SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 2-41957
ISRAEL BANK OF AGRICULTURE LTD.
(Exact name of registrant as specified in its charter)
83 Hashmonaim Street, Tel Aviv, Israel
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
7.5% Registered Subordinated Capital Notes due 2003
7.5% cumulative redeemable Preference "C" shares linked to the U.S. Dollar.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Ordinary shares of NIS 0.0001 135,050,000
8% Cumulative and Participating Preference
"A" Shares of NIS 0.001 195,768,412
7.5% Cumulative Redeemable Preference "C"
Shares of NIS 0.042 linked to the U.S. Dollar 250,000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has elected
to follow:
Item 17 |X| Item 18 |_|
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TABLE OF CONTENTS
PART I Pages
-----
Item 1 Identity of Directors, Senior Management and Advisors 3
Item 2 Offer Statistics and Expected Timetable 3
Item 3 Key Information: 3
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Item 4 Information on the Company: 6
A. History and Development of the Company
B. Business Overview
C. Property, Plants and Equipment
Item 5 Operating and Financial Review and Prospects 10
A. Business Policy
B. Liquidity and Capital Resources
C. Loss recognition of doubtful debts
D. Income recognition on loans
E. Loan restructuring gains or losses
F. Results of operations
G. Shareholders' equity
H. Principal Balance Sheet items
I. Investee companies
Item 6 Directors, Senior Management and Employees 17
A. Board of Directors
B. Bank's Management
C. Personnel
Item 7 Major Shareholders and Related Party Transactions 19
Item 8 Financial Information 19
Item 9 The Offer and Listing 19
Item 10 Additional Information 19
A. Share Capital
B. Material Contracts
C. Exchange Controls
D. Taxation
E. Dividend and Paying Agents
F. Statement by Experts
G. Documents on Display
H. Subsidiary Information
Item 11 Quantitative and Qualitative Disclosure about Market Risks 24
Item 12 Description of Securities Other Than Equity Securities 25
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies 26
Item 14 Material Modifications to the Rights of Security Holders
and Use of Proceeds 26
Item 15 Reserved 26
Item 16 Reserved 26
PART III
Item 17 Financial Statements 26
Item 18 Exhibits 26
Item 19 Signatures 26
Certifications 27
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FORM 20-F
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3. KEY INFORMATION:
A. SELECTED FINANCIAL DATA
Financial data which highlight certain significant trends in the
registrant's financial condition and results of operations, as
presented on the adjusted basis (index December 1987):
December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Rate of Exchange -
1US$ = NIS 4.737 4.416 4.041 4.153 4.160
Consumer Price Index (points) 440.65 413.77 408.00 408.00 402.61
ASSETS
-----------------------------------------------------------
Cash in hand and deposits with
Banks 58,745 36,022 23,759 13,001 2,770
Loans to the public 283,424 329,917 373,456 413,950 482,156
Loans to the Government of
Israel * 30,739 25,948 32,011 27,657 18,953
Investment in affiliate 988 969 932 853 786
Bank premises and equipment 382 335 384 429 526
Other assets 1,660 1,535 1,331 2,241 5,423
------- ------- ------- ------- -------
Total assets 375,938 394,726 431,873 458,131 510,614
======= ======= ======= ======= =======
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
December 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- -------- -------- -------- --------
Deposits from the public 1,098 1,869 1,548 2,464 2,249
Deposits from banks -- -- -- 33,390 50,210
Deposits from the Government
of Israel 445,346 448,606 447,966 448,345 442,963
Other liabilities 7,586 8,116 27,789 7,896 11,714
Deferred deposits from the
Government of Israel * 814,481 758,138 694,977 631,475 575,296
Deferred capital notes 40,193 40,144 37,947 39,389 40,758
Held by the public
Held by the Government 81,131 80,307 73,829 75,484 75,855
Non-participating preference
shares 11 12 11 11 12
Shareholders' deficiency (1,013,908) (942,466) (852,194) (780,323) (688,443)
---------- -------- -------- -------- --------
Total Liabilities and shareholders' equity 375,938 394,726 431,873 458,131 510,614
========== ======== ======== ======== ========
LOSS FROM FINANCING ACTIVITIES
Loss from financing activities before
provision for doubtful debts:
Interest expense (83,684) (97,857) (87,797) (83,071) (73,407)
Interest income 20,627 23,493 25,556 25,306 1,294
---------- -------- -------- -------- --------
(63,057) (74,364) (62,241) (57,765) (72,113)
Increase in provision for doubtful debts -- (6,390) -- (24,151) --
---------- -------- -------- -------- --------
Loss from financing activities after
provision for doubtful debts (63,057) (80,754) (62,241) (81,916) (72,113)
========== ======== ======== ======== ========
Operating loss (71,442) (90,272) (71,871) (91,041) (80,713)
========== ======== ======== ======== ========
Operating loss per ordinary share
Loss per NIS 1 nominal value
of share capital (341.40) (431.40) (343.40) (435.00) (385.70)
========== ======== ======== ======== ========
* Reclassified
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Share Capital
Share capital of the Bank (in nominal values)
December 31,
----------------------
2002 2001
-------- --------
Authorized Issued and Outstanding
---------- ----------------------
NIS
------------------------------------
Ordinary Shares of NIS 0.0001 37,970 13,505 13,505
8% Cumulative and Participating
Preferred "A" Shares of NIS 0.001 201,530 195,768 195,768
7.5% Cumulative and Redeemable
Preferred "C" Shares of of NIS 0.042,
linked to the U.S. dollar (see d. below) 10,500 10,500 10,500
------- ------- -------
250,000 219,773 219,773
======= ======= =======
B. CAPITALIZATION AND INDEBTEDNESS - Not applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS - Not applicable
D. RISK FACTORS
Since the Bank is not involved in granting credit, but rather in
collecting debts from the agricultural sector in respect to the loans
extended in the past, it does not have any risk in respect to new credit.
The existing debts are collected according to the arrangements reached
among the various banks and the agricultural sector. There are concerns
with respect to the credit, that the recession state of the economy will
also effect the agricultural sector and the possibility of its meeting the
payments in accordance with the aforesaid arrangements. For more with
respect to the Bank's activities, see also Item 11.
-5-
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The bank was incorporated on April 24, 1951. The bank was organized and is
owned by the Government of Israel, which supplied the original capital, to
serve as an instrument to encourage and assist agricultural development in
the State of Israel.
In the mid nineteen eighties, the agricultural sector started investing
large amounts in industrial plants, in the expansion of existing plants
and in better living conditions for its inhabitants.
For those purposes, loans were borrowed from banks, bearing real interest
(interest in excess of the change in the Consumer Price Index), which
sometimes exceeded 10% annually.
In addition, the Bank of Israel's monetary policy, since 1985, has kept
flat the rate of exchange of foreign currencies, and the rise in the
Consumer Price Index was halted to a slow pace, thus causing reduction in
the selling prices collected by the agricultural sector, which made the
inhabitants' repaying ability meager.
All that resulted in heavy losses and insolvency in the agricultural
sector, affecting banks' loan collecting ability.
Over the years of its existence, the bank has provided traditional banking
services to its agricultural customers. However, due to the financial
crisis prevailing in the agricultural sector in the recent years, as
described in the preceding paragraphs, it was decided to considerably
curtail the activities of the bank, the said decision having been taken on
December 11, 1991.
B. BUSINESS OVERVIEW
Background Information
Hebrew Terms:
"Kibbutz" - Cooperative agricultural settlement. Plural: "Kibbutzim"
"Moshav" - Village of family agricultural units. Plural: "Moshavim"
"Balloon" - Any amount from the debt of Kibbutz or a Company which they
are unable to repay in accordance with their repayment power.
"ILA" - Israel Land Administration.
In pursuance of an agreement between the Finance Ministry, the
representatives of the Kibbutzim and the banks, the Government of Israel
instituted an "Arrangement Administration" (the Administration) to solve
the debt arrears of the Kibbutzim to the banks. The said Administration
carried out a survey of the overall indebtedness of each Kibbutz to all
the banks.
-6-
The Administration accordingly classified the amounts of loans owed by the
Kibbutzim into three categories:
Category 1:
Amounts recoverable according to the assessment by the Administration of the
repayment ability of each Kibbutz. These amounts are to be rescheduled into new
long term loans at market terms. The Government placed long term deposits with
the banks at similar terms, to be used for the financing of the said new
long-term loans to be extended by the banks to the Kibbutzim, upon restructure
of the impaired loans.
Category 2:
Amounts to be borne by the Government. These amounts are paid by the Government
directly to the banks, by the way of "grants" to the respective Kibbutzim, in
partial settlement of the impaired loans.
Category 3:
The remainder - to be written off and borne by the banks. Provisions were
recognized by the bank in prior years for the amounts to be written off, and
were carried as losses to income.
As stated in note 3E to the financial statements, the Law of Arrangements in the
Family Agricultural Sector was enacted in 1992, for the purpose of solving the
indebtedness of the Moshavim to the various banks.
On January 28, 1992, a Deposit Agreement was signed between the bank and the
Government of Israel. The Deposit Agreement is a component of the arrangements
to secure the financing of the bank's operations within the framework of the
arrangements of the agricultural sector's indebtedness to banks. In accordance
with this agreement, the Government agreed to convert NIS 180 million deposited
with the bank to three deferred deposits, deferred to December 31, 1999, as
explained in Note 1A and 11 to the financial statements.
In accordance with the Deposit Agreement, the bank agreed not to grant loans in
excess of what it is obligated to grant in the framework of the arrangements
with the agricultural sector, and in excess of what it is obligated to grant to
its existing customers. If there will be additional obligations in the framework
of further arrangements in the agricultural sector, these will be given only
after authorization by the ministers in charge, in coordination with the Bank of
Israel. The bank will concentrate its major efforts in the collection of loans
which were granted to the agricultural sector, and will not expand the scope of
deposits from the public. Any renewal of existing deposits from the public will
be done in coordination with the Bank of Israel.
On January 31, 1992, the Bank of Israel notified the bank that further to the
deposit agreement with the Government of Israel, the Bank of Israel will make
available to the bank special credit facilities, subject to the terms set below:
The bank will not expand the scope of deposits raised from the public, and will
not renew existing deposits until determined otherwise.
The special credit facilities which the Bank of Israel is to make available to
the bank will be used only for carrying out its obligations to depositors, and
for financing current operating expenses (salaries, maintenance, etc.). The
granting of new loans to customers of the bank, in the framework of further
arrangements in the agricultural sector, will be carried out only after
authorization by the ministers in charge, and in coordination with the Bank of
Israel, according to the guidelines set out above.
The bank is a Government-owned company The arrangements described in Note 1A(2)
to the financial statements, are specifically intended to enable the bank to
proceed with its business, namely - its operations for the collection of the
loans. However, in the case of liquidation, the bank will repay these special
credit facilities only after repaying deposits from the public, from other
banks, and any remaining liabilities to the public, the employees of the bank,
and Government deposits.
Should the bank not carry out the above terms, all of these special credit
facilities will then be immediately due and repayable.
-7-
The credit facilities and interest thereon will be linked to the Israeli
Consumer Price Index. A guarantee of the complete and total repayment of funds
granted or to be granted by the Bank of Israel from time to time, including
monetary deposits of the Bank of Israel with the bank, as they currently exist,
or may exist in the future, the Bank signed a debenture, on January 10, 1992,
collateralizing its loan portfolio by a primary floating charge.
Toward the end of 2000, the Bank did not have a debt balance toward the Bank of
Israel. In a letter to the Bank dated December 6, 2000, the Bank of Israel gave
notice that it is ceasing to extend current credit to the Bank.
In addition, the Bank of Israel gave notice that it will act at the earliest
convenience to eliminate the floating charge on the Bank's credit portfolio and,
indeed, the floating charge was eliminated in January 2001.
Since the Bank does not have any credit sources as it had in the past, in the
event it may require short-term bridge loans, the Bank may be forced to defer
payments to the Government for those same periods of time in accordance with the
pace of its collections.
In the opinion of the Bank's management, the cash and cash equivalents balance
as of December 31, 2002 and the current collection anticipated in 2003 from the
payment arrangement with the moshavim and the kibbutzim will allow the Bank in
2003, subject to what is stated above, to pay the ongoing operating expenses
(primarily salaries) and make interest payments (primarily to the Government)
and the principal of the capital notes held by the public.
Effective May 10, 1992 trading in the Bank's "A" and "C" preferred shares, and
in its deferred capital notes, was discontinued on the Tel-Aviv Stock Exchange,
and on January 31, 1993 the aforementioned securities were unlisted. The
discontinuance of trading, and later the unlisted were decided upon due to the
difficulties encountered in trading the securities and due to the bank's
deficit.
In prior years, the bank reduced its manpower quota in accordance with its
requirements. At the present time, the number of employees currently employed by
the Bank is appropriate for its needs.
Nature of trading market
The following securities of the Company are traded in the United States.
Trade is effected through a United State Nominee:
250,000 - 7.5% Cumulative Redeemable Preference "C" shares linked to the dollar
(Nominee: Mellon Investor services LLC, New York).
25,612,000 - 7.5% Registered Subordinated Capital Notes due 2003 (Nominee:
JPMorgan Chase Bank, New York).
The 8% Cumulative and Participating Preference ":A" shares and the 7.5%
Cumulative Redeemable Preference "C" Shares were quoted on the Tel Aviv Stock
Exchange. On April 30, 1992, the Board of directors of the Tel Aviv Stock
Exchange resolved to cease trading of the securities of the bank until such time
when conditions permitted continuation of trading. The securities were de-listed
on January 31, 1993. Before that date, four trading days took place, from
January 25 to January 28, 1993. Appropriate notices were mailed to holders in
Israel and abroad.
Dividend to the shareholders of Preferred A and C shares:
-8-
Pursuant to the Companies Law, the prospectuses and the Banks' Memorandum and
Articles of Incorporation, a dividend may only be distributed from earnings.
In spite of the losses which the Bank accumulated during recent years, a
dividend was paid to the shareholders of Preferred A and C shares referred to
above, subject to the approval of the Board of Directors, the Government
Companies Authority, and based on legal opinions obtained in 1986 and 1987. The
amount of the aforementioned dividend paid in 1998 amounted to NIS 7,367
thousand, where approximately NIS 2 thousand was at the expense of the Bank and
the balance at the expense of the Government in the context of the exchange rate
insurance, to which it was committed in the issuance prospectus for the
Preferred C shares.
Over the years, the Government has become the principal shareholder (as of
December 31, 2002: Ordinary shares 100%, Preferred A shares - 99.52%, Preferred
C shares - 91.68%) and, in any case, it is entitled to receive the greater part
of the dividend. For several years, there is an arrangement pursuant to which
the Government purchases Preferred C shares from those who are willing to sell
them.
On July 27, 1999, the Board of Directors decided on the basis of a legal opinion
it obtained to cease paying the dividend. A report on this development was
communicated to the Accountant General and the Companies Authority.
The Bank did not record a liability with respect to the accumulative dividend,
since its distribution is dependent on:
a. The existence of earnings (in other words, the distribution of a dividend
will not be contrary to the Companies Law);
b. According to a decision of the Board of Directors.
The accumulative dividend which was not paid in respect to the years 1999 - 2002
amounted to NIS 35,590 thousand. In addition, there is a commitment on the part
of the Treasury of the State of Israel to cover the linkage differences included
in the above amount which amounted to NIS 35,524 thousand.
C. PROPERTY, PLANTS AND EQUIPMENT
The bank's offices are owned by it, and are located at 83 Hashmonaim
Street, a prominent business center in Tel-Aviv. These offices are too
large for the bank's present needs, and a portion of the building has been
leased out.
