treasury 887.2 - 879.2 -
Premises and equipment 1.2 1.2 1.9 1.9
Other assets 15.6 3.6 26.0 4.2
------- ------- ------- -------
Total assets 8,720.8 1,336.0 9,078.4 1,869.3
======= ======= ======= =======
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Transactions representing credit risk 241.6 188.2 300.1 241.2
Derivative financial instruments 197.0 3.7 525.1 5.2
------- ------- ------- -------
Total off-balance sheet financial
instruments 438.6 191.9 825.2 246.4
------- ------- ------- -------
Total credit risk assets 9,159.4 1,527.9 9,903.6 2,115.7
Market risk - 238.0 203.2
------- ------- ------- -------
Total risk assets 9,159.4 1,765.9 9,903.6 2,318.9
======= ======= ======= =======
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
(2) Assets - balance sheet amounts, off-balance sheet financial
instruments - nominal balances weighted by credit conversion factors.
F - 44
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
C. RATIO OF CAPITAL TO TOTAL RISK ASSETS
DECEMBER 31 DECEMBER 31
2005 2004
---- ----
% %
---- ----
Ratio of first tier capital to total risk assets (0.74) 0.32
Ratio of second tier capital to total risk assets - 0.32
---- ----
Ratio of total first and second tier capital to total risk assets (0.74) 0.64
==== ====
On November 26, 2003, the Supervisor of Banks informed the Bank of the
canceling of the previous requirement by which the Bank had to maintain a
minimal capital ratio of 15%. Accordingly, the required capital ratio is 9%
as prescribed by Proper Banking Procedures.
NOTE 16 - LIENS AND RESTRICTIVE CONDITIONS
A. In connection with receiving of the special line of credit from the
Bank of Israel, the Bank signed on November 14, 2002 a debenture in
favor of the Bank of Israel (that was amended on December 29, 2005),
whereby the Bank registered a first degree floating pledge on all of
its assets, excluding the following assets:
- Loans and credits under State guarantee at a total balance sheet
value (according to financial statements as at December 31, 2005)
of NIS 6.4 billion.
- The Bank's deposit with the Ministry of Finance (the Accountant
General) in respect of the DD preference shares of the Bank.
- Deposits made by the Bank from time to time with other banking
institutions in Israel and/or abroad, and/or with brokers in
Israel and/or abroad, which were deposited in connection with
guaranteeing the Bank's liabilities to such banking institutions
and/or brokers, which were created subsequent to November 14,
2002.
Under this debenture, the Bank undertook, among other things, not to
register additional pledges on the assets pledged as part of the
debenture and not to dispose of such assets, in any form, without
receiving the prior written consent of the Bank of Israel.
Notwithstanding the above, the debenture stipulates that the floating
pledge registered therein does not prevent the Bank, or restrict the
Bank in the ordinary course of its business, including the fulfillment
of its obligations, receiving repayments of credit or granting credit.
The balance of the credit line (including accrued interest) as at
December 31, 2005, was an amount of NIS 1,033.7 million (December 31,
2004 - NIS 1,403.9 million).
F - 45
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 16 - LIENS AND RESTRICTIVE CONDITIONS (CONT'D)
B. As part of the arrangement determined by the Bank of Israel for the
granting of monetary credit to the banking industry, the Bank
registered floating pledges on Government debentures traded on the
Stock Exchange. Following are details as to credit received,
Government debentures and deposits with the Bank of Israel.
DEPOSITS RECEIVED DEPOSITS OF THE BANK
FROM THE BANK OF ISRAEL(1) WITH THE BANK OF ISRAEL
----------------- -------------------
REPORTED AMOUNTS REPORTED AMOUNTS
----------------- -------------------
NIS MILLIONS NIS MILLIONS
----------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Balance as at balance sheet date - - 12.8 12.6
Average balance (2) during the year 0.3 0.5 12.2 17.0
Highest balance (2) during the year 0.5 0.7 28.2 57.0
(1) Not including the special line of credit as detailed in A above.
(2) The average balance and the highest balance are based on the month-end
balances during the year.
C. Deposits with banks in the amount of NIS 25.4 million have been
pledged by the Bank in favor of those banks. The Bank of Israel gave
its consent to the pledge, which serves as collateral for transactions
in derivative financial instruments with those banks.
NOTE 17 - EMPLOYEE RIGHTS
A. SEVERANCE PAY
1. The Bank's liability for the payment of severance pay to its
employees, which is calculated as customary on the basis of one
monthly salary per each year of employment, is fully covered by
payments and deposits with recognized pension and provident funds, the
purchase of insurance policies and by the unfunded provision in the
books.
2. Commencing on July 15, 2002, Mr. U. Galili has served as the General
Manager of the Bank. The Bank has recently extended the employment
agreement of Mr. Galili until July 31, 2008 (the end of the Run-Off
plan).
Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as the
Chairman of the Board of Directors of the Bank. The employment
agreement of Dr. Ra'anan Cohen has been recently extended until July
31, 2008 (the end of the Run-Off plan).
On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
Savir serves as Deputy General Manager and as Credit Supervisor of the
Bank. The employment agreement of Mr. Savir has been recently extended
until July 31, 2008 (the end of the Run-Off plan).
F - 46
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
3. On December 26, 2002 a collective agreement was signed between the
Bank, the New Histadrut (the general federation of labor) and the
representatives of the Bank's employees, which applies to the Bank's
employees who are subject to the collective agreements of the Bank.
The agreement was for a period of 3 years and can be extended by one
additional year. The agreement arranged, inter alia, the following
matters:
> Management's right to dismiss employees in the framework of
cutbacks in the Bank's activities, as well as the process of
dismissal.
> Cutbacks that will be made in the salary of the employees and in
their related benefits.
> Benefits and special payments that will be due to the employees
who are dismissed, including additional severance pay in addition
to those provided in the law, and with respect to employees
having worked a certain number of years and with a certain number
of years remaining until retirement, conversion of the right to
enhanced severance pay, with the right to receive an early
pension.
On March 14, 2005 the parties signed a new collective agreement which
extended the period of the aforementioned collective agreement (from
December 26, 2002) until the end of the Bank's Run-Off plan (including
any change and extension made and approved by the Government) or until
December 31, 2007, whichever is earlier.
This new agreement also provided and clarified the following points:
A. Employees who according to the original agreement are entitled to
an early pension following their dismissal, will be entitled to
receive it until they reach the age they are entitled to receive
an ordinary pension from the pension fund to which they belong,
following the pension reform that came into effect in Israel
after the signing of the original agreement.
B. Some of the concessions the employees agreed to make in the
original agreement that were limited in time, will continue to
apply also in the period of the new agreement.
Certain provisions of the aforementioned agreements, which for the
most part grant the employees special benefits and payments following
their dismissal, were also applied to employees with personal
contracts who began working with the Bank before January 1, 2003, in
exchange for their agreeing to certain reductions in their terms of
employment, as was done with respect to the employees under the
collective agreements.
The financial statements for 2002 included non-recurring provisions in
an amount of NIS 35.7 million in respect of the severance payments,
which the Bank Management estimates it will have to make to the
employees of the Bank, the Deputy General Manager, General Manager and
to the Chairman of the Board. In 2003 and 2004 the provision that was
made in 2002 in respect of the Deputy General Manager, the General
Manager and the Chairman of the Board was completely cancelled
following the change in the Board's evaluation regarding their period
of employment with the Bank. Following this the balance of the
provision relating to the employees included in the aforementioned
collective agreement amounted to NIS 20.5 million as at December 31,
2004. As at December 31, 2005 the balance of the aforementioned
provision amounts to NIS 21.0 million (not including salary tax).
F - 47
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
4. In the past, the Bank signed personal employment contracts with three
senior executives of the Bank. The Bank and these executives have the
right to terminate the employee-employer relationship by providing an
advance notice of three months.
In accordance with these contracts in the event of the resignation of
the executives, the Bank has undertaken to pay them additional
severance payments and an "adaptation bonus" in addition to the
regular severance pay. This liability in the amount of NIS 2.8 million
is covered by an appropriate provision included in the provision for
severance pay.
These executives are entitled to severance pay at higher rates in the
event that their employment is terminated by the Bank. The additional
maximum amount that the Bank will have to pay in the event of the
employment of all the said executives being terminated with immediate
effect amounts to NIS 2.8 million. A provision was made in the Bank's
books in respect of this commitment. According to the approval
provided by the Board of Directors and the Ministry of Finance
Commissioner of Wages and Labor Agreements, the employment contracts
of these employees are going to be amended so that under certain
circumstances the payment of severance pay upon dismissal will be
replaced with the purchase of pension rights.
5. In the framework of the Economic Policy Law for 2005 (Legislation
Amendments) - 2004, which was approved by the Knesset on March 29,
2005, the definition of "salary" for purposes of paying salary tax by
financial institutions, including the Bank, was expanded so as to
include also a retirement grant or a death grant and any other amount
paid by an employer to an advanced study fund or provident fund that
is not a central severance pay fund, even if according to Section 3 of
the Income Tax Ordinance it is not considered earned income on the
date it was paid to the advanced study fund or the provident fund. The
amendment is in effect from January 1, 2005. In accordance with an
examination of the Bank, the aforementioned law mainly affects the
special collective agreement that was signed at the end of 2002 with
respect to the dismissal of employees. Following the said change in
the definition of salary tax the Bank recorded a provision in the
amount of NIS 3.7 million in respect salary tax on expenses relating
to early retirement.
6. Following is the data relating to provisions and funding for severance
pay included in the balance sheet:
DECEMBER 31 DECEMBER 31
2005 2004
---- ----
REPORTED REPORTED
AMOUNTS AMOUNTS
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Provision for severance pay 51.2 50.3
Amounts funded with pension and provident funds
(including earnings thereon) 24.1 23.5
---- ----
Unfunded provision included in "Other liabilities" 27.1 26.8
==== ====
The Bank may not withdraw amounts funded other than for the purpose of
discharging severance pay liabilities.
F - 48
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
B. UNUTILIZED SICK LEAVE
Upon retirement, employees are entitled, under certain conditions, to
compensation in respect of unutilized sick leave. In the opinion of
Management of the Bank an adequate provision has been included in the
financial statements in this respect. The balance of the provision as at
balance sheet date totals NIS 3.1 million (December 31, 2004 - NIS 3.1
million) and is included in the "Other liabilities" item.
C. LONG SERVICE BONUS
In accordance with the employment agreement existing at the Bank, employees
who are subject to this agreement are entitled to a special long service
bonus upon completing periods of twenty-five years and thirty years of
service with the Bank. A full provision has been made in the financial
statements for this liability, based on the probability of the employee
still being employed by the Bank on the effective dates. The balance of the
provision as at balance sheet date is NIS 0.1 million (December 31, 2004 -
NIS 0.2 million). This balance is included in "Other liabilities" item.
