UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 2-16830
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
82 Menachem Begin Road, Tel Aviv, Israel 67138
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT:
None
(Title of Class)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION
15(D) OF THE ACT:
6% Cumulative Participating Preference "C" Shares
6% Cumulative Participating Preference "CC" Shares
7-1/2% Cumulative Redeemable Preference "D" Shares
7-1/2% Cumulative Redeemable Preference "DD" Shares
7-1/2% Registered Subordinated Capital Notes due 1998
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 is as
follows:
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF CLASS DECEMBER 31, 2003
----------
Ordinary "A" Shares, par value NIS.0.10 15,100
Ordinary "B" Shares, par value NIS.0.10 134,899
Ordinary "B1" Shares, par value NIS.0.10 1
8% Cumulative Participating Preferred Ordinary Shares, par value NIS.0.001 1,000,000
6% Cumulative Participating Preference "C" Shares, par value NIS.0.00018
(linked to the U.S.dollar at the rate of $1 = NIS.0.00018) 17,000,000
6% Cumulative Participating Preference "CC" Shares, par value NIS.0.003
(linked to the U.S.dollar at the rate of $1 = NIS.0.0003) 999,998
6% Cumulative Participating Preference "CC1" Shares, par value NIS.0.003
(linked to the U.S.dollar at the rate of $1 = NIS.0.0003) 1,734,779
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF CLASS DECEMBER 31, 2003
----------
7-1/2% Cumulative Redeemable Preference "D" Shares, par value NIS.0.03
(linked to the U.S.dollar at the rate of $1 = NIS.0.0003) 163,477
7-1/2% Cumulative Redeemable Preference "DD" Shares, par value NIS.2.10
(linked to the U.S.dollar at the rate of $1 = NIS.0.0021) 55,409
Unclassified Shares, par value NIS.0.10 --
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 [_]
TABLE OF CONTENTS
Explanatory Notes (ii)
Forward-Looking Statements (ii)
Industry and Market Data (iii)
Presentation of Financial Information (iii)
Exchange Rate Information (iii)
PART I
Item 1 -- Identity of Directors, Senior Management and Advisers 1
Item 2 -- Offer Statistics and Expected Timetable 1
Item 3 -- Key Information 1
Item 4 -- Information on the Company 17
Item 5 -- Operating and Financial Review and Prospects 43
Item 6 -- Directors, Senior Management and Employees 63
Item 7 -- Major Shareholders and Related Party Transactions 74
Item 8 -- Financial Information 76
Item 9 -- The Offer and Listing 80
Item 10 -- Additional Information 82
Item 11 -- Quantitative and Qualitative Disclosures About Market Risk 97
Item 12 -- Description of Securities Other than Equity Securities 102
PART II
Item 13 -- Defaults, Dividend Arrearages and Delinquencies 102
Item 14 -- Material Modifications to the Rights of Security Holders and Use of Proceeds 104
Item 15 -- Controls and Procedures 104
Item 16A -- Audit Committee Financial Expert 106
Item 16B -- Code of Ethics 106
Item 16C -- Principal Accountant Fees and Services 106
Item 16D -- Exemptions from the Listing Standards for Audit Committees 107
Item 16E -- Purchases of Equity Securities by the Issuer and Affiliated Purchasers 107
PART III
Item 17 -- Financial Statements 108
Item 18 -- Financial Statements 108
Item 19 -- Exhibits 108
i
EXPLANATORY NOTES
All references in this annual report to "Industrial Development Bank" or
"the Bank" as well as use of the terms "we," "us," "our" or similar terms, are
references to Industrial Development Bank of Israel Limited, a company
incorporated under the laws of the State of Israel on October 7, 1957.
FORWARD-LOOKING STATEMENTS
This annual report, including the exhibits incorporated by reference
herein, contains both historical and forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are not historical facts, but only predictions, and
generally can be identified by the use of statements that include phrases such
as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other words
or phrases of similar import. Similarly, statements that describe our
objectives, plans or goals are also forward-looking statements. These
forward-looking statements are based on our current expectations and are subject
to risks and uncertainties that could cause actual results to differ materially
from those currently anticipated. The forward-looking statements included in
this annual report are made only as of the date hereof and we undertake no
obligation to publicly update these forward-looking statements to reflect new
information, future events or otherwise.
Our actual results, performance and achievements could differ materially
from any future results, performance or achievements expressly predicted or
implied by these forward looking statements. The important factors which may
cause actual results to differ from the forward-looking statements contained
herein include, but are not limited to, the following: general economic and
business conditions; the continued availability of our special line of credit
from the Bank of Israel; the impact of the run-off plan on our operations; our
ability to collect on existing loans; operating costs for our remaining business
activities; and the ability to retain employees during the run-off period.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by us or any other
person that our objectives and expectations will be achieved.
Potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements, including the factors
described below in "Item 3. Key Information-Risk Factors", and are cautioned not
to place undue reliance on these forward-looking statements. In light of these
risks, uncertainties and assumptions, the forward-looking events might or might
not occur. We cannot assure you that projected results or events will be
achieved.
ii
INDUSTRY AND MARKET DATA
Industry statistics and market data used in this annual report were
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information contained in them has been obtained from sources believed to be
reliable, but that the accuracy and completeness of this information is not
guaranteed. Similarly, internal surveys and industry and market data, while
believed to be reliable, have not been independently verified, and we make no
representation as to the accuracy of this information.
PRESENTATION OF FINANCIAL INFORMATION
We state our financial statements in New Israeli Shekels. In this annual
report, references to New Israeli Shekels, NIS or shekels are to the currency of
Israel, and references to U.S. dollars, $ or US$ are to the currency of the
United States. Our financial statements have been prepared in accordance with
the accounting principles generally accepted in Israel, , and in accordance with
the directives of the Supervisor of Banks in Israel ("Israeli GAAP"), and are
adjusted to the CPI (Consumer's Price Index). Unless otherwise indicated, the
financial information presented is in accordance with Israeli GAAP. For a
discussion of the principal differences between Israeli GAAP and the accounting
principles generally accepted in the United States, or U.S. GAAP, see "Item 17.
Financial Statements".
Unless otherwise indicated, information provided in this annual report,
including all operating data presented, is as of December 31, 2003.
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods indicated, the average,
high, low and end of period exchange rates between the shekel and the U.S.
dollar, expressed as shekels per U.S. dollar and based upon the daily
representative rate of exchange as published by the Bank of Israel.
AVERAGE(1) HIGH LOW PERIOD END
YEAR ENDED
December 31, 2003 4.512 4.924 4.283 4.379
December 31, 2002 4.736 4.994 4.437 4.737
December 31, 2001 4.220 4.416 4.067 4.416
December 31, 2000 4.077 4.198 3.967 4.041
December 31, 1999 4.140 4.288 4.013 4.153
iii
AVERAGE(2) HIGH LOW PERIOD END
MONTH ENDED
December 31, 2004 4.341 4.374 4.308 4.308
November 30, 2004 4.405 4.453 4.363 4.363
October 31, 2004 4.460 4.476 4.420 4.468
September 30, 2004 4.498 4.517 4.478 4.482
August 31, 2004 4.534 4.516 4.549 4.526
July 31, 2004 4.491 4.528 4.710 4.516
June 30, 2004 4.517 4.528 4.465 4.500
May 31, 2004 4.596 4.634 4.555 4.555
April 30, 2004 4.552 4.599 4.515 4.588
March 31, 2004 4.503 4.535 4.483 4.528
February 29, 2004 4.464 4.493 4.437 4.485
January 31, 2004 4.424 4.483 4.371 4.483
December 31, 2003 4.393 4.441 4.352 4.379
- ----------
(1) The average of the exchange rates on the last day of each month during the
applicable year.
(2) The average of the exchange rates for all days during the applicable month.
As of January 14, 2005, the exchange rate was NIS 4.367 per U.S. dollar, as
published by the Bank of Israel.
iv
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
Directives of the Supervisor of Banks in Israel, effective as of December
31, 1984, require banking corporations to present their primary financial
statements adjusted for the effect of changes in the general purchasing power of
the Israeli currency (which changes in the general purchasing power result from
changes in the consumer price index during the year). Our financial statements
included in this annual report, as well as the selected financial data presented
below, have been prepared in accordance with Israeli GAAP, including the
directives of the Supervisor of Banks in Israel.
Our selected financial data presented below is derived from our audited
financial statements included in Item 17 of this annual report. Our selected
financial data presented below should be read in conjunction with the
information contained in "Item 5. Operating and Financial Review and Prospects"
and the financial statements and notes thereto contained below in "Item 17.
Financial Statements" of this annual report.
Our financial statements have been prepared in accordance with Israeli
GAAP, including the directives of the Supervisor of Banks in Israel. For a
discussion of the principal differences between Israeli GAAP and U.S. GAAP, see
Item 17 of this annual report.
1
SELECTED FINANCIAL DATA
(ADJUSTED TO NIS AS OF DECEMBER 31, 2003)
2003(1) 2002 2001 2000 1999
----- ----- ----- ----- -----
(IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE
INDICATED)
OPERATING DATA:
ISRAELI GAAP
Profit from financing operations before
allowance for doubtful debts 66.9 79.5 164.0 118.4 107.1
Allowance for doubtful debts 130.0 401.8 124.5 31.2 28.6
----- ----- ----- ----- -----
Profit (Loss) from financing operations after
allowance for doubtful debts (63.1) (322.3) 39.5 87.2 78.5
----- ----- ----- ----- -----
OPERATING AND OTHER INCOME
Operating commission 6.4 12.3* 15.3* 13.5* 11.7*
Gain (Loss) from investments in shares 10.2 (4.2) 2.2 13.3 14.0
Other income 5.4 4.1* 4.3* 6.4* 4.5*
----- ----- ----- ----- -----
Total operating and other income 22.0 12.2 21.8 33.2 30.2
OPERATING AND OTHER EXPENSES
Salaries and related
expenses 33.7 49.7 57.6 52.7 50.8
Employee terminations expenses (0.8) 35.7 - - -
Maintenance and depreciation of
premises and equipment 11.9 14.7 16.4 15.2 13.9
Other expenses 20.5 19.7 19.0 17.1 16.4
----- ----- ----- ----- -----
Total operating and other expenses 65.3 119.8 93.0 85.0 81.1
----- ----- ----- ----- -----
Operating profit (loss) before taxes
on income (106.4) (429.9) (31.7) 35.4 27.6
Taxes (Tax saving) on income (2.7) (0.4) 0.3 6.3 5.5
----- ----- ----- ----- -----
Operating profit (loss) after taxes
on income (103.7) (429.5) (32.0) 29.1 22.1
----- ----- ----- ----- -----
OTHER ITEMS
Special income from the Israel Treasury,net . - 6.4 14.9 14.3 14.7
Share in earnings (loss) of affiliate, net (0.4) (0.5) (3.3) 4.1 6.3
Capital gain (loss), net (0.3) 0.1 - - -
Profit from sale of affiliate, net - - -- 0.7 -
----- ----- ----- ----- -----
Total other items 0.7 6.0 11.6 19.1 21.0
----- ----- ----- ----- -----
Net profit (loss) for the year (104.4) (423.5) (20.4) 48.3 43.1
===== ===== ===== ===== =====
* Reclassified
2
2003(1) 2002 2001 2000 1999
----- ----- ----- ----- -----
(IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE
INDICATED)
Per an amount equal to $1 of the
par value of Class "C" Preference Shares,
Class "CC" Preference Shares and Class "CC1"
Preference Shares NIS NIS NIS NIS NIS
----- ----- ----- ----- -----
Preference shares (1.79) (7.23) (0.27) 0.90 0.81
"A" Ordinary shares (1.79) (7.37) (0.62) 0.59 0.48
Ordinary Preferred shares (1.79) (7.37) (0.54) 0.65 0.54
CASH DIVIDEND PER SHARE
" C", "CC" and "CC1" Preference shares - 0.14 0.30 0.33 0.32
Participating Preferred Ordinary shares - - 0.06 0.06 0.06
U.S. GAAP(2)
Net profit (loss) for the year (157.2) (334.0) 71.3
EARNINGS (LOSS) PER SHARE NIS NIS NIS
----- ----- -----
"A" Ordinary shares (1,522.54) (3,575.15) (62.26)
BALANCE SHEET DATA:
ISRAELI GAAP
Deposits received 9,742 11,474 13,092 12,291 11,683
Registered Subordinated Capital Notes 28 35 35 49 55
Total Liabilities 9,847 11,665 13,404 12,534 11,863
Non-participating Preference shares 314 334 331 307 316
Shareholder's equity 196 276 707 764 721
Loans extended 9,190 10,908 12,223 11,427 10,604
Deposits with the Israel Treasury 855 871 890 907 893
Credit to foreign government 21 82 111 114 111
Amounts receivable from the Israel Treasury in
respect of linkage increments and exchange
differences on the Bank's liabilities 28 35 35 49 53
Total Assets 10,356 12,274 14,441 13,605 12,899
U.S. GAAP(2)
Total Assets 10,160 12,129 14,257
Total Liabilities 9,855 11,672 13,448
Shareholder's equity 305 457 809
3
(1) Our board of directors adopted a run-off plan, which plan was approved,
with certain modifications, by the Government of Israel in July 2003. The
run-off plan (as modified) calls for the realization of our assets by July
2006. The run-off plan severely restricts our business activities and, upon
the expiration of the run-off plan, we may cease operations. See "Item 4 -
Information on the Company" below for a detailed description of the run-off
plan.
(2) Reconciliation to U.S. GAAP for the years 1999 and 2000 is not included
because the preparation of such reconciliation could not be done without
unreasonable effort or expense.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
This section describes some of the risks that could affect our business.
The factors below should be considered in connection with any forward-looking
statements in this annual report.
The risks below are not the only ones that we face; some risks are not yet
known to us and some that we do not currently believe to be material could later
turn out to be material. All of these risks could materially affect our
business, our revenues, operating income, net income, net assets, liquidity and
capital resources and the value of our securities.
IN 2003, WE ADOPTED A RUN-OFF PLAN PURSUANT TO WHICH OUR OPERATIONS WILL BE
WOUND DOWN DURING THE RUN-OFF PERIOD, WHICH EXPIRES IN 2006.
After experiencing a severe liquidity crisis and an unsuccessful attempt to
sell our assets and liabilities in 2002, our board of directors adopted a
run-off plan on February 27, 2003, which plan was approved, with certain
modifications, by the Ministerial Committee for Social and Economic Affairs of
the Government of Israel on July 29, 2003. Pursuant to the terms of the run-off
plan and the governmental approval thereof, our assets are to be realized in a
controlled manner over a defined period of time not to exceed thirty-six (36)
months from July 29, 2003. See "Item 4. Information on the Company - Business
Overview-Adoption of the Run Off Plan and Amendment of the Special Line of
Credit" below for a more detailed description of the run-off plan.
The terms of the run-off plan under which we are currently operating
severely curtail our banking operations. We are precluded from extending new
loans to customers or undertaking new banking activities during the run-off
period; our operations during the run-off period will be focused on the
collection of existing loans.
4
During the run-off period, we may use the special line of credit from the
Bank of Israel solely for the fulfillment of our banking undertakings and
related obligations that serve the goals of the repayment of the line of credit
and the realization of our credit portfolio. The special line of credit from the
Bank of Israel, which contains substantial conditions affecting our operations,
is discussed further below and in "Item 4. Information on the Company - Business
Overview." Our ultimate goals during the run-off period are to realize our
assets and repay the special line of credit from the Bank of Israel.
In the audit report relating to our financial statements for our fiscal
year ended December 31, 2003 included in this Annual Report on Form 20-F, our
independent public accountants, KPMG, expressed their opinion that the severe
liquidity problems that we experienced raise substantial doubts as to our
ability to continue as a going concern.
UPON THE EXPIRATION OF THE RUN-OFF PERIOD, IT IS UNCLEAR IF WE WILL CONTINUE TO
OPERATE AND, IF WE DO CONTINUE TO OPERATE, IN WHAT FORM WE WILL CONDUCT OUR
OPERATIONS; WE MAY, HOWEVER, CEASE OPERATIONS AT THE END OF THE RUN-OFF PERIOD
AND, IF WE CEASE OPERATIONS, IT IS UNCLEAR WHAT OUR LEGAL STATUS WILL BE.
According to the run-off plan approved by the Government, the run-off
period expires in July 2006. At the present time, it is unclear what our status
will be upon expiration of the run-off period. There are many factors to be
considered in connection with our ultimate status following the run-off period,
including, without limitation, the amount of remaining loans outstanding as of
the expiration of the run-off period, and the input of the Government of Israel.
We expect that the Government of Israel will ultimately decide what our
status will be upon expiration of the run-off period. We do not know when the
Government of Israel will make a definitive decision with respect to our status
after the expiration of the run-off period. We note, however, that our status at
the expiration of the run-off period is uncertain and that we may cease
operations at that time.
IN ACCORDANCE WITH THE RUN-OFF PLAN, WE HAVE SUBSTANTIALLY TERMINATED THOSE
BANKING OPERATIONS THAT DO NOT RELATE TO THE COLLECTION OF EXISTING LOANS.
The run-off plan and the terms of the special line of credit from the Bank
of Israel severely restrict our banking operations. We are precluded from
extending new loans to customers or otherwise generating new business. We have
substantially reduced, and we will continue to reduce, the volume of our
remaining operations. Until the expiration of the run-off period in 2006, we do
not anticipate having any new operating activities.
Our inability to extend new loans to customers or otherwise generate new
business has had, and will continue to have, an adverse effect on our ability to
generate profits during the run-off period.
5
WE HAVE SUSPENDED THE PAYMENT OF DIVIDENDS ON OUR CUMULATIVE PARTICIPATING
PREFERENCE C SHARES, OUR CUMULATIVE PARTICIPATING PREFERENCE CC SHARES, OUR
CUMULATIVE PARTICIPATING PREFERENCE CC1 SHARES, OUR CUMULATIVE REDEEMABLE
PREFERENCE D SHARES AND OUR CUMULATIVE REDEEMABLE PREFERENCE DD SHARES, AS WELL
AS ON OUR OTHER CLASSES OF SHARES. THE SUSPENSION OF THE PAYMENT OF DIVIDENDS ON
THOSE SHARES MAY CONTINUE FOR AN INDEFINITE PERIOD OF TIME AND, IN THE FUTURE,
WE MAY NOT BE ABLE TO PAY ANY DIVIDENDS ON THOSE SHARES.
According to the Companies Law - 1999 (Israel), a company may distribute
dividends only from its profits (adjusted to changes in the CPI). Under certain
circumstances, however, a company may seek court approval to pay dividends even
in the absence of profits. Under the Directives of Proper Banking Procedures,
the Supervisor of Banks has prohibited banking corporations from distributing
dividends if, among other things, such banking corporations have losses in one
or more of the last three calendar years or if the aggregate results of three
quarters ending in the interim period for which the last interim financial
statements were issued reflect a loss.
We ended the years 2001, 2002 and 2003 with losses and, beginning in the
first quarter of 2002, we have not had profits from which we could distribute
dividends. The last quarterly dividend that we paid in respect of our C shares,
our CC shares, our CC1 shares, our D shares and our DD shares was the dividend
for the second quarter of 2002, which payment of dividends was made with court
approval and approval of the Supervisor of Banks.
In connection with the issuance of our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, we deposited the proceeds of the
issuances with the Ministry of Finance of the State of Israel pursuant to
deposit agreements. In our financial statements, we refer to those deposits with
the Ministry of Finance as the perpetual deposits. According to the deposit
agreements, our perpetual deposits with the Ministry of Finance earn interest at
a rate of 7.5% per annum (plus differentials of linkage to the U.S. dollar),
which interest must be paid by the Ministry of Finance to us on the payment
dates for the dividends to be paid by us on our C shares, our CC shares, our CC1
shares, our D shares and our DD shares.
When we ceased making dividend payments on our C shares, CC shares, CC1
shares, D shares and DD shares, the Ministry of Finance also ceased making the
interest payments on the perpetual deposits to us. The last interest payment
that we have received from the Ministry of Finance was for the second quarter of
2002. The deposit agreements do not expressly stipulate how the interest on our
perpetual deposits with the Ministry of Finance should be handled during periods
in which we are prevented from distributing dividends on our C shares, our CC
shares, our CC1 shares, our D shares and our DD shares, and whether the interest
will accrue and be paid if we ultimately pay accrued dividends on such shares in
arrears or upon liquidation.
If the interest due under the deposit agreements is accruing and will
ultimately be paid to us by the Ministry of Finance if we pay accrued and unpaid
dividends or if we are liquidated, then such interest will be paid to us at that
time. However, there is no assurance that the interest is accruing or that we
will have sufficient net profits to permit the payment of dividends or that if
we do have sufficient net profits, the Supervisor of Banks will permit us to
make dividend payments.
6
The aggregate amount of the accrued and unpaid dividends in respect of our
C shares, our CC shares, our CC1 shares, our D shares and our DD shares as of
December 31, 2003 is NIS 58.7 million, which amount is not recorded in our
financial statements. Of this amount, an amount of NIS 38.1 million is in
respect of the fiscal year 2003. The aggregate amount of interest that may or
may not be accruing to us pursuant to the deposit agreements is also NIS 58.7
million, which amount is also not recorded in our financial statements. The
non-recording of the above amounts in our financial statements is due to the
present uncertainty concerning their eventual payment.
Under the circumstances, it is unclear when or if the payment of dividends
will be resumed. We do not know when a definitive decision with respect to the
accrual of interest under the deposit agreements will be made.
TO CONTINUE OUR LIMITED OPERATIONS DURING THE RUN-OFF PERIOD, WE ARE DEPENDENT
ON A SPECIAL LINE OF CREDIT EXTENDED BY THE BANK OF ISRAEL.
In August 2002, as a result of the liquidity crisis we experienced at that
time, we started drawing on our account with the Bank of Israel. The Governor of
the Bank of Israel had notified us on September 9, 2002 of his decision to
extend to us a special line of credit, in order to permit us to continue our
ongoing operations, and the line was actually granted on Nonember 14, 2002. In
connection with the governmental approval of the run-off plan in July 2003, the
special line of credit extended by the Bank of Israel was amended and restated
to provide funding for us throughout the run-off period, subject to certain
covenants and commitments. In accordance with the governmental approval of the
run-off plan, the Government of Israel has undertaken to assume responsibility
for the balance of the special line of credit outstanding as of the date that is
24 months after the date of the governmental approval (July 29, 2003) and to
repay that balance to the Bank of Israel over a period of twelve months
thereafter. See "Item 4. Business Overview" below for a discussion of the terms
of the special line of credit from the Bank of Israel.
In accordance with the run-off plan under which we are currently operating,
we are precluded from extending new loans to customers during the run-off
period. Our activities during the run-off period will focus on the collection of
existing loans. In addition, the terms of the special line of credit impose
significant restrictive operating covenants on us, including, among other
things, restrictions on our ability to receive deposits. Our failure to comply
with the covenants contained in our special line of credit could result in an
event of default or a termination of the special line of credit, either of which
could materially and adversely affect our operating results and our financial
condition.
If the special line of credit from the Bank of Israel were to be
terminated, then, in the absence of any alternative liquidity source, we would
not be able to continue any operations during the run-off period.
7
WE ARE SUBJECT TO A NUMBER OF BANKING REGULATIONS IN ISRAEL; CHANGES IN THE
REGULATORY FRAMEWORK IN ISRAEL COULD ADVERSELY AFFECT OUR BUSINESS.
A number of banking regulations designed to maintain the safety and
soundness of banks and limit their exposure to risk apply in Israel. Changes in
regulations, which are beyond our control, may have a material effect on our
remaining business and operations during the run-off period. No assurance can be
given generally that laws or regulations will be adopted, enforced or
interpreted in a manner that will not have an adverse effect on our remaining
business.
IN CONNECTION WITH THE RUN-OFF PLAN, OUR BANKING LICENSE MAY BE LIMITED,
CURTAILED OR REVOKED BY THE BANK OF ISRAEL.
In connection with the adoption and approval of the run-off plan, the Bank
of Israel may limit, curtail or revoke our banking license in order to more
accurately reflect our limited activities in accordance with the run-off plan.
Any limitation on, or revocation of, our banking license could have a material
adverse effect on our remaining business, financial condition or results of
operations.
WE ARE SUBJECT TO CREDIT RISK.
We are subject to credit risk, I.E., the risk that our borrowers and other
counterparties may become unable to meet their payment obligations to us. Risks
arising from changes in credit quality and the recoverability of loans and
amounts due from counterparties are inherent in a wide range of our businesses.
Adverse changes in the credit quality of our borrowers and counterparties or a
general deterioration in Israeli or global economic conditions, or arising from
systemic risks in the financial systems, could affect the recoverability and
value of our assets and require an increase in the provision for bad and
doubtful debts and other provisions.
Although we regularly review our exposure to specific borrowers and other
counterparties whom we believe present special concerns, defaults may arise from
events and circumstances that are difficult or impossible to predict or detect.
In addition, the value of any collateral we hold may deteriorate, for example,
as a result of sudden market declines. Accordingly, if a major borrower or other
counterparty were to default on its obligations, our results of operations and
financial condition could suffer.
As a result of the run-off plan as approved by the Government and the
special line of credit from the Bank of Israel, our main operations during the
run-off period relate to the collection of existing loans. Credit risk is,
therefore, a substantial risk during the run-off period because our ability to
collect on existing loans will affect our financial results.
8
BECAUSE WE HAVE ADOPTED A RUN-OFF PLAN, IT IS POSSIBLE THAT OUR CREDIT RISK MAY
BE INCREASED; WE ARE SPENDING MORE ON COLLECTION OF DEBTS AND LITIGATION
RELATING TO SUCH COLLECTION DURING THE RUN-OFF PERIOD.
We believe that some borrowers and other counterparties may try to avoid
honoring their obligations to us because of our present financial situation.
Because we are in a run-off period, borrowers and counterparties do not expect
to have a long-term relationship with us and they may be more likely to seek
concessions from us with respect to their debts. In addition, borrowers and
counterparties may believe that we will not aggressively collect on our existing
loans because we are operating pursuant to a run-off plan. As a result,
borrowers and counterparties may be less likely to pay their debts to us and
there is an increased credit risk for us.
We intend to aggressively and diligently collect our existing loans and, in
connection therewith, we may commence litigation with respect to those
collections if necessary. As a result, we may have more expenses in connection
with collecting existing loans during the run-off period.
WE MAY SUFFER ADDITIONAL LOSSES IN THE FUTURE DUE TO PROBLEM LOANS.
We have a substantial volume of problem loans and loans that may become
problem loans. Some of our borrowers may face increasingly challenging
circumstances. Our problem loans and credit-related expenses could increase if:
(a) economic conditions in Israel deteriorate, (b) real estate prices or stock
prices in Israel decline, (c) the rate of corporate bankruptcies in Israel
rises, (d) our large borrowers become insolvent or must be restructured, (e)
additional economic problems arise elsewhere in the world or (f) the global
economic environment deteriorates generally.
An increase in problem loans and credit-related expenses would adversely
affect our remaining operations, would weaken our financial condition and would
erode our capital base.
OUR ALLOWANCE FOR DOUBTFUL DEBTS MAY BE INSUFFICIENT TO COVER FUTURE LOAN
LOSSES.
Our allowance for doubtful debts in our loan portfolio is based, among
other things, on assumptions and estimates about our customers, the value of
collateral we hold and the economy as a whole and provides a reserve against
potential losses inherent in loans. Estimating potential losses, however, is
inherently uncertain and depends on many factors, including general economic
conditions, changes in our appraisal of the financial standing of our borrowers
and other counterparties, structural changes in industries that alter the
competitive positions of the companies operating in these industries as well as
other external factors, such as legal and regulatory requirements.
Our actual loan losses could prove to be materially different from our
estimates and could materially exceed our allowance. If our actual loan losses
are higher than we currently expect, our current allowance for doubtful debts
will be insufficient. If general economic conditions deteriorate, causing us to
change some of our assumptions and estimates, if the value of collateral we hold
declines or if we are adversely affected by other factors to an extent that is
worse than anticipated, we may have to provide for additional allowance for
doubtful debts.
OUR RECOVERIES FROM TROUBLED BORROWERS MAY BE LOWER THAN EXPECTED.
We may forbear from exercising some or all of our rights as a creditor
against troubled borrowers, and we may forgive loans to them in conjunction with
their debt restructuring. We may take these steps even when our legal rights
might permit us to take stronger action against the borrower and even when
others might take stronger action against the borrower to maximize recovery or
to reduce exposure in the short term.
9
WE MAY EXPERIENCE LOSSES BECAUSE OUR REMEDIES FOR CREDIT DEFAULTS BY OUR
BORROWERS ARE LIMITED.
We may not be able to realize the value of collateral we hold or enforce
our rights against defaulting customers because of the difficulty of foreclosing
on collateral and/or the depressed value of collateral.
SINCE OUR LOAN PORTFOLIO IS CONCENTRATED IN ISRAELI, ADVERSE CHANGES AFFECTING
THE ISRAELI ECONOMY COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Our loan portfolio is concentrated in Israel. As of December 31, 2003,
nearly 100% of our loans were made to Israeli resident borrowers. Therefore,
adverse changes affecting the Israeli economy would likely have a significant
adverse impact on our loan portfolio and, as a result, on our financial
condition, cash flows and results of operations.
A SUBSTANTIAL PERCENTAGE OF OUR CUSTOMER BASE IS PARTICULARLY SENSITIVE TO
ADVERSE DEVELOPMENTS IN THE ECONOMY.
Medium- and small-size companies can be more adversely affected by adverse
developments in the economy than large companies. As a result, our substantial
lending to these segments of our existing customer base causes us to assume a
relatively higher degree of risk than if we focused more heavily on the other
groups. In addition, because our loan portfolio does not include consumer loans,
we are more vulnerable to adverse effects suffered by the business sector.
THE ISRAELI ECONOMY CAN BE DIRECTLY AND NEGATIVELY AFFECTED BY ADVERSE
DEVELOPMENTS IN OTHER COUNTRIES.
Financial and securities markets in Israel are, to varying degrees,
influenced by geopolitical, economic and market conditions in other countries.
Negative developments in the geopolitical environment, the economy or securities
markets in other countries may have a negative impact on the Israeli economy.
These developments may adversely affect our remaining business, financial
condition and operating results.
EVEN WITH OUR LIMITED BANKING ACTIVITIES DURING THE RUN-OFF PERIOD, WE ARE
SUBJECT TO CERTAIN RISKS TYPICAL OF BANKING ACTIVITIES, SUCH AS MARKET RISK,
INTEREST RATE RISK AND CURRENCY RISK.
We are subject to the risks typical of banking activities, such as
fluctuations in the prevailing levels of interest rates and exchange rates and
capital market volatility. For more information on these risks, see "Item 11.
Quantitative and Qualitative Disclosures About Market Risk" below.
10
DIFFERENT DISCLOSURES AND ACCOUNTING PRINCIPLES BETWEEN ISRAEL AND THE U.S. MAY
PROVIDE YOU WITH DIFFERENT OR LESS INFORMATION ABOUT US THAN YOU EXPECT.
There may be less publicly available information about us than is regularly
published about companies in the United States. While we are subject to the
periodic reporting requirements of the U.S. Securities Exchange Act of 1934, as
amended, the disclosure required from foreign issuers under the Securities
Exchange Act is more limited than the disclosure required from U.S. issuers.
Additionally, we present our financial statements under Israeli GAAP which
differs from U.S. GAAP.For the discussion of the differences between Israeli
GAAP and U.S. GAAP, see "Item 17. Financial Statements".
OUR MANAGEMENT HAS IDENTIFIED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROLS AS OF
THE END OF THE PERIOD COVERED BY THIS ANNUAL REPORT, REGARDING THE
RECONCILIATION OF OUR FINANCIAL STATEMENTS TO U.S. GAAP, IN ACCORDANCE WITH OUR
S.E.C. REPORTING OBLIGATIONS.
To address the material weakness, our accounting personnel have outlined
the issues relevant to the reconciliation of our financial statements to U.S.
GAAP and the methods of preparing such a reconciliation. In addition, we have
retained U.S. counsel to advise as to the requirements of Form 20-F and related
SEC rules and regulations. As a result of the implementation of the run-off
plan, and subject to future changes in the requirements of U.S. GAAP, we do not
expect any significant new issues to arise in connection with the preparation of
the U.S. GAAP reconciliation because our business operations have been, and will
continue to be, dramatically reduced. In preparing our financial statements in
the future, our accounting personnel will be guided by the experience they
acquired in the preparation of this annual report on Form 20-F. Our accounting
personnel have indicated that they will regularly consult with, and seek the
assistance of, outside accounting advisors in connection with the preparation of
our financial statements and the required reconciliation of such financial
statements to U.S. GAAP. Moreover, they will periodically seek from such outside
accounting advisors relevant updates regarding SEC and PCOAB rules and
regulations relating to reconciliation to U.S. GAAP.
However, we cannot assure you that the measures we have taken to date or any
future measures will remediate the material weakness identified in Item 15 of
our annual report or that we will implement and maintain adequate controls in
the future. Our independent auditors have not evaluated the measures we have
taken or plan to take to address the conditions described above. In addition, we
cannot assure you that additional reportable conditions in our internal controls
will not be discovered in the future. Any failure to remediate the material
weakness identified in Item 15 of this Form 20-F or implement required new or
improved controls, or difficulties encountered in their implementation, could
cause us to fail to meet our reporting obligations relating to reconciliation to
U.S. GAAP.
11
VOLATILITY IN INTEREST RATES MAY NEGATIVELY AFFECT OUR NET INTEREST INCOME AND
INCREASE OUR NON-PERFORMING LOAN PORTFOLIO.
Changes in market interest rates could affect the interest rates charged on
the interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. Our special line of credit from the Bank of
Israel, which is our main source of liquidity, bears interest at the Bank of
Israel rate. Any increases in the Bank of Israel rate would result in an
increase in our interest expenses relative to interest income, which would
result in a reduction in our net interest income. Since a substantial part of
our loan portfolio reprices in less than one year, rising interest rates may
also bring about an increase in the volume of problem loans. Interest rates are
highly sensitive to many factors beyond our control, including deregulation of
the financial sector, monetary policies, domestic and international economic and
political conditions and other factors.
FOREIGN EXCHANGE RATE FLUCTUATIONS MAY NEGATIVELY AFFECT OUR EARNINGS AND THE
VALUE OF OUR ASSETS AND SHARES.
Beginning in the second half of 2002, as a result of the increased
withdrawal of deposits by the public, we experienced significant changes in the
surplus/deficit of our assets maintained in various bases (i.e. non-linked
shekels, shekels linked to CPI and foreign currency). The Bank of Israel granted
us a special line of credit in non-linked New Israeli Shekels and, as a result,
our ability to manage our assets and liabilities was severely reduced. If a
significant devaluation of the Israeli currency were to occur at a time when we
had a substantial surplus in our liabilities in foreign currencies (including
those linked to foreign currencies), we may experience a substantial adverse
effect on our financial results. See "Item 11. Quantitative and Qualitative
Disclosure of Market Risk" for a detailed discussion of market risks.
OUR REMAINING OPERATIONAL RISKS ARE INHERENT IN OUR BUSINESS.
Our remaining business activities are dependent on the ability to process
transactions efficiently and accurately. Operational risk and losses can result
from fraud, errors by employees, failure to document transactions properly or to
obtain proper internal authorization, failure to comply with regulatory
requirements and rules, equipment failures, natural disasters or the failure of
external systems, of our suppliers or counterparties. Although we have
implemented risk controls and we devote substantial resources to developing
efficient procedures, we cannot be absolutely certain that such procedures will
be effective in controlling each of the operational risks we face.
THERE IS CURRENTLY NO ESTABLISHED TRADING MARKET IN THE UNITED STATES FOR ANY OF
OUR SECURITIES.
There can be no assurance as to (a) the liquidity of any market that may
develop for our securities in the United States or elsewhere, (b) the ability of
the holders of the securities to sell them in the United States or elsewhere or
(c) the prices at which any sales of our securities may be made. Some of our
securities are listed on the Tel Aviv Stock Exchange.
WE HAVE DRAMATICALLY REDUCED THE NUMBER OF OUR EMPLOYEES; WE RELY ON OUR
REMAINING EMPLOYEES TO ASSIST US THROUGHOUT THE RUN-OFF PERIOD.
In accordance with the terms of the run-off plan, we have dramatically
reduced the number of our employees. Our ability to operate under the run-off
plan during the run-off period depends to a large extent upon the continued
services of our remaining senior management and employees. The loss of the
services of our remaining personnel could have a material adverse effect on our
business, financial condition or results of operations and our ability to
function throughout the run-off period.
12
OUR INDEBTEDNESS FOR OUR CAPITAL NOTES IS SUBORDINATED AND UNSECURED.
In 1974, we issued U.S.$ 50 million subordinated capital notes bearing
interest at an annual rate of 7.5%. Under their terms, subject to the provisions
of the following paragraph, the capital notes are redeemable at the election of
the holder beginning on December 31, 1998 and, thereafter, every 18 months, and
at our election at any time after January 1, 1981.
The capital notes are perpetual. The outstanding principal amount of the
capital notes is payable at certain enumerated times at the option of the
holder. The holder of capital notes, in order to receive payment of the
outstanding principal amount of the capital notes, must deliver the capital
notes for cancellation to the agent designated by us together with a written
demand for payment. The first date on which the outstanding principal amount
could be paid to holders who submitted the notes and the written demand was
December 31, 1998. After December 31, 1998, the holders of capital notes are
able to submit notes and written demands to obtain payment of the outstanding
principal amount every 18 months until all of the capital notes are paid off.
The holders must deliver their notes and written demands at least 30 days prior
to the date of payment.
The principal amount of our outstanding capital notes as of December 31,
2003 was $6,466,800.
We deposited the proceeds of the issuance of the capital notes with the
Ministry of Finance of the State of Israel pursuant to a deposit agreement.
According to the deposit agreement, the deposit earns interest at the annual
rate of 7.5%, payable to us on the payment dates for the interest on the capital
notes, and the Government undertook to repay the deposit to us upon the
redemption of the capital notes (together with any premium, if any, paid on
them) or upon the winding up of our bank, whichever is earlier. According to a
letter addressed to us from the General Comptroller of the Treasury, the payment
of interest on the deposit and the return of the principal amount of the deposit
WILL BE EFFECTED TOGETHER WITH LINKAGE INCREMENTS TO THE U.S. DOLLAR.
According to the terms of the capital notes, our indebtedness under the
notes is subordinated in right of payment to all our secured indebtedness and
obligations and to all our future indebtedness and obligations, secured or
unsecured, which by their terms shall be senior in right of payment to the
notes, and rank equally to all our other unsecured indebtedness and obligations.
We have pledged (by a floating charge) a substantial portion of our assets in
favor of the Bank of Israel, as collateral for the repayment of the special line
of credit. We have also pledged in favor of some other Israeli banks certain
deposits we have deposited with them, in order to secure our obligations to
them. We are not aware of any unsecured indebtedness or obligations which by
their terms are senior in right of payment to the capital notes. However, under
Israeli law, certain types of indebtednesses of a company are deemed to have
priority, in the event of winding up or receivership proceedings , over regular
unsecured debts, such as indebtedness to employees, indebtedness to the income
tax authorities, and rental obligations. The amount of the secured debt ranking
prior to the right of payment to the notes, as of December 31, 2003, was NIS
2,062 million.
13
Even though the Government has undertaken to pay us interest back-to-back
with the payment of interest on the capital notes and to pay us the outstanding
principal amount of the capital notes upon their redemption or upon our wind up,
the Government's obligation inures to our favor and not to the favor of the
holders of the capital notes and, therefore, in the event of our insolvency, the
Government's obligation does not guarantee that the payment due to the holders
of the capital notes will be made.
THE TRADING ON THE TEL AVIV STOCK EXCHANGE IN OUR ORDINARY PREFERRED SHARES AND
CERTAIN CLASSES OF OUR PREFERRED SHARES MAY BE RESTRICTED AND THESE SHARES MAY
EVENTUALLY BE DELISTED.
Pursuant to the rules and procedures adopted by the Tel Aviv Stock Exchange
(TASE), securities of a company which are traded on the exchange must abide by
certain preservation requirements concerning the minimum value of the public's
holdings in such class of securities, the minimum rate of the public's holdings
of such class of securities and the minimum capital of the company. Securities
are reviewed every six months to see if they comply with the preservation
requirements. If a class of securities fails to comply with the preservation
requirements on two consecutive reviews, it is moved to a special list and,
thereafter, is traded on a limited basis. If within 12 months of being placed on
the special preservation list the securities do not fulfill the conditions to
enable its return to regular trading, then (subject to certain provisions which
allow an extension of the above 12 month time frame), the class of securities
will be de-listed from trading. Prior to the amendment of the above rules at the
beginning of 2004, a class of securities which did not comply with the
preservation requirements was not moved to the "preservation list"; rather,
trading in the shares was suspended.
In April 2003, we were informed by the TASE that our Preferred Ordinary
Shares did not abide by the preservation requirements concerning the minimum
value of the public's holdings and that if upon the next review (on September
30, 2003) they continued to not be in compliance with the preservation
requirements, the board of directors of the TASE would consider suspending the
shares from trading. In October 2003, the TASE informed us that since the value
of the public's holdings of the Preferred Ordinary Shares on September 30, 2003
was higher than the minimum required by the preservation requirements, the
Preferred Ordinary Shares would not be suspended from trading.
In addition to our preferred ordinary shares, our C, CC, and CC1 shares and
our capital notes are traded on the TASE. If our shares or our capital notes
traded on the TASE were to be moved to the "preservation list" or delisted,
their liquidity would be adversely affected.
14
YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES AGAINST
OUR OFFICERS AND DIRECTORS.
All of our directors and executive officers are non-residents of the United
States. A significant portion of our assets and the personal assets of our
directors and executive officers are located outside the United States.
Therefore, it may be difficult to effect service of process upon any of these
persons within the United States. In addition, a judgment obtained in the United
States against us, and most of our directors and executive officers, including
but not limited to judgments based on the civil liability provisions of the U.S.
federal securities laws, may not be collectible in the United States.
Generally, it may also be difficult to bring an original action in an
Israeli court to enforce liabilities based upon the U.S. federal securities laws
against us and most of our directors and executive officers. Subject to
particular time limitations, executory judgments of a United States court for
liquidated damages in civil matters may be enforced by an Israeli court,
provided that:
(1) the judgment was obtained after due process before a court of
competent jurisdiction, that recognizes and enforces similar judgments
of Israeli courts, and according to the rules of private international
law currently prevailing in Israel;
(2) adequate service of process was effected and the defendant had a
reasonable opportunity to be heard;
(3) the judgment and its enforcement are not contrary to the law, public
policy, security or sovereignty of the State of Israel;
(4) the judgment was not obtained by fraud and does not conflict with any
other valid judgment in the same matter between the same parties;
(5) the judgment is no longer appealable; and
(6) an action between the same parties in the same matter is not pending
in any Israeli court at the time the lawsuit is instituted in the
foreign court.
POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO CONTINUE
OUR OPERATIONS DURING THE RUN-OFF PERIOD. THIS COULD RESULT IN A MATERIAL
ADVERSE EFFECT ON OUR REMAINING OPERATIONS AND BUSINESS.
We are incorporated under the laws of the State of Israel, where we also
maintain our headquarters. Political, economic and security conditions in Israel
directly influence us. Since the establishment of the State of Israel in 1948,
Israel and its Arab neighbors have engaged in a number of armed conflicts. A
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors
may hinder Israel's international trade and lead to economic downturn. This, in
turn, could have a material adverse effect on our remaining operations and
business.
Since October 2000, there has been substantial deterioration in the
relationship between Israel and the Palestinian Authority that has resulted in
increased violence. The future effect of this deterioration and violence on the
Israeli economy and our operations is unclear. Ongoing violence between Israel
and the Palestinians as well as tension between Israel and the neighboring Syria
and Lebanon may have a material adverse effect on our remaining business,
financial conditions or results of operations.
15
Our offices are located in Israel. Our operations could be materially and
adversely affected by acts of terrorism or if major hostilities should occur in
the Middle East or trade between Israel and its present trading partners should
be curtailed, including as a result of acts of terrorism in the United States.
Any such events may not be covered by insurance.
In addition, in recent years Israel has been going through a period of
recession in economic activity, resulting in low growth rates and growing
unemployment. Our operations could be adversely affected if the economic
conditions in Israel continue to deteriorate. In addition, due to significant
economic measures proposed by the Israeli Government, there have been several
general strikes and work stoppages in 2003 and 2004, affecting all banks,
airports and ports. These strikes have had an adverse effect on the Israeli
economy and on business. Following the passage by the Israeli Parliament of laws
to implement certain economic measures, Israeli trade unions have threatened
further strikes or work-stoppages, and these may have a material adverse effect
on the Israeli economy and on us.
CURRENT TERRORIST ATTACKS IN ISRAEL AND GLOBALLY MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, terrorist attacks in Israel and other
acts of violence or war may affect the markets on which our securities trade,
the markets in which we operate, and our remaining operations during the run-off
period. We cannot assure you that there will not be further terrorist attacks
against the United States or Israel, or against American or Israeli businesses.
These attacks or subsequent armed conflicts resulting from or connected to them
may directly impact our remaining business during the run-off period or the
operations of our customers. Furthermore, the ongoing armed conflicts around the
world such as in Iraq could have a further impact on our remaining operations.
WE ARE INVOLVED IN LITIGATION ALLEGING VIOLATIONS OF THE SECURITIES LAWS OF THE
STATE OF ISRAEL THAT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
In October 2002, a class action was filed against us and certain of our
present and former officers and directors asserting claims under the Securities
Law - 1968 (Israel) and the related Securities Regulations (Immediate and
Periodic Reports) - 1970 (Israel). The class action alleges that we breached our
duty to report significant events in accordance with the Securities Law - 1968
(Israel) and the related Securities Regulations (Immediate and Periodic Reports)
- - 1970 (Israel). Under Israeli law, the class action has to be approved by the
court. The court has not yet approved this class action .
In March 2003, a derivative action was filed against us and certain of our
present and former officers and directors. The derivative action alleges that
the officers and directors breached their duty of care to us and were negligent
in carrying out their duties. Under Israeli law, the derivative action has to be
approved by the court. The court has not yet approved this derivative action.
16
These legal proceedings are in the preliminary stages which makes it more
difficult to predict their outcome. The litigation process is inherently
uncertain. If we are not successful in defending against the class action we
could incur substantial monetary judgments in excess of available insurance
coverage and suffer damage to our reputation. Whatever the outcome of these
proceedings will be, they could result in substantial costs and may occupy a
significant amount of time and attention of our senior management. Since the
derivative action is an action in the name and on behalf of the company, it is
the opinion of our legal advisors that our main exposure in these proceedings is
for expenses.
POTENTIAL CLAIMS RELATING TO OUR BANKING OPERATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We may be subject to claims relating to the our banking operations. Our
agreements with our business customers generally contain provisions designed to
limit our exposure to potential claims, but these provisions may be declared
void or modified by the court, if the court determines that they are prejudicial
in accordance with the Standard Contracts Law -1982 (Israel). We also maintain
an insurance policy. However, our insurance may not cover all relevant claims or
may not provide sufficient coverage. Our remaining business, financial condition
and operating results could be materially adversely affected if costs resulting
from future claims are not covered by our insurance or exceed our coverage.
YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY ISRAELI
LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.
We are incorporated under Israeli law. The rights and responsibilities of
holders of our shares are governed by our memorandum of association, our
articles of association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith toward the company and other shareholders and to
refrain from abusing his power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters.
ITEM 4. INFORMATION ON THE COMPANY
THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A.- SELECTED FINANCIAL DATA" AND
"ITEM 17- FINANCIAL STATEMENTS".
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Industrial Development Bank of Israel Limited was incorporated under
the laws of the State of Israel on October 7, 1957. Our initial purpose was to
encourage and assist in the establishment and expansion of industrial
enterprises in Israel. The Bank of Israel issued a banking license permitting us
to operate as a commercial bank in Israel pursuant to the Banking Licensing Law
- -1981 (Israel) and, in September 1991, we commenced our commercial banking
operations.
17
Our legal and commercial name is Industrial Development Bank of Israel Ltd.
Our registered office is located at 82 Menachem Begin Road, Tel-Aviv, Israel
67138, and our telephone number is 972-3-6272727. Our corporate website can be
accessed through WWW.IDBI.CO.IL. The information found on our corporate website
is, however, not part of this annual report. Our agent in the United States
regarding our C,CC, D and DD shares is Mellon Financial Services Inc., located
at 85 Challenger Road, Ridgefield Park, New Jersey 07660. Our agent in the
United States regarding our capital notes is JPMorgan Chase Bank, located at 4
New York Plaza, 15th floor, New York, N.Y. 10004.
We are owned primarily by the Government of Israel, Bank Leumi Le-Israel,
Israel Discount Bank and Bank Hapoalim. The Government of Israel holds
approximately 75% of our equity.The Government of Israel and the three largest
banks in Israel, Bank Hapoalim, Bank Leumi and Israel Discount Bank,
collectively hold approximately 90% of our voting shares.
We are subject to the supervision and the regulations of the Bank of
Israel, through the Supervisor of Banks. Among other things, we are required to
submit periodic and other reports to the Bank of Israel and are subject to
inspections by the Bank of Israel. Since the State of Israel holds 45.8% of our
voting rights and about 50% of the rights to appoint directors, we are deemed to
be a "Mixed Company" under the Government Companies Law-1975 (Israel), and
therefore we must also report to the Government Companies Authority. Because the
State of Israel is entitled to appoint directors to our board, we are also
deemed to be a "body that the Government of Israel participates in its
management" within the State Comptroller Law-1958 (Israel) and consequently we
are subject to the State Comptroller's audit.