Square
Meters
--------
Total space owned by the bank 2,619
--------
Occupied by the bank 1,373
Space for rent 1,246
--------
2,619
========
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Business Policy
In the reported period, the bank continued to implement the prescribed policy
(see notes 1A and 11 to the annual financial statements) whereby the bank:
o Granted loans only for settlement of debts, within the framework of the
Arrangement in the agricultural sector.
o Collected loans, intensively using means of enforcement at its disposal.
On April 20, 1993, the bank received notice from the Bank of Israel,
limiting its banking permit to the activities described above.
In view of the above described prescribed policy, whereby the Bank
refrains from extending loans, except for those stemming from its
obligations under the Arrangements, and from taking deposits from the
public, the Bank of Israel has exempted the bank from reporting the
following:
o Rates of Income and expense.
o Exposure to fluctuations in interest rates.
o Breakdown of assets and liabilities according to linkage basis.
o Assets and liabilities according to linkage bases and repayment periods.
o Fair value of financial instruments.
o Disclosure of the effect of the differences between the increase in the
CPI according to which the financial statements are adjusted, and the
increase in the CPI according to which the loans are adjusted (the CPI for
the prior month).
o Exposure to market risks and how to manage them.
The Bank of Israel has also exempted the bank from implementing the
directive in respect of the setting off of those earmarked deposits, the
repayment of which to depositors is dependent upon the extent of credit
collected from the public.
Liquidity and Capital Resources
On January 31, 1992, the Bank of Israel notified the bank that further to the
Deposit Agreement with the Government of Israel, the Bank of Israel will make
available to the bank's special credit facilities, subject to the terms set out
below:
The bank will not expand the scope of deposits raised from the public, and will
not renew existing deposits until determined otherwise.
The special credit facilities which the Bank of Israel will make available to
the Bank will be used only for carrying out its obligations to depositors, and
for financing current operating expenses (salaries, maintenance, etc.). The
granting of new loans to customers of the Bank in the framework of comprehensive
arrangements in the agricultural sector, will be carried out only after
authorization by the responsible ministers, and in coordination with the Bank
Israel.
In case of dissolution, the Bank will repay these special credit facilities
after repaying deposits form the public, from banks, and the other remaining
liabilities to the public, the employees of the Bank, and Government deposits.
Should the Bank not carry out the above terms, all of these special credit
facilities will then be immediately repayable.
-10-
The credit facilities and interest thereon will be linked to the Israeli
Consumer Price Index. As a guarantee for the complete and total repayment of the
credit granted and/or to be granted by the Bank of Israel from time to time,
including monetary deposits of the Bank of Israel with the Bank, as they
currently exist, or may exist in the future, the Bank signed a debenture, on
January 10, 1992, collateralizing its credit portfolio by a senior in priority
floating charge.
Toward the end of 2000,the Bank did not have a debt balance toward the Bank of
Israel. In a letter to the Bank dated December 6, 2000, the Bank of Israel gave
notice that it is ceasing to extend current credit to the Bank.
In addition, the Bank of Israel eliminated the floating charge on the Bank's
credit portfolio.
Since the Bank does not have any credit sources as it had in the past, in the
event it will require short-term bridge loans, the Bank may be forced to defer
payments to the Government for those same periods of time and in accordance with
the pace of its collections.
In the opinion of the Bank's management, the cash and cash equivalents balance
as of December 31, 2002 and the current collection anticipated in 2003 from the
payment arrangement with the moshavim and the kibbutzim will allow the Bank in
2003, subject to what is stated above, to pay the ongoing operating expenses
(primarily salaries) and make interest payments (primarily to the Government)
and the principal of the capital notes held by the public.
Arrangements in the Agricultural Sector
Credit to the moshavim
On March 4, 1992, the Arrangements Law in the Family Agricultural Sector, 1992
was enacted. The ensuing obligating regulations were partly determined during
1994. In December 1997, the regulation for the realization of assets which are
not agricultural assets was completed, including land and which deals with the
modus operandi for those who are recovering. Within the framework of the
regulation, the agriculture assets which are not realizable were temporarily
determined. The regulations not yet amended refer to the distributions of the
proceeds, realization of agricultural assets and collateral for the settlement
of the debts. The proposal of the regulations to distribute the proceeds was
considered by several sessions of the economic committee of the Knesset, and
during the most recent session held on March 5, 2001, the members of the
committee voted against the approval of the regulations according to the text
submitted by the ministers.
In the absence of the above regulations, the settlement of debts in this segment
can only be completed by a comprehensive creditor arrangement which is
acceptable to the Moshav and all the creditors. Commencing with the end of the
first half of 1997, "wraparound plans" which constitute the basis for a
comprehensive arrangement were formulated. The sources for that arrangement are
the members' debts and the sale of the moshav assets, mainly by extended
appropriation of residential plots (in line with Resolution 737 of the Israel
Land Administration) and from changes in the designation of land initiated by
the moshav, according to Israel Land Administration (hereinafter "ILA")
decisions.
These arrangements are supposed to make the need to sell agricultural assets
superfluous, however at the beginning of 1999, the performance of Resolution 737
of the ILA was frozen, and since then the issue of the freeing of agricultural
land has come up for discussion over the years in the committees and in other
contexts.
On August 29 2002, the Supreme Court ruled that decisions 717,727 and 737 of the
ILA are void since they do not meet the reasonability criteria. However, this
determination did not receive immediate force since the decisions concern
numerous transactions for which the procedure in their respect and their
economic and social implications are far-reaching. Therefore, the Board of the
ILA has to formulate transitional provisions that will determine which of the
transactions will be carried out.
A committee of the legal advisory authority of the ILA formulated
recommendations with respect to the transitional provisions for the decisions
717, 727 and 737 of the Board of the ILA, and they are due to be discussed by
the Board of the ILA.
-11-
On November 17, 2002, the Government adopted the recommendation of the Milgrom
Committee that was established at the time to examine the composite of the
aspects involved in the change in the designation of agricultural land. In
accordance with the Government's decision, it is possible to act pursuant to the
committee's recommendations in connection with decisions 717 (income generating
real estate) and 737 (expansion of settlements) while in respect with decision
No. 727 (agricultural land for abundant construction), as long as a new policy
will not be formulated, in respect to land for which the designation is
different the lease agreement will be terminated and the land will be returned
to the ILA in consideration of compensation, as determined in decision 343 of
the ILA. The Israel Land Administration will formulate recommendations for a
decision pursuant to what is stated above, and will submit these proposals for
the approval of the Board of the ILA. In addition, it was determined in the
decision that there is nothing in the aforesaid that impair the transitional
directives that will be formulated in the meeting of the Board of the ILA.
On November 18, 2002, the Board of the ILA decided that, with respect to the
transition directives a new committee will be appointed that will interview
representatives of the kibbutzim, moshavim, initiators, etc. and it will
recommend if they are to be ratified, or if in part of the cases new directives
are to be accepted. And, indeed, a committee was set up that is headed by the
attorney, Moshe Nissim, that is acting according to the aforesaid.
On February 4, 2003, the ILA Board approved decisions that replace decisions 717
and 737 and which determines new conditions in the spirit of the Milgrom report,
where in connection with the expansion of settlements it was approved, among
others, that:
a) the number of plots in the plan will be determined by the planning
authorities, with the rule being that 11.5% of the quota of the planned
plots in the settlement. In spite of this, the subcommittee of the ILA's
Board is authorized to approve plans of a larger scope, pursuant to the
criteria that it will determine;
b) the area of the plots in the central region of the country will be 350
square meters, in national preference settlements and on the border line,
up to 500 squares meters, and in Golan Heights, confrontation line, the
Negev Heights and the Arava up to one dunam.
c) the local authority will handle the development;
d) the settlement is not allowed to collect any amount whatsoever in excess
of the development costs;
e) the lease fees will be in accordance with the national preference map and
individual assessments to be carried out by the Government appraiser.
According to the information that we received, the implication is that in
the country's center, the lease fee increased from 66% to 91%, while in
the national preference regions B and A they remain unchanged (36% and
22%, respectively).
f) The construction rights increased to 160 square meters as compared with
140 square meters in the past.
g) This decision does not apply to transactions on which the transition
directives will apply that will be determined by the ILA's Board, unless
the settlement will request this.
There is no reference in the decision to the issue of the collection of funds
for the payment of debts. Therefore, as long as the transition provisions will
not be amended it will not be possible to determine the proceeds that it is
possible to receive, if at all, from the real estate. This uncertainty, that has
persisted since 1999, inhibits any progress in finalizing arrangements, even
causes the collapse of arrangements agreed on in the past and the search for new
resources, among them the linkage of the framework of agreements to individual
level.
-12-
On June 6, 2000, an inter-bank agreement was reached for the distribution of the
proceeds, where until the date of the financial statements, several additional
creditors joined and, thereby since the end of 2001, it is possible to a certain
degree to promote the distribution of the proceeds that were accumulated at the
administration of arrangements in the agricultural sector.
As of the date of these financial statements, there are approximately 71
moshavim in respect of which recovery judgments have not yet been granted, and
65 settlements that were agreed upon. In part of them, they are already in
stages of being executed, and the proceeds are being channeled to the creditors
or to the Moshav account with the Administration of arrangements in the
agricultural sector, and there are moshavim that are not complying with the
arrangement and it will be necessary to deal with alternative arrangements.
During the reported year, the bank continued to implement the directives of the
Supervisor of Banks dated October 16, 1994, regarding the non-recording of
interest income (including linkage and exchange rate differentials) and on that
portion of the moshavim debt for which the provision for doubtful debts is made
on a collective basis.
Credit to the Kibbutzim
On August 15, 1991, the Bank signed the first agreement for the settlement of
the kibbutzim debts. On April 5, 1995, the Government decided to approve in
principle a supplementary agreement to the kibbutzim based on the
recommendations of the Suari Commission and, however, on March 20, 1996, a
supplementary kibbutzim agreement was reached between the Government the two
kibbutz movements, Bank Hapoalim with Bank Leumi, with the remaining banks
joining on May 6, 1996.
The supplementary agreement is intended to resolve the debts of the kibbutzim,
their companies and two regional organizations which, following the full
implementation of the first agreement, there is still a debt which they are
unable to repay according to their annual repayment power, ("the Balloon"), as
well as kibbutzim regarding which the ratio of their annual repayment power to
their debt exceeds 10 and they do not have an abundant amount of property. The
latter will join the Balloon kibbutzim to receive incentives. An incentive is a
conditional debt annulment and will be extended upon the kibbutz having
fulfilled the repayment of the arrangement debts over a period of a number of
years.
The origins of the supplementary agreement (including debts written off) as
referred to above, are as follows:
- - From the contribution made by the banks and the Government - Effected
through the annulment of the debts by the banks and the Government's cash
transfers at a ratio of 65% (banks) and 35% (Government) (except for the
kibbutzim of peripheral rehabilitation, regarding which the annulment of
the debts by the banks will be at a rate of 75% and Government
participation of 25%).
- - From contribution by kibbutzim entering the arrangement - Effected through
a waiver of rights to alternatively designated land which the ILA is
interested in the land being returned to it. The Government will provide
the banks with letters of commitment stating the amounts for the repayment
of the debts from the proceeds of the sale of the land. The share of each
bank in the proceeds will be in proportion to their share in the total
debt of the kibbutzim to the banks.
-13-
The parties agreed that if a transaction is carried out with respect to kibbutz
real estate, and a first priority mortgage has been imposed over the land in the
bank's favor, or that it has in respect thereto any lawful other fixed lien, of
a nature and quality identical or similar to the aforementioned mortgage, there
will be an increase of 20% of the bank's share in the amounts of the Government
letters of liability and/or the amounts of the financial bank guarantees and the
share of the other banks in the aforementioned amounts will be reduced
accordingly pari pasu.
In the context of the supplementary agreement, 61 kibbutzim entered and, in
addition, an arrangement was also implemented in the central organizations. In
respect to the real estate kibbutzim, a survey was conducted pursuant to which
the land for the ILA was earmarked. The survey was concluded, however, the
alternative value of the land cannot be estimated. Therefore, a financial
alternative was proposed, following which, on April 11, 1999, a supplementary
agreement (amended) was reached between the Accountant General and the banks,
including the Bank, which became effective pursuant to the notice of the
director of the Kibbutz Arrangement Board on May 25, 1999.
This alternative relies on the separation, both time-wise and financially -
between the arrangement regarding the "Balloon" and the realization of land -
the financial arrangement regarding the "Balloon" will be executed immediately
with the entrance of the kibbutz to the arrangement (65% by debt annulment by
the banks and 35% from Government sources). The treatment of the restored land
will be carried out after the financial arrangement is executed, while
distributing the yields from the change in the designation between the
Government and the banks, in proportion to the debt annulment.
At the stage when the kibbutz enters the arrangement, the Government and the ILA
will furnish the banks with an unlimited letter of commitment which does not
specify an amount, pursuant to which the ILA confirms its agreement that the
land will be returned to it and undertakes to only market the land following a
change in the designation against the receipt of a cash consideration. The banks
will be entitled to record a caveat at the Land Registry Office with respect to
the aforementioned letter of commitment.
As of the signing of the amendment to the supplementary agreement, a further 36
kibbutzim have entered into the arrangement, among them are kibbutzim of
peripheral rehabilitation and kibbutzim which have been classified as real
estate, and there remain 10 kibbutzim which have not yet joined.
The Supreme Court's decision from August 29, 2002, delays the settlement for the
liabilities of these Kibbutzim.
The write-off in the Bank's book with respect to the "Balloon" for the real
estate kibbutzim amounts to approximately NIS 101 million and, in exchange for
the write-off of the "Balloon" by all of the banks, the kibbutzim returned
approximately 9,134,000 sq. meters of land to the ILA and committed to comply
with the conditions of the supplementary agreement should a neighborhood be
established on the kibbutz's section of land. In addition, approximately,
1,255,000 sq. meters were expropriated for the purpose of the cross-Israel
highway, where the indemnification will be transferred to the banks and the
Government in accordance with the principles of the agreement.
Loss recognition of doubtful debts
Provision for losses on loans to the Moshavim were recognized in prior years, in
accordance with management estimates, and in concurrence with directives issued
to the banks by the "Bank's Supervisor", a department of the Bank of Israel. The
Bank's Supervisor has the overall information of the indebtedness to all the
banks in Israel. Total provision on Moshavim loans amounted on December 31, 2002
to about 90% of the total amounts owed by the Moshavim to the bank.
-14-
Impaired loans to Kibbutzim are carried net of the aforesaid Government grants
(see Category 2 above). The reported net amounts represent the expected
recoverable amounts. As explained above, these amounts are to be settled by new
long term loans, to be undertaken by the Kibbutzim and the Moshavim at market
terms (linked to the Consumer Price Index, and bearing interest at current
market rates, presently about 4%-5% p.a.). Thus, as of December 31, 2002, the
total amount of loans outstanding to Kibbutzim, net of specific provisions and
of Government "grants", received to that date amounted to NIS 124 million.
Deposits to finance the said restructuring of long term loans are financed by
the Government of Israel.
In view of the aforesaid, loss recognition on the impaired loans is compatible
with both Israel and U.S. GAAP in terms of "Constant Shekels" (Shekel amounts
adjusted to changes in general price level).
Income recognition on loans
Income on non-impaired loans, or restructured loans, is recognized as accrued
according to the contractual respective terms.
In accordance with the directives of the Supervisor of Banks dated July 1, 1994,
the Bank may not recognize revenues from linkage differences and interest with
respect to the debts of Moshavim which have not yet settled their debts.
Further, in accordance with Israeli GAAP, the comparative data in the financial
statements are presented in terms of adjustment to the Consumer Price Index as
of balance sheet date (a technical linkage of the comparative data was made
according to the annual increase in the Index).