D. UNUTILIZED VACATION
The balance of the provision for unutilized vacation is NIS 2.2 million as
at balance sheet date (December 31, 2004 - NIS 2.4 million). The balance is
included in "Other liabilities" item.
F - 49
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 18 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
REPORTED AMOUNTS
DECEMBER 31, 2005
------------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------- ----------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ---- ---- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ---- ---- -------
ASSETS
Cash and deposits
with banks 37.5 16.7 17.9 0.8 - 72.9
Securities - 2.6 - - 60.6 63.2
Credit to the public 400.2 616.3 6,597.1 67.1 - 7,680.7
Credit to governments - 10.2 33.7 15.1 - 59.0
Fixed assets - - - - 1.2 1.2
Other assets 13.1 - - - 2.5 15.6
Perpetual deposits with
the Israeli Treasury - 828.2 - - - 828.2
------- ------- ------- ---- ---- -------
Total assets 450.8 1,474.0 6,648.7 83.0 64.3 8,720.8
------- ------- ------- ---- ---- -------
LIABILITIES
Deposits of the public 87.8 78.6 11.5 0.3 - 178.2
Deposits of banks 1,033.7 - - 15.1 - 1,048.8
Deposits of
the Government - 356.4 6,526.6 - - 6,883.0
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 26.9 - - 26.9
Other liabilities 15.1 37.7 1.8 - 1.8 56.4
------- ------- ------- ---- ---- -------
Total liabilities 1,136.7 472.7 6,566.8 15.4 1.8 8,193.4
------- ------- ------- ---- ---- -------
Difference (685.9) 1,001.3 81.9 67.6 62.5 527.4
Forward transactions, net 177.9 (44.9) (59.7) (73.3) - -
Out-of-the-money options,
net (in terms of underlying
asset) 2.9 - (2.9) - - -
------- ------- ------- ---- ---- -------
Total (505.1) 956.4 19.3 (5.7) 62.5 527.4
======= ======= ======= ==== ==== =======
Out-of-the-money options,
net (discounted par value) 14.5 - (14.5) - - -
======= ======= ======= ==== ==== =======
F - 50
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 18 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2004
--------------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------- -----------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ----- ---- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ----- ---- -------
ASSETS
Cash and deposits
with banks 46.1 22.5 47.6 1.7 - 117.9
Securities 0.6 3.1 - - 56.3 60.0
Credit to the public 708.7 717.1 6,450.0 117.6 - 7,993.4
Credit to governments - 12.4 36.2 24.1 - 72.7
Fixed assets - - - - 1.9 1.9
Other assets 22.4 - - - 3.6 26.0
Perpetual deposits with
the Israeli Treasury - 806.5 - - - 806.5
------- ------- ------- ----- ---- -------
Total assets 777.8 1,561.6 6,533.8 143.4 61.8 9,078.4
------- ------- ------- ----- ---- -------
LIABILITIES
Deposits of the public 198.3 148.8 53.0 5.2 - 405.3
Deposits of banks 1,403.9 - - 24.1 - 1,428.0
Deposits of
the Government - 372.4 6,282.2 - - 6,654.6
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 25.3 - - 25.3
Other liabilities 17.5 33.8 1.8 2.4 1.3 56.8
------- ------- ------- ----- ---- -------
Total liabilities 1,619.8 555.0 6,362.3 31.7 1.3 8,570.1
------- ------- ------- ----- ---- -------
Difference (842.0) 1,006.6 171.5 111.7 60.5 508.3
Forward transactions, net 376.9 (143.0) (121.5) (112.4) - -
In-the-money options, net
(in terms of underlying
asset) 29.3 - (29.3) - - -
Total (435.8) 863.6 20.7 (0.7) 60.5 508.3
======= ======= ======= ===== ==== =======
In-the-money options, net
(discounted par value) 36.1 - (36.1) - - -
======= ======= ======= ===== ==== =======
F - 51
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1)
REPORTED AMOUNTS
DECEMBER 31, 2005
--------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER TOTAL WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
UNLINKED ISRAELI CURRENCY
Assets 61.3 18.2 46.5 24.6 32.2 10.8 7.1 5.8 - - 206.5 285.9 450.8
Liabilities 70.0 37.3 135.2 311.9 114.0 - - - - - 668.4 (4)562.5 1,136.7
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
Difference (8.7) (19.1) (88.7) (287.3) (81.8) 10.8 7.1 5.8 - - (461.9) (276.6) (685.9)
Derivative instruments
excluding options 151.5 10.2 19.6 - - - - - - - 181.3 - 181.3
Options (in terms of underlying asset) 2.9 - - - - - - - - - 2.9 - 2.9
ISRAELI CURRENCY LINKED TO THE CPI
Assets 22.9 21.1 104.5 122.2 96.7 86.2 77.1 220.7 83.7 - 835.1 828.2 1,474.0
Liabilities 15.4 21.6 94.7 54.7 52.2 49.5 48.4 136.0 3.6 - 476.1 36.7 472.7
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
Difference 7.5 (0.5) 9.8 67.5 44.5 36.7 28.7 84.7 80.1 - 359.0 791.5 1,001.3
Derivative instruments
excluding options (15.4) (10.3) (19.7) - - - - - - - (45.4) - (45.4)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 25.4 184.4 609.9 691.2 673.3 666.7 659.1 3,225.7 4,649.5 - 11,385.2 23.7 6,731.7
Liabilities 10.2 174.5 534.7 674.9 662.7 658.1 653.5 3,208.3 4,646.4 - 11,223.3 1.8 6,582.2
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
Difference 15.2 9.9 75.2 16.3 10.6 8.6 5.6 17.4 3.1 - 161.9 21.9 149.5
Derivative instruments
excluding options (133.0) - - - - - - - - - (133.0) - (133.0)
Options (2.9) - - - - - - - - - (2.9) - (2.9)
NON-MONETARY ITEMS
Assets 0.4 0.8 1.3 - - - - - - - 2.5 62.2 64.3
Liabilities 0.3 0.5 0.8 0.2 - - - - - - 1.8 - 1.8
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
Difference 0.1 0.3 0.5 (0.2) - - - - - - 0.7 62.2 62.5
TOTAL AS AT DECEMBER 31, 2005
ASSETS 110.0 224.5 762.2 838.0 802.2 763.7 743.3 3,452.2 4,733.2 - 12,429.3 1,200.0 8,720.8
LIABILITIES 95.9 233.9 765.4 1,041.7 828.9 707.6 701.9 3,344.3 4,650.0 - 12,369.6 601.0 8,193.4
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
DIFFERENCE 14.1 (9.4) (3.2) (203.7) (26.7) 56.1 41.4 107.9 123.2 - 59.7 599.0 527.4
===== ===== ===== ======= ===== ===== ===== ======= ======= ======== ======== ======= =======
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS 3.1 (0.1) (0.1) - - - - - - - 2.9 - -
OPTIONS (IN TERMS OF UNDERLYING ASSET) - - - - - - - - - - - - -
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 293.4 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 18 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the balance of the credit line that was provided by
the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).
F - 52
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1) (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2004
--------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER TOTAL WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
----- ----- ----- ------- ----- ----- ----- ------- ------- -------- -------- ------- -------
UNLINKED ISRAELI CURRENCY
Assets 114.9 44.2 84.4 48.8 17.5 25.6 7.6 11.2 - - 354.2 471.4 777.8
Liabilities 35.4 26.2 212.4 7.9 - - - - - - 281.9 (4)1,371.5 1,619.8
----- ----- ----- ----- ----- ----- ----- ------- ------- ---- -------- ------- -------
Difference 79.5 18.0 (128.0) 40.9 17.5 25.6 7.6 11.2 - - 72.3 (900.1) (842.0)
Derivative instruments
excluding options 241.9 25.2 121.9 - - - - - - - 389.0 - 376.9
Options (in terms of underlying asset) - 30.0 - - - - - - - - 30.0 - 29.3
ISRAELI CURRENCY LINKED TO THE CPI
Assets 16.3 22.5 108.2 140.9 120.0 97.2 85.0 288.8 101.9 0.9 981.7 806.5 1,561.6
Liabilities 5.9 17.2 98.7 118.4 53.5 50.9 48.3 179.0 4.1 - 576.0 32.5 555.0
----- ----- ----- ----- ----- ----- ----- ------- ------- ---- -------- ------- -------
Difference 10.4 5.3 9.5 22.5 66.5 46.3 36.7 109.8 97.8 0.9 405.7 774.0 1,006.6
Derivative instruments
excluding options - (25.3) (119.8) - - - - - - - (145.1) - (143.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 79.7 149.6 574.9 728.5 652.7 632.9 627.1 3,046.6 4,899.6 60.4 11,452.0 56.5 6,677.2
Liabilities 44.7 141.5 501.2 650.7 632.7 620.3 616.0 3,015.2 4,887.4 60.4 11,170.1 1.8 6,394.0
----- ----- ----- ----- ----- ----- ----- ------- ------- ---- -------- ------- -------
Difference 35.0 8.1 73.7 77.8 20.0 12.6 11.1 31.4 12.2 - 281.9 54.7 283.2
Derivative instruments
excluding options (235.0) (1.3) - - - - - - - - (236.3) - (233.9)
Options - (29.3) - - - - - - - - (29.3) - (29.3)
NON-MONETARY ITEMS
Assets 0.6 1.2 1.8 - - - - - - - 3.6 58.2 61.8
Liabilities 0.2 0.8 0.3 - - - - - - - 1.3 - 1.3
----- ----- ----- ----- ----- ----- ----- ------- ------- ---- -------- ------- -------
Difference 0.4 0.4 1.5 - - - - - - - 2.3 58.2 60.5
TOTAL AS AT DECEMBER 31, 2004
ASSETS 211.5 217.5 769.3 918.2 790.2 755.7 719.7 3,346.6 5,001.5 61.3 12,791.5 1,392.6 9,078.4
LIABILITIES 86.2 185.7 812.6 777.0 686.2 671.2 664.3 3,194.2 4,891.5 60.4 12,029.3 1,405.8 8,570.1
----- ----- ----- ----- ----- ----- ----- ------- ------- ---- -------- ------- -------
DIFFERENCE 125.3 31.8 (43.3) 141.2 104.0 84.5 54.4 152.4 110.0 0.9 761.2 (13.2) 508.3
===== ===== ===== ===== ===== ===== ===== ======= ======= ==== ======== ======= =======
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS 6.9 (1.4) 2.1 - - - - - - - 7.6 - -
OPTIONS (IN TERMS OF UNDERLYING ASSET) - 0.7 - - - - - - - - 0.7 - -
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 516.4 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 18 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the credit line that was provided by the Bank of
Israel. In accordance with the terms of the credit line as at December 31
2004, this balance was to be repaid by the Government by means of a
monetary transfer to the Bank of Israel within a period of 12 months
beginning from July 2005. Since a downward trend was not determined for the
credit line from this date, its amount on the aforementioned date was
included in the "Without maturity date" column.
