Industrial Development Bank Of Israel Inactive
Filed: 25 Sep 08, 12:00am
EXHIBIT 1
DATE: SEPTEMBER 25, 2008
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.
PC 520021924
("THE BANK")
TO: TO:
THE ISRAELI SECURITIES AUTHORITY THE TEL AVIV STOCK EXCHANGE LTD.
www.magna.isa.gov.il www.mava.tase.co.il
RE: CONVENING CLASS MEETINGS OF SHAREHOLDERS OF THE BANK IN ACCORDANCE WITH THE
SECURITIES REGULATIONS (PERIODIC AND IMMEDIATE REPORTS), 5730-1970, THE
COMPANIES REGULATIONS (NOTICE OF GENERAL MEETINGS AND CLASS MEETINGS IN
PUBLICLY-OWNED COMPANIES) 5760-2000, THE COMPANIES REGULATIONS (APPLICATION FOR
SETTLEMENT OR ARRANGEMENT) 5762-2002
Following the Bank's Immediate Report dated July 6, 2008 (Reference no.
2008-01-193413) and in accordance with the Securities Regulations (Periodic and
Immediate Reports) 5730-1970 ("THE REPORTING REGULATIONS"), the Companies
Regulations (Notice of General Meetings and Class Meetings in Publicly-Owned
Companies), 5760-2000 ("THE MEETING REGULATIONS") , the Companies Regulations
(Application for Settlement or Arrangement), 5762-2002 ("THE ARRANGEMENT
REGULATIONS") and the Companies Law, 5759-1999 ("THE COMPANIES LAW"), and in
accordance with the ruling of the Tel Aviv District Court dated July 26, 2008 in
Bankruptcy Case 2069/08 ("THE COURT"), and the resolution of the Bank's Board of
Directors dated May 26, 2008, the Bank hereby provides notice of the convening
of class meetings of Bank shareholders, on the agenda being the approval of a
settlement and arrangement plan between the Bank and its shareholders, to be
held on Thursday October 30, 2008, starting at 9:30 at the Bank's offices at 82
Menachem Begin Rd., Tel Aviv ("THE MEETINGS").
1. ON THE AGENDA
The approval of the settlement and arrangement plan between the Bank and
its shareholders according to Section 350 of the Companies Law, attached as
APPENDIX A to this Immediate Report ("THE ARRANGEMENT PLAN"), in accordance
with the terms detailed in the arrangement plan, including the trust
agreement attached as APPENDIX B to this Immediate Report ("THE TRUST
AGREEMENT").
2. SUMMARY OF RESOLUTIONS ON THE MEETINGS' AGENDA:
GENERAL:
On July 6, 2008, the Bank filed a request to the Court in accordance with
Section 350 of the Companies Law and the Arrangement Regulations, to issue
an order to convene the following meetings for the purpose of discussing
the Arrangement Plan and passing a resolution to approve it:
A meeting of the Ordinary Preferred shareholders.
A meeting of the Preference C, CC and CC1 shareholders ("GROUP C").
A meeting of the Preference D and DD shareholders ("GROUP D").
An meeting of the Ordinary A shareholders.
On July 16, 2008, the Court approved the convening of the meetings denoted
in this report, a decision served upon the Bank on July 21, 2008.
THE FOLLOWING IS A SUMMARY OF THE ARRANGEMENT PLAN:
The Arrangement Plan includes the return of the perpetual deposit to the
Bank (as fixed below) as well as two alternate scenarios: FIRST SCENARIO -
the sale of most of the Bank's shares and the redemption of their balance
by December 31 2009 ("THE DETERMINING DATE"), meaning, finding a purchaser
by way of the sales process (to be managed by the Government Companies
Authority) and the completion of the Bank stock purchase transaction,
including payment of most of the proceeds for them by the purchaser. As
part of the Arrangement Plan, the shareholders shall agree on a formula to
divide the proceeds between the shareholders and shall approve the sales
process. SECOND SCENARIO - to apply in the event that the sales process is
not completed by the Determining Date. In the framework of this scenario, a
settlement was reached regarding the distribution of dividends to Group C
shareholders.
The perpetual deposit derives from the proceeds from the issuing of Bank
Group C and Group D shares deposited by the Bank at the Ministry of
Finance. The State paid the Bank back-to-back interest on these proceeds in
return for dividends the Bank would distributed over the course of its
existence on a quarterly basis to said shareholders ("THE PERPETUAL
DEPOSIT").
According to the First Scenario, all of the Bank's shares, with the
exception of shares redeemed by the Bank, shall be sold by the State of
Israel and the public to an outside investor ("THE PURCHASER"), the
identity of whom shall be determined after the approval of the Arrangement
Plan by the Court, by way of a fair and competitive sales procedure and/or
by negotiations with certain person or persons, to be managed by the
Government Companies Authority ("THE SALES PROCESS").
In addition, as part of this scenario, upon completing the sales process,
the Bank shall redeem Group D shares not held by the State of Israel.
In the event that the sales process is not completed by the Determining
Date, the Second Scenario shall apply, according to which the Bank shall
distribute to Group C shareholders one half of the annual preferred
dividends (6%) accrued between July 1 2002 and July 31 2008, while at the
same time the State of Israel shall pay the Bank interest in the same
amount, resulting from a portion of the perpetual deposit deriving from the
proceeds from the issuing of Group C shares ("THE COMPROMISE DIVIDEND").
According to each of the above scenarios, on July 31 2008 or upon approval
of the plan by the Court, whichever is later ("the PERPETUAL DEPOSIT
REPAYMENT DATE"): (i) the State of Israel shall redeem the Bank's perpetual
deposit, with the exception of the relative portion of the perpetual
deposit deriving from the proceeds from the issuing of Group D shares held
by the Public, subject to the Bank's commitment that the perpetual deposit
funds be diverted first and foremost to repay the balance of the special
line of credit granted the Bank by the Bank of Israel (ii) the Bank shall
repay the balance Bank of Israel's special line of credit granted by the
Bank of Israel as part of the Run-Off plan, and (iii) the balance of the
perpetual deposit resulting from the proceeds from the issue of Group D
shares in the public's hands, shall continue to be managed as a
dollar-linked deposit only, and shall be returned to the bank immediately
prior to the sale.
In accordance with its terms, the Arrangement Plan shall primarily be
financed by sums granted by the purchaser and from the bank's own means
(including monies deposited at the Ministry of Finance). However, it must
be emphasized that the fulfillment of the First Scenario (meaning the
completion of the sales process) depends on finding a purchaser by way of
the sales process and on completing the bank stock purchase transaction,
including full payment made for them by the purchaser, by the Determining
Date. If the sale process is not completed by then, the Second Scenario of
the Arrangement Plan (returning the perpetual deposit by the State of
Israel, with the exception of the relative portion of the perpetual deposit
for the proceeds from the issuing of Group D shares held by the Public and
the repayment of the balance of the credit line to the Bank of Israel,
payment of half the deposit resulting from the perpetual deposit for Group
C shares by the State of Israel to the Bank and distribution of the
Compromise Dividend) alone shall be implemented.
The Arrangement Plan is presented as a single unit and cannot be separated
to its various components, nor can its terms be changed, except by the
Bank's approval. The redemption of Group D shares (in the event that the
Bank stock sales transaction is implemented) or the distribution of
Compromise Dividends to Group C shareholders (in the event that the Bank
stock sales transaction is not implemented), may create a distribution
situation not upholding the profit test pursuant to Section 303 of the
Companies Law and therefore depend upon the approval of the Court, in
accordance with the distribution request failing to pass the profit test
filed by the Bank on July 6 2008 and attached as APPENDIX C to this
Immediate Report.
All of the proceeds from the sale of Group C shares and for Ordinary
Preferred shares and all the proceeds from the redemption of Group D shares
(including the dividends in arrears and the premium) shall be held by a
trustee, who shall act in accordance with the Trust Agreement (APPENDIX B)
brought forth for the shareholders' approval as part of the Arrangement
Plan.
Furthermore, the Arrangement was designed, among other things, to provide
an absolute and comprehensive solution to all legal claims against the Bank
and its Officers and thus preventing the filing of additional claims in the
future.
NOTE THAT THE ABOVE DESCRIPTION OF THE ARRANGEMENT PLAN SHALL NOT REPLACE
THE FULL TEXT OF THE ARRANGEMENT PLAN AS PRESENTED FOR THE APPROVAL OF THE
SHAREHOLDERS AND THE COURT. FOR FURTHER DETAILS PLEASE SEE THE PLAN
ATTACHED TO THIS REPORT AS APPENDIX A.
IN LIGHT OF THE ABOVE, WE PROPOSE THAT THE ARRANGEMENT PLAN BETWEEN THE
BANK AND ITS SHAREHOLDERS ACCORDING TO SECTION 350 OF THE COMPANIES LAW,
ATTACHED AS APPENDIX A OF THIS IMMEDIATE REPORT, BE APPROVED IN ACCORDANCE
WITH THE TERMS DETAILED THEREOF, INCLUDING THE TRUST AGREEMENT ATTACHED AS
APPENDIX B TO THIS IMMEDIATE REPORT.
3. NAME OF THE CONTROLLING PARTY WHO AS FAR AS THE BANK IS AWARE HAS A
PERSONAL INTEREST IN THE TRANSACTION INCLUDED IN SECTION 1 ABOVE
3.1 The Bank's controlling party, as defined in Section 268 of the
Companies Law, who may be considered as having a personal interest in
the decision regarding the approval of the Arrangement Plan, is the
State of Israel ("THE STATE OF ISRAEL"), due to its holdings, which as
of this Report consist of 45.78% of the Bank's voting rights. In
addition, we note that the State holds 80.14% of the Bank's issued and
paid capital(1), and the State's personal interest derives from the
following factors:
3.1.1 According to the Arrangement Plan, upon its approval by the
Bank's shareholders and by the Court, most of the perpetual
deposit shall be returned to the bank, thus freeing the State
from its liabilities regarding the returned sums. The returned
perpetual deposit sums shall be used to repay the credit line
granted by the Bank of Israel and which the State of Israel took
responsibility for its payment, as far as it is not redeemed by
the Bank.
3.1.2 A portion of the Bank's Group C shareholders ("THE PLAINTIFF
SHAREHOLDERS") have filed an originating motion pertaining to the
renewal of the distribution of dividends on the Bank's preference
shares and sought to add the State to the originating motion.
According to the Arrangement Plan, its approval by the Bank's
shareholders and by the Court shall dismiss said motion.
3.1.3 The Bank has filed an originating motion against the State and
the Plaintiff Shareholders, in which it asked for a declaratory
ruling, stating among other things that the interest on the
perpetual deposit is accrued in the Bank's credit, even in the
absence of dividend distribution. The Court has rejected the
originating motion and the Bank has filed an appeal. According to
the Arrangement Plan, its approval by the Bank's shareholders and
by the court shall dismiss said appeal.
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1 This rate may increase to 82.04% if 2,636 D shares and 1,306 DD shares,
identified by the Bank as purchased by the State, are transferred and
listed in its name in the Bank's stockholders register.
3.1.4 According to the Arrangement Plan, if the sale of the Bank
shares is not completed by the Determining Date, or if the Bank
is liquidated before such date, the State shall pay the Bank, for
the period of July1, 2002 through July 31, 2008 for the portion
of the perpetual deposit equal to the dollar nominal value of the
Bank's Group C shares, interest in the amount of 3% per year
only, this while the Bank's position is that starting July 1,
2002 and until the return of the perpetual deposit, the Bank is
entitled to interest on this portion as well in the amount of
7.5% (or in the event of liquidation, 6% per year).
3.1.5 According to the Arrangement Plan, if the sale of Bank shares is
completed by the Determining Date, the Bank shall assign to the
Accountant General of the Ministry of Finance ("THE AG") or to
any third party indicated by the AG, the right to collect the
loans granted by the Bank to the Israeli Electric Company Ltd.
along with state deposits serving as a source for the granting of
these loans and the guarantees thereof.
3.1.6 According to the Arrangement Plan, the State has been authorized
to present for sale, along with its own shares, the shares of all
other holders of Bank shares (with the exception of Group D
shareholders).
3.1.7 According to the Arrangement Plan, the State shall be in charge
of the sale process and even if the sales price surpasses a
minimum price set in relation to all Bank shares, it shall be the
entity that approves whether the sale is approved or not.
3.1.8 According to the Arrangement Plan, if the sale of the Bank
shares is completed by the Determining Date, the State shall
receive a portion of a sum of 110,000 NIS plus VAT, on account of
sums paid by it to Professor A. Barnea for the preparation of his
proposal concerning the distribution of the proceeds of the sale
between the various shareholders, this being relative to the
distribution of the proceeds among the Bank's shareholders.
3.1.9 According to the Arrangement Plan, upon the completion of the
Arrangement Plan, the shareholders shall waive (fully or
partially, in accordance with the scenario according to which the
Arrangement Plan shall be implemented) any claim, of any type or
form, against the State of Israel.
4. APPROVALS NEEDED FOR THE IMPLEMENTATION OF THE TRANSACTION DESCRIBED
4.1 The Arrangement Plan required the approval of the Bank's Audit
Committee, the Bank's Board of Directors, the class meeting of Bank
shareholders as described in Section 2 above, as well as a written
decision from the State as sole holder of B and B1 shares of the Bank.
Also needed is the approval of the Bank's general meeting for the
amendment of Section 7(6) of the Bank's Articles of Association,
consisting of part of the Arrangement Plan (a separate general meeting
shall be convened for said approval). The approvals of the Audit
Committee and the Board of Directors were granted on May 26, 2008 as
detailed in Section 5 below.
4.2 In accordance with the provisions of Section 350 of the Companies Law,
the required majority for the approval of the Arrangement Plan is a
majority of the votes of shareholders participating in the vote, with
the exception of abstainees, holding 75% of the representative value
at the meeting (in accordance with Section 11.1 below).
5. REASONING OF THE AUDIT COMMITTEE AND BOARD OF DIRECTORS FOR THE APPROVAL OF
THE TRANSACTION DESCRIBED
The decision of the Bank's Audit Committee and Board of Directors was
reached, among other things, based on opinions presented to the Audit
Committee and Board members and based on the document presented by
Professor A Barnea on March 9 2008, attached to the Arrangement Plan
request. The reasons given by the Board of Directors and the Audit
Committee for the approval of the Arrangement Plan are as follows:
5.1 Based, among other things, upon the aforementioned opinions and
documents, the Arrangement Plan is fair to the shareholding public and
may benefit them more than the Bank's possible liquidation.
5.2 The Arrangement Plan does not harm the Bank's interests.
6. NAMES OF DIRECTORS WHO PARTICIPATED IN THE APPROVAL OF THE TRANSACTION
DESCRIBED
6.1 Participating in the discussion and vote at the May 26, 2008 meeting
of the Bank's Audit Committee, in which the filing of the Arrangement
Plan was approved, were: Y. Beinish, S. Eshbol, Y. Eisner, A. Green
(outside director) and A. Hildesheimer (outside director).
6.2 Participating in the discussion and vote at the May 26, 2008 meeting
of the Bank's Board of Directors, in which the filing of the
Arrangement Plan was approved, were: R. Cohen, A. Olshansky, M.
Gavish, R. Armon, Y. Beinish, S. Eshbol, Y. Eisner, A. Green (outside
director) and A. Hildesheimer (outside director).
6.3 No directors objected to the filing of the Arrangement Plan in the
above meetings.
7. NAMES OF BANK DIRECTORS WHO, AS FAR AS THE BANK KNOWS, HAVE A PERSONAL
INTEREST IN THE TRANSACTION INCLUDED IN THIS REPORT AND THE NATURE OF SAID
INTEREST
R. Cohen, A. Olshansky, M. Gavish. R. Armon, Y. Beinish, S, Eshbol, Y.
Eisner, A. Green (outside director) and A. Hildesheimer (outside director),
are all members of the Bank's Board of Directors who may be seen as having
a personal interest in the approval of the Arrangement Plan, this due to
the fact that with the execution of the Arrangement Plan, the shareholders
shall waive (in whole or in part, depending upon the scenario according to
which the Arrangement Plan is implemented) any claim and/or demand and/or
suit, including pending suits, against the Bank's Officers (as defined in
the Companies Law). In addition, in the event that the Arrangement Plan is
carried out in the framework of the First Scenario detailed above (the sale
of most of the Bank's stock and the redemption of the balance), the Bank
shall waive any suit, demand or claim against the Bank's Officers (as
defined in the Companies Law).
8. LOCATION AND DATE OF CLASS MEETINGS; ELIGIBILITY FOR THE CLASS MEETINGS AND
MANNER OF VOTING
8.1 We hereby give notice of the convening of a class meeting of the Bank
to take place on Thursday, October 30, 2008, at the time detailed
below in the Bank's offices, at 82 Menachem Begin Rd. Tel Aviv, with
on the agenda being the approval of the arrangement plan, including
the Trust Agreement detailed in Section 3 above. The class meetings
shall be convened at the following hours:
Meeting of Ordinary Preferred shareholders at 09:30.
Meeting of Group C shareholders at 10:00.
Meeting of Group D shareholders at 10:30.
Meeting of Ordinary A shareholders at 11:00.
8.2 Shareholders participating in votes detailed above shall inform the
Bank prior to the vote, whether or not they have any personal interest
in the transaction brought before the class meetings for approval.
Shareholders failing to provide information in this regard shall not
vote at the meetings and their vote shall not be counted.
In addition, the following is made clear:
8.2.1 The State shall not participate in the class meetings discussed
in this Report.
8.2.2 Holders of Ordinary A shares shall participate in Ordinary A
shareholder class meetings only, even if they also hold other
types of shares.
8.2.3 A Shareholder holding shares from Group C as well as Ordinary
Preferred shares, shall declare, at the meeting or on his
ballot/power of attorney/consent or objection notice, the number
of shares he holds of each of the classes of shares. Such a
shareholder shall participate in the class meetings in which the
rate of his holdings (in percentage) is highest.
8.3 In accordance with Section 182(b) of the Companies Law, the
determining date for eligibility for participation and voting in class
meetings as well as for voting via written ballot in accordance with
the Companies Regulations (Voting in Writing and Position Papers)
5766-2005 ("THE VOTING REGULATIONS") is the end of stock exchange
trade of the Bank's securities on October 2, 2008 (hereinafter: "THE
DETERMINING DATE").
8.4 A shareholder with shares listed in his name at stock exchange
members, with said shares included among shares listed in the
shareholders register in the name of the nominee company, interested
in voting in class meetings, shall be required to prove his ownership
for the purpose of voting at the class meeting. A shareholders shall
provide the Bank with appropriate confirmation from the stock exchange
members in whose name the right to the share is listed, in the matter
of his ownership of the share on the Determining Date, in accordance
with the Companies Regulations (Proving Ownership of a Share for the
Purpose of General Meeting Voting) 5760-2000.
8.5 Shareholders may receive the confirmation of ownership at the stock
exchange member's branch or via mail, in return for shipping fees, if
requested. A request for this matter shall be given in advance to a
specific securities account.
8.6 Any shareholder may appoint an agent to appear and vote on his behalf:
the power of attorney or other letter of authorization authorizing
this appointment, or notarized copies, shall be deposited at the Bank
no less than 48 hour before the time set for the beginning of the
meeting.
9. REQUIRED MAJORITY TO PASS THE DECISION DESCRIBED ABOVE
In accordance with Section 350 of the Companies Law, the majority required
to approve the Arrangement Plan is a majority of shareholders present at
the vote, with the exception of abstainees, holding 75% of the value
represented in the meeting (in accordance with Section 11.1 below).
10. WRITTEN VOTES AND POSITION PAPERS
10.1 Shareholders may vote on any subject on the agenda of class meetings
via written ballot, as stated in Section 8.2 above.
10.2 The addresses of the sites of the Securities Authority and the Tel
Aviv Stock Exchange Ltd., on which the written ballots and position
papers, as defined in Section 88 of the Companies Law, are posted are:
distribution site of the Securities Authority: www.magna.isa.gov.il
("THE DISTRIBUTION SITE"); Tel Aviv Stock Exchange Ltd. website:
http://maya.tase.co.il.
10.3 Written votes shall be cast using the second part of the written
ballot, as published on the Distribution Site. Any shareholder may
approach the Bank for a copy of the written ballot.
10.4 The written ballot and the documents which must be attached thereto
("THE ATTACHED DOCUMENTS"), as detailed on the writen ballot, must be
submitted to the Bank's offices up to 72 hours prior to the convening
of the General Meeting. In this regard, the "submission date" is the
date on which the written ballots and attached documents arrived at
the Bank offices.
10.5 The last date on which the Bank may be presented with position papers
is October 12, 2008, in accordance with the voting regulations.
11. LEGAL QUORUMS AND POSTPONED MEETINGS
11.1 In accordance with the provisions regarding the class meeting included
in the Arrangement Plan, in each of the shareholders' class meetings,
a minimum of two shareholders, present in person or via agent or by
ballot, and holding or representing at least one third (33.33%) of the
value of shares entitled to participate in the class meeting, with the
exception of the value of State holdings in stocks belonging to the
meeting in question - shall be considered a legal quorum. In Group C
and Group D share class meetings, the represented value shall be
determined based on the following: : $1 U.S. for each Preference C
share; $10 U.S. for each Preference CC share; $10 U.S. for each
Preference CC1 share; $100 U.S. for each Preference D share; and $100
U.S. for each Preference DD share.
11.2 If a legal quorum fails to convene within half an hour of the time for
which the class meeting was called - the class meeting shall be
postponed to the same day the following week, and if the day in
question is not a business day - to the business day immediately
following, at the same time and in the same place, with no need for
advance notice; or to a different day, place and time, as decided upon
by the Bank's Board of Directors, subject to notice being given.
11.3 In the event that a legal quorum could not be convened for such a
postponed class meeting, all shareholders present in person or via
proxy or via ballot at the class meeting in question and who are
entitled to be present, shall be considered a legal quorum, and may
discuss any matter for which the class meeting was convened.
12. THE POWERS OF THE SECURITIES AUTHORITY
In accordance with Section 36(f) of the Securities Law, 5728-1968, the
Authority may instruct the Bank to provide, by a set date, explanations,
details, information and documents pertaining to the commitment discussed
in this Immediate report as well as instruct the Bank to amend this
Immediate Report, in whatever manner and by whatever date it determines. In
the event that such an order to amend the Report was given, the Bank may,
in accordance with Section 74(c) of the Companies Law, instruct that the
class meetings be postponed to a date no earlier than three business days
and no later than twenty one from the date the amendment to the Report was
published.
13. REVIEWING DOCUMENTS
Any Bank shareholder may review this Report, and any document related to
this Report, at the Bank's offices, at 82 Menachem Begin Rd., Tel Aviv, by
prior appointment with Bank Secretary Natan Atlas, Adv. (phone:
03-6272796), Sunday through Thursday, during regular work hours, starting
September 28, 2008 until the convening of the class meetings.
14. THE BANK'S REPRESENTATIVE IN THE MATTER OF THIS REPORT
The Bank's representative for any matter pertaining to this Report is the
Bank Secretary Mr. Natan Atlas, Adv., phone: 03-6272796, Fax: 03-6272723.
SINCERELY,
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INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.
APPENDIX A
TO THE IMMEDIATE REPORT
IN THE DISTRICT COURT
IN TEL AVIV - JAFFA FILE NO. 2069/08
IN THE MATTER OF: ARTICLE 350(A) OF THE COMPANIES LAW, 5759-1999 ("THE
COMPANIES LAW")
THE APPLICANT: INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD. (Public Company
52-002192-4)
("THE BANK" OR "THE APPLICANT")
By the representatives the advocates Ehud Sol and/or
Asher Dovev Herzog, Fox, Neeman and Co.
of 4 Weizmann Street, Tel Aviv 64239
Tel: 03-6922020, Fax: 03-6966464
THE RESPONDENTS: 1. ORDINARY "A" SHAREHOLDERS OF THE INDUSTRIAL DEVELOPMENT
BANK OF ISRAEL LTD.
2. ORDINARY "B" SHAREHOLDERS OF THE INDUSTRIAL DEVELOPMENT
BANK OF ISRAEL LTD.
3. ORDINARY "B1" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
4. ORDINARY PREFERRED SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
5. PREFERENCE "C" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
6. PREFERENCE "CC" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
7. PREFERENCE "CC1" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
8. PREFERENCE "D" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
9. PREFERENCE "DD" SHAREHOLDERS OF THE INDUSTRIAL
DEVELOPMENT BANK OF ISRAEL LTD.
(All jointly "THE RESPONDENTS" or "THE SHAREHOLDERS")
WRITTEN APPLICATION FOR APPROVAL OF A COMPROMISE AND ARRANGEMENT PLAN
PURSUANT TO ARTICLE 350 OF THE COMPANIES LAW
(THE REMEDIES INCLUDED IN CLAUSES 16.1 - 16.4 OF THIS APPLICATION ARE
REQUESTED EX PARTE)
1
TABLE OF CONTENTS:
SECTION SECTION NAME PAGE
A. INTRODUCTION.............................................................3
B. THE REQUESTED REMEDIES...................................................8
C. THE SHAREHOLDERS AND THEIR RIGHTS .......................................9
D. THE COMPROMISE AND ARRANGEMENT PLAN.....................................11
E. THE PROCEEDINGS WHICH LED TO THE FILING OF THE APPLICATION..............21
F. MANNER OF ALLOCATION INTO CLASS MEETINGS................................25
G. THE BANK'S CREDITORS....................................................25
H. DESCRIPTION OF THE BANK AND ITS BUSINESS ENVIRONMENT ...................26
I. CONCLUSION..............................................................31
2
The Honorable Court is hereby requested by virtue of its authority pursuant to
Article 350(a) of the Companies Law and the Companies Regulations (Application
for Compromise or Arrangement), 5762-2002 ("THE ARRANGEMENT REGULATIONS") to
approve the compromise and arrangement plan ("THE PLAN" or "THE ARRANGEMENT
PLAN") between the Bank and all its shareholders. AT THE CENTER OF THE PLAN IS
AN ARRANGEMENT FOR THE SALE OF MOST OF THE BANK'S SHARES TO AN OUTSIDE INVESTOR
AND FOR REDEMPTION OF THE BALANCE, IN A MANNER THAT THE BANK WILL BE PRESERVED
AS A "GOING CONCERN" (BUT WITHOUT A BANKING LICENSE).
IT IS CLARIFIED THAT THE STATE OF ISRAEL (INCLUDING IN ITS CAPACITY AS THE
LARGEST SHAREHOLDER IN THE BANK) NOTIFIED THE BANK THAT THE ARRANGEMENT PLAN
SPECIFIED IN THIS APPLICATION IS ACCEPTABLE TO IT AND THAT IT AGREES TO THE
FILING THEREOF WITH THE COURT.
THE REMEDIES REQUESTED ARE SPECIFIED IN PART B OF THIS APPLICATION. In order to
facilitate the familiarity with the contents and the intricacy of this
application, we will precede the application itself with a short introductory
section wherein the structure of the Bank and the events which led the Bank to
file this application will be reviewed.
A. INTRODUCTION
1. The Bank is a public company with a very complex share capital structure,
which comprises nine (!) different classes of shares. The complexity of the
share capital of the Bank derives from a number of factors as follows: (a)
The different and numerous classes of shares comprising it, which confer
various rights to the shareholders; (b) Some of the shares of the Bank are
traded on the Tel Aviv Stock Exchange Ltd. ("THE EXCHANGE") and some are
not; (c) Many shareholders are not residents of Israel (most of the
shareholders residing outside of Israel are U.S. residents) and with a
substantial portion of the shareholders who are residents outside of
Israel, the contact was lost many years ago and they cannot be located.
2. In the course of 2002 a severe recession prevailed over the State of
Israel. The financial state of the economy was bad and there were concerns
floating in the air regarding the collapse of one of the large commercial
banks in the State of Israel, not long after the collapse of the Trade Bank
Ltd. as a result of the enormous embezzlement which was executed there. The
widespread concerns among the public, were reinforced by the Governor of
the Bank of Israel and the Supervisor of Banks who were aware of the
hardship in which the banks found themselves at that time and of the
possible implications to the whole economy if and so far as the black
forecasts regarding the collapse of another bank will materialize and they
publicly cautioned against the collapse of the commercial banks. The
recession which prevailed over the whole economy, did not pass over the
Bank: The Bank suffered a severe liquidity crisis, which led to
panic-driven withdrawals of depositor funds. The panic which gripped the
depositors who assembled at the doors of the Bank demanding the withdrawal
of their deposits, led the Bank to the brink of an abyss.
3. As a result of the crisis which the Bank experienced, the State of Israel,
and the Bank of Israel formulated a plan of action for the gradual
discontinuation of the Bank's activity and for making a special line of
credit available to the Bank for a defined period by the Bank of Israel
("THE RUN-OFF PLAN").
3
Within the framework of the Run-Off Plan the extension of credit activity
of the Bank was discontinued (almost completely) and the Bank focused on
collecting the balance of credit which it provided to its customers. It is
emphasized that on the one hand, this stage of collecting the credit within
the framework of the Run-Off Plan, which was orchestrated by the Chairman
of the Bank's Board of Directors and the GM of the Bank, who commenced
their duties immediately before the start date of the Run-Off Plan, was
crowned a great success. However, on the other hand, over the course of the
implementation of the Run-Off Plan various legal claims were filed against
the Bank and its officers, including by shareholders of the Bank, as will
be specified later.
Over the years, the Bank used to distribute every quarter a preferred
dividend to its preferred shareholders and the State paid the Bank back to
back interest (at the rate of the dividend which the Bank used to pay to
the preferred shareholders) for the issue considerations of the preferred
shares of the Bank which were deposited by the Bank with the Ministry of
Finance ("THE PERPETUAL DEPOSIT"). After the Bank found itself in a
liquidity crisis in the third quarter of 2002, the Bank ceased distributing
the preferred dividend to its shareholders and the State ceased paying the
Bank the aforesaid interest.
4. Pursuant to the government's decision, the Run-Off Plan is planned to
conclude at the end of July 2008. Whether the arrangement plan will succeed
or whether the Bank will end up in liquidation, the banking license of the
Bank will be taken from it upon the termination of the Run-Off Plan. In
order to prepare for "the day after" the Run-Off Plan, the Bank took a
series of steps, while examining two main alternatives in connection with
its future, the advantages and disadvantages of which were examined one
against the other: (a) Liquidation of the Bank and distribution of the
remainder of its assets to the shareholders, after discharge of the debts
to the creditors; (b) Sale of the Bank as a going concern to a third party
purchaser and distribution of the consideration among the shareholders.
5. The question what is the better alternative, that will better benefit the
shareholders of the Bank was examined by the Bank in full cooperation with
the State of Israel by virtue of its roles, including by virtue of the Bank
being "a mixed company" as this term is construed in the Government
Companies Law, 5735-1975.
After many discussions and with the assistance of an outside consulting
team, an outline was formulated according to which the Bank would be sold
as "a going concern" to an outside investor. Accordingly, as was reported
by the Bank, the State conducted over the course of 2007 an experimental
test, through the Government Companies Authority, in the manner of
publication of a request for information (RFI). The test was intended to
examine the level of response of various parties which could be interested
in acquiring all the issued and paid up share capital of the Bank. It is
emphasized that twelve entities expressed interest in acquiring the
aforesaid share capital.
6. After the initial draft of the outline for sale of the Bank as a going
concern, which includes, inter alia, the arrangement plan which the
Honorable Court is requested to approve, the State, Bank Leumi, Bank
Hapoalim, Bank Discount, approximately 40% of all classes of "C"
shareholders and approximately 30% of the Ordinary Preferred Shareholders
("THE MATERIAL SHAREHOLDERS") requested from Prof. Amir Barnea, a well
known expert in banking and financing, to propose a formula for
distribution of the consideration that will be received from the sale of
all the shares of the Bank to the outside investor, among the shareholders.
Professor Barnea submitted to the material shareholders his proposal for
distribution of such consideration (a proposal which was prepared on the
basis of the financial statements of the Bank as of September 30, 2007),
and within the framework thereof he addressed, inter alia, the alternative
of liquidating the Bank against its sale as a going concern. The conclusion
of Prof. Barnea in this matter was that: "THERE IS A CONSIDERABLE GAP
(APPROXIMATELY NIS 200 MILLION) BETWEEN THE VALUE ESTIMATE OF THE BANK WHEN
SOLD AS A GOING CONCERN AND ITS VALUE UPON LIQUIDATION" and - "THEREFORE
THERE IS JUSTIFICATION FOR REACHING AN AGREEMENT THAT WILL ENABLE A PROPER
AND EXPEDITIOUS SALE PROCEEDING". The conclusion of Prof. Barnea was,
therefore, that the alternative of selling the Bank as a going concern to
third parties in lieu of its liquidation was the optimal alternative for
the shareholders of the Bank.
4
7. As emerges from the proposal of Prof. Barnea, WHEREIN HE ADDRESSED, INTER
ALIA THE ALTERNATIVES CONCERNING THE FUTURE OF THE BANK, THE CONSIDERATION
THAT WILL BE RECEIVED BY THE SHAREHOLDERS OF THE BANK FROM ITS SALE AS A
GOING CONCERN, IS EXPECTED TO BE HIGHER BY A SUBSTANTIAL RATE THAN THE
CONSIDERATION EXPECTED FOR THEM UPON LIQUIDATION OF THE BANK AND THE
DISTRIBUTION OF THE REMAINDER OF ITS ASSETS AMONG THE shareholders.
Moreover, THE LIQUIDATION PROCEEDING IS EXPECTED TO BE LENGTHY AND
PROLONGED, especially in light of the complexity of the share capital
structure of the Bank as stated and the composition of the credit assets of
the Bank and "their life span" and at the end of which only classes of "C"
shareholders and classes of "D" shareholders are expected to earn a
liquidation dividend, which also with respect to which it cannot be known
whether it will amount to full consideration for return of the paid up
capital that was invested by them and payment of the preferred dividend in
arrears which accrued with respect to their shares.
The proposal of Prof. Barnea was attached to the Immediate Report of the
Bank of January 15, 2008 and an updated version thereof was attached to the
Immediate Report of the Bank of March 12, 2008. The updated Immediate
Report is attached to this application AS APPENDIX "A" and constitutes an
integral part hereof.
8. Following the proposal of Prof. Barnea, the negotiation between the
material shareholders progressed to the signing of a letter of principles
("THE LETTER OF PRINCIPLES") between the State and the material
shareholders (excluding Bank Leumi, Bank Hapoalim and Bank Discount) and to
the signing of letter of consents ("THE LETTER OF CONSENTS") between the
State and the shareholders from Group "C", both of which documents are
reflected in the arrangement plan. It is emphasized that in accordance with
the letter of principles and the letter of consents, the material
shareholders agreed to support the approval of the arrangement plan,
including the distribution of the consideration in accordance with the
proposal of Prof. Barnea.
The letter of principles and the letter of consents are attached to this
application AS APPENDIX "B".
9. The Bank's Board of Directors approached Prof. Yitzhak Suary and asked him
to give his opinion regarding the fairness of the proposal of Prof. Barnea
in connection with the distribution of the consideration of the sale to the
public shareholders.
The opinion of Prof. Suary from May 26, 2008 is attached to this
application AS APPENDIX "C".
5
10. It is therefore the case, that THE ARRANGEMENT PLAN IS FILED FOR APPROVAL
OF THE COURT AND FOR APPROVAL OF THE SHAREHOLDERS NOT AS A PURELY
THEORETICAL AND ABSTRACT PLAN, BUT RATHER AS A PLAN THAT EARNED THE
BLESSING OF A SUBSTANTIAL PORTION AMONG THE SHAREHOLDERS OF VARIOUS
CLASSES, INCLUDING OF THE LARGEST SHAREHOLDER IN THE BANK - THE STATE OF
ISRAEL, EVEN PRIOR TO THE FILING OF THE APPLICATION FOR APPROVAL OF THE
ARRANGEMENT PLAN WITH THE HONORABLE COURT.
11. The advantages of the arrangement plan in its current format, if and so far
as it will be approved by the Honorable Court, are clear:
FIRST, as specified hereinafter, the shareholders are likely to obtain a
greater return for their investment in the Bank's shares and will benefit
from a prompt and cash payment for their shares, in comparison to the Bank
liquidation alternative, with respect to which it cannot be known when and
over what length of time it will be realized.
SECOND, having the sale proceeding of the Bank as a going concern pass
through the Court's "refining effect" within the framework of a "compromise
and arrangement plan" pursuant to Article 350 of the Companies Law, assures
the transparency of the proceeding, the fairness and its certainty.
THIRD, the fact that a number of parties already expressed an interest in
acquiring shares of the Bank within the framework of the aforementioned
test of the State, may serve as a positive indication for the anticipated
success of the sale proceeding of the Bank's shares to the outside
investor.
12. In a nutshell it is emphasized that the arrangement plan, which is detailed
at length in Part D of this application, includes the return of the
perpetual deposit to the Bank (as specified at length in Section 23
hereinafter) as well as two alternative scenarios; THE FIRST SCENARIO - the
sale of most of the shares of the Bank and redemption of the remainder by
December 31, 2009 ("THE EFFECTIVE DATE"), i.e., finding a purchaser within
the sale proceeding (as defined hereinafter) and finalization of the
purchase transaction of the Bank's shares, including payment of the entire
consideration with respect thereto by the purchaser, as specified
hereinafter. Within the framework of this scenario, the shareholders will
consent to the consideration distribution formula and will approve the
manner in which the sale proceeding will be conducted. THE SECOND SCENARIO
- will apply in the event that the sale proceeding (as defined hereinafter)
will not be finalized. Within the framework of this scenario, a compromise
was formulated concerning distribution of a dividend to Group "C"
Shareholders, as will be specified later.
In accordance with the first scenario, all the shares of the Bank,
excluding shares that will be redeemed by the Bank, will be sold by the
State of Israel and the public to an outside investor ("THE PURCHASER"),
whose identity will be determined after approval of the arrangement plan by
the Honorable Court, through an equal and competitive sale proceeding
and/or within the framework of negotiations with a certain party or
parties, which will be conducted by the Government Companies Authority
("THE SALE PROCEEDING").
6
Each one of the shareholders of the Bank, in its capacity as a shareholder,
will waive any claim and demand, inter alia vis-a-vis the Bank and
vis-a-vis its officers (in the past or in the present), vis-a-vis
interested parties in the Bank and vis-a-vis the State of Israel. The State
of Israel, in its capacity as a Group "D" Shareholder and a Group "C"
Shareholder, will additionally waive its right, so far as it exists, to
receive a cumulative dividend. The State, as an Ordinary "B" Shareholder,
will waive its share of the total consideration that will be received from
the sale. At the conclusion of the arrangement plan the shares of the Bank
will be stricken from trade on the Exchange.
Should the sale proceeding not be finalized by the effective date (the
second scenario), the State of Israel, will pay half of the interest for
that part of the perpetual deposit which relates to the Group "C" shares
which accrued in certain years, and the Bank will distribute that same
amount as a dividend to Group "C" Shareholders ("THE COMPROMISE DIVIDEND").
According to each one of the scenarios specified above, on July 31, 2008 or
upon approval of the plan by the Honorable Court, whichever is later ("THE
PERPETUAL DEPOSIT MATURITY DATE"): (i) The State of Israel will pay the
Bank the perpetual deposit, excluding the proportionate part out of the
perpetual deposit which emanated from the issue considerations of the Group
"D" Shares held by the public, subject to an undertaking of the Bank that
the perpetual deposit funds will be used first and prior to any other
payment, toward payment of the balance of the special line of credit which
was made available to the Bank by the Bank of Israel; (ii) The Bank will
pay the Bank of Israel the balance of the special line of credit which was
made available to it by the Bank of Israel within the framework of the
Run-Off Plan and - (iii) The balance of the perpetual deposit with respect
to the issue considerations of Group "D" Shares held by the public, will
continue to be maintained solely as a dollar linked deposit and will be
returned to the Bank close to the sale execution date.
13. In accordance with its terms, the arrangement plan (detailed at length in
Part D of this application) will be financed primarily from the funds that
will be made available by the Purchaser and from the independent means of
the Bank (including funds that it deposited with the Ministry of Finance).
However it is emphasized that fulfillment of the first scenario (i.e.:
finalization of the sale proceeding), is dependent upon finding a Purchaser
by means of the sale proceeding and finalization of the purchase
transaction of the Bank's shares, including full payment of the
consideration with respect thereto by the Purchaser. If the sale proceeding
will not be finalized by the effective date, only the second scenario of
the arrangement plan will be executed (return of the perpetual deposit by
the State of Israel, excluding the proportionate part of the perpetual
deposit due to the issue considerations of the Group "D" Shares held by the
public and payment of the balance of the line of credit to the Bank of
Israel, payment of half of the interest due to the perpetual deposit for
Group "C" Shares by the State of Israel to the Bank and distribution of the
compromise dividend).
14. It is emphasized that the arrangement plan is proposed as a single unit and
it cannot be separated into its components nor may its terms be changed,
other than with the consent of the Bank. The plan includes redemption of
Group "D" Shares, in the event that the sale transaction of the Bank's
shares will be executed, or the distribution of the compromise dividend to
Group "C" Shareholders, in the event that the sale transaction of the
Bank's shares will not be executed. Both the scenarios are liable to create
a situation of distribution that does not fulfill the profit criterion
pursuant to Article 303 of the Companies Law and accordingly, are
conditioned upon approval of the Honorable Court, in accordance with a
separate application that the Bank filed simultaneously with this
application.
7
15. It is further emphasized that the arrangement was intended, inter alia, to
provide a comprehensive and complete solution to the issue of the claims
pending against the Bank and its officers and will prevent the possibility
of the filing of additional claims in the future.
B. THE REQUESTED REMEDIES
16. In light of that stated above and in accordance with that specified
hereafter, the Honorable Court is requested as follows:
16.1. To order, EX PARTE, the convening of meetings of all classes of
shareholders, in which the State of Israel will not take part, for the
purpose of discussion and passing a resolution in relation to the
approval of the plan as follows: a meeting of the Ordinary "A"
Shareholders; a meeting of the Ordinary Preferred Shareholders; a
meeting of the Preference "C" Shareholders together with Preference
"CC" Shareholders and Preference "CC1" shareholders ("GROUP "C"
SHARES") and a meeting of Preference "D" Shareholders together with
Preference "DD" Shareholders ("GROUP "D" SHARES") and the passing of a
written resolution by the Ordinary "B" Shareholders and the Ordinary
"B1" Shareholder ("GROUP "B" SHARES") in lieu of convening a meeting
since the State of Israel is the sole shareholder of Group "B" Shares
(all jointly: "THE CLASS MEETINGS").
It is clarified that the State of Israel will not participate in the
class meetings of the shareholders.
16.2. To order, EX PARTE, that the class meetings will be summoned, will be
convened and will be conducted in accordance with the provisions
specified in APPENDIX "D" to this application and will be held no
later than 60 days from the date the order is handed down by the
Court, on the date that will be determined by the Bank.
16.3. To approve, EX PARTE, that a trust company that will be determined by
the Bank will act as trustee ("THE TRUSTEE") for Group "D"
Shareholders, Group "C" Shareholders and Ordinary Preferred
Shareholders which hold share certificates in their name (all jointly
- "THE BENEFICIARY SHAREHOLDERS"), and all the consideration that will
be received for redemption and/or sale of the shares of the
Beneficiary Shareholders will be deposited therewith. The Trustee will
act in accordance with the trust agreement that will be presented and
brought for approval of all classes of shareholders as part of the
arrangement plan that they will be requested to approve ("THE TRUST
AGREEMENT").
16.4. To order, EX PARTE, by virtue of the authority given to the Honorable
Court pursuant to Regulation 8 of the Arrangement Regulations, the
granting of an exemption to the Bank from adding the details and
submission of the documents pursuant to Regulation 7(b) of the
Arrangement Regulations. The aforesaid exemption is requested since
the Bank is a public company, some of the issued shares of which are
traded on the Exchange in Israel. Accordingly, in the estimation of
the Bank, the information, the details and the documents required in
the aforesaid Regulation 7(b) are available to the public (including
the public shareholders) by virtue of their being included, inter
alia, in the periodic and immediate reports of the Bank prepared
pursuant to the Securities Law and the regulations thereof and
published on the MAGNA site (i.e.: The official site of the Israel
Securities Authority).
8
17. After the convening of the class meetings, as requested above, and the
passing of a resolution therein, as required pursuant to law, the Honorable
Court will be requested, in accordance with an application that will be
filed with the Court subsequent to the approval of the meetings, to hold a
hearing in the presence of the parties, within the framework of which the
Honorable Court will be requested to issue an order approving the plan.
18. The Bank reserves its right to appeal from time to time to the Honorable
Court with a motion to administer orders, change dates, or additional
decisions required in order to realize the arrangement plan, so far as this
will be required.
C. THE SHAREHOLDERS AND THEIR RIGHTS
19. Hereinafter we will briefly describe the rights attached to the various
shares in the capital of the Bank:
ORDINARY "A" SHAREHOLDERS (the State of Israel holds approximately 49% and
the balance held by Bank Leumi, Bank Hapoalim, IDB Holdings Ltd., the
Manufacturers Association, the International Bank and others) are entitled
by virtue of their shares to the right to appoint the directors of the Bank
and to a majority of the voting rights at the general meeting, to a right
to a dividend at an annual rate of 6%, to a right to a participating
dividend and to a right to participate in the distribution of the Bank's
surplus assets at the time of liquidation, and all subject to the order of
preference prescribed in the articles of the Bank.
GROUP "B" SHAREHOLDER (the State of Israel) is entitled by virtue thereof
to a dividend at an annual rate of 3% and to participation in the
distribution of the Bank's surplus assets upon liquidation, and all subject
to the order of preference prescribed in the articles of the Bank. For the
Ordinary "B1"Share, the State of Israel is entitled, upon liquidation of
the Bank, also to receive the positive difference between the increase of
the index and the increase of the Dollar rate, which will be paid to the
Bank upon liquidation for the perpetual deposit at the Ministry of Finance,
in accordance with agreements between the Bank and the Ministry of Finance,
and all subject to the order of preference prescribed in the articles of
the Bank.
THE ORDINARY PREFERRED SHAREHOLDERS are entitled by virtue of their shares
to voting rights at the general meeting of the Bank, to a cumulative
preferred dividend at an annual rate of 8%, to a participating dividend and
to participation in the distribution of the Bank's surplus assets upon
liquidation, and all subject to the order of preference in the articles of
the Bank. The Ordinary Preferred Shares are listed for trade on the
Exchange.
9
GROUP "C" SHAREHOLDERS are entitled by virtue of their shares to a dollar
linked cumulative preferred dividend at an annual rate of 6%, to a
participating dividend and to participation in the Bank's surplus assets
upon liquidation, and all subject to the order of preference prescribed in
the articles of the Bank. Group "C" Shares are listed for trade on the
Exchange.
GROUP "D" SHAREHOLDERS are entitled by virtue of their shares to a dollar
linked cumulative preferred dividend at an annual rate of 7.5% and to
participation in the Bank's surplus assets upon liquidation, and all
subject to the order of preference prescribed in the articles of the Bank.
Pursuant to the Bank's articles, the Bank has a right to call for early
redemption of Group "D" Shares. These shares were listed upon the issue
thereof for trade on the Exchange but they were stricken from trade during
the 90's. Excluding the State of Israel, most of the holders of Group "D"
Shares are U.S. residents. Over the years, as a result of its purchases of
these shares, the State of Israel reached a holding of approximately 88% of
Group "D" Shares.
A breakdown regarding the allocation of holdings in the Bank's shares
between the State and the public is found in APPENDIX "E" which constitutes
an integral part of this application.
It is emphasized that the description of the rights attached to the shares
as specified above and the order of preference for distribution of the
balance of the Bank's assets at the time of liquidation, as specified
hereinafter, reflect and constitute the basis for allocation of the
shareholders to class meetings, according to the various interests in each
one of the shareholder groups.
20. The order of preference for distribution of the balance of the Bank's
assets at the time of its liquidation as prescribed in the articles of the
Bank is as follows: FIRST - payment of arrears of cumulative preferred
dividend, including dollar linkage differentials, for all classes of the
preferred shares (i.e., Group "C" and Group "D" Shares). SECOND - payment
of arrears of cumulative preferred dividend for the Ordinary Preferred
Shares. THIRD - return of the paid up capital on Group "C" Shares and Group
"D" Shares and with the addition deriving from the dollar linkage terms.
FOURTH - return of the paid-up capital on Ordinary Preferred Shares. FIFTH
- return of the paid up capital on Ordinary "A" Shares and return of the
paid up capital on Group "B" Shares. SIXTH - the excess that will remain
from the differences that the State will pay to the Bank at the time of its
liquidation, so far as there will be such, as a result of the greater
increase in the rate of increase of the Consumer Price Index compared with
the rate of increase of the Representative Rate of the Dollar in connection
with the deposits which the Bank deposited with the State, will be paid to
the holder of the Ordinary "B1" Share. SEVENTH - the surplus of the
ordinary assets will be distributed among the holders of the Ordinary "A"
Shares, Ordinary Preferred Shares, Group "C" Shares in accordance with the
paid-up capital thereon and at a ratio of ten to each Agora paid on each
Ordinary "A" Share, ten to each Agora paid on a Ordinary Preferred Share,
ten to each Agora paid on each Preference "C" Share, six to each Agora paid
on each Preference "CC" Share and six to each Agora paid on each Preference
"CC1" Share.
21. So far as the Honorable Court will believe that the service of this
application to additional parties is required, or that the joinder thereof
as Respondents thereto is required, the Bank will act as the Honorable
Court will so order it in this matter.
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D. THE COMPROMISE AND ARRANGEMENT PLAN
22. The compromise and arrangement plan proposed in accordance with this
application includes three parts (two of them are alternates) which the
shareholders and the Honorable Court will be requested to approve as one:
22.1. FIRST PART: Return of the perpetual deposit to the Bank, excluding
that same part thereof which reflects the issue considerations of
Group "D" Shares which are not held by the State. This part will be
executed promptly upon approval of the arrangement plan (but not prior
to July 31, 2008) and it is not conditioned upon any term whatsoever
("THE PERPETUAL DEPOSIT ARRANGEMENT"). The return of the perpetual
deposit will enable the Bank to pay off the balance of the special
line of credit that was made available to it by the Bank of Israel
following the liquidity crisis it experienced (for a detailed
description regarding the first part see Section 23 hereinafter).
22.2. SECOND PART: Sale of most of the Bank's shares and redemption of the
remainder thereof, subject to a Purchaser being found for the Bank's
shares and the sale being finalized by the effective date (December
31, 2009) ("THE SALE ARRANGEMENT") (for a detailed description
regarding the second part see Section 24 hereinafter).
22.3. THIRD PART: Which will apply in the event that the sale arrangement
(the second part) will not be executed, and according to which the
State will pay the Bank on the effective date or when the Bank
commences liquidation proceedings, whichever is earlier, half of the
interest accrued during the period commencing on July 1, 2002 and
ending on July 31, 2008, on the part of the Bank's perpetual deposit
at the Treasury which reflects the issue considerations of "C", "CC"
and "CC1" Shares ("GROUP "C" SHARES") with the addition of linkage
differentials and interest commencing from July 31, 2008 until the
date of payment, where concurrently and out of this payment of the
State, the Bank will pay Group "C" Shareholders half of the arrears of
the preferred dividend which accrued on the shares thereof in the
aforementioned period, with the addition of linkage differentials and
interest commencing from July 31, 2008 until the date of payment ("THE
DIVIDEND ARRANGEMENT") (for a detailed description regarding the third
part see Section 25 hereinafter).
23. Within the framework of the perpetual deposit arrangement (the first part):
23.1. On July 31, 2008 or upon the approval of this arrangement, whichever
is later, the State of Israel will pay the Bank the perpetual deposit
which it deposited with the Ministry of Finance, excluding the
proportionate part of the perpetual deposit from the issue
considerations of Group "D" Shares held by the public, in the amount
of their par value linked to the Dollar, which will continue to be
maintained solely as a dollar linked deposit and which will be
returned close to the sale execution date, if it will be executed
("BALANCE OF THE DEPOSIT").
23.2. Prior to any additional distribution of monies from the perpetual
deposit, the Bank will transfer to the Bank of Israel, out of the
payment of the State of Israel for the perpetual deposit the amount
required for full payment of the balance of the special line of credit
which was made available to it by the Bank of Israel (as extended from
time to time).
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23.3. The deposit will be returned as stated above, linked to the Dollar
until October 1, 1987, and from this date and until its return, linked
to the Consumer Price Index or to the Dollar, whichever is higher.
23.4. The return of the deposit (including the linkage differentials
thereon) will be exempt from any tax and duty as stated in the
perpetual deposit agreements.
23.5. The balance of the deposit will continue to be maintained solely as a
Dollar linked deposit, in accordance with the perpetual deposit
agreements.
23.6. Section 7(6) of the Bank's articles, which grants the holder of the
"B1" Share (the State of Israel) the right to receive, at the time of
liquidation of the Bank, the excess of the index linkage differentials
over the dollar linkage differentials for the perpetual deposit, as
this excess is paid to the Bank at the time of the liquidation, will
be amended so that the holder of the share will be entitled to receive
the aforesaid excess at the time of liquidation of the Bank, even if
the aforesaid excess will be paid to the Bank not at the time of
liquidation thereof but rather before then, at the time of the return
of the perpetual deposit.
It is emphasized that for the purpose of amending the Bank's articles
as stated, a general meeting of the shareholders of the Bank will be
convened, concurrently with the convening of the class meetings, on
the agenda of which will be the amendment of the Bank's articles as
stated. A decision of the general meeting with regard to the amendment
of the articles is a condition to the compromise and arrangement plan
coming into force.
23.7. Originating Motion 1294/04, which was filed by some Group "C"
Shareholders, as stated above, with respect to cessation of payment of
the preferred dividend, will be dismissed, without an order for costs,
excluding the right of the applicants to court fee reimbursement
taking into consideration that the hearing of the motion has not yet
commenced; and Civil Appeal 174/08, which was filed by the Bank
concerning dismissal of the originating motion which was filed with
respect to accrual of the interest on the perpetual deposit of the
Bank at the Ministry of Finance, will be dismissed, without an order
for costs. The decision, the object of the aforesaid Civil Appeal
174/08, will bind the parties thereto only in the relations between
them with respect to the part of the perpetual deposit which reflects
the issue considerations of Group "C" Shares.
24. Within the framework of the sale arrangement (the second part):
24.1. The Government Companies Authority will act to locate a Purchaser
that will purchase all the shares of the Bank, excluding Group "D"
Shares which are not held by the State, from the State of Israel and
the public. The identity of the Purchaser will be determined after
approval of the arrangement plan by the Honorable Court, through an
equal and competitive sale proceeding, which will be conducted by the
Government Companies Authority ("THE SALE PROCEEDING"). The shares
will be transferred to the Purchaser against fulfillment of the
Purchaser's undertakings, free and clear of any lien, attachment or
third party right. The shareholders of the Bank will not be required
to provide the purchaser with any representation, undertaking or
indemnification within the framework of the sale proceeding.