Subsequent to the aforementioned, there is an erosion in the above mentioned
debts for the Moshavim which have not yet entered into an arrangement at the
rate of the increase in the annual Index. The loss resulting from this erosion
is included in the loss from financing activities in the statement of
operations.
Results of Operations
Major factors affecting results of operations in 2002 were:
o The non-recognition of interest income (including linkage) on portion of
Moshavim debt, as explained above.
o The high interest rate at the expense of the deferred deposits.
The bank's loss from financing activities, before provisions for doubtful debts,
was NIS 63.1 million in 2002 as compared to NIS 74.4 million in 2001. Loss from
financing activities, after provision for doubtful debts, was NIS 63.1 million,
compared to NIS 80.8 million in 2001.
The general provision and the additional provision together represent 16.10% of
the borrowers' debt, under the bank's responsibility, as of December 31, 2002.
In addition to the above provisions, the Supervisor of Banks instructed that a
special provision is to be recorded not later than December 31, 2001 in a
cumulative amount which will not be less than the aggregate of the following:
1. 0.5% of the balance of the risk assets as of June 30, 2001.
2. 1% of the balance of the specially supervised debts as of June 30, 2001.
3. 2.5% of the balance for the problematic debts, net of the balance for the
specially supervised debts as of June 30, 2001.
The special provision amounted to NIS 6 million and will be maintained in its
nominal amount, subject to the aforesaid.
Operating and other income totaled NIS 0.6 million in 2002, as compared to NIS
0.9 million in 2001.
Operating and net loss in 2002 was NIS 71.4 million, as compared to NIS 90.3
million in 2001. Net loss per NIS 1 par value Ordinary and Preference "A" share
was NIS 341.4 in 2002 (NIS 431.4 in 2001).
-15-
Shareholders' Equity
The shareholders' deficiency increased from NIS 942.5 million at the end of
2001, to a deficiency of NIS 1,014 million at the end of 2002.
On December 31, 1991, Government deposits in the amount of NIS 180 million were
converted (December 31, 2002 - NIS 814.5 million) to deferred deposits, while
the maturity date for a portion thereof was determined for January 1, 2000.
The maturity date for the deposits has been postponed several times pursuant to
an approval received from the Accountant General. Pursuant to an additional
extension which was approved by the Accountant General on June 24, 2003, their
maturity date was deferred until October 1, 2003, among other purposes, to allow
the Bank and the Government, during the period until the maturity date, to
formulate a detailed plan with respect to the manner for the continued
operations of the Bank.
The ratio of capital to credit risk components, computed according to the
provisions of the Supervisor of Banks, is negative and, at the end of December
2002, amounted to (59.85%).
Principal Balance Sheet Items
The assets and liabilities of the bank at the end of 2002 and 2001 were as
follows (in thousands of NIS):
Year ended December 31,
-------------------------
2002 2001
---------- --------
Total Balance Sheet 375,938 394,726
Credit to the Public 283,424 329,917
Credit loans to the Government of Israel 30,739 25,948
Cash and Bank Deposits 58,745 36,022
Deposits from the Public 1,098 1,869
Deposits from the Government 445,346 448,606
Capital Notes and Deferred Deposits 935,805 878,589
Shareholders' Equity (deficit) (1,013,908) (942,466)
Investee Companies
The bank's affiliated company - The Palestine Agricultural Settlement
Association Ltd. (50% owned by the bank, 49.9% of voting rights) was involved,
in the past, in financing activities, but in recent years has been only
collecting debts.
-16-
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Board of Directors
In the course of 2002, 8 Board meetings were held, as well as 7 meetings of
various Board Committees.
Board changes in 2002 were -
Directors whose term began:
Name Begining Date
-------------------------- ------------------------------
Fredkin Israel March 20, 2002
Lamdani Ariel March 20, 2002
Elmaliah Dorit October 8, 2002
Yakir Rivka November 3, 2002
Directors whose term ceased:
Name Termination Date
-------------------------- ------------------------------
Nave Uzi March 28, 2002
Ayalon Daniel May 15, 2002
Yakir Rivka January 8, 2003
Freeman Menahem May 30, 2003
Roster of Directors, their principal occupation and other directorships held by
them:
Name Principal Occupation Other Directorship
-------------------------- ----------------------------- -----------------------------
Freeman Menahem, Treasurer of Mavkim None
Chairman of the Board Settlement
Kauffman Doron Accountant Institute of C.P.A in
Israel, Study Fund for
Engineer, Macabi Israel
Haberman, Clara Director of the Economic Company for the
Development
Survey and Consultation of a Green Environment
Department, Ministry of
Agriculture
Helmaliah Dorit General manager of --
business developement
center in Kiryat Shmone
and Ezba Hagalil
Fredkin Israel Self employed - --
agriculturist
Lamdani Ariel Economist, Ministry of --
Agriculture
-17
Bank's Management
Name Major Responsibility
- ------------------------- ------------------------------------
Patalovsky Lea Managing Director
Sitton Moshe Assistant Managing Director,
Manager of Credit, Collection and
Current Accounts
Littman Amnon Secretary of the Bank, Director of
Human Resources, Personnel and
the Computer Unit
Remuneration
Salaries, benefits and provisions of the five highest paid executives among the
bank's officers (adjusted to December, 2002 CP Index - all amounts NIS in
thousands).
Provisions for Severance
Pay, Provident Funds,
Pensions, Continuing Total-Salary
Education Programs, Sick and Other Other
Name Salary Pay, Leave Pay, etc. Benefits Payments
- ----------------------------------------------------------------------------------------------------------
In 2002
- -------
Patalovsky Lea 399 56 455 --
Sitton Moshe 339 58 397 1
Littman Amnon 321 66 387 1
Levi Noah 287 73 360 2
Cohen Yacov 254 49 303 1
In 2001
- -------
Patalovsky Lea 424 113 537 --
Sitton Moshe 350 92 442 2
Littman Amnon 314 76 390 1
Levi Noah 300 77 377 2
Cohen Yakov 263 69 332 1
Personnel
At the end of 2002, 29 persons were employed by the bank (26.5 full-time
positions), as compared with 29 persons (26.5 full-time positions) at the end of
2001.
-18-
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A summary of the operating results with related parties:
Year ended December 31,
------------------------
2002 2001
Adjusted NIS (in
thousands)
------------------------
Participation in expenses by the affiliate 132 125
Management fees to shareholders 10 --
ITEM 8. FINANCIAL INFORMATION
Legal Proceedings
The bank has not had any material pending legal proceedings, other than ordinary
litigation, incidental to the business.
ITEM 9. THE OFFER AND LISTING
None.
ITEM 10. ADDITIONAL INFORMATION
Subsidiaries December 31,
---------------------------------
2002 2001
-------------- --------------
(NIS in thousands)
---------------------------------
(a) Investment in shares
Cost of shares 22,966 22,966
Losses accrued since acquisition (21,978) (21,997)
---------- -----------
Total investment in shares 988 969
========== ===========
(b) Details of subsidiaries Affiliated Company
---------------------------------
Name of company: The Palestine
Agricultural Settlement
Association Ltd.
Company details: Agricultural Financial
Institution
2002 2001
-------------- --------------
Capital with rights for dividends
- percentage of holding 50.0 50.0
Capital with voting rights
- percentage of holding 49.9 49.9
Investments in shares-equity basis 988 969
Contribution to net profit (loss) on ordinary activities 19 39
-19-
(c) Affiliated Company - The Palestine Agricultural Settlement Association
Ltd.
Balance Sheet December 31,
------------------
2002 2001
(NIS in thousands)
------------------
Assets
Loans out of earmarked deposits by the State of Israel 8,427 10,509
Loans out of earmarked deposits by the Jewish Agency 6,010 6,304
Other loans 2,987 3,208
Cash and deposits with banks 2,000 1,829
Other assets 33 32
------ ------
19,457 21,882
====== ======
Liabilities and Shareholders' Equity
Earmarked deposits from the Government of Israel 8,691 10,816
Earmarked deposits from the Jewish Agency 8,676 9,015
Other liabilities 114 130
Shareholders' Equity 1,976 1,921
------ ------
19,457 21,882
====== ======
The bank's share in equity, 50% of NIS 1,976 thousand, namely in the
amount of NIS 988 thousand, is shown in (a) above.
The Jewish Agency holds the other 50% in equity, but also holds a "casting
share". This share entitles the Agency to a casting vote in any general meeting
and in any meeting of the board of directors.
Uncertainties
See items 5 (Operating and financial review and prospects) and 11 (Quantitative
and Quantitative disclosure about market risks) for various uncertainties which
may affect the bank's operations.
U.S. GAAP Reconciliation - General
See item 5 for background and various clarifications referring to matters that
may appear to indicate variations between Israeli and U.S. GAAP. It emerges from
the clarifications and the information submitted that there are no material
variations between U.S. GAAP, and the GAAP applied in the financial statements.
No U.S. GAAP reconciliation are therefore required, except for certain
disclosures and elaboration.
-20-
B. MATERIAL CONTRACTS
On January 28, 1992, a Deposit Agreement was signed between the Bank and the
Government of Israel. In accordance with this agreement, the Government agreed
to convert NIS 180 million (NIS of January 1992) deposited with the Bank into
three deferred deposits, deferred to December 31, 1999, as explained in Note 11.
Paragraph 4(3) to the agreement stipulates that:
"The principal of the deposits including the accrued interest and linkage
differentials thereon are repayable as follows:
(1) All the amount that were scheduled to be repaid according to the original
clearing schedule by December 31, 1999 are repayable on January 1, 2000;
however, if it will become clear that the repayment of all such amounts on
January 1, 2000 may results in the dissolution of the Bank, the Bank may
request the Government of Israel to consider an agreement for changes in
the repayment schedule. The Government will deliberate the request while
applying pertinent considerations and subject to its policy at that time.
(2) All the amounts that according to the original clearing schedule were to
be repaid after December 31, 1999 will be repaid at the original date that
was determined for their repayment."
Due to the crisis in the agriculture sector and the restriction imposed on the
Bank regarding its ability to exercise the pledged assets by virtue of the "Gal
Law" and the "Kibbutz Arrangements", the Bank was unable to repay the deferred
deposits as scheduled.
The maturity date for the deposits has been postponed several times pursuant to
an approval received from the Accountant General. Pursuant to an additional
extension which was approved by the Accountant General on June 24, 2003, their
maturity date was deferred until October 1, 2003, among other purposes, to allow
the Bank and the Government, during the period until the maturity date, to
formulate a detailed plan with respect to the manner for the continued
operations of the Bank.
In the event, the aforesaid plan will not be formulated by October 1, 2003, the
Board of Directors intend to address a request to extend the maturity date.
In accordance with the Deposit Agreement, the Bank agreed not to extend credit
in excess of what it is obligated pursuant to the framework of the arrangements
for the agricultural sector, and in excess of what it is obligated to grant to
its existing customers. If there will be additional obligations in the framework
of comprehensive arrangements in the agricultural sector, these will be only
upon after authorization of the accountable ministers, in coordination with the
Bank of Israel. The Bank will concentrate its major efforts in the collection of
loans which were granted to the agricultural sector, and will not expand the
scope of deposits from the public. Existing deposits from the public will be
renewed in coordination with the Bank of Israel.
C. EXCHANGE CONTROL
No exchange control regulations exist prohibiting foreign currency payments to
overseas investors of interest or principal on investments in the bank's
securities, provided that the investment (a) is transferred through an
authorized dealer who confirm that the investment complies with the regulations,
and (b) transfers of payments are made according to general permits issued by
the Ministry of Finance.
-21-
D. TAXATION
Tax Reform in Israel
On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to
the reform, resident companies are subject to Israeli tax on income accrued or
derived in Israel or abroad. In addition, the concept of "controlled foreign
corporation" was introduced according to which an Israeli company may become
subject to Israeli taxes on certain income of a non-Israeli subsidiary if the
subsidiary's primary source of income is passive income (such as interst,
dividends, royalties, rental income or capital gains). The tax reform also
substantially changed the system of taxation of capital gains.
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax at the rate of 36% of
their taxable income.
Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders.
Israeli law generally imposes a capital gains tax on the sale of securities and
any other capital asset. The basic capital gains tax rate applicable to
corporations effective until December 31, 2002 had been 36% and the maximum tax
rate for individuals had been 50%. Effective January 1, 2003, the capital gains
tax rate imposed upon sale of capital assets acquired after that date has been
reduced to 25%; capital gains accrued from assets acquired before that date are
subject to a blended tax rate based on the relative periods of time before and
after that date that the asset was held.
In addition, if the ordinary shares are traded on the Tel Aviv Stock Exchange
(or listed on a stock exchange recognized by the Israeli Ministry of Fincance),
gains on the sale of ordinary shares held by non-Israeli tax resident investors
will generally be exempt from Israeli capital gains tax. Notwithstanding the
foregoing, dealers in securities in Israel are taxed at regular tax rates
applicable to business income. The U.S.-Israeli Tax Treaty exempts U.S.
residents who hold an interest of less than 10% in an Israeli company, and who
held an interest of less than 10% during the 12 months prior to a sale of their
shares, from Israeli capital gains tax in connection with such sale. Certain
other tax treaties to which Israel is a party also grant exemptions from Israeli
capital gains taxes.
Under the United States - Israel Tax Treaty, the maximum tax on dividends paid
to a holder of ordinary shares who is a Treaty United States Resident will be
25%.
E. DIVIDEND AND PAYING AGENTS
On July 27, 1999, the Board of Directors decided, based on a legal opinion which
it obtained, to terminate the payment of a dividend in respect to "A" and "C"
shares. A report regarding this decision was communicated to the Accountant
General and the Company's Authority.
The Bank did not record a liability with respect to the cumulative dividend
since its distribution is contingent upon:
1. The existence of income (in other words, the distribution will not be in
contravention of the Company's Law).
2. As per a decision of the Board of Directors.
The cumulative dividend which was not paid with respect to the years 1999 - 2002
amounted to NIS 35,590 thousand. In addition, the Treasury of the State of
Israel has a liability to cover the linkage differences included in the
aforementioned amount which amounts to NIS 35,524 thousand. In prior years, a
dividend was paid as noted in Note 12 to the financial statements.
F. STATEMENT BY EXPERTS
None.
-22-
G. DOCUMENTS ON DISPLAY
We are subject to the reporting requirements of the United States Securities
Exchange Act of 1934, as amended, as applicable to "foreign private issuers" as
defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we
file annual reports.
As a foreign private issuer, we are exempt from certain provisions of the
Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act,
transactions in our equity securities by our officers and directors are exempt
from reporting and the "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act, and were not required to, and do not, make our
Securities and Exchange Commission filings electronically, so that such filings
are not available on the Securities and Exchange Commission's website. In
addition, we are not required under the Exchange Act to file periodic reports
and financial statements as frequently or as promptly as United States companies
whose securities are registered under the Exchange Act. However, we distribute
annually to our shareholders an annual report, containing financial statements
that have been examined and reported on, with an opinion expressed by, an
independent public accounting firm.
This annual report and the exhibits thereto and any other document we file
pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms. 450 Fifth Street, N. W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549; 233 Broadway NY10279, 175W. Jackson Boulevard suite 900,
Chicago, IL60604. You may obtain information on the operation of the Securities
and Exchange Commission's public reference room in Washington, D. C. by calling
the Securities and Exchange Commission at 1-800-SEC-0330.
The documents concerning our company which are referred to in this annual report
may also be inspected at our offices located at 83 Hashmonaim St. Tel Aviv,
Israel.
H. SUBSIDIARY INFORMATION
None.
-23-
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is exposed to a variety of risks including changes in foreign
currency exchange rates.