F - 53
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 171.6 179.9
Guarantees to home purchasers 49.8 91.0
Other guarantees and liabilities 17.4 25.1
Documentary credit - 2.9
Unutilized revolving credit facilities 1.7 0.3
Irrevocable commitments to grant
credit facilities, approved but not yet executed - 0.8
B. OTHER CONTINGENT LIABILITIES AND COMMITMENTS
1. See Note 17A with respect to the contingent liabilities regarding
personal employment agreements with senior executives.
2. Long-term rental agreement -
During 2003, the Bank signed a rental agreement in respect of its
office premises for the period ending in August 2006. The annual
rental payment, which is linked to the CPI, amounts to NIS 0.9
million. The Bank has an option to extend the rental period by an
additional three years. The rental payment, which is linked to the
CPI, will be raised by 5% in the additional period.
3. As at January 1, 2004 the Bank has outsourced its computer services,
according to which it signed an agreement to receive computer services
for a period of three years, with an option for an extension by an
additional two years. In 2006 the cost of the service will amount to
NIS 2.6 million. In the event that the Bank decides to extend the
agreement by the additional two years, as aforementioned, the cost of
service for each additional year will amount to NIS 2.4 million.
4. The Bank entered into agreements whereby it will participate in
private investment funds. The total amount approved for investment by
the Bank amounts to U.S.$ 20 million. The said investment funds invest
in Israeli companies or companies related to Israel and in hi-tech
companies. The investment in them is presented under the "Securities"
item. The major part of the investments made by these funds is in the
credit component. The balance of these liabilities as at balance sheet
date amounts to U.S.$ 4.2 million.
F - 54
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS
1) The Company issued to its officers and directors a writ of
indemnification that was approved by the shareholders' general meeting
of the Bank on August 8, 2002. According to the writ of
indemnification that was issued, the Bank undertook to indemnify its
officers and directors in respect of any monetary liability imposed on
them in favor of another person in accordance with a court ruling
(including a ruling made as part of a compromise and an arbitration
decision that received court approval) and in respect of reasonable
legal expenses (including attorney fees), that are imposed on them
following actions (defined as including acts of omission or
commission) that were taken and/or will be taken by them due to their
being officers or directors of the Bank or as part of a position or
duty that they fulfilled and/or will fulfill at the request of the
Bank or on its behalf in a company or other corporate entity or any
business venture in which the Bank has invested or will invest,
providing that these actions are connected with one or more of the
types of events detailed in the writ of indemnification including,
inter alia, the following events:
o The issuance of securities.
o Using voting rights and rights to appoint directors in a company
in which the Bank held and/or will hold shares and/or in another
company and/or business venture in which the Bank has or will
invest.
o Voting for or against any decision of the board of directors, a
committee, etc., of a company, entity or venture as
aforementioned.
o The realizing of collateral provided to the Bank.
o The approval of credit and/or the provision of credit and other
actions as part of the Bank's permissible business in accordance
with the Banking Law (Licensing) - 1981.
o The holding of assets in trust.
o The providing of an underwriting commitment.
o A transaction in assets executed by the Bank for itself.
o The issuance of a report or notice as required by law.
o The receipt of licenses and permits.
o Events connected to employee-employer relations.
o Any refraining from executing one or more of the aforementioned
acts.
The amount of the total cumulative indemnification that is payable
according to the aforementioned writ of indemnification shall not
exceed 25% of the Bank's shareholders' equity according to its
financial statements for March 31, 2002, which was NIS 640,300,000,
meaning no more than NIS 160,075,000, linked to the CPI published in
respect of March 2002. The writ of indemnification is subject to the
provisions of the Companies Law and to various conditions as specified
in the writ of indemnification. It is noted that Amendment 3 to the
Companies Law - 1999 (dated March 7, 2005) provides, inter alia, that
an indemnification commitment (such as the aforementioned writ of
indemnification) has to be limited to events the board of directors
believes may actually occur at the time of providing the
indemnification commitment and to an amount or criterion the board of
directors deems as reasonable under the circumstances of the matter.
The question of the amendment applying to existing writs of
indemnification and the interpretation of the aforementioned
restriction have not yet been addressed in court rulings and therefore
the effects of the amendment on the aforementioned writ of
indemnification are uncertain.
F - 55
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS (CONT'D)
In May 2003, the Audit Committee and the Board of Directors of the
Bank approved the applicability of the indemnification writ to an
additional director whose appointment ended prior to July 11, 2002.
2) On June 11, 2003, the Bank issued a writ of indemnification to two
former employees of the Bank in connection with a suit in the amount
of NIS 295 million, which was filed against them and the Bank in
February 2003 and the details of which are presented in section D
hereunder. As stated hereunder the suit was dismissed.
3) On November 1, 2004 the Bank issued a writ of indemnification to an
employee of the Bank in connection with a claim that was filed in
March 2004 against her, the Bank and additional senior officers of the
Bank, which for purposes of court fees was set at NIS 1 million.
Details of this claim are presented in section D hereunder.
4) On July 17, 2005 the Bank issued a writ of indemnification to a former
employee of the Bank regarding a possible claim that may be filed
against him by a customer of the Bank and/or representatives of the
customer. The Bank has taken legal measures against this customer in
respect of a liability in the amount of U.S. $ 250,000. The claim
filed by the aforementioned customer also includes various allegations
against the aforementioned employee.
5) On December 20, 2005 the Bank issued a writ of indemnification to the
receiver that was appointed at the request of the Bank to a
construction project that was financed by the Bank, with respect to a
claim in the amount of NIS 1,356,459 that was filed against him (as
the receiver) and against the Bank, details of which are provided in
section D hereunder.
6) On February 11, 2005 the Bank issued a writ of indemnification in
favor of an attorney of the Bank who was appointed as the execution
office receiver for the purpose of realizing a mortgage of the Bank.
The writ of indemnification was issued in respect of proceedings the
Bank and aforementioned attorney are taking in order to annul the sale
agreement that was prepared by the said attorney in the framework of
realizing the mortgage in favor of the Bank.
D. LEGAL ACTIONS
Legal actions, including a motion to certify a claim as a class action,
were filed against the Bank in the ordinary course of business. Management
of the Bank, on the basis of legal opinions regarding the prospects of the
claims, including the motion to certify a claim as a class action, believes
that when necessary, adequate provisions were included in the financial
statements to cover possible losses in respect of those claims.
F - 56
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
Following are details of legal actions against the Bank in material
amounts:
1) In March 2003, Lehava Underwriters Ltd. (by virtue of its being a
shareholder of the Bank) filed a derivative claim in the amount of NIS
409.5 million against eleven senior officers of the Bank (current and
past) and against the Bank itself. The plaintiff claims that the named
senior officers breached their "duty of care" toward the Bank and were
negligent in fulfilling their duty and, as a result, should be
required to pay the Bank the amount of the claim, as compensation for
the damages they inflicted on the Bank. According to the claim, the
negligence of the senior officers is reflected in, among other things,
the credit that they granted without suitable collateral, problems
with the credit-granting policy and the quality and approval
procedures thereof, credit risk management and the ongoing handling of
the credit. The amount of the suit, in respect of damages incurred as
a result of the alleged negligence, reflects the amount of the
allowances for doubtful debts recorded by the Bank in 2002. The Bank
notified the insurers with which it has a directors and senior
officers liability insurance policy of the filing of the suit. The
insurers have notified the Bank that they have certain reservations
regarding the insurance coverage of the claim and that they reserve
their rights on this matter. The Bank rejects these reservations in
their entirety and intends to act in order to fully exercise its
rights against the insurers. The defendants filed a motion to have the
suit summarily dismissed on the grounds that the plaintiff should have
filed a motion for approval of the claim as a derivative claim. The
Court accepted the position of the defendants and it ordered the
plaintiff to file a motion for the approval of the claim as a
derivative claim. Such a motion was submitted on December 7, 2003. On
May 26, 2005 a hearing was held on the motion but the Court has not
yet handed down its decision. Representation of the Bank in the
proceedings regarding the claim and the motion has been handed over to
legal counsel. In the opinion of the Bank's legal counsel, since the
claim is a derivative action the Bank's exposure in respect thereto is
only for expenses (including court fees, expenses of the plaintiff,
fee to the attorney of the plaintiff and special compensation to the
plaintiff).
2) In October 2002, Mr. Arye Fin (a shareholder of the Bank) filed with
the Tel Aviv-Jaffa District Court a legal action against the Bank,
against the State of Israel (as controlling shareholder in the Bank),
and against 17 former and current officers of the Bank (two of which
were removed later from the action), together with a motion to have
the suit approved as a class action. The class action was filed in the
name of all those who purchased shares of the Bank between December 1,
2001 and August 22, 2002, and the cause of the action is the alleged
breach of the duty to report under the Securities Law - 1968 and the
Securities Regulations (Periodic and Immediate Reports) - 1970 enacted
thereunder (hereinafter - the Securities Regulations). As claimed in
the action, during the aforementioned period, a number of
extraordinary events and/or matters occurred that indicated that the
Bank was in serious condition, and both these events and matters, and
the Bank's very situation mandated that the Bank file an immediate
report under the Securities Regulations. Such a report was not filed.
The estimated damages being claimed in the action is NIS 20 million
and, alternatively, NIS 14 million. The Bank notified the insurers
with which it has a bankers policy and a directors and senior officers
liability insurance policy of the filing of the suit. The insurers
carrying the bankers policy notified the Bank that the bankers policy
does not cover the claim. The Bank was also notified by the insurers
carrying the directors and senior officers liability insurance policy
that they have certain reservations regarding the validity of the
claim's insurance coverage and that they reserve their rights on this
matter.
F - 57
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
The Bank rejects these reservations in their entirety and intends to
act in order to fully exercise its rights against the insurers. The
Bank transferred the handling of the suit and the motion to have the
suit recognized as a class action to an attorney acting on its behalf.
The Court has not yet handed down a ruling on the motion to have the
suit approved as a class action. On May 17, 2005 the Court accepted
the motion of the plaintiff and ordered the disclosure of a number of
documents by the Bank. The Bank filed an appeal on the ruling
regarding the disclosure of documents. The appeal was heard on
December 25, 2005 and as yet no ruling has been handed down.
