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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, 2004
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, 2004
- ----------------------------------------------------------------------------- ----------------------------------
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
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 [ ]
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TABLE OF CONTENTS
Explanatory Notes ........................................................................ (ii)
Forward-Looking Statements ............................................................... (ii)
Industry and Market Data ................................................................. (iii)
Presentation of Financial Information .................................................... (iii)
Exchange Rate Information ................................................................ (iv)
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 .................................................... 18
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 ............................. 75
Item 8-- Financial Information ......................................................... 78
Item 9-- The Offer and Listing ......................................................... 83
Item 10-- Additional Information ........................................................ 84
Item 11-- Quantitative and Qualitative Disclosures About Market Risk .................... 102
Item 12-- Description of Securities Other than Equity Securities ........................ 107
PART II
Item 13-- Defaults, Dividend Arrearages and Delinquencies ............................... 108
Item 14-- Material Modifications to the Rights of Security Holders and Use of Proceeds .. 111
Item 15-- Controls and Procedures ....................................................... 111
Item 16A-- Audit Committee Financial Expert .............................................. 112
Item 16B-- Code of Ethics ................................................................ 113
Item 16C-- Principal Accountant Fees and Services ........................................ 113
Item 16D-- Exemptions from the Listing Standards for Audit Committees .................... 114
Item 16E-- Purchases of Equity Securities by the Issuer and Affiliated Purchasers ........ 114
PART III
Item 17-- Financial Statements .......................................................... 115
Item 18-- Financial Statements .......................................................... 115
Item 19-- Exhibits ...................................................................... 115
(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; possible extension of our run-off plan; 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"). 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".
The financial statements for the year ending December 31, 2004 were
prepared in "reported amounts", as provided in Standard 12 of the Israel
Accounting Standards Board regarding discontinuance of the adjustment of
financial statements to the CPI (Consumer's Price Index). Pursuant to this
standard and in accordance with Accounting Standard No. 17 that was published in
December 2002, the adjustment of financial statements to the CPI was
discontinued as of January 1, 2004. Until December 31, 2003, we prepared
CPI-adjusted financial statements in accordance with the directives of the
Supervisor of Banks, on the basis of the principles of Opinion No. 36 of the
Institute of Certified Public Accountants in Israel. The adjusted amounts
presented in the financial statements as of December 31, 2003 are the basis for
the financial statements in reported amounts. Any additions made during the
period are included according to their nominal values.
In light of the significance of the income and expenses from financial
instruments that are included in the operating results, and so as to make it
possible to examine the annual data in comparison with the corresponding period
from last year, the comparative figures for 2003 of the income and expense items
that are included in the operating profit before taxes were presented in
reported amounts and the difference between the profit before taxes in "reported
amounts" and the profit before taxes adjusted to the CPI of December 2003 was
presented with respect to the comparative figures under the item of "erosions
and adjustments". This method of presentation makes it possible to examine the
development of the principal income and expense items (profit from financing
operations, allowance for doubtful debts, operating and other income and
expenses) by comparing data that is also presented in reported amounts. Data
regarding profit before taxes for 2003, after the effect of the "erosions and
adjustments" item on the comparative figures, is stated in amounts adjusted to
the CPI of December 2003, which was the basis for adjusting the financial
statements for December 31, 2003. Conversely, all the income and expense items
for 2004, including the profit before taxes, the net earnings, and similar
expense items, are stated in reported amounts in accordance with the reporting
and measurement principles that came into effect upon the implementation of
Standard 12 on January 1, 2004. For a further discussion of the amounts in our
financial statements, see "Note 1.C. Financial Statements in Reported Amounts"
in our Financial Statements in Item 17 of this annual report.
iii
Unless otherwise indicated, information provided in this annual report,
including all operating data presented, is as of December 31, 2004.
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, 2004 4.482 4.634 4.308 4.308
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
AVERAGE(2) HIGH LOW PERIOD END
---------- -------- ------- ----------
MONTH ENDED
June 30, 2005 4.485 4.574 4.405 4.574
May 31, 2005 4.374 4.421 4.348 4.416
April 30, 2005 4.372 4.395 4.360 4.369
March 31, 2005 4.329 4.379 4.302 4.361
February 29, 2005 4.370 4.392 4.357 4.357
January 31, 2005 4.378 4.414 4.352 4.383
December 31, 2004 4.341 4.374 4.308 4.308
- --------------
(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 July 13, 2005, the exchange rate was NIS 4.532 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
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel. In October 2001 the Israeli
Accounting Standards Board published Accounting Standard No. 12, "Discontinuance
of Adjustment of Financial Statements". Pursuant to this standard and in
accordance with Accounting Standard No. 17 which was published in December 2002,
the adjustment of financial statements to CPI was discontinued as of January 1,
2004. Until December 31, 2003, the Bank prepared adjusted financial statements
(adjusted to CPI) in accordance with the directives of the Supervisor of Banks,
on the basis of the principles of the Opinion No. 36 of the Institute of
Certified Public Accountants in Israel which required 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). The adjusted amounts presented in the financial statements as of
December 31, 2003 are the basis for the financial statements in reported
amounts. Any additions made during the period are included according to their
nominal values.
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. For
a discussion of the principal differences between Israeli GAAP and U.S. GAAP,
see Item 17 of this annual report.
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.
1
SELECTED FINANCIAL DATA
2004(1) 2003(1) 2002 2001 2000
------------ ------------- -------------- -------------- --------------
(IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE INDICATED)
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------------------------- ----------------------------------------------
OPERATING DATA:
ISRAELI GAAP
Profit from financing operations before allowance
for doubtful debts ............................. 66.2 70.1 79.5 164.0 118.4
Allowance for doubtful debts ...................... 70.2 129.8 401.8 124.5 31.2
------------ ------------- -------------- -------------- --------------
Profit (Loss) from financing operations after
allowance for doubtful debts ................... (4.0) (59.7) (322.3) 39.5 87.2
------------ ------------- -------------- -------------- --------------
OPERATING AND OTHER INCOME
Operating commission .............................. 4.1 6.5 12.3 15.3 13.5
Gain (Loss) from investments in shares............. 41.5 10.3 (4.2) 2.2 13.3
Other income ...................................... 4.6 5.5 4.1 4.3 6.4
------------ ------------- -------------- -------------- --------------
Total operating and other income .................. 50.2 22.3 12.2 21.8 33.2
------------ ------------- -------------- -------------- --------------
OPERATING AND OTHER EXPENSES
Salaries and related expenses...................... 19.7 33.7 49.7 57.6 52.7
Expenses (income) in respect of employee
retirement...................................... (0.8) (1.5) 35.7 - -
Maintenance and depreciation of premises and
equipment....................................... 5.7 11.8 14.7 16.4 15.2
Other expenses..................................... 20.4 20.7 19.7 19.0 17.1
------------ ------------- -------------- -------------- --------------
Total operating and other expenses................. 45.0 64.7 119.8 93.0 85.0
------------ ------------- -------------- -------------- --------------
Operating profit (loss) before taxes on income..... 1.2 (102.1) (429.9) (31.7) 35.4
Erosions and adjustments**......................... - (4.5) - - -
------------ ------------- -------------- -------------- --------------
Operating profit (loss) before taxes on income..... 1.2 (106.6) (429.9) (31.7) 35.4
------------ ------------- -------------- -------------- --------------
Taxes on income (Tax saving)....................... - (2.7)*** (0.4) 0.3 6.3
------------ ------------- -------------- -------------- --------------
Operating profit (loss) after taxes on income...... 1.2 (103.9)*** (429.5) (32.0) 29.1
------------ ------------- -------------- -------------- --------------
OTHER ITEMS
Special income from the Israel Treasury, net....... - - 6.4 14.9 14.3
Share in earnings (loss) of affiliate, net......... - (0.4)*** (0.5) (3.3) 4.1
Capital gain (loss), net........................... 0.2 (0.1)*** 0.1 - -
Profit from sale of affiliate, net................. - - - - 0.7
------------ ------------- -------------- -------------- --------------
Total other items 0.2 0.5*** 6.0 11.6 19.1
------------ ------------- -------------- -------------- --------------
Net profit (loss) for the year..................... 1.4 (104.4)*** (423.5) (20.4) 48.3
============ ============= ============== ============== ==============
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Erosions and adjustments to the effect of inflation according to the CPI
of December 2003 of income and expenses that were included in the
operating profit before taxation in reported amounts.
*** Amounts adjusted to the effect of inflation according to the CPI of
December 2003
2
2004(1) 2003(1) 2002 2001 2000
------------ ------------- -------------- -------------- ----------------
(IN MILLIONS OF NIS, EXCEPT PER SHARE DATA AND EXCEPT AS OTHERWISE INDICATED)
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------------------------- ------------------------------------------------
OPERATING DATA:
ISRAELI GAAP
Per an amount equal to $1 of the par value of Class
"C" Preference Shares,
Class "CC" Preference Shares and Class "CC1" NIS NIS NIS NIS NIS
------------ ------------- -------------- -------------- ----------------
Preference shares ................................... 0.02 (1.79) (7.23) (0.27) 0.90
"A" Ordinary shares ................................. 0.02 (1.79) (7.37) (0.62) 0.59
Ordinary Preferred shares ........................... 0.02 (1.79) (7.37) (0.54) 0.65
CASH DIVIDEND PER SHARE
"C", "CC" and "CC1" Preference shares - - 0.14 0.30 0.33
Participating Preferred Ordinary shares ............. - - - 0.06 0.06
U.S. GAAP(2)
Net profit (loss) for the year (20.0) (157.2) (334.0) 71.3
EARNINGS (LOSS) PER SHARE NIS NIS NIS NIS
------------ ------------- -------------- --------------
"A" Ordinary shares (3,019.28) (10,579.77) (9,603.09) (62.26)
BALANCE SHEET DATA:
ISRAELI GAAP
Deposits received ................................... 8,488 9,742 11,474 13,092 12,291
Registered Subordinated Capital Notes................ 25 28 35 35 49
Total Liabilities.................................... 8,570 9,847 11,665 13,404 12,534
Non-participating Preference shares.................. 309 314 334 331 307
Shareholder's equity................................. 199 196 276 707 764
Loans extended ...................................... 7,993 9,190 10,908 12,223 11,427
Deposits with the Israeli Treasury................... 843 835 871 890 907
Credit to foreign government......................... 11 21 82 111 114
Amounts receivable from the Israel Treasury in
respect of linkage increments and exchange
differences on the Bank's liabilities................ 25 28 35 35 49
Total Assets......................................... 9,078 10,356 12,274 14,441 13,605
U.S. GAAP(2)
Total Assets*** 9,443 10,830 12,929 15,047
Total Liabilities*** 9,168 10,525 12,472 14,238
Shareholder's equity 275 305 457 809
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
*** Figures as of December 31, 2003, December 31, 2002 and December 31, 2001
were revised.
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. We are
involved in discussions with the relevant authorities regarding extension
of the run-off period for an additional two years. 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 year 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.
4
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.
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, 2004 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. We are involved in discussions with the relevant
authorities regarding extension of the run-off period for an additional two
years. If the run-off plan were to be extended for an additional two years, as
noted above, it is unclear, as of the date of this annual report, to what
extent, if any, the terms of the special line of credit would be affected.
5
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, 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.
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 in 2004 with a
modest profit and, beginning in the first quarter of 2002, we have not had
profits from which we could distribute dividends. The last quarterly dividend
that we paid in respect of our C shares, our CC shares, our CC1 shares, our D
shares and our DD shares was the dividend for the second quarter of 2002, which
payment of dividends was made with court approval and approval of the Supervisor
of Banks.
We deposited the proceeds of the issuances of our C shares, our CC shares,
our CC1 shares, our D shares and our DD shares, 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.
6
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.
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, 2004 is NIS 95.2 million, which amount is not recorded in our
financial statements. Of this amount, an amount of NIS 37.5 million is in
respect of the fiscal year 2004. As of March 31, 2005, this would amount to
approximately NIS 105.1 million. The aggregate amount of interest that may or
may not be accruing to us pursuant to the deposit agreements as of December 31,
2004 is also NIS 95.2 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.
On September 28, 2004 various financial entities that hold our class C,
class CC and/or class CC1 shares filed with the Tel Aviv District Court an
originating motion in which the Court is requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until we last paid a dividend for the second quarter of 2002.
Our Board of Directors believes the aformentioned matter relating to
dividends is related to the question of whether, under the circumstances of a
non-distribution of dividends, interest on the perpetual deposits of the Bank
with the Israeli Treasury accrues in favor of the Bank. Since the responses
received as of the date of this annual report from the Ministry of Finance in
this matter have been unclear and insufficient, we filed an originating motion
with the Tel Aviv District Court seeking a declaratory judgment against the
State and the aformentioned financial entities which would provide that the
interest on the perpetual deposits is indeed accrued in favor of the Bank, as is
the position of our Board of Directors on this matter.
7
See Note 20 of the financial statements in Item 17 of this annual report
for additional details regarding this originating motion.
See Note 15 to our financial statements in Item 17 of this annual report
for details on the cessation of dividend distribution and the matter of the
accrued interest on the perpetual deposits with the Israeli Treasury.
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 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.
If the run-off plan were to be extended for an additional two years, as
noted above, it is unclear, as of the date of this annual report, to what extent
the terms of the special line of credit would be affected.
8
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 run-off plan, or its extension, 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.
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.
9
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.
10
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 ISRAEL, ADVERSE CHANGES AFFECTING
THE ISRAELI ECONOMY COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Our loan portfolio is concentrated in Israel. As of December 31, 2004,
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.
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.
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".
11
OUR MANAGEMENT HAS IDENTIFIED CERTAIN ISSUES RELATING TO THE PROCESSING AND
REPORTING OF INFORMATION AS REQUIRED BY THE RULES AND REGULATIONS OF THE SEC, AS
DESCRIBED MORE FULLY IN ITEM 15.
Our management has concluded that except as detailed in Item 15 below, our
disclosure controls and procedures were effective as of the end of the period
covered by this annual report. One of those issues mentioned in Item 15 is that
our system of financial reporting was not designed to reconcile, our financial
statements (which are prepared in accordance with Israeli GAAP) with U.S. GAAP
in accordance with the requirements of Form 20-F. To address this issue, our
accounting personnel have outlined the issues relevant to the reconciliation of
our financial statements to U.S. GAAP and the methods of preparing such a
reconciliation. In addition, we have retained U.S. counsel to advise as to the
requirements of Form 20-F and related SEC rules and regulations. In preparing
the reconciliation of our financial statements, our accounting personnel were
guided by the experience they acquired in the preparation of the annual report
for fiscal year ended December 31, 2003. 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. A discussion of these and other issues can also
be found in Item 15.
However, we cannot assure you that the measures we have taken to date or
any future measures will remediate the above issues or those identified in Item
15 of our annual report. In addition, we cannot assure you that additional
issues will not be discovered in the future. Any failure to remediate the above
issues or those identified in Item 15 could cause us to fail to meet our
reporting obligations.
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.
12
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 risks 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.
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.
13
The principal amount of our outstanding capital notes as of December 31,
2004 was $5,875,245.
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, 2004, was NIS
1,404 million.
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 winding
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.
14
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.
Our preferred ordinary shares, our C, CC, and CC1 shares and our capital
notes are traded on the Tel Aviv Stock Exchange (TASE). Pursuant to the rules
and procedures adopted by the 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 (the "preservation list") and, thereafter, is traded on
a limited basis. If within 12 months of being placed on the 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.
Our preferred ordinary shares, our C shares, CC shares, 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.
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;
15
(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.
Ongoing violence between Israel and the Palestinians as well as tension
between Israel and neighboring Syria and Lebanon may have a material adverse
effect on our remaining business, financial conditions or results of operations.
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.
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.
16
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 .On May 17, 2005, the
court decided to grant the motion of the above plaintiff for discovery of
documents and ordered us to produce most of the requested documents, including
minutes of the meetings of our Board of Directors and our credit committee,
audit reports of the Supervisor of Banks, and specific correspondence. We intend
to appeal this decision. We and the plaintiff have commenced a mediation
proceeding, and we have reserved our right to file an appeal in the event that
the mediation is not successful.
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.
The parties' witnesses were cross-examined on May 26, 2005 and a decision will
be announced after written summations are filed.
On June 1, 2005, we received notices from counsels to our insurers that
our insurers have reservations as to the validity of the insurance coverage for
these two actions and that they reserve their rights in this matter. The bank
categorically rejects these reservations and intends to act to exhaust its
rights against the insurers.
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 a substantial monetary judgment (the amount of which, in whole or in
part, may not be covered by our insurance coverage) and suffer damage to our
reputation. Whatever the outcome of these proceedings is, we could incur
substantial costs and we will expend a significant amount of time and attention.
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 including court costs, attorneys fees and special
remuneration to the plaintiff.
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.
17
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.
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 78% 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.
18
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.
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 million 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 and 2004 fiscal years and as of December 31, 2004, the balance of the
public's deposits with us had further declined to only NIS 405 million and as of
March 31, 2005 was NIS 345 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.
19
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.
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 6.2 billion as of December 31, 2004,
(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 brokers that were created after November 14, 2002.
20
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.
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.
21
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. We are involved in discussions with the relevant authorities regarding
extension of the run-off period for an additional two years.
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. (If the run-off plan were to be extended for an additional two years, as
noted above, it is unclear, as of the date of this annual report, to what
extent, if any, the terms of the special line of credit would be affected). 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.
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.
22
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 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).
NOTE - Some of the above terms, which are connected to our
activities, were approved for us until July 31, 2005.
The outstanding balance of the special line of credit from the Bank of
Israel, not including interest accrued but not yet charged, was NIS 2.12 billion
as of December 31, 2003, NIS 1.389 billion as of December 31, 2004 and NIS 1.20
billion, as of May 31, 2005.
23
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, 2004 is
NIS 70 million. As of the date of this annual report, the Bank of Israel has
declined our 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.
According to the Government of Israel's resolution to approve the run-off
plan, 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 1,826 million at
December 31, 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 almost
completely discontinued or completely discontinued the following activities: our
foreign currency and foreign trade activity, operating a foreign exchange
dealing room (for customers), operating current accounts and securities
accounts, execution of Government grants through the "Approved Enterprise"
status system, independently operating teller and clearing facilities and
issuing credit cards.
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.
24
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, was further reduced to 62 by December 31, 2004, and
was further reduced to 58 by May 31, 2005.
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 also took 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 in
order to reduce our 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 are implementing an aggressive policy in all matters relating
to collection of problematic debts, and in connection with such policy, we have
incurred significant collection costs and legal fees.
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 are involved in discussions with
the relevant authorities regarding extension of the run-off period for an
additional two years. 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. 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, 2004, 2003 and 2002.
25
AVERAGE BALANCE SHEETS AND INTEREST RATES (1)
2004 2003
------------------------------------ ----------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME INCOME AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES) BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ---------- ----------- --------- ---------
REPORTED AMOUNTS * ADJUSTED AMOUNTS **
------------------------ ---------- ---------------------- ---------
NIS MILLIONS % NIS MILLIONS %
------------------------ ---------- ---------------------- ---------
ISRAELI CURRENCY -
NON-LINKED
ASSETS
Credit to the Public 914.2 63.2 6.91 1,277.4 141.2 11.05
Credit to governments - - - 0.2 - 1.2
Deposits with Bank of Israel 10.8 0.1 0.93 11.2 0.1 1.13
Deposits with banks 16.1 0.8 4.97 8.0 0.8 9.49
Debentures 1.3 0.1 7.69 1.8 0.2 11.25
----------- ---------- ---------- ---------- --------- ---------
Total assets before effect
of derivatives 942.4 64.2 6.81 1,298.6 142.3 10.96
Effect of derivatives ALM (3) 524.3 34.4 6.56 674.0 66.7 9.90
----------- ---------- ---------- ---------
Total assets after effect
of derivatives 1,466.7 98.6 6.72 1,972.6 209.0 10.6
=========== ========== ========== ========== ========= =========
LIABILITIES
Deposits of the public 231.0 (10.8) (4.67) 239.0 (21.5) (8.99)
Deposits of Bank of Israel 1,715.6 (72.6) (4.23) 2,109.4 (219.0) (10.38)
Deposits of banks - - - - - -
----------- ---------- ---------- ---------- --------- ---------
Total liabilities 1,946.6 (83.4) (4.28) 2,348.4 (240.5) (10.24)
=========== ========== ========== ========== ========= =========
INTEREST MARGIN NOT
INCLUDING DERIVATIVES 2.53 0.72
INTEREST MARGIN INCLUDING
DERIVATIVES 2.44 0.36
ISRAELI CURRENCY - LINKED TO
THE CPI
ASSETS
Credit to the Public 923.0 60.9 6.59 1,237.0 61.2 4.95
Credit to governments 17.9 0.1 0.55 29.6 - -
Deposits with banks 25.7 1.6 6.22 31.9 1.4 4.46
Debentures 7.9 0.5 6.33 23.9 1.2 4.88
----------- ---------- ---------- ---------- --------- ---------
Total assets 974.5 63.1 6.48 1,322.4 63.8 4.82
=========== ========== ========== ========== ========= =========
LIABILITIES
Deposits of the public 221.2 (12.5) (5.65) 462.5 (20.0) (4.32)
Deposits of the Government 394.2 (12.9) (3.27) 578.4 (12.0) (2.08)
Deposits of banks 2.1 (0.1) (4.76) 54.3 (1.0) (1.8)
Debentures - - - - - -
----------- ---------- ---------- ---------- --------- ---------
617.5 (25.5) (4.13) 1,095.2 (33.0) (3.01)
Effect of derivatives ALM (3) 194.4 (8.9) (4.58) 88.8 (2.8) (3.15)
----------- ---------- ---------- ---------
Total liabilities 811.9 (34.4) (4.24) 1,184.0 (35.8) (3.02)
=========== ========== ========== ========== ========= =========
=========== ========== ========== ========== ========= =========
INTEREST MARGIN NOT
INCLUDING DERIVATIVES 2.35 1.81
INTEREST MARGIN INCLUDING
DERIVATIVES 2.24 1.80
2002
-----------------------------------
FINANCING RATE OF
AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ----------
ADJUSTED AMOUNTS **
----------------------- ----------
NIS MILLIONS %
----------------------- ----------
ISRAELI CURRENCY -
NON-LINKED
ASSETS
Credit to the Public 1,456.5 46.8 3.21
Credit to governments 1.8 (0.2) (11.11)
Deposits with Bank of Israel 59.2 (5.2) (8.79)
Deposits with banks 40.1 (2.7) (6.85)
Debentures 45.1 (2.0) (4.35)
---------- --------- ----------
Total assets before effect
of derivatives 1,602.7 36.7 2.29
Effect of derivatives ALM (3) 500.8 11.5 2.30
---------- ---------
Total assets after effect
of derivatives 2,103.5 48.2 2.29
========== ========= ==========
LIABILITIES
Deposits of the public 1,367.6 46.5 3.35
Deposits of Bank of Israel 632.3 (91.0) (14.4)
Deposits of banks 31.6 (0.1) (0.31)
---------- --------- ----------
Total liabilities 2,031.5 (44.6) (2.20)
========== ========= ==========
INTEREST MARGIN NOT
INCLUDING DERIVATIVES 0.09
INTEREST MARGIN INCLUDING
DERIVATIVES 0.09
ISRAELI CURRENCY - LINKED TO
THE CPI
ASSETS
Credit to the Public 1,758.9 75.6 4.30
Credit to governments 36.3 0.1 0.27
Deposits with banks 35.3 2.0 5.56
Debentures 52.6 2.7 5.04
---------- --------- ----------
Total assets 1,883.1 80.4 4.27
========== ========= ==========
LIABILITIES
Deposits of the public 1,027.0 (53.2) (5.18)
Deposits of the Government 644.2 (20.4) (3.17)
Deposits of banks 152.4 (8.6) (5.67)
Debentures - - -
---------- --------- ----------
1,823.6 (82.2) (4.51)
Effect of derivatives ALM (3) - - -
---------- ---------
Total liabilities 1,823.6 (82.2) (4.51)
========== ========= ==========
========== ========= ==========
INTEREST MARGIN NOT
INCLUDING DERIVATIVES (0.24)
INTEREST MARGIN INCLUDING
DERIVATIVES (0.24)
26
AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D) (1)
2004 2003
-------------------------------------- ---------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME INCOME AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES) BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ---------- ----------- ---------- ----------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
-------------------------- ---------- ------------------------- ----------
NIS MILLIONS % NIS MILLIONS %
-------------------------- ---------- ------------------------- ----------
FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public 7,071.6 400.6 5.66 7,609.8 149.6 1.97
Credit to governments 44.8 1.0 2.33 97.1 (2.3) (2.33)
Deposits with Bank of Israel 1.0 - - 13.7 (0.2) (1.28)
Deposits with banks 43.3 0.5 1.15 52.3 (1.5) (2.95)
Debentures 0.1 (0.1) (100.00) 1.7 0.2 10.86
----------- ---------- ---------- ----------- ---------- ----------
7,160.8 402.0 5.61 7,774.6 145.8 1.88
Effect of derivatives ALM (3) 127.2 16.9 13.29 179.1 6.7 3.73
----------- ---------- ----------- ----------
Total assets 7,288.0 418.9 5.75 7,953.7 152.5 1.92
=========== ========== ========== =========== ========== ==========
LIABILITIES
Deposits of the public 80.1 (0.7) (0.9) 146.1 2.2 1.48
Deposits of the Government 6,648.8 (372.1) (5.60) 6,793.5 (110.7) (1.63)
Deposits of banks 30.4 (2.6) (8.55) 154.2 4.7 3.10
----------- ---------- ---------- ----------- ---------- ----------
6,759.3 (375.4) (5.55) 7,093.8 (103.8) (1.46)
Effect of derivatives ALM (3) 457.1 (38.0) (8.31) 764.3 (28.5) (3.73)
----------- ---------- ----------- ----------
Total liabilities 7,216.4 (413.4) (5.73) 7,858.1 (132.3) (1.68)
=========== ========== ========== =========== ========== ==========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.06 0.42
INTEREST MARGIN INCLUDING DERIVATIVES 0.02 0.24
TOTAL
Monetary assets generating financial income 9,077.7 529.3 5.83 10,395.6 351.9 3.38
Effect of derivatives ALM (3) 651.5 51.3 7.87 853.1 73.4 8.62
----------- ---------- ----------- ----------
Total monetary assets generating financing
income 9,729.2 580.6 5.97 11,248.7 423.5 3.78
=========== ========== =========== ========== ==========
Monetary liabilities generating financing
expenses 9,323.4 (484.3) (5.19) 10,537.4 (377.3) (3.58)
Effect of derivatives ALM (3) 651.5 (46.9) (7.20) 853.1 (31.3) (3.69)
----------- ---------- ----------- ----------
Total liabilities generating financing expenses 9,974.9 (531.2) (5.33) 11,390.5 (408.6) (3.59)
=========== ========== =========== ========== ==========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.64 0.20
INTEREST MARGIN INCLUDING DERIVATIVES 0.64 0.19
2002
-------------------------------------
FINANCING RATE OF
AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ----------
ADJUSTED AMOUNTS **
----------------------- ----------
NIS MILLIONS %
------------------------ ----------
FOREIGN CURRENCY-DOMESTIC OPERATIONS (4)
ASSETS
Credit to the Public 8,793.0 650.6 7.4
Credit to governments 157.8 11.6 7.34
Deposits with Bank of Israel 105.4 3.3 3.17
Deposits with banks 107.0 8.5 7.88
Debentures 4.2 (0.1) (2.33)
----------- ---------- ----------
9,167.4 673.9 7.35
Effect of derivatives ALM (3) (500.8) (1.7) (0.33)
----------- ----------
Total assets 8,666.6 672.2 7.76
=========== ========== ==========
LIABILITIES
Deposits of the public 770.1 (49.9) (6.48)
Deposits of the Government 7,272.2 (564.1) (7.76)
Deposits of banks 550.5 (31.6) (5.74)
----------- ---------- ----------
8,592.8 (645.6) (7.51)
Effect of derivatives ALM (3) - - -
----------- ---------- ----------
Total liabilities 8,592.8 (645.6) (7.51)
=========== ========== ==========
INTEREST MARGIN NOT INCLUDING DERIVATIVES (0.16)
INTEREST MARGIN INCLUDING DERIVATIVES 0.25
TOTAL
Monetary assets generating financial income 12,653.2 790.9 6.25
Effect of derivatives ALM (3) 500.8 9.8
----------- ---------- ----------
Total monetary assets generating financing
income 13,154.0 800.7 6.33
=========== ========== ==========
Monetary liabilities generating financing
expenses 12,448.0 (772.5) (6.21)
Effect of derivatives ALM (3) 500.8 -
----------- ---------- ----------
Total liabilities generating financing expenses 12,948.0 (772.5) (6.21)
=========== ========== ==========
INTEREST MARGIN NOT INCLUDING DERIVATIVES 0.04
INTEREST MARGIN INCLUDING DERIVATIVES 0.12
27
AVERAGE BALANCE SHEETS AND INTEREST RATES (CONT'D) (1)
2004 2003
------------------------------------- -------------------------------------
FINANCING RATE OF FINANCING RATE OF
AVERAGE INCOME INCOME AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES) BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ---------- ----------- ---------- ----------
REPORTED AMOUNTS * ADJUSTED AMOUNTS**
------------------------ ---------- ------------------------- ----------
NIS MILLIONS % NIS MILLIONS %
------------------------ ---------- ------------------------- ----------
In respect of options 0.6 5.1
Financing commissions and other financing
income 27.8 59.3
Other financing expenses (11.6) (14.2)
---------- ----------
Financing income before allowance for
doubtful debts 66.2 66.9
Allowance for doubtful debts (including
general and supplementary provisions) (70.2) (130.0)
---------- ----------
Loss from financing operations after
allowance for doubtful debts (4.0) (63.1)
========== ==========
Other monetary assets 852.9 863.6
General and supplementary allowance for
doubtful debts (76.8) (83.7)
Non-monetary assets 74.3 63.1
---------- -----------
Total assets 9,928.1 11,238.6
========== ===========
Other monetary liabilities 90.3 136.7
Non-monetary liabilities 1.8 5.7
Capital resources 512.6 558.8
---------- -----------
Total liabilities and capital resources 9,928.1 11,238.6
========== ===========
2002
------------------------------------
FINANCING RATE OF
AVERAGE INCOME INCOME
BALANCE (2) (EXPENSES) (EXPENSES)
----------- ---------- ---------
ADJUSTED AMOUNTS **
----------------------- ---------
NIS MILLIONS %
------------------------ ---------
In respect of options 25.2
Financing commissions and other financing
income 41.8
Other financing expenses (15.8)
----------
Financing income before allowance for
doubtful debts 79.5
Allowance for doubtful debts (including
general and supplementary provisions) (401.8)
----------
Loss from financing operations after
allowance for doubtful debts (322.3)
==========
Other monetary assets 936.7
General and supplementary allowance for
doubtful debts (74.3)
Non-monetary assets 42.9
-----------
Total assets 13,558.5
===========
Other monetary liabilities 183.3
Non-monetary liabilities 10.4
Capital resources 916.8
-----------
Total liabilities and capital resources 13,558.5
===========
28
* For the year 2004, note that we discontinued the adjustment of our
financials for inflation according to the CPI of December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
FOOTNOTES:
(1) The data in this table is presented before and after the effect of
derivative instruments (including the off-balance sheet effect of
derivative instruments).
(2) Based on monthly opening balances except for the 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.
(3) Derivatives (ALM-Asset and Liability Management) which comprise part of he
Bank's 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.
