Industrial Development Bank Of Israel Inactive
Filed: 19 Aug 08, 12:00am
EXHIBIT 1
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 2008
CONTENTS
PAGE
Report of the Board of Directors for the three months ended March 31, 2008 2
Management Review of the Financial Position and Results of Operations of the Bank 25
Certifications of the General Manager and the Comptroller 28
Financial Statements as of March 31, 2008 32
This is a translation from the Hebrew and has been prepared for convenience
only. In the case of any discrepancy, the Hebrew will prevail.
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
REPORT OF THE BOARD OF DIRECTORS AS OF MARCH 31, 2008
At the meeting of the Board of Directors that was held on May 26, 2008, it was
resolved to approve the Bank's unaudited financial statements as of March 31,
2008. The financial statements are presented in accordance with the directives
of the Supervisor of Banks and the data is stated in reported amounts.
ECONOMIC DEVELOPMENTS
The economic developments during the first quarter of 2008 were influenced by
the sub-prime mortgage credit crisis in the U.S., and by the indications of an
economic slowdown that resulted from the aforementioned crisis. The economic
data published in Israel indicate somewhat of a slowdown in the growth rate when
compared with the growth rate of recent years.
Fiscal developments in Israel mainly indicated a continuation of the
strengthening of the shekel and a sharp decrease in the exchange rate of the
dollar. The representative exchange rate of the dollar as of March 31, 2008 was
NIS 3.553 to the dollar, compared with NIS 3.846 on December 31, 2007, a
decrease of 7.6% in only one quarter. The weakening trend of the dollar also
continued subsequent to March 31, 2008.
The Consumer Price Index rose by 0.4% in the first quarter of 2008, compared
with a decrease of a similar percentage in the first quarter of last year.
Forecasts indicate that there will be an increase in inflation in 2008, due to
among other things, the impact of the increase in commodity prices around the
world. The Index in respect of April, which was publicized on May 15, 2008,
increased by 1.5%, strengthening the trend in the increase of the Index. The
Bank of Israel interest rate as of March 31, 2008 was 3.25% per annum, versus
4.25% on December 31, 2007. This decrease was effected in a two-part process
with 0.5% decreases at the end of February 2008 and at the end of March 2008.
The decrease was made against the backdrop of the strengthening of the shekel.
As mentioned above, following the latest decrease in interest, the strengthening
of the shekel versus the dollar continued.
THE FOLLOWING TABLE PRESENTS DATA REGARDING THE EFFECT OF THE INCREASE
(DECREASE) IN THE "LAST KNOWN" CPI AND THE RATES OF DEVALUATION (APPRECIATION)
OF THE SHEKEL IN RELATION TO PRINCIPAL CURRENCIES:
FOR THE YEAR
FOR THE FOR THE ENDED
FIRST QUARTER FIRST QUARTER DECEMBER 31
2008 2007 2007
-------------- -------------- --------------
% % %
-------------- -------------- --------------
Increase (decrease) in "last published" CPI 0.4 (0.4) 2.8
Rate of devaluation (appreciation) of the
shekel in relation to the dollar (7.6) (1.7) (9.0)
Rate of devaluation (appreciation) of the
shekel in relation to the euro (0.7) (0.5) 1.7
Rate of devaluation (appreciation) of the
shekel in relation to the yen 4.0 (0.9) (3.3)
FORWARD LOOKING INFORMATION
Part of the information included in this report, which does not relate to
historical facts, constitutes forward looking information as defined in the
Securities Law - 1968.
2
The actual results of the Bank and future developments in its affairs may be
significantly different than those included or described in the forward looking
information, due to a large number of factors including, inter alia,
implementation or non-implementation of the resolution of the Government to
privatize the Bank, future decisions regarding the affairs of the Bank by the
Government of Israel or the Bank of Israel, additional restrictions imposed in
the future on the business of the Bank, changes in the condition of the Bank's
customers or in the condition of the collaterals for their debts, and changes in
the business environment in which the Bank and its customers operate.
Forward looking information is characterized by words such as "intention",
"likely", "might", "evaluation", "can be assumed", and so forth. These forward
looking terms involve risks and uncertainty since they are based on evaluations
of management regarding future events that may not occur or may occur
differently than expected.
The information presented below is based, inter alia, on the evaluations of
management of the Bank regarding various matters discussed in the directors'
report.
The Bank does not undertake to publish an update to the forward looking
information included in this report, including in respect of the effect on this
information of circumstances or events that occur after the date of publishing
the report.
PRINCIPAL DEVELOPMENTS AT THE BANK IN RECENT YEARS
Due to increased withdrawals of deposits during the third quarter of 2002, the
Bank experienced severe liquidity problems, following which the Bank was granted
a special line of credit by the Bank of Israel. The Bank stopped providing
credit and its business focuses on collecting credit as described below in more
detail.
On February 27, 2003, after the Bank did not succeed in selling its asset and
liability portfolio in a short-term, "all or nothing" sale, the Bank's Board of
Directors resolved to adopt the principles of the "Run-Off" plan that was
prepared by a staff of outside consultants. The central aspect of the plan is a
supervised sale of the credit assets of the Bank over a four-year period, along
with cutbacks in manpower and activities. On July 29, 2003, the Ministerial
Committee for Social and Economic Affairs (the socio-economic mini committee)
approved the adoption of the aforementioned plan for the period that was to have
ended, in accordance with the decision, on July 29, 2006.
On July 26, 2005 the Bank's Board of Directors approved the extension of the
"Run-Off" plan until July 31, 2008, and its continued implementation on the
basis of the plan that was presented before it. Furthermore, the Bank's Board of
Directors decided that due to the reduction in the Bank's activity pursuant 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, and to the restricted license specifying that it is
valid until the end of the plan (July 31, 2008).
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 until July 31, 2008. The main principles of the Committee's decision from
October 10, 2005 are presented in Note 1 of the financial statements.
In his letter dated January 29, 2006 the Bank was notified by the Governor of
the Bank of Israel as follows:
o 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 shareholders.
o The Bank's banking license will be revoked as from August 1, 2008.
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution regarding the privatization of the Bank in the form of the sale of
most of the shares of the Bank and the redemption the rest of the shares. For
more information regarding the privatization decision, see below.
On May 26, 2008, the Board of Directors of the Bank, based on the privatization
resolution of the Ministerial Committee on Privatization, decided to file an
application with the court to approve a compromise plan and arrangement,
pursuant to Article 350 of the Companies Law - 1999, between the Bank and its
shareholders, at the center of which is the blueprint for the sale of most of
the shares of the Bank and the redemption of the balance of the shares.
3
For more information pertaining to the compromise arrangement, see below and see
the immediate filing made by the Bank on May 26, 2008.
THE RUN-OFF PLAN AND ITS IMPLEMENTATION
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. Management of the Bank implements, and
intends to continue implementing, an aggressive policy in all matters relating
to collection of problematic debts. As a result, there has been a significant
increase in recent years in the Bank's collection costs and legal expenses.
In the first quarter of 2008, the Bank continued implementing the "Run-Off"
plan, while reducing credit to the public and public deposits. The balance of
credit to the public (not including loans with State guarantees to the Israel
Electric Corporation Ltd.), which as at December 31, 2007 amounted to NIS 558
million, decreased to the amount of NIS 462 million as of March 31, 2008. The
balance of public deposits in the Bank, which at December 31, 2007 amounted to
NIS 55 million, decreased to NIS 52 million as of March 31, 2008. The Bank
refrains from accepting new deposits and, in accordance with the directives of
the Bank of Israel, it ceased renewing existing deposits that reach maturity,
subject to certain exceptions.
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 trading room, maintenance of current
accounts and securities accounts, maintenance of checking accounts, processing
grants, operating cash and clearing facilities (independently) and credit cards.
The reduction in the Bank's operations was also accompanied by a reduction in
the Bank's staff and a significant reduction in its operating expenses.
Notwithstanding the fact that the date for the end of the Run-off Plan was set
for July 31, 2008, the Bank intends on continuing to focus, even subsequent to
that date, on the collection of its credit portfolio, as it has done to date,
until such time as the resolution pertaining to the privatization of the Bank is
implemented, or until other developments occur concerning the matters of the
Bank, in the event that the privatization is not implemented.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed if the Bank ceases
operating as a "going concern".
THE GOVERNMENT RESOLUTION CONCERNING PRIVATIZATION OF THE BANK
On April 29, 2008, the Ministerial Committee of Privatization passed a
resolution concerning the privatization of the Bank. The full version of the
resolution was published by the Bank in an Immediate Report dated April 30,
2008. The privatization resolution stipulates, among other things, the
following:
o The shares of the Bank held by the State will be sold as a block, by way of
a private sale, to an investor or group of investors from Israel and/or
abroad (the "Purchaser"), as part of an overall blueprint for the sale of
the shares of the Bank, including those held by the public, to the
purchaser (the "Sale").
o Until the consummation of the sale, the Bank will continue collecting its
credit portfolio.
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o Based on a memorandum of principles signed among the shareholders of the
Bank on March 18, 2008, the Bank will file an application for the approval
of an arrangement, pursuant to Article 350 of the Companies Law - 1999 (the
"Companies Law" and the "Arrangement Plan"). According to the arrangement,
among other things, the Purchaser shall purchase all of the Preferred "C"
shares, Preferred "CC" shares, Preferred "CC1" shares (the "C" Class
Shares") and the Ordinary Preference shares of the Bank, traded on the Tel
Aviv Stock Exchange Ltd. (the "Stock Exchange") and such shares shall be
delisted for trade on the Stock Exchange. In addition, as part of the
Arrangement Plan, the Purchaser shall purchase all of the Ordinary "A"
shares and all of the various types of shares held by the State.
o According to the Arrangement Plan, the Bank shall redeem, in accordance
with the provisions of the prospectus under which the shares were issued,
the "D" and "DD" shares of the Bank not held by the State.
o As a condition for the approval and performance of the arrangement among
the shareholders and the Bank, all of the different classes of shareholders
of the Bank shall waive all of their claims in their capacity as
shareholders against the Bank, officers of the Bank, employees of the Bank,
and the controlling shareholders of the Bank, as these terms are defined in
the Companies Law. In addition, the Bank and the "C Group Shareholders"
waive any claims against the State in connection with the perpetual deposit
and the return thereof to the Bank.
o The Bank shall repay, upon the performance of the Arrangement Plan, or
until December 31, 2008, or until a later date approved by the Bank of
Israel for the extension of the credit line, the entire special line of
credit granted to the Bank by the Bank of Israel in 2002.
o The Accountant General of the Finance Ministry was authorized to carry out,
among other things, the following steps:
a. To return to the Bank by the later of July 31, 2008 or the date of
approval by the court of the Arrangement Plan, the perpetual deposit
deposited by the Bank with the Accountant General, plus linkage
differentials in accordance with the agreements between the Bank and
the State in connection with the perpetual deposit. The Accountant
General, in coordination with the Government Companies Authority (the
"Authority") and the Bank is authorized to decide that the relative
part of the perpetual deposit in respect of the consideration of the
issuance of D and DD shares held by the Public shall be returned to
the Bank on the date of the refunding of the aforementioned perpetual
deposit or at a later date, the latest being proximate to the sale or
if the Bank is liquidated. As a condition of the refunding of the
perpetual deposit, it shall be guaranteed to the satisfaction of the
Accountant General that the funds of the deposit shall be used by the
Bank, as a first priority, to repay the balance of the special line of
credit granted to the Bank by the Bank of Israel.
b. To pay to the Bank, for purposes of redeeming preference D shares and
preference DD shares not held by the State:
1. Interest in respect of the perpetual deposit in an amount equal
to the accumulated dividend that was not paid to the preferred D
shareholders and the preferred DD shareholders, except the State,
from July 1, 2002 through the date of the redemption of the
shares.
2. A premium at a rate of 5.625% of the par value of the D shares
not held by the State.
c. To take steps to have the Bank assign the unpaid balance of the loan
granted to the Israel Electric Company Ltd. in favor of the Accountant
General or another banking entity to be determined by the Accountant
General.
o The Accountant General, together with the Authority, were authorized to
reach an agreement with the various types of shareholders of the Bank in
connection with the distribution of the consideration of the sale,
including taking into consideration the economic report of the selected
expert (Professor Amir Barnea) and to formalize such agreement in the
arrangement to be submitted by the Bank pursuant to Article 350.
o The employees of the Bank will be paid a privatization remuneration in
according with the rules of the Authority. The remuneration will be granted
immediately following the sale and will be subject to its execution.
The privatization decision was taken further to and on the basis of the
blueprint for the sale of the issued share capital of the bank that has been
assessed for quite some time by the Finance Ministry and the Government
Companies Authority. Within this framework, the Authority publicized on June 17,
2007 a request for information ("RFI") in which it announced, among other
things, that the State of Israel, through the Authority, was requesting
information from parties interested in purchasing the Bank. The Bank was
informed by the Authority that requests had been received from twelve companies
and individuals.
5
On March 18, 2008, a memorandum of principles was signed between the State and
the C, CC and CC1 shareholders and some of the Ordinary Preference shareholders
of the Bank, whereby the parties to the memorandum agreed, among other things,
to cooperate in carrying out the blueprint for the sale of the shares of the
Bank. The complete version of the memorandum of principles and the document of
agreements that was attached thereto were also publicized as part of the
Immediate Report made by the Bank on April 30, 2008. It should be noted that the
banks whose names appear on the memorandum of principles as part of the parties
to the document did not sign the document.
REQUEST FOR APPROVAL OF THE COMPROMISE AGREEMENT AND THE ARRANGEMENT PURSUANT TO
ARTICLE 350 OF THE COMPANIES LAW - 1999 BETWEEN THE BANK AND ITS SHAREHOLDERS
Further to the resolution regarding the privatization of the Bank that was
passed by the Ministerial Committee on Privatization and in accordance with such
resolution, the Board of Directors of the Bank decided at its meeting of May 26,
2008 to petition the Bank to approve the compromise plan and arrangement
pursuant to Article 350 of the Companies Law between the Bank and its
shareholders (hereinafter - the "Arrangement Plan").
According to the resolution, prior to the submission of the request to have the
Arrangement Plan approved, the Bank will have to obtain approvals and
clarifications regarding certain matters in connection with the Arrangement Plan
or deriving therefrom.
Prior to passing the resolution, the Board of Directors was presented with the
opinion of an expert regarding the reasonableness of the criterion for
determining the minimum price at which the sale of the Bank will be carried out
in accordance with the Arrangement Plan, and the fairness of the criterion as
far as the public shareholders are concerned, regarding the formula that was set
down in the plan for the distribution of the proceeds of the sale, and regarding
the document dated March 9, 2008, prepared by Professor A. Barnea, who assessed
the alternative of liquidating the Bank versus the alternative of selling the
shares of the Bank, on the basis of the financial statements of the Bank as of
September 30, 2007 and which contains the formula for the distribution of the
proceeds of the sale. The document of Professor A. Barnea constitutes part of
the Arrangement Plan and its full version was publicized by the Bank in an
Immediate Report dated March 12, 2008. In addition, the Board of Directors was
furnished with a legal opinion regarding the reasonableness of the arrangement
to pay a partial dividend to the C, CC, and CC1 shareholders that will apply in
the event that the sale of the shares of the Bank is not implemented.
The resolution of the Board of Directors regarding the submission of the
Arrangement Plan was passed after the Board of Directors reached a decision in
view of, among other things, the conclusions and findings in the aforementioned
two opinions and in the aforementioned document of Professor A. Barnea, that the
alternative of selling the shares of the Bank, which stands at the center of the
Arrangement Plan, will likely be more beneficial to the public shareholders than
the alternative of liquidating the Bank.
The Arrangement Plan was included in the Immediate Report made by the Bank on
May 27, 2008. A brief description follows:
The Arrangement Plan includes three parts (two of which are alternatives) which
the shareholders and the court will be asked to approve.
1. The first part will be implemented immediately upon the approval of the
Arrangement Plan (by the meetings of the classes of shareholders and the
court). Pursuant to the first part, the State will redeem the perpetual
deposits made by the Bank with the Treasury, except that part of them that
reflect the proceeds of the issuance of the DD shares held by the public
(which will continue to be maintained as a dollar-linked deposit). The Bank
will use the redemption of the perpetual deposits to repay the balance of
the line of credit granted by the Bank of Israel. The originating motion
that was filed by various financial institutions against the Bank to have
the distribution of the dividend renewed will be rejected, and the appeal
filed by the Bank against the court decision rejecting its originating
motion on the matter of the accrual of the interest on its perpetual
deposits with the Treasury will also be rejected.
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2. Pursuant to the second part (the sales arrangement), all of the shares of
the Bank, except for the D and DD shares not held by the State, will be
sold by the parties holding them (the State and the public) as part of the
sales process to be implemented by the Government Companies Authority.
The D and DD shares not held by the State will be redeemed according to the
terms of their issue: the D shares at their full dollar par value, plus a
premium of 5.625%, plus the entire preferred dividend in arrears in respect
of such shares, and the DD shares at their full dollar par value plus the
entire preferred dividend in arrears in respect of such shares. The
redemption of the amount of the principal will come from the resources of
the Bank while the payment of the premium and the preferred dividend in
arrears will be financed by funds provided to the Bank by the State of
Israel.
If the total proceeds to be received in respect of the sold shares are
lower than the greater of the "liquidation value of the Bank" as to be
determined by the average of the two valuations conducted at the request of
the State prior to the implementation of the sale, less the principal
amount of the redemption of the D and DD shares, or an amount of NIS 400
million (the "minimum price"), the consummation of the sale shall be
subject to the approval of the meeting of the C-class shareholders (C, CC
and CC1) by a majority of 75% of the value represented by the vote. The
State is authorized, at its discretion, not to carry out the sale even if
the average total proceeds are higher than the minimum price.
The proceeds of the sale shall be divided among the holders of the sold
shares on the basis of the distribution formulas prepared by Professor A.
Barnea as part of the document he prepared, which is attached to the
Arrangement Plan.
The State shall refund to the Bank part of the perpetual deposits it still
has, in accordance to the description in the first part above.