The Company does not use derivative instruments.
The Company created specific provisions for doubtful debts, which, in the
opinion of management, reflect potential losses on the credit portfolio, in
accordance with existing arrangements. Material changes in the arrangements if
any, are likely to obligate additional provisions. The criteria for such
provisions are as follows:
(1) In the credit portfolio for kibbutzim and their related organizations in
consideration of the kibbutzim Arrangement, as signed (see Note 3F.) and the
guidelines of the Supervisor of Banks.
(2) In the credit portfolio for moshavim and their related organizations - of
the "Law for Arrangements in the Family Agricultural Sector 1992" and the
guidelines of the Supervisor of Banks, is taken into consideration, as mentioned
in Note 3E.
(3) In the credit portfolio of other customers, with reference to the financial
information available to the Bank, in respect of the financial status of the
receivable.
In addition to the above mentioned specific provisions, a general provision for
doubtful debts was recorded in the past at a rate of 1% of the receivables
balance as of December 31, 1991. Beginning in 1992, the Supervisor of Banks
directives determine that an additional provision for doubtful debts is to be
recorded (in excess of the general provisions) and in addition to the former
general provision is to be maintained as accrued pursuant to prior directives at
an amount which is not greater than 1% of the total customer debts as of
December 31, 1991, adjusted for inflation.
The portion of the provision in excess of 1% may be charged on account of the
additional provision. As of December 31, 2002, the general and additional
provisions represent 16.1% of total credit for which the Bank is responsible.
In addition to the above provisions, the Supervisor of Banks instructed that a
special provision is to be recorded not later than December 31, 2001 in a
cumulative amount which will not be less than the aggregate of the following:
1. 0.15% of the balance of the risk assets as of June 30, 2001.
2. 1% of the balance of the specially supervised debts as of June 30, 2001.
3. 2.5% of the balance for the problematic debts, net of the balance for the
specially supervised debts as of June 30, 2001.
As aforementioned, the Company recorded a special provision in the amount of NIS
6,000 thousands. The special provision will be maintained in its nominal amount,
subject to the aforesaid.
Foreign currency exchange risk
The Company has both assets and liabilities in U.S. dollars. The maturity of the
primary item is up to 1 year.
A -10% movement in the level of the exchange rate of the Israeli shekel against
the U.S. dollar, with all other variables held constant, would not affect the
fair value of the assets. Liabilities would be effected by about adjusted NIS
8.5 million.
-24-
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The following securities of the Company are traded in the United States.
Trade is effected through a United State Nominee:
250,000 - 7.5% Cumulative Redeemable Preference "C" shares linked to the dollar
(Nominee: Mellon Investor Services LLC Manhattan Shareholders Service, New
York).
25,612,000 - 7.5% Registered Subordinated Capital Notes due 2003 (Nominee:
JPMorgan Chase Bank, New York).
The 8% Cumulative and Participating Preference ":A" shares and the 7.5%
Cumulative Redeemable Preference "C" Shares were quoted on the Tel Aviv Stock
Exchange. On April 30, 1992, the Board of directors of the Tel Aviv Stock
Exchange resolved to cease trading of the securities of the bank until such time
when conditions permitted continuation of trading. The securities were de-listed
on January 31, 1993. Before that date, four trading days took place, from
January 25 to January 28, 1993.
-25-
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Annual Report, we performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. The evaluation was performed under the supervision of
our General Manager, Lea Patalovsky and Chief Financial Officer Yakov Cohen. our
management, including Messrs. Patalovsky and Cohen, concluded that our
disclosure controls and procedures were effective in alerting them to material
information, on a timely basis, required to be included in our periodic filings
with the U.S. Securities and Exchange Commission. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date evaluation.
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
See pages F-1 to F-50 incorporated herein by reference
ITEM 18. EXHIBITS
Certification of the General Manager pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 to the Sarbanes - Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906 to the Sarbanes - Oxley Act of
2002.
ITEM 19. SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Company certifies that it meets all of the requirements
for filing on From 20-F and has duly caused this annual report to be
signed on its behalf by the undersign, thereunto duly authorized.
Israel Bank of Agriculture Ltd.
----------------------------------
Lea Patalovsky
General Manager
Date: July 9, 2003
-26-
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Lea Patalovsky, certify that:
1. I have reviewed this annual report on Form 20-F of Israel Bank of
Agriculture Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a 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
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors )or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: July 9, 2003
-----------------------------------
Lea Patalovsky
General Manager
-27-
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Yakov Cohen, certify that:
1. I have reviewed this annual report on Form 20-F of Israel Bank of
Agriculture Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a 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
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors )or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: July 9, 2003
-----------------------------------
Yakov Cohen
Chief Financial Officer
-28-
ISRAEL BANK OF AGRICULTURE LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
ISRAEL BANK OF AGRICULTURE LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
ADJUSTED TO THE NIS OF DECEMBER 2002
INDEX
Page
----------------
Report of Independent Auditors 2
Balance Sheets 6
Statements of Operations 8
Statements of Changes in Shareholders' Deficiency 9
Statements of Cash Flows 10
Notes to the Financial Statements 11
-1-
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
ISRAEL BANK OF AGRICULTURE LTD.
We have audited the accompanying balance sheet of Israel Bank of
Agriculture Ltd. ("the Bank") as of December 31, 2002 , and the related
statement of operations, changes in equity (deficiency) and cash flows for the
year ended December 31, 2002. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of an affiliate the investment
in which on the equity basis of accounting totaled NIS 988 thousand as of
December 31, 2002, and the Bank's share in the net income of which totaled NIS
19 thousand, for the year ended December 31, 2002. These statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to data included for the affiliate, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed by the
Israeli Auditors' Regulations (Mode of Performance), 1973. These standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Bank as of December 31,
2002, and the results of its operations, and its cash flows for the year ended
December 31, 2002, in conformity with generally accepted accounting principles
in Israel which differ in certain respects from Accounting Principles Generally
Accepted in the United States (See Note 21).
As explained in Note 1C, the aforementioned financial statements have been
prepared on the basis of historical cost adjusted to the reflect changes in the
general purchasing power of Israeli currency, in accordance with Statements of
the Institute of Certified Public Accountants in Israel.
-2-
The accompanying financial staements have been prepared assuming that the
bank will continue to operate as a going concern. As discussed in Note 1A to the
financial statements the Bank's operations, upon which restrictions were imposed
by the Bank of Israel as stated in Note 1A(2)(b) are stipulated on the fact that
the Government will defer the maturity date of its deferred deposits with the
Bank as stated in Note 1A(2), and on the basis that current cash collections of
the Bank will enable it to pay operating expenses and interest (mainly to
Government) and for the payment of the principal of capital notes held by the
public as stated in Note 1A(2)(c). The Bank has a shareholder's deficiency
amounting to NIS 1,014 million as of December 31, 2002 and the ratio of capital
to credit risk components, calculated according to the provisions of the
Supervisor of Banks is negative and amounts to (59.85%). Further, the maturity
date of the Government deposits was postponed to April 1, 2003. The Government
intends, during the period until the maturity date, to formulate a detailed plan
with the Bank with respect to the manner of the Bank's continued operations.
These factors raise substantial doubt with respect to Bank's ability to continue
as a going concern. The management's plans with respect to these issues are
described in Note 1A(2). These financial statements do not include any
adjustments to reflect that possible future effects on the recovereability and
classification of assets and the amount and classification of liabilities that
they may result from the outcome of this uncertainty.
ROSENBLUM HOLTZMAN KOST FORER & GABBAY
Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)
Haifa, Israel
March 2, 2003
Except for Note 22, as to which the date is June 24, 2003.
-3-
[GRAPHIC] Kost Forer & Gabbay [GRAPHIC] Phone: 972-4-8654000
[LOGO] ERNST & YOUNG 2 Pal-Yam St. Fax: 972-4-8654022
Haifa-33095, Israel
Report of Independent Auditors
To the Shareholders of
ISRAEL BANK OF AGRICULTURE LTD.
We have audited the accompanying balance sheets of Israel Bank of
Agriculture Ltd. ("the Bank") as of December 31, 2001 and 2000, and the related
statements of operations, changes in equity (deficiency) and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of an affiliate the investment
in which on the equity basis of accounting totaled NIS 910 thousand and NIS 875
thousand as of December 31, 2001 and 2000, respectively, and the Bank's share in
the net income of which totaled NIS 35 thousand, NIS 74 thousand and NIS 62
thousand for the years ended December 31, 2001, 2000 and 1999, respectively.
These statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for the
affiliate, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed by the
Israeli Auditors' Regulations (Mode of Performance), 1973. These standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Bank as of December 31,
2001 and 2000, and the results of its operations, and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
generally accepted accounting principles in Israel which differ in certain
respects from Accounting Principles Generally Accepted in the United States (See
Note 21).
As explained in Note 1C, the aforementioned financial statements have been
prepared on the basis of historical cost adjusted to the reflect changes in the
general purchasing power of Israeli currency, in accordance with Statements of
the Institute of Certified Public Accountants in Israel.
Kost Forer & Gabbay is a member practice of Ernst & Young Global
-4-
[LOGO] ERNST & YOUNG
The accompanying financial staements have been prepared assuming that the
bank will continue to operate as a going concern. As discussed in Note 1a to the
financial statements the Bank's operations, upon which restrictions were imposed
by the Bank of Israel as stated in Note 1a(2)(b) are stipulated on the fact that
the Government will defer the maturity date of its deferred deposits with the
Bank as stated in Note 1a(2)(a), and on the basis that current cash collections
of the Bank will enable it to pay operating expenses and interest (mainly to
government) as stated in Note 1a(2) (a). The Bank has a shareholder's deficiency
amounting to NIS 885 million as of December 31, 2001 and the ratio of capital to
credit risk components, computed according to the provisions of the Supervisor
of Banks is negative and amounts to (61.12%). Further, the maturity date of the
Government deposits was postponed to September 1, 2002. The Government intends,
during the period until the maturity date, to formulate a detailed plan with the
Bank with respect to the manner of the Bank's continued operations. These
factors raise substantial doubt with respect to Bank's ability to continue as a
going concern. The management's plans with respect to these issues are described
in Note 1a(2). These financial statements do not include any adjustments to
reflect that possible future effects on the recovereability and classification
of assets and the amount and classification of liabilities that they may result
from the outcome of this uncertainty.
Haifa, Israel KOST FORER & GABBAY
February 24, 2002 Certified Public Accountants (Isr.)
except for Note 23, as to which the date is July 11, 2002
Kost Forer & Gabbay is a member practice of Ernst & Young Global
-5-
ISRAEL BANK OF AGRICULTURE LTD.
BALANCE SHEETS
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
December 31,
-----------------------------
2002 2001
---------- ---------
Note Adjusted NIS
------- -----------------------------
(In thousands)
ASSETS
Cash on hand and deposits with banks 2 58,745 36,022
Credit to the public 3 283,424 329,917
Credit to the Government of Israel 4 30,739 25,948
Investments in an affiliate 5 988 969
Bank building and equipment 6 382 335
Other assets 7 1,660 1,535
---------- ---------
TOTAL ASSETS 375,938 394,726
========== =========
----------------------------------
Ms. M. Friman
Chairman of the Board
----------------------------------
Mr. D. Kofman
Director
----------------------------------
Ms. L. Patalovsky
General Manager
--------------------------
Date: March 2, 2003
The accompanying notes are an integral part of the financial statements.
-6-
ISRAEL BANK OF AGRICULTURE LTD.
BALANCE SHEETS
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
December 31,
-----------------------------
Note 2002 2001
-------- ------------ ------------
Adjusted NIS
-----------------------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Deposits from the public 8 1,098 1,869
Government of Israel deposit 9 445,346 448,606
Other liabilities 10 7,586 8,117
------------ ------------
454,030 458,592
Deferred deposits from the Government of Israel 11 814,481 758,138
Deferred capital notes :
Held by the public 40,193 40,144
Held by the Government 11 81,131 80,307
------------ ------------
1,389,835 1,337,181
Non-participating Preferred Shares 11 11
Shareholders' equity (1,013,908) (942,466)
------------ ------------
Total liabilities and shareholders' equity 375,938 394,726
============ ============
The accompanying notes are an integral part of the financial statements.
-7-
ISRAEL BANK OF AGRICULTURE LTD.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Year ended December 31,
---------------------------------------------
Note 2002 2001 2000
-------- --------- --------- ----------
Adjusted NIS
---------------------------------------------
(In thousands, except per share amount)
Loss from financing activities
Loss from financing activities before provision for doubtful
debts *) 15 (63,057) (74,364) (62,241)
Increase in provision for doubtful debts 3c -- (6,390) --
--------- --------- ----------
Loss from financing activities after provision for doubtful
debts (63,057) (80,754) (62,241)
--------- --------- ----------
Operating and other income
Operating commissions
Rental income 518 777 1,046
Other income 16 89 95 126
--------- --------- ----------
Total operating and other income 607 872 1,172
--------- --------- ----------
Operating and other expenses
Salaries and related expenses 17 6,743 7,311 8,186
Depreciation on bank building and equipment 35 62 97
Building and equipment maintenance 680 1,525 1,212
Other expenses (Note 21) 18 1,553 1,531 1,387
--------- --------- ----------
Total operating and other expenses (9,011) (10,429) (10,882)
--------- --------- ----------
Operating loss (71,461) (90,311) (71,951)
Equity in profits of an affiliate after tax effect 19 39 80
--------- --------- ----------
Net loss for the year (71,442) (90,272) (71,871)
========= ========= ==========
Loss per share NIS 1 nominal value (in NIS)
of Ordinary Share capital and Preferred "A" Share capital
(Note 1(k)
Operating loss for the year per Ordinary Share and Preferred
"A" share (341.40) (431.40) (343.40)
========= ========= ==========
*) Income from financing activities before provision for
doubtful debts, interest on Government deposits
and deferred capital notes 3,316 6,575 6,576
Interest on Government deposits and deferred capital notes (66,373) (80,939) (68,817)
--------- --------- ----------
Loss from financing activities before expense before provision
for doubtful debts (63,057) (74,364) (62,241)
========= ========= ==========
The accompanying notes are an integral part of these financial statements.
-8-
ISRAEL BANK OF AGRICULTURE LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Total
outstanding
Outstanding Receipts on share capital Total
share account of and capital Accumulated shareholders'
capital shares reserves deficit deficiency
-------- -------- --------- ---------- ----------
Adjusted NIS
------------------------------------------------------------------------
(In thousands)
Balance at January 1, 2000 881,189 314,409 1,195,598 (1,975,921) (780,323)
Loss for the year -- -- -- (71,871) (71,871)
-------- -------- --------- ---------- ----------
Balance at January 1, 2001 881,189 314,409 1,195,598 (2,047,792) (852,194)
Loss for the year -- -- -- (90,272) (90,272)
-------- -------- --------- ---------- ----------
Balance at December 31, 2001 881,189 314,409 1,195,598 (2,138,064) (942,466)
Loss for the year (71,442) (71,442)
-------- -------- --------- ---------- ----------
Balance at December 31, 2002 881,189 314,409 1,195,598 (2,209,506) (1,013,908)
======== ======== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
-9-
ISRAEL BANK OF AGRICULTURE LTD.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Year ended December 31,
-----------------------------------
2002 2001 2000
------- ------- -------
Adjusted NIS
-----------------------------------
(In thousands)
Cash flows from operating activities:
Loss for the year (71,442) (90,272) (71,871)
Adjustments to reconcile the cash flows used in
operating activities:
Equity in the profits of an affiliate (19) (39) (80)
Depreciation on the bank's building and equipment 35 62 97
------- ------- -------
Net cash used in operating activities (71,426) (90,249) (71,854)
------- ------- -------
Cash flows from investing activities
Credit to the public 46,493 43,539 40,493
Credit to the Government of Israel (4,791) 6,063 (4,354)
Purchase of equipment (82) (13) (53)
Other assets (125) (202) 911
------- ------- -------
Net cash provided by investing activities 41,495 49,387 36,997
------- ------- -------
Cash flows from financing activities:
Deposits from the public, net (771) 321 (916)
Deposits from banks, net -- -- (33,390)
Deposits from the Government, net (3,260) 640 (379)
Other liabilities, net (530) (19,671) 19,894
Deferred Government deposits 56,343 63,162 63,501
Deferred capital notes, net 872 8,675 (3,096)
------- ------- -------
Net cash provided by financing activities 52,654 53,127 45,614
------- ------- -------
Increase in cash on hand and deposits with banks 22,723 12,265 10,757
Balance of cash on hand and deposits with banks
at the beginning of the year 36,022 23,757 13,000
------- ------- -------
Balance of cash on hand and deposits with banks
at the end of the year 58,745 36,022 23,757
======= ======= =======
The accompanying notes are an integral part of these financial statements.
