africa israel investments ltd

Africa Israel Investments Ltd.

Consolidated Financial Statements

At December 31, 2010

Africa Israel Investments Ltd. Consolidated Financial Statements


Contents

Page Auditors’ Reports 2 – 3 Consolidated Statements of Financial Position 4 – 5 Consolidated Statements of Income 6 Consolidated Statements of Comprehensive Income 7 Consolidated Statements of Changes in Shareholders’ Equity 8 – 9 Consolidated Statements of Cash Flows 10 – 11 Notes to the Financial Statements 12 Appendix – List of Group Companies 280

2

Report of the Auditors to the Shareholders of Africa Israel Investments Ltd. regarding Audit of Internal Control Components over Financial Reporting In accordance with Section 9B(c) of the Securities Regulations (Periodic and Immediate Reports), 1970 We have audited internal control components over financial reporting of Africa Israel Investments Ltd. and its subsidiaries (hereinafter – “the Company”) as at December 31, 2010. These internal control components were determined as explained in the following paragraph. The Company’s Board of Directors and Management are responsible for maintenance of effective internal control over financial reporting and for their evaluation of the effectiveness of internal control components over financial reporting attached to the Periodic Report for the above-mentioned date. Our responsibility is to express an opinion on internal control components over the Company’s financial reporting based on our audit. Internal control components over financial reporting audited by us were determined in accordance with Audit Standard 104 of the Institute of Certified Public Accountants in Israel “Audit of Internal Control over Financial Reporting” (hereinafter – “Audit Standard 104”). These components are: (1) controls at the level of the organization, including controls over the preparation and closing process of financial reporting and general controls of information systems; (2) controls over investments in investee companies; (3) controls over investment property; (4) controls over inventory of buildings held for sale (all of these will be referred to hereinafter as – “the Audited Control Components”). We conducted our audit in accordance with Audit Standard 104. Pursuant to this Standard we are required to plan and perform the audit with the goal of identifying the Audited Control Components and to obtain a reasonable level of certainty whether these control components were effectively maintained in all material respects. Our audit included gaining an understanding of the internal control over financial reporting, identification of the Audited Control Components, evaluation of the risk that a significant weakness exists in the Audited Control Components, and examination and evaluation of the effectiveness of the planning and operation of those control components based on the assessed risk. Our audit, with respect to those control components, also included performance of other procedures such as those we considered necessary under the circumstances. Our audit referred solely to the Audited Control Components, as opposed to internal control over the overall significant processes in connection with the financial reporting and, therefore, our opinion relates solely to the Audited Control Components. In addition, our audit did not refer to reciprocal impacts between the Audited Control Components and those not audited and, therefore, our opinion does not take into account these possible impacts. We believe our audit provides a reasonable basis for our opinion in the context described above. Due to built-in limitations, internal control over financial reporting, in general, and components thereof, in particular, may not prevent or discover a material misrepresentation. In addition, making of conclusions with respect to the future on the basis of evaluation of any present effectiveness whatsoever is exposed to risk that the controls will become inappropriate due to changes in circumstances or the extent of compliance with the policies or the procedures will change for the worse. In our opinion, the Company effectively maintained, in all material respects, the Audited Control Components as at December 31, 2010. We have also audited, in accordance with generally accepted auditing standards in Israel, the Company’s consolidated financial statements as at December 31, 2010 and 2009 and for each of the three years the last one of which ended on December 31, 2010 and our report, dated March 30, 2011, included an unqualified opinion on those financial statements, based on our audit and the reports of the other auditors.

Somekh Chaikin Breitman Almogar Zohar & Co. Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)

March 30, 2011

3

Auditors’ Report to the Shareholders of Africa Israel Investments Ltd.