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24.2. The sale consideration will be distributed between the holders of the
shares being sold in accordance with the consideration distribution
formulas in Appendix "F" to the proposal of Prof. Barnea, which is
attached as Appendix "A" to this application and in accordance with
the rationale reflected in the chart attached hereinafter, and which,
as emerges from the letter of principles, was given the advance
consent of the material shareholders (excluding Bank Leumi, Bank
Hapoalim and Bank Discount). The calculation of the amount that must
be paid pursuant to these distribution formulas for each share
included in the classes of shares being sold will be done by the State
of Israel.
The rate of exchange of the Dollar according to which the rights of
the shareholders in accordance with the consideration distribution
formulas will be calculated as stated, will be determined in
accordance with the Representative Rate of the Dollar as it will be
three business days (in which foreign currency trade is carried out)
prior to the date of transfer of the consideration from the Purchaser
to the Trustee.
24.3. In a nutshell it can be said that most of the sale consideration is
distributed between Group "C" Shareholders, and Group "D" Shareholders
which are not held by the public (i.e., the State), in accordance with
the rights of these classes of shares to participate in the Bank's
assets at the time of its liquidation, as prescribed in its articles.
In addition, so long as the part of the total consideration
distributed to Group "C" Shares in accordance with the aforementioned
rights, will be lower than the return of the paid up capital on these
shares and payment of arrears of the preferred dividend with respect
thereto (all in Dollar values), then part of the consideration to
which the State of Israel was entitled for its holdings in Group "D"
Shares, will be transferred to Group "C" Shareholders (as specified in
the consideration distribution formulas).
24.4. Ordinary "A" Shareholders and "B1" Shareholder, will receive part of
the total consideration that will be received from the Purchaser, only
if the total consideration will be greater than the sum of NIS 550
million and their share of the consideration will increase
progressively together with the increase in the total consideration,
all as specified in the consideration distribution formulas.
24.5. The Ordinary Preferred Shareholders will receive a minimum amount of
NIS 11 million, which will increase progressively together with the
increase in the total consideration, as specified in the consideration
distribution formulas.
24.6. The State, as an Ordinary "B" Shareholder, waives its share of the
total consideration that will be received from the sale, only with
respect to these shares.
13
24.7. If the total consideration that will be received from the Purchaser
will be lower (i) than the average amount of two independent
valuations with respect to the Bank's value upon liquidation and
updated close to the submission date of bids by the bidders in the
sale proceeding, which will be requested by the State, net of the
Dollar value of redeemed Group "D" Shares (principal only and at their
Dollar value converted to New Israeli Shekels in accordance with the
representative rate known at that time), or - (ii) than NIS 400
million (the higher between them will be called: "THE MINIMUM PRICE"),
the consent of the State representatives to the finalization of the
sale will also be conditioned on obtaining approval of the class
meeting of Group "C" Shareholders by a majority of 75% of the value
represented at the vote.
It is clarified that the State reserves the right not to choose any
bid whatsoever and to cancel the sale proceeding even in the event
that the total consideration will be greater than the minimum price,
according to its sole discretion. A description of the sale proceeding
is attached AS APPENDIX "F", which constitutes an integral part of
this application.
HEREINAFTER IS A CHART SOLELY FOR ILLUSTRATION PURPOSES OF THE DISTRIBUTION OF
THE CONSIDERATION AMONG THE SHAREHOLDERS IN THE BANK IN ACCORDANCE WITH THE
PROPOSAL OF PROF. BARNEA:
AMOUNT PREFERENCE PRE- ORDINARY "A"
TO BE "C" AND "D" FERRED SHARES
RECEIVED SHARES SHARES (INCLUDING "B1") PREFERENCE "C" AND "D" SHARES
FROM ----------- ---------- -------------------- ------------------------------------------------------
THE COMPENSATION OF TOTAL %
PURCHASER GROUP "C" SHARES AT RETURN TO
(IN STATE STATE THE EXPENSE OF PREFERENCE
MILLIONS OF OF GROUP "D" SHARES OF "C"
OF NIS) ISRAEL OTHERS ISRAEL PUBLIC THE STATE SHAREHOLDERS
- ---------- ---------- ---------- ---------- ---------- ------- ------- ------------- -------------
400 389 11 0 0 205 184 28 79%
450(1) 439 11 0 0 235 204 28 88%
500 487 13 0 0 264 223 28 95%
550 525 15 6 4 291 234 24 100%
600 563 18 11 8 328 235 10 100%
650(2) 589 21 24 16 354 235 0 100%
700 589 25 51 35 354 235 0 100%
750 589 25 80 56 354 235 0 100%
* Principles of the consideration distribution among the shareholders as
specified in the chart are based on the assumptions of U.S. Dollar
Representative Rate = NIS 4.013 and the consideration payment date by the
Purchaser on 30.9.07. Other examples of the manner of distribution of the
consideration in accordance with the Representative Rate as it could change from
time to time, see page 10 of the proposal of Prof. Barnea, which is attached as
Appendix "A" to this application. The rights of the Group "C" and Group "D"
Shareholders as well as their right to the cumulative dividend will be
calculated as of the date of execution of the consideration payment.
- ---------------------------
(1) Where the consideration to be received will be in an amount situated between
two levels, distribution of the surplus amount above the previous level will be
proportional. For example, if the consideration of sale of all of the shares of
the Bank will be in the amount of NIS 525 million, Preference "C" and "D"
Shareholders will receive NIS 487 million plus half of the difference 525 - 487,
i.e. 487 + 19 = NIS 506 million. The Preferred Shareholders will receive NIS 14
(13 + 1) million and the Ordinary "A" and "B1" Shareholders NIS 5 (5 + 0)
million - a total of NIS 525 million.
(2) Due to the change in the rate of exchange of the U.S. Dollar, changes will
occur in the distribution of the consideration, since the rights of Group "C"
and "D" Shares are linked to the rate of exchange of the U.S. Dollar (see
details on page 4 of the Barnea document).
14
** It is emphasized that the total consideration for Group "C" Shareholders and
Group "D" Shareholders not held by the public, will be distributed between the
individual shareholders, pro rata in accordance with the Dollar value of Group
"C" Shares, according to a value of 1 U.S. Dollar for each Preference "C" Share,
a value of 10 U.S. Dollars for each Preference "CC" Share and a value of 10 U.S.
Dollars for each Preference "CC1" Share; and in accordance with the Dollar value
of Group "D" Shares, according to a value of 100 U.S. Dollars for each
Preference "D" Share, and a value of 1000 U.S. Dollars for each "DD" Share and
according to the rate of holdings of each one among the individuals of the Group
"C" Shareholders and the Group "D" Shareholders, respectively.
24.8. The State will return to the Bank the remainder of the perpetual
deposit with the addition of linkage differentials to the Dollar up to
the repayment date. The repayment of the balance of the deposit
(including linkage differentials thereon) will be exempt from any tax
and levy as stated in the perpetual deposit agreements.
24.9. The Bank will redeem, from its own resources, the Group "D" Shares
not held by the State of Israel, in accordance with the redemption
terms prescribed in their issue terms and the grossing up specified in
the perpetual deposit agreement, i.e. (1) Redemption of Preference "D"
Shares at a premium of 5.625% of their par value ("THE PREMIUM") and
in the amount of U.S. $ 105.625 per share and with the addition of the
cumulative preferred dividend in arrears payment at an annual rate of
7.5% and calculated on the Dollar value of the share (U.S. $100) from
July 1, 2002 and up to and including the day preceding the day of
repayment and (2) Redemption of Preference "DD" Shares in
consideration of their full value, in the amount of U.S. $1,000 per
"DD" Share and with the addition of the cumulative preferred dividend
in arrears payment at an annual rate of 7.5% and calculated on the
Dollar value of the share (U.S. $1,000) from July 1, 2002 and up to
and including the day preceding the day of repayment; and in total, in
consideration of a maximum amount (as of 31.12.09) of U.S. $12,517,944
to Group "D" Shareholders from the public. This amount is likely to be
reduced if the payment date will be brought forward prior to December
31, 2009 or in the event that the State of Israel will purchase from
the public additional shares of Group "D". Since the aforesaid
distribution may be, in due course, a distribution that does not meet
the profit criterion, which requires the approval of the Honorable
Court, the Bank files, with the Honorable Court, together with this
application, a separate application for approval of a distribution
that does not meet the profit criterion pursuant to Article 303 of the
Companies Law, which constitutes an integral part of the arrangement
plan.
24.10. The State will pay the Bank (as interest on the perpetual deposit)
amounts to the extent of the Preferred dividend arrears that will be
paid by the Bank to Group "D" Shareholders and amounts to the extent
of the premium payment that will be paid by it to "D" Shareholders as
stated, all as specified in clause 24.9 above. These amounts will be
paid by the State where they are grossed up, in a manner described in
the perpetual deposit agreements, so that the total net amount (after
tax) that will remain with the Bank will be sufficient to make the
aforesaid payments.
24.11. All the consideration that will be received from the redemption of
Group "D" Shares (including payment of the dividend in arrears and the
premium) and all the consideration that will be received from the sale
of Group "C" Shares and Ordinary Preferred Shares (all the holders of
these shares will hereinafter jointly be called: "THE BENEFICIARY
SHAREHOLDERS"), will be deposited with the Trustee.
15
The day of deposit with the Trustee will be deemed the day of payment
or repayment for the shares being sold or redeemed, accordingly.
The Bank will report to its shareholders (by way of Immediate Report)
regarding a number of key dates in relation, inter alia, to the date
for the fulfillment of all the conditions precedent prescribed in the
agreement with the Purchaser, the effective date entitling the
shareholders to receive the consideration for their shares from the
Purchaser, the date when trading of the Bank's shares will cease (as
stated in clause 24.21 hereinafter), the date when the total
consideration will be transferred from the Purchaser to the Trustee,
the date when the total consideration will be paid by the Trustee to
the nominee company of Bank Discount ("THE NOMINEE COMPANY"), with
which the Bank's shares that are traded on the Tel Aviv Stock Exchange
are registered, or to the shareholders (for shares registered in the
name of the relevant Beneficiary Shareholders in the Bank's register
of shareholders). Subject to the provisions of the agreement with the
Purchaser, the Bank will be entitled to postpone each one of the dates
specified above provided that the notice with regard to such
postponement will be given at least one business day prior to the
relevant date.
Notwithstanding, if and so far as it will be required, the report will
include the manner in which the consideration will be distributed to
the nominee company or to the shareholders by the Trustee in
accordance with a calculation that will be made by the State of
Israel, and the manner in which the shares will be transferred from
the Beneficiary Shareholders to the Purchaser.
The payment to the Trustee for the shares being sold and redeemed, in
accordance with the provisions of the agreement with the Purchaser,
will constitute final and full payment for the above-mentioned shares.
Upon deposit of the total consideration with the Trustee, shares of
the Beneficiary Shareholders who hold with respect to these shares a
share certificate in their name, will be cancelled, for all intents
and purposes, whether these are shares that are redeemed and whether
these are shares that are sold even if the certificates with respect
thereto will not be transferred to the Trustee. These Beneficiary
Shareholders will only have available to them the right to receive
from the Trustee the consideration for their shares, for seven years
("THE TRUST PERIOD"), subject to the duty to deduct tax at source,
without any addition of interest, but with the consideration for Group
"C" Shares and Group "D" Shares being linked to the Dollar or paid in
Dollars and all in accordance with the trust agreement.
For the removal of doubt, the shares registered in the Company's books
in the name of shareholders holding share certificates in their names
and in the name of the nominee company, will be registered in the name
of the Purchaser.
16
24.12. The monies remaining with the Trustee upon the expiration of the
trust period and after the expenses and remuneration of the Trustee
were deducted therefrom, will be allocated as follows: the
consideration monies payable to the Beneficiary Shareholders with
respect to the Ordinary Preferred Shares and Group "C" Shares and with
respect to preferred dividend arrears and the premium with respect to
Group "D" Shares, which were not claimed by then, will be paid to the
State. All the remaining monies that will remain with the Trustee will
be paid to the Bank, subject to any duty to deduct tax at source.
At the expiration of the trust period and after the transfer of the
monies that will remain with the Trustee to the State and to the Bank,
respectively, the right of the Beneficiary Shareholders to receive the
consideration will expire automatically.
24.13. Upon the deposit of the consideration with the Trustee, the Trustee
will publish in a newspaper with a wide circulation in the United
States and in a newspaper with a wide circulation in Israel, a notice
regarding the sale of the Ordinary Preferred Shares, Group "C" Shares
and regarding redemption of Group "D" Shares and the right to receive
consideration for them. In addition, a notice will be sent by mail to
the shareholders regarding sale of the shares and redemption of the
shares as specified above. The posting to the shareholders in the
United States will be carried out through an agent in the United
States, at the request of the Bank or at the request of the Trustee.
24.14. The remuneration of the Trustee and its expenses, as specified in
the trust agreement, including expenses due to publication in the
press, will be paid from the monies in the trust account, and the
profit accruing from them. However, so far as monies will be lacking
in consequence thereof to effectively pay the Beneficiary
Shareholders, the Bank will bear liability for the supplementation and
payment thereof to the Trustee.
24.15. Upon implementation of the arrangement plan, subsequent to
fulfillment of all the conditions precedent as specified in clause
24.26 hereinafter, the shareholders will comprehensively waive any
allegation and/or demand and/or claim, including a pending claim, of
any type and kind whatsoever, which originated in the period up to and
including the transfer date of their shares to the Purchaser in
accordance with the plan ("DEMAND"), whether this involves a demand
known to the shareholders on the share transfer date, or whether this
involves a demand that is not known to the shareholders on the share
transfer date and this, vis-a-vis the Bank, officers of the Bank (as
this term is defined in the Companies Law), the interested parties in
the Bank (as this term is defined in the Securities Law, 5728-1968),
employees of the Bank and against the State of Israel, as the case may
be (whether these are officers, employees and interested parties in
the past or in the present), and this effective from the transfer date
of their shares, in any matter deriving and/or related, directly or
indirectly, to the Bank and/or the companies held by the Bank in the
past or in the present, so far as there are such, their operations,
their businesses, their assets, the manner by which these are or were
managed, the holding of their shares and the exercise of rights by
virtue thereof, including in regard to distribution or
non-distribution of a dividend including a cumulative dividend in
arrears, or in regard to a demand in connection with the perpetual
deposit and/or the restitution thereof and/or interest payment with
respect thereto, and including any matter concerning the submission
and implementation of the arrangement plan and the service of the
aforesaid officers.
17
24.16. Upon the approval of the arrangement plan and the signature of the
trust agreement with the Trustee, and without derogating from that
stated in the trust agreement, the shareholders will absolutely and
irrevocably waive any allegation, demand or claim whatsoever against
the Trustee or anyone on his behalf deriving from or related to his
activities as Trustee or the fulfillment of a function as Trustee or
anyone on his behalf pursuant to the provisions of the trust
agreement, except for an action that will be done by the Trustee or
anyone on his behalf with malice and/or as a result of gross
negligence of the Trustee.
24.17. In addition, Group "C" Shareholders will waive vis-a-vis those
specified in clause 24.15 above, also their right to receive the
compromise dividend and any demand in connection with the perpetual
deposit and/or the return thereof.
24.18. Within seven days of the date of finalizing the sale transaction of
the Bank's shares, as specified above, the representative of the Bank
will file a notice with the Court hearing any proceeding instituted by
the shareholders of the Bank against the Bank and/or its officers
and/or its interested parties and/or its employees and/or the State,
regarding the aforesaid approval of the arrangement plan and regarding
the consent of the plaintiff shareholders in such proceeding to the
dismissal of the claim which was filed by them as stated, without an
order for costs.
24.19. The Bank will assign to the Accountant General of the Ministry of
Finance or to a third party ordered by the Accountant General of the
Ministry of Finance, without consideration, the right to collect the
loans extended by the Bank to the Israel Electric Corporation Ltd.
together with the State deposits at the Bank which served as a source
for providing these loans, including all the collateral that was
provided to secure them.
24.20. The Bank will waive any claim, demand and allegation, vis-a-vis the
officers of the Bank, employees of the Bank and vis-a-vis the
interested parties in the Bank (solely in their capacity as
shareholders), and all in connection with the period until the
transfer to the Purchaser of the Bank's shares within the framework of
the sale arrangement. In addition, the Bank will waive any demand,
claim and allegation vis-a-vis the State in connection with the
perpetual deposit, the payment of interest thereon and its return to
the Bank.
24.21. The purchase agreement according to which the Purchaser will
purchase the Bank's shares will include a waiver of the Purchaser of
any claim, demand and allegation, vis-a-vis the officers of the Bank,
employees of the Bank and vis-a-vis the interested parties in the Bank
(solely in their capacity as shareholders), and all in connection with
the period until the transfer to the Purchaser of the Bank's shares
within the framework of the sale arrangement.
24.22. The Bank's shares will be stricken from trade on the Exchange.
18
24.23. The consideration payable to the shareholders holding the Bank's
shares through a nominee company, will be subject to deduction of tax
at source in accordance with the Income Tax Regulations (Deduction
from Consideration, from Payment or from Capital Gains, upon Sale of a
Unit in a Trust Fund or in a Future Transaction), 5762-2002
("DEDUCTION AT SOURCE REGULATIONS").
The consideration payable to shareholders holding share certificates
in their name will be subject to deduction of tax at source in
accordance with the Deduction at Source Regulations, unless any such
shareholder whose address in the Bank's register of shareholders is in
Israel, presented to the Trustee confirmation of an exemption from
deduction of tax at source, on a date to be determined later.
24.24. Should the Honorable Court approve the arrangement plan, a motion
will be filed for a pre-ruling to the Tax Authority, according to
which transfer of the consideration from the Purchaser to the Trustee
will not be deemed a tax event and therefore it will be exempt from
the duty to deduct tax at source, so that only at the time of transfer
of the consideration from the Trustee to the Beneficiary Shareholders
will tax at source be deducted, so far as there will be a duty to do
so.
24.25. Should the arrangement plan be approved by the Honorable Court and
all of its above specified stages be finalized, from the total
consideration that will be received from the Purchaser for the shares,
a sum of NIS 110,000 with the addition of VAT, which was paid by the
State to Prof. Barnea for preparation of his proposal (Appendix "A" to
this application), will be returned to the State of Israel. After the
return of the aforesaid sum to the State, the balance of the
consideration for the shares will be distributed among the
shareholders in accordance with the distribution formulas included in
the plan.
24.26. A condition to finalization of the second part of the arrangement
plan and its implementation is the finding of a Purchaser by means of
the sale proceeding and finalization of the purchase transaction of
the Bank's shares, including full payment of the consideration with
respect thereto by the Purchaser, by the effective date.
25. Within the framework of the dividend arrangement (the third part) which
will apply in the event that the sale arrangement (the second part) will
not materialize:
25.1. On the effective date, or at the time a liquidation order is issued
against the Bank, or at the time a voluntary liquidation resolution is
passed by the general meeting of the Bank (whichever is earlier), the
State will pay the Bank half of the interest, at an annual rate of 6%,
which accrued during the period which commenced on July 1, 2002 and
ended on July 31, 2008 ("THE ACCRUAL PERIOD") on the part of the
perpetual deposit of the Bank at the Ministry of Finance which
reflects the issue considerations of Group "C" Shares, this interest
being linked to the Representative Rate of the U.S. Dollar ("DOLLAR")
in a manner that "the new rate" will be the Representative Rate that
will be published on the business day preceding July 31, 2008, and
from this date and until its payment to the Bank bearing "linkage
differentials and interest" pursuant to Article 3A of the Adjudication
of Interest and Linkage Law, 5721-1961 ("LAWFUL LINKAGE DIFFERENTIALS
AND INTEREST"). These amounts will be paid by the State grossed up, in
a manner described in the perpetual deposit agreements, so that the
net amount (after tax) that will remain with the Bank will be equal to
the payment pursuant to clause 25.2 hereinafter.
19
25.2. On the date stated in clause 25.1 above, the Bank will pay Group "C"
Shareholders, the net amounts that it will be paid as stated in
Section 25.1 above, i.e., half the preferred dividend arrears, at an
annual rate of 6%, which accrued on their shares in the accrual
period. This amount will be linked to the Representative Rate of the
Dollar in a manner that "the new rate" will be the Representative Rate
that will be published on the business day preceding July 31, 2008 and
from this date and until payment thereof to the shareholders it will
bear lawful linkage differentials and interest.
25.3. The State will waive any claim and/or demand and/or allegation
vis-a-vis the Bank and/or the liquidator of the Bank and/or the
liquidation fund of the Bank in relation to 50% of the preferred
dividend arrears which accrued on Group "D" Shares owned by the State
during, the accrual period.
25.4. Subject to the full payment of the amounts that will be due to them
pursuant to clause 25.2 above, Group "C" Shareholders will waive any
claim and/or allegation and/or demand vis-a-vis the State, in relation
to and/or in connection with the perpetual deposit, its return to the
Bank, payment of interest thereon and payment of a dividend on their
shares with respect to any period, in the past or in the future.
25.5. Subject to full payment of the amounts that will be due to them
pursuant to clause 25.2 above, Group "C" Shareholders will waive any
claim and/or allegation and/or demand vis-a-vis the Bank, the
interested parties in the Bank, the officers of the Bank and employees
of the Bank in connection with the perpetual deposit and its return to
the Bank and non-distribution of a dividend in the period which
commenced on July 1, 2002 and until the date of payment of half the
preferred dividend arrears with respect to their shares as stated in
clause 25.2 above. To remove any doubt, it is hereby clarified that
the above waiver will not derogate from the rights of Group "C"
Shareholders to accrual of the preferred dividend with respect to
their shares pursuant to the Bank's articles, including in relation to
the above-mentioned period.
25.6. Subject to the implementation of the dividend arrangement, the Bank
will waive any claim, demand and allegation vis-a-vis the State in
relation to payment of the interest with respect to the part of the
perpetual deposit which reflects the issue considerations of Group "C"
Shares, and Group "D" Shares that are owned by the State (without
derogating from any claim, demand and allegation thereof in relation
to payment of interest on the balance of the perpetual deposit) and
with respect to return of the perpetual deposit by the State.
26. It is emphasized that the arrangement plan is proposed to the shareholders
as a single unit, including implementation of the distribution as the
Honorable Court is requested to approve, and it cannot be separated into
its components or having its terms changed, other than with the consent of
the Bank.
20
E. THE PROCEEDINGS WHICH LED TO THE FILING OF THE APPLICATION
27. This application is filed in anticipation of the expiration of the Run-Off
Plan, described at length in Section 28 hereinafter, in the framework of
which the Bank is operating since the beginning of 2003 and it is intended
to enable the Bank to continue to operate as a business entity and to offer
its current shareholders a ready solution to the realization of their
holdings for suitable consideration and within a relatively short period of
time.
28. As is explained in the introductory section of this application, at the
time when a severe recession prevailed in the economy, the Bank also
encountered liquidity difficulties over the course of the third quarter of
2002. The concerns of the depositors of the Bank over the collapse of the
Bank, led the depositors to a panic-driven withdrawal of their deposits,
something which could indeed have caused the realization of the concerns
and the collapse of the Bank. In order to prevent the collapse of the Bank
a number of emergency steps were taken, by the Bank and by various parties
including the government of Israel and the Bank of Israel:
28.1. On August 26, 2002 the Bank's Board of Directors adopted a resolution
to approve the process of selling the banking activity portfolio of
the Bank, to cooperate in its implementation and to instruct the
management of the Bank as will be required.
The resolution of the Bank's Board of Directors from August 26, 2002
is attached to this application AS APPENDIX "G/1" and constitutes an
integral part hereof.
28.2 On September 1, 2002 the government of Israel decided to implement a
plan of action "the objective of which is to immediately stabilize the
Bank and to create certainty for the depositors while ensuring the
normal operations of the Bank until finalization of the sale of the
banking activity portfolio (the assets and liabilities portfolio) of
the Bank". As part of this plan of action, the Bank of Israel made
available to the Bank a special line of credit, and the Ministry of
Finance agreed that deposits of the State of Israel in the Bank will
be subordinated to deposits of the public in the Bank and to the
credit of the Bank of Israel, until the sale of the banking activity
portfolio of the Bank.
The decision of the government from September 1, 2002 is attached to
this application AS APPENDIX "G/2" and constitutes an integral part
hereof.
28.3. The process of selling the Bank's banking activity portfolio was due
to last a number of months, however the plan for its sale as "a single
unit", and within a short time frame, was not successful. Accordingly,
the Bank formulated, through a team of outside consultants (among
which Prof. Barnea was included), a Run-Off Plan. The principles of
the plan were adopted by the Bank's Board of Directors on February 27,
2008, at the core of which stood a controlled realization process of
the credit assets of the Bank over a period of four years, until the
end of 2006, while reducing the manpower of the Bank and the
operational costs, subject to the continued availability of the
aforesaid line of credit by the Bank of Israel.
21
28.4. On July 29, 2003 the Ministerial Committee for Social and Economic
Affairs (Socio-Economic Cabinet) approved the principles of the Bank's
Run-Off Plan. In the government decision it was noted that it was made
in order to ensure the normal operations of the Bank and the return of
the deposits to all the depositors and in order to realize the assets
of the Bank in a controlled process, within 36 months.
The aforesaid government decision, is attached to this application AS
APPENDIX "G/3" and constitutes an integral part hereof.
28.5. In accordance with the Run-Off Plan, the Bank refrains from making
new credits available, and its activity focuses on collection of
existing credits. The Bank reduced and/or completely discontinued
various activities which existed therein in the past and which are not
connected with the collection of credits.
28.6. In addition, the Bank's Board of Directors approved a comprehensive
and detailed efficiency plan which includes deep cutbacks in the
operational expenses and in the manpower.
28.7. In its meeting of July 26, 2005, the Bank's Board of Directors
approved the extension of the Run-Off Plan by two additional years and
the continued implementation thereof on the basis of a document which
was prepared by Prof. Barnea, this until July 31, 2008. The Bank's
Board of Directors decided, in light of the reduction in the Bank's
activity within the framework of the Run-Off Plan, to notify the
Governor of the Bank of Israel of its consent to the limitation of its
banking license in a manner which will reflect the limited activity
thereof, and including non-acceptance of new deposits and non-renewal
of deposits that have reached maturity. In addition, in the limited
license it will be set forth that the validity thereof will be until
the end of the extended plan period.
28.8. On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (Socio-Economic Cabinet) decided to approve the extension of
the Bank's Run-Off Plan by an additional two years, until July 31,
2008.
The decision of the Ministerial Committee for Social and Economic
Affairs from October 10, 2005 is attached AS APPENDIX "G/4" to this
application and constitutes an integral part hereof.
29. In addition, the government noted the Governor of the Bank of Israel's
notice regarding his consent to the realization of the balance of the
Bank's assets and continued availability of a line of credit to the Bank
until the end of the extended plan. The government's decision also set
forth that the Bank would not make use of the line of credit, or of other
sources, in order to make new credits available.
30. The Bank during the years of its existence used to distribute every quarter
a preferred dividend to its preferred shareholders and the State paid the
Bank back to back interest (at the rate of the dividend which the Bank used
to pay to the preferred shareholders) for the issue considerations of the
preferred shares of the Bank which were deposited by the Bank with the
Ministry of Finance as a perpetual deposit. After the Bank found itself in
a liquidity crisis in the third quarter of 2002, the Bank ceased
distributing the preferred dividend to its shareholders and the State
ceased paying the Bank the aforesaid interest.
22
31. Following the cessation of the payment of the interest with respect to the
perpetual deposit, an action was filed against the Bank which is still
pending before the courts (Originating Motion 1292/04). The action was
filed with the District Court in Tel Aviv on September 28, 2004 by various
financial bodies, holding the preferred shares of the Bank. Within the
framework of the claim the Court was requested, inter alia, to order the
Bank to pay its shareholders a dividend at a rate and on the dates as was
paid until the second quarter of 2002. Since in the opinion of the Bank, ,
the subject of distribution of the dividend is connected with the issue of
the accrual of interest on the perpetual deposits under the circumstances
of non-distribution of a dividend, the Bank filed following this
originating motion, an originating motion against the Minister of Finance
and the plaintiff shareholders (Originating Motion 377/05) in order for the
Court to declare that the interest accrues in favor of the Bank also with
respect to the period in which a preferred dividend was not distributed.
The Court dismissed the originating motion which was filed by the Bank and
determined that the interest does not accrue in favor of the Bank.
32. On October 9, 2007 the Bank's Board of Directors decided that in light of
the decision of the Court it is appropriate that the Bank will act to renew
the dividend distribution to the preferred shareholders of the Bank. In
this connection the Board of Directors also decided to convene the general
meeting of the Bank and to recommend to it the amendment of the Bank's
articles in a manner that will enable the renewal of the distribution. The
general meeting convened on January 7, 2008 and rejected the recommendation
of the Board of Directors.
33. Since in the opinion of the Bank the decision of the Court is liable to be
interpreted as denying the right of the Bank to receive accumulated
interest also if and when the Bank will distribute or pay in the future a
cumulative preferred dividend in arrears, the Bank filed on January 6, 2008
an appeal with the Supreme Court (Civil Appeal 174/08) on this part of the
Court's decision. This appeal is still pending before the Supreme Court.
For details regarding the material legal actions, including the action
specified above, see in the annual report of the Bank for December 31,
2007, and in the financial statements of the Bank for March 31, 2008 which
are attached as APPENDICES "H" and "I" respectively, to this application
and constitute an integral part hereof.
34. According to the government's decision, the Run-Off Plan will conclude at
the end of the month of July 2008. In order to prepare for "the day after"
the Run-Off Plan, the Bank's Board of Directors examined, in cooperation
with the State of Israel, including by virtue of the Bank being a mixed
company, as defined in the Government Companies Law, 5735- 1975, the
various possible alternatives that will benefit the shareholders.
35. As was conveyed to the Bank, the State conducted over the course of 2007 an
experimental test, through the Government Companies Authority, in order to
examine the level of response of various parties which could be interested
in acquiring all the issued and paid up share capital of the Bank. Twelve
entities expressed interest in acquiring the aforesaid share capital.
23
36. After the initial draft of the outline for sale of the Bank as a going
concern, which includes, inter alia, the arrangement plan, the material
shareholders requested from Prof. Barnea to propose a formula for the
distribution of the consideration that will be received from the sale of
all the shares of the Bank to the Purchaser, among the shareholders.
Professor Barnea submitted to the material shareholders his proposal for
distribution of such consideration within the framework of which he
addressed the alternative of liquidating the Bank against its sale as a
going concern.
37. The conclusion of Prof. Barnea was that the alternative of selling the
Bank's shares as a going concern was the best alternative for the
shareholders.
The recommendation of Prof. Barnea was adopted by the material shareholders
in a letter of principles which they signed on March 18, 2008 (excluding
Bank Leumi, Bank Hapoalim, and Bank Discount), which seeks to adopt the
arrangement plan.
38. The conclusion reached by the Bank's Board of Directors and the Government
Companies Authority after many discussions and with the assistance of a
team of outside consultants (including the distribution proposal of Prof.
Barnea which was given to the material shareholders), was that the sale of
the Bank as a "going concern" to an outside investor is likely to yield a
higher consideration to the shareholders compared to the alternative of
liquidating the Bank and distributing the balance of its assets (after
discharge of its debts to its creditors) to its shareholders.
39. On April 29, 2008, the Ministerial Committee for Privatization Affairs
decided that the shares of the State in the Bank will be sold, as a single
unit, by way of a private sale, to an investor or to a group of investors
from Israel and/or from abroad ("THE PURCHASER") and this within the
framework of a comprehensive sale outline for transfer of all the Bank's
shares including those held by the public to the Purchaser, as specified in
the Ministerial Committee decision ("THE PRIVATIZATION DECISION"). Further
to the privatization decision, the Bank's Board of Directors decided to
propose to all the Bank's shareholders an arrangement plan between it and
them, within the framework of which their holdings will be purchased by the
outside investor and/or will be redeemed by the Bank. The manner of
privatization of the Bank requires approval of the Finance Committee of the
Knesset in accordance with Article 59b(h) of the Government Companies Law.
Upon the decision of the Ministerial Committee for Privatization Affairs
the Bank is a "privatized company", as defined in the Government Companies
Law.
The privatization decision is attached to the Immediate Report of the Bank
from April 30, 2008 which is attached to this application AS APPENDIX "J"
and constitutes an integral part hereof.
24
F. MANNER OF ALLOCATION INTO CLASS MEETINGS
40. The manner of allocation into the class meetings, as specified in Appendix
"D" to this application, is almost completely based on the package of
rights of each share and that such an allocation properly reflects the
various interests of the shareholders in the Bank. For details regarding
the various interests of the class meetings, see clause 19 above.
It is emphasized, this allocation into the class meetings is a product of
balancing between meticulously safeguarding the interests and the rights of
the class shareholders, so that they will not be prejudiced, and using
caution against excess splitting of the shareholders into sub-groups,
without having material interests at the basis of the split which justify
this, which may vest in individual and specific shareholders, even those
whose rate of holdings in the Bank are minimal, non-proportional power, at
the stage when the arrangement proposal is brought for approval of the
shareholders and preclusion of the ability to make decisions in the Bank as
a result thereof. It is also emphasized that the Bank's articles grant only
to Ordinary "A" Shareholders and to Ordinary Preferred Shareholders voting
rights in the general meeting of the Bank.
The State of Israel notified the Bank that it would not participate in the
class meetings of the shareholders.
The words of the Honorable Judge D. Levin in Civil Appeal 70/92 CLAL
INDUSTRIES LTD. V. LEUMI - PIA, MUTUAL FUND MANAGEMENT COMPANY LTD., Piskei
Din 47(2) 329, 343 are suitable in this regard:
"NONETHELESS, ALSO WITH RESPECT TO CLASSIFICATION OF SHAREHOLDER
MEETINGS, AS WITH RESPECT TO CLASSIFICATION OF CREDITOR MEETINGS,
ACCORDING TO THE AFORESAID INTERESTS TEST, ONE SHOULD ABSTAIN FROM
CLASSIFICATION INTO TOO MANY SUB-GROUPS, SINCE SUCH A CLASSIFICATION
IS LIABLE TO RESULT IN OVER-DEMANDING MINORITY GROUPS CAUSING THE
FAILURE OF THE ARRANGEMENT NOT FOR A TRULY RELEVANT REASON".
G. THE BANK'S CREDITORS
41. Hereinafter are details regarding the Bank's creditors and the total debt
of the Bank to them (in NIS thousands) close to the filing date of the
application (as of March 31, 2008):
41.1. The material creditor of the Bank is the State of Israel, to which
the total debt of the Bank is set at NIS 4,877 million (approximately
90.3% of the Bank's total liabilities).
41.2. An additional material creditor of the Bank is the Bank of Israel,
which made available to the Bank a special line of credit which the
Bank undertook to pay back. As of March 31, 2008 the total debt of the
Bank in relation to the Bank of Israel is set at NIS 390 million.
25
As specified in the statements of the Bank for March 31, 2008
(Appendix "I"), the Bank is of the opinion that by right, the Bank of
Israel should credit it with the interest amounts over the "Bank of
Israel interest" with which it was charged by the Bank of Israel with
respect to the special line of credit from August 2002 and until July
29, 2003. The Bank is conducting discussions with the Bank of Israel
in this connection.
41.3. The total debt of the Bank in relation to its non-material creditors,
close to the aforesaid filing date of the application, is set at
approximately NIS 133 million.
H. DESCRIPTION OF THE BANK AND ITS BUSINESS ENVIRONMENT
42. In accordance with the requirement of the Arrangement Regulations for
providing details with regard to the Bank and its business environment,
hereinafter are detailed the data required pursuant to law. Nonetheless,
since the Bank is a public company which publishes periodic reports,
quarterly financial reports and immediate reports in accordance with the
provisions of the Securities Law and its regulations, wherein extensive and
comprehensive details are included beyond that required pursuant to the
Arrangement Regulations, the essentials are hereby briefly brought forth.
The Honorable Court is referred, for the purpose of receiving additional
and more complete details (to the extent so required), to the annual report
of the Bank for December 31, 2007 (Appendix "H" to the application).
43. THE SEGMENTS IN WHICH THE BANK OPERATES, THE FIELDS OF OPERATION AND
LICENSING CHARACTERISTICS
43.1. The Bank was incorporated on October 7, 1957 as a public company in
Israel. In the terminology of the Government Companies Law, 5735-1975
("THE GOVERNMENT COMPANIES LAW"), the Bank is a "mixed company" (as
defined in Article 1 of the Government Companies Law).
43.2. In 1989 the Bank commenced its activity as a commercial bank, however
as stated above, the Bank today engages primarily in collection of
bank credits, after its activity of providing varied and diverse
banking services was utterly reduced.
43.3. The Bank obtained a license to operate as a commercial bank on June
4, 1989, however this license was limited in accordance with the
limitation of the Bank's activity and is planned to be revoked upon
conclusion of the Run-Off Plan on July 31, 2008.
44. CHARACTERIZATION OF THE BANK'S CUSTOMERS AND THE EXTENT OF DEPENDENCE ON
THEM
44.1. The Bank's customers include borrowers (primarily from the business
sector) as well as depositors. The number of depositors, which
continues to diminish with the years, is fixed today at approximately
70. In addition, the Israel Electric Corporation Ltd. received from
the Bank loans guaranteed by the State of Israel which have not yet
been paid in full.
44.2. Apart from the Israel Electric Corporation Ltd., the Bank does not
have, nor did it have in the year preceding the filing of this
application, dependence on an individual customer or on a limited
number of customers, or customers the revenues from which constituted
10% or more of the total revenues of the Bank.
26
45. DEPENDENCE ON SUPPLIERS, MARKETING PEOPLE AND RAW MATERIALS
The Bank has no dependence on suppliers, marketing people and raw
materials.
46. RISK FACTORS
Hereinafter is a description of the primary risk factors that are liable to
affect the Bank's activity:
46.1. QUALITY OF BORROWERS AND COLLATERALS
The risk that borrowers of the Bank will not make payments of their
debts to the Bank, is a risk inherent in the activity of the Bank.
Although the Bank continuously reviews the condition of its customers
and the value of the collateral securing their debts and makes
provisions in accordance with its appraisals of the risk that they
will not be able to pay their debts, it is possible that in the future
there may be circumstances and situations that were not taken into
account until now by the Bank, including deterioration in the
condition of the customers and devaluation of their collateral, which
will require the making of additional provisions. The focus of the
Bank on collection of credits and its refraining from engaging in
other activities, increase the impact that this risk will have on the
financial results of the Bank in the event of its realization.
46.2. DISPERSAL OF CREDIT RISKS
In accordance with the policy adopted by the Bank within the framework
of the Run-Off Plan the Bank no longer engages in extending of credit,
but rather in collection of the credit which was made available by it
in the past, while executing debt settlements as a part of this
process. The ability to collect the credit is also affected by factors
external to the Bank, such as the condition of the economy in general
and the borrowers in particular and the policy of other banks with
respect to making credit available to customers. The fact that the
Bank has been refraining for approximately six years from making new
credit available, limited to a minimum the ability of the Bank to
disperse its credit risks in accordance with accepted parameters for
measuring credit risk dispersal.
46.3. INTEREST, EXCHANGE RATE AND INFLATION RISKS
The interest risk derives from the impact of future changes in the
interest rates on the current value of the assets and liabilities of
the Bank. These changes are liable to cause erosion of the Bank's
revenues and its capital.
46.4. SHARE PRICE RISK
The scope of the total investment of the Bank in securities on March
31, 2008 amounts to approximately NIS 40 million. Out of the aforesaid
amount, a sum of approximately NIS 29 million is comprised of tradable
shares. The aforesaid value is on the basis of the Stock Exchange rate
as of date of the financial statements. The above-mentioned value is
subject to fluctuations in accordance with the share prices included
in this clause. Most of the investment in tradable shares is with
respect to shares of one company included in the Tel Aviv 25 shares
list.
27
46.5. LIQUIDITY RISK
Since the Bank is precluded from receiving deposits from the public,
it relies on the line of credit from the Bank of Israel for its
liquidity management..
46.6. OPERATIONAL RISKS
These risks include risks deriving from fraudulent acts, errors on the
part of the Bank's employees, absence of proper documentation for
transactions, failures and defects in data processing, in equipment or
in external systems of service providers, and absence of proper
internal security check and control processes. Although the Bank
instituted various means of supervision and control with the objective
of minimizing the operational risks to which it is exposed, this is
not sufficient to ensure that such risks do not exist or that they
will not be realized in the future.
46.7. LEGAL RISKS
Over the course of its operation the Bank is exposed to legal risks,
including the risk of loss as a result of there being no possibility
of legally enforcing the existence of an agreement. These risks are
continuously handled by the legal department of the Bank, but this
does not ensure that all the risks were taken into account, or that
risks which were identified will not be realized in the future.
46.8. DEPENDENCE ON PROFESSIONAL PERSONNEL DUE TO REDUCTION OF THE WORK
FORCE
In accordance with the Run-Off Plan and the efficiency plan which
accompanied it, the Bank substantially reduced the number of its
employees, which was reduced from 170 on January 1, 2002 to 42 on
March 31, 2008. The ability of the Bank to continue to successfully
collect its credit portfolio, as well as to preserve the Bank as a
business platform for a potential purchaser of the Bank, are
dependent, inter alia, upon the continued employment of those managers
and employees who are acquainted with and hold the essential knowledge
concerning the systems of the Bank and its customers.
46.9. DEPENDENCE OF THE BANK ON THE SPECIAL LINE OF CREDIT FROM THE BANK OF
ISRAEL
In the absence of other liquidity sources, the ongoing regular
activity of the Bank is dependent upon the maintenance of the special
line of credit which was made available to the Bank by the Bank of
Israel and which was due to terminate on July 31, 2008.
Non-fulfillment by the Bank of the special line of credit terms is
liable to jeopardize the continued maintenance of the line of credit
and to lead to realization of the debenture which was registered in
favor of the Bank of Israel, to secure fulfillment of the Bank's
obligations toward it.
28
In the letter of the Governor of the Bank of Israel from April 13,
2008 the Governor of the Bank of Israel notified the Director of the
Government Companies Authority that he decided to accede to his
request and to extend the payment date of the special line of credit
which was made available to the Bank, until December 31, 2008, or
until the date the Court approval is received for an arrangement among
all the shareholders, which is the object of this application,
whichever is earlier. The aforesaid notice of the Governor which was
conditioned on the fulfillment of a number of prerequisites is
attached hereto as APPENDIX "K" to this application.
46.10. THE HARM TO THE BANK'S PROFITS DUE TO ITS INABILITY TO MAKE CREDITS
AVAILABLE AND TO RECEIVE AND/OR RENEW DEPOSITS
Following the decisions of the Ministerial Committee for Social and
Economic Affairs and of the Bank of Israel regarding the affairs of
the Bank, the Bank is precluded from making new credits available and
from receiving and/or renewing deposits, and the activity of the Bank
focuses on collection of its credit portfolio. Limitation of the
Bank's activity to collection of existing credits has and will
continue to have an adverse effect on the Bank's ability to generate
financing and operating income, and its being precluded from receiving
and/or renewing of deposits, harms its financial margins.
46.11. EFFECT OF THE RUN-OFF PLAN ON THE ATTITUDE OF THE BORROWERS TOWARD
THE BANK AND THE BANK'S COLLECTION ABILITY
The circumstances of the Bank and the limited prospect of its
continued activity, are liable to negatively affect the willingness of
its customers to fulfill their obligations toward it. On the one hand,
customers may believe that under these circumstances concessions and
reliefs can be extracted from the Bank, and on the other hand,
fulfilling their obligations does not assure them an ongoing
relationship with the Bank. The Bank's management is implementing and
intends to continue implementing a vigorous and resolute line of
action in everything connected with the handling of problematic debts.
As a result thereof, in the last years there has been a significant
increase in the collection expenses and the legal expenses borne by
the Bank and this trend is liable to continue also in the future.
29
47. THE CONTROL OF THE BANK AND THE BANK'S HOLDINGS IN OTHER CORPORATIONS WHICH
ARE MATERIAL TO THE BANK'S BUSINESSES
47.1. THE CAPITAL STRUCTURE OF THE BANK: As of the date of this
application, the registered capital of the Bank is NIS 18,890.1, and
the issued and paid up capital thereof is NIS 13,774.1, allocated as
follows:
NUMBER OF SHARES IN THE
CLASS OF SHARE PAR VALUE (NIS) REGISTERED CAPITAL NUMBER OF ISSUED SHARES
- ---------------------------- -------------------------- -------------------------- --------------------------
Ordinary "A" Shares 0.10 16,000 15,100
Ordinary "B" Shares 0.10 135,399 134,899
Ordinary "B1" Shares 0.10 1 1
Ordinary Preferred Shares 0.001 1,000,000 1,000,000
Preference "C" Shares 0.00018 17,000,000 17,000,000
Preference "CC" Shares 0.003 1,000,000 999,998
Preference "CC1" Shares 0.003 1,740,000 1,734,779
Preference "D" Shares 0.03 164,000 163,477
Preference "DD" Shares 2.10 60,000 55,409
Unclassified Shares 0.10 50,100
47.2. The principle shareholder in the Bank, the State of Israel, holds, as
of the filing date of this application approximately 80.09% of the
issued and paid up capital of the Bank (through its holdings of
various shares of the Bank - see Appendix "E") and approximately
45.78% of the voting rights therein (though Ordinary "A" Shares)(3).
- -----------------------
(3) Recently the Bank reached a conclusion whereby out of 3,429 Preference "D"
Shares and 1,901 Preference "DD" Shares registered in the name of the State on
the books of the Bank's agent in the United States and not registered on the
Bank's books and not reported by it, 2,636 Preference "D" Shares and 1,306
Preference "DD" Shares must be transferred and registered in the name of the
State on the Bank's books (and concurrently subtracted from shares registered in
the name of holders in the United States). In its meeting of February 26, 2008
the Bank's Board of Directors decided to approve the transfer of shares as
stated above in the name of the State, subject to receiving certain approvals
from the State concerning correction of the existing registrations in its name
and the "surplus" share certificates which are held by it. When this transfer is
accomplished, the rate of holding of the State in the Bank's capital will be set
at 81.82% in lieu of 80.09% as reported today. It is noted that there is still
an amount of approximately 30 Preference "DD" Shares (beyond the amount of 1,306
shares noted above) which prima facie were also purchased by the State, but due
to the absence of information with respect to details of the sellers, for now
they cannot be transferred or registered in its name on the Bank's books.
30
48. ADDITIONAL DETAILS REQUIRED IN ACCORDANCE WITH THE ARRANGEMENT REGULATIONS
48.1. As of the day of filing this application, a receiver was not
appointed for the Bank pursuant to a decision of a court or an
execution office.
48.2. To the best of the knowledge of the Bank, apart from that specified
below, no personal advantage arises for any of the officers therein
from the proposed plan, whether by virtue of their status as officers
or whether by virtue of their status as shareholders or creditors:
48.2.1. Subsequent to finalization of the sale of the Bank's shares,
the State will pay the Bank's employees, including to the
Chairman of the Bank's Board of Directors and the remaining
officers serving as employees of the Bank, a privatization grant,
in accordance with the Provision of Compensation to Employees due
to a Private Sale of the State's Shares Procedure, as it will be
updated from time to time.
48.2.2. Upon the filing of this application with the Honorable Court,
the indemnification letter and the exemption letter for the
officers of the Bank will come into force, as such were approved
in the general meeting of the Bank's shareholders of April 15,
2008 and in accordance with the Immediate Report which the Bank
then published.
48.3. The Bank was not given, and it was not proposed that it be given,
guarantees, collateral or other securities for the purposes of the
plan.
48.4. The total expenses and costs which according to the Bank's estimation
it may bear as a result of the plan, including amounts that were
already paid for services and expenses in connection with the
arrangement plan prior to its submission, is approximately NIS 2.25
million.
I. CONCLUSION
49. This application is supported by the affidavit of Dr. Raanan Cohen, the
Chairman of the Bank's Board of Directors, on the basis of which the
application was executed, which is attached to this application and
constitutes an integral part hereof.
50. Therefore the Honorable Court is requested to order as requested in clause
16 of this application.
51. This application should be granted as a matter of law and as a matter of
justice.
- --------------------------------------- -------------------------------------
EHUD SOL, ADV. ASHER DOVEV, ADV.
LICENSE NUMBER 12013 LICENSE NUMBER 21192
HERZOG, FOX, NEEMAN AND CO., ADVOCATES
REPRESENTATIVES OF THE BANK (THE APPLICANT)
31
I declare that the contents of the facts specified in the application and the
appendices thereof, to which this affidavit is appended, are true and that this
is my name and this is my signature.
______(-)____________
Dr. Raanan Cohen
CERTIFICATION
I certify that today, the 3rd of July, 2008, appeared before me, Asher Dovev,
Adv., Dr. Raanan Cohen, bearer of Identity Card Number 04831694 and after I
cautioned him that he must declare the truth, and that he will be subject to the
penalties prescribed by law if he does not do so, confirmed the accuracy of his
declaration above and signed it before me.
______(-)______________
Asher Dovev, Adv.
32
APPENDIX A
TO THE ARRANGEMENT APPLICATION
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.
March 12, 2008
TEL AVIV STOCK EXCHANGE SECURITIES AUTHORITY
www.tase.co.il www.isa.gov.il
IMMEDIATE REPORT OF AN EVENT OR MATTER DEVIATING FROM THE
COMPANY'S REGULAR COURSE OF BUSINESS
Subject of the Event: Update of Prof. Barnea's Proposal
On January 15, 2008, the Bank issued an Immediate Report in reference to a
proposal prepared by Prof. A. Barnea, by the request of the State of Israel and
by other shareholders of the Bank, for the distribution of the consideration
which will be received from the implementation of the blueprint (if and when the
blueprint will be carried out) among the various shareholders of the Bank. Prof.
Barnea's proposal, dated January 13, 2008, was attached to the above Immediate
Report.
On March 11, 2008, the Bank received an amended and updated proposal of Prof.
Barnea dated March 9, 2008.
Among the changes in the updated proposal as compared to the original proposal
is a clarification that the exact distribution of the consideration among the
holders of the various classes of shares shall be according to the Dollar
exchange rate prevalent at the time of the distribution, and there are also
corrections relating to the amounts proposed for distribution to the Preferred
Ordinary shareholders.
The attachment of the updated proposal is with the consent of Prof. A. Barnea.
The proposal document was not commissioned by the Bank.
As Prof. A. Barnea explicitly notes also in the updated proposal, the proposal
is not a valuation of the Bank assets and liabilities, which means that the data
brought below is indicative only and its purpose is to allow the owner of each
class of shares to make a quantitative examination of the size of the
consideration allocated to him.
Details regarding Prof. A. Barnea's education are attached hereto as an integral
part of this Immediate Report.
The Bank reiterates its clarification in its prior Immediate Report in
connection with the original proposal, that the estimates and evaluations
contained in the document should not be viewed as estimates and evaluations on
behalf of the Bank or binding upon the Bank.
The date and time when the Company was first made aware of the event or matter:
March 11, 2008 at 12:00 P.M.
- --------------------------------------------------------------------------------
BARNEA FINANCIAL CONSULTING LTD.
- --------------------------------------------------------------------------------
PROPOSAL TO DISTRIBUTE THE CONSIDERATION FROM THE SALE OF THE INDUSTRIAL
DEVELOPMENT BANK TO ITS SHAREHOLDERS AS A GOING CONCERN(1)
1. I have been asked by representatives of the shareholders of the Industrial
Development Bank (hereinafter: "THE BANK") to offer a framework for the
distribution of the consideration received from the sale of the Bank's
shares, which shall be supported by the various shareholders and by the
State. This support is necessary so as to allow a smooth sales process of
the Bank's shares as a GOING CONCERN. As is evident from the data in
Appendices A and C, a significant gap (some NIS 200 Million) exists between
an estimate of the Bank's value as a going concern and its value upon
liquidation. This value differential can be lost due to disunity between
the interests of the various shareholders, as a result of which a slow
legal procedure shall be initiated, leading to liquidation. The goal of the
proposed distribution framework is to reach a general agreement, while
balancing various interests, allowing an expedited procedure for the sale
of the Bank's shares as a going concern.
2. The proposed framework is based on the rights of shareholders under
liquidation as denoted in the Bank's Articles of Association and in the
documents of the holders of the classes of shares presented for my review.
The value of the Bank's assets and the rights of the preferred stock
holders has been assessed based on the Bank's September 30, 2007 Financial
Statements and the dollar rate of NIS 4.013. I direct your attention to the
notes of the attached tables referring to the influence of the change on
the dollar's rate of exchange on shareholders' rights. THE PRECISE
DISTRIBUTION SHALL BE DETERMINED BASED ON THE RATES OF EXCHANGE AT THE TIME
OF PAYMENT. An estimate of the proposed distribution based on the Bank's
value and the dollar's rate of exchange is included in Appendix D.
3. I was not asked to prepare and did not prepare a valuation of the Bank
assets and liabilities, which means that the data brought below is
indicative only and its purpose is to allow the owner of each class of
shares to make a quantitative examination of the size of the consideration
allocated to him.
4. I was not asked to refer to and did not refer to a central issue related to
the value of the Bank in the matter of THE BANK'S DEMAND FROM THE MINISTRY
OF FINANCE FOR INTEREST ON THE BANK'S PERPETUAL DEPOSIT INTENDED FOR THE
PAYMENT OF ACCUMULATED DIVIDEND FOR THE PREFERENCE SHARES. One may assume
that in the event of liquidation the Bank's claim against the Ministry
would be resolved by a legal process the results of which cannot be
predicted. Conversely, the consent on behalf of all the Bank's shareholders
for a sales process would probably be based on a settlement in the matter
of the deposit interest and thus make the legal procedure unnecessary.
5. The value of the Bank under liquidation or sale as a going concern depends
on two additional factors:
a. The interest rate the Bank will be required to pay for the special
line of credit from the Bank of Israel. The Bank is waiting for the
Governor's decision regarding a refund to the bank as a result of
excess interest collected between 8.2002 and 7.2003 in the amount of
some NIS 79 million. This proposal is based on the assumption that the
entire sum will be returned to the Bank. The bank's value under
liquidation or as a going concern will vary depending on the sum
actually refunded.
b. The financial outcome of the realization of the public credit
portfolio under liquidation or in a going concern situation. Appendix
B details the assumptions I made regarding the realization of the
credit portfolio, and is sufficiently detailed for users to posit
their own estimates.
- ----------
(1) This document is a translation of the original document submitted to the
representatives of shareholders in March 2008.
- --------------------------------------------------------------------------------
Aviv Tower, 49th Floor
7 Jabotinsky St, Ramat Gan 52520
Tel 03-6114061, Fax. 6114062 office@barnea.net
- --------------------------------------------------------------------------------
6. The Bank's December 31, 2006 and September 30, 2007 Board of Directors
Reports and Financial Statements are detailed and refer to the above issues
clearly and precisely. For the sake of brevity, I am assuming that the
information included in the reports is common knowledge and shall not
repeat it here,
A PROPOSED FRAMEWORK FOR THE DISTRIBUTION OF THE CONSIDERATION FROM THE SALE OF
THE BANK'S SHARES.