The shareholders of the Bank will waive any claim, demand, or suit against
the Bank, officers of the Bank, shareholders of the Bank, employees of the
Bank, or the State.
The Bank will assign its rights to the loan it grant to the Israel Electric
Company Ltd. and to the State deposit which served as a source of such
loan. The rights will be endorsed to the party to which the Bank is
instructed by the Accountant General.
The conditions for the performance of the second part (the sales
arrangement) are the finding of a purchaser and the completion of the sale
by December 31, 2009.
3. The third part (the dividend arrangement) is an alternative to the second
part and it shall be carried out in the event that the sales arrangement is
not completed by December 31, 2009 or, if prior to that date, a liquidation
order is issued against the Bank or if the general meeting of the Bank
decides to voluntarily liquidate the Bank. As part of this course of
action, the Bank will pay the holders of C, CC, and CC1 shares, on the
earliest of December 31, 2009, or the date on which a liquidation order is
issued against the Bank, or on the date on which the general meeting of the
Bank decides to voluntarily liquidate the Bank, half of the preferred
dividend in arrears (at an annual rate of 6%) accrued on their shares
during the period from July 1, 2002 through July 31, 2008, plus linkage
differentials and interest by law, from July 31, 2008 until the date of the
actual payment to the shareholders. The State will pay the Bank in respect
of the part of the perpetual deposits that reflect the consideration of the
issuance of C, CC and CC1 shares, half of the interest at an annual rate of
6% accrued on this part during the aforementioned period, plus linkage
differentials and interest by law, from July 31, 2008 until the date of the
actual payment to the Bank.
Pursuant to the third part, the State will waive any claim, demand or suit
against the Bank, the receiver of the Bank, and the liquidation account of
the Bank in connection with 50% of the preferred dividend in arrears
accrued on the D and DD shares held by the State in respect of the period
from July 1, 2002 through July 31, 2008, and the holders of C, CC and CC1
shares will waive any claim, demand, or suit in connection with the
perpetual deposit, its return to the Bank, the payment of interest thereon,
and the non-distribution of the dividend during the period until the
payment to them of half of the preferred dividend in arrears, as mentioned
above (without such waiver of the holders of the C, CC and CC1 shares
detracting from their rights under the articles of the Bank to accumulate a
preferred dividend in respect of their shares, including in relation to the
aforementioned period).
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It is hereby clarified and emphasized that the above is solely a condensed
description of the major features of the Arrangement Plan. It does not replace
the full version of the Arrangement Plan as approved by the Board of Directors
and/or as shall be submitted to the court for approval, and that until such time
as the plan is submitted to the court for approval, changes in the plan may
occur.
Since the redemption of the D and DD shares and the payment of half of the
preferred dividend in respect of the C, CC, and CC1 shares, as described above,
may constitute a reduction in capital, then concurrent with the submission of an
application to the court to approve the Arrangement Plan, the Bank will also
submit to the court an application to reduce its capital, which request was
approved by the Board of Directors at its meeting on May 26, 2008. Therefore,
execution of the arrangement shall be also subject to the approval of the court
in connection with the application to reduce the capital of the Bank.
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
The terms of the special line of credit that was provided to the Bank by the
Bank of Israel were determined by the Governor of the Bank of Israel and over
time they underwent changes. The present terms of the credit line are specified
in the letter of the Governor from October 30, 2005 and from April 13, 2008, and
the principal terms are as follows:
o The credit line will be in effect until the earlier of December 31, 2008 or
receipt of the approval by the court of the Arrangement Plan between all of
the shareholders of the Bank, the State and the Bank pursuant to Article
350 of the Companies Law - 1999. Extension of the credit line after July
31, 2008 is subject to the passing of an appropriate resolution by the
government, the extension of the State guarantee for the full repayment of
the amount of the credit line, making of the necessary corrections and
additions to the debenture issued in favor of the Bank of Israel on
November 14, 2002 and amended on December 29, 2005, and the integration of
the comments of the Bank of Israel into the arrangement request.
o The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline gradually in accordance with a forecast that
was attached to the letter of the Governor of the Bank of Israel dated
October 30, 2005.
o 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.
o The interest on the utilized credit will be until July 31, 2008 the "Bank
of Israel interest rate", following which date it will be the "Bank of
Israel rate", plus 1.5%
o 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.
o Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
In the abovementioned letter of the Governor of the Bank of Israel dated October
30, 2005 it was noted 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 in addition to 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.
8
The decision of the Ministerial Committee for Social and Economic Affairs from
October 10, 2005 provides as follows:
1) The Government is responsible for the repayment of the credit line 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.
2) If at the end of the plan there remains an unpaid balance of the line of
credit, the Government will repay the balance to the Bank of Israel until
July 31, 2008. The Government has noted before it that in exchange for its
repayment of the credit balance, the collateral that was provided by the
Bank for repayment of the credit will be assigned in its favor (the Bank
created a floating lien in favor of the Bank of Israel in a debenture dated
November 14, 2002, which was amended on December 29, 2005).
The utilized balance of the special line of credit from the Bank of Israel (not
including interest accrued but not yet charged) as of March 31, 2008 was NIS 386
million, compared with NIS 476 million as at December 31, 2007. The utilized
balance as of March 31, 2008 is NIS 214 million lower than the credit line
amount that was set for that date for the Bank in the updated credit line
decline forecast that was attached to the letter of the Governor of the Bank of
Israel dated October 30, 2005 and lower than the framework stipulated by the
Bank of Israel for the conclusion of the Run-Off Plan.
The Bank is of the opinion that the Bank of Israel should credit it with all the
amounts of interest in excess of the "Bank of Israel interest rate" which were
charged by the Bank of Israel from August 2002 until July 29, 2003 (the date the
Ministerial Committee for Social and Economic Affairs first approved the Bank's
"Run-Off" plan), in the total amount of NIS 80 million (as calculated by the
Bank). On May 1, 2007, the Bank issued an Immediate Report to the Israel
Securities Authority and to the Tel Aviv Stock Exchange in which it gave notice
that as part of the contacts it had with the Bank of Israel, it was made clear
that the issue of the recouping of the surplus interest to the Bank will be
assessed upon the complete repayment of the special line of credit.
The Bank is continuing its negotiations with the Bank of Israel in connection
with the recoupment of the aforementioned surplus interest (at an amount the
rate of which will be assessed and debated between the Bank and the Bank of
Israel).
CAPITAL ADEQUACY
On March 31, 2008, the Bank's ratio of capital to risk assets was 24.4%, higher
than the 9% minimum rate stipulated in Proper Banking Procedures and compared
with 15.4% as of December 31, 2007. In the opinion of the Bank's Board of
Directors, in the Bank's present circumstances, the requirement to maintain a
minimum capital ratio is irrelevant to its operations.
EXEMPTION FROM THE SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF A
DEVIATION FROM CERTAIN DEBT LIMITS
As stated in more detail in Note 3 of the condensed financial statements, as a
result of the approval received from the Supervisor of Banks, the financial
statements of the Bank do not include a supplementary allowance for doubtful
debts in respect of deviations from debt limits of an individual borrower and a
borrower group, deviations from debt limits in respect of financing means of
control in corporate entities and in respect of deviations from the limit of
sector concentration indebtedness.
It is noted that if the Supervisor of Banks had not granted the exemption, the
Bank would have been required to make a supplementary allowance of significant
amounts in respect of these deviations, in the periods in which they were
created, which would have had a material impact on its results of operations for
such periods. Furthermore, the adjustment of the aforementioned supplementary
allowance to the changes that occurred from time to time in the extent of the
deviations could have had an effect on the financial results of the Bank in the
subsequent reporting periods.
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MEASUREMENT AND DISCLOSURE OF IMPAIRED DEBTS, CREDIT RISK AND THE PROVISION FOR
CREDIT LOSSES
On December 31, 2007, the Bank of Israel issued a provision addressing the
measurement and disclosure of impaired debts, credit risks and the provision for
credit losses. The provision is scheduled to go into effect commencing with the
financial statements issued after January 1, 2010. In its letter dated August
12, 2007, the Bank of Israel notified the Bank that it is authorized not to make
preparations for the implementation of this provision. For information regarding
the major features of the new provision, see Note 3.
BUSINESS SEGMENTS
In light of the circumstances under which the Bank operates, the Supervisor of
Banks has exempted the Bank from the requirement to report according to business
segments as provided in the temporary order regarding description of a banking
entity's business and forward looking information in the directors' report.
Accordingly, the directors' report and the financial statements do not include a
description of business segments and information according to business segments.
DIVIDEND DISTRIBUTION - CESSATION OF DIVIDEND DISTRIBUTION ON PREFERRED SHARES
The Bank has not distributed any dividends since the third quarter of 2002, in
which the Bank distributed to the holders of the preference shares and of the
ordinary preferred shares the quarterly dividend for the second quarter of 2002.
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 on those classes and once a year, a participating dividend of
1.5% in respect of classes C, CC, and CC1. The last dividend paid by the Bank in
respect thereof was a preference dividend that was related to the second quarter
of 2002. Following the losses of the Bank in 2002 and after the Bank's Board of
Directors - with the assistance of legal counsel - had discussed the various
aspects concerning the dividend distribution (including the restrictions
stipulated in the Companies Law - 1999, the Bank's articles and the directives
of the Supervisor of Banks), the Bank's Board of Directors decided to refrain at
this point from distributing a dividend in respect of the aforementioned shares.
The aggregate 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 178.5 million as of March 31, 2008. 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 aggregate amount of NIS 178.5 million is comprised as follows: NIS 109.9
million is in respect of non-participating shares (D and DD) and NIS 68.6
million is in respect of participating shares (C, CC and CC1). Of this amount,
an amount of NIS 7.2 million is in respect of the first quarter of 2008 and is
comprised as follows: NIS 4.8 million is in respect of non-participating
preferred shares and NIS 2.4 million is in respect of participating preferred
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 was requested 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. On March 23, 2006, the court decided
that in the first stage, the question of the accrual of interest on the
perpetual deposits of the Bank with the Treasury will be discussed and resolved,
since a resolution of this question will advance the hearing and the resolution
of the rest of the questions that must be answered. At the time, the Bank's
Board of Directors expressed its fundamental position 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 Bank's articles. On August 5,
2007, a verdict was rendered by the Tel Aviv District Court whereby it rejected
the originating motion filed by the Bank against the Finance Minister and
against the aforementioned financial institutions and stipulated that as long as
a dividend is not distributed in respect of the preferred shares of the Bank,
the interest does not accrue.
10
At its meeting on October 9, 2007, the Board of Directors of the Bank discussed
the ramifications of the verdict. The Board of Directors decided that since the
suit of the Bank (its originating motion) related not only to the issue of the
accrual of the interest on the perpetual deposits, in the absence of a dividend
distribution, rather also to the accrual and payment of a dividend in arrears
(including upon liquidation), and since on the basis of the determination of the
court that the suit of the Bank was rejected, a claim can be made that the
verdict rejects also the right of the Bank to accrued interest against the
payment of the dividend in arrears on the preferred shares (a result which the
Board of Directors believes is incorrect and it is reasonable to assume that the
court did not intend such a result), then the Bank will file an appeal on the
rejection of the claim with regard to the payment of the accrued interest on the
perpetual deposits against the payment of the dividend in arrears.
Notwithstanding the above, the Board of Directors added in its decision that the
appeal will not be filed if an adequate clarification is provided by the State
as to its consent to pay accrued interest on the perpetual deposits against the
payment of the dividend in arrears on the preferred shares (Preferred C, CC,
CC1, D and DD shares). Such a clarification was not given and the Bank's appeal
was submitted to the Supreme Court on January 6, 2008. At the aforementioned
meeting on October 9, 2007, the Board of Directors of the Bank also discussed
the ramifications of the aforementioned verdict on the continuation of its
policy regarding the distribution of the dividend on the preferred shares
(Preferred C, CC, CC1, D and DD shares). In view of the stipulation of the
verdict pertaining to the non-accrual of interest on the perpetual deposits of
the Bank as long as a dividend is not distributed (a stipulation which the Bank
is not appealing), and after the Board of Directors considered the interests of
both the shareholders of the Bank and the creditors of the Bank (which in view
of the verdict no longer gain anything by the non-distribution of the dividend),
the Board of Directors reached the conclusion that it would be proper for the
Bank to take steps toward renewing the distribution of the dividend. In
connection with the above, the Board of Directors of the Bank decided (at the
same meeting) to take the following steps: 1) to recommend to the general
shareholders meeting of the Bank to amend the Articles of Association of the
Bank in respect of two matters relating to the renewal of the distribution of
the dividend. The first, the authorization to distribute a dividend not just out
of profits (which at present are non-existent), rather also from the interest to
be paid to the Bank on its perpetual deposits with the Finance Ministry, and the
second, authorization to distribute a current preferred dividend on the
preferred shares of the Bank, also without a distribution - prior or concurrent
- - of the preferred dividend in arrears on those shares (since, in view of the
wording of the verdict, a claim may be made whereby the Bank is not entitled to
the accrued interest on the perpetual deposits against the distribution of the
dividends in arrears, a result that will prevent the Bank from distributing the
dividends in arrears in the absence of adequate profits); 2) to convene a
general meeting of the Bank to make the aforementioned change in the Articles of
Association and to authorize the Chairman of the Board to determine the date of
the meeting; 3) to petition the Supervisor of Banks to grant approval for the
distribution of the dividend to the preferred shareholders, subject to the
aforementioned change in the Articles of Association and receipt of court
approval of the proposed distribution (pursuant to the Companies Law - 1999, the
distribution of a dividend not out of distributable profits requires court
approval, and as of that date, the Bank did not have distributable income). A
detailed description of the decision of the Board of Directors at its meeting on
October 9, 2007, as aforementioned, can be found in the Immediate Report issued
by the Bank on October 10, 2007. In accordance with the decision of the Board of
Directors of the Bank, the general meeting of the Bank convened on January 7,
2008, and on its agenda were the aforementioned proposals to amend the Articles
of the Bank, so that the Articles would no longer constitute an impediment to
the renewal of the dividend distribution. The proposed amendments were put to a
vote, but they were rejected by a majority of those voting. On February 5, 2008,
the financial entities that had filed the originating motion against the Bank
filed a petition with the court in which they requested to add the State as an
additional respondent to the originating motion, due to, among other things, the
vote of the State in the general meeting of the Bank against the proposed
amendments to the Bank's by-laws.
11
In a "document of agreements" signed between the State and the financial
institutions which filed the originating motion against the Bank and which came
further to the memorandum of principles signed on March 18, 2008 between the
State, the aforementioned financial institutions, and some of the Ordinary
Preference shareholders of the Bank, and pursuant to which the signing parties
agreed to the implementation of the blueprint for the sale of the shares of the
Bank and to cooperate in the implementation thereof, the aforementioned
financial institutions and the State agreed that as part of the Arrangement
pursuant to Article 350 of the Companies Law - 1999 to be submitted for the
approval of the Court as part of the blueprint for the sale, the following
points shall be included:
o The State and the aforementioned financial institutions will not object to
the refunding to the Bank of its perpetual deposits with the Treasury, on
the later of July 31, 2008 or the date on which the arrangement plan is
approved.
o In the event that the sale of the Bank is not consummated by December 31,
2009 or if prior to that date a liquidation order is issued against the
Bank, or if the general meeting of the Bank decides to voluntarily
liquidate the Bank (each of these - the "liquidation of the Bank"), the
following provisions shall apply:
a. The State shall pay 50% of the interest at an annual rate of 6%
accrued on the perpetual deposits in connection with the C, CC, and
CC1 preferred shares in respect of the period from July 1, 2002
through July 31, 2008. This amount will be paid upon the earlier of
the liquidation of the Bank or December 31, 2009 (the "payment date").
This amount shall bear linkage and interest as per the Interest and
Linkage Law - 1961, commencing from July 31, 2008 until the payment
date, to be paid by the State on the payment date. This amount will be
grossed up by the State in accordance with the perpetual deposit
agreements.
b. On the payment date, the Bank shall pay to the holders of preferred C,
CC, and CC1 shares a dividend of 50% of the aggregate preferred
dividend at a rate of 6% that accrued on their shares in the period
from July 1, 2002 through July 31, 2008, plus linkage differentials
and interest pursuant to the Interest and Linkage Law - 1961,
commencing from July 31, 2008 until the date of the actual payment.
c. The State waives its claims and demands toward the Bank and/or the
receiver of the Bank in connection with payment of 50% of the dividend
to the State, as the owner of D and DD shares, in respect of the
period from July 1, 2002 through July 31, 2008.
d. Subject to payment of the entire amount due to them pursuant to
sub-paragraph "b" above, the holders of preferred C, CC, and CC1
shares shall have no claim in connection with the non-distribution of
a dividend for the period from July 1, 2002 until the date of payment.
To remove all doubt, the above does not detract from the rights of the
aforementioned shareholders to the accrual of a preferred dividend in
respect of their shares pursuant to the articles of the Company,
including in relation to the aforementioned period.
o Subject to the payment of the amounts due to them from the proceeds of the
sale of the Bank, or - in the event that the sale is not implemented -
subject to the payment of 50% of the dividend, as above, the holders of the
C, CC, and CC1 preferred shares shall waive their demands, and claims
toward the State in connection with the payment of a dividend in respect of
any period in the past or in the future or in connection with the perpetual
deposit and the refunding of the proceeds to the Bank.
o Upon the approval of the arrangement by the court, the originating motion
filed by the aforementioned financial institutions shall be rejected,
together with the appeal filed by the Bank on January 6, 2008 to the
Supreme Court. The rejection of the appeal will bind the Bank and the State
only as to the relationship between them in connection with the part of the
perpetual deposits that relate to the various classes of "C" shares.
12
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution pertaining to the privatization of the Bank. As part of this
resolution, it was determined, among other things that, based on the memorandum
of principles dated March 18, 2008 signed among the shareholders of the Bank
which was followed by the aforementioned document of agreements), the Bank shall
file a petition for the approval of the arrangement pursuant to Article 350 of
the Companies Law - 1999.