-10-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
INDEX TO NOTES
Note Page
- ---- ----
1. The Bank, Its Main Activities and Significant
Accounting Policies 12-20
2. Cash on Hand and Deposits with Banks 21
3. Credit to the Public (Less Provisions for Doubtful Debts) 21 - 30
4. Credit to the Government of Israel 30
5. Investment in an Affiliate 31
6. Building and Equipment 32
7. Other Assets 33
8. Deposits from the Public 33
9. Deposits from the Government 33
10. Other Liabilities 34
11. Deferred Government Deposits and Deferred Capital Notes 35
12. Shareholders' Deficiency 36-37
13. Contingent Liabilities, Claims and Commitments 38
14. Related Parties 39-40
15. Loss from Financing Activities Before Provision for
Doubtful Debts 41
16. Commissions and Other Income 42
17. Salaries and Related Expenses 42
18. Other Expenses 42
19. Income Taxes 43
20. Reconciliation Between Israel GAAP and U.S. GAAP 43-46
21. Pro forma financial statements 47-48
22. Subsequent events 48
23. Financial Statements in Nominal (Historical) NIS 49-51
24. Other Information in Nominal Values 51
-11-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
A. General
1. The financial statements have been prepared in accordance with
the directives of the Supervisor of Banks, regarding the
preparation of annual financial statements by banking
corporations and in accordance with accounting principles
generally accepted in Israel ("Israel GAAP"). Israeli GAAP and
accounting principles generally accepted in the United States
("U.S. GAAP") as applicable to the financial statements of the
Company, differ in certain respects (see note 22).
2.(a) On January 28, 1992, a Deposit Agreement was signed
between the Bank and the Government of Israel. In
accordance with this agreement, the Government agreed to
convert NIS 180 million (NIS of January 1992) deposited
with the Bank into three deferred deposits, deferred to
December 31, 1999, as explained in Note 11. Paragraph
4(3) to the agreement stipulates that: "The principal of
the deposits including the accrued interest and linkage
differentials thereon are repayable as follows:
1. All the amounts that were scheduled to be repaid
according to the original clearing schedule by
December 31, 1999 are repayable on January 1,
2000; however if it will become clear that the
repayment of all such amounts on January 1, 2000
may result in the dissolution of the Bank, the
Bank may request the Government of Israel to
consider an agreement for changes in the repayment
schedule subject to. The Government will
deliberate the request while applying pertinent
considerations and subject to its policy at that
time.
2. All the amounts that according to the original
clearing schedule were to be repaid after December
31, 1999 will be repaid at the original date that
was determined for their repayment;"
Due to the crisis in the agriculture sector and the restriction
imposed on the Bank regarding its ability to exercise the pledged
assets by virtue of the "Gal Law" and the "Kibbutz Arrangements",
the Bank was unable to repay the deferred deposits as scheduled.
-12-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
The maturity date for the deposits has been extended several times
pursuant to approvals received from the Accountant General. Under
the last extension which was approved by the Accountant General on
November 4, 2002, their maturity date was deferred until April 1,
2003. The approval was granted, among other purposes, to allow the
Bank and the Government, during the period until the maturity date,
to formulate a detailed plan with respect to the manner for the
continued operations of the Bank. In the event and the aforesaid
plan will not be formulated by that date, the Board of Directors
intends to address a request to extend the maturity date until
December 31, 2003.
(b) In accordance with the Deposit Agreement, the Bank agreed not
to extend credit in excess of what it is obligated pursuant to
the framework of the arrangements for the agricultural sector,
and in excess of what it is obligated to grant to its existing
customers. If there will be additional obligations in the
framework of comprehensive arrangements in the agricultural
sector, these will be only upon after authorization of the
accountable ministers, in coordination with the Bank of
Israel. The Bank will concentrate its major efforts in the
collection of loans which were granted to the agricultural
sector, and will not expand the scope of deposits from the
public. Existing deposits from the public will be renewed in
coordination with the Bank of Israel.
(c) Toward the end of 2000, the Bank did not have a debt balance
toward the Bank of Israel. In a letter to the Bank dated
December 6, 2000, the Bank of Israel gave notice that it is
ceasing to extend current credit to the Bank.
In addition, the Bank of Israel eliminated the floating charge on
the Bank's credit portfolio.
Since the Bank does not have any credit sources as it had in the
past, in the event it will require short-term bridge loans, the Bank
may be forced to defer payments to the Government for those same
periods of time and in accordance with the pace of its collections.
In the opinion of the Bank's management, the cash and cash
equivalents balance as of December 31, 2002, and the current
collection anticipated in 2003 from the payment arrangement with the
moshavim and the kibbutzim will allow the Bank in 2003, subject to
what is stated above, to pay the ongoing operating expenses
(primarily salaries) and make interest payments (primarily to the
Government) and the principal of the capital notes held by the
public.
-13-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
B. Definitions
In these financial statements:
The Company/Bank - Israel Bank of Agriculture Ltd.
Affiliate - A company in which the Company has
significant influence and which is not
a subsidiary, and where the Company's
investment in that company is included
in the financial statements according
to the equity method.
Interested parties - As defined in the Securities
Related parties Regulations (Preparation of Annual
Financial Statements), 1993 of Israel.
- As defined in Statement No. 29 of
the Institute of Certified Public
Accountants in Israel.
C. Principles of adjustment
(1) General
All of the financial data in these financial statements
(including comparative data) are expressed in adjusted NIS of
identical purchasing power. The purchasing power of the
adjusted NIS reflects the average prices for December 2002
according to the Consumer Price Index ("CPI" ) published on
January 15, 2003 (115.1 points based on an average of 1998 =
100). A summary of the financial statements in nominal
(historical) Israeli shekels, which served as a basis for the
Bank's adjusted statements, is presented in Note 23.
(2) Balance sheet
Monetary assets and liabilities are stated in nominal values.
Non-monetary assets (investments in an affiliate, the Bank's
building and equipment, share capital) have been adjusted on
the basis of the changes in the CPI from the month in which
the transaction occurred through the CPI for December 2002.
Equity in an investment in an affiliate is determined on the
basis of the adjusted financial statements of that company.
The adjusted values of the non-monetary items do not
necessarily represent their economic value, but rather the
balance of their historical cost, adjusted for the effect of
changes in the general purchasing power of the NIS. The terms
"cost" and "equity" as used herein mean "adjusted cost" and
"adjusted equity", unless expressly stated otherwise.
-14-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
(3) Statement of operations
a. Income and expenses (excluding depreciation and interest
income or expenses), have been adjusted on a monthly
basis for the increase in the Index, from the month of
transaction up to the balance sheet month, net of the
adjustments of the opening balances of monetary assets
and liabilities.
Income and expenses in the unlinked shekel segment were
adjusted according to the average balances (on a daily
basis) of the previous month, instead of on the basis of
the opening monthly balances. The net differences
between the adjustments based on average balances and
adjustments based on opening monthly balances were
carried to other interest income (expense).
b. Depreciation has been adjusted on the same basis used
for the adjustment of the related balance sheet fixed
assets.
c. The specific provision for doubtful debts has been
adjusted to the changes in the CPI from the date on
which the debt has been determined as doubtful, up to
the balance date. See Note 1I. concerning the general
provision.
d. The Bank's equity in the operating results of the
affiliate has been determined on the basis of the
financial statements of the affiliate, as adjusted for
the effect of inflation on this company.
D. Foreign Currency and Linkage
(1) Assets and liabilities in or linked to foreign currency, are
stated according to the effective representative rates of
exchange as of balance sheet date as published by the Bank of
Israel. Exchange rate differences arising from the adjustment
of assets and liabilities in foreign currency, due to exchange
rate fluctuations, are included in the statement of
operations.
(2) Monetary balances which are linked to the CPI are stated in
the balance sheet on the basis of the known CPI as of balance
sheet date, according to their contractual terms.
(3) Assets and liabilities subject to optional linkage, i.e.,
either to the CPI or to the rate of exchange of the U.S.
dollar/NIS, are stated at the higher option.
-15-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
(4) Data on rates of exchange and the Consumer Price Index:
December 31, Rate of change for the year
------------------------------------- ------------------------------------
2002 2001 2000 2002 2001 2000
--------- ---------- ------------ ----------- ---------- ----------
% % %
----------- ---------- ----------
Rate of exchange of
the U.S. dollar 4.737 4.416 4.041 7.27 9.27 (2.70)
Consumer Price Index
(in points *) for the
month of
November 115.4 108.20 106.7 6.65 1.40 0.095
December 115.1 108.10 106.6 6.48 1.40 --
E. Investments in an affiliate
The investment in an affiliate is stated by the equity method.
F. Bank building and equipment
Assets acquired after April 1, 1984, are stated at cost net of
accumulated depreciation. Depreciation is calculated by the
straight-line method over the useful lives of the assets.
Up to March 31, 1984, the assets were written down in full in the
year they were acquired, in accordance with the policy then applied.
G. Deferred taxes
As it is uncertain whether there will be taxable income in the
future, the Bank did not record deferred assets taxes in its books.
H. Basis of recognition of revenues and expenses
(1) Revenues and expenses are recognized on an accrued basis.
(2) The Company implemented a directive of the Bank of Israel
regarding not recognizing income from interest for the debts
related to the Moshav and Kibbutz sectors, for those Kibbutzim
and Moshavim which have not yet joined the arrangement for
settling their debts.
-16-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
I. Provision for doubtful debts
The financial statements include specific provisions for doubtful
debts, which, in the opinion of management, reflect potential losses
on the credit portfolio, in accordance with existing arrangements.
Material changes in the arrangements if any, are likely to obligate
additional provisions. The criteria for such provisions are as
follows:
1. In the credit portfolio for kibbutzim and their related
organizations in consideration of the kibbutzim arrangement,
as signed (see Note 3F.) and the guidelines of the Supervisor
of Banks.
2. In the credit portfolio for moshavim and their related
organizations - of the "Law for Arrangements in the Family
Agricultural Sector 1992" and the guidelines of the Supervisor
of Banks, is taken into consideration, as mentioned in Note
3E.
3. In the credit portfolio of other customers, with reference to
the financial information available to the Bank, in respect of
the financial status of the receivable.
In addition to the above mentioned specific provisions, a general
provision for doubtful debts was recorded in the past at a rate of
1% of the receivables balance as of December 31, 1991. Beginning in
1992, the Supervisor of Banks directives determine that an
additional provision for doubtful debts is to be recorded (in excess
of the general provisions) and in addition to the former general
provision is to be maintained as accrued pursuant to prior
directives at an amount which is not greater than 1% of the total
customer debts as of December 31, 1991, adjusted for inflation.
The portion of the provision in excess of 1% may be charged on
account of the additional provision. As of December 31, 2002, the
general and additional provisions represent 16.1% of total credit
for which the Bank is responsible.
In addition to the above provisions, the Supervisor of Banks
instructed that a special provision is to be recorded not later than
December 31, 2001 in a cumulative amount which will not be less than
the aggregate of the following:
1. 0.15% of the balance of the risk assets as of June 30, 2001.
2. 1% of the balance of the specially supervised debts as of June
30, 2001.
3. 2.5% of the balance for the problematic debts, net of the
balance for the specially supervised debts as of June 30,
2001.
-17-
The special provision will be maintained in its nominal amount,
subject to the aforesaid.
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
J. Severance pay and pension and accruals for wage costs
The liabilities for severance pay and pension are covered by
appropriate accruals which are deposited with reputable pension
funds and by the appropriate liabilities.
K. Loss per share
Loss Per Share was computed in accordance with Statement 55 of the
Institute of Certified Public Accountants in Israel.
L. Statement of cash flows
The Bank reports on cash flows in accordance with the Statements of
the Institute of Certified Public Accountants in Israel and subject
to the directives of the Supervisor of Banks.
In the statement of cash flows, the cash flows from transactions in
assets and liabilities, excluding investments in the Bank's building
and equipment, are presented in their offset amounts.
The cash item includes unrestricted cash and bank deposits held with
banks and the Bank of Israel for which the original term of deposit
is short-term and does not exceed three months from the date of the
investment therein.
M. Financial instruments
The Bank's financial instruments include mainly cash, credit and
financial liabilities which include mainly deferred promissory notes
and deposits by the Government and others. Most of the credit
extended by the Bank is for the agricultural settlements - kibbutzim
and moshavim. The Bank has recorded a provision for doubtful debts
on a prudent and conservative basis. The Bank does not use
derivatives.
N. 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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
-18-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
O. Adoption of recently issued Accounting Standards and their impact on
the financial statements.
1. During October 2001, the Israel Accounting Standards Board
Published Accounting Standard No. 12 with respect to the
discontinuation of the adjustment of financial statements, and
Accounting Standard No. 13 with respect to the effect of the
changes in the exchange rates for foreign currencies. In
August 2002, Accounting Standard No.14 was published with
respect to fiscal reporting for interim periods, and in
December 2002, Accounting Standard No. 17 was published with
respect to the deferral of the implementation of Accounting
Standards No. 12 and No. 13 until January 1, 2004.
The objective of Accounting Standard No. 14, which deals with
fiscal reporting for interim periods, is to determine the
minimum content for financial reporting for interim periods,
as well as to determine the recognition and measurement
principles in financial statements for interim periods. In
addition, the interim financial statements will, for the first
time, include condensed segmental information similar to the
information included in the annual financial statements. This
Accounting Standard, which is based on International
Accounting Standard NO. 34, "Financial Reporting for Interim
Periods", replaces Opinion No. 43 of the Institute of
Certified Public Accountants in Israel that deals with
financial statements for interim periods and Opinion No. 60
that deals with the amendment of Opinion No. 43 with respect
to the cancellation of the obligation to include information
regarding nominal data in financial statements for interim
periods. This Standard will apply in respect to financial
statements for periods beginning on or after January 1, 2003.
Draft Accounting Standard No. 15, which deals with the
impairment of assets, is based on International Accounting
Standard No. 36, and prescribes the accounting principles in
the case of a decline/elimination of the decline, in the value
of a company's assets, including investments in investees that
are not subsidiaries, goodwill arising from the acquisition of
subsidiaries and fair value adjustments. This Standard will
apply with respect to financial statements for periods
commencing on or after January 1, 2003. The Council of the
Israel Accounting Standards Board deferred the coming into
force of Accounting Standard No. 15 until March 3, 2003.
Management does not anticipate that the new Standards, as
discussed above, will have a significant effect on its results
of operations, financial position and cash flows.