B. BUSINESS OVERVIEW
Until the liquidity crisis we experienced in the third quarter of 2002 (as
discussed below), our business focused on normal banking activities, including,
without limitation, the extension of short, medium and long term credit in NIS
and foreign currencies, the acceptance of deposits in all currencies, the
maintenance of checking accounts and the issuance of credit cards. In addition,
we issued guarantees of all types in Israel and abroad and issued letters of
credit and other documents relating to foreign trade. We maintained a foreign
exchange dealing room, which provided currency conversion services and services
relating to the hedging of currency and interest rate risk. Our finance
department also provided services in factoring and futures transactions. We also
analyzed and prepared applications for "Approved Enterprise" status and
administered government grants. Our customers included many of Israel's well
known large industrial companies, medium size commercial entities, public
institutions, kibbutzim and other agricultural sector companies. Until 2002, our
goal was to gradually expand our range of commercial banking activities, which
generally focused on the business and industrial sectors, and diversify our
customer base.
18
The balance of the public's deposits with us sharply declined in the third
quarter of 2002. The balance of the public's deposits with us was NIS 3,597
million as of June 30, 2002 and, by December 31, 2002, the balance had declined
to NIS 1,291 million, a NIS 2,306 decrease over 6 months. As a result of the
increased withdrawals of deposits by the public, we experienced a severe
liquidity crisis. The decline in the public's deposits continued through our
2003 fiscal year and as of December 31, 2003, the balance of the public's
deposits with us had further declined to only NIS 620 million
In response to our liquidity problems, the Government of Israel and the
Bank of Israel proposed a plan for the sale of our assets and liabilities to a
third party. To help us manage our liquidity crisis and continue operations
until the sale, the Bank of Israel agreed to provide us a special line of
credit. See "Proposed Sale of the Bank and Extension of Special Line of Credit
by the Bank of Israel" below for a detailed description of the proposed sale and
the special line of credit from the Bank of Israel.
We were unable to consummate the sale of our asset and liability portfolio
"en bloc" and within a short time frame and, on February 27, 2003, our board of
directors adopted a run-off plan for our business, which plan was approved, with
certain modifications, by the Government of Israel. We are currently operating
under the terms of the run-off plan. The ultimate goal of the run-off plan is
the controlled disposal of our credit assets over a period which will expire
during 2006. For a more detailed description of the run-off plan and the
amendments to the special line of credit, see "Adoption of the Run-Off Plan and
Amendment of the Special Line of Credit" below.
PROPOSED SALE OF THE BANK AND EXTENSION OF SPECIAL LINE OF CREDIT BY BANK OF
ISRAEL
On August 26, 2002, in response to our severe liquidity crisis, the Prime
Minister's Office of the State of Israel, the Finance Ministry of the State of
Israel and the Bank of Israel adopted a plan for the sale of our asset and
liability portfolio and the extension of a special line of credit by the Bank of
Israel to permit us to bridge our liquidity problems. Our board of directors
approved the sale of our asset and liability portfolio and the special line of
credit from the Bank of Israel in accordance with the plan and agreed to
cooperate during the sale process so as to facilitate its implementation.
On September 9, 2002, the Governor of the Bank of Israel notified us that
he had decided to extend to us a special line of credit. According to the terms
of the special line of credit as initially extended, we were able to utilize the
line of credit to the extent necessary to bridge our liquidity needs to fulfill
our banking obligations, including those toward our public depositors (not
including liabilities of any kind to the Government of Israel). The interest
rate on the special line of credit (which was to be charged quarterly) was set
by the Governor of the Bank of Israel at a rate equal to the Bank of Israel rate
plus 3%. In addition, we were required to pay the Bank of Israel a commission at
an annual rate of 1% (which was to be charged monthly) in respect of the
unutilized amount of the special line of credit. The special line of credit was
available through the earlier of May 10, 2003 or the date of the sale of our
asset and liability portfolio. According to the terms of the special line of
credit, the Governor of the Bank of Israel may, in his sole discretion, demand
the earlier repayment of the outstanding amounts due under the special line of
credit or terminate any further utilization of the special line of credit.
19
The extension of the special line of credit was also subject to various
conditions, including, without limitation, the pledge of a substantial part of
our assets to the Bank of Israel. The pledge in favor of the Bank of Israel was
created by us only on November 14, 2002 and the special line of credit, with an
available amount of credit of NIS 2.2 billion, was granted on that date. The
Governor of the Bank of Israel notified us on November 14, 2002 that our
drawings from the Bank of Israel prior to November 14, 2002 would bear interest,
until November 14, 2002, at a rate equal to the Bank of Israel rate plus 5%,
while according to the terms of the special line of credit as determined on
September 9, 2002, from November 14, 2002, the special line of credit would bear
interest equal to the Bank of Israel rate plus 3%.
The pledge in favor of the Bank of Israel does not apply to all of our
assets. The assets that were not pledged to the Bank of Israel included the
following: (a) loans and credits guaranteed by the State of Israel with a total
balance sheet value of approximately NIS 6.4 billion as of December 31, 2003,
(b) our perpetual deposit with the Ministry of Finance in respect of the DD
shares, and (c) deposits with other banking institutions in Israel and/or
abroad, and/or with brokers in Israel and/or abroad, that we make from time to
time in order to secure those of our liabilities to such banking institutions
and/or brokersthat were created after November 14, 2002.
On November 13, 2002, our board of directors approved the terms of the sale
of our asset and liability portfolio and the sale process. The asset portfolio
offered for sale by our board of directors included (a) credit granted to the
public, (b) credit to governments and (c) equity investments, all having an
aggregate balance sheet value as of December 31, 2002, equal to NIS 4.3 billion.
The liabilities portfolio included deposits of the public, banks and the Israeli
Government, having an aggregate balance sheet value as of December 31, 2002, of
NIS 2.5 billion. The assets not offered for sale (consisting mainly of loans
guaranteed by the State of Israel and the perpetual deposits with the Finance
Ministry) had an aggregate balance sheet value as of December 31, 2002 equal to
NIS 8.2 billion. The liabilities not offered for sale (consisting mainly of
State deposits for granting loans and the special line of credit from the Bank
of Israel) had an aggregate balance sheet value as of December 31, 2002 equal to
NIS 9.4 billion.
Our board of directors approved the sale as an "en bloc" sale to one or
more purchasers. Under the terms of the approved sale process, the proposal
documents were scheduled to be provided to potential purchasers by December 20,
2002 and the information room, which was established for due diligence review,
was scheduled to open on the same date. Prior to such date, we contacted those
other banks that we considered to be potential purchasers of our asset and
liability portfolio in order to discuss their participation in the sale process.
However our board of directors soon realized that there was little interest in
the proposed sale of our asset and liability portfolio. The information room was
closed at the end of January 2003 without any of the potential purchasers having
commenced a due diligence review.
20
ADOPTION OF THE RUN-OFF PLAN AND AMENDMENT OF THE SPECIAL LINE OF CREDIT
When it became apparent that the proposed "en bloc" sale of our assets and
liabilities within a short time frame would not be consummated, our board of
directors decided to entertain other alternatives to such a sale. At its meeting
on February 27, 2003, our board adopted the principles of a proposed run-off
plan prepared by Zinger Barnea and Co. Ltd. and Fahn Kanne Consultants Ltd. The
components of the run-off plan included, among other things, (a) a supervised
sale of our credit assets, by way of collection (in accordance with established
maturity dates) of some of the outstanding loans, and a segmented sale of some
of our other credit assets, to be conducted over a period ending on December 31,
2006, (b) a significant reduction in manpower and in operating expenses and (c)
the continuation of the special line of credit by the Bank of Israel during the
period of the run-off. Based on the economic evaluation of the plan, the cost of
implementing the run-off plan, including the sale of the credit assets, was
expected to be significantly less than the expected discount on the "en bloc"
and short-term sale of our asset and liability portfolio. At the same meeting,
our board approved a detailed efficiency plan formulated by our management. The
efficiency plan includes extensive cutbacks (beyond those formerly approved ) in
operating expenses and manpower, including termination and reduction of banking
services unrelated to the collection of existing loans.
On July 29, 2003 the Ministerial Committee for Social and Economic Affairs
of the Government of Israel approved the run-off plan with certain
modifications, including fixing the implementation period of the plan at three
years, from July 29, 2003. We are currently operating under the terms of the
run-off plan. In accordance with the run-off plan, our assets are to be disposed
of in a controlled process and over a defined period of time to expire during
2006.
In connection with the governmental approval of the run-off plan, the Bank
of Israel agreed to amend the terms of the special line of credit and continue
to extend the special line of credit to us for a period of 36 months. On
September 1, 2003, the terms and conditions of the special line of credit were
amended. As amended, the terms of the special line of credit require that the
loans extended to us under the special line of credit be repaid by August 1,
2006. The maximum available amount of credit under the special line of credit
decreases gradually over the term of the special line of credit (from a maximum
amount of NIS 2.2 billion) in accordance with the forecast that we provided to
the Bank of Israel. The interest rate on the utilized portion of the special
line of credit is the interest rate of the Bank of Israel, subject to "the
fulfillment of all the conditions, including that which is stipulated in the
government's resolution regarding the date of completion and return of the
deposits to the public and the realization of the bank's assets".
In addition, according to the amended terms of the special line of credit,
during the run-off period, the aggregate amount of outstanding loans to the
public may not exceed the balance of such outstanding loans as of July 31, 2003
and must continue to decline throughout the run-off period. Any increase in the
total amount of outstanding loans to the public will be deemed to be an
unauthorized overdraw on the special line of credit and interest will be charged
on such overdraw accordingly. Our volume of activity with respect to the receipt
of deposits was also curtailed. According to the amended terms of the special
line of credit, the commission to be paid to the Bank of Israel at the annual
rate of 1% in respect of the unutilized amount of the special line of credit, is
to be calculated on the basis of 105% of the utilized amount. If, as of July 29,
2005, there is an unpaid balance on the special line of credit, the Government
of Israel will become (with respect to the Bank of Israel) the obligor on the
balance of the outstanding special line of credit as of such date and the
balance will be paid by the Government of Israel to the Bank of Israel by means
of a monetary transfer on or before July 29, 2006.
21
The terms of the special line of credit impose significant restrictive
operating covenants on us. The main terms of the special line of credit, as
amended, and the main restrictions thereunder are as follows:
o The repayment date will be no later than August 1, 2006. The Governor
of the Bank of Israel may, in his sole discretion, demand an earlier
repayment of the special line of credit or terminate any further
utilization of the line.
o The maximum amount of the special line of credit will decline
gradually (from a maximum amount of NIS 2.2 billion) in accordance
with a forecast that we provided to the Bank of Israel.
o Subject to the terms of the special line of credit, we are allowed to
use the special credit line in order to fulfill our banking
obligations and other related obligations that serve the purposes of
reducing the special credit line and realizing our credit portfolio,
subject to our meeting the above forecast of the decline of the
special line of credit.
o Beginning from the date the Government decided to adopt the "Run-off"
plan (July 29, 2003) the interest on the utilized credit will be the
interest rate of the Bank of Israel, providing that all the other
conditions are fulfilled, including the Government decision with
respect to the date for completing the return of the deposits to the
public and the disposal of our assets. Until that date of July 29,
2003, the utilized credit bore interest at the "Bank of Israel rate"
plus 3%.
o The Bank will be required to pay a commission at the rate of 1%
(charged monthly) on the difference between the maximum amount of the
special line of credit and 105% of its utilized amount.
o The total credit to the public will not exceed its balance as of July
31, 2003 and it will decrease. Any deviation will be considered by the
Bank of Israel to be an unauthorized deviation and it will be charged
interest accordingly.
o Limitations were set on our volume of activity with respect to the
receipt of deposits.
o The granting of the special credit line is subject to various
conditions, among which is the placement of a pledge in favor of the
Bank of Israel on all of our assets, except for those assets to be
agreed upon by us and the Bank of Israel (the lien was created in a
debenture dated November 14, 2002).
The outstanding balance of the special line of credit from the Bank of
Israel, not including interest accrued but not yet charged, was NIS 2.06 billion
as of December 31, 2003 and the outstanding balance was NIS 1.93 billion, as of
February 24, 2004, and the outstanding balance was NIS 1.39 billion, as of
December 31, 2004.
22
CURRENT OPERATIONS UNDER THE RUN-OFF PLAN
We have petitioned the Bank of Israel to reimburse us for certain interest
payments that we previously made. Prior to the amendment of the special line of
credit on September 1, 2003 (in connection with the adoption and approval of the
run-off plan), the interest rate on the amounts outstanding on the credit we
drew from the Bank of Israel was (a) the Bank of Israel rate plus 5% from August
2002 to November 13, 2002 and (b) the Bank of Israel rate plus 3% from November
13, 2002 to July 29, 2003. Additionally, we paid a high interest rate on
liquidity deficits that occurred from time to time in our account with the Bank
of Israel. As amended, the special line of credit has an interest rate on
outstanding amounts equal to the Bank of Israel rate. We have requested that the
Bank of Israel reimburse us for the difference between the amount of interest
that we paid at the previous interest rates between August 2002 and July 2003
and the amount of interest that we would have paid at the new interest rate(Bank
of Israel rate) during the same time period. The total amount that we have
requested to be reimbursed, with interest thereon, as of December 31, 2003 is
NIS 66 million. The Bank of Israel declined our initial request for the
reimbursement, but we continue to pursue it.
Because our banking activities are limited to the collection of existing
loans and the wind-up of remaining activities during the run-off period, the
Bank of Israel may limit, curtail or revoke our banking license to reflect our
limited activity during the run-off plan. See "Item 3 - Risk Factors" above for
a discussion of the risks relating to the limitation, curtailment or revocation
of our banking license.
During the run-off period, the Accountant General of the Treasury and the
Government Companies Authority will continue to examine other alternatives for
the disposal of our asset and liability portfolio.
As a result of our considerable efforts to collect existing loans, we have
significantly reduced the aggregate amount of our outstanding loans to the
public. This balance (not including a loan to a certain government company
guaranteed by the State of Israel and granted out of a deposit that the State of
Israel has deposited with us for that purpose), which at December 31, 2001
amounted to NIS 5,238 million, was reduced to NIS 3,984 million at December 31,
2002, to NIS 2,784 million at December 31, 2003 and to NIS 2,619 million at
February 24, 2004. Even when we take into consideration the allowances for
doubtful debts provided for during this period (and which are deducted from the
amount of our outstanding loans), this still represents a collection of
considerable loan amounts.
As part of the implementation of the run-off plan, we have already reduced
or ceased certain activities we previously conducted. We have significantly
reduced our foreign currency and foreign trade activity, and we have almost
completely discontinued or completely discontinued the following activities:
operating a foreign exchange dealing room (for customers), operating current
accounts and securities accounts (for private customers), execution of
Government grants through the "Approved Enterprise" status system, independently
operating teller and clearing facilities and issuing credit cards.
23
Following the liquidity crisis that we experienced in the third quarter of
2002 and the implementation of our run-off plan, we are presently able to borrow
only by drawing on the special line of credit extended to us by the Bank of
Israel. The special line of credit is available to us only in shekels at a
variable rate of interest equal to the Bank of Israel rate and for a period
expiring on August 1, 2006. We are, therefore, unable to maintain a balance in
currency and linkage bases, in maturities and in interest rates, with respect to
our assets and liabilities.
In order to reduce our exposure to the risks resulting from these
circumstances, we are carrying out swap transactions with other banks and with
the Bank of Israel.
For further discussion of our risk management, see "Item 11-Quantitative
and Qualitative Disclosures About Market Risk" below.
The reduction in our operations was accompanied by a reduction in our
staff. The number of employees, which as of January 1, 2002 was 170, was reduced
to 79 by December 31, 2003, and was further reduced to 68 by February 24, 2004.
In addition to the significant reduction in payroll expenses because of the
reduction in the number of employees and the salary reductions that were
implemented at the beginning of 2003, we are also taking steps to significantly
reduce operating costs. We relocated to new offices in September 2003. The new
office space is two-thirds smaller than the previous office space that we rented
and the rent per square meter of the new office space is significantly lower
than the rent we had been paying. We have also outsourced our computer services.
Management believes that the outsourcing will lead to a significant reduction in
computer expenses.
We maintain close and continuous contacts with the Bank of Israel and the
Government of Israel. In accordance with the run-off plan and the efficiency
plan, we will refrain from extending new loans to customers and our activities
will concentrate on collection of the existing loan portfolio. We plan to
implement an aggressive policy in all matters to relating to collection of
problematic debts. We expect that as a result of the intensive handling of
problematic collections, there will be a significant increase in our collection
costs and legal fees.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed as a result of the
implementation of the run-off plan.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following tables show our average balance sheets and interest rates for the
three years ending on December 31, 2003, 2002 and 2001.
24
AVERAGE BALANCE SHEETS AND INTEREST RATES
IN TERMS OF NIS AS OF DECEMBER 2003
2003 2002
------------------------------------ ------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME(2) INCOME AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES) BALANCE (1) (EXPENSES) (EXPENSES)
------- ------- ------- ------- ------- -------
IN MILLIONS OF NIS % IN MILLIONS OF NIS %
--------------------- ------- --------------------- -------
ISRAELI CURRENCY - NON-LINKED
ASSETS
Credit to the Public 1,277.4 141.2 11.05 1,456.5 46.8 3.21
Credit to governments 0.2 - 1.2 1.8 (0.2) (11.11)
Deposits with Bank of Israel 11.2 0.1 1.13 59.2 (5.2) (8.79)
Deposits with banks 8.0 0.8 9.49 40.1 (2.7) (6.85)
Debentures 1.8 0.2 11.25 45.1 (2.0) (4.35)
------- ------- ------- -------
Total assets before effect of derivatives 1,298.6 142.3 10.96 1,602.7 36.7 2.29
Effect of derivatives ALM (3) 674.0 66.7 9.90 500.8 11.5 2.30
------- ------- ------- -------
Total assets after effect of derivatives 1,972.6 209.0 10.60 2,103.5 48.2 2.29
======= ======= ======= =======
LIABILITIES
Deposits of the public 239.0 (21.5) (8.99) 1,367.6 46.5 3.35
Deposits of Bank of Israel 2,109.4 (219.0) (10.38) 632.3 (91.0) (14.4)
Deposits of banks - - - 31.6 (0.1) (0.31)
------- ------- ------- -------
Total liabilities 2,348.4 (240.5) (10.24) 2,031.5 (44.6) (2.20)
======= ======= ======= =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.72 0.09
INTEREST MARGIN INCLUDING DERIVATIVES 0.36 0.09
ISRAELI CURRENCY -LINKED TO THE CPI
ASSETS
Credit to the Public 1,237.0 61.2 4.95 1,758.9 75.6 4.30
Credit to governments 29.6 - - 36.3 0.1 0.27
Deposits with banks 31.9 1.4 4.46 35.3 2.0 5.56
Debentures 23.9 1.2 4.88 52.6 2.7 5.04
------- ------- ------- -------
Total assets 1,322.4 63.8 4.82 1,883.1 80.4 4.27
======= ======= ======= =======
2001
------------------------------------
FINANCING RATE OF
AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES)
------- ------- -------
IN MILLIONS OF NIS %
--------------------- -------
ISRAELI CURRENCY - NON-LINKED
ASSETS
Credit to the Public 2,057.9 167.6 8.14
Credit to governments - - -
Deposits with Bank of Israel 224.8 8.1 3.63
Deposits with banks 104.8 5.6 5.38
Debentures 89.2 6.2 6.91
------- -------
Total assets before effect of derivatives 2,476.7 187.5 7.57
Effect of derivatives ALM (3) 172.0 10.3 5.99
------- -------
Total assets after effect of derivatives 2,648.7 197.8 7.47
======= =======
LIABILITIES
Deposits of the public 2,364.2 (130.0) (5.50)
Deposits of Bank of Israel 4.4 (0.2) (4.76)
Deposits of banks 40.6 (2.3) (5.66)
------- -------
Total liabilities 2,409.2 (132.5) (5.5)
======= =======
INTEREST MARGIN NOT INCLUDING DERIVATIVES 2.07
INTEREST MARGIN INCLUDING DERIVATIVES 1.97
ISRAELI CURRENCY -LINKED TO THE CPI
ASSETS
Credit to the Public 1,683.0 96.2 5.72
Credit to governments 42.9 - -
Deposits with banks 22.6 1.4 6.02
Debentures 86.3 5.6 6.54
------- -------
Total assets 1,834.8 103.2 5.63
======= =======
25
AVERAGE BALANCE SHEETS AND INTEREST RATES
IN TERMS OF NIS AS OF DECEMBER 2003
2003 2002
-------------------------------------- --------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME(2) INCOME AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES) BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS % IN MILLIONS OF NIS %
----------------------- -------- ----------------------- --------
LIABILITIES
Deposits of the public 462.5 (20.0) (4.32) 1,027.0 (53.2) (5.18)
Deposits of the Government 578.4 (12.0) (2.08) 644.2 (20.4) (3.17)
Deposits of banks 54.3 (1.0) (1.8) 152.4 (8.6) (5.67)
Debentures - - - - - -
-------- -------- -------- --------
1,095.2 (33.0) (3.01) 1,823.6 (82.2) (4.51)
Effect of derivatives ALM (3) 88.8 (2.8) (3.15) - - -
-------- -------- -------- --------
Total liabilities 1,184.0 (35.8) (3.02) 1,823.6 (82.2) (4.51)
======== ======== ======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 1.81 (0.24)
INTEREST MARGIN INCLUDING DERIVATIVES 1.80 (0.24)
FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public 7,609.8 149.6 1.97 8,793.0 650.6 7.40
Credit to governments 97.1 (2.3) (2.33) 157.8 11.6 7.34
Deposits with Bank of Israel 13.7 (0.2) (1.28) 105.4 3.3 3.17
Deposits with banks 52.3 (1.5) (2.95) 107.0 8.5 7.88
Debentures 1.7 0.2 10.86 4.2 (0.1) (2.33)
-------- -------- -------- --------
7,774.6 145.8 1.88 9,167.4 673.9 7.35
Effect of derivatives ALM (3) 179.1 6.7 3.74 (500.8) (1.7) (0.33)
-------- -------- -------- --------
Total assets 7,953.7 152.5 1.92 8,666.6 672.2 7.76
======== ======== ======== ========
2001
--------------------------------------
FINANCING RATE OF
AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- --------
IN MILLIONS OF NIS %
----------------------- --------
LIABILITIES
Deposits of the public 922.2 (53.3) (5.78)
Deposits of the Government 698.1 (18.8) (2.69)
Deposits of banks 91.5 (8.3) (9.02)
Debentures 0.2 - -
-------- --------
1,712.0 (80.4) (4.70)
Effect of derivatives ALM (3) - - -
-------- --------
Total liabilities 1,712.0 (80.4) (4.70)
======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.94
INTEREST MARGIN INCLUDING DERIVATIVES 0.94
FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public 8,578.2 1,208.0 14.08
Credit to governments 175.1 18.2 10.38
Deposits with Bank of Israel 134.3 11.9 8.87
Deposits with banks 160.2 20.7 12.92
Debentures 7.8 0.3 4.00
-------- --------
9,055.6 1,259.1 13.90
Effect of derivatives ALM (3) (172.0) (20.3) (11.8)
-------- --------
Total assets 8,883.6 (1,238.8) 13.94
======== ========
26
AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
IN TERMS OF NIS AS OF DECEMBER 2003
2003 2002
------------------------------------ ------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME(2) INCOME AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES) BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS % IN MILLIONS OF NIS %
---------------------- -------- ---------------------- --------
LIABILITIES
Deposits of the public 146.1 2.2 1.48 770.1 (49.9) (6.48)
Deposits of the Government 6,793.5 (110.7) (1.63) 7,272.2 (564.1) (7.76)
Deposits of banks 154.2 4.7 3.10 550.5 (31.6) (5.74)
-------- -------- -------- --------
7,093.8 (103.8) (1.46) 8,592.8 (645.6) (7.51)
Effect of derivatives ALM (3) 764.3 (28.5) (3.73) - - -
-------- -------- -------- --------
Total liabilities 7,858.1 (132.3) (1.68) 8,592.8 (645.6) (7.51)
======== ======== ======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.42 (0.16)
INTEREST MARGIN INCLUDING DERIVATIVES 0.24 0.25
TOTAL
Monetary assets generating financial income 10,395.6 351.9 3.38 12,653.2 790.9 6.25
Effect of derivatives ALM (3) 853.1 73.4 8.62 500.8 9.8
-------- -------- -------- --------
Total monetary assets generating financing
income 11,248.7 425.3 3.78 13,154.0 800.7 6.09
======== ======== ======== ========
Monetary liabilities generating financing
expenses 10,537.4 (377.3) (3.58) 12,448.0 (772.5) (6.21)
Effect of derivatives ALM (3) 853.1 (31.3) (3.69) 500.8 -
-------- -------- -------- --------
Total liabilities generating financing expenses 11,390.5 (408.6) (3.59) 12,948.8 (772.5) (5.97)
======== ======== ======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES (0.20) 0.04
INTEREST MARGIN INCLUDING DERIVATIVES 0.19 0.12
2001
------------------------------------
FINANCING RATE OF
AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- --------
IN MILLIONS OF NIS %
---------------------- --------
LIABILITIES
Deposits of the public 1,040.3 (111.4) (10.71)
Deposits of the Government 6,881.5 (996.9) (14.49)
Deposits of banks 926.4 (104.8) (11.31)
-------- --------
8,848.2 (1,213.1) (13.71)
Effect of derivatives ALM (3) - - -
-------- --------
Total liabilities 8,848.2 (1,213.1) (13.71)
======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.19
INTEREST MARGIN INCLUDING DERIVATIVES 0.23
TOTAL
Monetary assets generating financial income 13,367.1 1,549.8 11.59
Effect of derivatives ALM (3) - (10.0)
-------- --------
Total monetary assets generating financing
income 13,367.1 1,539.8 11.52
======== ========
Monetary liabilities generating financing
expenses 12,969.4 (1,426.0) (10.99)
Effect of derivatives ALM (3) - -
-------- --------
Total liabilities generating financing expenses 12,969.4 (1,426.0) (10.99)
======== ========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.60
INTEREST MARGIN INCLUDING DERIVATIVES 0.53
27
AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D)
IN TERMS OF NIS AS OF DECEMBER 2003
2003 2002
-------------------------------------- --------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME(2) INCOME AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES) BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS % IN MILLIONS OF NIS %
----------------------- -------- ----------------------- --------
In respect of options 5.1 25.2
Financing commissions and other financing
income 59.3 41.8
Other financing expenses (14.2) (15.8)
-------- --------
Financing income before allowance for
doubtful debts 66.9 79.5
Allowance for doubtful debts (including (130.0) (401.8)
-------- --------
general and supplementary provisions)
Earnings from financing operations after (63.1) (322.3)
======== ========
allowance for doubtful debts
Other monetary assets 863.6 936.7
General and supplementary allowance for
doubtful debts (83.7) (74.3)
Non-monetary assets 63.1 42.9
-------- --------
TOTAL ASSETS 11,238.6 13,558.5
======== ========
Other monetary liabilities 136.7 183.3
Non-monetary liabilities 5.7 10.4
Capital resources 558.8 916.8
-------- --------
TOTAL LIABILITIES AND CAPITAL RESOURCES 11,238.6 13,558.5
======== ========
2001
--------------------------------------
FINANCING RATE OF
AVERAGE INCOME(2) INCOME
BALANCE (1) (EXPENSES) (EXPENSES)
-------- -------- --------
IN MILLIONS OF NIS %
----------------------- --------
In respect of options 25.7
Financing commissions and other financing
income 38.5
Other financing expenses (14.0)
--------
Financing income before allowance for
doubtful debts 164.0
Allowance for doubtful debts (including (124.5)
--------
general and supplementary provisions)
Earnings from financing operations after 39.5
========
allowance for doubtful debts
Other monetary assets 924.8
General and supplementary allowance for
doubtful debts (58.7)
Non-monetary assets 44.9
--------
TOTAL ASSETS 14,278.1
========
Other monetary liabilities 218.2
Non-monetary liabilities 8.5
Capital resources 1,082.0
--------
TOTAL LIABILITIES AND CAPITAL RESOURCES 14,278.1
========
28
FOOTNOTES:
(1) Based on monthly opening balances except for the non-linked Israeli
currency segment where the average balance is based on daily figures, and
net of the average balance of the specific allowance for doubtful debts.
The Credit to the Public balances include non-accrual loans.
(2) Not including interest on non-accrual loans.
(3) Derivatives (ALM) which comprise part of our asset and liability management
and with respect to which revenue (expense) can be attributed to the
linkage segments.
(4) Including Israeli currency linked to foreign currency.
Note: The data for 2003 is presented according to the instructions of the
Supervisor of Banks effective January 1, 2003, therefore it is not
comparable with the data for 2002, which data is presented under the former
instructions.
29
The following table summarizes our assets and liabilities outstanding as of
December 31, 2003, 2002, and 2001:
IN MILLIONS OF NIS
--------------------------------
2003 2002 2001
------ ------ ------
Total assets 10,356 12,274 14,441
Assets consisting of
credits to the public 9,190 10,908 12,223
Total liabilities 9,847 11,665 13,403
Liabilities consisting of
deposits 9,742 11,474 13,092
The following table shows the linkage basis (currency) breakdown of our
credit to the public outstanding as of December 31, 2003, 2002 and 2001.
IN MILLIONS OF NIS
--------------------------------
2003 2002 2001
------ ------ ------
Non-linked Israeli currency 1,125 1,278 1,607
CPI linked Israeli currency 993 1,445 1,760
Dollar and linked thereto 6,903 7,913 8,438
Other foreign currency and linked thereto 169 272 418
------ ------ ------
TOTAL 9,190 10,908 12,223
====== ====== ======
30
INVESTMENT PORTFOLIO
The following table presents the book or market value of our investment
portfolio as of December 31of 1999, 2000, 2001, 2002 and 2003.
IN MILLIONS OF NIS
---------------------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ----- -----
Marketable Government bonds - 0.1 163.0 171.0 294.7
Marketable other bonds 7.2 13.0 19.3 15.2 17.3
Non-marketable other bonds 7.9 19.3 16.6 - -
Non marketable shares 34.3 25.7 30.2 25.7 14.9
Marketable and available for sale shares 36.0 13.5 1.0 1.7 3.3
Trading shares - - 8.0 7.7 -
----- ----- ----- ----- -----
Total 85.4 71.6 238.1 221.3 330.2
===== ===== ===== ===== =====
EQUITY HOLDINGS PORTFOLIO
The following table presents the book value of our investments in other
equity holdings as of December 31of 1999, 2000, 2001, 2002 and 2003.
IN MILLIONS OF NIS
---------------------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ----- -----
Investments in related companies --- 0.9 1.4 2.6 100.8
INTERNATIONAL OPERATIONS
We have no material operations outside of Israel and our past and current
operations concentrate on the Israeli market.
31
LOAN PORTFOLIO
TOTAL CREDIT TO THE PUBLIC
As of December 31, 2003, the total credit to the public amounted to NIS
9,190 million compared with NIS 10,908 million as of December 31, 2002. These
figures include credit guaranteed by the State of Israel and granted out of a
deposit that was deposited with us by the State of Israel for that purpose, the
balance of which amounted to NIS 6,405 million as of December 31, 2003 compared
with NIS 6,925 million as of December 31, 2002. Net of such credit, the credit
to the public amounted to NIS 2,785 million as of December 31, 2003 compared
with NIS 3,984 million as of December 31, 2002 (a 30% decrease). The above
figures are after deduction of allowance for doubtful debts. This decrease
stemmed from both our policy to reduce our credit portfolio and from the
allowances for doubtful debts that were recorded in those years. As of February
24, 2004, total credit to the public amounted to NIS 2,619 million (excluding
certain credit guaranteed by the State of Israel and granted out of a deposit
that was deposited with us by the State of Israel for that purpose), which
reflects a decline of NIS 1,365 million (approximately 34%) compared to the
balance outstanding as of December 31, 2002.
ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
The following tables show, by business segment, the related risk
counterparties to whom our counterparty risk exposures were allocated in the
last five years. The tables for 1999-2001 do not include data relating to
Government guarantees and their effect on the total risk because such data is
not available to us for these years.
32
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 2003
-----------------------------------------------------------------------------------
ANNUAL
TOTAL RISK EXPENSE FOR BALANCE OF
OFF-BALANCE OF THE SPECIFIC THE SPECIFIC BALANCE OF
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR ALLOWANCE FOR PROBLEMATIC
CREDIT RISK (1)* RISK (2)* PUBLIC* DOUBTFUL DEBTS DOUBTFUL DEBTS DEBTS (3)*
------- ------- ------- ------- ------- -------
IN MILLIONS OF NIS
-----------------------------------------------------------------------------------
Agriculture 25.0 - 25.0 - 6.0 7.7
Industry 922.5 90.5 1,013.0 66.1 425.7 543.1
Construction and real estate 524.9 135.3 660.2 18.8 196.0 433.8
Electricity 6,575.2 17.7 6,593.9 1.2 2.1 84.8
Commerce 97.5 6.1 103.6 4.9 92.8 47.3
Restaurants and hotels 83.1 31.9 115.0 6.8 68.6 77.0
Transport and storage 90.5 0.2 90.8 0.1 3.3 0.2
Communications and computer services 93.5 8.8 102.3 7.8 46.3 29.4
Financial services 344.8 109.2 454.0 10.0 129.2 121.1
Other business services 264.9 2.8 267.7 6.7 35.2 43.6
Public and community services 233.8 1.3 235.1 11.5 103.9 146.6
Private households 27.5 0.8 28.2 - 1.3 2.8
------- ------- ------- ------- ------- -------
TOTAL 9,283.2 404.6 9,688.8 133.9 1,101.4 1,447.4
======= ======= ======= ======= ======= =======
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 345.7 5.4 351.1 10.2 163.3
Local authorities 16.9 - 16.9 - 1.9
DECEMBER 31, 2003
----------------------
TOTAL RISK % OF SECTOR
NET OF FROM TOTAL RISK
GOVERNMENT GOVERNMENT NET OF GOVERNMENT
GUARANTEES GUARANTEES GUARANTEES
------- ------- -------
IN MILLIONS OF NIS
----------------------
Agriculture 0.3 24.7 0.8
Industry 20.1 992.9 30.5
Construction and real estate 4.5 655.7 20.1
Electricity 6,405.3 188.6 5.8
Commerce - 103.6 3.2
Restaurants and hotels 2.5 112.5 3.5
Transport and storage - 90.8 2.8
Communications and computer services - 102.3 3.1
Financial services - 454.0 13.9
Other business services - 267.7 8.2
Public and community services - 235.1 7.2
Private households - 28.2 0.9
------- ------- -------
TOTAL 6,432.7 3,256.1 100.0
======= ======= =======
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4)
Local authorities
(1) Credit to the public and investments in debentures of the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining a borrower or group of borrowers indebtedness
limitations.
(3) Balances of problematic debts, net of credit covered by collateral allowed
for set-off for the purpose of a borrower or a group of borrowers
indebtedness limitations include components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such entities.
* The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
33
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 2002
-----------------------------------------------------------------------------------
ANNUAL
TOTAL RISK EXPENSE FOR BALANCE OF
OFF-BALANCE OF THE SPECIFIC THE SPECIFIC BALANCE OF
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR ALLOWANCE FOR PROBLEMATIC
CREDIT RISK (1)* RISK (2)* PUBLIC* DOUBTFUL DEBTS DOUBTFUL DEBTS DEBTS (3)*
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS
-----------------------------------------------------------------------------------
Agriculture 35.7 0.2 35.9 0.3 5.7 12.8
Industry 1,506.4 219.2 1,725.6 112.4 344.9 517.9
Construction and real estate 558.3 210.1 768.4 74.4 120.8 331.0
Electricity 7,051.0 52.7 7,103.7 6.2 2.0 19.5
Water 0.2 - 0.2 - - -
Commerce 137.8 15.8 153.6 20.3 71.6 58.9
Restaurants and hotels 95.4 32.7 128.1 22.8 44.7 110.4
Transport and storage 126.0 5.3 131.3 1.2 5.6 47.7
Communications and computer services 175.4 12.0 187.4 16.5 45.0 59.9
Financial services 521.3 216.1 737.4 82.7 79.8 92.6
Other business services 478.3 12.6 490.9 11.5 21.1 46.5
Public and community services 294.1 2.9 297.0 39.1 79.7 145.4
Private households 42.9 3.6 46.5 4.4 7.5 9.2
-------- -------- -------- -------- -------- --------
Total 11,022.8 783.2 11,806.0 391.6 828.4 1,451.8
======== ======== ======== ======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 464.2 41.4 505.6 19.3 214.5
Local authorities 58.0 - 58.0 - 4.3
DECEMBER 31, 2002
----------------------
TOTAL RISK % OF SECTOR
NET OF OF TOTAL RISK
GOVERNMENT GOVERNMENT NET OF GOVERNMENT
GUARANTEES GUARANTEES GUARANTEES
-------- -------- --------
IN MILLIONS OF NIS
----------------------
Agriculture 2.1 33.8 0.7
Industry 80.1 1,645.5 34.3
Construction and real estate 4.8 763.6 15.9
Electricity 6,919.8 183.9 3.8
Water - 0.2 -
Commerce 4.5 149.1 3.2
Restaurants and hotels - 128.1 2.7
Transport and storage - 131.3 2.7
Communications and computer services - 187.4 3.9
Financial services - 737.4 15.4
Other business services - 490.9 10.2
Public and community services - 297.0 6.2
Private households - 46.5 1.0
-------- -------- --------
Total 7,011.3 4,794.7 100.0
======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4)
Local authorities
(1) Credit to the public and investments in debentures of the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining a borrower or group of borrowers indebtedness
limitations.
(3) Balances of problematic debts, net of credit covered by collateral allowed
for set-off for the purpose of a borrower or a group of borrowers
indebtedness limitations include components of off- balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such entities.
* The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts
34
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 2001
-----------------------------------------------------------------------------------
ANNUAL
TOTAL RISK EXPENSE FOR BALANCE OF
OFF-BALANCE OF THE SPECIFIC THE SPECIFIC BALANCE OF
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR ALLOWANCE FOR PROBLEMATIC
CREDIT RISK (1)* RISK (2)* PUBLIC* DOUBTFUL DEBTS DOUBTFUL DEBTS DEBTS (3)*
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS
-----------------------------------------------------------------------------------
Agriculture 45.1 1.1 46.2 1.3 6.3 6.0
Industry 1,903.2 708.9 2,612.1 35.5 185.4 554.2
Construction and real estate 778.0 428.8 1,206.8 26.7 47.8 260.4
Electricity 7,087.8 71.3 7,159.1 - 2.3 8.9
Water 0.2 - 0.2 - - -
Commerce 250.5 39.0 289.5 9.5 49.4 58.8
Restaurants and hotels 164.5 35.5 200.0 5.6 9.1 140.1
Transport and storage 229.2 14.8 244.0 - 1.7 59.8
Communications and computer services 217.1 146.1 363.2 12.2 23.5 24.7
Financial services 610.5 117.4 727.9 3.6 3.6 56.5
Other business services 672.4 137.5 809.9 3.6 4.8 35.0
Public and community services 304.9 31.0 335.9 9.9 29.4 140.5
Private households 67.3 5.9 73.2 0.5 2.7 7.1
-------- -------- -------- -------- -------- --------
Total 12,330.7 1,737.3 14,068.0 108.4 366.0 1,352.0
======== ======== ======== ======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 565.9 10.9 - 19.7 273.3
Local authorities 73.4 - 73.4 - 5.6
DECEMBER 31, 2001
----------------------
TOTAL RISK % OF SECTOR
NET OF OF TOTAL RISK
GOVERNMENT GOVERNMENT NET OF GOVERNMENT
GUARANTEES GUARANTEES GUARANTEES
-------- -------- --------
IN MILLIONS OF NIS
----------------------
Agriculture 3.0 43.2 0.6
Industry 123.5 2,488.6 35.9
Construction and real estate 5.1 1,201.7 17.3
Electricity 6,984.6 174.5 2.5
Water - 0.2 -
Commerce - 289.5 4.2
Restaurants and hotels 6.5 193.5 2.8
Transport and storage - 244.0 3.5
Communications and computer services - 363.2 5.2
Financial services - 727.9 10.5
Other business services - 809.9 11.7
Public and community services - 335.9 48
Private households - 73.2 1.0
-------- -------- --------
Total 7,122.7 6,945.3 100.0
======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4)
Local authorities
(1) Credit to the public and investments in debentures of the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining a borrower or group of borrowers indebtedness
limitations.
(3) Balances of problematic debts, net of credit covered by collateral allowed
for set-off for the purpose of a borrower or a group of borrowers
indebtedness limitations include components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such entities.
* The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
35
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 2000
-----------------------------------------------------------------------------------
ANNUAL
TOTAL RISK EXPENSE FOR BALANCE OF
OFF-BALANCE OF THE SPECIFIC THE SPECIFIC BALANCE OF
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR ALLOWANCE FOR PROBLEMATIC
CREDIT RISK (1)* RISK (2)* PUBLIC* DOUBTFUL DEBTS DOUBTFUL DEBTS DEBTS (3)*
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS
-----------------------------------------------------------------------------------
Agriculture 36.2 1.5 37.7 1.6 3.7 3.5
Industry 1,890.6 496.5 2,387.1 12.9 168.1 677.3
Construction and real estate 751.0 502.4 1,253.4 3.0 14.0 99.7
Electricity 6,569.5 30.2 6,599.7 - 2.1 1.8
Water 0.3 - 0.3 - - 0.3
Commerce 242.6 29.2 271.8 6.8 33.6 36.3
Restaurants and hotels 158.5 41.4 199.9 0.5 3.0 22.8
Transport and storage 233.9 10.2 244.1 0.7 1.4 0.4
Communications and computer services 63.0 30.5 93.5 (0.5) 8.9 6.9
Financial services 438.3 121.0 559.3 - 2.9 2.4
Other business services 704.0 123.0 827.0 0.2 0.9 31.2
Public and community services 317.0 6.6 323.6 6.0 13.7 27.3
Private households 81.7 34.8 116.5 0.3 0.3 6.0
-------- -------- -------- -------- -------- --------
Total 11,486.6 1,427.3 12,913.9 31.5 252.6 915.9
======== ======== ======== ======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 626.1 9.5 635.5 4.2 358.4
Local authorities 99.8 - 99.8 - 9.6
DECEMBER 31, 2000
----------------------
TOTAL RISK % OF SECTOR
NET OF OF TOTAL RISK
GOVERNMENT GOVERNMENT NET OF GOVERNMENT
GUARANTEES GUARANTEES GUARANTEES
-------- -------- --------
IN MILLIONS OF NIS
----------------------
Agriculture 3.7 34.0 0.5
Industry 185.9 2,201.2 35.6
Construction and real estate 6.5 1,246.9 20.1
Electricity 6,507.5 92.2 1.5
Water - 0.3 -
Commerce 0.2 271.6 4.4
Restaurants and hotels 10.0 189.9 3.1
Transport and storage - 244.1 3.9
Communications and computer services 0.4 93.1 1.5
Financial services - 559.3 9.0
Other business services - 827.0 13.3
Public and community services - 323.6 5.2
Private households - 116.5 1.9
-------- -------- --------
Total 6,714.2 6,199.7 100.0
======== ======== ========
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4)
Local authorities
(1) Credit to the public and investments in debentures of the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining a borrower or group of borrowers indebtedness
limitations.
(3) Balances of problematic debts, net of credit covered by collateral allowed
for set-off for the purpose of a borrower or a group of borrowers
indebtedness limitations include components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such entities.
* The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
36
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 1999
-----------------------------------------------------------------------------------
ANNUAL
TOTAL RISK EXPENSE FOR BALANCE OF
OFF-BALANCE OF THE SPECIFIC THE SPECIFIC BALANCE OF
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR ALLOWANCE FOR PROBLEMATIC
CREDIT RISK (1)* RISK (2)* PUBLIC* DOUBTFUL DEBTS DOUBTFUL DEBTS DEBTS (3)*
-------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS
-----------------------------------------------------------------------------------
Agriculture 54.7 2.4 57.1 - 19.8 5.8
Industry 1,748.2 505.0 2,253.2 21.8 176.1 779.8
Construction and real estate 625.9 399.5 1,025.4 (2.5) 8.1 97.9
Electricity 6,702.6 0.8 6,703.4 - 2.1 1.6
Water 0.2 - 0.2 - - 0.3
Commerce 245.4 32.7 278.1 3.3 23.2 48.8
Restaurants and hotels 106.2 12.8 119.0 - 2.4 29.0
Transport and storage 203.4 141.6 345.0 (2.1) 2.6 1.1
Communications and computer services 76.5 10.6 87.1 - 8.0 40.6
Financial services 361.1 123.5 484.6 - 1.9 2.1
Other business services 197.2 44.7 241.9 0.8 0.6 24.8
Public and community services 268.6 28.7 297.3 5.0 5.4 32.0
Private households 76.7 25.7 102.4 - - 3.0
-------- -------- -------- -------- -------- --------
Total 10,666.7 1,328.0 11,994.7 26.3 250.2 1,066.8
======== ======== ======== ======== ======== ========
Credit risk included in the
Various industry sectors:
Agricultural settlement movements (4) 764.5 3.9 743.8 11.0 502.4
Local authorities 129.2 - 129.2 - 13.8
DECEMBER 31, 1999
----------------------
TOTAL RISK % OF SECTOR
NET OF OF TOTAL RISK
GOVERNMENT GOVERNMENT NET OF GOVERNMENT
GUARANTEES GUARANTEES GUARANTEES
-------- -------- --------
IN MILLIONS OF NIS
----------------------
Agriculture 4.8 52.3 1.0
Industry 287.6 1,965.6 39.7
Construction and real estate 50.8 974.6 19.7
Electricity 6,700.5 2.9 0.1
Water 0.7 (0.5) -
Commerce 13.2 264.9 5.4
Restaurants and hotels - 119.0 2.4
Transport and storage - 345.0 7.0
Communications and computer services 0.1 87.0 1.8
Financial services 0.1 484.5 9.8
Other business services 0.1 241.8 4.9
Public and community services - 297.3 6.0
Private households - 102.4 2.1
-------- -------- --------
Total 7,057.9 4,936.8 100.0
======== ======== ========
Credit risk included in the
Various industry sectors:
Agricultural settlement movements (4)
Local authorities
(1) Credit to the public and investments in debentures of the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining a borrower or group of borrowers indebtedness
limitations.
(3) Balances of problematic debts, net of credit covered by collateral allowed
for set-off for the purpose of a borrower or a group of borrowers
indebtedness limitations include components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such entities.
* The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
37
MATURITY DISTRIBUTION OF CREDIT TO THE PUBLIC BY LINKAGE BASIS SEGMENTS
The following table sets forth the maturity profile of our credit to the
public by linkage basis segments as of December 31, 2003.
IN MILLIONS OF NIS
------------------------------------------------------------------------
UP BETWEEN BETWEEN 6 BETWEEN MORE
LINKAGE TO 3 3 AND AND 1 AND THAN
BASIS MONTHS 6 MONTHS 12 MONTHS 5 YEARS 5 YEARS TOTAL
------- ------- ------- ------- ------- -------
Non-Linked Israeli currency 849.8 56.9 72.0 137.1 9.3 1,125.1
CPI- linked Israeli Currency 77.3 35.5 90.8 343.2 446.4 993.2
Foreign Currency and linked thereto 257.0 107.3 147.5 1,168.6 5,390.9 7,071.3
------- ------- ------- ------- ------- -------
TOTAL 1184.1 199.7 310.3 1,648.9 5,846.6 9,189.6
======= ======= ======= ======= ======= =======
(1) Balances of current accounts and credits which have matured are included in
the up to 3 months category.
(2) The balances include accumulated interest as of December 31, 2003 but do
not include accumulated interest until the maturity date.
DEVELOPMENT OF CREDIT RISK IN RESPECT OF PROBLEMATIC BORROWERS
The following table sets forth comparative data on the development of the
overall credit risk in respect of problematic borrowers (balances are net of
allowance):
IN MILLIONS OF NIS
-------------------------------------------------------------
2003 2002 2001 2000 1999
------- -------- ------- ------- -------
Non income bearing 571.6 *589.3 427.7 164.3 189.7
Restructured (2) 34.7 62.4 93.6 278.1 316.7
Designated for restructuring (3) 54.2 16.8 32.1 6.6 32.4
Temporarily in arrears 102.4 130.2 60.0 266.7 217.6
Under special supervision **497.2 ***464.6 656.0 124.2 152.4
------- -------- ------- ------- -------
Total balance sheet credit to problematic
borrowers (1) 1,260.1 1,263.3 1,269.4 839.9 908.8
======= ======== ======= ======= =======
Off-balance sheet credit risk in
respect of problematic borrowers(1) 187.2 188.4 82.2 76.2 158.0
Debentures of problematic borrowers 0.1 0.2 0.4 --- ---
------- -------- ------- ------- -------
Overall credit risk in respect of
problematic borrowers (1) (4) 1,447.4 1,451.9 1,352.0 916.1 1,066.8
======= ======== ======= ======= =======
38
* Including a loan to a customer that was classified as non-income bearing,
and according to instructions of Bank of Israel was reclassified in 2003 to
the "Securities" item (see Note 4 to the financial statements in Item 17).
** Including NIS 136.1 million in respect of debts for which a specific
allowance exists
*** Including NIS 237.5 million in respect of debts for which a specific
allowance exists.
(1) Not including problematic debts that are covered by collateral that is
deductible for purposes of individual borrower and borrower group
indebtedness limitations (Proper Banking Procedure No. 313).
(2) Credit that was restructured in the current year and credit that was
restructured in prior years with waiver of income.
(3) Credit to borrowers in respect of which there is an as yet unimplemented
decision by management to restructure their debt.
(4) As calculated for purposes of individual borrower and borrower group
indebtedness limitations, except in respect of guarantees granted by a
borrower as security for the debt of a third party.