At its meeting on May 26, 2008, the Board of Directors of the Bank approved the
filing of an application to the Court for the approval of the arrangement
between the Bank and its shareholders pursuant to Article 350 of the Companies
Law - 1999. The focus of the arrangement is the blueprint for the sale of most
of the shares of the Bank and the redemption of the balance of the shares. The
arrangement consists of, among other things, the abovementioned points that were
agreed to by the State and the financial institutions in connection with the
refund of the perpetual deposit, payment of half of the preferred dividend, and
a waiver of all claims.
For a description of the arrangement covered by the petition, see above, and see
the Immediate Report issued by the Bank on May 27, 2008.
See also Note 1 of the financial statements for details on the cessation of the
dividend distribution, the legal and regulatory restrictions applicable to the
Bank with respect to a dividend distribution and the matter of the accrued
interest on the perpetual deposits with the Treasury. See also Note 9 of the
financial statements regarding the aforementioned originating motions.
EXEMPTION FROM IMPLEMENTING THE BASEL II TREATY
The Basel committee on banking supervision published a document on June 26,
2004, which is known as the "Basel II Treaty", and is comprised of a list of
principles intended first and foremost to improve risk management, including
management of the capital adequacy of banks. The Supervisor of Banks announced
his intention to impose the Basel II Treaty on the entire banking system in
Israel. Implementation of the Treaty's principles requires proper and extensive
preparations, including the establishment and building of various
infrastructures and systems.
In his letter dated November 30, 2004, the Supervisor of Banks accepted the
request of the Bank and exempted it from the need to prepare for implementing
the Basel II Treaty, this in light of the circumstances under which the Bank
operates, including the Government decision regarding implementation of the
Run-Off plan.
MITIGATIONS IN THE IMPLEMENTATION OF PROPER BANKING PROCEDURES WITH RESPECT TO
CREDIT MANAGEMENT
In his letter of May 1, 2005, the Supervisor of Banks confirmed that in light of
the changes in the Bank's activity and its focusing on the collection of credit,
the Bank is exempt from implementing certain proper banking procedures with
respect to credit management as follows: Section 9(a) of Directive 301 regarding
the establishment of a credit policy by the Board of Directors, Section 3(b) of
Annex A of Directive 316 regarding the credit rating of borrowers and Directive
323 regarding the financing of purchases of means of control in companies.
In accordance with the provisions of the Proper Banking Procedure, a bank is
required to maintain a credit control unit as one of the means of educated
management of its credit risks. Due to the fact that since commencing with the
second half of 2002, the Bank's activity has been centering around the
collection of its credit portfolio, and it does not approve any new credit, the
need for such a unit at the Bank has diminished.
Further to the request of the Bank, the Supervisor of Banks notified the Bank in
his letter dated November 26, 2003 that the Bank is exempt from complying with
the provision of the Proper Banking Procedure that relates to credit control.
ADOPTION OF CODE OF ETHICS
In its resolution of December 29, 2003, the Bank's Board of Directors adopted a
code of ethics which applies to all the officers and employees of the Bank. This
was done following the provisions of the Sarbanes Oxley Act, which are
applicable to the Bank.
13
LEGAL CLAIMS AND OTHER CONTINGENCIES
Note 9 of the condensed financial statements presents information regarding the
significant legal claims filed against the Bank. When evaluating the risks
included in the claims submitted against the Bank, management of the Bank relies
on the opinions of the external legal advisors that represent the Bank in these
claims. These opinions are rendered by them on the basis of their discretion and
on the basis of the facts and legal status known to them, and the data is more
than once subject to contradictory interpretation and arguments. Accordingly,
the actual results of the claims may differ from the evaluations of the external
legal advisors and from the provisions made, based upon them.
14
DEVELOPMENT OF INCOME AND EXPENSES
NET INCOME - The Bank's net income amounted to NIS 1.2 million in the first
quarter of 2008, compared with NIS 4.9 million in the first quarter of 2007 and
NIS 22.2 million for all of 2007.
PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS -
amounted to NIS 11.3 million in the first quarter of 2008, compared with NIS 8.7
million in the same period last year.
The increase in profit from financing operations derived from the following
factors:
o The increase in revenues in respect of interest collected on problematic
debts which amounted to NIS 9.0 million compared with NIS 6.5 million in
the first quarter of 2007.
o A decrease in the volume of problematic debts classified as non-interest
bearing. The average balance of non-interest bearing debts in the first
quarter of 2008 amounted to NIS 67 million, compared with NIS 162 million
in the same period last year. The balance of these debts constituted 12% of
the average of total monetary assets (excluding credit to the Israel
Electric Company guaranteed by the State), compared with 17% in the same
quarter of 2007.
o The impact of the decrease in the interest rate in the economy on the
volume of the non-accrual of income in respect of non-interest bearing
debt. The average interest rate in the first quarter of 2008 was lower than
the average interest during the same period last year. As a result, the
negative impact of the non-accrual of revenues in respect of non-revenue
generating debt was smaller than in the same period last year, in addition
to the aforementioned volume of problematic debts.
On the other hand, this increase was offset by the decrease in the volume of the
Bank's financing activity, as part of the policy implemented by the Bank in the
past few years. For details regarding this decrease in volume, see the analysis
below on financing activity by the various linkage segments.
An analysis of the Bank's financing operations in the various linkage segments
indicates as follows:
UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 117 million in the first quarter of 2008, compared with NIS 249 million
in the same period of 2007, a decrease of 53%. The margin in this segment,
including the effect of derivatives, was 4.71% in the first quarter of 2008,
compared with 1.09% in 2007.
The improvement in the margin of this segment compared with the same period of
2007, derived both from a decrease in the volume of non-interest bearing debt
and its relative weight out of total credit and from the decline in the interest
rate and its impact on the non-accrual of revenue in respect of these debts.
CPI-LINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 337 million in the first quarter of 2008, compared with NIS 502
million in the same period of 2007, a decrease of 33%. The margin in this
segment, including the effect of derivatives, was 2.06% in the first quarter of
2008, compared with 2.65% in the same quarter of 2007. The decrease in the
volume of activity of this segment derives mainly from the fact that in the
first quarter of 2008, the Index rose by 0.4% compared with a decrease of a
similar rate in the same period of 2007. As a result, the negative impact on the
non-accrual of revenues in respect of non-revenue generating debt was higher.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The average balance of
assets in this segment amounted to NIS 4,913 million in the first quarter of
2008, compared with NIS 5,887 million in the first quarter of 2007. Credit in
this segment includes credit guaranteed by the State that was granted to the
Israel Electric Corporation Ltd. out of a deposit of the State. The margin in
respect of this credit is negligible and matches the level of risk attached to
this credit. The average balance of this credit amounted to NIS 4,791 million
compared with NIS 5,692 million in the first quarter of 2007. Excluding the said
credit, the average balance of assets in this segment amounts to NIS 122
million, compared with NIS 195 million in the first quarter of 2007, a decrease
of 37%. The margin in this segment, including the effect of derivatives, was
0.11% in the first quarter of 2008, compared with 0.05% in the same quarter of
2007. The low margin rate in this segment is the result of the volume of State
guaranteed credit, as stated above.
15
The average of the total monetary assets in all linkage segments (excluding the
abovementioned state-guaranteed credit out of the State deposit) amounted to NIS
576 million in the first quarter of 2008, compared with NIS 946 million in the
first quarter of 2007, a decrease of 39% in the average monetary assets.
The above data indicate that the Bank succeeded in preserving a positive margin
in all linkage segments, notwithstanding the large proportion of credit that is
classified as non-revenue bearing credit.
Comparative data on the development of the overall credit risk in respect of
problematic borrowers (1) is as follows (in NIS millions):
BALANCE AS AT BALANCE AS AT BALANCE AS AT
----- ----- -----
MARCH 31 MARCH 31, DECEMBER 31,
2008 2007 2007
----- ----- -----
Non-income bearing 63.8 107.2 69.7
Restructured(2) 27.8 82.1 31.5
Designated for restructuring(3) 12.5 20.4 17.3
Temporarily in arrears 3.6 11.8 8.7
Under special supervision* 165.7 182.2 181.7
----- ----- -----
Total balance sheet credit to problematic borrowers(1) 273.4 403.7 308.9
Off-balance sheet credit risk in
respect of problematic borrowers(1) 74.0 84.7 81.2
----- ----- -----
Overall credit risk in respect of problematic borrowers(1)(4) 347.4 488.4 390.1
===== ===== =====
* Including an amount of NIS 152.9 million in respect of debts for which a
specific allowance exists (March 31, 2007 - NIA 158.7 million, December 31,
2007 - 169.7 million).
1) Not including problematic debts that are covered by collateral that is
deductible for purposes of individual borrower and borrower group
limitations (Proper Banking Procedure Directive No. 313).
2) Credit that was restructured in the current year and credit that was
restructured in prior years with waiver of income.
3) Credit to borrowers in respect of which there is an as yet unimplemented
Management decision to restructure their debt.
4) As calculated for purposes of individual borrower and borrower group
limitations, except in respect of guarantees granted by a borrower as
security for the debt of a third party.
The above data indicates a significant decrease in the volume of debts
classified as non-income bearing. Nevertheless, the proportion of problematic
debts to total debt continues to be high in relation to the total credit of the
Bank. The high volume of non-interest bearing debt will have a negative impact
on the results of the Bank's operations in the future since the interest income
in respect of these debts will not be recorded as financing income as long as
these debts are classified as non-income bearing.
A significant portion of the volume of the off-balance sheet credit risk in
respect of problematic borrowers derives from the indemnification issued by the
Bank in favor of the receivers that were appointed to realize the assets of the
companies undergoing legal proceedings. The letters of indemnification are in
respect of receipts that were credited to the borrowers' accounts with the Bank
out of the proceeds from the realization of the assets.
16
THE ALLOWANCE FOR DOUBTFUL DEBTS - An amount of NIS 11.1 million was recorded as
income in this item in the first quarter of 2008, compared with an expense of
NIS 1.0 million in the first quarter of 2007. In the specific allowances for
doubtful debts, income of NIS 9.7 million was recorded in the first quarter of
2008, compared with an expense of NIS 3.6 million in the first quarter of 2007.
The most significant component of income in this item is the collection of debts
that were written off in the past, in an amount of NIS 7.6 million, deriving
from a non-recurring receipt from the settlement segment as a result of the sale
of the share of the KIBBUTZIM in the shares of Tnuva. The supplementary
allowance for doubtful debts reflected a decrease of NIS 1.4 million, deriving
mainly from the decrease in the volume of problematic debts. In the first
quarter of 2007, the decrease in the supplementary allowance amounted to NIS
2.5.
The supplementary allowance for doubtful debts (including a general allowance
for doubtful debts) amounted to NIS 43.8 million as of March 31, 2008,
constituting 8.7% of the balance of the credit (excluding State-guaranteed
credit to the Israel Electric Company out of the State deposit) before the
aforementioned allowance. This rate is extraordinarily higher than the accepted
rate in the banking system. The high rate derives mainly from the volume of the
general allowance which amounts to NIS 38.9 million. The general allowance was
standard practice in the banking system until December 31, 1991 and it was based
on the volume of the debt as of that date. In accordance with the provisions of
the Supervisor of Banks, the aforementioned allowance remained at that volume,
notwithstanding the decrease in the volume of debt in recent years. At present
it constitutes 7.7% of the balance of the credit.
INCOME FROM FINANCING ACTIVITY AFTER THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
amounted in the first quarter of 2008 to NIS 22.4 million, compared to NIS 7.7
million in the first quarter of 2007.
OPERATING AND OTHER INCOME - This income amounted to NIS 0.1 million in the
first quarter of 2008, compared with income of NIS 5.3 million in the first
quarter of 2007. The major component in which a change was recorded was the loss
recorded in respect of the investment in shares, in an amount of NIS 0.7
million, compared with a gain of NIS 4.2 million in the same quarter of 2007.
Revenues from operating commissions in the first quarter of 2008 amounted to NIS
0.1 million, compared with NIS 0.2 million in the same period of 2007. The low
volume of this income reflects the fact that the Bank has been reducing the
operational transactions it conducts on behalf of its customers.
Other income amounted to NIS 0.5 million, compared with NIS 0.9 million in the
first quarter of 2007.
OPERATING AND OTHER EXPENSES - Amounted to NIS 19.4 million in the first quarter
of 2008, compared with NIS 8.1 million in the first quarter of 2007. The
increase in operating expenses derived from the following factors:
Early retirement agreement - On December 26, 2002, a collective agreement was
signed by the Bank, the New General Labor Federation and the Bank's Workers
Committee. The agreement prescribed, among other things, special payments to be
made to employees upon early retirement. For details of the agreement and
additional extension agreements related thereto, see Note 18D of the financial
statements as of December 31, 2007.
Regarding the plan for the privatization of the Bank, the Board of Directors of
the Bank approved additional special payments to be made to employees upon early
retirement. The additional amounts total some NIS 10 million, in respect of
which the Bank recorded an expense in the item entitled "Early Retirement". A
new agreement will be drafted in the near future and will be presented to the
Commissioner of Wages and Labor Agreements at the Treasury for approval.
In addition, in connection with the privatization plan for the Bank, the Audit
committee and Board of Directors of the Bank gave their approval to payment of
three months pay in lieu of advance notice and three months acclimation payments
to the Chairman of the Board, the General Manager of the Bank and the Deputy
General Manager of the Bank, should the aforementioned parties leave the
employment of the Bank for any reason whatsoever. The three months pay will be
paid in lieu of giving three months actual notice as per their current
employment agreements. For details of the terms of employment of the Chairman of
the Board, the General Manager and the Deputy General Manager, see Note 18A.2 of
the financial statements as of December 31, 2007.
Resolutions of the Audit committee and Board of Directors of the Bank are
subject to the approval of the Commissioner of Wages and Labor Agreements at the
Treasury. The expense deriving from such approval amounts to NIS 1 million and
is presented as part of the early retirement item.
Payroll expenses were also affected by losses of NIS 0.7 million that accrued
during the period in severance funds. The amount needed to compensate for such
losses in the liability for employee severance pay was included as part of
payroll expenses.
Other operating expenses amounted to NIS 2.0 million in the first quarter of
2008, compared with NIS 2.5 million in the same period of 2007. There was a
significant decrease in the all of the components of this item as part of the
efficiency plan that was implemented by the Bank in connection with the Run-off
Plan.
17
BALANCE SHEET AND CAPITAL RESOURCES
TOTAL ASSETS - As at March 31, 2008, amounted to NIS 5,959 million, compared
with NIS 6,483 million as at December 31, 2007.
SHAREHOLDERS' EQUITY OF THE BANK INCLUDING PREFERENCE SHARES - Amounted to NIS
558 million as at March 31, 2008, compared with NIS 557 million as at December
31, 2007.
SHAREHOLDERS' EQUITY - From an accounting standpoint, the preference shares
issued by the Bank are classified as a liability and are not included in the
shareholders' equity of the Bank. The total amount of liabilities in respect of
the preference shares of the Bank amounted to NIS 413 million (compared with NIS
447 million as at December 31, 2007). Of the total amount, an amount of NIS 158
million is in respect of participating preference shares (compared with NIS 171
million as at December 31, 2007). Until December 31, 2005, the participating
preference shares were classified as part of the shareholders' equity of the
Bank. As a result of the implementation of Israeli Accounting Standard No. 22,
they were reclassified, commencing January 1, 2006, as a liability in respect of
participating preference shares (for details regarding this change, see Note 1D
of the financial statements of the Bank as at December 31, 2007).
This accounting change has no impact on the surplus of assets distributable to
shareholders upon liquidation, on the preference order for the distribution of
the balance of assets of the Bank upon liquidation and on the related rights of
each class of shares. (For details of these rights, see Notes 14, 15, and 16 of
the financial statements of the Bank as at December 31, 2007).
TOTAL CREDIT TO THE PUBLIC - As at March 31, 2008 amounted to NIS 5,001 million
compared with NIS 5,521 million as at December 31, 2007. The credit data
presented above include credit guaranteed by the State that was granted to the
Israel Electric Corporation Ltd. out of a deposit of the State with the Bank,
the balance of which amounted to NIS 4,539 million as at March 31, 2008,
compared with NIS 4,963 million as at December 31, 2007. Net of such credit, the
credit to the public amounts to NIS 462 million as at March 31, 2008, compared
with NIS 558 million as at December 31, 2007. This decline reflects the credit
portfolio reduction policy being followed by the Bank, and is further to the
decrease in credit that commenced in 2002.
SECURITIES - The balance of securities as at March 31, 2008 amounts to NIS 40
million, compared with NIS 46 million as at December 31, 2007. The securities
portfolio includes an investment of NIS 10 million in mezzanine funds. In
addition, the securities portfolio includes marketable shares in the amount of
NIS 30 million (according to their market value as at March 31, 2008). The
market value of the shares includes unrealized gains in the amount of NIS 6.2
million which were credited to a capital reserve, as part of the adjustments in
respect of the presentation of available for sale securities to fair value. The
Bank has no investments in securities or other asset backed financial
instruments.
DEPOSITS OF THE PUBLIC - Amounted to NIS 52 million as at March 31, 2008,
compared with NIS 55 million as at December 31, 2007.
The Bank refrains from accepting new deposits and upon instructions from the
Bank of Israel, it ceased renewing deposits that have reached maturity, subject
to certain exceptions. Please note that about half of the balance of deposits as
at March 31, 2008 and at December 31, 2007 are deposits related to credit.
DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as at March 31,
2008 amounted to NIS 4,877 million, compared with NIS 5,319 million as at
December 31, 2007. The main component of the Government deposits is foreign
currency denominated deposits, which served as the source for granting long-term
loans. The balance of the Government's foreign currency deposits amounted to NIS
4,629 million as at March 31, 2008, compared with NIS 5,063 million as at
December 31, 2007.
Another component of these deposits is the CPI-linked deposits that were
received from the Government as part of the arrangement of the Kibbutzim. These
deposits served as a source for rescheduling these debts. The balance of the
Government's CPI-linked deposits as at March 31, 2008 amounted to NIS 248
million, compared with NIS 256 million as at December 31, 2007.