3) In September 2004, various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv-Jaffa
District Court an originating motion in which the Court was requested,
inter alia, to instruct the Bank to pay to its shareholders a dividend
at the rates and dates it was paid until the second quarter of 2002.
The petitioners contend, inter alia, that according to the Bank's
articles of association, the Bank is required to pay to the holders of
its preferred shares an annual dividend at the rate of 7.5%, because
this dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits the
Bank keeps with it, and therefore its distribution is not subject to
the distribution conditions provided in the law, and that even if the
distribution conditions should be applied, the Bank should still be
ordered to distribute the requested dividend, due to the Bank's
meeting the repayment ability test as the dividend is being fully
financed by the State of Israel and not being deducted from the
capital of the Bank. The Bank transferred the handling of the
originating motion to attorneys acting on its behalf. Since in the
opinion of the Bank, the matter of the dividend distribution, which is
the issue of the aforementioned originating motion, is connected to
the question of whether under the circumstances of a non-distribution
of dividends, the interest on the perpetual deposits of the Bank with
the Ministry of Finance is accrued in its favor, and since the answers
received so far from the Ministry of Finance were not clear enough and
were insufficient, the Bank filed an originating motion with the Court
on March 9, 2005 against the Minister of Finance and the
aforementioned financial entities, in which it requested (among other
things) a declaratory ruling by which the interest on the perpetual
deposits is indeed accrued in favor of the Bank. Following the request
of the Bank and the aforementioned financial entities the Court
ordered that the hearing on the two originating motions be
consolidated. A preliminary hearing on the originating motions took
place on January 12, 2006. In the reply of the Minister of Finance to
the originating motions prior to the aforementioned preliminary
hearing, the Minister of Finance announced that his position is that
the interest on the perpetual deposits does not accrue in favor of the
Bank when it does not distribute a dividend, and that even so, in
light of the Bank's circumstances, there is no justification for the
distribution of a dividend by the Bank. In the opinion of the Bank's
legal advisors, the Bank will probably not be exposed to any monetary
exposure as a result of the originating motion that was filed against
it, based on the assumption that if the Court accepts the request of
the aforementioned financial entities and orders the payment of the
dividend, the State will have to pay the Bank the amount of the
dividend out of the interest on the Bank's perpetual deposits with the
Treasury.
F - 58
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
4) In February 2006 a motion was filed with the Haifa District Court
against the Bank, a receiver that was appointed at the request of the
Bank over a shopping mall that was financed by the Bank and the
company that purchased the shopping mall from the receiver. The
petitioning company contends that at the time it had sold the rights
in the land of the shopping mall to the company that had constructed
it, that the construction company still owes it, as part of the sale
consideration, space in the shopping center that is worth $ 260,000
plus VAT and that the Bank had at the time confirmed to it that the
liens it had created in favor of the Bank on the rights in the land of
the shopping mall are subject to the construction company keeping this
commitment. In the motion, the Court is requested, inter alia, to
order the cancellation of the sale of the shopping mall by the
receiver or to order that the money from the sale not be transferred
to the Bank, until guaranteeing the rights of the petitioning company
to receive $ 260,000 plus VAT and compensation in the amount of NIS
1,200,000, the amount provided in the sale agreement between the
petitioning company and the construction company as agreed
compensation in the event of a material breach. The handling of the
motion was transferred to the care of an attorney acting on behalf of
the Bank.
5) In October 2005, a company, that performs engineering and plumbing
work, filed a claim with the Tel Aviv-Jaffa District Court in the
amount of NIS 1,356,459 against the Bank, a receiver that was
appointed at the request of the Bank to a residential and commercial
project that encountered difficulties, and against the owner of the
land that at the time had entered into a combination agreement with
the promoter that had constructed the project with the financing of
the Bank. The plaintiff company performed work on the project at the
request of the promoter, which had failed and did not repay its debt
to the plaintiff company. The claim states that the amount requested
reflects the amount the promoter still owes the plaintiff company in
respect of the work it executed on the project with the addition of
interest and/or linkage differences. The plaintiff company contends
that due to principles of closed banking financing and the Bank having
granted to the promoter bank financing for construction of the
project, the Bank should be considered responsible for repayment of
the debt. Furthermore, it contends that at the time it had entered
into the agreement with the promoter, the Bank should have brought to
its attention the information the plaintiff contends was in the
possession of the Bank, regarding the difficult condition of the
promoter and the project. The handling of the claim was transferred to
the care of an attorney acting on behalf of the Bank.
6) In June 2004 two former employees of the Bank, who had filled senior
positions in the Bank, filed a suit against the Bank with the Tel
Aviv-Jaffa Labor Court in the total amount (for both of them) of NIS
2.3 million. The claim is for the payment of certain benefits, which
the plaintiffs allege were due to them with regard to their retirement
from the Bank in 2002. The suit was filed also against the Ministry of
Finance Commissioner of Wages and Labor Agreements in respect of the
non-approval of these payments. Alternatively the aforementioned
plaintiffs claim the salary raises they allege that they forfeited in
the past in exchange for the aforementioned benefits. The Bank has
transferred the matter to an attorney acting on its behalf. On June
20, 2005 the aforementioned plaintiffs filed a request for a partial
ruling in the amount of NIS 410 thousand, in respect of amounts the
payment of which was approved by the Ministry of Finance Commissioner
of Wages and Labor Agreements without conditioning the approval upon
their relinquishing any additional claims. The Bank has filed an
objection to the request. The Court has not yet ruled on the request.
F - 59
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
7) In March 2004 three companies that are customers of the Bank filed a
claim with the Tel Aviv-Jaffa District Court for a declaratory ruling
and for damages against the Bank, the Bank's Chairman of the Board,
the Bank's General Manager and a credit manager of the Bank. The three
plaintiffs, against which the Bank is conducting legal proceedings
(against one of which a ruling was handed down in favor of the Bank
and became final in January 2005 and against the other two a permanent
receiving order was issued in December 2005 at the request of the
Bank), request from the Court to declare, inter alia, that a binding
financing agreement had been signed between them and the Bank. The
three plaintiffs also claim damages in the amount of NIS 200 million
which they claim were caused by the Bank and the other defendants, but
for purposes of court fees they are claiming the amount of NIS 1
million while maintaining their right to amend the amount in the
future. The Bank has transferred the matter to an attorney acting on
its behalf.
8) In January 2004 a counterclaim in the amount of NIS 1,250,000 was
filed against the Bank with the Tel Aviv-Jaffa District Court in the
framework of a claim the Bank had filed against a company that had
constructed a commercial and residential project with the financing of
the Bank and against the guarantors for its debt. The plaintiffs in
the counterclaim are one of the responding guarantors and a company he
owns, and they contend that the Bank had breached the guarantee
contract between it and the counter plaintiff, that the Bank had
agreed to changes in the project and to increase the credit to the
project without the knowledge of the counter plaintiff and that the
Bank had also been negligent in the financing it had provided for the
project. The counter plaintiffs contend that they incurred various
damages as a result of the acts of commission and omission they
attribute to the Bank, including the loss of their investment in the
company that had constructed the project, and they state that in order
to pay less court fees (while reserving their right to amend the
amount of the claim) they set their claim at the amount of NIS
1,250,000. The Bank has transferred the matter of the counterclaim to
an attorney acting on its behalf.
9) In September 2003 a supplier of fuel products filed a claim in the
amount of NIS 6 million with the Tel Aviv-Jaffa District Court against
the Bank and two other banks regarding non-payment of the
consideration for fuel products it had provided to a mutual customer
of the three defending banks. It is alleged that the involvement of
the defending banks in the approval of the business plan and in the
approval of the expense and income budget of the aforementioned
customer, had created a representation towards the plaintiff on which
it had relied at the time of delivery of its products, because it had
assumed that the expenses included in the approved plan and/or budgets
would be paid by the defending banks. The Bank has transferred the
matter to an attorney acting on its behalf.
10) In February 2003, the Bank was served with a suit that was filed with
the Tel Aviv-Jaffa District Court in which a company that had received
from the Bank government-guaranteed loans in the 1990s claims,
together with its controlling shareholders, an amount of NIS 295
million from 13 different defendants, including the Israeli Ministry
of Industry and Trade, the Israeli Ministry of Finance, the heads of
the Israel Investment Center, the Bank, and two of its former
employees. The claim is for compensation in respect of damages
allegedly caused by the defendants, among other things, as a result of
a failure and/or a delay to grant loans and/or grants to the company.
The Bank notified its insurers of the filing of the suit, but has not
yet received confirmation of the insurance coverage.
F - 60
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
Nevertheless, the attorneys of the insurer carrying the Bank's bankers
policy have notified the Bank that following an initial examination it
is possible that the claim or part of it are not covered by the
policy. The Bank disagrees with this opinion and has notified the
insurers of this. The Bank has transferred the matter to an attorney
acting on its behalf. On January 31, 2005 the Court denied the motion
of the plaintiffs to be exempted from court fees and ruled that if the
fees are not paid by March 1, 2005 the claim would be dismissed. Since
the fees were not paid the claim was dismissed. The plaintiffs filed
an appeal on the denial of their motion for exemption from court fees
and on June 7, 2005 the Court rejected their appeal. On September 18,
2005 the plaintiffs filed an appeal with the Supreme Court on the
dismissal of the claim and the denial of their motion for exemption
from court fees. Since the appeal was submitted late, the plaintiffs
submitted with it a request to extend the date for filing an appeal.
On October 26, 2005 the Supreme Court Registrar denied their request
for an extension. To the best of the Bank's knowledge, since then no
additional legal proceedings have been initiated by the plaintiff.
11) In August 2000 a suit was filed with the Tel Aviv-Jaffa District Court
against one of the Bank's former senior executives and against 24
other defendants by a number of venture capital funds. For purposes of
the court fee, the amount of the suit was set at $ 18.7 million, which
was later increased to $ 22.5 million. According to the plaintiff's
complaint, the suit was filed, among other reasons, in connection with
the breach of an investment agreement, whereby the plaintiffs and
other investors were allegedly supposed to receive 46.5% of the shares
of a company in which the aforementioned senior executive served in
the past as a director on behalf of a former sub-subsidiary of the
Bank. The claim was transferred to an attorney and a defense brief was
submitted. The insurers carrying the directors and senior officers
liability insurance policy have recently notified the Bank that in
their opinion the claim does not have insurance coverage, but the
Bank's legal counsel handling the claim believes that if the said
executive has to make any monetary payment in respect of the suit, the
payment will be covered by the insurance policy.