The data presented above indicates the high volume of debts that are
classified as non-income bearing in relation to total credit to the public. The
interest revenue in respect of those debts, which will not be included in
financing income, will have a negative impact on our results of operations in
the future, as long as the debts continue to be classified as non-income
bearing. Interest income that was not credited to income for non-income bearing
debts for the year ending December 31, 2003 was NIS 73 million, in comparison to
NIS 65 million for the year ending December 31, 2002, and NIS 25 million for the
year ending December 31, 2001.
According to our policy, a loan is classified as non-income bearing if the
loan is in arrears and management's evaluation is that the arrears are not
temporary.
39
LOAN CONCENTRATION
The following table sets forth our credit risk exposure to the largest six
borrowers/borrower groups as defined by the Proper Banking Procedures of the
Bank of Israel, for the five years ending on December 31, 2003, 2002, 2001, 2000
and 1999.
IN MILLIONS OF NIS
IN TERMS OF NIS DECEMBER 2003
2003 2002 2001 2000 1999
------- -------- -------- -------- --------
Credit risk exposure to
the largest six
borrowers/borrower groups* 595.5 783.0 1,046.9 698.5 628.5
Total credit to the
public** 9,189.6 10,908.1 12,223.3 11,426.6 10,604.2
Percentage of the
borrower/borrower group of
the total credit to the public 6.5% 7.2% 8.6% 6.1% 5.9%
* The credit risk exposure is calculated according to the Proper Banking
Procedures of the Supervisor of Banks (Israel) and consequently, the amounts are
presented after the deduction of certain types of collateral, such as State of
Israel guarantees.
** The amount of total credit to the public includes a credit guaranteed by the
State of Israel which was granted out of a deposit that was deposited with us by
the State of Israel for that purpose and the outstanding balance of which, in
terms of NIS December 31, 2003, for each of the above years , was as follows:
o December 31, 2003 - NIS 6,405.3 million
o December 31, 2002 - NIS 6,925.2 million
o December 31, 2001 - NIS 6,984.6 million
o December 31, 2000 - NIS 6,507.6 million
o December 31, 1999 - NIS 6,700.5 million
40
ANALYSIS OF SPECIFIC ALLOWANCES FOR DOUBTFUL DEBTS BY BUSINESS SEGMENTS
The following table details our annual expense for specific allowances for
doubtful debts, according to business segments, for each of the past five years.
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
IN IN IN IN IN
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
OF NIS % OF NIS % OF NIS % OF NIS % OF NIS %
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Agriculture - - 0.3 - 1.3 1 1.6 5 - -
Industry 66.1 49 112.2 29 35.4 33 13.0 41 21.8 83
Construction and real estate 18.8 14 74.4 19 26.8 25 2.9 9 (2.5) (10)
Electricity 1.2 1 6.2 2 - - - - - -
Water - - - - - - - - - -
Commerce 4.9 4 20.3 5 9.5 9 6.8 22 3.3 13
Restaurants and hotels 6.8 5 22.8 6 5.6 5 0.5 2 - -
Transport and storage 0.1 - 1.2 - - - 0.7 2 (2.1) (8)
Communications and computer services 7.8 6 16.5 4 12.2 11 (0.5) (2) - -
Financial services 10.0 7 82.7 21 3.6 3 - - - -
Other business services 6.7 5 11.5 3 3.6 3 0.2 1 0.8 3
Public and community services 11.5 9 39.1 10 9.9 9 6.1 19 5.0 19
Private households - - 4.4 1 0.5 1 0.3 1 - -
Total 133.9 100 391.6 100 108.4 100 31.6 100 26.3 100
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 10.2 8 19.3 5 19.7 18 4.3 14 11.0 42
Local authorities - - - - - - -
41
DEPOSITS
The following tables provide an analysis of the maturity of deposits as of
December 31, 2003.
DEPOSITS OF THE PUBLIC AS OF DECEMBER 31,2003.
IN MILLIONS OF NIS
-----------------------------------------------
UP BETWEEN BETWEEN 6 MORE
LINKAGE TO 3 3 AND AND 12 THAN
SEGMENT MONTHS 6 MONTHS MONTHS 1 YEAR TOTAL
----- ----- ----- ----- -----
Non-Linked Israeli currency 56.3 42.1 131.2 7.9 237.5
CPI- linked Israeli Currency 36.2 36.3 58.3 144.6 275.4
Foreign Currency and linked thereto 98.3 5.9 1.6 1.3 107.1
DEPOSITS OF THE GOVERNMENT AS OF DECEMBER 31,2003
IN MILLIONS OF NIS
--------------------------------------------------
UP BETWEEN BETWEEN 6 MORE
LINKAGE TO 3 3 AND AND 12 THAN
SEGMENT MONTHS 6 MONTHS MONTHS 1 YEAR TOTAL
------- ------- ------- ------- -------
CPI- linked Israeli Currency 13.0 13.0 26.1 352.4 404.5
Foreign Currency and linked thereto 36.8 42.3 82.0 6,383.7 6,544.8
The balances set forth in the tables above include accumulated interest as of
December 31, 2003 but do not include future interest.
C. ORGANIZATIONAL STRUCTURE
Not applicable.
D. PROPERTY, PLANTS AND EQUIPMENT
Until September 14, 2003, our offices, which we leased, were located at
Asia House, 4 Weizman Street, Tel Aviv, Israel. These premises encompassed
approximately 30,000 square feet.
In connection with the run-off plan and the efficiency plan approved by our
board and the reduction in the number of employees, all of our operations moved
on September 14, 2003 to a smaller office located at 82 Menachem Begin Road, Tel
Aviv, Israel.
42
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE FINANCIAL INFORMATION PRESENTED IN THIS ITEM BELOW IS BASED ON ISRAELI
GAAP, WHICH MAY DIFFER MATERIALLY FROM U.S. GAAP. FOR A RECONCILIATION OF OUR
FINANCIAL INFORMATION TO U.S. GAAP, SEE "ITEM 3.A.- SELECTED FINANCIAL DATA" AND
"ITEM 17- FINANCIAL STATEMENTS".
SUMMARY
Until the liquidity crisis we experienced in the third quarter of 2002,
which stemmed from the withdrawals of deposits by the public, our business
focused on normal banking activities, including, without limitation, the
extension of short, medium and long term credit in NIS and foreign currencies,
the acceptance of deposits in all currencies, the maintenance of checking
accounts and the issuance of credit cards. In addition, we issued guarantees of
all types in Israel and abroad and issued letters of credit and other documents
relating to foreign trade. As of June 30, 2002, the balance of the public's
deposits with us was NIS 3,597 million, which decreased to NIS 1,291 million as
of December 31, 2003. As a result of the increased withdrawals of deposits by
the public, we began to experience a severe liquidity crisis and, by December
31, 2003 the balance of the public's deposits with us had declined to only NIS
620 million.
In response to the liquidity crisis, the Government of Israel and the Bank
of Israel proposed a plan for the ultimate sale of our assets and liabilities to
a third party. Until the sale, however, the Bank of Israel agreed to provide us
a special line of credit to help us manage our liquidity crisis and continue our
operations. See "Item 4. Information on the Company - Business Overview -
Proposed Sale of the Bank and Extension of Special Line of Credit by the Bank of
Israel" for a detailed description of the proposed sale and the special line of
credit from the Bank of Israel.
The "en bloc" sale of our asset and liability portfolio within a short time
frame was not consummated and, on February 27, 2003, our board of directors
adopted a run-off plan for our business, a modified version of which was
approved by the Government of Israel. The ultimate goal of the run-off plan is
the controlled disposal of our credit assets over a period expiring in 2006. For
a more detailed description of the run-off plan and the amendments to the
special line of credit, see "Item 4. Information on the Company - Business
Overview - Adoption of the Run-Off Plan and Amendment of the Special Line of
Credit".
For the fiscal year ended December 31, 2003, we had a loss of NIS 104.4
million, compared with a loss of NIS 423.5 million in 2002. Our losses in 2003
derived mainly from the provision for doubtful debts and from the decrease in
our earnings from financing activities. Our profits from financing operations
before the provision for doubtful debts amounted to NIS 66.9 million as of
December 31, 2003 compared to NIS 79.5 million in the previous year. Our
after-tax loss from ordinary operations amounted to NIS 103.7 million in 2003
compared to NIS 429.5 million in 2002.
43
A. OPERATING RESULTS
For the fiscal year ended December 31, 2003, we had a loss of NIS 104.4
million, compared with a loss of NIS 423.5 million in 2002. The loss in 2003
derived mainly from the provision for doubtful debts and from the decrease in
earnings from financing activities
Our total balance sheet as of December 31, 2003 amounted to NIS 10,356
million as compared to NIS 12,274 million at December 31, 2002. Credit to the
public amounted to NIS 9,190 million, which represented approximately 88.7% of
our total balance sheet.
Our profits from financing operations before the provision for doubtful
debts amounted to NIS 66.9 million as of December 31, 2003 compared to NIS 79.5
million in the previous year. Our after-tax loss from ordinary operations
amounted to NIS 103.7 million in 2003 compared to NIS 429.5 million in 2002. Our
net loss, including income from the perpetual deposit with the Treasury, was NIS
104.4 million as of December 31, 2003 compared to NIS 423.5 million as of
December 31, 2002.
The decrease in profits from financing operations resulted mainly from the
following:
o A DECREASE IN THE VOLUME OF OUR FINANCING ACTIVITIES. The balance of
outstanding credit to the public (not including credit guaranteed by
the State of Israel and granted out of a deposit that the State of
Israel deposited with us for that purpose) as of December 31, 2003 was
NIS 2,784 million, compared to NIS 3,984 million as of December 31,
2002 and NIS 5,238 million as of December 31, 2001. The average
balance of credit to the public during 2003 was equal to NIS 3,485
million, compared with NIS 4,913 million in 2002, a decrease of NIS
1,428 million or 29% in the average balance.
o A DECREASE IN OFF-BALANCE SHEET ACTIVITIES. Concurrently with the
decrease in volume of financing activities, we also experienced a
decrease in the volume of off-balance sheet activities. The balance of
guarantees issued by us was NIS 419 million as of December 31, 2003,
compared to NIS 570 million as of December 31, 2002 and NIS 1,161
million as of December 31, 2001.
o CESSATION OF DEALING ROOM ACTIVITIES. Our dealing room activities have
been terminated. As a result no income was recorded in 2003 from
transactions in derivative financial instruments on behalf of
customers.
o INCREASE IN NON-INCOME BEARING DEBTS. The average balance of loans
classified in 2003 as non-income bearing amounted to NIS 634 million,
compared to NIS 501 million on average in 2002. As a result, the
amount of interest and linkage increments not credited to financing
income in 2003 was higher than that of 2002.
44
o COST OF THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL. Starting
from August 2002, we had to draw on our account with the Bank of
Israel. On November 14, 2002, the Bank of Israel granted us a special
line of credit. The interest rate that we currently pay on the line of
credit is the Bank of Israel interest rate, which is currently 4.1%
per annum . The interest rate that was originally set for the credit
we drew on the Bank of Israel, and which was in effect until July 29,
2003, was significantly higher (initially, on credit drawn on the Bank
of Israel, we paid the Bank of Israel rate plus 5% and starting on
November 14, 2002, the Bank of Israel rate plus 3%). Interest charges
in respect of the credit line in 2003 were NIS 36 million more than
the interest paid on the deposits that the credit line replaced,
compared to a difference of NIS 30 million in 2002. The excess amounts
of such interest reduced our financing income both in 2002 and 2003.
On the other hand, our policy of increasing the interest rate on credit
granted offset the decline in income from financing operations derived from
the above mentioned factors. This policy enabled us to maintain a positive
margin (including the effect of derivatives) in each of the linkage
segments.
In accordance with the monetary policies established by the Bank of Israel,
a relatively high rate of interest prevailed through 2003 in the unlinked shekel
sector. While we paid higher rates of interest on deposits in unlinked shekels
(including the special line of credit), we debited higher rates of interest on
loans in unlinked shekels. However, a substantial part of the interest that we
debited was not added to our income, because a substantial portion of our loan
portfolio was non-income bearing. Therefore the high interest rate policy of the
Bank of Israel had an adverse effect on our results.
Another factor which offset the decline in income from financing operations
was income which stemmed from compensation from the Treasury, as follows. In
1991, we joined the Kibbutz Debt Arrangement with certain other banks, the
Government of Israel and the kibbutzim. Under this arrangement, (a)
rehabilitation programs were provided to borrowers, (b) portions of loans
granted to kibbutzim were forgiven, (c) Government grants were provided for the
early repayment of portions of Kibbutz debts, and (d) other portions of debt
were rescheduled. A modification made later to the Kibbutz Debt Arrangement also
provided that banks were required to refund to the Treasury a part of the
deposits received by the banks under the original Kibbutz Debt Arrangement,
which deposits were designated to serve as a source for rescheduling Kibbutz
debts. In 1996, we entered into an agreement with the Treasury with respect to
the repayment of Treasury deposits as stipulated by the complementary
arrangement for the Kibbutz debts. The 1996 agreement stipulated that in
consideration of the refund of the deposits to Treasury, we would be entitled to
compensation from Treasury (because the deposits carried interest at a rate that
was 1% lower than the interest paid on similar deposits at the other
participating banks). In the fourth quarter of 2003, we refunded to the Treasury
(in accordance with the Kibbutz Debt Arrangement and the 1996 agreement) an
amount equal to NIS 171 million, and, accordingly, received compensation from
Treasury equal to NIS 26.5 million. See Note 4.B. to our financial statements
included in Item 17 of this annual report for a more detailed discussion of
credit to Kibbutzim.
TOTAL ASSETS
Our total assets as of December 31, 2003 decreased to NIS 10,356 million as
compared to NIS 12,274 million as of December 31, 2002. The main component of
the net change in the total assets was the reduction of our credit portfolio,
which decreased from NIS 10,908 million as of December 31, 2002 to NIS 9,190
million as of December 31, 2003 (a decrease of 15.75%). The above figures
include a state guaranteed credit (NIS 6,405 million as of December 31, 2003 and
NIS 6,925 million as of December 31, 2002), that was granted out of a deposit
that was deposited with us by the State of Israel for that purpose.
45
TOTAL LIABLITIES
Our total liabilities as of December 31, 2003 decreased to NIS 9,847
million as compared to NIS 11,665 million as of December 31, 2002. The main
component of the net change in the total liabilities was the reduction of our
deposits, which decreased from NIS 11,474 million as of December 31, 2002 to NIS
9,742 million as of December 31, 2003 (15.1% decrease). The calculation of total
liabilities includes a deposit of the State of Israel that was used to grant a
credit guaranteed by the State of Israel, the balance of which amounted to NIS
6,925 million as of December 31, 2002 and NIS 6,405 millions as of December 31,
2003.
AVERAGE BALANCE OF ASSETS IN VARIOUS LINKAGE SEGMENTS AND THE MARGIN ON THESE
ASSETS
NON-LINKED SHEKEL SEGMENT. The average balance of assets in this segment
amounted to NIS 1,299 million in 2003 compared with NIS 1,603 million in 2002.
The average margin in this segment, including the effect of derivatives, was
0.36% in 2003 compared with 0.09% in 2002.
It should be noted that most of our non-income bearing loans are in the
non-linked shekel segment and that the low margin stems from the volume of
accumulated interest on the non-income bearing debt that was not included in
financing income.
CPI LINKED SHEKEL SEGMENT. The average balance of assets in this segment
amounted to NIS 1,322 million in 2003 compared with NIS 1,883 million in 2002, a
decrease of 29.8%. The decline in volume of our operations in this segment
stemmed both from the general decline in our operations and from the
implementation of our credit policy, pursuant to which we renew credit for short
periods and mainly in the non-linked shekel segment. The average margin in this
segment, including the effect of derivatives, was 1.80% in 2003 compared with a
negative margin of 0.24% in 2002. The improvement in this margin results from a
combination of the following factors: (a) our policy of increasing the interest
rate when we renew credits in this segment; (b) a decrease in the volume of
non-income bearing loans in this segment due to the fact that the debt was
transferred mainly to the non-linked shekel segment; and (c) the negative
inflation rate in 2003 contributed to the decline in the volume of accumulated
interest that was not recorded as income with respect to the non-income bearing
debt.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT. The total average
volume of assets in this segment amounted to NIS 7,775 million in 2003 compared
with NIS 9,167 million in 2002. Credit in this segment includes credit
guaranteed by the State of Israel and granted out of a deposit that was
deposited with us by the State of Israel for that purpose. The margin in respect
of this credit is negligible and matches the level of risk attached to this
credit. Excluding such credit, the average balance of assets in this segment
amounted to NIS 1,137 million in 2003, compared with NIS 2,072 million in 2002.
The average margin in this segment, including the effect of derivatives, was
0.19% in 2003 compared with 0.12% in 2002. The low margin rate in this segment
resulted from the volume of State guaranteed credit, as stated above.
46
OPERATING INCOME AND EXPENSE
OPERATING AND OTHER INCOME. Our operating income was NIS 22.0 million in
2003, compared with NIS 12.2 million in 2002. The increase in operating income
stems mainly from gains on investments in shares compared with the losses
incurred in 2002. This increase was partly offset by the decline in income from
operating commissions as a result of the decline in transactions made by
customers through us. Income from operating commissions in 2003 amounted to NIS
6.4 million compared with NIS 12.3 million in 2002. Gains on investment in
shares in 2003 amounted to NIS 10.2 million compared to a loss of NIS 4.2
million in 2002. In addition, other income in 2003 included gains on severance
funding of NIS 1.6 million compared with losses in 2002, which losses were
included in payroll expenses and related benefits.
OPERATING AND OTHER EXPENSES. Operating and other expenses amounted to NIS
65.3 million in 2003, compared with NIS 119.8 million in 2002. Operating
expenses in 2002 included provisions related to the retirement of employees in
the amount of NIS 35.7 million, compared with a reduction of NIS 0.8 million in
2003. The income recorded in respect of retirement stemmed from a renewed
evaluation made by the Board of Directors, which resulted in a reduction in the
provision made in respect of the period in which the service of the Chairman of
the Board, General Manager and Deputy General Manager may no longer be required.
Excluding this item, operating expenses in 2003 amounted to NIS 66.1 million
compared to NIS 84.1 million in 2002, a decrease of 21% in operating expenses.
At the end of the third quarter of 2003, we relocated to a new office at a
much lower rent than that paid for our previous office. The anticipated savings
in rental payments are reflected as from the fourth quarter of 2003 and will be
fully reflected as from the first quarter of 2004.
Payroll expenses, not including employee retirement costs, totaled NIS 33.7
million in 2003, compared with NIS 49.7 million in 2002, a decrease of 32%. The
decrease in payroll expenses resulted from the decrease in the number of
employees in accordance with the run off plan and the related efficiency
measures, as well as from the reduction in salaries made at the beginning of
2003. We expect payroll expenses to continue to decline.
As a result of losses for the purpose of VAT on profit, an amount of NIS
5.1 million in respect of VAT on payroll that is usually levied on a financial
institution was not included in payroll expenses in 2003, compared with NIS 6.7
million in 2002.
Other operating expenses amounted to NIS 20.5 million in 2003, compared
with NIS 19.7 million in 2002. In most of the components of this item there was
a significant decrease, which was offset by the increase in insurance expense
and legal fees. In 2003, this item also included non-recurring expenses of NIS
1.3 million in connection with the relocation of our offices.
47
B. LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF FUNDS
Our main sources of liquidity at the present time are (a) the special line
of credit extended by the Bank of Israel, (b) Treasury deposits, (c) deposits of
the public and (d) any collections we obtain on existing loans to customers. Set
forth below is a chart showing the percentage of the various segments of
deposits.
Deposits from the public: 6%
Deposits from banks: 1%
Treasury: 71%
Deposits from Bank of Israel: 22%
Our additional drawings under the special line of credit made during 2003
were repaid in that year.. Therefore, the principal amount of balance of the
special line of credit outstanding at the end of 2003 was the same as the
principal amount outstanding at the beginning of the year. We used funds made
available primarily from the realization of our assets to repay deposits of the
public and repay the special line of credit
The balance of the special line of credit (principal and interest) at the
end of each quarter of 2003, was as follows:
IN MILLIONS OF NIS
1st Quarter- NIS 2,200
2nd Quarter- NIS 2,090
3rd Quarter- NIS 2,005
4th Quarter- NIS 2,062
The terms of the special line of credit require that the loans extended to
us thereunder be repaid by August 1, 2006. Additionally, the Governor of the
Bank of Israel may, in his sole discretion, demand the earlier repayment of the
outstanding amounts due under the special line of credit or terminate its
further utilization. See "Item 4. Information on the Company-Business Overview"
above for a description of our special line of credit.
The amount made available to us under the special line of credit was
initially NIS 2,200 million. According to the terms of the special line of
credit, the available amount under the line of credit will decrease gradually
over the term of the special line of credit in accordance with the forecast that
we provided to the Bank of Israel.
In the opinion of management, subject to the continued availability of the
special line of credit from the Bank of Israel, our capital is sufficient for
our present requirements under the run-off plan.
48
For a more detailed description of the restrictions imposed by the special
line of credit, see "Item 4. Business Overview - Adoption of Run-Off Plan and
Amendment of the Special Line of Credit" above.
Deposits of the public amounted to NIS 620 million as of December 31, 2003,
compared to NIS 1,291 million as of December 31, 2002, a decrease of 52%. As of
December 31, 2003, deposits of the public consisted of unlinked shekel deposits
equal to NIS 238 million, CPI linked shekel deposits equal to NIS 275 million
and foreign currency linked deposits equal to NIS 107 million. As of December
31, 2002, deposits of the public consisted of unlinked shekel deposits equal to
NIS 302 million, CPI linked shekel deposits equal to NIS 769 million and foreign
currency linked deposits equal to NIS 220 million. Government deposits as of
December 31, 2003 amounted to NIS 6,949 million, compared with NIS 7,712 million
as of December 31, 2002. The main component of the Government deposits is
foreign currency denominated deposits, which serve as the source for granting
long-term loans. The balance of the Government's foreign currency deposits
amounted to NIS 6,545 million as of December 31, 2003, compared with NIS 7,093
million as of December 31, 2002. The decrease in foreign currency denominated
Government deposits resulted mainly from the erosion in the exchange rate of the
U.S. dollar.
Another component of the Government deposits are the CPI-linked deposits
which we received as part of the arrangements with the kibbutzim. These deposits
served as a source for rescheduling the debts of the kibbutzim. The balance of
the Government's CPI-linked deposits as of December 31, 2003 amounted to NIS 404
million, compared with NIS 618 million as of December 31, 2002. As stated above,
in the course of 2003 we refunded the Treasury an amount equal to NIS 171
million, in accordance with the complementary kibbutz debt arrangement.
Deposits from other banks as of December 31, 2003 amounted to NIS 2,173
million, compared with NIS 2,471 million as of December 31, 2002. Of this
amount, an amount equal to NIS 2,091 million was from the special line of credit
from the Bank of Israel.
The balance of the special credit line, not including accrued interest from
January 1, 2004, amounted to NIS 1,935 million on February 24, 2004 and NIS
1,389 million on December 31, 2004.
CASH FLOW
Our cash flow must be examined in light of the process by which we are
realizing the assets of the bank within the framework of the run-off plan under
which we are operating.
The cash balance as of December 31, 2003 amounted to approximately NIS 115
million, compared to NIS 155 million as of December 31, 2002, a decline of
approximately NIS 40 million.
CASH AND DEPOSITS WITH BANKS. The balance of our deposits with banks amounted to
approximately NIS 143.9 million, as of December 31, 2003, compared with
approximately NIS 243.6 million as of December 31, 2002.
49
The balance of our deposits with banks as of December 31, 2003 was
comprised as follows:
o NIS 57.0 million deposits with the Bank of Israel.
o NIS 58.4 million short-term deposits with other banks in Israel and
abroad. (This amount includes approximately NIS 11 million, as of
December 31, 2003, that are pledged to the banks in which they are
deposited. These pledges were granted pursuant to the approval of the
Bank of Israel and serve as collateral for our activities in
derivative financial instruments with these banks).
o NIS 28.5 million long-term CPI-linked deposits.
Cash flow from current operations in 2003 showed a surplus of approximately
NIS 8 million.
Cash flow from asset operations in 2003 shows a decline in the assets in an
amount equal to approximately NIS 1,759 million, resulting primarily from a
decline in loans, which was approximately NIS 1,567 million.
Cash flow from liabilities in 2003 showed a decline of approximately NIS
1,806 million in our liabilities, including deposits of the public, deposits of
banks and deposits of the Government. The special line of credit from the Bank
of Israel currently represents the cash flow surplus between the cash flow
resulting from realization of the assets and the cash flow resulting from the
payment of liabilities . The balance of the special line of credit at the end of
2003 was the same as at the beginning of the year, which indicates that, during
the course of 2003, the consideration from the realization of the assets
(including the decline of cash) plus the surplus cash flow from current
operations, constituted a sufficient source for the payment of liabilities.
According to the management's forecast for 2004, the realization of assets
is expected to act as the primary source for the payment of our liabilities. The
balance of the special line of credit from the Bank of Israel is expected to
decline by December 31, 2004 by approximately NIS 600 million compared to the
balance as of December 31, 2003.
The changes in the makeup of our asset and liability portfolio should be
viewed in light of the run-off plan that we are currently implementing. The
run-off plan includes the cessation of our granting of new credits, the gradual
realization of our assets and the repayment of deposits to our depositors. We
are presently unable to raise new capital or new deposits and the special line
of credit was extended to us to enable us to meet our obligations.
EQUITY CAPITAL
Our Equity Capital as of December 31, 2003 was equal to NIS 196 million.
The Capital Sum, including Non-Participating shares, amounts to approximately
NIS 510 million representing approximately 4.92% of the balance sheet total
50
CAPITAL ADEQUACY
On December 31, 2003, our minimum capital ratio was negative (0.28%)
compared with 2.86% on December 31, 2002. The Proper Banking Procedures
stipulate that the minimum capital ratio must be 9.0%.
On November 26, 2003, the Supervisor of Banks notified us of his decision
to waive the minimum capital ratio of 15%, which applied to us until that date.
As a result of the sharp decline in our "first tier capital" and in view of
the limitation providing that "second tier capital" in excess of the "first tier
capital" shall not be taken into consideration in calculating the minimum
capital ratio, all of our "second tier capital" (comprising most of our capital)
remains unutilized in the calculation of the minimum capital ratio (thus, as at
December 31, 2003, "second tier capital" in the total amount of NIS 548 million
remains unutilized). In the opinion of our board of directors, in our present
circumstances, the requirement to maintain a minimum capital ratio is irrelevant
to our operations. It should be noted that the regulatory mandated minimum
capital ratio is applied to normally operating institutions, while our Bank is
currently subject to severe limitations pursuant to the run-off plan.
ALLOWANCE FOR DOUBTFUL DEBTS
The following table shows a summary of the changes in the allowance for
doubtful debts for the years ended December 31, 2003, 2002 and 2001.
2003
----------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL
----- ----- -----
IN MILLIONS OF NIS
----------------------------------
Balance of allowance at beginning of year 617.3 82.4 699.7
----- ----- -----
Current provisions 144.3 3.5 147.8
Reduction in allowances (10.4) (7.4) (17.8)
----- ----- -----
Amount charged to the income statement 133.9 (3.9) 130.0
----- ----- -----
Debts written off or transferred (31.3) - (31.3)
Inflationary and other adjustments 12.6 - 12.6
----- ----- -----
Balance of allowance at end of year 732.5 78.5 811.0
===== ===== =====
Amount of provision not deducted from credit
to public 1.5 0.9 2.4
----- ----- -----
51
2002
----------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL
----- ----- -----
IN MILLIONS OF NIS
----------------------------------
Balance of allowance at beginning of year 250.9 72.2 323.1
----- ----- -----
Current provisions 394.4 15.7 410.1
Reduction in allowances (2.6) (5.5) (8.1)
Collection of debts written off in previous years (0.2) - (0.2)
----- ----- -----
Amount charged to the income statement 391.6 10.2 401.8
----- ----- -----
Bad debts written off (8.8) - (8.8)
Inflationary and other adjustments (16.4) - (16.4)
----- ----- -----
Balance of allowance at end of year 617.3 82.4 699.7
===== ===== =====
Amount of provision not deducted from credit
to public 20.2 - 20.2
----- ----- -----
2001
----------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL
----- ----- -----
IN MILLIONS OF NIS
----------------------------------
Balance of allowance at beginning of year 166.3 56.1 222.4
----- ----- -----
Current provisions 115.8 20.6 136.4
Reduction in allowances (7.4) (4.5) (11.9)
----- ----- -----
Amount charged to the income statement 108.4 16.1 124.5
----- ----- -----
Bad debts written off (22.1) - (22.1)
Inflationary and other adjustments (1.7) - (1.7)
----- ----- -----
Balance of allowance at end of year 250.9 72.2 323.1
===== ===== =====
(*) Not including accrued interest on non-income bearing loans.
(**) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.5 million as of December 31,
for the years 2003, 2002 and 2001.
52
The following table summarizes the balance of overall credit risk of
problem loans in 2003, 2002 and 2001 and the allowance for doubtful debts
relating to them.
AS OF DECEMBER 31-IN MILLIONS OF NIS
--------------------------------
2003 2002 2001
---- ---- ----
Overall Credit Risk of
Problem Loans 1,447.4 1,451.9 1,352.0
Annual Expense for
Allowance for Doubtful
Debts 130.0 401.8 124.5
Percentage of Annual
Expense for Allowances
for Doubtful Debts out
of Overall Credit of
Problem Loans 9.0% 27.7% 9.2%
C. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of our business, we engage in several types of
off-balance sheet arrangements to meet the financing needs of our customers,
including various types of guarantees, commitments to extend credit and letters
of credit. The following table summarizes these arrangements as of December 31,
2003 and 2002.
DECEMBER 31 DECEMBER 31
2003 2002
---- ----
IN MILLIONS OF NIS
------------------
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 251.0 308.1
Guarantees to home purchasers 112.2 154.9
Other guarantees and liabilities 55.5 106.6
Letters of credit 17.6 57.8
Unutilized revolving credit facilities 5.9 28.6
Irrevocable commitments to grant
credit facilities, approved but not yet executed 13.8 65.1
53
Our income and expenses from the above types of off-balance sheet financial
instruments for the past two years were as follows:
IN MILLIONS OF NIS
-----------------
In terms of December 31, 2003
-----------------
2003 2002
---- ----
Income from guarantees issued
by us 4.3 7.1
Income from letters of credit
issued by us 0.3 0.5
Expenses on guarantees issued
in our favor 0.6 0.9
Our off-balance sheet arrangements involve credit risk, as detailed in the
table above, according to each type of arrangement.
The realization of our undertakings pursuant to our off-balance sheet
arrangements will have an adverse effect on our liquidity.
The circumstances under which we would have to pay pursuant to our
off-balance sheet arrangements are generally external circumstances, dependent
upon third parties. While, generally speaking, it is not certain whether or not
such circumstances will take place, it can be assumed with a high degree of
certainty that we will pay the letters of credit included in the above
off-balance sheet arrangements.
OTHER CONTINGENT LIABILITIES AND COMMITMENTS
In 2003, we signed a lease agreement in respect of our office premises for
the period ending in August 2006. The annual lease payment, which is linked to
the CPI, amounts to NIS 0.9 million.
We have outsourced our computer services. In connection with the
outsourcing, we entered into an agreement with a three year term, with an
optional two year extension. The cost of the services for the first, second and
third years amounts to NIS 3.7 million, NIS 2.8 million and NIS 2.1 million,
respectively. In the event that we decide to exercise the option, the cost of
service for each additional year would amount to NIS 2.0 million.
In recent years, we entered into agreements to participate in private
investment funds. The total amount approved for investment by us amounts to
US$20 million. The investment funds invest in Israeli companies or companies
related to Israel and in high-tech companies. The majority of the investments
made by these funds is in the credit component. The balance of this undertaking
as of December 31, 2003, amounts to US$ 7.1 million.
54
DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS
A. VOLUME OF OPERATIONS
1) Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2003
--------------------
CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACT
----- -----
IN MILLIONS IN MILLIONS
OF NIS OF NIS
----- -----
Options purchased - 18.2
Forward contracts 235.0 658.3
----- -----
Total 235.0 676.5
===== =====
2) Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2003
------------------
CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACT
--- ---
IN MILLIONS IN MILLIONS
OF NIS OF NIS
--- ---
Gross positive fair value 4.6 3.3
Gross negative fair value - 1.7
--- ---
Total 4.6 5.0
=== ===
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO THE
CONTRACT
DECEMBER 31, 2003
---------------------------------------------
IN MILLIONS OF NIS
---------------------------------------------
BANKS CENTRAL BANKS OTHER TOTAL
---- ---- ---- ----
Gross positive fair value
of derivative instruments 4.6 3.1 0.2 7.9
Off-balance sheet credit risk in
Respect of derivative instruments (2) 44.4 46.7 - 91.1
---- ---- ---- ----
Total credit risk in respect of
derivative instruments 49.0 49.8 0.2 99.0
==== ==== ==== ====
(1) Derivatives comprising part of our asset and liability management
which is not designed for hedging purposes.
(2) Off-balance sheet credit risk relating to derivative instruments
(including those with a negative fair value) as computed according to
the Bank of Israel's Proper Banking Procedures, regarding the
limitation on borrower indebtedness.
55
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2003
-----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
IN MILLIONS OF NIS
-----------------------------------
CPI/Shekel interest contracts - 235.0 235.0
Foreign currency contracts 676.5 - 676.5
----- ----- -----
Total 676.5 235.0 911.5
===== ===== =====
D. DERIVATIVE FINANCIAL INSTRUMENTS-BALANCES AT DECEMBER 31, 2002
AT-RISK BROKERAGE TRANSACTIONS
DECEMBER 31, 2002
---------------------------
STATED PRESENT CREDIT
VALUE(1) EXPOSURE
------- -------
IN MILLIONS OF NIS IN MILLIONS OF NIS
------- -------
Currency contracts 3,856.0 *20.8
------- -------
Total at- risk brokerage transactions 3,856.0 20.8
======= =======
(1) At-risk brokerage transactions are transactions that we enter with one
party (hereinafter - the original transaction) in respect of which a
counter transaction in the same derivative instrument was executed
with a third party (hereinafter - the counter transaction). The stated
value includes the stated value of the original transaction and of the
counter transaction.
(*) Presented in accordance with the directives of the Supervisor of
Banks, assuming that the collateral provided to us by the
counter-party to the transaction has no value.
56
OTHER TRANSACTIONS
DECEMBER 31, 2002
------------------------------------------------------------------
IN MILLIONS OF NIS
------------------------------------------------------------------
FAIR VALUE AVERAGE FAIR VALUE(**)
STATED --------------------- ---------------------
VALUE ASSETS LIABILITIES ASSETS LIABILITIES
------- ------- ------- ------- -------
Currency
contracts -
Spot, swap,
Forward 2,140.7 14.0 17.3 31.5 37.1
Options bought 113.9 2.5 - - -
------- ------- ------- ------- -------
Total 2,254.6 16.5 17.3 31.5 37.1
======= ======= ======= ======= =======
Current credit
exposure (*) 16.5
=======
(*) Presented in accordance with the directives of the Supervisor of
Banks, assuming that the collateral provided to us by the
counter-party to the transaction has no value.
(**) On a quarterly basis.
E. MATURITY PERIOD - STATED AMOUNTS AS OF DECEMBER 31, 2002
DECEMBER 31, 2002
---------------------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
IN MILLIONS OF NIS IN MILLIONS OF NIS IN MILLIONS OF NIS
------- ------- -------
Currency contracts 4,733.1 1,377.6 6,110.7
======= ======= =======
F. DERIVATIVE FINANCIAL INSTRUMENTS CLASSIFIED ACCORDING TO COUNTER-PARTY OF
THE TRANSACTION - STATED AMOUNTS AS OF DECEMBER 31, 2002
DECEMBER 31, 2002
----------------------------------
TRADED
ABROAD OTHER TOTAL
------- ------- -------
IN MILLIONS IN MILLIONS IN MILLIONS
OF NIS OF NIS OF NIS
------- ------- -------
Currency contracts - 6,110.7 6,110.7
======= ======= =======
Note: The data for the year 2002 is presented in the format prescribed
for that year by the directives of the Supervisor of Banks.
Since we currently enter into these transactions in derivative financial
instruments with other banks, the credit risk involved in these transactions is
relatively small.
57
We enter into derivative financial instruments transactions in order to
limit our market risk exposure, as further detailed in "Item 11. Quantitative
and Qualitative Disclosures about Market Risk".
ALLOWANCE FOR DOUBTFUL DEBTS RELATING TO OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Our allowance for doubtful debts relating to off-balance sheet financial
instruments was NIS 2.4 million in 2003 compared with NIS 20.2 million for 2002
and 0 for 2001.
MATURITY PROFILE OF OUR CONTRACTUAL OBLIGATIONS
The following table sets forth as of December 31, 2003 the maturity profile
of our contractual obligations.
As of December 31, 2003
Payments Due by Period
IN MILLIONS OF NIS
------------------
CONTRACTUAL CASH AFTER
OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ----------- ----- ---------------- --------- --------- -------
Senior Debt 2,220.2 364.4 1,855.8 - -
Subordinated Debt 12,959.9 1,236.7 1,571.6 1,405.1 8,746.5
-------- -------- -------- -------- --------
Total Contractual Cash
Obligations 15,180.1 1,601.1 3,427.4 1,405.1 8,746.5
======== ======== ======== ======== ========
CONTINGENT LIABILITIES
AND COMMITMENTS
Lease Agreement 2.4 0.9 1.5 - -
IT Outsource Contract 8.6 3.7 4.9 - -
Stated Amount of
Derivative Instruments 911.5 911.5 - - -
-------- -------- -------- -------- --------
Total Contingent
Liabilities and
Commitments 922.5 916.1 6.4 - -
======== ======== ======== ======== ========
58
Note - In the above table, the future cash flows are presented in respect
of them liabilities in accordance with the remaining period to the contractual
maturity date of each cash flow.
Out of the total contractual cash obligations set forth in the table above,
NIS 11,467.3 million (included in subordinate debt) stemmed from the repayment
of the State of Israel's deposit which served for the granting of a credit
guaranteed by the State of Israel. The maturity profile of the payments due with
respect to the deposit is as follows:
Less than one year NIS 594.7 million
1-3 years NIS 1,264.3 million
4-5 years NIS 1,266.7 million
More than 5 years NIS 8,341.7 million
ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES
Note 1 to our financial statements describes the principal accounting
policies according to which our financial statements are prepared. The
implementation of these accounting principles by our board of directors and
management in the preparation of our financial statements requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and our financial results. Actual
results may differ from the assessments and estimates applied.
Accounting policy as to critical issues relates to issues that are
significant to the reporting of our financial position, are difficult and
subjective and may require complex assessments due to the necessity to perform
estimates of effects, which are mostly uncertain.
A portion of the assessments and estimates that we use involve, to a large
extent, uncertainty or dependency on various variables. Assessments and
estimates of this type may have a material effect on the financial results
presented in the financial statements.
With respect to each of the critical issues discussed herein, our
management relies on the best information at hand. Our directors and management
believe that the assessments and estimates that we use were fairly applied in
the preparation of our financial statements.
THESE ACCOUNTING PRINCIPLES IN RESPECT TO CRITICAL ISSUES IS IMPLEMENTED BY
OUR BOARD OF DIRECTORS AND MANAGEMENT ACCORDING TO ISRAELI GAAP , WHICH DIFFERS
IN CERTAIN RESPECTS FROM U.S. GAAP AS DESCRIBED BELOW IN "ITEM 17- FINANCIAL
STATEMENTS" AND NOTE 33 TO THE FINANCIAL STATEMENTS.
The following list sets forth the issues defined by our directors and
management as critical from the accounting perspective.
59
ALLOWANCES FOR DOUBTFUL DEBTS - The specific allowance for doubtful debts is
prepared based on the assessment of our directors and management as to the
losses inherent in our credit portfolio, including off-balance sheet items. In
making these estimates management takes into consideration, among other things,
the risks involved in the financial stability of our borrowers and their
repayment ability, based on the information at hand as to their financial
position and future cash flows as well as the quality and value of the
collateral received.
The financial stability of our borrowers and their ability to repay depends
on economic variables that are not under our control and/or the control of the
borrowers.
Our directors and management are assisted by independent assessors and
appraisers in order to obtain an indication as to the value of the collateral
that we hold. For example, the assessment of real estate that serves as
collateral for a loan that we extend is generally made for us by independent
assessors. The value taken for the purpose of computing the required allowance
for doubtful debts is lower than the market value of the real estate due to the
effects of a hasty sale and capital -gains tax that may apply, if at all, in
respect of the sale.
The amount that may be collected from borrowers is therefore based on
assessments that by nature are subjective. The dependency on these assessments
cannot assure that the amount that would in fact be collected will be in
accordance with the assessments.
The total monetary debt (not including off-balance sheet items) of
borrowers in respect of whom an allowance for doubtful debts exists as of
December 31, 2003 was NIS 782 million.
The amount of credit to the public stated in the financial statements is
net of the general and supplemental allowances for doubtful debts, the total
balance of which as of December 31, 2003 amounted to NIS 78.5 million. The
allowances that we made are done in accordance with directives of the Bank of
Israel.
Our management classifies problematic debts according to classes and
criteria determined by Proper Banking Procedures. Classification of our debts
could sometimes be subjective (such as the differentiation between a debt
temporarily in arrears and a debt in arrears and the classification of a debt as
under special supervision). Changes in our estimates may have a significant
effect on our financial statements. Our directors and management examine the
allowances for doubtful debts and the classification of the borrowers on a
quarterly basis and update them where necessary.
The supplemental allowance is based on risk characteristics determined by
the Bank of Israel. However, the Bank of Israel has exempted us from the
requirement to record a supplemental allowance in respect of deviations from the
limits on the indebtedness of a single borrower and of a borrower group, in
respect of deviations from limits on credit for the purpose of acquiring means
of control in corporate entities and in respect of deviation from limits on the
concentration of indebtedness by economic sectors. Following this, a
supplemental allowance was created in respect of deviations relating to the lack
of updated financial statements and in respect of balance of credit to borrowers
classified as problematic borrowers.
60
PROVISIONS RELATING TO EMPLOYEE RIGHTS - The liability in respect of severance
pay is computed as generally accepted on the basis of a monthly salary for each
year of employment, and is covered in full by payments and deposits in pension
and provident funds and by the purchase of insurance policies.
In December 2002, a special collective agreement was signed by us, the
General Federation of Labor and our employees' committee regarding the reduction
in the number of our employees. According to this agreement, some of our
employees are entitled to a pension as from date of termination of their
employment.
In respect of our employees, we signed an agreement with a pension fund
arranging for the pension payment. On the date on which the employment of each
employee is terminated, we must deposit with the pension fund the amount
required to purchase the pension rights for the particular employee in
accordance with the agreement. We included a provision in respect of the
anticipated cost of acquisition of the pension rights, as calculated in an
opinion prepared by a pension expert. The opinion of the expert is based on his
best knowledge of the effects of recent legislation and pension arrangement
changes. The discounted cost of acquisition of pension rights is based on an
annual discount rate of 3.5%. The total provision in respect of our employees
entitled to a pension upon their retirement amounts to NIS 18.2 million.
Computation of the said rights at an annual discount rate of 2.5% would increase
the cost of acquisition of the pension rights by NIS 0.9 million.
In view of the above it is not certain that the actual expense would be in
accordance with the estimate used to calculate the provision.
FAIR VALUE OF FINANCIAL INSTRUMENTS
A. SECURITIES - All the securities owned by us as of December 31, 2003 are
classified as available-for-sale securities. Securities are stated in the
balance sheet at fair value. Their fair value is determined on the basis of
market quotation as of the balance sheet date. This data does not
necessarily reflect the price that may be received from the sale of
securities in large quantities. The value of non-marketable shares in the
financial statements at December 31, 2003, was NIS 34 million. These shares
are stated at their adjusted cost net of provisions for impairment in value
based on management's assessments. These provisions were included based on
the financial statements of the companies involved. Actual proceeds from
the disposal of these investments may differ from their equity value as
stated in the financial statements.
B. DERIVATIVE FINANCIAL INSTRUMENTS - Within the framework of the asset and
liability management policy intended to manage our exposure to financial
risks, we conduct transactions in derivative financial instruments. These
instruments include future transactions and options designed to hedge
against exposure to linkage base and currency exchange risks. The
transactions which we conduct are in instruments that are not traded on an
active market. In order to estimate the fair value of these instruments, we
use models that serve us in our current operations and which take into
consideration the inherent risk of the financial instrument (interest rate,
margin of error, credit risk etc.). The fair value of assets and
liabilities relating to such transactions, included in the financial
statements as at December 31, 2003, is as follows:
61
Other assets - NIS 7.9 million
Other liabilities - NIS 1.7 million.
The above values relate to transactions of a total stated value of NIS
911 million. Of this transaction value, transactions of a stated value of
NIS 676 million matured during January 2004, and transactions of a stated
value of NIS 235 million will mature during the period of three to twelve
months subsequent to the date of the financial statements.
As stated above, all balances of derivative financial instruments
serve as hedging against exposure to linkage base and currency exchange
risks. Changes in financial parameters, which served as a basis for
computing the fair value of the said instruments may result in a change in
their fair value.
C. CONTINGENT LIABILITIES - Various legal actions are pending against us
(including a motion for approval of a class action and a motion for
approval of a derivative action). All of these actions are handled by our
independent counsels. The independent counsels have informed us of their
evaluation as to the probability of success of these actions. Where the
evaluation is that the probability of success is not probable (but either
remote or reasonably possible), we have not made any provisions in respect
of the risk involved. See "Item 8. Legal Proceedings" below.
We have made provisions with respect to those actions where, according
to our counsels' opinion it is probable to assume that they will not be
cancelled or dismissed. Our counsels submit their opinion in each quarter
and management updates the provisions where required. The provisions that
we make are based on the evaluations of our counsels. There is no certainty
that the final results of the legal actions will be the same as what our
counsels suggest.
62
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
IDENTITY OF DIRECTORS
The name, age and position of each member of our board of directors as of
May 31, 2004, and the month and/or year his or her tenure began, are set forth
in the following table:
NAME AGE POSITION WITH REGISTRANT HOLDS POSITION SINCE
- ---- --- ------------------------ --------------------
Dr. Raanan Cohen(1),(3),(4),(12) 63 Chairman of the Board of Directors of the Bank August 2002
Richard Armonn(1),(4),(5) 71 Deputy Chairman of the Board of Directors of the Bank 1971(6)
Hillel Ashkenazy(1),(4),(7) 70 Director January 1997
Avi Olshansky(1),(4),(8) 68 Director November 1997
Yacob Aizner(2),(4),(8) 68 Director October 2002
Shulamit Eshbol(2),(3),(9) 40 Director November 2002
Yeheskel Beinisch(2),(3),(9) 63 Director November 2002
Ephrat Bronfeld(1),(2),(3),(10) 57 Director December 2002
Moshe Gavish(1),(3),(9) 56 Director November 2002
Ehud Green(2),(4),(10) 50 Director December 2002
Shmuel Sisso(2),(3),(9) 53 Director November 2001(11)
Ben-Zion Dagan(3),(4),(7) 71 Director July 2002
- ----------
(1) Member of the Administration Committee.
(2) Member of the Audit Committee.
(3) Member of Financial Statement Review Committee.
(4) Member of Credit Committee.
(5) Appointee of Bank Hapoalim B.M. and its affiliates.
(6) Director since 1971 with interruptions.
(7) Appointee of Israel Discount Bank Ltd. and its affiliates.
(8) Appointee of Bank Leumi-Le-Israel B.M. and its affiliates.
(9) Appointee of State of Israel.
(10) Outside director elected by our shareholders at the annual general meeting
of the shareholders on December 26, 2002 in accordance with the Companies
Act - 1999 (Israel).
(11) Director since November 2001 with interruptions.
(12) Dr. Raanan Cohen is not a director appointed by the holders of our Ordinary
A shares. He was appointed to the board of directors by the other members
of the board of directors. Under our Articles of Association, a director so
appointed by the other directors automatically becomes Chairman of the
Board.
63
DR. RAANAN COHEN, DIRECTOR. Dr. Cohen has been a director since August 2002
and he currently serves as our Chairman of the Board. He was appointed to the
board of directors by the other directors. He is chairman of our administration
and financial statement review committees and a member of our credit committee.
Dr. Cohen was a member of Knesset (the Israeli parliament) from 1988 until 2002.
Dr. Cohen served as the secretary general of the Israeli Labor Party from 1997
until 2002. From 2000 until 2002, he served as a minister in the Government.
From 1992 until 1999, he served as a public director of Transclal Trade Ltd.,
Williger Ltd. and Blue Square Cooperative. Dr. Cohen is also a director of Oil
Refineries Ltd.
AVI OLSHANSKY, DIRECTOR. Mr. Olshansky has been a director since November
1997. He is an appointee of Bank Leumi-Le-Israel B.M. and its affiliates. Mr.
Olshansky is a member of our administration and credit committees. Since 1997,
he has worked independently as a financial and economic adviser and since 2003,
as Chairman of A.Olshansky Consulting Ltd. From 1978 to 1991, Mr. Olshansky also
served in various positions at Bank Hapoalim B.M., including as Vice President,
Deputy Managing Direcror, Senior Executive Vice-President and joint Managing
Director. From 1991 to 1997, he served as Chairman of the Board of Clal (Israel)
Ltd., that operated companies in the insurance, industry, commerce and
construction fields. Mr. Olshansky is a director of the following companies:
Polgat Ltd., Azorim Investment Development and Construction Company Ltd., Camel
Grinding Wheels Sarid Ltd., Kibbutz Sarid, Kibbutz-Tzora, Tzora Active System
Ltd. and Asif Provident Funds Management Company Ltd.
YACOB AIZNER, DIRECTOR. Mr. Aizner has been a director since October 2002.