18
DEPOSITS FROM BANKS - The balance of these deposits as at March 31, 2008
amounted to NIS 390 million, compared with NIS 481 million as at December 31,
2007. The entire balance derived from the special line of credit which the Bank
of Israel granted to the Bank (of which an amount of NIS 386 million represents
the principal of the line of credit and NIS 4 million represents the interest
which accrued but has not yet been charged). See Note 1 of the condensed
financial statements (the part referring to the credit line of the Bank of
Israel) for more information regarding the amounts of interest the Bank was
charged by the Bank of Israel in excess of the "Bank of Israel" rate.
MARKET RISKS AND THEIR MANAGEMENT
Market risk is the risk of impairment of the Bank's capital, which may derive
from changes in financial markets that impact on the assets and liabilities of
the Bank. Such changes include changes in foreign currency exchange rates,
changes in interest rates, the rate of inflation and the prices of shares.
Asset and liability risk management policy is designed to protect against
linkage base and interest risks and maintain such risks within the limits of
exposure set by the Board of Directors.
Implementation of this policy is debated as part of a committee, the members of
which include the General Manager and other members of management, and which
usually meets on a weekly basis. In accordance with the approval of the
Supervisor of Banks, granted on November 26, 2003, this management committee
serves as the Bank's financial risk manager.
The following is a summary of the major risks to which the Bank is exposed, the
limits set by the Bank and the manner and frequency at which the Bank issues
reports regarding the level of exposure and the compliance with the limits set:
BASE RISK - The exposure to base risk is measured as the difference between the
assets and liabilities (including the impact of futures transactions) in each of
the linkage bases. In respect of each of the linkage segments listed above, the
Bank sets out frameworks of maximum permissible surpluses and deficits. These
restrictions are set, taking into consideration the composition of the Bank's
capital and the current activity of the Bank.
The limits sets by the Board of Directors of the Bank for each of the linkage
segments are as follows (in NIS millions):
INDEX-LINKED SEGMENT* - A maximum surplus of NIS 500 million, and a maximum
deficit of NIS 50 million.
UNLINKED SHEKEL SEGMENT - A maximum surplus of NIS 100 million, and a maximum
deficit of NIS 550 million.
FOREIGN CURRENCY/FOREIGN CURRENCY LINKED SEGMENT - A maximum surplus of NIS 50
million, and a maximum deficit of NIS 25 million.
* In the Index-linked segment, the permissible surplus/deficit is net of the
equity of the Bank (including preference shares classified from an
accounting standpoint as liabilities).
The following table presents the surplus of assets over liabilities (liabilities
over assets) broken down by linkage segment. The data include off-balance sheet
items. The data below are computed after neutralizing liabilities in respect of
the Bank's preference shares which are classified from an accounting standpoint
as liabilities, since the Bank's asset and liability management policy is to
relate to the surplus of assets over liabilities that are unrelated to the
equity of the Bank.
19
The following data are in NIS millions:
FOREIGN
CURRENCY
UNLINKED CPI-LINKED DENOMINATED/ NON-MONETARY
SHEKEL SEGMENT SEGMENT (*) LINKED ITEMS TOTAL
------ ------ ------ ------ -----
March 31, 2008 (326.9) 838.9 5.1 40.9 558.0
March 31, 2007 (438.1) 877.7 21.1 49.0 509.7
December 31, 2007 (350.6) 854.6 5.5 47.2 556.7
(*) Including a perpetual deposit with the Treasury (March 31, 2008 in an amount
of NIS 852.2 million, March 31, 2007 - NIS 822.2 million, December 31, 2007 -
NIS 848.8 million).
The data presented below indicate that in all of the linkage segments, the
exposure is within the limits set by the Board of Directors of the Bank.
An examination conducted on the impact of an increase of 1% in the Consumer
Price Index indicates that the calculated addition to equity amounts to NIS 8.6
million. A decrease of 1% in the Index would result in a decrease in equity of
the same amount.
As indicated in Appendix C of the condensed financial statements, the volume of
foreign currency assets in currencies other than the dollar is relatively much
lower than the volume of the balance sheet of the Bank and amounts to NIS 12
million, comprising 0.2% of total assets. The Bank has no surplus assets or
liabilities in such currencies and, therefore, a change in the rates of foreign
currencies other than the dollar has a minimal impact on the results of
operations of the Bank.
The following table presents the sensitivity of the impact of changes in the
exchange rate of the dollar as of March 31, 2008 (in NIS millions) on the
results of operations of the Bank:
Percentage change in dollar rate (5)% (10)% 5% 10%
-------- -------- -------- --------
Impact on the results of operations (0.3) (0.5) 0.3 0.5
The abovementioned data are net of the liabilities in respect of the Bank's
preference shares. In addition, the data presented below are calculated without
the impact of such changes on other variables (such as interest rates).
INTEREST RISK - The interest risk derives from the impact of future changes in
interest rates on the present value of the Bank's assets and liabilities. Such
changes may cause erosion of the Bank's income and equity.
In order to reduce the risk deriving from possible changes in interest rates,
the Bank implements a policy of matching, to the extent possible, between the
dates of change of interest on the assets to the dates of change of interest on
liabilities. In the unlinked shekel segment, the major activity is in variable
interest, so that there is a correlation between the dates of changes in
interest. In the foreign currency segment, loans at fixed interest are solely
back-to-back, so that in this segment too, there is no material lack of
correlation between the dates of changes in interest.
As part of the limits on the rate of exposure to changes in interest rates, the
Board of Directors of the Bank set limits to the maximum calculated impairment
to the equity of the Bank in the event of a change in interest rate of 1%,
versus the accepted interest rates as of the date of the report. The limits are
as follows:
UNLINKED SEGMENT - a maximum decrease of NIS 2 million.
INDEX-LINKED SEGMENT - a maximum decrease of NIS 14 million.
20
FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease of NIS 3
million.
According to the decision of the Board of Directors, the impact of a possible
change in interest rates on the computed value of assets and liabilities is
measured on a semi-annual basis. This is due to the fact that the Bank does not
issue any new credit, making a semi-annual examination adequate for the level of
the Bank's activity.
LIQUIDITY RISK
Since the Bank is not permitted to recruit deposits from the public, it relies
on the credit line from the Bank of Israel in managing its liquidity.
During 2003, the Bank of Israel issued provisions pertaining to liquidity
management. In view of the credit line, the Supervisor of Banks, in his letter
dated November 26, 2003, stipulated that the Bank is not required to implement
part of those provisions.
SUPERVISION OVER MARKET RISKS MANAGEMENT POLICY AND THE MANNER IN WHICH IT IS
IMPLEMENTED
Implementation of the Bank's assets and liability management policy, including
the exposure to market risks, is discussed in a committee on which the General
Manager and members of management serve. This committee usually meets once a
week. A report on the Bank's assets and liabilities, broken down by linkage
bases, is presented at every meeting of the committee.
The controller of the Bank, who is a member of the aforementioned committee,
receives a daily report of assets and liabilities by linkage bases and checks
the changes that occurred in the assets and liabilities between the dates of the
reports to the committee.
In addition, once a month, the committee is presented with a breakdown of the
Bank's securities portfolio.
The Board of Directors of the Bank set out guidelines for the implementation of
the Bank's asset and liability management policy, as well as a number of
limitations regarding the exposures to market risks. In addition, they set out
the means and the dates of reporting and control in respect of compliance with
the limitations that were set. Once a quarter, the plenary of the Board of
Directors is furnished with a quarterly report on the management of the
financial risks and as part of the deliberations, an updated document covering
the risks, the limits set for the risks, the compliance therewith, and an
updating of the limits in accordance with the resolutions taken by the Board of
Directors.
MEASUREMENT OF MARKET RISKS
The model used by the Bank in determining the fair value of financial
instruments not having a market price is based on the expected cash flows from
each of the instruments and the discounting thereof using relevant interest
rates.
The calculation that relates to the impact of a change of 1% in the interest
rate curve of each linkage segment is also based on the expected cash flows from
all of the financial assets and liabilities of the Bank at relevant interest
rates for each balance sheet item, with a variance of 1% in each direction.
VALUE AT RISK (VAR) - The Bank does not conduct an analysis based on this model.
The Board of Directors of the Bank believes that the model for measuring market
risks used by the Bank, which is based mainly on discounted cash flows, is
adequate for the activity of the Bank, taking into consideration the following
factors:
- - The total volume of the Bank's assets and liabilities.
- - The Run-Off Plan which the Bank has been implementing.
- - The fact that the Bank does not grant new credit or enter into new
investments.
- - The fact that the Bank grants credit in foreign currency or in the unlinked
shekel segment on the basis of variable interest only. Credit at fixed
interest in foreign currency also in the past was based solely on specific
sources at back-to-back conditions.
21
OPERATIONAL RISKS
The Bank takes various steps to reduce the operational risks to which the Bank
may be exposed:
- - The Bank appointed an operational risk manager and an operational risk
controller.
- - The Bank operates a computerized control system to identify operational
risks in the Bank's operating framework.
- - The Bank conducts, through outside professional parties, periodic
assessments to assess operational risk - including the risks of fraud and
embezzlement to which it is exposed, and the adequacy of the preventative
and compensatory controls designed to reduce such risks. As part of these
assessments, recommendations are made, when necessary for improvement
and/or expansion of existing controls and/or the institution of new
controls.
- - The Bank has a process of management and monitoring of the implementation
of the recommendations of the aforementioned risk assessments.
In accordance with directives of the Bank of Israel regarding risks of
embezzlement and fraud, a team was established headed by the General Manager and
including members of management, the Internal Auditor, the Operating Risks
Controller and those responsible over the computer field. The team periodically
discusses the risks of embezzlement and fraud that were included in the
operating risks review and the controls required in order to minimize these
exposures.
ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES
Note 1 of the annual financial statements describes the principal accounting
policies according to which the financial statements of the Bank are prepared.
The implementation of these accounting principles by the Board of Directors and
Management when preparing the financial statements often requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and the financial results of the
Bank.
Details relating to the accounting policy on critical issues were presented in
the Report of the Board of Directors for 2007 in the chapter relating to
critical accounting policy.
RESPONSIBILITY OF THE MANAGEMENT FOR THE INTERNAL CONTROL OVER FINANCIAL
REPORTING
The financial statements include certifications of the Bank's General Manager
and Comptroller regarding the effectiveness of the controls and procedures
relating to the disclosure in the financial statements and regarding changes in
the internal control over financial reporting.
The aforementioned certifications are in accordance with the directives
published by the Bank of Israel, which came into effect for the first time in
the financial statements for June 30, 2005. The directives published by the Bank
of Israel are in accordance with the provisions of Section 302 of the Sarbanes
Oxley Law.
With the assistance of external consultants, the Bank established controls and
procedures relating to the disclosure, and it maintains a system of internal
control relating to the disclosure among the various managers of the Bank, in
such a way as to enable compliance with the requirement of this directive.
Management of the Bank together with the General Manager and Comptroller
evaluated, as at the end of the period included in this report, the
effectiveness of the controls and procedures relating to the Bank's disclosure.
On the basis of this evaluation, the Bank's General Manager and Comptroller
concluded that as at the end of this period, the controls and procedures
relating to the Bank's disclosure are effective in order to record, process,
summarize and report the information that the Bank is required to disclose in
the annual report in accordance with the reporting to the public directives of
the Supervisor of Banks and at the date specified in these directives.
During the course of the quarter ended March 31, 2008, there was no change in
the Bank's internal control over financial reporting which has had or is likely
to have a significant effect on the Bank's internal control over financial
reporting.
22
SECTION 404 OF THE SARBANES OXLEY ACT
Since the Bank has issued its securities to shareholders in the United States,
it is subject to the provisions of the Sarbanes Oxley Act. Pursuant to Section
404 of the Sarbanes Oxley Act, the management of the reporting entity is
required to declare, among other things, its responsibility for fulfilling and
maintaining proper internal controls and proper procedures with respect to
financial reporting, and to provide its evaluation on the effectiveness of such
controls and procedures. The United States Securities and Exchange Commission
(SEC) announced that it is postponing the application of Section 404 with
respect to companies that are not defined as an "Accelerated Filer", including a
foreign issuer that does not meet this definition, so that they will be required
to implement the Section only from the fiscal year ending on or after July 15,
2007. In the opinion of the Bank's legal advisors and on the basis of the Bank's
valuation of its shares, the Bank does not meet the aforementioned definition of
an "Accelerated Filer". As a result of this, the Bank will be required to
implement Section 404 of the Sarbanes Oxley Act only from the financial
statements for 2007 that it submits in the U.S.A. On August 9, 2006, the SEC
issued a leniency whereby the filing of an external auditor's report on the
effectiveness of internal controls pertaining to financial reporting will be
required from the fiscal year ended December 15, 2008. In the past year, the
Bank invested significant resources so as to be in position to implement Section
404 of the Sarbanes Oxley Act in respect of the 2007 annual report to be filed
in the U.S.
In accordance with a directive that was published by the Supervisor of Banks on
December 5, 2005, requirements similar to those included in Section 404 of the
Sarbanes Oxley Act will be imposed on the banks in Israel. In accordance with
this directive, the provisions will apply as from the annual financial
statements for the year ended December 31, 2008. In accordance with the letter
of the Supervisor of Banks dated March 18, 2007, the Bank is entitled to not
implement this directive.
PROCESS OF APPROVING THE FINANCIAL STATEMENTS
The Board of Directors of the Bank is the body that is charged with overall
control of the Bank. In filling this role, the Board of Directors of the Bank
utilizes the services of its committees. The committees that assist the board in
the area of control are the Audit committee and the Balance Sheet committee. The
committee that discusses the draft of the financial statements before they are
presented to the Board for approval is the Balance Sheet committee which has a
membership of six directors, including the Chairman of the Board. Three of the
members of the Balance Sheet committee are directors having accounting and
financial expertise. As part of the financial statement approval process, two
meetings of the Balance Sheet committee are held. At the first meeting,
deliberations are held concerning the problematic debts and the allowances for
doubtful debts. A few days prior to the meeting, the members of the committee
receive reviews of the problematic debtors on the basis of the stipulated
criteria. At the meeting, a discussion is held regarding the fairness of the
allowances for doubtful debts and answers are provided to the questions raised
by the directors. At the meeting, the external auditor is also present. At the
second meeting of the Balance Sheet committee, a discussion is held regarding
the financial statements. A number of days before this meeting, the members are
furnished with a draft of the financial statements, as well as additional
accompanying material. Concurrently, a draft of the financial statements is sent
to the Disclosure committee which is comprised of members of the management of
the Bank and a number of additional senior executives. As part of the meeting of
the Disclosure committee, the members of the committee hold discussions and
offer their comments regarding the fairness of the disclosure in connection with
the major issues relating to the activity of the Bank and to the results of its
operations, as reflected in the draft financial statements. During the course of
the meeting of the Balance Sheet committee, which is held after the meeting of
the Disclosure committee, the results of operations of the Bank for the past
year are reviewed, as well as the major changes in the composition of the Bank's
assets and liabilities. In addition, a report is presented on the changes that
took place in the financial statements when compared to those of previous
periods, on changes in accounting presentation (if any occurred) and on the
major comments of the members of the disclosure committee.
During the meeting answers are provided for the questions raised by the
directors. The meeting is attended by the external auditors of the Bank who
review the changes in accounting that occurred during the past year and the
policies that were implemented during the performance of the audit of the
financial statements. The auditor is at the disposal of the members of the
committee to answer any question and, where necessary, provides his opinion on
accounting issues in connection with the financial statements.
23
The Bank's financial statements are brought before the plenary of the Board of
Directors for approval. A draft of the financial statements is presented to the
members of the Board a few days before the meeting. A review is presented and
discussions are held in a manner similar to the one described above regarding
the second meeting of the balance sheet committee.
The meeting is attended by the external auditor of the Bank.
After deliberation,a vote is taken on the basis of which the financial
statements are approved.
DISCLOSURE REGARDING THE INTERNAL AUDITOR OF THE BANK
The disclosure regarding the internal auditor of the Bank is as detailed in the
report of the Board of Directors for 2007, with no changes occurring therein,
except for the extension of his tenure until the earliest of December 31, 2009,
the privatization of the Bank, or commencement of liquidation proceedings.
Extension of his tenure is subject to the provisions of Article 11A of the
Banking Ordinance - 1941, whereby no one is permitted to serve as an officer in
a banking institution unless the Supervisor of Banks is notified 60 days prior
to commencement of the tenure and, within the 60-day period, the Supervisor does
not express his opposition to the appointment or has granted his approval
thereof.
EXTENSION OF THE TENURE OF THE CHAIRMAN OF THE BOARD, GENERAL MANAGER AND DEPUTY
GENERAL MANAGER
At its meeting on April 28, 2008, the Board of Directors of the Bank decided to
extend the tenure of Dr. R. Cohen as a Director and as the Chairman of the
Board, and the tenures of the General Manager of the Bank, Mr. A. Galili and the
deputy General Manager, Mr. A. Savir, for an additional period to commence on
July 31, 2008 and to end on the earliest of December 31, 2009, the privatization
of the Bank or when the Bank commences liquidation proceedings. Extension of
tenure as aforesaid is subject to the provisions of Article 11A of the Banking
Ordinance - 1941, whereby no one is permitted to serve as an officer in a
banking institution unless the Supervisor of Banks is notified 60 days prior to
commencement of the tenure and, within the 60-day period, the Supervisor does
not express his opposition to the appointment or has granted his approval
thereof. In addition, the general meeting of the Bank has to approve the
extension of the terms of employment of Dr. R. Cohen for the additional period.
ORGANIZATIONAL STRUCTURE AND MANPOWER
The number of full-time employees employed by the Bank as at March 31, 2008 was
42, compared with 43 on December 31, 2007 and 170 employees on January 1, 2002.
During the first quarter of 2008, there were three plenary sessions of the Board
of Directors and 4 meetings of its committees.
The Board of Directors wishes to thank the Bank's management and employees for
achieving targets and for their contribution to the Bank's accomplishments in
successfully implementing the Run-Off plan.