29
The following table summarizes our assets and liabilities outstanding as of
December 31, 2004, 2003, and 2002:
IN MILLIONS OF NIS
---------------------
2004* 2003** 2002**
----- ------ ------
Total assets 9,078 10,356 12,274
Assets consisting of
credits to the public 7,993 9,190 10,908
Total liabilities 8,570 9,847 11,665
Liabilities consisting of
deposits 8,488 9,742 11,474
The following table shows the linkage basis (currency) breakdown of our credit
to the public outstanding as of December 31, 2004, 2003 and 2002:
IN MILLIONS OF NIS
--------------------
2004* 2003** 2002**
----- ------ ------
Non-linked Israeli currency 709 1,125 1,278
CPI linked Israeli currency 717 993 1,445
Dollar and linked thereto 6,450 6,903 7,913
Other foreign currency and linked thereto 117 169 272
----- ------ ------
TOTAL 7,993 9,190 10,908
===== ====== ======
* Reported Amounts
** Adjusted Amounts
30
INVESTMENT PORTFOLIO
The following table presents the book or market value of our investment
portfolio as of December 31 of 2000, 2001, 2002, 2003 and 2004:
IN MILLIONS OF NIS
------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- -----
Marketable Government bonds - - 0.1 163.0 171.0
Marketable other bonds 0.2 7.2 13.0 19.3 15.2
Non-marketable other bonds 3.5 7.9 19.3 16.6 -
Non-marketable shares 30.5 34.3 25.7 30.2 25.7
Marketable and available for sale shares 25.8 36.0 13.5 1.0 1.7
Trading shares - - - 8.0 7.7
---- ---- ---- ----- -----
Total 60.0 85.4 71.6 238.1 221.3
==== ==== ==== ===== =====
EQUITY HOLDINGS PORTFOLIO
The following table presents the book value of our investments in other
equity holdings as of December 31of 2000, 2001, 2002, 2003 and 2004:
IN MILLIONS OF NIS
-----------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Investments in related companies - - 0.9 1.4 2.6
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, 2004, the total credit to the public amounted to NIS
7,993 million compared with NIS 9,190 million as of December 31, 2003. 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 6,167 million as of December 31, 2004 compared
with NIS 6,405 million as of December 31, 2003. Net of such credit, the credit
to the public amounted to NIS 1,826 million as of December 31, 2004 compared
with NIS 2,785 million as of December 31, 2003 (a 34% decrease). The above
figures are after deduction of allowance for doubtful debts. This decrease
stemmed mainly from our policy to reduce our credit portfolio and was also
affected by the allowances for doubtful debts that were recorded in those years.
As of March 31, 2005, total credit to the public amounted to NIS 1,625 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 201 million (approximately 11%) compared to the
balance outstanding as of December 31, 2004.
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 2000-2001 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
REPORTED AMOUNTS*
DECEMBER 31, 2004
---------------------------------------------------------------------------------
ANNUAL BALANCE OF
EXPENSE FOR THE SPECIFIC
OFF-BALANCE TOTAL RISK OF THE SPECIFIC ALLOWANCE FOR
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR DOUBTFUL
CREDIT RISK (1)** RISK (2)** PUBLIC** DOUBTFUL DEBTS DEBTS(5)
----------------- ------------ ------------- -------------- -------------
IN MILLIONS OF NIS
---------------------------------------------------------------------------------
Agriculture 14.9 0.3 15.2 0.7 5.4
Industry 595.4 53.5 648.9 29.8 448.6
Construction and real estate 447.3 84.2 531.5 24.3 276.7
Electricity 6,341.9 4.6 6,346.5 2.6 20.8
Commerce 65.7 9.5 75.2 4.2 99.6
Restaurants and hotels 42.3 2.5 44.8 0.5 58.2
Transport and storage 32.4 - 32.4 - 4.1
Communications and computer services 44.2 0.1 44.3 (0.5) 46.5
Financial services 159.8 98.0 257.8 4.7 61.7
Other business services 127.3 2.3 129.6 10.6 55.5
Public and community services 184.9 1.2 186.1 1.1 113.7
Private households 9.7 - 9.7 1.1 1.7
----------------- ------------ ------------- -------------- -------------
TOTAL 8,065.8 256.2 8,322.0 79.1 1,192.5
================= ============ ============= ============== =============
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 291.5 5.6 297.1 (1.8)
Local authorities and entities
controlled by them 22.5 - 22.5 -
DECEMBER 31, 2004
---------------------------------------------------------
TOTAL RISK % OF SECTOR
BALANCE OF NET OF FROM TOTAL RISK
PROBLEMATIC GOVERNMENT GOVERNMENT NET OF GOVERNMENT
DEBTS (3)** GUARANTEES GUARANTEES GUARANTEES
----------- ---------- ---------- -----------------
IN MILLIONS OF NIS
---------------------------------------------------------
Agriculture 10.6 0.2 15 0.7%
Industry 331.4 5.3 643.6 30.0%
Construction and real estate 395.1 4.3 527.2 24.6%
Electricity 86.1 6,167.3 179.2 8.4%
Commerce 32.8 0.2 75 3.5%
Restaurants and hotels 35.1 - 44.8 2.1%
Transport and storage 0.2 - 32.4 1.5%
Communications and computer services 18.8 - 44.3 2.1%
Financial services 83.1 - 257.8 12.0%
Other business services 43.3 - 129.6 6.0%
Public and community services 88.8 - 186.1 8.7%
Private households 0.8 - 9.7 0.5%
----------- ---------- ---------- -----------------
TOTAL 1,126.1 6,177.3 2,144.7 100.00%
=========== ========== ========== =================
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 124.7
Local authorities and entities
controlled by them 1.9
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
(1) Credit to the public and investments in debentures of the public. There
are no other assets in respect of derivative instruments in relation to
the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
(5) Including allowance for interest on non-income bearing loans.
33
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS (CONT.)
ADJUSTED AMOUNTS*
DECEMBER 31, 2003
---------------------------------------------------------------------------------
ANNUAL BALANCE OF
EXPENSE FOR THE SPECIFIC
OFF-BALANCE TOTAL RISK OF THE SPECIFIC ALLOWANCE FOR
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR DOUBTFUL
CREDIT RISK (1)** RISK (2)** PUBLIC** DOUBTFUL DEBTS DEBTS(5)
----------------- ------------ ------------- -------------- -------------
IN MILLIONS OF NIS
---------------------------------------------------------------------------------
Agriculture 25.0 - 25.0 - 6.0
Industry 922.5 90.5 1,013.0 66.1 425.7
Construction and real estate 524.9 135.3 660.2 18.8 196.0
Electricity 6,575.2 17.7 6,593.9 1.2 2.1
Commerce 97.5 6.1 103.6 4.9 92.8
Restaurants and hotels 83.1 31.9 115.0 6.8 68.6
Transport and storage 90.5 0.2 90.8 0.1 3.3
Communications and computer services 93.5 8.8 102.3 7.8 46.3
Financial services 344.8 109.2 454.0 10.0 129.2
Other business services 264.9 2.8 267.7 6.7 35.2
Public and community services 233.8 1.3 235.1 11.5 103.9
Private households 27.5 0.8 28.2 - 1.3
----------------- ------------ ------------- -------------- -------------
TOTAL 9,283.2 404.6 9,688.8 133.9 1,101.4
================= ============ ============= ============== =============
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 345.7 5.4 351.1 10.2
Local authorities and entities
controlled by them 28.6 - 28.6 -
DECEMBER 31, 2003
---------------------------------------------------------
TOTAL RISK % OF SECTOR
BALANCE OF NET OF FROM TOTAL RISK
PROBLEMATIC GOVERNMENT GOVERNMENT NET OF GOVERNMENT
DEBTS (3)** GUARANTEES GUARANTEES GUARANTEES
----------- ---------- ---------- -----------------
IN MILLIONS OF NIS
---------------------------------------------------------
Agriculture 7.7 0.3 24.7 0.8
Industry 4713 20.1 992.9 30.5
Construction and real estate 433.8 4.5 655.7 20.1
Electricity 66.6 6,405.3 188.6 5.8
Commerce 47.3 - 103.6 3.2
Restaurants and hotels 77.0 2.5 112.5 3.5
Transport and storage 0.2 - 90.8 2.8
Communications and computer services 29.4 - 102.3 3.1
Financial services 121.1 - 454.0 13.9
Other business services 43.6 - 267.7 8.2
Public and community services 146.6 - 235.1 7.2
Private households 2.8 - 28.2 0.9
----------- ---------- ---------- -----------------
TOTAL 1,447.4 6,432.7 3,256.1 100.0
=========== ========== ========== =================
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 163.3
Local authorities and entities
controlled by them 1.9
* Amounts adjusted to the effect of inflation according to the CPI for
December 2003.
** The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
(1) Credit to the public and investments in debentures of the public. There
are no other assets in respect of derivative instruments in relation to
the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
(5) Including allowance for interest on non-income bearing loans.
34
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS (CONT.)
ADJUSTED AMOUNTS*
DECEMBER 31, 2002
---------------------------------------------------------------------------------
ANNUAL BALANCE OF
EXPENSE FOR THE SPECIFIC
OFF-BALANCE TOTAL RISK OF THE SPECIFIC ALLOWANCE FOR
BALANCE SHEET SHEET CREDIT CREDIT TO ALLOWANCE FOR DOUBTFUL
CREDIT RISK (1)** RISK (2)** PUBLIC** DOUBTFUL DEBTS DEBTS(5)
----------------- ------------ ------------- -------------- -------------
IN MILLIONS OF NIS
---------------------------------------------------------------------------------
Agriculture 35.7 0.2 35.9 0.3 5.7
Industry 1,506.4 219.2 1,725.6 112.4 344.9
Construction and real estate 558.3 210.1 768.4 74.4 120.8
Electricity 7,051.0 52.7 7,103.7 6.2 2.0
Water 0.2 - 0.2 - -
Commerce 137.8 15.8 153.6 20.3 71.6
Restaurants and hotels 95.4 32.7 128.1 22.8 44.7
Transport and storage 126.0 5.3 131.3 1.2 5.6
Communications and computer services 175.4 12.0 187.4 16.5 45.0
Financial services 521.3 216.1 737.4 82.7 79.8
Other business services 478.3 12.6 490.9 11.5 21.1
Public and community services 294.1 2.9 297.0 39.1 79.7
Private households 42.9 3.6 46.5 4.4 7.5
----------------- ------------ ------------- -------------- -------------
Total 11,022.8 783.2 11,806.0 391.6 828.4
================= ============ ============= ============== =============
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 464.2 41.4 505.6 19.3
Local authorities and entities
controlled by them 58.0 - 58.0 -
DECEMBER 31, 2002
---------------------------------------------------------
TOTAL RISK % OF SECTOR
BALANCE OF NET OF of TOTAL RISK
PROBLEMATIC GOVERNMENT GOVERNMENT NET OF GOVERNMENT
DEBTS (3)** GUARANTEES GUARANTEES GUARANTEES
----------- ---------- ---------- -----------------
IN MILLIONS OF NIS
---------------------------------------------------------
Agriculture 12.8 2.1 33.8 0.7
Industry 517.9 80.1 1,645.5 34.3
Construction and real estate 331.0 4.8 763.6 15.9
Electricity 19.5 6,919.8 183.9 3.8
Water - - 0.2 -
Commerce 58.9 4.5 149.1 3.2
Restaurants and hotels 110.4 - 128.1 2.7
Transport and storage 47.7 - 131.3 2.7
Communications and computer services 59.9 - 187.4 3.9
Financial services 92.6 - 737.4 15.4
Other business services 46.5 - 490.9 10.2
Public and community services 145.4 - 297.0 6.2
Private households 9.2 - 46.5 1.0
----------- ---------- ---------- -----------------
Total 1,451.8 7,011.3 4,794.7 100.0
=========== ========== ========== =================
Credit risk included in the
various industry sectors:
Agricultural settlement movements (4) 214.5
Local authorities and entities
controlled by them 4.3
* Amounts adjusted to the effect of inflation according to the CPI for
December 2003.
** The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
(1) Credit to the public and investments in debentures of the public. There
are no other assets in respect of derivative instruments in relation to
the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
(5) Including allowance for interest on non-income bearing loans.
35
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS (CONT.)
ADJUSTED AMOUNTS*
DECEMBER 31, 2001
-------------------------------------------------------------------------------------------
ANNUAL BALANCE OF
EXPENSE FOR THE SPECIFIC
BALANCE SHEET OFF-BALANCE TOTAL RISK OF THE SPECIFIC ALLOWANCE FOR BALANCE OF
CREDIT RISK SHEET CREDIT CREDIT TO ALLOWANCE FOR DOUBTFUL PROBLEMATIC
(1)** RISK (2)** PUBLIC** DOUBTFUL DEBTS DEBTS (5) 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
---------------------------------------
% OF SECTOR
TOTAL RISK OF TOTAL RISK
NET OF NET OF
GOVERNMENT GOVERNMENT 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
* Amounts adjusted to the effect of inflation according to the CPI for
December 2003.
** The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
(1) Credit to the public and investments in debentures of the public. There
are no other assets in respect of derivative instruments in relation to
the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
(5) Including allowance for interest on non-income bearing loans.
36
CREDIT TO THE PUBLIC - ANALYSIS OF OVERALL RISK BY BUSINESS SEGMENTS (CONT.)
ADJUSTED AMOUNTS*
DECEMBER 31, 2000
-------------------------------------------------------------------------------------------
ANNUAL BALANCE OF
EXPENSE FOR THE SPECIFIC
BALANCE SHEET OFF-BALANCE TOTAL RISK OF THE SPECIFIC ALLOWANCE FOR BALANCE OF
CREDIT RISK SHEET CREDIT CREDIT TO ALLOWANCE FOR DOUBTFUL PROBLEMATIC
(1)** RISK (2)** PUBLIC** DOUBTFUL DEBTS DEBTS(5) 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
----------------------------------------
% OF SECTOR
TOTAL RISK OF TOTAL RISK
NET OF NET OF
GOVERNMENT GOVERNMENT 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
* Amounts adjusted to the effect of inflation according to the CPI for
December 2003.
** The credit risk and the balance of problematic debts are presented net of
the specific allowance for doubtful debts.
(1) Credit to the public and investments in debentures of the public. There
are no other assets in respect of derivative instruments in relation to
the public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
(5) Including allowance for interest on non-income bearing loans.
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, 2004. In this table, the
future cash flows in respect of assets and liabilities are presented according
to linkage base, in accordance with the remaining period to the contractual
maturity date of each cash flow.
IN MILLIONS OF NIS
------------------------------------------------------------
LINKAGE UP BETWEEN BETWEEN 6 BETWEEN MORE
BASIS TO 3 3 AND AND 1 AND THAN
MONTHS 6 MONTHS 12 MONTHS 5 YEARS 5 YEARS TOTAL
------ -------- --------- ------- ------- --------
Non-Linked Israeli currency 563.4 24.0 58.3 99.4 11.2 756.3
CPI-linked Israeli Currency 34.1 33.2 66.4 416.0 391.6 941.3
Foreign Currency and linked thereto 232.4 197.1 354.2 2,604.6 8,006.6 11,394.9
------ -------- --------- ------- ------- --------
TOTAL 829.4 254.3 478.9 3,120.0 8,409.4 13,095.5
====== ======== ========= ======= ======= ========
o Balances of current accounts and credits which have matured are
included in the up to 3 months category.
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 (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):
(IN NIS MILLIONS) (AS OF DECEMBER 31)
---------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -----
Non income bearing 400.2 571.6 589.3 427.7 164.3
Restructured (2) 108.3 34.7 62.4 93.6 278.1
Designated for restructuring (3) 24.3 54.2 16.8 32.1 6.6
Temporarily in arrears 117.9 102.4 130.2 60.0 266.7
Under special supervision* 353.8 497.2 464.6 656.0 124.2
------- ------- ------- ------- -----
Total balance sheet credit to
problematic borrowers (1) 1,004.5 1,260.1 1,263.3 1,269.4 839.9
======= ======= ======= ======= =====
Off-balance sheet credit risk in
respect of problematic borrowers (1) 121.6 187.2 188.4 82.2 76.2
Debentures of problematic borrowers - 0.1 0.2 0.4 -
------- ------- ------- ------- -----
Overall credit risk in respect of
problematic borrowers (1) (4) 1,126.1 1,447.4 1,451.9 1,352.0 916.1
======= ======= ======= ======= =====
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 116.1 million as of December 31, 2004 in respect of debts
for which a specific allowance exists (NIS 136.1 million as of December
31, 2003 and NIS 237.5 million as of December 31, 2002).
(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, 2004 was NIS 59 million, in comparison to
NIS 73 million for the year ending December 31, 2003, and NIS 65 million for the
year ending December 31, 2002.
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, 2004, 2003, 2002,
2001, and 2000:
IN MILLIONS OF NIS
- -----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------
Reported
Amounts Adjusted Amounts
- -----------------------------------------------------------------------------------
Credit risk exposure to
the largest six
borrowers/borrower groups* 542.3 595.5 783.0 1,046.9 698.5
- -----------------------------------------------------------------------------------
Total credit to the
public** 7,993.4 9,189.6 10,908.1 12,223.3 11,426.6
- -----------------------------------------------------------------------------------
Percentage of the
borrower/borrower group of
the total credit to the
public 6.8% 6.5% 7.2% 8.6% 6.1%
- -----------------------------------------------------------------------------------
* 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 to a certain
governmental entity, 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, for each of the above
years, was as follows:
o December 31, 2004*- NIS 6,167.3 million
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
* Reported Amounts
** Adjusted Amounts
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:
- ----------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
IN IN IN IN IN
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
OF NIS % OF NIS % OF NIS % OF NIS % OF NIS %
- ----------------------------------------------------------------------------------------------------------------------
Agriculture 0.7 1 - - 0.3 - 1.3 1 1.6 5
Industry 29.8 38 66.1 49 112.2 29 35.4 33 13.0 41
Construction and real estate 24.3 31 18.8 14 74.4 19 26.8 25 2.9 9
Electricity 2.6 3 1.2 1 6.2 2 - - - -
Commerce 4.2 5 4.9 4 20.3 5 9.5 9 6.8 22
Restaurants and hotels 0.5 1 6.8 5 22.8 6 5.6 5 0.5 2
Transport and storage - - 0.1 - 1.2 - - - 0.7 2
Communications and computer
services (0.5) (1) 7.8 6 16.5 4 12.2 11 (0.5) (2)
Financial services 4.7 6 10.0 7 82.7 21 3.6 3 - -
Other business services 10.6 14 6.7 5 11.5 3 3.6 3 0.2 1
Public and community services 1.1 1 11.5 9 39.1 10 9.9 9 6.1 19
Private households 1.1 1 - - 4.4 1 0.5 1 0.3 1
TOTAL 79.1 100 133.9 100 391.6 100 108.4 100 31.6 100
---- --- ----- --- ----- --- ----- --- ---- ---
Credit risk included in the various
industry sectors:
Agricultural settlement
movements (1.8) 10.2 8 19.3 5 19.7 18 4.3 14
Local authorities - - - - - - - - - -
41
DEPOSITS
The following tables provide an analysis of the maturity of deposits as of
December 31, 2004. In the tables above the future cash flows in respect of
assets and liabilities are presented according to linkage base, in accordance
with the remaining period to the contractual maturity date of each cash flow.
DEPOSITS OF THE PUBLIC AS OF DECEMBER 31,2004
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 61.6 34.0 98.4 7.9 201.9
CPI-linked Israeli Currency 12.2 31.2 33.9 85.0 162.3
Foreign Currency and linked thereto 47.2 5.4 5.8 - 58.4
DEPOSITS OF THE GOVERNMENT AS OF DECEMBER 31,2004
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 10.8 10.8 21.6 369.1 412.3
Foreign Currency and linked thereto 132.4 154.7 316.6 10,452.6 11,056.3
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 regular 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, 2002. 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, and by December 31, 2004, to only NIS 405 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, 2004, we had a profit of NIS 1.4
million, compared with a loss of NIS 104.4 million in 2003. Our losses from
financing operations after allowance for doubtful debts in 2004 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 66.2 million as of December 31, 2004 compared
to NIS 70.1 million in the previous year. Our after-tax profit from ordinary
operations amounted to NIS 1.2 million in 2004 compared to a loss of NIS 103.9
million in 2003.
43
A. OPERATING RESULTS
For the fiscal year ended December 31, 2004, we had a profit of NIS 1.4
million, compared with a loss of NIS 104.4 million in 2003 and a loss of NIS
423.5 million in 2002. The profit was derived in part from gains on investments
in shares in the amount of NIS 41.5 million in 2004, compared with NIS 10.3
million in 2003.
Our total balance sheet as of December 31, 2004 amounted to NIS 9,078
million as compared to NIS 10,356 million at December 31, 2003 and NIS 12,274
million as of December 31, 2002. Credit to the public amounted to NIS 7,993
million, which represented approximately 88.0% of our total balance sheet.
Our profits from financing operations before the provision for doubtful
debts amounted to NIS 66.2 million as of December 31, 2004 compared to NIS 70.1
million in 2003 and NIS 79.5 million in 2002. Our after-tax profit from ordinary
operations amounted to NIS 1.2 million in 2004 compared to a loss of NIS 103.9
million in 2003 and a loss of NIS 429.5 in 2002. The decrease in profits from
financing operations resulted mainly from the following:
- - THE DECREASE IN THE VOLUME OF OUR FINANCING ACTIVITY. The balance of
credit to the public (not including credit out of deposits of the State
and guaranteed by the State) as of December 31, 2004 totaled NIS 1,828
million, compared with NIS 2,785 million at December 31, 2003 and NIS
3,984 million at December 31, 2002. The average balance of credit to the
public in 2004, which is included in the tables on the rates of financing
income and expenses, amounted to NIS 2,552 million compared with NIS 3,658
million in 2003, a decrease of NIS 1,106 million or 31% in the average
balance of credit to the public.
- - THE DECREASE IN OFF-BALANCE SHEET ACTIVITY. Concurrent with the decrease
in volume of assets, there was also a decrease in the volume of
off-balance sheet activity. The balance of guarantees issued by us was NIS
296 million on December 31, 2004, compared with NIS 419 million on
December 31, 2003, and NIS 570 million at December 31, 2002.
- - THE IMPLEMENTATION OF KIBBUTZ DEBT ARRANGEMENT. The profit from financing
operations for 2003 includes income of NIS 26.5 million which derives from
the implementation of the arrangement signed in 1996 between the Bank and
the Treasury, in respect of the repayment of Treasury deposits as
stipulated by the complementary arrangement for the debts of the
Kibbutzim. According to that arrangement (signed among the banking system,
the Treasury and the Kibbutzim), the banks were required to refund to the
Treasury a part of the deposits received by them according to the original
Kibbutz debt arrangements ("the Kibbutz arrangement deposits") which were
designated to serve as a source for the rescheduling of the Kibbutz debts.
The 1996 arrangement stipulated that in consideration for the refund of
the deposits we would be entitled to compensation because the deposits
carried interest at a rate lower by 1% than the interest paid on similar
deposits by the other banks. In the fourth quarter of 2003, we refunded to
the Treasury (in accordance with the complementary arrangement) an amount
of NIS 171 million out of the Kibbutz arrangement deposits, and
accordingly received compensation under the 1996 arrangements, in the
amount of NIS 26.5 million.
44
On the other hand the decrease in the profit from financing
operations was offset by the following factors:
- - Cost of the credit facility from the Bank of Israel - Commencing on August
20, 2002, we needed a credit facility from the Bank of Israel. The
interest that was established for this credit line, until July 29 2003,
was significantly higher than the interest we paid on the deposits which
the credit line replaced. Until that date, we were charged interest at the
Bank of Israel Rate plus 3%. In respect of excess overdrawing from the
credit line, we were charged interest at the rate of 48% (adjusted
interest of 61%).
Interest charges in respect of the credit line in 2003 were higher by NIS
36 million than the interest paid on the deposits that the credit line
replaced. As stated above, as from July 29, 2003, the interest rate paid
on the credit line was reduced, and we are now being charged the Bank of
Israel Interest Rate. In 2004 the average balance of the credit line was
NIS 1,716 million, compared with an average balance of NIS 2,146 million
in 2003.
- - Our continued policy of raising interest rates on credit.
TOTAL ASSETS
Our total assets as of December 31, 2004 decreased to NIS 9,078 million as
compared to NIS 10,356 million as of December 31, 2003. The main component of
the net change in the total assets was the reduction of our credit portfolio,
which decreased from NIS 9,190 million as of December 31, 2003 to NIS 7,993
million as of December 31, 2004 (a decrease of 13%). The above figures include a
state guaranteed credit (NIS 6,167 million as of December 31, 2004 and NIS 6,405
million as of December 31, 2003), that was granted out of a deposit that was
deposited with us by the State of Israel for that purpose.
TOTAL LIABILITIES
Our total liabilities as of December 31, 2004 decreased to NIS 8,570
million as compared to NIS 9,847 million as of December 31, 2003. The main
component of the net change in the total liabilities was the reduction of our
deposits, which decreased from NIS 9,742 million as of December 31, 2003 to NIS
8,488 million as of December 31, 2004 (12.9% 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
6,405 million as of December 31, 2003 and NIS 6,167 millions as of December 31,
2004.
45
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 942 million compared with NIS 1,299 million in 2003, a decrease
of 27.5%. The margin in this segment, including the effect of derivatives, was
2.44% in 2004, compared with 0.36% in 2003.
It should be noted that most of the non-income bearing loans are included
in this segment and that the increase in the margin of this segment was affected
by the decrease in the interest rate on the special credit line and the decline
in market interest rates in 2004 (which reduced the volume of accrued interest
on the non-income bearing debt that was not recorded in the statement of
income).
CPI LINKED SHEKEL SEGMENT. The average balance of assets in this segment
amounted to NIS 974 million compared with NIS 1,322 million in 2003, a decrease
of 26.3%. The decline in volume of operations in this segment derives both from
the general decline in our operations and from our policy which generally
provided that credit that we renew is for short periods and mainly in the
non-linked shekel segment. The margin in this segment, including the effect of
derivatives, was 2.24% in 2004, compared with 1.80% in 2003. The improvement in
this margin is due to a decrease in the volume of non-income bearing loans in
this segment, because of the said debt being transferred mainly to the
non-linked shekel segment.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT. The total average volume
of assets in this segment amounted in 2004 to NIS 7,161 million compared with
NIS 7,775 million in 2003, a decrease of 7.9%. Credit in this segment includes
credit guaranteed by the State and granted to a certain Government corporation
out of a deposit of the State. The margin in respect of this credit is
negligible and matches the level of risk attached to this credit. Excluding the
credit, the average balance of assets in this segment amounts to NIS 636
million, compared with NIS 1,137 million in 2003, a decrease of 44.0%. The
margin in this segment, including the effect of derivatives, was 0.02% in 2004,
compared with 0.24% in 2003. The low margin rate in this segment is the result
of the volume of State guaranteed credit, as stated above.
With respect to the profit from financing operations, it should be
emphasized that our policy of reducing our activities and the continuous
decrease in the volume of credit will cause the profit from financing operations
to continue to decrease.
OPERATING INCOME AND EXPENSE
OPERATING AND OTHER INCOME. Operating and other income amounted to NIS 50.2
million in 2004, compared with NIS 22.3 million in 2003. Most of the income
derived from gains on investments in shares in the amount of NIS 41.5 million in
2004, compared with NIS 10.3 million in 2003. This increase was partly offset by
the decline in income from operating commissions which is due to the decline in
transactions made by customers through our Bank. Income from operating
commissions in 2004 amounted to NIS 4.1 million compared with NIS 6.5 million in
2003.
46
OPERATING AND OTHER EXPENSES. Operating and other expenses amounted to NIS 45.0
million in 2004, compared with NIS 64.7 million in 2003. Beginning with 2002 the
operating expenses included provisions related to the retirement of employees
following the approval of the run-off plan. In 2004 the financial statements
included income in respect of this component. The income recorded in respect of
staff retirement derives from a re-evaluation made by our Board of Directors,
which resulted in a reduction in the provision made in respect of the period in
which the services of the Chairman of the Board, the General Manager and the
Deputy General Manager may no longer be required. The reduction amounted to NIS
1.7 million. On the other hand, the allowance in respect of employees included
in the retirement plan was increased by the amount of NIS 0.9 million, so that
the net income amounted to NIS 0.8 million. Excluding this item, operating
expenses in 2004 amounted to NIS 45.8 million compared with NIS 64.7 million in
2003, a decrease of 29% in operating expenses.
Salary expenses, not including employee retirement costs, totaled NIS 19.7
million in 2004, compared with NIS 33.7 million in 2003, a decrease of 42%. The
decrease in salary expenses was affected by the decrease in the number of staff
in accordance with the run off plan and the efficiency measures complementing
it. At the beginning of 2003, we reduced salaries. These measures continued to
be in effect in 2004, although some of the reductions were cancelled as of the
beginning of 2005. The decline in salary expenses is expected to continue due to
the continued reduction in manpower.
The provision for taxes on our income, 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". Due to losses for the purpose of VAT on profit, payroll
VAT that is usually levied on a financial institution pursuant to the above law,
in an amount which totaled NIS 3.0 million was not included in salary expenses
in 2004, compared to NIS 5.1 million in 2003, due to a recording of a payroll
VAT receivable.
At the end of the third quarter of 2003, we relocated to office premises
at a much lower rent than that paid for the previous offices. The reduced rental
payments are fully reflected in 2004 whereas in 2003 the savings were only
reflected in the last quarter of the year.
Other operating expenses amounted to NIS 20.4 million, compared with NIS
20.7 million in 2003. In most of the components of this item there was a
significant decrease, which was offset by the increase in insurance expense and
collection and legal fees. In 2004, this item included expenses relating to the
preparation of the annual report in the United States for 2003 and the auditing
related to that report.
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, as of December 31, 2004:
Deposits from the public: 5%
Deposits from banks: 0%
Treasury: 78%
Deposits from Bank of Israel: 17%
The balance of the special line of credit (principal and interest) as of
December 31, 2004 was NIS 1,404 million, as compared to NIS 2,091 million as of
December 31, 2003, a decline of NIS 689 million. 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 2004, was as follows:
IN MILLIONS OF NIS
- --------------------------------
1st Quarter- 1,903
2nd Quarter- 1,763
3rd Quarter- 1,513
4th Quarter- 1,404
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 405 million on December 31, 2004,
compared with NIS 620 million on December 31, 2003, a decrease of 35%. These
deposits are comprised of non-linked shekel deposits in the amount of NIS 198
million, compared with NIS 238 million at December 31, 2003, CPI-linked deposits
in the amount of NIS 149 million, compared with NIS 275 million at December 31,
2003, and foreign currency denominated or linked deposits in the amount of NIS
58 million, compared with NIS 107 million at December 31, 2003. Government
deposits as of December 31, 2004 amounted to NIS 6,655 million, compared with
NIS 6,949 million on December 31, 2003. 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 6,282 million on December 31, 2004, compared with NIS
6,545 million at the end of 2003. The decrease in foreign currency Government
deposits results mainly from the erosion in the exchange rate of the US dollar.
Another component of these deposits are the CPI-linked deposits, received
as part of the arrangement of the Kibbutzim. These deposits served as a source
for rescheduling the debts of the kibbutzim. The balance of the Government's
CPI-linked deposits as of December 31, 2004 amounted to NIS 372 million,
compared with NIS 404 million as of December 31, 2003. These deposits are
long-term deposits that are repaid in installments according to the period for
which the arrangement loans were provided (until the end of 2013).
Deposits from banks as of December 31, 2004 amounted to NIS 1,428 million,
compared with NIS 2,173 million at December 31, 2003. Of this amount, an amount
of NIS 1,404 million derived from the special credit line, which the Bank of
Israel granted to the Bank, compared with NIS 2,091 million as at December 31,
2003. These figures indicate a decrease of NIS 687 million in the utilized
credit line. Other than the Bank of Israel credit line, the aforementioned item
also includes a deposit in the amount of NIS 24 million which is a long-term
deposit of a foreign bank that was deposited with the Bank in the 1990s. This
deposit was deposited by the Bank with the Treasury and has the same repayment
dates as the aforementioned deposit.
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, 2004 amounted to approximately NIS 95
million, compared to NIS 115 million as of December 31, 2003, a decline of
approximately NIS 20 million.
49
CASH AND DEPOSITS WITH BANKS. The balance of our deposits with banks amounted to
approximately NIS 117.9 million, as of December 31, 2004, compared with
approximately NIS 143.9 million as of December 31, 2003.
The balance of our deposits with banks as of December 31, 2004 was
comprised as follows:
o NIS 12.6 million deposits with the Bank of Israel.
o NIS 82.8 million short-term deposits with other banks in Israel and
abroad. (This amount includes approximately NIS 13.5 million, as of
December 31, 2004, 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 22.5 million long-term CPI-linked deposits.
Cash flow from current operations in 2004 showed a surplus of
approximately NIS 27 million.
Cash flow from asset operations in 2004 shows a decline in the assets in
an amount equal to approximately NIS 1,219 million, resulting primarily from a
decline in loans, which was approximately NIS 1,125 million.