He is an appointee of Bank Leumi-Le-Israel B.M. and its affiliates. Mr. Aizner
is a member of our audit and credit committees. Mr. AIZNER was the Managing
Director (from 1996-1999) and Deputy Managing Director (from 1986-1996) of Bank
of Jerusalem Ltd. Since 2000, Mr. Aizner has worked as an independent real
estate promoter. Mr. Aizner is also a director of Sadot Binyamina Ltd.
SHULAMIT ESHBOL, DIRECTOR. Ms. Eshbol has been a director since November
2002. She is an appointee of the State of Israel. Ms. Eshbol is a member of our
audit and financial statement review committees. Ms. Eshbol worked in public
accounting as a sole practitioner from 1994-1998. She has also practiced law at
the firm of Eshbol & Yakuel since 2000. As part of her legal practice, she is
engaged in commercial and financial fields. From 2001-2002, she served as a
director in Zim Lines Ltd.
HILLEL ASHKENAZY, DIRECTOR. Mr. Ashkenazy has been a director since January
1997. He is an appointee of Israel Discount Bank Ltd. and its affiliates. Mr.
Ashkenazy is a member of our administration and credit committees. Mr. Ashkenazy
served as Chairman of our audit committee from 1999 to 2002. He has served in
various positions with the Government, and in the public and private sector,
including, as Director General OF the Ministry of Immigrant Absorption. Mr.
Ashkenazy heads a law firm and specializes in corporations and investments. He
serves as a director of Aman Holdings Ltd., C.D.I. Systems (1992) Ltd. and Hanan
Management and Assets Ltd.
64
MOSHE GAVISH, DIRECTOR. Mr. Gavish has been a director since November 2002.
He is an appointee of the State of Israel. Mr. Gavish is a member of our
administration and financial statement review committees. From 1989 to 1993, he
served as Commissioner of the Income Tax and Property Tax Authority and from
1994 to 2000, as General Manager of Mercantile Discount Bank. Since 2000, he has
practiced law and advised companies independently. Mr. Gavish is a director of
the following companies: Ma'alot, Bituach Yashir, Afikim Hashkaot G.G. (2000)
Ltd., Innoventions and Allium.
RICHARD ARMONN, DIRECTOR. Mr. Armonn has been a director since 1971, with
interruptions. He is an appointee of Bank Hapoalim B.M. and its affiliates and
he currently serves as our Deputy Chairman. He is chairman of our credit
committee and a member of our administration committee. Mr. Armonn served in the
past as Deputy Chief Executive Officer of Bank Hapoalim B.M. and he was also the
manager of the credit department for that bank. He has served as Deputy Chief
Executive Officer and Chairman of the board of Gmul Investments Ltd. He is the
Chairman of the Israel-Romania Chamber of Commerce and Industry. He is also a
director of Elhana Ltd.
YEHESKEL BEINISCH, DIRECTOR. Mr. Beinisch has been a director since
November 2002. He is an appointee of the State of Israel. He is chairman of our
audit committee and a member of our financial statement review committee. Mr.
Beinisch has practiced law since 1967 and currently heads his own firm, Y.
Beinisch-Law office. Mr. Beinisch was a director of Card Guard AG (Switzerland)
until April 2004.
EPHRAT BRONFELD, DIRECTOR. Ms. Bronfeld has been a director since December
2002. She is a member of our audit, financial statement review , and
administration committees. Ms. Bronfeld is an outside director. From 1996-2002,
Ms. Bronfeld worked at Tahal Consulting Engineers Ltd., for two years as
Assistant to the General Manager and Corporate Secretary and for four years as
the General Manager of one of its subsidiaries. Ms. Bronfeld is a director of
Yahav Massad Mutual Funds Ltd. and Arel Communications and Software Ltd.
EHUD GREEN, DIRECTOR. Mr. Green has been a director since December 2002. He
is a member of our audit and credit committees. Mr. Green is an outside
director. Mr. Green has been practicing law in his own firm since 1996.
BEN-ZION DAGAN, DIRECTOR. Mr. Dagan has been a director since July 2002. He
is an appointee of Israel Discount Bank and its affiliates. He is a member of
our audit and financial statement review committees Mr. Dagan served as a
director of a subsidiary of Bank of Jerusalem Ltd. from 1997 to 2002.
SHMUEL SISSO, DIRECTOR. Mr. Sisso has been a director since November 2001,
with interruptions. He is an appointee of the State of Israel. He is a member of
our audit and financial statement review committees. Mr. Sisso is a director of
Israel Salt Industries Ltd. He served as the mayor of the Kiryat-Yam
municipality from 1989 to 2001 and again from 2003 to the present. From 1997 to
2000, he served as the Israeli Consular General in New York. On July 6, 2004,
Mr. Sisso advised us of his resignation from the board of directors, which will
take effect upon the confirmation of his appointment as a member of the advisory
council of the Bank of Israel.
65
IDENTITY OF OFFICERS
The name, age and position of each of our executive officers, as of
December 31, 2003, and the month and year his or her tenure began, are set forth
in the following table:
NAME AGE POSITION WITH REGISTRANT HELD POSITION SINCE
- ---- --- ------------------------ -------------------
Dr. Raanan Cohen(1) 63 Chairman of the Board August 2002
Uri Galili 59 General Manager July 2002
Arieh Savir 58 Deputy General Manager September 2002
Rimon Shmaya 55 Comptroller April 2001
Comptroller & Financial Risks Manager January 1998
Member of the Management May 1996
Jacob Garten(2) 54 Supervision & Risk Monitoring Manager July 1999
Training and Information Technologies Member of
the Management November 1989
Nathan Dekel 53 Operations & Controls Manager April 2004
Operations Manager July 1999
Member of the Management August 1990
Michael Warzager 49 General Counsel March 1998
Itzhak David 49 Internal Auditor November 2002
(1) Dr. Raanan Cohen is included in this list since he is a salaried
employee of the bank. Under Israeli law, a director, including a salaried
chairman of the board, is not considered to be an executive officer.
(2) Terminated active employment April 15, 2004.
Mr. Uri Galili has served as our General Manager since July 2002. From 1995
until 2001, Mr. Galili was Director and General Manager of Bank Leumi (U.K.)
Ltd. From 2001 until July 2002, he served as Head of International Private
Banking at Bank Leumi Le-Israel Ltd.
Mr. Arieh Savir has served as our Credit Manager since September 2002 and
as our Deputy General Manager since October 2002. From 1994 until September
2002, Mr. Savir was Head of the Financial Services and Workout Division of Bank
Hapoalim Ltd.
Mr. Rimon Shmaya has served as our Comptroller since January 1998 and as a
member of our management since May 1996.
66
Mr. Jacob Garten served as our Supervision and Risk Monitoring Manager from
July 1999 until April 15, 2004, when his active employment with us ended. He had
been a member of our management since 1989.
Mr. Nathan Dekel has served as our Operations Manager since July 1999.
Prior to that, he served as the Business Department Manager and has been a
member of our management since 1990.
Mr. Michael Warzager has served as our General Counsel since March 1998.
Prior to that, he was the Head of our Legal Department.
Mr. Itzhak David has served as our Internal Auditor since November 2002.
Prior to that, he served as assistant to the Internal Auditor for approximately
one year. From 2000 to 2001, Mr. David was Deputy Financial Officer of Ampa
Investments Ltd. From 1994 until 2000, he was the Financial Officer and
Secretary of Investments for Industrial Development of Israel Ltd.
FAMILY RELATIONSHIPS
No family relationships exist between any of our directors or executive
officers and any other directors or executive officers of the Bank.
SELECTION OF DIRECTORS AND OFFICERS AND TERMS OF OFFICE
Except for the outside directors (the election and removal of which are
discussed in the next paragraph) and the chairman of the board (who is appointed
by the other board members), our directors are appointed by the holders of our
Ordinary A Shares, par value NIS 0.10. See "Item 7. Major Shareholders and
Related Party Transactions - Major Shareholders" below for more detailed
information regarding the ownership of our Ordinary A Shares.
Each holder of Ordinary A Shares is entitled to appoint one director for
every 1,015 Ordinary A Shares held by such holder, and each group of
shareholders (who together hold 1,015 or more Ordinary A Shares) is entitled to
appoint one director for every 1,015 Ordinary A Shares held. As a result, the
Government of Israel currently has the right to appoint seven directors, Bank
Leumi Le-Israel B.M. currently has the right to appoint three directors, Israel
Discount Bank currently has the right to appoint two directors and Bank Hapoalim
B.M. currently has the right to appoint one director. However, pursuant to an
agreement between Bank Hapoalim B.M. and certain other holders of Ordinary A
shares (which holders together have 500 Ordinary A Shares), Bank Hapoalim B.M.
is entitled, by virtue of combining its own shares and the shares of the other
holders party to the agreement, to appoint one additional director
Pursuant to the Companies Act, we are required, as of February 1, 2000, to
have two outside directors elected by our shareholders voting at a general
meeting of the shareholders. An outside director must be an Israeli citizen and,
at the time of the appointment or during the two years preceding the
appointment, neither the outside director himself nor any of his relatives,
partners , employers or companies in which he is a controlling member may have
had an interest in the company whose board the outside director is to be
appointed. Among the other qualifications for election, no individual shall be
appointed an outside director if his other positions or affairs create or are
liable to create a conflict of interest with his position as director. Our
outside directors are Efrat Brunfeld and Ehud Green. Our outside directors hold
office for a term of three years and, according to the Companies Law, outside
directors may be elected for one additional three-year term after the initial
three-year term.
67
In order to facilitate the appointment of outside directors at the general
meeting without exceeding the maximum number of directors prescribed by our
articles of association and by Israeli Proper Banking Procedures, special
arrangements have been agreed to by our major shareholders. The Government of
Israel has agreed to refrain (subject to various conditions) from exercising its
right to appoint one director of the seven that it is entitled to appoint. Bank
Leumi Le-Israel B.M., Israel Discount Bank and Bank Hapoalim B.M.have agreed
that they will refrain (subject to various conditions), through a rotation among
them, from exercising their right to appoint one director of the seven that they
are jointly entitled to appoint. Consequently, as long as these consents remain
in force, the two outside directors may be elected by the shareholders at a
general meeting, on account of the vacancies created by the above consents.
Under these arrangements, the outside directors elected by the shareholders at a
general meeting should be the candidates put forward by the shareholders who
created the vacancies that are filled by the election of the outside directors.
Shareholders who, by virtue of their ownership of Ordinary A Shares, have
appointed a director may remove such director at any time and appoint another in
his or her place. Each director (who is appointed by the holders of Ordinary A
Shares), therefore, holds office until removed by the holders of Ordinary A
Shares who originally appointed such director or, if appointed for a fixed term,
until such term expires.
An outside director may be removed by court order, if the court (a) finds
that the director is permanently unable to exercise his office or (b) the
outside director no longer meets one of the conditions required by law for his
appointment or, (c) the outside director violated his obligation of loyalty to
the company, or (d) the outside director, during his tenure, was convicted by a
court abroad of offenses such as bribery, deceit or utilization of inside
information.
Alternatively, if the board of directors determines that the outside
director no longer meets one of the conditions required for his appointment or
that he violated his obligation of loyalty, then the board of directors shall
call an extraordinary meeting of the shareholders in order to present to the
shareholders its reasons for the removal of the outside director. At such
meeting, the outside director shall have an opportunity to respond. The removal
of the outside director must be approved at the extraordinary meeting with the
same majority that was necessary for his appointment.
Our General Manager is appointed by our Board of Directors and holds office
until removed by the Board or until the expiration of the term of his
appointment. The remainder of our executive officers are appointed by the
General Manager, subject to the approval of our Board of Directors.
68
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of remuneration that we paid to all directors and
executive officers as a group during the year ended December 31, 2003 was NIS
5,755,000 and we set aside NIS 1,648,000 to provide severance pay, retirement or
similar benefits for our directors and executive officers. At December 31, 2002,
our financial statements include a provision in an amount of NIS 3.6 million in
respect of the period during which management estimates that the services of the
Chairman of the Board, the General Manager and the Deputy General Manager will
no longer be required. In 2003, this provision was decreased and at December 31,
2003 it amounts to NIS 1.7 million, due to a renewed evaluation of the Board as
to the remainder of that period. This provision is not included in the severance
pay, retirement or similar benefits costs mentioned above.
According to the employment contracts with the Chairman of the Board, the
General Manager and the Deputy General Manager, the terms of their employment
extends until August 14, 2006, July 14, 2005 and August 31, 2005, respectively.
According to the employment contracts, the Chairman of the Board, the General
Manager and the Deputy General Manager are entitled to receive prior notice
before the end of their employment period and, at the end of their employment,
they are entitled to receive compensation for unutilized vacation days as well
as the sums deposited during the period of their employment into insurance
policies or pension funds for their benefit.
According to the employment contracts with five of our officers (the
employment of one of whom, Mr. D. Blass, ended in 2003) the employment period is
not fixed, the officers are entitled to receive prior notice before the end of
their employment and, at the end of their employment, they are entitled to
receive several months' salary, compensation for unutilized vacation and sick
days (subject to the customary conditions applying to our other employees), and
- - the sums deposited during the period of their employment into insurance
policies or pension funds for their benefit as well as additional severance
compensation. In the event that we terminate the officer's employment, in
exchange for the additional severance compensation and subject to various
conditions we may instead pay the terminated officer pension payments until the
age of 65.
The following chart sets forth, on an individual basis, the compensation
paid to our executive officers:
SEVERANCE ADDITIONAL
NAME SALARY PAY(1) AMOUNTS(2) TOTAL(3)
- ---- ------ ---- -------- ------
IN THOUSANDS OF NIS
Raanan Cohen(4) 564 204 --- 768
Uri Galili(4) 679 233 --- 912
Arieh Savir(4) 583 205 --- 788
David Blass(5) 511 151 --- 662
Jacob Garten(5) 562 148 --- 710
Nathan Dekel(5) 561 218 --- 779
Rimon Shmaya(5) 565 218 --- 783
Itzhak David 283 66 --- 349
Michael Warzager(5) 547 205 --- 752
69
(1) Includes severance pay, provident fund, pension, national insurance,
further education allowance, vacation pay, provisions/payments of long
service bonus and provisions for unutilized sick leave benefits.
(2) Includes amounts with respect to salary-related benefits resulting from
changes in the salary during any given year.
(3) Includes salaries and related benefits not including payroll tax.
(4)During 2002, employment contracts were signed with the Chairman of the
Board, the General Manager and the Deputy General Manager, each of whom
commenced his employment in 2002. The employment contract for the Chairman
of the Board has a four year term while the employment contracts for the
General Manager and the Deputy General Manager each have three year terms.
As of December 31, 2002, the financial statements include a provision in an
amount of NIS 3.6 million in respect of the period during which management
then estimated that the service of these three officers will no longer be
required. In 2003, this provision was decreased and as of December 31, 2003
it was NIS 1.7 million, as a result of a re-evaluation of the Board as to
the remainder of that period. This provision is not included in the payroll
costs presented in the table above.
(5) In the past, we signed employment contracts with five senior executives
who were employed during 2003. Under these contracts, we undertook to pay,
inter alia, additional severance payments in the event of termination(see
note 18A(4) to our financial statements). The employment of one of the
five, Mr. David Blass, ended in December 2003and he received his severance
payment as agreed at that time. In the event that the employment of the
other four executives is terminated, the maximum severance amount that we
anticipate that we will have to pay them (as of December 31, 2003) amounted
to NIS 3.5 million. In respect to this commitment, a provision for payroll
costs was made, which is not included in the table above.
Pursuant to a resolution of our board of directors, which was approved by
the shareholders at a general meeting, the annual compensation paid to our
directors (other than our outside directors) is updated semi-annually to the
CPI. As of the last compensation update on February 1, 2004, the annual
compensation paid to our directors (other than our outside directors) was NIS
31,488, plus V.A.T., which is paid on a monthly basis. Outside directors are
paid NIS 33,111 annually.
In addition, our directors receive compensation for each plenum or
committee meeting attended. The amount of compensation paid for plenum and
committee meetings is also updated semi-annually to the CPI. Our directors
(other than our outside directors) receive, as of February 1, 2004, NIS 1,174,
plus V.A.T. for each plenum and committee meeting attended while our outside
directors receive NIS 1,208.
The amounts set forth in the preceding two paragraphs are after a 12%
reduction in compensation pursuant to a resolution of the board on October 1,
2002, which resolution was made in light of our financial situation. In
addition, the amounts set forth in the preceding two paragraphs do not apply to
our chairman of the board, who receives a monthly salary in accordance with his
employment contract.
70
BOARD PRACTICES
Except for our Chairman of the Board of Directors, none of our directors
has a service contract with us. The service contract for our Chairman of the
Board of Directors provides that, upon the termination of his employment, we
must pay him compensation for unused vacation days and make available to him the
sums deposited for his benefit, during his employment with us, into insurance
policies or pension funds.
Our audit committee is composed of Yeheskel Beinisch who serves as the
audit committee chairman, Yacob Aizner, Shulamit Eshbol, Shmuel Sisso, Ehud
Green and Ephrat Bronfeld. The audit committee operates pursuant to the audit
committee procedures, which were ratified by our Board of Directors. The primary
functions and responsibilities of the audit committee, are as follows:
1. To provide recommendations to the board of directors regarding the
appointment or termination of the internal auditor.
2. To define the responsibilities of the internal auditor.
3. To review and make recommendations to the Chairman of the Board of
Directors regarding the internal auditor's work plan.
4. To review the periodic and special reports of the internal auditor.
5. To review the audit reports of the Supervisor of Banks and the external
auditor.
6. To review the implementation of the internal auditor's work plan, at least
quarterly.
7. To review the handling of irregularities reported by the internal auditor
concerning the activities of the board of directors
8. To review the correction of defects raised in the internal auditor's
reports.
9. To approve (subject to the approval of the board of directors and the
shareholders at a general meeting) the terms of service of directors,
including remuneration, the granting of insurance, exemption from
liability, and indemnification, and to approve (subject to the approval of
the board of directors and/or, to the extent required by our articles of
association, subject also to the approval of the shareholders at a general
meeting) the granting of insurance, exemption from liability, and
indemnification, to officers who are not directors.
10. To approve (subject to approval of the board of directors) any exceptional
transactions between us and a third party in which any of our directors or
officers has a personal interest.
11. To approve (subject to the approval of the board of directors and the
shareholders at a general meeting) exceptional transactions between us and
any of our controlling shareholders, and exceptional transactions between
us and a third person, in which any of our controlling shareholders has a
personal interest.
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12. To approve transactions between us and associated parties (as defined in
the Proper Banking Procedures), the amounts of which exceed the minimum
prescribed by the Proper Banking Procedures.
Our administration committee is composed of Dr. Raanan Cohen, Richard
Armonn, Hillel Ashkenazy, Avi Olshansky, Moshe Gavish and Ephrat Bronfeld. The
chairman is Dr. Raanan Cohen. The primary functions and responsibilities of the
administration committee are as follows:
1. To approve organizational changes proposed by the General Manager.
2. To approve collective employment agreements pursuant to guidelines set by
the board of directors.
3. To review work plans as presented by the General Manager and recommend
their approval by the board of directors.
4. To review our overall budget as presented by management and recommend its
approval by the board of directors.
5. To approve our senior authorized signatories.
Our credit committee is composed of Dr. Raanan Cohen, Richard Armonn,
Hillel Ashkenazy, Avi Olshansky, Yacob Aizner, Ehud Green and Ben-Zion Dagan.
The chairman is Richard Armonn. The primary functions and responsibilities of
the credit committee are as follows:
1. To approve loans for customers whose outstanding debt (including the
new proposed loan) to us is between NIS 15-50 million (for regular
customers) provided that the unsecured portion of the debt does not
exceed NIS 30 million, or NIS 15-30 million ( for problem customers).
2. To approve the rescheduling of debt or the reorganization of debt for
customers whose outstanding debt to us is between NIS 15-50 million
(for regular customers), or between NIS 15-30 million(for problem
customers).
3. To approve write-offs of loans between NIS 0.75-3 million for any one
customer.
Our financial statement review committee is composed of Dr. Raanan Cohen,
Shulamit Eshbol, Yeheskel Beinisch, Ephrat Bronfeld, Moshe Gavish, Shmuel Sisso
and Ben-Zion Dagan. The chairman is Dr. Raanan Cohen. The primary functions and
responsibilities of the financial statement review committee are as follows:
1. To review drafts of the annual and quarterly financial statements
prior to their presentation to the board of directors.
2. To keep regular contact with the external auditors and our comptroller
on matters relating to accounting principles implemented in the
financial statements.
72
3. To review all matters relating to the financial statements brought
before it by the board of directors.
We do not have a compensation committee.
EMPLOYEES
As of December 31, 2003, we had 79 employees, as follows:
Personnel/Training Staff 3
Compliance and Auditing 3
Officers 6
Sales and Professional Staff 30
Support Staff 37
As of February 24, 2004, we had 68 employees, as follows:
Personnel/Training Staff 3
Compliance and Auditing 2
Officers 6
Sales and Professional Staff 27
Support Staff 30
31 of our current employees are subject to collective employment agreements
entered into between us, the General Federation of Labor and our employees'
committee.
Pursuant to the Basic Budget Law-1985 (Israel), "mixed companies", as
defined in the Government Companies Law-1975 (Israel), shall not agree to
changes in wages, severance payments, retirement or other employment-related
financial benefits and shall not institute such changes or benefits other than
changes that have been agreed to or instituted with respect to all of the state
employees, or that have been approved by the Minister of Finance. The Minister
of Finance's authority to approve was delegated to the director of wages in the
Ministry of Finance.
We are a "mixed company" as defined in the Government Companies Law-1975
(Israel) and the opinion of the director of wages of the Ministry of Finance is
that the above Basic Budget Law applies to us. The last collective agreement
entered into between us and some of our employees, in December 2002 was
approved, upon our request, by the director of wages in the Ministry of Finance
and he also approved certain severance payments to our officers, which were
lower than those stipulated in their employment agreements.
SHARE OWNERSHIP
None of our directors or executive officers own any of our shares. We do
not have any arrangements, including stock option plans, that provide for the
issuance of our securities to our directors or officers.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
RELATIONSHIP OF THE BANK TO THE GOVERNMENT OF ISRAEL
As of December 31, 2004, the State of Israel held approximately 45.78% of
our outstanding voting rights and had the right to appoint approximately 50% of
the directors (based upon the actual number of directors the State of Israel is
entitled to appoint out of the total number of directors that may be appointed
by the shareholders). Directors appointed by both the Ministry of Finance and
the Ministry of Industry, Trade and Employment are members of our board of
directors.
The Government has issued guarantees in our favor (which guarantees are
also granted to other banks) to secure loans granted by us in cases where the
Government was interested in supporting the projects being financed by such
loans.
In accordance with the governmental approval of the run-off plan, the
Government of Israel has undertaken to assume responsibility for the balance of
the special line of credit outstanding as of July 29, 2005 and to repay that
balance to the Bank of Israel over a period of twelve months. See "Item 4.
Business Overview" above for a discussion of the special line of credit from the
Bank of Israel.
Since the State of Israel holds approximately 45.78% of our voting rights
and about 50% of the rights to appoint directors, we are considered as a "Mixed
Company" under the Governmental Companies Law-1975 (Israel), and therefore we
must report to the Governmental Companies Authority. Due to the State of
Israel's entitlement to appoint directors to our board, we are also considered
as a "body that the Government of Israel participates in its management" within
the State Comptroller Law-1958 (Israel), and consequently we are subject to the
State Comptroller's audit.
SHAREHOLDERS IN THE UNITED STATES
The number of holders of shares in the United States and the number of
shares that such holders held as of November 2004, is set forth below:
6% Cumulative Participating Preference C Shares- 1,139 holders in the
United States, holding 2,022,892 shares.
6% Cumulative Participating Preference CC Shares- 761 holders in the United
States, holding 118,942 shares.
71/2% Cumulative Redeemable Preference D Shares- 668 holders in the United
States, holding 15,082 shares.
71/2% Cumulative Redeemable Preference DD Shares- 1,847 holders in the
United States, holding 10,439 shares.
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PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth, as of December 31, 2004, certain
information concerning ownership of our voting securities, including all persons
known by us to own more than 5% of any class of our voting securities and the
total amount of any class of our voting securities owned by our officers and
directors as a group:
PERCENTAGE OF
NUMBER OF SHARES PERCENTAGE OF TOTAL VOTING
NAME OF HOLDER TITLE OF CLASS OWNED CLASS OWNED RIGHTS HELD
- -------------- -------------- ----- ----------- -----------
State of Israel Ordinary "A" 7,370 48.81% 45.78%
shares(1)
Poalim Trust Services Ordinary "A" 1,830 12.12% 11.37%
Ltd. (3) shares(1)
Israel Discount Bank Ordinary "A" 2,030 13.44% 12.61%
Ltd., (4) shares(1)
Bank Leumi Le-Israel Ordinary "A" 3,110 (6) 20.60% 19.32%
B.M Israel (4) shares(1)
Bank Hapoalim B.M Ordinary 65,020 (5) 6.50% 0.40%
Israel (4) Preferred
shares(2)
All officers and Voting Shares None (As per the
directors as a records of our
group Bank)
(1) Each Ordinary "A" share entitles the owner thereof to 1,000 votes at
any meeting of our shareholders.
(2) Each Ordinary Preferred Share entitles the owner thereof to one (1)
vote at any meetings of our shareholders.
(3) The Ordinary "A" Shares are listed in the name of Poalim Trust
Services Ltd., which reported to us that said shares are held in
trust, as follows:
1,829.8 Shares held for Bank Hapoalim Ltd. 0.20 Shares held for David
Shocnay
(4) Includes shares held by affiliates of the shareholder
(5) Held of record (not beneficially) by Hevra Lerishumim shel Bank
Discount Le-Israel. The shares are beneficially held by Bank Hapoalim
B.M. and its affiliates.
(6) Includes 1,050 or 6.95% held by Bank Leumi Lepituah Hataasiya Ltd., an
affiliate of Bank Leumi Le-Israel B.M.
75
RELATED PARTY TRANSACTIONS
Loans Granted to Executive Officers
AS OF DECEMBER 31, 2003
IN NIS THOUSANDS
--------------------------------------------------------
VALUE OF THE
BENEFIT
DERIVED FROM THE
OUTSTANDING AVERAGE TERM PREFERENTIAL
NAME BALANCE (YEARS) TERMS
---- ------- ------- -----
Raanan Cohen --- --- ---
Uri Galili --- --- ---
Arieh Savir --- --- ---
David Blass --- --- ---
Jacob Garten 28 0.5 2
Nathan Dekel 218 2.0 12
Rimon Shmaya 110 2.0 6
Itzhak David --- --- ---
Michael Warzager 154 1.9 8
These loans are linked to the CPI and are non-interest bearing
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENT AND OTHER FINANCIAL INFORMATION
Our financial statements are prepared in accordance with Israeli GAAP and
with the directives of the Israeli Supervisor of Banks. Israeli GAAP may differ
significantly from U.S. GAAP. See "Item 17. Financial Statements", in particular
note33 which sets forth the principal differences between Israeli GAAP and U.S.
GAAP.
LEGAL PROCEEDINGS
Set forth below are certain details regarding material legal proceedings
against us which were pending as of December 1, 2004:
(A) In December 1999, United Mizrachi Bank Ltd. filed a third-party notice in
the amount of NIS 50,000,000 against us and ten other parties. The third-party
notice relates to a counterclaim in the amount of NIS 150,208,289 filed by the
State of Israel against United Mizrachi Bank with respect to losses incurred by
the State of Israel as a result of a collapse of a group of companies that had
received state grants and/or state guaranteed loans through United Mizrachi
Bank. In the third-party notice, United Mizrachi Bank claims (a) that we were
negligent in our preparation of surveys about the group of failed companies,
which surveys were used by the State of Israel and United Mizrachi Bank to
determine whether or not to provide state grants and/or state guaranteed loans
and (b) seeks indemnification to be paid by us and the other defendants named in
the third party notice for the damages suffered as a consequence of the failure
of the group of companies. We reject the third-party notice and we have
instructed our lawyers to file a statement of defense.
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(B) In August 2000, a claim in the sum of US$18,666,711 was filed by several
venture capital funds against Mr. Blass, our former deputy general manager, and
24 other defendants alleging a violation of an investment agreement by Mr. Blass
and the other defendants. Mr. Blass rejects the claim and he has instructed his
lawyer to file a statement of defense. The claim was filed against Mr. Blass in
his capacity as a director in the company in which the investment was to be
made. At that time, Mr. Blass served as the general manager of our subsidiary
and was appointed by our subsidiary as director in the above company. In 2000,
we sold all of our holdings in the subsidiary.
(C) In October 2002, a class action was filed against us, the State of Israel
(as our controlling shareholder) and 17 of our current and former officers and
directors. This action was instituted by Mr. A. Fine, one of our shareholders.
The action was instituted in the name of all those who purchased our shares
between December 1, 2001 and August 22, 2002. The claim alleges that we breached
our duty to report pursuant to the Securities Law -1968(Israel) and the
Securities Regulations (Immediate and Periodic Reports) -1970(Israel). According
to the action, between December 1, 2001 and August 22, 2002, several events
occurred which demonstrated our severe condition. The claim alleges that the
occurrence of the events obligated us to file an immediate report pursuant to
Israeli securities regulations, and that such report was not filed. The claim
seeks damages of between NIS 14 million and NIS 20 million. We have instructed
our lawyers to file the appropriate defenses. Under Israeli law, the filing of a
class action must be approved by the court. Accordingly, the plaintiff has filed
an application to that effect, which has yet to be heard. We and those of our
officers and directors who were sued, are vigorously contesting the action and
the application for its approval.
(D) In February 2003, a claim was filed against us and several other defendants,
including the Ministry of Industry and Trade, the Ministry of Finance, Directors
of the Investments Center, the Deputy General of the Ministry of Finance and two
of our former employees, alleging damages caused (directly or indirectly) by us
and the other defendants as a result of the failure to extend, or delay in
extending, loans and/or grants. The plaintiffs seek damages in the amount of NIS
295 million. The claim was filed by a company which received loans from us in
the 1990's that were fully guaranteed by the State of Israel. Additionally, the
plaintiffs filed a motion to receive an exemption from the payment of court
fees. We have instructed our lawyers to file the appropriate defenses.
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(E) In March 2003, Lahava Chatamim Ltd., in its capacity as a shareholder,
(according to a motion it filed, Lahava Chatamim Ltd. held at the time 325,194
cumulative participating preference C shares, 4,598 cumulative participating
preference CC shares and 8,000 cumulative participating preference CC1 shares)
filed a derivative action in the amount of NIS 409.5 million against us and
eleven of our current and former officers and directors. The plaintiff claims
that the officers and directors breached their duty of care and were negligent
in carrying out their duties. According to the claim, the negligence of the
officers and directors is evident, among other things, in granting credits
without proper collateral, in problems in the bank credit policy, in the quality
of the credits, in the procedures employed for granting the credits, in managing
credit risk and in the routine handling of credits. The alleged damages are
equal to the allowances for doubtful debts we made in our financial statements
for 2002. Under Israeli law, the filing of a derivative action must be approved
by the court. Accordingly, the plaintiff has filed an application to that
effect, which has yet to be heard. Those of our officers and directors who were
sued are vigorously contesting the action and the application for its approval.(
F) In September 2003, an Israeli oil company filed a claim against us and two
other banks, in the amount of NIS 6 million, concerning the delivery of oil
products by the plaintiff to a power station that was financed by us and the
other two banks. The plaintiff alleges that the three banks should reimburse the
plaintiff for the delivered oil products because they made a false
representation that expenses included in the business plan and/or the budget
(which, allegedly, we and the other banks were familiar with) would be paid by
them. We and the other two banks reject the claim and we have instructed our
lawyers to file the appropriate defenses.
(G) In January 2004, a guarantor of the debts of one of our customers filed a
claim against us in the amount of NIS 999,000. We were previously awarded a
judgment against both the customer and the guarantor. The plaintiff argues that
he suffered damages as a result of the legal proceedings we instituted against
him in his capacity as guarantor of the customer. The plaintiff claims that the
amount of damages exceeds $50 million, but in order to reduce court fees, he
fixed the amount being sought at NIS 999,000, reserving his right to later amend
the amount of the claim. We reject the claim and we have instructed our lawyers
to file the appropriate defenses.
(H) In January 2004, a guarantor of the debts of one of our customers and a
company controlled by the guarantor, filed a counterclaim against us. We are
suing the guarantor in his capacity as guarantor for the debts of a company that
is now in receivership. The company in receivership had received a construction
loan from us for the financing of a building project. In the counterclaim, the
guarantor argues, among other things, that without informing the guarantor, we
agreed to changes in the building project and to an increase of the construction
loan, and that we were negligent in the financing of the building project. The
plaintiffs in the counterclaim claim that we caused them various damages, but in
order to reduce court fees, they fixed the amount of the counterclaim at NIS
1,250,000, reserving their right to later amend the amount of the counterclaim.
We reject the counterclaim and we have instructed our lawyers to file the
appropriate defenses.
(I) In March 2004, three companies that received various loans from us in the
past, filed a claim for a declaratory and monetary judgment against us, our
Chairman of the Board, our General Manager and one of our credit officers. The
three plaintiffs, against whom we had previously initiated legal proceedings,
have petitioned the court to declare, among other things, that they had entered
into a binding construction loan agreement with us. The plaintiffs claim that as
a result of our refusal to extend to them the construction loan to which we had
allegedly committed, they suffered damages of approximately NIS 200 million, but
in order to reduce court fees (while reserving their right to later amend the
amount of the claim), they fixed the amount of the monetary claim at NIS 1
million. We reject the claim and we have instructed our lawyers to file a
statement of defense and various preliminary motions to strike out the claim and
for stay of the proceedings.
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(J) On June 30, 2004, two of our former senior employees, S. Flomin (who served
as our Internal Auditor) and L. Rutman (who served as Senior Adviser to the
General Manager) filed a claim in the labor court, seeking NIS 2,346,200 in the
aggregate (nominal). The claim is for various additional payments which,
according to the claim, are due to them in connection with the cessation of
their employment in 2002 and pursuant to the terms of their employment
contracts. The payment of these additional payments was not approved by the
Supervisor of Wages of the Ministry of Finance, who was also named in the claim
as a defendant. The plaintiffs claim that in return for these additional
payments that were granted to them in their employment contracts, they agreed to
waive wage increases that were due to them at the time. Therefore, the
plaintiffs have alternatively petitioned the court to award them the value of
the wage increases that they agreed to waive. Despite the fact that, according
to the plaintiffs' claim, the value of the wage increases is greater than the
amount of the claim, in order to reduce court fees, they have set their value
equal to the amount of the claim. The plaintiffs also state that they reserve
their right to file a claim concerning the above against our management and
directors who approved their employment contracts.
(K) On September 14, 2004, Adi Eilat Hotel Ltd. ("the Company") and its
shareholders filed an action in the Tel Aviv District Court, petitioning the
court to declare that the Company and its shareholders who are guarantors of its
debt are not liable to pay any monetary amount to us, that we are obliged to
return to the shareholders/guarantors the value of their private assets which
were invested in the Company, that our Chairman of the Board and 12 members of
our board of directors who served during the years 1997-2001 were negligent in
carrying out their duties in that they allowed us to fund the hotel of the
Company and that after the guarantors receive back their private assets, we will
be entitled to take the hotel into our possession. According to our records, the
Company and its shareholders/guarantors owe us approximately NIS 63 million. We
reject the claim and we have instructed our lawyers to file the appropriate
defenses.
(L) On September 28, 2004, 27 financial institutions that hold our participating
preference C and/or CC and/or CC1 shares filed an action in the Tel Aviv
District Court, in which the court is petitioned, inter alia, to direct us to
pay to our shareholders a dividend similar in an amount and on such date as it
had paid until the second quarter of 2002. The plaintiffs claim, inter alia,
that according to the our articles of incorporation, we are bound to pay to our
preferred shareholders an annual dividend in the amount of 7.5%, that such
dividend is not in essence a dividend, but rather a payment which is paid in
full by the State of Israel with respect to the perpetual deposits that we
deposited with the State and, therefore, such distribution is not subject to
distribution requirements proscribed by the law, and that even if such
requirements should be applied, we should be ordered to pay the requested
dividend because the solvency requirement proscribed by law exists in relation
to us, in light of the fact that the dividend is financed in full by the State
of Israel and is not deducted from our capital. We reject the claim and we have
instructed our lawyers to file the appropriate defenses.
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In addition, we are party to various pending legal proceedings which we do
not expect will have a material adverse effect on our business, financial
condition or results of operations.
Except for the changes indicated above, there have been no significant
changes in the legal proceedings since the date of our annual financial
statements.
DIVIDEND POLICY
In the past, we paid an annual dividend on Ordinary A shares, Preferred
Ordinary shares, Ordinary B shares and Ordinary B1 shares, as well as on our
preferred shares. The B and B1 shares are owned by the State of Israel. We
stopped paying dividends on these shares at the same time that we stopped paying
dividends on our Preferred shares. For a discussion regarding the cessation of
the payment of dividends, see "Item 3.D. Risk Factors" above and "Item 13.
Defaults, Dividend Arrearages and Delinquencies" below.
ITEM 9. THE OFFER AND LISTING
OFFER AND LISTING DETAILS
PRICE HISTORY OF LISTED STOCK
Our Ordinary Preferred Shares, and our cumulative participating preference
C Shares, CC Shares and CC1 Shares are listed on the Tel Aviv Stock Exchange.
The following table shows the high and low closing price in NIS for our Ordinary
Preferred Shares, and our cumulative participating preference C Shares, CC
Shares and CC1 Shares on the Tel Aviv Stock Exchange for the periods indicated:
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IN NIS
CLASS C CUMULATIVE CLASS CC CUMULATIVE CLASS CC1 CUMULATIVE
PARTICIPATING PARTICIPATING PARTICIPATING ORDINARY PREFERENCE
PREFERENCE SHARES PREFERENCE SHARES PREFERENCE SHARES SHARES
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1999 435 330 4180 3153 4330 3153 4630 1345
2000 392 342 4159 3201 3900 3260 4520 2410
2001 446 339 4070 3379 4458 3370 2592 1905
2002
1st Quarter 490 440 4750 4030 4840 4359 2870 1950
2nd Quarter 460 354 4300 3400 4447 3600 2219 1250
3rd Quarter 356 100 3444 887 3711 986 1440 157
4th Quarter 119 58 1050 752 1000 555 293 150
2003
1st Quarter 63 58 938 700 578 550 204 144
2nd Quarter 123 63 775 700 860 578 229 143
3rd Quarter 105 90 800 740 900 849 200 182
4th Quarter 108 78 1142 730 990 900 207 172
2004
1st Quarter 158 95 1590 1020 1449 925 1174 194
2nd Quarter 134 105 1249 1000 1290 720 841 481
June 122 119 1236 1190 1200 720 681 511
3rd Quarter 130 117 1220 1190 1230 1100 642 540
July 115 130 1220 1190 1176 1150 642 630
August 130 122 1220 1211 1230 1100 642 607
September 122 117 1211 1210 1150 1125 607 540
4th Quarter 124 107 1211 1050 1129 1001 586 410
October 119 107 1211 1050 1129 1125 586 503
November 124 110 1057 1057 1100 1001 586 410
December 121 90 1200 1057 1100 1097 613 509
Neither our Class D Cumulative Participating Preference Shares nor our
Class DD Cumulative Participating Preference Shares, are listed or traded on the
Tel Aviv Stock Exchange. None of our securities are listed or traded on any
stock exchange in the United States.
PLAN OF DISTRIBUTION
Not applicable.
MARKETS
Our listed securities are traded only on the TelAviv Stock Exchange.
SELLING SHAREHOLDERS
Not applicable.
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DILUTION
Not applicable.
EXPENSES
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
MEMORANDUM OF ASSOCIATION
Under the Companies Law, a company may define its purposes as to engage in
any lawful business. Section 2 of our Memorandum of Association, which outlines
our objects and purposes, states that we may undertake the following activities,
among others:
(a) to establish a financial institution to be instrumental in the
encouragement of, and assistance to, the creation and expansion of
efficient, useful and economically sound enterprises in Israel;
(b) to grant and provide banking services of any kind or nature;
(c) to grant credits of any kind or nature whatsoever, financial and any
other assistance to any person in Israel and outside Israel, in such a
manner and way and on such terms as we may deem proper and fit;
(d) to deal in investment, underwrite, acquire and hold securities issued
or made by any company in Israel or abroad;
(e) to promote, further and encourage the issue of securities by
industrial and other enterprises and to promote and further the
investment and participation of capital in industrial and other
enterprises whatsoever;
(f) to promote and assist in the creation and issuance of securities of
all kinds;
(g) to lend money and to provide credit to any enterprises;
(h) to guarantee loans obtained or to be obtained by any industrial and
other enterprise ; and
(i) to borrow and raise money and secure the repayment thereof in the
manner and on the terms as we may deem advisable.
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ARTICLES OF ASSOCIATION
AMENDMENT OF ARTICLES OF ASSOCIATION. Under the Companies Law, a company
incorporated before the Companies Law went into effect (February 1, 2000) may
modify or amend its articles of association by a resolution adopted by 75% of
the shareholders at a General Meeting, or by a different percentage if so
provided in the company's memorandum and articles of association. We were
incorporated in 1957; our memorandum and articles of association do not provide
any percentage for amendment of our Articles of Association and so we may amend
the Articles with the approval of 75% of the shareholders.
The Companies Law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not obligate the
shareholder without his prior consent.
RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION. Under the
Companies Law, for the purpose of a shareholder vote, the record date for public
companies, defined as companies traded on an exchange or as companies whose
shares were offered to the public by prospectus and are held by the public, such
as us, can be set between 4 and 21 days before the date of the meeting.
NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE. The Companies Law
provides that a public company , such as us, must give notice of a general
meeting to its shareholders of record at least twenty-one days prior to the
meeting, unless the company's articles of association provide that a notice need
not be sent. Article 5 of our articles of association provide that only the
holders of Ordinary A shares and Ordinary Preferred shares, will be entitled to
receive notice of a General Meeting and that the holders of all other classes of
shares will not enjoy such right.
ANNUAL MEETINGS AND EXTRAORDINARY MEETINGS. Under the Companies Law, an
annual meeting of the shareholders should be held once in every calendar year
and not more than fifteen months from the last annual meeting. The Companies Law
provides that an extraordinary meeting of shareholders of a public company, such
as us, must be called by the board of directors upon the written request of (i)
two directors, (ii) one-fourth of the serving directors, (iii) one or more
shareholders who hold(s) at least five percent of the issued share capital and
at least one percent of the voting rights of the company, or (iv) one or more
shareholders who have at least five percent of the voting rights of the company.
Within twenty-one days of receipt of such demand, the board of directors is
required to convene the extraordinary meeting for a time not later than
thirty-five days after notice has been given to the shareholders. Article 58 of
our Articles of Association provides that our board of directors may call an
Extraordinary Meeting at any time it sees fit. In addition, Article 61 of our
articles of association provides that our board of directors shall convene an
Extraordinary Meeting upon the written request of a holder or holders of not
less than 1/10 of our paid up capital that carries with it voting rights at
General Meetings.
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QUORUM AT GENERAL MEETINGS. Under Article 65 of our Articles of
Association, the required quorum for any General Meeting of shareholders is two
or more shareholders present in person, by proxy or by attorney who collectively
hold Ordinary A shares representing at least thirty-three and one-third percent
(331/3%) of the number of votes of the company. Article 68 of our Articles of
Association provides that if a quorom is not present within half an hour from
the time the meeting was set, then, if the meeting was called at the request of
the shareholders it will be cancelled, and otherwise it will be adjourned and
any shareholders present and entitled to participate in the adjourned meeting
shall constitute the required quorom.
ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS. Article 71 of our Articles of
Association and the Companies Law (with respect to public companies, such as us)
provide for voting by poll only. In addition, the Companies Law provides that a
declaration by the Chairman of the Meeting that a resolution has been carried or
rejected, unanimously or by a particular majority, shall be prima facie evidence
of the fact.
VOTING POWER; MODIFICATION OF CLASS RIGHTS. Article 77 of our Articles of
Association provides that every shareholder shall have one thousand votes for
each Ordinary A Share held by him and one vote for every Preferred Ordinary
Share held by him. Article 8 of our Articles of Association provides that if at
any time our share capital is divided into different classes of shares, the
rights attached to any class may be modified abrogated or otherwise dealt with
by the company with the consent in writing of the holders of 75% of the issued
and outstanding shares of that class or by Special Resolution (a resolution
carried by at least 75% of the votes of those present and voting) in an
Extraordinary Meeting of the shareholders of that class. A shareholder may vote
in person, by proxy or by a duly authorized representative.
ELECTION AND REMOVAL OF DIRECTORS. Under our Articles of Association, our
board of directors shall consist of not less than seven and not more than
fifteen directors. The appointment of our directors and their removal (except
for the "additional director" who is appointed by the other members of the board
of directors and who by virtue of his appointment becomes the chairman if the
board) shall be effected by the holders of our Ordinary A Shares.
Our Articles provide that each member or group of members shall be entitled
to appoint one director for every 1,015 Ordinary A Shares held. The appointer(s)
of a director may at any time remove the director appointed by him.
Under our Articles of Association, a director is not required to retire at
a certain age and need not hold our shares. Under the Companies Law, a person
cannot serve as a director if convicted of certain offenses or been declared
bankrupt. In the event the appointer of a director shall cease to hold the
requisite number of Ordinary A Shares, the director appointed by him shall cease
to be a director according to Article 88 of our Articles of Association.
QUALIFICATION OF DIRECTORS. Articles 96 and 97 of our Articles of
Association provide that no person shall be disqualified to serve as a director
by reason of him not holding shares in the Company or by reason of him having
served as director in the past. Our directors are not subject under the
Companies Law or our Articles of Association to an age limit requirement. Under
the Companies Law and in accordance with Article 100 of our Articles of
Association, a person cannot serve as a director if he has been convicted of
certain offenses, unless specifically authorized by the court, or has been
declared bankrupt.
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CHAIRMAN OF THE BOARD OF DIRECTORS. The board of directors may from time to
time appoint one additional director to serve as chairman of the Board of
Directors in accordance with Article 89A of our Articles of Association.
Alternatively, the board of directors may, in accordance with Article 112 of our
Articles of Association, elect one of its members to serve as the chairman of
the board.
CONFLICTS OF INTEREST. The Companies Law provides that a director, as well
as an officer, shall refrain from any act that involves a conflict of interest
between the performance of his function in the company and his performance of
any other function or his personal affairs. The Companies Law further provides
that if a director has a personal interest in the approval of a transaction
(other than a transaction that is not deemed to be exceptional and does not
relate to the director's terms of service or his employment in other
assignments) brought for approval by the audit committee or the board of
directors, then he shall not be present at the discussion and shall not
participate in the vote in the audit committee and at the board of directors.
DIRECTOR REMUNERATION. The Companies Law provides that director
remuneration must be approved by the audit committee, the board of directors and
the General Meeting of the shareholders.
PROCEEDINGS OF THE BOARD OF DIRECTORS. Article 106 of our Articles of
Association provides that the board of directors may meet and adjourn its
meetings and otherwise regulate such meetings and proceedings as the directors
think fit. A meeting of directors may be called on three days' notice according
to Article 110 of our Articles of Association.
Article 107 of our Articles of Association provides that 1/3 of the
directors then in office shall constitute a quorum for meetings of the board of
directors. No business shall be transacted at a meeting of the board of
directors unless the requisite quorum is present. At a twice adjourned meeting
(due to lack of the requisite quorom), two directors shall constitute a quorum
according to Article 107 of our Articles of Association.
Except as provided in the next sentence, all questions arising at any
meeting of our board of directors shall be decided by a majority of votes, and,
in the case of equal votes for and against, the Chairman of the Board of
Directors shall be granted one additional vote in accordance with Article 113.
Article 114 provides that the consent of a special majority (consisting of the
consent of (a) a majority of the then serving directors and (b) at least half of
the directors appointed by the State of Israel) is required to elect a chairman
or vice chairman of the board of directors, to appoint (in accordance with
Article 89A) an additional director (who upon his appointment becomes chairman)
or to appoint (in accordance with Article 122) a managing director.
BORROWING POWERS. The Companies Law authorizes the board of directors of a
company, among other things, to determine the credit limit of the company and to
issue bonds. Articles 51 and 52 of our Articles of Association state that our
board of directors may, from time to time, at its discretion, cause us to borrow
money and secure the payment of any sum or sums of money, and may secure or
provide for the repayment of such sum in such manner and upon such terms and
conditions as it deems fit.
85
TRANSFER OF SHARES. Article 37 of our Articles of Association provides that
no Ordinary A Shares may be transferred without the consent of the board of
directors.
ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS. The Companies Law provides
that an acquisition of our shares must be made by means of a tender offer, if,
as a result of the acquisition, the purchaser would become a holder of
twenty-five percent or more of the voting rights. This rule does not apply if
there is already another holder of twenty-five percent of the voting rights.
Similarly, the Companies Law provides that an acquisition of our shares must be
made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of more than forty-five percent of the voting
rights, unless there is another person holding at that time more than fifty
percent of the voting rights.
Regulations under the Companies Law provide that the Companies Law's tender
offer rules do not apply to a company whose shares are publicly traded either
outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
REPURCHASE OF SHARES. The Companies Law, subject to certain limitations,
allows companies under certain circumstances to repurchase their own shares.
FOREIGN OWNERSHIP. Neither our Articles of Association nor Israeli law
restrict in any way the ownership of our shares by nonresidents of Israel, or
restrict the voting or other rights of nonresidents of Israel. Notwithstanding,
nationals or residents of countries that are in a state of war with Israel or
entities incorporated, established or managed in such countries may not transfer
and/or acquire ownership in shares in Israel, and/or receive dividends in
respect thereto, without a special government permit.