DR.RAANAN COHEN URI GALILI
Chairman of the Board General Manager
Tel-Aviv, May 26, 2008
24
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF INCOME AND EXPENSES (1)
Reported amounts
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING (EXPENSES) (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE INCOME NOT INCLUDING INCLUDING
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVE DERIVATIVES
----------- ------------ ------- ------- ----------- ----------- ------ ------
NIS MILLIONS % % NIS MILLIONS % %
------------------------- ------- ------- ------------------------ ------ ------
ISRAELI CURRENCY - UNLINKED
Assets 116.6 2.9 10.33 249.2 3.3 5.40
Effect of ALM derivatives (3) 40.0 0.4 83.8 1.0
Total assets 156.6 3.3 8.70 333.0 4.3 5.27
Liabilities 429.1 (4.2) (3.97) 757.9 (7.8) (4.18)
Effect of ALM derivatives (3) 19.1 (0.2) -- --
Total liabilities 448.2 (4.4) (3.99) 757.9 (7.8) (4.18)
------- ------- ------- ------- ------- ------- ------- -------
Interest margin 6.36 4.71 1.22 1.09
------- ------- ------- ------- ------- ------- ------- -------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 336.8 5.5 6.69 502.5 4.5 3.63
Effect of ALM derivatives (3) 19.0 0.1 -- --
Total assets 355.8 5.6 6.45 502.5 4.5 3.63
Liabilities 281.9 (3.0) (4.33) 325.6 (0.7) (0.86)
Effect of ALM derivatives (3) 24.0 (0.3) 43.9 (0.2)
Total liabilities 305.9 (3.3) (4.39) 369.5 (0.9) (0.98)
------- ------- ------- ------- ------- ------- ------- -------
Interest margin 2.36 2.06 2.77 2.65
------- ------- ------- ------- ------- ------- ------- -------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 4,913.5 (303.2) (22.49) (22.49) 5,887.3 1.7 0.12 0.12
Liabilities 4,881.6 304.2 22.69 5,813.5 (0.9) (0.06)
Effect of ALM derivatives (3) 15.9 (0.4) 39.9 (0.1)
Total liabilities 4,897.5 303.8 22.60 5,853.4 (1.0) (0.07)
------- ------- ------- ------- ------- ------- ------- -------
Interest margin 0.20 0.11 0.06 0.05
------- ------- ------- ------- ------- ------- ------- -------
TOTAL
Monetary assets generating financing income 5,366.9 (294.8) (20.23) 6,639.0 9.50 0.57
Effect of ALM derivatives (3) 59.0 0.5 83.8 1.0
Total monetary assets generating financing income 5,425.9 (294.3) (19.99) 6,722.8 10.5 0.63
Monetary liabilities generating financing expenses 5,592.6 297.0 19.61 6,897.0 (9.4) (0.55)
Effect of ALM derivatives (3) 59.0 (0.9) 83.8 (0.3)
Total liabilities generating financing expenses 5,651.6 296.1 19.37 6,980.8 (9.7) (0.56)
------- ------- ------- ------- ------- ------- ------- -------
Interest margin (0.62) (0.62) 0.02 0.07
------- ------- ------- ------- ------- ------- ------- -------
See page 27 for footnotes relating to rates of income and expenses
25
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
Reported amounts
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------------------------------------------
2008 2007
------------------------------------------------------------------- --------------------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING (EXPENSES) (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE INCOME NOT INCLUDING INCLUDING
ALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVE ALANCE (2) (EXPENSES) DERIVATIVE DERIVATIVE
-------------- ------------- ---------- --------- -------------- -------------- -------------- ---------------
NIS MILLIONS % % NIS MILLIONS % %
-------------------------------- ---------- --------- -------------------------------- -------------- ---------------
Financing commissions and other financing income 11.7 10.6
Other financing expenses (2.2) (2.7)
--------- --------
Profit from financing operations before allowance
for doubtful debts 11.3 8.7
Allowance for doubtful debts (including general
and supplementary allowances) 11.1 (1.0)
--------- --------
Profit (loss) from financing operations after
allowance for doubtful debts 22.4 7.7
Other monetary assets 877.6 859.3
General and supplementary allowances for
doubtful debts (45.2) (51.7)
Non-monetary assets 46.0 50.1
--------- ---------
Total assets 6,245.3 7,496.7
========= =========
Other monetary liabilities 93.4 89.7
Non-monetary liabilities 0.6 1.6
Capital resources 558.7 508.4
--------- ---------
Total liabilities and capital resources 6,245.3 7,496.7
========= =========
See page 27 for footnotes relating to rates of income and expenses
26
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------------------------------------------
2008 2007
--------------------------------------------------------------------------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING FINANCING (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE BALANCE NOT INCLUDING INCLUDING
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES (EXPENSES) (EXPENSES) DERIVATIVES DERIVATIVES
------------ ----------- -------- -------- ------------ ----------- -------- --------
$ MILLIONS % % $ MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 1,327.3 21.3 6.58 6.58 1,391.1 25.0 7.38 7.38
Liabilities 1,318.7 (21.0) (6.52) 1,373.7 (23.3) (6.96)
Effect of ALM derivatives (3) 4.3 (0.1) 9.4 (0.1)
-------- -------- -------- --------
Total liabilities 1,323.0 (21.1) (6.53) 1,383.1 (23.4) (6.94)
-------- -------- -------- --------
Interest margin 0.06 0.05 0.42 0.44
-------- -------- -------- --------
FOOTNOTES:
(1) The data in this table are presented before and after the effect of
derivative instruments (including the off-balance sheet effect of
derivative instruments).
(2) Based on monthly opening balances except for the unlinked Israeli currency
segment where the average balance is based on daily figures, and net of the
average balance of the specific allowance for doubtful debts.
(3) Derivatives (ALM) which comprise part of the Bank's asset and liability
management.
(4) Including Israeli currency linked to foreign currency.
27
CERTIFICATION
I, Uri Galili, hereby certify as follows:
1. I have reviewed the quarterly report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the quarter ended March 31, 2008
(hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the quarterly financial statements and other
financial information included in the report fairly present in all material
respects, the Bank's financial condition, results of operations, and the
changes in the shareholders' equity as at the dates and for the periods
presented in the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the first quarter
and that has materially affected, or is reasonably likely to
materially affect, the internal control of the Bank over financial
reporting; and
5. The Bank's other certifying officers and I have disclosed to the Bank's
auditor, Board of Directors and Audit Committee, based on our most recent
evaluation of the internal control over financial reporting, as follows:
A. All significant deficiencies and material weaknesses relating to the
establishment or operation of internal control over financial
reporting that are reasonably likely to adversely affect the ability
of the Bank to record, process, summarize and report financial
information; and
B. Any fraud, whether or not material, which involves Management or other
employees who have a significant role in the Bank's internal control
over financial reporting.
The aforementioned does not derogate from my responsibility or from the
responsibility of any other person according to the law.
- ---------------------------
U. Galili - General Manager
May 26, 2008
28
CERTIFICATION
I, Rimon Shmaya, hereby certify as follows:
1. I have reviewed the quarterly report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the quarter ended March 31, 2008
(hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the quarterly financial statements and other
financial information included in the report fairly present in all material
respects, the Bank's financial condition, results of operations, and the
changes in the shareholders' equity as at the dates and for the periods
presented in the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the first quarter
and that has materially affected, or is reasonably likely to
materially affect, the internal control of the Bank over financial
reporting; and
5. The Bank's other certifying officers and I have disclosed to the Bank's
auditor, Board of Directors and Audit Committee, based on our most recent
evaluation of the internal control over financial reporting, as follows:
A. All significant deficiencies and material weaknesses relating to the
establishment or operation of internal control over financial
reporting that are reasonably likely to adversely affect the ability
of the Bank to record, process, summarize and report financial
information; and
B. Any fraud, whether or not material, which involves Management or other
employees who have a significant role in the Bank's internal control
over financial reporting.
The aforementioned does not derogate from my responsibility or from the
responsibility of any other person according to the law.
- --------------------------
Rimon Shmaya - Comptroller
May 26, 2008
29
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
AS OF MARCH 31, 2008
30
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS OF MARCH 31, 2008
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Review Report 32
Balance Sheets 34
Statements of Income 35
Statement of Shareholders' Equity 36
Notes to the Financial Statements 38
31
- --------------------------------------------------------------------------------
|KESSELMAN & KESSELMAN
|Certified Public Accountants (Isr.)
|Trade Tower, 25 Hamered Street
|Tel Aviv 68125 Israel
|P.O Box 452 Tel Aviv 61003
|Telephone +972-3-7954555
|Facsimile +972-3-7954556
The Board of Directors
The Industrial Development Bank of Israel Limited
TEL AVIV
Dear Gentlemen/Ladies,
RE: REVIEW OF THE CONDENSED UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE
THREE-MONTH PERIOD ENDED MARCH 31, 2008
At your request, we reviewed the condensed interim balance sheet of The
Industrial Development Bank of Israel Limited (hereinafter - the "Bank") as of
March 31, 2008 and the condensed interim statement of income and the condensed
interim statement of shareholders' equity for the three-month period then ended.
Our review was conducted in accordance with procedures prescribed by the
Institute of Certified Public Accountants in Israel and included, inter alia,
reading the said financial statements, reading the minutes of the shareholders'
meetings and of the Board of Directors and its committees, as well as making
inquiries of persons responsible for financial and accounting matters at the
Bank.
Since the review performed is limited in scope and does not constitute an audit
in accordance with generally accepted auditing standards, we do not express an
opinion on the said condensed interim financial statements.
Based on our review, we are not aware of any material modifications that would
have to be made to the condensed interim financial statements referred to above
in order for them to be in conformity with generally accepted accounting
principles, and in accordance with the directives and guidelines of the
Supervisor of Banks.
We would call attention to the following:
A. Note 1 of the condensed interim financial statements regarding the severe
liquidity problems the Bank experienced in August 2002, which were caused
by increased withdrawals of public deposits, the interest-bearing special
line of credit that was provided to the Bank by the Bank of Israel, the
decision of the Bank's Board of Directors to adopt the "Run-Off" plan for
the supervised sale of the Bank's credit assets and to extend the plan
until July 31, 2008, the agreement of the Bank's Board of
32
Directors to restrict the license of the Bank and to limit its duration
until the end of the "Run-Off " plan, 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, and the decision of the Ministerial
Committee for Social and Economic Affairs (the Social Economic Cabinet) to
approve and extend the "Run-Off" plan, as above (hereinafter - the
Government decision extending the "Run-Off" plan), the decision of the
Government regarding the privatization of the Bank, and the decision of the
Board of Directors of the Bank to submit a request for approval of a
compromise plan and arrangement pursuant to Article 350 of the Companies
Law between the Bank and its shareholders, all as detailed in the said
note.
Note 1 states, among other things, that "Notwithstanding the fact that the
date for the conclusion of the Run-Off Plan was set for July 31, 2008, the
Bank intends on continuing to focus on the collection of its credit
portfolio even after that date, as it did previously, until such time as
the decision regarding the privatization of the Bank is realized or until
other developments occur in connection with the affairs of the Bank, in the
event that privatization is not realized."
B. Note 9 of the condensed interim financial statements regarding the
litigation pending against the Bank and its senior officers, all as
detailed in the aforementioned note.
The condensed interim financial statements do not contain any changes in the
value or classification of assets or liabilities that may be needed if the Bank
is unable to continue operating as a "Going Concern".
Kesselman & Kesselman
Certified Public Accountants (Isr.)
May 26, 2008
33
The Industrial Development Bank of Israel Limited
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
MARCH 31,
--------------------- DECEMBER 31,
2008 2007 2007
------- ------- -------
(UNAUDITED) (UNAUDITED) (AUDITED)
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
ASSETS
Cash and deposits with banks 35.1 42.7 33.8
Securities 40.3 48.5 46.3
Credit to the public 5,000.8 6,314.1 5,521.1
Credit to governments 23.4 40.2 24.7
Fixed assets 0.7 1.0 0.8
Other assets 6.2 11.4 7.2
Perpetual deposits with the Israeli Treasury 852.2 822.2 848.8
------- ------- -------
Total assets 5,958.7 7,280.1 6,482.7
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 52.3 65.8 54.6
Deposits of banks 390.0 703.4 481.2
Deposits of the Government 4,876.9 5,919.6 5,319.2
Perpetual deposit 0.1 0.1 0.1
Capital notes 19.0 24.1 20.2
Other liabilities 62.4 57.4 50.7
Non-participating preference shares 255.0 298.1 276.0
Participating preference shares 157.6 184.3 170.6
------- ------- -------
Total liabilities 5,813.3 7,252.8 6,372.6
------- ------- -------
Shareholders' equity 145.4 27.3 110.1
------- ------- -------
Total liabilities and shareholders' equity 5,958.7 7,280.1 6,482.7
======= ======= =======
--------------------- --------------- -----------
DR. RAANAN COHEN URI GALILI RIMON SHMAYA
Chairman of the Board General Manager Comptroller
May 26, 2008
The accompanying notes are an integral part of the condensed financial
statements.
34
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
THREE MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 DECEMBER 31
2008 2007 2007
------- ------- -------
(NIS MILLIONS)
-------------------------------
(UNAUDITED) (AUDITED)
------- ------- -------
Profit from financing operations
before allowance for doubtful debts 11.3 8.7 29.3
Allowance for doubtful debts (11.1) 1.0 (13.8)
------- ------- -------
Profit from financing operations
after allowance for doubtful debts 22.4 7.7 43.1
------- ------- -------
OPERATING AND OTHER INCOME
Operating commissions 0.1 0.2 1.1
Gains (losses) from investments in shares (0.7) 4.2 8.7
Other income 0.5 0.9 1.7
------- ------- -------
Total operating and other income (expenses) (0.1) 5.3 11.5
------- ------- -------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 5.7 4.9 18.5
Expenses in respect of employee retirement 11.0 - -
Maintenance and depreciation of buildings and equipment 0.7 0.7 2.9
Other expenses 2.0 2.5 9.4
------- ------- -------
Total operating and other expenses 19.4 8.1 30.8
------- ------- -------
Operating profit before taxes on income 2.9 4.9 23.8
Provision for taxes on operating income 1.7 - 1.6
------- ------- -------
NET EARNINGS FOR THE PERIOD 1.2 4.9 22.2
======= ======= =======
NET EARNINGS (LOSS) PER SHARE IN NIS
"A" ordinary shares 79.5 324.5 1,470.2
======= ======= =======
The accompanying notes are an integral part of the financial statements.
35
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)
-------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD (AUDITED) 207.1 402.3 9.5 (508.8) 110.1
Net earnings for the period - - - 1.2 1.2
Adjustments from present-
ation of available-for-sale
securities at market value - - (3.3) - (3.3)
Translation differences
relating to a perpetual
deposit - 37.4 - - 37.4
------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 439.7 6.2 (507.6) 145.4
======= ======= ======= ======= =======
THREE MONTHS ENDED MARCH 31, 2007 (UNAUDITED)
-------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD (AUDITED) 207.1 335.2 8.7 (531.0) 20.0
Net earnings for the period - - - 4.9 4.9
Adjustments from present-
ation of available-for-sale
securities at market value - - (2.1) - (2.1)
Translation differences
relating to a perpetual
deposit - 4.5 - - 4.5
------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 339.7 6.6 (526.1) 27.3
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
36
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
YEAR ENDED DECEMBER 31, 2007 (AUDITED)
-------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE YEAR 207.1 335.2 8.7 (531.0) 20.0
Net earnings - - - 22.2 22.2
Adjustments from present-
ation of available-for-sale
securities at market value - - 0.8 - 0.8
Translation differences
relating to a perpetual
deposit - 67.1 - - 67.1
------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
YEAR 207.1 402.3 9.5 (508.8) 110.1
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
37
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. THE "RUN OFF" PLAN, PRIVATIZATION OF THE BANK, APPROVAL OF THE
COMPROMISE PLAN AND ARRANGEMENT BETWEEN THE BANK AND ITS SHAREHOLDERS,
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, as part 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, which was amended on
December 29, 2005).
38
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE RUN-OFF PLAN AND ITS IMPLEMENTATION
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 is prohibited from granting new credit and
concentrates its activities on collecting the existing credit. Bank
Management has been following and will continue to follow a vigorous and
forceful course of action regarding the handling of problematic debts. As a
result, there has been a significant increase in the Bank's collection and
legal expenses in recent years.
In the first quarter of 2008, the Bank continued implementing the Run-Off
Plan, reducing monetary credit to the public and reducing deposits of the
public as well. The outstanding balance of public credit (excluding the
State-guaranteed loans to the Israel Electric Company Ltd.), which as at
December 31, 2007, amounted to NIS 558 million, decreased to NIS 462
million as at March 31, 2008. The balance of the deposits of the public
with the Bank which, as at December 31, 2007, amounted to NIS 55 million,
decreased to NIS 52 million as at March 31, 2008. The Bank is prohibited
from accepting new deposits and, in accordance with the instructions of the
Bank of Israel, it no longer renews existing deposits which have matured,
except for certain instances.
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,
maintenance of current accounts, checking accounts and securities accounts,
processing grants, operating cash and clearing facilities (independently)
and credit cards.
The reduction in the Bank's operations was also accompanied by a reduction
in the Bank's staff and in the Bank's operating expenses.
Notwithstanding the fact that the date for the conclusion of the Run-Off
Plan was set for July 31, 2008, the Bank intends on continuing to focus on
the collection of its credit portfolio even after that date, as it did
previously, until such time as the decision regarding the privatization of
the Bank is realized or until other developments occur in connection with
the affairs of the Bank, in the event that privatization is not realized.
The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be needed if the Bank is
unable to continue operating as a "Going Concern".
GOVERNMENT RESOLUTION REGARDING THE PRIVATIZATION OF THE BANK
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution pertaining to the privatization of the Bank. The full wording of
the resolution was publicized by the Bank in its immediate filing on April
30, 2008. The privatization resolution stipulates, among other things, the
following:
o The shares of the State in the Bank shall be sold, as a block, by way
of a private placement, to an investor or group of investors from
Israel and/or abroad (the "Purchaser"), as part of the blueprint for
the sale, including the transfer of all of the shares of the Bank,
including those held by the public, to the Purchaser (the "Sale").