7. The starting point for the proposed distribution framework is the value of
the bank under liquidation. A detailed estimate of this value is included
in Appendices A and B. The assumption is that under liquidation, without
interest being paid on the perpetual deposit and based on a reasonable
estimate of the value of the credit portfolio to be sold in bulk or
separately, the ENTIRE consideration shall be distributed between
Preference C, CC, CC1, D and DD shareholders. In my opinion, based upon the
data in the appendices, assuming that interest is not paid on the perpetual
deposit, the consideration shall not suffice for full compensation (see
definition below) of these Preference shareholders.
8. Full compensation for Preference C and D shareholders includes:
a. Payment of the entire principal according to the linkage terms.
b. Payment of accrued interest of 6% to Preference C shareholders and
7.5% to Preference D shareholders.
9. The estimate of the return from the sale of the Bank's shares as a going
concern, is, according to my estimates, some NIS 200 million higher than
the sum achievable in the liquidation alternative (see Appendix C),
therefore, reaching an agreement permitting a proper and quick sale
procedure is justified.
10. The capital notes issued by the Bank are senior to all classes of shares
(like deposits) and shall be redeemed prior to the Preference shares. In
the following calculation, the capital notes are included as deposits.
11. A proposed distribution framework between shareholders in a situation in
which the Bank is sold as a going concern is detailed as follows:
a. The Bank's value under liquidation and the sum to be distributed
between C and D shareholders if the bank is liquidated, after the
repayment of all the Bank's more senior liabilities (public,
government and Bank of Israel deposits, employees, capital notes and
liabilities), and the liquidation of all its assets, shall be
determined. This sum shall be designated by the letter P. The sum P
less the cost of purchasing D shares held by the public, shall be
defined as the minimum price in the tender for the Bank's sale as a
going concern, and be designated by P* (as it is possible that proper
management of the tender will require the setting of a different
minimum sum, the table below also includes a lower value, according to
my estimates, than the current value of the Bank under liquidation).
b. The process of selling the shares of the Bank as a going concern shall
commence. We shall designate this sum with the letter M. My assumption
is that M is greater than P*.
c. The distribution framework deals with the distribution of the sum M
received from the sale of the Bank's shares as a going concern between
the following shareholders
1) Preference C and D shareholders for the purpose of completing the
full compensation sum.
2) Ordinary Preferred shareholders.
3) Ordinary A shareholders.
4) B1 shareholder.
12. The Ordinary Preferred shareholders are inferior in relation to Preference
shareholders and will receive nothing upon liquidation. On the other hand,
Ordinary Preferred shareholders have voting rights (6%) and are capable of
delaying the sales process. Based on this and other public considerations
detailed in the letter I received from a representative of the
shareholders, the distribution framework proposes compensation to Ordinary
Preferred shareholders in the sales option, to the maximum sum of NIS 25
million as detailed below.
13. Ordinary class A shareholders are also capable of delaying the process of
selling the Bank as a going concern. Based on this consideration, the
distribution framework proposes certain compensation to Ordinaty class A
shareholders even if the sum received does not fully compensate Preference
D shareholders (only after Preference C shareholders are fully compensated,
this assuming that the dollar rate is under NIS 4.1).
14. A B1 share was issued to the government in return for its agreement to
change the perpetual deposit conditions to a CPI-linkage alternative. This
share does not have voting rights or dividends, but only a residual upon
liquidation. Realistically, a B1 share holder will receive nothing in the
liquidation option. The increase received by the State is significantly
lower than its contribution to the Bank in consenting to the change in the
terms of the perpetual deposit, but it reflects the inferior rights of the
B1 share both under liquidation and upon its sale as a going concern. As
compensation to the State for the B1 shares it holds under the proposed
distribution framework, I have taken into account an increase in the
State's portion of Ordinary A shares from 48.8% to 58.8% and a subsequent
reduction of the portion of the banks' and others' from 51.2% to 41.2%.
15. The sum of the dividends accumulated and not paid to Preference C
shareholders as of September 30, 2007 is NIS 56 million (assuming that they
are entitled to dividends under liquidation at a rate of 6% per year). I
suggest that the State allocate a sum of NIS 28 million from its share to
Preference C shareholders in return for their waiving their demand that
interest be paid for the perpetual deposit for the payment of the
accumulated dividend. The sum of the dividends to Preference C and D
shareholders shall be updated at the date of payment of the consideration
on the sale by the purchaser (according to the dollar rate and accumulated
interest on said date), and the State shall allocate from its share as a D
shareholder a sum of up to 50% of the dividends as determined for the
payment date. This allocation is only relevant for a situation in which the
consideration from the sale is low. If a higher sum is received the State
shall receive back the allocated sum and shall save the ENTIRE interest for
the perpetual deposit. In return for this State waiver, Preference C
shareholders shall waive their claims and cooperate with the sales process,
as detailed below.
16. Assuming that a sales process takes place, the Bank shall redeem from its
own means the Preference D shares held by the public with an estimated sum
of $8.3 million, and the accumulated dividends for these shares shall be
paid by the State. A sum of NIS 33 million ($8.3 million) was deducted from
the Bank's value in a sales process, and a sum of NIS 46 million, 33
million plus 13 million cumulative dividend, was deducted from the sum
accrued for Preference shareholders, for a sum total, based upon a dollar
rate of NIS 4.013, of NIS 589 million.
17. THE ESTIMATED VALUE OF THE BANK UNDER LIQUIDATION as of September 30, 2007,
as detailed in Appendices A and B, is NIS 484 million. Under liquidation,
and assuming that the perpetual deposit does not bear interest, the sum is
divided between C and D shareholders pro rata, based on the sum they are
owed, including dividends in arrears, and without the purchase of
Preference D shares from the public, i.e., 63% for Preference D shares and
37% for Preference C shares. Based upon the estimate in Appendix A, they
shall receive 76% of the sum they are owed (including the dividends in
arears). The remaining shareholders will receive nothing.
18. THE FOLLOWING IS THE PROPOSED DISTRIBUTION BETWEEN THE SHAREHOLDERS
ASSUMING THE BANK IS SOLD AS A GOING CONCERN. My estimate of the Bank's
value as a going concern is as detailed in Appendix C, NIS 651 million. The
MINIMUM sum for which the Bank will be offered for sale as a going concern
was determined based upon its value under liquidation and is (at least) NIS
484 million less the sum of NIS 33 million redemption sum of the D shares
held by the public, meaning NIS 451 million. I shall also refer to a lower
sum, NIS 400 million, in the event that market conditions change before the
actual sale.
19. The distribution of compensation between Preference C and D shareholders
when the Bank is sold as a going concern, is based upon the sum they are
owed, including dividends in arrears AFTER the purchase of Preference D
shares from the public. Preference C shares are entitled to 40% of the sum
(NIS 234/589 million, see table below) and Preference D shareholders to 60%
of the sum. As noted in Paragraph 15 above, the State agrees to compensate
a sum of up to 50% of the dividend owed to Preference C shareholders from
the funds for its Preference D shares. The below tables takes this sum into
account.
DISTRIBUTION OF CONSIDERATION FROM THE SALE OF THE BANK AS A GOING CONCERN
(NIS MILLIONS AS OF SEPTEMBER 30 2007)*
(ROUNDED TO NIS MILLIONS)
=============== ============= ============ ====================== ==========================================================
PREFERENCE ORDINARY
C AND D PREFERRED ORDINARY A SHARES
SHARES SHARES (INCLUDING B1) PREFERENCE C AND D SHARES
============= ============ ====================== ==========================================================
COMPENSATION
% REFUND TO OF PREFERENCE
GOVERNMENT PREFERENCE C C SHAREHOLDERS
SUM RECEIVED GOVERNMENT OTHERS PUBLIC C D SHAREHOLDERS FROM D
=============== ============= ============ =========== ========== ========== ============ ================ =================
400 389 11 0 0 184 205 79% 28
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
450 439 11 0 0 204 235 88% 28
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
500 487 13 0 0 223 264 95% 28
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
550 525 15 6 4 234 291 100% 24
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
600 563 18 11 8 235 328 100% 10
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
650 589 21 24 16 235 354 100% 0
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
700 589 25 51 35 235 354 100% 0
- --------------- ------------- ------------ ----------- ---------- ---------- ------------ ---------------- -----------------
750 589 25 80 56 235 354 100% 0
=============== ============= ============ =========== ========== ========== ============ ================ =================
*4.013 DOLLAR RATE.
NOTE 1
When the sum received is between levels, the distribution of the INCREASE from
the previous level is proportional to the sum to which shareholders are entitled
in their shift between levels. For instance, assume that the sum received is 525
million NIS, meaning half of the level between 500 and 550. Preference C and D
shareholders shall receive 487 plus half the difference between 487-525 meaning
487+19=506. Ordinary Preferred shareholders shall receive NIS 14 million and
Ordinary shareholders shall receive NIS 5 million, totaling NIS 525 million.
NOTE 2
Due to changes in the dollar's rate of exchange, changes will take place in the
distribution of the consideration. I do not possess Bank balance sheet data
updated to current dollar rates. The change in the dollar's rate of exchange
also applies to other of the Bank's assets and liabilities, and must not be
attributed only to shares. LET US ASSUME that the value of the Bank (in NIS) as
of the date of this document has not changed relative to the September 30, 2007
estimate. The rights of Preference C and D shareholders have eroded due to
appreciation and have increased due to cumulative dividends. The dollar rate has
appreciated by some 7% (NIS 3.76 as of the writing of this document compared to
NIS 4.013 on September 30, 2007). The cumulative dividend for this period is
some 2%, meaning that as a result, Preference shareholders rights have decreased
from NIS 589 million to NIS 563 million, with the NIS 26 million difference
transferred to Ordinary A shareholders. See table in Appendix D determining the
refund sum for each stock class based upon the value of the Bank and the
dollar's rate of exchange on the date of payment.
NOTE 3
C and D shareholder rights shall be calculated as of the date of the payment of
the consideration by the purchaser, including their cumulative dividend rights
and dollar rate adjustments (see Appendix D).
PREFERENCE SHARE RIGHTS AS OF SEPTEMBER 30, 2007(1)
========================== =============== ============ ============== ============== ============
ORIGINAL TOTAL
PREFERENCE C PREFERENCE AFTER AFTER
SHARES D SHARES REDEMPTION REDEMPTION REDEMPTION(2)
========================== =============== ============ ============== ============== ============
PRINCIPAL 178 288 (33) 255 433
- -------------------------- --------------- ------------ -------------- -------------- ------------
CUMULATIVE DIVIDEND 56 113 (13) 100 156
- -------------------------- --------------- ------------ -------------- -------------- ------------
TOTAL 234 401 (46) 355 589
========================== =============== ============ ============== ============== ============
4.013 NIS DOLLAR RATE.
20. The sales blueprint would benefit Preference C and D shareholders, as it
offers in a reasonable manner a full or nearly full compensation compared
to 76% + the sum under a legal dispute according to the liquidation option.
The State's NIS 28 million "contribution"(3) improves from their viewpoint
their minimum position. The maximum sum they'd be able to request in the
event of legal liquidation is NIS 56 million, which is their portion of the
accrued interest (at 6%).
(-) MARCH 9, 2008
------------- -------------
SIGNATURE DATE
- ----------
(1) See estimated alternate for 3.31.2008 data in Appendix E.
(2) Due to changes in the dollar's rate of exchange, the updated sum of
Preference share rights as of this report, including cumulative dividend
for the report date, January 13, 2008, at a dollar rate of NIS 3.76 NIS, is
NIS 563 million.
(3) Correct for September 30 2007 data.
APPENDIX A - INDICATION FOR THE ASSESSMENT OF THE VALUE OF THE BANK UNDER
LIQUIDATION BASED ON THE BANK'S STATEMENTS DATED SEPTEMBER 30, 2007
DATA FROM THE BANK'S SEPTEMBER 30 2007 STATEMENTS
1. Preference C and D share rights for cumulative dividend as of
September 30, 2007(4) 169 NIS Millions
Preference C and D share rights for principal repayment 466 NIS Millions
-----
TOTAL PREFERENCE C AND D SHARES 635 NIS MILLIONS
2. Value of credit portfolio in the Bank's books after specific
allowances and before a general NIS 47 million allowance 672 NIS Millions
Of that, credit not defined as problematic 325 NIS Millions
3. General allowance 47 NIS Millions
Specific allowance (not including
interests) 586 NIS Millions
Gross credit portfolio 1,258 NIS Millions
VALUE OF THE BANK UNDER LIQUIDATION (NOT INCLUDING INTEREST ON THE PERPETUAL
DEPOSIT)
Assets as per September 30 2007 financial statement less Israel
Electric Company 1,591 NIS Millions
Bank of Israel Interest Return Estimate 79 NIS Millions
Reduction due to realization of credit portfolio and other
assets.(5) (141) NIS Millions
-----
TOTAL ASSETS 1,529 NIS Millions
NIS Millions
Liabilities with priority over various shareholders 1,045 NIS Millions
Net for distribution 484 NIS Millions
Return to Preference C and D shareholders 484 :635 = 76%
- ----------
(4) At 6% for Preference C shares and 7.5% for Preference D shares.
(5) See details in Appendix B.
APPENDIX B - REALIZATION OF CREDIT PORTFOLIO UNDER LIQUIDATION
One must take into account that the remainder of the portfolio, even as regards
the non-problematic portion, is hard to collect, this because the credit balance
is after 5 years of collection efforts. The following estimates are based, among
other things, upon previous experience accumulated by the Bank regarding credit
portfolio purchase offers made under liquidation conditions, when a collection
platform familiar with the details and developments of the credit over many
years does not exist.
* 85% of the non-problematic credit
(a total of NIS 325 million) will have a
collection of: 276 NIS Millions
* 60% of the problematic credit
(a total of NIS 347 million) will have a
collection of: 208 NIS Millions
TOTAL CREDIT PORTFOLIO REALIZATION 484 NIS Millions
Realization of the portfolio's value in
the Bank's books, in percent 484:625= 77%
Reduction from book value 141 million NIS = 625-484
NOTE:
The estimate of the scope of collection has been set in current values, meaning
that collecting the sum in the future without adding interest would be equal to
a lower sum in current values.
APPENDIX C - VALUE OF THE BANK AS A GOING CONCERN
AS OF SEPTEMBER 30, 2007
INCREASES
Loss for tax purposes (After collection of
NIS 79 million for excess interest) 600 NIS Millions
Value of cumulative loss to the purchaser 50-60 NIS Millions
Estimated value of business platform 10-15 NIS Millions
CREDIT PORTFOLIO
Gross borrowers' debt of NIS 1,258 million (not including interest in arrears)
of which 325 million is not problematic.
My assumption is that realizing the credit portfolio as a going concern shall be
at the following proportions and sums:
95% From a non-problematic debt 309 NIS Millions
90% From a problematic debt after
specific allowances 312 NIS Millions
---
621(6)
Difference relative to liquidation 621-484= NIS 137 Million
Total increase to value of bank as going
concern 200 NIS Millions
TOTAL VALUE OF BANK AS GOING CONCERN
(not including arrangements for perpetual
deposit interest)
684 NIS Millions
Redemption of Preference D shares by the
Bank(7) (33) NIS Millions
TOTAL VALUE OF BANK AS GOING CONCERN 651 NIS MILLIONS
NOTE:
Determining the value of the Bank as a going concern is based upon my evaluation
that the ordinary income from interest on the NIS 620 million credit portfolio
covers the Bank's operating costs of NIS 30 million per year.
- ----------
(6) This sum is roughly equal to the net sum in which the credit is presented
in the Bank's balance sheet dated September 30, 2007, that being NIS 625
million (after a general allowance of NIS 47 million ).
(7) The $8.3 million (NIS 33 million ) sum is the Bank's estimate of the net
redemption of Preference D and DD shares held by the public. As
discrepancies exist in the listings of the public's holdings in these
shares, the presented sum is an estimate.
APPENDIX D - DISTRIBUTION OF CONSIDERATION ACCORDING TO THE SALE VALUE OF THE
BANK AND THE DOLLAR RATE AT PAYMENT DATE INCLUDING CUMULATIVE DIVIDENDS AS OF
MARCH 31, 2008
============ ============= ============== =============== ============== ======================== ==================
ORDINARY
PREFERENCE PREFERENCED PREFERRED ORDINARY A SHARES TRANSFER OF
C SHARES SHARES SHARES (INCLUDING B1) DIVIDENDS TO
============== =============== ============== ======================== PREFERENCE C
BANKS AND SHAREHOLDERS AT
DOLLAR RATE SALES VALUE GOVERNMENT OTHERS THE EXPENSE OF D
============ ============= ============== =============== ============== ============ =========== ==================
3.60 400 183 206 11 0 0 27
------------- -------------- --------------- -------------- ------------ ----------- ------------------
450 203 236 11 0 0 27
------------- -------------- --------------- -------------- ------------ ----------- ------------------
500 215 272 13 0 0 20
------------- -------------- --------------- -------------- ------------ ----------- ------------------
550 215 310 15 6 4 5
------------- -------------- --------------- -------------- ------------ ----------- ------------------
600 215 327 18 24 16 0
------------- -------------- --------------- -------------- ------------ ----------- ------------------
650 215 327 21 51 36 0
------------- -------------- --------------- -------------- ------------ ----------- ------------------
700 215 327 25 81 52 0
============= ============== =============== ============== ============ =========== ==================
3.80 400 184 208 11 0 0 29
------------- -------------- --------------- -------------- ------------ ----------- ------------------
450 204 238 11 0 0 29
------------- -------------- --------------- -------------- ------------ ----------- ------------------
500 222 266 13 0 0 27
------------- -------------- --------------- -------------- ------------ ----------- ------------------
550 227 298 15 6 4 17
------------- -------------- --------------- -------------- ------------ ----------- ------------------
600 227 334 18 11 8 3
------------- -------------- --------------- -------------- ------------ ----------- ------------------
650 227 345 21 34 23 0
------------- -------------- --------------- -------------- ------------ ----------- ------------------
700 227 345 25 61 42 0
============= ============== =============== ============== ============ =========== ==================
4.00 400 186 203 11 0 0 30
------------- -------------- --------------- -------------- ------------ ----------- ------------------
450 206 233 11 0 0 30
------------- -------------- --------------- -------------- ------------ ----------- ------------------
500 225 262 13 0 0 30
------------- -------------- --------------- -------------- ------------ ----------- ------------------
550 239 286 15 6 4 30
------------- -------------- --------------- -------------- ------------ ----------- ------------------
600 239 324 18 11 8 15
------------- -------------- --------------- -------------- ------------ ----------- ------------------
650 239 350 21 24 16 4
------------- -------------- --------------- -------------- ------------ ----------- ------------------
700 239 364 25 41 27 0
============= ============== =============== ============== ============ =========== ==================
4.20 400 188 201 11 0 0 32
------------- -------------- --------------- -------------- ------------ ----------- ------------------
450 208 231 11 0 0 32
------------- -------------- --------------- -------------- ------------ ----------- ------------------
500 227 260 13 0 0 32
------------- -------------- --------------- -------------- ------------ ----------- ------------------
550 242 283 15 6 4 32
------------- -------------- --------------- -------------- ------------ ----------- ------------------
600 251 312 18 11 8 19
------------- -------------- --------------- -------------- ------------ ----------- ------------------
650 251 338 21 24 16 15
------------- -------------- --------------- -------------- ------------ ----------- ------------------
700 251 381 25 25 17 0
============= ============== =============== ============== ============ =========== ==================
APPENDIX E - PREFERENCE SHARE RIGHTS AS OF MARCH 31, 2008
============================= =============== ================== ==============
PREFERENCE D
PREFERENCE C SHARES (AFTER
SHARES REDEMPTION) TOTAL
============================= =============== ================== ==============
PRINCIPAL 160 229 389
- ----------------------------- --------------- ------------------ --------------
CUMULATIVE DIVIDEND 55 98 153
- ----------------------------- --------------- ------------------ --------------
TOTAL 215 327 542
- ----------------------------- --------------- ------------------ --------------
RELATIVE PORTION 40% 60% 100%
============================= =============== ================== ==============
DOLLAR RATE OF 3.6 NIS
============================= =============== ================== ==============
PREFERENCE D
PREFERENCE C SHARES (AFTER
SHARES REDEMPTION) TOTAL
============================= =============== ================== ==============
PRINCIPAL 169 242 411
- ----------------------------- --------------- ------------------ --------------
CUMULATIVE DIVIDEND 58 103 161
- ----------------------------- --------------- ------------------ --------------
TOTAL 227 345 572
- ----------------------------- --------------- ------------------ --------------
RELATIVE PORTION 40% 60% 100%
============================= =============== ================== ==============
DOLLAR RATE OF 3.8 NIS
============================= =============== ================== ==============
PREFERENCE D
PREFERENCE C SHARES (AFTER
SHARES REDEMPTION) TOTAL
============================= =============== ================== ==============
PRINCIPAL 179 255 433
- ----------------------------- --------------- ------------------ --------------
CUMULATIVE DIVIDEND 60 108 169
- ----------------------------- --------------- ------------------ --------------
TOTAL 239 363 602
- ----------------------------- --------------- ------------------ --------------
RELATIVE PORTION 40% 60% 100%
============================= =============== ================== ==============
DOLLAR RATE OF 4.0 NIS
============================= =============== ================== ==============
PREFERENCE D
PREFERENCE C SHARES (AFTER
SHARES REDEMPTION) TOTAL
============================= =============== ================== ==============
PRINCIPAL 187 268 455
- ----------------------------- --------------- ------------------ --------------
CUMULATIVE DIVIDEND 64 113 177
- ----------------------------- --------------- ------------------ --------------
TOTAL 251 381 632
- ----------------------------- --------------- ------------------ --------------
RELATIVE PORTION 40% 60% 100%
============================= =============== ================== ==============
DOLLAR RATE OF 4.2 NIS
APPENDIX F - FORMULAS FOR THE DISTRIBUTION OF CONSIDERATION BY STOCK CLASS
ORDINARY PREFERRED AND ORDINARY A AND B1 SHARES
1. ORDINARY PREFERRED SHARES
The sum does not change along with the rate of exchange or payment date and
is set as a function of the sale values according to the following table:
===================== ===================
ORDINARY
SUM OF SALE PREFERRED SHARES
===================== ===================
400 11
- --------------------- -------------------
450 11
- --------------------- -------------------
500 13
- --------------------- -------------------
600 18
- --------------------- -------------------
650 21
- --------------------- -------------------
700 25
===================== ===================
2. ORDINARY A AND B1 SHARES
The sum does not change with the date of payment,
According to the format of the sale, assuming that Preference C and D
shareholders DID NOT RECEIVE FULL COMPENSATION, Ordinary shareholders shall
be paid the following:
===================== ===================
SUM OF SALE ORDINARY SHARES
===================== ===================
Under 500 0
- --------------------- -------------------
550 10
- --------------------- -------------------
600 19
- --------------------- -------------------
650 40
===================== ===================
Assuming Preference C and D shareholders HAVE BEEN FULLY COMPENSATED, the
shareholders shall be paid as follows:
================================================================================
[Full compensation for Preference C and D shares - sum to Ordinary Preferred
shares(8) - sum received from sale]
================================================================================
In both cases the State's share is 58.8%
- ----------
(8) According to the data detailed in the above table.
PREFERENCE C AND D SHARES
DEFINITIONS
 |  |  |
Estimated Principal: | Â | Â |
 |  |  |
 | Dollar Rate at Payment |  |
 | X   Shekel Principal | |
 | Base Dollar Rate |  |
Unpaid Cumulative Dividend: | ||
 | ||
Estimated Principal X[1 +[r X[95 ½ +(1/4* number of quarters to payment) ] ] - 1 ] | ||
Full Payable Sum | ||
Estimated Principal + Unpaid Cumulative Dividend | ||
3. PREFERENCE C SHARES
R=6%
- --------------------------------------------------------------------------------
THE LESSER BETWEEN:
Full payable sum |
or |
 |
0.4 x [ sum received from sale - sum to Ordinary Preferred shares |
 |
– sum to A and B Shareholders10 ] + [ unpaid cumulative dividend] x £ 0.5 |
 |
4. PREFERENCE D SHARES
R=7.5%
- --------------------------------------------------------------------------------
THE LESSER BETWEEN:
Full payable sum |
or |
 |
[sum received from sale - sum to Ordinary Preferred shares - sum to A and B shareholders - |
 |
sum to Preference C shares ] |
- ---------- (9) Representing the period between July 1, 2002 and December 31, 2007. (10) According to the definitions detailed above.
APPENDIX B
TO THE ARRANGEMENT APPLICATION
March 18, 2008
LETTER OF PRINCIPLES
Following the proposed blueprint for the process of the sale of the shares of
the Industrial Development Bank of Israel Ltd. ("the Bank") ("Sale Blueprint")
(attached as Annex "A") the undersigned parties, holders of shares of various
classes of the Bank ,hereby declare that they consent to the implementation of
the Sale Blueprint and are willing to co-operate in its execution and the
transfer of the Bank shares to an entity to be selected by the representatives
of the State ( the Purchaser"), pursuant to the Sale Blueprint and the following
principles ( the Sale Blueprint and the following principles are complementary.
However in the case of contradiction between the Sale Blueprint and the
following principles, the hereinafter stated shall prevail).
1. The parties undertake to support all the processes necessary for the
execution of the Sale Blueprint and to take all actions required for
that purpose. Likewise the parties undertake to participate at the
ordinary and extraordinary meetings and class meetings of the Bank and
to vote by virtue of the Bank shares held by them in favor of the
execution of the Sale Blueprint whether by themselves and whether by
means of their agents.
2. The consideration which will be paid by the Purchaser shall be
distributed between the State and the shareholders of the Bank of the
various classes in accordance with the formulas for the distribution
of the consideration according to the share class, as detailed in
annex "f" to the report prepared by Prof. Amir Barnea ( "the
Expert")(attached as annex "B").
3. The parties confirm it being known to them that this document is
subject to receipt of the approvals under the Law, including the
decision of the Ministerial Committee for Privatization Matters,
approval of the privatization procedure by the Finance Committee of
the Knesset and approval by the court for the arrangement pursuant to
Section 350 of the Companies Law-1999, which will be submitted to the
court by the Bank ("the Arrangement").
4. The shareholders of the Bank will bear the payment of the fees of the
expert, each one proportionately to his share of the consideration to
be paid by the purchaser as determined by the expert. The State will
provide interim financing of the fees and the bearing of the
proportionate share shall also be submitted to the Court for approval
as part of the final arrangement. Payment of the expert's fees shall
be deducted from the consideration to be received under the Sale
Blueprint, taking into consideration the interim financing borne by
the State.
5. A condition to the coming into effect of this Letter of Principles is
the approval by the general meeting of the Bank of the Letter of
Indemnity and the Letter of Exemption of the officers of the Bank.
The Letter of Indemnity and the Letter of Exemption shall come Into
effect upon the submission of the arrangement to the court pursuant to
Section 350 of the Companies Law.
6. Subject to the fulfillment of all that stated in this document and its
annexes, which form an integral part hereof, the parties undertake not
to raise any contention or claim against a party to this document, or
anyone on his behalf, in respect of the execution of the Sale
Blueprint or its cessation, and provided that each party acted in good
faith in the execution of his undertakings pursuant to this document.
Signatures of the Parties:
- ----------------- -------------------------------- ---------------
State of Israel Office of Advocate Efrati Galili Mr.Nissim Cohen
on behalf of the shareholders of on behalf of the
class C, CC of the Bank, detailed Shareholders of
in annex "C" attached. the Ordinary
Preferred shares
as detailed in
annex "C"
attached
- ------------------ -------------------------------- ---------------
Bank Hapoalim Ltd. Bank Leumi Ltd. Bank Discount Ltd.
LETTER OF PRINCIPAL CONSENTS BETWEEN THE STATE AND A PORTION OF THE HOLDERS OF
PREFERRED SHARES C', CC' AND CC'1 ("THE LETTER OF CONSENTSS WITH C' SHARES")
Following the Letter of Principles dated March 18, 2008 ("Letter of Principles")
between the shareholders of the Industrial Development Bank of Israel Ltd. (
"the Bank") , the parties reached the following consents ( the Letter of
Principles and the Letter of Consents with the C' shares, are complementary).
1. In the event that the sale to the Purchaser shall be finalized
pursuant to the proposed Sale Blueprint attached as annex "A" to the
Letter of Principles until December 31, 2009, then:
a. Within the framework of the arrangement it shall be set forth
that if the total consideration which shall be received from the
Purchaser is less than NIS 400 million, then the consent of the
State representatives to the finalization of the sale shall also
be subject to approval at the joint meeting of shareholders of
class C', CC' and CC'1 in a majority determined in Section 350 of
the Companies Law.
b. Within the framework of the arrangement it shall be set forth
that, subject to the actual payment of all the amounts due to
them in accordance with the Letter of Principles and this Letter
of Consents, the holders of Preferred shares C', CC' and CC'1
shall waive their claims and contentions, as shareholders of the
Bank, against the Bank, its Officers ,employees and interested
parties therein and against the State, including in relation to
payment of a dividend in respect of the period commencing July 1,
2002 and terminating on the date of the finalization of the sale,
or in connection with the perpetual deposit or its return to the
Bank.
2. The arrangement shall set forth that if for whatsoever reason the sale
has not been finalized pursuant to the Sale Blueprint until December
31, 2009 or a liquidation order was granted against the Bank or the
general meeting decided on a voluntary liquidation of the Bank (each
one of these: "Liquidation of the Bank") prior to this date:
a. The State shall pay the Bank 50% of the interest at the rate of
6% annually accumulating on the perpetual deposit in connection
with the Preferred shares C',CC' and CC'1 for the period
commencing July 1, 2002 until July 31, 2008. This amount shall be
paid on the date of liquidation of the Bank or on December 31,
2009, whichever shall be the earlier ("Date of Payment").
This amount shall bear linkage differentials and interest
according to the Interest and Linkage Settlement Law-1961
commencing July 31, 2008 and until the date of payment, which
shall be paid by the State on the date of payment. The payment by
the State shall be grossed-up pursuant to the agreements
regarding the perpetual deposit.
b. The Bank shall pay the holders of the Preferred shares C',CC' and
CC1' on the date of payment a dividend at the rate of 50% of the
Preferred accumulating dividend at the rate of 6% annually which
accumulated on their shares for the period from 1.7.02 until
31/7/08 together with linkage differentials and interest
according to the Interest and Linkage Settlement Law-1961,
commencing from July 31, 2008 and until the date of payment.
c. The State waives its claims and contentions against the Bank
and/or the liquidator of the Bank in relation to the payment of
50% of the dividend to the State as holder of Preferred shares D
and DD, for the period commencing July 1, 2002 and terminating on
July 31, 2008.
d. Subject to the payment of all the amounts due to them pursuant to
sub-paragraph b. above, the holders of Preferred shares C', CC'
and CC1' shall have no claim against the Bank, the interested
parties, the Officers or the employees of the Bank, in relation
to the non- distribution of a dividend for the period from July1,
2002 until the date of payment. To avoid any doubt, nothing in
the above-stated shall derogate from the rights of the said
shareholders to accumulate preferred dividend in respect of their
shares according to the Articles of the Bank including in
relation to the said period.
3. The arrangement shall determine that in any event, whether the sale to
the purchaser has been finalized in accordance with the proposed Sale
Blueprint, attached as annex "A" to the Letter of Principles, until
December 31, 2009 and whether for whatever reason the sale pursuant to
the Sale Blueprint has not been finalized until December 31, 2009 or a
liquidation order shall be granted against the Bank or the general
meeting decided on a voluntary liquidation of the Bank prior to this
date, the hereinafter stated shall apply:
a. The parties shall not object to the return to the Bank on July
31,.2008 or on the date of approval of the arrangement to be
submitted by the Bank to the court, whichever is the later of
them, of the perpetual deposit deposited with the Ministry of
Finance. The return of the said perpetual deposit shall serve the
Bank, first and foremost, for purposes of the full payment of the
special line of credit made available to the Bank by the Bank of
Israel.
b. Subject to the payment of all the amounts due to them in
accordance with the Letter of Principles and this Letter of
Consents, as the case may be, the holders of Preferred shares
C',CC' and CC1' shall waive their demands and contentions against
the State in relation to the payment of dividend for any period
whatever, in the past and in the future, or in connection with
the perpetual deposit or its return to the Bank.
c. Subject to the approval of the arrangement and its execution, the
Bank shall waive its demand and claims against the State in
connection with the payment of interest on the perpetual deposit
to the holders of the Preferred shares C',CC' and CC1' or the
return of the perpetual deposit pursuant to this agreement.
d. The aforesaid consents shall be included in the motion for
approval of the arrangement plan , pursuant to Section 350 of the
Companies Law 1999, which shall be submitted by the Bank for
approval by the court, and which shall become effective upon
receipt of the approval by the court of the arrangement plan.
e. If for whatever reason the approval of the court for the
arrangement plan is not obtained, then all the rights which the
parties had ,as the case may be, on July 8, 2007 shall be
reserved for them.
f. Should the court approve this arrangement, Originating Motion
1294/04 shall be struck out and likewise Civil Appeal 174/08
without an order for costs. It is agreed upon that the judgment,
the subject matter of the said Civil Appeal, binds the Bank and
the State only as far as their relationship regarding the various
C' shares' portion of the perpetual deposit.
--------------- --------------------------------------------
State of Israel Office of Advocate Efrati Galili in the name
of the holders of C' and CC' shares of the Bank
detailed in Annex "C" attached to the
Letter of Principles
APPENDIX C
TO THE ARRANGEMENT APPLICATION
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.
AN ASSESMENT OF THE DISTRIBUTION OF THE PROCEEDS FROM THE SALE OF THE BANK
AS PART OF THE PROPOSED PLAN RELATING TO THE SHARES HELD BY THE PUBLIC AT LARGE
ITZHAK SWARY LTD.
ITZHAK SWARY LTD.
FINANCIAL CONSULTING
- --------------------------------------------------------------------------------
ITZHAK SWARY
URI COHEN
MENACHEM PERLMAN
ALONA BAR ON
MAY 26, 2008
DR. RA'ANAN COHEN
CHAIRMAN OF THE BOARD OF DIRECTORS
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD. ("BANK")
DEAR SIR,
SUBJECT: AN ASSESSMENT OF THE DISTRIBUTION FORMULA PROPOSED BY PROF. BARNEA
RELATING TO PROCEEDS FROM THE SALE OF THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL
LTD. CONCERNING SHARES HELD BY THE PUBLIC
On April 22, 2007, the Bank published an Immediate Report giving notice, inter
alia, that the Ministry of Finance and the Government Companies Authority are
considering a possible sale and / or transfer of all of the Bank's issued and
fully paid up capital to a potential buyer (third-party). On June 17, 2007, the
Government Companies Authority published a "Request for Information," which
included said proposal.
According to the proposal, the buyer will purchase all controlling shares (or
close to 100% of them) and all the various classes of share capital of the Bank.
Additionally, the Bank will then cease to be a public company.
On March 9, 2008, Professor Barnea submitted, at the request of representatives
of Bank shareholders, a proposal for distributing the proceeds from the sale of
the Bank shares, which received initial approval from some of the shareholders
and the State ("Barnea Proposal"). The basis for the Barnea Proposal is that
from an economic standpoint, a sale of all Bank shares as a "going concern" is
preferred over any statutory liquidation. In addition, the Proposal considered
if as a result of any sale, there would be no worsening in the position of any
of the shareholders of the public at large.
We were asked by Bank management to consider if the proposed distribution of
proceeds, as presented in Prof. Barnea's opinion, protects the rights of the
shares held by the PUBLIC AT LARGE: Preference "C", "CC" and "CC1" shares
(hereinafter: Class "C" shareholders), Preference "D" and "DD" shareholders
(hereinafter: Class "D" shares held by the public at large), and the Ordinary
Preferred shareholders. Our opinion does not relate to any distribution between
the State and the Bank Group regarding Ordinary "A" and "B" shares (including
"B1"), and their considerations in this issue.
With this in mind, we considered if the Barnea Proposal could possibly harm the public shareholders. In our study, we compared the funds that would be received under the Barnea Proposal, with the funds that would be received under the alternative liquidation option (the liquidation value as of now is estimated at NIS 512 million, in December 2007 terms). Our study shows, that the Ordinary Preferred shareholders and Class "D" shareholders (these shares are held by the public at large) are not expected to suffer from the distribution, but rather, they will benefit significantly. - - The Preference shares are denominated in nominal terms, and accordingly grant only negligible rights vis a vis cumulative dividends, participating dividends and any refund of paid up capital on liquidation. The shares grant 6% of the Bank's voting rights, however, these rights have no significant control value because of their being spread out among the Preferred shareholders, and because most of the voting rights are held by the State and three banks. The Barnea Proposal offers these shareholders some NIS 11 - 25 million (approximately 2.4% - - 3.6% of the proceeds from sale). This offer is significantly higher than the value of the rights inherent in the shares in the event of liquidation. - - The Class "D" and Class "DD" Preference shares, which are linked to the US Dollar, grant cumulative dividend rights (7.5%) and rights to a refund of the cumulative dividends in arrears and the paid up capital on liquidation, subject to an order of priority on liquidation. In addition, the Class "D" and Class "DD" Preference shares are redeemable. According to the plan, the Bank will redeem the Class "D" and Class "DD" shares held by the public at large, including the cumulative dividends in arrears. As the redemption value is not less than the full paid up value (regarding Class "D" preference shares, the redemption value is higher because of a redemption premium), we are accordingly dealing with the maximum payment that said Class "D" shareholders could receive under the liquidation alternative. We do note that these shares are redeemed by the Bank itself, and thus the redemption value is not dependent on any proceeds from sale of the Bank. Regarding the Class "C" shareholders, the issue is more complex. The various Class "C" shares are linked to the US Dollar, grant cumulative dividend rights (6%), a participating dividend and a refund of cumulative dividends in arrears and of paid up capital on liquidation, all subject to an order of priority on liquidation. When considering the Bank's accumulated losses and the limitations imposed by the Bank's Articles of Association (as the Bank interprets them) regarding the distribution of dividends only from accumulated profits, the rights to a dividend which participates in profits has no significant value. Accordingly, the situation of a refund of cumulative dividends in arrears and total paid up capital reflects a MAXIMUM refund to Class "C" shareholders (hereinafter: "maximum refund" or "full refund.") The refund to Class "C " shareholders under the BARNEA PROPOSAL is based on the premise that the State will waive in their favor, as Class "D" and Class "DD" shareholders, an amount equivalent to 50% of the cumulative dividends in arrears, against which the Class "C" shareholders undertake to waive their claims against the State regarding payment of interest on the perpetual deposit (this issue is now under discussion in Court between the Bank and the State). Contrary to the position of the Preference shareholders and Class "D" shareholders from the public at large, a maximum refund to Class "C" shareholders is not guaranteed, and they may receive only a partial refund if the proceeds from any sale are low. For example, if the proceeds from the sale range between NIS 400 - 450 million, the maximum refund to Class "C" shareholders will not be greater than 85% - 94%, at an exchange rate of NIS 3.6 / US $1. If the Shekel exchange rate is lower, the Shekel - denominated proceeds constitute a higher percentage.
According to an indicative calculation of the value on liquidation of the Bank based on the financial statements as of December 31, 2007, and based on the assumptions adopted by the Barnea Proposal, it appears that the value on liquidation totals NIS 512 million, plus any additional compensation from the State reflecting the prospects of the claim for interest on the perpetual deposit in the amount of 50%, which would increase the value on liquidation (similar, - regarding the effect on the shareholders- of the waiver mechanism that was included in the Barnea Proposal). This evaluation of the claim's chances is reasonable in our opinion. Class "C" shareholders would have received on liquidation a full refund on the basis of an exchange rate of NIS 3.6 to US $1 (approximately NIS 215 million). Based on the above, we believe that a positive (internal) provision is required to the effect that the Bank will not be sold at a price less than its liquidation value (as of today, approximately NIS 512 million, in December 2007 terms), as calculated close to the date of sale, less funds required to redeem the Class "D" and Class "DD" Preference shares held by the public. Any sale at a lower price may harm the various Class "C" shareholders. Based on the above, it appears that the Barnea and Government Companies Authority Proposals are fair vis-a-vis shareholders from the public at large. Moreover, said criteria for determining the minimum price on sale appears reasonable in our opinion. Attached please find further details to the opinion. - ---X-- ITZHAK SWARY MAY 26, 2008
A. GENERAL
The Industrial Development Bank of Israel Ltd. ("Bank") was established in 1957
as a limited liability company. The Bank is a public company and is classified
as a mixed government company. Until 1989, the Bank was involved in investment
financing. During 1989, the Bank was licensed to operate as a commercial bank.
The Bank's credit portfolio focuses on credits to companies and mid-sized
businesses. The volume of credits to households is negligible. The Bank operates
through one branch, which is located in Tel Aviv.
Because of intensive deposit withdrawals during 2002, the Bank experienced
serious liquidity problems, after which the Bank was granted a special line of
credit by the Bank of Israel. During 2003 and after the Bank was not able to
sell its asset and liability portfolio as a single unit and within a short
period of time, the Bank's Board of Directors decided to adopt a "run off" plan.
The main principles of this plan include the supervised sale of Bank assets by
the end of the plan period (July 31, 2008) and a reduction in manpower and
operating costs, subject to the continued availability of the special line of
credit by the Bank of Israel. In accordance with the "run off" plan, the Bank
was prevented from providing new credits, and its operations are now focused on
collecting existing credits. The Bank is prevented from accepting new deposits
and it has ceased, in accordance with Bank of Israel directives, to renew
existing deposits, which have matured.
In a letter dated January 29, 2006, the Governor of the Bank of Israel notified
the Bank, that, inter alia, its banking license would be canceled as of August
1, 2008. During May 2007, the Bank of Israel gave notice that if the plan for
the sale of the Bank's shares (see below), would be completed before August 1,
2008; its banking license would be canceled on the date of executing the plan.
B. THE BANK'S SHARE CAPITAL STRUCTURE.
The Bank's share capital is made up of nine share classes, four of which are
traded on the Tel Aviv Stock Exchange. The following is a summary of the share
capital structure and principal rights that are attached to each share class:
PARTICIPATES IN TRADED ON THE PERCENTAGE OF PERCENTAGE
CLASS PROFITS STOCK EXCHANGE CAPITAL OF VOTING RIGHTS
------------------------------- ----------------- --------------- ---------------- ---------------
1. Ordinary "A" shares, NIS 0.1 + - 1.016% 93.78%
2. Ordinary Preferred shares,
NIS 0.001 + + 0.673% 6.22%
3. Ordinary "B" shares, NIS 0.1 - - 9.082% -
4. Preference "C" shares, linked
to the US $ + + 2.060% -
5. Preference "CC" shares + + 2.019% -
6. Preference "CC1" shares + + 3.503% -
7. Preference "D" shares - - 3.301% -
8. Preference "DD" shares - - 78.341% -
9. "B1" shares - - - -
--------------- ------------
Total 100.000% 100.00%
--------------- ------------
The following is a breakdown of capital and voting rights, by interested parties:
PERCENTAGE OF PERCENTAGE OF
CAPITAL * VOTING RIGHTS
------ ------
State of Israel 53.43% 45.78%
Bank Hapoalim Group - 11.77%
Bank Leumi Group 0.22% 19.32%
Discount Group 2.00% 9.5%
Public 44.35% 13.63%
------ ------
Total 100.00% 100.00%
------ ------
* Weighted percentage of holdings of "C", "CC", "CC1", "D" and "DD" shares
taking into consideration the value of the paid up share capital after linkage
to the US Dollar (the other shares are not linked and the percentage of paid up
share capital is negligible).
C. THE PROPOSED PLAN FOR SALE OF THE BANK'S SHARES.
On April 22, 2007, the Bank published an Immediate Report and gave notice, inter
alia, that the Ministry of Finance and the Government Companies Authority are
considering a possible sale and / or transfer of 100% of the Bank's issued and
fully paid up capital to a potential buyer (third-party). On June 17, 2007, the
Government Companies Authority published a "Request for Information," which
included the proposal.
According to the proposal, the buyer will purchase all controlling shares (or
close to 100% of them) and all the various classes of share capital of the Bank.
In addition, the Bank will then cease to be a public company.
As we were advised, the proposed plan in its final form will have two phases: in
framework of the first phase, the Bank will ask the Court to approve an
arrangement between it and its shareholders, under which Class "D" and Class
"DD" shares held by the public will be redeemed, while the other share Classes,
those held by the State, the Banks and the public, will be sold within a process
to be managed by the Government Companies Authority.
In the framework of the second phase, and after approval of the arrangement,
there will be a sale by the Government Companies Authority, which will be
entitled to sell said shares at a price that will not be less than the minimum
price set in the arrangement plan.
On March 9, 2008, Professor Amir Barnea submitted, at the request of
representatives of Bank shareholders, a proposal for distributing the proceeds
from the sale of the Bank shares, which received initial approval from some of
the shareholders and the State. A table of the proposed distribution is attached
to this document as appendix A.
D. CONSIDERATION OF THE PROPOSED DISTRIBUTION RELATING TO SHAREHOLDERS FROM THE PUBLIC We considered if the Barnea Proposal involves any possible harm to shareholders from among the public, by comparing funds that will be received under the Barnea Proposal, with funds that will be received on liquidation, which is the possible alternative, taking into account the Bank's accumulated losses and its operations during the "run off" plan during the last few years. E. ORDINARY PREFERRED SHAREHOLDERS. These shares entitle their holders to voting rights at the Bank's general meeting, to cumulative dividends of 8% (nominal) per year, to a participating dividend, and participation in the distribution of the Bank's excess assets on liquidation, all subject to an order of priority set by the Bank's Articles of Association. These shares are registered for trading on the Tel Aviv Stock Exchange. The rights to participate in profits are not relevant because of the Bank's accumulated losses. The voting rights attached to these shares (approximately 6%) have no significant value because they are spread out among the Ordinary Preferred shareholders, and because the core control is held by the State and the Banks. As of 31.12.2007, the paid up capital of Ordinary Preferred shares totaled NIS 1,000, while cumulative dividends in arrears totaled only NIS 440. The distribution formula offers compensation to said shareholders of a minimum of NIS 11 million and a maximum of NIS 25 million and is significantly greater than the value of any inherent share rights in the event of liquidation. F. CLASS "D" PREFERENCE SHAREHOLDERS FROM AMONG THE PUBLIC Class "D" and Class "DD" Preference shares entitle their holders to a cumulative dividend of 7.5% per year (linked to the US Dollar) and participation in the Bank's excess assets on liquidation, subject to an order of priority prescribed by the Bank's Articles of Association. The distribution formula allocates the proceeds from sale AFTER FULL REDEMPTION OF CLASS "D" SHARES THAT ARE HELD BY THE PUBLIC AT LARGE. The full redemption means that these shareholders will receive all funds that they were entitled to assuming liquidation. Class "D" shareholders will receive an amount that is higher than the amount that they would receive on liquidation, as the redemption value is higher (because of the payment of a redemption premium) than the value of refunding the paid up capital. These shares are redeemed by the Bank from its own resources and accordingly the redemption value is not dependent on any proceeds from the sale of the Bank. G. CLASS "C" PREFERRED SHAREHOLDERS Class "C", Class "CC", and Class "CC1" Preference shares entitle their holders to a cumulative preferred dividend of 6% per year (linked to the United States Dollar), to a participating dividend and participation in the Bank's excess assets on liquidation, subject to an order of priority prescribed by the Bank's Articles of Association.
The rights to participate in profits are not expected to be relevant because of
the Bank's accumulated losses.
The refund to Class "C" shareholders included under the Barnea Proposal is based
on the assumption that the State will waive 50% of the cumulative dividend
amount in arrears in their favor, and that the Class "C' shareholders undertake
to waive their claims against the State regarding payment of interest on the
perpetual deposit. Contrary to the position of the Preferred shareholders, and
Class "D" shareholders from among the public, a full refund to Class "C'
shareholders is not guaranteed, and they may receive only a partial refund
should the proceeds from sale be low (see the following table).
An indication of the Bank's value on liquidation, on the basis of the December
31, 2007 financial statements and on the Barnea Proposal, is attached as
Appendix B. On the basis of this calculation, the value of the Bank on
liquidation is approximately NIS 512 million. The table presents the funds that
the Class "C" shareholders are entitled to assuming liquidation(1), compared
with the funds that they are entitled to assuming sale, on the basis of the
Barnea Proposal.
PROCEEDS TO CLASS "C" SHAREHOLDERS
NIS 3.6/US$1 NIS 3.8/US$1
------------ ------------
EXCHANGE RATE EXPRESSED IN NIS MILLION
-----------------------------
Assuming liquidation alternative in the value of
NIS 512 million 187.2 186.7
Rate of return of total liabilities 87% 82%
Assuming a sale of: A. 400 183.0 184.0
B. 450 203.0 204.0
C. 500 215.0 222.0
D. 550 215.0 227.0
E. 600 215.0 227.0
F. 650 215.0 227.0
G. 700 215.0 227.0
The calculation of the indicative value on liquidation, DOES NOT TAKE INTO
ACCOUNT the Bank's claims regarding cumulative interest on the perpetual
deposits with the Ministry of Finance. If the State will be required to pay said
interest to the Bank, the return that the Class "C" shareholders will receive
will increase up to the maximum amount due them with regard to the claims.
We are not able to evaluate the prospects of the claim for interest on the
perpetual deposit, however, if the State was required, as part of the claim or
as part of any compromise, to pay 50% of the interest on the perpetual deposit
from the cumulative dividend, Class "C" shareholders would receive on
liquidation a full refund on the basis of an exchange rate of NIS 3.6 to the US
Dollar, as shown below.
- ----------
(1) Based upon accumulated dividend as of March 31, 2008.
NIS 3.6$/US$1
EXPRESSED IN
NIS MILLION
----------
REALIZATION value of assets and liabilities 512.4
Interest on the perpetual loan from the State (50%) 83.3
DISTRIBUTION OF LIQUIDATION PROCEEDS:
Cumulative dividend on Class "D" and Class "DD" Preference shares held by the public (15.4)
Cumulative dividend on Class "D" and Class "DD" Preference shares held by the
government (96.0)
Cumulative dividend on Class "C", Class "CC", and Class "CC1" Preference shares (55.1)
----------
Balance after payment of cumulative dividends in arrears 429.1
Refund of paid up capital - Class "D" and Class "DD" Preference shares held by the
public (35.7)
Refund of paid up capital - Class "D" and Class "DD" Preference shares held by the
government (222.6)
Total refund of paid up capital - Class "D" and Class "DD" Preference shares 258.3
Refund of paid up capital - Class "C", Class "CC", and Class "CC1" Preference shares (159.7)
----------
To the government, on account of Class "B1"share 11.1
----------
BREAKDOWN OF RECEIPTS BETWEEN THE STATE AND THE PUBLIC
Total payments to the State 246.5
Payments to the public - Class "D" and Class "DD" shares 51.1
Payments to the shareholders of Class "C", Class "CC", and Class "CC1" shares 214.8
----------
Total 512.4
----------
Rate of repayment of total liabilities to Class "C" shareholders 100%
----------
Based on the above, we believe that a positive (internal) provision is required
to effect so that the Bank will not be sold at a price less than its value on
liquidation (as of now, NIS 512 million, in December 2007 terms), as will be
decided close to the date of the sale, less any amount required to redeem the
par value of Class "D" and Class "DD" Preference shares held by the public.
Any sale at a lower price may harm the various Class "C" shareholders.
Subject to that stated above, it appears that the Barnea and Government
Companies Authorities Proposal is fair vis-a-vis the shareholders from among the
public. In addition, the criterion used to determine the minimum price on sale
is, in our opinion, reasonable.
APPENDIX A - DISTRIBUTION OF PROCEEDS AMONG THE SHAREHOLDERS
PURSUANT TO THE BARNEA PROPOSAL
TRANSFER OF DIVIDEND
TO CLASS "C"
PREFERENCE
SHAREHOLDERS, ON
US $ "C" "D" PREFER- ORDINARY ACCOUNT OF CLASS "D"
EXCHANGE VALUE ON PREFERENCE ENCE SHARES PREFERRED ORDINARY "A" PREFERENCE
RATE SALE SHARES (STATE) SHARES SHARES SHAREHOLDERS
- ----------- ------------ ---------- ------------- ---------------- ------------ ----------------------
3.6 400 183 206 11 0 27
450 203 236 11 0 27
500 215 272 13 0 20
550 215 310 15 10 5
600 215 327 18 40 0
650 215 327 21 87 0
700 215 327 25 133 0
3.8 400 184 205 11 0 29
450 204 235 11 0 29
500 222 265 13 0 27
550 227 298 15 10 17
600 227 336 18 19 3
650 227 345 21 57 0
700 227 345 25 103 0
4.0 400 186 203 11 0 30
450 206 233 11 0 30
500 225 262 13 0 30
550 239 286 15 10 30
600 239 324 18 19 15
650 239 350 21 40 4
700 239 364 29 68 0
4.2 400 188 201 11 0 32
450 208 231 11 0 32
500 227 260 13 0 32
550 242 283 15 10 32
600 251 312 18 19 19
650 251 338 21 40 15
700 251 351 25 42 0
APPENDIX B - AN INDICATION OF THE BANK'S VALUE ASSUMING LIQUIDATION
EXPRESSED IN NIS
MILLION NOTE
------------------ -------
Balance of cash and deposits as of December 31, 2007 33.8
CASH FLOWS FROM THE SALE OF ASSETS AND LIABILITIES
Refund to the Bank for excess interest 80.0 A
Sale of securities 44.9 B
Transfer of credits - Israel Electrical Company, and the back-to-back
deposit from the government- to a third party - C
Sale of the balance of the credit portfolio to the public 435.4 D
Sale of credits to the government 24.7
Sale of fixed assets 0.4 E
Sale of other assets 7.2
Repayment of a perpetual deposit from the Ministry of Finance (capital only) 848.8 F
Repayment of deposits from the public (54.6)
Repayment of deposits from banks (including credit facilities from the Bank of Israel) (481.2) G
Repayment of balance of deposits from the government (356.0) H
Repayment of perpetual deposits (0.1)
Repayment of capital notes (20.2)
Repayment of other liabilities (50.7)
----------------
BALANCE OF CASH AVAILABLE FOR DISTRIBUTION, NET 512.4
----------------
The following is an explanation of the determination of the realization value of
the various assets and liabilities.
a. We assumed that the Bank would receive a refund of excess interest that it
paid totaling NIS 80 million on the special line of credit received from
the Bank of Israel. The calculation of value on liquidation will be
affected by the amount of interest to be refunded.
b. SECURITIES - the average stock exchange value of the Bank's marketable
securities portfolio during the month ending 28.2.08 was NIS 1.5 million
less than book value. The value of all other securities, which are not
traded, was calculated at book cost.
b. CREDITS TO THE ISRAEL ELECTRIC COMPANY - credits to the public include
credits to the Israel Electric Company of NIS 4,963 million, which are back
to back against deposits from the government that were provided for this
credit. We assumed that the credits and deposits would be transferred to
the third party at book value, in concert with the Accountant General.
c. CREDITS TO THE PUBLIC - in order to get an indication, we adopted the
assumption posited by Professor Barnea of a collection of only 60% of
problematic credits, and 85% of credits considered not problematic.
d. FIXED ASSETS - includes equipment, computers, furniture, and automobiles.