Cash flow from liabilities in 2004 showed a decline of approximately NIS
1,267 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
2004 was NIS 689 million less than at the end of 2003, which indicates that,
during the course of 2004, 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 the liabilities
and the significant reduction of the outstanding balance.
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.
50
EQUITY CAPITAL
Our Equity Capital as of December 31, 2004 was equal to NIS 199 million.
The Capital Sum, including Non-Participating shares, amounts to approximately
NIS 508 million representing approximately 5.60% of the balance sheet total
CAPITAL ADEQUACY
On December 31, 2004, our minimum capital ratio was 0.64% compared with a
negative ratio (0.28%) on December 31, 2003. 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, almost all of our "second tier capital" remains unutilized in the
calculation of the minimum capital ratio (thus, as at December 31, 2004, "second
tier capital" in the total amount of NIS 532 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, 2004, 2003 and 2002:
2004
--------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------------- -------------- -------
REPORTED AMOUNTS*
--------------------------------------------
NIS MILLIONS
--------------------------------------------
Balance of allowance at beginning of year 732.5 78.5 811.0
------------- -------------- -------
Current allowances 96.5 3.4 99.9
Reduction in allowances (16.5) (12.3) (28.8)
Collection of debts written-off in previous years (0.9) - (0.9)
------------- -------------- -------
Amount charged to the income statement 79.1 (8.9) 70.2
------------- -------------- -------
Debts written-off (98.1) - (98.1)
------------- -------------- -------
Balance of allowance at end of year 714.4 69.6 784.0
============= ============== =======
Amount of allowance not deducted from credit to
public 0.9 0.9 1.8
------------- -------------- -------
51
2003
--------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------------- -------------- -------
ADJUSTED AMOUNTS**
--------------------------------------------
NIS MILLIONS
--------------------------------------------
Balance of allowance at beginning of year 617.3 82.4 699.7
------------- -------------- -------
Current allowances 144.3 3.5 147.8
Reduction in allowances (10.4) (7.4) (17.8)
------------- -------------- -------
Amount charged to the income statement 133.9 (3.9) 130.0(3)
------------- -------------- -------
Debts written-off or transferred (31.3) - (31.3)
Erosion and inflationary adjustments 12.6 - 12.6
------------- -------------- -------
Balance of allowance at end of year 732.5 78.5 811.0
============= ============== =======
Amount of allowance not deducted from credit to
public 1.5 0.9 2.4
------------- -------------- -------
2002
--------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------------- ------------- -------
ADJUSTED AMOUNTS*
--------------------------------------------
NIS MILLIONS
--------------------------------------------
Balance of allowance at beginning of year 250.9 72.2 323.1
------------- ------------- -------
Current allowances 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
Debts written-off (8.8) - (8.8)
Erosion and inflationary adjustments (16.4) - (16.4)
------------- ------------- -------
Balance of allowance at end of year 617.3 82.4 699.7
============= ============= =======
Amount of allowance not deducted from credit to
public 20.2 - 20.2
------------- ------------- -------
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel directives
in the total amount of NIS 38.9 million (as of December 31, 2003 - NIS
38.9 million; as of December 31, 2002 - NIS 38.9 million).
(3) Amount of NIS 129.8 million was recorded in the statement of income in
reported amounts.
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
52
The following table summarizes the balance of overall credit risk of
problem loans in 2004, 2003 and 2002 and the allowance for doubtful debts
relating to them:
AS OF DECEMBER 31-in millions of NIS
-------------------------------------
2004 2003 2002
------- ------- -------
Overall Credit Risk of
Problem Loans 1,126.1 1,447.4 1,451.9
Annual Expense for
Allowance for Doubtful
Debts 70.2 129.8 401.8
Percentage of Annual
Expense for Allowances
for Doubtful Debts out
of Overall Credit of
Problem Loans 6.2% 9.0% 27.7%
C. OFF-BALANCE SHEET ARRANGEMENTS (GUARANTEE ARRANGEMENTS AND OTHER
COMMITMENTS).
In the normal course of our business, prior to the liquidity crisis we
experienced in the third quarter of 2002, we engaged 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 the balances these arrangements as of
December 31, 2004 and 2003:
DECEMBER 31 DECEMBER 31
2004 2003
----------- -----------
IN MILLIONS OF NIS
-------------------------
TRANSACTIONS THE BALANCE OF WHICH
REPRESENTS A CREDIT RISK -
Guarantees securing credit 179.9 251.0
Guarantees to home purchasers 91.0 112.2
Other guarantees and liabilities 25.1 55.5
Letters of credit 2.9 17.6
Unutilized revolving credit facilities 0.3 5.9
Irrevocable commitments to grant
credit facilities, approved but not yet executed 0.8 13.8
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 MILLIONS OF NIS
------------------ ------------------
2004 2003
---- ----
Income from guarantees issued
by us 3.0 4.3
Income from letters of credit
issued by us - 0.3
Expenses on guarantees issued
in our favor 0.1 0.6
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 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 3.3 million, NIS 2.4 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 2.3 million.
Between 1998-2001, we entered into agreements to participate in private
investment funds. The total amount approved for investment by us amounts to
US$20 million. The investment funds invest in Israeli companies or companies
related to Israel and in high-tech companies. The majority of the investments
made by these funds is in the credit component. The balance of this undertaking
as of December 31, 2004, amounts to US$ 6.9 million.
54
DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (Asset and Liability
Management(1))
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------- -------------------------------------
CPI/SHEKEL FOREIGN CURRENCY CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACTS INTEREST CONTRACTS CONTRACTS
------------------ ---------------- ------------------ ----------------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
------------------------------------- -------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------------------------------- -------------------------------------
Options purchased - 36.2 - 18.2
Forward contracts 145.0 343.9 235.0 658.3
------------------ ---------------- ------------------ ----------------
Total 145.0 380.1 235.0 676.5
================== ================ ================== ================
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------- -------------------------------------
CPI/SHEKEL FOREIGN CURRENCY CPI/SHEKEL FOREIGN CURRENCY
INTEREST CONTRACTS CONTRACTS INTEREST CONTRACTS CONTRACTS
------------------ ---------------- ------------------ ----------------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
------------------------------------- -------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------------ ---------------- ------------------ ----------------
Gross positive fair value 1.4 9.5 4.6 3.3
Gross negative fair value 0.1 2.4 - 1.7
------------------ ---------------- ------------------ ----------------
Total 1.3 7.1 4.6 5.0
================== ================ ================== ================
(1) Derivatives comprising part of the asset and liability management of the
Bank, not designed for hedging purposes.
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
55
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO THE
CONTRACT
DECEMBER 31, 2004
---------------------------------
REPORTED AMOUNTS*
---------------------------------
NIS MILLIONS
---------------------------------
BANKS CENTRAL BANKS TOTAL
----- ------------- -----
Gross positive fair value of derivative
instruments 1.4 9.5 10.9
Off-balance sheet credit risk in respect
of derivative instruments (2) 25.7 26.8 52.5
----- ------------- -----
Total credit risk in respect of derivative
instruments 27.1 36.3 63.4
===== ============= =====
DECEMBER 31, 2003
--------------------------------------
ADJUSTED AMOUNTS**
--------------------------------------
NIS MILLIONS
--------------------------------------
CENTRAL
BANKS BANKS OTHERS 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
individual borrower indebtedness.
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
56
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2004
----------------------------------------------
REPORTED AMOUNTS*
----------------------------------------------
FROM 3
UP TO MONTHS
3 MONTHS TO 1 YEAR TOTAL
------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------
CPI/Shekel interest contracts 25.0 120.0 145.0
Foreign currency contracts 380.1 - 380.1
------------ ------------ ------------
Total 405.1 120.0 525.1
============ ============ ============
DECEMBER 31, 2003
----------------------------------------------
ADJUSTED AMOUNTS**
----------------------------------------------
FROM 3
UP TO 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
============ ============ ============
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
Since we currently enter into these transactions in derivative financial
instruments with other banks that have high credit ratings, the credit risk
involved in these transactions is relatively small.
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 1.8 million in 2004 compared with NIS 2.4 million for 2003
and 20.2 for 2002.
57
MATURITY PROFILE OF OUR CONTRACTUAL OBLIGATIONS
The following table sets forth as of December 31, 2004 the maturity
profile of our contractual obligations.
As of December 31, 2004
Payments Due by Period
in millions of NIS
-------------------------------------------------------------
CONTRACTUAL LESS WITHOUT
CASH THAN 1 4-5 OVER MATURITY
OBLIGATIONS TOTAL YEAR 1-3 YEARS YEARS 5 YEARS DATE
-------- ------- --------- ------- ------- --------
Senior Debt 1,434.0 80.0 - - - 1,354.0*
Subordinated Debt 12,001.1 1,004.5 1,463.2 1,335.5 8,146.1 51.8
-------- ------- ------- ------- ------- --------
Total Contractual Cash
Obligations 13,435.1 1,084.5 1,463.2 1,335.5 8,146.1 1,405.8
======== ======= ======= ======= ======= ========
CONTINGENT LIABILITIES
AND COMMITMENTS
Lease Agreement 1.5 0.9 0.6 - - -
IT Outsource Contract 5.7 3.3 2.4 - - -
Stated Amount of
Derivative Instruments 525.1 525.1 - - - -
-------- ------- ------- ------- ------- --------
Total Contingent
Liabilities and
Commitments 532.3 529.3 3.0 - - -
======== ======= ======= ======= ======= ========
*The balance includes the credit line amount provided by the 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 the Bank of Israel. Since from this date a downward trend was not
determined for the credit line, its amount at the above date was included in
the "Without maturity date" column. The Bank of Israel has the right to demand
an early repayment of the credit line.
In the above table, the future cash flows are presented in respect of the
liabilities in accordance with the remaining period to the contractual maturity
date of each cash flow.
58
Out of the total contractual cash obligations set forth in the table
above, NIS 10,841.3 million (included in subordinate debt) stems 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 594.4 million
1-3 years NIS 1,235.1 million
4-5 years NIS 1,218.2 million
More than 5 years NIS 7,793.6 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 32 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 compiled and presented by our credit
officers 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 isbased upon an appraiser's valuation concerning "hasty
sale", taking into account the terms and conditions of the sale and the expenses
incurred with 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, 2004 was NIS 629 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, 2004 amounted to NIS 69.6 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 made only 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 March 2005, this last collective agreement was extended by the
parties until the earlier of December 31, 2007 or the end of the run-off period.
In respect of these employees, we signed an agreement with a pension fund
arranging for the pension payment. On the date on which the employment of each
such 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 for the above employees,
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 3.0% (December 31, 2003 -3.5%).
The total provision in respect of our employees entitled to a pension upon their
retirement amounts to NIS 15.9 million (December 31, 2003 - NIS 18.2 million).
Computation of such rights at an annual discount rate of 2.0% would increase the
cost of acquisition of the pension rights by NIS 0.9 million (December 31, 2003
- - 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, 2004 are
classified as available-for-sale securities. Marketable 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, 2004, was NIS 31 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.
61
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, 2004, is as follows:
Other assets - NIS 10.9 million
Other liabilities - NIS 2.5 million.
The above values relate to transactions of a total stated value of
NIS 525 million. Of this transaction value, transactions of a stated value
of NIS 380 million matured during January 2005, and transactions of a
stated value of NIS 145 million will mature during the period of three to
twelve months from December 31, 2004.
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 generally not made any provisions
in respect of the risk involved. See "Item 8. Legal Proceedings" below.
We make 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
June 30, 2005, 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(1,3,4,11) 64 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) 71 Director January 1997
Avi Olshansky(1,4,8) 69 Director November 1997
Yacob Aizner(2,4,8) 59 Director October 2002
Shulamit Eshbol(2,3,9) 40 Director November 2002
Yeheskel Beinisch(2,3,9) 64 Director November 2002
Ephrat Bronfeld(1,2,3,10) 58 Director December 2002
Moshe Gavish(1,3,9) 57 Director November 2002
Ehud Green(2,4,10) 51 Director December 2002
Shmuel Sisso(2,3,9,12) 54 Director November 2001
Ben-Zion Dagan(3,4,7) 72 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) 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.
(12) Tenure ended in November 2004.
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. and Phoenix (Israel) Insurance 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 Director, 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:
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., Arel Communications and Software Ltd and Okiana
Advanced Industries 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. From 1972 to 1996, Mr. Green served as a career officer in the Israel
Defense Forces, the Israel Police Force and the security services. 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 was a director from November 2001 to
November 2004 (with interruptions). He was an appointee of the State of Israel.
He was 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.
65
IDENTITY OF OFFICERS
The name, age and position of each of our executive officers, as of June
30, 2005, 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) 64 Chairman of the Board August 2002
Uri Galili 60 General Manager July 2002
Arieh Savir 59 Deputy General Manager September 2002
Rimon Shmaya 56 Comptroller April 2001
Comptroller & Financial Risks Manager January 1998
Member of the Management May 1996
Jacob Garten(2) 55 Supervision & Risk Monitoring Manager July 1999
Training and Information Technologies
Member of the Management November 1989
Nathan Dekel 54 Operations & Controls Manager April 2004
Operations Manager July 1999
Member of the Management August 1990
Michael Warzager 50 General Counsel March 1998
Itzhak David 50 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.) Le-Israel B.M.. 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 Chief Financial Officer of Ampa
Investments Ltd. From 1994 until 2000, he was the Chief Financial Officer and
Secretary of The Investment Company for Industrial Development in Israel Ltd.
and its subsidiaries.
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. Further to a
recent amendment to the Banking Law (Licensing) - 1981, such an agreement to
combine shares for the purpose of appointing a director requires the approval of
the Governor of the Bank of Israel.
67
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 Ephrat 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.
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, 2004 was NIS
5,339,000 and we set aside NIS 1,088,000 to provide severance pay, retirement or
similar benefits for our directors and executive officers. At December 31, 2002,
our financial statements included a provision in the amount of NIS 3.6 million
in respect of the period during which management estimated that the services of
the Chairman of the Board, the General Manager and the Deputy General Manager
would no longer be required. In 2003, this provision was decreased and as of
December 31, 2003 it amounted to NIS 1.7 million, and in 2004, after a
subsequent evaluation by our Board (which concluded that we will employ the
three executives until the end of their respective employment periods), the said
provision was cancelled in its entirety.
According to the employment contracts with the Chairman of the Board, the
General Manager and the Deputy General Manager, the terms of their employment
extend until August 14, 2006, July 29, 2006 and July 29, 2006, respectively.
According to the employment contracts, each of the Chairman of the Board, the
General Manager and the Deputy General Manager is 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 amount deposited during the period of their employment into
insurance policies or pension funds for their benefit.
According to the employment contracts with three other of our officers,
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 severance payment (equal to several months'
salary), compensation for unutilized vacation and sick days (subject to the
customary conditions applying to our other employees), and the amount deposited
during the period of their employment into insurance policies or pension funds
for their benefit as well as additional severance compensation ("transition
payment"). 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 67.
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) 577 176 -- 753
Uri Galili(4) 687 182 -- 869
Arieh Savir(4) 591 174 -- 765
Jacob Garten(5) 731 110 -- 841
Nathan Dekel(5) 564 216 -- 780
Rimon Shmaya(5) 558 189 -- 747
Itzhak David 280 67 -- 347
Michael Warzager(5) 543 184 -- 727
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 original employment contracts for the
General Manager and the Deputy General Manager each have three year terms (in
April 2005, these last two contracts were each extended through July 2006). As
of December 31, 2002, the financial statements included 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, and in 2004, after a subsequent evaluation by our Board (which
concluded that we will employ the three executives until the end of their
respective employment periods), the said provision was cancelled in its entirety
(5) In the past, we signed employment contracts with four senior executives who
were employed during 2004. Under these contracts, we undertook to pay, among
other things, additional severance payments in the event of termination (see
note 18A(4) to our financial statements). The employment of Mr. Jacob Garten
ended in September 2004. He received his severance payment as agreed at the
relevant time. In the event that the employment of the other three executives is
terminated, the maximum additional severance amount that we anticipate that we
will have to pay them (as of December 31, 2004) amounted to NIS 5.4 million. In
consideration of this commitment, a provision for payroll costs was made, which
provision 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 adjusted semi-annually to the
CPI. As of the last compensation update on February 1, 2005, 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, 2005, NIS 1,174,
plus V.A.T. for each plenum and committee meeting attended while our outside
directors received NIS 1,223.
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
We granted an indemnification agreement to our directors and senior
officers, which was approved by our General Meeting on August 8, 2002. Pursuant
to the agreement, we undertook to indemnify our directors and senior officers
for a monetary obligation imposed on them in favor of a third party pursuant to
a judgment (including a judgment by way of settlement or by an arbitrator's
decision which was approved by a court) and for reasonable litigation expenses
(including lawyers' fees), imposed upon them in consequence of an act (defined
as including omissions and decisions) performed or to be performed by virtue of
their being directors or senior officers in the Bank or by virtue of any office
or function they fulfilled and/or will fulfill according to our request or in
our name within any company in which we hold and/or will hold shares and any
other entity and any business venture in which we invested and/or will invest,
on condition however that such activities are related to at least one of the
types of events detailed in the indemnity agreement, which include, among
others, the following events: offering of securities, implementing voting rights
and rights to appoint directors in a company in which we hold and/or will hold
shares and/or in another entity and/or in a business venture in which we
invested and/or will invest, realization of collateral granted to us, approval
of credit and other acts within the framework of permitted activities for banks
pursuant to the Banking Law (Licensing) 1981-5741, holding of assets in trust,
granting of underwriter's undertaking, a transaction of our concerning any
assets for our account, giving any report or notice pursuant to the law, receipt
of licenses and permits, events related to employer-employee relations and the
failure to perform one or more of the above matters.
The general and cumulative amount of indemnification that could be paid
pursuant to the above agreement shall not exceed 25% of our equity according to
our financial statements as of March 31, 2002, which stood at NIS 640,300,000,
meaning shall not exceed NIS 160,075,000, this amount being linked to the
Consumer Price Index published for the month of March 2002. The indemnification
pursuant to the indemnification agreement is subject to the provisions of the
Companies Law and to the various conditions detailed in the indemnification
agreement
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
amount 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, 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:
71
1. To provide recommendations to the board of directors regarding the
appointment or termination of the appointment 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.
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.
72
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, 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.
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.
73
EMPLOYEES
As of December 31, 2004, we had 62 employees, as follows:
Personnel/Training Staff 3
Compliance and Auditing 2
Officers 6
Sales and Professional Staff 24
Support Staff 27
As of June 30, 2005, we had 58 employees, as follows:
Personnel/Training Staff 3
Compliance and Auditing 2
Officers 6
Sales and Professional Staff 20
Support Staff 27
The reduction in our operations pursuant to the run-off plan was
accompanied also by a reduction in our staff. The number of our employees as of
December 31, 2004 is about 40% of the number that were employed on December 31,
2002.
28 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 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. In March 2005, we entered into a new
collective agreement, which amended and extended the collective agreement dated
as of December 2002, and which was also approved, upon our request, by the
Director of Wages of the Ministry of Finance.
74
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.
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.
75
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 May 2005, is set forth below:
6% Cumulative Participating Preference C Shares- 1,133 holders in the
United States, holding 2,022,892 shares.
6% Cumulative Participating Preference CC Shares- 753 holders in the
United States, holding 118,942 shares.
7 1/2% Cumulative Redeemable Preference D Shares- 619 holders in the
United States, holding 15,082 shares.
7 1/2% Cumulative Redeemable Preference DD Shares- 1,639 holders in the
United States, holding 10,439 shares.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth, as of May 31, 2005, 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"
shares(1) 7,370 48.81% 45.78%
Poalim Trust Services Ordinary "A"
Ltd. (3) shares(1) 1,830 12.12% 11.37%
Israel Discount Bank Ordinary "A"
Ltd., (4) shares(1) 2,030 13.44% 12.61%
Bank Leumi Le-Israel Ordinary "A"
B.M Israel (4) shares(1) 3,110 (6) 20.60% 19.32%
Bank Hapoalim B.M Ordinary
Israel (4) Preferred
shares(2) 65,020 (5) 6.50% 0.40%
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.
76
(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.
RELATED PARTY TRANSACTIONS
Loans Granted to Executive Officers
AS OF DECEMBER 31, 2004
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 150 1.7 6
Rimon Shmaya 84 1.6 4
Itzhak David -- -- --
Michael Warzager 96 1.7 6
These loans are linked to the CPI and are non-interest bearing
For a description of the Indemnification Agreement for Directors and Senior
Officers, see Item 6.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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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
NOTE32, 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 June 30, 2005:
(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 (a) claims 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.
(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.
78
(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.
On May 17, 2005, the court granted the plaintiff's motion for discovery of
documents and ordered us to produce most of the requested documents, including
minutes of the meetings of our Board of Directors and our credit committee,
audit reports of the Supervisor of Banks, and specific correspondence. We intend
to appeal this decision. We and the plaintiff have agreed on a mediation
proceeding, which has already begun, while reserving our right to file an
appeal, in the event that the mediation is not successful.
On June 1, 2005, we received notices from counsel to our directors and officers
insurers that our insurers have reservations as to the validity of the insurance
coverage for this action and that they reserve their rights in this matter. The
bank categorically rejects these reservations and intends to act to exhaust its
rights against the insurers.
(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, including our former joint General Manager, 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. On January 31, 2005, the court
denied the motion for exemption, while also expressing its doubts as to the
alleged claim of action. Since the court fees were not paid, the action was
struck out. The plaintiff has filed an appeal against the above decision, which
was rejected, on June 7, 2005, on procedural grounds. The plaintiff may still
file an additional appeal to the Supreme Court, subject to being granted an
extension.
79
(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. The parties' witnesses were cross-examined on May 26, 2005 and a
decision will be given after the filing of the parties' written summations.
Those of our officers and directors who were sued are vigorously contesting the
action and the application for its approval. On June 1, 2005, we received
notices from counsel to our directors and officers insurers that our insurers
have reservations as to the validity of the insurance coverage for this action
and that they reserve their rights in this matter. The bank categorically
rejects these reservations and intends to act to exhaust its rights against the
insurers.
F) In September 2003, an Israeli oil company filed a claim against us and two
other banks, Israel Discount Bank Ltd. and United Mizrachi Bank Ltd., in the
amount of NIS 6 million, concerning the delivery of oil products by the
plaintiff to a power plant owned by a company called Ashcogen Ltd. We, together
with the other two named banks, financed the building of the power plant. We
provided 26% of the financing for the power plant and the management of the
consortium of the bank financing was performed by Israel Discount Bank Ltd. The
plaintiff alleges that the involvement of the three banks in the approval of the
business plan and its income and expense budget created a representation upon
which the plaintiff relied at the time that it provided its products to the
plant, assuming that the expenses included in the approved plan and/or budget
would be paid by the above banks. Due to the fact that the consideration for the
products delivered was not paid, the plaintiff claims that the banks are
responsible to compensate it for its losses. We and the other two banks reject
the claim and we have instructed our lawyers to file the appropriate defenses.
(G) 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.
80
(H) 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
Director of Wages of the Ministry of Finance, who was also named in the claim as
a defendant. The plaintiffs claim that in return for these additional payments
that were granted to them in their employment contracts, they agreed to forfeit
wage increases that were due to them at the time. Therefore, the plaintiffs have
alternatively petitioned the court to award them the value of the wage increases
that they agreed to forfeit. Despite the fact that, according to the plaintiffs'
claim, the value of the wage increases is greater than the amount of the claim,
in order to reduce court fees, they have set their value equal to the amount of
the claim. 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.
(I) 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 owed us, at the time that the claim was
filed, approximately NIS 63 million. We rejected the claim and we instructed our
lawyers to file the appropriate defenses. This action was settled in March 2005,
as part of an agreement reached with the Company and its shareholders.
81
(J) On September 28, 2004, 27 financial institutions that hold our participating
preference C and/or CC and/or CC1 shares filed an action in the Tel Aviv
District Court, in which the court is petitioned, inter alia, to direct us to
pay to our shareholders a dividend similar in an amount and on such date as we
had paid until the payment of the last dividend for the second quarter of 2002.
The plaintiffs claim, inter alia, that according to 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 Treasury and, therefore,
such distribution is not subject to distribution requirements proscribed by the
law, and that even if such requirements should be applied, we should be ordered
to pay the requested dividend because we meet the solvency requirement
proscribed by law, in light of the fact that the dividend is financed in full
by the State of Israel and is not deducted from our capital. Since the issue of
the dividend is connected, in the opinion of our management, to the issue of the
accruing of interest on the Bank's perpetual deposits with the Treasury, the
Bank filed, on March 9, 2005, a motion for a declaratory judgment against the
State of Israel and the above financial entities, stating that the interest on
the perpetual deposits does in fact accrue. We reject the claim and we have
instructed our lawyers to file the appropriate defenses.
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 as 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.
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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:
IN NIS
CLASS C CLASS CC CLASS CC1
CUMULATIVE CUMULATIVE CUMULATIVE
PARTICIPATING PARTICIPATING PARTICIPATING ORDINARY
PREFERENCE PREFERENCE PREFERENCE PREFERENCE
SHARES SHARES SHARES SHARES
High Low High Low High Low High Low
2000 392 342 4,159 3,201 3,900 3,260 4,520 2,410
2001 446 339 4,070 3,379 4,458 3,370 2,592 1,905
2002 490 58 4,750 752 4,840 555 2,870 150
2003
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 1,142 730 990 900 207 172
2004
1st Quarter 158 95 1,590 1,020 1,449 925 1,174 194
2nd Quarter 134 105 1,249 1,000 1,290 720 841 481
3rd Quarter 130 117 1,220 1,190 1,230 1,100 642 540
4th Quarter 124 107 1,211 1,050 1,129 1,001 586 410
December 2004 129 114 1,200 1,200 1,200 1,200 850 622
2005
January 162 115 1,200 1,200 1,500 1,198 850 711
February 169 133 1,400 1,200 1,500 1,198 1,058 774
March 140 140 1,300 1,250 1,373 1,310 926 854
April 145 140 1,300 1,250 1,300 1,300 895 832
May 135 135 1,201 1,200 1,200 1,200 828 825
June 120 120 1,200 1,134 1,200 1,200 808 808
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.
83
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.
84
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.
85
QUORUM AT GENERAL MEETINGS. Under Article 65 of our Articles of
Association, the required quorum for any General Meeting of shareholders is two
or more shareholders present in person, by proxy or by attorney who collectively
hold Ordinary A shares representing at least thirty-three and one-third percent
(33 1/3%) of the number of votes of the company. Article 68 of our Articles of
Association provides that if a quorom is not present within half an hour from
the time the meeting was set, then, if the meeting was called at the request of
the shareholders it will be cancelled, and otherwise it will be adjourned and
any shareholders present and entitled to participate in the adjourned meeting
shall constitute the required quorom.
ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS. Article 71 of our Articles of
Association and the Companies Law (with respect to public companies, such as us)
provide for voting by poll only. In addition, the Companies Law provides that a
declaration by the Chairman of the Meeting that a resolution has been carried or
rejected, unanimously or by a particular majority, shall be prima facie evidence
of the fact.
VOTING POWER; MODIFICATION OF CLASS RIGHTS. Article 77 of our Articles of
Association provides that every shareholder shall have one thousand votes for
each Ordinary A Share held by him and one vote for every Preferred Ordinary
Share held by him. Article 8 of our Articles of Association provides that if at
any time our share capital is divided into different classes of shares, the
rights attached to any class may be modified, abrogated or otherwise dealt with
by the company with the consent in writing of the holders of 75% of the issued
and outstanding shares of that class or by Special Resolution (a resolution
carried by at least 75% of the votes of those present and voting) in an
Extraordinary Meeting of the shareholders of that class. A shareholder may vote
in person, by proxy 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.
86
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.
87
TRANSFER OF SHARES. Article 37 of our Articles of Association provides
that no Ordinary A Shares may be transferred without the consent of the board of
directors.
ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS. The Companies Law provides
that, subject to the provisions stipulated therein, an acquisition of our shares
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of twenty-five percent or more of the voting
rights. This rule does not apply if there is already another holder of
twenty-five percent of the voting rights. Similarly, the Companies Law provides
that an acquisition of our shares must be made by means of a tender offer, if,
as a result of the acquisition, the purchaser would become a holder of more than
forty-five percent of the voting rights, unless there is another person holding
at that time, forty-five percent of the voting rights.
Regulations under the Companies Law provide that the Companies Law's
tender offer rules do not apply to a company whose shares are publicly traded
either outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
REPURCHASE OF SHARES. The Companies Law, subject to certain limitations,
allows companies under certain circumstances to repurchase their own shares.
FOREIGN OWNERSHIP. Neither our Articles of Association nor Israeli law
restrict in any way the ownership of our shares by nonresidents of Israel, or
restrict the voting or other rights of nonresidents of Israel. Notwithstanding,
nationals or residents of countries that are in a state of war with Israel or
entities incorporated, established or managed in such countries may not transfer
and/or acquire ownership in shares in Israel, and/or receive dividends in
respect thereto, without a special government permit.
MERGERS. The Companies Law provides for mergers between Israeli companies,
if each party to the transaction obtains the appropriate approval of its board
of directors and (subject to certain provisions) also the approval of the
General Meeting of shareholders. A "merger" is defined in the Companies Law as a
transfer of all assets and liabilities (including conditional, future, known and
unknown liabilities) of a target company to another company, the consequence of
which is the dissolution of the target company in accordance with the provisions
of the Companies Law. For purposes of the approval of the General Meeting of
shareholders of each merging entity, unless a court rules otherwise, the merger
will not be deemed approved, if 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, and who had participated in the vote
(excluding abstainers) had objected to the merger. The Companies Law further
provides that with respect to companies incorporated prior to the commencement
of the law (such as us), the merger requires the approval of a majority of
three-quarters of the voting members present at the General Meeting (excluding
abstainers).
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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.
Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors, subject to any other provision in the company's articles
of association.
Under the Companies Law, dividends may be paid by a company only out of
its balance of net profits or out of its net profits for the two years preceding
the distribution of the dividends, whichever is greater, calculated in the
manner prescribed in the Companies Law. Pursuant to the Companies Law, any
distribution of dividends is subject to the proviso that there is no reasonable
concern that the distribution of dividends will prevent the company from meeting
its existing and foreseeable obligations as they become due. Article 133 of our
Articles of Association provides that no dividends shall be paid otherwise than
out of our profits and that any such dividend shall carry no interest.
INTERESTED PARTIES TRANSACTIONS. The Companies Law requires that certain
transactions, actions and arrangements be approved by the audit committee as
well as by our board of directors. In certain circumstances, in addition to
audit committee and board of directors' approval, approval by our shareholders
at a general meeting is also required. Specifically, the approval of our audit
committee, board of directors and shareholders is required with respect to the
following:
(1) a director's terms of service and employment, including, among other
things, grant of exemptions, insurance and indemnification;
(2) exceptional transactions (as defined in the Companies Law) with (i)
a controlling shareholder or his relative, or (ii) another person or
entity in which transaction a controlling shareholder has a personal
interest, including a private placement which is an exceptional
transaction; and
(3) the terms of engagement or employment with a controlling shareholder
who is also an office holder (including a director) or an employee
of the Company.
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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, if such private placement grants twenty percent or more of the total
voting rights in our company prior to its issuance, and the consideration for it
is not in cash or in securities registered for trading in a stock exchange or is
not at the market rate, or a private placement 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.
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 or
documents, in connection with any existing or proposed transaction
by us;
o in the event of a private placement that will increase the holdings
in our securities of a shareholder holding more than five percent of
our outstanding share capital or our voting rights, if such private
placement grants twenty percent or more of the total voting rights
in our company prior to its issuance, and the consideration for it
is not in cash or in securities registered for trading in a stock
exchange or is not at the market rate, or that will cause any person
to become, as a result of the issuance, a 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, including all material,
related information or documents; and
o any of our shareholders voting on any transaction concerning a
controlling shareholder as set forth above must inform us prior to
the voting, or on the proxy card if applicable, of any personal
interest he has in the transaction. The vote of a shareholder who
does not inform us with respect to any such interest shall not be
counted.
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In addition, a director who has a personal interest in a transaction
(whether with him or with another person), except a transaction that is not
exceptional, may not be present or vote at a meeting of the audit committee or
the board of directors, unless a majority of directors in the audit committee or
the board of directors, as applicable, have a personal interest in the
transaction.
EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS. The
Companies Law describes the fiduciary duty of an office holder (including a
director) as a duty to act in good faith and for the benefit of the company,
including by refraining from actions in which he has a conflict of interest or
that compete with the company's business, refraining from exploiting a business
opportunity of the company in order to gain a benefit for himself or for another
person, and disclosing to the company any information and documents which are
relevant to the company and that were obtained by him in his or her capacity as
an office holder. The Companies Law provides that an office holder (including a
director) owes a duty of care to the company, that requires the office holder,
among other things, to act at a level of competence at which a reasonable office
holder would have acted in the same position and under the same circumstances,
including by adopting reasonable means for obtaining information concerning the
profitability of the act brought for his approval or performed by him in the
scope of his office.
Under the Companies Law, a company may not exempt an office holder
(including a director) from liability with respect to a breach of his fiduciary
duty, but may exempt in advance an office holder from his liability to the
company, in whole or in part, with respect to a breach of his duty of care,
except with respect to a distribution.
Pursuant to the Companies Law, a company may indemnify an office holder
(including a director) against a monetary liability imposed on him by a court,
including in settlement or arbitration proceedings that were approved by a
court, reasonable litigation costs, including attorneys' fees, incurred due to
an investigation or a proceeding by a competent authority to perform such
investigation or proceeding, and which terminated without the filing of an
indictment and without a monetary liability in place of a criminal proceeding,
or which terminated without the filing of an indictment but with a monetary
liability in place of a criminal proceeding for an offense which does not
require proof of criminal intent and reasonable 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 events that in the board of director's opinion can be foreseen,
in view of the actual activity of the company, at the time of giving such
undertaking and up to an amount or specific criterion determined by the board of
directors to be reasonable under the circumstances, which events and which
amount or criterion are to be stipulated in the company's undertaking or (ii)
provide indemnification retroactively.
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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, except with
respect to indemnification against and insurance for a breach of
fiduciary duty where the office holder acted in good faith and had a
reasonable basis to believe that the act would not be detrimental to
the company;
o a breach by the office holder of his duty of care if such breach was
done intentionally or recklessly, except in the case of negligence;
o any act or omission done with the intent to derive an illegal
personal gain; or
o any fine or penalty levied against the office holder as a result of
a criminal offense.
In addition, under the Companies Law, exemption of, indemnification of,
and procurement of insurance coverage for a company's office holders, must be
approved by the company's audit committee and board of directors, and, with
regard to directors also, by the company's shareholders.
The provisions of the Companies Law described above include certain
amendments recently enacted in the Law. Our Articles of Association allow us to
exempt office holders (including directors), to indemnify them and to procure
insurance for them, in accordance with the provisions of the Companies Law, as
enacted prior to the above amendments, but require the additional approval of
our shareholders even with regard to exemption and undertaking to indemnify to
be granted to our office holders who are not directors.
C. MATERIAL CONTRACTS
The following is a summary of each material contract, other than contracts
entered into in the ordinary course of business and other than the run-off plan
and the special line of credit (which are described in "Item 4. Business
Overview - Proposed Sale of the Bank and Extension of Special Line of Credit by
Bank of Israel" and "Business Overview - Adoption of Run-Off Plan and Amendment
of the Special Line of Credit" above), and the indemnification agreement for
directors and senior officers (which is described in "Item 6. Compensation of
Directors and Officers") to which we are a party, for the two years preceding
publication of this annual report.
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o Lease Agreement - On June 26, 2003, we signed a lease for new
offices, located at 82 Menachem Begin Road, Tel Aviv, Israel 67138.
We lease approximately 12,000 square feet, plus parking spaces and
additional storage space. 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 $4,800 more per month
for parking and storage space. In addition, we pay maintenance,
municipal property tax and other related expenses. The rental
amounts are linked to the cost-of-living index. If we exercise the
option to extend the lease, the rental charges will increase by 5%,
plus any cost-of-living increases.
o Perpetual Deposit Agreement - Pursuant to agreements (by way of
exchange of letters) that were entered into at various times between
us and the Israeli Treasury, we deposited with the Israeli Treasury
the capital from the offerings of our preferred shares (C, CC, CC1,
D and DD). The total principal amount of perpetual deposits with the
Treasury was NIS 806.5 million, as of December 31, 2004, as compared
with NIS 799.3 million, as of December 31, 2003. Pursuant to these
agreements, we are entitled, regarding the amounts so deposited, to
receive dollar-interest at the annual rate of 7.5% of the dollar
value of the deposits (as of the date of their deposit), which will
be paid net to us by the Treasury, on the dates that we will declare
the payment of a dividend for the above preferred shares, in such
manner that after the payment of taxes and other charges, the net
amount of interest that we receive from the Treasury will be at the
above rate of 7.5%.
The deposit agreements do not expressly stipulate how the interest
on the perpetual deposits should be handled during periods in which
the Bank is prevented from distributing dividends on these preferred
shares, and whether the interest will accrue and be paid when the
Bank pays the accrued preferred dividends in arrears or upon
liquidation. See Note 15 to our financial statements in Item 17 of
this annual report for details on the cessation of dividend
distribution and the matter of the accrued interest on the perpetual
deposits with the Israeli Treasury.
The principal amounts that we so deposited will be returned to us by
the Israeli Treasury only upon our liquidation or for the purpose of
redemption of preferred D and DD shares (which were offered as
redeemable shares), with the principal amounts being linked to the
dollar from the date of their deposit with the Treasury and until
October 1987, and from October 1, 1987 until the date of their
repayment to us, linked to the Consumer Price Index or the dollar,
whichever is higher. The deposit agreements establish that the
Treasury shall not have a right of set-off as to amounts that we
will receive regarding the deposits thereby deposited.
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o Computer Outsourcing Agreement - Pursuant to an agreement dated
December 23, 2003 between us and NESS A.T. Ltd. ("NESS"), NESS has
undertaken to provide us with IT Outsourcing services, including
ongoing management and operation of our Information Systems,
maintenance and operation of hardware, computers, peripheral
equipment, communications and software infrastructure (i.e.
Databases, Operations Systems, etc.), application operation and
maintenance, modification and adaptation of our applications,
information security services etc.
The agreement is for an initial period of three years beginning from
January 1, 2004. We are entitled to terminate the agreement by a
prior notice of a few months or extend it for one or two more years.
In 2004, the cost of the service was NIS 4.3 million. In 2005, the
cost of the service will amount to NIS 3.3 million and in 2006 to
NIS 2.4 million. In the event that we decide to extend the agreement
by an additional two years, as above-mentioned, the cost of the
service for each additional year will amount to NIS 2.3 million.
During the term of the agreement, we are entitled to order from NESS
modifications to our information systems and/or development of new
applications and for such purpose, we have available to us a "bank
of hours".
o Special Collective Agreement With Employees - On December 26, 2002,
a collective agreement was signed between us, the General Federation
of Labor and our employee committee, which applies to those of our
workers to which collective agreements apply (and not to those who
are employed on personal employment contracts). The contract was for
a three year period, and can be extended for an additional year. The
contract established, among other things: 1) the right of management
to terminate the employment of employees within the framework of the
reduction of our banking services, and the termination procedure; 2)
the special benefits and payments to which an employee is entitled
if terminated, including additional severance payments beyond those
set by law and the conversion of the right to additional severance
(for employees with particular seniority and with a particular
number of years until their reaching retirement age); and 3) certain
reductions to be made in the salaries of the employees and the
related benefits to which they are entitled.
On March 14, 2005, the above parties signed a new collective
agreement which extended the term of the above agreement (dated
December 26, 2002) until the termination date of our run-off plan
(including any modification or extension to the plan, approved by
the government) or until December 31, 2007, whichever is first. This
new agreement also established and clarified that employees who
under the original agreement are entitled to an early old-age
pension due to the termination of their employment, will be entitled
to the pension until they reach the age from which they will be
entitled -in light of the reform which took place in the pension
field after the signing of the original agreement- to receive a
regular old-age pension from the pension fund in which they are
members, and it also established that some of the concessions to
which the employees agreed in the original agreement and which had a
time limit, will continue to apply also during the period of the new
agreement.
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o Kibbutz Debt Agreement - Following the difficulties experienced by
the kibbutzim in Israel and the organizations affiliated with them
during the 1980's, several agreements were entered into between the
years 1989-1999 in which the parties were the kibbutz movements, the
creditor-banks and the State of Israel.
The purpose of these agreements was to reorganize the debt of the
kibbutzim and the organizations affiliated with them and to conform
it to their actual repayment ability. The agreements include a
detailed and complex apparatus to handle these debts. Within this
framework, it was established that the kibbutzim that were defined
as assisted kibbutzim (those requiring assistance) shall be entitled
to refunds of certain interest differentials for unpaid credit which
they were granted by the banks who were parties to the agreement, to
a waiver of part of these credits and to long-term rescheduling of
the remainder.
The government financed 35% of the waivers and deposited funds with
the banks to serve as a source for the rescheduling. Kibbutzim that
were defined as owners of real estate having the potential for
development, were required pursuant to these agreements to assign
their rights in the land in consideration for a portion of the
waivers that they were approved for them.
See Note 4 to our financial statements in Item 17 of this annual
report for further details of the Kibbutz debt agreement.
o Credit to a certain governmental entity - Pursuant to a series of
agreements entered into at various times during the 1990's, we
granted long-term credits to a certain governmental entity in a
total amount of approximately 1.5 billion U.S. dollars. These
credits were granted from deposits which were deposited with us by
the State of Israel, in identical amounts and having identical
maturity dates as the credits. These credits are fully guaranteed
(principal and interest)_by the State of Israel. The outstanding
balance of these credits as of December 31, 2004 was approximately
1.43 billion U.S. dollars, comprising approximately 77% of the total
credit to the public at that date.
D. EXCHANGE CONTROLS
There are no Israeli government laws, decrees or regulations that restrict
or affect our export or import of capital or the remittance of dividends,
interest or other payments to non-resident holders of our securities, including
the availability of cash and cash equivalents for use by us, except or otherwise
as set forth under "Item 10 - Foreign Ownership" above, or under "Item 10.
Additional Information - Taxation." below.
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E. TAXATION
ISRAELI TAXATION
The following is general information regarding Israeli tax laws to which
U.S. and other non-Israeli shareholders may be subject. It does not cover all
possible tax considerations and therefore you should not rely on this
information as legal or professional tax advice. You should consult your own tax
advisor as to the particular tax consequences of an investment in our shares and
notes including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws. The discussion is based on Israeli tax
laws in force as of June 30, 2005. There are currently proposals to introduce
legislation which, if passed, is likely to come into effect on January 1, 2006
and which will alter the tax rates applicable to unlisted securities.
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.
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Non-residents of Israel are subject to income tax on passive income
accrued or derived from sources in Israel, such as dividends, royalties and
interest, as well as non-passive income from services rendered in Israel.
On distributions of dividends other than bonus shares (stock dividends) to
non-residents of Israel, we generally withhold at source income tax at a rate of
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
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o a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or
more "U.S. persons" (within the meaning of the Code) have the
authority to control all substantial decisions of the trust, or if a
valid election is in effect to be treated as a U.S. person.
This summary does not cover all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax
provisions of the Code) or to investors that may be subject to special treatment
under U.S. federal income tax law, including:
o dealers in stocks, securities or currencies;
o securities traders that use a mark-to-market accounting method;
o banks and other financial institutions or financial services
entities;
o insurance companies;
o tax-exempt organizations;
o persons holding our shares or notes as part of a hedging or
conversion transaction or a straddle;
o persons who or that are not U.S. Holders;
o persons whose functional currency is not the U.S. dollar; and
o direct, indirect or constructive owners of 10% or more of our
outstanding voting shares.
The summary also does not discuss any aspect of state, local or foreign
law, or U.S. federal estate and gift tax law as applicable to U.S. Holders. In
addition, it is limited to U.S. Holders who or that acquire and hold our shares
or notes as "capital assets" within the meaning of the Code - generally,
property held for investment- and, in the case of our notes, who or that
acquired notes in connection with their original issuance. This discussion also
does not consider the tax treatment of persons or partnerships who or that hold
our shares or notes through a partnership or other "pass-through" entity.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION
OF OUR SHARES OR NOTES.
A U.S. Holder generally will be required to include in gross income, as
ordinary dividend income, the amount of any distributions paid on our shares,
including the amount of any Israeli taxes withheld, to the extent that those
distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
earnings and profits will be applied against and will reduce the U.S. Holder's
tax basis in our shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those shares. Our dividends will not
qualify for the dividends-received deduction applicable in certain cases to U.S.
corporations.
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In general, a U.S. Holder generally will be required to include in gross
income, as ordinary interest income, the amount of stated interest, including
the amount of any Israeli taxes withheld, on our notes as that interest is
received or accrued under that U.S. Holder's usual method of tax accounting.
Dividends or interest paid in NIS, including the amount of any Israeli
taxes withheld, will be includible in the income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend or interest
is includible in the income of the U.S. Holder to the date that payment is
converted into U.S. dollars will be treated as ordinary income or loss.
Any dividends or interest we pay to a U.S. Holder with respect to our
shares or notes generally will be treated as foreign source income for U.S.
foreign tax credit purposes. Subject to the limitations set forth in the Code,
as modified by the Treaty, U.S. Holders may elect to claim a foreign tax credit
against their U.S. federal tax liability for Israeli income tax withheld from
dividends or interest received in respect of our shares or notes. These
limitations include, among others, rules that limit foreign tax credits
allowable with respect to specific classes of income to the U.S. federal income
taxes otherwise payable with respect to each such class of income. The total
amount of foreign tax credits allowable to a U.S. Holder in any year cannot
exceed the regular U.S. tax liability for the year attributable to that U.S.
Holder's total foreign source taxable income. 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.
99
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.
100
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, Tel Aviv, Israel. Any reports and other
information that we file electronically with the U.S. Securities and Exchange
Commission may be found at www.sec.gov. They can also be inspected without
charge and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Avenue, N.W., Washington, D.C. 20549.
101
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, 2004 (435.8) 863.6 20.0 60.5 508.3
December 31, 2003 (472.8) 887.0 17.9 77.7 509.8
* Including a perpetual deposit with the Treasury (as of December 31, 2004
- in an amount equal to NIS 806.5 million and as of December 31, 2003 -
799.3 million )
102
Our analysis of the data in the table above shows that: (a) in the event
of an increase as of December 31, 2004 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
200,000 as a result of the surplus of foreign currency assets; and (b) in the
event of a decrease as of December 31, 2004 in the shekel exchange rate of 1%
compared to the "basket of currencies", we can expect to lose approximately NIS
1,700,000 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. Until 2004 the frequency of our compliance
reporting with such limitations was quarterly. Following the decline in the
Bank's volume of activity, the frequency of the aforementioned compliance
reporting was changed to twice a year (semi-annual report).
The following table sets forth details relating to the average duration in
the various linkage segments (in years):
FOREIGN CURRENCY AND
FOREIGN CURRENCY LINKED
NON-LINKED SHEKEL SEGMENT CPI LINKED SEGMENT SEGMENT
------------------------------------------------------------------------
DECEMBER 31
------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Total assets 0.12 0.13 3.61 3.41 6.87 6.80
Total liabilities 0.09 0.11 3.50 3.24 6.90 6.82
Difference in years 0.03 0.02 0.11 0.17 (0.03) (0.02)
Our interest risk exists mainly in the CPI linked segment, since most of
the assets and liabilities in this segment are long-term and at a fixed interest
rate. As of December 31, 2004, the average duration of assets in this segment is
3.61 years while the average duration of liabilities is 3.50 years. A higher
average duration of assets creates exposure to increases in interest rates in
this segment. The said exposure to interest risk is within the limits determined
by our Board of Directors.
In the non-linked shekel segment, the average duration difference is
minimal and results from a short average duration of both assets and
liabilities, due to the fact that most of the assets and liabilities are at a
variable rate of interest.
In the foreign currency segment, the average duration is affected by a
considerable amount of credit that has low risk characteristics, and which
carries a fixed rate of interest. The average duration of liabilities in this
segment is higher by 0.03 years than the average duration of assets.
The following table is an analysis of our exposure to fluctuations in
interest rates as of December 31, 2004. The table includes the fair value of our
assets and liabilities, calculated as explained below:.
103
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS OF DECEMBER 31, 2004
Reported amounts***
DECEMBER 31, 2004
----------------------------------------------------------------------------------------------
ON FROM FROM FROM FROM FROM WITHOUT
DEMAND ONE TO THREE TO ONE TO THREE TO FROM TEN TO OVER FIXED
AND UP TO THREE TWELVE THREE FIVE FIVE TO TWENTY TWENTY MATURITY
ONE MONTH MONTHS MONTHS YEARS YEARS TEN YEARS YEARS YEARS DATE* TOTAL
--------- ------ -------- ------- -------- --------- -------- ------ -------- -------
NIS
millions
------------------------------------------------------------------------------------- -------
ISRAELI CURRENCY - NON
LINKED
Total assets 735.6 0.3 25.8 16.1 - - - - - 777.8
Total liabilities 1,577.5 13.2 29.0 - - - - - 0.1 1,619.8
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Difference (841.9) (12.9) (3.2) 16.1 - - - - (0.1) (842.0)
Effect of future
transactions 233.9 54.4 117.9 - - - - - - 406.2
Exposure to interest rate
fluctuations (608.0) 41.5 114.7 16.1 - - - - (0.1) (435.8)
Segment cumulative exposure (608.0) (566.5) (451.8) (435.7) (435.7) (435.7) (435.7) (435.7) (435.8) (435.8)
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 31.3 24.5 126.6 264.8 110.7 154.4 42.8 - 806.5 1,561.6
Total liabilities 5.8 17.1 111.4 179.2 88.9 150.3 2.3 - - 555.0
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Difference 25.5 7.4 15.2 85.6 21.8 4.1 40.5 - 806.5 1,006.6
Effect of future
transactions - (25.1) (117.9) - - - - - - (143.0)
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Exposure to interest rate
fluctuations 25.5 (17.7) (102.7) 85.6 21.8 4.1 40.5 - 806.5 863.6
Segment cumulative exposure 25.5 7.8 (94.9) (9.3) 12.5 16.6 57.1 57.1 863.6 863.6
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 251.1 206.8 490.1 1,119.4 937.3 1,803.1 1,854.6 14.8 - 6,677.2
Total liabilities 44.6 152.2 479.5 1,104.6 935.8 1,803.6 1,858.7 14.9 - 6,394.0
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Difference 206.5 54.6 10.6 14.8 1.5 (0.5) (4.2) (0.1) - 283.2
Effect of future
transactions (233.9) (29.3) - - - - - - - (263.2)
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Exposure to interest rate
fluctuations (27.4) 25.3 10.6 14.8 1.5 (0.5) (4.2) (0.1) - 20.0
Segment cumulative exposure (27.4) (2.1) 8.5 23.3 24.8 24.3 20.1 20.0 20.0 20.0
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 1,017.9 231.6 642.5 1,400.3 1,048.0 1,957.5 1,897.4 14.8 806.5 9,016.6
Total liabilities (1,627.9) 182.5 619.9 1,283.8 1,024.7 1,953.9 1,861.0 14.9 0.1 8,568.8
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Difference (610.0) 49.1 22.6 116.5 23.3 3.6 36.4 (0.1) 806.4 447.8
Exposure to interest rate
fluctuations (610.0) 49.1 22.6 116.5 23.3 3.6 36.4 (0.1) 806.4 447.8
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
Cumulative exposure (610.0) (560.9) (538.3) (421.8) (398.5) (395.0) (358.5) (358.6) 447.8 447.8
-------- ------ ------ ------- ------- ------- ------- ------ ------ -------
DECEMBER 31, 2004
---------------------------
INTERNAL
FAIR RATE OF AVERAGE
VALUE RETURN DURATION
------- -------- --------
% YEARS
------- -------- --------
ISRAELI CURRENCY - NON
LINKED
Total assets 794.4 7.06 0.12
Total liabilities 1,619.5 3.80 0.09
------- ---- ----
Difference (825.1) 3.26 0.03
Effect of future
transactions
Exposure to interest rate
fluctuations
Segment cumulative exposure
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 1566.2 5.38 3.61
Total liabilities 540.0 2.74 3.50
------- ---- ----
Difference 1,026.2 2.64 0.11
Effect of future
transactions
Exposure to interest rate
fluctuations
Segment cumulative exposure
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 6,680.7 7.13 6.87
Total liabilities 6,415.9 7.10 6.90
------- ---- ----
Difference 264.8 0.03 (0.03)
Effect of future
transactions
Exposure to interest rate
fluctuations
Segment cumulative exposure
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 9041.3 6.82 5.72
Total liabilities 8575.4 6.19 5.39
------- ---- ----
Difference 465.9 0.63 0.33
Exposure to interest rate
fluctuations
Cumulative exposure
General notes -
1. The data classified according to maturity date, presented above,
represents the present value of future flows, discounted at the internal
rate of return, for each balance sheet item. Such discounted future flows
include interest, which will accrue until the earlier of the maturity date
or the date of change in the interest rate.
2. The effect of hedging transactions is included in the total of assets
or liabilities, as the case may be.
3. The table does not include the effect of early repayments.
* The amounts stated in the "without fixed maturity date" column are the
amounts as stated in the balance sheet.
** Including shares, which are stated in the "without fixed maturity date"
column.
*** Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
104
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.
105
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 69.6 million (as of December 31,
2004), 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.
In conjunction with the limitations on the rate of exposure to changes in
interest rates, limitations were also established with respect to the change in
the calculated value of the Bank's assets and liabilities in the event of a 1%
change in interest in comparison with the accepted interest rates as at the date
of the report. The aforementioned calculation is based on the accepted
calculations for measuring the average duration of assets, meaning the
discounting of future cash flows, including interest that will accrue until
maturity, or until the date the interest rate changes, whichever is earlier. The
aforementioned calculation of the change in the value of assets and liabilities
relates only in respect of a given change in interest rates, without effects of
the aforementioned change in interest on other factors (such as the forecasted
rate of inflation, etc.).
106
Presented below is the effect of the aforementioned changes on the
calculated value of the assets and liabilities as at December 31, 2004 (in NIS
millions):
SEGMENT INCREASE OF 1% IN INTEREST RATE DECREASE OF 1% IN INTEREST RATE
- ----------------------- ---------------------------------------- ----------------------------------------
DECREASE IN DECREASE IN INCREASE IN INCREASE IN
VALUE OF VALUE OF NET DECREASE VALUE OF VALUE OF NET INCREASE
ASSETS LIABILITIES IN VALUE ASSETS LIABILITIES IN VALUE
----------- ----------- ------------ ----------- ----------- ------------
Unlinked (2.3) (1.4) (0.9) 2.3 1.4 0.9
CPI-linked (24.9) (17.8) (7.1) 26.4 18.8 7.6
Foreign currency
denominated or linked (582.0) (583.0) (1.0) 654.2 653.1 1.1
It should be noted that the aforementioned calculation measures only the
effect of the change in interest and does not relate to credit risks. The change
in the calculated value of assets and liabilities in foreign currency as a
result of a given change of 1% is high, as it is affected mainly by long-term
credit in foreign currency from a deposit of the State and guaranteed by the
State. The change affects both the assets and the liabilities and, as shown
above, the net differences are small.
The rate of the net changes in all the linkage segments is low in
comparison with the volume of assets of each segment.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of our policy for asset and liability
management, we conduct transactions in financial derivatives. As a result of the
events that occurred in the second half of 2002, our activities in financial
instruments were reduced to a minimum and at present they are mainly limited to
forward transactions, swap transactions and foreign currency option purchases
for the purpose of closing our position exposure.
The risk to which we are exposed due to the derivative financial
instruments is not material to our financial position.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
107
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 in 2004 with a
modest profit and, beginning in the first quarter of 2002, we have not had
profits from which we could distribute dividends. The last quarterly dividend
that we paid in respect of our C shares, our CC shares, our CC1 shares, our D
shares and our DD shares was the dividend for the second quarter of 2002, which
payment of dividends was made with court approval and approval of the Supervisor
of Banks.
The proceeds of the issuance of our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, were deposited by us with the Ministry
of Finance of the State of Israel pursuant to deposit agreements. In our
financial statements, we refer to our deposits with the Ministry of Finance as
the perpetual deposit. According to the deposit agreements, our perpetual
deposit with the Ministry of Finance earns interest at a rate of 7.5% per annum
(plus differentials of linkage to the U.S. dollar), which interest must be paid
by the Ministry of Finance to us on the payment dates for the dividends to be
paid by us on our C shares, our CC shares, our CC1 shares, our D shares and our
DD shares.
108
When we ceased making dividend payments on our C shares, our CC shares,
our CC1 shares, our D shares and our DD shares, the Ministry of Finance also
ceased making the interest payments on the perpetual deposits to us. The deposit
agreements do not expressly stipulate how the interest on our perpetual deposits
with the Ministry of Finance should be handled during periods in which we are
prevented from distributing dividends on our C shares, our CC shares, our CC1
shares, our D shares and our DD shares, and whether the interest will accrue and
be paid if we ultimately pay accrued dividends on such shares in arrears, or
upon liquidation.
Immediately prior to the publication of our financial statements for the
third quarter of 2002, our board of directors, assisted by legal advice, decided
not to distribute, for the time being, a dividend for the third quarter of 2002.
The decision was reached after considering, among other things, the following
issues:
o our results of operations of the third quarter of 2002 and the
liquidity crisis which affected us during the third quarter of 2002;
o our lack of distributable profits (as required by the Companies
Law);
o the prohibition on the distribution of dividends according to our
Articles of Association when there are no profits, not even nominal
profits;
o the prohibition on distribution of dividends according to the
Directives of Proper Banking Procedures, as long as the Supervisor
of Banks did not permit the distribution; and
o the possibility that the interest on our perpetual deposits with the
Ministry of Finance would continue to accrue even if not actually
paid, if no dividend is distributed.
We submitted a request to the Supervisor of Banks for guidance relating to
the distribution of dividends for the third quarter of 2002. On December 1,
2002, the Supervisor of Banks, in response to our request for guidance,
indicated, among other things, that under the circumstances, it would be
inappropriate for us to distribute a dividend for the third quarter of 2002.
Nevertheless, the Supervisor of Banks noted that it was still not completely
clear as to (a) the legal aspects of various questions connected with the
distribution of the dividends and (b) the accrual of interest on the perpetual
deposits, and the position of the State of Israel on this issue. The Supervisor
of Banks, in the interest of resolving the open issues, sent a copy of our
request for guidance to the Government Companies Authority and the Accountant
General in the Treasury and sought their input.
Because it 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 into the liquidation fund. In a letter dated January 22,
2003, we requested from the Ministry of Finance and the Government Companies
Authority that they promptly issue their respective positions in this matter.
109
In its reply dated March 13, 2003, the Ministry of Finance stated, among
other things, that the monies paid on the perpetual deposits for purposes of
distributing the dividend will be transferred to us solely for purposes of
redeeming the aforementioned redeemable preference shares (Classes D and DD), or
upon liquidation. In order to clarify matters and to avoid doubt, we once again
petitioned the Ministry of Finance to confirm that it accepts the position of
our board of directors as described in the preceding paragraph. Despite
reminders that were sent by the Bank to the Ministry of Finance regarding this
issue, the requested clarification has still not been obtained. The Bank made
further requests regarding this issue in 2004, but as yet has not received a
satisfactory response. The Board of Directors has deliberated the matter of the
dividend on the said preferred shares several times, and after taking into
account all of the considerations and circumstances described above, has decided
to abide by its previous decision and to refrain from distributing any further
dividend for the time being.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has ceased paying to the Bank the interest on its
perpetual deposits.
The aggregate amount of accrued and unpaid quarterly dividends on the
preferred shares is equal to NIS 95.2 million as of December 31, 2004, of which
NIS 37.5 million is in respect of accrued and unpaid dividends for 2004. 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 also
amounts to NIS 95.2 million as of December 31, 2004 in the aggregate) is also
not recorded on our financial statements. See "Item 3 - Risk Factors" above for
a discussion.
On September 28, 2004 various financial entities that hold our class C,
class CC and/or class CC1 shares filed with the Tel Aviv District Court an
originating motion in which the Court is requested to instruct us to pay to our
shareholders back dividends at the same rate and relevant quarterly dates as was
paid until the second quarter of 2002. As of March 31, 2005, this would amount
to approximately NIS 105.1 million. The petitioners contend, among other things,
that, according to our Articles of Association, we are required to pay to the
holders of our preferred shares an annual dividend at the rate of 7.5%, and that
this annual dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits we maintain
with the State. The petitioners contend that the annual dividend is not subject
to the distribution conditions provided by law, since the dividend is not paid
from our profits but rather by a third party (the State of Israel) and therefore
its payment does not lessen our assets. Moreover, they contend that even if the
distribution conditions should be applied to the annual dividend, we should
still be ordered to distribute the annual dividends, because we have met the
repayment ability test because the annual dividend is being fully financed by
the State of Israel and not being deducted from our capital.
110
Management believes the matter relating to dividends distribution is
connected to the question of whether under the circumstances of a
non-distribution of dividends, the interest on our perpetual deposits with the
Israeli Treasury is accrued in our favor. Since the answers received as of the
date of this annual report from the Ministry of Finance in this matter have been
unclear and insufficient, we have requested from the Tel Aviv District Court a
declaratory judgment against the State, by which the interest on the perpetual
deposits is indeed accrued in our favor, as is the position of our Board of
Directors on this matter.
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.
In connection with the audit of our financial statements for the fiscal
year ended December 31, 2004, our management has identified certain issues
relating to the processing and reporting of information as required by the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In
particular, our system of financial reporting was not designed to reconcile our
financial statements (which are prepared in accordance with Israeli GAAP) with
U.S. GAAP in accordance with the requirements of Form 20-F. This issue primarily
resulted from our lack of qualified financial and accounting personnel with
knowledge and expertise in U.S. GAAP and the requirements of the SEC and the
Public Company Accounting Oversight Board (the "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.
Our accounting personnel have outlined the issues relevant to the
reconciliation of our financial statements to U.S. GAAP and the methods of
preparing such a reconciliation. In addition, we have retained U.S. counsel to
advise as to the requirements of Form 20-F and related SEC rules and
regulations. . In preparing the U.S. GAAP reconciliation of our financial
statements, our accounting personnel were guided by the experience they acquired
in the previous annual report. 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.
111
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, 2004. 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 implemented certain control procedures,
including, without limitation, significantly limiting the number of personnel
authorized to retroactively record transactions.
Another matter that was identified concerned proper separation of duties.
Our accounting department, in addition to its financial reporting tasks, is also
responsible for various financial activities (regarding certain activities,
these responsibilities were transferred to our accounting department due to the
reduction of our staff as a result of the run-off plan), thus creating a lack of
separation of duties between the reporting body and the executing body.
Regarding some of these activities, their quantity and size and are negligible,
thus minimizing the risk. In order to reduce the risk regarding the other
activities, we have implemented additional, compensating control procedures and
we have also recently transferred some of the activities to other departments.
Finally, in December 2004, the Supervisor of Banks issued a directive
which stipulated that banks must consider the specific credit risk of its credit
in their calculation of the fair value of financial instruments by, at a
minimum, referring to three categories of borrowers that are not classified as
problematic. Our bank has not established categories for non-problematic
borrowers and, therefore, the specific credit category and the credit risk of
non-problematic borrowers is not considered in our calculation of the fair value
of financial instruments. Nevertheless, on May 1, 2005, the Supervisor of Banks
agreed to exempt us from complying with the above directive regarding credit
categories, thus making this matter mute.
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.
112
ITEM 16B - CODE OF ETHICS
We have adopted a code of ethics (as defined in Item 16B of Form 20-F)
that applies to all our directors, officers and employees. We have filed a copy
of this code of ethics as Exhibit 11.1 to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2003.
ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
According to the Companies Law-1999 (Israel), the remuneration of the
independent auditor for auditing work shall be established by the shareholders
at the general meeting, by the board of directors if the shareholders so
authorize, or, if the matter is prescribed in the articles of association, as
prescribed therein. Our shareholders authorized our board of directors to
establish the remuneration of the independent auditors for auditing work done in
2003 and 2004, subject to the fee schedule of the Government Companies
Authority.