39
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
o Until the completion of the sale, the Bank shall continue collecting
its credit portfolio.
o Based on the memorandum of principles signed among the shareholders of
the Bank on March 18, 2008, the Bank shall submit an application
request for approval of an arrangement, pursuant to Article 350 of the
Companies Law - 1999 (the "Companies Law", the "Arrangement Plan").
Pursuant to the arrangement, among other things, the Purchaser shall
purchase all of the Preferred C shares, the Preferred CC shares and
the Preferred CC1 shares (the "C Class Shares") and the Ordinary
Preference shares of the Bank, traded on the Tel Aviv Stock Exchange
(the "TASE"), and such shares shall be delisted from the TASE. In
addition, the Purchaser shall purchase, as part of the arrangement
pursuant to Article 350, all of the Ordinary A shares and all of the
types of the government shares.
o According to the Arrangement Plan, the Bank shall redeem, in
accordance with the provisions of the prospectus governing their
issuance, the D and DD shares of the Bank which are not held by the
State.
o As a condition for the approval and implementation of the arrangement
among the shareholders, all the different classes of shareholders of
the Bank shall waive their claims in their capacity as shareholders
against the Bank, officers of the Bank, and interested parties in the
Bank, as these terms are defined in the Companies Law. In addition,
the Bank and the C Share Group shall waive all claims against the
State in connection with the redemption of the perpetual deposit and
its refunding to the Bank.
o The Bank shall redeem, upon implementation of the Arrangement Plan, or
until December 31, 2008, or until a later date to be approved by the
Bank of Israel for the extension of the credit line, the entire
special line of credit placed at its disposal by the Bank of Israel in
2002.
o The Accountant General of the Ministry of Finance is authorized to
carry out, among other things, the following steps:
a. To refund to the Bank, by the later of July 31, 2008 or until the
approval by the court of the Arrangement Plan, the perpetual
deposit that was by the Bank with the Accountant General, plus
linkage differentials in accordance with the agreements between
the State and the Bank pertaining to the perpetual deposit. The
Accountant General, in coordination with the Government Companies
Authority (the "Authority") and the Bank is authorized to decide
that the relative part of the perpetual deposit in respect of the
consideration of the issuance of D and DD shares held by the
Public shall be returned to the Bank on the date of the refunding
of the aforementioned perpetual deposit or at a later date, the
latest being proximate to the sale or if the Bank is liquidated.
As a condition of the refunding of the perpetual deposit, it
shall be guaranteed to the satisfaction of the Accountant General
that the funds of the deposit shall be used by the Bank, as a
first priority, to repay the balance of the special line of
credit granted to the Bank by the Bank of Israel.
b. To pay to the Bank, for purposes of redeeming preference D shares
and preference DD shares not held by the State:
1. Interest in respect of the perpetual deposit in an amount
equal to the accumulated dividend that was not paid to the
preferred D shareholders and the preferred DD shareholders,
except the State, from July 1, 2002 through the date of the
redemption of the shares.
2. A premium at a rate of 5.625% of the par value of the D
shares not held by the State.
c. To take steps to have the Bank assign the unpaid balance of the
loan granted to the Israel Electric Company Ltd. in favor of the
Accountant General or another banking entity to be determined by
the Accountant General.
40
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
o The Accountant General, together with the Authority, were authorized
to reach an agreement with the various types of shareholders of the
Bank in connection with the distribution of the consideration of the
sale, including taking into consideration the economic report of the
selected expert (Professor Amir Barnea) and to formalize such
agreement in the arrangement to be submitted by the Bank pursuant to
Article 350.
o The employees of the Bank will be paid a privatization remuneration in
according with the rules of the Authority. The remuneration will be
granted immediately following the sale and will be subject to its
execution.
The privatization decision was taken further to and on the basis of the
blueprint for the sale of the issued share capital of the bank that has
been assessed for quite some time by the Finance Ministry and the
Government Companies Authority. Within this framework, the Authority
publicized on June 17, 2007 a request for information ("RFI") in which it
announced, among other things, that the State of Israel, through the
Authority, was requesting information from parties interested in purchasing
the Bank. The Bank was informed by the Authority that requests had been
received from twelve companies and individuals.
On March 18, 2008, a memorandum of principles was signed between the State
and the C, CC and CC1 shareholders and some of the Ordinary Preference
shareholders of the Bank, whereby the parties to the memorandum agreed,
among other things, to cooperate in carrying out the blueprint for the sale
of the shares of the Bank. The complete version of the memorandum of
principles and the document of agreements that was attached thereto were
also publicized as part of the Immediate Report made by the Bank on April
30, 2008. It should be noted that the banks whose names appear on the
memorandum of principles as part of the parties to the document did not
sign the document.
REQUEST FOR APPROVAL OF THE COMPROMISE AGREEMENT AND THE ARRANGEMENT
PURSUANT TO ARTICLE 350 OF THE COMPANIES LAW - 1999 BETWEEN THE BANK AND
ITS SHAREHOLDERS
Further to the resolution regarding the privatization of the Bank that was
passed by the Ministerial Committee on Privatization and in accordance with
such resolution, the Board of Directors of the Bank decided at its meeting
of May 26, 2008 to petition the Bank to approve the compromise plan and
arrangement pursuant to Article 350 of the Companies Law between the Bank
and its shareholders (hereinafter - the "Arrangement Plan").
According to the resolution, prior to the submission of the request to have
the Arrangement Plan approved, the Bank will have to obtain approvals and
clarifications regarding certain matters in connection with the Arrangement
Plan or deriving therefrom.
Prior to passing the resolution, the Board of Directors was presented with
the opinion of an expert regarding the reasonableness of the criterion for
determining the minimum price at which the sale of the Bank will be carried
out in accordance with the Arrangement Plan, and the fairness of the
criterion as far as the public shareholders are concerned, regarding the
formula that was set down in the plan for the distribution of the proceeds
of the sale, and regarding the document dated March 9, 2008, prepared by
Professor A. Barnea, who assessed the alternative of liquidating the Bank
versus the alternative of selling the shares of the Bank, on the basis of
the financial statements of the Bank as of September 30, 2007 and which
contains the formula for the distribution of the proceeds of the sale. The
document of Professor A. Barnea constitutes part of the Arrangement Plan
and its full version was publicized by the Bank in an Immediate Report
dated March 12, 2008. In addition, the Board of Directors was furnished
with a legal opinion regarding the reasonableness of the arrangement to pay
a partial dividend to the C, CC, and CC1 shareholders that will apply in
the event that the sale of the shares of the Bank is not implemented.
41
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
The resolution of the Board of Directors regarding the submission of the
Arrangement Plan was passed after the Board of Directors reached a decision
in view of, among other things, the conclusions and findings in the
aforementioned two opinions and in the aforementioned document of Professor
A. Barnea, that the alternative of selling the shares of the Bank, which
stands at the center of the Arrangement Plan, will likely be more
beneficial to the public shareholders than the alternative of liquidating
the Bank.
The Arrangement Plan was included in the Immediate Report made by the Bank
on May 27, 2008. A brief description follows:
The Arrangement Plan includes three parts (two of which are alternatives)
which the shareholders and the court will be asked to approve.
1. The first part will be implemented immediately upon the approval of
the Arrangement Plan (by the meetings of the classes of shareholders
and the court). Pursuant to the first part, the State will redeem the
perpetual deposits made by the Bank with the Treasury, except that
part of them that reflect the proceeds of the issuance of the DD
shares held by the public (which will continue to be maintained as a
dollar-linked deposit). The Bank will use the redemption of the
perpetual deposits to repay the balance of the line of credit granted
by the Bank of Israel. The originating motion that was filed by
various financial institutions against the Bank to have the
distribution of the dividend renewed will be rejected, and the appeal
filed by the Bank against the court decision rejecting its originating
motion on the matter of the accrual of the interest on its perpetual
deposits with the Treasury will also be rejected.
2. Pursuant to the second part (the sales arrangement), all of the shares
of the Bank, except for the D and DD shares not held by the State,
will be sold by the parties holding them (the State and the public) as
part of the sales process to be implemented by the Government
Companies Authority.
The D and DD shares not held by the State will be redeemed according
to the terms of their issue: the D shares at their full dollar par
value, plus a premium of 5.625%, plus the entire preferred dividend in
arrears in respect of such shares, and the DD shares at their full
dollar par value plus the entire preferred dividend in arrears in
respect of such shares. The redemption of the amount of the principal
will come from the resources of the Bank while the payment of the
premium and the preferred dividend in arrears will be financed by
funds provided to the Bank by the State of Israel.
If the total proceeds to be received in respect of the sold shares are
lower than the greater of the "liquidation value of the Bank" as to be
determined by the average of the two valuations conducted at the
request of the State prior to the implementation of the sale, less the
principal amount of the redemption of the D and DD shares, or an
amount of NIS 400 million (the "minimum price"), the consummation of
the sale shall be subject to the approval of the meeting of the C-type
shareholders (C, CC and CC1) by a majority of 75% of the value
represented by the vote. The State is authorized, at its discretion,
not to carry out the sale even if the average total proceeds are
higher than the minimum price.
The proceeds of the sale shall be divided among the holders of the
sold shares on the basis of the distribution formulas prepared by
Professor A. Barnea as part of the document he prepared, which is
attached to the Arrangement Plan.
The State shall refund to the Bank part of the perpetual deposits it
still has, in accordance to the description in the first part above.
42
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
The shareholders of the Bank will waive any claim, demand, or suit
against the Bank, officers of the Bank, shareholders of the Bank,
employees of the Bank, or the State.
The Bank will assign its rights to the loan it granted to the Israel
Electric Company Ltd. and to the State deposit which served as a
source of such loan. The rights will be endorsed to the party to which
the Bank is instructed by the Accountant General.
The conditions for the performance of the second part (the sales
arrangement) are the finding of a purchaser and the completion of the
sale by December 31, 2009.
3. The third part (the dividend arrangement) is an alternative to the
second part and it shall be carried out in the event that the sales
arrangement is not completed by December 31, 2009 or, if prior to that
date, a liquidation order is issued against the Bank or if the general
meeting of the Bank decides to voluntarily liquidate the Bank. As part
of this course of action, the Bank will pay the holders of C, CC, and
CC1 shares, on the earliest of December 31, 2009, or the date on which
a liquidation order is issued against the Bank, or on the date on
which the general meeting of the Bank decides to voluntarily liquidate
the Bank, half of the preferred dividend in arrears (at an annual rate
of 6%) accrued on their shares during the period from July 1, 2002
through July 31, 2008, plus linkage differentials and interest by law,
from July 31, 2008 until the date of the actual payment to the
shareholders. The State will pay the Bank in respect of the part of
the perpetual deposits that reflect the consideration of the issuance
of C, CC and CC1 shares, half of the interest at an annual rate of 6%
accrued on this part during the aforementioned period, plus linkage
differentials and interest by law, from July 31, 2008 until the date
of the actual payment to the Bank.
Pursuant to the third part, the State will waive any claim, demand or
suit against the Bank, the receiver of the Bank, and the liquidation
account of the Bank in connection with 50% of the preferred dividend
in arrears accrued on the D and DD shares held by the State in respect
of the period from July 1, 2002 through July 31, 2008, and the holders
of C, CC and CC1 shares will waive any claim, demand, or suit in
connection with the perpetual deposit, its return to the Bank, the
payment of interest thereon, and the non-distribution of the dividend
during the period until the payment to them of half of the preferred
dividend in arrears, as mentioned above (without such waiver of the
holders of the C, CC and CC1 shares detracting from their rights under
the articles of the Bank to accumulate a preferred dividend in respect
of their shares, including in relation to the aforementioned period).
It is hereby clarified and emphasized that the above is solely a condensed
description of the major features of the Arrangement Plan. It does not
replace the full version of the Arrangement Plan as approved by the Board
of Directors and/or as shall be submitted to the court for approval, and
that until such time as the plan is submitted to the court for approval,
changes in the plan may occur.
Since the redemption of the D and DD shares and the payment of half of the
preferred dividend in respect of the C, CC, and CC1 shares, as described
above, may constitute a reduction in capital, then concurrent with the
submission of an application to the court to approve the Arrangement Plan,
the Bank will also submit to the court an application to reduce its
capital, the submission of which was approved by the Board of Directors at
its meeting on May 26, 2008. Therefore, execution of the arrangement shall
be also subject to the approval of the court in connection with the
application to reduce the capital of the Bank.
43
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
The terms of the special line of credit that was provided to the Bank by
the Bank of Israel were determined by the Governor of the Bank of Israel
and over time they underwent changes. The present terms of the credit line
are specified in the letter of the Governor from October 30, 2005 and from
April 13, 2008, and the principal terms are as follows:
o The credit line will be in effect until the earlier of December 31,
2008 or receipt of the approval by the court of the Arrangement Plan
between all of the shareholders of the Bank, the State and the Bank
pursuant to Article 350 of the Companies Law - 1999. Extension of the
credit line after July 31, 2008 is subject to the passing of an
appropriate resolution by the government, the extension of the State
guarantee for the full repayment of the amount of the credit line,
making of the necessary corrections and additions to the debenture
issued in favor of the Bank of Israel on November 14, 2002 and amended
on December 29, 2005, and the integration of the comments of the Bank
of Israel into the arrangement request.
o The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline gradually in accordance with a forecast
that was attached to the letter of the Governor of the Bank of Israel
dated October 30, 2005.
o 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.
o The interest on the utilized credit will be until July 31, 2008 the
"Bank of Israel interest rate", following which date it will be the
"Bank of Israel rate", plus 1.5%
o 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.
o Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
In the abovementioned letter of the Governor of the Bank of Israel dated
October 30, 2005 it was noted 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 in addition to 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 decision of the Ministerial Committee for Social and Economic Affairs
from October 10, 2005 provides as follows:
1) The Government is responsible for the repayment of the credit line 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.
2) If at the end of the plan there remains an unpaid balance of the line
of credit, the Government will repay the balance to the Bank of Israel
until July 31, 2008. The Government has noted before it that in
exchange for its repayment of the credit balance, the collateral that
was provided by the Bank for repayment of the credit will be assigned
in its favor (the Bank created a floating lien in favor of the Bank of
Israel in a debenture dated November 14, 2002, which was amended on
December 29, 2005).
44
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
The utilized balance of the special line of credit from the Bank of Israel
(not including interest accrued but not yet charged) as of March 31, 2008
was NIS 386 million, compared with NIS 476 million as at December 31, 2007.
The utilized balance as of March 31, 2008 is NIS 214 million lower than the
credit line amount that was set for that date for the Bank in the updated
credit line decline forecast that was attached to the letter of the
Governor of the Bank of Israel dated October 30, 2005 and lower than the
framework stipulated by the Bank of Israel for the conclusion of the
Run-Off Plan.
The Bank is of the opinion that the Bank of Israel should credit it with
all the amounts of interest in excess of the "Bank of Israel interest rate"
which were charged by the Bank of Israel from August 2002 until July 29,
2003 (the date the Ministerial Committee for Social and Economic Affairs
first approved the Bank's "Run-Off" plan), in the total amount of NIS 80
million (as calculated by the Bank). On May 1, 2007, the Bank issued an
Immediate Report to the Israel Securities Authority and to the Tel Aviv
Stock Exchange in which it gave notice that as part of the contacts it had
with the Bank of Israel, it was made clear that the issue of the recouping
of the surplus interest to the Bank will be assessed upon the complete
repayment of the special credit line.
The Bank is continuing its negotiations with the Bank of Israel in
connection with the recoupment of the aforementioned surplus interest (at
an amount the rate of which will be assessed and debated between the Bank
and the Bank of Israel).
45
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 2 - ACCOUNTING POLICY
The condensed interim financial statements are presented in accordance with
accounting principles implemented for purposes of preparing interim
financial statements. The accounting principles implemented in the
preparation of the interim financial statements are consistent with those
applied in the preparation of the audited financial statements as at
December 31, 2007. These financial statements should be read in conjunction
with the annual financial statements as at December 31, 2007 and for the
year then ended, together with their accompanying notes.
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO IMPLEMENTATION
a. In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29, "Adoption of International Financial Reporting
Standards ("IFRS")" (hereinafter - the Standard). The Standard
stipulates that entities subject to the Securities Law - 1968 and that
are required to report according to the regulations of this law, are
to prepare their financial statements for periods beginning as from
January 1, 2008 according to IFRS. This does not apply to banking
institutions, the financial statements of which are presented in
accordance with the provisions and guidelines of the Supervisor of
Banks.
In relating to the manner in which banking institutions are to
implement the Standard, the Supervisor of Banks notified banking
institutions that:
o He intends on setting down on a regular basis provisions for the
implementation of Israeli standards issued by the Israel
Accounting Standards Board and which are based on IFRS that do
not relate to the core banking business.
o In the second half of 2009, he will publicize his decision
regarding the date of implementation of IFRS standards that
relate to the core banking business. In doing so, he will take
into consideration the results of the process of adoption of
these standards in Israel on the one hand and the progress of the
process of convergence between IFRS and U.S. standards on the
other hand.
o Therefore, relating to the core banking business, the financial
statements of a banking institution presented in accordance with
the provisions and guidelines of the Supervisor of Banks will
continue to be presented on the basis of the U.S. standards as
stipulated in the provisions for reporting to the public.
b. In December 2006, the Israel Accounting Standards Board issued
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and its Controlling Shareholder" issued by the
Israel Accounting Standards Board (hereinafter - the "Standard"). The
Standard replaces the Securities Regulations (Financial Statement
Presentation of a Transaction between a Company and its Controlling
Shareholder) - 1996 as adopted in the provisions for reporting to the
public of the Supervisor of Banks. The Standard stipulates that assets
and liabilities which were the subject of a transaction between an
entity and its controlling shareholders shall be measured at the date
of the transaction at fair value and that the difference between the
fair value and the consideration of the transaction be carried to
shareholders' equity. Any difference with a debit balance is in effect
a dividend which reduces retained earnings. Any difference with a
credit balance constitutes an investment by the owners and shall be
presented separately as part of shareholders' equity under the title
"Capital Reserve deriving from a transaction between the entity and
its controlling shareholder".