MERGERS. The Companies Law provides for mergers between Israeli companies,
if each party to the transaction obtains the appropriate approval of its board
of directors and the General Meeting of shareholders. A "merger" is defined in
the Companies Law as a transfer of all assets and liabilities (including
conditional, future, known and unknown liabilities) of a target company to
another company, the consequence of which is the dissolution of the target
company in accordance with the provisions of the Companies Law. For purposes of
the approval of the General Meeting of shareholders of each merging entity,
unless a court rules otherwise, the merger will not be deemed approved, if a
majority of the holders of shares of that entity that are not held by the other
entity or are not held by any person who holds 25% or more of the voting rights
or the right to appoint 25% or more of the directors of the other entity, had
objected to the merger.
DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS. Article 130 of our
Articles of Association provides that if we have sufficient profits, the board
of directors, (a) must recommend that dividends be paid to the holders of the
cumulative participating preference C, CC, and CC1 shares, the holders of
cumulative redeemable preference D and DD shares and the holders of ordinary
preference shares; and (b) may recommend the payment of any other dividend that
is payable on our share capital under our Articles of Association, provided that
if the payment of fixed cumulative preferred dividends on our preferred shares
or our ordinary preference shares, is in arrears, the board of directors must
recommend first the payment of the arrearage. In the event of the winding up of
our business, after satisfaction of liabilities to creditors, our assets will be
distributed in accordance with Article 7 of our Articles of Association.
86
Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors, subject to any other provision in the company's articles
of association.
Under the Companies Law, dividends may be paid by a company only out of its
balance of net profits or out of its net profits for the two years preceding the
distribution of the dividends, whichever is greater, calculated in the manner
prescribed in the Companies Law. Pursuant to the Companies Law, any distribution
of dividends is subject to the proviso that there is no reasonable concern that
the distribution of dividends will prevent the company from meeting its existing
and foreseeable obligations as they become due. Article 133 of our Articles of
Association provides that no dividends shall be paid otherwise than out of our
profits and that any such dividend shall carry no interest.
INTERESTED PARTIES TRANSACTIONS. The Companies Law requires that certain
transactions, actions and arrangements be approved by the audit committee as
well as by our board of directors. In certain circumstances, in addition to
audit committee and board of directors' approval, approval by our shareholders
at a general meeting is also required. Specifically, the approval of our audit
committee, board of directors and shareholders is required with respect to the
following:
(1) a director's terms of service and employment, including, among other
things, grant of exemptions, insurance and indemnification;
(2) exceptional transactions (as defined in the Companies Law) with (i) a
controlling shareholder, or (ii) another person or entity in which
transaction a controlling shareholder has a personal interest,
including a private placement which is an exceptional transaction; and
(3) the terms of engagement or employment with a controlling shareholder
who is also an office holder (including a director) or an employee of
the Company.
The approval of our shareholders would be required in addition to the
approval of our board of directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings in our securities of a shareholder
that holds five percent or more of our outstanding share capital or our voting
rights, or that will cause any person to become, as a result of the issuance, a
holder of more than five percent of our outstanding share capital or our voting
rights.
87
For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company, excluding such
ability that stems only from serving as a director or holding another office in
the company (for this purpose, any person holding one half or more of the voting
rights of the company or of the right to appoint one half or more of the
directors of the company or the right to appoint the General Manager of the
company, is presumed to have control of the company); or (ii) the holder of
twenty five percent or more of the voting rights at the general meeting of the
company, if there is no other person holding more than fifty percent of such
rights (for this purpose, two or more holders having a personal interest in the
same transaction shall be deemed to be joint holders).
The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders (excluding absentees) voting at the meeting who do not have a
personal interest in the transaction, or (b) the total number of opposing votes
from amongst the shareholders who do not have a personal interest in the
transaction does not exceed one percent of all of our voting power rights
The disclosure provisions of the Companies Law require certain disclosure
to be made to us in connection with interested parties transactions, as follows:
o an office holder (including a director) or a controlling shareholder
must promptly disclose any direct or indirect personal interest
(excluding personal interest that stems only from the personal
interest of a relative and where the transaction is not exceptional)
that he may have, and all material, related information, in connection
with any existing or proposed transaction by us;
o in the event of a private placement that will increase the holdings in
our securities of a shareholder holding more than five percent of our
outstanding share capital or our voting rights, or that will cause any
person to become, as a result of the issuance, a holder of more than
five percent of our outstanding share capital or our voting rights,
such holder or person must promptly disclose to us any personal
interest he may have in such private placement; and
o any of our shareholders voting on any transaction concerning a
controlling shareholder as set forth above must inform us prior to the
voting, or on the proxy card if applicable, of any personal interest
he has in the transaction. The vote of a shareholder who does not
inform us with respect to any such interest shall not be counted.
In addition, a director who has a personal interest in a transaction
(whether with him or with another person), except a transaction that is not
exceptional, may not be present or vote at a meeting of the audit committee or
the board of directors, unless a majority of directors in the audit committee or
the board of directors, as applicable, have a personal interest in the
transaction.
88
EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS. The
Companies Law describes the fiduciary duty of an office holder (including a
director) as a duty to act in good faith and for the benefit of the company,
including by refraining from actions in which he has a conflict of interest or
that compete with the company's business, refraining from exploiting a business
opportunity of the company in order to gain a benefit for himself or for another
person, and disclosing to the company any information and documents which are
relevant to the company and that were obtained by him in his or her capacity as
an office holder. The Companies Law provides that an office holder (including a
director) owes a duty of care to the company, that requires the office holder,
among other things, to act at a level of competence at which a reasonable office
holder would have acted in the same position and under the same circumstances,
including by adopting reasonable means for obtaining information concerning the
profitability of the act brought for his approval or performed by him in the
scope of his office.
Under the Companies Law, a company may not exempt an office holder
(including a director) from liability with respect to a breach of his fiduciary
duty, but may exempt in advance an office holder from his liability to the
company, in whole or in part, with respect to a breach of his duty of care.
Pursuant to the Companies Law, a company may indemnify an office holder
(including a director) against a monetary liability imposed on him by a court,
including in settlement or arbitration proceedings that were approved by a
court, and against reasonable legal expenses in a civil proceeding or in a
criminal proceeding in which the office holder was found to be innocent or in
which he was convicted of an offense which does not require proof of a criminal
intent. The indemnification of an office holder must be expressly allowed in the
articles of association, under which the company may (i) undertake in advance to
indemnify its office holders (including directors)with respect to categories of
events that in the board of director's opinion can be foreseen at the time of
giving such undertaking and up to an amount determined by the board of directors
to be reasonable under the circumstances, or (ii) provide indemnification
retroactively.
Pursuant to the Companies Law, a company may also procure insurance of an
office holder's (including a director's) liability in consequence of an act
performed by him in the scope of his office, in the following cases: (a) a
breach of the duty of care of such office holder, (b) a breach of the fiduciary
duty, provided the office holder acted in good faith and had reasonable grounds
to believe that such act would not be detrimental to the company, or (c) a
monetary liability imposed on the office holder for the benefit of another
person.
A company may not indemnify an office holder (including a director)
against, nor enter into an insurance contract which would provide an office
holder (including a director) coverage for, nor exempt an office holder
(including a director) from:
o a breach by the office holder of his fiduciary duty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not be detrimental to the company;
o a breach by the office holder of his duty of care if such breach was
done intentionally or recklessly;
o any act or omission done with the intent to derive an illegal personal
gain; or
o any fine or penalty levied against the office holder as a result of a
criminal offense.
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In addition, under the Companies Law, exemption of, indemnification of, and
procurement of insurance coverage for a company's office holders, must be
approved by the company's audit committee and board of directors, and, with
regard to directors also, by the company's shareholders.
Our Articles of Association allow us to exempt office holders (including
directors), to indemnify them and to procure insurance for them, in accordance
with the provisions of the Companies Law, as described above, but require the
additional approval of our shareholders even with regard to exemption and
undertaking to indemnify to be granted to our office holders who are not
directors.
C. MATERIAL CONTRACTS
The following is a summary of each material contract, other than contracts
entered into in the ordinary course of business and other than the run-off plan
and the special line of credit (which are described in "Item 4. Business
Overview - Proposed Sale of the Bank and Extension of Special Line of Credit by
Bank of Israel" and "Business Overview - Adoption of Run-Off Plan and Amendment
of the Special Line of Credit" above), to which we are a party, for the two
years preceding publication of this annual report.
On June 26, 2003, we signed a lease for new offices, located at 82 Menachem
Begin Road, Tel Aviv, Israel 67138. We lease approximately 12,000 square feet,
plus parking spaces and additional storage space. The term of the lease is three
years, commencing September 1, 2003. We have an option to extend the lease for
an additional three years. We pay rent of approximately $11,000 per month for
office space and approximately $5,000 more per month for parking and storage
space. In addition, we pay maintenance, municipal property tax and other related
expenses. The rental amounts are linked to the cost-of-living index. If we
exercise the option to extend the lease, the rental charges will increase by 5%,
plus any cost-of-living increases.
D. EXCHANGE CONTROLS
There are no Israeli government laws, decrees or regulations that restrict
or affect our export or import of capital or the remittance of dividends,
interest or other payments to non-resident holders of our securities, including
the availability of cash and cash equivalents for use by us, except or otherwise
as set forth under "Item 10 - Foreign Ownership" above, or under "Item 10.
Additional Information - Taxation." below.
90
E. TAXATION
ISRAELI TAXATION
The following is general information regarding Israeli tax laws to which
U.S. and other non-Israeli shareholders may be subject. It does not cover all
possible tax considerations and therefore you should not rely on this
information as legal or professional tax advice. You should consult your own tax
advisor as to the particular tax consequences of an investment in our shares and
notes including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws.
To the extent that the discussion is based on legislation yet to be
judicially or administratively interpreted, we cannot assure you that the views
we express herein will accord with any such interpretation in the future.
Under current Israeli law, individual or corporate shareholders or
noteholders that are foreign residents and that do not maintain a permanent
establishment in Israel are exempt from capital gains tax on the sale (including
redemption) of traded securities of Israeli companies. Upon the sale of unlisted
securities, such persons are subject to a 25% tax rate on any capital gain
accrued after January 1, 2003. The foregoing does not apply to companies or
individuals that are subject to Chapter II of the Income Tax (Inflationary
Adjustments) Law-1985 (Israel). In general, Chapter II of the Inflationary
Adjustments Law applies to all Israeli companies and individuals, except for
those that: (i) do not generate any business income; (ii) do not apply for a
deduction of financing expenses; and (iii) are held only by individuals.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income.
Pursuant to the convention between the Government of the United States of
America and the Government of Israel with respect to taxes on income, which we
refer to as the treaty or the U.S.-Israel tax treaty, the sale, exchange or
disposition of our shares or notes by a person who qualifies as a resident of
the United States under the treaty and who is entitled to claim the benefits
afforded to him by the treaty, will generally not be subject to Israeli capital
gains tax. This exemption does not apply to the sale of shares by a person who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12-month period preceding the sale,
exchange or disposition, subject to certain conditions. A sale, exchange or
disposition of our shares by a U.S. resident qualified under the treaty, who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company at any time during the preceding 12-month period would be
subject to Israeli tax, to the extent applicable; however, under the treaty,
this U.S. resident would be permitted to claim a credit for these taxes against
U.S. income tax due with respect to the sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits in accordance
with tax treaties.
Non-residents of Israel are subject to income tax on passive income accrued
or derived from sources in Israel, such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel.
91
On distributions of dividends other than bonus shares (stock dividends) to
non-residents of Israel, we generally withhold at source income tax at a rate of
25%, unless a different rate applies under a treaty between Israel and the
shareholder's country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our shares who is a resident of the
United States will be 25% or 12.5% if certain conditions are met, including,
inter alia that the holder is a corporation which holds, directly or indirectly,
shares representing 10% or more of the voting power in our company during any
part of the 12-month period preceding the date of payment of the dividend.
On payments of interest on listed notes to non-residents of Israel, we
generally withhold at source income tax at a rate of 15% when the noteholder is
an individual, the note was issued on or after May 8, 2000 and certain further
conditions are met; at a rate of 35% when the noteholder is an individual and
the note was issued before May 8, 2000; and at a rate of 25% when the noteholder
is a corporation, in each case unless a different rate applies under a treaty
between Israel and the noteholder's country of residence. Under the U.S.-Israel
tax treaty, the maximum tax on interest paid to a noteholder who is a resident
of the United States will be 17.5%, or 10% if the interest is derived from a
loan granted by a bank, savings institution, or insurance company or the like.
Alternatively, the noteholder may elect under the treaty to pay tax at the full
rate (that is, 35% in the case of a corporate noteholder, or the individual's
marginal income tax rate in the case of an individual noteholder) on the net
profit deriving from the interest payment although this is generally subject to
filing a tax return in Israel.
U.S. TAXATION
The following is a summary of certain U.S. federal income tax consequences
applicable to the acquisition, ownership and disposition of our shares and notes
by a "U.S. Holder." This summary is based upon the Internal Revenue Code of
1986, as amended, which we refer to as the Code; Treasury Regulations; Internal
Revenue Service rulings; and judicial decisions now in effect. All of these are
subject to change, possibly with retroactive effect, or different
interpretations. For purposes of this summary, "U.S. Holder" means the
beneficial holder of a share or a note who or that, for U.S. federal income tax
purposes, is:
o an individual citizen or resident alien of the United States;
o a corporation, partnership or other entity treated as such formed in
or under the laws of the United States or any political subdivision of
the United States;
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or
more "U.S. persons" (within the meaning of the Code) have the
authority to control all substantial decisions of the trust, or if a
valid election is in effect to be treated as a U.S. person.
92
This summary does not cover all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax
provisions of the Code) or to investors that may be subject to special treatment
under U.S. federal income tax law, including:
o dealers in stocks, securities or currencies;
o securities traders that use a mark-to-market accounting method;
o banks and other financial institutions or financial services entities;
o insurance companies;
o tax-exempt organizations;
o persons holding our shares or notes as part of a hedging or conversion
transaction or a straddle;
o persons who or that are not U.S. Holders;
o persons whose functional currency is not the U.S. dollar; and
o direct, indirect or constructive owners of 10% or more of our
outstanding voting shares.
The summary also does not discuss any aspect of state, local or foreign
law, or U.S. federal estate and gift tax law as applicable to U.S. Holders. In
addition, it is limited to U.S. Holders who or that acquire and hold our shares
or notes as "capital assets" within the meaning of the Code - generally,
property held for investment- and, in the case of our notes, who or that
acquired notes in connection with their original issuance. This discussion also
does not consider the tax treatment of persons or partnerships who or that hold
our shares or notes through a partnership or other "pass-through" entity.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR SHARES OR NOTES.
A U.S. Holder generally will be required to include in gross income, as
ordinary dividend income, the amount of any distributions paid on our shares,
including the amount of any Israeli taxes withheld, to the extent that those
distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
earnings and profits will be applied against and will reduce the U.S. Holder's
tax basis in our shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those shares. Our dividends will not
qualify for the dividends-received deduction applicable in certain cases to U.S.
corporations.
93
In general, a U.S. Holder generally will be required to include in gross
income, as ordinary interest income, the amount of stated interest, including
the amount of any Israeli taxes withheld, on our notes as that interest is
received or accrued under that U.S. Holder's usual method of tax accounting.
Dividends or interest paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in the income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend or interest
is includible in the income of the U.S. Holder to the date that payment is
converted into U.S. dollars will be treated as ordinary income or loss.
Any dividends or interest we pay to a U.S. Holder with respect to our
shares or notes generally will be treated as foreign source income for U.S.
foreign tax credit purposes. Subject to the limitations set forth in the Code,
as modified by the Treaty, U.S. Holders may elect to claim a foreign tax credit
against their U.S. federal tax liability for Israeli income tax withheld from
dividends or interest received in respect of our shares or notes. These
limitations include, among others, rules that limit foreign tax credits
allowable with respect to specific classes of income to the U.S. federal income
taxes otherwise payable with respect to each such class of income. The total
amount of foreign tax credits allowable to a U.S. Holder in any year cannot
exceed the regular U.S. tax liability for the year attributable to that U.S.
Holder's total foreign source taxable income. A U.S. Holder will be denied a
foreign tax credit with respect to Israeli income tax withheld from dividends
received in respect of our shares if the U.S. Holder has not held those shares
for a minimum period or to the extent the U.S. Holder is under an obligation to
make certain related payments with respect to substantially similar or related
property. U.S. Holders who or that do not elect to claim a foreign tax credit
may instead claim a deduction for Israeli income tax withheld, but only for a
tax year in which the U.S. Holder does with respect to all foreign income taxes.
Upon a sale or other disposition of our shares or notes, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition (less amounts attributable to accrued but
unpaid dividends or interest, if any, which will be taxed as dividends or
interest, respectively) and the holder's adjusted tax basis in the shares or
notes sold or disposed of. A U.S. Holder using the cash method of accounting
must calculate the U.S. dollar value of the proceeds received on the sale date
as of the date that the sale settles, while a U.S. Holder using the accrual
method of accounting is required to calculate the value of the proceeds of the
sale as of the "trade date," unless the U.S. Holder has elected to use the
settlement date to determine the proceeds of sale. Gain or loss upon the
disposition of our shares or notes will be treated as long-term if, at the time
of the sale or disposition, the shares or notes disposed of were held for more
than one year. Long-term capital gains realized by individual U.S. Holders are
generally subject to a lower marginal U.S. federal income tax rate than ordinary
income. The deductibility of capital losses by a U.S. Holder is subject to
limitations.
94
In general, any gain recognized by a U.S. Holder on the sale or other
disposition of our shares or notes will be U.S. source income for U.S. foreign
tax credit purposes. Pursuant to the Treaty, however, gain from the sale or
other disposition of our shares by a holder who is a U.S. resident for Treaty
purposes and who sells those shares within Israel may be treated as foreign
source income for U.S. foreign tax credit purposes. A loss on the sale or other
disposition of our shares may have to be allocated against foreign source income
for those purposes.
Special U.S. federal income tax rules apply to U.S. Holders owning shares
of a so-called "passive foreign investment company," or "PFIC." A foreign
corporation will be considered a PFIC for any taxable year in which either 75%
or more of its gross income consists of certain types of passive income, or 50%
or more of the average value of its assets consists of assets that generate
those types of passive income. These tests are applied annually, but once
classified as a PFIC a foreign corporation remains one with respect to its U.S.
Holders except to the extent that those U.S. Holders elect to purge their shares
of that classification, with a possible tax cost. If we were classified as a
PFIC, a U.S. Holder could be subject to increased tax liability, possibly
including an interest charge, upon the sale or other disposition of our shares
or upon the receipt of amounts treated as "excess distributions." Although
several elections may be available to alleviate that potential increased tax
liability, there can be no assurance that the conditions necessary for those
elections to be made with respect to our shares will be satisfied.
A U.S. Holder of our shares or notes may be subject to "backup withholding"
with respect to certain "reportable payments," including dividend payments and,
under certain circumstances, proceeds from the sale or disposition of our shares
or notes. These backup withholding rules apply if the U.S. Holder, among other
things:
o fails to furnish a social security number or other taxpayer
identification number (a "TIN") certified under penalty of perjury
within a reasonable time after the request for the TIN;
o furnishes an incorrect TIN;
o fails to report properly interest or dividends; or
o under certain circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is the
correct number and that such holder is not subject to backup
withholding.
95
A U.S. Holder that does not provide us with its correct TIN also may be
subject to penalties imposed by the Internal Revenue Service (the "IRS"). Any
amount withheld from a payment to a U.S. Holder under the backup withholding
rules is creditable against the U.S. Holder's federal income tax liability,
provided that the required information is furnished to the IRS. Backup
withholding will not apply with respect to payments made to certain U.S.
Holders, including corporations and tax-exempt organizations, provided their
exemptions from backup withholding are properly established. We are required to
report to U.S. Holders and to the IRS the amount of any "reportable payments"
for each calendar year and the amount of tax withheld, if any, with respect to
these payments.
AVAILABILITY OF DOCUMENTS
All documents referred to in this annual report may be inspected at our
offices at 82 Menachem Begin Road, TelAviv, Israel. Any reports and other
information that we file electronically with the U.S. Securities and Exchange
Commission may be found at WWW.SEC.GOV. They can also be inspected without
charge and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Avenue, N.W., Washington, D.C. 20549.
96
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK
Our activities as a financial broker involve the taking of financial risks.
The main financial risks that we face are market risks and liquidity risks,
which are accompanied by operating and legal risks.
Our policy for managing our assets and liabilities is currently designed to
keep the linkage basis risks and interest risks within the exposure boundaries
established by the board of directors. Our financial risks committee, which
includes our General Manager and members of management, deliberates on the
implementation of this policy.
Details of the main areas of exposure, the limitations inherent therein,
and the manner and dates for reporting relating thereto, are presented below:
LINKAGE BASE EXPOSURE - The exposure to linkage base risk is measured by the
difference between the assets and liabilities (including the effect of forward
transactions) for each linkage base.
Similar to the entire Israeli banking industry, we have three main linkage
segments: CPI-linked, foreign currency denominated and linked and non-linked
shekel. Linkage base exposure relates to the exposure to changes in the rate of
inflation as well as to changes in the exchange rates of the different
currencies.
For each of the aforementioned linkage segments, maximum permissible
surplus and deficit levels have been established. These limitations were
established on the basis of the composition of our capital and our current
activities.
The report on linkage basis exposure is included in the quarterly report on
our activities, which is reviewed by our financial risks committee and submitted
to our board of directors.
Beginning in the second half of 2002 we experienced significant changes in
the surplus/deficit of assets by linkage bases as a result of the withdrawal by
the public of its deposits with us. Because the special line of credit from the
Bank of Israel is granted in non-linked shekels, our ability to manage our
assets and liabilities was severely reduced.
The following table presents details of the excess of assets over
liabilities (or when presented in parentheses, excess of liabilities over
assets) classified by linkage segment, including off-balance sheet items:
IN MILLIONS OF NIS
FOREIGN
CURRENCY
NON-LINKED CPI-LINKED DENOMINATED/ NON-MONETARY
SHEKEL SEGMENT SEGMENT (*) LINKED ITEMS TOTAL
-------------- ----------- ------ ----- -----
December 31, 2003 (472.8) 887.0 17.9 77.7 509.8
December 31, 2002 (210.8) 707.6 70.2 42.2 609.2
* Including a perpetual deposit with the Treasury (as of December 31, 2003
-in an amount equal to NIS 799.3 million and as of December 31, 2002 -
799.9 million )
97
Our analysis of the data in the table above shows that: (a) in the event of
an increase as of December 31, 2003 in the shekel exchange rate of 1% compared
to the "basket of currencies" (a mix of foreign currencies, the composition of
which and the relative weight of each participating currency are determined by
the Bank of Israel), we can expect to lose approximately NIS 170,000 as a result
of the surplus of foreign currency assets; and (b) in the event of an increase
as of December 31, 2002 in the shekel exchange rate of 1% compared to the
"basket of currencies", we can expect to lose approximately NIS 700,000 as a
result of the surplus of foreign currency assets.
INTEREST EXPOSURE - The interest risk derives from the effect of future changes
in interest rates on the present value of our assets and liabilities. Such
changes may lead to erosion of our capital and profits. In order to reduce our
exposure to interest rate fluctuations, it is our practice, to coordinate, to
the extent possible, the dates of interest rate changes on assets with the
interest rate changes on liabilities. Our exposure to interest rate risks is
measured by the difference in the average period to maturity (duration) in each
linkage segment. Our board of directors establishes the maximum allowable
duration for each linkage segment. The frequency of our compliance reporting is
quarterly.
The following table sets forth details relating to the average duration in
the various linkage segments (in years):
FOREIGN CURRENCY AND
FOREIGN CURRENCY LINKED
NON-LINKED SHEKEL SEGMENT CPI LINKED SEGMENT SEGMENT
----------------------------------------------------------------------------
AS OF DECEMBER 31,
----------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Total assets 0.13 0.16 3.41 2.79 7.12 6.50
Total liabilities 0.11 0.10 3.24 2.70 7.09 6.58
Difference in years 0.02 0.06 0.17 0.09 0.03 (0.08)
Our interest rate risk exists mainly in the CPI linked segment, since most
of the assets and liabilities in this segment are long-term and at a fixed
interest rate. The duration of assets in this segment as of December 31, 2003 is
3.41 years while the duration of liabilities is only 3.24 years (a very small
duration differential of about two months). A higher duration of assets creates
exposure to increases in the interest rate. Our exposure to interest risk is
within the limits determined by our board of directors.
In the non-linked shekel segment, the duration differential is smaller
resulting from a short duration of both assets and liabilities because most of
the items are at a variable rate of interest.
In the foreign currency segment the average duration is affected by one
loan in a considerable amount that has low risk characteristics, and which
carries a fixed rate of interest. The average duration of assets in this segment
is higher by 0.03 years than the average duration of liabilities. This
differential results from the fact that a part of the short-term sources in
foreign currency are by way of derivative financial instruments (swap
transactions).
The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2003. The table includes the fair value of our
assets and liabilities, calculated as explained below.
98
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS OF DECEMBER 31, 2003
IN TERMS OF NIS OF DECEMBER 2003
DECEMBER 31, 2003
----------------------------------------------------------------------------------------
ON FROM FROM FROM FROM FROM
DEMAND ONE TO THREE TO ONE TO THREE TO FIVE TO
AND UP TO THREE TWELVE THREE FIVE TEN
ONE MONTH MONTHS MONTHS YEARS YEARS YEARS
------- ------- ------- ------- ------- -------
IN MILLIONS OF NIS
----------------------------------------------------------------------------------------
ISRAELI CURRENCY
- - NON LINKED
TOTAL ASSETS 1,128.3 29.0 17.9 16.5 3.0 0.1
Total liabilities 2,227.4 43.8 80.5 5.9 - -
------- ------- ------- ------- ------- -------
Difference (1,099.1) (14.8) (62.6) 10.6 3.0 0.1
Effect of future
transactions 446.1 17.5 226.5 - - -
------- ------- ------- ------- ------- -------
Exposure to interest
rate changes (653.0) 2.7 163.9 10.6 3.0 0.1
Segment cumulative
exposure (653.0) (650.3) (486.4) (475.8) (472.8) (472.7)
------- ------- ------- ------- ------- -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 21.1 62.8 214.2 342.1 169.3 193.0
Total liabilities 41.4 38.2 150.0 223.8 104.7 184.8
------- ------- ------- ------- ------- -------
Difference (20.3) 24.6 64.2 118.3 64.6 8.2
Effect of future
transactions - - (226.5) - - -
------- ------- ------- ------- ------- -------
Exposure to interest
rate changes (20.3) 24.6 (162.3) 118.3 64.6 8.2
Segment cumulative
exposure (20.3) 4.3 (158.0) (39.7) 24.9 33.1
------- ------- ------- ------- ------- -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 376.7 268.5 549.1 1,184.9 986.0 1,855.2
Total liabilities 95.3 170.6 493.8 1,142.1 984.4 1,846.2
------- ------- ------- ------- ------- -------
Difference 281.4 97.9 55.3 42.8 1.6 9.0
Effect of future
transactions (446.1) (17.5) - - - -
------- ------- ------- ------- ------- -------
Exposure to interest
rate changes (164.7) 80.4 55.3 42.8 1.6 9.0
Segment cumulative
exposure (164.7) (84.3) (29.0) 13.8 15.4 24.4
------- ------- ------- ------- ------- -------
OVERALL EXPOSURE TO
CHARGES IN INTEREST
RATES
Total assets** 1,526.1 360.3 781.3 1,543.5 1,158.3 2,048.3
Total liabilities 2,364.1 252.6 724.3 1,371.8 1,089.1 2,031.0
------- ------- ------- ------- ------- -------
Difference (838.0) 107.7 56.9 171.7 69.2 17.3
Exposure to interest
rate changes (838.0) 107.7 56.9 171.7 69.2 17.3
------- ------- ------- ------- ------- -------
Cumulative exposure
General Notes- (838.0) (730.3) (673.4) (501.7) (432.5) (415.2)
------- ------- ------- ------- ------- -------
FROM
TEN TO OVER WITHOUT INTERNAL
TWENTY TWENTY FIXED FAIR RATE OF AVERAGE
YEARS YEARS MATURITY* TOTAL VALUE RETURN MATURITY
-------- -------- -------- -------- -------- -------- --------
IN MILLIONS OF NIS % YEARS
-------------------------------------- -------- -------- -------- --------
ISRAELI CURRENCY
- - NON LINKED
TOTAL ASSETS - - - 1,194.8 1,226.2 9.33 0.13
Total liabilities - - 0.1 2,357.7 2,358.8 5.32 0.11
-------- -------- -------- -------- -------- -------- --------
Difference - - (0.1) (1,162.9) (1,132.6) 4.01 0.02
Effect of future
transactions - - - 690.1
-------- -------- -------- --------
Exposure to interest
rate changes - - (0.1) (472.8)
Segment cumulative
exposure (472.7) (472.7) (472.8) (472.8)
-------- -------- -------- --------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 57.4 - 799.3 1,859.2 1,840.5 5.61 3.41
Total liabilities 2.8 - - 745.7 714.2 2.81 3.24
-------- -------- -------- -------- -------- -------- --------
Difference 54.6 - 799.3 1,113.5 1,126.3 2.80 0.17
Effect of future
transactions - - - (226.5)
-------- -------- -------- --------
Exposure to interest
rate changes 54.6 - 799.3 887.0
Segment cumulative
exposure 87.7 87.7 887.0 887.0
-------- -------- -------- --------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 1,959.8 42.6 - 7,222.8 7,245.5 7.12 6.80
Total liabilities 1,963.7 45.2 - 6,741.3 6,817.9 7.09 6.82
-------- -------- -------- -------- -------- -------- --------
Difference (3.9) (2.6) - 481.5 427.6 0.03 (0.02)
Effect of future
transactions - - - (463.6)
-------- -------- -------- --------
Exposure to interest
rate changes (3.9) (2.6) - 17.9
Segment cumulative
exposure 20.5 17.9 17.9 17.9
-------- -------- -------- --------
OVERALL EXPOSURE TO
CHARGES IN INTEREST
RATES
Total assets** 2,017.2 42.6 799.3 10,276.8 10,312.2 7.10 5.41
Total liabilities 1,966.5 45.2 0.1 9,844.7 9,890.8 6.34 4.94
-------- -------- -------- -------- -------- -------- --------
Difference 50.7 (2.6) 799.2 432.1 421.3 0.76 0.47
Exposure to interest
rate changes 50.7 (2.6) 799.2 432.1
-------- -------- -------- --------
Cumulative exposure
General Notes- (364.5) (367.1) 432.1 432.1
-------- -------- -------- --------
1. The maturity distribution, presented above, represents the present value of
future flows, computed at the internal rate of return, for each balance
sheet item. Such discounted future flows include interest, which will
accrue until the earlier of the maturity date or the date of change in the
interest rate.
2. The effect of hedging transactions is included in the total of assets or
liabilities, as the case may be.
* The amounts stated in the "without fixed maturity" column are the amounts
as stated in the balance sheet.
** Including shares, which are stated in the "without fixed maturity" column.
99
The fair value of our assets and liabilities as presented in the table
above was calculated in accordance with the following principles, assumptions
and methods:
o Since most of our assets and liabilities are not traded on active
markets, and thus market quotations are not available, the fair value
is arrived at by using accepted pricing models, such as the present
value of future cash flows discounted at interest rates, which reflect
the level of risk inherent in the assets and liabilities. Estimating
the fair value by way of determining the future cash flows and setting
the discount interest rate is subjective. Therefore, regarding most of
the assets and liabilities, the fair value estimate is not necessarily
an indication of their realizable value on balance sheet date. The
estimate of the fair value was made at interest rates prevailing at
balance sheet date and did not take interest rate fluctuations into
consideration. The use of other interest rates would result in
significantly different fair values. This is especially true in regard
to non-interest bearing assets and liabilities or those bearing fixed
interest rates. Furthermore, commissions receivable or payable
resulting from the business activity, were not taken into account,
neither was the tax effect considered. In view of the above, it should
be emphasized, that the data contained in the above table should not
be considered as an indication of our value as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques, which may be applied in arriving at fair values, caution
should be used in comparing the fair values arrived at by different
banks.
o As mentioned in Item 4, the Bank of Israel has granted us a special
line of credit, bearing interest equal to the Bank of Israel rate of
interest. The discount rate of the cash flows of our deposits is set
by us, for purposes of the fair value of the liabilities, on the basis
of the said interest rate.
o The fair value of deposits with banks and credit to the Government is
arrived at by use of the method of discounting future cash flows at
interest rates used by us in similar transactions proximate to balance
sheet date.
o Marketable securities are valued at market value. Shares for which no
market value is readily available are stated at cost.
o The fair value of the balance of credit to the public was arrived at
by using the method of the present value of future cash flows
discounted at an appropriate interest rate. The balance of such credit
was segmented into several categories. The future aggregate cash flows
of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level
of risk inherent in the credit. Generally, such interest rate was set
on the basis of the rate at which similar transactions were effected
by us proximate to balance sheet date. No additional disclosure is
given regarding the range of fair values in relation to the range of
discount rate values, which in our management's opinion, might reflect
the level of risk inherent in the debt. For short-term balances of
credit (for an initial period of up to three months), or balances at
variable market interest rates (prime, Libor, etc.), which change at
intervals of up to three months, their stated value is considered to
be their fair value.
100
o The fair value of problematic debts was calculated by using discount
rates reflecting their inherent high credit risk. In any event, such
discount rates were not less than the highest interest rate used by us
in our operations proximate to balance sheet date. The future cash
flows of problematic debts were calculated net of the specific
allowances for doubtful debts. The general and supplementary
allowances for doubtful debts in an aggregate amount of NIS 78.5
million (as of December 31, 2003), were not deducted from the balance
of credit to the public for cash flows purposes in assessing the fair
value.
o Regarding perpetual deposits with the Israeli Treasury, the accepted
pricing models cannot be applied to such deposits. Therefore, their
book value is considered to be their fair value. See "Item 3.D.- Risk
Factors" above for details of the terms of these deposits.
o The fair value of deposits, debentures and capital notes was arrived
at by the method of discounting the future cash flows at the interest
rate paid by us in obtaining similar deposits, or the interest rate we
would expect to pay on similar debentures and capital notes if they
were issued by us, as of balance sheet date.
o Regarding deposits from the Bank of Israel, the balance in the balance
sheet is a close approximation of the fair value since the deposits
are at variable rates of interest.
An analysis of scenarios carried out regarding the influence of a 1% change
in the interest rate indicates that in the worst case such a change will cause a
maximum loss as follows:
IN MILLIONS OF NIS
-----------------------
LINKAGE SEGMENT MAXIMUM LOSS DUE TO 1% RATE CHANGE
- --------------- -----------------------
AS OF DECEMBER 31, 2003 AS OF DECEMBER 31, 2002
----------------------- -----------------------
Non-linked Shekel 1.0 0.6
CPI-linked Shekel 15.4 6.2
Foreign Currency Denominated & Linked 1.8 0.7
TOTAL 18.2 7.5
DERIVATIVE FINANCIAL INSTRUMENTS - As part of our policy for asset and liability
management, we conduct transactions in financial derivatives. As a result of the
events that occurred in the second half of 2002, our activities in financial
instruments were reduced to a minimum and at present they are mainly limited to
forward transactions, swap transactions and foreign currency option purchases
for the purpose of closing our position exposure.
101
The risk to which we are exposed due to the derivative financial
instruments is not material to our financial position.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
CESSATION OF DIVIDEND DISTRIBUTION.
Our issued and outstanding share capital includes, among others, our
Cumulative Participating Preference C shares, CC shares and CC1 shares and our
Cumulative Redeemable Preference D shares and DD shares. The C, CC and CC1
shares entitle the holders thereof to a cumulative preferred dividend of 6% per
annum plus a participating dividend. The D and DD shares entitle the holders
thereof to a cumulative preferred dividend of 7.5% per annum.
According to Article 6 of our articles of association, the C, CC, CC1, D
and DD shares rank first (pari passu with each other) and prior to all of our
other classes of shares, in any distribution of dividends, provided, however,
that if there are arrears of any fixed cumulative preferential dividends, then
according to Article 130 of our articles of association, our board of directors
is bound to recommend to the general meeting of shareholders the payment of
arrears prior to any other distribution. The payment of cumulative preferential
dividends to the holders of our ordinary preferred shares, totaling
approximately $20 per annum, is prior to the dividend on our ordinary A shares.
According to Article 7 of our articles of association, upon liquidation of
the bank, the assets available for distribution to the shareholders will be
first distributed to pay cumulative preferred dividends in arrears to all
classes of preference shares, i.e. the C,CC,CC1,D and DD shares.
According to the Companies Law - 1999 (Israel), a company may distribute
dividends only from its profits (adjusted to the changes in the CPI). Under
certain circumstances, however, a company may seek court approval to pay
dividends in the absence of profits. Under the Directives of Proper Banking
Procedures, the Supervisor of Banks has prohibited banking corporations from
distributing dividends, without his prior approval, if, among other things, such
banking corporations have losses in one or more of the last three calendar years
or if the aggregate results of three quarters ending in the interim period for
which the last interim financial statements were issued reflect a loss.
We ended the years 2001, 2002 and 2003 with losses and, beginning in the
first quarter of 2002, we have not had profits from which we could distribute
dividends. The last quarterly dividend that we paid in respect of our C shares,
our CC shares, our CC1 shares, our D shares and our DD shares was the dividend
for the second quarter of 2002, which payment of dividends was made with court
approval and approval of the Supervisor of Banks.
102
In connection with the issuance of our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, we deposited the proceeds of the
issuances with the Ministry of Finance of the State of Israel pursuant to
deposit agreements. In our financial statements, we refer to our deposits with
the Ministry of Finance as the perpetual deposit. According to the deposit
agreements, our perpetual deposit with the Ministry of Finance earns interest at
a rate of 7.5% per annum (plus differentials of linkage to the U.S. dollar),
which interest must be paid by the Ministry of Finance to us on the payment
dates for the dividends to be paid by us on our C shares, our CC shares, our CC1
shares, our D shares and our DD shares.
When we ceased making dividend payments on our C shares, our CC shares, our
CC1 shares, our D shares and our DD shares, the Ministry of Finance also ceased
making the interest payments on the perpetual deposits to us. The deposit
agreements do not expressly stipulate how the interest on our perpetual deposits
with the Ministry of Finance should be handled during periods in which we are
prevented from distributing dividends on our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, and whether the interest will accrue and
be paid if we ultimately pay accrued dividends on such shares in arrears, or
upon liquidation.
Immediately prior to the publication of our financial statements for the
third quarter of 2002, our board of directors, assisted by legal advice, decided
not to distribute, for the time being, a dividend for the third quarter of 2002.
The decision was reached after considering, among other things, the following
issues:
o our results of operations of the third quarter of 2002 and the
liquidity crisis which affected us during the third quarter of 2002;
o our lack of distributable profits (as required by the Companies Law);
o the prohibition on the distribution of dividends according to our
Articles of Association when there are no profits, not even nominal
profits;
o the prohibition on distribution of dividends according to the
Directives of Proper Banking Procedures, as long as the Supervisor of
Banks did not permit the distribution; and
o the possibility that the interest on our perpetual deposits with the
Ministry of Finance would continue to accrue even if not actually
paid, if no dividend is distributed.
We submitted a request to the Supervisor of Banks for guidance relating to the
distribution of dividends for the third quarter of 2002. On December 1, 2002,
the Supervisor of Banks, in response to our request for guidance, indicated,
among other things, that under the circumstances, it would be inappropriate for
us to distribute a dividend for the third quarter of 2002. Nevertheless, the
Supervisor of Banks noted that it was still not completely clear as to (a) the
legal aspects of various questions connected with the distribution of the
dividends and (b) the accrual of interest on the perpetual deposits, and the
position of the State of Israel on this issue. The Supervisor of Banks, in the
interest of resolving the open issues, sent a copy of our request for guidance
to the Government Companies Authority and the Accountant General in the Treasury
and sought their input.
103
Because it is unclear whether or not interest is accruing on the perpetual
deposits during the period in which we are prevented from distributing dividends
and in consideration of the possible ramifications of the interest accrual on
the distribution of dividends in respect of the preferred shares, the board of
directors consulted legal counsel and concluded that the interest not paid on
the perpetual deposits , as a result of our failure to distribute dividends,
should accrue to us and, accordingly, in the event of our liquidation, the
interest should be paid. In a letter dated January 22, 2003, we requested from
the Ministry of Finance and the Government Companies Authority that they
promptly issue their respective positions in this matter.
In its reply dated March 13, 2003, the Ministry of Finance stated, among
other things, that the monies paid on the perpetual deposits for purposes of
distributing the dividend will be transferred to us solely for purposes of
redeeming the aforementioned redeemable preference shares (Classes D and DD), or
upon liquidation. In order to clarify matters and to avoid doubt, we once again
petitioned the Ministry of Finance to confirm that it accepts the position of
our board of directors as described in the preceding paragraph. A further
request in this matter was made in May 2004, but we have not yet received a
response from the Ministry of Finance as of the date of this annual report.
The Board of Directors has continued to discuss the payment of dividends on
the preferred shares and we have not paid dividends on the preferred shares
since the dividends paid for the second quarter of 2002.
The aggregate amount of accrued and unpaid quarterly dividends on the
preferred shares is equal to NIS 58.7 million as of December 31, 2003, of which
NIS 38.1 million is in respect of accrued and unpaid dividends for 2003. The
aggregate amount of accrued and unpaid dividends is not recorded in our
financial statements. Likewise, the interest income due to us arising from the
perpetual deposits with the Ministry of Finance (which interest income amounts
to NIS 58.7 million as of December 31, 2003 in the aggregate) is also not
recorded on our financial statements. See "Item 3 - Risk Factors" above for a
discussion.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES
Our management, with the participation of the General Manager and the
Controller, evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this annual report on Form 20-F. Based on such
evaluation, our General Manager and Controller have concluded that, except as
described below, our disclosure controls and procedures were effective as of the
end of the period covered by this annual report. There were no changes in our
internal control over financial reporting (as defined in Rule 13a-15 or 15d-15
under the Exchange Act) that occurred during the period covered by this annual
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
104
In connection with the audit of our financial statements for the fiscal
year ended December 31, 2003, our management has identified certain issues
relating to the processing and reporting of information as required by the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In
particular, our system of financial reporting was not designed to reconcile,
and, therefore, did not timely reconcile, our financial statements (which are
prepared in accordance with Israeli GAAP) with U.S. GAAP in accordance with the
requirements of Form 20-F. This issue primarily resulted from our lack of
qualified financial and accounting personnel with knowledge and expertise in
U.S. GAAP and the requirements of the SEC and the Public Company Accounting
Oversight Board (the "PCOAB"). In addition, the severe liquidity crisis that we
faced in 2002 and the subsequent implementation of the run-off plan negatively
affected our ability to address and correct this issue. This issue has
negatively impacted our ability to timely process and report the information
required by the rules and regulations of the SEC and has contributed to
significant delays in the completion and filing of our annual report on Form
20-F.
Our management has discussed this issue with our outside accounting
advisors. Our accounting personnel have outlined the issues relevant to the
reconciliation of our financial statements to U.S. GAAP and the methods of
preparing such a reconciliation. In addition, we have retained U.S. counsel to
advise as to the requirements of Form 20-F and related SEC rules and
regulations. As a result of the implementation of the run-off plan, and subject
to future changes in the requirements of U.S. GAAP, we do not expect any
significant new issues to arise in connection with the preparation of the U.S.
GAAP reconciliation because our business operations have been, and will continue
to be, dramatically reduced. In preparing the U.S. GAAP reconciliation of our
financial statements in the future, our accounting personnel will be guided by
the experience they acquired in the preparation of this annual report on Form
20-F. Our accounting personnel have indicated that they will regularly consult
with, and seek the assistance of, outside accounting advisors in connection with
the required reconciliation of our financial statements to U.S. GAAP. Moreover,
they will periodically seek from such outside accounting advisors relevant
updates regarding SEC and PCOAB rules and regulations relating to reconciliation
to U.S. GAAP.
In addition, our management has identified certain other matters in
connection with the audit of our financial statements for the fiscal year ended
December 31, 2003. In many instances, the credit lines of our clients were not
renewed until after such credit lines expired. Such late renewal resulted in the
accrual of penalty-rate interest, which penalty-rate interest would then be
eliminated once the renewal was effected. The recording of the penalty-rate
interest temporarily distorted our income data, until the subsequent elimination
of such penalty-rate interest was effected. We have improved our controls and
procedures in order to avoid this problem in the future.
Another matter that was identified concerned recording of retroactive
transactions in certain instances. In order to reduce the risk involved in
retroactively recording transactions, we recently implemented certain control
procedures, including, without limitation, significantly limiting the number of
personnel authorized to retroactively record transactions.
105
ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that we have at least one audit
committee financial expert (as defined in Item 16A of Form 20-F) and that Mr.
Yacob Aizner is our "audit committee financial expert" serving on the audit
committee of our board of directors. Mr. Aizner is an appointee of Bank Leumi
Le-Israel B.M. Our board of directors has yet to affirmatively affirm that Mr.
Aizner is independent as such term is defined in Section 303A of the New York
Stock Exchange Listed Company Manual.
ITEM 16B - CODE OF ETHICS
We have adopted a code of ethics (as defined in Item 16B of Form 20-F) that
applies to all our directors, officers and employees. We have filed a copy of
this code of ethics as Exhibit 11.1 to this annual report on Form 20-F.
ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
According to the Companies Law-1999 (Israel), the remuneration of the
independent auditor for auditing work shall be established by the shareholders
at the general meeting, by the board of directors if the shareholders so
authorize , or, if the matter is prescribed in the articles of association, as
prescribed therein. Our shareholders authorized our board of directors to
establish the remuneration of the independent auditors for auditing work done in
2002 and 2003, subject, with respect to 2003 only, to the fee schedule of the
Government Companies Authority.
Furthermore, the Companies Law-1999 (Israel) stipulates that the
remuneration of the independent auditors for services other than auditing work
shall be established by the board of directors unless the articles of
association state that remuneration for such services shall be established by
the shareholders at the general meeting.
Pursuant to the above, the remuneration of our independent auditors for
audit work and other services in 2002 and 2003 was established and/or will be
established by our board of directors.
Somekh Chaikin - KPMG, Certified Public Accountants (Isr.), has served as
our independent public accountant for each of the fiscal years in the three-year
period ended December 31, 2003, for which audited financial statements appear in
this annual report on Form 20-F. For the years ended December 31, 2003 and 2002,
the aggregate fees billed and/or agreed to by Somekh Chaikin and its affiliates
are as follows:
106
2003 2002
----- -----
(IN THOUSANDS OF NIS)
--------------------
Audit Fees(1) 1,729 795
Audit-related Fees(2) 171 172
Tax Fees(3) 53 51
----- -----
TOTAL 1,953 1,018
===== =====
(1) Audit Fees consist of fees billed for the annual audit of the company's
consolidated financial statements or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements. They also include fees billed for other audit services, which
are those services that only the external auditor reasonably can provide,
and include the provision of comfort letters and consents and the review of
documents filed with the SEC.
(2) Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the company's financial statements or that are traditionally
performed by the external auditor, and include consultations concerning
financial accounting and reporting standards.
(3) Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with tax
audits and appeals, and requests for rulings or technical advice from
taxing authorities; tax planning services; consultation and planning
services
ITEM 16D - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not applicable.
107
PART III
ITEM 17. FINANCIAL STATEMENTS
The following financial statements are filed as part of this annual report:
Our audited balance sheets as of December 31, 2003 and December 31, 2002
and the statements of income, deficit and cash flows for the years ended
December 31, 2003, 2002 and 2001, including the notes thereto and together with
the auditors' report thereon, are included at pages F-1 to F- 82 to this annual
report.
OUR FINANCIAL STATEMENTS CONFORM WITH ISRAELI GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND THE INSTRUCTIONS OF THE SUPERVISOR OF BANKS (ISRAEL) ("ISRAELI
GAAP"), WHICH DIFFER IN CERTAIN RESPECTS FROM THOSE GENERALLY ACCEPTED IN THE
UNITED STATES ("U.S. GAAP) AS DESCRIBED BELOW IN NOTE 33 TO THE FINANCIAL
STATEMENTS.
ITEM 18. FINANCIAL STATEMENTS
See Item 17 above.
ITEM 19. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
1.1 Memorandum and Articles of Association of Israel Development Bank of Israel Ltd. (translation).
4.1 Summary of run-off plan.
4.2 Summary of Lease Agreement.
4.3 Summary of special line of credit from Bank of Israel.
11.1 Code of Ethics.
12.1 Certification of Uri Galili, General Manager of Industrial Development Bank of Israel Ltd.,
pursuant to 15 U.S.C. Section 78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
12.2 Certification of Rimon Shmaya, Comptroller of Industrial Development Bank of Israel Ltd.,
pursuant to 15 U.S.C. Section 78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
13.1 Certification of Uri Galili, General Manager of Industrial Development Bank of Israel Ltd.,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
13.2 Certification of Rimon Shmaya, Comptroller of Industrial Development Bank of Israel Ltd.,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
108
SIGNATURES
The Registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
By: /S/ Uri Galili By: /S/ Natan Atlas
- ------------------ -------------------
Uri Galili, General Manager Natan Atlas, General Secretary
Dated: January 18, 2005.
109
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2003
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2003
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Report
Financial Statements -
Balance Sheets F-3
Statements of Income F-4
Statement of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying financial statements of the Industrial
Development Bank of Israel Limited (the Bank), detailed hereunder:
a. Balance sheets as of December 31, 2003 and 2002.
b. Statements of income, shareholders' equity, and cash flows, for each of the
three years, the last of which ended December 31, 2003.