-19-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 1. The Bank, Its Main Activities and Significant Accounting Policies
(continued)
2. Discontinuation of the adjustment of financial statements:
As stated above, in October 2001, the Israel Accounting
Standards Board published Accounting Standard No. 12 that
deals with the discontinued adjustment of financial
statements. In accordance with this Standard and Accounting
Standard No. 17 with respect to the deferral of the
implementation of Standard No. 12, financial statements will
cease to be adjusted for inflation in Israel commencing
January 1, 2004.
Until December 31, 2002, the Company will continue to prepare
its adjusted financial statements in accordance with Opinion
No. 36 of Institute of Certified Public Accountants in Israel.
The adjusted amounts, which are included in the financial
statements as of December 31, 2003, will serve as the starting
point for the nominal financial reporting commencing January
1, 2004.
With respect to the pro forma financial statements, they will
include the statements as of December 31, 2002 and 2001 as if
the Standard is in force as of January 1, 2001, see Note 20.
-20-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 2. Cash on Hand and Deposits with Banks
December 31,
-------------------------------
2002 2001
---------- ----------
Adjusted NIS
-------------------------------
(In thousands)
Cash on hand and deposits with the Bank of Israel 22,579 35,908
Deposits with banks * 36,166 114
---------- ----------
Total 58,745 36,022
========== ==========
Out of this - cash and deposits for an original period of up to
three months in the Bank of Israel and banks 58,745 36,022
========== ==========
* Includes a balance in the amount of NIS 35,951 in foreign
currency (in U.S. Dollars).
Note 3. Credit to the Public (Less - Provision for Doubtful Debts)
A. Composition:
December 31,
----------------------------------
2002 2001
--------- ---------
Adjusted NIS
----------------------------------
(In thousands)
Credit *) 134,319 151,502
Credit from earmarked deposits **) 121,998 148,956
--------- ---------
Total credit to the public for which the bank is responsible 256,317 300,458
Less - general and additional provisions for doubtful debts (25,347) (25,347)
Special provision (6,000) (6,390)
--------- ---------
Total 224,970 268,721
--------- ---------
Credit from earmarked deposits, repayment of which to the
depositor is conditional upon the collection of the loan
and includes a margin 58,454 61,196
--------- ---------
Total credit to the public 283,424 329,917
========= =========
The specific allowance for doubtful debts was deducted from the
appropriate credit items.
*) An amount of NIS 55,180 thousand (2001 - NIS 54,051 thousand)
for which the bank is not responsible, but which is included
as credit extended from the Bank's resources since the
deposits are presented as deferred deposits and not as
earmarked deposits.
**) With respect to kibbutzim which have not yet arranged their
credit balances (net of specific provisions) and were financed
by Government deposits, part of which were included under
earmarked deposits and part under deferred deposits.
-21-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
B. Credit to the public for which the Bank is responsible includes*)
December 31,
--------------------------------
2002 2001
--------- ---------
Adjusted NIS
--------------------------------
(In thousands)
1. Credit to the agricultural sector
(a) For which the Bank is responsible*):
Kibbutzim (including factories and regional and
national organizations) 121,393 148,295
Moshavim (including factories and regional
and national organizations) 134,921 152,149
--------- ---------
Total credit to the Agricultural Sector for which
the Bank is responsible**) 256,314 300,444
(b) Credit for which the Bank is not responsible:
Balance as of balance sheet date 37,236 37,666
--------- ---------
Total credit to the Agricultural Sector 293,550 338,110
========= =========
*) Credit for which the Bank is responsible excluding earmarked
deposits. The repayment of these deposits is subject to
collection of the respective credit.
**) An amount of NIS 55,175 thousand (2001 - NIS 54,046 thousand)
is not under the Bank's responsibility, but is included in the
Bank's responsibility since the deposits are shown as deferred
rather than earmarked.
-22-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
Credit to the Agricultural Sector for which the Bank is responsible
includes *.
December 31,
-----------------------------------
2002 2001
----------- -----------
Adjusted NIS
-----------------------------------
(In thousands)
(a) Credit to borrowers which has been rescheduled:
(1) Credit which was rescheduled in prior years,
with waiver of income - Balance as of balance sheet date 5,238 11,671
(2) Credit which was rescheduled during the current
year without waiver of income - Balance as of balance
sheet date 4,652 34,876
(b) Credit to borrowers which is to be rescheduled, as per
the Bank management's decision, but has not yet been
rescheduled:
Balance as balance sheet date 112,170 122,448
(c) Credit in temporary arrears, balance at balance sheet date 3,077 --
(d) Credit under special supervision:
Balance as of balance sheet date 47,558 38,431
(d) Credit to the agricultural sector for which the Bank is
responsible *), and is not included within the framework
of loans to problematic borrowers as above:
Balance as of balance sheet date (income in respect of 83,619 93,018
These loans included in the statement of operations -
NIS 4,099 thousand (2001 - NIS 4,893 thousand)
----------- -----------
Total 256,314 300,444
=========== ===========
*) Credit for which the Bank is responsible excluding credit
extended from earmarked deposits.
The repayment of these deposits is subject to the collection
of the respective loans.
2. Credit to local authorities
December 31,
-------------------------------------
2002 2001
------------- -------------
Adjusted NIS
-------------------------------------
(In thousands)
Total loans **) 3 14
============= =============
**) Not included within the framework of credit to problematic
borrowers.
-23-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
C. Provisions for doubtful debts
December 31, 2002 December 31, 2001
------------------------------------- -----------------------------------
Provision Provision
------------------------------------- -----------------------------------
Specific* Additional** Total Specific* Additional** Total
--------- ------------ -------- --------- ------------ --------
Balance at the beginning of the
year 139,543 31,737 171,280 167,743 25,347 193,090
Provision during the current year -- -- -- -- 6,390 6,390
Decrease in provisions (25) -- (25) -- -- --
Amount charged to statement of
operations (25) -- (25) -- 6,390 6,390
-------- ------- -------- -------- ------ --------
Write offs (16,774) -- (16,774) (18,486) -- (18,486)
Erosion and adjustment
of balances (2,095) (390) (2,485) (9,714) -- (9,714)
-------- ------- -------- -------- ------ --------
Balance at the end of the year 120,649 31,347 151,996 139,543 31,737 171,280
======== ======= ======== ======== ====== ========
December 31, 2000
-----------------------------------
Provision
-----------------------------------
Specific* Additional** Total
--------- ------------ --------
Balance at the beginning of the
year 192,553 25,347 217,900
Provision during the current year -- -- --
Decrease in provisions -- -- --
Amount charged to statement of
operations -- -- --
-------- ------ --------
Write offs (25,535) -- (25,535)
Erosion and adjustment
of balances 725 -- 725
-------- ------ --------
Balance at the end of the year 167,743 25,347 193,090
======== ====== ========
*) Does not include a provision for interest on doubtful debts
for the period after the debts had been determined as
doubtful.
**) Including an additional and general provision for doubtful
debts.
-24-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
D. Classification of credit balances * to the public under the Bank's
responsibility** according to size of credit to individual borrower
Credit to borrowers December 31, 2002 December 31, 2001
--------------------------- ------------------------------- ---------------------------
No. of No. of
borrowers borrowers
From To ****) Credit ****) Credit
-------------- ---------- ------------ --------------- ------------- ----------
Adjusted NIS
---------------------------------------------------------------------------------------------
(In thousands)
7 17 69 17 65
7 18 10 126 11 149
18 35 19 483 22 591
35 70 22 1,121 16 783
70 140 20 2,025 27 2,637
140 285 25 5,255 23 4,982
285 530 23 8,945 25 9,103
530 1,060 24 17,300 32 23,876
1,060 1,770 20 27,724 24 34,016
1,770 3,500 32 78,108 32 82,878
3,500 7,100 13 64,677 16 79,677
7,100 17,700 4 31,584 5 42,507
17,700 35,000 1 18,900 1 19,194
---------- ---------- --------- ----------
Total 230 256,317 251 300,458
========== ========== ========= ==========
*) Net of specific provisions for doubtful debts.
**) Credit, excluding earmarked deposits, the repayment of which
is subject to the collection of the credit.
***) Number of borrowers, according to total credit and credit
risk.
E. Credit to the moshavim
On March 4, 1992, the Arrangements Law in the Family Agricultural
Sector, 1992 was enacted. The ensuing obligating regulations were
partly determined during 1994. In December 1997, the regulation for
the realization of assets which are not agricultural assets was
completed, including land and which deals with the modus operandi
for those who are recovering. Within the framework of the
regulation, the agriculture assets which are not realizable were
temporarily determined.
The regulations not yet amended refer to the distributions of the
proceeds, realization of agricultural assets and collateral for the
settlement of the debts. The proposal of the regulations to
distribute the proceeds was considered by several sessions of the
economic committee of the Knesset, and during the most recent
session held on March 5, 2001, the members of the committee voted
against the approval of the regulations according to the text
submitted by the ministers.
-25-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
In the absence of the above regulations, the settlement of debts in
this segment can only be completed by a comprehensive creditor
arrangement which is acceptable to the Moshav and all the creditors.
Commencing with the end of the first half of 1997, "wraparound
plans" which constitute the basis for a comprehensive arrangement
were formulated. The sources for that arrangement are the members'
debts and the sale of the moshav assets, mainly by extended
appropriation of residential plots (in line with Resolution 737 of
the Israel Land Administration) and from changes in the designation
of land initiated by the moshav, according to Israel Land
Administration (hereinafter "ILA") decisions.
These arrangements are supposed to make the need to sell
agricultural assets superfluous, however at the beginning of 1999,
the performance of Resolution 737 of the ILA was frozen, and since
then the issue of the freeing of agricultural land has come up for
discussion over the years in the committees and in other contexts.
On August 29 2002, the Supreme Court ruled that decisions 717,727
and 737 of the ILA are void since they do not meet the reasonability
criteria. However, this determination did not receive immediate
force since the decisions concern numerous transactions for which
the procedure in their respect and their economic and social
implications are far-reaching. Therefore, the Board of the ILA has
to formulate transitional provisions that will determine which of
the transactions will be carried out.
A committee of the legal advisory authority of the ILA formulated
recommendations with respect to the transitional provisions for the
decisions 717, 727 and 737 of the Board of the ILA, and they are due
to be discussed by the Board of the ILA.
On November 17, 2002, the Government adopted the recommendation of
the Milgrom Committee that was established at the time to examine
the composite of the aspects involved in the change in the
designation of agricultural land. In accordance with the
Government's decision, it is possible to act pursuant to the
committee's recommendations in connection with decisions 717 (income
generating real estate) and 737 (expansion of settlements) while in
respect with decision No. 727 (agricultural land for abundant
construction), as long as a new policy will not be formulated, in
respect to land for which the designation is different the lease
agreement will be terminated and the land will be returned to the
ILA in consideration of compensation, as determined in decision 343
of the ILA. The Israel Land Administration will formulate
recommendations for a decision pursuant to what is stated above, and
will submit these proposals for the approval of the Board of the
ILA. In addition, it was determined in the decision that there is
nothing in the aforesaid that impair the transitional directives
that will be formulated in the meeting of the Board of the ILA.
-26-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
On November 18, 2002, the Board of the ILA decided that, with
respect to the transition directives a new committee will be
appointed that will interview representatives of the kibbutzim,
moshavim, initiators, etc. and it will recommend if they are to be
ratified, or if in part of the cases new directives are to be
accepted. And, indeed, a committee was set up that is headed by the
attorney, Moshe Nissim, that is acting according to the aforesaid.
On February 4, 2003, the ILA Board approved decisions that replace
decisions 717 and 737 and which determines new conditions in the
spirit of the Milgrom report, where in connection with the expansion
of settlements it was approved, among others, that:
a) the number of plots in the plan will be determined by the
planning authorities, with the rule being that 11.5% of the
quota of the planned plots in the settlement. In spite of
this, the subcommittee of the ILA's Board is authorized to
approve plans of a larger scope, pursuant to the criteria that
it will determine;
b) the area of the plots in the central region of the country
will be 350 square meters, in national preference settlements
and on the border line, up to 500 squares meters, and in Golan
Heights, confrontation line, the Negev Heights and the Arava
up to one dunam.
c) the local authority will handle the development;
d) the settlement is not allowed to collect any amount whatsoever
in excess of the development costs;
e) the lease fees will be in accordance with the national
preference map and individual assessments to be carried out by
the Government appraiser. According to the information that we
received, the implication is that in the country's center, the
lease fee increased from 66% to 91%, while in the national
preference regions B and A they remain unchanged (36% and 22%,
respectively).
f) The construction rights increased to 160 square meters as
compared with 140 square meters in the past.
g) This decision does not apply to transactions on which the
transition directives will apply that will be determined by
the ILA's Board, unless the settlement will request this.
There is no reference in the decision to the issue of the collection
of funds for the payment of debts. Therefore, as long as the
transition provisions will not be amended it will not be possible to
determine the proceeds that it is possible to receive, if at all,
from the real estate. This uncertainty, that has persisted since
1999, inhibits any progress in finalizing arrangements, even causes
the collapse of arrangements agreed on in the past and the search
for new resources, among them the linkage of the framework of
agreements to individual level.
-27-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued)
On June 6, 2000, an inter-bank agreement was reached for the
distribution of the proceeds, where until the date of the financial
statements, several additional creditors joined and, thereby since
the end of 2001, it is possible to a certain degree to promote the
distribution of the proceeds that were accumulated at the
administration of arrangements in the agricultural sector.
As of the date of these financial statements, there are
approximately 71 moshavim in respect of which recovery judgments
have not yet been granted, of which, 65 settlements that were agreed
upon. In part of them, they are already in stages of being executed,
and the proceeds are being channeled to the creditors or to the
Moshav account with the Administration of arrangements in the
agricultural sector, and there are moshavim that are not complying
with the arrangement and it will be necessary to deal with
alternative arrangements.
During the reported year, the bank continued to implement the
directives of the Supervisor of Banks dated October 16, 1994,
regarding the non-recording of interest income (including linkage
and exchange rate differentials) and on that portion of the moshavim
debt for which the provision for doubtful debts is made on a
collective basis.
F. Credit to the kibbutzim
On August 15, 1991, the Bank signed the first agreement for the
settlement of the kibbutzim debts.
On April 5, 1995, the Government decided to approve in principle a
supplementary agreement to the kibbutzim based on the
recommendations of the Suari Commission and, on March 30, 1996, a
supplementary kibbutzim agreement was reached between the
Government, the two kibbutz movements, Bank Hapoalim and Bank Leumi,
with the remaining banks joining on May 6, 1996.
The supplementary agreement is intended to resolve the debts of the
kibbutzim, their companies and two regional organizations which,
following the full implementation of the first agreement, there is
still a debt which they are unable to repay according to their
annual repayment power, ("the Balloon"), as well as kibbutzim
regarding which the ratio of their annual repayment power to their
debt exceeds 10 and they do not have an abundant amount of property.
The latter will join the Balloon kibbutzim to receive incentives. An
incentive is a conditional debt annulment and will be extended upon
the kibbutz having fulfilled the repayment of the arrangement debts
over a period of a number of years.
-28-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued
The origins of the supplementary agreement (including debts written
off) as referred to above, are as follows:
- From the contribution made by the banks and the
Government - Effected through the annulment of the debts
by the banks and the Government's cash transfers at a
ratio of 65% (banks) and 35% (Government) (except for
the kibbutzim of peripheral and rehabilitation,
regarding which the annulment of the debts by the banks
will be at a rate of 75% and Government participation of
25%).
- From contributions by kibbutzim entering the arrangement
- Effected through a waiver of rights to alternatively
designated land which the ILA is interested in the land
being returned to it. The Government will provide the
banks with letters of commitment stating the amounts for
the repayment of the debts from the proceeds of the sale
of the land. The share of each bank in the proceeds will
be in proportion to their share in the total debt of the
kibbutzim to the banks.