12) In December 1999, the Bank was served with a "third party" notice in
the amount of NIS 50 million. The notice was served by the United
Mizrahi Bank Ltd. ("Mizrahi") against the Bank and against ten
additional parties, within the framework of a counterclaim, which the
State of Israel had filed with the Tel Aviv-Jaffa District Court
against Mizrahi concerning grants and loans, which Mizrahi had
provided to a group of companies. Mizrahi claims, inter alia, that the
Bank was negligent in preparing the surveys that were relied upon in
the issuance of letters of approval to the said group of companies,
and thereby the Bank is responsible for the damage suffered by the
State and/or Mizrahi as a result of the collapse of the group. The
Bank rejects the claims raised by Mizrahi. On December 19, 2005 the
Court gave judicial force to a compromise that was signed between the
various parties in the aforementioned proceedings, by which the claim
of Mizrahi against the Bank was rejected without the Bank being
required to make any payments.
In the opinion of Management of the Bank, which is based on the opinion of
its legal counsel, the Bank's exposure in respect of pending claims, whose
prospects of success are not remote and regarding which a provision was not
recorded, amounts to NIS 33 million.
F - 61
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
E. REQUEST FOR DISCLOSURE OF DOCUMENTS REGARDING STAMP TAX
On August 30, 2004 the Bank received a request from the Customs and VAT
Department of the Ministry of Finance to provide agreements (including
memorandums) that were signed by the Bank after June 1, 2003. The request
was made following the amendment of the Stamp Tax Law, which came into
effect on June 1, 2003, and which provided the identity of the parties
required to pay stamp tax in respect of documents that were subject to the
tax but for which no provision had been made until then about who is
required to pay it. It is noted that following the adoption and
implementation of the Bank's "Run-off" plan, the Bank has significantly
reduced its activities and even before June 1, 2003 actually stopped
providing any new credit, and along with the collection of existing credit
has handled, in certain cases, the restructuring or extension of credit.
The stamp tax on loan agreements was cancelled as from January 1, 2005 and
was annulled completely (in respect of all documents) as from January 1,
2006. In 2005 the High Court of Justice denied motions that were submitted
to it against the aforementioned amendment to stamp tax and the manner of
its enforcement.
The aforementioned request to provide agreements that was received by the
Bank was transferred to the examination of outside legal counsel, who also
reviewed, in the opinion they provided, agreements customarily used by the
Bank.
In the opinion of Management of the Bank, which is based on the legal
opinion it received, there is sound basis that:
1. To the extent that tax is required with respect to credit agreements
signed before June 1, 2003, the requirement applies to the agreements
and not to the parties to the agreement.
2. And to the extent that tax is required with respect to credit
agreements signed by the Bank after June 1, 2003, with respect to most
of the relevant agreements, this requirement applies to the customers
who were party to these agreements and not to the Bank.
In light of the aforementioned no provision was recorded in the books of
the Bank.
F - 62
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
F. OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
ON COLLECTION OF LOANS*
DECEMBER 31 DECEMBER 31
2005 2004
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Credit from deposits based on rate of collection**
Unlinked Israeli currency 343.0 382.5
CPI linked Israeli currency 4.7 1.3
Foreign currency 205.4 199.7
----- -----
Total 553.1 583.5
===== =====
* Credit and deposits from deposits the repayment of which to the
depositor is contingent upon the collection of credit (or deposits).
The Bank presently has no interest margin or collection commission
with respect to the handling of such credit.
** The aforementioned credit and deposits mainly derive from agreements
that were made with the State regarding the granting of credit as
follows:
- Loans intended for research and development.
- Loans in the framework of the fund for small businesses.
- Loans that were granted in the framework of Amendment 39 of the
Law for the Encouragement of Capital Investments.
As at December 31, 2005 the activity based on the extent of collection
includes past due balances amounting to NIS 548.4 million (December 31,
2004 - NIS 574.9 million).
G. ANNUAL REPORTING IN THE U.S.
Since the Bank had in the past issued its securities to holders in the
U.S., the Bank is required under American law to submit an annual report to
the United States Securities and Exchange Commission (hereinafter - SEC).
The Bank has for decades submitted this annual report on a form known as
20F. As part of the annual report to the SEC the Bank has to fulfill
various reporting and disclosure requirements that are not applicable in
Israel, including a reconciliation of its financial statements to the
accepted accounting principles in the United States (US GAAP). This
reconciliation is made by providing a qualitative note on the differences
between Israeli GAAP and US GAAP and by providing a quantitative note,
which presents the results of the reporting entity's financial statements
as if they had been prepared according to US GAAP. The Bank used to include
the qualitative note regarding the differences between Israeli GAAP and US
GAAP in its financial statements in the USA, but it did not include the
quantitative note.
F - 63
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
G. ANNUAL REPORTING IN THE U.S. (CONT'D)
One of the requirements applicable in the U.S. is that an auditors' report
be attached to the financial statements. The auditors of the Bank refrained
from providing a report on the financial statements that were submitted by
the Bank in the U.S. in respect of the years 2001 and 2002, because of,
inter alia, the non-inclusion of a quantitative note regarding
reconciliation of the Bank's financial statements to U.S. GAAP. After the
Bank's legal counsel in the U.S. examined the matter and concluded that the
prospects were slim for receiving an exemption from submitting the annual
report in the USA, the Bank began preparing to submit its annual report for
2003 and to comply with the reporting and disclosure requirements relating
to this report. The Bank was supposed to submit the report by July 15, 2004
at the latest, but there was a delay and it was submitted only on January
19, 2005, mainly because of the complex accounting issues the Bank had to
deal with in order to reconcile its financial statements to U.S. GAAP. The
non-compliance with part of the requirements applicable to the financial
statements filed in the U.S., including the non-inclusion of an auditors'
report as aforementioned, and the delay in filing the annual report for
2003, may expose the Bank to sanctions and/or claims on the part of various
parties. The report regarding 2004 was filed on time.
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------- --------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
----- ----- ----- -----
REPORTED AMOUNTS REPORTED AMOUNTS
------------------- --------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- -----
Options purchased - 14.5 - 36.2
Forward contracts 45.8 136.7 145.0 343.9
----- ----- ----- -----
Total 45.8 151.2 145.0 380.1
===== ===== ===== =====
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
F - 64
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
A. VOLUME OF OPERATIONS (CONT'D)
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------- --------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
----- ----- ----- -----
REPORTED AMOUNTS REPORTED AMOUNTS
------------------- --------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- -----
Gross positive fair value - 3.5 1.4 9.5
Gross negative fair value 0.5 - 0.1 2.4
--- --- --- ---
Total (0.5) 3.5 1.3 7.1
=== === === ===
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
DECEMBER 31, 2005
-------------------------------
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS
-------------------------------
BANKS CENTRAL BANKS TOTAL
---- ---- ----
Gross positive fair value of derivative instruments 3.5 - 3.5
Off-balance sheet credit risk in
respect of derivative instruments (2) 18.2 1.4 19.6
---- ---- ----
Total credit risk in respect of derivative instruments 21.7 1.4 23.1
==== ==== ====
DECEMBER 31, 2004
--------------------------------
REPORTED AMOUNTS
--------------------------------
NIS MILLIONS
--------------------------------
BANKS CENTRAL BANKS TOTAL
---- ---- ----
Gross positive fair value
of derivative instruments 1.4 9.5 10.9
Off-balance sheet credit risk in
respect of derivative instruments (2) 25.7 26.8 52.5
---- ---- ----
Total credit risk in respect of
derivative instruments 27.1 36.3 63.4
==== ==== ====
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
(2) Off-balance sheet credit risk relating to derivative instruments
(including those with a negative fair value) as computed for
limitation on individual borrower indebtedness.
F - 65
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2005
----------------------------------
REPORTED AMOUNTS
----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
CPI/Shekel interest contracts 25.3 20.5 45.8
Foreign currency contracts 151.2 - 151.2
----- ----- -----
Total 176.5 20.5 197.0
===== ===== =====
DECEMBER 31, 2004
-----------------------------------
REPORTED AMOUNTS
-----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
CPI/Shekel interest contracts 25.0 120.0 145.0
Foreign currency contracts 380.1 - 380.1
----- ----- -----
Total 405.1 120.0 525.1
===== ===== =====
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This note contains information on the methods of arriving at the fair value
of financial instruments. Most of the Bank's financial instruments are not
traded on active markets and thus market quotations are not available.
Therefore, the fair value is arrived at by using accepted pricing models,
such as the present value of future cash flows discounted at interest
rates, which reflect the level of risk intrinsic to the financial
instrument. Estimating the fair value by way of determining the future cash
flows and setting the discount interest rate is subjective. Therefore,
regarding most of the financial instruments, the fair value estimate is not
necessarily an indication of the instrument's realizable value on balance
sheet date. The estimate of the fair value was made at interest rates
prevailing at balance sheet date and did not take interest rate
fluctuations into consideration. The use of other interest rates could
result in significantly different fair values. This is especially true in
regard to non-interest bearing financial instruments or those bearing fixed
interest rates. Furthermore, commissions receivable or payable as a result
of the business activity were not taken into account and neither was the
tax effect.
F - 66
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
Moreover, the difference between the book value and fair value of the
financial instruments may not be realized since, in most cases, the Bank is
likely to hold the instruments until redemption. In view of the above, it
should be emphasized, that the data contained in this note should not be
considered as an indication of the value of the Bank as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques which may be applied in arriving at fair values, caution should
be used in comparing the fair values arrived at by different banks.
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
Bank of Israel. The credit line from the Bank of Israel bears the Bank of
Israel rate of interest. The discount rate of the cash flows of the
deposits raised by the Bank is set, for purposes of the fair value of the
liabilities, on the basis of the said interest rates.
DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
discounting future cash flows at interest rates used by the Bank in similar
transactions proximate to balance sheet date.
MARKETABLE SECURITIES - Are valued at market value. Shares for which no
market value is readily available are stated at cost.
CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
public was arrived at by using the method of the present value of future
cash flows discounted at an appropriate interest rate. The balance of such
credit was segmented into several categories. The future aggregate cash
flows of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level of
risk intrinsic in the credit. Generally, this interest rate is set on the
basis of the rate at which similar transactions of the Bank were effected
as at balance sheet date. For short-term balances of credit (for an initial
period of up to three months), or balances at variable market interest
rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.
The fair value of problematic debts was calculated by using discount rates
reflecting their intrinsic high credit risk. In any event, such discount
rates were not less than the highest interest rate used by the Bank in its
operations proximate to balance sheet date. The future cash flows of
problematic debts were calculated net of the specific allowances for
doubtful debts. The general and supplementary allowances for doubtful debts
in an aggregate amount of NIS 57.6 million (on December 31, 2004 - NIS 67.7
million), were not deducted from the balance of credit to the public for
cash flows purposes in assessing the fair value.
PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
cannot be applied to such deposits. Therefore, their book value is
considered to be their fair value (see Note 8 for details of the terms of
these deposits).
DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
liabilities was arrived at by the method of discounting the future cash
flows at the interest rate paid by the Bank in obtaining similar deposits,
or the interest rate of similar debentures and capital notes issued by the
Bank, prevailing as at balance sheet date.
F - 67
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is a
close approximation of the fair value since the deposits are at variable
rates of interest.
DERIVATIVE FINANCIAL INSTRUMENTS - Instruments having an active market,
were valued at market value. Where these instruments are traded on several
markets, valuation was based on quotations in the most active market.
Derivatives that are not traded on an active market, were valued based on
models used by the Bank in its current operations which take into
consideration the intrinsic risk of the financial instrument (market risk,
credit risk etc.).
FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
VARIABLE MARKET INTEREST RATES - The amount stated in the balance sheet
represents an approximation of the fair value subject to changes in credit
risks and interest margins of the Bank in transactions at variable interest
rates.
Following are balances and fair value estimates of financial instruments:
DECEMBER 31, 2005
----------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
------- ------- ------- -------
REPORTED AMOUNTS
----------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
FINANCIAL ASSETS
Cash and deposits with banks 56.2 16.7 72.9 73.2
Securities 62.5 0.7 63.2 63.2
Credit to the public 486.7 7,194.0 7,680.7 7,669.4
Credit to governments 1.8 57.2 59.0 60.0
Other financial assets 6.0 - 6.0 6.0
Perpetual deposits with the
Israeli Treasury 828.2 - 828.2 828.2
------- ------- ------- -------
Total financial assets 1,441.4 7,268.6 8,710.0 8,700.0
======= ======= ======= =======
FINANCIAL LIABILITIES
Deposits of the public 106.9 71.3 178.2 180.0
Deposits of banks 1,033.7 15.1 1,048.8 1,048.1
Deposits of the Government
and a perpetual deposit 0.1 6,883.0 6,883.1 6,877.4
Capital notes - 26.9 26.9 27.3
Other financial liabilities 22.0 - 22.0 22.0
------- ------- ------- -------
Total financial liabilities 1,162.7 6,996.3 8,159.0 8,154.8
======= ======= ======= =======
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 68
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
(cont'd)
DECEMBER 31, 2004
----------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
------- ------- ------- -------
REPORTED AMOUNTS
----------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
FINANCIAL ASSETS
Cash and deposits with banks 95.4 22.5 117.9 118.4
Securities 56.6 3.4 60.0 60.0
Credit to the public 857.5 7,135.9 7,993.4 8,016.2
Credit to governments - 72.7 72.7 74.1
Other financial assets 13.0 - 13.0 13.0
Perpetual deposits with the
Israeli Treasury 806.5 - 806.5 806.5
------- ------- ------- -------
Total financial assets 1,829.0 7,234.5 9,063.5 9,088.2
======= ======= ======= =======
FINANCIAL LIABILITIES
Deposits of the public 116.5 288.8 405.3 408.5
Deposits of banks 1,403.9 24.1 1,428.0 1,428.3
Deposits of the Government
and a perpetual deposit 0.1 6,654.5 6,654.6 6,656.0
Capital notes - 25.3 25.3 27.0
Other financial liabilities 23.0 - 23.0 23.0
------- ------- ------- -------
Total financial liabilities 1,543.5 6,992.7 8,536.2 8,542.8
======= ======= ======= =======
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 69
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED PARTIES
"Related Parties" and "Interested Parties" of the Bank, as defined in
Opinion No. 29 of the Institute of Certified Public Accountants in Israel
and the Securities Regulations (Preparation of Annual Financial Statements)
- 1993, are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank
Ltd.; Bank Leumi le-Israel B.M.; the General Manager, Directors of the Bank
and companies related to them, affiliates of the Bank and their related
companies.
The Bank conducts transactions with all or some of the aforementioned
parties, in the ordinary course of business on terms applicable to its
transactions in general. As it is not practical to separately record the
transactions with such entities, it is not possible to reflect the
information required by the said Opinion except for the following details:
A. BALANCES
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------------------------------- ---------------------------------------------------
AFFILIATES AND THEIR DIRECTORS AND AFFILIATES AND THEIR DIRECTORS AND
RELATED COMPANIES GENERAL MANAGER RELATED COMPANIES GENERAL MANAGER
------------------------- ------------------------- ------------------------- -------------------------
HIGHEST BALANCE AT HIGHEST HIGHEST BALANCE AT HIGHEST
BALANCE AT BALANCE BALANCE BALANCE BALANCE AT BALANCE BALANCE BALANCE
BALANCE SHEET DURING THE SHEET DURING THE BALANCE DURING THE SHEET DURING THE
DATE YEAR(1) DATE YEAR(1) DATE YEAR(1) DATE YEAR(1)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
REPORTED AMOUNTS
-------------------------------------------------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Credit to the public 0.3 0.4 - - 0.4 17.5 - -
LIABILITIES
Deposits of the public - 0.1 - 0.6 0.1 0.1 0.6 0.6
Other liabilities - - 0.2 0.2 - - 0.1 0.1
CREDIT RISK IN OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS - - - - - 0.7 - -
(1) On the basis of the balances at the end of each month.
F - 70
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED PARTIES (CONT'D)
B. SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES
2005 2004
------------ ------------
DIRECTORS AND DIRECTORS AND
GENERAL GENERAL
MANAGER MANAGER
------------ ------------
REPORTED AMOUNTS
---------------------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Profit from financing
operations before allowance
for doubtful debts (1) - -
Allowance for doubtful debts - -
Operating and other expenses (2) 2.4 1.0
(1) See details in D hereunder.
(2) See details in C hereunder.
C. BENEFITS TO INTERESTED PARTIES
2005 2004
------------------------ ------------------------
DIRECTORS AND DIRECTORS AND
GENERAL MANAGER GENERAL MANAGER
------------------------ ------------------------
REPORTED AMOUNTS REPORTED AMOUNTS
------------------------ ------------------------
NUMBER OF NUMBER OF
NIS MILLIONS RECIPIENTS NIS MILLIONS RECIPIENTS
------------ ---------- ------------ ----------
Interested parties employed by
the Bank (1) 1.7 2 (2)0.2 2
Fees to directors not employed
by the Bank 0.7 10 0.8 11
(1) Not including VAT on salaries.
(2) Including changes in provisions relating to the period in which, as
the Board of Directors believes, the services of the Chairman of the
Board and of the General Manager will possibly no longer be required.
See Note 17A regarding employment agreements with the Chairman of the Board
of the Bank and its General Manager.
F - 71
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED PARTIES (CONT'D)
D. RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
WITH INTERESTED AND RELATED PARTIES
2005 2004 2003
-------- -------- --------
REPORTED AMOUNTS
--------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- --------
Income deriving from credit to the public - - -
Expenses deriving from deposits of the public - - -
-------- -------- --------
Net results from financing operations
before allowance for doubtful debts - - -
======== ======== ========
Definitions in this note:
- Interested parties - as defined in Paragraph 1 of the definition of an
"interested party in a company" in Section 1 of the Securities Law.
- Related party - as defined in Opinion 29 of the Institute of Certified
Public Accountants in Israel.
- Directors and General Manager - including their spouses and minors
(Opinion 29 of the Institute of Certified Public Accountants in
Israel).
E. CREDIT TO THE ISRAEL ELECTRIC CORPORATION LTD. AND DEPOSITS OF THE
GOVERNMENT
The Bank has provided long-term credit to the Israel Electric Corporation
Ltd. which was granted out of a deposit of the State. The State provided a
guarantee as security for the repayment of such credit to the Bank. As at
December 31, 2005 the balance of the credit was NIS 6,405 million (as at
December 31, 2004 - NIS 6,167 million). Income in the total amount of NIS
854 million was recorded in respect of the aforementioned credit in 2005
compared with NIS 364 million in 2004, constituting more than 10% of the
profit from financing operations before the allowance for doubtful debts in
the said years.
As aforementioned, the source for this credit was a deposit of the State of
Israel. In addition to the said deposit, the balance of the Government
deposits includes also deposits made in order to provide loans in the
framework of the Kibbutzim arrangement and other deposits made in order to
provide other long-term loans. As at December 31, 2005 the overall balance
of the Government deposits amounted to NIS 6,883 million compared with NIS
6,655 million as at December 31, 2004. Financing expenses in the amount of
NIS 902 million were recorded in 2005 in respect of the Government deposits
compared with NIS 385 million in 2004.
F - 72
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 22 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
2005 2004 2003
----- ----- -----
REPORTED AMOUNTS
-------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
A. INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public 979.3 524.7 143.0
Credit to governments 1.0 1.1 (3.8)
Deposits with Bank of Israel 0.1 - 0.3
Deposits with banks 8.2 2.9 (0.6)
Debentures 0.3 0.6 1.1
----- ----- -----
988.9 529.3 140.0
----- ----- -----
B. (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public (15.4) (24.0) (32.3)
Deposits of the Government (901.7) (385.0) 59.8
Deposits of Bank of Israel (43.0) (72.6) (196.2)
Deposits of banks 0.7 (2.7) 4.4
----- ----- -----
(959.4) (484.3) (164.3)
----- ----- -----
C. INCOME DERIVING FROM DERIVATIVE FINANCIAL
INSTRUMENTS
Net income from derivative instruments ALM * 1.8 5.0 47.2
----- ----- -----
1.8 5.0 47.2
----- ----- -----
D. OTHER INCOME AND EXPENSES
Commissions from financing operations 13.4 14.7 16.7
Other financing income** 28.1 13.1 44.7
Other financing expenses (11.2) (11.6) (14.2)
----- ----- -----
30.3 16.2 47.2
----- ----- -----
Total profit from financing operations before
allowance for doubtful debts 61.6 66.2 70.1
===== ===== =====
Including - exchange rate differences, net 15.6 11.5 0.2
===== ===== =====
E. RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
sale debentures (included in income from assets) 0.3 0.6 1.1
Gain from sale of available-for-sale debentures
(included in other financing income) - 0.5 0.7
----- ----- -----
Total profit from investments in debentures 0.3 1.1 1.8
===== ===== =====
* Derivatives comprising part of the asset and liability management system of
the Bank, not designated for hedging purposes
** Including income from interest collected in
respect of problematic debts 21.6 10.5 1.6
===== ===== =====
F - 73
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 23 - OPERATING COMMISSIONS
2005 2004 2003
---- ---- ----
REPORTED AMOUNTS
-----------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Ledger fees (in Israeli and foreign currency) 1.1 1.6 2.3
Payment order system services 0.1 0.2 0.5
Customer foreign trade transactions 0.2 0.1 1.5
Credit handling and drafting of contracts 0.1 0.3 0.2
Computerized information services and
confirmations 0.1 0.1 0.2
Other 0.6 1.8 1.8
--- --- ---
Total operating commissions 2.2 4.1 6.5
=== === ===
NOTE 24 - GAINS ON INVESTMENTS IN SHARES
2005 2004 2003
---- ---- ----
REPORTED AMOUNTS
--------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Gains on sale of available-for-sale shares 11.3 38.0 8.5
Dividend from available-for-sale and trading shares - 3.5 1.8
---- ---- ----
Total gains on investments in shares 11.3 41.5 10.3
==== ==== ====
NOTE 25 - OTHER INCOME
2005 2004 2003
---- ---- ----
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Gains on severance funding 0.6 1.0 1.6
Other 4.1 3.6 3.9
--- --- ---
Total other income 4.7 4.6 5.5
=== === ===
F - 74
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 26 - SALARIES AND RELATED EXPENSES
2005 2004 2003
----- ----- -----
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
Salaries 14.5 *16.5 25.5
Severance pay, provident fund, pensions,
further education fund, vacation pay,
sick leave pay and long service bonuses 2.8 * 2.3 6.6
National insurance 0.8 0.9 1.5
Other related expenses 0.1 - 0.1
----- ----- -----
Total salaries and related expenses 18.2 19.7 33.7
===== ===== =====
* Reclassified.