Furthermore, the Companies Law-1999 (Israel) stipulates that the
remuneration of the independent auditors for services other than auditing work
shall be established by the board of directors unless the articles of
association state that remuneration for such services shall be established by
the shareholders at the general meeting.
Pursuant to the above, the remuneration of our independent auditors for
audit work and other services in 2003 and 2004 was established and/or will be
established by our board of directors.
KPMG - Somekh Chaikin, Certified Public Accountants (Isr.), has served as
our independent public accountant for each of the fiscal years in the three-year
period ended December 31, 2004, for which audited financial statements appear in
this annual report on Form 20-F. For the years ended December 31, 2004 and 2003,
the aggregate fees billed and/or agreed to by KPMG and its affiliates are as
follows:
2004 2003
----- -----
(IN THOUSANDS OF NIS)
-------------------------
Audit Fees(1) ........................ 1,277 1,729
Audit-related Fees(2) ................ 59 171
Tax Fees(3) .......................... 23 53
----- -----
TOTAL ................................ 1,359 1,953
===== =====
(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.
113
(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.
114
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, 2004 and December 31, 2003
and the statements of income, deficit and cash flows for the years ended
December 31, 2004, 2003 and 2002, including the notes thereto and together with
the auditors' report thereon, are included at pages F-1 to F-83 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 32 TO THE FINANCIAL
STATEMENTS.
ITEM 18. FINANCIAL STATEMENTS
See Item 17 above.
ITEM 19. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Memorandum and Articles of Association of Israel Development Bank of
Israel Ltd. (translation) (incorporated by reference to the
applicable exhibit to the Annual Report on Form 20-F of Industrial
Development Bank of Israel Limited for fiscal year ended December
31, 2003).
4.1 Summary of run-off plan (incorporated by reference to the applicable
exhibit to the Annual Report on Form 20-F of Industrial Development
Bank of Israel Limited for fiscal year ended December 31, 2003).
4.2 Summary of Lease Agreement (incorporated by reference to the
applicable exhibit to the Annual Report on Form 20-F of Industrial
Development Bank of Israel Limited for fiscal year ended December
31, 2003).
4.3 Summary of special line of credit from Bank of Israel (incorporated
by reference to the applicable exhibit to the Annual Report on Form
20-F of Industrial Development Bank of Israel Limited for fiscal
year ended December 31, 2003).
4.4 Summary of Perpetual Deposit Agreement.
4.5 Summary of Computer Services Outsourcing Agreement.
4.6 Summary of Special Collective Agreement with Employees.
4.7 Summary of Indemnification Agreement for Directors and Senior
Officers.
4.8 Summary of Kibbutz Debt Agreement.
4.9 Summary of Credit to a certain Governmental Entity
115
11.1 Code of Ethics (incorporated by reference to the applicable exhibit
to the Annual Report on Form 20-F of Industrial Development Bank of
Israel Limited for fiscal year ended December 31, 2003).
12.1 Certification of Uri Galili, General Manager of Industrial
Development Bank of Israel Ltd., pursuant to 15 U.S.C. Section
78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
12.2 Certification of Rimon Shmaya, Comptroller of Industrial Development
Bank of Israel Ltd., pursuant to 15 U.S.C. Section 78(m)(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
116
SIGNATURES
The Registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
By: /s/ Uri Galili By: /s/ Natan Atlas
- --------------------------- ------------------------------
Uri Galili, General Manager Natan Atlas, General Secretary
Dated: July 14, 2005.
117
<page>
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2004
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Report F-1
Balance Sheets F-3
Statements of Income F-4
Statement of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7
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, 2004 and 2003.
b. Statements of income, shareholders' equity, and cash flows, for each of the
three years, the last of which ended December 31, 2004.
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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Such standards require that we plan
and perform the audits to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank as of December 31,
2004 and 2003, 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, 2004, 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 32 to the financial statements.
As explained in Note 1C, the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board and the directives and guidelines of the Supervisor of Banks. The
financial statements for dates and reporting periods that ended through the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel and the directives and guidelines of the supervisor of
Banks.
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 the Bank experienced in August 2002, which
were caused by increased withdrawals of public deposits. Following these
liquidity problems, on August 22, 2002, the Bank turned to the Governor of
the Bank of Israel with a request for a special 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, 2004, 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 20 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.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 28, 2005, except for Note 32, as to which the date is July 14, 2005.
Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
2004 2003
------- --------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------- --------
NIS NIS
NOTE MILLIONS MILLIONS
---- ------- --------
ASSETS
Cash and deposits with banks 2 117.9 143.9
Securities 3 60.0 85.4
Credit to the public 4 7,993.4 9,189.6
Credit to governments 5 72.7 105.2
Fixed assets 6 1.9 4.7
Other assets 7 26.0 28.2
Perpetual deposits with the Israeli Treasury 8 806.5 799.3
------- --------
Total assets 9,078.4 10,356.3
======= ========
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
/s/ Dr. Raanan Cohen
____________________________________
Dr. Raanan Cohen - Chairman of the Board
/s/ Uri Galili
____________________________________
Uri Galili - General Manager
/s/ Rimon Shmaya
____________________________________
Rimon Shmaya - Comptroller
Date of approval of the financial statements: February 28, 2005, except
for Note 32, as to which
the date is July 14, 2005
The accompanying notes are an integral part of the financial statements.
Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
2004 2003
------- --------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------- --------
NIS NIS
NOTE MILLIONS MILLIONS
--- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 9 405.3 620.0
Deposits of banks 10 1,428.0 2,172.7
Deposits of the Government 6,654.6 6,949.3
Perpetual deposit 11 0.1 0.1
Capital notes 12 25.3 28.2
Other liabilities 13 56.8 76.2
------- --------
Total liabilities 8,570.1 9,846.5
Non-participating shares 14 309.1 314.2
Shareholders' equity 15 199.2 195.6
------- --------
Total liabilities and shareholders' equity 9,078.4 10,356.3
======= ========
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
The accompanying notes are an integral part of the financial statements.
F - 3
The Industrial Development Bank of Israel Limited
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
2004 2003 2002
---- ----- -----
ADJUSTED
REPORTED AMOUNTS* AMOUNTS***
--------------- -----
NIS NIS NIS
NOTE MILLIONS MILLIONS MILLIONS
---- ---- ----- -----
Profit from financing operations
before allowance for doubtful debts 22 66.2 70.1 79.5
Allowance for doubtful debts 4C 70.2 129.8 401.8
---- ----- -----
Profit (loss) from financing operations
after allowance for doubtful debts (4.0) (59.7) (322.3)
---- ----- -----
OPERATING AND OTHER INCOME
Operating commissions 23 4.1 6.5 12.3
Gains (losses) from investments in shares 24 41.5 10.3 (4.2)
Other income 25 4.6 5.5 4.1
---- ----- -----
Total operating and other income 50.2 22.3 12.2
---- ----- -----
OPERATING AND OTHER EXPENSES
Salaries and related expenses 26 19.7 33.7 49.7
Expenses (income) in respect of employee
retirement (0.8) (1.5) 35.7
Maintenance and depreciation of premises
and equipment 5.7 11.8 14.7
Other expenses 27 20.4 20.7 19.7
---- ----- -----
Total operating and other expenses 45.0 64.7 119.8
---- ----- -----
Operating profit (loss) before taxes on income 1.2 (102.1) (429.9)
Erosions and adjustments** - (4.5) -
---- ----- -----
Operating profit (loss) before taxes on income 1.2 *** (106.6) (429.9)
Tax savings 28 - *** (2.7) (0.4)
---- ----- -----
Operating profit (loss) after taxes on income 1.2 *** (103.9) (429.5)
---- ----- -----
OTHER ITEMS
Special income from the Israeli Treasury, net 30 - *** - 6.4
Share in losses of affiliates, net
of related tax - *** (0.4) (0.5)
Capital gain (loss), net 0.2 *** (0.1) 0.1
---- ----- -----
0.2 *** (0.5) 6.0
---- ----- -----
NET EARNINGS (LOSS) FOR THE YEAR 1.4 *** (104.4) (423.5)
==== ===== =====
EARNINGS (LOSS) PER SHARE (SEE NOTE 1Q)
NET EARNINGS
(LOSS) PER SHARE DIVIDEND PER SHARE
------------------------ -------------------
2004 2003 2002 2004 2003 2002
---- ----- ----- ---- ---- ----
NIS NIS NIS NIS NIS NIS
---- ----- ----- ---- ---- ----
Per an amount equal to
US$1 of the par value
of -
"C", "CC" and "CC1"
preference shares 0.02 (1.79) (7.23) - - 0.14
"A" ordinary shares 0.02 (1.79) (7.37) - - -
Preferred ordinary shares 0.02 (1.79) (7.37) - - -
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003. For the year 2003 -
Discontinuance of the adjustment to the effect of inflation according to
the CPI of December 2002.
** Erosions and adjustments to the effect of inflation according to the CPI of
December 2003 of income and expenses that were included in the operating
profit before taxation in reported amounts.
*** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
The accompanying notes are an integral part of the financial statements.
F - 4
The Industrial Development Bank of Israel Limited
STATEMENT OF SHAREHOLDERS' EQUITY*
- --------------------------------------------------------------------------------
ACCUMULATED
ACCUMULATED DIFFERENCE ON
DIFFERENCE ON TRANSLATION
TRANSLATION OF
OF CPI LINKED
ORDINARY PREFERENCE DOLLAR LINKED DEPOSIT(**)
SHARES SHARES DEPOSIT(**) NIS MILLIONS
------- ------- ------- -------
BALANCE AT JANUARY 1, 2002 131.4 1,068.0 (697.5) 172.6
CHANGES DURING 2002
Net loss - - -
Adjustments from presentation of available- for- sale securities
at fair value - - -
Translation differences relating to CPI-linked perpetual deposit (**) - - (1.1)
Dividends - preference shares - - -
------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2002 131.4 1,068.0 (697.5) 171.5
CHANGES DURING 2003
Net loss - - -
Adjustments from presentation of available-for -sale securities
at fair value - - -
Translation differences relating to CPI-linked perpetual deposit (**) - - 18.7
------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2003 131.4 1,068.0 (697.5) 190.2
CHANGES DURING 2004
Net earnings - - -
Adjustments from presentation of available- for sale securities
at fair value - - -
Translation differences relating to CPI-linked perpetual deposit (**) - - 12.3
------- ------- ------- -------
Balance as of December 31, 2004 131.4 1,068.0 (697.5) 202.5
======= ======= ======= =======
ADJUSTMENTS
FROM
PRESENTATION
OF AVAILABLE- RETAINED
FOR-SALE EARNINGS TOTAL
SECURITIES (ACCUMULATED SHAREHOLDERS'
AT FAIR VALUE LOSS) EQUITY
------- ------- -------
BALANCE AT JANUARY 1, 2002 4.7 27.4 706.6
CHANGES DURING 2002
Net loss - (423.5) (423.5)
Adjustments from presentation of available- for- sale securities
at fair value 0.1 - 0.1
Translation differences relating to CPI-linked perpetual deposit (**) - - (1.1)
Dividends - preference shares - (6.4) (6.4)
------- ------- -------
BALANCE AS OF DECEMBER 31, 2002 4.8 (402.5) 275.7
CHANGES DURING 2003
Net loss - (104.4) (104.4)
Adjustments from presentation of available-for -sale securities
at fair value 5.6 - 5.6
Translation differences relating to CPI-linked perpetual deposit (**) - - 18.7
------- ------- -------
BALANCE AS OF DECEMBER 31, 2003 10.4 (506.9) 195.6
CHANGES DURING 2004
Net earnings - 1.4 1.4
Adjustments from presentation of available- for sale securities
at fair value (10.1) - (10.1)
Translation differences relating to CPI-linked perpetual deposit (**) - - 12.3
------- ------- -------
Balance as of December 31, 2004 0.3 (505.5) 199.2
======= ======= =======
(*) The balances and changes relating to 2002 and 2003 are in amounts adjusted
to the effect of inflation according to the CPI of December 2003. The
balances and changes relating to 2004 are in reported amounts -
discontinuance of the adjustment to the effect of inflation according to
the CPI of December 2003
(**) See Note 8 to the financial statements.
The accompanying notes are an integral part of the financial statements.
F - 5
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
2004 2003 2002
-------- -------- --------
AMOUNTS ADJUSTED TO THE EFFECT OF
REPORTED INFLATION ACCORDING TO THE
AMOUNTS* CPI OF DECEMBER 2003
-------- ---------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- --------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the year 1.4 (104.4) (423.5)
Adjustments to reconcile net earnings (loss) to net cash flows
generated by operating activities:
Bank's share in losses of an affiliate, net of related taxes - 0.4 0.5
Depreciation on equipment 2.9 5.3 6.8
Allowance for doubtful debts 71.1 130.0 402.0
Realized and non-realized loss on adjustment
to fair value of trading securities - - 2.1
Loss due to impairment in value of available-for-sale debentures - - 3.1
Gain on sale of available-for-sale securities (38.5) (9.1) (1.8)
Capital gain (loss) (0.2) 0.3 (0.1)
Provision for severance pay and pensions, net (7.0) (12.5) 36.5
Inflationary erosion of capital notes and perpetual deposit (2.3) (2.2) (0.2)
-------- -------- --------
Net cash inflow generated by operating activities 27.4 7.8 25.4
-------- -------- --------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net 6.1 60.0 15.5
Trading securities, net - - 6.0
Available-for-sale securities, net 53.8 24.9 159.9
Purchase of held-to-maturity debentures - - (2.8)
Credit to the public, net 1,124.5 1,567.4 933.7
Credit to governments, net 32.5 82.9 50.0
Other assets, net 2.2 23.6 152.3
Acquisition of fixed assets (0.1) (0.2) (4.0)
Proceeds from sale of fixed assets 0.2 0.1 0.1
-------- -------- --------
Net cash inflow generated by activities
related to assets 1,219.2 1,758.7 1,310.7
-------- -------- --------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes (0.6) (4.9) (0.1)
Deposits of the public, net (214.7) (671.4) (3,055.1)
Deposits of banks, net (744.7) (297.9) 1,561.4
Deposits of the Government, net (294.7) (762.2) (125.3)
Redemption of debentures - - (0.1)
Other liabilities, net (11.8) (69.8) (176.6)
Dividend paid to holders of participating shares - - (6.4)
-------- -------- --------
Net cash outflow generated by activities
relating to liabilities and shareholders' equity (1,266.5) (1,806.2) (1,802.2)
-------- -------- --------
DECREASE IN CASH (19.9) (39.7) (466.1)
BALANCE OF CASH AS AT BEGINNING OF YEAR 115.3 155.0 621.1
-------- -------- --------
BALANCE OF CASH AS AT END OF YEAR 95.4 115.3 155.0
======== ======== ========
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
F - 6
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. DETERIORATION IN THE LIQUIDITY SITUATION, THE GOVERNMENT DECISIONS
PERTAINING TO THE AFFAIRS OF THE BANK, THE CREDIT LINE FROM THE BANK
OF ISRAEL AND THE "RUN OFF" PLAN
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, on July 29, 2003
the Ministerial Committee for Social and Economic Affairs (The
Social-Economic Cabinet) approved the "Run-Off" plan of the Bank
(hereinafter - the Government 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 supervised 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 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 after 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 repaid by means of a
monetary transfer to the Bank of Israel within an additional period of
12 months.
o The Government has noted 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 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
depositors, and for the purpose of disposing of the assets of the Bank
within 36 months in a supervised process.
The Bank is presently in the process of implementing the "Run-off" plan as
described above and in more detail below.
F - 7
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
THE SPECIAL CREDIT LINE FROM THE BANK OF ISRAEL
The conditions of the special line of credit that was provided to the Bank
by the Bank of Israel were specified in the letters of the Governor of the
Bank of Israel from September 9, 2002 and September 1, 2003, and
clarifications regarding those letters were provided to the Bank in a
letter from the Supervisor of Banks dated March 4, 2004.
The principal conditions (as arise from combining all the aforementioned
letters) are as follows:
o The repayment date will be no later than August 1, 2006. The Governor
has the right to demand an earlier repayment of the credit line or to
discontinue its use.
o The maximum amount of the credit line will decline (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 (hereinafter - the credit
line decline forecast).
o The Bank will be allowed to use the credit line in order to fulfill
its banking obligations and other related obligations that serve the
purposes of reducing the special credit line and selling its credit
portfolio, subject to its complying with the credit line decline
forecast.
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 sale of the Bank's 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 annual rate of 1%
(charged monthly) on the difference between the amount of the credit
line and 105% of its utilized amount.
o The total amount of credit to the public will not exceed its balance
as at July 31, 2003 and it will have a downward trend. 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 the Bank's volume of activity with respect to
the deposit and receipt of deposits.
o The granting of the special credit line is subject to various
conditions, among which is the registering 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 (the
pledge was created by a debenture dated November 14, 2002). See Note
16A.
With respect to some of the aforementioned matters relating to the Bank's
activities, the approval that was provided to the Bank by the Supervisor of
Banks is in effect until July 31, 2005.
Following several reductions made during 2003 and 2004 in the "Bank of
Israel interest rate", this rate of interest was 3.7% p.a. on December 31,
2004.
The utilized balance of the special credit line (not including accrued
interest) was NIS 1,389 million at December 31, 2004 (compared with NIS
2,062 million as at December 31, 2003).
F - 8
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
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 this respect, the Board of Directors also approved an extensive and
detailed efficiency plan formulated by the Bank Management, which 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 complementary efficiency
plan, the Bank refrains from granting new credit and it concentrates its
activities on collection and sale of the existing credit.
As part of the implementation of its plans, the Bank has reduced and/or
completely or almost completely discontinued the following activities:
foreign currency and foreign trade activity, maintenance of a dealing room
(for customers), maintenance of current accounts and securities accounts
(for private customers), processing grants, operating cash and clearing
facilities (independently) and credit cards.
The reduction in the Bank's operations was accompanied also by a reduction
in the Bank's staff.
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 selling the Bank's assets as part of
the "Run-Off" plan.
B. DEFINITIONS
In these financial statements -
ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
the changes in the general purchasing power of the Israeli currency in
accordance with the opinions of the Institute of Certified Public
Accountants in Israel.
REPORTED AMOUNT - The adjusted amount as at the date of transition with the
addition of amounts in nominal values that were added after the date of
transition and less amounts subtracted after the date of transition.
DATE OF TRANSITION - December 31, 2003.
ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
the effect of the changes in the general purchasing power of the Israeli
currency in accordance with the opinions of the Institute of Certified
Public Accountants in Israel.
F - 9
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
GENERAL
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel.
In October 2001 the Israeli Accounting Standards Board published Accounting
Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
Pursuant to this standard and in accordance with Accounting Standard No. 17
that was published in December 2002, the adjustment of financial statements
will be discontinued as of January 1, 2004. Until December 31, 2003, the
Bank continued to prepare adjusted financial statements in accordance with
the directives of the Supervisor of Banks, on the basis of the principles
of the Opinion No. 36 of the Institute of Certified Public Accountants in
Israel. The adjusted amounts presented in the financial statements as of
December 31, 2003 are the basis for the financial statements in reported
amounts. Any additions made during the period are included according to
their nominal values.
BALANCE SHEET
Non-monetary items are stated at reported amounts.
Monetary items are stated in the balance sheet at their nominal historical
values as at balance sheet date.
Amounts of non-monetary assets do not necessarily reflect their realizable
value or current economic value, but only the reported amounts of such
assets.
The term "cost" in these financial statements means the reported amount of
cost.
STATEMENTS OF INCOME
1. Income and expenses deriving from non-monetary items or from
provisions included in the balance sheet are derived from the
difference between the reported amount of the opening balance and the
reported amount of the closing balance.
2. All other operating items are stated at their nominal historical
values.
COMPARATIVE DATA
STATEMENT OF INCOME - In light of the significance attributed by the
Supervisor of Banks to the income and expenses from financial instruments
that are included in the operating results of banking entities, and so that
the readers of the financial statements will be able to examine the annual
data for 2004 in comparison with the data for 2003 (hereinafter - the
comparative financial statements), the Supervisor of Banks issued
transitional directives regarding the financial statements of 2004 in
reported amounts. In accordance with these transitional directives the
statement of income for the year ended December 31, 2004 was prepared in
reported amounts, as provided in Standard 12 of the Israeli Accounting
Standards Board regarding discontinuance of the adjustment of financial
statements.
F - 10
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT'D)
The statement of income for the year ended December 31, 2003 is presented
as follows:
The statement of income items up to and including the operating profit
before taxes on income are adjusted to the effect of inflation according to
the CPI of December 2002.
Erosions and adjustments to the effect of inflation according to the CPI of
December 2003 of income and expenses included in the operating profit
before taxes on income are presented as one amount in a separate line
before the item of the operating profit before taxes on income.
The statement of income items included after the operating profit before
taxes on income in reported amounts are adjusted to the effect of inflation
according to the CPI of December 2003.
BALANCE SHEET AND STATEMENT OF SHAREHOLDERS' EQUITY - The comparative
figures of the balance sheet and the statement of shareholders' equity
items are presented adjusted to inflation according to the CPI of December
2003.
D. STATEMENT OF SHAREHOLDERS' EQUITY
The difference generated until May 6, 1996 between the adjustment of the
special deposit with the Israeli Treasury which, up to May 6, 1996, was
linked to the exchange rate of the US dollar, in respect of the
participating preference shares similarly linked to the exchange rate of
the US dollar, and the adjustment of the said deposit on the basis of the
CPI, is reflected in the statement of shareholders' equity in the item
entitled "Accumulated difference on translation of a dollar linked deposit"
(see Note 8).
The difference generated from May 7, 1996, between the adjustment of the
special deposit with the Israeli Treasury, linked from that date to the CPI
(which in no event will be less than its dollar value as it was on October
1, 1987) and the adjustment of the non-participating shares linked to the
exchange rate of the dollar, is reflected in the statement of shareholders'
equity in the item entitled "Accumulated difference on translation of
CPI-linked deposit" (see Note 8).
E. EXCHANGE RATES AND LINKAGE
(1) Assets and liabilities denominated in, or linked to, foreign currency,
except for investments in securities, are stated on the basis of the
representative exchange rates, published by Bank of Israel, in effect
on balance sheet date or on a date relevant to the particular
transaction.
(2) Assets and liabilities linked to the CPI are stated according to the
contractual linkage terms of each balance.
(3) Assets and liabilities, which are optionally linked to the CPI or to
foreign currency, are stated in the financial statements using the
relevant basis under the terms of the respective transactions.
(4) Interest and linkage differences accrued in respect of assets and
liabilities are included in the balance sheet under the items to which
they relate.
F - 11
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. EXCHANGE RATES AND LINKAGE (CONT'D)
(5) Following are details of exchange rates and the CPI and the rates of
change therein:
DECEMBER 31 RATE OF CHANGE DURING
--------------------------- --------------------
2004 2003 2002 2004 2003 2002
----- ----- ----- ---- ---- ---
% % %
---- ---- ---
Representative
exchange rate
of US$1
(in NIS) 4.308 4.379 4.737 (1.6) (7.6) 7.3
CPI in points
for:
December 180.7 178.6 182.0 1.2 (1.9) 6.5
November 180.6 178.9 182.5 1.0 (2.0) 6.7
F. SECURITIES
In accordance with the directives of the Supervisor of Banks securities are
to be classified into three groups, and principles of measurement were
provided for each group as follows:
HELD-TO-MATURITY DEBENTURES
Such debentures are stated at their adjusted value as of balance sheet
date. Such value represents the par 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.
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.
SECURITIES FOR TRADING
Such securities are stated at their fair value, and income resulting from
such adjustment is recognized on a current basis. The fair value of
securities for trading is determined based on their stock market prices as
of balance sheet date.
F - 12
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
F. SECURITIES (CONT'D)
IMPAIRMENT IN VALUE OF INVESTMENTS
From time to time the bank examines whether there has been an impairment in
the value of its investments in securities which is not of a temporary
nature. This examination is performed when there are signs that may
indicate the possibility of an impairment in the value of an investment,
including a decline in their stock market prices, the business of the
investee, the industry in which the investee operates and additional
parameters. Provisions for the adjustment in value of these investments,
which in accordance with the opinion of the Management are based on an
examination of the overall relevant aspects and the significance of each,
and which are not of a temporary nature, are recorded in the income
statement.
G. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts,
which, in Management's opinion, fairly present the anticipated loss on the
credit portfolio, including off-balance sheet credit.
In determining the adequacy of the allowances, Management based itself upon
the evaluation of the risk involved in the credit portfolio using available
information on the customers' financial position, volume of activity, past
record and adequacy of the collaterals received.
The directives of the Supervisor of Banks require that, commencing with
1992, banks include, in addition to the specific allowance for doubtful
debts, a supplementary allowance for doubtful debts, which replaces the
general allowance, which had been required up to that time.
The supplementary allowance for doubtful debts is based upon excessive
credit balances, measured according to specified quality characteristics of
the credit portfolio, as provided in the directives of the Supervisor of
Banks. In accordance with the aforementioned requirements, a portion of the
general allowance, as 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. According to a directive of the Supervisor of Banks the
adjustment to inflation of the general allowance will be discontinued as of
January 1, 2005.
According to Directive 315 of Proper Banking Procedures, a banking
corporation must record a supplementary allowance for doubtful debts in
respect of debts of customers which deviate from limits stipulated by the
Supervisor of Banks, which are calculated as a certain percentage of the
Bank's capital, as stipulated for purposes of calculating the minimum
capital ratio. These limits relate to the indebtedness of an individual
borrower or a borrower group, to the indebtedness in respect of financing
the acquisition of means of control of corporate entities and to the
indebtedness of related parties.
As a result of the decline in the "first tier capital" of the Bank and the
limitation on the amount of "second tier capital" that may be taken into
consideration, a large part of the customers' debts to the Bank exceed the
amounts of the aforementioned limits.
Furthermore, Directive 315 of the Proper Banking Procedures provides that a
banking corporation is required to make a supplementary allowance for
doubtful debts if the total liabilities of a certain sector to the banking
corporation exceed 20% of the total liabilities of the public to the
banking corporation (hereinafter - "the limit on sector indebtedness").
F - 13
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
Since the Bank has stopped providing new credit and is focusing on the
collection of the existing credit to its customers, its ability to spread
the indebtedness of its customers between the various sectors has decreased
and it may on occasion deviate from the limit on sector indebtedness.
The Bank applied to the Bank of Israel requesting an exemption from
recording the supplementary allowance for doubtful debts deriving from
deviations from the aforementioned various debt limits.
In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
Banks exempted the Bank from the requirement to increase the supplementary
allowance for doubtful debts in its financial statements as 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 control in corporate entities.
In his letter of November 26, 2003, the Supervisor of Banks announced that
in light of the Government's decision on the affairs of the Bank, the
Bank's plan to reduce its activity and the commitment of the Government to
repay the special credit line, which was granted to the Bank by the Bank of
Israel and which is being used by the Bank to repay its liabilities to its
depositors, he approves the following 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 supplementary allowance for
doubtful debts in respect of deviations from debt limits of an
individual borrower and a borrower group and deviations from debt
limits in respect of financing means of control in corporate entities,
and in respect of deviations from the limit of sector indebtedness.
B. The Bank is allowed to reduce the supplementary allowance it recorded
in respect of the deviation from the aforementioned limits in the last
quarter of 2002.
C. The Bank is allowed to reduce the supplementary allowance it recorded
in the past in respect of the deviation from indebtedness of related
parties.
Accordingly, in the Bank's financial statements as of December 31, 2003,
the Bank did not record a supplementary allowance for doubtful debts in
respect of deviations from the aforementioned limits, and the supplementary
allowance for doubtful debts in the amount of NIS 7.5 million that was
included in the financial statements of the Bank on December 31, 2002 and
thereafter, in respect of the deviation from these limits, was cancelled in
the third quarter of 2003.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to record a supplementary allowance in
significant amounts in respect of these deviations, which would have had a
material impact on its financial results.
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, 2004, constitutes 3.27% of the public credit
risk, which includes credit risk and off-balance sheet credit risk less
credit covered by collateral that is allowed to be deducted for purposes of
individual borrower and group of borrowers limitations (December 31, 2003 -
2.43%).
F - 14
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
The Bank's policy is not to write-off doubtful debts until all collection
efforts, with respect thereto, have been exhausted. If Management concludes
that recovery of a debt is no longer possible, then cases involving
significant amounts are brought before the authorized bodies of the Bank,
which decide upon their being written-off.
H. FIXED ASSETS
Fixed assets are stated at cost net of accumulated depreciation.
Depreciation is calculated using the "straight-line" method, at rates
deemed adequate to write off the assets over their estimated useful lives.
I. CONTINGENT LIABILITIES
Adequate provisions have been recorded in respect of claims, which, in
Management's estimation, based on the opinion of legal counsel, will
probably not be rejected or canceled.
J. BASIS OF RECOGNITION OF INCOME AND EXPENSES
(1) Income and expenses are recognized on the accrual basis.
(2) As to basis of recognition of income and expenses with respect to
trading securities and derivative financial instruments defined as
other transactions, see F and L, respectively.
K. EMPLOYEE RIGHTS
Appropriate provisions cover the Bank's liability for payment of severance
pay and other benefits to its employees, according to labor agreements.
In December 2002 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. In accordance with the agreements, upon the
retirement of each one of these employees the Bank deposits with the
pension fund the amount required to purchase the pension rights for the
particular employee. The Bank records provisions with respect to the
anticipated cost of acquiring the said pension rights, as computed by an
expert.
F - 15
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
L. DERIVATIVE FINANCIAL INSTRUMENTS
Beginning with January 1, 2003, the Bank implements the directives of the
Supervisor of Banks regarding derivative financial instruments and hedging
activities that were provided in a circular issued by the Supervisor of
Banks on January 1, 2001. The directives in the circular are based on the
principles stipulated in U.S. Accounting Standard FAS 133. In accordance
with these directives, beginning with January 1, 2003 the Bank presents all
the derivative instruments, including certain derivative instruments
embedded in other contracts, as assets or liabilities in the balance sheet
and measures them according to fair value. The change in the fair value of
a derivative instrument is recorded in statement of income or included in
the shareholders' equity as a component of other comprehensive income,
according to the designated purpose of the instrument.
The effect of the change in the aforementioned accounting policy on the
financial statements was immaterial.
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 -
A 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
A transaction 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
A 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 opposing 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
A transaction in a derivative financial instrument that 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.
F - 16
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
L. DERIVATIVE FINANCIAL INSTRUMENTS (CONT'D)
In accordance with the criteria described above, the derivative financial
instruments were defined in 2002 as at-risk brokerage transactions and as
other transactions.
M. OFF-SETTING OF FINANCIAL INSTRUMENTS
Pursuant to the directives, amounts of designated deposits, the repayment
of which to the depositor is contingent on the collection of the loans
granted therefrom, are offset against the amounts of the related loans and,
therefore, are not reflected in the balance sheet. Income earned from such
collection-based loan operations is classified as operating commissions.
In accordance with the instructions of the Supervisor of Banks, assets and
liabilities in respect of financial instruments with the same counter party
are set-off against one another and presented net in the balance sheet when
the following cumulative conditions are fulfilled:
(1) In respect of such liabilities the Bank has the legal right to enforce
the set-off of the liabilities from the assets.
(2) The Bank intends to pay the liabilities and realize the assets on a
net basis or simultaneously.
N. TAXES ON INCOME
The provision for taxes on the income of the Bank, which is defined as a
"financial institution" for Value Added Tax (hereinafter - VAT) purposes,
includes VAT on profit in accordance with the Value Added Tax Law. VAT
levied on salaries paid by financial institutions is included in the
statement of income under "Salaries and related expenses". In 2002, 2003
and 2004, "Salaries and related expenses" included a provision in respect
of salary VAT receivable, due to losses for purposes of VAT on profit.
O. STATEMENT OF CASH FLOWS
Cash flows from activity in assets and liabilities are presented net,
except for securities, fixed assets, investments in affiliates, capital
notes and debentures. "Cash", for purposes of the cash flow statement,
includes cash deposits with banks for an initial period not exceeding three
months.
P. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of income and expenses during
the reported period. Actual results may differ from such estimates.
F - 17
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
Q. EARNINGS PER SHARE
Earnings per share have been computed on the basis of the number of
outstanding participating shares, which remained unchanged during the
reported years. In view of the fact that the share capital of the Bank is
composed of several classes of shares, a situation which does not allow for
a fair comparison of the per share data of the various classes of shares,
and as certain of these classes of shares are linked to the US dollar while
other classes participate in earnings on an equal basis with the linked
shares, the per share earnings data is given in relation to an amount which
equals US$1 of the par value of the shares, according to the basic exchange
rate to which they are linked.