These financial statements are the responsibility of the Bank's Board of
Directors and its management. Our responsibility is to express an opinion on
these financial statements, based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audits to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides 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,
2003 and 2002, and the results of its operations, the changes in the
shareholders' equity and its cash flows for each of the three years, the last of
which ended December 31, 2003, in conformity with accounting principles
generally accepted in Israel. Furthermore, these statements have, in our
opinion, been prepared in conformity with the directives and guidelines of the
Supervisor of Banks in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States.
Information relating to the nature and effect of such differences is presented
in Note 33 to the financial statements.
As explained in Note 1B, the above-mentioned financial statements are stated in
values adjusted for the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
KPMG
The accompanying financial statements have been prepared assuming that the Bank
will continue as a going concern. As discussed in Note 1 and 16A to the
financial statements we draw attention to the following:
A. The severe liquidity problems experienced by the Bank, which were caused by
increased withdrawals of public deposits. Following these liquidity
problems, on August 22, 2002, the Bank turned to the Governor of the Bank
of Israel with a request for a special credit line.
B. A special credit line granted to the Bank by Bank of Israel on November 14,
2002, secured by a floating first degree charge in favor of the Bank of
Israel on all of the assets of the Bank except for certain assets, and a
notice of the Governor of Bank of Israel dated September 1, 2003, regarding
changes in the terms of the credit line, as discussed in Note 1.
C. The decision of the Bank's Board of Directors to adopt a run-off plan for
the supervised realization of the Bank's loan assets, in view of the
difficulties in carrying out the sale of the Bank's asset and liability
portfolio as previously decided on by the Government and approved by the
Board of Directors, and the decision of the Ministerial Committee for
Social and Economic Affairs (The social economic Cabinet) to approve the
"Run Off" plan (hereunder - the Government's decision to adopt the "Run
Off" plan), as discussed in Note 1.
D. The minimum capital ratio of the Bank as of December 31, 2003, that has
fallen below the minimum of 9% set by the Supervisor of Banks in Proper
Banking Procedures Regulations.
These severe liquidity problems experienced by the Bank raise substantial doubts
as to the ability of the Bank to continue operating as a going concern. The
ability of the Bank to honor its obligations as they become due depends upon the
continuation of the special credit line from the Bank of Israel and the
implementation of the government's decision to adopt the run-of plan. We further
note that in the event the Bank continues to operate and is able to complete its
planned controlled realization of loan assets upon such completion, the Bank
will cease operating as a banking corporation under its present format.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
As well, we call attention to Note 21 to the financial statements regarding the
litigation pending against the Bank and its executive officers and the letters
received by the Bank expressing the intention or the possibility of suing the
Bank and/or its executive officers, as detailed in the said Note.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
February 29, 2004, except for Note 33, as to which the date is January 5, 2005.
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002
-------- --------
NOTE NIS MILLIONS NIS MILLIONS
---- -------- --------
ASSETS
Cash and deposits with banks 2 143.9 243.6
Securities 3 85.4 71.6
Credit to the public 4 9,189.6 10,908.1
Credit to governments 5 105.2 188.1
Investment in affiliates 6 - 0.9
Fixed assets 7 4.7 10.2
Other assets 8 28.2 51.8
Perpetual deposits with the Israeli Treasury 9 799.3 799.9
-------- --------
Total assets 10,356.3 12,274.2
======== ========
/s/ Dr. Raanan Cohen
- --------------------
Dr. Raanan Cohen - Chairman of the Board
/s/ Uri Galili
- --------------
Uri Galili - Chief Executive Officer
/s/ Rimon Shmaya
- ----------------
Rimon Shmaya - Comptroller
Date of approval of the financial statements: February 29, 2004, except for
Note 33, as to which the date is January 5, 2005.
The accompanying notes are an integral part of the financial statements.
The Industrial Development Bank of Israel Limited
- --------------------------------------------------------------------------------
2003 2002
-------- --------
NOTE NIS MILLIONS NIS MILLIONS
---- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 10 620.0 1,291.4
Deposits of banks 11 2,172.7 2,470.6
Deposits of the Government 6,949.3 7,711.5
Perpetual deposit 12 0.1 0.1
Capital notes 13 28.2 35.2
Other liabilities 14 76.2 156.2
-------- --------
Total liabilities 9,846.5 11,665.0
Non-participating shares 15 314.2 333.5
Shareholders' equity 16 195.6 275.7
-------- --------
Total liabilities and shareholders' equity 10,356.3 12,274.2
======== ========
The accompanying notes are an integral part of the financial statements.
F - 3
The Industrial Development Bank of Israel Limited
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
----- ----- -----
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ----- ----- -----
Profit from financing operations
before allowance for doubtful debts 23 66.9 79.5 164.0
Allowance for doubtful debts 4C 130.0 401.8 124.5
----- ----- -----
Profit (loss) from financing operations
after allowance for doubtful debts (63.1) (322.3) 39.5
----- ----- -----
Operating and other income
Operating commissions 24 6.4 *12.3 *15.3
Gains (losses) from investments in shares 25 10.2 (4.2) 2.2
Other income 26 5.4 *4.1 *4.3
----- ----- -----
TOTAL OPERATING AND OTHER INCOME 22.0 12.2 21.8
----- ----- -----
Operating and other expenses
Salaries and related expenses 27 33.7 49.7 57.6
Expenses (income) in respect of employee
termination payments (0.8) 35.7 -
Maintenance and depreciation of premises
and equipment 11.9 14.7 16.4
Other expenses 28 20.5 19.7 19.0
----- ----- -----
TOTAL OPERATING AND OTHER EXPENSES 65.3 119.8 93.0
----- ----- -----
Operating loss before taxes on income (106.4) (429.9) (31.7)
Taxes on income (tax savings) 29 (2.7) (0.4) 0.3
----- ----- -----
Operating loss after taxes on income (103.7) (429.5) (32.0)
----- ----- -----
Other items
Special income from the Israeli Treasury, net 31 - 6.4 14.9
Share in losses of affiliates, net
of related tax (0.4) (0.5) (3.3)
Capital gain (loss), net (0.3) 0.1 -
----- ----- -----
(0.7) 6.0 11.6
----- ----- -----
LOSS FOR THE YEAR (104.4) (423.5) (20.4)
===== ===== =====
LOSS PER SHARE (SEE NOTE 1-P.)
LOSS PER SHARE DIVIDEND PER SHARE
------------------------- ---------------------
2003 2002 2001 2003 2002 2001
----- ----- ----- ---- ---- ----
NIS NIS NIS NIS NIS NIS
----- ----- ----- ---- ---- ----
Per an amount equal to
US$1 of the par value
of -
"C", "CC" and "CC1"
preference shares (1.79) (7.23) (0.27) - 0.14 0.30
"A" ordinary shares (1.79) (7.37) (0.62) - - -
Preferred ordinary shares (1.79) (7.37) (0.54) - - 0.06
* Reclassified
The accompanying notes are an integral part of the financial statements.
F - 4
The Industrial Development Bank of Israel Limited
STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
ADJUSTMENTS
ACCUMULATED ACCUMULATED FROM
DIFFERENCE DIFFERENCE PRESENTATION
ON ON OF AVAILABLE-
TRANSLATION TRANSLATION FOR-SALE RETAINED
OF DOLLAR OF SECURITIES EARNINGS TOTAL
ORDINARY PREFERENCE LINKED CPI LINKED AT FAIR (ACCUMULATED SHAREHOLDERS'
SHARES SHARES DEPOSIT* DEPOSIT* VALUE DEFICIT) EQUITY
------- ------- ------- ------- ------- ------- -------
BALANCE AT JANUARY 1, 2001 131.4 1,068.0 (697.5) 196.4 2.5 63.1 763.9
CHANGES DURING 2001
Loss for the year - - - - - (20.4) (20.4)
Adjustments from presentation
of available- for- sale securities
at fair value - - - - 2.6 - 2.6
Related tax effect - - - - (0.4) - (0.4)
Translation differences relating to
a perpetual deposit linked to the CPI* - - - (23.8) - - (23.8)
Dividends on preference shares - - - - - (14.9) (14.9)
Dividends on other shares - - - - - (0.4) (0.4)
------- ------- ------- ------- ------- ------- -------
Balance as of December 31,2001 131.4 1,068.0 (697.5) 172.6 4.7 27.4 706.6
CHANGES DURING 2002
Loss for the year - - - - - (423.5) (423.5)
Adjustments from presentation
of available- for- sale securities
at fair value - - - - 0.1 - 0.1
Translation differences relating to
a perpetual deposit linked to the CPI* - - - (1.1) - - (1.1)
Dividends on preference shares - - - - - (6.4) (6.4)
------- ------- ------- ------- ------- ------- -------
Balance as of December 31,2002 131.4 1,068.0 (697.5) 171.5 4.8 (402.5) 275.7
CHANGES DURING 2003
Loss for the year - - - - - (104.4) (104.4)
Adjustments from presentation
of available- for- sale securities
at fair value - - - - 5.6 - 5.6
Translation differences relating to
a perpetual deposit linked to the CPI* - - - 18.7 - - 18.7
------- ------- ------- ------- ------- ------- -------
Balance as of December 31,2003 131.4 1,068.0 (697.5) 190.2 10.4 (506.9) 195.6
======= ======= ======= ======= ======= ======= =======
* See Note 9 to the financial statements.
The accompanying notes are an integral part of the financial statements.
F - 5
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Loss for the year (104.4) (423.5) (20.4)
Adjustments to reconcile the loss to net cash flows
generated by operating activities:
Bank's share in losses of an
affiliate, net of related taxes 0.4 0.5 3.3
Depreciation of equipment 5.3 6.8 7.4
Allowance for doubtful debts 130.0 402.0 124.5
Realized and non-realized loss on adjustment
to fair value of trading securities - 2.1 0.6
Loss on write-down of available for sale debentures - 3.1 1.4
Gain on held to maturity securities - - (0.3)
Gain on sale of available-for-sale securities (9.1) *(1.8) *(4.3)
Capital gain (loss) 0.3 (0.1) -
Provision for severance pay and pensions, net (12.5) 36.5 0.1
Inflationary erosion of capital notes and perpetual deposit (2.2) (0.2) (0.6)
------- ------- -------
Net cash inflow generated by operating activities 7.8 25.4 111.7
------- ------- -------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Investment in affiliates - - (2.1)
Deposits with banks, net 60.0 15.5 22.2
Trading securities, net - 6.0 (0.8)
Available-for-sale securities, net 24.9 *159.9 *5.5
Purchase of held to maturity debentures - (2.8) (16.3)
Credit to the public, net 1,567.4 933.7 (921.7)
Credit to governments, net 82.9 50.0 33.4
Other assets, net 23.6 152.3 (95.1)
Acquisition of fixed assets (0.2) (4.0) (6.3)
Proceeds from sale of fixed assets 0.1 0.1 -
------- ------- -------
Net cash inflow (outflow) generated by activities
related to assets 1,758.7 1,310.7 (981.2)
------- ------- -------
* Reclassified
The accompanying notes are an integral part of the financial statements.
F - 6
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
- --------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes (4.9) (0.1) (12.9)
Deposits of the public, net (671.4) (3,055.1) 324.6
Deposits of banks, net (297.9) 1,561.4 59.8
Deposits of the Government, net (762.2) (125.3) 417.6
Redemption of debentures - (0.1) (0.2)
Other liabilities, net (69.8) (176.6) 82.2
Dividend paid to holders of participating shares - (6.4) (15.3)
------- ------- -------
Net cash inflow generated by activities
relating to liabilities and shareholders' equity (1,806.2) (1,802.2) 855.8
------- ------- -------
Decrease in cash (39.7) (466.1) (13.7)
Balance of cash as at beginning of year 155.0 621.1 634.8
------- ------- -------
BALANCE OF CASH AS AT END OF YEAR 115.3 155.0 621.1
======= ======= =======
F - 7
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. DETERIORATION IN THE LIQUIDITY POSITION, CREDIT LINE FROM THE BANK OF
ISRAEL, THE "RUN OFF" PLAN AND GOVERNMENT DECISIONS PERTAINING TO THE
AFFAIRS OF THE BANK
Due to increased withdrawals of deposits of the public during the third
quarter of 2002, the Bank experienced severe liquidity problems, following
which the Bank turned to the Governor of the Bank of Israel (hereinafter -
the "Governor") on August 22, 2002, with a request for a special credit
line.
GOVERNMENT DECISIONS PERTAINING TO THE AFFAIRS OF THE BANK
Following the liquidity problems encountered by the Bank, the Government
passed a resolution which was adopted by the Bank's Board of Directors to
sell the assets and liabilities of the Bank within a number of months.
On August 26, 2002, the Bank of Israel issued a press release whereby the
Prime Minister's Office, the Finance Ministry, and the Bank of Israel
decided to implement a number of steps pertaining to the Bank. These steps
included selling the assets and liabilities of the Bank to another bank,
the granting to the Bank of a credit line by Bank of Israel in order to
bridge its liquidity requirements, and upon the granting of this credit
line, the agreement of the Finance Ministry that the State's deposits with
the Bank would be subordinate to the public's deposits with the Bank and to
the credit provided by the Bank of Israel, until the sale of the Bank's
banking activity. On August 26, 2002, the Board of Directors of the Bank
resolved to approve the sale of the Bank's banking activity.
On September 1, 2002, the Government decided on a course of action "the
goal of which was to immediately stabilize the Bank and establish a feeling
of certainty among the depositors, by guaranteeing the orderly operation of
the Bank until the completion of the sale of its banking activity (asset
and liability portfolio)". As part of this course of action, the Government
resolved that "upon the setting up for the Bank of the credit line by the
Bank of Israel, under clause 8 of the Banking Ordinance, in order to bridge
the Bank's liquidity needs, if required- the deposits of the State should
be subordinated to the public's deposits currently held with the Bank or
the credit of the Bank of Israel granted to repay deposits, all on the
basis of the resolution of the Board of Directors of the Bank to sell its
activity portfolio within a few months". The manner of the subordination
under the aforementioned Government resolution was detailed in a letter of
the Accountant General of the Finance Ministry dated September 4, 2002.
F - 8
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
GOVERNMENT DECISIONS PERTAINING TO THE AFFAIRS OF THE BANK (CONT'D)
In view of the difficulties which arose in trying to sell the assets and
liabilities of the Bank as an "all or nothing" sale, the Ministerial
Committee on Social and Economic Affairs (the social economic Cabinet)
decided on July 29, 2003, to approve a "Run Off" plan for the Bank
(hereinafter - "the Governments decision to adopt the "Run Off" plan"). The
principal items of the decision are as follows:
o The assets of the Bank are to be disposed of in a controlled process
and over a defined period of time not exceeding 36 months from the
date of the decision, in the framework of the "Run-Off" plan approved
by the Bank's Board of Directors and with the changes to be determined
by the Accountant General and the Government Companies Authority.
o The Government has noted before it the announcement of the Governor of
the Bank of Israel regarding his agreement to continue to provide a
credit facility to the Bank for a period of 36 months, at an interest
rate not exceeding (from then onwards) the interest rate of the Bank
of Israel. The balance of utilized credit is not to exceed the credit
utilization forecast the Bank put before the Bank of Israel, and in
any case it is not to exceed NIS 2.2 billion.
o The Bank will not use the special credit line or other sources for the
purpose of providing new credit.
o If at the end of 24 months from the date of the decision there is an
unpaid balance of the credit line, this balance will become the
responsibility of the Government and it will be paid by means of a
monetary transfer to the Bank of Israel within an additional period of
12 months.
o The Government has noted before it the announcement of the Bank of
Israel that it will consider curtailing the banking license of the
Bank so as to reflect its limited activity as derived from the
"Run-Off" plan.
o The Government has noted before it that the Accountant General and the
Government Companies Authority will examine and present, if necessary,
an alternative outline for the disposal of the asset and liability
portfolio of the Bank, on an "all or nothing" basis, or by other sale
methods, along with implementation of the plan.
It was indicated in the decision that it is being made in order to assure
the proper operation of the Bank and the refunding of deposits to all
customers, and for the purpose of disposing of the assets of the Bank
within 36 months in a controlled process.
The Bank is presently in the process of implementing the "Run-off" plan as
described above and in more detail below.
F - 9
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE SPECIAL CREDIT LINE FROM THE BANK OF ISRAEL
In view of the liquidity problems experienced by the Bank, The Governor of
the Bank of Israel was approached on August 22, 2002, with a request for a
special credit line.
On September 9, 2002, the Governor notified the Bank as to his decision to
place a special credit line at the disposal of the Bank, the major terms of
which are as follows:
o The Bank will be able to obtain the special credit from the Bank of
Israel to the extent necessary to bridge the Banks liquidity needs to
fulfill its banking obligations, including those toward its public
depositors (not including liabilities of any kind to the Government).
o The credit under the special credit line will bear interest at the
"Bank of Israel rate", plus 3% (charged quarterly), and the Bank will
also have to pay a commission at an annual rate of 1% (charged
monthly) in respect of the unutilized amount of the credit line
(hereinafter - the credit commission).
o The special credit line will expire on the earlier of May 10, 2003 or
upon the sale of the Bank's banking activity. However, the Governor
reserves the right to demand the earlier repayment of the outstanding
credit, or to cease any further utilization of the credit line.
o The granting of the special credit line is subject to various
conditions, among which is the placement of a pledge in favor of the
Bank of Israel on all of the assets of the Bank, except for those
assets to be agreed upon by the Bank and the Bank of Israel.
On November 14, 2002, the special credit line was actually granted to the
Bank and the Bank signed a debenture in favor of the Bank of Israel. The
amount of the credit facility at that date was set at NIS 2.2 billion. For
details as to the pledges created by the said debenture see Note 17,
hereunder. The period of the credit facility that was first set until May
10, 2003, was extended until the Government decision on the adoption of the
"Run Off" plan was passed.
Following the decision of the Government to adopt the "Run-off" plan, the
Governor of the Bank of Israel announced on September 1, 2003, of a number
of changes in the conditions of the credit facility.
The principal changes are as follows:
o The repayment date will be no later than August 1, 2006.
o The maximum amount of the credit line will decline gradually (from a
maximum amount of NIS 2.2 billion) in accordance with a forecast that
was provided to the Bank of Israel by the Bank.
F - 10
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE SPECIAL CREDIT LINE FROM THE BANK OF ISRAEL (CONT'D)
o Beginning from the date the Government decided to adopt the "Run-off"
plan (July 29, 2003) the interest on the utilized credit will be the
interest rate of the Bank of Israel, providing that all the other
conditions are fulfilled, including the Government decision with
respect to the date for completing the return of the deposits to the
public and the disposal of the Bank's assets.
o The total amount of credit to the public will not exceed its balance
as at July 31, 2003 and it will present a downward trend. Any
deviation will be considered by Bank of Israel to be an unauthorized
overdrawing and it will be charged interest accordingly.
o Limitations were set on the Bank's volume of activity with respect to
the receipt and placement of deposits.
o The credit commission in respect of the unutilized credit will be
calculated on the difference between the amount of the credit line and
105% of its utilized amount.
Following several reductions made during 2003 in the "Bank of Israel
interest rate", this rate of interest was on December 31, 2003 at an annual
rate of 5.3%
The utilized balance of the special credit line (not including accrued
interest) was NIS 2,062 million at December 31, 2003. On February 24, 2004,
the said amount was NIS 1,935 million (unaudited). These balances are lower
than the framework of the credit facility determined in the Governors
letter of September 1, 2003.
The total amount of the interest on the special credit from Bank of Israel,
included in the financing expenses of the Bank for 2003, amounts to NIS 219
million, of which NIS 36 million reflects interest in excess of the "Bank
of Israel rate".
THE "RUN OFF" PLAN
The principal components of the "Run-Off" plan that was approved by the
Bank's Board of Directors are a supervised sale of the Bank's credit assets
by the end of 2006, by way of collection of a part of the credits and a
segmented sale of some of the other credits, and a significant reduction in
manpower and in operating expenses, subject to the continued granting of
the special credit line by the Bank of Israel. In accordance with the
economic evaluation of the parties who prepared the plan, the cost of
implementing the "Run-Off" plan, including the disposal of the credit, will
be significantly less than the expected discount on the "all or nothing"
and short-term sale of the Bank's asset and liability portfolio.
In addition, the Board of Directors also decided to approve the extensive
and detailed efficiency plan formulated by the Bank Management. The plan
includes extensive cutbacks in operating expenses and manpower, including
termination and reduction in banking services unrelated to the collection
of debts.
In accordance with the "Run-Off" plan and the efficiency plan complementing
it, the Bank refrains from granting new credit and its activities
concentrate on collection and sale of the existing credit.
F - 11
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE "RUN OFF" PLAN (CONT'D)
As part of the implementation of the "Run-Off" plan, the Bank has already
reduced or ceased activities it previously conducted. The Bank has
significantly reduced its foreign currency and foreign trade activity, and
it has almost completely discontinued the following activities: maintenance
of a dealing room (for customers), maintenance of current accounts and
securities accounts (for private customers), execution of Government
grants, operating teller services and clearing facilities (independently)
and credit cards.
The reduction in the Bank's operations was accompanied by a reduction in
the Bank's staff.
As a result of the developments in the third quarter of 2002, there was a
significant reduction in deposits from the public. The balance of the
public's deposits with the Bank as of December 31, 2003 was NIS 620
million, compared with NIS 3,597 million on June 30, 2002, and NIS 1,291
million on December 31, 2002. On February 24, 2004, the said balance
amounted to NIS 584 million (unaudited).
The ability of the Bank to repay its liabilities is contingent upon the
continuation of the special credit line from the Bank of Israel and
implementation of the Government decision adopting the "Run-Off" plan.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed due to the
financial results of the process of realizing the Bank's assets as part of
the "Run-Off" plan.
B. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES
(1) GENERAL
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel.
The financial statements have been prepared on the basis of historical cost
adjusted for changes in the general purchasing power of the Israeli
currency.
The adjusted values of the non-monetary assets do not purport to reflect
their real economic value but rather their historical cost adjusted to
reflect the changes in the general purchasing power of the Israeli
currency.
In the adjusted financial statements the terms "cost" and "net asset value"
mean "adjusted cost" and "adjusted net asset value".
All comparative data for prior periods (including amounts of monetary
items) are also stated in terms of shekels of December 31, 2003.
F - 12
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
B. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES (CONT'D)
(1) GENERAL (cont'd)
Data from the Bank's financial statements in nominal historical values, is
presented in Note 32.
See Note 1R. below regarding the discontinuance of the adjustment of
financial statements beginning from January 1, 2004.
(2) PRINCIPLES OF ADJUSTMENT
(A) BALANCE SHEET
Monetary items are stated in the adjusted balance sheet at their historical
values.
Non-monetary items (such as fixed assets, investment in shares, deferred
income, prepaid expenses and shareholders' equity) are adjusted on the
basis of the changes in the Consumer Price Index (hereinafter - CPI) from
the index in respect of the month of the transaction to the index published
in respect of December 2003.
The net asset value of the investment in affiliates is based on the
adjusted financial statements of such affiliates.
(B) STATEMENT OF INCOME
The statement of income items were adjusted on the basis of the adjustment
of monthly income statements in nominal values, as follows:
- Income and expenses arising from non-monetary items have been adjusted
on the basis of specific indices applied in the adjustment of the
related balance sheet items.
- Other income and expenses, after offsetting the adjustment of the
opening monthly balances of the related assets and liabilities, except
for balances of items in the non-linked shekel sector, have been
adjusted from the index in respect of that month to the index in
respect of December 2003. In the non-linked shekel sector, the
offsetting of the adjustment of asset and liability balances was
computed on the basis of the average daily balances for the month.
- See K below regarding income and expenses related to derivative
financial instruments.
F - 13
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
B. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES (CONT'D)
(2) PRINCIPLES OF ADJUSTMENT (cont'd)
(B) STATEMENT OF INCOME (cont'd)
- The specific allowance for doubtful debts has been adjusted from the
index of the date the debt was determined to be doubtful to the index
in respect of December 2003.
- Tax expenses for the current year include the erosion of tax payments
from the date of payment to the date of the financial statements.
- The Bank's equity in the results of operations of affiliates was
determined on the basis of the adjusted financial statements of those
affiliates.
- See (c) below in respect of income from a special deposit with the
Israeli Treasury, related to the participating share capital.
(C) STATEMENT OF SHAREHOLDERS' EQUITY
The difference generated until May 6, 1996 between the adjustment of the
special deposit with the Israeli Treasury which, up to May 6, 1996, was
linked to the US dollar, in respect of the participating preference shares
similarly linked to the US dollar, and the adjustment of the said deposit
on the basis of the CPI, is reflected in the statement of shareholders'
equity in the item entitled "Accumulated difference on translation of a
dollar linked deposit" (see Note 9).
The difference generated from May 7, 1996, between the special deposit with
the Israeli Treasury, linked from that date to the CPI (which in no event
will be less than its dollar value as it was on October 1, 1987) and the
revaluation of the non-participating shares linked to the exchange rate of
the dollar, is reflected in the statement of shareholders' equity in the
item entitled "Accumulated difference on translation of CPI linked deposit"
(see Note 9).
C. EXCHANGE RATES AND LINKAGE
(1) Assets and liabilities denominated in, or linked to, foreign currency,
except for investments in securities, are stated on the basis of the
representative exchange rates, published by Bank of Israel, in effect
on balance sheet date or on a date relevant to the particular
transaction.
(2) Assets and liabilities linked to the CPI are stated according to the
contractual linkage terms of each balance.
F - 14
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. EXCHANGE RATES AND LINKAGE (CONT'D)
(3) Assets and liabilities which are optionally linked to the CPI or to
foreign currency, and those which are optionally linked to the CPI or
earn additional interest instead of being linked to the CPI, are
stated in the financial statements using the relevant basis under the
terms of the respective transactions.
(4) Interest and linkage differences accrued in respect of assets and
liabilities are included in the balance sheet under the items to which
they relate.
(5) Following are details of exchange rates and the CPI and the rates of
change therein:
DECEMBER 31 RATE OF CHANGE DURING
--------------------------------- -------------------------
2003 2002 2001 2003 2002 2001
----- ----- ----- ---- --- ---
% % %
---- --- ---
Representative
exchange rate
of US$1
(in NIS) 4.379 4.737 4.416 (7.6) 7.3 9.3
CPI in points
for:
December 178.6 182.0 170.9 (1.9) 6.5 1.4
November 178.9 182.5 171.1 (2.0) 6.7 1.4
D. SECURITIES
Securities are classified into three groups, the principles of measurement
of each group are as follows:
HELD TO MATURITY DEBENTURES
Such debentures are stated at their amortized value as of balance sheet
date. Such value represents the nominal value plus linkage differences and
interest accrued since acquisition. It also includes the unamortized
discount or premium, generated upon acquisition. Income from held to
maturity debentures is recognized on the accrual basis.
F - 15
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
D. SECURITIES (CONT'D)
AVAILABLE-FOR-SALE SECURITIES
Such securities are stated at their fair value. Income therefrom is
recognized on the accrual basis. The difference between the fair value and
adjusted value of available-for-sale securities, net of the related tax
effect, is recorded as a capital reserve. Non-marketable shares are stated
at their adjusted value.
TRADING SECURITIES
Such securities are stated at their fair value, and income resulting from
such adjustment is recognized on a current basis. The fair value of
securities for trading is determined based on their stock market prices as
of balance sheet date.
IMPAIRMENT IN VALUE OF INVESTMENTS
The Bank examines from time to time whether its investments in securities
have been impaired otherwise then temporarily. This examination is being
conducted whenever signs appear that might indicate the possibility of an
impairment in the value of investment, including a decline in market
prices, the business of the investee, the field in which the investee
operates and additional parameters. Provisions for the adjustment in value
of these investments, which in Management's evaluation are based on the
examination of the overall relevant aspects and assigning the proper weight
to them, and which are not of a temporary nature, are recognized in the
income statement.
E. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts,
which, in Management's opinion, present fairly the anticipated loss on the
credit portfolio, including off-balance sheet credit.
In determining the adequacy of the allowances, Management based itself upon
the evaluation of the risk involved in the credit portfolio using available
information on the customers' financial standing, volume of activity, past
record and adequacy of the security received.
The directives of the Supervisor of Banks require that, commencing with
1992, banks include, in addition to the specific allowance for doubtful
debts, a supplementary allowance for doubtful debts, which replaces the
general allowance, which had been required up to that time.
The supplementary allowance for doubtful debts is based upon excessive
credit balances, measured according to specified quality characteristics of
the credit portfolio, as provided in the directives of the Supervisor of
Banks
In accordance with the aforementioned requirements, a portion of the
general allowance, as of December 31, 1991, equal to 1% of the total debt
to which it was related at that date, is to be maintained in inflation
adjusted values.
F - 16
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
According to Directive 315 of the Directives for Proper Banking Procedures,
a banking corporation must make an additional allowance for doubtful debts
in respect of debts of customers who deviate from limits stipulated by the
Supervisor of Banks, which are calculated as a certain percentage of the
Bank's capital, as stipulated for purposes of calculating the minimum
capital ratio. These limits relate to the indebtedness of an individual
borrower or a borrower group, to the indebtedness in respect of financing
the acquisition of means of control of corporate entities and to the
indebtedness of related parties.
As a result of the decline in the "first tier capital" of the Bank and the
limitation on the amount of "second tier capital" that may be taken into
consideration, as described above, a large part of the customers' debts to
the Bank exceed the amounts of the aforementioned limits.
Furthermore, Directive 315 of the Proper Banking Procedures provides that a
banking corporation is required to make an additional allowance for
doubtful debts if the total liabilities of a certain segment to the banking
corporation exceed 20% of the total liabilities of the public to the
banking corporation (hereinafter - "the limit on segment indebtedness").
Since the Bank has stopped providing new credit and it focuses on the
collection of the existing credit to its customers, its ability to spread
the indebtedness of its customers between the various segments has
decreased and it may on occasion deviate from the limit on segment
indebtedness.
The Bank applied to the Bank of Israel requesting an exemption from making
the additional allowance for doubtful debts deriving from deviations from
the aforementioned various debt limits.
In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
Banks exempted the Bank from the requirement to increase the additional
allowance for doubtful debts in its interim financial statements as of
March 31, 2003 and June 30, 2003, in respect of deviations from the debt
limits of an individual borrower and a borrower group and in respect of
deviations from limits in respect of financing means of controls in
corporate entities.
In his letter of November 26, 2003, the Supervisor of Banks announced that
in light of the Government's decision on the affairs of the Bank, the
Bank's plan to reduce it activity and the commitment of the Government to
repay the special credit line, which was put at the disposal of the Bank by
the Bank of Israel and which is being used by the Bank to repay its
liabilities to the depositors of the public, he approves the following
reliefs with respect to implementation of the Proper Banking Procedures:
A As from the financial statements as of September 30, 2003 onwards, the
Bank is exempt from increasing the additional allowance for doubtful
debts in respect of deviations from debt limits of an individual
borrower and a borrower group and deviations from debt limits in
respect of financing means of control in corporate entities, and in
respect of deviations from the limit of segment indebtedness.
B. The Bank is allowed to reduce the additional allowance it made in
respect of the deviation from the aforementioned limits in the last
quarter of 2002.
F - 17
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
C. The Bank is allowed to reduce the additional allowance it made in the
past in respect of the deviation from indebtedness of related parties.
Accordingly, in the Bank's financial statements as of December 31, 2003,
the Bank did not record an additional allowance for doubtful debts in
respect of deviations from the aforementioned limits, and the additional
allowance for doubtful debts in the amount of NIS 7.5 million that was
included in the financial statements of the Bank on December 31, 2002 and
thereafter, in respect of the deviation from these limits, was cancelled.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to make an additional allowance of
significant amounts in respect of these deviations, which would have had a
material impact on the results of operations.
The aggregate balance of the general allowance and the supplementary
allowance for doubtful debts in accordance with the directives of the Bank
of Israel, as of December 31, 2003, constitutes 2.43% of the public credit
risk, which includes credit risk and off-balance sheet risk less credit
covered by security that is allowed to be deducted for purposes of
individual borrower and group of borrowers limitations (December 31, 2002 -
1.88%).
The Bank's policy is not to write-off doubtful debts until all collection
efforts, with respect thereto, have been exhausted. If Management concludes
that recovery of a debt is no longer possible, then cases involving
significant amounts are brought before the authorized bodies of the Bank,
which decide upon their being written-off.
F. INVESTMENTS IN AFFILIATED COMPANIES
The investments in affiliated companies are presented in the financial
statements by the equity method of accounting.
G. FIXED ASSETS
Fixed assets are stated at cost net of accumulated depreciation.
Depreciation is calculated using the "straight-line" method, at rates
deemed adequate to write off the assets over their estimated useful lives.
H. CONTINGENT LIABILITIES
Adequate provisions have been made in respect of claims, which, in
Management's estimation, based on the opinion of legal counsel, will not be
rejected or canceled.
F - 18
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
I. BASIS OF RECOGNITION OF INCOME AND EXPENSES
(1) Income and expenses are recognized on the accrual basis.
(2) See D above and K hereunder as to basis of recognition of income and
expenses with respect to trading securities and derivative financial
instruments defined as other transactions.
J. EMPLOYEE RIGHTS
Appropriate provisions cover the Bank's liability for payment of severance
pay and other benefits to its employees, according to labor agreements.
In December 2002 a special collective agreement was entered into between
the Bank, the General Federation of Labor and the Employees Committee
whereby the number of the Bank's staff will be reduced. Under this
agreement, certain of the employees are entitled upon their termination of
employment to a pension as from date of termination.
As regards the said employees, an agreement has been signed with a pension
fund, which arranges for the payment of pensions. Upon retirement of each
of such employees the Bank deposits with the pension fund the amount
required to purchase the pension rights for the particular employee in
accordance with the agreement. The Bank recorded provisions with respect to
the anticipated cost of acquiring the said pension rights, as computed by
an expert.
K. DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Bank's policy for the management of its assets and
liabilities, which is intended to monitor exposure to financial risks, the
Bank executes transactions in derivative financial instruments. These
instruments include, among others, forward exchange contracts, options,
etc., which are intended, primarily, to hedge against exposure to changes
in linkage bases and foreign currency exchange rates.
On January 17, 2000, the Supervisor of Bank issued instructions regarding
the "Accounting for Derivative Instruments and Hedging Transactions"
(hereinafter - "The Instructions"), which were based on principles
promulgated in the United States in Accounting Standard FAS133 - Accounting
principles and reporting regarding derivative instruments including certain
derivative financial instruments embedded in other contracts (hereinafter -
"host contracts") and regarding hedging transactions. The Instruction is
effective as from the end of the quarter ended March 31, 2002.
In June 2000, FAS 138 was published which amends the principles of FAS 133
as to the measurement and disclosure of derivative financial instruments
and hedging transactions. In order to adjust the Instruction to the
accounting principles as amended in FAS 138, the Supervisor of Banks issued
on January 1, 2001, amendments to the Instruction.
F - 19
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
K. DERIVATIVE FINANCIAL INSTRUMENTS (CONT'D)
On February 18, 2002, the Supervisor of Banks issued an instruction
postponing the effective date of the Instruction to the quarter ending on
March 31, 2003.
According to the Instruction all derivative instruments are to be stated at
their fair value. Changes in fair value of derivative instruments are taken
to the statement of income or to shareholders' equity (as a component of
"Other comprehensive profit") in accordance with the designation of the
derivative instrument. The effect of the said change in accounting on the
financial statements is in insignificant amounts.
Pursuant to the directives of the Supervisor of Banks, which were in effect
until December 31, 2002, transactions in derivative financial instruments
were classified into four categories:
NON-RISK BROKERAGE TRANSACTION -
Transaction in a derivative financial instrument with respect to which the
Bank is not a party. Income from this type of transaction is classified as
income from operating commissions.
AT-RISK BROKERAGE TRANSACTION
Transactions in a derivative financial instrument executed by the Bank with
one party, in which immediately following its execution and no later than
the same business day, the Bank enters into a counter transaction in an
identical derivative financial instrument with another party. Income from
this type of transaction is classified as financing income and is
recognized over the period of the transaction. Assets and liabilities
deriving from this type of transaction are measured according to their fair
value so that the balance of the asset is equal to the balance of the
liability.
HEDGING TRANSACTION
Transaction in a derivative financial instrument with respect to which a
number of conditions exist, mainly that: the derivative financial
instrument is intended to hedge a specific balance sheet transaction and
that there is a correlation between the fair value of the item being hedged
and opposite changes in the fair value of the derivative financial
instrument. Net financing income or expenses with respect to hedging
transactions are recorded in correspondence with the recording of the
income or expense for the balance sheet transaction and in the same income
or expense item.
OTHER TRANSACTION
Transaction in a derivative financial instrument, which was not classified
as a brokerage or a hedging transaction. Assets and liabilities deriving
from other transactions are measured according to their fair value as of
the date of report. Changes in the fair value of the other transactions are
recorded as other financing income and expenses.
In accordance with the criteria described above the derivative financial
instruments were defined in the preceding year as at-risk brokerage
transactions and as other transactions.
F - 20
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
L. OFFSETTING OF FINANCIAL INSTRUMENTS
Pursuant to the directives, amounts of designated deposits, the repayment
of which to the depositor is contingent on the collection of the loans
granted therefrom, are offset against the amounts of the related loans and,
therefore, are not reflected in the balance sheet. Income earned from such
collection-based loan operations is classified as operating commissions.
In accordance with the instructions of the Supervisor of Banks, assets and
liabilities in respect of financial instruments with the same counter party
are set-off against one another and presented net in the balance sheet when
the following conditions are fulfilled:
(1) In respect of such liabilities the Bank has the legal right to enforce
the set-off of the liabilities from the assets.
(2) The Bank intends to pay the liabilities and realize the assets on a
net basis or at the same time.
M. TAXES ON INCOME
The provision for taxes on the income of the Bank, which is defined as a
"financial institution" for Value Added Tax (hereinafter - VAT) purposes,
includes VAT on profit in accordance with the Value Added Tax Law. VAT
levied on salaries paid by financial institutions is included in the
statement of income under "Salaries and related expenses". In 2002 and
2003, "Salaries and related expenses" included a provision in respect of
salary tax receivable, due to losses for purposes of profit taxes.
N. STATEMENT OF CASH FLOWS
Cash flows from activity in assets and liabilities are shown net, except
for securities, fixed assets, investments in affiliates, in capital notes
and in debentures. "Cash", for purposes of the cash flow statement,
includes cash and bank deposits for an initial period not exceeding three
months.
O. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results may differ from such estimates.
F - 21
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
P. EARNINGS PER SHARE
Earnings per share have been computed on the basis of the number of
outstanding participating shares, which remained unchanged during the
reported years. In view of the fact that the share capital of the Bank is
composed of several classes of shares, a situation which does not allow for
a fair comparison of the per share data of the various classes of shares,
and as certain of these classes of shares are linked to the US dollar while
other classes participate in earnings on an equal basis with the linked
shares, the per share earnings data is given in relation to an amount which
equals US$1 of the par value of the shares, at the base exchange rate to
which they are linked.
Q. IMPAIRMENT OF ASSETS
In February 2003, the Israel Accounting Standards Board issued Standard No.
15, which deals with the impairment of assets. The standard stipulates the
procedures to be implemented by the corporation in order to ensure that its
assets are not presented at amounts higher than their recoverable value.
Such value is the higher of the net selling price and the present value of
the estimated future cash flows expected to be generated from the use and
disposal of the asset. The Standard also stipulates principles of
presentation and disclosure regarding assets, which have been impaired. The
Standard is effective as regards financial statements for periods beginning
on January 1, 2003. Implementation of the Standard did not have a material
effect on the results of operations, the financial position or the cash
flows of the Bank.
R. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION
During the year 2001 the Israel Accounting Standards Board published
Accounting Standard No. 12 on "Discontinuance of Adjustment of Financial
Statements". Pursuant to this standard, commencing January 1, 2003, the
adjustment to inflation of financial statements will be discontinued. In
December 2002, the Israel Accounting Standards Board issued Standard No. 17
which stipulates that implementation of Standard No. 12 will be postponed
to January 1, 2004. Therefore, financial statements will no longer be
adjusted as from January 1, 2004. Until December 31, 2003, the Bank
continues to prepare inflationary-adjusted financial statements in
accordance with the directives of the Supervisor of Banks, on the basis of
the principles of existing Opinions of the Institute of Certified Public
Accountants in Israel.
The implementation of Standard No.12 might have a material effect in the
reported results of the Bank. The extent of the effect depends on the
inflation rate and the sources of finance of the Bank.
F - 22
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - CASH AND DEPOSITS WITH BANKS
COMPOSITION:
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Cash and deposits with Bank of Israel (*) 57.0 113.7
Deposits with commercial banks (**) 67.8 107.0
Deposits in special banking corporations 19.1 22.9
----- -----
Total 143.9 243.6
===== =====
Including cash, deposits with Bank of Israel
and with banks for an initial period not
exceeding three months 115.3 155.0
===== =====
(*) This serves as security for deposits received from the Bank of Israel
- see also Note 17, below.
(**) As to pledges on deposits with banks - see also Note 17, below.
NOTE 3 - SECURITIES
A. COMPOSITION
DECEMBER 31, 2003
-----------------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING AMORTIZED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE COST(*) FAIR VALUE FAIR VALUE VALUE (**)
--------- --------- ----------- ----------- ---------
NIS MILLIONS
-----------------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES (1)
Non-Government
bonds 15.1 15.4 - (0.3) 15.1
Shares (2) 70.3 59.6 11.0 (0.3) (***)70.3
--------- --------- ----------- ----------- ---------
Total available-
for-sale securities 85.4 75.0 (****) 11.0 (****) (0.6) 85.4
--------- --------- ----------- ----------- ---------
Total securities 85.4 75.0 11.0 (0.6) (***)85.4
========= ========= =========== =========== =========
F - 23
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (CONT'D)
A. COMPOSITION (CONT'D)
DECEMBER 31, 2002
-----------------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING AMORTIZED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE COST(*) FAIR VALUE FAIR VALUE VALUE (**)
--------- --------- ---------- ----------- ---------
NIS MILLIONS
-----------------------------------------------------------------------------------
HELD TO MATURITY
DEBENTURES
Other debentures 19.4 19.4 - - 19.4
--------- --------- ---------- ----------- ---------
AVAILABLE-FOR-
SALE SECURITIES
Government bonds 0.1 0.1 - - 0.1
Other debentures 12.9 14.3 1.0 (2.4) 12.9
Shares 39.2 32.2 7.1 (0.1) (***)39.2
--------- --------- ---------- ----------- ---------
Total available-
for-sale securities 52.2 46.6 (****) 8.1 (****) (2.5) 52.2
--------- --------- ---------- ----------- ---------
Total securities 71.6 66.0 8.1 (2.5) (***)71.6
========= ========= ========== =========== =========
(*) In the case of shares - cost less provision for impairment in value,
where required.
(**) Fair value data are based, generally, on stock market prices, which do
not necessarily reflect the price which would be received on the sale
of a large quantity of shares.
(***) Includes shares, the fair value of which is not readily determinable,
which are stated at cost in the amount of NIS 34.3 million (December
31, 2002 - NIS 25.7 million).
(****) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
(1) Following the approval of the "Run Off" plan, all the debentures that
in the past were classified as held to maturity were transferred in
the course of 2003 to the available-for-sale portfolio. During 2003,
the Bank sold and redeemed such debentures in the amount of NIS 11.2
million. The balance of the above debentures at December 31, 2003
amounted to NIS 8.2 million.
(2) See Note 4E. regarding the classification of a loan balance to the
securities item
B. See Note 17 below, with respect to lien on Government bonds as
security for credit received from the Bank of Israel.
NOTE: For detail regarding results of investments in debentures - see Note
23E, and for detail regarding results of investments in shares - see
Note 25.
F - 24
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (*)
A. COMPOSITION
DECEMBER 31 DECEMBER 31
2003 2002
-------- --------
NIS MILLIONS NIS MILLIONS
-------- --------
Credit 9,268.1 10,987.8
Liabilities of customers for acceptances - 2.7
-------- --------
Total credit 9,268.1 10,990.5
Less - general and supplementary allowance for
doubtful debts* 78.5 82.4
-------- --------
Total 9,189.6 10,908.1
======== ========
B. CREDIT TO THE PUBLIC INCLUDES:
1. CREDIT TO PROBLEMATIC BORROWERS(**) WHICH ARE NOT INCLUDED IN THE
AGRICULTURAL SECTOR AND ARE NOT MUNICIPALITIES
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
a. Non income bearing credit to problematic borrowers -
Non-linked Israeli currency 391.9 308.4
Israeli currency linked to the CPI 47.6 164.7
Denominated in or linked to foreign currency 88.5 81.7
----- -----
528.0 554.8
===== =====
b. Credit restructured during the year, without waiver of income -
Israeli currency linked to the CPI - 14.9
Non-linked Israeli currency 3.6 13.0
Denominated in or linked to foreign currency 1.2 2.2
c. Credit to borrowers regarding which there is as yet an
unimplemented Management decision to restructure
their debt 46.9 -
d. Credit temporarily in arrears 98.9 128.2
Interest income recognized in respect thereof 11.5 5.7
e. Credit under special supervision 416.3 331.3
(*) The specific allowance for doubtful debts was deducted from the relevant
categories.
(**) The balance of problematic debts, less credit covered by security that is
deductible for purposes of individual borrower and group of borrowers
limitations.
F - 25
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO KIBBUTZIM (*) INCLUDED IN THE KIBBUTZ DEBT ARRANGEMENT
In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
the banks, the Government and the Kibbutz movements. This Arrangement
includes the implementation of a rehabilitation program prepared by the
borrowers, the waiver by the Bank of part of the loans granted by it,
Government grants designated for the early repayment of a part of the
Kibbutz debts, and a rescheduling of another portion of the debts for a
period of up to 25 years, in respect of which the Government provided less
costly financing which leaves the Bank with a margin of 2% p.a.
During 1991 through 1996, the Bank received from the Government the grants
under the Kibbutz Arrangement of 1989, designated for the early repayment
of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
debt accordingly. Furthermore, the Bank also received from the Government,
the deposits required for the rescheduling of part of the Kibbutz debts in
accordance with the Bank's proportionate share of the overall arrangement.
In 1993, the Bank commenced the implementation of the Arrangement at the
individual Kibbutz level for some Kibbutzim, reflecting the results thereof
on its books.
During 1996, a supplementary arrangement was signed by the banks, the
Government and the Kibbutz movements for the arrangement of the debts of
the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
was signed by the said parties. The main principles of the supplementary
arrangement, including the amendment thereto, are as follows:
- The arrangement relates to a part of the Kibbutzim and organizations
included in the first arrangement, in respect thereof it has become
evident that after full execution of the financial arrangement
contemplated by the first arrangement, debts remain regarding which
the repayment ability envisioned, with respect thereto, under that
agreement, does not allow them to fulfill their obligations (the
"Balloon" debt). Such "Balloon" debt is to be written off.
- In respect of most of the "Balloon" debts, the writing off shall be
covered as to 65% from bank sources and as to 35% from Government
sources.
- Kibbutzim will assign part of their rights in land to the Israel Lands
Administration. Upon each Kibbutz joining the arrangement, its land,
which was found in the land survey to have an alternative value
compared to agricultural use, will revert to the Israel Lands
Administration, without attaching to it an obligatory price tag. A
caveat is to be registered in favor of the banks with respect to such
land. In the future, when the land is sold, that part of the net
proceeds to be received, which represents the value of the original
rights of the Kibbutz in the land, will be paid over to the banks and
the Government in proportion to their share in the writing off of the
debt, as stated above. The funds transferred by the Government for the
purpose of the writing off of the debts of each Kibbutz, as stated
above, are conditional upon the consent of each individual Kibbutz to
the said arrangement and its subsequent joining to the supplementary
arrangement, including the transfer of its land to the Israel Lands
Administration. The abovementioned payments will be made in five
annual installments: the first immediately upon the transfer and the
balance to be linked to the CPI with annual interest at a rate of
1.5%.
(*) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 26
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
2. CREDIT TO KIBBUTZIM (*) INCLUDED IN THE KIBBUTZ DEBT ARRANGEMENT
(CONT'D)
- Until the real estate Kibbutzim join the supplementary arrangement on
the basis of the said land arrangement, a Kibbutz, at its own
initiative, may enter into interim property transactions, the
consideration for which, whether in cash or cash equivalents, will
partially or fully serve as a substitute to the said land arrangement.
The "Balloon" debt balance of a potential real estate Kibbutz which is
not repaid by the proceeds of such interim transactions or land
arrangement, will be treated in accordance with the financial
arrangement, as mentioned above.
In the opinion of the Bank, uncertainty exists in view of the above,
as to the real estate proceeds anticipated in the said arrangement.
The Bank has made provisions for doubtful debts for all the amounts it
considered necessary in light of that mentioned above.
COMPOSITION OF CREDIT TO THE AGRICULTURAL SECTOR
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Communal settlements (kibbutzim) including
regional enterprises and organizations 316.5 423.4
Cooperative settlements (moshavim) 29.2 40.8
----- -----
Total credit for kibbutzim and moshavim 345.7 464.2
Private agriculture 3.7 7.7
----- -----
Total credit to the agricultural sector 349.4 471.9
===== =====
(*) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 27
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
2. CREDIT TO KIBBUTZIM (**) INCLUDED IN THE KIBBUTZ DEBT ARRANGEMENT
(CONT'D)
CREDIT (*) TO THE AGRICULTURAL SECTOR (**) INCLUDES:
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
a. Non income bearing loans to problematic borrowers -
Israeli currency linked to the CPI 41.7 32.5
b. Restructured credit to borrowers-
1. Credit restructured during the current
year with waiver of income -
Israeli currency linked to the CPI 14.3 14.1
Average repayment period (years) 5.0 5.5
Expected interest margin from the credit 2% 2%
2. Credit restructured in prior years
with waiver of income -
Israeli currency linked to the CPI 15.6 17.7
c. Credit to borrowers in respect of which
there is an as yet unimplemented
management decision to restructure their debt 7.3 16.8
d. Credit temporarily in arrears 3.5 2.0
Interest income recognized in respect thereof 0.3 0.1
e. Credit under special supervision 80.9 131.4
f. Credit not included in above credit to problematic borrowers 186.1 257.4
Interest income recognized in respect thereof 10.5 8.0
(*) The balance of problematic debts less credit covered by security that
is deductible for purposes of individual borrower and group of
borrowers limitations.