We assumed that the fixed assets would be sold at 50% of their book value.
e. PERPETUAL DEPOSITS WITH THE MINISTRY OF FINANCE - we assumed that these
deposits would be repaid at their current value (that is, after considering
linkage to the CPI from 1987), HOWEVER, WE ASSUMED THAT ANY INTEREST, UP TO
THE CUMULATIVE DIVIDEND IN ARREARS WOULD NOT BE PAID BY THE GOVERNMENT.
f. DEPOSITS FROM BANKS - includes NIS 481.2 million for the special line of
credit from the Bank of Israel. We assumed that the Bank would repay these
credits in full, at their updated values.
g. DEPOSITS FROM THE GOVERNMENT (EXCEPT FOR A DEPOSIT AGAINST CREDITS TO THE
ISRAEL ELECTRIC COMPANY) - we assumed a full refund.
APPENDIX D
TO THE ARRANGEMENT APPLICATION
INSTRUCTIONS FOR THE SUMMONING, CONVENING, AND MANAGEMENT OF CLASS MEETINGS
(1) Class meetings that are convened will be as follows:
A. Ordinary A shareholders;
B. Ordinary B shareholders and Ordinary B1 shareholder ("Group B
Shares"), or passing of a written resolution by the shareholder in
lieu of the convening of the meeting;
C. Ordinary Preferred shareholders;
D. Preference C, CC and CC1 shareholders ("Group C Shares");
E. Preference D and DD shareholders ("Group D Shares").
(2) The meetings will be held within 60 days from the granting of the court
order, on a date set by the Bank and on the following hours:
Preferred Ordinary shareholders meeting at 09:30.
Group C shareholders meeting at 10:00.
Group D ordinary shareholders meeting at 10:30.
Group A shareholders meeting at 11:00.
The shareholders meetings will take place without the participation of the
State of Israel.
(3) The Bank will publish an announcement no less than 35 days in advance with
regard to the convening of the meetings. The notice will be published in
the manner specified in subsection (4) below, and will specify the
location, date, and time when each of the meetings will be convened.
(4) The Bank will notify the shareholders about the convening of the meeting.
The notice about the convening of the meeting will be prepared in
accordance with the Companies Regulations (Notice of General Meeting and
Class Meeting in Public Companies), 5760-2000, with the necessary changes,
and will be published as mandated by the Companies Regulations (Application
for Compromise or Arrangement) 5762-2002, ("Arrangement Regulations"). For
the sake of good order, an announcement about the convening of the meetings
will also be published via a notice in a newspaper widely distributed
across the United States. An announcement published in this manner will be
considered as delivered to the shareholders on the day it is published in
the newspaper.
(5) The date for determining eligibility of each shareholder to participate and
vote in a meeting will be set in accordance with Sections 182 (b) and 182
(c) of the Companies Law, with the necessary changes. A shareholder whose
shares are registered with a nominee company will prove his ownership of
his shares, in accordance with the Companies Regulations (Proof of
Ownership of Shares for the Purpose of Voting in a General Meeting),
5760-2000, with the necessary changes. The Bank will be entitled, at its
discretion, to accept proof of ownership of shares by other means.
(6) Notwithstanding the above, no resolution passed at a meeting summoned as
stated above will be invalidated because by error notice was not given
about the meeting to some shareholders of the class, or because said notice
was not received by every shareholder of the class for whom it was
intended.
(7) Unless otherwise determined by the court, the Chairman of the Board of
Directors of the Company or another director appointed by the Board of
Directors of the Company for this purpose will be appointed Chairman of the
meeting. The Chairman of the meeting will open the shareholders meeting
after it is made clear that the legal quorum necessary to start the
proceedings is present.
(8) At each of the shareholders' meetings, at least two shareholders who will
be present in person or by their legal representative, or by written proxy,
and holding or representing together at least one third (33.33%) of the
value of shares that have the right to participate in the class meeting,
excluding the value of the State's holding in the shares relating to that
meeting - will constitute a legal quorom. At group C and group D
shareholders class meetings, the value to be represented will be determined
on the basis of the following: One US Dollar per Preference C share; ten US
Dollars per Preference CC share; ten US Dollars per Preference CC1 share;
one hundred US Dollars per Preference D share; and one thousand US Dollars
per Preference DD share.
(9) If within half an hour from the scheduled start of the meeting there is no
legal quorum as stated above, the meeting will be postponed to the same day
in the following week, and if that day is not a business day, then to the
next business day immediately afterwards, at the same place and at the same
time; without the need for another notification; or to another day, place,
and time as the Board of Directors of the Bank decides, subject to giving
notification to that effect. If there is no legal quorum at the postponed
meeting as stated above, the shareholders present in person, or by their
representatives, or by their written proxy, and which are entitled to be
present, will constitute the legal quorum and will be able to discuss all
matters for which the meeting was convened.
(10) A shareholder, or his agent, is eligible to vote for part of the value that
he represents in favor and part against, at his discretion.
A shareholder has the right to vote by himself, or by his agent, or by
written proxy, or by submitting a statement giving his consent or
opposition to the plan.
(11) The required majority for a resolution at each of the meetings convened by
this application is the majority number of participants in the voting,
except for abstentions, which together have three quarters of the value
represented in the vote, which is in accordance with Section 8 above. In
the event of joint holders, only the vote of the first party of them
recorded in the Shareholders Registrar will be entitled to vote, either in
person or by an agent. The declaration by the Chairman of the meeting with
regard to passing a resolution or rejecting it and registration of this
matter in the minutes will serve as PRIMA FACIE evidence for this fact.
(12) The letter of appointment empowering an agent will be in writing, prepared
as stipulated in Regulation 25 (c) (4) of the Arrangement Articles and will
be signed by the principal or by his legal representative who has the legal
authority to do so in writing as required. If the principal is a
corporation, the appointment will be in writing signed with the company
stamp or by a company officer, or by a legal representative who has the
authority to do so. The letter of appointment or a copy of it certified by
a lawyer as being identical to the original will be deposited at the office
of the Bank no later than 48 hours before the date of the meeting for which
it is designated.
Notification of the consent or opposition to the Compromise and Arrangement
plan will be prepared as stipulated in Regulation 25 (c) (5) of the
Arrangement Articles and in accordance with the Companies Regulations
(Voting by Letter and Position Statements), 5765-2005, will be signed by
the shareholder and will be submitted to the Bank as is submitted the
letter of appointment, as stated in this subsection 12 above.
(13) The vote made in accordance with the conditions of the agent appointment
document will be valid even if prior to it the principal died or the letter
of appointment was voided, or the share that provides the right to vote was
transferred, unless written notification was made prior to the vote to
Registry Office of the Bank or to the Chairman of the meeting at which the
vote was held with regard to the said death, voiding or written transfer.
The members entitled to vote can vote either in person, by written proxy,
or by a legal representative, and if the member is a company, cooperative
society, entity of any kind, government, public or legal entity,
partnership, or group of persons (for the purpose of this section only:
"Company") by the legal representative legally appointed or by written
proxy. Appointment of a legal representative will be made in writing and
signed by the principal or his authorized signatory legally appointed, in
writing, for this purpose. If the member is a company, the authorization to
the signatory will be in writing in accordance with Memorandum to the
Articles of Association of the Company.
(14) The minutes of each of the meetings will be recorded in the minutes
register. The minutes signed by the Chairman of the Meeting will serve as
PRIME FACIE evidence for matters recorded therein.
(15) The Bank Secretary and any other person or persons authorized for the
purpose by the Bank will have the right to be present at the shareholders
meetings.
(16) The written resolution of the shareholders, signed by all the shareholders
entitled to participate in a particular meeting, will be considered for all
intents and purposes as passed at that meeting as a unanimous resolution.
APPENDIX E
TO THE ARRANGEMENT APPLICATION
OWNERSHIP TABLE
(AS OF JUNE 30, 2008)
PERCENTAGE OWNERSHIP OF THE
STATE OF ISRAEL IN THE PERCENTAGE OWNERSHIP OF THE
CLASS OF SHARE CLASS OF SHARES PUBLIC IN THE CLASS OF SHARES
- -------------- --------------- -----------------------------
Ordinary A 48.81% 51.19
Ordinary B 100% -
Ordinary B'1 100% -
Preferred Ordinary - 100%
Preference C 0.057% 99.943%
Preference CC 0.002% 99.998%
Preference CC'1 - 100%
Preference D 88.228% 11.772%
Preference DD 86.289% 13.711%
APPENDIX F
TO THE ARRANGEMENT APPLICATION
STATE OF ISRAEL
GOVERNMENT COMPANIES AUTHORITY
Jerusalem
16 Iyar 5768
21 May 2008
EXAMPLE OF SALE PROCESS STRUCTURE
The sale process of State shares (hereinafter: "the Sale Process") will be
carried out by means of an auction among the participants in the sale process
(and not via tender), in a number of main stages, as detailed below:
1. The publication of a notice in the press, in which the State of Israel
will announce that it is considering the possibility of selling the
shares sold in the context of the arrangement that was approved by the
court, in a single bloc, and invites any person (except for government
companies) interested in obtaining additional information with regard
to participation in the sale process to contact the Government
Companies Authority (hereinafter: "the Authority").
Government companies will not be permitted to participate in the Sale
Process, either individually or as part of a group.
The Authority reserves the right to initiate contact with other
parties, in any way that it sees fit, to inform them of its intention
to sell the shares being sold and to invite them at any time to
participate in the Sale Process.
2. The inquiry stage, in which the applicants will provide the
information required under the sale procedure that will be published
by the Authority.
3. A sorting stage of the candidates by representatives of the State, and
the selection of the candidates that will be invited to participate in
the continuation of the Sale Process.
As part of the sorting of the applicants, representatives of the State
will have the right to consider and to take into account, among other
things, the applicants' standing, including interested parties in the
applicants, using the following criteria, in whole or in part:
A. Suitable administrative capability;
B. Appropriate financial ability to acquire the shares being sold,
hold them, and operate the company as a going concern;
C. Honesty and integrity;
D. Absence of conflicts of interest between the business and
interests of the applicant and the interests of the State of
Israel and the interests of the company.
It is hereby made clear that the representatives of the State have the
right to return and re-sort the applicants until the submission of
quotes stage, and the applicant must comply with the requirements of
this clause, and the dates that will be set, as a condition for
submitting its quote.
4. The examination of the company's documents stage, in which the
applicants will be summoned, as determined by the representatives of
the State, to examine the company's documents in the information room
prepared by the company.
5. Signing of the candidates on the sale agreement stage.
6. Submission of quote stage, in which the candidates will submit quotes
for the shares being sold and will negotiate with representatives of
the State, severally or together, if that is what is decided by the
representatives of the State.
7. Selection of the preferred bidder stage.
8. Obtaining the consent of the Antitrust Authority Commissioner in
accordance with the Restrictive Trade Practices Law, 5748-1988, by the
preferred bidder, and any other certification required to complete the
Sale Process.
9. The stage of the transfer of the shares sold to the preferred bidder
and payment for them.
The above is intended to assist, and changes are possible in the stages
described above, including dividing the stages or changing the order of the
stages described above.
APPENDIX G/1
TO THE ARRANGEMENT APPLICATION
PROTOCOL NUMBER 349 AUGUST 26, 2002 PAGE 8
RESOLUTION NUMBER 2939
1. The Bank's Board of Directors welcomes the resolutions of the Bank of
Israel and the Ministry of Finance by which the Bank of Israel will make
available a credit facility to the Industrial Development Bank in order to
provide for the Bank's liquidity needs, and the Ministry of Finance will
agree that the deposits of the State of Israel at the Bank will be
subordinated to the deposits of the public at the Bank and the credit from
the Bank of Israel until the sale of the Bank's banking activities (assets
and liabilities portfolio), subject to the sale of the portfolio within a
few months.
During a 4-5 month period a due diligence will be performed on the banking
activities portfolio, so that upon its conclusion the portfolio will be
sold to one of the banks that will participate in the auction process.
2. Therefore and subject to the passing of the above resolutions of the Bank
of Israel and the Ministry of Finance, the Bank's Board of Directors
resolved to approve the above process for the sale of the banking
activities portfolio, to cooperate in order to implement it and to direct
the Bank's management as will be necessary.
3. The Board of Directors authorizes the Chairman of the Board and the Bank's
General Manager to finalize with the Bank of Israel the terms under which
it will make available the credit line to the Bank.
Dr. R. Cohen thanks the participants and adjourns the meeting.
(-)
--------
Chairman
APPENDIX G/2
TO THE ARRANGEMENT APPLICATION
RESOLUTION OF THE GOVERNMENT NUMBER 29 HEADED BY ARIEL SHARON
FORUM: GOVERNMENT
GOVERNMENT RESOLUTION NUMBER: 2492 DATE: SEPTEMBER 1, 2002
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD. ("BANK")
Resolved (One vote opposed):
To perform the following act, its purpose being to immediately stabilize the
Bank and create certainty for the depositors by insuring the proper functioning
of the Bank until the sale of the banking activities portfolio (assets and
liabilities portfolio) ("the Activities Portfolio") of the Bank:
1. Against the granting of a credit facility to the Bank by the Bank of
Israel, pursuant to Section 8 of the Banking Ordinance, in order to
bridge the liquidity needs of the Bank, if it will be necessary - the
deposits of the State of Israel at the Bank will be subordinated to
the deposits of the public at the bank today or credit from the Bank
of Israel granted in order to pay deposits, and this based upon the
resolution of the Bank's Board of Directors to sell the Bank's
Activities Portfolio within a few months.
2. During the period a due diligence will be performed on the Bank's
Activities Portfolio in order to set the value of the Portfolio, among
others, by banks participating in the sale process. Upon the
conclusion of the due diligence the Portfolio will be sold to the
bank/s who will participate in the sale process.
3. To authorize the Government Companies Authority and the Accountant
General in the Ministry of Finance to act, in concert with the Bank,
to implement this resolution including the sale of the Bank's
Activities Portfolio.
4. The Government duly notes that on August 26, 2002 the Bank's Board of
Directors resolved: "...to approve the sale process of the banking
activities portfolio, to cooperate in order to implement it and to
direct the Bank's management as will be necessary", attached hereto as
Appendix A (Page 3).
5. The Government duly notes the draft letter of the Accountant General
from August 27, 2002 regarding deposits of the government at the
Industrial Development Bank against loans to the Electric Company,
attached as Appendix B (Page 4).
APPENDIX G/3
TO THE ARRANGEMENT APPLICATION
RESOLUTION OF THE GOVERNMENT NUMBER 30 HEADED BY ARIEL SHARON
FORUM: MINISTERIAL COMMITTEE FOR TEXTS OF PROPOSED LEGISLATION
REGARDING THE STATE'S BUDGET
COMMITTEE RESOLUTION NUMBER: 26 DATE: JULY 29, 2003
GOVERNMENT RESOLUTION NUMBER: 741 DATE: AUGUST 21, 2003
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD. ("BANK")
The Chairman of the Committee opens the meeting.
The Deputy Accountant General presents the matter.
Participating in the Meeting: Ministers Binyamin Netanyahu, Meir Shitrit;
Messrs. Eldad Fresher, Avigdor Yitzhaki and David Klein.
Resolved (unanimously), to approve in principle the resolution regarding the
industrial Development Bank of Israel set forth in Appendix number 27-revised,
and to establish that the Minister of Finance together with the Governor of the
Bank of Israel will set the interest rate on the line of credit that will be
made available to the bank- such that it reflects the government's interest, in
such a way as not to create a differential between the obligation of the
government and the balance of the line of credit that the Bank of Israel made
available; and will be changed pursuant to Section 4 of the said resolution.
Further to the above:-
a. The above resolution will be amended, pursuant to the understanding to
be reached by the Minister of Finance and the Governor of the Bank of
Israel;
b. To authorize the Minister of Finance to approve, with the consent of
Ministerial Committee for Social and Economic Affairs, the amended
text of the resolution and to attach the text to the protocol of the
Ministerial Committee.
c. Pursuant to the above, following is the language of the resolution:
Resolved:
"In light of the difficulties uncovered in the sale of the bank's
assets and liabilities portfolio :as a single unit", according to the
letter of the Chairman of the Board of the bank to the Governor of the
Bank of Israel, the Accountant General and the Director of the
Government Companies Authority from February 2, 2003, and in order to
insure the proper functioning of the bank, to return the deposits to
the depositors and to realize its assets in a supervised process,
within 36 months. To approve the change in the operational framework
decided upon by the Government regarding the bank's affairs on
September 1, 2002, as follows:
1. The assets of the bank will be realized in a supervised process
during a defined period that shall not exceed 36 months from the
date of this resolution, this within the framework of the Run-off
plan (hereinafter: "the Plan) approved by the Bank's Board of
Directors and with the changes determined by the Accountant
General and the Government Companies Authority.
2. Against the granting of a credit facility to the Bank by the Bank
of Israel, pursuant to Section 8 of the Banking Ordinance, in
order to bridge the liquidity needs of the Bank during the period
of the Plan , the deposits of the State of Israel at the Bank
will be subordinated according to the letter of the accountant
General from August 27, 2002 attached as an appendix to the
Government's resolution from September 1, 2002 (with the
necessary changes).
3. The Government duly noted the statement of the Governor of the
Bank of Israel concerning his consent to continue to grant to the
Bank for the period of 36 months a credit line at an interest
rate that from now on will not exceed the Bank of Israel interest
and its balance during this period shall not exceed the line
utilization forecast set forth in the letter (attached hereto) of
the General Manager and Controller of the Bank to the Deputy
Supervisor of Banks from July 31, 2003, and in no event shall it
exceed 2.2 billion NIS. The bank will not utilize the special
line of credit or other sources to grant new credits.
4. In the event that after 24 months from the date of this
resolution there shall remain an unpaid balance for the credit
line from the bank to the Bank of Israel for the line of credit
that the Bank of Israel made available to implement the Plan,
this balance shall be transferred to the responsibility of the
government, subject to and on the condition that the interest on
the line of credit shall not exceed from the date of this
resolution the Bank of Israel rate. The government shall pay the
balance of the line of credit as aforesaid, by a monetary
transfer to the Bank of Israel within 12 additional months, in a
manner it shall determine.
5. The government duly noted the statement of the Bank of Israel
that it will examine the limitation of the banking license of the
Bank such that it shall reflect the limited nature of its
activities resulting from the Plan.
6. To authorize the Government Companies Authority and the
Accountant General to act, in concert with the bank and the Bank
of Israel, to implement the above, including setting milestones
for the implementation of the plan and supervision of its
execution, with the aim to shorten the length of the Plan as much
as possible.
7. The government duly notes that on February 27, 2003 the bank's
Board of Directors resolved to adopt the principles of the Plan
and that the bank intends to formulate soon a detailed and
updated plan to implement the Plan which will be put forward for
the approval of the Government Companies Authority and the
Accountant General.
8. The government duly notes that the Accountant General and the
Government Companies Authority will examine and will bring, as
needed, for the approval of the government an alternative
blueprint for the sale of the Bank's assets and liabilities
portfolio as a single unit or by any other means parallel to the
implementation of the Plan. The government duly notes that the
bank undertakes to cooperate and assist with these acts of the
Accountant General and the Government Companies Authority.
APPENDIX G/4
TO THE ARRANGEMENT APPLICATION
RESOLUTION OF THE GOVERNMENT NUMBER 30 HEADED BY ARIEL SHARON
FORUM: MINISTERIAL COMMITTEE FOR TEXTS OF PROPOSED LEGISLATION
REGARDING THE STATE'S BUDGET
COMMITTEE RESOLUTION NUMBER: 173 DATE: OCTOBER 10, 2005
GOVERNMENT RESOLUTION NUMBER: 4324 DATE: OCTOBER 26, 2005
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD. - EXTENSION OF RUN-OFF PLAN
The Chairman of the Committee opens the meeting.
The Deputy Accountant General presents the matter.
The Chairman of the Board of the Industrial Development Bank of Israel Ltd.
supplements.
The Chairman of the Ministerial Committee comments
Resolved:
Further to Resolution 741 of the Government from August 21, 2003 (hereinafter -
741) regarding the affairs of the Industrial Development Bank Ltd. (hereinafter
- - "the Bank"), to approve the extension of the period set in Resolution 741 for
the sale of the assets of the bank, pursuant to the following principles:
1. The remaining assets of the Bank will be realized in a supervised
process during an additional period that shall not exceed 24 months
from the end of the period established in Resolution 741, meaning,
until July 31, 2008, this within the framework of the Run-off plan
approved by the Bank's Board of Directors and with the changes
determined by the Accountant General and the Government Companies
Authority (hereinafter: "the Plan");
2. The Government duly notes the statement of the Governor of the Bank of
Israel concerning his consent to the realization of the remaining
assets of the Bank and the granting of a credit line to the Bank as
set forth in Resolution 741 (hereinafter - "the Line of Credit") this
beginning as of August 21, 2002 and until the end of the Plan as said
in Section 1 above. From the date of the resolution, the balance of
the credit line shall not exceed NIS 1.25 billion and during the
implementation of the plan it shall not exceed the amounts set forth
in the forecast detailed in Appendix A found with the Secretary of the
Government. The Bank will not utilize the special line of credit or
other sources to grant new credits.
3. Against the continued granting of a special line of credit to the Bank
by the Bank of Israel, the deposits of the State of Israel will be
subordinated according to the letter of the Accountant General from
August 27, 2002 attached as an appendix to the resolution of the
government from September 1, 2002 (with the necessary changes).
4. The government is responsible for the payment of the Line of Credit as
of July 1, 2005, on the condition that the interest thereon, until the
end of the Plan, shall not exceed the Bank of Israel rate of interest.
5. In the event, that at the end of the term of the plan, there shall be
a balance due for the credit line, the government shall pay the
balance of the credit line to the Bank of Israel until July 31, 2008.
6. The government duly notes the announcement of the Bank of Israel that
immediately after the payment of the balance of the credit, the
collateral that was given by the Bank to insure payment of the credit,
pursuant to an debenture from November 14, 2002, will be assigned to
the government. Also, the government duly noted the consent of the
Bank of Israel that no changes in the scope or make-up of the above
collateral will be effected, except for the change stemming from the
fact that this is a floating charge.
7. The government duly notes the notice of the Governor of the Bank of
Israel of the consent of the Bank for the immediate restriction of its
banking license such that it would reflect its limited activities
deriving from the Plan and including the restriction on the renewal of
deposits of the public deposited at the Bank and which matured. Also,
the government duly notes the consent of the Bank that the amended
license, as aforesaid, shall state that the license will be valid
until July 31, 2008 and after this date the bank will no longer have a
license.
8. The Accountant General and the Government Companies Authority will
act, in concert with the Bank and the Bank of Israel, to implement
this resolution, including establishing milestones for the
implementation of the Plan and supervision over its execution.
APPENDIX H
TO THE ARRANGEMENT APPLICATION
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
2007 ANNUAL REPORT
CONTENTS
PAGE
Report of the Board of Directors for the Year 2007 F-1
Management Review of the Financial Position and Results of
Operations of the Bank F-40
Certifications of the General Manager and the Comptroller F-50
Management and Board of Directors' Statement Regarding their
Responsibility for the Annual Report F-52
Financial Statements as at December 31, 2007 F-55
- --------------------------------------------------------------------------------
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 DECEMBER 31, 2007
At the meeting of the Board of Directors that was held on February 26, 2008, it
was resolved to approve the Bank's audited financial statements as of December
31, 2007. 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 growth rate of the gross domestic product in 2007 remained high, further to
the growth of recent years. The initial estimate of growth in 2007 is 5.1%,
similar to the data of 2006.
The representative exchange rate of the dollar as of December 31, 2007 was NIS
3.846 to the dollar, compared with NIS 4.225 on December 31, 2006, a decrease of
9%. The weakening trend of the dollar also continued at the beginning of 2008.
The Consumer Price Index rose by 3.4% in 2007, compared with a decrease of 0.1%
in 2006. The rate of increase constitutes a deviation from the target set by the
Bank of Israel, notwithstanding the aforementioned decline in the rate of the
dollar.
The Bank of Israel interest rate as of December 31, 2007 was 4.25% per annum,
versus 4.5% on December 31, 2006. In the first half of 2007, there was a
declining trend in the interest rate and at the end of June 2007, the Bank of
Israel interest rate was 3.5% per annum. In the second half of 2007, a process
began whereby the interest rate increased, so that by December 31, 2007, as
mentioned above, the interest rate amounted to 4.25% per annum.
THE FOLLOWING TABLE PRESENTS DATA REGARDING THE EFFECT OF THE INCREASE IN THE
"LAST KNOWN" CPI AND THE RATES OF DEVALUATION (APPRECIATION) OF THE SHEKEL IN
RELATION TO PRINCIPAL CURRENCIES:
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2007 2006 2005
---- ---- ----
% % %
---- ---- ----
Increase (decrease) in "last published" CPI 2.8 (0.3) 2.7
Rate of devaluation (appreciation) of the
shekel in relation to the dollar (9.0) (8.2) 6.8
Rate of devaluation (appreciation) of the
shekel in relation to the euro 1.7 2.2 (7.3)
Rate of devaluation (appreciation) of the
shekel in relation to the yen (3.3) (9.4) (6.7)
A DESCRIPTION OF THE BUSINESS AFFAIRS OF THE BANK AND 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.
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 blueprint for the sale of the shares
of the bank that was assessed by the Finance Ministry and the Government
Companies Authority, 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.
F - 1
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.
The report of the board of directors presented below and the financial
statements do not include a report on activity segments, mainly due to the
exemption granted to the Bank by the Supervisior of Banks regarding such
information.
A DESCRIPTION OF THE GENERAL DEVELOPMENT OF THE BUSINESS AFFAIRS OF THE BANK
YEAR AND FORM OF INCORPORATION
The Bank was incorporated in 1957 as a limited liability company. The Bank is a
public company and is defined as a mixed government company. Until 1989, the
Bank operated as an investment financing bank and its major area of operations
was the provision of long-term loans to finance investments. On June 4, 1989,
the Bank was granted a license to operate as a commercial bank (a "banking
license").
PRINCIPAL DEVELOPMENTS 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 Social-Economic Cabinet) 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 from October 30, 2005, the Governor of the Bank of Israel advised
of the extension of the special line of credit that had been provided to the
Bank, until July 31, 2008. The main provisions of the special line of credit are
described hereunder.
In his letter dated January 29, 2006 the Bank was notified by the Governor of
the Bank of Israel as follows:
>> The banking license the Bank received on June 4, 1989 will be
restricted so that the Bank cannot engage in any business it did not
engage in prior to the date of the license (until the date of the
license the Bank engaged in financing investments) and without
derogating from the generality of the aforementioned, the Bank will
not receive new deposits and will not renew deposits reaching their
current date of maturity, other than from shareholders.
F - 2
>> The Bank's banking license will be revoked as from August 1, 2008.
In its letter dated May 1, 2007, the Bank of Israel announced that if
the blueprint described below for the sale and/or transfer of the
shares of the Bank is carried out prior to August 1, 2008, the license
of the Bank will be cancelled as of the date the blueprint is carried
out.
For more information pertaining to the significance of the restricting of the
banking license, see below the chapter relating to the special restrictions and
constraints of the Bank.
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
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 2007, 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 Company Ltd.),
which as at December 31, 2006 amounted to NIS 848 million, decreased to the
amount of NIS 558 million as of December 31, 2007. The balance of public
deposits in the Bank, which at December 31, 2006 amounted to NIS 67 million,
decreased to NIS 55 million as of December 31, 2007. 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.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed if it is decided at
the conclusion of the Run-Off Plan to sell the Bank's asset and liability
portfolio as a single unit and within a short time.
A BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
The Finance Ministry and the Government Companies Authority are in the process
of assessing and taking steps to advance the blueprint for the sale of all of
the issued share capital of the Bank to a third party purchaser. As part of
this, on June 17, 2007, the Government Companies Authority issued a request for
information (RFI) in which it announced, among other things, that the Government
of Israel, through the Government Companies Authority, was requesting
information from parties interested in purchasing the Industrial Development
Bank of Israel Ltd. and was requesting that those interested parties submit
their requests on July 3, 2007. The RFI also included a description of the
proposed blueprint for the sale whereby, among other things, the holdings of the
State in the shares of the Bank, including the controlling shares (ordinary "A"
shares ) and the holdings of the other holders of controlling shares (the three
large bank groups: the Bank Discount Group, the Bank Hapoalim Group, the Bank
Leumi Group, and also First International Bank, IDB, and the Association of
Industrialists) will be transferred to the designated buyer, the shares of the
Bank that are traded on the Tel Aviv Stock Exchange and which are held by the
public will be purchased by the designated buyer, as part of the creditors
agreement pursuant to article 350 of the Companies Law - 1999, whereas
preference Shares D and DD held by the public will be redeemed and the accrued
preferred dividend in arrears will be paid in respect thereof. A detailed
description of the blueprint that was included in the RFI can be found in the
immediate filing issued by the Bank on June 17, 2007. As reported to the Bank by
the Government Companies Authority, on the date stipulated for submission of the
requests, July 3, 2007, eleven requests were received at the offices of the
Authority from companies and individuals.
F - 3
At the beginning of 2008, at the request of the State and other shareholders,
Professor A. Barnea prepared a proposal for the distribution of the proceeds to
be received upon the realization of the blueprint (if and when it is
implemented), among the various shareholders of the Bank. Professor Barnea's
document, which contains the proposed distribution formula and which is dated
January 13, 2008, was attached to the immediate filing issued by the Bank on
January 15, 2008. Among the ordinary shareholders of the Bank who requested the
proposal are Bank Leumi, Bank Hapoalim, Discount Bank, the financial
institutions which filed the suit against the Bank regarding the renewal of the
dividend distribution, and part of the holders of the Bank's ordinary preference
shares. It should be noted that the Bank is not in possession of information
that the State and the aforementioned shareholders have given their consent to
the distribution formula and even at this stage, it is impossible to know if and
when the blueprint will be implemented. In addition, the sale of the holdings of
the State in the Bank necessitates passage of a privatization resolution by the
Ministerial Committee on Privatization, a resolution which has not yet been
passed.
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 the principal terms are
as follows:
o The credit line will be in effect until no later than July 31, 2008.
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 notice of the Governor of the Bank of Israel regarding
extension of the line until July 31, 2008.
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 the "Bank of Israel interest
rate" (it is noted that before July 29, 2003 the utilized credit bore a
higher rate of interest).
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:
F - 4
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 December 31, 2007 was NIS
476 million, compared with NIS 751 million as at December 31, 2006. The utilized
balance as of December 31, 2007 is NIS 174 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 notification of the Governor of the
Bank of Israel regarding the extension of the line 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.
EXEMPTION FROM THE SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF A
DEVIATION FROM CERTAIN DEBT LIMITS
As stated in more detail in Note 1G of the 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 should be 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.
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 1.
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.
F - 5
CONTROL OF THE BANK
The Bank is a "mixed company" as defined in the Government Companies Law - 1975.
The means of control of the Bank (voting rights at the general meeting and the
rights to appoint directors) are held primarily by the State and the three large
banking groups: the Bank Leumi Group, the Bank Hapoalim Group and the Discount
Bank Group.
The percentages of the means of control in the Bank, held by each of the
aforementioned groups, are as follows:
The State of Israel - voting rights - 45.78%, rights to appoint directors -
48.81%.
The Bank Leumi Group - voting rights - 19.32%, rights to appoint directors -
20.60%.
The Discount Bank Group - voting rights - 9.50%, rights to appoint directors -
10.13%.
The Bank Hapoalim Group - voting rights - 11.77%, rights to appoint directors -
12.12%.
As reported to the Bank by Bank Hapoalim, according to the agreements between
Bank Hapoalim and the other shareholders, Bank Hapoalim was granted usage rights
to additional voting rights that constitute 1.55% of all of the voting rights
and additional rights to appoint directors that constitute 3.31% of the total
rights to appoint directors.
THE STRUCTURE OF THE BANK'S SHARE CAPITAL
The issued share capital of the Bank is comprised of nine types of shares, as
follows:
ORDINARY A SHARES - granting their holders the rights to appoint directors in
the Bank and most of the voting rights at the general meetings, the right to a
dividend at an annual rate of 6% (nominal), the right to a participating
dividend and the right to participate in the distribution of the surplus assets
of the Bank upon liquidation, all subject to the preference order set out in the
Bank's by-laws. These shares are held mostly by the State of Israel and by the
three large banking groups.
ORDINARY B SHARES - granting their holders the right to a dividend at an annual
rate of 3% (nominal), and the right to participate in the distribution of the
surplus assets of the Bank upon liquidation, all subject to the preference order
set out in the Bank's by-laws. These shares are held by the State of Israel.
ORDINARY B1 SHARE - granting its holders the right to a dividend at an annual
rate of 3% (nominal), and the right to participate in the distribution of the
surplus assets of the Bank upon liquidation, including receipt of the difference
between the increase in the CPI and the increase of the dollar which will be
paid to the Bank upon liquidation in respect of the perpetual deposits with the
Treasury, on the basis of the agreements between the Bank and the Treasury, all
subject to the preference order set out in the Bank's by-laws. This share is
held by the State of Israel.
ORDINARY PREFERRED SHARES - granting their holders voting rights at the general
meetings, the right to a cumulative preferred dividend at an annual rate of 8%
(nominal), the right to a participating dividend and the right to participate in
the distribution of the surplus assets of the Bank upon liquidation, all subject
to the preference order set out in the Bank's by-laws. These shares are listed
for trade on the Tel Aviv Stock Exchange and are held by the public in Israel.
PREFERENCE C, CC, AND CC1 SHARES - granting their holders the right to a
cumulative preferred dividend at an annual rate of 6% (linked to the U.S.
dollar), the right to a participating dividend and the right to participate in
the distribution of the surplus assets of the Bank upon liquidation, all subject
to the preference order set out in the Bank's by-laws. These shares are listed
for trade on the Tel Aviv Stock Exchange and are held mostly by the public in
Israel and a minority in the U.S.
PREFERENCE D AND DD SHARES - granting their holders the right to a cumulative
preferred dividend at an annual rate of 7.5% (linked to the U.S. dollar), and
the right to participate in the distribution of the surplus assets of the Bank
upon liquidation, all subject to the preference order set out in the Bank's
by-laws. These shares were listed for trade on the Tel Aviv Stock Exchange but
were delisted during the nineties. The shares are held mostly by the State of
Israel which purchased them from their holders in the U.S., and a minority by
the public (mainly in the U.S.).
For more details, see Note 14, 15, and 16 to the financial statements.
F - 6
INVESTMENTS IN THE CAPITAL OF THE BANK AND TRANSACTIONS IN THE SHARES THEREOF
A. In the past two years, no investments were made in the capital of the Bank.
B. Material transactions in the shares of the Bank conducted by an interested
party off of the stock market - in the past two years, the State purchased
Preference D and DD shares that do not participate in income. The number of
shares purchased in each of the years 2006 and 2007 and the purchase
prices, are as follows:
2007 2006
--------------------------------------------------------- -------------------------------------------------------
$ PRICE $ PRICE
QUANTITY PERCENTAGE HELD OF PER SHARE QUANTITY PERCENTAGE HELD OF PER SHARE
TYPE PURCHASED ACQUIRED SHARES PURCHASED TYPE PURCHASED ACQUIRED SHARES PURCHASED
---- --------- --------------------- --------- ---- --------- --------------------- ---------
IN CAPITAL IN VOTING IN CAPITAL IN VOTING
---------- --------- ---------- ---------
D 290 0.01% - 90 D 391 0.01% - 90
DD 308 0.44% - 1,000 DD 415 0.59% - 1000
The purchase of the preference D shares by the State was made, as far as the
Bank knows, further to a declaration included in a letter of the Finance
Minister, Mr. Pinchas Sapir, dated February 15, 1967 (which was addressed to the
Vice President of Capital for Israel Inc.) whereby the State of Israel intends
on purchasing D-type shares upon their being listed for trade on the Tel Aviv
Stock Exchange at prices ranging from 90% to 95% of their par value which stood
at $100 a share.
The purchase of the preferencered DD shares by the State was made, as far as the
Bank knows, further to a declaration included in the prospectuses in respect of
the issuance of those shares, whereby the Israeli Government agreed that if
these shares are offered for sale on the Tel Aviv Stock Exchange at any time
during the 20-year period after the issuance to the public, it would bring about
that their purchase would be done at a price equal to 90% of the $1,000 a share
at which they were issued, and from the 21st year after the issuance of the
shares, at a price equal to 100% of the aforementioned price at which they were
issued. The preference D and DD shares were delisted from the stock exchange in
1993 and their purchase by the State directly from their holders was done,
apparently, in lieu of guaranteeing their sales price on the stock market. Since
these purchases were apparently made further to and/or against the background of
the aforementioned declarations, and not as part of a regular sale from a
willing seller to a willing buyer, the Bank is of the opinion that there is no
room to derive from these transactions the price of the shares that were
purchased therein. As the above table indicates, these shares do not grant means
of control.
PREFERENCE SHARES PURCHASED BY THE STATE FROM U.S. RESIDENTS WITHOUT THEIR
HAVING BEEN REGISTERED IN THE SHAREHOLDERS REGISTRY
Further to examinations and verifications carried out by the Bank during the
past year, the Bank reached the conclusion that, of the 3,429 preferred D shares
(par value $100 each) and the 1,901 preference DD shares (par value $1,000 each)
registered in the name of the State in the Bank Agent's registry in the U.S. and
which are not registered in the books of the Bank and are not reported by the
Bank, 2,636 preference D shares and 1,306 preference DD shares should be
transferred and registered in the name of the State in the books of the Bank
(and at the same time remove them from the shares that are registered in the
names of the holders in the U.S.). At its meeting on February 26, 2008, the
Board of Directors of the Bank resolved to approve the transfer of the
aforementioned shares into the name of the State, subject to the receipt of
certain approvals from the State in connection with the correction of the
existing records in its name and the "surplus" stock certificates it has in its
possession. When the transfer is carried out, the percentage held by the State
in the capital of the Bank will amount to 81.82% instead of 79.92% as currently
reported. It should be noted that there is still a quantity of 30 preference DD
shares (beyond the quantity of 1,306 shares mentioned above) which were
apparently also purchased by the State, but due to a lack of information
regarding the details of the sellers, it is not currently possible to transfer
and register them in the name of the State in the books of the Bank.
F - 7
DIVIDEND DISTRIBUTION - CESSATION OF DIVIDEND DISTRIBUTION ON PREFERRED SHARES
The Bank has not distributed any dividends since the third quarter of 2002, when
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 185.4 million as of December 31, 2007. 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 185.4 million is comprised as follows: NIS 113.8
million is in respect of non-participating shares (D and DD) and NIS 71.6
million is in respect of participating shares (C, CC and CC1). Of this amount,
an amount of NIS 33.4 million is in respect of 2007 and is comprised as follows:
NIS 20.7 million is in respect of non-participating D and DD shares and NIS 12.7
million is in respect of participating C, CC and CC1 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 opening 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.
F - 8
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 preference 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 8, 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 preference shares
(Preference 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
preference 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 preference 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 by-laws
of the Bank, so that the by-laws 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.
See also Notes 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 21D of the
financial statements regarding the aforementioned originating motions.
SPECIAL RESTRICTIONS AND CONSTRAINTS OF THE BANK
The following special restrictions and constraints on the activity of the Bank
derive from the decisions of the Israeli Government and the Bank of Israel in
the matter of the Bank:
o According to a decision of the Ministerial Committee on Socio-Economic
Affairs, taken on October 10, 2005, the realization of the balance of the
Bank's assets in a controlled process will continue until July 31, 2008.
F - 9
o According to the letter of the Governor of the Bank of Israel dated October
30, 2005, the term of the special credit line, which constitutes the main
source of the Bank's liquidity needs, is until July 31, 2008.
o According to the aforementioned decision of the Ministerial Committee on
Socio-Economic Affairs, the Bank shall not make use of the special credit
line placed at its disposal by the Bank of Israel or from other sources,
for purposes of granting new credit. According to the aforementioned letter
of the Governor of the Bank of Israel, the Bank can continue using the
special credit line to bridge its liquidity needs required to fulfill its
current and banking liabilities.
o According to the aforementioned decision of the Ministerial Committee on
Socio-Economic Affairs, and the letter of the Governor of the Bank of
Israel, the amount of the special credit line shall not exceed NIS 1.25
billion at any time, and it shall be reduced in accordance with the
forecast that was attached to the letter of the Governor.
o According to the aforementioned letter of the Governor of the Bank of
Israel, the Bank is prohibited from participating in the inter-bank credit
procedure as part of the daily liquidity trading. This restriction will
continue to apply also after the repayment of the special credit line.
o According to the aforementioned letter of the Governor of the Bank of
Israel, any significant administrative expense which deviates from the
normal course of business of the Bank and has an impact on the results of
business operations, requires the approval of the Bank of Israel.
o According to the aforementioned letter of the Governor of the Bank of
Israel, restrictions were placed on the Bank in connection with the making
of deposits in other banks and the pledging of such deposits.
o The Governor of the Bank of Israel clarified in the aforementioned letter
that if the Bank of Israel finds it necessary, and to the extent that it is
necessary in the sole opinion of the Bank of Israel, it will consider
placing additional restrictions beyond those set out above, in connection
with the activity of the Bank, whether or not as a result of the
non-compliance with the objectives of the Run-Off plan.
o According to the debenture dated November 14, 2002 (amended on December 29,
2005), and as part of which the Bank placed a floating charge on part of
its assets in favor of the Bank of Israel, the Bank undertook, among other
things, not to make additional pledges on the aforementioned assets and not
to sell them, in any form whatsoever, unless it receives written permission
in advance from the Bank of Israel. Notwithstanding, the aforementioned
debenture stipulates that the floating charge created by it does not
prohibit the Bank or restrict it as part of management of its normal
business, including the fulfillment of its commitments, from receiving
repayments of or issuing credit. For more information in connection with
the aforementioned debenture, see Note 17 - Liens and Restrictive
Conditions.
o According to the notice of the Governor of the Bank of Israel dated January
29, 2006, the banking license granted to the Bank on June 4, 1989 will be
restricted such that the bank will not engage in a business in which it did
not engage prior to the date of such license. Without derogating from the
generality of the above, the Bank will not accept new deposits and will not
renew deposits that reached their current maturity except for those of
shareholders. The banking license granted to the Bank on June 4, 1989 was a
"banking license" pursuant to article 10 of the Banking Law (Licensing) -
1981 which enabled the Bank to operate as a commercial bank. Until that
time, the Bank operated pursuant to an "Investment Financing Bank" license
under article 16 of that law and its major activity was granting long-term
credit for purposes of financing investments, including granting credit
under the direction of the government from deposits for providing loans.
o According to the aforementioned notice of the Governor of the Bank of
Israel, the banking license of the Bank will be cancelled commencing on
August 1, 2008. If the blueprint for the sale of the Bank is implemented
prior to August 1, 2008, the Bank's license will be cancelled at the date
of the implementation of the blueprint.
F - 10
MATERIAL AGREEMENTS
THE PERPETUAL DEPOSIT AGREEMENT
In accordance with agreements (by way of an exchange of letters) entered into at
various times between the State and the Bank, the Bank deposited with the
Treasury the proceeds of the issuance of the Bank's preference shares, shares of
classes C, CC, CC1, D, and DD. Pursuant to these agreements, the Bank is
entitled to receive in respect of the amounts deposited by it, as above, dollar
interest at a annual rate of 7.5% of the dollar value of the amounts of the
deposit (as they were at the date of deposit), to be paid to the Bank by the
State in a grossed-up manner, on the dates on which the bank declares the
payment of a dividend in respect of those preferred shares, such that following
payment of various taxes and levies, the net amount of the interest to be paid
to the Bank by the State will amount to the aforementioned rate of 7.5%. The
principal amounts deposited by the Bank will be repaid to the Bank by the State
upon liquidation of the Bank or at the time and for the purpose of redeeming
preference shares of classes D and DD (which were issued as redeemable shares),
with these principal amounts being linked to the rate of the dollar, from the
date of deposit with the Treasury until October 1, 1987 and from October 1, 1987
until the date of their repayment to the bank, they will be linked to the higher
of the Consumer Price Index or the dollar. The deposit agreements stipulate that
the State shall not have a right of offset in relation to the amounts due to the
Bank in connection with the performance of the deposits thereof. For more
details, see Note 8 of the financial statements.
AGREEMENTS FOR THE KIBBUTZ DEBT ARRANGEMENT
As a result of difficulties suffered by the kibbutzim in Israel and the
organizations related thereto, between 1989 and 1999, a number of agreements
were entered into by the various kibbutz movements, the creditor banks and the
State of Israel.
The objective of these agreements was to refinance the debt of the kibbutzim and
the related organizations and to adapt the debt to the real abilities of the
debtors to repay the debt.
The agreements contain detailed mechanisms for handling these debts. As part of
the agreements, it was stipulated that the kibbutzim that were defined to be
assisted kibbutzim (in need of assistance) would be entitled to refunds of
certain interest differentials in respect of unsettled credit they received in
the past from the banks that are party to the agreement, to the writing off of
part of the balances of such credit and to restructure the repayment dates of
the balance of the credit.
The government financed 35% of the amounts written-off and deposited in the
banks funds to be used as a source for the restructuring of the payment dates.
Kibbutzim defined to be owners of real estate with potential for development
were required as part of these agreements to contribute their rights in the land
in return for part of the write-offs that were approved for them. For more
details, see Note 24 B(2) of the financial statements.
CREDIT TO THE ISRAEL ELECTRIC COMPANY LTD. FROM DEPOSITS OF THE STATE AND
STATE-GUARANTEED
According to a series of agreements entered into at various times during the
nineteen nineties, the Bank lent the Israel Electric Company Ltd. long-term
credits, the final repayment times of which are in the years 2020 - 2025, at a
total amount of $1.5 billion. The loans were granted from deposits made in the
Bank by the State at identical amounts and with identical repayment dates of
those of the credits. These credits are fully guaranteed (principal and
interest) by the State of Israel. The unamortized balance of these credits as of
December 31, 2007 was NIS 4,963 million and they constituted 89.9% of the total
balance of the public credit portfolio of the Bank as of that date.
AGREEMENT FOR THE DISMISSAL OF THE EMPLOYEES OF THE BANK
On December 26, 2002, a collective agreement was signed by the Bank, the New
General Histadrut and the bank's workers committee, applicable to the employees
of the Bank to whom the collective agreements in the Bank apply (and not to
those employees having personal employment contracts). The agreement was made
for a three-year period, with an option to extend the agreement for another
year. The agreement settled, among other things, the following issues:
F - 11
o The termination process and the right of management to dismiss employees as
part of the reduction in the Bank's activity.
o Reductions to be made in the salaries of the employees and in the fringe
benefits to which they are entitled.
o Special benefits and payments to be due to the employees of the Bank as a
result of dismissal, including additional severance pay beyond what is
stipulated by law, and the conversion of the right to additional severance
pay - in respect of employees having a certain amount of seniority and who
have a certain number of years remaining until they reach retirement age -
to the right of early pension.
On March 14, 2005, an additional collective agreement was signed by the
aforementioned parties, extending the aforementioned collective agreement (dated
December 26, 2002) until the earlier of the date on which the Bank's Run-off
Plan ends (including any change or extension of the Plan and approved by the
government) or December 31, 2007 (the "First Extension Agreement").
The First Extension Agreement also set out and clarified the following points:
A. Employees who, under the original agreement, are entitled to early pension
due to their dismissal, will be entitled to it until the age upon which
they are entitled to a regular pension from the pension fund of which they
are members, in accordance with the reform that was enacted in the Israeli
pension schemes after the signing of the original agreement.
B. Part of the items that the employees waived in the original agreement,
which were limited in time, will continue to apply during the period of the
new agreement.
On July 12, 2006, an additional collective agreement was signed between the
aforementioned parties (the "Second Extension Agreement") which extended for an
additional period the aforementioned collective agreement (dated December 26,
2002), as amended by the First Extension Agreement, until July 31, 2008 (the
date for the end of the Run-off Plan). The Second Extension Agreement also
stipulates that if the Run-off Plan is extended beyond July 31, 2008, the period
of the aforementioned collective agreement will also be extended until the date
to be set for the end of the Run-off Plan, but not beyond December 31, 2008.
The Bank set up the provisions in its books in respect of the agreement,
including the extension agreements.
The aforementioned agreements were approved by the Supervisor of Wages and
Employment Agreements in the Finance Ministry.
The items waived and part of the benefits set out in the abovementioned
collective agreements were also applied to some of the employees of the Bank who
are employed under personal contracts.
At present, with the end of the Second Extension Agreement coming near,
negotiations are being conducted for a possible additional extension and/or
change in the collective agreement from December 26, 2002.
LETTER OF INDEMNIFICATION FOR DIRECTORS AND OFFICERS
The Bank issued its officers and directors a letter of indemnification which was
approved by the general meeting of the Bank on August 8, 2002. According to the
letter of indemnification, the Bank undertook to indemnify its officers and
directors in respect of a monetary indebtedness placed on them in favor of
another person by a court ruling (including a ruling rendered as part of a
compromise and the ruling of an arbitrator approved by the court) and in respect
of reasonable litigation expenses (including attorney fees) levied against them
as a result of actions (defined as including acts of omission and decisions)
taken by them and/or to be taken by them by virtues of their being officers or
directors in the Bank or by virtue of any position or job that they fulfilled
and/or will fulfill at the request of the Bank or on its behalf in any company
in which the Bank held and/or will hold shares and in any other corporation and
business initiative in which the Bank invested or will invest, as long as these
actions are connected to one or more of the types of events detailed in the
letter of indemnification, which include, among other things, the following
types of events:
F - 12
o Issuance of shares
o Implementation of voting rights and rights to appoint directors in a
company in which the Company holds and/or will hold shares and/or another
corporation and/or business initiative in which the Bank invested or will
invest
o Voting for or against any decision in the board of directors, committees of
the Company, etc., corporations and/or initiative
o Realization of collateral given to the Bank
o Approval and/or furnishing of credits and other transactions taken as part
of the areas in which the Bank is allowed to do business in accordance with
the Banking Law (Licensing) - 1981
o Holding assets in trust
o Granting an underwriting commitment
o A transaction of the Bank in any assets undertaken on behalf of the Bank
itself
o Providing a report or notification pursuant to any law
o Receipt of licenses and permits
o Events connected to employee - employer relationships
o Privatization of the Bank and any course of action taken to advance the
privatization and/or in connection therewith
o Any refraining from doing one or more of the above matters
The overall and aggregate amount of the indemnification that may be paid under
the abovementioned letter of indemnification shall not exceed 25% of the
shareholders' equity of the Bank on the basis of its financial statements as of
March 31, 2002, which amounted to NIS 640.3 million. In other words, it shall
not exceed NIS 160.1 million, linked to the Consumer Price Index publicized in
respect of March 2002. The indemnification pursuant to the letter of
indemnification is subject to the provisions of the Companies Law and to the
various conditions detailed in the letter of indemnification. Please note that
as part of Amendment No. 3 of the Companies Law - 1999 (which was passed on
March 7, 2005), it was stipulated that an undertaking to indemnify (such as the
aforementioned letter of indemnification) has to be limited to events which the
board of directors believes are expected to occur as a result of the actual
activity of the Company at the time the commitment to indemnify was given and
limited to an amount or benchmark that the board of directors set, which are
reasonable under the circumstances of the matter. The question of the
applicability of the amendment to existing letters of indemnification and the
interpretation of the limitations have not yet been adjudicated in court and,
therefore, the consequences of the amendment on the aforementioned letters of
indemnification are uncertain.
See Note 21C of the financial statements.
AGREEMENT TO OUTSOURCE THE COMPUTER SERVICES OF THE BANK
According to an agreement dated December 23, 2003, signed between the Bank and a
company that provides outsourcing services, including IT services, the company
undertook to provide the Bank with current management and operating services in
connection with the Bank's computer system, operation and maintenance of
hardware, computers, peripheral equipment, communications and infrastructure
software, operation and maintenance of applications, making changes and
adjustments to the IT system, data security , etc.
The agreement was for a period commencing on January 1, 2004 and ends on
December 31, 2008. During the agreement period, the Bank is entitled to order
from the company changes, additions, updates and improvements to the Bank's
existing computer system and/or develop new systems. The Bank has a "bank of
hours" at its disposal for this purpose.
See Note 21B of the financial statements.
SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
A special line of credit was placed at the disposal of the Bank by the Bank of
Israel to bridge the Bank's liquidity needs. The terms of the line of credit
were set by the Governor of the Bank of Israel, details of which are presented
above in this report and in Note 1 of the financial statements.
F - 13
RISK FACTORS
RISK IN RESPECT OF THE QUALITY OF DEBTORS AND COLLATERAL
The risk that borrowers from the Bank will not meet their debts to the Bank is
an inherent risk of the activity of the Bank even during the implementation of
the Run-Off Plan. Even though the Bank reviews the condition of its customers on
a regular basis as well as the value of the collateral securing their debts, and
makes provisions on the basis of its assessments of the risk that the debtors
will not be able to repay their debts, it is possible that circumstances will
arise in the future that were not taken into account to date by the Bank,
including a deterioration of the condition of the customers and a decline in the
value of their collateral which will require the making of additional
provisions. The focusing of the Bank on the collection of credit and its
refraining from other activities, increase the impact that this risk will have
on the results of the Bank's operations in the event that the risk comes to
fruition.
SPREADING OUT THE CREDIT RISK
For details of the spreading out of the credit risk in connection with credit
concentration and concentration of the indebtedness of borrower groups, see
below the chapter on risk management.
INTEREST RISK, EXCHANGE RATE RISK AND INFLATION RISK
For details regarding these risks, see below the chapter on risk management.
SHARE PRICE RISK
The total volume of investment by the Bank in securities, as of December 31,
2007, amounted to NIS 46 million. Of this amount, an amount of NIS 34 million is
in traded shares. This value is based on the market prices as of the balance
sheet date. Such value is subject to the volatility of the prices of the shares
included in this item. Most of the investments in traded shares (NIS 32.9
million) are in respect of the shares of one company that is listed for trade on
the Tel Aviv 25 list.
LIQUIDITY RISK
Since the Bank is prohibited from raising deposits from the public, it depends
on the credit line from the Bank of Israel to manage its liquidity risk.
OPERATIONAL RISKS
Operational risks include risks deriving from acts of fraud, errors on the part
of bank employees, lack of proper documentation of transactions, failures and
faults in data processing, equipment or external systems of service providers,
and the absence of fair testing procedures and internal control. Notwithstanding
the fact that the Bank instituted various means of supervision and control with
a goal of minimizing the operational risks to which it is exposed, there is no
guarantee that such risks do not exist or that they will not be realized in the
future.
For additional details regarding operational risks, see below the chapter on
risk management.
LEGAL RISKS
During the course of its activity, the Bank is exposed to legal risks, including
the risk of loss as a result of the lack of the possibility to legally enforce
the fulfillment of an agreement. These risks are handled regularly by the Legal
Department of the Bank. There is no guarantee that all of the risks were taken
into consideration or that any given risk will not be realized in the future.