NOTE 27 - OTHER EXPENSES
2005 2004 2003
---- ---- ----
REPORTED AMOUNTS
--------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Marketing and advertising 0.1 0.1 0.2
Communications (postage, telephone,
courier fees, etc.) 0.4 0.6 0.8
Computer (not including salaries and
depreciation) 4.3 5.2 3.5
Office expenses 0.3 0.3 0.5
Insurance 4.7 6.3 4.8
Professional services 4.8 6.3 7.0
Directors' fees (not including a director employed
as a senior executive) 0.7 0.8 0.9
Staff training, further education, etc - - 0.1
Other 1.2 0.8 2.9
---- ---- ----
Total other expenses 16.5 20.4 20.7
==== ==== ====
F - 75
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 28 - TAXES ON INCOME
A. COMPOSITION:
2005 2004 2003
---- ---- ----
REPORTED AMOUNTS
---------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Taxes for the current year - - -
Taxes in respect of prior years - - (2.7)
--- --- ---
Provision for taxes on income - - (2.7)
=== === ===
B. RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE
Following is the reconciliation between the theoretical tax applying to the
operating profit of the Bank, based on the statutory tax rate applicable to
banks in Israel, and the tax expense on operating profit, as reflected in
the statement of income:
2005 2004 2003
----- ----- -----
REPORTED AMOUNTS
---------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
Statutory tax rate 43.59% 45.76% 45.55%
===== ===== =====
Tax (tax savings) at the valid statutory rate (3.7) 0.6 (48.7)
Tax (tax savings) in respect of:
Differences from adjustment of monetary
assets, net 2.2 0.2 1.2
General and supplementary allowances for
doubtful debts (5.2) (8.9) (2.5)
Non-deductible expenses 0.1 0.1 0.1
Exempt income - (0.3) -
Differences and tax benefits in respect of which
deferred taxes had not been recorded, net 3.6 4.8 38.1
Loss for purposes of profit VAT which
cannot be set off 3.0 3.5 11.8
Taxes in respect of prior years - - (2.7)
----- ----- -----
Tax expense reflected in the statement of income - - (2.7)
===== ===== =====
C. The Bank has been issued final tax assessments for all years through
2000.
D. Carryforward tax losses in respect of which deferred tax assets were
not recorded total NIS 693 million (in 2004 - NIS 641 million).
F - 76
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 28 - TAXES ON INCOME (CONT'D)
E. In 2005 and 2004, the Bank recorded VAT on salaries receivable in the
amounts of NIS 3.0 million and NIS 3.1 million, respectively, as a
result of losses for purposes of VAT on profit.
F. On July 25, 2005 the Knesset passed the Law for the Amendment of the
Income Tax Ordinance (No. 147 and Temporary Order) - 2005 (hereinafter
- Amendment 147). The Amendment provides for a gradual reduction in
the company tax rate in the following manner: in 2006 the tax rate
will be 31%, in 2007 the tax rate will be 29%, in 2008 the tax rate
will be 27%, in 2009 the tax rate will be 26% and from 2010 onward the
tax rate will be 25%. Furthermore, as from 2010, upon reduction of the
company tax rate to 25%, real capital gains will be subject to tax of
25%. Accordingly the statutory tax rate that will apply to the Bank
will be 41.03% in the 2006 tax year, 39.32% in 2007, 37.61% in 2008,
36.75% in 2009 and 35.90% in 2010.
NOTE 29 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM
DECEMBER 31 DECEMBER 31
2005 2004
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public 6,619.4 6,395.6
------- -------
Total 6,619.4 6,395.6
======= =======
DESIGNATED DEPOSITS
Deposits of the Government 6,761.4 6,539.7
------- -------
Total 6,761.4 6,539.7
======= =======
Credit out of designated deposits includes NIS 6,405.0 million, which is
secured by a State guarantee. The annual interest margin in respect of this
credit amounts to NIS 0.3 million (on December 31, 2004 the balance of the
credit secured by a State guarantee was NIS 6,167.3 million).
F - 77
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 30 - INFORMATION ON NOMINAL DATA BASIS
DECEMBER 31 DECEMBER 31
2005 2004
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Total assets 8,720.7 9,078.2
Total liabilities 8,193.4 8,570.1
------- -------
Total shareholders' equity 527.3 508.1
======= =======
2005 2004 2003
------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------
Nominal net earnings (loss) (8.4) 1.4 (99.9)
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS
A. The bank's financial statements conform with Israeli generally
accepted accounting principles and the instructions of the Supervisor
of Banks in Israel ("Israeli GAAP"), which differ in certain respects
from those generally accepted in the United States of America ("U.S.
GAAP") as described below:
1. EFFECT OF INFLATION:
The Bank, in accordance with Israeli GAAP, comprehensively includes
the effect of price level changes in the accompanying financial
statements, as described in Note 1C. According to such Israeli
accounting principles, the Bank has discontinued the adjustment of the
financial statements as at January 1, 2004.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. However, such effects have not been quantified or
included in a reconciliation to U.S. GAAP.
2. SPECIFIC PROVISION FOR LOAN LOSSES
In accordance with Israeli GAAP:
The provision for loan losses is determined on a specific basis,
taking the following factors into consideration:
a. The financial position of the borrower, including an assessment
of the likelihood of repayment of the loan within an acceptable
period and the extent of the Bank's other commitments to the same
borrower.
F - 78
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
2. SPECIFIC PROVISION FOR LOAN LOSSES (CONT'D)
b. The realizable value of any security for the loan; and
c. The cost associated with obtaining repayment and realization of
any such security.
In accordance with U.S. GAAP:
Financial Accounting Standards (FAS) 114, as amended by FAS 118,
prescribes the accounting treatment by creditors with respect to
impairment of loans. These standards cover all creditors and all
loans, except:
a. Large groups of small-balance homogeneous loans that are
collectively evaluated for impairment.
b. Loans that are measured at fair value or at the lower of cost or
fair value.
c. Leases, as defined in FAS 13.
d. Debt securities, as defined in FAS 115.
These standards cover every loan, which is part of an arrangement
restructuring liabilities, involving modifications of terms of the
loans, including those involving a receipt of assets in partial
satisfaction of a receivable.
In accordance with FAS 114, a loan is impaired when it is probable,
based on current information and events, that the creditor will be
unable to collect all amounts (contractual interest and principle
payments) due according to the contractual terms of the loan
agreement.
Loans impaired are measured based on the present value of the expected
future cash flows, discounted at the loan's effective interest rate
or, alternatively, based on the observable market price of the loan or
the fair value of the collateral, if the loan is collateral dependent.
3. GENERAL PROVISION FOR LOAN LOSSES
In accordance with Israeli GAAP:
The directives of the Supervisor of Banks require that, commencing
with 1992, banks include, in addition to the specific allowance for
doubtful debts, a supplementary allowance for doubtful debts, which
replaces the general allowance, which had been required up to that
time.
The supplementary allowance for doubtful debts is based upon excessive
credit balances, measured according to specified quality
characteristics of the credit portfolio, as provided in the directives
of the Supervisor of Banks.
In accordance with the aforementioned requirements, a portion of the
general allowance, as at December 31, 1991, equal to 1% of the total
debt to which it was related at that date, is to be maintained in
inflation adjusted values.
F - 79
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
3. GENERAL PROVISION FOR LOAN LOSSES (CONT'D)
In accordance with U.S. GAAP:
Each bank determines its own methodology for general reserve based on
past experience of credit losses and on the quality of its credit
portfolio.
In light of the structure of the Bank's credit portfolio and its
concentrations, the Bank is considering the application of FAS 114 to
all its borrowers without recording a general provision.
4. NON-PARTICIPATING PREFERENCE SHARES
Preferred D and DD shares that were issued by the Bank, pay 7.5%
cumulative dividend, linked to the U.S. dollar exchange rate and
redeemable by the Bank. The redemption dates of these preferred shares
will be determined by the Bank, subject to the approval of the State
of Israel's Treasury.
In accordance with Israeli GAAP:
These preferred shares are presented as a liability and not as part of
shareholders' equity since they are redeemable.
In accordance with U.S. GAAP:
Since the Bank controls the decision on the redemption and since it
does not anticipate that it will redeem the preferred shares, these
preferred shares are presented as part of the shareholders' equity.
5. LIABILITY FOR TERMINATION BENEFITS IN REGARD WITH COLLECTIVE
TERMINATION AGREEMENT AND PERSONAL AGREEMENTS
In accordance with Israeli GAAP:
The Bank recognized a liability for involuntary termination benefits
in accordance with the collective termination agreement and certain
personal agreements, for those employees that under the Bank's
management best estimation it is probable that they will be
involuntary terminated. The liability was calculated under the
assumption that those employees would be terminated as at the Balance
Sheet date.
In regard to the personal agreements with the Chairman of the Board,
CEO and Deputy CEO, the Bank recorded a provision in the amount that
in management's estimate would be obligated to compensate them for the
period after their expected termination and till the end of the period
during which the Bank is obligated to employ them in accordance with
their personal agreements.