(**) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 28
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
3. CREDIT TO LOCAL AUTHORITIES
Following is the composition of credit to local authorities:
DECEMBER 31 DECEMBER 31
2003 2002
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Balance of credit to local authorities at
balance sheet date 16.9 56.9
CREDIT (*) GRANTED TO LOCAL AUTHORITIES INCLUDES:
a. Non-income bearing credit - CPI-linked 1.9 2.0
b. Credit restructured during the year without waiver
of income - CPI linked - 0.5
c. Credit under special supervision - 1.9
d. Credit not included in above credit to problematic borrowers 15.0 52.7
Interest income recognized with respect of such credit 0.6 2.4
(*) The balance of problematic debts less credit covered by security that
is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 29
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS
2003
------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE(*) ALLOWANCE(**) TOTAL
----- ----- -----
NIS MILLIONS
------------------------------
Balance of allowance at beginning of year 617.3 82.4 699.7
----- ----- -----
Current provisions 144.3 3.5 147.8
Reduction in allowances (10.4) (7.4) (17.8)
----- ----- -----
Amount charged to the income statement 133.9 (3.9) 130.0
----- ----- -----
Debts written off or transferred (see E hereunder) (31.3) - (31.3)
Inflationary and other adjustments 12.6 - 12.6
----- ----- -----
Balance of allowance at end of year 732.5 78.5 811.0
===== ===== =====
Amount of provision not deducted from credit
to public 1.5 0.9 2.4
----- ----- -----
2002
------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE(*) ALLOWANCE(**) TOTAL
----- ----- -----
NIS MILLIONS
------------------------------
Balance of allowance at beginning of year 250.9 72.2 323.1
----- ----- -----
Current provisions 394.4 15.7 410.1
Reduction in allowances (2.6) (5.5) (8.1)
Collection of debts written off in previous years (0.2) - (0.2)
----- ----- -----
Amount charged to the income statement 391.6 10.2 401.8
----- ----- -----
Bad debts written off (8.8) - (8.8)
Inflationary and other adjustments (16.4) - (16.4)
----- ----- -----
Balance of allowance at end of year 617.3 82.4 699.7
===== ===== =====
Amount of provision not deducted from credit
to public 20.2 - 20.2
----- ----- -----
(*) Not including accrued interest on non-income bearing loans.
(**) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.5 million (as of December 31,
2002 - NIS 38.5 million; as of December 31, 2001 - NIS 38.5 million).
F - 30
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
2001
------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE(*) ALLOWANCE(**) TOTAL
----- ----- -----
NIS MILLIONS
------------------------------
Balance of allowance at beginning of year 166.3 56.1 222.4
----- ----- -----
Current provisions 115.8 20.6 136.4
Reduction in allowances (7.4) (4.5) (11.9)
----- ----- -----
Amount charged to the income statement 108.4 16.1 124.5
----- ----- -----
Bad debts written off (22.1) - (22.1)
Inflationary and other adjustments (1.7) - (1.7)
----- ----- -----
Balance of allowance at end of year 250.9 72.2 323.1
===== ===== =====
(*) Not including accrued interest on non-income bearing loans.
(**) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.5 million (as of December 31,
2002 - NIS 38.5 million, as of December 31, 2001 - NIS 38.5 million).
F - 31
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER.
DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------------- -----------------------------------
AMOUNT OF CREDIT PER NUMBER OF CREDIT NUMBER OF CREDIT
BORROWER BORROWERS (3) CREDIT (1) RISK (2) BORROWERS (3) CREDIT (1) RISK (2)
- -------------------- ----- ------- ------- ----- -------- --------
NIS THOUSANDS NIS MILLIONS NIS MILLIONS
- ------------- --------------------- -----------------------
Up to 7 189 0.8 - 257 1.2 -
From 7 to 18 161 1.9 - 340 4.0 -
From 18 to 35 99 2.5 - 357 6.3 2.1
From 35 to 70 92 4.6 - 177 8.2 0.5
From 70 to 140 97 9.1 1.1 121 10.7 0.9
From 140 to 285 91 17.4 1.3 103 19.0 0.9
From 285 to 530 90 33.1 2.4 121 41.2 4.4
From 530 to 1,060 140 104.8 5.1 155 114.5 4.9
From 1,060 to 1,770 112 145.6 6.6 126 156.2 5.8
From 1,770 to 3,500 110 253.4 13.6 163 349.8 18.6
From 3,500 to 7,100 85 399.2 21.5 109 482.3 44.2
From 7,100 to 17,700 63 648.5 33.3 102 1,016.9 77.6
From 17,700 to 35,000 25 558.1 49.1 30 623.6 184.4
From 35,000 to 177,000 15 683.8 270.6 24 1,149.9 311.1
From 177,000 to 355,000 - - - 1 81.5 127.8
From 2,800,000 to 7,118,800(4) 1 (5)6,405.3 - 1 (5)6,925.2 -
----- ---------- ------- ----- ---------- --------
1,370 9,268.1 404.6 2,187 10,990.5 783.2
===== ========== ======= ===== ========== ========
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as computed
for the purpose of per borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
(4) The maximum credit in the highest grade is NIS 6,405.3 million (December
31, 2002 - NIS 6,925.2 million)
(5) Credit is secured by a guarantee of the State.
E. CUSTOMER'S DEBT RECLASSIFIED AS AVAILABLE FOR SALE SECURITIES
In his letter of dated July 15, 2003, regarding a debt of a customer in
respect of which a Receiver was appointed to realize shares pledged in
favor of the Bank, the Supervisor of Banks stated that it is no longer
proper to treat the outstanding balance of the debt, due to be repaid
through the realization of the said shares by the Receiver, as a "credit to
the public" item. Accordingly, the balance of the debt was reclassified on
June 30, 2003, and stated as shares included in the item
"Available-for-sale securities", presented at their market value at that
date.
Changes in the market value of these shares since that date, are recorded
in a capital reserve. In view of the inability of the customer to honor his
debt, the Bank in the past classified this loan as a non-income bearing
loan and created the allowance required as a result. The additional
allowance for doubtful debts recorded in respect of the classification of
the loan as non-income bearing was not reversed, despite the above change
in classification, and is included in the "Other liabilities" item.
F - 32
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT TO GOVERNMENTS
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Deposits in foreign currency out of loans received 31.4 37.6
Amounts receivable in connection with exchange
rate insurance of capital notes 28.2 35.2
Credit to foreign governments 21.1 82.1
Other credit 24.5 33.2
----- -----
Total credit to governments 105.2 188.1
===== =====
NOTE 6 - INVESTMENT IN AFFILIATES
DECEMBER 31 DECEMBER 31
2003 2002
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Shareholders' loans - 0.9
---- ----
Total investment in affiliates - 0.9
==== ====
Bank's share in losses of affiliates, net (0.4) (0.5)
==== ====
NOTE 7 - FIXED ASSETS
A. This item includes equipment, computers, furniture and motor vehicles
as follows:
CHANGES DURING THE YEAR
AT ------------------ AT
JANUARY 1 DECEMBER 31
2003 ADDITIONS DISPOSALS 2003
---- ---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ---- ----
Cost 60.2 0.2 (2.8) 57.6
Accumulated depreciation (50.0) (5.3) 2.4 (52.9)
---- ----
Net book value 10.2 4.7
==== ====
B. The average rate of depreciation is 31% (2002 - 29%).
F - 33
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - OTHER ASSETS
DECEMBER 31 DECEMBER 31
2003 2002
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Excess of income tax advances over current
provisions 1.6 0.5
Prepaid expenses 4.5 3.4
Payroll VAT refundable 11.8 6.6
Sundry receivables and debit balances 2.4 4.0
Debit balances in respect of financial derivatives 7.9 37.3
---- ----
Total other assets 28.2 51.8
==== ====
NOTE 9 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the U.S. dollar (B) 305.3 305.5
Deposit in respect of the "D" redeemable non-participating
preference shares linked to the U.S. dollar (C) 112.6 112.6
Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the U.S. dollar (C) 381.4 381.8
----- -----
Total perpetual deposits with the Treasury 799.3 799.9
===== =====
A. On May 6, 1996, an agreement was signed between the Bank and the
Treasury of the State of Israel regarding the changes in the method of
computing the linkage on perpetual deposits, which the Bank had
deposited with the Israeli Treasury with respect to the Bank's share
capital (C, CC, CC1, D, and DD).
Until the signing of the agreement the aforementioned deposits were
linked to the exchange rate of the dollar. In addition, the deposits
bear dollar-linked interest at a rate, which, after the payment of VAT
on profit imposed on the Bank's earnings (which is paid to the Bank by
the Treasury of the State of Israel) leaves the Bank with an amount
comprising net interest at a rate of 7.5% per annum, equivalent to the
dividend the Bank customarily pays on the aforementioned preferred
shares. Pursuant to an Order of the Income Tax Authorities, the
interest and linkage differentials paid on the deposits are exempt
from tax, except for VAT on profit on the interest. The deposits will
be repaid to the Bank at the time of the redemption of the relevant
shares or upon liquidation of the Bank.
F - 34
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
Pursuant to the deposit agreements, the aforementioned interest will
be paid to the Bank on the payment dates of the preferred dividends.
According to the agreement, the deposits have become, in effect,
linked to the CPI, with retroactive effect from October 1, 1987.
However, in no case shall the principal amount be less than their
dollar value as computed prior to the date of the agreement. Namely,
the linkage on the deposits as of October 1, 1987 is based on the CPI
or the dollar, whichever is higher. The interest continues to be
computed based on a dollar calculation.
The deposit agreements do not explicitly relate to the interest on the
perpetual deposits in respect of the period during which the Bank is
prevented from distributing the aforementioned preferred dividends, or
to whether the interest will accrue and be paid when the Bank pays the
accrued preferred dividends in arrears or upon liquidation. The Bank's
Board of Directors reached the conclusion that the interest, which is
not claimed due to the non-payment of dividend, would accrue to the
Bank's credit and, accordingly, upon liquidation, it would become part
of the liquidation assets. The amount of the accrued interest, which
has not yet been claimed as above, totals NIS 58.7 million and is not
recorded in the financial statements. This amount is equal to the
amount of the accrued dividend in arrears, which also is not recorded
in the financial statements. Of the above amount NIS 38.1 million
relates to 2003. See Note 16F for further details as to the
discontinued distribution of dividend and the approach to the Ministry
of Finance and the Government Corporations Authority in the above
matters.
Concurrent with the signing of the above-mentioned agreement, the
Bank's Articles of Association were amended in May 1996. According to
the amendment, one ordinary "B" share out of the total number of
ordinary "B" shares was converted into an ordinary "B.1" share
(presently held by the State of Israel). The holder of the ordinary
"B.1" share is entitled to receive, upon liquidation of the Bank, the
difference, if any, arising from the change in the method of computing
the linkage of the said deposits, as discussed above. However, the
right attached to the ordinary "B.1" share ranks after the settlement
in full of all amounts due to creditors of the Bank, present and
future, and after repayment of the paid-up share capital to the
holders of the Bank's preferred "A" shares, preferred ordinary shares,
Ordinary "A" shares and Ordinary "B" shares and after repayment of the
paid-up share capital, including linkage differentials, to the holders
of the Bank's linked preferred shares of the "C", "CC", "CC1", "D" and
"DD" classes, in accordance with the Bank's Articles of Association.
The above-mentioned agreement resulted in an increase in the amounts
of the deposits with the Treasury as well as in the Bank's
shareholders' equity. Such increase, as at the date of the signing of
the agreement, amounted to NIS 279.6 million.
This increase in capital was reflected in the statement of
shareholders' equity under "change in capital due to changes in rights
of "B.1" ordinary share". Out of the above-mentioned amount, NIS 106.7
million, relating to differences in respect of the participating
shares, was credited to the "accumulated difference on translation of
dollar linked deposits".
The balance of the increase in capital, in the amount of NIS 172.9
million, which relates to deposits in respect of non-participating
shares, was credited to the "accumulated difference on translation of
CPI linked deposits".
F - 35
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
B. As noted, up to May 6, 1996, the above-mentioned deposit was linked to
the dollar. The difference which arose up to May 6, 1996, between the
adjustment of the deposit on the basis of the dollar linkage, in
respect of the participating, preferred "C", "CC" and "CC1" shares,
which are also dollar-linked, and the adjustment thereof to the CPI,
was credited in the statement of shareholders' equity to "accumulated
difference on translation of dollar linked deposits."
C. Up to May 6, 1996, the above-mentioned deposits were linked to the
dollar. The difference which arose up to May 6, 1996, between the
adjustment of the deposits on the basis of the dollar linkage in
respect of the non-participating preferred "D" and "DD" shares, which
do not constitute shareholder's equity and which are also linked to
the dollar, and the adjustment of the above-mentioned deposit to the
CPI, was reflected in the statement of income, as was reflected the
difference arising from the liabilities in respect of these shares.
As a result of the above-mentioned agreement, differences arose from
the date of the signing of the agreement between the adjustment of the
deposits with the Treasury (optionally linked to the higher of the CPI
or the dollar), and the adjustment of the non-participating
dollar-linked preferred shares. Such differences are reflected in the
statement of shareholder's equity under "accumulated difference on
translation of CPI linked deposits."
NOTE 10 - DEPOSITS FROM THE PUBLIC
DECEMBER 31 DECEMBER 31
2003 2002
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Demand deposits 65.5 99.1
Fixed-term and other deposits 405.6 876.6
Savings deposits 148.9 315.7
------- -------
Total deposits from the public 620.0 1,291.4
======= =======
NOTE 11 - DEPOSITS FROM BANKS
DECEMBER 31 DECEMBER 31
2003 2002
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Fixed-term deposits 80.8 365.3
Acceptances - 2.7
BANK OF ISRAEL* -
Fixed-term deposits 0.7 11.3
Special credit line 2,091.2 2,091.3
------- -------
Total deposits from banks 2,172.7 2,470.6
======= =======
* See Note 17 regarding pledges to secure credit received from the Bank
of Israel.
F - 36
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 12 - PERPETUAL DEPOSIT
This deposit of the Israeli Treasury is non-linked and is convertible at
any time, at the request of the Israeli Treasury, into "B" ordinary shares
of the Bank, at their par value.
The deposit is perpetual, but the Israeli Treasury has the right to demand
its redemption in the event that the State's voting power in the Bank falls
below 20%. The redemption would thereupon be effected in twenty-five equal
annual installments, beginning ten years after the date of the demand for
redemption. The Bank has agreed to issue capital notes to the State of
Israel in place of the deposit, on identical terms and conditions.
NOTE 13 - CAPITAL NOTES
This series of capital notes of a par value of $ 49,976,000 bears interest
at the rate of 7.5% per annum and was due on December 31, 1998. The terms
of the above capital notes provide that the redemption date of notes for
which the holders did not give notice of their intention to redeem, will be
deferred by an additional 18 months each time. Over the last five years,
notes of a par value of $ 43,551,000 were redeemed. Accordingly, the
balance of notes still outstanding as at December 31, 2003 amounts to $
6,425,000 (NIS 28,135,075) (December 31, 2002 - $ 7,576,000). The next
redemption date for the capital notes is December 31, 2004. The Bank is
entitled to redeem the unredeemed capital notes at a premium of 5%.
See Note 5 regarding amounts receivable with respect to exchange rate
insurance on the capital notes.
NOTE 14 - OTHER LIABILITIES
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Excess of provision for severance pay and pensions over
amounts funded (see Note 18) 33.8 46.0
Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 18) 8.1 12.5
Deferred income 1.8 10.6
Credit balances in respect of financial derivatives 1.7 38.0
Allowance for doubtful debts in respect of an off-balance sheet item 1.4 20.2
Sundry creditors and credit balances 29.4 28.9
----- -----
Total other liabilities 76.2 156.2
===== =====
F - 37
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 15 - NON-PARTICIPATING SHARES
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
"B" ordinary shares - -
"D" preference shares linked to the US dollar (*) 71.6 76.0
"DD" preference shares linked to the US dollar (*) 242.6 257.5
----- -----
Total non-participating shares 314.2 333.5
===== =====
(*) See Note 9 regarding a corresponding deposit with the Israel Treasury
in respect of non-participating preference shares.
B. ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN HISTORICAL
VALUES)
AUTHORIZED ISSUED AND PAID
--------- -------------------------
2003 2003 2002
NUMBER OF --------- --------- ---------
SHARES CLASS OF SHARES NIS NIS NIS
- --------- ------------------------------------------------- --------- --------- ---------
135,399 "B" ordinary shares of NIS 0.1
each 13,539.9 13,489.9 13,489.9
164,000 7.5% cumulative redeemable
"D" preference shares of
NIS 0.03 each, linked to the
US dollar at the rate of
$1 = NIS 0.0003, redeemable
at a premium of 5 5/8 %
(redemption dates will be
determined by the Bank subject
to approval by the Israeli Treasury) 4,920 4,904 4,904
60,000 7.5% cumulative redeemable
(without premium)
"DD" preference shares of
NIS 2.1 each, linked to the
US dollar at the rate of
$1 = NIS 0.0021 (redemption dates
will be determined by the Bank,
subject to approval by the Israeli Treasury) 126,000 116,359 116,359
----------- ----------- -----------
Total shares 144,459.9 134,752.9 134,752.9
=========== =========== ===========
F - 38
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 15 - NON-PARTICIPATING SHARES (CONT.)
C. For rights in dividend distributions - see Note 16 E.
D. For cessation of dividend distributions - see Note 16 F.
E. For rights upon liquidation - see Note 16 G.
F. All the non-participating shares are not traded on the Tel-Aviv Stock
Exchange.
NOTE 16 - SHAREHOLDERS' EQUITY
A. The share capital is composed of registered shares, which are traded
on the Tel-Aviv Stock Exchange. The following are details regarding
the historical value of the share capital and the principal rights
attaching thereto:
AUTHORIZED ISSUED AND PAID
--------- ---------------------------
2003 2003 2002
NUMBER OF --------- --------- ---------
SHARES TYPE OF SHARES NIS NIS NIS
- ----------- ------------------------------- --------- --------- ---------
16,000 "A" ordinary shares of NIS 0.1
each (*) 1,600 *1,510 (*) 1,510
1 "B.1" ordinary share of
NIS 0.1 0.1 (*) 0.1 (*) 0.1
1,000,000 8% cumulative participating
preferred ordinary shares of
NIS 0.001 each 1,000 1,000 1,000
17,000,000 6% cumulative participating
"C" preference shares of
NIS 0.00018 each linked to the
US dollar at the rate of $1 =
NIS 0.00018 3,060 3,060 3,060
1,000,000 6% cumulative participating
"CC" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 3,000 3,000 3,000
1,740,000 6% cumulative participating
"CC1" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 5,220 5,204 5,204
50,100 Unclassified shares of NIS 0.1
each 5,010 - -
--------- --------- ---------
Total 18,890.1 13,774.1 13,774.1
========= ========= =========
(*) Not traded on the Tel Aviv Stock Exchange.
F - 39
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
B. The following are details of the annual dividends
2003 2002
------------------------------- -------------------------------
HISTORICAL VALUE ADJUSTED HISTORICAL VALUE ADJUSTED
------------ ------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------ ------------
Preferred ordinary shares - - - -
"C" preference shares - - 2.4 2.5
"CC" preference shares - - 1.4 1.5
"CC1" preference shares - - 2.4 2.5
--- --- --- ---
Total dividends - - 6.2 6.5
=== === === ===
C. VOTING RIGHTS
Only "A" class ordinary shares and ordinary preference shares grant their
holders the right to receive notification regarding general shareholders'
meetings of the Bank, to participate and to vote in the general meetings of
the Bank. Every "A" class ordinary share has 1000 votes and every ordinary
preference share has one vote.
D. RIGHT TO APPOINT DIRECTORS
According to the Bank's Articles of Association, the board of directors is
comprised of no less than 7 and no more than 15 directors. The directors of
the Bank (except for the Chairman of the Board) are appointed solely by
holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
grant the right to appoint one director. The other shares in the Bank do
not grant rights to appoint directors of the Bank.
The Chairman of the Board, who is the extra director (the fifteenth
director), is appointed by all the other members of the board who were
appointed, as above, by the holders of "A" class ordinary shares.
E. RIGHTS TO RECEIVE A PREFERENCE DIVIDEND
According to the Bank's Articles of Association, in the event that there
are sufficient profits, the Bank shall first distribute - a preferred
dividend of 6% per annum (plus necessary adjustments due to linkage to the
dollar) of the paid in capital of "C" class preference shares, 6% per annum
(plus necessary adjustments due to linkage to the dollar) of the paid in
capital of "CC" class preference shares, 6% per annum (plus necessary
adjustments due to linkage to the dollar) of the paid in capital of "CC1"
class preference shares, 7 1/2% per annum (plus necessary adjustments due
to linkage to the dollar) of the paid in capital of "D" class preference
shares, 7 1/2% per annum (plus necessary adjustments due to linkage to the
dollar) of the paid in capital of "DD" class preference shares - all
dividends being pari passu and pro-rata to the paid in capital of the
aforementioned shares, and second, an 8% cumulative preferred dividend on
the paid in capital of ordinary preference shares.
F - 40
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION
The issued and outstanding share capital of the Bank includes preferred
shares of classes C, CC, CC1, D, and DD to which the Bank used to pay
quarterly, 25% of the annual preferred dividend of those classes (the
"quarterly dividend"). The Bank deposited the proceeds of issue of these
preferred shares, with the Ministry of Finance in perpetual deposits (the
"perpetual deposits"). According to the deposit agreements, the interest on
the perpetual deposits, at a rate of 7.5% (plus differentials of linkage to
the dollar), is paid to the Bank on the payment dates of the dividends to
the aforementioned preferred shares. The deposit agreements do not
expressly stipulate how the interest on the perpetual deposits should be
handled during periods in which the Bank is prevented from distributing
dividends on these preferred shares, and whether the interest will accrue
and be paid when the Bank pays the accrued preferred dividends in arrears
or upon liquidation.
According to the Companies Law - 1999 (the "Companies Law"), a company is
entitled to distribute dividends only from its profits (as defined
therein), on the condition that no reasonable fear exists that such
distribution would prevent the company from meeting its existing
liabilities and its expected liabilities when they come due (hereinafter -
the "repayment ability test"). Nevertheless, the Court is permitted to
approve the distribution of a dividend not from the company's profits, if
it is convinced that the company meets the "repayment ability test".
According to the Directives of Proper Banking Procedures, the Supervisor of
Banks prohibited distribution of dividends by a banking corporation if,
among other things, one or more of the last three calendar years ended in a
loss, or if the aggregate results of three quarters ending in the interim
period for which the last interim financial statements were issued
reflected a loss.
The Bank ended the years 2001, 2002 and 2003 with a loss and as from the
financial statements for the first quarter of 2002 the Bank has not had
profits from which it could distribute a dividend under the Companies Law.
The last quarterly dividend paid by the Bank in respect of the
aforementioned preferred shares was the second quarterly dividend of 2002,
and in order to distribute that dividend, the Bank obtained Court approval
and the approval of the Supervisor of Banks.
Immediately prior to the publication of the financial statements of the
Bank for the third quarter of 2002, the Board of Directors of the Bank
decided, at that stage, not to distribute a dividend for the third quarter
of 2002. The decision was taken upon the advice of legal counsel and taking
into consideration, among other things, the following issues:
o The results of operations of the third quarter of 2002 and the crises
which affected the Bank during that quarter.
o Non-existence of distributable profits under the Companies Law.
o The prohibition on distribution of dividends according to the Bank's
articles when there are no profits, even in nominal terms.
o The prohibition on distribution of dividends according to the
Directives of Proper Banking Procedure, as long as the Supervisor of
Banks has not replied to the Bank's request and has not permitted such
distribution.
F - 41
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
o The possibility that the interest on the Bank's perpetual deposits
with the Ministry of Finance will continue to accrue to the credit of
the Bank even if not actually paid, as long as no dividend is
distributed.
On December 1, 2002, the Bank received the reply of the Supervisor of Banks
to its request for the position of the Supervisor on the matter of
distributing a dividend in respect of the third quarter of 2002. The
Supervisor's answer stipulated, among other things, that in the existing
circumstances (as detailed in the letter), the Supervisor of the Banks
believes that "it is inappropriate to distribute a dividend at this time".
Nevertheless, the Supervisor of Banks noted that it was still not
completely clear as to the legal aspects of various questions connected
with the distribution of the dividend and the accrual of the interest on
the perpetual deposits, and as to what the position of the State of Israel
is on this issue. The Supervisor of Banks added that a copy of the letter
had been sent to the Government Companies Authority and the Accountant
General, and that following receipt of clarifications from them and from
the Bank to the questions raised, the Supervisor will notify the Bank as to
his position.
In view of the lack of clarity as to the matter of the accrual of interest
on the perpetual deposits during the period in which the Bank is prevented
from distributing a dividend (the lack of clarity to which the Supervisor
of Banks referred to in his letter) and in view of the possible
ramifications of this matter on the distribution of the dividends in
respect of the preferred shares, the Board of Directors deliberated the
matter, taking into consideration a comprehensive legal opinion placed
before the Board. The Board reached the conclusion that the interest not
paid to the Bank due to the non-distribution of the dividend should accrue
to the Bank's credit and, accordingly, in the event of the Bank's
liquidation, the interest will be paid to the Receiver. In a letter dated
January 22, 2003, the Bank requested from the Ministry of Finance and the
Government Companies Authority to issue their positions on this matter as
soon as possible.
In its reply dated March 13, 2003, the Finance Ministry stated (among other
things) that the monies paid on the perpetual deposits for purposes of
distributing the dividend should be transferred to the Bank solely for
purposes of redeeming the aforementioned redeemable preferred shares
(Classes D and DD), or upon liquidation. In order to clarify matters and to
avoid doubt, the Bank once again petitioned the Finance Ministry to confirm
that it accepts the position of the Bank's Board of Directors as described
above. Despite of the reminders that were sent by the Bank on this matter,
the requested clarification has still not been obtained.
During 2003 the Board of Directors of the Bank deliberated several times in
the matter of the dividend on the said preferred shares. In view of all of
the considerations and circumstances described above, the Board decided to
abide by its previous decision and to refrain from distributing any further
dividend for the time being.
F - 42
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
The amount of the accrued dividend in arrears in respect of the
aforementioned preferred shares not recorded in the financial statements is
NIS 58.7 million. This amount is equal to the amount of the accrued
interest on the perpetual deposits, which was also not recorded in the
financial statements. Of this amount, an amount of NIS 38.1 million is in
respect of the year 2003
G. RIGHTS UPON LIQUIDATION
Upon liquidation of the Bank, all available assets will be distributed to
shareholders. Following are the stages of distribution of assets in
accordance with the priorities appearing in the Bank's articles of
association:
o First - to pay cumulative preferred dividends in arrears, including
dollar linkage differentials, to all classes of preference shares (C,
CC, CC1, D, DD) - all being pari passu and pro-rata to the paid in
capital of the aforementioned shares. As at December 31, 2003, the
amount of cumulative preferred dividends in arrears on such shares
which have not been accrued totaled NIS 52.8 million.
o Second - to pay cumulative preferred dividends in arrears to preferred
ordinary shares. As at December 31, 2003. The amount of cumulative
preferred dividends in arrears on preferred ordinary shares which have
not been accrued totaled NIS 120.
o Third - to refund paid-in capital of "C" class preference shares,
refund paid in capital (plus dollar linkage differentials) of "CC"
class preference shares, refund paid in capital (plus dollar linkage
differentials) of "CC1" class preference shares, refund paid in
capital (plus dollar linkage differentials) of "D" class preference
shares, refund paid in capital (plus dollar linkage differentials) of
"DD" class preference shares - all being pari passu and pro-rata to
the paid in capital of the aforementioned shares. As at December 31,
2003, the amount of paid-in capital of such shares totaled NIS 508.4
million.
o Fourth - refund paid in capital of preferred ordinary shares. As at
December 31, 2003 the amount of paid-in capital on such shares totaled
NIS 1 thousand.
o Fifth - refund paid in capital of class "A" ordinary shares, refund
paid in capital of class "B" ordinary shares, refund paid in capital
of class "B1" ordinary share - all being pari passu and pro-rata to
the paid in capital of the aforementioned shares. As at December 31,
2003 the amount of paid in capital of such ordinary shares totaled NIS
15 thousand.
o Sixth - the remainder of the differences to be paid (if at all) to the
Bank by the State of Israel upon liquidation as a result of the
increase in rate of the CPI compared with the increase in the
representative exchange rate of the dollar, in respect of the deposits
made by the Bank with the State, totaling, as at December 31, 2003,
NIS 279.7 million, shall be paid to the holder or holders of the class
"B1" ordinary share.
o Seventh - The surplus of the ordinary assets shall be divided between
the holders of ordinary "A" shares, and the holders of preferred
ordinary shares and the holders of preference "C" shares and the
holders of preference "CC" shares and the holders of preference "CCI"
shares, in accordance with the capital paid up thereon and in the
proportion of - ten for every Agora paid up on each ordinary "A"
share, ten for every Agora paid up on each preferred ordinary share,
ten for every Agora paid up on each preference "C" share, six for
every Agora paid up on each preference "CC" share and six for every
Agora paid up on each preference "CC" share - all pari passu and
proportionately to the capital paid up on such shares.
F - 43
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
H. NOTIFICATION REGARDING THE POSSIBLE SUSPENSION OF TRADE OF THE BANK'S
ORDINARY PREFERRED SHARES
During April 2003, the Bank was notified by the Tel Aviv Stock Exchange
Ltd. (hereinafter - the "Stock Exchange") whereby in an examination made by
the Stock Exchange, it found that the preferred ordinary shares of the Bank
- traded on the Stock Exchange - did not comply with the Stock Exchange's
preservation guidelines as provided in its articles, under which the
public's holdings in such shares must amount to at least NIS 1.6 million.
The number of preferred ordinary shares traded on the Stock Exchange is
1,000,000 and their par value is NIS 1,000. Aside from these shares,
Classes C, CC, and CC1 shares of the Bank are also traded on the Stock
Exchange.
According to the aforementioned notification, if the examination to be
conducted on September 30, 2003 shows that these shares do not comply with
the preservation guidelines, the Board of Directors of the Stock Exchange
will discuss, at its October 2003 meeting, whether or not to suspend
trading of those shares. In a letter dated October 26, 2003 the Stock
Exchange notified the Bank that since the value of the public's holdings as
at that date was higher than 1.6 million, it was not recommended before the
Board of Directors of the Stock Exchange to suspend trading of the
aforementioned shares. In its letter the Stock Exchange also states that
the next examination of compliance with preservation guidelines will be
conducted at the beginning of January 2004 on the basis of the data as at
December 31, 2003. An orral clarification made with the Stock Exchange
disclosed that the said shares complied with the preservation guidelines
also on the basis of the data as of December 31, 2003.
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS
Following is the calculation of capital adequacy in accordance with
Directives Nos. 311 and 341 of the Supervisor of Banks, regarding "Minimal
Capital Ratio" and "Capital Allocation with respect to Exposure to Market
Risks":
A. CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
First tier capital (9.4) 64.7
Second tier capital (*) - 64.7
----- -----
Total capital (9.4) 129.4
===== =====
(*) The general allowance for doubtful debts, in the amount of NIS 38.5
million was deducted from the credit since it is not a part of the
second tier capital.
F - 44
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
B. WEIGHTED-BALANCES OF CREDIT RISK
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- --------------------------
WEIGHTED CREDIT WEIGHTED CREDIT
BALANCES(**) RISK BALANCES BALANCES(**) RISK BALANCES
-------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- --------
ASSETS
Cash and deposits with Banks 143.9 17.4 243.6 26.0
Securities 85.4 85.4 71.6 71.3
Credit to the public (*) 9,189.6 2,706.8 10,908.1 3,660.5
Credit to governments and
perpetual deposits with the
Treasury 904.5 5.6 988.0 15.4
Investments in affiliates - - 0.9 0.9
Premises and equipment 4.7 4.7 10.2 10.1
Other assets 28.2 6.0 51.8 20.9
-------- -------- -------- --------
Total assets 10,356.3 2,825.9 12,274.2 3,805.2
======== ======== ======== ========
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Transactions representing credit risk 457.3 342.9 491.6 472.9
Derivative financial instruments 911.5 8.9 418.3 158.7
-------- -------- -------- --------
Total off-balance sheet financial
instruments 1,368.8 351.8 909.0 631.6
-------- -------- -------- --------
Total credit risk assets 11,725.1 3,177.7 13,184.1 4,436.8
Market risk 218.2 72.2
-------- -------- -------- --------
Total risk assets 11,725.1 3,395.9 13,184.1 4,509.0
======== ======== ======== ========
(*) The general allowance for doubtful debts, in the amount of NIS 38.5
million was deducted from the credit since it is not a part of the
second tier capital.
(**) Assets - balance sheet amounts, off-balance sheet financial
instruments - nominal balances weighted by credit conversion factors.
F - 45
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
C. RATIO OF CAPITAL TO TOTAL RISK ASSETS
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
% %
----- -----
Ratio of first tier capital to total risk assets (0.28) 1.43
Ratio of second tier capital to total risk assets - 1.43
----- -----
Ratio of total first and second tier capital to total risk assets (0.28) 2.86
===== =====
On November 26, 2003, the Supervisor of Banks informed the Bank that it no
longer has to maintain a "Minimal Capital Ratio" of 15%. Accordingly, the
required capital ratio is 9% as prescribed by Proper Banking Procedure
guidelines.
NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS
A. As mentioned in Note 1A, commencing on November 14, 2002, a special
credit line was placed at the disposal of the Bank by the Bank of
Israel. In connection with receipt of this credit line, the Bank
signed on November 14, 2002 a debenture in favor of the Bank of
Israel, whereby the Bank registered a first degree floating charge on
all of its assets, excluding the following assets:
- Loans and credits under State guarantee at a total balance sheet
value, as of December 31, 2003, of NIS 6.4 billion.
- The Bank's deposit with the Finance Ministry (the Accountant
General) in respect of the DD preferred shares of the Bank.
- Deposits to be made by the Bank from time to time with other
banking institutions in Israel and/or abroad, and/or with brokers
in Israel and/or abroad, which deposits are made in connection
with guaranteeing the Bank's liabilities to such banking
institutions and/or brokers, which were created subsequent to
November 14, 2002.
Under this debenture, the Bank undertook, among other things, not to place
additional pledges on the assets pledged as part of the debenture and not
to dispose of such assets, in any form, without receiving the prior written
consent of the Bank of Israel. Notwithstanding the above, the debenture
stipulates that the floating charge placed therein does not prevent the
Bank, or restrict the Bank in the ordinary course of its business,
including the fulfillment of its obligations, receiving repayments of
credit or granting credit.
Upon signing the debenture, the Bank notified the Governor of the Bank of
Israel that it intends on continuing its efforts to obtain a subordination
of the State's deposits with the Bank, which would satisfy the Bank of
Israel and alleviate the necessity of pledging the Bank's assets in favor
of the Bank of Israel.
The balance of the credit line (including accrued interest) as of December
31, 2003, was an amount of NIS 2,091.2 million.
F - 46
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS (CONT.)
B. As part of the arrangement determined by the Bank of Israel for the
granting of monetary credit to the banking industry, the Bank
registered floating charges on Government bonds traded on the Stock
Exchange. Following are details as to credit received, bonds pledged
and deposits with Bank of Israel.
DEPOSITS RECEIVED GOVERNMENT BONDS DEPOSITS WITH
FROM BANK OF ISRAEL(*) PLEDGED BANK OF ISRAEL
---------------------- ------- --------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Balance at year
end - 11.3 - - 57.0 113.7
Average balance
during the year(**) 4.8 7.4 - 55.8 37.6 193.6
Highest balance
during the year(**) 11.3 13.8 - 135.7 113.7 442.4
* Not including the special credit line as detailed in A above.
** The average balance and highest balance are based on the month-end
balances during the year.
C. Deposits with banks in the amount of NIS 11 million have been pledged
by the Bank in favor of those banks. Bank of Israel gave its consent
to the pledge, which serves as security for transactions in derivative
financial instruments with those banks.
NOTE 18 - EMPLOYEE RIGHTS
A. SEVERANCE PAY
1. The Bank's liability for payment of severance pay to its employees,
according to a plan agreed upon with the employees' committee, or
according to other agreements with employees not covered by the said
plan, is fully covered by payments and deposits with recognized
pension and provident funds, payment of premiums of insurance policies
and by the unfunded provision in the books. The calculation of the
severance pay liability is based on the most recent monthly salary
multiplied by the number of years of service.
F - 47
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
2. Commencing on July 15, 2002, Mr. A. Galili has been serving as the
CEO. of the Bank. The Bank signed an employment agreement with Mr.
Galili in which the Bank undertook to employ him for a period of three
years.
Commencing on August 14, 2002, Dr. Ra'anan Cohen has been serving as
the Chairman of the Board of Directors of the Bank. The Bank signed an
agreement with Dr. Cohen whereby it undertook to employ him for a four
year period.
On September 1, 2002, Mr. A. Savir joined the Bank's Management team.
Mr. Savir serves as deputy CEO and is in charge of the Bank's credit
operations. The Bank signed an employment agreement with Mr. Savir
whereby it undertook to employ him for a three year period.
3. Bank Management decided to take steps to significantly reduce the
Bank's operating and manpower costs. As part of this process, it was
also decided to make a significant reduction in the number of workers
employed by the Bank. On December 26, 2002, a special collective
agreement was signed by the Bank, the General Federation of Labor and
the Bank's workers committee regarding the termination of Bank
employees, termination payments to which those employees will be
entitled, and reduction in the salaries of those employees remaining
with the Bank.
The financial statements for 2002 include non-recurring provisions in
an amount of NIS 35 million in respect of the termination payments,
which the Bank Management estimates it will have to make to the
employees of the Bank, the Deputy CEO, CEO and to the Chairman of the
Board. The balance provision amounts at December 31, 2003, to NIS 24.7
million.
4. In the past, the Bank signed personal employment agreements with four
senior employees of the Bank. In accordance with these agreements in
the event of the resignation of the employee, the Bank has undertaken
to make increased severance payments and pay an "adaptation bonus" in
addition to the regular severance pay. This liability is covered by an
appropriate provision included in the provision for severance pay.
These employees are entitled to severance pay at higher rates in the
event that their employment is terminated by the Bank. The Bank and
the said employees have the right to terminate their employment
relationship by giving prior notice of three months.
F - 48
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT.)
A. SEVERANCE PAY (CONT'D)
The provision calculated in respect of each of the aforementioned
employees is based on the severance pay that each will be entitled to
receive upon resigning. The maximum amount that the Bank will have to
pay in the event that the employement of all of the said executives is
terminated with immediate effect amounts to NIS 3.5 million. A
provision was made in respect of this commitment.
Data relating to provisions and funding included in the balance sheet:
DECEMBER 31 DECEMBER 31
2003 2002
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Provision for severance pay 58.5 85.0
Amounts funded with pension and provident funds,
including earnings thereon 24.7 39.0
---- ----
Unfunded provision included in "Other liabilities" 33.8 46.0
==== ====
The Bank may not withdraw amounts funded other than for the purpose of
discharging severance pay liabilities.
B. UNUTILIZED SICK LEAVE
Upon retirement, employees are entitled, under certain conditions, to
compensation in respect of unutilized sick leave. In the opinion of
Management of the Bank an adequate provision has been included in the
financial statements in this respect. The balance of the provision as of
balance sheet date totals NIS 4.3 million (December 31, 2002 - NIS 7.5
million) and is included in the "Other liabilities" item.
C. LONG SERVICE BONUS
In accordance with the employment agreement existing at the Bank, employees
who are subject to this agreement are entitled to a special long service
bonus upon completing periods of twenty-five years and thirty years of
service with the Bank. A full provision has been made in the financial
statements for this liability, based on the probability of the employee
still being employed by the Bank on the effective dates. The amount has
been discounted at a rate of 3.5% per annum (2002 - 3.5%). These rates are
net of the expected real increase in salaries. The balance of the provision
as of balance sheet date is NIS 0.3 million (December 31, 2002 - NIS 0.4
million). This balance is included in "Other liabilities".
D. UNUTILIZED VACATION
The balance of the provision for unutilized vacation as of balance sheet
date is NIS 3.5 million (December 31, 2002 - NIS 4.6 million). The balance
is included in "Other liabilities".
F - 49
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
DECEMBER 31, 2003
---------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
-------- -------- -------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- -------- -------- --------
ASSETS
Cash and deposits
with banks 45.0 28.5 63.2 7.2 - 143.9
Securities 1.2 13.8 0.1 - 70.3 85.4
Credit to the public 1,125.1 993.2 6,902.2 169.1 - 9,189.6
Credit to governments - 24.4 49.4 31.4 - 105.2
Fixed assets - - - - 4.7 4.7
Other assets 23.5 - - 0.2 4.5 28.2
Perpetual deposits with
the Israeli Treasury - 799.3 - - - 799.3
-------- -------- -------- -------- -------- --------
Total assets 1,194.8 1,859.2 7,014.9 207.9 79.5 10,356.3
-------- -------- -------- -------- -------- --------
LIABILITIES
Deposits of the public 237.5 275.4 97.6 9.5 - 620.0
Deposits of banks 2,091.9 23.0 26.4 31.4 - 2,172.7
Deposits of
the Government - 404.5 6,544.8 - - 6,949.3
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 28.2 - - 28.2
Other liabilities 28.2 42.8 1.7 1.7 1.8 76.2
-------- -------- -------- -------- -------- --------
Total liabilities 2,357.7 745.7 6,698.7 42.6 1.8 9,846.5
-------- -------- -------- -------- -------- --------
Difference (1,162.9) 1,113.5 316.2 165.3 77.7 509.8
Forward transactions, net 673.6 (226.5) (294.4) (152.7) - -
In the money options, net
(in base asset terms) 16.5 - (16.5) - - -
-------- -------- -------- -------- -------- --------
Total (472.8) 887.0 5.3 12.6 77.7 509.8
======== ======== ======== ======== ======== ========
In the money options, net
(discounted par value) 17.5 - (17.5) - - -
======== ======== ======== ======== ======== ========
F - 50
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)
DECEMBER 31, 2002
--------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
-------- -------- -------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- -------- -------- --------
ASSETS
Cash and deposits
with banks 57.3 34.8 140.2 11.3 - 243.6
Securities 1.8 27.5 3.1 - 39.2 71.6
Credit to the public 1,278.1 1,444.8 7,912.7 272.5 - 10,908.1
Credit to governments 0.6 32.7 117.2 37.6 - 188.1
Investment in affiliates - - 0.9 - - 0.9
Fixed assets - - - - 10.2 10.2
Other assets 34.3 - 0.2 13.9 3.4 51.8
Perpetual deposits with
the Israeli Treasury - 799.9 - - - 799.9
-------- -------- -------- -------- -------- --------
Total assets 1,372.1 2,339.7 8,174.3 335.3 52.8 12,274.2
-------- -------- -------- -------- -------- --------
LIABILITIES
Deposits of the public 302.3 769.2 173.1 46.8 - 1,291.4
Deposits of banks 2,102.7 157.7 171.7 38.6 - 2,470.6
Deposits of
the Government - 618.2 7,093.3 - - 7,711.5
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 35.2 - - 35.2
Other liabilities 35.5 87.0 14.3 8.7 10.6 156.2
-------- -------- -------- -------- -------- --------
Total liabilities 2,440.6 1,632.1 7,487.6 94.1 10.6 11,665.0
-------- -------- -------- -------- -------- --------
Difference (1,068.5) 707.6 686.7 241.2 42.2 609.2
Forward transactions, net 772.1 - (546.0) (226.1) - -
In the money options, net
(in base asset terms) 85.6 - (85.6) - - -
-------- -------- -------- -------- -------- --------
Total (210.8) 707.6 55.1 15.1 42.2 609.2
======== ======== ======== ======== ======== ========
In the money options, net
(discounted par value) 113.5 - (113.5) - - -
======== ======== ======== ======== ======== ========
F - 51
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE
DECEMBER 31, 2003
------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE
AND UP TO TO THREE MONTHS TO TO TO THREE TO FOUR TO FIVE TO TEN
ONE MONTH MONTHS ONE YEAR TWO YEARS YEARS YEARS YEARS YEARS
-------- -------- -------- -------- -------- -------- -------- --------
NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- -------- -------- -------- -------- --------
NON-LINKED ISRAELI CURRENCY
Assets 76.4 135.3 191.9 74.4 64.7 12.4 2.3 8.1
Liabilities 43.6 19.2 534.2 514.1 - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Difference 32.8 116.1 (342.3) (439.7) 64.7 12.4 2.3 8.1
Derivative instruments excluding options 447.3 - 237.5 - - - - -
Options - 18.2 - - - - - -
ISRAELI CURRENCY LINKED TO THE CPI
Assets 23.0 58.2 184.4 169.7 148.4 125.4 107.8 386.1
Liabilities 41.4 30.7 143.4 126.5 89.6 55.0 52.6 218.6
-------- -------- -------- -------- -------- -------- -------- --------
Difference (18.4) 27.5 41.0 43.2 58.8 70.4 55.2 167.5
Derivative instruments excluding options - - (235.0) - - - - -
FOREIGN CURRENCY AND LINKED THERETO
Assets 224.9 165.4 618.5 776.8 758.4 691.9 654.0 3,135.5
Liabilities 93.6 173.0 517.4 646.5 667.6 657.5 640.0 3,093.8
-------- -------- -------- -------- -------- -------- -------- --------
Difference 131.3 (7.6) 101.1 130.3 90.8 34.4 14.0 41.7
Derivative instruments excluding options (447.2) - - - - - - -
Options - (17.5) - - - - - -
NON-MONETARY ITEMS
Assets - - - - - - - -
Liabilities - - - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Difference - - - - - - - -
TOTAL FOR DECEMBER 31, 2003
ASSETS 324.3 358.9 994.8 1,020.9 971.5 829.7 764.1 3,529.7
LIABILITIES 178.6 222.9 1,195.0 1,287.1 757.2 712.5 692.6 3,312.4
-------- -------- -------- -------- -------- -------- -------- --------
DIFFERENCE 145.7 136.0 (200.2) (266.2) 214.3 117.2 71.5 217.3
======== ======== ======== ======== ======== ======== ======== ========
DERIVATIVE INSTRUMENTS EXCLUDING OPTIONS 0.1 - 2.5 - - - - -
OPTIONS - 0.7 - - - - - -
DECEMBER 31, 2003
------------------------------------------------------------------
FROM TEN OVER WITHOUT
TO TWENTY TWENTY TOTAL CASH MATURITY
YEARS YEARS FLOWS DATE(**) TOTAL(***)
-------- -------- -------- -------- --------
NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- -------- --------
NON-LINKED ISRAELI CURRENCY
Assets 0.7 - 566.2 685.4 1,194.8
Liabilities - - 1,111.1 (1)1,376.6 2,357.7
-------- -------- -------- -------- --------
Difference 0.7 - (544.9) (691.2) (1,162.9)
Derivative instruments excluding options - - 684.8 - 673.6
Options - - 18.2 - 16.5
ISRAELI CURRENCY LINKED TO THE CPI
Assets 154.5 0.2 1,357.7 799.3 1,859.2
Liabilities 4.8 - 762.6 42.8 745.7
-------- -------- -------- -------- --------
Difference 149.7 0.2 595.1 756.5 1,113.5
Derivative instruments excluding options - - (235.0) - (226.5)
FOREIGN CURRENCY AND LINKED THERETO
Assets 5,269.3 177.1 12,471.8 - 7,222.8
Liabilities 5,252.2 177.1 11,918.7 1.7 6,741.3
-------- -------- -------- -------- --------
Difference 17.1 - 553.1 (1.7) 481.5
Derivative instruments excluding options - - (447.2) - (447.1)
Options - - (17.5) - (16.5)
NON-MONETARY ITEMS
Assets - - - 79.5 79.5
Liabilities - - - 1.8 1.8
-------- -------- -------- -------- --------
Difference - - - 77.7 77.7
TOTAL FOR DECEMBER 31, 2003
ASSETS 5,424.5 177.3 14,395.7 1,564.2 10,356.3
LIABILITIES 5,257.0 177.1 13,792.4 1,422.9 9,846.5
-------- -------- -------- -------- --------
DIFFERENCE 167.5 0.2 603.3 141.3 509.8
======== ======== ======== ======== ========
DERIVATIVE INSTRUMENTS EXCLUDING OPTIONS - - 2.6 - 2.6
OPTIONS - - 0.7 - 0.7
(*) In this table the future cash flows are presented in respect of assets and
liabilities according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow
(**) Including assets past due in the amount of NIS 324.3 million (December 31,
2002 - NIS 22.4 million). The data is net of specific allowance for
doubtful debts.
(***) As Included in Note 19 "Assets and liabilities according to linkage base",
including off-balance sheet amounts for derivatives.
(1) The balance includes the credit line framework provided by Bank of Israel,
in accordance with its terms, at the beginning of the period of 12 months
during which this balance will be taken over by the Government by means of
a monetary transfer to Bank of Israel. Whereas as from this date a downward
trend is not determined for the credit line, the framework at the above
date was included in the "Without maturity date" column.
F - 52
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE FINANCIAL INSTRUMENTS
DECEMBER 31 DECEMBER 31
2003 2002
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 251.0 308.1
Guarantees to home purchasers 112.2 154.9
Other guarantees and liabilities 55.5 106.6
Documentary credits 17.6 57.8
Unutilized revolving credit facilities 5.9 28.6
Irrevocable commitments to grant
credit facilities, approved but not yet executed 13.8 65.1
B. OTHER CONTINGENT LIABILITIES AND COMMITMENTS
1. See Note 18A with respect to the contingent commitment regarding
personal employment agreements with senior executives.