DEPENDENCY ON PROFESSIONAL MANPOWER DUE TO THE REDUCTION OF THE WORK FORCE
According to the Run-off Plan and the efficiency plan that accompanied it, the
Bank significantly reduced the number of its employees, which declined from 170
on January 1, 2002 to 43 on December 31, 2007. The ability of the Bank to
continue the successful implementation of the Run-off Plan is contingent on,
among other things, the continued employment of the same executives and
employees who have the crucial knowledge and acquaintance of the Bank's systems
and customers.
F - 14
DEPENDENCY OF THE BANK ON THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
In the absence of other sources of liquidity, the continued proper functioning
of the Bank is contingent on the existence of the special credit line placed at
the disposal of the Bank by the Bank of Israel until July 31, 2008.
Non-compliance by the Bank with the terms of the special credit line may
jeopardize the continued existence of the line. In addition, in a letter from
the Governor of the Bank of Israel dated October 30, 2005, regarding the
extension of the special line of credit, it was stated that in the event that
the Bank of Israel sees fit to do so, and to the extent that it finds it
necessary at its sole discretion, it will consider placing additional
restrictions on those already set out in the above letter in connection with the
activity of the Bank, either as a result of non-compliance with the objectives
of the Run-off Plan or not.
THE IMPAIRMENT OF THE PROFITS OF THE BANK AS A RESULT OF ITS INABILITY TO EXTEND
NEW CREDIT AND RECRUIT AND/OR RENEW DEPOSITS
Further to the decisions of the Socio-economic Ministerial Committee and the
Bank of Israel regarding the affairs of the Bank, the Bank is prohibited from
extending new credit and from raising and/or renewing deposits, and its activity
focuses on collecting its credit portfolio. Restricting the activity of the Bank
to collecting existing credit negatively impacts and will continue to negatively
impact on the ability of the Bank to generate financing and operational income
and its being prohibited from raising and/or renewing deposits impairs its
financing margins.
THE EFFECT OF THE RUN-OFF PLAN ON THE ATTITUDE OF THE DEBTORS OF THE BANK AND
THE COLLECTION ABILITY OF THE BANK
The circumstances of the bank and the limited horizon of the Run-off Plan may
have a negative effect on the willingness of its customers to meet their
liabilities to the Bank. On the one hand, customers may believe that in such
circumstances, it is possible to get the Bank to make concessions and other
leniencies, while on the other hand, they may feel that meeting their
liabilities does not guarantee them a long-term relationship with the Bank. As
noted above, Bank Management has been taking and will continue to take a tough
line in handling its collection problems. As a result, in recent years there has
been a significant increase in the Bank's collection and legal expenses and such
a trend may continue in the future as well.
THE STATUS OF THE BANK AT THE CONCLUSION OF THE RUN-OFF PLAN
In accordance with the decision of the board of directors of the Bank from July
26, 2005, and the decision of the Socio-economic Ministerial Committee from
October 10, 2005, the Run-off Plan of the Bank was extended until July 31, 2008.
According to the notice issued by the Governor of the Bank of Israel on January
29, 2006, the Bank's banking license will be cancelled on August 1, 2008. As
mentioned above, the Finance Ministry and the Government Companies Authority are
assessing and advancing a blueprint for the sale of the shares of the Bank, a
blueprint regarding which, at present, it is impossible to know whether or not
and how it will be implemented. It is unclear as to what the status of the Bank
will be when the Run-off Plan comes to its conclusion, whether or not it will
continue to operate and how. It is reasonable to assume that the final decision
on the future of the Bank will be influenced when the time comes by developments
in connection with the blueprint for the sale of the shares of the Bank and the
decisions of the Israeli government which took upon itself to repay to the Bank
of Israel the remaining balance of the credit line and against which repayment
of the line, is supposed to receive through endorsement from the Bank of Israel,
the floating charge generated by the Bank to guarantee the line.
F - 15
The following table sets out the risk factors and the extent of impact of the
risk on the Bank. The table was prepared in accordance with the instructions of
the Bank of Israel:
RISK FACTOR EFFECT OF THE RISK
------------------------------------------------------------------------------------------ ------
1 Overall impact of credit risk Medium
1.1 Risk in respect of quality of debtor and collateral Medium
1.2 Risk in respect of credit concentration Medium
1.3 Risk in respect of debtor / debtor group concentration Medium
2. Overall effect of market risks Low
2.1 Interest risk Low
2.2 Inflation risk Low
2.3 Exchange rate risk Low
2.4 Share price risk Low
3. Liquidity risk Low
4 Operational risks Low
5. Legal risks Low
6. Dependency on professional manpower due to the reduction in the work force High
7. Dependency on the special credit line of the Bank of Israel High
8. Impairment of profits of the Bank due to its inability to extend new credit and recruit and/or renew deposits High
9. The effect of the Run-off Plan on the attitudes of borrowers to the Bank and the collection ability of the Bank Low
10. The status of the Bank at the conclusion of the Run-off Plan High
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.
F - 16
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.
TAXATION
In 2007, the Bank was subject to corporate tax at a rate of 29% and payroll tax
levied on financial institutions at a rate of 15.5%. The overall tax rate
applicable to the Bank in 2007 was 38.5%.
Due to tax losses, no tax expenses were recorded during the period 2002 - 2006.
In 2006, the Bank recorded a salary tax receivable in an amount of NIS 2.8
million. This amount was included in "Other assets". In 2007, a tax expense was
recorded in an amount of NIS 1.6 million, due to the fact that the tax loss
carry-forwards from prior years cannot be offset against the profit tax
applicable to banking institutions in accordance with the VAT Law.
The Bank received final tax assessments through the 2003 tax year.
Tax losses in respect of which no deferred taxes were recorded amounted to NIS
719 million. The overall tax rate applicable to the Bank in 2008 is 36.8%, in
2009 - 35.9% and in 2010 - 35.1%.
LEGAL CLAIMS AND OTHER CONTINGENCIES
Note 21D of the 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.
DEVELOPMENT OF INCOME AND EXPENSES
NET INCOME - The Bank's net income amounted to NIS 22.2 million in 2007,
compared with a net loss of NIS 17.1 million in 2006. The net income in 2007 was
affected mainly by the increase in interest revenue collected in respect of
problematic debts which amounted to NIS 17.4 million, compared with NIS 9.4
million in 2006 and from the fact that in 2007, income of NIS 13.8 million was
recorded to the provision for doubtful debts, compared with an expense of NIS
21.7 million in 2006..
PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS -
amounted to NIS 29.3 million in 2007, compared with NIS 18.2 million in 2006.
The increase in profit from financing operations resulted mainly from the
following:
- - The increase in revenues from interest collected on problematic debts which
amounted to NIS 17.4 million compared with NIS 9.4 million in 2006.
- - A decrease in the volume of problematic debts classified as non-interest
bearing. The average balance of non-interest bearing debts in 2007 amounted
to NIS 109 million, compared with NIS 242 million in 2006. The balance of
these debts constituted 13.7% of total monetary assets (excluding credit to
the Israel Electric Company guaranteed by the State), compared with 20.3%
in 2006.
- - 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 2007 was lower than the average interest
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.
F - 17
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 linkage segment.
An analysis of the Bank's financing operations in the various linkage segments,
according to Addendum C of the Management Review, indicates as follows:
UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 184 million in 2007, compared with NIS 364 million in 2006, a decrease of
49%. The margin in this segment, including the effect of derivatives, was 1.70%
in 2007, compared with 1.39% in 2006.
It should be noted that most of the non-income bearing debt is included in this
segment. The balance of such debt as of December 31, 2007 amounted to NIS 42
million, compared with NIS 125 million at December 31, 2006. The improvement in
the margin of this segment compared with 2006, derived both from the 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 455 million in 2007, compared with NIS 561 million in 2006, a
decrease of 18.9%. The decrease in the volume of activity of this segment
derives both from the overall decline in the activity of the Bank and from the
Bank's policy whereby credit renewed by the Bank is for short periods and mainly
in the unlinked shekel segment. The margin in this segment, including the effect
of derivatives, was 2.30% in 2007, compared with 2.58% in 2006.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The average overall
volume of assets in this segment amounted to NIS 5,602 million in 2007 compared
with NIS 6,406 million in 2006. Credit in this segment includes credit
guaranteed by the State that was granted to the Israel Electric Company 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 in 2007 amounted to NIS 5,445 million compared with NIS 6,143
million in 2006. Excluding the said credit, the average balance of assets in
this segment amounts to NIS 156 million, compared with NIS 264 million in 2006,
a decrease of 41%. The margin in this segment, including the effect of
derivatives, was 0.07% in 2007, compared with 0.08% in 2006. The low margin rate
in this segment is the result of the volume of State guaranteed credit, as
stated above. The credit guaranteed by the State and the deposit of the State
from which the credit is granted bear interest at a high rate. Due to their
heavy weight in the assets and liabilities and the negligible interest margin on
this credit, they distort the data referring to the margin in this segment. In
respect of this credit, denominated in dollars, an expense was recorded in 2007
in an amount of NIS 127 million (compared with an expense of NIS 89 million in
2006). The reason that in these years an expense was recorded in respect of this
credit was the decline in the rate of the dollar. As mentioned above, this
credit is guaranteed by the State and the margin in respect thereof is marginal.
Therefore, the amount of the income recorded in respect of the deposit of the
State granted as a source to finance the credit is similar in amount.
In an analysis made regarding the data of this segment, net of the
aforementioned credit and deposit, the data indicate a margin of 2.37% in 2007
(compared with 1.99% in 2006).
The average of the total financial assets (excluding state-guaranteed credit to
the Israel Electric Company) amounted to NIS 795 million in 2007, compared with
NIS 1,189 million in 2006, a decrease of 33%.
Regarding income from financing activity, it can be assumed that the policy
implemented by the Bank to reduce the activity of the Bank and the continued
decline in the volume of credit will continue to negatively impact on the income
from financing activity.
THE ALLOWANCE FOR DOUBTFUL DEBTS - An amount of NIS 13.8 million was recorded as
income in this item in 2007, compared with an expense of NIS 21.7 million in
2006. In the specific allowances for doubtful debts, income of NIS 7.3 million
was recorded in 2007, compared with an expense of NIS 27.6 million in 2006. The
supplementary allowance for doubtful debts reflected a decrease of NIS 6.5
million in 2007, compared with a decrease of NIS 5.9 million in 2006.
F - 18
The decrease in the supplementary allowance for doubtful debts is mainly due to
the decrease in the volume of problematic debts in general and to the volume of
non-income bearing debts in particular. This decline is gradual and has been
reflected in the financial statements of the Bank in recent years.
The supplementary allowance for doubtful debts (including a general allowance
for doubtful debts) amounted to NIS 45.2 million as of December 31, 2007,
constituting 7.5% of the balance of the credit (excluding State-guaranteed
credit to the Israel Electric Company out of the State deposit) before the
aforementioned allowance, compared with an allowance of NIS 51.7 million in 2006
which constituted 5.7% of the balance of the credit. 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 6.4% of the
balance of the credit (versus 4.3% at December 31, 2006).
F - 19
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
----- -----
DECEMBER 31, DECEMBER 31,
2007 2006
----- -----
Non-income bearing 69.7 171.2
Restructured (2) 31.5 74.1
Designated for restructuring (3) 17.3 26.9
Temporarily in arrears 8.7 14.5
Under special supervision** 181.7 208.5
----- -----
Total balance sheet credit to problematic borrowers (1) 308.9 495.2
Off-balance sheet credit risk in
respect of problematic borrowers (1) 81.2 88.0
----- -----
Overall credit risk in respect of problematic borrowers (1) (4) 390.1 583.2
===== =====
** Including an amount of NIS 169.7 million in respect of debts for which a
specific allowance exists (December 31, 2006 - 183.1 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.
A comparison of the data indicates a decrease in the volume of problematic debts
in general and debts classified as non-income bearing in particular. The
decrease in the volume of debts classified as non-income bearing derives from a
combination of the following factors: collection of debts from customers
classified as non-income bearing, and arrangements with some of these customers,
further to which moved over to a track of regular payments and were classified
as restructured.
Nevertheless, the data point to a high proportion of debts classified as
non-income bearing when compared to total public credit. The interest charges in
respect of these debts, which were not recorded to financing income, will have a
negative impact on the results of the Bank's operations in the future as long as
these debts are classified as non-income bearing. It is worth noting that
notwithstanding the decline in the volume of non-income bearing debts as a
result of the policy implemented by the Bank of collecting credit, it is
reasonable to assume that the negative impact of this debt on the results of
operations will continue to be significant. In connection with this it is worth
noting that the amount of the interest that will not accrue to income will be
affected both by the volume of the non-income bearing debt and the interest rate
in the economy. In the event that the Bank of Israel interest rate increases,
the negative impact of the non-income bearing debt on the amount of financing
income will be even greater.
Almost all 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 writs 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.
INCOME FROM FINANCING ACTIVITY AFTER THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
amounted in 2007 to NIS 43.1 million, compared to a loss of NIS 3.5 million in
2006.
F - 20
OPERATING AND OTHER INCOME - This income amounted to NIS 11.5 million in 2007,
compared with NIS 21.5 million in 2006. Most of the income derived from gains
from investments in shares which amounted to NIS 8.7 million in 2007, compared
with NIS 16.4 million in 2006. It should be noted that the total investment in
shares as of December 31, 2005 amounted to NIS 61 million, on December 31, 2006
to NIS 50 million, and on December 31, 2007 on NIS 46 million, so that the
income recorded in respect of the share portfolio in recent years was of a very
high rate, but there is no certainty that they will continue in the future.
Revenues from operating commissions in 2007 amounted to NIS 1.1 million,
compared with NIS 1.3 million in 2006, a decline that reflects the decline in
the transactions conducted by the customers through the Bank.
OPERATING AND OTHER EXPENSES - Amounted to NIS 30.8 million in 2007, compared
with NIS 35.1 million in 2006. Payroll expenses totaled NIS 18.5 million in
2007, compared with NIS 17.6 million in 2006. With regard to payroll expenses,
the following points should be noted:
- - Payroll expenses of 2007 included an amount of NIS 2.5 million in respect
of payroll tax. The payroll expenses of 2006 did not include payroll tax
since there was a loss for purposes of the profit tax in 2006.
- - Payroll expenses of 2007 included a provision in an amount of NIS 0.8
million in respect of an expense related to additional severance pay
approved to the Chairman of the Board of the Bank, the GM, and the deputy
GM, upon their retirement from the Bank (see Note 18A to the financial
statements).
Neutralizing the effect of these factors shows that there was a decrease of NIS
2.4 million in payroll expenses.
Maintenance and depreciation expenses for 2007 amounted to NIS 2.9 million,
compared with NIS 2.7 million in 2006.
Other operating expenses amounted to NIS 9.4 million in 2007,, compared with NIS
14.3 million in 2006. There was a significant decrease in the components of this
item as part of the efficiency plan that was implemented by the Bank in
connection with the Run-off Plan.
PROVISION FOR TAXES - The provision for taxes on profits in 2007, which amounted
to NIS 1.6 million and which derived from the losses carried forward from
previous years, cannot be offset against profit tax. The Bank received tax
assessments though the 2003 tax year. The Bank has tax loss carry-forwards of
NIS 719 million in respect of which no deferred taxes were recorded.
BALANCE SHEET AND CAPITAL RESOURCES
TOTAL ASSETS - As at December 31, 2007 amounted to NIS 6,483 million, compared
with NIS 7,516 million as at December 31, 2006, a decrease of 14%.
SHAREHOLDERS' EQUITY OF THE BANK INCLUDING PREFERENCE SHARES - Amounted to NIS
557 million as at December 31, 2007, compared with NIS 511 million as at
December 31, 2006.
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 amounted to NIS 447 million (compared with NIS 491 million
as at December 31, 2006).
Therefore, the shareholders' equity at December 31, 2007 amounted to NIS 110
million, compared with NIS 20 million on December 31, 2006. The increase in
shareholders' equity is comprised of the annual income of NIS 22 million, and
the difference between the revaluation of the perpetual deposit with the
Treasury which is linked to the Index and the revaluation of the preference
shares that are linked to the dollar. This gap amounted in 2007 to NIS 67
million and is expressed in the capital of the Bank and is reflected in the
statement of changes in shareholders' equity, without it being expressed in the
statement of operations.
Of the total amount in respect of the preferred shares which amounted to NIS 447
million at December 31, 2007, an amount of NIS 171 million is in respect of
profit-sharing preference shares (compared with NIS 187 million as at December
31, 2006). Until December 31, 2005, the profit-sharing 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 profit-sharing
preference shares (for details regarding this change, see Note 1D).
F - 21
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.
TOTAL CREDIT TO THE PUBLIC - As at December 31, 2007 amounted to NIS 5,521
million compared with NIS 6,519 million as at December 31, 2006. The credit data
presented below include credit guaranteed by the State that was granted to the
Israel Electric Company Ltd. out of a deposit of the State with the Bank, the
balance of which amounted to NIS 4,963 million as at December 31, 2007, compared
with NIS 5,671 million as at December 31, 2006. The decline in the volume of
this credit was affected also by the decline in the exchange rate of the dollar.
Net of such credit, the credit to the public amounts to NIS 558 million as at
December 31, 2007, compared with NIS 848 million as at December 31, 2006. This
data reflects a decline of 34% when compared to December 2006. The decline in
credit is in accordance with the credit portfolio reduction policy being
followed by the Bank, which policy is the major component of the Run-off Plan.
As can be seen by sorting the balances of public credit by the size of the
borrower's credit (Note 4D of the financial statements) and from the table of
public credit risk by industry (Addendum E of the Management Review), the credit
portfolio of the Bank focuses on credit to mid-sized companies and businesses.
The volume of credit to households is marginal and the weight of this credit in
the Bank is significantly lower than its weight in the general banking system.
The composition of the credit described above increases the sensitivity to
changes in the condition of the economy.
SECURITIES - The balance of securities as at December 31, 2007 amounts to NIS 46
million, compared with NIS 50 million as at December 31, 2006. The securities
portfolio includes an investment of NIS 12 million in mezzanine funds (NIS 17
million as of December 31, 2006). In addition, the securities portfolio includes
marketable shares in the amount of NIS 34 million (according to their market
value as at December 31, 2007). The market value of the shares includes
unrealized gains in the amount of NIS 9.5 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 income realized on the
investment in shares in 2007 amounted to NIS 8.7 million, further to the income
of NIS 16.4 million recorded in 2006. For information on the classification of a
customer debt to "Securities", see Note 4E of the financial statements.
DEPOSITS OF THE PUBLIC - Amounted to NIS 55 million as at December 31, 2007,
compared with NIS 67 million as at December 31, 2006. These deposits are
comprised of unlinked deposits in the amount of NIS 29 million, compared with an
amount of NIS 31 million as at December 31, 2006, CPI-linked deposits in the
amount of NIS 25 million, compared with NIS 33 million as at December 31, 2006,
and foreign currency denominated or linked deposits in the amount of NIS 1
million, compared with NIS 3 million as at December 31, 2006.
The Bank refrains from accepting new deposits and during 2005 it ceased renewing
deposits that have reached maturity, subject to certain exceptions. Please note
that about half of the balance of deposits as at December 31, 2007 and at
December 31, 2006 are deposits related to credit.
DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as at December
31, 2007 amounted to NIS 5,319 million, compared with NIS 6,087 million as at
December 31, 2006. 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
5,062 million compared with NIS 5,781 million as at December 31, 2006. The
decrease in the Government's deposits in foreign currency is affected mainly
from the decrease in the exchange rate of the dollar. Of the State deposits in
foreign currency, an amount of NIS 4,963 million derives from the deposit that
is designated for granting long-term credit to the Israel Electric Company Ltd,
compared with NIS 5,671 million at December 31, 2006. The credit and the deposit
have the same terms, except for a negligible margin that the Bank has on this
credit. As mentioned above, to secure this credit, the Bank also received a
State guarantee.
Another component of these deposits is the CPI-linked deposits that were
received as part of the arrangement of the Kibbutzim. These deposits served as a
source for rescheduling the debts of the kibbutzim. The balance of the
Government's CPI-linked deposits amounted to NIS 257 million, compared with NIS
306 million as at December 31, 2006. These deposits are long-term deposits paid
in installments, concurrent with the period in which the arrangement loans were
granted (until the end of 2013).
F - 22
In respect of government deposits, in 2007 the Bank recorded income of NIS 115.2
million. This was the result of the fact that the government deposit, which
serves as a source for the granting of credit to the Israel Electric Company is
dollar-denominated. Due to the decrease in the exchange rate of the dollar in
2006, income was recorded in respect of this deposit, since the negative
exchange rate differentials were higher than the interest in respect of the
deposit. In 2006, the income in respect of the government deposit amounted to
NIS 84.2 million.
DEPOSITS FROM BANKS - The balance of these deposits as at December 31, 2007
amounted to NIS 481 million, compared with NIS 768 million as at December 31,
2006. The entire balance as of December 31, 2007 derived from the special line
of credit which the Bank of Israel granted to the Bank. The balance at December
31, 2006 also included a deposit from a foreign bank, the balance of which at
December 31, 2006 amounted to NIS 7 million. This deposit was paid out during
2007. The utilized balance of the credit line declined during 2007 by an amount
of NIS 280 million. The utilized balance of the credit line on December 31, 2007
is lower than the framework set for the Bank, both for December 31 and for the
end of the Run-off Plan.
ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES AND CRITICAL ACCOUNTING
ESTIMATES
Note 1 of the 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.
We would like to make it perfectly clear that actual results may be different
than these estimates and assessments.
Accounting policy in respect of critical issues as set out below relates to
issues which are of importance to the description of the financial condition of
the Bank, which are difficult and subjective and which often require complex
assessment, as a result of the need to make estimates of effects which for the
most part are uncertain.
Some of the estimates and assessments used, involve a great extent of
uncertainty or dependency on many variables. Such types of estimates and
assessments may have a significant impact on the results of operations in the
financial statements.
In each of the critical issues detailed below, Bank Management makes use of the
best information it has in its possession. The board of directors and management
of the Bank are of the opinion that the estimates and assessments applied in the
preparation of the financial statements are fair.
The following issues were defined by the board of directors and management of
the Bank to be critical issues / estimates from an accounting standpoint:
PROVISIONS FOR DOUBTFUL DEBTS - The specific provision for doubtful debts is
made on the basis of the assessment of the Board of Directors and management
regarding the inherent losses in the Bank's credit portfolio, including in
respect of off-balance sheet items. The assessment of the Board of Directors and
management takes into account, among other considerations, the risks involved in
the financial strength of the debtors and in their repayment capabilities, on
the basis of the information in their possession regarding their financial
position and future cash flows, as well as in the condition and value of the
collateral received.
The financial strength of the debtors and their repayment capabilities are
contingent upon economic variables, part of which are not under the control of
the Bank and/or the customers.
The Management and Board of Directors of the Bank use external appraisers and
valuators in order to obtain an indication of the value of the collateral. For
example, the assessment of the collateral that pertains to real estate is
usually done by external appraisers who conduct appraisals for the Bank. The
value that is used for the provisions required for doubtful debts is usually
lower than the market value of the real estate, due to the constraints of quick
realization and the tax that would apply (if at all) upon the realization of the
real estate.
The amount that can be collected from the debtors is based, therefore, on
estimates which, by their nature, are subjective. The dependency on these
estimates cannot guarantee that the amount actually collected will be in
accordance with the assessment.
The total balance of the monetary debt (excluding off-balance sheet items) of
the debtors in respect of which there is a provision for doubtful debts amounted
to NIS 252 million as of December 31, 2007 (NIS 362 million as of December 31,
2006).
F - 23
The amount of the credit to the public in the financial statements is after
deduction of the supplementary allowance and the general allowance for doubtful
debts, the total balance of which as of December 31, 2007 is NIS 45.2 million
(December 31, 2006 - NIS 51.7 million). These allowances are in accordance with
the instructions of the Bank of Israel.
Bank Management classifies problematic debts on the basis of the classifications
and criteria set out in the Proper Banking Management Provisions. The
classification of debts is sometime subjective (such as the distinction between
a debt that is temporarily in arrears versus one that is in arrears, and the
classification of a debt under special supervision). Changes in such assessments
may have a material impact on the financial statements.
Bank Management and the Board of Directors review the allowances for doubtful
debts and the classifications of the customers on a quarterly basis and update
them where necessary.
The supplementary allowance is based on risk criteria set out by the Bank of
Israel. As mentioned above, the Bank of Israel exempted the Bank from the need
to make a supplementary allowance in respect of deviations from the restrictions
regarding the debts of borrowers and groups of borrowers, in respect of
deviations from the restrictions on the financing of the acquisition of means of
control in corporations, and in respect of deviations from restrictions on
concentration of debts. As a result, the supplementary allowance was made only
in respect of certain deviations relating to the absence of up-to-date financial
statements and in respect of credit balances of borrowers who are classified as
problematic borrowers.
FAIR VALUE OF SECURITIES - All of the securities held by the Bank are classified
as available for sale securities.
Marketable securities are presented in the financial statements at fair value.
The balance of marketable securities at market value as of December 31, 2007 was
NIS 34 million (on December 31, 2006 - NIS 33 million). This data does not
necessarily reflect the price that will be obtained on the sale of a large
number of the securities.
The fair value of non-marketable shares as of December 31, 2007 is NIS 12
million (December 31, 2006 - NIS 17 million). These shares are presented in the
financial statements at adjusted cost, less write-downs in value based on
management estimates. Write-downs in value are done on the basis of the
financial statements of the companies. The actual realization of the investment
in non-marketable shares may be different than the book value in the financial
statements.
CONTINGENT LIABILITIES - There are a number of legal suits pending against the
Bank. Each of the suits is transferred to an external attorney for handling.
These attorneys provide the Bank with their assessments of the probability that
the risk involved in the suit will be realized. In respect of suits, the
probability of which the attorneys believe to be remote or possible, the Bank
does not usually set up a provision in respect of the risk involved.
Regarding suits which the attending attorneys believe will not be rejected or
cancelled, the Bank sets up an appropriate provision.
The opinions of the legal counsel of the Bank are received quarterly, and Bank
Management updates the provisions when necessary.
There is no certainty that the final results of the suits will be in accordance
with the aforementioned assessments.
RISK MANAGEMENT
The activity of the Bank as a financial broker exposes the Bank to credit risks
and financial risks. The major financial risks are market risks and liquidity
risks. These risks are accompanied by operational risks and legal risks.
CREDIT RISKS
As mentioned above, in accordance with the policy adopted by the Bank as part of
the Run-off Plan, the Bank no longer provides credit. The Bank is currently
occupied with collecting the credit that was furnished in the past, and as part
of this process, it enters into debt arrangements with customers.
The ability to collect credit is affected by factors that are external to the
Bank, such as the situation in the economy in general and with borrowers in
particular, and with the policies of other banks in connection with the
furnishing of credit to customers.
F - 24
The balance of public credit as of December 31, 2007 amounted to NIS 5,521
million. This credit includes the credit to the Israel Electric Company Ltd.,
which was secured by a State guarantee. Neutralizing this credit, the balance of
credit amounts to NIS 558 million. The fact that the Bank has refrained from
granting credit for the past five years has reduced to a minimum the ability of
the Bank to spread out its credit risks in accordance with accepted criteria for
measuring credit risk. This is reflected in the following issues (in all of the
issues, the measurement relates to credit after having neutralized credit in an
amount of NIS 4,963 million, which is State-guaranteed):
BREAKDOWN BY INDUSTRY - The Bank's credit to industry constitutes 47% of
the total credit on the balance sheet, compared with 14% of the total
credit to industry in the five large banking groups. The balance sheet
credit to the various branches of trade in the Bank constitutes 2.6% of the
total credit, compared with 8.9% of the credit to branches of trade in the
regular banking institutions. Credit granted by the Bank to individuals
amounts to a small percentage of 0.6%, compared with 31.9% at the large
banking groups. The comparative figures of the five large banking groups
are as of December 31, 2006.
The above indicates that credit to industry at the Bank is significantly
higher than the accepted norms in the banking system and that the level of
spreading out credit over the various industries in the economy is lower
than the accepted norm in the banking system. The area that particularly
stands out is credit to individuals.
SPREADING OUT CREDIT BY SIZE OF BORROWER - The total credit risk of the
Bank as of December 31, 2007 amounts to NIS 722 million. The total credit
risk in respect of the 15 largest borrowers amounts to NIS 413 million and
constitutes 57% of the total credit risk.
Based on the data as of the end of 2006, the weight of the 15 largest
borrowers at the five largest banking groups in Israel constituted 2.7% of
the total credit risk of these banking groups.
The following data point to a larger degree of concentration of the large
borrowers at the Bank than the accepted norm in the banking system.
CREDIT TO PROBLEMATIC BORROWERS -The total balance sheet credit to
borrowers whose debt is classified as problematic credit amounted to NIS
309 million and constitutes 51.2% of the total balance sheet credit (before
deduction of the general and supplementary allowances for doubtful debts),
compared with 8.4% at the five largest banking groups (as of December
2006). The balance of debt classified as non-income bearing amounted to NIS
70 million and constitutes 11.6% of total balance sheet credit, compared
with 1.9% at the five largest banking groups. The large percentage of the
problematic debts at the Bank compared with the data mentioned above in
respect of the five largest banking groups derives from, among other
things, the fact that the Bank has been engaged for more than five years in
the collection of credit and not in the granting of credit.
As mentioned above, the ability of the Bank to control the spreading out of the
credit risks mentioned above is practically non-existent.
CREDIT CONTROL
According to the Proper Banking Management Provisions, a bank has to maintain a
credit control unit as one of the means of intelligent management of its credit
risks. Since from the second half of 2002, the Bank's activity has been focusing
on the collection of its credit portfolio and it does not furnish new credit,
the need for such a unit at the Bank has decreased.
In response to a request from the Bank, the Supervisor of Banks, in his letter
dated November 26, 2003, exempted the Bank from compliance with the Proper
Banking Management Provisions relating to credit control.
F - 25
FINANCIAL RISKS
The asset and liability management policy is designed to keep the risks of
linkage bases and interest risks within the boundaries of exposure set by the
Board of Directors.
The implementation of this policy is discussed by a committee in which the GM
and members of management participate. The committee usually meets weekly. In
accordance with the approval of the Supervisor of Banks from November 26, 2003,
this management committee acts as the Bank's financial risk manager.
In 1997, the Bank of Israel issued instructions regarding management and control
of financial risks. The Bank acts in accordance with such instructions. For
purposes of implementing the asset and liability management policy and the
financial risk management policy, the Board of Directors set out a number of
limits. In addition, it set out dates and formats for reporting and control
regarding compliance with the limits it set. On a quarterly basis, a report on
financial risk management is presented to the plenary session of the Board of
Directors and as part of the discussions held, an updated exposure document is
presented. This document also addresses the exposure limits set and such limits
are updated on the basis of the decisions taken.
The following is a breakdown of the major risks, the limits that were set, and
the reporting dates and formats in connection with the level of the risks and
the compliance with the limits:
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.
The Bank, as does the overall banking system, acts in three major activity
segments: the Index-linked segment, the foreign currency (and linked thereto)
segment, and the shekel unlinked segment. The exposure to a base risk relates to
exposure to changes in inflation and to changes in the exchange rates of the
various currencies.
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 report on the base exposure is included as part of the report on the
operations of the Bank that is presented to the plenary of the Board of
Directors. In addition, the report is included as part of the management
committee that meets, as mentioned above, on a weekly basis.
F - 26
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. The following data are in NIS millions:
FOREIGN
CURRENCY
UNLINKED CPI-LINKED DENOMINATED/ NON-MONETARY
SHEKEL SEGMENT SEGMENT (*) LINKED ITEMS TOTAL
-------------- ----------- ------ ----- -----
December 31, 2007 (350.6) 854.6 5.5 47.2 556.7
December 31, 2006 (456.0) 888.9 26.8 50.9 510.6
(*) Including a perpetual deposit with the Treasury (December 31, 2007 in an
amount of NIS 848.8 million, December 31, 2006 - NIS 825.8 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 8.7
million. A decrease of 1% in the Index would result in a decrease in equity of
the same amount.
The following table presents the sensitivity of the impact of changes in the
exchange rate of the dollar as of December 31, 2007 (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 (0.4) (0.8) 0.4 0.8
The exposure of the Bank to other currencies is small and, therefore, the impact
on the results of operations of the Bank is marginal.
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 rate 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.
The exposure to interest risk is measured by the gap of the average lifespan in
each linkage segment.
The following table presents the major data pertaining to the average lifespan
in the various linkage segments (in years):
FOREIGN CURRENCY AND
UNLINKED SHEKEL SEGMENT INDEX-LINKED SEGMENT LINKED THERETO
------------------------------- ------------------------------- -------------------------------
12/31/07 12/31/06 12/31/07 12/31/06 12/31/07 12/31/06
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total assets 0.08 0.20 4.13 3.73 6.28 6.52
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total liabilities 0.09 0.09 2.97 3.20 6.34 6.64
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Discrepancy in years (0.01) 0.11 1.16 0.53 (0.06) (0.12)
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
The major interest risk exists mainly in the Index-linked segment, since most of
the assets and liabilities in this segment are long-term and at fixed interest.
The average lifespan of the assets in this segment as of December 31, 2007 is
4.13 years versus an average lifespan of the liabilities of this segment of 2.97
years. The gap in the average lifespan, therefore, is 14 months. A longer
average lifespan of assets generates an exposure to the risk of an increase in
interest rates in this segment. This exposure to interest risk is within the
framework set by the Board of Directors of the Bank.
F - 27
In the unlinked shekel segment, the average lifespan gap is smaller and derives
from the fact that the average lifespan of both assets and liabilities is short,
since most of the assets and liabilities have variable rates of interest.
In the foreign currency segment, the average lifespan is affected by the large
volume of credit, which is characterized by low risk and which has a fixed rate
of interest. The average lifespan of the liabilities of this segment is 0.06
years longer than the average lifespan of the assets of the segment.
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 following
are the limits set for the maximum possible decrease in the calculated value of
the Bank's equity, as established by the Board of Directors:
UNLINKED SEGMENT - a maximum decrease of NIS 4 million.
INDEX-LINKED SEGMENT - a maximum decrease of NIS 14 million.
FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease of NIS 3 million.
The frequency of reporting on compliance with the limits in connection with
exposure to changes in interest rates was, until 2004, on a quarterly basis, As
a result of the decrease in the volume of the Bank's activity, the frequency of
such reports was changed to twice a year (semi-annual reports).
The following table presents the central data in connection with the sensitivity
of the capital of the Bank (in NIS millions) to changes of 1% in the interest
curve (the theoretical change in the economic value as a result of the
scenario):
LINKAGE SEGMENT INCREASE ON INTEREST BY 1% DECREASE OF INTEREST BY 1%
- ------------------------------------------- ---------------------------------------- ----------------------------------------
Index-linked 10.2 8.7
- ------------------------------------------- ---------------------------------------- ----------------------------------------
Foreign currency / linked thereto 1.2 (1.3)
- ------------------------------------------- ---------------------------------------- ----------------------------------------
In the unlinked segment, the impact of a change in interest of 1% is marginal
and therefore, not included in the table.
The above calculation is based on accepted calculations for the measurement of
the average lifespan of assets, i.e., discounting the future cash flows,
including interest to accrue until the earlier of maturity, or the date of a
change in the interest rate. The calculation of the change in the value of these
assets and liabilities is only in respect of a change in the interest rate,
without the impact of a change in interest on other factors (such as the rate of
forecasted inflation, etc.).
It is worth noting that such a calculation measures only the impact of a change
in interest and is not connected with credit risks.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of the asset and liability management
policy, the Bank conducts transactions in derivative financial instruments.
As a result of the events that occurred in the second half of 2002, the Bank's
activity in derivative financial instruments was reduced to a minimum and, at
present, it is designed solely for the closure of the Bank's position exposure,
through the use of forward transactions, Swap transactions and the purchase of
foreign currency options.
LIQUIDITY RISK - During 2003, the Bank of Israel issued provisions pertaining to
liquidity management. In view of the arrangement of the line of credit, the
Supervisor of Banks, in his letter dated November 26, 2003, stipulated that the
Bank is not required to implement part of those provisions.
F - 28
OPERATIONAL RISKS - The Bank takes various steps to reduce the operational risks to which the Bank
may be exposed:
- - The Bank appointed an operations risk manager and an operations risk
controller.
- - The Bank operates a computerized control system to identify operational
risks in the Bank's operating system.
- - 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 the provisions of the Bank of Israel regarding fraud and
embezzlement risks, a team was set up, headed by the GM, with the participation
of members of management, the internal auditor, the operations risk controller
and the parties responsible for computers in the Bank. The team periodically
discusses the fraud and embezzlement risks that were included in the operational
risk assessment and the controls needed to minimize such risks.
CAPITAL ADEQUACY
On December 31, 2007, the Bank's ratio of capital to risk assets was 15.4%,
higher than the 9% minimum rate stipulated in Proper Banking Procedures and
compared with 1.3% as of December 31, 2006, a rate that was lower than the
minimum stipulated in the Proper Banking Procedures.
The shareholders' equity of the Bank as of December 31, 2007 amounted to NIS 110
million. The Bank's preference shares, in an amount of NIS 447 million, are not
included in the Bank's shareholders' equity. The equity amount of the preference
shares, plus the general allowance for doubtful doubts, constitutes the
second-tier capital of the Bank. In view of the restriction whereby in
calculating the minimum capital ratio, second-tier capital that exceeds
first-tier capital is not taken into consideration, most of the Bank's
second-tier capital is unutilized for purposes of this calculation (as of
December 31, 2007, second-tier capital of NIS 385 million is unutilized).
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.
DISCLOSURE REGARDING THE BANK'S INTERNAL AUDITOR
Mr. Yitzhak David, CPA (Isr.) has been the Bank's internal auditor since
November 1, 2002. Mr. Yitzhak David is a Certified Internal Auditor (CIA), a
certified public accountant since 1982 and has a BA in economics and accounting
from the Tel Aviv University.
The internal auditor and the external auditing services he uses comply with the
conditions set out in the Companies Law - 1989, the Internal Auditing Law - 1992
and the Banking Rules (Internal Auditing) - 1993 regarding their independence
and the dedication of their activities in the Bank.
The internal auditor is an employee of the Bank and is administratively
subordinate to the Chairman of the Board. The appointment of the internal
auditor was approved by the plenary of the Board of Directors on October 30,
2002 upon the recommendation of the Audit Committee given on October 1, 2002.
The appointment was extended a number of times and in May 2006, it was extended
with the approval of the Supervisor of Banks until the end of the Run-off Plan,
i.e., July 31, 2008.
A summary of the reasons for approving his appointment - the professional
qualifications of the candidate, his extensive experience in the field of
auditing, including his many years of work in the CPA firm of Somekh Chaikin,
and his last position as the assistant to the Bank's internal auditor.
F - 29
The internal audit work plan under the special circumstances of the Bank is an
annual plan, taking into consideration the requirements of the Supervisor of
Banks and in accordance with professional standards, as is based mainly on:
- - Mapping risk areas in the various activities of the Bank and assessing the
level of risk of such activities (including exposure to embezzlement and
fraud), on the basis of, inter alia, the risk reviews prepared by the Bank.
- - The Bank's work-plan.
- - The organizational structure of the Bank and the definition of roles in the
various departments and units of the Bank, as provided in the Bank's
procedures.
- - Findings of external auditing parties including - the Supervisor of Banks,
the independent auditors and the State Controller.
- - The necessary frequency, as determined by the internal auditor, for
auditing each audit area/issue, also taking into account the Bank's present
special situation.
- - Additional auditing tasks requested by the Chairman of the Board, the
Chairman of the Audit Committee and the GM.
The parties involved in determining the work plan for the internal audit of the
Bank are: the internal auditor in consultation with the GM, Chairman of the
Board and the chairman of the Audit Committee.
The Bank's internal audit work plan is presented to the Board's Audit Committee
for discussion and is approved by the Committee and by the Chairman of the
Board. It is also reported to the plenary Board of Directors.
The work plan leaves the internal auditor with the discretion to vary from the
plan when necessary, in consultation with the Chairman of the Board and the
chairman of the Audit Committee.
The Bank has a wholly-owned (100%) subsidiary whose activity is immaterial to
the activity of the Bank. The internal audit work-plan refers to this company on
the basis of the criteria described above.
The internal auditor is employed in a full time position. In the reported period
no employees were subordinated to him. The internal auditor uses the services of
external auditing parties, who specialize in specific relevant areas such as:
information systems auditing and auditing in banking areas. The external
auditing parties perform the internal audit of the Bank according to the
instructions of the internal auditor and under his supervision. In the reported
period their work amounted to an average annual scope of 0.3 full-time positions
(in 2006 - an average of 0.4 full-time positions).
The accepted professional standards and guidelines on the basis of which the
internal auditor performs the audit are as follows:
- - Professional guidelines of the Supervisor of Banks in Proper Banking
Procedure Provisions and provisions of the law including the Internal Audit
Law - 1992.
- - Internal auditing ethics code and professional principles.
- - Professional internal auditing standards.
- - Professional guidelines of the Institute of Internal Auditors in Israel.
- - The guidelines of the Audit Committee.
The detailed reports submitted by the internal auditor during the year to the
Audit Committee and the Board of Directors and the discussions held regarding
the reports satisfy the Board of Directors and the Audit Committee that the
internal auditor did indeed fulfill all of the requirements set down by the
aforementioned professional standards and guidelines.
The internal auditor and anyone acting on his behalf have the authority to
request and receive from all the Bank's employees and associated parties any
information, including computerized information, documents and any explanations
that they consider to be necessary in order to perform their duty. Furthermore,
the internal auditor and anyone acting on his behalf have free access to any
asset of the Bank in order to examine it, including continuous and direct access
to the Bank's information systems including financial data, as required in
Section 9 of the Internal Audit Law - 1992.
F - 30
During the reported period the internal auditor submitted the following written
reports to the Chairman of the Board, the General Manager and the Chairman of
the Audit Committee:
- - Current audit reports, which include audit findings, conclusions and
recommendations.
- - Periodic reports - quarterly reports which include a general review,
reports regarding execution of the work-plan during the quarter compared to
the original plan, and a list of all the audit documents that were issued
during the quarter.
- - An annual report which includes a summary of the audit activity during the
reported year, reports on the principal findings and the recommendations in
the various current reports that were issued (material findings),
conclusions of the auditor from following up on the correction of
deficiencies in the previous audit reports, recommendations that were not
accepted by Management and recommendations the implementation of which are
taking more time than reasonable. The report also includes the internal
auditor procedure - definition of the internal auditor's responsibilities,
authorities and manner of operation.
The current audit reports (together with minutes of the discussions held in
respect thereof with the General Manager and other relevant parties in the Bank,
which include decisions that were made and time schedules for their
implementation), the quarterly reports and the annual report are discussed in
the Audit Committee and after the discussion are submitted in a full or
condensed form (together with the minutes of discussions of the Audit Committee)
to the plenary Board of Directors.
During 2007, the internal auditor submitted 4 quarterly reports that were
submitted on the following dates: March 20, 2007, May 22, 2007, August 22, 2007
and November 22, 2007. The reports were discussed on the following dates: March
26, 2007, May 30, 2007, August 28, 2007 and December 31, 2007, as well as an
annual report that was submitted on November 28, 2007 and discussed on December
31, 2007.
The Bank's Board of Directors and the Audit Committee are of the opinion that
the scope of the internal auditor's work-plan, and the nature and continuity of
his work during the reported period are reasonable taking into consideration the
present special situation of the Bank which is in a Run-Off process, and that
they are sufficient for fulfilling the objectives of the internal audit in the
Bank.
The payments of the Bank in respect of the employment of the internal auditor
includes commitments for payments, including terms of retirement in 2007 as
follows:
NIS'000
Salary 331
Severance, provident, pension, National Insurance, education fund and vacation 64
---
Total salary and fringe benefits, not including payroll tax 395
===
The salary of the internal auditor and any raises are set by the plenary of the
Board of Directors on the basis of the recommendation of the Audit Committee.
The Board of Directors believes that this method of determining the remuneration
of the internal auditor will not have an impact on his professional discretion.
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 guideline of this provision.
F - 31
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 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 year ended December 31, 2007, 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.
REPORTING REQUIREMENTS IN THE U.S.A.
Since the Bank had in the past issued securities to shareholders in the U.S.A.,
the Bank is required under American law to submit an annual report to the United
State Securities and Exchange Commission (hereinafter - SEC). As part of the
annual report, submitted on a form known as 20F, the Bank has to fulfill various
reporting and disclosure requirements that are not applicable in Israel,
including a reconciliation of its financial statements to the accepted
accounting principles in the United States (U.S. GAAP.). This reconciliation is
made by providing a qualitative note on the differences between Israeli GAAP and
U.S. GAAP and by providing a quantitative note, which presents the results of
the reporting entity's financial statements as if they had been prepared
according to U.S. GAAP.
SECTION 404 OF THE SARBANES OXLEY ACT
Since, as mentioned above, the Bank has issued its securities to shareholders in
the U.S.A., 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 above requirement under Section 404 for the filing
of an external auditor's report on the effectiveness of internal controls
pertaining to financial reporting will apply only from the fiscal year ended
December 15, 2008. The implementation of Section 404 of the Sarbanes Oxley Act
requires appropriate preparations and the investment of significant time and
management resources. The Bank has been taking steps for the implementation of
Section 404 regarding the annual report to be filed in the U.S. in respect of
2007.
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 not to
implement this directive in its reports filed in Israel.
F - 32
PROCESS OF APPROVING THE FINANCIAL STATEMENTS
The Board of Directors of the Bank is the body that is charged with entity-wide
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 is
comprised of six directors, including the Chairman of the Board. Four 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
tDe 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.
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 who also reviews the
major findings of the audit as part of a detailed annual report.
After deliberation, a vote is taken on the basis of which the financial
statements are approved.
DIRECTORS HAVING ACCOUNTING AND FINANCIAL SKILLS/EXPERTISE
The Bank of Israel has instructed the banks to implement (with the changes and
adjustments specified by the Bank of Israel) a directive that had been issued by
the Securities Authority in 2003 regarding the report relating to directors
having accounting and financial skills, as well as the clarifications that were
issued to this directive. According to the directive of the Securities Authority
and the instructions of the Bank of Israel, the Bank has to determine the
minimum number of directors having accounting and financial skills that should
serve on the Bank's Board of Directors, the Audit Committee and the Balance
Sheet Committee, with "a director having accounting and financial skills" being
a director that does not hold any other position in the company and due to his
education, experience or qualifications, has high skills and understanding in
business, accounting, internal control and financial statement matters, in a way
that enables him to have an in-depth understanding of the financial statements
of the company and to raise on the agenda of the Board of Directors issues and
questions relating to the financial reporting of the company, with the objective
of approving and publishing fair financial statements.
During 2005 Amendment No. 3 to the Companies Law - 1999 was passed, by which,
inter alia, a public company will have at least one external director who has
accounting and financial expertise and additional directors having accounting
and financial expertise in the number determined by the board of directors. The
definition of "accounting and financial expertise" was included in regulations
that were published at the end of 2005 [Companies Regulations (Conditions and
Criteria for a Director having Accounting and Financial Expertise and a Director
having Professional Ability) - 2005] and it is essentially the same as the
definition of "accounting and financial skills" (other than its not including a
threshold condition of not holding an additional position in the company).
F - 33
The Bank implements both the directive of the Securities Authority regarding
directors having accounting and financial skills as instructed by the Bank of
Israel and the provisions of the Companies Law - 1999 and aforementioned
amendments with respect to directors having accounting and financial expertise.
The Bank's Board of Directors has decided that the appropriate minimum number of
directors having accounting and financial skills/expertise that should serve on
the Bank's Board of Directors is two, being of the opinion that in light of the
significant decrease in the volume of activities of the Bank, the reduction in
the lines of operation in which it is engaged and the focusing on the collection
of loans, this number is adequate in order to enable the Board to fulfill the
duties it has to perform in accordance with the law and the Bank's Articles of
Association, and in particular in relation to the examination of the financial
position of the Bank and the preparation and approval of its financial
statements
The Bank's Board of Directors also decided that the appropriate minimum number
of these directors on the Audit Committee and the Balance Sheet Committee is
one. As at the date of approval of these financial statements (February 26,
2008), the Bank has eight directors with accounting and financial
skills/expertise on its Board of Directors. It has three such directors on the
Audit Committee and four such directors on the Balance Sheet Committee. The
Directors having accounting and financial skills/expertise and the facts that
support them as such are as follows:
DR. RAANAN COHEN: Chairman of the Board of Directors of the Bank from August 15,
2002. He is also the Chairman of the Balance Sheet Committee. He has taken
academic courses in risk management, investments in securities and in financial
instruments, directors' training and company recovery laws. Dr. Raanan Cohen
also serves as a director of Trans Clal Trade Ltd. (member of the Balance Sheet
Committee), Zerah Oil and Gas Exploration Ltd., and New Koppel Insurance Company
Ltd.
A. OLSHANSKY: Bachelor of Economics of the Hebrew University. Served in the past
in various positions in Bank Hapoalim, including VP, Deputy CEO and joint CEO.
Served as CEO of Gmul Investment Company Ltd. (central management company of
pension funds). Served as Chairman of the Board of Clal (Israel) Ltd. that
operated companies in the insurance, industry, commerce and construction fields.
Served as a director in various companies, including: external director in Teva
Pharmaceutical Industries Ltd., Gemel Investment Company Ltd., Polgat Ltd.,
Ytong Industries Ltd., and Azorim Properties Ltd. He currently serves as a
director in Camel Grinding Wheels Sarid Ltd, and Asif Provident Fund Management
Company Ltd. and Kibbutz Zora. In the past, he served as a member of the balance
sheet committee of the Hebrew University. Engages in financial and economic
consulting.
Y. EIZNER: Member of the Audit Committee. Bachelor of Economics and Statistics,
studied business administration at the Hebrew University. In the past served for
several years as CEO of Bank Jerusalem Ltd. and as a director of the bank and
its subsidiaries, and prior to that as Deputy CEO of that bank. He currently
serves as a director in Binyamina Fields Company Ltd. He serves as the chairman
of the investment committee of the teachers education funds.
S. ESHBOL: Member of the Audit Committee and the Balance Sheet Committee.
Bachelor of Accounting with minor in financing from the Michlalah Leminhal. An
academic degree in law from the Herzliya Interdisciplinary Center. CPA and
lawyer. In the past engaged in accounting and for several years has been
practicing law. As part of her legal practice she is engaged in the commercial
and financial fields. Served as director of Zim and in the Zichron Yaacov
Economic Development Company. She currently serves as a director of the Israel
Electric Company Ltd.
M. GAVISH: Member of the Balance Sheet Committee. Bachelor of Economics and Law
and Master of Business Administration from the Hebrew University. Served as
Commissioner of the Income Tax and Property Tax Authority and as CEO of
Mercantile Discount Bank. Served in the past and currently serves as chairman of
the finance committees of various entities. Served and currently serves as
director of companies and acts as CEO of companies and as a consultant. Served
as a director in the Israel Electric Company Ltd. and serves today as the
Chairman of the Israel Broadcasting Authority.
B. DAGAN: Member of the Balance Sheet Committee. Bachelor of Economics,
Political Science and Public Administration of the Hebrew University and courses
in business administration. Served as a counselor for small businesses, manager
of a division in the Ministry of Trade and Industry and manager of the imports
and exports financing department of the Ministry of Finance. Served as a
director of Jerusalem Capital Markets and Delek Car Systems. Currently serves as
a director of Gadot Chemical Industries Ltd.
F - 34
A. HILDESHEIMER: Member of the Audit Committee. Bachelor of Economics and
Political Science, and Master of Business Administration from the Hebrew
University. In the past, he filled a number of positions at Bank Mizrahi,
including assistant to the CEO and Deputy CEO. Served as the CEO of Finance and
Trade Bank Ltd. Served as a director in various companies, including senior
Financial Vice President and CFO of an Irish company, Inflight Financial
Services Ltd. Ireland. Engages in economic and financial consulting.
R. ARMON: Bachelor of Social Science, studied business administration at the
Hebrew University. Studied law at the Frahon University of Bucharest. Honorary
chairman of the Romanian - Israel Chamber of Commerce. Served in the past as
Deputy CEO of Bank Hapoalim and in charge of credits in that bank, served as
Deputy CEO and Chairman of the Board of Gmul Investment Company Ltd. (central
management company of pension funds). Served as director of Clal Israel Ltd.,
Clal Industries Ltd., and Amot. Currently serves as a director of Elchana Ltd.
Has been serving a director of the Bank since 1967 (not continuously), including
as Chairman of the Loan Committee of the Board.
F - 35
ORGANIZATIONAL STRUCTURE AND MANPOWER
The activity of the Bank is conducted through a number of departments that
report directly to the GM of the Bank:
- - A business department that deals with collecting credit provided to the
customers of the Bank.
- - An accounting department responsible for, among other things, the financial
reporting of the Bank.
- - An operations department that is responsible for manpower, organization,
administration, operating banking services, information technologies of the
computer services provided by outsourcing and conducting feasibility
surveys for government ministries.
- - The legal counsel and legal department.
The number of full-time employees employed by the Bank as at December 31, 2007
was 43, compared with 50 on December 31, 2006 and 156 employees on December 31,
2002. The number of employees of the Bank as of December 31, 2007 is 28% of the
number employed on December 31, 2002. The decline in the number of employees
increases the dependency of the Bank on the remaining manpower.
REMUNERATION OF THE AUDITORS (IN NIS THOUSANDS)
2007 2006 (1)
----- -----
For audit services (2) 548 690
For audit related services (3) 538 520
----- -----
Total auditors' fees 1,086 1,210
===== =====
(1) The payment in 2006 is to the joint auditors.
(2) Includes the audit of the financial statements, review of interim financial
statements and audit of tax reports.
(3) Audit services of the financial statements that were included in the report
to the SEC in the U.S.A. These payments were paid to Somekh Chaikin which
conducted the audit up to and including 2006.