The parties agreed that if a transaction is carried out with respect
to kibbutz real estate, and a first priority mortgage has been
imposed over the land in the bank's favor, or that it has in respect
thereto any lawful other fixed lien, of a nature and quality
identical or similar to the aforementioned mortgage, there will be
an increase of 20% of the bank's share in the amounts of the
Government letters of liability and/or the amounts of the financial
bank guarantees and the share of the other banks in the
aforementioned amounts will be reduced accordingly pari pasu.
In the context of the supplementary agreement, 61 kibbutzim entered
and, in addition, an arrangement was also implemented in the central
organizations. In respect to the real estate kibbutzim, a survey was
conducted pursuant to which the land for the ILA was earmarked. The
survey was concluded, however, the alternative value of the land
cannot be estimated. Therefore, a financial alternative was
proposed, following which, on April 11, 1999, a supplementary
agreement (amended) was reached between the Accountant General and
the banks, including the Bank, which became effective pursuant to
the notice of the director of the Kibbutz Arrangement Board on May
25, 1999.
This alternative relies on the separation, both time-wise and
financially - between the arrangement regarding the "Balloon" and
the realization of land - the financial arrangement regarding the
"Balloon" will be executed immediately with the entrance of the
kibbutz to the arrangement (65% by debt annulment by the banks and
35% from Government sources). The treatment of the restored land
will be carried out after the financial arrangement is executed,
while distributing the yields from the change in the designation
between the Government and the banks, in proportion to the debt
annulment.
-29-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 3. Credit to the Public (Less - Provision for Doubtful Debts) (continued
At the stage when the kibbutz enters the arrangement, the Government
and the ILA will furnish the banks with an unlimited letter of
commitment which does not specify an amount, pursuant to which the
ILA confirms its agreement that the land will be returned to it and
undertakes to only market the land following a change in the
designation against the receipt of a cash consideration. The banks
will be entitled to record a caveat at the Land Registry Office with
respect to the aforementioned letter of commitment.
As of the signing of the amendment to the supplementary agreement, a
further 36 kibbutzim have entered into the arrangement, among them
are kibbutzim of peripheral and rehabilitation and 31 kibbutzim
which have been classified as real estate, and there remain 10
kibbutzim which have not yet joined. The Supreme Court's decision
from August 29, 2002, to stay the ILA decisions is delaying a
settlement for the liabilities of these kibbutzim.
The write-off in the Bank's books with respect to the "Balloon" for
the real estate kibbutzim amounts to approximately NIS 101 million
and, in exchange for the write off of the "Balloon" by all of the
banks, the kibbutzim returned approximately 9,134,000 sq. meters of
land to the Administration and committed to comply with the
conditions of the supplementary agreement should a neighborhood be
established on the kibbutz's section of land. In addition,
approximately, 1,255 dunams were expropriated for the purpose of the
cross-Israel highway, where the indemnification will be transferred
to the banks and the Government in accordance with the principles of
the agreement.
Note 4. Credit to the Government of Israel (including deposits)
December 31,
--------------------------------
2002 2001
---------- ---------
Adjusted NIS
--------------------------------
(In thousands)
Credit in respect of deferred capital notes 1,704 1,691
Credit in respect of participation in write-off of Balloon and 24,777 22,058
incentive
Write-offs against deferred deposits 4,258 2,199
---------- ---------
Total credit to the Government (including deposits) 30,739 25,948
========== =========
-30-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 5. Investments in an Affiliate
December 31,
---------------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------------
(In thousands)
(a) Composition:
Cost of shares 22,966 22,966
Post acquisition losses (21,978) (21,997)
---------- ----------
Total investments 988 969
========== ==========
(b) Details of the Company
Name of company: The Palestine Agricultural
Settlement Association Ltd.
Agricultural financial
institution
2002 2001
--------- ----------
Equity in capital providing rights for
dividends - percentage of holdings 50.0% 50.0%
Equity in capital providing voting rights -
percentage of holdings 49.9% 49.9%
Investments in shares - equity basis (NIS in
thousand) 988 969
Contribution to net operating profit (loss)
(NIS in thousand) 19 39
-31-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 6. Building and Equipment
Cost Depreciation
----------------------------------------- ---------------------------------------------------
Rate Beginning Additions Disposals Accumulated Provision Disposals Accumulated
of of during during End of at beginning during during at end
depreciation year the year the year year of year year year of year
------------ --------- --------- --------- ------ ------------ --------- --------- -----------
(NIS in
% thousands)
------------ ----------
Building 4% 374 - - 374 165 12 - 177
Equipment and
Furniture 6-20% 1,417 82 28 1,471 1,291 23 28 1,286
----- -- -- ----- ----- -- -- -----
Total building and
Equipment 1,791 82 28 1,845 1,456 35 28 1,463
===== == == ===== ===== == == =====
Depreciated Balance
-----------------------
Beginning
of End of
Year year
------------ ---------
Building 209 197
Equipment and
Furniture 126 185
--- ---
Total building and
Equipment 335 382
=== ===
-32-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 7. Other Assets
December 31,
---------------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------------
(In thousands)
Refund of payroll tax 1,014 1,011
Other accounts receivable 646 524
---------- ----------
Total other assets 1,660 1,535
========== ==========
Note 8. Deposits from the Public
December 31,
---------------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------------
(In thousands)
Demand deposits 1,053 1,015
Time deposits 17 18
Earmarked deposits 28 836
---------- ----------
1,098 1,869
========== ==========
Includes deposits the repayment of which to the depositor is
dependent on collection of the related credit with margin 28 836
========== ==========
Note 9. Deposits from the Government
December 31,
---------------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------------
(In thousands)
Designated and other deposits ** 445,346 448,606
========== ==========
** Includes deposits for which the repayment to the depositor is
stipulated on the collection of the credit (without any margin) 60,605 60,388
========== ==========
-33-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 10. Other Liabilities
December 31,
---------------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------------
(In thousands)
Accrued severance pay (1) 1,279 1,362
Accrued for vacation pay and sick leave (2) 5,384 5,498
Other accounts payable credit balances 729 1,065
---------- ----------
Total other liabilities 7,572 8,117
========== ==========
1. The Banks' liabilities for the payment of severance or pension pay
to the employees are calculated on the basis of the employees' most
recent salary as of balance sheet date and pursuant to the Severance
Pay Law, and are fully covered by deposits with a pension fund and a
severance pay fund, as well as the balance for the liability for
severance pay.
The amounts that were accrued in the pension fund and a severance
pay fund on behalf of the employees and the liability in their
respect are not presented in the balance sheet since they are not
under the control or the management of the Company.
2. Employees who retire are entitled to a partial compensation in
respect of unutilized sick leave. A full provision for this
compensation was recorded only for those employees who have reached
the age of 55. As for those employees who have not yet reached the
age of 55, a partial provision has been recorded taking into
consideration the uncertainty as to the scope of the entitlement to
this compensation.
The Bank's employees are entitled to special vacations upon the
completion of 15 years of employment. This entitlement increases at
the end of every five years until the employee has been employed for
35 years. These vacations can be utilized in addition to the annual
vacation. In addition, such vacation can be redeemed or,
alternatively, accrued until retirement, at the employee's
discretion. The Banks' liability to cover this entitlement amounts
to NIS 1,370 thousand, on an actuarial basis at an annual interest
rate of 4%. As of balance sheet date, there is a provision to cover
the entitlement that can be utilized at that date.
-34-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 11. Deferred Government Deposits and Deferred Capital Notes
(a) Secondary capital
The Supervisor of Banks agreed to recognize the entire amount of the
capital notes held by the Government (as owner of the Bank) as
"Secondary Capital" for the purpose of computing the ratio of
capital to risk components.
(b) Deferred Government deposits
December 31,
-------------------------
Weighted
interest rate
December 31,
2002 2002 2001
-------------------- --------- ---------
% Adjusted NIS
-------------------- -------------------------
(In thousands)
In Israeli currency:
Not linked 15.1-28.5 353,828 314,808
Linked to the Index 3.66 458,963 441,753
Linked to foreign currency 6.22 1,690 1,577
--------- ---------
814,481 758,138
========= =========
* As to the repayment date, see Note 1 A (2) a.
In accordance with the Deposit Agreement, as described in Note 1A,
the interest on each of the three deposits will be the average
weighted interest rate of all the Government deposits which became
deferred deposits, computed quarterly, and will be added to the
principal.
In the case of dissolution of the Bank prior to April 1, 2003, the
deferred deposits will be repaid only after the Bank has repaid all
its liabilities, including liabilities to the Government of Israel,
except for Government deferred deposits and prior to liabilities to
shareholders at the time of dissolution, in accordance with the
Articles of Association of the Bank (excluding liabilities for
distribution of earnings to foreign shareholders).
(c) Deferred capital notes
U.S. dollar denominated capital notes, repayable on December 31,
2003, bear interest at 7.5%.
The capital notes are deferred in relation to both secured
liabilities and other liabilities of the Bank, whose terms guarantee
that they have preference over the capital notes. Pursuant to the
letter from the Treasury dated February 12, 2003, commencing in
2004, the Bank will file a request on a quarterly basis to extend
the time for the payment of the deferred capital notes held by the
Government.
The Bank, with the approval of the Treasury, may redeem the capital
notes by transferring the amount with an additional redemption
premium of 5%. Up to the balance sheet date, the Bank has not
requested such approval, and has not redeemed any capital notes.
-35-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 12. Shareholders' Deficiency
a) Share capital of the Bank (in nominal values)
December 31,
-------------------------------
2002 2001
----------- ----------
Authorized Issued and Outstanding
------------- -------------------------------
NIS
-----------------------------------------------------
Ordinary Shares of NIS 0.0001 37,970 13,505 13,505
8% Cumulative and Participating
Preferred "A" Shares of NIS 0.001 201,530 195,768 195,768
7.5% Cumulative and Redeemable
Preferred "C" Shares of of
NIS 0,042, linked to the U.S. dollar
(see d. below) 10,500 10,500 10,500
----------- ---------- ----------
250,000 219,773 219,773
=========== ========== ==========
b) Ordinary Shares
In case of a resolution to distribute dividends on Ordinary Shares,
the Preferred "A" Shares and the Preferred "C" Shares will first be
entitled to their dividends (see (c) and (d) below). The Ordinary
Shares will then be entitled to a dividend of 3% on outstanding
capital. Thereafter, the Ordinary Shares will rank pari passu in the
distribution of the balance of the earnings in respect of which it
was resolved to distribute dividends, together with the Preferred
"A" Shares.
c) 8% "A" Cumulative and Participating Shares
These shares entitle their holders to the following:
1) The right to receive a fixed and cumulative preferred dividend
for each financial year, at a rate of 8% of the outstanding,
or deemed to be outstanding capital.
2) The right to receive, out of profits to be distributed as
dividends, after a dividend at the rate of 3% was distributed
to the holders of Ordinary Shares, a supplemental non
cumulative dividend, at the rate of 2% of outstanding, or
deemed to be outstanding capital.
3) The right to participate, pari passu with the Ordinary Shares,
in the distribution of earnings resolved to be distributed as
dividends after distribution of the dividend as mentioned in
paragraph (2) above.
-36-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 12. Shareholders' Deficiency (continued)
4) In the event of dissolution, the excess of assets, if any, is
to be distributed equally between the shareholders, except for
holders of 7.5% Preferred "C" Shares, according to the
outstanding, or deemed to be outstanding capital.
(d) 7.5% "C" Cumulative Preferred shares, linked to the U.S. dollar
7.5% "C" Cumulative Preferred Shares, linked to the exchange rate of
the U.S. dollar, redeemable, nominal value NIS 0.042 (issued at $ 1
= NIS 0.00042).
The shares are redeemable at dates as to be elected by the Bank,
with additional premium of 5.625% and an additional dividend,
accrued to redemption date of 7.5% per annum. The redemption is
subject to the advance consent of the Comptroller of Foreign
Currency at the Ministry of Finance. The shares do not provide their
holders with the rights to receive notification of general meetings
of the Company, and to attend or vote at such meetings.
The amount payable upon redemption of these shares (without premium
- see above), at the U.S. dollar exchange rate on balance sheet
date, exceeds their nominal value by approximately NIS 101 million.
Such excess is not reflected in the financial statements, as the
Ministry of Finance had undertaken to cover any liabilities which
may accrue, or shall accrue, as a result of changes in the rate of
the U.S. dollar.
(e) Dividend to holders of Preferred "A" and "C" Shares
On July 27, 1999, the Board of Directors decided, based on a
legal opinion which it obtained, to terminate the payment of a
dividend in respect to "A" and "C" shares. A report regarding this
decision was communicated to the Accountant General and the
Company's Authority.
The Bank did not record a liability with respect to the
cumulative dividend since its distribution is contingent upon:
1. The existence of income (in other words, the distribution will
not be in contravention of the Company's Law).
2. As per a decision of the Board of Directors. The cumulative
dividend which was not paid with respect to the years 1999 -
2002, amounted to NIS 35,590 thousand. In addition, the
Treasury of the State of Israel has a liability to cover the
linkage differences included in the aforementioned amount
which amount to NIS 35,524 thousand. In prior years, a
dividend was paid.
-37-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 13. Contingent Liabilities, Claims and Commitments
December 31,
-----------------------------------
2002 2001
------------- ------------
Adjusted NIS
-----------------------------------
(In thousands)
Off balance sheet financial instruments
Transactions for which the amount stated constitutes
a credit risk:
Unutilized lines of credit 402 1,216
-38-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 14. Related Parties
(a) Balance sheet balances:
Affiliate General manager
---------------------------------------- ----------------------------------------
Balance As of Highest balance Balance As of Highest balance
December 31, during December 31, during
----------------- ------------------ ---------------- -----------------
Adjusted NIS Adjusted NIS
(In thousands) (In thousands)
------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
------- -------- ------- ------- ------ ------ ------ -------
The following include balances of the
affiliate:
Assets - credit to the public -- -- -- 51 -- -- -- --
Liabilities - deposits from the public 12 32 22 32 34 31 35 38
(b) A summary of the operating results with related parties:
Year ended December 31,
------------------------------------------
2002 2001 2000
----------- ------------ ------------
Adjusted NIS
------------------------------------------
(In thousands)
Participation in expenses by the affiliate 132 125 129
Management fees to shareholders 10 -- 16
(c) The Bank is a Government Company as defined in the Government
Companies Law - 1975.
Balances of the Government of Israel are stated separately in the
balance sheet. The Bank has dealings in the ordinary course of
business, and at customary commercial terms, with entities that may
be considered related parties.
The following balance sheet items include balances of these
entities:
December 31,
------------------------------
2002 2001
------------- ----------
Adjusted NIS
------------------------------
(In thousands)
Assets:
Credit to the public 21,218 25,519
Liabilities:
Deposits from the public -- 1
-39-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 14. Related Parties (continued)
(d) Benefits to related parties:
Year ended December 31,
------------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Total Number of Total Number of
Benefits beneficiaries benefits beneficiaries
---------------- ----------------- ---------------- ----------------
Adjusted NIS
------------------------------------------------------------------------------
(In thousands)
Related party employed by the Bank 455 1 537 1
Directors not employed by the Bank 29 4 37 5
---------- ----------
484 574
========== ==========
-40-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 15. Loss from Financing Activities Before Provision for Doubtful Debts
(expenses are shows in negative numbers).