46
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO IMPLEMENTATION (CONT.)
The Standard deals with three issues in connection with transactions
between an entity and its controlling shareholder, as follows: the
transfer of an asset to the entity from the controlling shareholder,
or the opposite, transfer of an asset from the controlling shareholder
to the entity; the assumption of a liability of the entity to a third
party, in whole or in part, by the controlling shareholder,
indemnification of the entity by the controlling shareholder in
respect of an expense, the waiver of the controlling shareholder to
the entity regarding a debt due to him from the entity, in whole or in
part; and loans granted to the controlling shareholder or loans
received from the controlling shareholder. In addition, the Standard
sets forth the disclosure to be made in the financial statements
regarding transactions between the entity and its controlling
shareholder during the period.
The Standard applies to transactions between an entity and its
controlling shareholder carried out after January 1, 2007 and to loans
granted to or received from the controlling shareholder prior to the
effective date of the Standard, commencing on the effective date.
As of the date of release of the financial statements, the Supervisor
of Banks had not yet issued his provisions regarding the manner of
adoption of the Standard by banking institutions, if at all.
c. Directive on the Measurement and Disclosure of Impaired Debts, Credit
Risk and a Provision for credit Losses - On December 31, 2007, the
Supervisor of Banks issued a draft directive on "Measurement and
Disclosure of Impaired Debts, Credit Risk, and a Provision for Credit
Losses". The directive was brought up for discussion at the advisory
committee of the Bank of Israel on matters related to banking affairs.
The directive is based on accounting principles generally accepted by
banks in the U.S. The underlying principles of the draft directive
constitute a significant change versus the current provisions relating
to the classification of problematic debts and the measurement of the
provision for doubtful debts in respect of credit losses. The new
directive sets out explicit guidelines regarding the classification of
impaired debts, credit risk, the measurement of the provisions for
credit losses, the accounting write-offs of debts and revenue
recognition in respect of debts. Moreover the new guidelines set out
detailed requirements for the conducting of a systematic process to
set up provisions for credit losses and to save documentation in
support of the process and the provisions.
The new directive is scheduled to go into effect commencing with the
financial statements as of January 1, 2010. The directive set out
transition provisions to implement in the annual financial statements
of 2007 and in the financial statements to be issued during 2008 and
2009. The transition provisions for the financial statements of 2007
relate to the major details of the directive, information regarding
the preparations of the banking institution for the implementation of
the directive and data pertaining to the expected impact (direction
and scope) of the initial implementation of the directive on
shareholders' equity as of January 1, 2010. The transition provision
for the financial statements of 2009 include, in addition to the
above, disclosure of quantitative data on the impact of the adoption
of the new guidelines on:
- The recorded credit debt balance as of January 1, 2010, broken
down by component.
- The balance of the provision for credit losses as of January 1,
2010, broken down by component.
47
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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- The balances included in the required disclosure in the report of
the Board of Directors as of January 1, 2010.
- The balance of the provision for credit losses in respect of
off-balance sheet credit instruments as of January 1, 2010.
- The balance of current taxes or deferred taxes receivable or
payable in respect of the provision for credit losses and
accounting write-offs as of January 1, 2010.
- The impact on the shareholders' equity as of January 1, 2010.
In its letter to the Bank dated August 12, 2007, the Bank of Israel
notified the Bank that it has permission not to take steps to prepare
for the implementation of the aforementioned directive.
NOTE 4 - EXEMPTION FROM SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF
DEVIATIONS FROM CERTAIN DEBT LIMITS
As stated in Note 1G of the Bank's financial statements as at December 31,
2007, as a result of the approval received from the Supervisor of Banks,
the financial statements of the Bank do not include a supplementary
allowance for doubtful debts in respect of deviations from debt limits of
an individual borrower and a borrower group, deviations from debt limits in
respect of financing purchases of means of control in corporate entities
and in respect of deviations from the limit of sector indebtedness.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to make a supplementary allowance of
significant amounts in respect of these deviations, in the periods in which
they were created, which could have had a material impact on its results of
operations for such periods. Furthermore, the adjustment of the
aforementioned supplementary allowance to the changes that occurred from
time to time in the extent of the deviations could have had an effect on
the financial results of the Bank in the subsequent reporting periods.
NOTE 5 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
Since the third quarter of 2002, during the course of which the Bank
distributed to its preferred shareholders and to the holders of its
ordinary preference shares, the quarterly dividend in respect of Q2/2002,
no dividend whatsoever has been distributed by the Bank.
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 on a quarterly basis
25% of the annual preferred dividend of those classes (hereinafter - the
"quarterly dividend"). In addition, the Bank would pay an annual
participating dividend at a rate of 1.5% in respect of C, CC and CC1
shares. The last dividend paid by the Bank in respect of the preferred
shares was the quarterly dividend of Q2/2002, further to the losses
incurred by the Bank in 2002. After the Board of Directors of the Bank,
based on its legal counsel, discussed the various aspects involved in
distributing the dividend (including the restrictions set out in the
Companies Law - 1999, in the articles of the Bank and in the directives of
the Supervisor of the Banks), the Board of Directors decided to refrain for
the time being from distributing a dividend in respect of these shares.
48
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 5 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D.)
As of March 31, 2008, 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 178.5
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 of
the Bank with the Treasury, which was also not recorded in the financial
statements.
The total accrued amount of NIS 178.5 million is comprised as follows: NIS
109.9 million is in respect of non-participating shares (D and DD) and NIS
68.6 million is in respect of participating shares (C, CC and CC1). Of this
amount, an amount of NIS 7.2 million is in respect of the first quarter of
2008 and is comprised as follows: NIS 4.8 million in respect of
non-participating D and DD shares and NIS 2.4 million in respect of
participating C, CC and CC1 shares.
On September 28, 2004 various financial entities that hold preferred shares
of 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 was requested 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
dividends, 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 (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. 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. On March 23, 2006, the court
decided that it would first deliberate and decide on the question of the
accrual of interest on the perpetual deposits of the Bank with the
Treasury, since a decision on this matter would advance the deliberation
and decision on the rest of the issues on hand. In the past, the Board of
Directors of the Bank expressed its opinion regarding the renewal of the
dividend distribution, subject to the legal and regulatory restrictions
placed on the Bank regarding this issue, including the need to obtain
approvals and to amend the articles of the Bank. On August 5, 2007, a
verdict was handed down by the Tel Aviv District Court whereby it rejected
the originating motion filed by the Bank against the Finance Minister and
against the aforementioned financial institutions and determined that as
long as a dividend is not distributed on the preference shares of the Bank,
no interest will accrue on the perpetual deposits of the Bank with the
Treasury.
At its meeting on October 9, 2007, the Board of Directors of the Bank
discussed the ramifications of the verdict. The Board of Directors decided
that since the suit of the Bank (its originating motion) related not only
to the issue of the accrual of the interest on the perpetual deposits, in
the absence of a dividend distribution, rather also to the accrual and
payment of a dividend in arrears (including upon liquidation), and since on
the basis of the determination of the court that the suit of the Bank was
rejected, a claim can be made that the verdict rejects also the right of
the Bank to accrued interest against the payment of the dividend in arrears
on the preferred shares (a result which the Board of Directors believes is
incorrect and it is reasonable to assume that the court did not intend such
a result), then the Bank will file an appeal on the rejection of the claim
with regard to the payment of the accrued interest on the perpetual
deposits against the payment of the dividend in arrears.
49
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 5 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D.)
Notwithstanding the above, the Board of Directors added in its decision
that the appeal will not be filed if an adequate clarification is provided
by the State as to its consent to pay accrued interest on the perpetual
deposits against the payment of the dividend in arrears on the preferred
shares (Preferred C, CC, CC1, D and DD shares). Such a clarification was
not furnished and the appeal of the Bank was filed with the Supreme Court
on January 6, 2008.
At its meeting on October 9, 2007, the Board also discussed the
ramifications of the aforementioned ruling on its continued policy in
connection with the distribution of a dividend on the preference shares
(preference shares of classes C, CC, CC1, D and DD). In view of the
determination of the court ruling in connection with the non-accrual of
interest on the Bank's perpetual deposits with the Treasury as long as no
dividend is distributed (a determination which the Bank does not dispute),
and after the Board considered the interests of both the shareholders of
the Bank and the creditors of the Bank (who in view of the court ruling no
longer profit from the non-distribution of the dividend), the Board reached
a decision that it would be prudent for the Bank to take steps towards a
renewal of the distribution of the dividend. In connection with this, the
Board decided (at the aforementioned meeting) to take a number of steps, as
follows: 1) to recommend to the general meeting of the Bank to amend the
Articles of Association of the Bank in connection with two matters that
relate to the renewal of the dividend, one being the authorization to
distribute a dividend not only from profits (which at present are
non-existent) but also from the interest to be paid to the Bank on its
perpetual deposits with the Treasury and the other, the authorization of
the distribution of a regular preference dividend on the Bank's preference
shares even without the distribution - either prior or concurrent - of the
preference dividend in arrears on these shares (since, in view of the
wording of the court ruling, claims may be raised whereby the Bank is not
entitled to the accrued interest on the perpetual deposits against the
distribution of the dividend in arrears, a result that will prevent the
Bank from distributing the dividend in arrears in the absence of sufficient
income); 2) to convene a general meeting of the Bank to amend the Bank's
Articles as above and empower the Chairman of the Board to determine the
date of the meeting; 3) to petition the Supervisor of Banks for his
approval of a distribution of a dividend to the preferred shareholders,
subject to an amendment to the Articles, as above, and to obtain the
approval of the court to the proposed distribution (according to the
Companies Law - 1999), the distribution of a dividend not from
distributable income requires court approval, and at that time the Bank did
not have distributable income). A detailed description of the decisions of
the Board of Directors at its meeting of October 9, 2007 can be found in
the Immediate Report issued by the Bank on October 10, 2007. In accordance
with those decisions of the Board of Directors of the Bank, on January 7,
2008, the general meeting of the Bank was convened and on its agenda were
the abovementioned proposals for the amendment to the Articles of the Bank
such that the by-laws would not continue being an impediment to the renewal
of a dividend distribution.
The proposed changes were put to a vote and were rejected by a majority of
the voters. On February 5, 2008, the financing entities which filed the
originating motion against the Bank filed a request with the court to add
the State as an additional respondent to the originating motion, due to,
among other reasons, the vote of the State at the general meeting of the
Bank against the proposed amendments to the Articles of the Bank, as
mentioned above.
For information pertaining to the originating motions on the aforementioned
cessation of distribution of dividends, see also Note 9 of the financial
statements.
50
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
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NOTE 5 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D.)
In a "document of agreements" signed between the State and the financial
institutions which filed the originating motion against the Bank and which came
further to the memorandum of principles signed on March 18, 2008 between the
State, the aforementioned financial institutions, and some of the Ordinary
Preference shareholders of the Bank, and pursuant to which the signing parties
agreed to the implementation of the blueprint for the sale of the shares of the
Bank and to cooperate in the implementation thereof, the aforementioned
financial institutions and the State agreed that as part of the Arrangement
pursuant to Article 350 of the Companies Law - 1999 to be submitted for the
approval of the Court as part of the blueprint for the sale, the following
points shall be included:
o The State and the aforementioned financial institutions will not
object to the refunding to the Bank of its perpetual deposits with the
Treasury, on the later of July 31, 2008 or the date on which the
arrangement plan is approved.
o In the event that the sale of the Bank is not consummated by December
31, 2009 or if prior to that date a liquidation order is issued
against the Bank, or if the general meeting of the Bank decides to
voluntarily liquidate the Bank (each of these - the "liquidation of
the Bank"), the following provisions shall apply:
a. The State shall pay 50% of the interest at an annual rate of 6%
accrued on the perpetual deposits in connection with the C, CC,
and CC1 preferred shares in respect of the period from July 1,
2002 through July 31, 2008. This amount will be paid upon the
earlier of the liquidation of the Bank or December 31, 2009 (the
"payment date").
This amount shall bear linkage and interest as per the Interest
and Linkage Law - 1961, commencing from July 31, 2008 until the
payment date, to be paid by the State on the payment date. This
amount will be grossed up by the State in accordance with the
perpetual deposit agreements.
b. On the payment date, the Bank shall pay to the holders of
preferred C, CC, and CC1 shares a dividend of 50% of the
aggregate preferred dividend at a rate of 6% that accrued on
their shares in the period from July 1, 2002 through July 31,
2008, plus linkage differentials and interest pursuant to the
Interest and Linkage Law - 1961, commencing from July 31, 2008
until the date of the actual payment.
c. The State waives its claims and demands against the Bank and/or
the receiver of the Bank in connection with payment of 50% of the
dividend to the State, as the owner of D and DD shares, in
respect of the period from July 1, 2002 through July 31, 2008.
d. Subject to payment of the entire amount due to them pursuant to
sub-paragraph "b" above, the holders of preferred C, CC, and CC1
shares shall have no claim in connection with the
non-distribution of a dividend for the period from July 1, 2002
until the date of payment. To remove all doubt, the above does
not detract from the rights of the aforementioned shareholders to
the accrual of a preferred dividend in respect of their shares
pursuant to the articles of the Company, including in relation to
the aforementioned period.
o Subject to the payment of the amounts due to them from the proceeds of
the sale of the Bank, or - in the event that the sale is not
implemented - subject to the payment of 50% of the dividend, as above,
the holders of the C, CC, and CC1 preferred shares shall waive their
demands, and claims toward the State in connection with the payment of
a dividend in respect of any period in the past or in the future or in
connection with the perpetual deposit and the refunding of the
proceeds to the Bank.
51
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 5 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D.)
o Upon the approval of the arrangement by the court, the originating
motion filed by the aforementioned financial institutions shall be
rejected, together with the appeal filed by the Bank on January 6,
2008 to the Supreme Court. The rejection of the appeal will bind the
Bank and the State only as to the relations between them in connection
with the part of the perpetual deposits that relate to the various
classes of "C" shares.
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution pertaining to the privatization of the Bank. As part of this
resolution, it was determined, among other things that, based on the
memorandum of principles dated March 18, 2008 signed among the shareholders
of the Bank ( which was followed by the aforementioned document of
agreements), the Bank shall file a petition for the approval of the
arrangement pursuant to Article 350 of the Companies Law - 1999.
At its meeting on May 26, 2008, the Board of Directors of the Bank approved
the filing of an application to the Court for the approval of the
arrangement between the Bank and its shareholders pursuant to Article 350
of the Companies Law - 1999. The focus of the arrangement is the blueprint
for the sale of most of the shares of the Bank and the redemption of the
balance of the shares. The arrangement consists of, among other things, the
abovementioned points that were agreed to by the State and the financial
institutions in connection with the refund of the perpetual deposit,
payment of half of the preferred dividend, and a waiver of all claims.
NOTE 6 - EARLY RETIREMENT
On December 26, 2002, a collective agreement was signed by the Bank, the
New General Labor Federation and the Bank's Workers Committee. The
agreement prescribed, among other things, special payments to be made to
employees upon early retirement. For details of the agreement and
additional extension agreements related thereto, see Note 18D of the
financial statements as of December 31, 2007.
Regarding the plan for the privatization of the Bank, the Board of
Directors of the Bank approved additional special payments to be made to
employees upon early retirement. The additional amounts total some NIS 10
million, in respect of which the Bank recorded an expense in the item
entitled "Early Retirement". A new agreement will be drafted in the near
future and will be presented to the Commisioner of Wages and Labor
Agreements at the Treasury for approval.
In addition, in connection with the privatization plan for the Bank, the
Audit committee and Board of Directors of the Bank gave their approval to
payment of three months pay in lieu of advance notice and three months
acclimation payments to the Chairman of the Board, the General Manager of
the Bank and the Deputy General Manager of the Bank, should the
aforementioned parties leave the employment of the Bank for any reason
whatsoever. The three months pay will be paid in lieu of giving three
months actual notice as per their current employment agreements. For
details of the terms of employment of the Chairman of the Board, the
General Manager and the Deputy General Manager, see Note 18A.2 of the
financial statements as of December 31, 2007.
Resolutions of the audit committee and Board of Directors of the Bank are
subject to the approval of the Commissioner of Wages and Labor Agreements
at the Treasury. The expense deriving from such approval amounts to NIS 1
million and is presented as part of the early retirement item.
52
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 7 - EXTENSION OF THE TENURE OF THE CHAIRMAN OF THE BOARD, GENERAL MANAGER
AND DEPUTY GENERAL MANAGER
At its meeting on April 28, 2008, the Board of Directors of the Bank
decided to extend the tenure of Dr. R. Cohen as a Director and as the
Chairman of the Board, and the tenures of the General Manager of the Bank,
Mr. A. Galili and the deputy General Manager, Mr. A. Savir, for an
additional period to commence on July 31, 2008 and to end on the earliest
of December 31, 2009, the privatization of the Bank or when the Bank
commences liquidation proceedings. Extension of tenure as aforesaid is
subject to the provisions of Article 11A of the Banking Ordinance - 1941,
whereby no one is permitted to serve as an officer in a banking institution
unless the Supervisor of Banks is notified 60 days prior to commencement of
the tenure and, within the 60-day period, the Supervisor does not express
his opposition to the appointment or has granted his approval thereof. In
addition, the general meeting of the Bank has to approve the extension of
the terms of employment of Dr. R. Cohen for the additional period.
NOTE 8 - ISSUANCE OF A NEW LETTER OF INDEMNIFICATION AND EXEMPTION TO DIRECTORS
AND OFFICERS OF THE BANK
The Audit committee and the Board of Directors of the Bank at their
meetings on February 26, 2008, and the general meeting of the Bank that
took place on April 15, 2008, approved the issuance of a new letter of
indemnification to officers and directors of the Bank (hereinafter - the
"New Letter of Indemnification"). The new letter of indemnification applies
to transactions (as defined to include acts of omission and decisions)
conducted commencing on August 26, 2002 (which is the date on which the
Prime Minister's Office, the Finance Ministry and the Bank of Israel
decided on a package of steps in connection with the Bank, including the
sale of its asset and liability portfolio) and that were performed and/or
will be performed by Officers and Directors of the Bank by virtue of their
being Officers or Directors of the Bank, or by virtue of any position or
job in any company, the shares of which are and/or will be held by the Bank
or in any corporation or other business project in which the Bank invested
and/or will invest. The new letter of indemnification covers monetary
indebtedness imposed on the Officers or Directors in favor of another
person by court ruling (including the a ruling rendered as part of a
compromise or arbitration ruling approved by the court) and which are
connected or which derive from events set out in the new letter of
indemnification, that are events that the Board of Directors of the Bank
found to be foreseeable in view of the activity of the Bank at the date of
the approval of the new letter of indemnification.