F - 36
SALARY AND BENEFITS OF SENIOR EXECUTIVES FOR THE YEAR ENDED DECEMBER 31, 2007
Reported amounts (in NIS thousands)
LOANS GRANTED AT PREFERENTIAL TERMS (2)
---------------------------------------------
SEVERANCE PAY, SUPPLEMENTARY TOTAL
PROVIDENT FUND, AMOUNTS WITH SALARIES
PENSION, NATIONAL RESPECT TO SALARY AND RELATED LOANS
INSURANCE, RELATED BENEFITS BENEFITS NOT BALANCE AVERAGE BENEFIT GRANTED
FURTHER EDUCATION RESULTING FROM INCLUDING AS AT TERM GRANTED UNDER
ALLOWANCE AND CHANGES IN SALARY PAYROLL DECEMBER (YEARS) DURING THE REGULAR OTHER
NAME SALARY VACATION PAY (1) DURING THE YEAR TAX 31, 2007 TO MATURITY YEAR TERMS BENEFITS
- --------------------------------------- ----------- ---------------------- ------------------- --------------- ------------- --------------- --------------- ------------ ---------------
Cohen Raanan 614 444 - 1,058 - - - - 57
Galili Uri 728 559 - 1,287 - - - - 37
Savir Arieh 619 452 - 1,071 - - - - 27
Dekel Nathan 612 198 - 810 15 0.5 1.0 15 24
Shmaya Rimon 604 216 - 820 2 0.6 0.4 2 26
SALARY AND BENEFITS OF SENIOR EXECUTIVES FOR THE YEAR ENDED DECEMBER 31, 2006
Reported amounts (in NIS thousands)
LOANS GRANTED AT PREFERENTIAL TERMS (2)
---------------------------------------------
SEVERANCE PAY, SUPPLEMENTARY TOTAL
PROVIDENT FUND, AMOUNTS WITH SALARIES
PENSION, NATIONAL RESPECT TO SALARY AND RELATED LOANS
INSURANCE, RELATED BENEFITS BENEFITS NOT BALANCE AVERAGE BENEFIT GRANTED
FURTHER EDUCATION RESULTING FROM INCLUDING AS AT TERM GRANTED UNDER
ALLOWANCE AND CHANGES IN SALARY PAYROLL DECEMBER (YEARS) DURING THE REGULAR OTHER
NAME SALARY VACATION PAY (1) DURING THE YEAR TAX 31, 2006 TO MATURITY YEAR TERMS BENEFITS
- --------------------------------------- ----------- ---------------------- ------------------- --------------- ------------- --------------- --------------- ------------ ---------------
Cohen Raanan 602 177 - 779 - - - - 47
Galili Uri 714 249 - 963 - - - - 35
Savir Arieh 608 140 - 748 - - - - 27
Dekel Nathan 596 231 - 827 28 1.0 1.8 28 25
Shmaya Rimon 590 165 - 755 16 0.6 1.0 16 27
(1) Including provisions/payments of long service bonus and provisions for
unutilized sick leave and vacation benefits.
(2) The loans are linked to the CPI and are non-interest bearing.
F - 37
MEMBERS OF MANAGEMENT OF THE BANK
FOLLOWING ARE THE MEMBERS OF MANAGEMENT AND THEIR DUTIES:
GALILI URI GM
SAVIR ARIEH Deputy GM, Credit Supervisor
DEKEL NATHAN Operations Manager
SHMAYA RIMON Comptroller
- -------------------------------------------------------------------------------
WARZAGER MICHAEL Legal Counsel
DAVID YITZHAK Internal Auditor
ATLAS NATAN General Secretary
KESSELMAN & KESSELMAN Auditors
F - 38
THE BOARD OF DIRECTORS OF THE BANK
Below is a list of members of the Board of Directors, their main occupations and positions in other
companies:
DR. COHEN RAANAN Education - University.
RAMAT GAN Chairman of the Board of Directors of the Bank.
Director: Trans Clal Trade Ltd., Zerah Oil and Gas Exploration Ltd.,
New Koppel Insurance Company Ltd.
OLSHANSKY AVI Education - University. Economic and financial consultant,
TEL-AVIV project promotion and development.
Director of A. Olshenski Consultancy Ltd., Zora Active Systems Ltd.
Chairman of the following companies: Camel Grinding Wheels Sarid Ltd., Asif Provident
Funds Management Company Ltd., Plasgad Plastic Products Agsh Ltd., Kibbutz Zora
AIZNER YACOB Education - University. Real estate development.
JERUSALEM Director of Sadot Binyamina Ltd., Yacob Eisner Ltd.
Chairman of the audit committee of the teachers education funds
ESHBOL SHULAMIT Attorney and CPA.
ZICHRON YAAKOV Director, Israel Electric Company Ltd.
BEINISCH YEHESKEL Attorney.
JERUSALEM
GAVISH MOSHE Attorney
TEL-AVIV Director of the following companies: Afikim Hashkaot G.G. (2000) Ltd.,
Innoventions, Allium Ltd., Medipower Ltd.
Chairman of the Israel Broadcasting Authority
GREEN EHUD Attorney
JERUSALEM Outside director
DAGAN BEN-ZION Education - Academic
JERUSALEM Director - Gadot Chemical Industries Ltd.
HILDESHEIMER AARON Education - Academic
RAMAT GAN Outside director
CEO - Admon Trusts and Investments Ltd.
Director - Pardes Industries Ltd., L.F.S. (Israel) Ltd., Inflight
Financial Services Ltd. Ireland.
ARMONN RICHARD Education - University.
TEL-AVIV Chairman of the Israel-Romania Chamber of Commerce and Industry.
Director: Elhana Ltd. and various companies associated with Romania.
During 2007, there were eleven plenary sessions of the Board of Directors and 21
meetings of its committees. The committees are the Audit Committee, the Credit
Committee, the Administration Committee, and the Balance Sheet Committee.
The Board of Directors wishes to thank the Bank's management and employees for
achieving objectives 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, February 26, 2008
F - 39
MANAGEMENT REVIEW OF THE FINANCIAL POSITION OF THE BANK AND THE RESULTS OF ITS
OPERATIONS
The following tables present multi-period information pertaining to the
development of the financial position of the Bank and the results of its
operations:
Table of contents
Exhibit A BALANCE SHEETS - MULTI-PERIOD DATA AS AT THE END OF THE YEARS 2003 - 2007 41
Exhibit B STATEMENTS OF INCOME - MULTI-PERIOD DATA FOR THE YEARS 2003 - 2007 42
Exhibit C RATES OF INCOME AND EXPENSES 43
Exhibit D ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES 46
Exhibit E OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTOR 47
Exhibit F CONDENSED QUARTERLY BALANCE SHEETS FOR 2006 AND 2007 48
Exhibit G CONDENSED QUARTERLY STATEMENTS OF INCOME FOR 2006 AND 2007 49
F - 40
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
EXHIBIT A
BALANCE SHEETS - MULTI-PERIOD DATA AS AT THE END OF THE YEARS 2003 - 2007
AS AT DECEMBER 31
----------------------------------------------------------------
2007 2006 2005 2004 **2003
-------- -------- -------- -------- --------
REPORTED AMOUNTS*
----------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- -------- --------
ASSETS
Cash and deposits
with banks 33.8 66.4 72.9 117.9 143.9
Securities 46.3 50.4 63.2 60.0 85.4
Credit to the public 5,521.1 6,519.1 7,680.7 7,993.4 9,189.6
Credit to governments 24.7 41.5 59.0 72.7 105.2
Fixed assets 0.8 1.1 1.2 1.9 4.7
Other assets 7.2 12.1 15.6 26.0 28.2
Perpetual deposits
with the Israeli Treasury 848.8 825.8 828.2 806.5 799.3
-------- -------- -------- -------- --------
Total assets 6,482.7 7,516.4 8,720.8 9,078.4 10,356.3
======== ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits of the public 54.6 66.9 178.2 405.3 620.0
Deposits of banks 481.2 768.3 1,048.8 1,428.0 2,172.7
Deposits of the
Government 5,319.2 6,087.4 6,883.0 6,654.6 6,949.3
Capital notes 20.2 24.9 26.9 25.3 28.2
Perpetual deposit 0.1 0.1 0.1 0.1 0.1
Other liabilities 50.7 58.2 56.4 56.8 76.2
Non-participating
Shares 276.0 303.2 330.3 309.1 314.2
Participating shares *** 170.6 187.4 - - -
Total liabilities 6,372.6 7,496.4 8,523.7 8,879.2 10,160.7
-------- -------- -------- -------- --------
Shareholders' equity *** 110.1 20.0 197.1 199.2 195.6
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity 6,482.7 7,516.4 8,720.8 9,078.4 10,356.3
======== ======== ======== ======== ========
* DISCONTINUANCE OF INFLATIONARY ADJUSTMENT ON THE BASIS OF THE INDEX OF
DECEMBER 2003.
** Amounts adjusted for inflation based on Index of December 2003.
*** FOR INFORMATION REGARDING THE CLASSIFICATION OF PARTICIPATING PREFERENCE
SHARES, SEE NOTE 1D.
F - 41
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MANAGEMENT REVIEW
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EXHIBIT B
STATEMENTS OF INCOME - MULTI-PERIOD DATA FOR THE YEARS 2003 - 2007
AS AT DECEMBER 31
----------------------------------------------------------------
2007 2006 2005 2004 2003
--------- --------- --------- --------- ----------
REPORTED AMOUNTS*
----------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- --------- ----------
Profit from financing
operations before allowance
for doubtful debts 29.3 18.2 61.6 66.2 70.1
Allowance for doubtful debts (13.8) 21.7 44.2 70.2 129.8
--------- --------- --------- --------- ----------
Profit (loss) from financing
operations after allowance
for doubtful debts 43.1 (3.5) 17.4 (4.0) (59.7)
--------- --------- --------- --------- ----------
OPERATING AND OTHER INCOME -
Operating commissions 1.1 1.3 2.2 4.1 6.5
Gains (losses) from
investments in shares 8.7 16.4 11.3 41.5 10.3
Other income 1.7 3.8 4.7 4.6 5.5
--------- --------- --------- --------- ----------
Total operating and other income 11.5 21.5 18.2 50.2 22.3
--------- --------- --------- --------- ----------
OPERATING AND OTHER EXPENSES -
Salaries and related expenses 18.5 17.6 18.2 19.7 33.7
Expenses (income) in respect of
employee retirement - 0.5 5.5 (0.8) (1.5)
Maintenance and depreciation
of buildings and equipment 2.9 2.7 3.8 5.7 11.8
Other expenses 9.4 14.3 16.5 20.4 20.7
--------- --------- --------- --------- ----------
Total operating and other expenses 30.8 35.1 44.0 45.0 64.7
--------- --------- --------- --------- ----------
Operating profit (loss)
before taxes on income 23.8 (17.1) (8.4) 1.2 (102.1)
Erosions and adjustments*** - - - - (4.5)
--------- --------- --------- --------- ----------
Operating profit (loss)
before taxes on income 23.8 (17.1) (8.4) 1.2 ** (106.6)
Provision for taxes on operating
income (tax benefit) 1.6 - - - ** (2.7)
--------- --------- --------- --------- ----------
Operating profit (loss) after
taxes on income 22.2 (17.1) (8.4) 1.2 ** (103.9)
OTHER ITEMS
Share of Bank in losses of
affiliates, net of related taxes - - - - ** (0.4)
Capital gain (loss), net - - - 0.2 ** (0.1)
--------- --------- --------- --------- ----------
Total other items - - - 0.2 ** (0.5)
--------- --------- --------- --------- ----------
NET INCOME (LOSS) FOR THE YEAR 22.2 (17.1) (8.4) 1.4 ** (104.4)
========= ========= ========= ========= ==========
NET INCOME (LOSS) PER SHARE
IN NIS, ORDINARY "A" SHARES 1,470.2 (1,132.4) (556.3) 92.7 (6,913.9)
--------- --------- --------- --------- ----------
* For 2004 and thereafter - discontinuance of inflationary adjustment on the
basis of the Index of December 2003.
For 2003 - discontinuance of inflationary adjustment on the basis of the
Index of December 2002.
** Amounts adjusted for inflation based on Index of December 2003.
*** Erosions and inflationary adjustments based on the Index of December 2003
of income and expenses that were included in the operating profit before
taxes, in reported amounts.
F - 42
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
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EXHIBIT C
RATES OF INCOME AND EXPENSES (1)
Reported amounts
2007 2006
-------------------------------------------------------- -------------------------------------------------------
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) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
ISRAELI CURRENCY - UNLINKED
Assets 183.8 11.3 6.15 363.9 24.4 6.71
Effect of ALM derivatives (3) 64.7 2.6 137.7 7.7
-------- -------- -------- --------
Total assets 248.5 13.9 5.59 501.6 32.1 6.40
Liabilities 632.1 (24.6) (3.89) (3.89) 935.9 (46.9) (5.01) (5.01)
-------- -------- -------- --------
Interest margin 2.26 1.70 1.70 1.39
-------- -------- -------- --------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 454.8 35.1 7.72 7.72 561.4 28.7 5.11 5.11
Liabilities 308.4 (16.3) (5.29) 387.5 (9.8) (2.53)
Effect of ALM derivatives (3) 40.0 (2.6) 43.3 (1.1)
-------- -------- -------- --------
Total liabilities 348.4 (18.9) (5.42) 430.8 (10.9) (2.53)
-------- -------- -------- --------
Interest margin 2.43 2.30 2.58 2.58
-------- -------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 5,601.7 (126.3) (2.25) (2.25) 6,406.5 (93.0) (1.45) (1.45)
Liabilities 5,556.1 129.4 2.33 6,276.0 92.2 1.47
Effect of ALM derivatives (3) 24.7 0.3 94.4 5.0
-------- -------- -------- --------
Total liabilities 5,580.8 129.7 2.32 6,370.4 97.2 1.53
-------- -------- -------- --------
Interest margin 0.08 0.07 0.02 0.08
-------- -------- -------- --------
TOTAL
Monetary assets generating income 6,240.3 (79.9) (1.28) 7,331.8 (39.9) (0.54)
Effect of ALM derivatives (3) 64.7 2.6 137.7 7.7
-------- -------- -------- --------
Total monetary assets 6,305.0 (77.3) (1.23) 7,469.5 (32.2) (0.43)
Monetary liabilities generating financing expenses 6,496.6 88.5 1.36 7,599.4 35.5 0.47
Effect of ALM derivatives (3) 64.7 (2.3) 137.7 3.9
-------- -------- -------- --------
Total liabilities 6,561.3 86.2 1.31 7,737.1 39.4 0.51
-------- -------- -------- --------
Interest margin 0.08 0.08 (0.07) 0.08
-------- -------- -------- --------
See page 50 for footnotes relating to rates of income and expenses
F - 43
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT C (CONT'D)
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
Reported amounts
2007 2006
-------------------------------------------------------- -------------------------------------------------------
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) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
Financing commissions and other financing income 30.0 23.7
Other financing expenses (9.6) (12.7)
-------- --------
Profit from financing operations before allowance
for doubtful debts 29.3 18.2
Allowance for doubtful debts (including general
and supplementary allowances) 13.8 (21.7)
-------- --------
Profit (loss) from financing operations after
Allowance for doubtful debts 43.1 (3.5)
Other monetary assets 865.1 868.7
General and supplementary allowances for
doubtful debts (49.0) (55.1)
Non-monetary assets 48.7 57.1
-------- --------
Total assets 7,105.1 8,202.5
======== ========
Other monetary liabilities 85.8 79.3
Non-monetary liabilities 1.1 1.6
Capital resources 521.6 522.2
-------- --------
Total liabilities and capital resources 7,105.1 8,202.5
======== ========
See page 50 for footnotes relating to rates of income and expenses
F - 44
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT C (CONT'D)
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
2007 2006
-------------------------------------------------------- -------------------------------------------------------
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) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
$ MILLIONS % % $ MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 1,360.3 92.3 6.79 6.79 1,431.2 96.9 6.77 6.77
Liabilities 1,349.3 (90.8) (6.73) 1,402.3 (95.5) (6.81)
Effect of ALM derivatives (3) 5.9 (0.1) 20.9 1.2
-------- -------- -------- --------
Total liabilities 1,355.2 (90.9) (6.70) 1,423.2 (94.3) (6.63)
-------- -------- -------- --------
Interest margin 0.06 0.09 (0.04) 0.14
======== ======== ======== ========
Full data of rates of income and expenses per segment, according to balance
sheet classification, are available on request.
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 and with respect to which income (expense) can be attributed to
the linkage segments.
(4) Including Israeli currency linked to foreign currency.
F - 45
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW (CONT'D)
- -------------------------------------------------------------------------------
EXHIBIT D
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2007
Reported amounts
DECEMBER 31, 2007 DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------------------------------------------------- -----------------
ON FROM FROM FROM FROM FROM FROM WITHOUT
DEMAND ONE TO THREE TO ONE TO THREE TO FIVE TO TEN TO OVER FIXED INTERNAL INTERNAL
AND UP TO THREE TWELVE THREE FIVE TEN TWENTY TWENTY MATURITY RATE OF AVERAGE RATE OF AVERAGE
ONE MONTH MONTHS MONTHS YEARS YEARS YEARS YEARS YEARS DATE * TOTAL RETURN DURATION RETURN DURATION
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS % YEARS % YEARS
------------------------------------------------------------------------------------------------------------------------- ------- ------- ------- -------
ISRAELI CURRENCY - UNLINKED
Total assets 130.3 - 0.1 - - - - - - 130.4 5.67 0.08 6.72 0.20
Total liabilities 504.9 22.3 0.2 - - - - - 0.1 (527.5) 4.19 0.09 4.50 0.09
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference (374.6) (22.3) (0.1) - - - - - (0.1) (397.1) 1.48 (0.01) 2.22 0.11
Effect of futures
transactions 16.5 20.1 9.9 - - - - - - 46.5
Exposure to interest rate
fluctuations (358.1) (2.2) 9.8 - - - - - (0.1) (350.0)
Cumulative segment exposure (358.1) (360.3) (350.5) (350.5) (350.5) (350.5) (350.5) (350.5) (350.6) (350.6)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 6.3 11.6 54.0 105.2 65.9 72.7 33.3 - 848.8 1,197.7 5.78 4.13 5.00 3.73
Total liabilities 1.2 12.5 48.5 124.0 84.3 41.3 1.4 - - 313.3 2.62 2.97 2.66 3.20
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 5.1 (0.9) 5.5 (18.8) (18.4) 31.4 31.9 - 848.8 884.6 3.16 1.16 2.34 0.53
Effect of futures
transactions - (20.1) (9.9) - - - - - - (30.0)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations 5.1 (21.0) (4.4) (18.8) (18.4) 31.4 31.9 - 848.8 854.6
Cumulative segment exposure 5.1 (15.9) (20.3) (39.1) (57.5) (26.1) 5.8 5.8 854.6 854.6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 41.6 140.9 397.3 969.4 816.5 1,586.8 1,154.2 - - 5,106.7 6.90 6.28 6.90 6.52
Total liabilities 1.7 137.0 397.5 970.7 818.1 1,596.7 1,163.0 - 446.6 5,531.3 6.88 6.34 6.88 6.64
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 39.9 3.9 (0.2) (1.3) (1.6) (9.9) (8.8) - (446.6) (424.6) 0.02 (0.06) 0.02 (0.12)
Effect of futures
transactions (16.5) - - - - - - - - (16.5)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations 23.4 3.9 (0.2) (1.3) (1.6) 9.9 (8.8) - (446.6) (441.1)
Cumulative segment exposure 23.4 27.3 27.1 25.8 24.2 14.3 5.5 5.5 (441.1) (441.1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 178.2 152.5 451.4 1,074.6 882.4 1,659.5 1,187.5 - 848.8 6,434.9 6.81 6.01 6.76 6.08
Total liabilities 507.8 171.8 446.2 1,094.7 902.4 1,638.0 1,164.4 - 446.7 6,372.0 6.44 5.64 6.40 5.72
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference (329.6) (19.3) 5.2 (20.1) (20.0) 21.5 23.1 - 402.1 (62.9) 0.37 0.37 0.36 0.36
Exposure to interest rate
fluctuations (329.6) (19.3) 5.2 (20.1) (20.0) 21.5 23.1 - 402.1 (62.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative exposure (329.6) (348.9) (343.7) (363.8) (383.8) (362.3) (339.2) (339.2) 62.9 (62.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
General Nnotes -
1. The data classified according to maturity date, presented above, represent
the present value of future flows, discounted at the internal rate of
return, for each balance sheet item. Such discounted future flows include
interest, which will accrue until the earlier of the maturity date or the
date of change in the interest rate.
2. The effect of hedging transactions is included in the total of assets or
liabilities, as the case may be.
3. The table does not include the effect of early repayments.
* The amounts stated in the "without fixed maturity date" column are the
amounts as stated in the balance sheet.
** Including shares, which are stated in the "without fixed maturity date"
column.
F - 46
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
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EXHIBIT E
OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTORS
Reported amounts
DECEMBER 31, 2007 DECEMBER 31, 2006
-------------------------------------------------------------- -------------------------------------------------------------
ANNUAL ANNUAL
EXPENSE EXPENSE
FOR FOR THE
OFF THE SPECIFIC OFF SPECIFIC
BALANCE -BALANCE TOTAL ALLOWANCE BALANCE -BALANCE TOTAL ALLOWANCE
SHEET SHEET RISK OF FOR BALANCE OF SHEET SHEET RISK OF FOR BALANCE OF
CREDIT CREDIT CREDIT TO DOUBTFUL PROBLEMATIC CREDIT CREDIT CREDIT TO DOUBTFUL PROBLEMATIC
RISK (1) RISK (2) PUBLIC DEBTS DEBTS (3) RISK (1) RISK (2) PUBLIC DEBTS DEBTS (3)
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
NIS MILLIONS NIS MILLIONS
-------------------------------------------------------------- -------------------------------------------------------------
Agriculture 5.2 0.6 5.8 (0.2) 1.0 5.6 0.3 5.9 1.4 0.7
Industry 264.6 12.1 276.7 (7.2) 179.6 338.7 14.4 353.1 7.2 221.9
Construction and real estate 56.4 65.3 121.7 0.6 102.4 156.4 71.3 227.7 7.5 193.9
Electricity 5,083.5 3.2 5,086.7 - 38.0 5,795.8 3.7 5,799.5 - 34.9
Commerce 14.3 5.6 19.9 (0.6) 16.8 31.0 5.7 36.7 2.1 28.3
Restaurants and hotels 8.9 2.1 11.0 - 7.5 11.6 2.1 13.7 0.7 8.6
Transport and storage 19.2 - 19.2 - - 23.0 - 23.0 0.1 0.5
Communications and computer services 3.8 0.4 4.2 0.8 2.0 7.9 - 7.9 (1.1) 7.2
Financial services 32.6 70.8 103.4 (1.2) 2.7 45.2 84.0 129.2 1.3 23.0
Other business services 32.1 3.4 35.5 0.8 8.9 54.4 2.5 56.9 6.7 31.9
Public and community services 42.6 0.1 42.7 (0.4) 30.9 97.2 0.2 97.4 1.2 32.0
Private households 3.6 - 3.6 - 0.3 4.7 - 4.7 0.5 0.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total 5,566.8 163.6 5,730.4 (7.4) 390.1 6,571.5 184.2 6,755.7 27.6 583.2
======= ======= ======= ======= ======= ======= ======= ======= ======= =====
Credit risk included in the
various economic sectors:
Agricultural settlement movements (4) 173.8 1.4 175.2 (6.3) 78.0 208.9 2.8 211.7 2.1 94.0
Local authorities and entities controlled by them 4.0 - 4.0 - - 6.5 - 6.5 - -
(1) Credit to the public and investments in debentures of the public. There are
no other assets in respect of derivative instruments in relation to the
public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
The credit risk and the balance of problematic debts are presented net of the
specific allowances for doubtful debts.
F - 47
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EXHIBIT F
CONDENSED QUARTERLY BALANCE SHEETS FOR 2006 AND 2007
Reported amounts
YEAR 2007 2006
---------------------------------------------------- ----------------------------------------------------
QUARTER 4 3 2 1 4 3 2 1
------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS
---------------------------------------------------- ----------------------------------------------------
ASSETS
Cash and deposits with banks 33.8 32.6 42.9 42.7 66.4 50.0 79.8 75.1
Securities 46.3 45.9 48.5 48.5 50.4 50.3 52.7 57.9
Credit to the public 5,521.1 5,857.4 6,273.1 6,314.1 6,519.1 6,773.9 7,115.4 7,533.2
Credit to governments 24.7 31.5 33.6 40.2 41.5 47.1 46.6 54.7
Fixed assets 0.8 0.8 0.9 1.0 1.1 1.0 1.0 1.1
Other assets 7.2 6.2 7.0 11.4 12.1 11.3 13.3 11.4
Perpetual deposits with the Israeli Treasury 848.8 848.8 828.0 822.2 825.8 840.2 838.6 829.0
------- ------- ------- ------- ------- ------- ------- -------
Total assets 6,482.7 6,823.2 7,234.0 7,280.1 7,516.4 7,773.8 8,147.4 8,562.4
======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 54.6 57.6 62.2 65.8 66.9 74.0 87.0 117.7
Deposits of banks 481.2 541.6 584.0 703.4 768.3 832.2 937.8 952.5
Deposits of the Government 5,319.2 5,602.1 5,986.4 5,919.6 6,087.4 6,270.3 6,519.4 6,892.6
Perpetual deposit 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Capital notes 20.2 23.2 25.1 24.1 24.9 24.9 25.2 27.7
Other liabilities 50.7 52.9 54.4 57.4 58.2 55.0 54.6 55.0
Non-participating shares 276.0 288.0 304.9 298.1 303.2 308.7 318.6 334.7
Participating shares* 170.6 178.0 188.4 184.3 187.4 190.8 196.9 206.9
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities 6,372.6 6,743.5 7,205.5 7,252.8 7,496.4 7,756.0 8,139.6 8,587.2
======= ======= ======= ======= ======= ======= ======= =======
Shareholders' equity* 110.1 79.7 28.5 27.3 20.0 17.8 7.8 (24.8)
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities and shareholders' equity 6,482.7 6,823.2 7,234.0 7,280.1 7,516.4 7,773.8 8,147.4 8,562.4
======= ======= ======= ======= ======= ======= ======= =======
F - 48
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT G
CONDENSED QUARTERLY STATEMENTS OF INCOME FOR 2006 AND 2007
Reported amounts
YEAR 2007 2006
------------------------------------------------ -----------------------------------------------
QUARTER 4 3 2 1 4 3 2 1
------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS
------------------------------------------------ -----------------------------------------------
Profit from financing operations before
allowance for doubtful debts 5.4 8.2 10.6 * 5.1 3.6 3.1 6.9 4.6
Allowance for doubtful debts (9.3) (3.1) 1.2 * (2.6) (2.6) 4.8 8.3 11.2
------- ------- ------- ------- ------- ------- ------- -------
Profit (loss) from financing operations after
allowance for doubtful debts 14.7 11.3 9.4 7.7 6.2 (1.7) (1.4) (6.6)
------- ------- ------- ------- ------- ------- ------- -------
OPERATING AND OTHER INCOME
Operating commissions 0.5 0.1 0.3 0.2 0.4 0.2 0.4 0.3
Gains (losses) from investments in shares 2.6 0.4 1.5 4.2 3.6 0.9 9.3 2.6
Other income - - 0.8 0.9 1.3 0.9 0.6 1.0
------- ------- ------- ------- ------- ------- ------- -------
Total operating and other income 3.1 0.5 2.6 5.3 5.3 2.0 10.3 3.9
------- ------- ------- ------- ------- ------- ------- -------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 4.1 4.3 5.2 4.9 4.5 4.0 4.6 4.5
Expenses (income) in respect of employee
retirement - - - - - 0.3 0.2 -
Maintenance and depreciation of buildings and
equipment 0.8 0.7 0.7 0.7 0.8 0.6 0.7 0.6
Other expenses 2.7 2.2 2.0 2.5 5.1 3.3 3.0 2.9
------- ------- ------- ------- ------- ------- ------- -------
Total operating and other expenses 7.6 7.2 7.9 8.1 10.4 8.2 8.5 8.0
------- ------- ------- ------- ------- ------- ------- -------
Operating profit (loss) before taxes on income 10.2 4.6 4.1 4.9 1.1 (7.9) 0.4 (10.7)
Provision for income taxes 1.6 - - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) for the period 8.6 4.6 4.1 4.9 1.1 (7.9) 0.4 (10.7)
======= ======= ======= ======= ======= ======= ======= =======
NIS NIS
------------------------------------------------ -----------------------------------------------
INCOME (LOSS) PER SHARE IN NIS
Ordinary "A' shares 569.5 304.6 271.5 324.5 73.0 (523.2) 26.4 (708.6)
* Restated.
F - 49
CERTIFICATION
I, Uri Galili, hereby certify as follows:
1. I have reviewed the annual report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the year ended December 31, 2007
(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 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 and cash-flows 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 fourth 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
February 26, 2008
F - 50
CERTIFICATION
I, Rimon Shmaya, hereby certify as follows:
1. I have reviewed the annual report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the year ended December 31, 2007
(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 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 and cash-flows 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 fourth 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
February 26, 2008
F - 51
MANAGEMENT AND BOARD OF DIRECTORS' STATEMENT REGARDING THEIR RESPONSIBILITY FOR
THE ANNUAL REPORT
- --------------------------------------------------------------------------------
The Management of the Bank has prepared the annual report and is responsible for
its suitability. This report includes financial statements prepared in
accordance with generally accepted accounting principles and with the reporting
principles and guidelines of the Supervisor of Banks, related supplementary
data, as well as other information.
The preparation of the periodic financial statements also requires the use of
estimates for the purpose of determining various amounts and items in the
financial statements. Such estimates were prepared by the Bank's Management,
using its best judgment.
In order to ensure suitable standards for the Bank's financial reporting,
Management maintains a comprehensive system of internal control for the purpose
of ensuring that all the transactions effected by the Bank are properly
authorized, that the Bank's assets are properly safeguarded and their soundness
is ensured and that the accounting records provide a reliable basis for
compilation of the financial statements. The system of internal control is, by
its nature, limited in that it provides only reasonable rather than absolute
assurance as to its ability to detect and prevent errors and irregularities. The
principle of reasonable assurance is based on the recognition that the decision
regarding the amount of resources to be invested in operating the control
procedures must, by its nature, be weighed against the benefit to be derived
from such procedures.
The Board of Directors of the Bank, which in accordance with Section 92 of the
Companies Law, is responsible for the financial statements and their approval,
determines the accounting policy and supervises its application. It also
determines the structure of the internal control system and supervises its
functioning. The General Manager is responsible for the Bank's current
operations in the framework of the policies set by the Board of Directors and is
subject to its guidelines. Management of the Bank acts according to the policies
set by the Board of Directors. The Board of Directors, through its committees,
holds regular meetings with the Bank's Management as well as with the Internal
Auditor and the Bank's independent auditors, in order to review the scope and
results of their work.
The Bank's external auditors, Kesselman & Kessleman, have audited the annual
financial statements of the Bank, in accordance with generally accepted auditing
standards, including those standards prescribed by the Auditors Regulations
(Manner of Auditors' Performance) - 1973 and certain auditing standards
promulgated by the Institute of Certified Public Accountants in the U.S., the
use of which are mandatory under the provisions of the Supervisor of Banks. The
purpose of their audit was to enable them to express an opinion regarding the
extent to which these statements reflect the financial position of the Bank, the
results of its operations, the changes in its shareholders' equity and its cash
flows, in accordance with generally accepted accounting principles, and
reporting procedures prescribed in directives and guidelines issued by the
Supervisor of Banks. Pursuant to Section 170 of the Companies Law, the auditors
are responsible to the Bank and its shareholders for what is stated in their
opinion in respect of the financial statements. The auditors' report is appended
to the annual financial statements.
Furthermore, the information contained in the Board of Directors' Report and the
Management Review (henceforth - the ancillary information) was given to the
external auditors for their review, so that they might indicate whether there is
any material inconsistency between the information contained in the financial
statements and the ancillary information, or whether the ancillary information
contains information which is materially inconsistent with evidence or other
information brought to the attention of the auditors in the course of their
audit. No such indication has been received from the external auditors. The
auditors did not, for this purpose, employ any auditing procedures in addition
to those that they considered necessary for the purpose of auditing the
financial statements.
- --------------------- --------------------- ---------------------
DR. RAANAN COHEN URI GALILI RIMON SHMAYA
Chairman of the Board General Manager Comptroller
DATE OF APPROVAL OF THE REPORT: February 26, 2008
F - 52
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
F - 53
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Review Report F-55
Balance Sheets F-57
Statements of Income F-58
Statement of Shareholders' Equity F-59
Notes to the Financial Statements F-61
F - 54
- --------------------------------------------------------------------------------
|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
AUDITORS' REPORT TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
We have audited the accompanying financial statements of Industrial Development
Bank of Israel Limited ("the Bank"), detailed hereunder: Balance sheets as at
December 31, 2007 and 2006 and the statements of income, shareholders' equity,
and cash flows, for each of the years then ended. These financial statements are
the responsibility of the Bank's Board of Directors and of its Management. Our
responsibility is to express an opinion on these financial statements, based on
our audits.
The financial statements of the Bank as of December 31, 2005 and for the year
then ended were audited solely by Somekh Chaikin, CPAs (Isr.), whose unqualified
opinion, rendered on February 27, 2006 ,drew attention to certain issues.
The financial statements of the Bank as of December 31, 2006 and for the year
then ended were audited jointly by us and by Someh Chaikin CPAs (Isr.). Our
joint opinion dated March 26, 2007 was unqualified. The opinion drew attention
to certain issues.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner of
Auditors' Performance) - 1973, and standards the implementation of which in
audits of banking corporations is determined in guidelines of the Supervisor of
Banks. Such standards require that we plan and perform the audits to obtain
reasonable assurance that the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements that were audited by us, as referred to
above, present fairly, in all material respects, the financial position of the
Bank as at December 31, 2007 and 2006 and the results of its operations, the
changes in its shareholders' equity and its cash flows for each of the years
then ended, in conformity with accounting principles generally accepted in
Israel. Furthermore, in our opinion, the statements that were audited by us, as
above, have been prepared in accordance with the directives and guidelines of
the Supervisor of Banks.
As explained in Note 1C, the aforementioned financial statements are presented
in new Israeli shekels in accordance with Accounting Standards of the Israel
Accounting Standards Board and the provisions of the Supervisor of Banks.
F - 55
Without qualifying our opinion, we would call attention to the following:
A. Note 1A of the financial statements refers to the severe liquidity problems
experienced by the Bank in August 2002. These liquidity problems were
caused by increased withdrawals of deposits by the public, the
interest-bearing special line of credit provided to the Bank by the Bank of
Israel, the decisions 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
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
Bank of Israel regarding the restriction of the Bank's license and the
revocation of the license 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 duration of the "Run-Off" plan, as
above, (hereinafter - the Government decision extending the duration of the
"Run-Off" plan), and the blueprint for the sale of all the shares of the
Bank, all this as detailed in the above note.
Note 1 states, among other things, that: "as mentioned above, the decision
of the Government stipulates that the Run-off Plan shall conclude on July
31, 2008. As of the date of approval of these financial statements, it is
not known whether the blueprint plan for the sale will be implemented."
B. Note 21 of the financial statements regarding the litigation pending
against the Bank and senior officers thereof, all as detailed in the
aforementioned note.
The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the Bank
cease to operate as a "going concern".
Kesselman & Kesselman
Certified Public Accountants (Isr.)
February 26, 2008
F - 56
The Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts
2007 2006
------- -------
NOTE NIS MILLIONS NIS MILLIONS
------- ------- -------
ASSETS
Cash and deposits with banks 2 33.8 66.4
Securities 3 46.3 50.4
Credit to the public 4 5,521.1 6,519.1
Credit to governments 5 24.7 41.5
Fixed assets 6 0.8 1.1
Other assets 7 7.2 12.1
Perpetual deposits with the Israeli Treasury 8 848.8 825.8
------- -------
Total assets 6,482.7 7,516.4
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 9 54.6 66.9
Deposits of banks 10 481.2 768.3
Deposits of the Government 5,319.2 6,087.4
Perpetual deposit 11 0.1 0.1
Capital notes 12 20.2 24.9
Other liabilities 13 50.7 58.2
Non-participating shares 14 276.0 303.2
Participating preference shares 15 170.6 187.4
------- -------
Total liabilities 6,372.6 7,496.4
Shareholders' equity 16 110.1 20.0
------- -------
Total liabilities and shareholders' equity 6,482.7 7,516.4
======= =======
- ---------------------------------------- ---------------------------- --------------------------
Dr. Raanan Cohen - Chairman of the Board Uri Galili - General Manager Rimon Shmaya - Comptroller
Date of approval of the financial statements: February 26, 2008
The accompanying notes are an integral part of the financial statements.
F - 57
The Industrial Development Bank of Israel Limited
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts
2007 2006 2005
------- ------- -------
NIS NIS NIS
NOTE MILLIONS MILLIONS MILLIONS
------- ------- ------- -------
Profit from financing operations
before allowance for doubtful debts 23 29.3 18.2 61.6
Allowance for doubtful debts 4C (13.8) 21.7 44.2
------- ------- -------
Profit (loss) from financing operations
after allowance for doubtful debts 43.1 (3.5) 17.4
------- ------- -------
OPERATING AND OTHER INCOME
Operating commissions 24 1.1 1.3 2.2
Gains from investments in shares 25 8.7 16.4 11.3
Other income 26 1.7 3.8 4.7
------- ------- -------
Total operating and other income 11.5 21.5 18.2
------- ------- -------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 27 18.5 17.6 18.2
Expenses in respect of employee retirement - 0.5 5.5
Maintenance and depreciation of buildings
and equipment 2.9 2.7 3.8
Other expenses 28 9.4 14.3 16.5
------- ------- -------
Total operating and other expenses 30.8 35.1 44.0
------- ------- -------
Income (loss) from ordinary operations before taxes 23.8 (17.1) (8.4)
Provision for taxes on operating income 29 1.6 - -
------- ------- -------
NET INCOME (LOSS) FOR THE YEAR 22.2 (17.1) (8.4)
======= ======= =======
NET INCOME (LOSS) PER SHARE
--------------------------------------
2007 2006 2005
------- -------- ------
NIS NIS NIS
------- -------- ------
"A" ordinary shares 1,470.2 (1,132.4) (556.3)
======= ======== =======
WEIGHTED QUANTITY OF SHARES USED IN COMPUTING
INCOME PER SHARE
---------------------------------
2007 2006 2005
------- ------- -------
"A" ordinary shares 1,510 1,510 1,510
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F - 58
The Industrial Development Bank of Israel Limited
STATEMENT OF SHAREHOLDERS' EQUITY*
- --------------------------------------------------------------------------------
Reported amounts
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF OF FOR-SALE TOTAL
ON DOLLAR LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT(*) DEPOSIT(*) AT FAIR VALUE LOSS EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------------------------
BALANCE AS AT JANUARY 31,
2005 1,199.4 (697.5) 202.5 0.3 (505.5) 199.2
CHANGES DURING 2005
Net loss - - - - (8.4) (8.4)
Adjustments from
presentation of
available-for
- -sale securities at fair - - - 5.8 - 5.8
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 0.5 - - 0.5
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2005 1,199.4 (697.5) 203.0 6.1 (513.9) 197.1
CHANGES DURING 2006
Adjustments as of January 1,
2006 caused by initial
implementation of
Accounting Standard No. 22 (992.3) 697.5 90.7 - - (204.1)
------- ------- ------- ------- ------- -------
Balance as at January 1,
2006 following the
implementation of
Standard No. 22 207.1 - 293.7 6.1 (513.9) (7.0)
Net loss - - - - (17.1) (17.1)
Adjustments from
presentation of available-
for-sale securities at fair - - - 2.6 - 2.6
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 41.5 - - 41.5
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2006 207.1 - 335.2 8.7 (531.0) 20.0
------- ------- ------- ------- ------- -------
CHANGES DURING 2007
Net income - - - - 22.2 22.2
Adjustments from
presentation of
available-for
- -sale securities at fair - - - 0.8 - 0.8
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 67.1 - - 67.1
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2007 207.1 - 402.3 9.5 (508.8) 110.1
* See Note 8 to the financial statements.
The accompanying notes are an integral part of the financial statements.
F - 59
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
2007 2006 2005
--------- --------- ---------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income (loss) for the year 22.2 (17.1) (8.4)
Adjustments to reconcile net income/loss to net cash flows
generated by operating activities:
Depreciation on equipment 0.4 0.4 1.1
Allowance for doubtful debts (13.0) 22.9 44.5
Gain on sale of available-for-sale securities (3.3) (10.3) (11.3)
Provision for severance pay and pensions, net (4.9) (0.6) 0.3
Inflationary erosion of capital notes and perpetual deposit (3.0) (1.8) 1.6
--------- --------- ---------
Net cash provided by (used in) operating activities (1.6) (6.5) 27.8
--------- --------- ---------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net 9.2 6.5 3.0
Available-for-sale securities, net 8.2 25.7 13.9
Credit to the public, net 1,010.5 1,139.6 269.2
Credit to governments, net 16.8 17.5 13.7
Other assets, net 4.9 3.5 10.4
Acquisition of fixed assets (0.1) (0.3) (0.4)
--------- --------- ---------
Net cash provided by activities related to assets 1,049.5 1,192.5 309.8
--------- --------- ---------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes (1.7) (0.2) -
Deposits of the public, net (12.3) (111.3) (227.1)
Deposits of banks, net (287.1) (280.5) (379.2)
Deposits of the Government, net (768.2) (795.6) 228.4
Other liabilities, net (2.0) 1.6 (1.7)
--------- --------- ---------
Net cash used in activities
relating to liabilities and shareholders' equity (1,071.3) (1,186.0) (379.6)
--------- --------- ---------
DECREASE IN CASH (23.4) - (42.0)
BALANCE OF CASH AS AT BEGINNING OF YEAR 53.4 53.4 95.4
--------- --------- ---------
BALANCE OF CASH AS AT END OF YEAR 30.0 53.4 53.4
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F - 60
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. THE "RUN OFF" PLAN, THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
AND THE BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
Due to increased withdrawals of deposits of the public during the third
quarter of 2002, the Bank experienced severe liquidity problems, following
which the Bank turned to the Governor of the Bank of Israel (hereinafter -
the "Governor") on August 22, 2002, with a request for a special line of
credit.
DECISIONS OF THE MINISTERIAL COMMITTEE FOR SOCIAL AND ECONOMIC AFFAIRS
REGARDING APPROVAL AND EXTENSION OF THE RUN-OFF PLAN
On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (the Social Economic Cabinet) approved the extension of the Bank's
"Run-Off" plan, after two years earlier, on July 29, 2003, it had decided
to adopt it. The main principles of the Committee's decision from October
10, 2005 are as follows:
>> The assets of the Bank are to be sold of in a supervised process
and over a period ending by July 31, 2008, in the framework of
the "Run-Off" plan approved by the Bank's Board of Directors and
with the changes to be determined by the Accountant General and
the Government Companies Authority.
>> The maximum amount of the special line of credit will at no time
exceed NIS 1.25 billion and over the period of executing the
Run-Off plan it will not exceed the amounts approved by the Bank
of Israel.
>> The Bank will not use the special line of credit or other sources
for the purpose of providing new credit.
>> The Government is responsible for the repayment of the special
line of credit as from July 1, 2005, on the condition that the
interest on the credit line until the end of the plan shall not
exceed the Bank of Israel interest rate.
>> If, at the end of the Run-Off plan, there remains an unpaid
balance of the special line of credit, the Government will repay
the balance to the 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).
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
Following the liquidity problems encountered by the Bank in the third
quarter of 2002, the Bank of Israel had provided it a special line of
credit, which was recently extended until July 31, 2008 in accordance with
the letter of the Governor from October 30, 2005. The terms of the special
line of credit were determined by the Governor of the Bank of Israel and
over time they underwent changes. The present terms of the special line of
credit are specified in the letter of the Governor from October 30, 2005,
and the principal terms are as follows:
F - 61
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
>> The credit line will be in effect until no later than July 31, 2008.
>> The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline in accordance with a forecast that was
attached to the notice of the Governor of the Bank of Israel regarding
extension of the line until July 31, 2008.
>> The Bank will be allowed to continue to use the credit line in order
to meet the liquidity needs it has for fulfilling its current banking
obligations.
>> The interest on the utilized credit will be the "Bank of Israel
interest rate" (it is noted that before July 29, 2003 the utilized
credit bore a higher rate of interest).
>> Any significant administrative expense that deviates from the Bank's
ordinary course of business and has an effect on its business results
will require the approval of the Bank of Israel.
>> Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
The letter of the Governor dated October 30, 2005 noted that, should the
Bank of Israel, in its sole and exclusive discretion, see fit so to do,
consideration will be given to the imposition of further restrictions upon
the operations of the Bank in addition to those contained in the
above-mentioned letter, whether or not those further restrictions relate to
non-compliance with the provisions of the "Run-off plan."
The utilized balance of the special line of credit of the Bank of Israel
(not including accrued interest) was NIS 476 million as at December 31,
2007 (compared with NIS 751 million as at December 31, 2006).
THE COMPONENTS OF THE RUN-OFF PLAN
The principal components of the "Run-Off" plan that was approved by the
Bank's Board of Directors are a supervised sale of the Bank's assets by the
end of the plan period and a significant reduction in manpower and in
operating expenses, subject to the continued granting of the special line
of credit by the Bank of Israel. As a part of this process the Bank also
implemented an extensive and detailed efficiency plan.
In accordance with the "Run-Off" plan and the efficiency plan implemented
by the Bank, the Bank refrains from granting new credit and concentrates
its activities on collecting the existing credit.
As part of the implementation of its plans, the Bank has significantly
reduced or completely discontinued the following activities: foreign
currency and foreign trade activity, maintenance of a dealing room (for
customers), maintenance of current accounts, checking accounts and
securities accounts, processing grants, operating cash and clearing
facilities (independently) and credit cards. The Bank also refrains from
accepting new deposits and it has recently stopped (subject to certain
exceptions) renewing existing deposits that reach maturity.
The reduction in the Bank's operations was also accompanied by a reduction
in the Bank's staff.
F - 62
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
On July 26, 2005 the Bank's Board of Directors discussed a document that
had been prepared regarding the extension of the "Run-Off" plan. In light
of the document's conclusion regarding the advantages of extending the
plan, the Board of Directors approved extension of the plan until July 31,
2008. The Bank's Board of Directors also decided on the same occasion that
due to the reduction in the Bank's activity according to the "Run-Off" plan
and the date to which the plan was extended, the Bank would notify the
Governor of the Bank of Israel that it agrees that its banking license be
restricted in a manner that reflects its reduced activity as derived from
the "Run-Off" plan, and to the restricted license specifying that it is
valid until the end of the plan (July 31, 2008).
In his letter from January 29, 2006 the Bank was notified by the Governor
of the Bank of Israel as follows:
>> The banking license the Bank received on June 4, 1989 will be
restricted so that the Bank cannot engage in any business it did
not engage in prior to the date of the license (until the date of
the license the Bank acted as an investment bank) and without
derogating from the generality of the aforementioned, the Bank
will not receive new deposits and will not renew deposits
reaching their current date of maturity, other than from the
shareholders.
>> The Bank's banking license will be revoked as from August 1,
2008.
In a letter dated May 1, 2007, the Bank of Israel announced that if the
blueprint set out below for the sale of the shares of the Bank is
implemented prior to July 31, 2008, the banking license of the Bank will be
cancelled on the date the blueprint is carried out.
BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
The Finance Ministry and the Government Companies Authority are in the
process of assessing and taking steps to advance the blueprint for the sale
of all of the issued share capital of the Bank to a third party purchaser.
As part of this, on June 17, 2007, the Government Companies Authority
issued a request for information (RFI) in which it announced, among other
things, that the Government of Israel, through the Government Companies
Authority, was requesting information from parties interested in purchasing
the Industrial Development Bank of Israel Ltd. and was requesting that
those interested parties submit their requests on July 3, 2007. The RFI
also included a description of the proposed blueprint for the sale whereby,
among other things, the holdings of the State in the shares of the Bank,
including the controlling shares (ordinary shares A) and the holdings of
the other holders of controlling shares (the three large bank groups: Bank
Discount, Bank Hapoalim, Bank Leumi, and also First International Bank,
IDB, and the Association of Industrialists) will be transferred to the
designated buyer, the shares of the Bank that are traded on the Tel Aviv
Stock Exchange and which are held by the public will be purchased by the
designated buyer, as part of the creditors agreement pursuant to article
350 of the Companies Law - 1999, whereas preferred Shares D and DD held by
the public will be redeemed and the accrued preferred dividend in arrears
will be paid in respect thereof. A detailed description of the blueprint
that was included in the RFI can be found in the Immediate Report issued by
the Bank on June 17, 2007. As reported to the Bank by the Government
Companies Authority, on the date stipulated for submission of the requests,
July 3, 2007, eleven requests were received at the offices of the Authority
from companies and individuals.
F - 63
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
At the beginning of 2008, at the request of the State and other
shareholders, Professor A. Barnea prepared a proposal for the distribution
of the proceeds to be received upon the realization of the blueprint (if
and when it is implemented), among the various shareholders of the Bank.
Professor Barnea's document, which contains the proposed distribution
formula and which is dated January 13, 2008, was attached to the Immediate
Report issued by the Bank on January 15, 2008. Among the ordinary
shareholders of the Bank who requested the proposal are Bank Leumi, Bank
Hapoalim, Discount Bank, the financial institutions which filed the suit
against the Bank regarding the renewal of the dividend distribution, and
part of the holders of the Bank's ordinary preferred shares. Please note
that the Bank is not in possession of information that the State and the
aforementioned shareholders have given their consent to the distribution
formula and even at this stage, it is impossible to know if and when the
blueprint will be implemented. In addition, the sale of the holdings of the
State in the Bank necessitates passage of a privatization resolution by the
Ministerial Committee on Privatization, a resolution which has not yet been
passed.
As mentioned above, the decision of the Government stipulates that the
Run-off Plan shall conclude on July 31, 2008. As of the date of approval of
these financial statements, it is not known whether the blueprint plan for
the sale will be implemented
The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the
Bank cease to operate as a "going concern".
B. DEFINITIONS
In these financial statements -
ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
the changes in the general purchasing power of the Israeli currency in
accordance with the opinions of the Institute of Certified Public
Accountants in Israel.
REPORTED AMOUNT - The adjusted amount as at the date of transition with the
addition of amounts in nominal values that were added after the date of
transition and less amounts subtracted after the date of transition.
DATE OF TRANSITION - December 31, 2003.
ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
the effect of the changes in the general purchasing power of the Israeli
currency in accordance with the opinions of the Institute of Certified
Public Accountants in Israel.
F - 64
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
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NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
GENERAL
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel and in accordance with
generally accepted accounting principlesin Israel.
In October 2001 the Israel Accounting Standards Board published Accounting
Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
Pursuant to this standard and in accordance with Accounting Standard No. 17
that was published in December 2002, the adjustment of financial statements
was discontinued as at January 1, 2004. Until December 31, 2003, the Bank
continued to prepare adjusted financial statements in accordance with the
directives of the Supervisor of Banks, on the basis of the principles of
the Opinion No. 36 of the Institute of Certified Public Accountants in
Israel. The adjusted amounts presented in the financial statements as at
December 31, 2003 are the basis for the financial statements in reported
amounts. Any additions made during the period are included according to
their nominal values.
BALANCE SHEET
Non-monetary items are stated at reported amounts.
Monetary items are stated in the balance sheet at their nominal historical
values as at balance sheet date.
Amounts of non-monetary assets do not necessarily reflect their realizable
value or current economic value, but only the reported amounts of such
assets.
The term "cost" in these financial statements means the reported amount of
cost.
STATEMENTS OF INCOME
Income and expenses deriving from non-monetary items or from provisions
included in the balance sheet are derived from the difference between the
reported amount of the opening balance and the reported amount of the
closing balance. All other operating items are stated at their nominal
historical values.
D. STATEMENT OF ADJUSTMENTS TO SHAREHOLDERS' EQUITY
On January 1, 2006, the Bank implemented for the first time accounting
Standard No. 22, "Financial Instruments: Disclosure and Presentation'
(hereinafter - the "Standard"). The Standard sets forth the presentation
provisions of financial instruments in the financial statements and details
the required fair disclosure thereof. In addition, the Standard stipulates
the manner of classification of financial instruments as financial
liabilities and equity, classification of interest, dividends, and related
losses and gains, and the circumstances under which an entity can set off
financial assets and liabilities. The Standard cancels Opinion No. 53, "The
Accounting Treatment of Convertible Liabilities" and Opinion No. 48, "the
Accounting Treatment of Option Warrants".
In respect of certain issues relating to the aforementioned treatment,
there exist directives of the Supervisor of Banks. In such cases, the Bank
is subject to those directives.
F - 65
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
D. STATEMENT OF SHAREHOLDERS' EQUITY (CONT.)
The initial implementation of the Standard resulted in a reduction in
shareholders' equity in an amount of NIS 204.1 million, as a result of the
classification of participating preference shares of Class C, CC, and CC1
which were previously classified as shareholders' equity, to a liability in
respect of participating preference shares.
Adoption of the Standard was prospective. Comparative amounts relating to
previous periods were not restated.
The difference generated until May 6, 1996 between the adjustment of the
special deposit with the Israeli Treasury which, up to May 6, 1996, was
linked to the exchange rate of the US dollar, in respect of the
participating preference shares similarly linked to the exchange rate of
the US dollar, and the adjustment of the said deposit on the basis of the
CPI, is reflected in the statement of shareholders' equity in the item
entitled "Accumulated difference on translation of a dollar linked
deposit".
Further to the initial implementation of Standard No. 22, the balance of
the accumulated difference from the dollar-linked deposit was cancelled as
from January 1, 2006, due to the fact that the participating preference
shares were classified to a liability in respect of participating
preference shares and are measured, as from that date, on the basis of
their dollar-linked value (see Note 8).
The difference generated from May 7, 1996, between the adjustment of the
perpetual deposit with the Israeli Treasury, linked from that date to the
CPI (which in no event will be less than its dollar value as it was on
October 1, 1987) and the adjustment of the non-participating shares linked
to the exchange rate of the dollar, is reflected in the statement of
shareholders' equity in the item entitled "Accumulated difference on
translation of CPI-linked deposit" (see Note 8).
E. EXCHANGE RATES AND LINKAGE
(1) Assets and liabilities denominated in, or linked to, foreign currency,
except for investments in securities, are stated on the basis of the
representative exchange rates, published by Bank of Israel, in effect
on balance sheet date or on a date relevant to the particular
transaction.
(2) Assets and liabilities linked to the CPI are stated according to the
contractual linkage terms of each balance.
(3) Assets and liabilities, which are optionally linked to the CPI or to
foreign currency, are stated in the financial statements using the
relevant basis under the terms of the respective transactions.
(4) Interest and linkage differences accrued in respect of assets and
liabilities are included in the balance sheet under the items to which
they relate.
F - 66
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. EXCHANGE RATES AND LINKAGE (CONT'D)
(5) Following are details of exchange rates and the CPI and the rates of
change therein:
DECEMBER 31 RATE OF CHANGE DURING
--------------------------------- ----------------------------------
2007 2006 2005 2007 2006 2005
---- ---- ---- ---- ---- ----
% % %
---- ---- ----
Representative
exchange rate
of US$1
(in NIS) 3.846 4.225 4.603 (9.0) (8.2) 6.8
CPI in points
for:
December 191.1 184.9 185.0 3.3 (0.1) 2.4
November 190.0 184.9 185.4 2.8 (0.3) 2.7
F. SECURITIES
In accordance with the directives of the Supervisor of Banks securities are
to be classified into three groups, and principles of measurement were
provided for each group as follows:
HELD-TO-MATURITY DEBENTURES
Such debentures are stated at their amortized cost as at balance sheet
date. Such cost represents the par value plus linkage increments and
interest accrued since acquisition. It also includes the unamortized
discount or premium, generated upon acquisition. Income from
held-to-maturity debentures is recognized on the accrual basis.
AVAILABLE-FOR-SALE SECURITIES
Such securities are stated at their fair value. Income therefrom is
recognized on the accrual basis. The difference between the fair value and
the amortized cost of available-for-sale securities, net of the related tax
effect, is recorded as a capital reserve. Non-marketable shares are stated
at their reported cost.