R. IMPAIRMENT OF ASSETS
In February 2003, the Israeli Accounting Standards Board issued Accounting
Standard No. 15, which deals with the impairment in value of assets. The
standard stipulates the procedures to be implemented by the corporation in
order to ensure that its assets are not presented at amounts higher than
their recoverable value. Such value is the higher of the net selling price
and the present value of the estimated future cash flows expected to be
generated from the use and disposal of the asset. The Standard also
stipulates principles of presentation and disclosure regarding assets which
have been impaired. The Standard is effective as regards financial
statements for periods beginning on January 1, 2003. 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.
S. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION
In July 2004, the Israeli Accounting Standards Board published Accounting
Standard No. 19, "Taxes on Income". The Standard provides that a liability
for deferred taxes is to be recorded for all temporary differences subject
to tax, except for a limited number of exceptions. In addition, a deferred
tax asset is to be recorded for all temporary differences that may be
deducted, losses for tax purposes and tax benefits not yet utilized, if it
is anticipated that there will be taxable income against which they can be
offset, except for a limited number of exceptions. The new Standard applies
to financial statements for periods beginning on January 1, 2005. The
Standard provides that it is to be implemented by means of a cumulative
effect of a change in accounting method. In the Bank's estimation, the
impact of the Standard on its results of operations, financial position and
cash flows is not expected to be material. With respect to certain matters
relating to the accounting treatment of taxes on income, including the
matter of recognizing a deferred tax asset in respect of carryforward
losses and temporary differences, directives of the Supervisor of Banks
contain additional restrictions. With respect to these matters the Bank is
subject also to the additional restrictions provided in the directives of
the Supervisor of Banks.
F - 18
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - CASH AND DEPOSITS WITH BANKS
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS NIS
MILLIONS MILLIONS
----- -----
Cash and deposits with Bank of Israel (1) 12.6 57.0
Deposits with commercial banks (2) 90.0 67.8
Deposits in special banking corporations 15.3 19.1
----- -----
Total 117.9 143.9
===== =====
Including cash, deposits with Bank of Israel
and with banks for an initial period not
exceeding three months 95.4 115.3
===== =====
(1) This serves as collateral for deposits received from the Bank of
Israel - see also Note 16 below.
(2) As to pledge on deposits with commercial banks - see also Note 16
below.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
NOTE 3 - SECURITIES
A. COMPOSITION
DECEMBER 31, 2004
------------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
---- ---- --- ---- ----
REPORTED AMOUNTS*
------------------------------------------------------------------------------
NIS MILLIONS
------------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES (A)
Other debentures 3.7 3.6 0.1 - 3.7
Shares of others 56.3 56.1 0.6 (0.4) (3) 56.3
---- ---- --- ---- ----
Total available-
for-sale securities 60.0 59.7 (4)0.7 (4)(0.4) 60.0
---- ---- --- ---- ----
Total securities 60.0 59.7 0.7 (0.4) (3)60.0
==== ==== === ==== ====
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
F - 19
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (CONT'D)
A. COMPOSITION (CONT'D)
DECEMBER 31, 2003
------------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
---- ---- ---- ---- ----
ADJUSTED AMOUNTS*
------------------------------------------------------------------------------
NIS MILLIONS
------------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES (A)
Other debentures 15.1 15.4 - (0.3) 15.1
Shares of others (b) 70.3 59.6 11.0 (0.3) (3) 70.3
---- ---- ---- ---- ----
Total available-
for-sale securities 85.4 75.0 (4) 11.0 (4) (0.6) 85.4
---- ---- ---- ---- ----
Total securities 85.4 75.0 11.0 (0.6) (3) 85.4
==== ==== ==== ==== ====
(1) In the case of shares - cost less provision for impairment in value,
where required.
(2) Fair value data are based, generally, on stock market prices, which do
not necessarily reflect the price which would be received on the sale
of a large quantity of shares.
(3) Includes shares, the fair value of which is not readily determinable,
which are stated at cost in the amount of NIS 30.5 million (December
31, 2003 - NIS 34.3 million).
(4) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
(a) 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. The balance of
the above debentures at December 31, 2004 amounted to NIS 3.4 million
(December 31, 2003 - NIS 8.2 million).
(b) See Note 4E regarding the classification of a customer's debt to the
securities item.
B. See Note 16 regarding the Government debentures that were pledged in
order to receive credit from Bank of Israel.
NOTE: For detail regarding results of investments in debentures - see Note
22E, and for detail regarding results of investments in shares - see
Note 24.
* Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 20
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)
A. COMPOSITION
DECEMBER 31 DECEMBER 31
2004 2003
------- -------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Credit 8,062.1 9,268.1
General and supplementary allowances for
doubtful debts (1) 68.7 78.5
------- -------
Total 7,993.4 9,189.6
======= =======
B. CREDIT TO THE PUBLIC INCLUDES:
1. CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
a. Non-income bearing credit to problematic borrowers -
Non-linked Israeli currency 296.7 391.9
Israeli currency linked to the CPI 20.2 47.6
Denominated in or linked to foreign currency 49.9 88.5
----- -----
366.8 528.0
===== =====
b. Credit restructured during the year, without waiver of income -
Non-linked Israeli currency 40.3 3.6
Israeli currency linked to the CPI 25.3 -
Denominated in or linked to foreign currency 19.0 1.2
c. Credit to borrowers regarding which there is as yet an
unimplemented Management decision to restructure
their debt 17.6 46.9
d. Credit temporarily in arrears 114.5 98.9
Interest income recorded in respect thereof 9.6 11.5
e. Credit under special supervision 293.2 416.3
(1) The specific allowance for doubtful debts was deducted from the
relevant credit categories.
(2) The balance of problematic debts, less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 21
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR
In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
the banks, the Government and the Kibbutz movements. This Arrangement
includes the implementation of a rehabilitation program prepared by the
borrowers, the waiver by the Bank of part of the loans granted by it,
Government grants designated for the early repayment of a part of the
Kibbutz debts, and a rescheduling of another portion of the debts for a
period of up to 25 years, in respect of which the Government provided less
costly financing which leaves the Bank with a margin of 2% p.a.
During 1991 through 1996, the Bank received from the Government the grants
under the Kibbutz Arrangement of 1989, designated for the early repayment
of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
debt accordingly. Furthermore, the Bank also received from the Government,
the deposits required for the rescheduling of part of the Kibbutz debts in
accordance with the Bank's proportionate share of the overall arrangement.
In 1993, the Bank commenced the implementation of the Arrangement at the
individual Kibbutz level for some Kibbutzim, reflecting the results thereof
on its books.
During 1996, a supplementary arrangement was signed by the banks, the
Government and the Kibbutz movements for the arrangement of the debts of
the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
was signed by the said parties. The main principles of the supplementary
arrangement, including the amendment thereto, are as follows:
- The arrangement relates to a part of the Kibbutzim and organizations
included in the first arrangement, in respect thereof it has become
evident that after full execution of the financial arrangement
contemplated by the first arrangement, debts remain regarding which
the repayment ability envisioned, with respect thereto, under that
agreement, does not allow them to fulfill their obligations (the
"Balloon" debt). Such "Balloon" debt is to be written off.
- In respect of most of the "Balloon" debts, the writing-off shall be
covered as to 65% from bank sources and as to 35% from Government
sources.
- Kibbutzim will assign part of their rights in land to the Israel Lands
Administration. Upon each Kibbutz joining the arrangement, its land,
which was found in the land survey to have an alternative value
compared to agricultural use, will revert to the Israel Lands
Administration, without attaching to it an obligatory price tag. A
caveat is to be registered in favor of the banks with respect to such
land. In the future, when the land is sold, part of the net proceeds
to be received, which represents the value of the original rights of
the Kibbutz in the land, will be paid over to the banks and the
Government in proportion to their share in the writing-off of the
debt, as stated above. The funds transferred by the Government for the
purpose of the writing-off of the debts of each Kibbutz, as stated
above, are conditional upon the consent of each individual Kibbutz to
the said arrangement and its subsequent joining as a party to the
supplementary arrangement, including the 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 remaining payments to be linked to the CPI with annual
interest at a rate of 1.5%.
F - 22
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
- Until a real estate Kibbutz joins as party to the supplementary
arrangement on the basis of the said land arrangement, the Kibbutz, at
its own initiative, may enter into interim property transactions, the
consideration for which, whether in cash or cash equivalents, will
partially or fully serve as a substitute to the said land arrangement.
The "balloon" debt balance of a potential real estate Kibbutz which is
not repaid by the proceeds of such interim transactions or land
arrangement, will be treated in accordance with the financial
arrangement, as mentioned above.
In the opinion of the Bank, in view of the above, uncertainty exists
as to the real estate proceeds anticipated in the said arrangement.
The Bank has recorded allowances for doubtful debts for all the
amounts it considered necessary in light of that mentioned above.
Composition of the credit to the agricultural sector:
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Communal settlements (kibbutzim) including
regional enterprises and organizations 278.3 316.5
Cooperative settlements (moshavim) 13.2 29.2
----- -----
Total credit for kibbutzim and moshavim 291.5 345.7
Private agriculture 2.7 3.7
----- -----
Total credit to the agricultural sector 294.2 349.4
===== =====
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 23
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
a. Non-income bearing loans to problematic borrowers -
Israeli currency linked to the CPI 33.4 41.7
b. Restructured credit to borrowers-
1. Credit restructured during the current
year with waiver of income -
Israeli currency linked to the CPI 12.3 14.3
Average repayment period (years) 4.5 5.0
Expected interest margin from the credit 2% 2%
2. Credit restructured in prior years
with waiver of income -
Israeli currency linked to the CPI 9.5 15.6
c. Credit to borrowers in respect of which
there is an as yet unimplemented
management decision to restructure their debt 6.7 7.3
d. Credit temporarily in arrears 3.4 3.5
Interest income recorded in the income statements
in respect thereof 0.2 0.3
e. Credit under special supervision 60.6 80.9
f. Credit not included in above credit to problematic borrowers 168.3 186.1
Interest income recorded in the income statements in respect
thereof 9.7 10.5
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
(2) Including industrial enterprises and other organizations related to
the Kibbutz sector.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 24
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
3. CREDIT TO LOCAL AUTHORITIES
Following is the composition of credit to local authorities:
DECEMBER 31 DECEMBER 31
2004 2003
---- ----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
---- ----
NIS NIS
MILLIONS MILLIONS
---- ----
Balance of credit to local authorities at
balance sheet date 13.1 16.9
CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:
a. Non-income bearing credit - CPI-linked - 1.9
b. Credit restructured during the year without waiver
of income - CPI linked 1.9 -
c. Credit not included in above credit to problematic borrowers 11.2 15.0
Interest income recorded in income statements with respect of
such credit 0.8 0.6
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 25
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS
2004
------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ---- -----
REPORTED AMOUNTS*
------------------------------------------
NIS MILLIONS
------------------------------------------
Balance of allowance at beginning of year 732.5 78.5 811.0
----- ---- -----
Current allowances 96.5 3.4 99.9
Reduction in allowances (16.5) (12.3) (28.8)
Collection of debts written-off in previous years (0.9) - (0.9)
----- ---- -----
Amount charged to the income statement 79.1 (8.9) 70.2
----- ---- -----
Debts written-off (98.1) - (98.1)
----- ---- -----
Balance of allowance at end of year 714.4 69.6 784.0
===== ==== =====
Amount of allowance not deducted from credit
to public 0.9 0.9 1.8
----- ---- -----
2003
------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ---- -----
ADJUSTED AMOUNTS**
------------------------------------------
NIS MILLIONS
------------------------------------------
Balance of allowance at beginning of year 617.3 82.4 699.7
----- ---- -----
Current allowances 144.3 3.5 147.8
Reduction in allowances (10.4) (7.4) (17.8)
----- ---- -----
Amount charged to the income statement 133.9 (3.9) (3)130.0
----- ---- -----
Debts written-off or transferred (see E hereunder) (31.3) - (31.3)
Erosion and inflationary adjustments 12.6 - 12.6
----- ---- -----
Balance of allowance at end of year 732.5 78.5 811.0
===== ==== =====
Amount of allowance not deducted from credit
to public 1.5 0.9 2.4
----- ---- -----
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as of December 31,
2003 - NIS 38.9 million; as of December 31, 2002 - NIS 38.9 million).
(3) Amount of NIS 129.8 million was recorded in the statement of income in
reported amounts.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 26
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
2002
------------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
----- ---- -----
ADJUSTED AMOUNTS*
------------------------------------------
NIS MILLIONS
------------------------------------------
Balance of allowance at beginning of year 250.9 72.2 323.1
----- ---- -----
Current allowances 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
----- ---- -----
Debts written-off (8.8) - (8.8)
Erosion and inflationary adjustments (16.4) - (16.4)
----- ---- -----
Balance of allowance at end of year 617.3 82.4 699.7
===== ==== =====
Amount of allowance not deducted from credit
to public 20.2 - 20.2
----- ---- -----
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as of December 31,
2003 - NIS 38.9 million; as of December 31, 2002 - NIS 38.9 million).
* Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 27
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
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, 2004
------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
----- ------- -----
AMOUNTS OF CREDIT PER BORROWER REPORTED AMOUNTS*
- ------------------------------ ------------------------------------------
NIS THOUSANDS NIS MILLIONS
- ------------------------------ ------------------------------------------
Up to 10 189 1.2 -
From 10 to 20 107 1.6 -
From 20 to 40 74 2.1 0.1
From 40 to 80 61 3.4 0.1
From 80 to 150 61 6.0 0.5
From 150 to 300 84 17.8 0.8
From 300 to 600 89 37.5 1.8
From 600 to 1,200 121 103.3 2.6
From 1,200 to 2,000 82 121.7 6.6
From 2,000 to 4,000 81 214.4 15.7
From 4,000 to 8,000 58 305.2 10.4
From 8,000 to 20,000 35 428.2 16.5
From 20,000 to 40,000 12 248.4 71.5
From 40,000 to 200,000 8 404.0 129.6
Greater than 3,200,000 1 (4)6,167.3 -
----- ------- -----
1,063 8,062.1 256.2
===== ======= =====
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
(4) Credit is secured by a guarantee of the State.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
F - 28
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
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
------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
----- ------- -----
AMOUNTS OF CREDIT PER BORROWER ADJUSTED AMOUNTS*
- ------------------------------ ------------------------------------------
NIS THOUSANDS NIS MILLIONS
- ------------------------------ ------------------------------------------
Up to 7 189 0.8 -
From 7 to 18 161 1.9 -
From 18 to 35 99 2.5 -
From 35 to 70 92 4.6 -
From 70 to 140 97 9.1 1.1
From 140 to 285 91 17.4 1.3
From 285 to 530 90 33.1 2.4
From 530 to 1,060 140 104.8 5.1
From 1,060 to 1,770 112 145.6 6.6
From 1,770 to 3,500 110 253.4 13.6
From 3,500 to 7,100 85 399.2 21.5
From 7,100 to 17,700 63 648.5 33.3
From 17,700 to 35,000 25 558.1 49.1
From 35,000 to 177,000 15 683.8 270.6
From 177,000 to 355,000 - - -
Greater than 2,800,000 1 (4)6,405.3 -
----- ------- -----
1,370 9,268.1 404.6
===== ======= =====
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
(4) Credit is secured by a guarantee of the State.
* Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
E. CUSTOMER'S DEBT RECLASSIFIED AS AVAILABLE FOR SALE SECURITIES
In his letter of July 15, 2003, regarding a debt of a customer in respect
of which a receiver was appointed to realize shares pledged in favor of the
Bank, the Supervisor of Banks stated that it is no longer proper to treat
the outstanding balance of the debt, due to be repaid through the
realization of the said shares by the receiver, as a credit item.
Accordingly, the balance of the debt was reclassified on June 30, 2003, and
stated as shares included in the item "Available-for-sale securities",
presented at their market value at that date.
Beginning with June 30, 2003, these shares are included in the item
"Securities" and from that date the changes in the market value of these
shares are recorded in a capital reserve.
In view of the inability of the customer to honor his debt, the Bank in the
past classified this debt as non-income bearing and recorded the allowances
required from such classification. The supplementary allowance for doubtful
debts recorded in respect of the classification of the debt as non-income
bearing was not reversed, despite the above change in classification, and
is included in the "Other liabilities" item.
F - 29
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT TO GOVERNMENTS
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Deposits in foreign currency out of loans received 24.1 31.4
Amounts receivable in connection with exchange
rate insurance of capital notes 25.3 28.2
Credit to foreign governments 10.9 21.1
Other credit 12.4 29.5
----- -----
Total credit to governments 72.7 105.2
===== =====
NOTE 6 - FIXED ASSETS
A. This item includes equipment, computers, furniture and motor vehicles
as follows:
CHANGES DURING THE YEAR
AT ---------------------- AT
JANUARY 1 DECEMBER 31
2004 ADDITIONS DISPOSALS 2004
----- ---- --- -----
REPORTED AMOUNTS*
-------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ---- --- -----
Cost 57.7 0.1 (0.9) 56.9
Accumulated depreciation (53.0) (2.9) 0.9 (55.0)
----- -----
Net book value 4.7 1.9
===== =====
B. The average rate of depreciation is 31% (2003 - 31%).
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 30
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 7 - OTHER ASSETS
DECEMBER 31 DECEMBER 31
2004 2003
---- ----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
---- ----
NIS NIS
MILLIONS MILLIONS
---- ----
Excess of income tax advances over current
provisions 1.3 1.6
Prepaid expenses 3.6 4.5
Payroll VAT receivable 8.1 11.8
Sundry receivables and debit balances 2.1 2.4
Debit balances in respect of derivative financial
instruments 10.9 7.9
---- ----
Total other assets 26.0 28.2
==== ====
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the US dollar (B) 308.0 305.3
Deposit in respect of the "D" redeemable non-participating
preference shares linked to the US dollar (C) 113.6 112.6
Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the US dollar (C) 384.9 381.4
----- -----
Total perpetual deposits with the Treasury 806.5 799.3
===== =====
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 31
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
A. On May 6, 1996, an agreement was signed between the Bank and the
Treasury of the State of Israel regarding changes in the method of
computing the linkage on perpetual deposits, which the Bank had
deposited with the Israeli Treasury with respect to the Bank's
preferred 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, the same as the
dividend the Bank used to pay 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.
Pursuant to the deposit agreements, the aforementioned interest will
be paid to the Bank on the payment dates of the dividends on the
aforementioned preferred shares. According to the agreement signed on
May 6, 1996, the deposits have become, in effect, linked to the CPI,
with retroactive effect from October 1, 1987. However, in no case
shall their amount be less than their dollar value as computed prior
to the date of the agreement. Namely, the linkage on the deposits as
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 state what will happen to the
interest on the perpetual deposits in the period during which the Bank
is prevented from distributing the aforementioned dividends on the
preferred shares, and whether the interest will accrue and be paid
when the Bank pays the accrued preferred dividends in arrears or upon
liquidation. The Bank's Board of Directors reached the conclusion that
the interest, which is not claimed due to the non-payment of the
dividend, would accrue to the Bank's credit and, accordingly, upon
liquidation, it would become part of the liquidation assets. The
amount of the accrued interest, which has not yet been drawn as above,
totals NIS 95.2 million and is not recorded in the financial
statements. This amount is equal to the amount of the accrued dividend
in arrears, which is also not recorded in the financial statements.
See Note 15F for further details as to the discontinued distribution
of dividend and the requests made to the Ministry of Finance and the
Government Companies Authority with respect to the above matter.
Concurrent with the signing of the above-mentioned agreement, the
Bank's Articles of Association were amended in May 1996. According to
the amendment, one ordinary "B" share out of the total number of
ordinary "B" shares was converted into an ordinary "B1" share
(presently held by the State of Israel). The holder of the ordinary
"B1" share is entitled to receive, upon liquidation of the Bank, the
difference, if any, arising from the change in the method of computing
the linkage of the said deposits, as discussed above. However, the
right attached to the ordinary "B1" share ranks after the settlement
in full of all amounts due 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 ordinary shares, ordinary "A" shares
and ordinary "B" shares and after repayment of the paid-up share
capital, including linkage differentials, to the holders of the Bank's
linked preferred shares of the "C", "CC", "CC1", "D" and "DD" classes,
in accordance with the Bank's Articles of Association.
F - 32
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
The above-mentioned agreement resulted in an increase in the amounts
of the deposits with the Treasury as well as in the Bank's
shareholders' equity. Such increase, as at the date of the signing of
the agreement, amounted to NIS 279.6 million.
This aforementioned increase in shareholders' equity was reflected in
the statement of shareholders' equity under the item of "change in
capital due to change in rights of "B1" ordinary share". Out of the
above-mentioned amount, NIS 106.7 million, relating to differences in
respect of the participating shares, was credited to the "accumulated
difference on translation of dollar linked deposits", which was also
not included in the financial statements. The rest of the increase in
capital, in the amount of NIS 172.9 million, which relates to deposits
in respect of non-participating shares, was credited to the
"accumulated difference on translation of CPI linked deposits".
B. As noted, up to May 6, 1996, the above-mentioned deposits were linked
to the dollar. The difference which arose up to May 6, 1996, between
the adjustment of the deposit on the basis of the dollar linkage, in
respect of the participating, 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 deposit on the basis of the dollar linkage in
respect of the non-participating preferred "D" and "DD" shares, which
do not constitute shareholders' equity and which are also linked to
the dollar, and the adjustment of the above-mentioned deposit to the
CPI, was recorded in the statement of income, as was recorded the
difference arising from the liabilities in respect of these shares. As
a result of signing the above-mentioned agreement, differences arose
from the date of signing between the adjustment of the deposits with
the Treasury (linked to the higher of the CPI or the dollar), and the
adjustment of the non-participating dollar-linked preferred shares.
Such differences are recorded in the statement of shareholders' equity
under "accumulated difference on translation of CPI linked deposits."
NOTE 9 - DEPOSITS OF THE PUBLIC
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
On-demand deposits 42.0 65.5
Fixed-term and other deposits 301.7 405.6
Savings deposits 61.6 148.9
----- -----
Total deposits from the public 405.3 620.0
===== =====
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 33
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 10 - DEPOSITS OF BANKS
DECEMBER 31 DECEMBER 31
2004 2003
------- -------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Fixed-term deposits 24.1 80.8
Bank of Israel (1) -
Fixed-term deposits - 0.7
Special line of credit 1,403.9 2,091.2
------- -------
Total deposits of banks 1,428.0 2,172.7
======= =======
(1) See Note 16 regarding pledge provided as security for credit received
from the Bank of Israel.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
NOTE 11 - 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 12 - CAPITAL NOTES
This series of capital notes of a par value of $ 49,976,000 bears interest
at the rate of 7.5% per annum and was due on December 31, 1998. The terms
of the above capital notes provide that the redemption date of notes for
which the holders did not give notice of their intention to redeem, will be
deferred by an additional 18 months each time. Over the last six years,
notes of a par value of $ 44,101,000 were redeemed. Accordingly, the
balance of notes still outstanding as at December 31, 2004 amounts to $
5,875,000 which constitute NIS 25.3 million (December 31, 2003 - $
6,425,000 which constitute NIS 28.2 million). The next redemption date for
the capital notes is June 30, 2006. The Bank is entitled to redeem the
unredeemed capital notes at a premium of 5%. See Note 5 regarding amounts
receivable with respect to exchange rate insurance on the capital notes.
F - 34
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 13 - OTHER LIABILITIES
DECEMBER 31 DECEMBER 31
2004 2003
---- ----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
---- ----
NIS MILLIONS NIS MILLIONS
---- ----
Excess of provision for severance pay and pensions over
amounts funded (see Note 17) 26.8 33.8
Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 17) 5.7 8.1
Deferred income 1.3 1.8
Credit balances in respect of derivative financial instruments 2.5 1.7
Allowance for doubtful debts in respect of an off-balance sheet item 0.9 1.5
Sundry creditors and credit balances 19.6 29.3
---- ----
Total other liabilities 56.8 76.2
==== ====
NOTE 14 - NON-PARTICIPATING SHARES
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2004 2003
----- -----
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
"B" ordinary shares - -
"D" preference shares linked to the US dollar (1) 70.4 71.6
"DD" preference shares linked to the US dollar (1) 238.7 242.6
----- -----
Total non-participating shares 309.1 314.2
===== =====
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 35
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)
B. ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
--------- --------------------------
2004 2004 2003
NUMBER --------- --------- ---------
OF SHARES CLASS OF SHARES NIS NIS NIS
- --------- --------------- --------- --------- ---------
135,399 "B" ordinary shares of NIS 0.1
each 13,539.9 13,489.9 13,489.9
164,000 7.5% cumulative "D" preference
shares of NIS 0.03 each, linked to the
US dollar at the rate of
$1 = NIS 0.0003, redeemable
at a premium of 5 5/8 %
(redemption dates will be
determined by the Bank subject
to approval by the Israeli Treasury) 4,920 4,904 4,904
60,000 7.5% cumulative "DD" preference
shares of NIS 2.1 each, linked to the
US dollar at the rate of
$1 = NIS 0.0021 redeemable (without
premium) (redemption dates will be
determined by the Bank, subject to
approval by the Israeli Treasury) 126,000 116,359 116,359
--------- --------- ---------
Total shares 144,459.9 134,752.9 134,752.9
========= ========= =========
C. For rights in dividend distributions - see Note 15E.
D. For cessation of dividend distributions - see Note 15F.
E. For rights upon liquidation - see Note 15G.
F. All the non-participating shares are not traded on the Tel-Aviv Stock
Exchange.
F - 36
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY
A. The share capital is composed of registered shares, which are traded
on the Tel-Aviv Stock Exchange. The following are details regarding
the nominal value of the share capital and the principal rights
attached thereto:
AUTHORIZED ISSUED AND PAID
-------- ------------------------
2004 2004 2003
NUMBER -------- -------- --------
OF SHARES TYPE OF SHARES NIS NIS NIS
- --------- -------------- -------- -------- --------
16,000 "A" ordinary shares of NIS 0.1
each 1,600 (*)1,510 (*) 1,510
1 "B1" ordinary share of
NIS 0.1 0.1 (*) 0.1 (*) 0.1
1,000,000 8% cumulative participating
preferred ordinary shares of
NIS 0.001 each 1,000 1,000 1,000
17,000,000 6% cumulative participating
"C" preference shares of
NIS 0.00018 each linked to the
US dollar at the rate of $1 =
NIS 0.00018 3,060 3,060 3,060
1,000,000 6% cumulative participating
"CC" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 3,000 3,000 3,000
1,740,000 6% cumulative participating
"CC1" preference shares of
NIS 0.003 each linked to the
US dollar at the rate of $1 =
NIS 0.0003 5,220 5,204 5,204
50,100 Unclassified shares of NIS 0.1
each 5,010 - -
-------- -------- --------
Total shares 18,890.1 13,774.1 13,774.1
======== ======== ========
(*) Not traded on the Tel Aviv Stock Exchange.
F - 37
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
B. Following are details on the annual dividend:
The last quarterly dividend that was paid by the Bank on the preferred
shares was in respect of the second quarter of 2002. No dividend was
distributed in respect of the second half of 2002 and the years 2003 and
2004. See F below regarding the cessation of dividend distribution.
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 appointment of
outside directors is done in accordance with an agreement that was signed
in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
Ltd., and the decision of the Government from March 2001. In accordance
with the aforementioned agreement and Government decision, one outside
director is appointed by the general meeting on account of the rights to
appoint directors of the three banking groups that are party to the
aforementioned agreement (as proposed by one of them and supported by the
others) and an additional outside director is appointed by the general
meeting on account of the State's rights to appoint directors.
The Chairman of the Board, who is the extra director (the fifteenth
director), is appointed by all the other members of the Board who were
appointed, as above, by the holders of "A" class ordinary shares.
E. RIGHTS TO RECEIVE A PREFERENCE DIVIDEND
According to the Bank's Articles of Association, in the event that there
are sufficient profits, the Bank shall first distribute - a preferred
dividend of 6% per annum (plus necessary adjustments due to linkage to the
dollar) on the paid in capital of "C" class preference shares, the paid in
capital of "CC" class preference shares and the paid in capital of "CC1"
class preference shares, and of 7 1/2% per annum (plus necessary
adjustments due to linkage to the dollar) on the paid in capital of "D"
class preference shares, and the paid in capital of "DD" class preference
shares - all dividends being pari-passu and pro-rata to the paid in capital
of the aforementioned shares, and then will distribute an 8% cumulative
preferred dividend on the paid in capital of ordinary preference shares.
F - 38
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION
The issued 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 (the "quarterly dividend"). The Bank deposited
the proceeds of issue of these preferred shares, with the Israeli Treasury
in perpetual deposits, which will be returned to the Bank only upon
liquidation or for the purpose of redeeming the preferred D and DD shares
(hereinafter - the "perpetual deposits"). According to the deposit
agreements, the interest on the perpetual deposits, at a rate of 7.5% (plus
differentials of linkage to the dollar), is paid to the Bank on the payment
dates of the dividends to the aforementioned preferred shares. The deposit
agreements do not expressly stipulate how the interest on the perpetual
deposits should be handled during periods in which the Bank is prevented
from distributing dividends on these preferred shares, and whether the
interest will accrue and be paid when the Bank pays the accrued preferred
dividends in arrears or upon liquidation.
According to the Companies Law - 1999 (the "Companies Law"), a company is
entitled to distribute dividends only from its profits (as defined
therein), on the condition that no reasonable apprehension 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 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 crisis
which affected the Bank during that quarter.
o Non-existence of distributable profits under the Companies Law.
o The prohibition on distribution of dividends according to the Bank's
Articles of Association when there are no profits, even in nominal
terms.
o The prohibition on distribution of dividends according to Proper
Banking Procedure, as long as the Supervisor of Banks has not replied
to the Bank's request and has not permitted such distribution.
o The possibility that the interest on the Bank's perpetual deposits
with the Israeli Treasury of Finance will continue to accrue to the
credit of the Bank even if not actually paid, as long as no dividend
is distributed.
F - 39
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
On December 1, 2002, the Bank received the reply of the Supervisor of Banks
to its request for the position of the Supervisor on the matter of
distributing a dividend in respect of the third quarter of 2002. The
Supervisor's answer stipulated, among other things, that in the existing
circumstances (as detailed in the letter), the Supervisor of the Banks
believes that "it is inappropriate to distribute a dividend at this time".
Nevertheless, the Supervisor of Banks noted that it was still not
completely clear as to the legal aspects of various questions connected
with the distribution of the dividend and the accrual of the interest on
the perpetual deposits, and as to what the position of the State of Israel
is on this issue. The Supervisor of Banks added that a copy of the letter
had been sent to the Government Companies Authority and the Accountant
General, and that following receipt of clarifications from them and from
the Bank to the questions raised, the Supervisor will notify the Bank as to
his position.
In view of the lack of clarity as to the matter of the accrual of interest
on the perpetual deposits during the period in which the Bank is prevented
from distributing a dividend (the lack of clarity to which the Supervisor
of Banks referred to in his letter) and in view of the possible
ramifications of this matter on the distribution of the dividends in
respect of the preferred shares, the Board of Directors deliberated the
matter, taking into consideration a comprehensive legal opinion presented
to the Board. The Board reached the conclusion that the interest not paid
to the Bank due to the non-distribution of the dividend should accrue to
the Bank's credit and, accordingly, in the event of the Bank's liquidation,
the interest will be paid to the receiver. In a letter dated January 22,
2003, the Bank requested from the Ministry of Finance and the Government
Companies Authority to issue their positions on this matter as soon as
possible.
In its reply dated March 13, 2003, the 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. The Bank made
further requests on this matter during 2004, but as yet has not received a
satisfactory response. The Board of Directors has deliberated the matter of
the dividend on the said preferred shares another several times, and after
taking into account all of the considerations and circumstances described
above has decided to abide by its previous decision and to refrain from
distributing any further dividend for the time being.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has stopped paying to the Bank the interest on
its perpetual deposits.