The new letter of indemnification was added to the previous letter of
indemnification of the Officers and Directors of the Bank that was approved
by the general meeting of the Bank on August 8, 2002, for a total amount of
NIS 160.1 million, linked to the Consumer Price Index published in respect
of March 2002 (hereinafter - "existing letter of indemnification").
The overall amount of the indemnification in respect of the aforementioned
monetary indebtedness to be paid as part of the new letter of
indemnification and the overall amount of the indemnification in respect of
the monetary indebtedness to be paid as part of the existing letter of
indemnification shall not exceed in the aggregate the ceiling for
indemnification set out in the existing letter of indemnification which, as
mentioned above, amounts to NIS 160.1 million, linked to the Cost of Living
Index in respect of March 2002.
53
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 8 - ISSUANCE OF A NEW LETTER OF INDEMNIFICATION AND EXEMPTION TO DIRECTORS
AND OFFICERS OF THE BANK (CONT'D.)
In addition to the aforementioned monetary indebtedness, the new letter of
indemnification also covers reasonable litigation costs, including attorney
fees that Officers or Directors incurred or will be charged in certain
proceedings. The new letter of indemnification will go into effect only
after the Bank submits its application to the court to approve a compromise
plan and/or arrangement pursuant to article 350 of the Companies Law -
1999, between the Bank and all or part of its shareholders, in connection
with (among other things) the purchase and/or redemption of their shares.
The Audit committee and the Board of Directors of the Bank at their
meetings on February 26, 2008, and the general meeting of the Bank that
took place on April 15, 2008, approved the issuance of a letter of
exemption to Officers and Directors of the Bank. The letter of exemption
exempts the Officers and Directors of the Bank from liability in respect of
damage caused to the Bank as a result of a breach in their fiduciary
responsibility towards the Bank in actions (defined as including acts of
omission and decisions) carried out and/or that will be carried out by them
by virtue of their being Officers and Directors of the Bank, except for
actions carried out, as above, prior to August 26, 2002.
The letter of exemption will go into effect only upon submission of an
application by the Bank to the court to approve a compromise plan and/or
arrangement pursuant to article 350 of the Companies Law - 1999, between
the Bank and all or part of its shareholders, in connection with (among
other things) the purchase and/or redemption of their shares.
54
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 9 - LEGAL CLAIMS
Legal actions 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.
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. The
Bank delegated an attorney to represent it in the claim and the motion
for approval. The hearing on the motion was held on May 26, 2005. On
June 18, 2006, the Court decided to reject the motion to approve the
suit as a derivative suit and awarded the defendants court costs and
attorney fees. On September 18, 2006, the plaintiff appealed the
decision to reject the motion to approve the suit as a derivative suit
to the Supreme Court. The parties submitted written summaries, and the
completion of oral claims was held on February 21, 2008. The Supreme
Court has not yet rendered its ruling on the appeal. In the opinion of
the Bank's legal counsel, since the claim is a derivative action in
which the Bank is only a formal respondent, 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 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.
55
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 9 - LEGAL CLAIMS (CONT'D.)
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. On March 23, 2006, the court decided that in the
first stage, the question of the accrual of interest on the perpetual
deposits of the Bank with the Treasury will be discussed and resolved,
since a resolution of this question will advance the hearing and the
resolution of the rest of the questions that must be answered. On
August 5, 2007, a verdict was handed down by the Tel Aviv District
Court whereby it rejected the originating motion filed by the Bank
against the Finance Minister and against the aforementioned financial
institutions and determined that as long as a dividend is not
distributed on the preference shares of the Bank, the interest on the
perpetual deposits of the Bank with the Treasury does not accrue. At
its meeting on October 9, 2007, the Board of Directors of the Bank
discussed the ramifications of the verdict. The Board of Directors
decided that since the suit of the Bank (its originating motion)
related not only to the issue of the accrual of the interest on the
perpetual deposits, in the absence of a dividend distribution, rather
also to the accrual and payment of a dividend in arrears (including
upon liquidation), and since on the basis of the determination of the
court that the suit of the Bank was rejected, a claim can be made that
the verdict rejects also the right of the Bank to accrued interest
against the payment of the dividend in arrears on the preferred shares
(a result which the Board of Directors believes is incorrect and it is
reasonable to assume that the court did not intend such a result),
then the Bank will file an appeal on the rejection of the claim with
regard to the payment of the accrued interest on the perpetual
deposits against the payment of the dividend in arrears.
Notwithstanding the above, the Board of Directors added in its
decision that the appeal will not be filed if an adequate
clarification is provided by the State as to its consent to pay
accrued interest on the perpetual deposits against the payment of the
dividend in arrears on the preferred shares (Preferred C, CC, CC1, D
and DD shares). Such clarification was not forthcoming and the appeal
of the Bank was submitted to the Supreme Court on January 6, 2008. At
the aforementioned meeting on October 9, 2007, the Board of Directors
of the Bank also decided that in view of the ruling handed down by the
Tel Aviv District Court on the originating motion of the Bank, it
would be prudent for the Bank to take steps towards the renewal of the
distribution of the dividend and as such, it decided to take a number
of steps including convening a general meeting of the Bank and
recommending to the general meeting to amend the Articles of the Bank
so as to remove the existing impediment therein against the renewal of
a dividend distribution to the preferred shareholders of the Bank. The
general meeting of the Bank convened on January 7, 2008 and rejected
the proposed amendments to the Articles of the Bank. On February 5,
2008, the financial entities that filed the originating motion against
the Bank submitted a request to the court to add the State as an
additional respondent to the originating motion due to, among other
reasons, the vote of the State at the general meeting of the Bank
against the proposed amendments to the Bank's Articles, as mentioned
above.
56
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 9 - LEGAL CLAIMS (CONT'D.)
On February 24, 2008, the Bank responded to the request of the
financial entities stating that it had no objection to having the
State added as an additional respondent to the originating motion. On
March 18, 2008, a "document of agreements" was signed between the Bank
and the financial entities. In the document, the parties reached an
agreement whereby, among other things, as part of the arrangement
pursuant to Article 350 of the Companies Law - 1999, an arrangement
that is to be submitted by the Bank to the court for approval and
which deals with the sale of the shares of the Bank or alternatively a
partial payment of the preferred dividend to the holders of preference
C, CC, and CC1, shares, it shall be stipulated that when the
arrangement is approved by the court, the originating motion that was
filed by the financial entities will be rejected and the appeal filed
by the Bank against the decision of the Tel Aviv District Court on the
matter of the rejection of the originating motion would also be
rejected. In addition, subject to the receipt of the amounts due to
the holders of the preference C, CC, and CC1 shares (including the
financial entities) as part of the arrangement, they will waive their
claims and suits in connection with the dividend. In the opinion of
the Bank's legal counsel, the chances that the court will require the
Bank to pay the dividend, as above, without its being financed by the
State (as interest on the perpetual deposits of the Bank with the
Treasury) are remote.
3) In December 2007, a suit was filed against the Bank in the Tel Aviv-
Jaffa Magistrates Court for an amount of NIS 1.3 million. The suit was
filed by a customer of the Bank which received in the past credit from
the Bank to finance a construction project. As alleged in the suit,
the Bank overcharged the plaintiff's account with the bank in respect
of interest and commissions, without its consent or against agreements
with it. According to the plaintiff, if not for these charges, its
account with the Bank as of June 2007 would have had a credit balance
in the amount being sued for and not a debit balance. The Bank
transferred the handling of this suit to an attorney. The Bank filed a
countersuit in respect of the debit balance with the Bank.
4) In May 2006, a suit was filed in the Rehovot Magistrates Court, in an
amount of NIS 2.5 million, against the Bank, the receiver that was
appointed at the request of the Bank in respect of a carpentry
workshop and the purchaser of the workshop from the receiver.
According to the statement of claim, the Bank agreed to allow the
plaintiffs who were the owners of the workshop to find a purchaser for
the workshop by themselves, but when the potential purchaser that the
owners found heard that the workshop was in receivership, he entered
into an agreement with the Bank and the receiver for the purchase of
the workshop at an amount that was lower than the amount that he
undertook to pay the plaintiffs. The plaintiffs also claim that the
Bank and the receiver did not insure the premises and equipment of the
workshop and, therefore, they are liable for the damages that occurred
to the premises and the equipment as a result of a fire that broke out
at the workshop. The handling of the suit was transferred to an
attorney 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 1.4 million 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 allegedly 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.
57
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 9 - LEGAL CLAIMS (CONT'D.)
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. On March 14, 2006, the suit
against the receiver was summarily dismissed, but the suit against the
Bank and the owner of the property (who has since passed away)
remained in place.
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 415 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.
In the meantime, the evidentiary phase of the hearing was concluded,
as well as the summations in the actual suit, so that the court will
now be able to render its decision on the entire case.
7) 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.
8) 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 subsidiary of the Bank.
The claim was transferred to an attorney and a defense brief was
submitted. In 2005, the insurers carrying the directors and senior
officers liability insurance policy 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.
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 15 million.
58
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UANAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAX LAW (INFLATIONARY ADJUSTMENTS) (AMENDMENT NO. 20)
On February 26, 2008, the Israeli Parliament passed Income Tax Law
(Inflationary Adjustments) (Amendment No. 20) (Limiting the Period of
Applicability) - 2008 (hereinafter - the "Amendment"). Pursuant to the
Amendment, the applicability of the Adjustments Law will end with the 2007
tax year and, commencing with the 2008 tax year, the law will no longer
apply, except for transition provisions, the goal of which is to prevent
distortions in tax calculations.
According to the Amendment, from 2008 and thereafter, income for tax
purposes will no longer be measured on a "real" basis. In addition,
depreciation on fixed assets and tax loss carryforwards will no longer be
linked to the Consumer Price Index. Such amounts will be adjusted for
changes in the Index until the end of 2007 and from that date and
thereafter, will no longer be linked to the Index. Moreover, as part of the
Amendment, the definitions of the terms "profit" and "wages" will be
changed for purposes of the VAT Law. According to the new definitions,
profit tax will be computed after payroll taxes are deducted and the
definition of wages for purposes of computing the payroll tax will also
include the share of the employer in respect of National Insurance.
The impact of the Amendment on the results of the Bank in the first quarter
of 2008 was a reduction in tax expense in an amount of NIS 0.1 million.
This derives mainly from the abolishment of the Adjustments Law. The impact
of the change in the definitions of "profit" and "wages" is immaterial.
59
ANNEX A - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
THREE MONTHS ENDED MARCH 31,
---------------------
2008 2007
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
(UNAUDITED)
----- -----
A. INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public (294.3) 10.3
Credit to governments - (0.7)
Deposits with banks (0.5) (0.1)
----- -----
(294.8) 9.5
----- -----
B. INCOME (EXPENSES) DERIVING FROM LIABILITIES:
Deposits of the public (0.6) (0.5)
Deposits of the Government 301.6 (1.3)
Deposits of Bank of Israel (4.0) (7.6)
----- -----
297.0 (9.4)
----- -----
C. DERIVING FROM DERIVATIVE FINANCIAL INSTRUMENTS
Net income (expenses) from ALM derivative
instruments (*) (0.4) 0.7
----- -----
D. OTHER
Commissions from financing operations 2.3 3.2
Other financing income** 9.4 7.4
Other financing expenses (2.2) (2.7)
----- -----
11.3 8.7
----- -----
Total profit from financing operations
before allowance for doubtful debts 9.5 7.9
===== =====
Including - exchange rate differences, net (2.3) (1.4)
===== =====
* 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 9.0 6.5
===== =====
60
ANNEX B - ALLOWANCE FOR DOUBTFUL DEBTS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
-----------------------------------------------------------------------------------
2008 2007
------------------------------------ ------------------------------------
SPECIFIC SUPPLEMENTARY SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL ALLOWANCE (*) ALLOWANCE (**) TOTAL
----- ----- ----- ----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- ----- ----- -----
BALANCE OF ALLOWANCE AT
THE BEGINNING OF THE
PERIOD (AUDITED) 572.6 45.2 617.8 658.3 51.7 710.0
----- ----- ----- ----- ----- -----
Allowance provided
during the period 0.4 - 0.4 6.8 0.2 7.0
Reduction of allowance (2.5) (1.4) (3.9) (3.2) (2.8) (6.0)
Collection of debts written
off in the past (7.6) - (7.6) - - -
----- ----- ----- ----- ----- -----
Amount carried to
statement of income (9.7) (1.4) (11.1) 3.6 (2.6) 1.0
----- ----- ----- ----- ----- -----
Debts written off, net 1.6 - 1.6 (5.2) - (5.2)
----- ----- ----- ----- ----- -----
BALANCE OF ALLOWANCE AT
THE END OF THE PERIOD 564.5 43.8 608.3 656.7 49.1 705.8
===== ===== ===== ===== ===== =====
Including - balance of
allowance not deducted
from credit to public 1.1 - 1.1 3.8 - 3.8
----- ----- ----- ----- ----- -----
(*) Not including allowance for interest on non-income bearing credit.
(**) Including the general allowance for doubtful debts.
61
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
MARCH 31, 2008 (UNAUDITED)
---------------------------------------------------------------------------------------
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 20.7 2.3 12.0 0.1 - 35.1
Securities - 0.2 - - 40.1 40.3
Credit to the public 96.5 267.3 4,624.9 12.1 - 5,000.8
Credit to governments - 4.4 19.0 - - 23.4
Fixed assets - - - - 0.7 0.7
Other assets 5.6 - - - 0.6 6.2
Perpetual deposits with
the Israeli Treasury - 852.2 - - - 852.2
------- ------- ------- ------- ------- -------
Total assets 122.8 1,126.4 4,655.9 12.2 41.4 5,958.7
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 28.9 22.9 0.5 - - 52.3
Deposits of banks 390.0 - - - - 390.0
Deposits of the Government - 247.6 4,629.3 - - 4,876.9
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 19.0 - - 19.0
Other liabilities 18.8 41.6 1.4 0.1 0.5 62.4
Non-participating shares - - 255.0 - - 255.0
Preferred participating shares - - 157.6 - - 157.6
------- ------- ------- ------- ------- -------
Total liabilities 437.8 312.1 5,062.8 0.1 0.5 5,813.3
------- ------- ------- ------- ------- -------
Difference (315.0) 814.3 (406.9) 12.1 40.9 145.4
Forward transactions, net (11.9) 24.6 - (12.7) - -
------- ------- ------- ------- ------- -------
Total (326.9) 838.9 (406.9) (0.6) 40.9 145.4
======= ======= ======= ======= ======= =======
62
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (cont'd)
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
MARCH 31, 2007 (UNAUDITED)
----------------------------------------------------------------------------------------
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 21.0 8.7 12.9 0.1 - 42.7
Securities - 0.4 - - 48.1 48.5
Credit to the public 215.0 437.5 5,643.2 18.4 - 6,314.1
Credit to governments 0.1 7.3 26.0 6.8 - 40.2
Fixed assets - - - - 1.0 1.0
Other assets 10.5 - - - 0.9 11.4
Perpetual deposits with
the Israeli Treasury - 822.2 - - - 822.2
------- ------- ------- ------- ------- -------
Total assets 246.6 1,276.1 5,682.1 25.3 50.0 7,280.1
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 33.6 29.9 2.3 - - 65.8
Deposits of banks 696.6 - - 6.8 - 703.4
Deposits of the Government - 288.1 5,631.5 - - 5,919.6
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 24.1 - - 24.1
Other liabilities 18.0 36.8 1.6 - 1.0 57.4
Non-participating shares - - 298.1 - - 298.1
Preferred participating shares - - 184.3 - - 184.3
------- ------- ------- ------- ------- -------
Total liabilities 748.3 354.8 6,141.9 6.8 1.0 7,252.8
------- ------- ------- ------- ------- -------
Difference (501.7) 921.3 (459.8) 18.5 49.0 27.3
Forward transactions, net 63.6 (43.6) - (20.0) - -
------- ------- ------- ------- ------- -------
Total (438.1) 877.7 (459.8) (1.5) 49.0 27.3
======= ======= ======= ======= ======= =======
63
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (cont'd)
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
DECEMBER 31, 2007 (AUDITED)
----------------------------------------------------------------------------------------
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 20.3 3.8 9.6 0.1 - 33.8
Securities - 0.5 - - 45.8 46.3
Credit to the public 104.0 340.2 5,060.2 16.7 - 5,521.1
Credit to governments - 4.5 20.2 - - 24.7
Fixed assets - - - - 0.8 0.8
Other assets 6.1 - - - 1.1 7.2
Perpetual deposits with
the Israeli Treasury - 848.8 - - - 848.8
------- ------- ------- ------- ------- -------
Total assets 130.4 1,197.8 5,090.0 16.8 47.7 6,482.7
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 29.4 24.7 0.5 - - 54.6
Deposits of banks 481.2 - - - - 481.2
Deposits of
the Government - 256.6 5,062.6 - - 5,319.2
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 20.2 - - 20.2
Other liabilities 16.8 31.9 1.5 - 0.5 50.7
Non participating shares - - 276.0 - - 276.0
Preferred participating
shares - - 170.6 - - 170.6
------- ------- ------- ------- ------- -------
Total liabilities 527.5 313.2 5,531.4 - 0.5 6,372.6
------- ------- ------- ------- ------- -------
Difference (397.1) 884.6 (441.4) 16.8 47.2 110.1
Forward transactions, net 46.5 (30.0) - (16.5) - -
------- ------- ------- ------- ------- -------
Total (350.6) 854.6 (441.4) 0.3 47.2 110.1
======= ======= ======= ======= ======= =======
64