SECURITIES FOR TRADING
Such securities are stated at their fair value. Gains or losses arising
from changes in the fair value are recognized in the statement of income.
The fair value of securities for trading is determined based on their stock
market prices as at balance sheet date.
F - 67
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
F. SECURITIES (CONT'D)
IMPAIRMENT IN VALUE OF INVESTMENTS
From time to time the Bank examines whether there has been an impairment in
the value of its investments in securities which is not of a temporary
nature. This examination is performed when there are signs that may
indicate the possibility of an impairment in the value of an investment,
including a decline in their stock market prices, the business of the
investee, the industry in which the investee operates and additional
parameters. Provisions for the adjustment in value of these investments,
which in accordance with the opinion of the Management are based on an
examination of the overall relevant aspects and the significance of each,
and which are not of a temporary nature, are recorded in the statement of
income.
G. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts,
which, in Management's opinion, fairly present the anticipated loss on the
credit portfolio, including off-balance sheet credit.
In determining the adequacy of the allowances, Management based itself upon
the evaluation of the risk involved in the credit portfolio using available
information on the customers' financial position, volume of activity, past
record and adequacy of the collaterals received.
The directives of the Supervisor of Banks require that, commencing with
1992, banks include, in addition to the specific allowance for doubtful
debts, a supplementary allowance for doubtful debts, which replaces the
general allowance, which had been required up to that time. The
supplementary allowance for doubtful debts is based upon excessive credit
balances, measured according to specified quality characteristics of the
credit portfolio, as provided in the directives of the Supervisor of Banks.
In accordance with the aforementioned requirements, a portion of the
general allowance, as at December 31, 1991, equal to 1% of the total debt
to which it was related at that date, is to be maintained in inflation
adjusted values. According to a directive of the Supervisor of Banks the
adjustment to inflation of the general allowance was discontinued as at
January 1, 2005.
According to Directive 315 of Proper Banking Procedures, a banking
corporation must record a supplementary allowance for doubtful debts in
respect of debts of customers which deviate from limits stipulated by the
Supervisor of Banks, which are calculated as a certain percentage of the
Bank's capital, as stipulated for purposes of calculating the minimum
capital ratio. These limits relate to the indebtedness of an individual
borrower or a borrower group, to the indebtedness in respect of financing
the acquisition of means of control of corporate entities and to the
indebtedness of related parties.
As a result of the decline in the "first tier capital" of the Bank and the
limitation on the amount of "second tier capital" that may be taken into
consideration, a part of the customers' debts to the Bank exceed the
amounts of the aforementioned limits.
Furthermore, Directive 315 of the Proper Banking Procedures provides that a
banking corporation is required to make a supplementary allowance for
doubtful debts if the total liabilities of a certain sector to the banking
corporation exceed 20% of the total liabilities of the public to the
banking corporation (hereinafter - "the limit on sector indebtedness").
F - 68
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
Since the Bank has stopped providing new credit and is focusing on the
collection of the existing credit to its customers, its ability to spread
the indebtedness of its customers between the various sectors has decreased
and it may on occasion deviate from the limit on sector indebtedness.
The Bank applied to the Bank of Israel requesting an exemption from
recording the supplementary allowance for doubtful debts deriving from
deviations from the aforementioned various debt limits.
In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
Banks exempted the Bank from the requirement to increase the supplementary
allowance for doubtful debts in its financial statements as at March 31,
2003 and June 30, 2003, in respect of deviations from the debt limits of an
individual borrower and a borrower group and in respect of deviations from
limits in respect of financing means of control in corporate entities.
In his letter of November 26, 2003, the Supervisor of Banks announced that
in light of the Government's decision on the affairs of the Bank, the
Bank's plan to reduce its activity and the commitment of the Government to
repay the special line of credit, which was granted to the Bank by the Bank
of Israel and which is being used by the Bank to repay its liabilities to
its depositors, he approves the following relief with respect to
implementation of the Proper Banking Procedures:
A. As from the financial statements as at September 30, 2003 and
thereafter, the Bank is exempt from increasing the supplementary
allowance for doubtful debts in respect of deviations from debt limits
of an individual borrower and a borrower group and deviations from
debt limits in respect of financing means of control in corporate
entities, and in respect of deviations from the limit of sector
indebtedness.
B. The Bank is allowed to reduce the supplementary allowance it recorded
in respect of the deviation from the aforementioned limits in the last
quarter of 2002.
C. The Bank is allowed to reduce the supplementary allowance it recorded
in the past in respect of the deviation from indebtedness of related
parties.
Accordingly, in the Bank's financial statements as at December 31, 2003,
the Bank did not record a supplementary allowance for doubtful debts in
respect of deviations from the aforementioned limits, and the supplementary
allowance for doubtful debts in the amount of NIS 7.5 million that was
included in the financial statements of the Bank on December 31, 2002 and
thereafter, in respect of the deviation from these limits, was cancelled in
the third quarter of 2003.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to record a supplementary allowance in
significant amounts in respect of these deviations, which would have had a
material impact on its financial results for those periods. In addition,
the adjustment of the supplementary allowance for changes occurring from
time to time in the volume of the deviations would have impacted on the
financial results of the Bank in the subsequent reporting periods.
The aggregate balance of the general allowance and the supplementary
allowance for doubtful debts in accordance with the directives of the Bank
of Israel, as at December 31, 2007, constitutes 5.94% of the credit to the
public risk, which includes credit risk and off-balance sheet credit risk
as calculated for purposes of individual borrower and group of borrowers
limitations (December 31, 2006 - 4.82%).
F - 69
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
The Bank's policy is not to write-off doubtful debts until all collection
efforts, with respect thereto, have been exhausted. If Management concludes
that recovery of a debt is no longer possible, then cases involving
significant amounts are brought before the authorized bodies of the Bank,
which decide upon their being written-off.
H. FIXED ASSETS
Fixed assets are stated at cost net of accumulated depreciation.
Depreciation is calculated using the "straight-line" method, at rates
deemed adequate to write off the assets over their estimated useful lives.
I. CONTINGENT LIABILITIES
The accounting treatment of contingent legal claims is based on an opinion
received by management of the Bank from its legal counsel, on which
management of the Bank relies, which provides the probability of occurrence
of the exposure to risk relating to contingent claims. The claims were
classified in accordance with the probability ranges of occurrence of the
exposure to risk as follows:
1) Probable - when the probability is over 70%.
2) Reasonably possible - when the probability is over 20% and less than
or equal to 70%.
3) Remote - when the probability is less than or equal to 20%.
Only in rare cases is a banking institution allowed to state in the
financial statements that in the opinion of the bank's management, based
upon its legal counsel, it is unable to evaluate the probability of
realization of the exposure to risk in respect of a claim for which a
petition was filed to have the claim certified as a class action, this in
the four financial statements that are published after the filing of the
petition. The Bank has provided disclosure with respect to material legal
proceedings pending against the Bank. Note 21D provides disclosure
regarding contingencies in respect of which the risk of occurrence of the
exposure is not remote and for which no provision was made. The Bank's
practice is to include in its financial statements appropriate provisions
in respect of claims which in the opinion of management of the Bank will
not be rejected or cancelled and the risk of their occurrence is probable.
J. BASIS OF RECOGNITION OF INCOME AND EXPENSES
(1) Income and expenses are recognized on the accrual basis.
(2) As to the basis of recognition of income and expenses with respect to
trading securities and derivative financial instruments defined as
other transactions, see F and L, respectively.
F - 70
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
K. EMPLOYEE RIGHTS
Appropriate provisions cover the Bank's liability for payment of severance
pay and other benefits to its employees, according to labor agreements.
In December 2002, the Bank, the General Federation of Labor and the Bank's
employee committee signed a special collective agreement regarding a
reduction in the number of the Bank's employees. According to this
agreement some of the employees are entitled to a pension as from the date
of termination of their employment. In respect of such employees, the Bank
signed an agreement with a pension fund which arranges the payment of the
pensions. In accordance with the agreements, on the date on which the
employment of each such employee is terminated, the Bank deposits with the
pension fund the amount required in order to purchase the pension rights
for the employee. The Bank included a provision in respect of the
anticipated cost of acquisition of the pension rights, as calculated by a
pension consultant.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank implements the directives of the Supervisor of Banks regarding
derivative financial instruments and hedging activities. The directives are
based on the principles stipulated in U.S. Accounting Standard FAS 133. In
accordance with these directives, the Bank presents all the derivative
instruments, including certain derivative instruments embedded in other
contracts, as assets or liabilities in the balance sheet and measures them
according to fair value. The change in the fair value of a derivative
instrument is recorded in the statement of income or included in the
shareholders' equity as a component of other comprehensive income,
according to the designated purpose of the instrument.
M. OFF-SETTING OF FINANCIAL INSTRUMENTS
Pursuant to the directives of the Supervisor of Banks, amounts of
designated deposits, the repayment of which to the depositor is contingent
on the collection of the loans granted therefrom, are offset against the
amounts of the related loans and, therefore, are not reflected in the
balance sheet. Income earned from such collection-based loan operations is
classified as operating commissions.
In accordance with the instructions of the Supervisor of Banks, assets and
liabilities in respect of financial instruments with the same counter party
are set-off against one another and presented net in the balance sheet when
the following cumulative conditions are fulfilled:
(1) In respect of such liabilities the Bank has the legal right to enforce
the set-off of the liabilities from the assets.
(2) The Bank intends to pay the liabilities and realize the assets on a
net basis or simultaneously.
F - 71
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
N. TAXES ON INCOME
The provision for taxes on the income of the Bank, which is classified as a
financial institution for value-added tax purposes, includes a provision
for profit tax leviable on the Bank's income under the provisions of the
Value-Added Tax Law. Value-added tax on payroll ("Payroll Tax"), which is
leviable on the payroll costs of financial institutions, is reflected in
the statement of income under the "payroll and related expenses" item. In
the period between 2002 and 2006, the payroll and related expenses item was
not charged with any expense relating to payroll tax due to losses for
profit tax purposes.
O. STATEMENT OF CASH FLOWS
Cash flows from activity in assets and liabilities are presented net,
except for securities, fixed assets, and capital notes. "Cash", for
purposes of the cash flow statement, includes cash balances and cash
deposits with banks for an initial period not exceeding three months.
P. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of income and expenses during
the reported period. Actual results may differ from such estimates.
Q. NET INCOME (LOSS) PER SHARE
Commencing on January 1, 2006, the Bank implemented Accounting Standard No.
21 "Income Per Share" of the Israel Accounting Standards Board. This
standard, which is based on International Accounting Standard No. 33,
replaces Opinion No. 55 of the Institute of Certified Public Accountants in
Israel on this issue and sets out new rules regarding the calculation of
income per share and the presentation thereof in the financial statements.
According to the provisions of the Standard, the Bank computes income per
share in respect of income from continuing operations allocated to ordinary
shareholders. Income per share is computed by dividing the income or loss
allocated solely to the ordinary shareholders, by the weighted average of
the number of ordinary shares in circulation during the reported period. In
the past, income per share was computed in relation to an amount which
equals US$1 of the par value of the shares, according to the basic exchange
rate to which they are linked. Comparative amounts of income per share in
these financial statements were restated in respect of the retroactive
implementation of the calculation provisions of the new standard.
R. IMPAIRMENT OF ASSETS
Accounting Standard No. 15, "Impairment in value of assets" stipulates the
procedures to be implemented by the corporation in order to ensure that its
assets in the balance sheet are not presented at amounts higher than their
recoverable value. Such value is the higher of the net selling price and
the present value of the estimated future cash flows expected to be
generated from the use and disposal of the asset. The Standard also
stipulates principles of presentation and disclosure regarding assets which
have been impaired.
F - 72
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
S. BUSINESS SEGMENTS
In accordance with an approval received from Bank of Israel, the Bank is
not required to report according to business segments.
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION
1. In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29, "Adoption of International Financial Reporting
Standards ("IFRS")" (hereinafter - the "Standard"). The Standard
provides that entities subject to the Securities Law - 1968 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 directives and guidelines of the Supervisor of
Banks.
In addressing the manner in which the Standard is to be implemented by
banking institutions, the Supervisor of Banks notified the banking
institutions that:
a. He intends on regularly issuing directives for the implementation
of Israeli standards issued by the Israel Accounting Standards
Board, which are based on IFRS that do not relate to the core
banking business.
b. In the second half of 2009 he will render his decision regarding
the date of implementation of IFRS that relate to the core
banking business, taking into account the results of the process
of adoption of these standards in Israel on the one hand and the
progress of the process of convergence of IFRS and U.S. standards
on the other.
c. Therefore, in addressing the core banking business, the financial
statements of a banking institution presented in accordance with
the directives and guidelines of the Supervisor of Banks will
continue to be presented on the basis of U.S. standards that were
set out in the public reporting directives.
2. In December 2006, the Israel Accounting Standards Board published
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and Its Controlling Shareholder" (hereinafter - the
"Standard"). The Standard replaces the Securities Regulations
(Financial Statement Presentation of Transactions between a
Corporation and its Controlling Shareholder) - 1996 as adopted in the
public reporting directives of the Supervisor of Banks. The Standard
stipulates that assets and liabilities that were the subject of a
transaction between an entity and its controlling interest shall be
measured at the date of the transaction at fair value and that the
difference between the fair value and the proceeds of the transaction
are to be carried to shareholders' equity. A debit difference is in
essence a dividend, thereby reducing retained earnings. A credit
difference is in essence an owners' investment and shall be presented
as a separate item in shareholders' equity entitled "Capital reserve
from a transaction between the entity and its controlling
shareholder".
F - 73
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION (CONT'D)
The Standard discusses three issues relating to transactions between
an entity and its controlling interest, as follows: the transfer of an
asset from the controlling shareholder to the entity or alternatively,
the transfer of an asset from the entity to the controlling
shareholder; a controlling shareholder's assumption of a liability, in
whole or in part, to a third party on behalf of the entity, the
indemnification of the entity by a controlling shareholder in respect
of an expense, or the waiver by the controlling shareholder to the
entity of a debt, in whole or in part, due to the shareholder from the
entity; and loans granted to the controlling shareholder or received
from the controlling shareholder. In addition, the Standard stipulates
the disclosure that must be made in the financial statements in
connection with transactions between the entity and its controlling
shareholder during the period.
The Standard applies to transactions between an entity and its
controlling shareholder that were made after January 1, 2007, as well
as to loans granted to or received from a controlling shareholder
prior to the effective date of the Standard, as of the effective date.
As of the date of the release of the financial statements, the
Supervisor of Banks has not yet issued a directive regarding the
manner of adoption of the Standard by banking institutions, if at all.
3. A directive on the issue of measurement and disclosure of impaired
debts, credit risk and the allowance for credit losses - On December
31, 2007, the Supervisor of Banks issued a draft directive on the
issue of "Measurement and Disclosure of Impaired Debts, Credit Risk
and the Allowance for Credit Losses". The directive was raised for
discussion at the Advisory Committee of the Bank of Israel regarding
banking matters.
The directive is based on accounting principles accepted among U.S.
banks. The principles behind the draft directive constitute a
significant change over the current directives regarding the
classification of problematic debts and the measurement of allowances
for doubtful debts in respect of credit losses. The new directive sets
out explicit rules in connection with the classification of impaired
debts, credit risk, measurement of allowances for credit losses, the
accounting write-off of debts and the recognition of income in respect
of debts. In addition, the new guidelines set out explicit
requirements for maintaining a systematic process for setting up
provisions for credit losses and preservation of documentation that
supports the process and the allowances.
The new directive is supposed to go into effect commencing with the
financial statements as of January 1, 2010. The directive set out
transition provisions for implementation in the annual financial
statements for 2007 and in the financial statements to be issued
during 2008 and 2009. The transition provisions for the annual
financial statements of 2007 relate to setting out the major features
of the directive, information regarding the preparations of a banking
entity to implement the directive and data in respect of the expected
impact (direction and scope) of initial implementation of the
directive on shareholders' equity as of January 1, 2010. The
transition provision for the annual financial statements of 2009
includes, in addition to the above, the requirement to provide
quantitative information regarding the adoption of the new guidelines
on:
- The recorded balance of credit debt as of January 1, 2010, with a
breakdown into its various components.
F - 74
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION (CONT'D)
- The balance of the provision for credit losses as of January 1,
2010, with a breakdown into its various components.
- The balance included in the required disclosure for 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 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 shareholders' equity as of January 1, 2010.
In its letter dated August 12, 2007, the Bank of Israel notified the Bank
that the Bank is entitled not to take steps toward implementation of this
directive.
NOTE 2 - CASH AND DEPOSITS WITH BANKS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS NIS
MILLIONS MILLIONS
------- -------
Cash and deposits with Bank of Israel 5.9 8.1
Deposits with commercial banks (1) 24.1 50.6
Deposits in special banking institutions 3.8 7.7
------- -------
Total 33.8 66.4
======= =======
Including cash, deposits with Bank of Israel
and with banks for an initial period not
exceeding three months 30.0 53.4
======= =======
(1) As to the pledge on deposits with commercial banks - see Note 17
below.
F - 75
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
A. COMPOSITION
DECEMBER 31, 2007
-------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
------- ------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------------------------
NIS MILLIONS
-------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 0.5 0.5 - - 0.5
Shares of others 45.8 36.3 9.5 - 45.8 (3)
------- ------- ------- ------- -------
Total available-
for-sale securities 46.3 36.8 9.5 (4) - 46.3
------- ------- ------- ------- -------
Total securities 46.3 36.8 9.5 - 46.3 (3)
======= ======= ======= ======= =======
DECEMBER 31, 2006
-------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
------- ------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------------------------
NIS MILLIONS
-------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 0.7 0.7 - - 0.7
Shares of others 49.7 41.0 8.7 - 49.7 (3)
------- ------- ------- ------- -------
Total available-
for-sale securities 50.4 41.7 8.7 (4) - 50.4
------- ------- ------- ------- -------
Total securities 50.4 41.7 8.7 - 50.4 (3)
======= ======= ======= ======= =======
(1) In the case of shares - cost less provision for impairment in value,
where required.
(2) Fair value data are based, generally, on stock market prices, which do
not necessarily reflect the price which would be received on the sale
of a large quantity of shares.
(3) Includes shares, the fair value of which is not readily determinable,
which are stated at cost in the amount of NIS 11.8 million (December
31, 2006 - NIS 16.7 million).
(4) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
B. See Note 4E regarding the classification of a customer's debt to the
securities item.
NOTE: For detail regarding results of investments in debentures - see Note
23E, and for detail regarding results of investments in shares - see
Note 25.
F - 76
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)
A. COMPOSITION OF CREDIT
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Credit 5,566.3 6,570.8
General and supplementary allowances for doubtful debts(1) 45.2 51.7
------- -------
Total 5,521.1 6,519.1
======= =======
B. CREDIT TO THE PUBLIC INCLUDES:
1. CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
a. Non-income bearing credit to problematic borrowers -
Unlinked Israeli currency 41.1 123.7
Israeli currency linked to the CPI 3.9 7.0
Denominated in or linked to foreign currency 3.5 10.9
------- -------
48.5 141.6
======= =======
b. Credit restructured during the year, without waiver of income -
Unlinked Israeli currency 23.3 21.7
Israeli currency linked to the CPI 1.1 38.2
Denominated in or linked to foreign currency 1.0 5.1
c. Credit to borrowers regarding which there is an as-yet
unimplemented Management decision to restructure
their debt 9.3 26.5
d. Credit temporarily in arrears 8.7 14.5
Interest income recorded in respect thereof 0.7 0.4
e. Credit under special supervision 139.8 156.2
(1) The specific allowance for doubtful debts was deducted from the
relevant credit categories.
(2) The balance of problematic debts, less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 77
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR
In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
the banks, the Government and the Kibbutz movements. This Arrangement
includes the implementation of a rehabilitation program prepared by the
borrowers, the waiver by the Bank of part of the loans granted by it,
receipt of Government grants designated for the early repayment of a part
of the Kibbutz debts, and a rescheduling of another portion of the debts
for a period of up to 25 years, in respect of which the Government provided
less costly financing which leaves the Bank with a margin of 2% p.a.
During 1991 through 1996, the Bank received from the Government the grants
under the Kibbutz Arrangement of 1989, designated for the early repayment
of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
debt accordingly. Furthermore, the Bank also received from the Government,
the deposits required for the rescheduling of part of the Kibbutz debts in
accordance with the Bank's proportionate share of the overall arrangement.
In 1993, the Bank commenced the implementation of the Arrangement at the
individual Kibbutz level for some Kibbutzim, reflecting the results thereof
on its books.
During 1996, a supplementary arrangement was signed by the banks, the
Government and the Kibbutz movements for the arrangement of the debts of
the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
was signed by the said parties. The main principles of the supplementary
arrangement, including the amendment thereto, are as follows:
- The arrangement relates to a part of the Kibbutzim and organizations
included in the first arrangement, in respect thereof it has become
evident that after full execution of the financial arrangement
contemplated by the first arrangement, debts remain regarding which
the repayment ability envisioned, with respect thereto, under that
agreement, does not allow them to fulfill their obligations (the
"balloon" debt). Such "balloon" debt is to be written off.
- In respect of most of the "balloon" debts, the writing-off shall be
covered as to 65% from bank sources and as to 35% from Government
sources.
- Kibbutzim will assign part of their rights in land to the Israel Lands
Administration. Upon each Kibbutz joining the arrangement, its land,
which was found in the land survey to have an alternative value
compared to agricultural use, will revert to the Israel Lands
Administration, without attaching to it an obligatory price tag. A
caveat is to be registered in favor of the banks with respect to such
land. In the future, when the land is sold, part of the net proceeds
to be received, which represents the value of the original rights of
the Kibbutz in the land, will be paid over to the banks and the
Government in proportion to their share in the writing-off of the
debt, as stated above. The funds transferred by the Government for the
purpose of the writing-off of the debts of each Kibbutz, as stated
above, are conditional upon the consent of each individual Kibbutz to
the said arrangement and its subsequent joining as a party to the
supplementary arrangement, including the reversion of the land to the
Israel Lands Administration. The abovementioned payments will be made
in five annual installments: the first - an immediate payment and the
remaining payments to be linked to the CPI with annual interest at a
rate of 1.5%.
The Bank set up a provision for doubtful debts in respect of all of
the amounts it believes will be required taking the above into
consideration.
F - 78
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
During 2007, principles were formulated regarding the transfer of the
receipts that the Kibbutzim are supposed to receive in respect of the
sale of their holdings in Tnuva on account of the repayment of their
debts included in the Kibbutz Debt Arrangement with the banks. At the
beginning of 2008, further to the completion of the Tnuva transaction,
debts of Kibbutzim were repaid as part of the implementation of the
abovementioned principles, in an amount of NIS 50 million. In
addition, at the same date, an amount of NIS 7.5 million was received
in account of debts written off in the past, which will be included in
the Bank's income for the first quarter of 2008.
Composition of the credit to the agricultural sector:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Kibbutzim (including regional enterprises and organizations) 168.3 202.5
Moshavim 5.5 6.4
------- -------
Total credit for kibbutzim and moshavim 173.8 208.9
======= =======
F - 79
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
---------------------
NIS MILLIONS NIS MILLIONS
------- -------
a. Non-income bearing loans to problematic borrowers -
Unlinked Israeli currency 1.2 1.3
Denominated in or linked to foreign currency 1.0 -
Israeli currency linked to the CPI 19.0 28.3
------- -------
21.2 29.6
======= =======
b. Restructured credit to borrowers-
1. Credit restructured during the current
year with waiver of income -
Israeli currency linked to the CPI 4.8 6.8
Average repayment period (years) 3.0 3.5
Expected interest margin from the credit 2.0% 2.0%
Unlinked Israeli currency 0.9 -
Average repayment period (years) 0.5 -
Weighted interest margin in respect of 3.0% -
2. Credit restructured in prior years
with waiver of income -
Israeli currency linked to the CPI 0.4 2.3
c. Credit to borrowers in respect of which
there is an as-yet unimplemented
management decision to restructure their debt 8.0 0.4
d. Credit under special supervision 41.9 52.3
e. Credit not included in above credit to problematic borrowers 96.6 117.5
Interest income recorded in the income statements in respect
Of this credit 7.1 5.2
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
(2) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 80
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
3. CREDIT TO LOCAL AUTHORITIES
Following is the composition of credit to local authorities:
DECEMBER 31 DECEMBER 31
2007 2006
------- ---------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Balance of credit to local authorities at balance sheet date 4.0 6.5
CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:
b. Credit not included in above credit to problematic borrowers 4.0 6.5
Interest income recorded in income statements with respect of such credit 0.4 0.5
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 81
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS
2007
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 658.3 51.7 710.0
------- ------- -------
Current allowances 13.1 - 13.1
Reduction in allowances (19.6) (6.5) (26.1)
Collection of debts written-off in previous years (0.8) - (0.8)
------- ------- -------
Amount charged to the income statement (7.3) (6.5) (13.8)
------- ------- -------
Debts written-off (79.2) - (79.2)
------- ------- -------
Balance of allowance at end of year 572.6 45.2 617.8
======= ======= =======
Amount of allowance not deducted from credit
to public 1.3 - 1.3
------- ------- -------
2006
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 675.6 57.6 733.2
------- ------- -------
Current allowances 40.8 - 40.8
Reduction in allowances (12.0) (5.9) (17.9)
Collection of debts written-off in previous years (1.2) - (1.2)
------- ------- -------
Amount carried to the income statement 27.6 (5.9) 21.7
------- ------- -------
Debts written-off (46.1) - (46.1)
------- ------- -------
Balance of allowance at end of year 658.3 51.7 710.0
======= ======= =======
Amount of allowance not deducted from credit
to public 1.9 - 1.9
------- ------- -------
F - 82
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
2005
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 714.4 69.6 784.0
------- ------- -------
Current allowances 82.9 - 82.9
Reduction in allowances (26.4) (12.0) (38.4)
Collection of debts written-off in previous years (0.3) - (0.3)
------- ------- -------
Amount carried to the income statement 56.2 (12.0) 44.2
------- ------- -------
Debts written-off (95.3) - (95.3)
------- ------- -------
Balance of allowance at end of year 675.6 57.6 733.2
======= ======= =======
Amount of allowance not deducted from credit
to public 1.0 - 1.0
------- ------- -------
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as at December 31,
2006 - NIS 38.9 million; as at December 31, 2005 - NIS 38.9 million).
F - 83
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER
DECEMBER 31, 2007
---------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------- ------- -------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- --------------------------------- ---------------------------------------------
NIS THOUSANDS NIS MILLIONS
- --------------------------------- ---------------------------------------------
Up to 10 33 0.2 -
From 10 to 20 19 0.3 -
From 20 to 40 15 0.4 -
From 40 to 80 17 0.9 0.1
From 80 to 150 26 2.5 0.2
From 150 to 300 49 9.9 1.0
From 300 to 600 57 22.4 1.7
From 600 to 1,200 74 61.4 2.7
From 1,200 to 2,000 43 59.7 7.6
From 2,000 to 4,000 37 97.0 13.1
From 4,000 to 8,000 13 66.8 5.3
From 8,000 to 20,000 10 84.5 32.8
From 20,000 to 40,000 2 38.2 28.0
From 40,000 to 200,000 3 158.9 71.1
From 3,200,000 and up 1 4,963.2 (4) -
------- ------- -------
399 5,566.3 163.6
======= ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
F - 84
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER (CONT'D)
DECEMBER 31, 2006
------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------- ------- -------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- -------------------------------- ------------------------------------------
NIS THOUSANDS NIS MILLIONS
- -------------------------------- ------------------------------------------
Up to 10 98 0.6 -
From 10 to 20 42 0.6 -
From 20 to 40 34 1.0 -
From 40 to 80 30 1.4 0.2
From 80 to 150 33 3.5 0.2
From 150 to 300 56 11.2 1.5
From 300 to 600 65 25.2 0.8
From 600 to 1,200 81 68.3 2.3
From 1,200 to 2,000 53 76.0 6.5
From 2,000 to 4,000 53 141.8 10.9
From 4,000 to 8,000 22 110.9 9.5
From 8,000 to 20,000 17 175.2 38.0
From 20,000 to 40,000 5 112.6 29.6
From 40,000 to 200,000 3 171.5 84.7
From 3,200,000 and up 1 5,671.0 (4) -
------- ------- -------
593 6,570.8 184.2
======= ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
E. CUSTOMER'S DEBT RECLASSIFIED TO THE "SECURITIES" ITEM
In his letter of July 15, 2003, regarding a debt of a customer in respect
of which a receiver was appointed to realize shares pledged in favor of the
Bank, the Supervisor of Banks stated that it is no longer proper to treat
the outstanding balance of the debt, due to be repaid through the
realization of the said shares by the receiver, as a credit item.
Accordingly, the balance of the debt was reclassified on June 30, 2003, and
stated as shares included in the item "Available-for-sale securities",
presented at their market value at that date.
Beginning with June 30, 2003, these shares are included in the "Securities"
item and from that date the changes in the market value of these shares are
recorded in a capital reserve.
In view of the inability of the customer to honor his debt, the Bank in the
past classified this debt as non-income bearing and recorded the allowances
required from such classification. The supplementary allowance for doubtful
debts recorded in respect of the classification of the debt as non-income
bearing was cancelled in 2005.
F - 85
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT TO GOVERNMENTS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Deposits in foreign currency out of loans received - 6.8
Amounts receivable in connection with exchange
rate insurance of capital notes 20.2 24.9
Credit to foreign governments - 2.0
Other credit 4.5 7.8
------- -------
Total credit to governments 24.7 41.5
======= =======
NOTE 6 - FIXED ASSETS
A. This item includes equipment, computers, furniture and motor vehicles
as follows:
CHANGES DURING THE YEAR
AT ------------------------ AT
JANUARY 1 DECEMBER 31
2007 ADDITIONS DISPOSALS 2007
------- ------- ------- -------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
Cost 57.6 0.1 - 57.7
Accumulated depreciation (56.5) (0.4) - (56.9)
------- ------- ------- -------
Net book value 1.1 (0.3) - 0.8
======= ======= ======= =======
B. The average rate of depreciation is 25% (2006 - 21%).
F - 86
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 7 - OTHER ASSETS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Excess of income tax advances over current
provisions - 0.1
Prepaid expenses 1.1 1.6
Payroll VAT receivable 2.8 5.9
Debit balances in respect of derivative financial instruments 0.5 2.1
Sundry receivables and debit balances 2.8 2.4
------- -------
Total other assets 7.2 12.1
======= =======
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the U.S. dollar (B) 324.2 315.4
Deposit in respect of the "D" redeemable non-participating
preference shares linked to the U.S. dollar (C) 119.5 116.3
Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the U.S. dollar (C) 405.1 394.1
------- -------
Total perpetual deposits with the Treasury 848.8 825.8
======= =======
F - 87
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
A. On May 6, 1996, an agreement was signed between the Bank and the
Treasury of the State of Israel regarding changes in the method of
computing the linkage on perpetual deposits, which the Bank had
deposited with the Israeli Treasury with respect to the Bank's
preference shares (C, CC, CC1, D, and DD).
Until the signing of the agreement the aforementioned deposits were
linked to the exchange rate of the dollar. In addition, the deposits
bear dollar-linked interest at a rate, which, after the payment of VAT
on profit imposed on the Bank's income, leaves the Bank with an amount
comprising net interest at a rate of 7.5% per annum, the same as the
dividend the Bank used to pay on the aforementioned preference shares.
Pursuant to an Order of the Income Tax Authorities, the interest and
linkage differentials paid on the deposits are exempt from tax, except
for VAT on profit on the interest. The deposits will be repaid to the
Bank at the time of the redemption of the relevant shares or upon
liquidation of the Bank.
Pursuant to the deposit agreements, the aforementioned interest will
be paid to the Bank on the payment dates of the dividends on the
aforementioned preference shares. According to the agreement signed on
May 6, 1996, the deposits have become, in effect, linked to the CPI,
with retroactive effect from October 1, 1987. However, in no case
shall their amount be less than their dollar value as computed prior
to the date of the agreement. Namely, the linkage on the deposits as
at October 1, 1987 is based on the higher of the CPI or the dollar.
The interest continues to be computed based on a dollar calculation.
These deposit agreements do not explicitly establish the rule as to
the interest on the perpetual deposits in the period during which the
Bank is prevented from distributing the aforementioned dividends on
the aforementioned preference shares, and whether the interest will
accrue and be paid when the Bank pays the accrued preferred dividends
in arrears or upon liquidation. The Bank's Board of Directors reached
the conclusion that the interest, which is not claimed due to the
non-payment of the dividend, would accrue to the Bank's credit and,
accordingly, upon liquidation, it would become part of the liquidation
assets. On August 5, 2007, the Tel Aviv District Court rendered a
ruling on the originating motion filed by the Bank, in which it
rejected the position of the Bank and stipulated that as long as a
dividend is not distributed on the Bank's preference shares, no
interest accrues on the perpetual deposits with the Treasury. The
amount of the accrued interest, which has not yet been drawn, totals
NIS 185.4 million as of December 31, 2007 (NIS 167.0 million as at
December 31, 2006), and is not recorded in the financial statements of
the Bank. This amount is equal to the amount of the accrued dividend
in arrears, which is also not recorded in the financial statements.
See Note 16E for further details regarding the discontinued
distribution of dividend and the requests made to the Ministry of
Finance and the Government Companies Authority with respect to the
above matter as well as regarding the legal proceedings being held on
this matter.
F - 88
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
Concurrent with the signing of the above-mentioned agreement, the
Bank's Articles of Association were amended in May 1996. According to
the amendment, an ordinary "B1" share (currently held by the State of
Israel) was separated from all of the ordinary "B" shares. The
difference deriving from the change in the method of calculating the
revaluation of the deposit (should such difference exist) shall be
paid, upon liquidation of the Bank to the holder of the "B1" share.
However, the right attached to the ordinary "B1" share ranks after the
settlement in full of all amounts due in the present and future to
creditors of the Bank, and after repayment of the paid-up share
capital to the holders of the Bank's preferred ordinary shares,
ordinary "A" shares and ordinary "B" shares and after repayment of the
paid-up share capital, including linkage differentials, to the holders
of the Bank's linked preferred shares of the "C", "CC", "CC1", "D" and
"DD" classes and payment of the cumulative preferred dividends in
arrears to these preferred shareholders and to ordinary shareholders.
Further to the agreement with the Treasury, there was an increase in
the amount of the deposits with the Treasury and a parallel increase
in the Bank's shareholders' equity. As of the date of the signing of
the agreement, the aforementioned increase in deposits and capital
amounts to NIS 279.6 million. As of December 31, 2007, this difference
amounts to NIS 402.3 million (December 31, 2006 - NIS 335.2 million).
B. As noted, up to May 6, 1996, the above-mentioned deposits were linked
to the dollar. The difference which arose up to May 6, 1996, between
the adjustment of the deposit on the basis of the dollar linkage, in
respect of the participating, preference "C", "CC" and "CC1" shares,
which are also dollar-linked, and the adjustment thereof to the CPI,
was credited in the statement of shareholders' equity to "accumulated
difference on translation of dollar linked deposits." Further to the
initial implementation of Accounting Standard No. 22, as at January 1,
2006, the Bank cancelled the balance of the accumulated difference
from the dollar-linked deposit, due to the reclassification of the
participating preference shares to a liability and their being
measured as at that date at their dollar-linked value.
C. Up to May 6, 1996, the above-mentioned deposits were linked to the
dollar. The difference which arose up to May 6, 1996, between the
adjustment of the deposit on the basis of the dollar linkage in
respect of the non-participating preference "D" and "DD" shares, which
do not constitute shareholder's equity and which are also linked to
the dollar, and the adjustment of the above-mentioned deposit to the
CPI, was recorded in the statement of income, as was recorded the
difference arising from the liabilities in respect of these shares. As
a result of signing the above-mentioned agreement, differences arose
from the date of signing between the adjustment of the deposits with
the Treasury (linked to the higher of the CPI or the dollar), and the
adjustment of the non-participating dollar-linked preference D and DD
shares and the participating dollar-linked preference C, CC, and CC1
shares. Such differences are recorded in the statement of
shareholder's equity under "accumulated difference on translation of
CPI linked deposits." As at December 31, 2007, the balance of this
item amounted to NIS 402.3 million (December 31, 2006 - NIS 335.2
million).
F - 89
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS OF THE PUBLIC
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
On-demand deposits 11.4 14.2
Fixed-term and other deposits 37.0 44.3
Savings deposits 6.2 8.4
------- -------
Total deposits from the public 54.6 66.9
======= =======
NOTE 10 - DEPOSITS OF BANKS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Fixed-term deposits - 6.8
Special line of credit from the Bank of Israel (1) 481.2 761.5
------- -------
Total deposits of banks 481.2 768.3
======= =======
(1) See Note 17 regarding a pledge provided as security for credit
received from the Bank of Israel.
NOTE 11 - PERPETUAL DEPOSIT
This deposit of the Israeli Treasury is unlinked and is convertible at
any time, at the request of the Israeli Treasury, into ordinary "B"
shares of the Bank, at their par value.
The deposit is perpetual, but the Israeli Treasury has the right to
demand its redemption in the event that the State's voting power in
the Bank falls below 20%. The redemption would thereupon be effected
in twenty-five equal annual installments, beginning ten years after
the date of the demand for redemption. The Bank has agreed to issue
capital notes to the State of Israel in place of the deposit, on
identical terms and conditions.
F - 90
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL NOTES
This series of capital notes of a par value of $ 49,976,000 bears
interest at the rate of 7.5% per annum and was due on December 31,
1998. The terms of the above capital notes provide that the redemption
date of notes for which the holders did not give notice of their
intention to redeem, will be deferred by an additional 18 months each
time. Over the last nine years, notes of a par value of $ 44,730,755
were redeemed. Accordingly, the balance of notes still outstanding as
at December 31, 2007 amounts to $ 5,245,245 which constitute NIS 20.2
million (December 31, 2006 - $ 5,684,245 which constitute NIS 24.0
million). The next redemption date for the capital notes is June 30,
2009. The Bank is entitled to redeem the unredeemed capital notes at a
premium of 5%. See Note 5 regarding amounts receivable with respect to
exchange rate insurance on the capital notes.
NOTE 13 - OTHER LIABILITIES
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Excess of provision for severance pay and pensions over
amounts funded (see Note 18) 21.3 26.2
Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 18) 4.3 5.4
Prepaid income 0.5 1.5
Credit balances in respect of derivative financial instruments 0.6 -
Allowance for doubtful debts in respect of an off-balance sheet item 1.3 1.9
Sundry creditors and credit balances 22.7 23.2
------- -------
Total other liabilities 50.7 58.2
======= =======
F - 91
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
"B" ordinary shares - -
"D" preference shares linked to the US dollar (1) 62.9 69.1
"DD" preference shares linked to the US dollar (1) 213.1 234.1
------- -------
Total non-participating shares 276.0 303.2
======= =======
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
B. ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
--------- ---------------------------
2007 2007 2006
NUMBER --------- --------- ---------
OF SHARES CLASS OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ --------- --------- ---------
135,399 "B" ordinary shares of NIS 0.1 each 13,539.9 13,489.9 13,489.9
164,000 7.5% cumulative "D" preference
shares of NIS 0.03 each, linked to the
US dollar at the rate of
$1 = NIS 0.0003, redeemable
at a premium of 5 5/8 %
(redemption dates will be
determined by the Bank subject
to approval by the Israeli Treasury) 4,920 4,904.3 4,904.3
60,000 7.5% cumulative "DD" preference
shares of NIS 2.1 each, linked to the
US dollar at the rate of
$1 = NIS 0.0021 redeemable (without
premium) (redemption dates will be
determined by the Bank, subject to
approval by the Israeli Treasury) 126,000 116,358.9 116,358.9
--------- --------- ---------
Total shares 144,459.9 134,753.1 134,753.1
========= ========= =========
F - 92
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)
C. For rights in dividend distributions - see Note 16D.
D. For cessation of dividend distributions - see Note 16E.
E. For rights upon liquidation - see Note 16F.
F. All the non-participating shares are not traded on the Tel-Aviv Stock
Exchange.
F - 93
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 15 - PARTICIPATING PREFERENCE SHARES *
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
"C" preference shares linked to the US dollar (1) 65.4 71.8
"CC" preference shares linked to the US dollar (1) 38.4 42.3
"CC1" preference shares linked to the US dollar (1) 66.8 73.3
------- -------
Total participating shares 170.6 187.4
======= =======
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
B. ADDITIONAL DATA REGARDING THE PARTICIPATING PREFERENCE SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
------- -----------------------
2007 2007 2006
NUMBER ------- ------- -------
OF SHARES CLASS OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ ------- ------- -------
17,000,000 6% cumulative "C" participating
preference shares of NIS 0.00018 each,
linked to the US dollar at the rate of
$1 = NIS 0.00018 3,060 3,060 3,060
1,000,000 6% cumulative "CC" participating
preference shares of NIS 0.003 each,
linked to the US dollar at the rate of
$1 = NIS 0.0003 3,000 3,000 3,000
1,740,000 6% cumulative "CC1" participating
preference shares of NIS 0.003 each,
linked to the US dollar at the rate of
$1 = NIS 0.0003 5,220 5,204 5,204
------- ------- -------
Total shares 11,280 11,264 11,264
======= ======= =======
The participating shares are traded on the Tel-Aviv Stock Exchange.
C. For rights in dividend distributions - see Note 16D.
D. For cessation of dividend distributions - see Note 16E.
E. For rights upon liquidation - see Note 16F.
* For information regarding the accounting classification of the
participating preference shares as a result of the initial
implementation of Accounting Standard No. 22, see Note 1D.
F - 94
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY
A. The following are details regarding the nominal value of the share
capital and the principal rights attached thereto:
AUTHORIZED ISSUED AND PAID
------- -----------------------
2007 2007 2006
NUMBER ------- ------- -------
OF SHARES TYPE OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ ------- ------- -------
16,000 "A" ordinary shares of NIS 0.1 each 1,600 1,510 1,510
1 "B1" ordinary share of NIS 0.1 0.1 0.1 0.1
1,000,000 8% cumulative participating preferred ordinary shares of NIS 0.001 each 1,000 1,000 1,000
50,100 Unclassified shares of NIS 0.1 each 5,010 - -
------- ------- -------
Total shares 7,610.1 2,510.1 2,510.1
======= ======= =======
The ordinary preference shares are traded on the Tel Aviv Stock Exchange.
None of the other shares are traded.
F - 95
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
B. VOTING RIGHTS
Only "A" class ordinary shares and ordinary preferred shares grant their
holders the right to receive notification regarding general shareholders'
meetings of the Bank, and to participate and vote in the general meetings
of the Bank. Every "A" class ordinary share has 1000 votes and every
ordinary preferred share has one vote.
C. RIGHT TO APPOINT DIRECTORS
According to the Bank's Articles of Association, the Board of Directors is
comprised of no less than 7 and no more than 15 directors. The directors of
the Bank (except for the Chairman of the Board) are appointed solely by
holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
grant the right to appoint one director. The other shares in the Bank do
not grant rights to appoint directors of the Bank. The appointment of
external directors is done in accordance with an agreement that was signed
in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
Ltd., and the decision of the Government from March 2001. In accordance
with the aforementioned agreement and Government decision, one external
director is appointed by the general meeting on account of the rights to
appoint directors of the three banking groups that are party to the
aforementioned agreement (as proposed by one of them and supported by the
others) and an additional external director is appointed by the general
meeting on account of the State's rights to appoint directors.
The Chairman of the Board, who is the extra director (the fifteenth
director), is appointed by all the other members of the Board who were
appointed, as above, by the holders of "A" class ordinary shares.
D. RIGHTS TO RECEIVE A PREFERENCE DIVIDEND
According to the Bank's Articles of Association, in the event that there
are sufficient profits, the Bank shall first distribute a preferred
dividend of 6% per annum (plus necessary adjustments due to linkage to the
dollar) on the paid-in capital of "C" class preference shares, the paid in
capital of "CC" class preference shares and the paid-in capital of "CC1"
class preference shares, and of 7 1/2% per annum (plus necessary
adjustmenTS due to linkage to the dollar) on the paid-in capital of "D"
class preference shares, and the paid-in capital of "DD" class preference
shares, all dividends being pari-passu and pro-rata to the paid-in capital
of the aforementioned shares, and then will distribute an 8% cumulative
preferred dividend on the paid in capital of ordinary preferred shares.
However, if until then preferred dividends in arrears on the shares
accumulated, they will be distributed prior to the other dividends.
F - 96
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION
The issued share capital of the Bank includes preference shares of classes
C, CC, CC1, D, and DD to which the Bank used to pay quarterly 25% of the
annual preferred dividend (the "quarterly dividend"). The Bank deposited
the proceeds of issue of these preferred shares with the Israeli Treasury
in perpetual deposits, which will be returned to the Bank only upon
liquidation or for the purpose of redeeming the preference D and DD shares
(hereinafter - the "perpetual deposits"). According to the deposit
agreements, the interest on the perpetual deposits, at a rate of 7.5% (plus
differentials of linkage to the dollar), is paid to the Bank on the payment
dates of the dividends to the aforementioned preferred shares. The deposit
agreements do not expressly stipulate how the interest on the perpetual
deposits should be handled during periods in which the Bank is prevented
from distributing dividends on these preferred shares, and whether the
interest will accrue and be paid when the Bank pays the accrued preferred
dividends in arrears or upon liquidation.
According to the Companies Law - 1999 (hereinafter - "the Companies Law"),
a company is entitled to distribute dividends only from its profits (as
defined therein), on condition that there is no reasonable fear that such
distribution would prevent the company from meeting its existing
liabilities and its expected liabilities when they come due (hereinafter -
the "repayment ability test"). Nevertheless, the Court is permitted to
approve the distribution of a dividend not from the company's profits, if
it is convinced that the company meets the "repayment ability test".
According to the Directives of Proper Banking Procedures, the Supervisor of
Banks prohibited distribution of dividends by a banking institution if,
among other things, one or more of the last three calendar years ended in a
loss, or the aggregate results of the three quarters ending on the last day
of the interim period for which the last financial statements were issued
reflected a loss.
The Bank ended the years 2001 through 2003 with a loss, the year 2004 with
earnings and the years 2005 - 2006 with a loss. Commencing with the
financial statements for the first quarter of 2002, the Bank had no profits
from which it could distribute a dividend under the Companies Law.
In accordance with the Bank's Articles it can distribute a dividend only
out of earnings of the Bank. As from the second quarter of 2002 the Bank
did not remain even with nominal earnings.
The last quarterly dividend paid by the Bank in respect of the
aforementioned preferred shares was the second quarterly dividend of 2002,
and in order to distribute that dividend, the Bank obtained Court approval
and the approval of the Supervisor of Banks.
Immediately prior to the publication of the financial statements of the
Bank for the third quarter of 2002, the Board of Directors of the Bank
decided, at that stage, not to distribute a dividend for the third quarter
of 2002. The decision was taken upon the advice of legal counsel and taking
into consideration, among other things, the following issues:
o The results of operations of the third quarter of 2002 and the crisis
which affected the Bank during that quarter.
o Non-existence of distributable profits under the Companies Law.
o The prohibition on distribution of dividends according to the Bank's
Articles of Association when there are no profits, even in nominal
terms.
o The prohibition on distribution of dividends according to Proper
Banking Procedure, as long as the Supervisor of Banks has not replied
to the Bank's request and has not permitted such distribution.
F - 97
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
o The possibility that the interest on the Bank's perpetual deposits
with the Israeli Treasury will continue to accrue to the credit of the
Bank even if not actually paid, as long as no dividend is distributed.
On December 1, 2002, the Bank received the reply of the Supervisor of Banks
to its request for the position of the Supervisor on the matter of
distributing a dividend in respect of the third quarter of 2002. The
Supervisor's answer stipulated, among other things, that in the existing
circumstances (as detailed in the letter), the Supervisor of the Banks
believes that "it is inappropriate to distribute a dividend at this time".
Nevertheless, the Supervisor of Banks noted that it was still not
completely clear as to the legal aspects of various questions connected
with the distribution of the dividend and the accrual of the interest on
the perpetual deposits, and as to what the position of the State of Israel
is on this issue. The Supervisor of Banks added that a copy of the letter
had been sent to the Government Companies Authority and the Accountant
General, and that following receipt of clarifications from them and from
the Bank to the questions raised, the Supervisor will notify the Bank as to
his position.
In view of the lack of clarity as to the matter of the accrual of interest
on the perpetual deposits during the period in which the Bank is prevented
from distributing a dividend (the lack of clarity to which the Supervisor
of Banks referred to in his letter) and in view of the possible
ramifications of this matter on the distribution of the dividends in
respect of the preferred shares, the Board of Directors deliberated the
matter, taking into consideration a comprehensive legal opinion presented
to the Board. The Board reached the conclusion that the interest not paid
to the Bank due to the non-distribution of the dividend should accrue to
the Bank's credit and, accordingly, in the event of the Bank's liquidation,
the interest will be paid to the receiver. In a letter dated January 22,
2003, the Bank requested from the Ministry of Finance and the Government
Companies Authority to issue their positions on this matter as soon as
possible. The reply of the Finance Ministry to the Bank's letter was
unclear and further requests and reminders of the Bank did not result in
its clarification. During that time, the Board of Directors has deliberated
the matter of the dividend on the said preference shares several more
times, and after taking into account all of the considerations and
circumstances described above has decided to abide by its previous decision
and to refrain from distributing any further dividend for the time being.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has stopped paying to the Bank the interest on
its perpetual deposits.
On September 28, 2004 various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
originating motion in which the Court is petitioned to instruct the Bank to
pay to its shareholders a dividend at the rates and dates it was paid until
the second quarter of 2002.
Since in the opinion of the Bank, the matter of the dividend distribution,
which is the issue of the aforementioned originating motion, is connected
to the question of whether under the circumstances of a non-distribution of
dividend, the interest on the perpetual deposits of the Bank with the
Israeli Treasury is accrued in its favor, and since the answers received so
far from the Ministry of Finance were not clear enough and were
insufficient, the Bank filed an originating motion with the Court on March
9, 2005 against the Minister of Finance and the aforementioned financial
entities, in which it requested a ruling declaring (among other things)
that the interest on the perpetual deposits is indeed accrued in favor of
the Bank.
F - 98
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
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.
At the time, the board of directors of the Bank expressed its in principle
position that if the court rules that the interest on the perpetual
deposits does not accrue, the board of directors will reconsider its
position regarding the renewal of the dividend distribution, subject to the
legal and regulatory restrictions placed on the Bank in connection with
this issue, including the need to obtain authorizations and to amend the
by-laws of the Bank. On August 5, 2007, the Tel Aviv District Court issued
its ruling whereby it rejected the originating motion filed by the Bank
against the Finance Minister and the aforementioned financial institutions
and stipulated that as long as no dividend is distributed to the preference
shares of the Bank, the interest does not accrue on the perpetual deposits
of the Bank with the Treasury.
At its meeting of October 9, 2007, the Board of Directors of the Bank
discussed the consequences of the court ruling. The Board decided that
since the claim of the Bank (its originating motion) related not only to
the issue of the accrual of interest on the perpetual deposits in the
absence of a dividend distribution, rather also to its accrual and payment
when a dividend in arrears is paid (including during liquidation), and
since on the basis of the determination of the court that the claim of the
Bank was rejected, a claim could be made that the court ruling also
rejected the right of the Bank to accrued interest against the payment of
the dividend in arrears on the preference shares (a result which in the
opinion of the Board of Directors is basically incorrect and it is
reasonable to assume that the court did not mean it), then the Bank should
file an appeal on the rejection of the suit in connection with the payment
of the accrued interest on the perpetual deposits against payment of the
dividend in arrears. Such an appeal was filed by the Bank with the Supreme
Court on February 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 also 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 by-laws 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 by-laws as above and
empower the Chairman of the Board to determine the date of the meeting;
F - 99
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
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
by-laws, 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 Reports 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
by-laws 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 by-laws of the Bank.
The cumulative amount of the dividend, at a rate of 7.5% per annum, in
respect of the aforementioned preference shares (including a 1.5%
participating dividend in respect of class C, CC, and CC1 shares) which has
not been paid since the Bank ceased paying dividends is, as of December 31,
2007, an amount of NIS 185.4 million. This amount was not recorded in the
financial statements and is equal to the amount of the interest on the
perpetual deposits which was also not recorded in the financial statements.
The cumulative amount of NIS 185.4 million is broken down as follows: NIS
113.8 million in respect of non-participating shares (D and DD), and an
amount of NIS 71.6 million in respect of participating shares (C, CC, and
CC1). Of this amount, an amount of NIS 33.4 million is in respect of 2007,
as follows: NIS 20.7 million in respect of non participating shares (D and
DD), and an amount of NIS 12.7 million in respect of C, CC, and CC1 shares
which are participating shares.
For information pertaining to the originating motions on the aforementioned
cessation of distribution of dividends, see Note 20D below.
F. RIGHTS UPON LIQUIDATION
Upon liquidation of the Bank, all available assets will be distributed to
shareholders. Following are the first seven stages of distribution in
accordance with the priorities appearing in the Bank's Articles of
Association:
o First - to pay cumulative preferred dividends in arrears, including
dollar linkage differentials, to all classes of preference shares (C,
CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
capital of the aforementioned shares. As at December 31, 2007, the
accrued amount of the preferred dividend in arrears is NIS 170.1
million (as at December 31, 2006 - NIS 152.9 million).
o Second - to pay cumulative preferred dividends in arrears to preferred
ordinary shares. As at December 31, 2007 the dividends in arrears in
respect of the preferred ordinary shares amount to NIS 440 (as at
December 31, 2005 - NIS 360).
F - 100
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
F. RIGHTS UPON LIQUIDATION (CONT'D)
o Third - to refund paid in capital (plus dollar linkage differentials)
of "C" class preference shares, to refund paid in capital (plus dollar
linkage differentials) of "CC" class preference shares, to refund paid
in capital (plus dollar linkage differentials) of "CC1" class
preference shares, to refund paid in capital (plus dollar linkage
differentials) of "D" class preference shares, to refund paid in
capital (plus dollar linkage differentials) of "DD" class preference
shares - all being pari-passu and pro-rata to the paid in capital of
the aforementioned shares. As at December 31, 2007, the aforementioned
amounts to NIS 446.6 million (as at December 31, 2006 - NIS 490.6
million).
o Fourth - to refund paid in capital of preferred ordinary shares. As at
December 31, 2007, the aforementioned amounts to NIS 1,000 (as at
December 31, 2006 - NIS 1,000).
o Fifth - to refund paid in capital of class "A" ordinary shares, to
refund paid in capital of class "B" ordinary shares, and to refund
paid in capital of class "B1" ordinary shares - all being pari passu
and pro-rata to the paid in capital of the aforementioned shares. As
at December 31, 2007, the aforementioned amounts to NIS 14 thousand
(as at December 31, 2006 - NIS 14 thousand).
o Sixth - the remainder (if at all) of the differences to be paid to the
Bank by the State of Israel upon liquidation as a result of the rate
of increase in the CPI as compared with the increase in the
representative exchange rate of the dollar, in respect of the deposits
made by the Bank with the State, shall be paid to the holder or
holders of the class "B1" ordinary share. As at December 31, 2007, the
aforementioned difference amounts to NIS 402.3 million (as at December
31, 2006 - NIS 335.2 million).
o Seventh - the remainder of ordinary assets will be distributed between
the holders of the class "A" ordinary shares, the holders of the
preferred ordinary shares, and the holders of the C, CC and CC1
preference shares, according to the paid in capital of these shares
and at the ratio of ten per each agora of paid in class "A" ordinary
shares, ten per each agora of paid in preferred ordinary shares, ten
per each agora of paid in class "C" preference shares, six per each
agora of paid in class "CC" preference shares and six per each agora
of paid in class "CC1" preference shares - all being pari-passu and
pro-rata to the paid in capital of the aforementioned shares.