2. Long-term rental agreement -
During 2003, the Bank signed a lease agreement in respect of its
office premises for the period ending in August 2006. The annual lease
payment, which is linked to the CPI, amounts to NIS 0.9 million.
3. The Bank has outsourced its computer services, signing an agreement
for receiving computer services for a period of three years, with an
option for extension for additional two years. The cost of the service
for the first year amounts to NIS 3.7 million, for the second year -
NIS 2.8 million, and for the third year - NIS 2.1 million. In the
event that the Bank decides to exercise the above-mentioned option,
the cost of service for each additional year would amount to NIS 2.0
million.
4. In recent years, the Bank entered into agreements whereby it will
participate in private investment funds. The total amount approved for
investment by the Bank amounts to US$20 million. The said investment
funds invest in Israeli companies or companies related to Israel and
in hi-tech companies. The major part of the investments made by these
funds is in the credit component. The balance of this undertaking at
balance sheet date amounts to US$ 7.1 million.
F - 53
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS
1) On August 8, 2002, further to the approvals of the audit committee and
the Board of Directors at their meetings of July 11, 2002, the general
shareholders' meeting of the Bank approved the issuance of writs of
indemnification to the Bank's senior officers. According to the writ
of indemnification that was issued, the Bank undertook to indemnify
the senior officers that served and/or will serve the Bank from July
11, 2002 and thereafter, in respect of liabilities and expenses levied
against them or borne by them (including a monetary liability under a
verdict in favor of another person and reasonable court costs) as a
result of actions taken and/or that will be taken by them as senior
officers of the Bank and/or as result of actions taken and/or that
will be taken by them (while serving as officers of the Bank) as part
of a position or duty that they fulfill at the request of the Bank or
on its behalf in a company or other corporate body or any project in
which the Bank invested or in which the Bank owns shares, as long as
these actions are connected with one or more of the types of events
detailed in the appendix of the writ of indemnification.
The types of events include, among other things, realization of
pledges, conducting transactions as part of the Bank's permissible
business activities under clause 10 of the Banking Law (Licensing) -
1981, approving and/or granting credit, a transaction of the Bank
involving any assets for itself, and issuing a report or notification
under any law. The amount of the total cumulative indemnification to
be paid under the writ of indemnification to all senior executives
shall not exceed 25% of the shareholders' equity of the Bank in the
financial statements as of March 31, 2002 (which amounted to NIS 640.3
million), linked to the increase in the CPI according to the base
index published in respect of March 2002. In May 2003, the audit
committee and the Board of Directors of the Bank approved the
applicability of the indemnification writ to an additional Director
whose appointment ended prior to July 11, 2002.
2) Further to the approval of the audit committee on January 15, 2003,
the Bank's Board of Directors approved, on January 23, 2003, the
issuance of a writ of general exemption from a breach in the duty of
care of senior officers of the Bank. The writ applies to officers who
served and/or will serve in the Bank commencing August 21, 2002, in
connection with duties carried out by them commencing August 21, 2002
and thereafter.
3) Further to the approval of the audit committee on January 15, 2003,
the Bank's Board of Directors approved, on January 23, 2003, the
issuance of a writ of indemnification to senior officers who served
and/or will serve in the Bank commencing on August 26, 2002, in
respect of liabilities and expenses levied against them or borne by
them (including a monetary liability under a verdict in favor of
another person and reasonable court costs) as a result of actions
taken and/or that will be taken by them as senior officers of the
Bank, as long as these actions are connected with the sale of the
asset and liability portfolio of the Bank, in whole or in part, in one
transaction or piecemeal. This writ of indemnification is in addition
to the previous writ of indemnification approved by the general
shareholders' meeting of the Bank on August 8, 2002, and the amount of
the total cumulative indemnification to be paid under the writ of
indemnification to all senior executives shall not exceed 50% of the
shareholders' equity of the Bank in the financial statements as of
September 30, 2002 (which amounted to NIS 445.4 million), linked to
the increase in the CPI according to the base index published in
respect of September 2002.
F - 54
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND EXEMPTION WRITS FOR SENIOR OFFICERS (CONT'D)
4) In accordance with the Companies Law - 1999, granting exemptions and
indemnifications as described in paragraphs 2) and 3) above require
the approval of the general shareholders' meeting of the Bank. As long
as such approval has not yet been granted, the aforementioned writs
are not in effect.
5) On June 1, 2003, the Board of Directors of the Bank approved issuance
of a writ of indemnification to two former employees of the Bank in
connection with a suit in the amount of NIS 295 million, which was
filed against the Bank and them in February 2003 and the details of
which are presented in D hereunder.
D. LEGAL ACTIONS
Several legal actions are pending against the Bank. Management of the Bank,
based on opinions of Counsels for the Bank, believes that adequate
provisions are included in the financial statements to cover possible
losses in respect of those actions where it is probable to assume that they
will not be cancelled or dismissed in whole or in part.
Following are details of legal actions in material amounts (including a
plea for approval of an action as a class action suit):
1. In March 2003, Lehava Underwriters Ltd. (by virtue of it being a
shareholder of the Bank) filed a derivative claim in an amount of NIS
409.5 million against eleven senior officers of the Bank (current and
past) and against the Bank itself. The plaintiff claims that the named
senior officers breached their "duty of care" toward the Bank and were
negligent in fulfilling their duty and, as a result, should be
required to pay the Bank the amount of the claim, as compensation for
the damages they inflicted on the Bank. According to the claim, the
negligence of the senior officers is reflected in, among other things,
the credit that they granted without suitable security, problems with
the credit-granting policy and the quality and approval procedures
thereof, credit risk management and the ongoing handling of the
credit. The amount of the suit, in respect of damages incurred as a
result of the alleged negligence, reflects the amount of the
allowances made by the Bank for doubtful debts in 2002. The Bank
notified its insurance company that the suit was filed. The insurance
company has not yet confirmed that the Company's policy for Directors
and senior officers covers this derivative suit that was filed against
the aforementioned
F - 55
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
senior officers. The defendants filed a request to have the suit
dismissed IN LIMINE, on grounds that the plaintiff should have filed a
request to approve the claim as a derivative claim. The Court accepted
the position of the defendants and it ordered the plaintiff to file a
request for the approval of the claim as a derivative claim. Such a
request was submitted on December 7, 2003, but no Court ruling in the
matter has as yet been given. Counsels are representing the Bank in
the matter of the action and the request, and in their opinion, since
the action is a derivative action, the exposure of the Bank in respect
thereto is for expenses.
2. In October 2002, a legal action was filed against the Bank, against
the State of Israel (as controlling shareholder in the Bank), and
against 17 former and current officers of the Bank, together with a
petition to have the action approved as a class-action suit. In the
said petition the plaintiff seeks approval to act on behalf of anyone
who purchased shares of the Bank in the period from December 1, 2001
through August 22, 2002. The cause of the action is the alleged breach
by the Bank of the duty to report under the Securities Law - 1968 and
the Securities Regulations (Periodic and Immediate Reports) - 1970
enacted there under ("Securities Regulations"). As claimed in the
action, during the aforementioned period, a number of extraordinary
events and/or matters occurred that would indicate that the Bank was
in serious condition. Both these events and matters, and the Bank's
very situation mandated that the Bank file an immediate report under
the Securities Regulations. Such a report was not filed. The estimated
damage being claimed in the action is NIS 20 million and,
alternatively, NIS 14 million. The Bank notified its insurance company
of the action filed against it. The Bank has not yet received
confirmation from the insurance company that the coverage under its
insurance policy for Directors and senior officers is applicable to
the action filed against the officers. The Bank has delegated its
legal Counsel to handle the action and the petition to have the action
recognized as a class action suit. On March 16, 2003, the Bank filed
for the IN LIMINE dismissal of the petition. The Court has not yet
decided in the petition for approval of a class action suit.
3. In September 2003 a supplier of fuel products filed a claim in the
amount of NIS 6 million against the Bank and two other banks regarding
non-payment of the consideration for fuel products it had provided to
a mutual customer of the three defendant banks. It is alleged that the
involvement of the defendant banks in the approval of the business
plan and in the approval of the expense and income budget of the
aforementioned customer, had created a representation towards the
plaintiff upon which it had relied when selling its products, because
it had assumed that the expenses included in the approved plan and/or
budgets would be paid by the defendant banks. The Bank has transferred
the matter to Counsel acting on its behalf.
F - 56
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
4. In February 2003, the Bank was served with a suit in which a company
that in the 90's had received from the Bank government-guaranteed
loans claims, together with its controlling shareholders, an amount of
NIS 295 million from 13 defendants, including the Israeli Ministry of
Industry and Trade, the Israeli Finance Ministry, the heads of the
Israel Investment Center, the Bank, and two of its former employees.
The claim is for compensation in respect of damages allegedly caused
by the defendants, among other things, as a result of a failure and/or
a delay to grant loans and/or grants. The plaintiffs filed a petition
with the Court to be exempted from payment of the Court fee, but the
request has not yet been heard. The Bank notified its insurance
company regarding the suit, but has not yet received confirmation of
the insurance coverage. The Bank has delegated its Counsel to handle
the suit on its behalf.
5. An action was filed in August 2000, against a former senior executive
of the Bank and against 24 other defendants, by a number of venture
capital funds, which for purposes of Court fees was set at
US$18,666,711. According to the plaintiff's complaint, the suit was
filed, inter-alia, in connection with the breach of an investment
agreement, whereby the plaintiffs and other investors were allegedly
supposed to receive 46.5% of the shares of a company in which the
aforementioned senior executive served in the past as a Director on
behalf of a former subsidiary of the Bank. The senior executive has
Counsel representing him in this matter who has filed a statement of
defense on his behalf. In the opinion of the Bank's legal Counsel,
even if the said executive will have to make any payment in respect of
the suit, it will be covered by the Bank's insurance policy.
6. In December 1999, the Bank was served with a "third party" notice in
the amount of NIS 50 million. The notice was served by the United
Mizrahi Bank Ltd. ("Mizrahi") against the Bank and against ten
additional parties, within the framework of a counterclaim, which the
State of Israel has filed against Mizrahi concerning grants and loans,
which Mizrahi had provided to a group of companies. Mizrahi claims,
inter alia, that the Bank was negligent in preparing economic surveys
that were relied upon in the issuance of letters of approval to the
said group of companies, and thereby the Bank is responsible for the
damage suffered by the State and/or Mizrahi as a result of the
collapse of the group. The Bank rejects the claims raised by Mizrahi.
The matter is still in a preliminary stage in the proceedings, which
makes it difficult to make a definite evaluation of the outcome of the
case. Notwithstanding this fact, Management of the Bank, basing itself
on Counsel's opinion, believes that the Bank will not suffer any
monetary damages in respect of the said notice.
7. The Bank has been informed by a number of parties of their intention
or possibility of filing suits against the Bank and/or senior officers
of the Bank and/or the Bank's shareholders in connection with events,
which recently occurred in the Bank. Inter-alia, the Bank was
approached by the representatives of several provident funds that hold
preference shares of the Bank ("C", "CC" and "CC1"), demanding the
renewal of the payment of dividend on the said preference shares.
Otherwise, the said representatives intend to take all the necessary
legal measures in order to realize the right to dividends claimed by
their clients.
F - 57
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
8. Several additional monetary claims not detailed above, are pending
against the Bank at the Courts in a total amount of NIS 3.8 million.
E. OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
ON COLLECTION OF LOANS
DECEMBER 31 DECEMBER 31
2003 2002
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Non-linked Israeli currency 465.4 430.1
CPI linked Israeli currency 1.3 13.3
Foreign currency 203.6 347.2
----- -----
Total 670.3 790.6
===== =====
The cash flow in respect of the collection commission and interest margins
on the above credit is not material.
Activity based on the extent of collection of loans at December 31, 2003,
includes past due balances amounting to NIS 663.4 million (December 31,
2002 - NIS 771.7 million).
F. APPLICATION FOR EXEMPTION FROM ANNUAL REPORTING IN THE UNITED STATES
Since certain of the Bank's shares were issued according to prospectuses
published in the USA, the Bank is required to submit an annual report to
the United State Securities and Exchange Commission (hereinafter - SEC).
Under the annual reporting to the SEC the Bank has to comply with certain
requirements, which due to their becoming more strict in recent years and
to the changes that have taken place in US accounting principles, the Bank
does not comply with certain of them. The main issue in this respect is the
requirement to include in the annual report a quantitative note showing the
reconciliation of the financial statements of the Bank to US accepted
accounting principles (US GAAP). Enquiries and clarifications made by the
Bank's legal counsels in the US indicate that the likelihood of the Bank
receiving at this stage an exemption from the SEC reporting requirements is
low. In view of the above, the Bank is preparing for the reconciliation of
its financial statements to US GAAP, and has also engaged a firm of
accountants to assist it in this matter.
It should be noted that the shares, which as a result of their issuance the
Bank is required to report as above, have not been traded in the US in the
past nor are they traded there at present.
F - 58
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2003
-----------------------
CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACT
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Options purchased - 18.2
Forward contracts 235.0 658.3
----- -----
Total 235.0 676.5
===== =====
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2003
-----------------------
CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACT
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Gross positive fair value 4.6 3.3
Gross negative fair value - 1.7
--- ---
Total 4.6 5.0
=== ===
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
DECEMBER 31, 2003
---------------------------------------------
NIS MILLIONS
---------------------------------------------
BANKS CENTRAL BANKS OTHER TOTAL
---- ---- ---- ----
Gross positive fair value
of derivative instruments 4.6 3.1 0.2 7.9
Off-balance sheet credit risk in
respect of derivative instruments (2) 44.4 46.7 - 91.1
---- ---- ---- ----
Total credit risk in respect of
derivative instruments 49.0 49.8 0.2 99.0
==== ==== ==== ====
(1) Derivatives comprising part of the asset and liability management of
the Bank not designed for hedging purposes.
(2) Off-balance sheet credit risk relating to derivative instruments
(including those with a negative fair value) as computed for
limitation on borrower indebtedness.
F - 59
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2003
-----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
CPI/Shekel interest contracts - 235.0 235.0
Foreign currency contracts 676.5 - 676.5
----- ----- -----
Total 676.5 235.0 911.5
===== ===== =====
D. DERIVATIVE FINANCIAL INSTRUMENTS -BALANCES AT DECEMBER 31, 2002
AT-RISK BROKERAGE TRANSACTIONS
DECEMBER 31, 2002
------------------------
STATED PRESENT CREDIT
VALUE(1) EXPOSURE
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Currency contracts 3,856.0 *20.8
------- -------
Total at- risk brokerage transactions 3,856.0 20.8
======= =======
(1) As mentioned in Note 1K, at-risk brokerage transactions are
transactions of the Bank with one party (hereinafter - the original
transaction) in respect of which a counter transaction in the same
derivative instrument was executed with a third party (hereinafter -
the counter transaction). The stated value includes the stated value
of the original transaction and of the counter transaction.
(*) Presented in accordance with the directives of the Supervisor of
Banks, assuming that the existing collateral has no value.
F - 60
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
D. DERIVATIVE FINANCIAL INSTRUMENTS -BALANCES AT DECEMBER 31, 2002
(CONT'D)
OTHER TRANSACTIONS
DECEMBER 31, 2002
------------------------------------------------------------
NIS MILLIONS
------------------------------------------------------------
FAIR VALUE AVERAGE FAIR VALUE(**)
STATED --------------------- ---------------------
VALUE ASSETS LIABILITIES ASSETS LIABILITIES
------- ------- ------- ------- -------
Currency
contracts -
Spot, swap,
forward 2,140.7 14.0 17.3 31.5 37.1
Options bought 113.9 2.5 - - -
------- ------- ------- ------- -------
Total 2,254.6 16.5 17.3 31.5 37.1
======= ======= ======= ======= =======
Current credit
exposure (*) 16.5
=======
(*) Presented in accordance with the directives of the Supervisor of
Banks, assuming that the existing collateral has no value.
(**) On a quarterly basis.
E. MATURITY PERIOD - STATED AMOUNTS AT DECEMBER 31, 2002
DECEMBER 31, 2002
-----------------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Currency contracts 4,733.1 1,377.6 6,110.7
======= ======= =======
F. DERIVATIVE FINANCIAL INSTRUMENTS CLASSIFIED ACCORDING TO COUNTER-PARTY
OF THE TRANSACTION - STATED AMOUNTS AT DECEMBER 31, 2002
DECEMBER 31, 2002
-------------------------------------
TRADED
ABROAD OTHER TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Currency contracts - 6,110.7 6,110.7
======= ======= =======
Note: The data for the year 2002 is presented in the format in effect for
that year.
F - 61
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21B - BALANCE AS FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This note contains information on the methods of arriving at the fair value
of financial instruments. Most of the Bank's financial instruments are not
traded on active markets and thus market quotations are not available.
Therefore, the fair value is arrived at by using accepted pricing models,
such as the present value of future cash flows discounted at interest
rates, which reflect the level of risk inherent in the financial
instrument. Estimating the fair value by way of determining the future cash
flows and setting the discount interest rate is subjective. Therefore,
regarding most of the financial instruments, the fair value estimate is not
necessarily an indication of the instrument's realizable value on balance
sheet date. The estimate of the fair value was made at interest rates
prevailing at balance sheet date and did not take interest rate
fluctuations into consideration. The use of other interest rates would
result in significantly different fair values. This is especially true in
regard to non-interest bearing financial instruments or those bearing fixed
interest rates. Furthermore, commissions receivable or payable resulting
from the business activity, were not taken into account, neither was the
tax effect considered. Moreover, the difference between the book value and
fair value of the financial instruments may not be realized since, in most
cases, the Bank is likely to hold the instruments until redemption. In view
of the above, it should be emphasized, that the data contained in this note
should not be considered as an indication of the value of the Bank as a
going concern. Furthermore, considering the wide range of valuation and
estimation techniques, which may be applied in arriving at fair values,
caution should be used in comparing the fair values arrived at by different
banks.
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL
INSTRUMENTS
o GENERAL - as mentioned in Note 1A, the Bank needed a credit line from
the Bank of Israel. The credit line from the Bank of Israel bears the
Bank of Israel rate of interest. The discount rate of the cash flows
of the deposits raised by the bank is set, for purposes of the fair
value of the liabilities, is based on the said interest rates.
o DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the
method of discounting future cash flows at interest rates used by the
Bank in similar transactions proximate to balance sheet date.
o MARKETABLE SECURITIES - Are valued at market value. Shares for which
no market value is readily available are stated at cost.
F - 62
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
o CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
public was arrived at by using the method of the present value of
future cash flows discounted at an appropriate interest rate. The
balance of such credit was segmented into several categories. The
future aggregate cash flows of each category (principal and interest)
were calculated. Such cash inflows were discounted at an interest
rate, which reflects the level of risk inherent in the credit.
Generally, such interest rate was set on the basis of the rate at
which similar transactions of the Bank were effected proximate to
balance sheet date. No additional disclosure is given regarding the
range of fair values in relation to the range of discount rate values,
which in Management opinion, might reflect the level of risk inherent
in the debt. For short-term balances of credit (for an initial period
of up to three months), or balances at variable market interest rates
(prime, Libor, etc.), which change at intervals of up to three months,
their stated value is considered to be their fair value.
The fair value of problematic debts was calculated by using discount
rates reflecting their inherent high credit risk. In any event, such
discount rates were not less than the highest interest rate used by
the Bank in its operations proximate to balance sheet date. The future
cash flows of problematic debts were calculated net of the specific
allowances for doubtful debts. The general and supplementary
allowances for doubtful debts in an aggregate amount of NIS 78.5
million (December 31, 2002 - NIS 82.4 million), were not deducted from
the balance of credit to the public for cash flows purposes in
assessing the fair value.
PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing
models cannot be applied to such deposits. Therefore, their book value
is considered to be their fair value (see Note 9 for details of the
terms of these deposits).
DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
liabilities was arrived at by the method of discounting the future
cash flows at the interest rate paid by the Bank in obtaining similar
deposits, or the interest rate of similar debentures and capital notes
issued by the Bank, prevailing as of balance sheet date.
DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is
a close approximation of the fair value since the deposits are at
variable rates of interest.
DERIVATIVE FINANCIAL INSTRUMENTS - Such instruments having an active
market, were valued at market value. Where these instruments are
traded on several markets, valuation was based on quotations in the
most active market. Derivatives that are not traded on an active
market, were valued based on models used by the Bank in its current
operations which take into consideration the inherent risk of the
financial instrument (market risk, credit risk etc.).
FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
VARIABLE MARKET INTEREST RATES - The amount stated in the balance
sheet represents an approximation of the fair value subject to changes
in credit risks and interest margins of the Bank in transactions at
variable interest rates.
F - 63
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
DECEMBER 31, 2003
------------------------------------------------------------------
STATED BALANCE
----------------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
-------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and deposits with banks 115.4 28.5 143.9 144.3
Securities 70.4 15.0 85.4 85.4
Credit to the public 1,491.2 7,698.4 9,189.6 9,224.3
Credit to governments - 105.2 105.2 105.5
Other financial assets 10.3 - 10.3 10.3
Perpetual deposits with the
Israeli Treasury 799.3 - 799.3 799.3
-------- -------- -------- --------
Total financial assets 2,486.6 7,847.1 10,333.7 10,369.1
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits from the public 296.2 323.8 620.0 624.9
Deposits from banks 2,140.7 32.0 2,172.7 2,172.4
Deposits from the Government
and a perpetual deposit 0.1 6,949.3 6,949.4 6,989.3
Capital notes - 28.2 28.2 29.9
Other financial liabilities 32.5 - 32.5 32.5
-------- -------- -------- --------
Total financial liabilities 2,469.5 7,333.3 9,802.8 9,849
======== ======== ======== ========
(1) Financial instruments, the stated balance of which represents the
estimated fair value include: financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or on the basis of variable market interest rates that
vary at intervals of up to three months.
(2) Other financial instruments.
F - 64
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
DECEMBER 31, 2002
------------------------------------------------------------------
STATED BALANCE
----------------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
-------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and deposits with banks 195.6 48.0 243.6 242.3
Securities 52.2 19.4 71.6 70.6
Credit to the public 2,123.7 8,784.4 10,908.1 10,754.8
Credit to governments - 188.1 188.1 186.2
Other financial assets 41.3 - 41.3 41.3
Perpetual deposits with the
Israeli Treasury 799.9 - 799.9 799.9
-------- -------- -------- --------
Total financial assets 3,212.7 9,039.9 12,252.6 12,095.1
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits from the public 591.7 699.7 1,291.4 1,280.7
Deposits from banks 2,272.9 197.7 2,470.6 2,469.2
Deposits from the Government
and a perpetual deposit 0.1 7,711.5 7,711.6 7,631.2
Capital notes - 35.2 35.2 36.3
Other financial liabilities 87.2 - 87.2 87.2
-------- -------- -------- --------
Total financial liabilities 2,951.9 8,644.1 11,596.0 11,504.6
======== ======== ======== ========
(1) Financial instruments, the stated balance of which represents the
estimated fair value include: financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or on the basis of variable market interest rates that
vary at intervals of up to three months.
(2) Other financial instruments.
F - 65
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 22 - RELATED AND INTERESTED PARTIES
"Related Parties" of the Bank, as defined in Opinion No. 29 of the
Institute of Certified Public Accountants in Israel are: The State of
Israel; Bank Hapoalim B.M.; Bank Leumi le-Israel B.M.; the Chief Executive
Officer, Directors of the Bank and companies related to them, affiliates of
the Bank and their related companies.
The Bank conducts transactions with all or some of the aforementioned
parties, in the ordinary course of business on terms applicable to its
transactions in general. As it is not practical to separately record the
transactions with such entities, it is not possible to reflect the
information required by the said Opinion except for the following details:
A. BALANCES
DECEMBER 31, 2003
-------------------------------------------------
AFFILIATES AND THEIR DIRECTORS AND CHIEF
RELATED COMPANIES EXECUTIVE OFFICER
--------------------- --------------------
HIGHEST HIGHEST
BALANCE AT BALANCE BALANCE AT BALANCE
BALANCE SHEET DURING THE BALANCE SHEET DURING THE
DATE YEAR* DATE YEAR*
------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
ASSETS
Credit to the public 17.5 27.1 - -
Investment in affiliates - 0.9 - -
LIABILITIES
Deposits of the public - - 0.6 0.6
Other liabilities - - - 2.5
CREDIT RISK IN OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS 0.7 0.8 - -
DECEMBER 31, 2002
------------------------------------------------
AFFILIATE AND ITS RELATED DIRECTORS AND CHIEF
COMPANIES EXECUTIVE OFFICER
--------------------- --------------------
HIGHEST HIGHEST
BALANCE AT BALANCE BALANCE AT BALANCE
BALANCE SHEET DURING THE BALANCE SHEET DURING THE
DATE YEAR* DATE YEAR*
------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
ASSETS
Credit to the public 21.6 26.4 - -
Investment in affiliates 0.9 1.4 - -
LIABILITIES
Deposits of the public - - 0.5 2.6
Other liabilities - - 2.5 2.9
CREDIT RISK IN OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS 0.8 0.8 - -
* On the basis of the balances at the end of each month.
F - 66
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 22 - RELATED AND INTERESTED PARTIES (CONT'D)
B. SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES
2003 2002
----------------------------- -----------------------------
AFFILIATE AND DIRECTORS AND AFFILIATE AND DIRECTORS AND
ITS RELATED CHIEF EXECUTIVE ITS RELATED CHIEF EXECUTIVE
COMPANIES OFFICER COMPANIES OFFICER
------------ ------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------ ------------
Profit (loss) from financing
operations before allowance
for doubtful debts (*) - - 1.1 (0.1)
Allowance for doubtful debts 8.6 - (***)7.4 -
Operating and other expenses (**) - 1.2 - (***)4.7
(*) See details in D hereunder.
(**) See details in C hereunder.
(***) Restated
C. BENEFITS TO INTERESTED PARTIES
2003 2002
---------------------------- -----------------------------
DIRECTORS AND CHIEF EXECUTIVE DIRECTORS AND CHIEF EXECUTIVE
OFFICERS OFFICERS
---------------------------- -----------------------------
NUMBER OF NUMBER OF
NIS MILLIONS BENEFICIARIES NIS MILLIONS BENEFICIARIES
------------ ------------- ------------ -------------
Interested parties employed by
the Bank (1) (2)0.3 2 (2)4.4 4
Fees to Directors not employed
by the Bank 0.9 11 1.5 17
(1) Not including VAT on salaries.
(2) Including changes in provisions relating to the period in which, as
the Board believes, the services of the Chairman of the Bank and of
the CEO would probably not be required any longer.
See Note 18A regarding employment agreements with the Chairman of the Bank
and its CEO.
F - 67
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 22 - RELATED AND INTERESTED PARTIES (CONT'D)
D. RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
WITH INTERESTED PARTIES AND RELATED PARTIES
2003 2002 2001
------------ ------------- ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------- ------------
Income deriving from credit to the public - 1.1 0.9
Expenses deriving from deposits of
the public - 0.1 0.1
--- --- ---
Net results from financing operations
before allowance for doubtful debts - 1.0 0.8
=== === ===
Definitions in this note:
- Interested parties - as defined in Paragraph 1 of the definition of an
"interested party in a company" in Section 1 of the Securities Law.
- Related party - As defined in Opinion 29 of the Institute of Certified
Public Accountants in Israel.
- Directors and Chief Executive Officer - including their spouses and
minors (Opinion 29 of the Institute of Certified Public Accountants in
Israel).
F - 68
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
2003 2002 2001
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
A. INCOME DERIVING FROM ASSETS:
Credit to the public 352.0 773.1 1,471.7
Credit to governments (2.2) 11.5 18.2
Deposits with Bank of Israel - (1.9) 20.0
Deposits with banks 0.6 7.7 27.6
Debentures 1.5 0.5 12.3
------- ------- -------
351.9 790.9 1,549.8
------- ------- -------
B. (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public (39.3) (56.5) (294.5)
Deposits of the Government (122.8) (584.6) (1,015.9)
Deposits of Bank of Israel (219.0) (91.2) (0.2)
Deposits of banks 3.8 (40.2) (115.4)
------- ------- -------
(377.3) (772.5) (1,426.0)
------- ------- -------
C. INCOME DERIVING FROM DERIVATIVE FINANCIAL INSTRUMENTS
Commissions from at-risk brokerage
transactions - 12.4 11.5
Income from derivative instruments ALM 47.2 22.7 4.3
------- ------- -------
47.2 35.1 15.8
------- ------- -------
D. OTHER INCOME AND EXPENSES
Commissions from financing operations 16.7 30.1 24.6
Collection of interest on problematic debts 1.7 4.9 7.3
Other financing income 40.9 6.8 6.6
Other financing expenses (14.2) (15.8) (14.1)
------- ------- -------
45.1 26.0 24.4
------- ------- -------
Total profit from financing operations before
allowance for doubtful debts 66.9 79.5 164.0
======= ======= =======
F - 69
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
(CONT'D)
E. RESULTS FROM INVESTMENTS IN DEBENTURES
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Accrued financing income on available-for-sale
debentures (included in income from assets) 1.5 0.5 12.3
Gain from sale of available-for-sale debentures
(included in other financing income) 0.7 0.9 0.2
---- ---- ----
Total profit from investments in debentures 2.2 1.4 12.5
==== ==== ====
NOTE 24 - OPERATING COMMISSIONS
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Ledger fees (in Israeli and foreign currency) 2.3 2.2 2.6
Payment order system services 0.5 1.2 1.2
Customer foreign trade transactions 1.5 5.6 6.4
Credit handling and drafting of contracts 0.2 0.6 1.9
Computerized information services and
confirmations 0.2 0.2 0.3
Margin and collection commissions from credit
granted from deposits based on collection:
Collection commissions on credit from
Treasury funds - 0.1 0.4
Others 1.7 *2.4 *2.5
---- ---- ----
Total operating commissions 6.4 12.3 15.3
==== ==== ====
(*) Reclassified
F - 70
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 25 - GAINS (LOSS) ON INVESTMENTS IN SHARES
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Gain on sale of available-for-sale shares 8.4 0.9 4.1
Loss on impairment in value of available-for-sale
shares - (3.1) (1.4)
Dividend from available-for-sale shares 1.8 0.1 0.1
Realized and unrealized losses on adjustments
to fair value of trading shares, net - (2.1) (0.6)
---- ---- ----
Total gains (losses) on investments in shares 10.2 (4.2) 2.2
==== ==== ====
NOTE 26 - OTHER INCOME
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Gains on severance funding 1.6 - -
Other 3.8 *4.1 *4.3
---- ---- ----
Total other income 5.4 4.1 4.3
==== ==== ====
(*) Reclassified
NOTE 27 - SALARIES AND RELATED EXPENSES
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Salaries 25.1 35.9 40.0
Severance pay, provident fund, pensions,
further education fund, vacation pay,
sick pay and long service bonuses 7.0 *10.8 7.1
National insurance contributions and
VAT on salaries 1.5 2.0 9.2
Other related expenses 0.1 0.8 1.0
Adjustment of provisions for related
benefits, following changes in salaries
in the current year - *0.2 0.3
---- ---- ----
Total salaries and related expenses 33.7 49.7 57.6
==== ==== ====
(*) Reclassified
F - 71
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 28 - OTHER EXPENSES
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
Marketing and advertising 0.2 0.6 2.3
Communications (postage, telephone,
courier fees etc.) 0.8 1.3 1.5
Computer (not including salaries and
depreciation) 3.5 5.0 5.2
Office expenses 0.5 0.9 1.2
Insurance 4.8 2.3 1.1
Professional services 7.0 5.6 4.5
Directors' fees (not including a director employed
as a senior executive) 0.9 1.5 1.2
Staff training, further education etc 0.1 0.2 0.4
Others 2.7 2.3 1.6
---- ---- ----
Total other expenses 20.5 19.7 19.0
==== ==== ====
NOTE 29 - TAXES ON INCOME
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
A. COMPOSITION:
Taxes for the current year - 0.2 0.3
Taxes in respect of prior years (2.7) (0.6) -
---- ---- ----
Net provision for taxes on income (tax savings) (2.7) (0.4) 0.3
==== ==== ====
F - 72
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 29 - TAXES ON INCOME (CONT'D)
B. RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE
Following is the reconciliation between the theoretical tax applying to the
operating results of the Bank, based on the statutory tax rate applicable
to banks in Israel, and the tax expense (tax savings) on operating results,
as reflected in the statement of income.
2003 2002 2001
----- ----- ----
Statutory tax rate 45.76% 45.55% 45.30%
===== ===== =====
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
Tax savings at the statutory rate (48.7) (195.8) (14.4)
Tax (tax savings) in respect of:
Differences from adjustment of net monetary
assets 1.2 (3.1) 1.8
General and supplementary allowance for
doubtful debts (2.5) 6.7 7.7
Non-deductible expenses 0.1 0.1 0.4
VAT on profit on VAT on salaries, net - - 0.6
Differences and other tax
benefits in respect of which deferred taxes
had not been recorded, net 38.1 164.7 4.2
Loss for purposes of profit tax which
cannot be set off 11.8 27.5 -
Inflationary erosion of advance tax payments - 0.1 -
Taxes in respect of prior years (2.7) (0.6) -
----- ----- -----
Tax expense (tax savings) reflected in the
statement of income (2.7) (0.4) 0.3
===== ===== =====
C. The Bank has been issued final tax assessments for all years through
2000
D. Carryforward tax losses in respect of which deferred tax assets were
not created total NIS 548 million (2002 - NIS 426 million).
E. In 2002 and in 2003, the Bank recorded VAT on salaries refundable in
an amount of NIS 6.7 million and NIS 5.1 million, respectively, as a
result of losses for purposes of VAT on profit.
F - 73
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM
DECEMBER 31 DECEMBER 31
2003 2002
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public 6,675.0 7,217.1
------- -------
Total 6,675.0 7,217.1
======= =======
DESIGNATED DEPOSITS
Deposits of the Government 6,698.1 7,237.1
------- -------
Total 6,698.1 7,237.1
======= =======
Credit out of designated deposits includes NIS 6,405.3 million, which is
secured by a State guarantee. The annual interest margin in respect of this
credit amounts to NIS 0.3 million (on December 31, 2002, the balance of the
credit secured by a State guarantee was NIS 6,925.2 million).
NOTE 31 - SPECIAL INCOME FROM THE ISRAELI TREASURY, NET
The special income from the Israeli Treasury is interest paid on perpetual
deposits with the Treasury in connection with preference shares of the Bank
linked to the dollar. The income is presented net of the related tax effect
and its composition is as follows:
2003 2002 2001
---- ---- ----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ---- ----
IN RESPECT OF PARTICIPATING PREFERENCE SHARES -
Special income from the Israeli Treasury - 7.5 17.6
Income tax - (1.1) (2.7)
---- ---- ----
Special income from the Israeli Treasury, net - 6.4 14.9
---- ---- ----
IN RESPECT OF NON-PARTICIPATING PREFERENCE SHARES -
Special income from the Israeli Treasury - 14.4 28.1
Income tax - (2.0) (4.1)
---- ---- ----
Special income from the Israeli Treasury, net - 12.4 24.0
Less/ - dividend on the aforementioned shares - 12.4 24.0
---- ---- ----
Total in respect of non-participating shares - - -
---- ---- ----
Total special income from the Israeli Treasury, net - 6.4 14.9
==== ==== ====
See Note 9A, Note 15 and Note 16 for details of the special income from the
Israeli Treasury which was not recorded in the books, due to the cessation
of dividend distribution.
F - 74
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 32 - INFORMATION ON THE BASIS OF NOMINAL HISTORICAL VALUES
DECEMBER 31 DECEMBER 31
------------ ------------
2003 2002
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Total Assets 10,356.0 12,509.3
Total liabilities 9,846.5 11,889.4
Shareholders' equity 509.5 619.9
2003 2002
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Net loss 99.9 417.8
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS
A. The bank's financial statements conform with Israeli generally
accepted accounting principles and the instructions of the Supervisor
of Banks ("Israeli GAAP"), which differ in certain respects from those
generally accepted in the United States of America ("US GAAP") as
described below:
1. EFFECT OF INFLATION
The Bank, in accordance with Israeli GAAP, comprehensively includes
the effect of price level changes in its financial statements, as
described in Note 1B to the Annual Financial Statements. Such Israeli
accounting principles measure the effects of price level changes in
the Israeli economy. US GAAP does not permit financial statements of a
company stated in a currency of a country not experiencing
hyperinflation to be restated for price level changes.
However, as permitted by the Securities and Exchange Commission
("SEC") rules, which are applicable to foreign private issuers, such
effects have not been included in the following reconciliation to U.S.
GAAP.
2. SPECIFIC PROVISION FOR LOAN LOSSES
In accordance with Israeli GAAP:
The provision for loan losses is determined on a specific basis,
taking the following factors into consideration:
a. The financial position of the borrower, including an assessment
of the likelihood of repayment of the loan within an acceptable
period and the extent of the Bank's other commitments to the same
borrower.
F - 75
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
2. SPECIFIC PROVISION FOR LOAN LOSSES (CONT'D)
b. The realizable value of any security for the loan; and
c. The cost associated with obtaining repayment and realization of
any such security.
In accordance with US GAAP:
Financial Accounting Standards (FAS) 114, as amended by FAS 118,
prescribes the accounting treatment by creditors with respect to
impairment of loans. These standards cover all creditors and all
loans, except:
a. Large groups of small-balance homogeneous loans that are
collectively evaluated for impairment.
b. Loans that are measured at fair value or at the lower of cost or
fair value.
c. Leases, as defined in FAS 13.
d. Debt securities, as defined in FAS 115.
These standards cover every loan, which is part of an arrangement
restructuring liabilities, involving modifications of terms of the
loans, including those involving a receipt of assets in partial
satisfaction of a receivable.
In accordance with FAS 114, a loan is impaired when it is probable,
based on current information and events, that the creditor will be
unable to collect all amounts (contractual interest and principle
payments) due according to the contractual terms of the loan
agreement.
Loans impaired are measured based on the present value of the expected
future cash flows, discounted at the loan's effective interest rate
or, alternatively, based on the observable market price of the loan or
the fair value of the collateral, if the loan is collateral dependent.
3. GENERAL PROVISION FOR LOAN LOSSES
In accordance with Israeli GAAP:
The directives of the Supervisor of Banks require that, commencing
with 1992, banks include, in addition to the specific allowance for
doubtful debts, a supplementary allowance for doubtful debts, which
replaces the general allowance, which had been required up to that
time.
The supplementary allowance for doubtful debts is based upon excessive
credit balances, measured according to specified quality
characteristics of the credit portfolio, as provided in the directives
of the Supervisor of Banks.
In accordance with the aforementioned requirements, a portion of the
general allowance, as of December 31, 1991, equal to 1% of the total
debt to which it was related at that date, is to be maintained in
inflation adjusted values.
F - 76
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
3. GENERAL PROVISION FOR LOAN LOSSES (CONT'D)
In accordance with US GAAP:
Each bank determines its own methodology for general reserve based on
past experience of credit losses and on the quality of its credit
portfolio.
In light of the structure of the Bank's credit portfolio and its
concentrations, the Bank is considering the application of FAS 114 to
all its borrowers without recording a general provision.
4. NON-PARTICIPATING PREFERENCE SHARES
Preferred D and DD shares that were issued by the Bank, pay 7.5%
cumulative dividend, linked to the US dollar exchange rate and
redeemable by the Bank. The redemption dates of these preferred shares
will be determined by the Bank, subject to the approval of the State
of Israel's Treasury.
In accordance with Israeli GAAP:
These preferred shares are presented as a liability and not as part of
shareholders' equity since they are redeemable.
Since in accordance with Israeli GAAP these shares are classified as a
liability, the dividend that was paid in their respect is recorded as
an expense.
In accordance with US GAAP:
Since the Bank controls the decision on the redemption and since it
does not anticipate that it will redeem the preferred shares, these
preferred shares are presented as part of the shareholders' equity.
Therefore, the dividend that was paid in their respect is posted
directly to the shareholders' equity.
5. LIABILITY FOR TERMINATION BENEFITS IN REGARD WITH COLLECTIVE
TERMINATION AGREEMENT AND PERSONAL AGREEMENTS
In accordance with Israeli GAAP:
The Bank recognized a liability for involuntary termination benefits
in accordance with the collective termination agreement and certain
personal agreements, for those employees that under the Bank's
management best estimation it is probable that they will be
involuntary terminated. The liability was calculated under the
assumption that those employees would be terminated as of the Balance
Sheet date.
In regard to the personal agreements with the Chairman of the Board,
CEO and Deputy CEO, the Bank recorded a provision in the amount that
in management's estimate would be obligated to compensate them for the
period after their expected termination and till the end of the period
during which the Bank is obligated to employ them in accordance with
their personal agreements.
F - 77
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
5. LIABILITY FOR TERMINATION BENEFITS IN REGARDS WITH COLLECTIVE
TERMINATION AGREEMENT AND PERSONAL AGREEMENTS (CONT'D)
In accordance with US GAAP:
All these agreements grant involuntary termination benefits, and are
accounted for in accordance with SFAS 88. The liability is recognized
when it is probable that employees will be entitled to termination
benefits and the amount can be reasonably estimated.
Since the employees are required to render services until they are
terminated in order to receive termination benefits, the liability and
loss are recognized ratably over the expected future service period.
6. LINKAGE DIFFERENCES ON PERPETUAL DEPOSIT WITH THE ISRAELI
TREASURY
In accordance with Israeli GAAP:
Linkage differences on the perpetual deposit with the Israeli Treasury
was credited to the shareholders' equity item.
In accordance with US GAAP:
These linkage differences are reported in the profit and loss
statement.
7. LOSS PER SHARE
In accordance with Israeli GAAP:
The dividend on the preferred shares which was accrued but not yet
been declared was not added to the calculation of the loss on the
ordinary A shares since no income has been recorded in respect of the
interest on the perpetual deposits, the payment of which is contingent
upon payment of the dividend in respect of the aforementioned
preferred shares.
Furthermore, it is not required to add to the calculation of the loss
on the ordinary A shares, the dollar exchange rate linkage differences
on the principal of the preferred shares net of the erosion deriving
from the change in the general purchasing power of the Israeli
currency.
In accordance with US GAAP:
Both the accrued but not yet paid dividend on the preferred shares and
the dollar exchange rate linkage differences on the principal of the
preferred shares net of the erosion deriving from the change in the
general purchasing power of the Israeli currency were added to the
calculation of the loss on the ordinary A shares.
F - 78
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT
ON THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
8. PERPETUAL DEPOSITS WITH THE STATE OF ISRAEL
In accordance with Israeli GAAP:
Due to the agreement between the Bank and the Israeli Treasury
regarding the changes in the method of computing the linkage on the
perpetual deposits with the State of Israel (see note 9), an increase
in the amounts of the perpetual deposits as well as in the Bank's
shareholders' equity is recorded.
In accordance with US GAAP:
According to EITF 85-1, as this transaction involved issuance of
capital securities to the Israeli Treasury in exchange for non-cash
consideration, no increase in the Bank's shareholders' equity is
recorded due to the said agreement.
9. SUMMARY OF SIGNIFICANT PRESENTATION DIFFERENCES OF BALANCE SHEET
ITEMS BETWEEN ISRAELI GAAP AND U.S. GAAP:
a. Non-marketable shares included in securities available for sale
under Israeli GAAP were classified to other assets under U.S.
GAAP.
b. Accrued interest receivable included in credit items was
classified to other assets under U.S. GAAP.
c. Equity basis investments were classified to other assets under
U.S. GAAP.
d. The provision for severance pay net of amounts deposited in
provident funds is presented under Israeli GAAP in other
liabilities. Under U.S. GAAP, such funded amounts that do not
release the Bank from liability to pay severance upon retirement,
are presented in other assets, and related liability is presented
in other liabilities.
e. Accrued interest payable included in deposit items was
reclassified to other liabilities under U.S. GAAP.
f. See note 4E regarding a customer's debt reclassified to
securities item and presented according to market value of the
shares pledged in favor of the Bank. In accordance with US GAAP
this customer's debt is presented in credit to public balance
sheet line item.
F - 79
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT
ON THE FINANCIAL STATEMENTS (CONT'D)
B. The effect of the material differences between Israeli and US GAAP on
the financial statements
1. STATEMENTS OF OPERATIONS:
YEAR ENDED DECEMBER 2003
--------------------------------------
2003 2002 2001
------ ------ ------
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
------ ------ ------ ------
(A) Net loss as reported,
according to Israeli GAAP (104.4) (423.5) (20.4)
------ ------ ------
Specific provision for loan
losses 33.A.2 (2.4) 31.5 13.2
General provision for loan
losses 33.A.3 (3.9) 10.2 16.1
Dividend on non
participating
preference shares 33.A.4 - 12.4 24.0
Liability for termination
benefits 33.A.5 (15.3) 31.5 -
Linkage differences on
perpetual deposits with
the Israeli Treasury 33.A.6 (31.2) 3.9 38.4
------ ------ ------
(52.8) 89.5 91.7
------ ------ ------
Net income (loss)
according to US GAAP (157.2) (334.0) 71.3
====== ====== ======
YEAR ENDED DECEMBER 2003
-----------------------------------------
2003 2002 2001
---- ---- ----
NIS NIS NIS
---- ---- ----
(B) Earnings (losses) per share
BASIC EARNINGS (LOSSES) PER "A" ORDINARY
SHARE:
As reported according to Israeli GAAP (994.84) (4,095.94) (340.53)
As reported according to US GAAP (10,579.77) (9,603.09) (62.26)
Number of shares 15,100 15,100 15,100
F - 80
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT
ON THE FINANCIAL STATEMENTS (CONT'D)
2. BALANCE SHEET:
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
AS REPORTED ADJUSTMENTS US GAAP AS REPORTED ADJUSTMENTS US GAAP
-------- -------- -------- -------- -------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- -------- -------- --------
Cash and deposits with banks 143.9 - 143.9 243.6 - 243.6
Securities (1) (2) (3) 85.4 (85.4) - 71.6 (71.6) -
Available-for-sale
securities (1) - 27.9 27.9 - 21.9 21.9
Held to maturity
debentures (1) - - - - 19.4 19.4
Credit to the public (3)(4)(5)(6) 9,189.6 (35.3) 9,154.3 10,908.1 (84.3) 10,823.8
Credit to governments (4) 105.2 (0.5) 104.7 188.1 (0.6) 187.5
Investments in affiliates (7) - - - 0.9 (0.9) -
Fixed assets 4.7 - 4.7 10.2 (0.1) 10.1
Other assets (2) (4) (7) (8) 28.2 188.0 216.2 51.8 231.2 283.0
Perpetual deposits with the
Israeli Treasury (12) 799.3 (290.9) 508.4 799.9 (260.3) 539.6
-------- -------- -------- -------- -------- --------
Total assets 10,356.3 (196.2) 10,160.1 12,274.2 (145.3) 12,128.9
======== ======== ======== ======== ======== ========
Deposits of the public (9) 620.0 (19.7) 600.3 1,291.4 (49.7) 1,241.7
Deposits of banks (9) 2,172.7 (31.0) 2,141.7 2,470.6 (79.6) 2,391.0
Deposits of the
government (9) 6,949.3 (99.8) 6,849.5 7,711.5 (107.8) 7,603.7
Perpetual deposits 0.1 - 0.1 0.1 - 0.1
Capital notes 28.2 - 28.2 35.2 - 35.2
Debentures - - - - - -
Other liabilities (8) (9) (10) 76.2 158.9 235.1 156.2 244.5 400.7
Non-participating
shares (11) 314.2 (314.2) - 333.5 (333.5) -
Shareholders' equity
(see 3 below)(3)(5)(6)(10)(11)(12) 195.6 109.6 305.2 275.7 180.8 456.5
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity 10,356.3 (196.2) 10,160.1 12,274.2 (145.3) 12,128.9
======== ======== ======== ======== ======== ========
(1) Classification from securities item to available-for-sale securities,
Trading account assets, and held to maturity debentures item.
(2) Classification of non-marketable shares from securities item to other
assets item (see note 33.A.9.a).
(3) A customer's debt in respect of which shares were pledged in favor of the
Bank (see note 33.A.9.f).
(4) Classification of accrued interest receivables from credit items to other
assets item (see note 33.A.9.b).
(5) Specific provision for loan losses (see note 33.A.2).
(6) General provision for loan losses (see note 33.A.3).
(7) Classification of equity basis investments from investment in affiliates
item to other assets item (see note 33.A.9.c).
(8) Classification of amounts deposited in provident funds in respect of
severance pay liabilities from other liabilities item, to other assets item
(see note 33.A.9.d).
(9) Classification of accrued interest payables from deposit items to other
liabilities items (se Note 33.A.9.e).
(10) Liability for termination benefits (see note 33.A.5).
(11)Classification of non-participating shares to shareholder's equity item (see
note 33.A.4).
(12)The agreement between the Bank and the Israeli Treasury regarding the
changes in the method of computing the linkage on the perpetual deposits
(see Note 33.A.8).
F - 81
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 33 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
3. SHAREHOLDERS' EQUITY:
DECEMBER DECEMBER
31, 2003 31, 2002
-------- --------
NOTE NIS MILLIONS NIS MILLIONS
-------- -------- --------
Shareholders' equity as reported according to
Israeli GAAP 195.6 275.7
A customer debt in respect of which shares
were pledged in favor of the Bank 33.A.9.f 0.3 -
Specific provision for loan losses 33.A.2 (8.8) (6.4)
General provision for loan losses 33.A.3 78.5 82.4
Liability for termination benefits 33.A.5 16.3 31.6
Perpetual deposits with the State of Israel 33.A.8 (290.9) (260.3)
Classification of non-participating shares to
shareholders' equity item 33.A.4 314.2 333.5
-------- --------
Shareholders' equity according to US GAAP 305.2 456.5
======== ========
F - 82