Year ended December 31,
-----------------------------------
2002 2001 2000
------- ------- -------
Adjusted NIS
(In thousands)
In respect to assets
From credit to the public 18,406 21,429 24,155
From credit to the Government of Israel 883 617 410
From deposits with the Bank of Israel (431) 914 588
From deposits with banks (1,282) -- 1
From other assets (18) (27) 19
In respect to liabilities
On deposits from the: 29 (20) (92)
Public (15,579) (16,871) (17,879)
Government -- -- (968)
Bank of Israel -- -- (43)
Banks 6 2 (2)
On other liabilities
On respect to deferred deposits and capital
notes:
On deferred Government deposits (56,327) (63,216) (63,520)
On deferred capital notes:
Held by the public (3,328) (5,906) (1,798)
Held by the Government (6,719) (11,817) (3,498)
Other
Other financing income 1,303 531 386
------- ------- -------
Total loss from financing activities before
provision for doubtful debts (63,057) (74,364) (62,241)
======= ======= =======
The cases where the financing income or expenses on non-linked NIS or
foreign currency balances was lower than the annual increase in the Index
are included as expenses with respect to assets, or income for
liabilities.
-41-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 16. Commissions and Other Income
Year ended December 31,
-------------------------------------------------
2002 2001 2000
--------- --------- --------
Adjusted NIS
-------------------------------------------------
(In thousands)
Includes commissions in respect to:
Bookkeeping 56 71 85
Collections and transfers 18 18 16
Management fees and participation in expenses from
affiliated company 10 -- 16
Other 5 6 9
--------- --------- --------
89 95 126
========= ========= ========
Note 17. Salaries and Related Expenses
Salaries 5,636 5,681 6,224
Severance pay, pension, provident fund
contributions and sick pay 799 1,349 1,660
National Insurance, employees tax and salary tax 308 281 302
--------- --------- --------
6,743 7,311 8,186
========= ========= ========
Note 18. Other Expenses
Professional services 196 294 272
Communications 121 120 135
Computer services 75 83 89
Office expenses 65 63 70
Promotion and advertising 16 11 16
Insurance 215 160 153
Professional training and extension courses 4 4 1
Director fees 29 37 45
Commissions 19 24 21
Trustee commissions due to shares and capital notes 294 224 265
Taxes and toll fees 67 71 72
Participation in the budget of kibbutzim management 110 142 144
Participation in the budget of Moshavim management 243 169 --
Others 99 129 104
--------- --------- --------
1,553 1,531 1,387
========= ========= ========
-42-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 19. Income Taxes
(a) The Bank has received final tax up to and including the year ended
December 31, 1998.
(b) The Bank's tax loss carry forwards amount to NIS 1,215,417 thousand
(2001 - NIS 1,071,000 thousand). A deferred tax asset in the net
amount of NIS 437,550 thousand was not included in the balance sheet
(2001 - NIS 385,560 thousand) since the Company does not expect that
it will be able to utilize it in the foreseeable future. The
adjusted amounts for buildings, for which the depreciation in their
respect will not be allowed in the future, are immaterial.
Note 20. Reconciliation Between Israel GAAP and U.S. GAAP
The financial statements of Israel Bank of Agriculture are prepared in
accordance with accounting principles generally accepted in Israel
("Israel GAAP"), which differ in certain respects from those generally
accepted in the United States ("U.S. GAAP") as described below:
(a) Effect of inflation:
In accordance with Israeli GAAP: The financial statements of Israel
Bank of Agriculture are expressed in terms of uniform monetary unit
- the inflation adjusted Israel shekel - which is after adjustment
in respect of the changes in the Consumer Price Index. (See Note 1C
for principles of the adjustment).
In accordance with US GAAP:
The financial statements are expressed in current nominal historical
monetary terms.
Measuring on the basis of the change in the CPI, which reflects the
effect of changes in the general price level in the Israeli economy,
provides a very valid picture of the financial position, results of
operations and the cash flows of the Israel Bank of Agriculture for
both Israel and US accounting purposes.
In view of the above, no data on the effect of the differences
between measurement on the basis of cost adjusted to the CPI or on
the basis of historical cost, were included.
As permitted by the United States Securities and Exchange Commission
rules for foreign private issuers whose financial statements
comprehensively include the effects of inflation, price level
adjustments have not been reversed in the accompanying
reconciliation of Israeli accounting principles to U.S. accounting
principles.
-43-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Adjusted to the NIS of December 2002
Note 20. Reconciliation Between Israel GAAP and U.S. GAAP (continued)
(b) Depreciation method:
In accordance with the banking regulations in Israel prior to April
1, 1984, the Bank wrote-off all of its investments in the building
and equipment to the statement of operations immediately upon making
the investment. The matter is contradictory to the directives of
both Israeli and U.S. GAAP.
Commencing with 1984, the Bank records its investments in assets and
depreciates those investments over their useful lives.
Since all of the equipment purchased until 1984 was, in any event,
fully depreciated, the aforementioned equipment has not effect on
the financial statements.
With respect to the building in which the Bank's offices are
located, the aforementioned was purchased in 1956 and, therefore, in
effect it would have been substantially depreciated, if they would
have depreciated it commencing at that time.
With respect to land on which the building is located, its adjusted
historical cost amounts to approximately NIS 2,368 thousand.
The reconciliation to U.S. GAAP requires the addition of the amount
to fixed assets on the one hand, and to equity on the other hand.
Otherwise, there is no effect on U.S. GAAP reconciliation. The
change in equity as described above does not effect loss per share.
(c) Accrued severance pay
According to U.S. GAAP, accrued severance pay is included in
the balance sheet at the total liabilities amount and total amounts
funded through provident funds and through insurance policies.
According to Israeli GAAP, the net accrued severance pay is
included in the balance sheets.
The difference between the two methods described above is
immaterial with respect to the financial statements of the Company.
-44-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 20. Reconciliation Between Israel GAAP and U.S. GAAP (continued)
(d) Statement of cash flows
The Bank reports on cash flows in accordance with the Statements of
the Institute of Certified Public Accountants in Israel and subject
to the directives of the Supervisor of Banks.
In the statements of cash flows, the cash flows from transactions in
assets and liabilities, excluding investments in the Bank's building
and equipment, are presented in their offset amounts.
The cash item includes unrestricted cash and bank deposits held with
banks and the Bank of Israel for which the original term of deposit
is short-term and does not exceed three months from the date of the
investment therein.
Under U.S. GAAP, Items that qualify for net reporting (because their
turnover is quick, their amounts are large, and their maturities are
short) are cash receipts and payments pertaining to (a) investments
(other than cash equivalents), (b) loans receivable, and (c) debt,
providing that the original maturity of the asset or liability is
three months or less.
Cash flows from collection of accounts receivable (credit) is
reported in cash flow from operating activities.
-45-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 20. Reconciliation Between Israel GAAP and U.S. GAAP (continued)
Below is a summary of the Cash Flow showing the amounts described in
Note 1L that are presented in their presented offset amount, and
herein is disclosed as gross amounts:
Year ended December 31,
-----------------------------------
2002 2001 2000
------- ------- -------
Adjusted NIS
-----------------------------------
(In thousands)
Cash flows from operating activities:
Loss for the year 71,442 (90,272) (71,871)
Adjustments to reconcile the cash flows used in
operating activities:
Equity in the profits of an affiliate (19) (39) (80)
Depreciation on the bank's building and 35 62 97
equipment
------- ------- -------
Net cash used in operating activities 71,426 90,249 (71,854)
------- ------- -------
Cash flows from investing activities
Decrease (increase) in credit to the public (886) (4,479) (6,055)
Collection from the public 47,379 48,018 46,548
Decrease (increase) in credit to the
Government of Israel (15,925) (8,867) (19,074)
Collection from the Government of Israel 11,134 14,930 14,720
Purchase of equipment (82) (13) (53)
Other assets (125) (202) 911
------- ------- -------
Net cash provided by investing activities 41,495 49,387 36,997
------- ------- -------
Net cash provided by financing activities 52,654 53,127 45,614
------- ------- -------
------- ------- -------
Increase in cash on hand and deposits with banks 22,723 12,265 10,757
Balance of cash on hand and deposits with
banks at the beginning of the year 36,022 23,757 13,000
------- ------- -------
Balance of cash on hand and deposits with
banks at the end of the year 58,745 36,022 23,757
======= ======= =======
-46-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 21. Pro forma financial statements
Below are the pro forma data of the condensed financial statements
as of December 31, 2002, and the condensed statement of operations
for the year ended as of that date assuming that the directives of
the Standard No. 12 of the Israel Accounting Standards Board with
respect to the discontinuation of the adjustment of financial
statements is effective as of January 1, 2002 and not January 1,
2003, as was determined by the Standard, and the adjusted amounts
which were included in the financial statements as of December 31,
2001 were used as the starting point for the preparation of the
these pro forma financial statements.
Balance sheets
December 31,
---------------------------
2002 2001
---------- ----------
Adjusted NIS
---------------------------
(In thousands)
ASSETS
Cash on hand and deposits with banks 58,745 33,825
Credit to the public 283,424 309,793
Credit to the Government of Israel 30,739 24,365
Investments in an affiliate 988 910
Bank building and equipment 359 310
Other assets 1,660 1,440
TOTAL ASSETS 375,915 370,643
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Deposits from the public 1,098 1,755
Government of Israel deposit 445,346 421,242
Other liabilities 7,586 7,621
---------- ----------
454,030 430,618
Deferred deposits from the Government of Israel 814,481 711,893
Deferred capital notes:
Held by the public 40,193 37,695
Held by the Government 81,131 75,408
---------- ----------
TOTAL LIABILITIES 1,389,821 1,255,614
Non-participating Preferred Shares 11 11
Shareholders' deficiency (1,013,999) (884,982)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 375,833 370,643
========== ==========
-47-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 21. Pro forma financial statements (continued)
Statements of operations
Year ended December 31,
-------------------------
2002 2001
--------- ---------
Adjusted NIS
-------------------------
(In thousands, except per
share amount)
Loss from financing activities
Loss from financing activities before provision for doubtful debts (120,297) (80,908)
Allowance for doubtful accounts -- (6,000)
-------- -------
Loss from financial activities after the allowance for doubtful (120,297) (86,908)
accounts
Operating and other income 600 812
Operating and other expenses (9,330) (9,843)
-------- -------
Loss from operating activities (129,027) (95,939)
Equity in earnings of an affiliate after the tax effect 78 47
-------- -------
Loss for the year (128,949) (95,892)
======== =======
Total
outstanding
Outstanding Additional share capital Total
share paid-in and capital Accumulated shareholders'
capital capital reserves deficit deficiency
----------- ---------- ------------- ------------ -------------
Adjusted NIS
------------------------------------------------------------------------
(In thousands)
Balance at January 1, 2001 815,939 291,128 1,107,067 (1,896,157) (789,090)
Loss for the year -- -- -- (95,892) (95,892)
------- ------- --------- ---------- ----------
Balance at January 1, 2002 815,939 291,128 1,107,067 (1,992,049) (884,982)
Loss for the year -- -- -- (128,949) (128,949)
------- ------- --------- ---------- ----------
Balance at December 31, 2002 815,939 291,128 1,107,067 (2,120,998) (1,013,931)
======= ======= ========= ========== ==========
Note 22. Subsequent events
1. On June 24, 2003, the Accountant General at the Ministry of Finance
approved the defer the redemption of the deferred deposits until
October 1, 2003 (see note 1A(2)).
2. As for the distribution of the payments which the administration
received from the Moshavim, regulations which settle the matter were
not yet regulated and, therefore, the distribution of the amounts to
the creditors was not yet effectuated.
-48-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 23. Financial Statements of the Bank in Nominal (Historical) NIS
(a) Balance sheets:
December 31,
---------------------------
2002 2001
---------- ----------
NIS
---------------------------
(In thousands)
ASSETS
Cash on hand and deposits with banks 58,745 33,825
Credit to the public 283,424 309,793
Credit to the Government of Israel 30,739 24,365
Investment in an affiliate 988 910
Bank building and equipment 219 155
Other assets 1,660 1,440
---------- ----------
Total assets 375,775 370,488
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Deposits from the public 1,098 1,755
Government of Israeli deposits 445,346 421,242
Other liabilities 7,586 7,621
---------- ----------
454,030 430,618
Deferred deposits from the Government of Israel 814,481 711,893
Deferred capital notes:
Held by the Public 40,193 37,695
Held by the Government 81,131 75,408
---------- ----------
Total liabilities 1,389,835 1,255,614
Shareholders' deficiency (1,014,060) (885,126)
---------- ----------
Total liabilities and shareholders' deficiency 375,775 370,488
========== ==========
-49-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 23. Financial Statements of the Bank in Nominal (Historical) NIS
(continued)
(b) Statements of operations
Year ended December 31,
------------------------------------
2002 2001 2000
-------- ------- -------
NIS
------------------------------------
(In thousands)
Loss from financing activities
Loss from financing activities before provision (120,296) (80,909) (57,648)
for doubtful debts*
Provision for doubtful debts -- (6,000) --
-------- ------- -------
Loss from financing activities after provision for
doubtful debts
(120,296) (86,909) (57,648)
-------- ------- -------
Operating and other income
Rental income 511 724 966
Commissions and other income 89 88 119
-------- ------- -------
600 812 1,085
-------- ------- -------
Operating and other expenses
Salaries and related expenses 7,093 6,923 7,567
Depreciation for building and equipment 19 40 65
Maintenance of building and equipment 659 1,428 1,119
Other expenses 1,545 1,434 1,283
-------- ------- -------
Total operating and other expenses (9,316) (9,825) (10,034)
-------- ------- -------
-------- ------- -------
Operating loss (129,012) (95,922) (66,597)
Equity in profits of an affiliate after tax effect 78 47 73
-------- ------- -------
Loss for the year (128,934) (95,875) (66,524)
======== ======= =======
Loss per NIS 1 nominal value of share capital -
operating loss (616.10) (458.10) (317.90)
======== ======= =======
* Income (loss) from financing activities before
Provision for doubtful debts, interest on
Government deposits and deferred capital notes (8,578) (4,336) 8,953
Interest on Government deposits and deferred
capital notes (111,718) (76,573) (66,601)
-------- ------- -------
Loss from financing activities before provision
for doubtful debts (120,296) (80,909) (57,648)
======== ======= =======
-50-
ISRAEL BANK OF AGRICULTURE LTD.
NOTES TO THE FINANCIAL STATEMENTS - As of December 31, 2002
- --------------------------------------------------------------------------------
Note 23. Financial Statements of the Bank in Nominal (Historical) NIS
(continued)
(c) Statements of Changes in Shareholders' Deficiency
Additional Receipts
Share paid-in account Accumulated
capital capital of shares deficit Total
-------- ---------- --------- ----------- ----------
NIS
-------------------------------------------------------------
(In thousands)
Balance at January 1, 2000 220 -- 91,893 (814,840) (722,727)
Loss for the year -- -- -- (66,524) (66,524)
------ ------ -------- ---------- ----------
Balance at January 1, 2001 220 -- 91,893 (881,364) (789,251)
Loss for the year -- -- -- (95,875) (95,875)
------ ------ -------- ---------- ----------
Balance at January 1, 2002 220 -- 91,893 (977,239) (885,126)
Loss for the year -- -- -- (128,934) (128,934)
------ ------ -------- ---------- ----------
Balance at December 31, 2002 220 -- 91,893 (1,106,173) (1,014,060)
====== ====== ======== ========== ==========
Note 24. Other Information in Nominal Values
2002 2001
------- -------
NIS
--------------------
(In thousands)
Ordinary shares NIS 0.0001 par value 13,505 13,505
8% "A" Cumulative and Participating shares 195,768 195,768
7.5% "C" Cumulative Preferred shares linked to the exchange
Of the U.S. Dollar convertible to NIS 0.042 par value
(see Note 12) 10,500 10,500
------- -------
219,773 219,773
======= =======
-51-