The accrued sum of the dividend, at the annual rate of 7.5%, in respect of
the aforementioned preferred shares (including a 1.5% participating
dividend for C, CC and CC1 shares) that has not been paid since the Bank
ceased paying the dividend amounts to NIS 95.2 million. This amount was not
recorded in the financial statements and it is equal to the amount of the
accrued interest on the perpetual deposits, which was also not recorded in
the financial statements.
The total amount of NIS 95.2 million is comprised as follows: NIS 58.0
million is in respect of non-participating shares (D and DD) and NIS 37.2
million is in respect of participating shares (C, CC and CC1). Of this
amount, an amount of NIS 37.5 million is in respect of 2004 and is
comprised as follows: NIS 14.3 million in respect of participating C, CC
and CC1 shares and NIS 23.2 million in respect of non-participating D and
DD shares.
F - 40
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
F. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
On September 28, 2004 various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
originating motion in which the Court is petitioned to instruct the Bank to
pay to its shareholders a dividend at the rates and dates it was paid until
the second quarter of 2002. See Note 20 for additional details regarding
this originating motion.
G. RIGHTS UPON LIQUIDATION
Upon liquidation of the Bank, all available assets will be distributed to
shareholders. Following are the first seven stages of distribution in
accordance with the priorities appearing in the Bank's Articles of
Association:
o First - to pay cumulative preferred dividends in arrears, including
dollar linkage differentials, to all classes of preference shares (C,
CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
capital of the aforementioned shares. As at December 31, 2004 the
accrued amount of the preferred dividend in arrears is NIS 86.6
million (As at December 31, 2003 - NIS 52.8 million).
o Second - to pay cumulative preferred dividends in arrears to preferred
ordinary shares. As at December 31, 2004 the dividends in arrears in
respect of the preferred ordinary shares amount to NIS 200 (As at
December 31, 2003 - NIS 120).
o Third - to refund paid in capital (plus dollar linkage differentials)
of "C" class preference shares, to refund paid in capital (plus dollar
linkage differentials) of "CC" class preference shares, to refund paid
in capital (plus dollar linkage differentials) of "CC1" class
preference shares, to refund paid in capital (plus dollar linkage
differentials) of "D" class preference shares, to refund paid in
capital (plus dollar linkage differentials) of "DD" class preference
shares - all being pari-passu and pro-rata to the paid in capital of
the aforementioned shares. As at December 31, 2004 the aforementioned
amounts to NIS 500.2 million (As at December 31, 2003 - NIS 508.4
million).
o Fourth - to refund paid in capital of preferred ordinary shares. As at
December 31, 2004 the aforementioned amounts to NIS 1,000 (As at
December 31, 2003 - NIS 1,000).
o Fifth - to refund paid in capital of class "A" ordinary shares, to
refund paid in capital of class "B" ordinary shares, and to refund
paid in capital of class "B1" ordinary shares - all being pari passu
and pro-rata to the paid in capital of the aforementioned shares. As
at December 31, 2003 the aforementioned amounts to NIS 15 thousand (As
at December 31, 2003 - NIS 15 thousand).
o Sixth - the remainder (if at all) of the differences to be paid to the
Bank by the State of Israel upon liquidation as a result of the
increase rate of the CPI as compared with the increase in the
representative exchange rate of the dollar, in respect of the deposits
made by the Bank with the State, shall be paid to the holder or
holders of the class "B1" ordinary share. As at December 31, 2004 the
aforementioned difference amounts to NIS 306.6 million (As at December
31, 2003 - NIS 290.7 million).
F - 41
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15 - SHAREHOLDERS' EQUITY (CONT'D)
G. RIGHTS UPON LIQUIDATION (CONT'D)
o Seventh - the remainder of ordinary assets will be distributed between
the holders of the class "A" ordinary shares, the holders of the
preferred ordinary shares, and the holders of the C, CC and CC1
preference shares, according to the paid in capital of these shares
and at the ratio of ten per each agora of paid in class "A" ordinary
shares, ten per each agora of paid in preferred ordinary shares, ten
per each agora of paid in class "C" preference shares, six per each
agora of paid in class "CC" preference shares and six per each agora
of paid in class "CC1" preference shares - all being pari-passu and
pro-rata to the paid in capital of the aforementioned shares.
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS
Following is the calculation of capital adequacy in accordance with
Directives Nos. 311 and 341 of the Supervisor of Banks, regarding "Minimal
Capital Ratio" and "Capital Allocation with respect to Exposure to Market
Risks":
A. CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO
DECEMBER 31 DECEMBER 31
2004 2003
------------ ------------
REPORTED ADJUSTED
AMOUNTS * AMOUNTS**
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
First tier capital 7.5 (9.4)
Second tier capital (1) 7.5 -
---- ----
Total capital 15.0 (9.4)
==== ====
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 42
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
B. WEIGHTED-BALANCES OF CREDIT RISK
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------- --------------------------
WEIGHTED CREDIT WEIGHTED CREDIT
BALANCES(2) RISK BALANCES BALANCES(2) RISK BALANCES
-------- -------- -------- --------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
------------------------- --------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- --------
ASSETS
Cash and deposits with banks 117.9 21.1 143.9 17.4
Securities 60.0 60.0 85.4 85.4
Credit to the public (1) 7,993.4 1,782.1 9,189.6 2,706.8
Credit to governments and
perpetual deposits with the
Israeli Treasury 879.2 - 904.5 5.6
Premises and equipment 1.9 1.9 4.7 4.7
Other assets 26.0 4.2 28.2 6.0
-------- -------- -------- --------
Total assets 9,078.4 1,869.3 10,356.3 2,825.9
======== ======== ======== ========
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Transactions representing credit risk 300.1 241.2 457.3 342.9
Derivative financial instruments 525.1 5.2 911.5 8.9
-------- -------- -------- --------
Total off-balance sheet financial
instruments 825.1 246.4 1,368.8 351.8
-------- -------- -------- --------
Total credit risk assets 9,903.5 2,115.7 11,725.1 3,177.7
Market risk 203.2 218.2
-------- -------- -------- --------
Total risk assets 9,903.5 2,318.9 11,725.1 3,395.9
======== ======== ======== ========
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
(2) Assets - balance sheet amounts, off-balance sheet financial
instruments - nominal balances weighted by credit conversion factors.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 43
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 15A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
C. RATIO OF CAPITAL TO TOTAL RISK ASSETS
DECEMBER 31 DECEMBER 31
---- ----
2004 2003
---- ----
% %
---- ----
Ratio of first tier capital to total risk assets 0.32 (0.28)
Ratio of second tier capital to total risk assets 0.32 -
---- ----
Ratio of total first and second tier capital to total risk assets 0.64 (0.28)
==== ====
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 Procedures.
NOTE 16 - LIENS AND RESTRICTIVE CONDITIONS
A. In connection with receipt of the special credit line from Bank of
Israel, the Bank signed on November 14, 2002 a debenture in favor of
the Bank of Israel, whereby the Bank registered a first degree
floating pledge on all of its assets, excluding the following assets:
- Loans and credits under State guarantee at a total balance sheet
value (according to financial statements as of December 31, 2004)
of NIS 6.2 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 were deposited in connection with
guaranteeing the Bank's liabilities to such banking institutions
and/or brokers, which were created subsequent to November 14,
2002.
Under this debenture, the Bank undertook, among other things, not to
register additional pledges on the assets pledged as part of the
debenture and not to dispose of such assets, in any form, without
receiving the prior written consent of the Bank of Israel.
Notwithstanding the above, the debenture stipulates that the floating
pledge registered therein does not prevent the Bank, or restrict the
Bank in the ordinary course of its business, including the fulfillment
of its obligations, receiving repayments of credit or granting credit.
The balance of the credit line (including accrued interest) as of
December 31, 2004, was an amount of NIS 1,403.9 million (December 31,
2003 - NIS 2,091.2 million).
F - 44
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 16 - LIENS AND RESTRICTIVE CONDITIONS (CONT'D)
B. As part of the arrangement determined by the Bank of Israel for
the granting of monetary credit to the banking industry, the Bank
registered floating pledges on Government debentures traded on
the Stock Exchange. Following are details as to credit received,
Government debentures and deposits with Bank of Israel.
DEPOSITS RECEIVED GOVERNMENT DEPOSITS WITH
FROM BANK OF ISRAEL(1) DEBENTURES PLEDGED BANK OF ISRAEL
--------------------- --------------------- --------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------------------- --------------------- --------------------
2004* 2003** 2004* 2003** 2004* 2003**
----- ------ ----- ------ ----- ------
Balance as at
balance sheet
date - - - - 12.6 57.0
Average balance
(2) during the
year 0.5 4.8 - - 17.0 37.6
Highest balance
(2) during the
year 0.7 11.3 - - 57.0 113.7
(1) Not including the special credit line as detailed in A above.
(2) The average balance and the highest balance are based on the month-end
balances during the year.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
C. Deposits with banks in the amount of NIS 13.5 million have been
pledged by the Bank in favor of those banks. Bank of Israel gave its
consent to the pledge, which serves as collateral for transactions in
derivative financial instruments with those banks.
NOTE 17 - EMPLOYEE RIGHTS
A. SEVERANCE PAY
1. The Bank's liability for the payment of severance pay to its
employees, which is calculated as accepted on the basis of one monthly
salary per each year of employment, is fully covered by payments and
deposits with recognized pension and provident funds, the purchase of
insurance policies and by the unfunded provision in the books.
F - 45
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
2. Commencing on July 15, 2002, Mr. A. Galili has been serving as the
General Manager 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
period of four years.
On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
Savir serves as Deputy General Manager and as Credit Supervisor of the
Bank. The Bank signed an employment agreement with Mr. Savir whereby
it undertook to employ him for a period of three years.
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 the
Bank's employees. On December 26, 2002, a special collective agreement
was signed between the Bank, the General Federation of Labor and the
Bank's employee committee regarding the termination of the employment
of Bank employees, severance payments of which those employees will be
entitled, and a reduction in the salaries of those employees remaining
with the Bank.
The aforementioned agreement is in effect for three years and has an
option for extension. The Bank agreed in principle with the General
Federation of Labor and with the Bank's employee committee that the
aforementioned agreement would be extended until the end of 2007 or
until the date of the Run-Off plan is concluded, whichever earlier.
The agreement to this effect is to be signed in the near future.
The financial statements for 2002 included non-recurring provisions in
an amount of NIS 35.7 million in respect of the severance payments,
which the Bank Management estimates it will have to make to the
employees of the Bank, the Deputy General Manager, General Manager and
to the Chairman of the Board. In 2003 and 2004 the provision that was
made in 2002 in respect of the Deputy General Manager, the CEO and the
Chairman of the Board was completely cancelled following the change in
the Board's evaluation regarding their period of employment with the
Bank. As at December 31, 2004 the balance of the provision in respect
of the employees included in the aforementioned collective agreement
amounts to NIS 20.5 million (December 31, 2003 - NIS 24.7 million).
4. In the past, the Bank signed personal employment contracts with three
senior executives of the Bank. The Bank and these executives have the
right to terminate the employee-employer relationship by providing an
advance notice of three months.
In accordance with these contracts in the event of the resignation of
the executives, the Bank has undertaken to pay them additional
severance payments and an "adaptation bonus" in addition to the
regular severance pay. This liability is covered by an appropriate
provision included in the provision for severance pay.
F - 46
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
These executives are entitled to severance pay at higher rates in the
event that their employment is terminated by the Bank. The maximum
amount that the Bank will have to pay in the event of the employment
of all the said executives being terminated with immediate effect
amounts to NIS 2.7 million. A provision was made in the Bank's books
in respect of this commitment.
Folowing is the data relating to provisions and funding for severance
pay included in the balance sheet:
DECEMBER 31 DECEMBER 31
2004 2003
------------ ------------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Provision for severance pay 50.3 58.5
Amounts funded with pension and provident funds
(including earnings thereon) 23.5 24.7
---- ----
Unfunded provision included in "Other liabilities" 26.8 33.8
==== ====
The Bank may not withdraw amounts funded other than for the purpose of
discharging severance pay liabilities.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
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 3.1 million (December 31, 2003 - NIS 4.3
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 (2003 - 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 0.2 million (December 31, 2003 - NIS 0.3
million). This balance is included in "Other liabilities" item.
D. UNUTILIZED VACATION
The balance of the provision for unutilized vacation is NIS 2.4 million as
of balance sheet date (December 31, 2003 - NIS 3.5 million). The balance is
included in "Other liabilities" item.
F - 47
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYEE RIGHTS (CONT'D)
E. ECONOMIC POLICY FOR THE 2005 FISCAL YEAR LAW PROPOSAL
On October 27, 2004, the Government submitted a law proposal: "The Economic
Policy for the 2005 Fiscal Year (Legislative Amendments) - 2004", in which
it is proposed to impose salary VAT in 2005 also on the payments made by an
employer that is a financial institution in respect of the social benefits
of its employees (such as: provident funds, pension funds, executive
insurance policies, etc.). In light of the lack of clarity in the law
proposal and the uncertainty regarding the result at the end of the
legislation process, Management of the Bank is unable, at this point, to
evaluate the implications of the Government's decisions on the future
results of the Bank.
F - 48
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 18 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
REPORTED AMOUNTS*
DECEMBER 31, 2004
--------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------ ------------------------
LINKED TO US OTHER NON-MONETARY
NON-LINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- -------
ASSETS
Cash and deposits
with banks 46.1 22.5 47.6 1.7 - 117.9
Securities 0.6 3.1 - - 56.3 60.0
Credit to the public 708.7 717.1 6,450.0 117.6 - 7,993.4
Credit to governments - 12.4 36.2 24.1 - 72.7
Fixed assets - - - - 1.9 1.9
Other assets 22.4 - - - 3.6 26.0
Perpetual deposits with
the Israeli Treasury - 806.5 - - - 806.5
------- ------- ------- ------- ------- -------
Total assets 777.8 1,561.6 6,533.8 143.4 61.8 9,078.4
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 198.3 148.8 53.0 5.2 - 405.3
Deposits of banks 1,403.9 - - 24.1 - 1,428.0
Deposits of
the Government - 372.4 6,282.2 - - 6,654.6
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 25.3 - - 25.3
Other liabilities 17.5 33.8 1.8 2.4 1.3 56.8
------- ------- ------- ------- ------- -------
Total liabilities 1,619.8 555.0 6,362.3 31.7 1.3 8,570.1
------- ------- ------- ------- ------- -------
Difference (842.0) 1,006.6 171.5 111.7 60.5 508.3
Forward transactions, net 376.9 (143.0) (121.5) (112.4) - -
In-the-money options, net
(in terms of underlying
asset) 29.3 - (29.3) - - -
------- ------- ------- ------- ------- -------
Total (435.8) 863.6 20.7 (0.7) 60.5 508.3
======= ======= ======= ======= ======= =======
In-the-money options, net
(discounted par value) 36.1 - (36.1) - - -
======= ======= ======= ======= ======= =======
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
F - 49
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 18 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)
AMOUNTS ADJUSTED TO THE EFFECT OF INFLATION ACCORDING TO THE CPI OF DECEMBER
2003
DECEMBER 31, 2003
----------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
------------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
NON-LINKED 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 terms of underlying
asset) 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, 2004
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1)
REPORTED AMOUNTS*
DECEMBER 31, 2004
--------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS
----- ----- ----- ----- ----- -----
NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
----- ----- ----- ----- ----- -----
NON-LINKED ISRAELI CURRENCY
Assets 114.9 44.2 84.4 48.8 17.5 25.6
Liabilities 35.4 26.2 212.4 7.9 - -
----- ----- ----- ----- ----- -----
Difference 79.5 18.0 (128.0) 40.9 17.5 25.6
Derivative instruments
excluding options 241.9 25.2 121.9 - - -
Options (in terms of underlying - 30.0 - - - -
asset)
ISRAELI CURRENCY LINKED TO THE CPI
Assets 16.3 22.5 108.2 140.9 120.0 97.2
Liabilities 5.9 17.2 98.7 118.4 53.5 50.9
----- ----- ----- ----- ----- -----
Difference 10.4 5.3 9.5 22.5 66.5 46.3
Derivative instruments
excluding options - (25.3) (119.8) - - -
FOREIGN CURRENCY AND
LINKED THERETO
Assets 79.7 149.6 574.9 728.5 652.7 632.9
Liabilities 44.7 141.5 501.2 650.7 632.7 620.3
----- ----- ----- ----- ----- -----
Difference 35.0 8.1 73.7 77.8 20.0 12.6
Derivative instruments
excluding options (235.0) (1.3) - - - -
Options (in terms of underlying - (29.3) - - - -
asset)
NON-MONETARY ITEMS
Assets 0.6 1.2 1.8 - - -
Liabilities 0.2 0.8 0.3 - - -
----- ----- ----- ----- ----- -----
Difference 0.4 0.4 1.5 - - -
TOTAL AS AT DECEMBER 31, 2004
ASSETS 211.5 217.5 769.3 918.2 790.2 755.7
LIABILITIES 86.2 185.7 812.6 777.0 686.2 671.2
----- ----- ----- ----- ----- -----
DIFFERENCE 125.3 31.8 (43.3) 141.2 104.0 84.5
===== ===== ===== ===== ===== =====
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS 6.9 (1.4) 2.1 - - -
OPTIONS (IN TERMS OF UNDERLYING ASSET) - 0.7 - - - -
DECEMBER 31, 2004
--------------------------------------------------------------------------------
FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL(3)
TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT
----- ------- ------- ---- -------- ------- -------
NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
----- ------- ------- ---- -------- ------- -------
NON-LINKED ISRAELI CURRENCY
Assets 7.6 11.2 - - 354.2 471.4 777.8
Liabilities - - - - 281.9 (4)1,371.5 1,619.8
----- ------- ------- ---- -------- ------- -------
Difference 7.6 11.2 - - 72.3 (900.1) (842.0)
Derivative instruments
excluding options - - - - 389.0 - 376.9
Options (in terms of underlying - - - - 30.0 - 29.3
asset)
ISRAELI CURRENCY LINKED TO THE CPI
Assets 85.0 288.8 101.9 0.9 981.7 806.5 1,561.6
Liabilities 48.3 179.0 4.1 - 576.0 32.5 555.0
----- ------- ------- ---- -------- ------- -------
Difference 36.7 109.8 97.8 0.9 405.7 774.0 1,006.6
Derivative instruments
excluding options - - - - (145.1) - (143.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 627.1 3,046.6 4,899.6 60.4 11,452.0 56.5 6,677.2
Liabilities 616.0 3,015.2 4,887.4 60.4 11,170.1 1.8 6,394.0
----- ------- ------- ---- -------- ------- -------
Difference 11.1 31.4 12.2 - 281.9 54.7 283.2
Derivative instruments
excluding options - - - - (236.3) - (233.9)
Options (in terms of underlying - - - - (29.3) - (29.3)
asset)
NON-MONETARY ITEMS
Assets - - - - 3.6 58.2 61.8
Liabilities - - - - 1.3 - 1.3
----- ------- ------- ---- -------- ------- -------
Difference - - - - 2.3 58.2 60.5
TOTAL AS AT DECEMBER 31, 2004
ASSETS 719.7 3,346.6 5,001.5 61.3 12,791.5 1,392.6 9,078.4
LIABILITIES 664.3 3,194.2 4,891.5 60.4 12,029.8 1,405.8 8,570.1
----- ------- ------- ---- -------- ------- -------
DIFFERENCE 54.4 152.4 110.0 0.9 762.2 (13.2) 508.3
===== ======= ======= ==== ======== ======= =======
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS - - - - 7.6 - -
OPTIONS (IN TERMS OF UNDERLYING ASSET) - - - - 0.7 - -
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 516.4 million. The data is
net of specific allowance for doubtful debts.
(3) As included in Note 18 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the credit line amount provided by the 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 the Bank of Israel. Since from this date a downward
trend was not determined for the credit line, its amount at the above date
was included in the "Without maturity date" column.
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
F - 51
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1) (CONT'D)
AMOUNTS ADJUSTED TO THE EFFECT OF INFLATION ACCORDING TO THE CPI OF DECEMBER
2003
DECEMBER 31, 2003
--------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS
------- ------- ------- ------- ------- -------
NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
------- ------- ------- ------- ------- -------
NON-LINKED ISRAELI CURRENCY
Assets 76.4 135.3 191.9 74.4 64.7 12.4
Liabilities 43.6 19.2 534.2 514.1 - -
------- ------- ------- ------- ------- -------
Difference 32.8 116.1 (342.3) (439.7) 64.7 12.4
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
Liabilities 41.4 30.7 143.4 126.5 89.6 55.0
------- ------- ------- ------- ------- -------
Difference (18.4) 27.5 41.0 43.2 58.8 70.4
Derivative instruments
excluding options - - (235.0) - - -
FOREIGN CURRENCY AND
LINKED THERETO
Assets 224.9 165.4 618.5 776.8 758.4 691.9
Liabilities 93.6 173.0 517.4 646.5 667.6 657.5
------- ------- ------- ------- ------- -------
Difference 131.3 (7.6) 101.1 130.3 90.8 34.4
Derivative instruments
excluding options (447.2) - - - - -
Options - (17.5) - - - -
NON-MONETARY ITEMS
Assets - - - - - -
Liabilities - - - - - -
------- ------- ------- ------- ------- -------
Difference - - - - - -
TOTAL AS AT DECEMBER 31, 2003
ASSETS 324.3 358.9 994.8 1,020.9 971.5 829.7
LIABILITIES 178.6 222.9 1,195.0 1,287.1 757.2 712.5
------- ------- ------- ------- ------- -------
DIFFERENCE 145.7 136.0 (200.2) (266.2) 214.3 117.2
======= ======= ======= ======= ======= =======
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS 0.1 - 2.5 - - -
OPTIONS - 0.7 - - - -
DECEMBER 31, 2003
--------------------------------------------------------------------------------
FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL(3)
TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT
------- ------- ------- ------- -------- ------- --------
NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
------- ------- ------- ------- -------- ------- --------
NON-LINKED ISRAELI CURRENCY
Assets 2.3 8.1 0.7 - 566.2 685.4 1,194.8
Liabilities - - - - 1,111.1 (4)1,376.6 2,357.7
------- ------- ------- ------- -------- ------- --------
Difference 2.3 8.1 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 107.8 386.1 154.5 0.2 1,357.7 799.3 1,859.2
Liabilities 52.6 218.6 4.8 - 762.6 42.8 745.7
------- ------- ------- ------- -------- ------- --------
Difference 55.2 167.5 149.7 0.2 595.1 756.5 1,113.5
Derivative instruments
excluding options - - - - (235.0) - (226.5)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 654.0 3,135.5 5,269.3 177.1 12,471.8 - 7,222.8
Liabilities 640.0 3,093.8 5,252.2 177.1 11,918.7 1.7 6,741.3
------- ------- ------- ------- -------- ------- --------
Difference 14.0 41.7 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 AS AT DECEMBER 31, 2003
ASSETS 764.1 3,529.7 5,424.5 177.3 14,395.7 1,564.2 10,356.3
LIABILITIES 692.6 3,312.4 5,257.0 177.1 13,792.4 1,422.9 9,846.5
------- ------- ------- ------- -------- ------- --------
DIFFERENCE 71.5 217.3 167.5 0.2 603.3 141.3 509.8
======= ======= ======= ======= ======== ======= ========
DERIVATIVE INSTRUMENTS
EXCLUDING OPTIONS - - - - 2.6 - -
OPTIONS - - - - 0.7 - -
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 324.3 million. The data is
net of specific allowance for doubtful debts.
(3) As included in Note 18 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the credit line amount provided by the 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 the Bank of Israel. Since from this date a downward
trend was not determined for the credit line, its amount 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, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
DECEMBER 31 DECEMBER 31
2004 2003
------------ ------------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 179.9 251.0
Guarantees to home purchasers 91.0 112.2
Other guarantees and liabilities 25.1 55.5
Documentary credit 2.9 17.6
Unutilized revolving credit facilities 0.3 5.9
Irrevocable commitments to grant
credit facilities, approved but not yet executed 0.8 13.8
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
B. OTHER CONTINGENT LIABILITIES AND COMMITMENTS
1. See Note 17A with respect to the contingent liabilities regarding
personal employment agreements with senior executives.
2. Long-term rental agreement -
In 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. The
Bank has an option to extend the lease period by an additional three
years. The lease payment, which is linked to the CPI, will be raised
in the additional period by 5%.
3. As of January 1, 2004 the Bank has outsourced its computer services,
according to which it signed an agreement for receiving computer
services for a period of three years, with an option for extension by
an additional two years. In 2005 the cost of the service will amount
to NIS 3.3 million and in 2006 to NIS 2.4 million. In the event that
the Bank decides to extend the agreement by the additional two years,
as aforementioned, the cost of service for each additional year will
amount to NIS 2.3 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$20 million. The said investment
funds invest in Israeli companies or companies related to Israel and
in hi-tech companies. The investment in them is presented under the
item of securities. The major part of the investments made by these
funds is in the credit component. The balance of this liabilities at
balance sheet date amounts to US$ 6.9 million.
F - 53
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - 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 of the Bank 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 entity 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. These types of events include, among other things,
realization of collateral, 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) 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 section D hereunder.
3) On October 28, 2004 the Board of the Directors of the Bank approved
issuance of a writ of indemnification to an employee of the Bank in
connection with a claim that was filed in March 2004 against her, the
Bank and additional senior officers of the Bank, which for purposes of
court fees was set at NIS 1 million. Details of this claim are
presented in section D hereunder.
D. LEGAL ACTIONS
Legal actions, including a motion to certify a claim as a class action,
were filed against the Bank in the ordinary course of business. Management
of the Bank, on the basis of legal opinions regarding the prospects of the
claims, including the motion to certify a claim as a class action, believes
that when necessary, adequate provisions were included in the financial
statements to cover possible losses in respect of those claims.
F - 54
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
Following are details of legal actions against the Bank in material
amounts:
1) In March 2003, Lehava Underwriters Ltd. (by virtue of its being a
shareholder of the Bank) filed a derivative claim in the amount of NIS
409.5 million against eleven senior officers of the Bank (current and
past) and against the Bank itself. The plaintiff claims that the named
senior officers breached their "duty of care" toward the Bank and were
negligent in fulfilling their duty and, as a result, should be
required to pay the Bank the amount of the claim, as compensation for
the damages they inflicted on the Bank. According to the claim, the
negligence of the senior officers is reflected in, among other things,
the credit that they granted without suitable collateral, problems
with the credit-granting policy and the quality and approval
procedures thereof, credit risk management and the ongoing handling of
the credit. The amount of the suit, in respect of damages incurred as
a result of the alleged negligence, reflects the amount of the
allowances for doubtful debts recorded by the Bank in 2002. The Bank
notified the insurers with which it has a directors and senior
officers liability insurance policy of the filing of the suit, but it
has not yet been notified of their position regarding the insurance
coverage. The defendants filed a motion to have the suit dismissed IN
LIMINE, on grounds that the plaintiff should have filed a motion to
approve the claim as a derivative claim. The Court accepted the
position of the defendants and it ordered the plaintiff to file a
motion for the approval of the claim as a derivative claim. Such a
motion was submitted on December 7, 2003, but the Court has not yet
handed down its decision. Representation of the Bank in the
proceedings regarding the claim and the motion has been handed over to
legal counsel. In the opinion of the Bank's legal counsel, since the
claim is a derivative claim the Bank's exposure in respect thereto is
only 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 (two of which were
removed later from the action), together with a motion to have the
suit approved as a class action. The class action was filed in the
name of all those who purchased shares of the Bank between December 1,
2001 and August 22, 2002, and the cause of the action is the alleged
breach of the duty to report under the Securities Law - 1968 and the
Securities Regulations (Periodic and Immediate Reports) - 1970 enacted
thereunder (hereinafter - the Securities Regulations). As claimed in
the action, during the aforementioned period, a number of
extraordinary events and/or matters occurred that indicated that the
Bank was in serious condition, and both these events and matters, and
the Bank's very situation mandated that the Bank file an immediate
report under the Securities Regulations. Such a report was not filed.
The estimated damages being claimed in the action is NIS 20 million
and, alternatively, NIS 14 million. The Bank notified the insurers
with which it has a banking policy and a directors and senior officers
liability insurance policy of the filing of the suit. The insurers
carrying the banking policy notified the Bank that the banking policy
does not cover the claim. The insurers carrying the directors and
senior officers liability insurance policy have not yet notified the
Bank of their position regarding the insurance coverage of the Bank.
The Bank handed over the care of the suit and the petition to have the
suit recognized as a class action to an attorney acting on its behalf.
The Court has not yet handed down a ruling on the petition to have the
suit approved as a class action.
F - 55
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
3) In September 2004, 27 different financial entities that hold class C
and/or CC and/or CC1 shares of the Bank filed with the Tel Aviv
District Court an originating motion in which the Court is requested,
inter alia, to instruct the Bank to pay to its shareholders a dividend
at the rates and dates it was paid until the second quarter of 2002.
The petitioners contend, inter alia, that according to the Bank's
Articles of Association, the Bank is required to pay to the holders of
its preferred shares an annual dividend at the rate of 7.5%, because
this dividend is not actually a dividend but rather a payment made in
full by the State of Israel in respect of the perpetual deposits the
Bank keeps with it, and therefore its distribution is not subject to
the distribution conditions provided in the law, and that even if the
distribution conditions should be applied, the Bank should still be
ordered to distribute the requested dividend, due to the Bank meeting
the repayment ability test as the dividend is being fully financed by
the State of Israel and not being deducted from the capital of the
Bank. The Bank handed over the handling of the originating motion to
an attorney acting on its behalf. In the opinion of the Bank's legal
advisors, the Bank will probably not be exposed to any monetary
exposure following this request, based on the assumption that if the
Court accepts the request and orders the payment of the dividend, the
State will have to pay the Bank the amount of the dividend out of the
interest on the Bank's perpetual deposits with the Treasury.
4) In September 2004, a company that is a customer of the Bank and its
shareholders filed an originating motion with the Tel Aviv District
Court, in which the Court is requested to declare that the company and
its shareholders that are guarantors to its debts do not owe the Bank
any amounts (whereas on the books of the Bank the debt of the company
and its shareholders amounts to NIS 63 million), that the Bank is
required to return to the guarantor shareholders the value of their
private assets they invested in the company, that the Chairman and the
12 members who served on the Bank's Board in 1997-2001 were negligent
in the fulfillment of their duties in that they allowed the Bank to
provide financing for the construction of the company's hotel, and
that after all their private assets are returned to the guarantors,
the Bank will be entitled to receive the hotel. On February 10, 2005
the District Court handed down a ruling striking the originating
motion, as part of an arrangement that was reached by the Bank and the
company and which received judicial force from the Supreme Court.
5) In June 2004 two former employees of the Bank, who had filled senior
positions in the Bank, filed a suit against the Bank with the Labor
Court in the total amount (for both of them) of NIS 2.3 million. The
claim is for the payment of certain benefits, which the plaintiffs
allege were due to them with regard to their retirement from the Bank
in 2002. The suit was filed also against the Director of Wages in the
Ministry of Finance in respect to the non-approval of these payments.
Alternatively the aforementioned plaintiffs claim the salary raises
they allege to have forfeited in the past in exchange for the
aforementioned benefits. The Bank has transferred the matter to an
attorney acting on its behalf.
F - 56
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
6) In March 2004 three companies that are customers of the Bank filed a
claim for a declaratory ruling and for damages against the Bank, the
Bank's Chairman of the Board, the Bank's General Manager and a credit
manager of the Bank. The three plaintiffs, against which the Bank is
conducting legal proceedings (against one of whom a judgment was
handed down in favor of the Bank and became final in 2005), request
from the Court to declare, inter alia, that a binding financing
agreement had been signed between them and the Bank. The three
plaintiffs also claim damages in the amount of NIS 200 million which
they claim were caused by the Bank and the other defendants, but for
purposes of court fees they are claiming the amount of NIS 1 million
while maintaining their right to amend the amount in the future. The
Bank has transferred the matter to an attorney acting on its behalf.
7) 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.
8) In February 2003, the Bank was served with a suit in which a company
that had received government-guaranteed loans from the Bank in the
1990s, 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. The Bank
notified its insurers of the filing of the suit, but has not yet
received confirmation of the insurance coverage. Nevertheless, the
attorneys of the insurer carrying the Bank's banking policy have
notified the Bank that following an initial examination it is possible
that the claim or part of it is not covered by the policy. The Bank
disagrees with this opinion and has notified the insurers of this. The
Bank has transferred the matter to an attorney acting on its behalf.