F - 80
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
5. LIABILITY FOR TERMINATION BENEFITS IN REGARDS WITH COLLECTIVE
TERMINATION AGREEMENT AND PERSONAL AGREEMENTS (CONT'D)
In accordance with U.S. GAAP:
All these agreements grant involuntary termination benefits, and are
accounted for in accordance with SFAS 88. The liability is recognized
when it is probable that employees will be entitled to termination
benefits and the amount can be reasonably estimated.
Since the employees are required to render services until they are
terminated in order to receive termination benefits, the liability and
loss are recognized ratably over the expected future service period.
As discussed in Note 1A, the "Run-Off" plan which was originally
supposed to end as of June 30, 2006, was extended until July 31, 2008.
This resulted in a change of an accounting estimate and the remaining
liability and loss are now recognized over the new expected future
service period which is expected to end on July 31, 2008.
6. LINKAGE DIFFERENCES ON PERPETUAL DEPOSIT WITH THE ISRAELI
TREASURY
In accordance with Israeli GAAP:
Linkage differences on the perpetual deposit with the Israeli Treasury
was credited to the shareholders' equity item.
In accordance with U.S. GAAP:
These linkage differences are reported in the profit and loss
statement.
7. EARNINGS/LOSS PER SHARE
In accordance with Israeli GAAP:
The dividend on the preferred shares which was accrued but not yet
been declared was not added to the calculation of the loss on the
ordinary A shares since no income has been recorded in respect of the
interest on the perpetual deposits, the payment of which, in the
opinion of the Bank's management, is contingent upon payment of the
dividend in respect of the aforementioned preferred shares.
Furthermore, it is not required to add to the calculation of the loss
on the ordinary A shares, the dollar exchange rate linkage differences
on the principal of the preferred shares net of the erosion deriving
from the change in the general purchasing power of the Israeli
currency.
In accordance with U.S. GAAP:
Both the accrued but not yet paid dividend on the preferred shares and
the dollar exchange rate linkage differences on the principal of the
preferred shares net of the erosion deriving from the change in the
general purchasing power of the Israeli currency were added to the
calculation of the loss on the ordinary A shares.
F - 81
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
8. PERPETUAL DEPOSITS WITH THE STATE OF ISRAEL
In accordance with Israeli GAAP:
Due to the agreement between the Bank and the Israeli Treasury
regarding the changes in the method of computing the linkage on the
perpetual deposits with the State of Israel (see Note 8), an increase
in the amounts of the perpetual deposits as well as in the Bank's
shareholders' equity is recorded.
In accordance with U.S. GAAP:
According to EITF 85-1, as this transaction involved issuance of
capital securities to the Israeli Treasury in exchange for non-cash
consideration, no increase in the Bank's shareholders' equity is
recorded due to the said agreement.
9. COMMITMENT IN RESPECT OF ACTIVITY BASED ON COLLECTION OF LOANS
In accordance with Israeli GAAP:
Deposits, the payment of which is dependent on collection of loans,
and the loans that were granted from the proceeds of such deposits,
are set off and presented on net basis, as the Bank has no credit
risk.
In accordance with U.S. GAAP:
The transactions mentioned above do not meet the set off conditions
under U.S. GAAP, hence, the deposits and loans are presented on gross
basis.
F - 82
10. SUMMARY OF SIGNIFICANT PRESENTATION DIFFERENCES OF BALANCE SHEET
ITEMS BETWEEN ISRAELI GAAP AND U.S. GAAP:
a. Non-marketable shares included in securities available for sale
under Israeli GAAP were classified to other assets under U.S.
GAAP.
b. Accrued interest receivable included in credit items was
classified to other assets under U.S. GAAP.
c. The provision for severance pay net of amounts deposited in
provident funds is presented under Israeli GAAP in other
liabilities. Under U.S. GAAP, such funded amounts that do not
release the Bank from liability to pay severance upon retirement,
are presented in other assets, and related liability is presented
in other liabilities.
d. Accrued interest payable included in deposit items was
reclassified to other liabilities under U.S. GAAP.
e. See note 4E regarding a customer's debt reclassified to
securities item and presented according to market value of the
shares pledged in favor of the Bank. In accordance with U.S. GAAP
this customer's debt is presented in credit to public balance
sheet line item.
11. STATEMENT OF OTHER COMPREHENSIVE INCOME
In accordance with Israeli GAAP:
No disclosure is given regarding comprehensive income.
In accordance with US GAAP:
SFAS 130 "Reporting comprehensive income" requires that all items that
are required to be recognized under the accounting standards as
components of comprehensive income be reported in a financial
statement and displayed in the same prominence as other financial
statements. It requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in
the equity section of the statement of financial position.
F - 83
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
B. The effect of the material differences between Israeli and U.S. GAAP
on the financial statements
1. STATEMENTS OF OPERATIONS:
YEAR ENDED DECEMBER 31
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ------------ ------------ ------------
(A)
Net earnings (loss) as
reported, according to
Israeli GAAP (8.4) 1.4 (104.4)
---- ----- -----
Specific provision for loan
losses 31.A.2 5.0 2.6 (2.4)
General provision for loan
losses 31.A.3 (12.0) (8.9) (3.9)
Liability for termination
benefits 31.A.5 (1.8) (6.9) (15.3)
Linkage differences on
perpetual deposits with
the Israeli Treasury 31.A.6 34.3 (8.2) (31.2)
---- ----- -----
25.5 (21.4) (52.8)
---- ----- -----
Net earnings (loss)
according to U.S. GAAP 17.1 (20.0) (157.2)
==== ===== =====
YEAR ENDED DECEMBER 31
----------------------------------------
2005 2004 2003
--- --- ---
NIS NIS NIS
--- --- ---
(B) Earnings (loss) per share
BASIC EARNINGS (LOSS) PER "A" ORDINARY
SHARE:
As reported according to Israeli GAAP (80.06) 13.27 (994.84)
As reported according to U.S. GAAP (3,983.55) (3,019.28) (10,579.77)
Number of shares 15,100 15,100 15,100
F - 84
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
2. BALANCE SHEET:
DECEMBER 31, 2005 DECEMBER 31, 2004
-------------------------------------- --------------------------------------
AS REPORTED ADJUSTMENTS U.S. GAAP AS REPORTED ADJUSTMENTS U.S. GAAP
------- ----- ------- ------- ----- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ----- ------- ------- ----- -------
Cash and deposits with banks 72.9 - 72.9 117.9 - 117.9
Securities (1)(2)(3) 63.2 (63.2) - 60.0 (60.0) -
Available-for-sale
securities (1) - 6.4 6.4 - 6.3 6.3
Credit to the public (3)(4)(5)(6) 7,680.7 (30.8) 7,649.9 7,993.4 (27.5) 7,965.9
Credit to governments (4)(12) 59.0 552.3 611.3 72.7 583.2 655.9
Fixed assets 1.2 - 1.2 1.9 - 1.9
Other assets (2)(4)(7) 15.6 164.8 180.4 26.0 168.8 194.8
Perpetual deposits with the
Israeli Treasury (11) 828.2 (293.8) 534.4 806.5 (306.3) 500.2
------- ------ ------- ------- ------ -------
Total assets 8,720.8 335.7 9,056.5 9,078.4 364.5 9,442.9
======= ====== ======= ======= ====== =======
Deposits of the public (8) 178.2 (5.2) 173.0 405.3 (12.4) 392.9
Deposits of banks (8) 1,048.8 (10.8) 1,038.0 1,428.0 (15.0) 1,413.0
Deposits of the
government (8)(12) 6,883.0 450.5 7,333.5 6,654.6 487.4 7,142.0
Perpetual deposits 0.1 - 0.1 0.1 - 0.1
Capital notes 26.9 - 26.9 25.3 - 25.3
Other liabilities (7)(8)(9) 56.4 134.5 190.9 56.8 137.6 194.4
Non-participating
shares (10) 330.3 (330.3) - 309.1 (309.1) -
Shareholders' equity
(see 3 below)(3)(5)(6)(9)(10)(11) 197.1 97.0 294.1 199.2 76.0 275.2
------- ------ ------- ------- ------ -------
Total liabilities and
shareholders' equity 8,720.8 335.7 9,056.5 9,078.4 364.5 9,442.9
======= ====== ======= ======= ====== =======
(1) Classification from securities item to available-for-sale securities.
(2) Classification of non-marketable shares from securities item to other
assets item (see note 31.A.10.a).
(3) A customer's debt in respect of which shares were pledged in favor of the
Bank (see note 31.A.10.e).
(4) Classification of accrued interest receivables from credit items to other
assets item (see note 31.A.10.b).
(5) Specific provision for loan losses (see note 31.A.2).
(6) General provision for loan losses (see note 31.A.3).
(7) Classification of amounts deposited in provident funds in respect of
severance pay liabilities from other liabilities item, to other assets item
(see note 31.A.10.c).
(8) Classification of accrued interest payables from deposit items to other
liabilities items (see Note 31.A.10.d).
(9) Liability for termination benefits (see note 31.A.5).
(10) Classification of non-participating shares to shareholders' equity item
(see note 31.A.4).
(11) The agreement between the Bank and the Israeli Treasury regarding the
changes in the method of computing the linkage on the perpetual deposits
(see Note 31.A.8).
(12) Commitment in respect of activity based on collection of loans (see Note
31.A.9).
F - 85
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 31 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
3. STATEMENT OF OTHER COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
--------------------------------
2005 2004 2003
----- ----- ------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
----- ----- ------
Net earnings (loss) according to U.S. GAAP 17.1 (20.0) (157.2)
Unrealized gains (losses) on available-for-sale
securities 1.8 (10.0) 5.9
----- ----- ------
Net comprehensive income (loss) according to
U.S. GAAP 18.9 (30.0) (151.3)
===== ===== ======
4. SHAREHOLDERS' EQUITY:
DECEMBER 31 DECEMBER 31
2005 2004
------------ ------------
NOTE NIS MILLIONS NIS MILLIONS
---- ------------ ------------
Shareholders' equity as reported according to
Israeli GAAP 197.1 199.2
A customer debt in respect of which shares
were pledged in favor of the Bank 31.A.10.e (3.6) 0.4
Specific provision for loan losses 31.A.2 (1.1) (6.2)
General provision for loan losses 31.A.3 57.6 69.6
Liability for termination benefits 31.A.5 7.6 9.4
Perpetual deposits with the State of Israel 31.A.8 (293.8) (306.3)
Classification of non-participating shares to
shareholders' equity item 31.A.4 330.3 309.1
----- -----
Shareholders' equity according to U.S. GAAP 294.1 275.2
===== =====
C. STATEMENTS OF CASH FLOWS
There are no material differences in the presentation of the Statement of
Cash Flows between Israeli GAAP and US GAAP.
F - 86