F - 101
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS
Following is the calculation of capital adequacy in accordance with
Directives Nos. 311 and 341 of the Supervisor of Banks, regarding
"Minimal Capital Ratio" and "Capital Allocation with respect to
Exposure to Market Risks":
A. CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
First tier capital 100.4 11.4
Second tier capital (1) 100.4 11.4
------- -------
Total capital 200.8 22.8
======= =======
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
F - 102
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
B. WEIGHTED-BALANCES OF CREDIT RISK
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------------- ----------------------
WEIGHTED CREDIT WEIGHTED CREDIT
BALANCES(2) RISK BALANCES Balances(2) RISK BALANCES
------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
ASSETS
Cash and deposits with banks 33.8 5.6 66.4 11.7
Securities 46.3 36.8 50.4 50.4
Credit to the public (1) 5,521.1 547.8 6,519.1 831.2
Credit to governments and
perpetual deposits with the
Israeli Treasury 873.5 - 867.3 -
Buildings and equipment 0.8 0.8 1.1 1.1
Other assets 7.2 2.0 12.1 2.4
------- ------- ------- -------
Total assets 6,482.7 593.0 7,516.4 896.8
======= ======= ======= =======
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Transactions representing credit risk 180.4 163.4 224.0 182.8
Derivative financial instruments 47.5 0.9 99.3 1.9
------- ------- ------- -------
Total off-balance sheet financial instruments 227.9 164.3 323.3 184.7
------- ------- ------- -------
Total credit risk assets 6,710.6 757.3 7,839.7 1,081.5
Market risk - 548.0 - 615.5
------- ------- ------- -------
Total risk assets 6,710.6 1,305.3 7,839.7 1,697.0
======= ======= ======= =======
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
(2) Assets - balance sheet amounts, off-balance sheet financial
instruments - nominal balances weighted by credit conversion factors.
F - 103
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
C. RATIO OF CAPITAL TO TOTAL RISK ASSETS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
% %
------- -------
Ratio of first tier capital to total risk assets 7.7 0.67
Ratio of second tier capital to total risk assets 7.7 0.67
------- -------
Ratio of total first and second tier capital to total risk assets 15.4 1.34
======= =======
The ratio of capital to risk assets, as of December 31, 2006, was lower
than the 9% as prescribed by Proper Banking Procedures.
NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS
A. In connection with receiving of the special line of credit from the
Bank of Israel, the Bank signed on November 14, 2002 a debenture in
favor of the Bank of Israel (that was amended on December 29, 2005),
whereby the Bank registered a first degree floating pledge on all of
its assets, excluding the following assets:
- Loans and credits under State guarantee at a total balance sheet
value (according to financial statements as at December 31, 2007)
of NIS 5.0 billion.
- The Bank's deposit with the Ministry of Finance (the Accountant
General) in respect of the DD preference shares of the Bank.
- Deposits made by the Bank from time to time with other banking
institutions in Israel and/or abroad, and/or with brokers in
Israel and/or abroad, which were deposited in connection with
guaranteeing the Bank's liabilities to such banking institutions
and/or brokers, which were created subsequent to November 14,
2002.
Under this debenture, the Bank undertook, among other things, not to
register additional pledges on the assets pledged as part of the
debenture and not to dispose of such assets, in any form, without
receiving the prior written consent of the Bank of Israel.
Notwithstanding the above, the debenture stipulates that the floating
pledge registered therein does not prevent the Bank, or restrict the
Bank in the ordinary course of its business, including the fulfillment
of its obligations, receiving repayments of credit or granting credit.
The balance of the credit line (including accrued interest) as at
December 31, 2007, was an amount of NIS 481.2 million (December 31,
2006 - NIS 761.5 million).
B. As of December 31, 2007, deposits with banks in the amount of NIS 10.0
million have been pledged by the Bank in favor of those banks
(December 31, 2006 - NIS 22.0 million). The Bank of Israel gave its
consent to the pledge, which serves as collateral for transactions in
derivative financial instruments with those banks.
F - 104
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS
A. SEVERANCE PAY
1. The Bank's liability for the payment of severance pay to its
employees, which is calculated as customary on the basis of one
monthly salary per each year of employment, is fully covered by
payments and deposits with recognized pension and provident funds, the
purchase of insurance policies and by the unfunded provision in the
books.
2. Commencing on July 15, 2002, Mr. U. Galili has served as the General
Manager of the Bank. During 2005, the Bank extended the employment
agreement of Mr. Galili until July 31, 2008 (the end of the Run-Off
plan).
Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as the
Chairman of the Board of Directors of the Bank. During 2005, the
employment agreement of Dr. Ra'anan Cohen was extended until July 31,
2008 (the end of the Run-Off plan).
On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
Savir serves as Deputy General Manager and as Credit Supervisor of the
Bank. During 2005, the employment agreement of Mr. Savir was extended
until July 31, 2008 (the end of the Run-Off plan).
On May 30, 2007, the Audit Committee and the Board of Directors of the
Bank authorized the granting of additional severance pay to the GM and
the Deputy GM of the Bank upon resignation from their positions (in
excess of the amounts provided for them in managers insurance policies
and/or pension funds), at a rate of one month's salary for each year
of service and the relative share of a month's salary in respect of
part of the year. This resolution is subject to the approval of the
Supervisor of Wages and Labor Agreements in the Israeli Finance
Ministry, who announced that he had no objection to the wording of the
decision and that his approval of the proposal will be taken under
advisement if, and only if, the termination of their employment occurs
at the end of the Bank's Run-off Plan (which is scheduled to end on
July 31, 2008) or if ownership of the Bank is transferred to an
external investor prior to the end of the Run-Off Plan. The additional
severance pay to the Chairman of the Board of Directors was ratified
by the general shareholders meeting of the Bank. The periods of
service of the Chairman of the Board, Dr. R. Cohen, the GM, Mr. A
Galili, and the Deputy GM, Mr. A Savir, started at different times
during the second half of 2002 and, therefore, assuming that their
periods of service conclude at the end of the Run-off Plan on July 31,
2008, there will be additional severance pay of six-months' salary for
each of the above. The cost of the additional severance pay in respect
of the three of them together, for the entire period, amounts to NIS
0.9 million. The financial statements contained a provision related to
the period ended September 30, 2007 (approx. NIS 0.8 million).
3. On December 26, 2002 a collective agreement was signed between the
Bank, the New Histadrut (the general federation of labor) and the
representatives of the Bank's employees, which applies to the Bank's
employees who are subject to the collective agreements of the Bank.
The agreement was for a period of 3 years and can be extended by one
additional year. The agreement arranged, inter alia, the following
matters:
F - 105
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
o Management's right to dismiss employees in the framework of
cutbacks in the Bank's activities, as well as the process of
dismissal.
o Cutbacks that will be made in the salary of the employees and in
their related benefits.
o Benefits and special payments that will be due to the employees
who are dismissed, including additional severance pay in addition
to those provided in the law, and with respect to employees
having worked a certain number of years and with a certain number
of years remaining until retirement, conversion of the right to
enhanced severance pay, with the right to receive an early
pension.
On March 14, 2005 the parties signed a new collective agreement which
extended the period of the aforementioned collective agreement (from
December 26, 2002) until the earlier of the end of the Bank's Run-Off
plan (including any change and extension made and approved by the
Government) or December 31, 2007 (the "first extension agreement").
The first extension agreement also provided and clarified the
following points:
A. Employees who according to the original agreement are entitled to
an early pension following their dismissal, will be entitled to
receive it until they reach the age they are entitled to receive
an ordinary pension from the pension fund to which they belong,
following the pension reform that came into effect in Israel
after the signing of the original agreement.
B. Some of the concessions the employees agreed to make in the
original agreement that were limited in time, will continue to
apply also in the period of the first extension agreement.
On July 12, 2006, a new collective agreement was signed between the
parties (the "second extension agreement") which extended for the
second time the aforementioned collective agreement (dated December
26, 2002), as amended by the first extension agreement, until July 31,
2008 (the end of the Run-off Plan). The second extension agreement
also stipulated that should the Run-off Plan be extended past July 31,
2008, the aforementioned collective agreement would be extended until
the termination of the Run-off Plan, but not beyond December 31, 2008.
At present, with the second extension agreement coming to an end,
negotiations are being held regarding the possible extension of the
agreement for an additional period and/or a change in the collective
agreement from December 26, 2002.
Certain provisions of the aforementioned agreements, which for the
most part grant the employees special benefits and payments following
their dismissal, were also applied to employees with personal
contracts who began working with the Bank before January 1, 2003, in
exchange for their agreeing to certain reductions in their terms of
employment, as was done with respect to the employees under the
collective agreements.
As at December 31, 2007, the balance of the provision relating to the
employees included in the aforementioned collective agreement amounted
to NIS 18.2 million (excluding salary tax), compared with NIS 20.8
million in December 2006.
F - 106
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
4. In the past, the Bank signed personal employment contracts with three
senior executives of the Bank. The Bank and these executives have the
right to terminate the employee-employer relationship by providing an
advance notice of three months.
In accordance with these contracts, in the event of the resignation of
the executives, the Bank has undertaken to pay them additional
severance payments and an "adaptation bonus" in addition to the
regular severance pay. In the event that their employment is
terminated by the Bank, these executives are entitled to severance pay
at higher rates or to early pensions. In August 2006, the employment
contracts of these three employees were amended with regard to the
severance terms in the event of termination by the Bank. The amended
terms, which in general are inferior to those included in the original
employee contracts, were determined on the basis of the principles of
the collective agreement dated December 26, 2002 and in accordance
with the approval of the Supervisor of Wages in the Israeli Finance
Ministry.
The Bank has an appropriate provision included in the reserve for
severance pay in respect of these liabilities, which as at December
31, 2007 amounted to NIS 6.4 million (December 31, 2006 - NIS 6.5
million).
5. In the framework of the Economic Policy Law for 2005 (Legislation
Amendments) - 2004, which was approved by the Knesset on March 29,
2005, the definition of "salary" for purposes of paying salary tax by
financial institutions, including the Bank, was expanded so as to
include also a retirement grant or a death grant and any other amount
paid by an employer to an advanced study fund or provident fund that
is not a central severance pay fund, even if according to Section 3 of
the Income Tax Ordinance it is not considered earned income on the
date it was paid to the advanced study fund or the provident fund. The
amendment is in effect from January 1, 2005. In accordance with an
examination of the Bank, the aforementioned law mainly affects the
special collective agreement that was signed on December 26, 2002 with
respect to the dismissal of employees. Following the said change in
the definition of salary tax the Bank recorded a provision in 2005 in
the amount of NIS 3.7 million in respect of salary tax on expenses
relating to early retirement.
6. Following is the data relating to provisions and funding for severance
pay included in the balance sheet:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Provision for severance pay 43.4 48.0
Amounts funded with pension and provident funds
(including earnings thereon) 22.1 21.8
------- -------
Unfunded provision included in "Other liabilities" 21.3 26.2
======= =======
The Bank may not withdraw amounts funded other than for the purpose of
discharging severance pay liabilities.
F - 107
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
B. UNUTILIZED SICK LEAVE
Employees who retire or are terminated are entitled, under certain
conditions, to compensation in respect of unutilized sick leave. In the
opinion of Management of the Bank an adequate provision has been included
in the financial statements in this respect. The balance of the provision
as at balance sheet date totals NIS 2.5 million (December 31, 2006 - NIS
3.1 million) and is included in the "Other liabilities" item.
C. LONG SERVICE BONUS
In accordance with the current collective employment agreement at the Bank,
employees who are subject to this agreement are entitled to a special long
service bonus upon completing periods of twenty-five years and thirty years
of service with the Bank. A full provision has been made in the financial
statements for this liability, based on the probability of the employee
still being employed by the Bank on one of the two aforementioned dates.
The balance of the provision as at balance sheet date is NIS 0.1 million
(December 31, 2006 - NIS 0.1 million). This balance is included in "Other
liabilities" item.
D. UNUTILIZED VACATION
The balance of the provision for unutilized vacation is NIS 1.7 million as
at balance sheet date (December 31, 2006 - NIS 2.2 million). The balance is
included in "Other liabilities" item.
F - 108
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
REPORTED AMOUNTS
DECEMBER 31, 2007
-----------------------------------------------------------------------------------
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
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
======= ======= ======= ======= ======= =======
F - 109
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2006
-----------------------------------------------------------------------------------
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 33.1 10.2 22.9 0.2 - 66.4
Securities - 0.7 - - 49.7 50.4
Credit to the public 213.9 464.8 5,819.5 20.9 - 6,519.1
Credit to governments - 7.8 26.9 6.8 - 41.5
Fixed assets - - - - 1.1 1.1
Other assets 10.5 - - - 1.6 12.1
Perpetual deposits with
the Israeli Treasury - 825.8 - - - 825.8
------- ------- ------- ------- ------- -------
Total assets 257.5 1,309.3 5,869.3 27.9 52.4 7,516.4
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 30.6 32.7 3.5 0.1 - 66.9
Deposits of banks 761.5 - - 6.8 - 768.3
Deposits of
the Government - 306.1 5,781.3 - - 6,087.4
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 24.9 - - 24.9
Other liabilities 17.5 37.6 1.6 - 1.5 58.2
Non participating shares - - 303.2 - - 303.2
Participating shares - - 187.4 - - 187.4
------- ------- ------- ------- ------- -------
Total liabilities 809.7 376.4 6,301.9 6.9 1.5 7,496.4
------- ------- ------- ------- ------- -------
Difference (552.2) 932.9 (432.6) 21.0 50.9 20.0
Forward transactions, net 96.2 (44.0) (29.5) (22.7) - -
------- ------- ------- ------- ------- -------
Total (456.0) 888.9 (462.1) (1.7) 50.9 20.0
======= ======= ======= ======= ======= =======
F - 110
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1)
REPORTED AMOUNTS
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
UNLINKED ISRAELI CURRENCY
Assets 22.3 1.6 24.9 19.9 4.9 2.1 0.1 - - - 75.8 68.4 130.4
Liabilities 15.0 11.7 3.0 - - - - - - - 29.7 510.0 (4) 527.5
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 7.3 (10.1) 21.9 19.9 4.9 2.1 0.1 - - - 46.1 (441.6) (397.1)
Derivative instruments
excluding options 16.5 20.1 9.9 - - - - - - - 46.5 - 46.5
ISRAELI CURRENCY LINKED TO THE CPI
Assets 5.5 11.9 50.4 60.4 56.6 49.3 47.2 127.6 68.3 - 477.2 848.8 1,197.8
Liabilities 1.2 12.6 47.2 50.7 49.6 48.4 45.0 48.1 2.4 - 305.2 31.3 313.2
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 4.3 (0.7) 3.2 9.7 7.0 0.9 2.2 79.5 65.9 - 172.0 817.5 884.6
Derivative instruments
excluding options - (20.1) (9.9) - - - - - - - (30.0) - (30.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 22.8 139.7 419.5 574.3 549.1 544.8 540.8 2,675.8 2,808.8 - 8,275.6 5.1 5,106.8
Liabilities 0.2 139.0 416.6 570.8 546.1 542.2 538.4 2,671.3 2,811.1 - 8,235.7 448.1 5,531.4
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 22.6 0.7 2.9 3.5 3.0 2.6 2.4 4.5 (2.3) - 39.9 (443.0) (424.6)
Derivative instruments
excluding options (16.5) - - - - - - - - - (16.5) - (16.5)
NON-MONETARY ITEMS
Assets - - - - - - - - - - - 47.7 47.7
Liabilities - - - - - - - - - - - 0.5 0.5
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference - - - - - - - - - - - 47.2 47.2
TOTAL AS AT DECEMBER 31, 2007
ASSETS 50.6 153.2 494.8 654.6 610.6 596.2 588.1 2,803.4 2,877.1 - 8,828.6 970.0 6,482.7
LIABILITIES 16.4 163.3 466.8 621.5 595.7 590.6 583.4 2,719.4 2,813.5 - 8,570.6 989.9 6,372.6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
DIFFERENCE 34.2 (10.1) 28.0 33.1 14.9 5.6 4.7 84.0 63.6 - 258.0 (19.9) 110.1
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 67.7 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 19 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the balance of the credit line that was provided by
the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).
F - 111
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1) (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
UNLINKED ISRAELI CURRENCY
Assets 37.1 3.6 36.6 34.3 30.3 4.0 2.1 3.3 - - 151.3 128.0 257.5
Liabilities 25.2 21.1 128.5 114.0 - - - - - - 288.8 569.5 (4) 809.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference 11.9 (17.5) (91.9) (79.7) 30.3 4.0 2.1 3.3 - - (137.5) (441.5) (552.2)
Derivative instruments
excluding options 52.2 19.9 24.1 - - - - - - - 96.2 - 96.2
ISRAELI CURRENCY LINKED TO THE CPI
Assets 10.2 21.4 74.7 82.5 73.9 67.5 58.7 163.4 87.9 0.8 641.0 825.8 1,309.3
Liabilities 20.5 11.9 47.5 51.9 49.3 48.2 47.0 89.7 3.2 - 369.2 37.6 376.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference (10.3) 9.5 27.2 30.6 24.6 19.3 11.7 73.7 84.7 0.8 271.8 788.2 932.9
Derivative instruments
excluding options - (19.9) (24.1) - - - - - - - (44.0) - (44.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 26.2 160.4 496.8 617.5 611.7 606.4 600.6 2,949.2 3,672.5 - 9,741.3 36.8 5,897.2
Liabilities 2.8 158.1 488.8 608.3 604.1 599.9 595.6 2,940.5 3,673.6 - 9,671.7 492.2 6,308.8
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference 23.4 2.3 8.0 9.2 7.6 6.5 5.0 8.7 (1.1) - 69.6 (455.4) (411.6)
Derivative instruments
excluding options (52.2) - - - - - - - - - (52.2) - (52.2)
NON-MONETARY ITEMS
Assets - - - - - - - - - - - 52.4 52.4
Liabilities - - - - - - - - - - - 1.5 1.5
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference - - - - - - - - - - - 50.9 50.9
TOTAL AS AT DECEMBER 31, 2006
ASSETS 73.5 185.4 608.1 734.3 715.9 677.9 661.4 3,115.9 3,760.4 0.8 10,533.6 1,043.0 7,516.4
LIABILITIES 48.5 191.1 664.8 774.2 653.4 648.1 642.6 3,030.2 3,676.8 - 10,329.7 1,100.8 7,496.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
DIFFERENCE 25.0 (5.7) (56.7) (39.9) 62.5 29.8 18.8 85.7 83.6 0.8 203.9 (57.8) 20.0
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 154.3 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 19 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the balance of the credit line that was provided by
the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).
F - 112
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
DECEMBER 31 DECEMBER 31
2007 2006
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 157.9 170.9
Guarantees to home purchasers 17.9 46.2
Other guarantees and liabilities 4.6 6.3
Unutilized revolving credit facilities - 0.6
B. OTHER CONTINGENT LIABILITIES AND COMMITMENTS
1. See Note 18A with respect to the contingent liabilities regarding
personal employment agreements with senior executives.
2. Long-term rental agreement -
During 2003, the Bank signed a rental agreement in respect of its
office premises for the period ending in August 2009. The annual
rental payment, which is linked to the CPI, amounts to NIS 1.1
million.
3. As at January 1, 2004 the Bank has outsourced its computer services,
according to which it signed an agreement to receive computer services
for a period of five years. As part of the agreement, the company with
which the Bank signed the agreement undertook to provide the Bank with
ongoing management and operational services of its information
systems, operation and maintenance of hardware, computers, peripheral
equipment, communications and infrastructure software, operation and
maintenance of applications, making changes and adjustments to the
information systems, data security, etc. In 2008, the cost of the
service will amount to NIS 2.2 million per annum. This agreement will
expire on December 31, 2008 and the parties have no commitment to
extend it further.
4. During 2006, the Bank signed an agreement to receive storage and
archive services for a period of four years, ending at the end of
April 2010. The annual cost is estimated at NIS 78 thousand.
5. A few years ago, the Bank entered into agreements whereby it will
participate in private investment funds. The total amount approved for
investment by the Bank amounts to U.S.$ 20 million. The said
investment funds invest in Israeli companies or companies related to
Israel and in hi-tech companies. The investment in them is presented
under the "Securities" item. The major part of the investments made by
these funds is in the credit component. The balance of these
liabilities as at balance sheet date amounts to U.S.$ 0.7 million.
F - 113
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS
1) The Company issued to its officers and directors a letter of
indemnification that was approved by the shareholders' general meeting
of the Bank on August 8, 2002. According to the letter of
indemnification that was issued, the Bank undertook to indemnify its
officers and directors in respect of any monetary liability imposed on
them in favor of another person in accordance with a court ruling
(including a ruling made as part of a compromise and an arbitration
decision that received court approval) and in respect of reasonable
legal expenses (including attorney fees), that are imposed on them
following actions (defined as including acts of omission or
commission) that were taken and/or will be taken by them due to their
being officers or directors of the Bank or as part of a position or
duty that they fulfilled and/or will fulfill at the request of the
Bank or on its behalf in a company or other corporate entity or any
business venture in which the Bank has invested or will invest,
providing that these actions are connected with one or more of the
types of events detailed in the letter of indemnification including,
inter alia, the following events:
o The issuance of securities.
o Using voting rights and rights to appoint directors in a company
in which the Bank held and/or will hold shares and/or in another
company and/or business venture in which the Bank has or will
invest.
o Voting for or against any decision of the Board of Directors, a
committee, etc., of a company, entity or venture as
aforementioned.
o The realizing of collateral provided to the Bank.
o The approval of credit and/or the provision of credit and other
actions as part of the Bank's permissible business in accordance
with the Banking Law (Licensing) - 1981.
o The holding of assets in trust.
o The providing of an underwriting commitment.
o A transaction in assets executed by the Bank for itself.
o The issuance of a report or notice as required by law.
o The receipt of licenses and permits.
o Events connected to employee-employer relations.
o The privatization of the Bank and any course of action performed
to further the privatization or in connection therewith.
o Any refraining from executing one or more of the aforementioned
acts.
The amount of the total cumulative indemnification that is payable
according to the aforementioned letter of indemnification shall not
exceed 25% of the Bank's shareholders' equity according to its
financial statements for March 31, 2002, which was NIS 640.3 million,
meaning no more than NIS 160.1 million, linked to the CPI published in
respect of March 2002. The letter of indemnification is subject to the
provisions of the Companies Law and to various conditions as specified
in the letter of indemnification. It is noted that Amendment 3 to the
Companies Law - 1999 (dated March 7, 2005) provides, inter alia, that
an indemnification commitment (such as the aforementioned letter of
indemnification) has to be limited to events the board of directors
believes may actually occur at the time of providing the
indemnification commitment and to an amount or criterion the board of
directors deems as reasonable under the circumstances of the matter.
The question of the amendment applying to existing letters of
indemnification and the interpretation of the aforementioned
restriction have not yet been addressed in court rulings and therefore
the effects of the amendment on the aforementioned writ of
indemnification are uncertain.
F - 114
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS
(CONT'D)
In May 2003, the Audit Committee and the Board of Directors of
the Bank approved the applicability of the letter of
indemnification to an additional director whose appointment ended
prior to July 11, 2002.
2) On February 26, 2008, the Audit Committee and the Board of
Directors of the Bank 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 placed on the Officers or Directors in favor of
another person by court ruling (including 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.
These events include, among other things, the following:
o The sale or assignment of credit or collateral.
o Receipt of a special credit line from the Bank of Israel.
o Adoption or extension of the Bank's Run-off Plan.
o Liquidation or receivership of the assets of the Bank.
o Repayment of the perpetual deposits of the Bank with the
Treasury.
o Redemption of the redeemable preference shares of the Bank.
o Conducting and/or advancing negotiations and executing an
arrangement with the shareholders of the Bank as part of
article 350 of the Companies Law - 1999, in connection with
the transfer and/or delivery and/or redemption of their
shares.
o The privatization of the Bank.
o Management of credit, handling debts, restructuring of
debts, taking steps to collect debts.
o Management of various types of risks.
o Activities connected with the disclosure and recording
requirements applicable to the Bank.
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 which was
approved by the general meeting of the Bank on August 8, 2002
(hereinafter - 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.
F - 115
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS (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
still requires the approval of the general meeting of the Bank (which
has not yet been given) and in any event will go into effect only upon
submission of a request 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.
3) On February 26, 2008, the Audit Committee and the Board of Directors
of the Bank 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 still requires the approval of the general
meeting of the Bank (which has not yet been given) and in any event
will go into effect only upon submission of a request 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.
4) On July 17, 2005 the Bank issued a letter of indemnification to a
former employee of the Bank regarding a possible claim that may be
filed against him by a customer of the Bank and/or representatives of
the customer. The Bank has taken legal measures against this customer
in respect of a liability in the amount of U.S. $ 250,000. The claim
filed by the aforementioned customer also includes various allegations
against the aforementioned employee.
5) On February 11, 2005 the Bank issued a letter of indemnification in
favor of an attorney of the Bank who was appointed as the execution
office receiver for the purpose of realizing a mortgage of the Bank.
The letter of indemnification was issued in respect of proceedings the
Bank and aforementioned attorney are taking in order to annul the sale
agreement that was prepared by the said attorney in the framework of
realizing the mortgage in favor of the Bank.
D. LEGAL ACTIONS
Legal actions, including a motion to certify a claim as a class
action, were filed against the Bank in the ordinary course of
business. Management of the Bank, on the basis of legal opinions
regarding the prospects of the actions, 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.
F - 116
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
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 arguments 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 October 2002, Mr. Arye Fin (a shareholder of the Bank) filed with
the Tel Aviv-Jaffa District Court a legal action against the Bank,
against the State of Israel (as controlling shareholder in the Bank),
and against 17 former and current officers of the Bank (two of which
were removed later from the action), together with a motion to have
the suit approved as a class action. The class action was filed in the
name of all those who purchased shares of the Bank between December 1,
2001 and August 22, 2002, and the cause of the action is the alleged
breach of the duty to report under the Securities Law - 1968 and the
Securities Regulations (Periodic and Immediate Reports) - 1970 enacted
thereunder (hereinafter - the Securities Regulations). As claimed in
the action, during the aforementioned period, a number of
extraordinary events and/or matters occurred that indicated that the
Bank was in serious condition, and both these events and matters, and
the Bank's very situation mandated that the Bank file an immediate
report under the Securities Regulations. Such a report was not filed.
The estimated damages being claimed in the action is NIS 20 million
and, alternatively, NIS 14 million. The Bank notified the insurers
with which it has a bankers policy and a directors and senior officers
liability insurance policy of the filing of the suit. The insurers
carrying the bankers policy notified the Bank that the bankers policy
does not cover the claim. The Bank was also notified by the insurers
carrying the directors and senior officers liability insurance policy
that they have certain reservations regarding the validity of the
claim's insurance coverage and that they reserve their rights on this
matter.
F - 117
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
The Bank announced that it summarily rejects these reservations and
intends to act in order to fully exercise its rights towards the
insurers. The Bank handed over the care of the suit and the motion to
have the suit recognized as a class action to an attorney acting on
its behalf. On July 11, 2007, a compromise agreement was signed
between the Bank and the representative plaintiff, Mr. A. Fin (without
either party recognizing the claims of the other), whereby the Bank
undertook to pay an amount of NIS 4.7 million to the plaintiff group
and an additional amount of NIS 1.2 million (plus VAT as applicable)
as a special remuneration to the plaintiff and attorney fees to the
attorneys of the plaintiff. In addition, the Bank will have to bear
the costs of advertising the compromise arrangement, the fee of the
examiner to be appointed by court to render his opinion on the
proposed compromise, and an amount of US$ 10,000 plus VAT as the fee
of the Supervisor who will examine the debt claims of the group.
Concurrently, the Bank entered into a compromise agreement with the
insurer which issued the policy granting indemnification of the
Directors and senior officers, whereby the insurers undertook to
indemnify the Bank in an amount equal to half of the cost of the
compromise with the representative plaintiff (up to a maximum of NIS
6.25 million), plus NIS 1 million in respect of the legal fees of the
Bank and the senior officers that were sued. The compromise agreement
with the representative plaintiff was ratified by the court on
November 4, 2007 (with no objections to its ratification being
submitted), after having been previously ratified by the general
shareholders meeting of the Bank and the Bank paid the amounts set out
in the agreement.
3) In September 2004, various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv-Jaffa
District Court an originating motion in which the Court was requested,
inter alia, to instruct the Bank to pay to its shareholders a dividend
at the rates and dates it was paid until the second quarter of 2002.
The petitioners contend, inter alia, that according to the Bank's
articles of association, the Bank is required to pay to the holders of
its preferred shares an annual dividend at the rate of 7.5%, because
this dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits the
Bank keeps with it, and therefore its distribution is not subject to
the distribution conditions provided in the law, and that even if the
distribution conditions should be applied, the Bank should still be
ordered to distribute the requested dividend, due to the Bank's
meeting the repayment ability test as the dividend is being fully
financed by the State of Israel and not being deducted from the
capital of the Bank. The Bank transferred the handling of the
originating motion to attorneys acting on its behalf. Since in the
opinion of the Bank, the matter of the dividend distribution, which is
the issue of the aforementioned originating motion, is connected to
the question of whether under the circumstances of a non-distribution
of dividends, the interest on the perpetual deposits of the Bank with
the Ministry of Finance is accrued in its favor, and since the answers
received so far from the Ministry of Finance were not clear enough and
were insufficient, the Bank filed an originating motion with the Court
on March 9, 2005 against the Minister of Finance and the
aforementioned financial entities, in which it requested (among other
things) a declaratory ruling by which the interest on the perpetual
deposits is indeed accrued in favor of the Bank. Following the request
of the Bank and the aforementioned financial entities the Court
ordered that the hearing on the two originating motions be
consolidated. A preliminary hearing on the originating motions took
place on January 12, 2006. In the reply of the Minister of Finance to
the originating motions prior to the aforementioned preliminary
hearing, the Minister of Finance announced that his position is that
the interest on the perpetual deposits does not accrue in favor of the
Bank when it does not distribute a dividend, and that even so, in
light of the Bank's circumstances, there is no justification for the
distribution of a dividend by the Bank.
F - 118
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
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 opening 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 opening 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 by-laws 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 by-laws 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 by-laws. In the opinion
of the Bank's legal counsel, the likelihood 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) is remote.
4) 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 over charged 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.
F - 119
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
5) 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.
6) 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. 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.
7) 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
judgment 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.
F - 120
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
8) 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.
9) 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 grandchild 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.
E NON-REPORTING IN THE U.S. REGARDING SHARES CONSIDERED "ABANDONED"
The Bank's D and DD preference shares were issued in the U.S., as were some
of the C and CC preference shares and capital notes of the Bank. According
to U.S. state law, under certain circumstances, a security that is uncalled
for is considered to be "abandoned" and it must be reported each year to
the state in which the last residence of the owner of the security is
located. The same state is also entitled to take ownership of the security.
The same applies to the payment of a dividend and/or interest in respect of
securities not collected by the holders of the securities which, when
certain conditions are fulfilled, are also considered to be "abandoned" and
which must be reported and transferred. The shares and capital notes were
issued in the U.S. many years ago and the ongoing handling of the
securities was done by an agent in the U.S. The information which reached
the Bank indicates that no reports were filed with the various states and
as a result the securities and/or the payments in respect of the securities
of the Bank which were not collected became "abandoned".. Failure to file
the required reports and the resulting non-transfer of the securities
and/or the payments, may expose the bank to financial sanctions. There are
various issues involved which still require further investigation, such as
the volume of the securities and payments involved, whether the securities
are indeed subject to U.S. law or to Israeli law, who is entitled to them
as a result of their being "abandoned", the likelihood of sanctions and the
possibility of having them cancelled, and to what extent the Bank is liable
for the failure to report and transfer. At this stage, the Bank is unable
to assess the financial consequences, if at all.
F - 121
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
F. OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
ON COLLECTION OF LOANS*
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Credit from deposits based on rate of collection**
Unlinked Israeli currency 335.1 335.6
CPI linked Israeli currency 4.7 4.7
Foreign currency 171.8 188.6
------- -------
Total 511.6 528.9
======= =======
* Credit and deposits from deposits the repayment of which to the
depositor is contingent upon the collection of credit (or deposits).
The Bank presently has no interest margin or collection commission
with respect to the handling of such credit.
** The aforementioned credit and deposits mainly derive from agreements
that were made with the State regarding the granting of credit as
follows:
- Loans intended for research and development.
- Loans in the framework of the fund for small businesses.
- Loans that were granted in the framework of Amendment 39 of the
Law for the Encouragement of Capital Investments.
As at December 31, 2007, the activity based on the extent of collection
includes past due balances amounting to NIS 506.9 million (December 31,
2006 - NIS 524.2 million).
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2007 DECEMBER 31, 2006
--------------------- ---------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------- ------- ------- -------
REPORTED AMOUNTS REPORTED AMOUNTS
--------------------- ---------------------
NIS MILLIONS NIS MILLIONS NIS millions NIS millions
------- ------- ------- -------
Forward contracts 30.4 17.0 45.9 53.4
------- ------- ------- -------
Total 30.4 17.0 45.9 53.4
======= ======= ======= =======
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
F - 122
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
A. VOLUME OF OPERATIONS (CONT'D)
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2007 DECEMBER 31, 2006
--------------------- ---------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------- ------- ------- -------
REPORTED AMOUNTS REPORTED AMOUNTS
--------------------- ---------------------
NIS MILLIONS NIS MILLIONS NIS millions NIS millions
------- ------- ------- -------
Gross positive fair value - 0.5 1.0 1.1
Gross negative fair value (0.6) - - -
------- ------- ------- -------
Total (0.6) 0.5 1.0 1.1
======= ======= ======= =======
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
DECEMBER 31, 2007
-------------------------------
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS
-------------------------------
BANKS CENTRAL BANKS TOTAL
------- ------- -------
Gross positive fair value of derivative instruments 0.5 - 0.5
Off-balance sheet credit risk in
respect of derivative instruments (2) 4.7 - 4.7
------- ------- -------
Total credit risk in respect of derivative instruments 5.2 - 5.2
======= ======= =======
DECEMBER 31, 2006
-------------------------------
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS
-------------------------------
BANKS CENTRAL BANKS TOTAL
------- ------- -------
Gross positive fair value of derivative instruments 2.1 - 2.1
Off-balance sheet credit risk in
respect of derivative instruments (2) 9.9 - 9.9
------- ------- -------
Total credit risk in respect of derivative instruments 12.0 - 12.0
======= ======= =======
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
(2) Off-balance sheet credit risk relating to derivative instruments
(including those with a negative fair value) as computed for
limitation on individual borrower indebtedness.
F - 123
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2007
----------------------------------
REPORTED AMOUNTS
----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CPI/Shekel interest contracts 20.3 10.1 30.4
Foreign currency contracts 17.0 - 17.0
------- ------- -------
Total 37.3 10.1 47.4
======= ======= =======
DECEMBER 31, 2006
----------------------------------
REPORTED AMOUNTS
----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CPI/Shekel interest contracts 20.5 25.4 45.9
Foreign currency contracts 53.4 - 53.4
------- ------- -------
Total 73.9 25.4 99.3
======= ======= =======
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This note contains information on the methods of arriving at the fair value
of financial instruments. Most of the Bank's financial instruments are not
traded on active markets and thus market quotations are not available.
Therefore, the fair value is arrived at by using accepted pricing models,
such as the present value of future cash flows discounted at interest
rates, which reflect the level of risk intrinsic to the financial
instrument. Estimating the fair value by way of determining the future cash
flows and setting the discount interest rate is subjective. Therefore,
regarding most of the financial instruments, the fair value estimate is not
necessarily an indication of the instrument's realizable value on balance
sheet date. The estimate of the fair value was made at interest rates
prevailing at balance sheet date and did not take interest rate
fluctuations into consideration. The use of other interest rates could
result in significantly different fair values. This is especially true in
regard to non-interest bearing financial instruments or those bearing fixed
interest rates. Furthermore, commissions receivable or payable as a result
of the business activity were not taken into account and neither was the
tax effect.
F - 124
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
Moreover, the difference between the book value and fair value of the
financial instruments may not be realized since, in most cases, the Bank is
likely to hold the instruments until redemption. In view of the above, it
should be emphasized, that the data contained in this note should not be
considered as an indication of the value of the Bank as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques which may be applied in arriving at fair values, caution should
be used in comparing the fair values arrived at by different banks.
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
Bank of Israel. The credit line from the Bank of Israel bears the Bank of
Israel rate of interest. The discount rate of the cash flows of the
deposits raised by the Bank is set, for purposes of the fair value of the
liabilities, on the basis of the said interest rates.
DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
discounting future cash flows at interest rates used by the Bank in similar
transactions proximate to balance sheet date.
MARKETABLE SECURITIES - Are valued at market value. Shares for which no
market value is readily available are stated at cost.
CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
public was arrived at by using the method of the present value of future
cash flows discounted at an appropriate interest rate. The balance of such
credit was segmented into several categories. The future aggregate cash
flows of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level of
risk inherent in the credit. Generally, this interest rate is set on the
basis of the rate at which similar transactions of the Bank were effected
as at balance sheet date. For short-term balances of credit (for an initial
period of up to three months), or balances at variable market interest
rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.
The fair value of problematic debts was calculated by using discount rates
reflecting their intrinsic high credit risk. In any event, such discount
rates were not less than the highest interest rate used by the Bank in its
operations proximate to balance sheet date. The future cash flows of
problematic debts were calculated net of the specific allowances for
doubtful debts. The general and supplementary allowances for doubtful debts
in an aggregate amount of NIS 45.3 million (on December 31, 2006 - NIS 51.7
million), were not deducted from the balance of credit to the public for
cash flows purposes in assessing the fair value.
PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
cannot be applied to such deposits. Therefore, their book value is
considered to be their fair value (see Note 8 for details of the terms of
these deposits).
DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
liabilities was arrived at by the method of discounting the future cash
flows at the interest rate paid by the Bank in obtaining similar deposits,
or the interest rate of similar debentures and capital notes issued by the
Bank, prevailing as at balance sheet date.
F - 125
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is a
close approximation of the fair value since the deposits are at variable
rates of interest.
NON-PARTICIPATING PREFERENCE SHARES - The common costing models do not
address this type of share. As a result, the fair value is presented as
book value (for information pertaining to the rights of these shares and
the dividend in arrears, see Notes 14 and 16).
PARTICIPATING PREFERENCE SHARES - The common costing models do not address
this type of share. As a result, the fair value is presented as book value
(for information pertaining to the rights of these shares and the dividend
in arrears, see Notes 15 and 16).
DERIVATIVE FINANCIAL INSTRUMENTS - Instruments having an active market,
were valued at market value. Where these instruments are traded on several
markets, valuation was based on quotations in the most active market.
Derivatives that are not traded on an active market, were valued based on
models used by the Bank in its current operations which take into
consideration the inherent risk of the financial instrument (market risk,
credit risk etc.).
FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
VARIABLE MARKET INTEREST RATES - The amount stated in the balance sheet
represents an approximation of the fair value subject to changes in credit
risks and interest margins of the Bank in transactions at variable interest
rates.
F - 126
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
DECEMBER 31, 2007
---------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
--------- --------- --------- ---------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- ---------
FINANCIAL ASSETS
Cash and deposits with banks 31.5 2.3 33.8 33.9
Securities 45.8 0.5 46.3 46.3
Credit to the public 148.5 5,372.6 5,521.1 5,551.9
Credit to governments 0.1 24.6 24.7 26.2
Other financial assets 3.3 - 3.3 3.3
Perpetual deposits with the
Israeli Treasury 848.8 - 848.8 848.8
--------- --------- --------- ---------
Total financial assets 1,078.0 5,400.0 6,478.0 6,510.4
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits of the public 30.0 24.6 54.6 55.5
Deposits of banks 481.2 - 481.2 481.2
Deposits of the Government
and a perpetual deposit 0.1 5,319.2 5,319.3 5,326.2
Capital notes - 20.2 20.2 21.8
Other financial liabilities 24.0 - 24.0 24.0
Non participating preference
shares 276.0 - 276.0 276.0
Participating preference shares 170.6 - 170.6 170.6
--------- --------- --------- ---------
Total financial liabilities 981.9 5,364.0 6,345.9 6,355.3
========= ========= ========= =========
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 127
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
(cont'd)
DECEMBER 31, 2006
---------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
--------- --------- --------- ---------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- ---------
FINANCIAL ASSETS
Cash and deposits with banks 56.2 10.2 66.4 66.5
Securities 49.7 0.7 50.4 50.4
Credit to the public 322.7 6,196.4 6,519.1 6,514.5
Credit to governments - 41.5 41.5 41.8
Other financial assets 4.5 - 4.5 4.5
Perpetual deposits with the
Israeli Treasury 825.8 - 825.8 825.8
--------- --------- --------- ---------
Total financial assets 1,258.9 6,248.8 7,507.7 7,503.5
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits of the public 33.8 33.1 66.9 68.2
Deposits of banks 761.5 6.8 768.3 768.4
Deposits of the Government
and a perpetual deposit 0.1 6,087.4 6,087.5 6,088.2
Capital notes - 24.9 24.9 25.4
Other financial liabilities 25.1 - 25.1 25.1
Non participating preference
shares 303.2 - 303.2 303.2
Participating preference shares 187.4 - 187.4 187.4
--------- --------- --------- ---------
Total financial liabilities 1,311.1 6,152.2 7,463.3 7,465.9
========= ========= ========= =========
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 128
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES
"Related Parties" and "Interested Parties" of the Bank, as defined in
Opinion No. 29 of the Institute of Certified Public Accountants in Israel
and the Securities Regulations (Preparation of Annual Financial Statements)
- 1993, are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank
Ltd.; Bank Leumi le-Israel B.M.; the General Manager, Directors of the Bank
and companies related to them, affiliates of the Bank and their related
companies.
The Bank conducts transactions with all or some of the aforementioned
parties, in the ordinary course of business on terms applicable to its
transactions in general. As it is not practical to separately record the
transactions with such entities, it is not possible to reflect the
information required by the said Opinion except for the following details:
A. BALANCES
DECEMBER 31, 2007 DECEMBER 31, 2006
------------------------------------------------- -------------------------------------------------
AFFILIATES AND THEIR AFFILIATES AND THEIR
RELATED COMPANIES DIRECTORS AND GENERAL MANAGER RELATED COMPANIES DIRECTORS AND GENERAL MANAGER
--------------------- --------------------- --------------------- ---------------------
HIGHEST HIGHEST HIGHEST HIGHEST
BALANCE AT BALANCE BALANCE AT BALANCE BALANCE AT BALANCE BALANCE AT BALANCE
BALANCE SHEET DURING THE BALANCE SHEET DURING THE BALANCE SHEET DURING THE BALANCE SHEET DURING THE
DATE YEAR(1) DATE YEAR(1) DATE YEAR(1) DATE YEAR(1)
------- ------- ------- ------- ------- ------- ------- -------
REPORTED AMOUNTS
---------------------------------------------------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Credit to the public 0.1 0.2 - - 0.2 0.3 - -
LIABILITIES
Other liabilities - - 0.9 0.9 - - 0.2 0.2
(1) On the basis of the balances at the end of each month.
(*) For information on the credit to the Israel Electric Company
Ltd., granted from the deposit of the State and with the
guarantee of the State - see E below.
F - 129
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)
B. SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES*
2007 2006
--------- ---------
DIRECTORS AND DIRECTORS AND
GENERAL GENERAL
MANAGER MANAGER
--------- ---------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
--------- ---------
Profit from financing
operations before allowance
for doubtful debts (1) - -
Allowance for doubtful debts - -
Operating and other expenses (2) 2.3 2.3
(1) See details in D hereunder.
(2) See details in C hereunder.
(*) For information on the credit to the Israel Electric Company Ltd.,
granted from the deposit of the State and with the guarantee of the
State - see E below.
C. BENEFITS TO INTERESTED PARTIES
2007 2006
---------------------- ----------------------
DIRECTORS AND GENERAL MANAGER DIRECTORS AND GENERAL MANAGER
---------------------- ----------------------
REPORTED AMOUNTS REPORTED AMOUNTS
---------------------- ----------------------
NUMBER OF NUMBER OF
NIS MILLIONS RECIPIENTS NIS MILLIONS RECIPIENTS
--------- --------- --------- ---------
Interested parties employed by
the Bank (1) 2.3 2 1.7 2
Fees to directors not employed
by the Bank 0.6 9 0.6 10
(1) Not including VAT on salaries.
See Note 18A regarding employment agreements with the Chairman of the Board
of the Bank and its General Manager.
F - 130
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)
D. RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
WITH INTERESTED AND RELATED PARTIES*
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
-----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Income deriving from credit to the public - - -
Expenses deriving from deposits of the public - - -
------- ------- -------
Net results from financing operations
before allowance for doubtful debts - - -
======= ======= =======
Definitions in this note:
- Interested parties - as defined in Paragraph 1 of the definition of an
"interested party in a company" in Section 1 of the Securities Law.
- Related party - as defined in Opinion 29 of the Institute of Certified
Public Accountants in Israel.
- Directors and General Manager - including their spouses and minors
(Opinion 29 of the Institute of Certified Public Accountants in
Israel).
(*) For information on the income and expenses in connection with the
credit to the Israel Electric Company Ltd., granted from the deposit
of the State and with the guarantee of the State - see E below.
E. CREDIT TO THE ISRAEL ELECTRIC COMPANY LTD. AND DEPOSITS OF THE
GOVERNMENT
The Bank provided long-term credit to the Israel Electric Corporation Ltd.
which was granted out of a deposit of the State. The State provided a
guarantee as security for the repayment of such credit to the Bank. As at
December 31, 2007, the balance of the credit was NIS 4,963 million (as at
December 31, 2006 - NIS 5,671 million). An expense of NIS 127 million was
recorded in respect of the aforementioned credit in 2007 (in 2006 - an
expense of NIS 89 million). This refers to dollar-denominated credit and
due to the decrease in the exchange rate of the dollar, negative exchange
rate differentials were recorded. In 2005, income of NIS 864 million was
recorded, constituting more than 10% of the profit from financing
operations before the allowance for doubtful debts in the said year.
As aforementioned, the source for this credit was a deposit of the State of
Israel. In addition to the said deposit, the balance of the Government
deposits includes also deposits made in order to provide loans in the
framework of the Kibbutzim arrangement and other deposits made in order to
provide other long-term loans. As at December 31, 2007, the overall balance
of the Government deposits amounted to NIS 5,319 million compared with NIS
6,087 million as at December 31, 2006. Financing income in an amount of NIS
115 million was recorded in 2007 in respect of the Government deposits,
compared with income of NIS 84 million in 2006 and an expense of NIS 902
million in 2005.
F - 131
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
2007 2006 2005
--------- --------- ---------
REPORTED AMOUNTS
--------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
A. INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public (80.7) (39.7) 979.3
Credit to governments - (0.9) 1.0
Deposits with Bank of Israel - - 0.1
Deposits with banks 0.8 0.7 8.2
Debentures - - 0.3
--------- --------- ---------
(79.9) (39.9) 988.9
--------- --------- ---------
B. (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public (3.1) (4.4) (15.4)
Deposits of the Government 115.1 84.2 (901.7)
Deposits of Bank of Israel (23.6) (45.2) (43.0)
Deposits of banks 0.1 0.9 0.7
--------- --------- ---------
88.5 35.5 (959.4)
--------- --------- ---------
C. INCOME DERIVING FROM DERIVATIVE FINANCIAL
INSTRUMENTS
Net income from derivative instruments ALM * 0.3 11.6 1.8
--------- --------- ---------
0.3 11.6 1.8
--------- --------- ---------
D. OTHER INCOME AND EXPENSES
Commissions from financing operations 11.0 12.1 13.4
Other financing income** 19.0 11.6 28.1
Other financing expenses (9.6) (12.7) (11.2)
--------- --------- ---------
20.4 11.0 30.3
--------- --------- ---------
Total profit from financing operations before
allowance for doubtful debts 29.3 18.2 61.6
========= ========= =========
Including - exchange rate differences, net (6.1) (9.8) 15.6
========= ========= =========
E. RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
sale debentures (included in income from assets) - - 0.3
--------- --------- ---------
Total profit from investments in debentures - - 0.3
========= ========= =========
* 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 17.4 9.4 21.6
========= ========= =========
F - 132
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 24 - OPERATING COMMISSIONS
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Ledger fees (in Israeli and foreign currency) 0.5 0.4 1.1
Payment order system services - 0.1 0.1
Foreign trade transactions 0.1 0.2 0.2
Credit handling and drafting of contracts - - 0.1
Computerized information services and
confirmations - - 0.1
Other 0.5 0.6 0.6
------- ------- -------
Total operating commissions 1.1 1.3 2.2
======= ======= =======
NOTE 25 - GAINS ON INVESTMENTS IN SHARES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Gains on sale of available-for-sale shares 3.3 10.3 11.3
Dividend from available-for-sale and trading shares 5.4 6.1 -
------- ------- -------
Total gains on investments in shares 8.7 16.4 11.3
======= ======= =======
NOTE 26 - OTHER INCOME
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Gains on severance funding 0.2 0.8 0.6
Other 1.5 3.0 4.1
------- ------- -------
Total other income 1.7 3.8 4.7
======= ======= =======
F - 133
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 27 - SALARIES AND RELATED EXPENSES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Salaries 13.3 13.8 14.5
Severance pay, provident fund, pensions,
continuing education fund, vacation pay,
sick leave pay and long service bonuses (*) 2.1 3.0 2.8
National insurance 3.1 0.7 0.8
Other related expenses - 0.1 0.1
------- ------- -------
Total salaries and related expenses 18.5 17.6 18.2
======= ======= =======
(*) In 2006 and 2005, payroll tax was not included in payroll expenses due
to the existence of losses for purposes of profit tax.
NOTE 28 - OTHER EXPENSES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Marketing and advertising 0.1 0.1 0.1
Communications (postage, telephone,
courier fees, etc.) 0.3 0.4 0.4
Computer (not including salaries and
depreciation) 2.8 3.3 4.3
Office expenses 0.2 0.2 0.3
Insurance 1.5 3.2 4.7
Professional services 3.3 3.4 4.8
Directors' fees (not including a director employed
as a senior executive) 0.6 0.6 0.7
Staff training, further education, etc. 0.1 0.1 -
Other 0.5 3.0 1.2
------- ------- -------
Total other expenses 9.4 14.3 16.5
======= ======= =======
F - 134
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 29 - TAXES ON ORDINARY OPERATING INCOME
A. COMPOSITION:
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Taxes for the current year 1.5 - -
Taxes in respect of prior years 0.1 - -
------- ------- -------
Provision for taxes on income 1.6 - -
======= ======= =======
B. RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE
The following table presents a reconciliation between the theoretical tax
applying to the operating profit of the Bank, based on the statutory tax
rate applicable to banks in Israel, and the tax expense on operating
profit, as reflected in the statement of income:
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Statutory tax rate 38.53% 40.65% 43.59%
======= ======= =======
Tax (tax savings) at the valid statutory rate 9.2 (7.0) (3.7)
Tax (tax savings) in respect of:
Addition (deduction) in respect of inflation 2.1 (0.2) 2.2
General and supplementary allowances for
doubtful debts (2.5) (2.4) (5.2)
Other non-deductible expenses (fines, excess expenses) 0.1 0.1 0.1
Exempt income and income with limited rates - 1.1 -
Differences and tax benefits in respect of which
deferred taxes had not been recorded, (4.2) 7.3 3.6
Profit tax on payroll tax (net) 0.2 - -
Taxes in respect of prior years 0.1 - -
Additional payables (receivables) in respect of
other problematic debts (3.4) - -
Loss for purposes of profit VAT which
cannot be set off - 1.1 3.0
------- ------- -------
Tax expense reflected in the statement of income 1.6 - -
======= ======= =======
C. The Bank has been issued final tax assessments for all years through
2003.
D. Carryforward tax losses in respect of which deferred tax assets were
not recorded total NIS 719 million (in 2006 - NIS 707 million).
F - 135
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 29 - TAXES ON INCOME (CONT'D)
E. In 2006, the Bank recorded payroll tax on salaries receivable in the
amounts of NIS 2.8 million, as a result of losses for purposes of
profit tax.
F. On July 25, 2005 the Israeli parliament passed the Law for the
Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) -
2005 (hereinafter - Amendment 147). The Amendment provides for a
gradual reduction in the company tax rate in the following manner: in
2007 the tax rate will be 29%, in 2008 the tax rate will be 27%, in
2009 the tax rate will be 26% and from 2010 onward the tax rate will
be 25%. Furthermore, as from 2010, upon reduction of the company tax
rate to 25%, real capital gains will be subject to tax of 25%.
The tax on banking institutions includes profit tax in accordance with
the VAT Law
On June 29, 2006, a VAT Order was issued reducing the profit tax rate
from 17% to 15.5%, commencing on July 1, 2006. Accordingly, the
statutory tax rate that will apply to the Bank will be 36.8% in 2008,
35.9% in 2009 and 35.1% in 2010.
NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM
DECEMBER 31 DECEMBER 31
2007 2006
--------- ---------
REPORTED REPORTED
AMOUNTS AMOUNTS
--------- ---------
NIS MILLIONS NIS MILLIONS
--------- ---------
CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public 5,095.4 5,840.1
--------- ---------
Total 5,095.4 5,840.1
========= =========
DESIGNATED DEPOSITS
Deposits of the Government 5,219.8 5,977.1
--------- ---------
Total 5,219.8 5,977.1
========= =========
Credit out of designated deposits includes NIS 4,963.2 million, which is
secured by a State guarantee. The annual interest margin in respect of this
credit amounts to NIS 0.3 million (on December 31, 2006 the balance of the
credit secured by a State guarantee was NIS 5,671.0 million).
F - 136
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 31 - INFORMATION ON NOMINAL DATA BASIS
DECEMBER 31 DECEMBER 31
2007 2006
--------- ---------
NIS MILLIONS NIS MILLIONS
--------- ---------
Total assets 6,482.6 7,516.3
Total liabilities 6,372.6 7,496.4
--------- ---------
Total shareholders' equity 110.0 19.9
========= =========
2007 2006 2005
--------- --------- ---------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
Nominal net income (loss) 22.2 (17.1) (8.4)
F - 137
APPENDIX I
TO THE ARRANGEMENT APPLICATION
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.
4
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.
6
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).
7
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.
9
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