On January 31, 2005 the Court rejected the request for exemption from
court fees, and stated that if the fee is not paid by March 1, 2005
the claim will be dismissed.
9) In August 2000 a suit was filed against one of the Bank's former
senior executives and against 24 other defendants by a number of
venture capital funds. For purposes of the court fee, the amount of
the suit was set at $ 18.7 million. According to the plaintiffs'
complaint, the suit was filed, among other reasons, in connection with
the breach of an investment agreement, whereby the plaintiffs and
other investors were allegedly supposed to receive 46.5% of the shares
of a company in which the aforementioned senior executive served in
the past as a director on behalf of a former subsidiary of the Bank.
The senior executive has an attorney representing him in this matter
and the attorney has filed a defense brief on his behalf. In the
opinion of the Bank's legal counsel, even if the executive has to pay
something in respect of the suit, the payment will be covered by the
Bank's insurance policy.
F - 57
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
10) 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 an evaluation of the outcome of the case.
Notwithstanding this fact, Management of the Bank, basing itself on
legal counsel's opinion, believes that the Bank will not suffer any
monetary damages in respect of the legal said notice.
In the opinion of Management of the Bank, which is based on the opinion of
its legal counsels, the Bank's estimated aggregate exposure in respect of
pending claims in which likelihood of loss is considered reasonably
possible and regarding which a provision was not recorded because the
likelihood of loss is not considered probable, amounts to NIS 21 million.
E. REQUEST FOR DISCLOSURE OF DOCUMENTS REGARDING STAMP TAX
On August 30, 2004 the Bank received a request from the Customs and VAT
Department of the Ministry of Finance to provide agreements (including
memorandums) that were signed by the Bank after June 1, 2003. The request
was made following the amendment of the Stamp Tax Law, which came into
effect on June 1, 2003, and which provided the identity of the parties
required to pay stamp tax in respect of documents that were subject to the
tax but for which no provision had been made until then about who is
required to pay it. It is noted that following the adoption and
implementation of the Bank's "Run-off" plan, the Bank has significantly
reduced its activities and even before June 1, 2003 actually stopped
providing any new credit, and along with the collection of existing credit
has handled the restructuring or extension of credit in certain cases. The
stamp tax on loan agreements was cancelled as from January 1, 2005
according to the Stamp Tax on Documents Order (Annulment of Appendix A to
the Law) - 2005. The aforementioned request to provide agreements was
transferred to the examination of outside legal counsel, which in the
opinion they provided also reviewed the agreements customarily used by the
Bank. In the opinion of Management of the Bank, which is based on the legal
opinion it received, there is sound basis that:
1. The tax authorities do not have the authority to present before the
Bank a demand (request) to provide agreements as aforementioned.
2. To the extent that tax is required with respect to credit agreements
signed before June 1, 2003, the requirement applies to the agreements
and not to the parties to the agreement.
3. And to the extent that tax is required with respect to credit
agreements signed by the Bank after June 1, 2003, with respect to most
of the relevant agreements, this requirement applies to the customers
who were party to these agreements and not to the Bank.
In light of the aforementioned no provision was recorded on the books of
the Bank.
F - 58
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
E. REQUEST FOR DISCLOSURE OF DOCUMENTS REGARDING STAMP TAX (CONT'D)
It is noted that a motion that was filed by the forum of Chief Finance
Managers is pending before the High Court of Justice and that this motion
touches on various aspects related to the aforementioned matters.
F. OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
ON COLLECTION OF LOANS
DECEMBER 31 DECEMBER 31
2004 2003
------------ ------------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------------ ------------
NIS MILLIONS NIS MILLIONS
------------ ------------
Non-linked Israeli currency 382.5 465.4
CPI linked Israeli currency 1.3 1.3
Foreign currency 199.7 203.6
----- -----
Total 583.5 670.3
===== =====
The cash flow in respect of the collection commission and interest margins
on the above credit is marginal.
As at December 31, 2004 the activity based on the extent of collection
includes past due balances amounting to NIS 574.9 million (December 31,
2003 - NIS 663.4 million).
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
G. ANNUAL REPORTING IN THE USA
Since the Bank had in the past issued its securities to holders in the USA,
the Bank is required under American law to submit an annual report to the
United States Securities and Exchange Commission (hereinafter - SEC). The
Bank has for decades submitted this annual report on a form known as 20F.
As part of the annual report to the SEC the Bank has to fulfill various
reporting and disclosure requirements that are not applicable in Israel,
including a reconciliation of its financial statements to the accepted
accounting principles in the United States (US GAAP). This reconciliation
is made by providing a qualitative note on the differences between Israeli
GAAP and US GAAP and by providing a quantitative note, which presents the
results of the reporting entity's financial statements as if they had been
prepared according to US GAAP. The Bank used to include the qualitative
note regarding the differences between Israeli GAAP and US GAAP in its
financial statements in the USA, but it did not include the quantitative
note.
F - 59
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
G. ANNUAL REPORTING IN THE USA (CONT'D)
One of the requirements applicable in the USA is that an auditors' report
be attached to the financial statements. The auditors of the Bank refrained
from providing a report on the financial statements that were submitted by
the Bank in the USA in respect of the years 2001 and 2002, because of,
inter alia, the non-inclusion of a quantitative note regarding
reconciliation of the Bank's financial statements to US GAAP. After the
Bank's legal counsel in the USA examined the matter and concluded that the
prospects were slim for receiving an exemption from submitting the annual
report in the USA, the Bank began preparing to submit its annual report for
2003 and to comply with the reporting and disclosure requirements relating
to this report. The Bank was supposed to submit the report by July 15, 2004
at the latest, but there was a delay and it was submitted only on January
19, 2005, mainly because of the complex accounting issues the Bank had to
deal with in order to reconcile its financial statements to US GAAP. The
non-compliance with part of the requirements applicable to the financial
statements filed in the USA, including the non-inclusion of an auditors'
report as aforementioned, and the delay in filing the last report, may
expose the Bank to sanctions and/or claims on the part of various parties.
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2004 DECEMBER 31, 2003
--------------------- ---------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
----- ----- ----- -----
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------------------- ---------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- -----
Options purchased - 36.2 - 18.2
Forward contracts 145.0 343.9 235.0 658.3
----- ----- ----- -----
Total 145.0 380.1 235.0 676.5
===== ===== ===== =====
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designed for hedging purposes.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 60
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
A. VOLUME OF OPERATIONS (CONT'D)
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------- --------------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------------ ------------ ------------ ------------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
-------------------------- --------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------ ------------
Gross positive fair value 1.4 9.5 4.6 3.3
Gross negative fair value 0.1 2.4 - 1.7
--- --- --- ---
Total 1.3 7.1 4.6 5.0
=== === === ===
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
DECEMBER 31, 2004
-----------------------------------
REPORTED AMOUNTS*
-----------------------------------
NIS MILLIONS
-----------------------------------
BANKS CENTRAL BANKS TOTAL
----- ------------- -----
Gross positive fair value of derivative instruments 1.4 9.5 10.9
Off-balance sheet credit risk in
respect of derivative instruments (2) 25.7 26.8 52.5
---- ---- ----
Total credit risk in respect of derivative instruments 27.1 36.3 63.4
==== ==== ====
DECEMBER 31, 2003
-------------------------------------------------
ADJUSTED AMOUNTS**
-------------------------------------------------
NIS MILLIONS
-------------------------------------------------
BANKS CENTRAL BANKS OTHERS 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 individual
borrower indebtedness.
* Discontinuance of the adjustment to the effect of inflation according to
the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 61
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2004
-------------------------------------------
REPORTED AMOUNTS*
-------------------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------
CPI/Shekel interest contracts 25.0 120.0 145.0
Foreign currency contracts 380.1 - 380.1
----- ----- -----
Total 405.1 120.0 525.1
===== ===== =====
DECEMBER 31, 2003
-------------------------------------------
ADJUSTED AMOUNTS**
-------------------------------------------
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
===== ===== =====
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 62
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This note contains information on the methods of arriving at the fair value
of financial instruments. Most of the Bank's financial instruments are not
traded on active markets and thus market quotations are not available.
Therefore, the fair value is arrived at by using accepted pricing models,
such as the present value of future cash flows discounted at interest
rates, which reflect the level of risk 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 could
result in significantly different fair values. This is especially true in
regard to non-interest bearing financial instruments or those bearing fixed
interest rates. Furthermore, commissions receivable or payable as a result
of the business activity were not taken into account and neither was the
tax effect.
Moreover, the difference between the book value and fair value of the
financial instruments may not be realized since, in most cases, the Bank is
likely to hold the instruments until redemption. In view of the above, it
should be emphasized, that the data contained in this note should not be
considered as an indication of the value of the Bank as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques which may be applied in arriving at fair values, caution should
be used in comparing the fair values arrived at by different banks.
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
Bank of Israel. The credit line from the Bank of Israel bears the Bank of
Israel rate of interest. The discount rate of the cash flows of the
deposits raised by the Bank is set, for purposes of the fair value of the
liabilities, on the basis of the said interest rates.
DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
discounting future cash flows at interest rates used by the Bank in similar
transactions proximate to balance sheet date.
MARKETABLE SECURITIES - Are valued at market value. Shares for which no
market value is readily available in the amount of NIS 30.5 million are
stated at cost.
CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
public was arrived at by using the method of the present value of future
cash flows discounted at an appropriate interest rate. The balance of such
credit was segmented into several categories. The future aggregate cash
flows of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level of
risk inherent in the credit. Generally, this interest rate is set on the
basis of the rate at which similar transactions of the Bank were effected
as at balance sheet date. For short-term balances of credit (for an initial
period of up to three months), or balances at variable market interest
rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.
F - 63
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
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 67.7 million (December 31, 2003 - NIS 78.5
million), were not deducted from the balance of credit to the public for
cash flows purposes in assessing the fair value.
PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
cannot be applied to such deposits. Therefore, their book value is
considered to be their fair value (see Note 8 for details of the terms of
these deposits).
DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
liabilities was arrived at by the method of discounting the future cash
flows at the interest rate paid by the Bank in obtaining similar deposits,
or the interest rate of similar debentures and capital notes issued by the
Bank, prevailing as 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 - 64
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
DECEMBER 31, 2004
-------------------------------------------------------------
BALANCE SHEET AMOUNTS
-------------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS TOTAL FAIR VALUE
------- ------- ------- -------
REPORTED AMOUNTS*
-------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
FINANCIAL ASSETS
Cash and deposits with banks 95.4 22.5 117.9 118.4
Securities 56.6 3.4 60.0 60.0
Credit to the public 857.5 7,135.9 7,993.4 8,016.2
Credit to governments - 72.7 72.7 74.1
Other financial assets 13.0 - 13.0 13.0
Perpetual deposits with the
Israeli Treasury 806.5 - 806.5 806.5
------- ------- ------- -------
Total financial assets 1,829.0 7,234.5 9,063.5 9,088.2
======= ======= ======= =======
FINANCIAL LIABILITIES
Deposits of the public 116.5 288.8 405.3 408.5
Deposits of banks 1,403.9 24.1 1,428.0 1,428.3
Deposits of the Government
and a perpetual deposit 0.1 6,654.5 6.654.6 6,656.0
Capital notes - 25.3 25.3 27.0
Other financial liabilities 23.0 - 23.0 23.0
------- ------- ------- -------
Total financial liabilities 1,543.5 6,992.7 8,536.2 8,542.8
======= ======= ======= =======
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
F - 65
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 20B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments
(cont'd):
DECEMBER 31, 2003
---------------------------------------------------------------
BALANCE SHEET AMOUNTS
--------------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS TOTAL FAIR VALUE
------- ------- -------- --------
ADJUSTED AMOUNTS**
---------------------------------------------------------------
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 of the public 296.2 323.8 620.0 624.9
Deposits of banks 2,140.7 32.0 2,172.7 2,172.4
Deposits of 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 - financial instruments stated at market value,
or instruments with an initial maturity period not exceeding three
months, or instruments based on market interest rates that vary at
intervals of up to three months.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 66
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED 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 General Manager,
Directors of the Bank and companies related to them, affiliates of the Bank
and their related companies.
The Bank conducts transactions with all or some of the aforementioned
parties, in the ordinary course of business on terms applicable to its
transactions in general. As it is not practical to separately record the
transactions with such entities, it is not possible to reflect the
information required by the said Opinion except for the following details:
A. BALANCES
DECEMBER 31, 2004 DECEMBER 31, 2003
--------------------------------------- ----------------------------------------
AFFILIATES AND THEIR DIRECTORS AND AFFILIATES AND THEIR DIRECTORS AND
RELATED COMPANIES GENERAL MANAGER RELATED COMPANIES GENERAL MANAGER
------------------ ------------------ ------------------- ------------------
BALANCE BALANCE BALANCE BALANCE
AT HIGHEST AT HIGHEST AT HIGHEST AT HIGHEST
BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE
SHEET DURING THE SHEET DURING THE SHEET DURING THE SHEET DURING THE
DATE YEAR(1) DATE YEAR(1) DATE YEAR(1) DATE YEAR(1)
-------- -------- -------- -------- -------- -------- -------- --------
REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------------------------------------- ----------------------------------------
NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- -------- -------- -------- -------- --------
ASSETS
Credit to the public 0.4 17.5 - - 17.5 27.1 - -
Investment in affiliates - 0.9 - -
LIABILITIES
Deposits of the public 0.1 0.1 0.6 0.6 - - 0.6 0.6
Other liabilities - - 0.1 0.1 - - - 2.5
CREDIT RISK IN OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS - 0.7 - - 0.7 0.8 - -
(1) On the basis of the balances at the end of each month.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 67
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED PARTIES (CONT'D)
B. SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES
2004 2003
------------------- -------------------
AFFILIATES DIRECTORS AFFILIATES DIRECTORS
AND THEIR AND AND THEIR AND
RELATED GENERAL RELATED GENERAL
COMPANIES MANAGER COMPANIES MANAGER
-------- -------- -------- --------
REPORTED AMOUNTS* REPORTED AMOUNTS*
------------------- -------------------
NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- --------
Profit (loss) from financing
operations before allowance
for doubtful debts (1) - - - -
Allowance for doubtful debts - - 8.6 -
Operating and other expenses (2) - 1.0 - 1.2
(1) See details in D hereunder.
(2) See details in C hereunder.
C. BENEFITS TO INTERESTED PARTIES
2004 2003
---------------------- ----------------------
DIRECTORS AND DIRECTORS AND
GENERAL MANAGER GENERAL MANAGER
---------------------- ----------------------
REPORTED AMOUNTS* REPORTED AMOUNTS*
---------------------- ----------------------
NIS NUMBER OF NIS NUMBER OF
MILLIONS BENEFICIARIES MILLIONS BENEFICIARIES
-------- ------------- -------- -------------
Interested parties employed by
the Bank (1) (2)0.2 2 (2)0.3 2
Fees to directors not employed
by the Bank 0.8 11 0.9 11
(1) Not including VAT on salaries.
(2) Including changes in provisions relating to the period in which, as
the Board of Directors believes, the services of the Chairman of the
Board and of the General Manager will possibly no longer be required.
See Note 17A regarding employment agreements with the Chairman of the Board
of the Bank and its General Manager.
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
F - 68
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 21 - INTERESTED AND RELATED PARTIES (CONT'D)
D. RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
WITH INTERESTED AND RELATED PARTIES
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
----------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Income deriving from credit to the public - - 1.1
Expenses deriving from deposits of the public - - 0.1
--- --- ---
Net results from financing operations
before allowance for doubtful debts - - 1.0
=== === ===
Definitions in this note:
- Interested parties - as defined in Paragraph 1 of the definition of an
"interested party in a company" in Section 1 of the Securities Law.
- Related party - as defined in Opinion 29 of the Institute of Certified
Public Accountants in Israel.
- Directors and General Manager - including their spouses and minors
(Opinion 29 of the Institute of Certified Public Accountants in
Israel).
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 69
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 22 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
--------------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
A. INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public 524.7 143.0 773.1
Credit to governments 1.1 (3.8) 11.5
Deposits with Bank of Israel - 0.3 (1.9)
Deposits with banks 2.9 (0.6) 7.7
Debentures 0.6 1.1 0.5
----- ----- -----
529.3 140.0 790.9
----- ----- -----
B. (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public (24.0) (32.3) (56.5)
Deposits of the Government (385.0) 59.8 (584.6)
Deposits of Bank of Israel (72.6) (196.2) (91.2)
Deposits of banks (2.7) 4.4 (40.2)
----- ----- -----
(484.3) (164.3) (772.5)
----- ----- -----
C. INCOME DERIVING FROM DERIVATIVE FINANCIAL
INSTRUMENTS
Commissions from at-risk brokerage transactions - - 12.4
Net income from derivative instruments ALM 5.0 47.2 22.7
----- ----- -----
5.0 47.2 35.1
----- ----- -----
D. OTHER INCOME AND EXPENSES
Commissions from financing operations 14.7 16.7 30.1
Collection of interest on problematic debts 10.5 1.6 4.9
Other financing income 2.6 43.1 6.8
Other financing expenses (11.6) (14.2) (15.8)
----- ----- -----
16.2 47.2 26.0
----- ----- -----
Total profit from financing operations before
allowance for doubtful debts 66.2 70.1 79.5
===== ===== =====
Including - exchange rate differences, net 11.5 0.2 37.0
===== ===== =====
E. RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
sale debentures (included in income from assets) 0.6 1.1 0.5
Gain from sale of available-for-sale debentures
(included in other financing income) 0.5 0.7 0.9
----- ----- -----
Total profit from investments in debentures 1.1 1.8 1.4
===== ===== =====
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 70
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 23 - OPERATING COMMISSIONS
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
------------------ --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Ledger fees (in Israeli and foreign currency) 1.6 2.3 2.2
Payment order system services 0.2 0.5 1.2
Customer foreign trade transactions 0.1 1.5 5.6
Credit handling and drafting of contracts 0.3 0.2 0.6
Computerized information services and
confirmations 0.1 0.2 0.2
Margin and collection commissions on credit
granted from deposits based on collection:
Collection commissions on credit from Israeli
Treasury funds - - 0.1
Other 1.8 1.8 2.4
---- ---- ----
Total operating commissions 4.1 6.5 12.3
==== ==== ====
NOTE 24 - GAINS (LOSSES) ON INVESTMENTS IN SHARES
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
------------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Gains on sale of available-for-sale shares 38.0 8.5 0.9
Loss on impairment in value of available-for-sale
shares - - (3.1)
Dividend from available-for-sale and trading shares 3.5 1.8 0.1
Realized and unrealized losses on adjustments
to fair value of trading shares, net - - (2.1)
---- ---- ----
Total gains (losses) on investments in shares 41.5 10.3 (4.2)
==== ==== ====
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 71
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 25 - OTHER INCOME
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
------------------ --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Gains on severance funding 1.0 1.6 -
Other 3.6 3.9 4.1
--- --- ---
Total other income 4.6 5.5 4.1
=== === ===
NOTE 26 - SALARIES AND RELATED EXPENSES
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
------------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Salaries 18.3 25.5 35.9
Severance pay, provident fund, pensions,
further education fund, vacation pay,
sick pay and long service bonuses 0.5 6.6 10.8
National insurance 0.9 1.5 2.0
Other related expenses - 0.1 0.8
Adjustment of provisions for related
benefits following changes in salaries
in the current year - - 0.2
---- ---- ----
Total salaries and related expenses 19.7 33.7 49.7
==== ==== ====
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 72
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 27 - OTHER EXPENSES
2004 2003 2002
-------- -------- --------
ADJUSTED
REPORTED AMOUNTS* AMOUNTS**
------------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Marketing and advertising 0.1 0.2 0.6
Communications (postage, telephone,
courier fees, etc.) 0.6 0.8 1.3
Computer (not including salaries and
depreciation) 5.2 3.5 5.0
Office expenses 0.3 0.5 0.9
Insurance 6.3 4.8 2.3
Professional services 6.3 7.0 5.6
Directors' fees (not including a director employed
as a senior executive) 0.8 0.9 1.5
Staff training, further education, etc - 0.1 0.2
Other 0.8 2.9 2.3
---- ---- ----
Total other expenses 20.4 20.7 19.7
==== ==== ====
NOTE 28 - TAXES ON INCOME
A. COMPOSITION:
2004 2003 2002
-------- -------- --------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
----------------- --------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Taxes for the current year - - 0.2
Taxes in respect of prior years - (2.7) (0.6)
--- --- ---
Provision for taxes on income (tax savings) - (2.7) (0.4)
=== === ===
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
For the year 2003 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2002.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 73
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 28 - 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 profit of the Bank, based on the statutory tax rate applicable to
banks in Israel, and the tax expense (tax savings) on operating profit, as
reflected in the statement of income.
2004 2003 2002
-------- -------- --------
REPORTED
AMOUNTS* ADJUSTED AMOUNTS**
-------- ----------------------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
Statutory tax rate 45.30% 45.76% 45.55%
====== ====== ======
Tax (tax savings) at the statutory rate 0.6 (48.7) (195.8)
Tax (tax savings) in respect of:
Differences from adjustment of monetary
assets, net 0.2 1.2 (3.1)
General and supplementary allowances for
doubtful debts (8.9) (2.5) 6.7
Non-deductible expenses 0.1 0.1 0.1
Exempt income (0.3) - -
Differences and tax
benefits in respect of which deferred taxes
had not been recorded, net 4.8 38.1 164.7
Loss for purposes of profit VAT which
cannot be set off 3.5 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)
====== ====== ======
C. The Bank has been issued final tax assessments for all years through
2000.
D. Carryforward tax losses in respect of which deferred tax assets were
not recorded total NIS 641 million (in 2003 - NIS 600 million).
E. In 2002, 2003 and 2004, the Bank recorded VAT on salaries receivable
in the amounts of NIS 6.7 million, NIS 5.1 million and NIS 3.0
million, respectively, as a result of losses for purposes of VAT on
profit.
* For the year 2004 - Discontinuance of the adjustment to the effect of
inflation according to the CPI of December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 74
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 29 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM
DECEMBER 31 DECEMBER 31
2004 2003
------- -------
REPORTED ADJUSTED
AMOUNTS* AMOUNTS**
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public 6,395.6 6,675.0
------- -------
Total 6,395.6 6,675.0
======= =======
DESIGNATED DEPOSITS
Deposits of the Government 6,539.7 6,698.1
------- -------
Total 6,539.7 6,698.1
======= =======
Credit out of designated deposits includes NIS 6,167.3 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, 2003, the balance of the
credit secured by a State guarantee was NIS 6,405.3 million).
NOTE 30 - 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:
2004 2003 2002
-------- -------- --------
REPORTED
AMOUNTS* ADJUSTED AMOUNTS**
-------- -----------------
NIS NIS NIS
MILLIONS MILLIONS MILLIONS
-------- -------- --------
IN RESPECT OF PARTICIPATING PREFERENCE SHARES -
Special income from the Israeli Treasury - - 7.5
Income tax - - (1.1)
---- ---- ----
Special income from the Israeli Treasury, net - - 6.4
---- ---- ----
IN RESPECT OF NON-PARTICIPATING PREFERENCE SHARES -
Special income from the Israeli Treasury - - 14.4
Income tax - - (2.0)
---- ---- ----
Special income from the Israeli Treasury, net - - 12.4
Less/ - dividend on the aforementioned shares - - 12.4
---- ---- ----
Total in respect of non-participating shares - - -
---- ---- ----
Total special income from the Israeli Treasury, net - - 6.4
==== ==== ====
See Note 8A, Note 14 and Note 15 for details of the special income from the
Israeli Treasury which was not recorded in the books, due to the cessation
of dividend distribution.
* Discontinuance of the adjustment to the effect of inflation according
to the CPI for December 2003.
** Amounts adjusted to the effect of inflation according to the CPI of
December 2003.
F - 75
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 31 - INFORMATION ON NOMINAL DATA BASIS
DECEMBER 31 DECEMBER 31
2004 2003
-------- --------
NIS MILLIONS NIS MILLIONS
-------- --------
Total assets 9,078.2 10,356.0
Total liabilities 8,570.1 9,846.5
-------- --------
Total shareholders' equity 508.1 509.5
======== ========
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
------------ ------------ ------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------------ ------------ ------------
Nominal net earnings (loss) 1.4 (99.9) (417.8)
NOTE 32 - 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 the accompanying financial
statements, as described in Note 1C. According to such Israeli
accounting principles, the Bank has discontinued the adjustment of the
financial statements as of January 1, 2004.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. However, such effects have not been quantified or
included in a reconciliation to U.S. GAAP.
2. SPECIFIC PROVISION FOR LOAN LOSSES
In accordance with Israeli GAAP:
The provision for loan losses is determined on a specific basis,
taking the following factors into consideration:
a. The financial position of the borrower, including an assessment
of the likelihood of repayment of the loan within an acceptable
period and the extent of the Bank's other commitments to the same
borrower.
F - 76
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - 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 - 77
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - 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 - 78
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - 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. EARNINGS/LOSS PER SHARE
In accordance with Israeli GAAP:
The dividend on the preferred shares which was accrued but not yet
been declared was not added to the calculation of the loss on the
ordinary A shares since no income has been recorded in respect of the
interest on the perpetual deposits, the payment of which, in the
opinion of the Bank's management, is contingent upon payment of the
dividend in respect of the aforementioned preferred shares.
Furthermore, it is not required to add to the calculation of the loss
on the ordinary A shares, the dollar exchange rate linkage differences
on the principal of the preferred shares net of the erosion deriving
from the change in the general purchasing power of the Israeli
currency.
In accordance with 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 - 79
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - 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 8), 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. COMMITMENT IN RESPECT OF ACTIVITY BASED ON COLLECTION OF LOANS
In accordance with Israeli GAAP:
Deposits, the payment of which is dependent on collection of loans,
and the loans that were granted from the proceeds of such deposits,
are set off and presented on net basis, as the Bank has no credit
risk.
In accordance with US GAAP:
The transactions mentioned above cannot be set off under US GAAP since
the bank liability with respect to the above mentioned deposits has
not been extinguished yet. Therefore, the deposits and loans are
presented on gross basis.
Figures as of December 31, 2003 were revised accordingly.
10. SUMMARY OF SIGNIFICANT PRESENTATION DIFFERENCES OF BALANCE SHEET
ITEMS BETWEEN ISRAELI GAAP AND U.S. GAAP:
a. Non-marketable shares included in securities available for sale
under Israeli GAAP were classified to other assets under U.S.
GAAP.
b. Accrued interest receivable included in credit items was
classified to other assets under U.S. GAAP.
c. The provision for severance pay net of amounts deposited in
provident funds is presented under Israeli GAAP in other
liabilities. Under U.S. GAAP, such funded amounts that do not
release the Bank from liability to pay severance upon retirement,
are presented in other assets, and related liability is presented
in other liabilities.
d. Accrued interest payable included in deposit items was
reclassified to other liabilities under U.S. GAAP.
e. See note 4E regarding a customer's debt reclassified to
securities item and presented according to market value of the
shares pledged in favor of the Bank. In accordance with US GAAP
this customer's debt is presented in credit to public balance
sheet line item.
F - 80
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - 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 31
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
---- ------------ ------------ ------------
Net earnings (loss) as
reported, according to
Israeli GAAP 1.4 (104.4) (423.5)
---- ----- -----
Specific provision for loan
Losses 32.A.2 2.6 (2.4) 31.5
General provision for loan
Losses 32.A.3 (8.9) (3.9) 10.2
Dividend on non
participating preference
Shares 32.A.4 - - 12.4
Liability for termination
Benefits 32.A.5 (6.9) (15.3) 31.5
Linkage differences on
perpetual deposits with
the Israeli Treasury 32.A.6 (8.2) (31.2) 3.9
---- ----- -----
(21.4) (52.8) 89.5
---- ----- -----
Net earnings (loss)
according to US GAAP (20.0) (157.2) (334.0)
==== ===== =====
YEAR ENDED DECEMBER 31
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
NIS NIS NIS
------------ ------------ ------------
(B) Earnings (loss) per share
BASIC EARNINGS (LOSS) PER "A" ORDINARY
SHARE:
As reported according to Israeli GAAP 13.27 (994.84) (4,095.94)
As reported according to US GAAP (3,019.28) (10,579.77) (9,603.09)
Number of shares 15,100 15,100 15,100
F - 81
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
2. BALANCE SHEET:
DECEMBER 31, 2004 DECEMBER 31, 2003
--------------------------------------- ----------------------------------------
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 117.9 - 117.9 143.9 - 143.9
Securities (1)(2)(3) 60.0 (60.0) - 85.4 (85.4) -
Available-for-sale
Securities (1) - 6.3 6.3 - 27.9 27.9
Credit to the public (3)(4)(5)(6) 7,993.4 (27.5) 7,965.9 9,189.6 (35.3) 9,154.3
Credit to governments (4)(12) 72.7 583.2 655.9 105.2 669.8 775.0
Fixed assets 1.9 - 1.9 4.7 - 4.7
Other assets (2)(4)(7) 26.0 168.8 194.8 28.2 188.0 216.2
Perpetual deposits with the
Israeli Treasury (11) 806.5 (306.3) 500.2 799.3 (290.9) 508.4
-------- -------- -------- -------- -------- --------
Total assets 9,078.4 364.5 9,442.9 10,356.3 474.1 10,830.4
======== ======== ======== ======== ======== ========
Deposits of the public (8) 405.3 (12.4) 392.9 620.0 (19.7) 600.3
Deposits of banks (8) 1,428.0 (15.0) 1,413.0 2,172.7 (31.0) 2,141.7
Deposits of the
government (8) (12) 6,654.6 487.4 7,142.0 6,949.3 570.5 7,519.8
Perpetual deposits 0.1 - 0.1 0.1 - 0.1
Capital notes 25.3 - 25.3 28.2 - 28.2
Other liabilities (7)(8)(9) 56.8 137.6 194.4 76.2 158.9 235.1
Non-participating
shares (10) 309.1 (309.1) - 314.2 (314.2) -
Shareholders' equity
(see 3 below)(3)(5)(6)(9)(10)(11) 199.2 76.0 275.2 195.6 109.6 305.2
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity 9,078.4 364.5 9,442.9 10,356.3 474.1 10,830.4
======== ======== ======== ======== ======== ========
(1) Classification from securities item to available-for-sale securities.
(2) Classification of non-marketable shares from securities item to other
assets item (see note 32.A.10.a).
(3) A customer's debt in respect of which shares were pledged in favor of the
Bank (see note 32.A.10.e).
(4) Classification of accrued interest receivables from credit items to other
assets item (see note 32.A.10.b).
(5) Specific provision for loan losses (see note 32.A.2).
(6) General provision for loan losses (see note 32.A.3).
(7) Classification of amounts deposited in provident funds in respect of
severance pay liabilities from other liabilities item, to other assets item
(see note 32.A.10.c).
(8) Classification of accrued interest payables from deposit items to other
liabilities items (see Note 32.A.10.d).
(9) Liability for termination benefits (see note 32.A.5).
(10) Classification of non-participating shares to shareholders' equity item
(see note 32.A.4).
(11) The agreement between the Bank and the Israeli Treasury regarding the
changes in the method of computing the linkage on the perpetual deposits
(see Note 32.A.8).
(12) Commitment in respect of activity based on collection of loans. Figures as
of December 31, 2003 were revised to increase loans and deposits by NIS
670.3 million (see Note 32.A.9).
F - 82
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 32 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND US GAAP AND THEIR EFFECT ON
THE FINANCIAL STATEMENTS (CONT'D)
3. SHAREHOLDERS' EQUITY:
DECEMBER 31 DECEMBER 31
2004 2003
------------ ------------
NOTE NIS MILLIONS NIS MILLIONS
---- ------------ ------------
Shareholders' equity as reported according to
Israeli GAAP 199.2 195.6
A customer debt in respect of which shares
were pledged in favor of the Bank 32.A.10.e 0.4 0.3
Specific provision for loan losses 32.A.2 (6.2) (8.8)
General provision for loan losses 32.A.3 69.6 78.5
Liability for termination benefits 32.A.5 9.4 16.3
Perpetual deposits with the State of Israel 32.A.8 (306.3) (290.9)
Classification of non-participating shares to
shareholders' equity item 32.A.4 309.1 314.2
----- -----
Shareholders' equity according to US GAAP 275.2 305.2
----- -----
F - 83