We have audited the accompanying consolidated statements of financial position of Africa Israel Investments Ltd. (hereinafter – “the Company”) as at December 31, 2010 and 2009, and the consolidated statements of income, the consolidated statements of comprehensive income, the consolidated statements changes in shareholders’ equity, and the consolidated statements cash flows for each of the three years the last one of which ended on December 31, 2010. These financial statements are the responsibility of the Company’s Board of Directors and of its Management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain consolidated subsidiaries and joint ventures, whose assets constitute about 12% and about 13% of the total consolidated assets as at December 31, 2010 and 2009 respectively, and whose revenues constitute about 20%, about 19% and about 42% of the total consolidated revenues for the three years the last one of which ended on December 31, 2010, respectively. In addition, we did not audit the financial statements of investee companies and jointly controlled entities, the investment in which totaled NIS 354,419 thousand and NIS 406,424 thousand, as at December 31, 2010 and 2009, respectively, and the Company’s share in their income (losses) was NIS 113,630 thousand, NIS (167,716) thousand and NIS (533,336) thousand for the three years the last one of which ended on December 31, 2010, respectively. The financial statements of those companies were audited by other auditors, whose reports thereon were furnished to us, and our opinion, insofar as it relates to amounts included in respect of those companies, is based on reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards in Israel, including standards prescribed by the Auditors’ Regulations (Manner of Auditor’s Performance), 1973. Such standards require that we plan and perform the audits in order 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 Company’s Board of Directors and by its Management, as well as evaluating the overall financial-statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and on the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as at December 31, 2010 and 2009, and the results of their operations, the changes in the shareholders’ equity and their cash flows, for each of the three years the last one of which ended on December 31, 2010, in accordance with International Financial Reporting Standards (IFRS) and the provisions of the Securities Regulations (Annual Financial Statements), 2010. We also audited, in accordance with Auditing Standard 104 of the Institute of Certified Public Accountants in Israel “Audit of Internal Control Components over Financial Reporting” the internal control components over the Company’s financial reporting as at December 31, 2010, and our report dated March 30, 2011 included an unqualified opinion with respect to the effective maintenance of those internal control components.

Somekh Chaikin Breitman Almogar Zohar & Co. Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)

March 30, 2011

4

Africa Israel Investments Ltd. Consolidated Statements of Financial Position

In Thousands of New Israeli Shekels At December 31 Note 2010 2009

Current Assets

Cash and cash equivalents 8 2,155,726 1,560,504 Short-term investments 9 191,524 353,971 Marketable securities 10 424,706 567,148 Trade receivables 11 937,090 865,776 Other receivables and debit balances, including financial derivatives 11 1,064,851 931,075 Income taxes receivable 32,443 79,617 Inventory of buildings held for sale 12 3,007,503 *3,438,636 Other inventories 13 553,467 364,195 Assets held for sale 14 1,784,298 883,969 10,151,608 9,044,891 -------------- --------------

Non-Current Assets

Investments in investee companies accounted for using the equity method of accounting 15 1,516,346 1,174,053 Loans to investee companies 15 883,034 1,288,968 Property, plant and equipment 16 591,661 **1,582,910 Investment property 17 5,192,277 5,387,076 Investment property under construction 18 6,051,801 5,265,491 Long-term loans, investments and other debit balances 19 164,368 1,887,436 Inventory of real estate 20 1,639,952 *1,986,328 Intangible assets 21 113,714 114,247 Excess of assets over liabilities in respect of employee benefits 22 1,626 2,332 Deferred tax assets 36 96,429 100,452 16,251,208 18,789,293 -------------- -------------- 26,402,816 27,834,184 * Reclassified – see Note 2G. ** Retroactive application of new accounting standard – see Note 2(H)2.

____________________________ ________________________ _________________________ Lev Leviev

Chairman of the Board of Directors Izzi Cohen

CEO Ron Fainaro

CFO Approval date of the financial statements: March 30, 2011

The accompanying notes to the consolidated financial statements are an integral part thereof.

5

Africa Israel Investments Ltd. Consolidated Statements of Financial Position

In Thousands of New Israeli Shekels At December 31 Note 2010 2009 Current Liabilities

Debentures 23 1,277,346 7,576,961 Short-term credit from banks and others 23 2,270,373 3,984,439 Contractors and suppliers 24 805,608 760,025 Other payables and credit balances, including financial derivatives 25 888,624 1,212,956 Income taxes payable 90,613 49,629 Advances from customers 26 814,160 742,907 Provisions 27 377,819 415,757 Liabilities held for sale 14 1,620,226 26,681 8,144,769 14,769,355 -------------- --------------

Long-Term Liabilities

Debentures 23 3,984,767 1,701,023 Liabilities to banks 23 4,965,081 5,469,018 Other liabilities 23 595,623 777,431 Excess of losses on investments in investee companies accounted for using the equity method of accounting 15 155,723 253,458 Options issued 7D(1) 10,698 34,986 Employee benefits 22 14,749 19,259 Provisions 27 – 3,139 Liabilities for deferred taxes 36 490,500 486,113 10,217,141 8,744,427 -------------- --------------

Equity 37

Share capital and premium 374,841 368,604 Premium on shares 3,552,657 1,812,964 Capital reserves (2,350,584) (1,295,145) Retained earnings 1,955,851 249,293 Total equity allocated to the owners of the Company 3,532,765 1,135,716 Rights not conferring control 4,508,141 *3,184,686 Total equity 8,040,906 4,320,402 -------------- -------------- 26,402,816 27,834,184 * Retroactive application of new accounting standard – see Note 2(H)1.


6

Africa Israel Investments Ltd. Consolidated Statements of Income

In Thousands of New Israeli Shekels (unless stated otherwise)

For the Year Ended December 31 Note 2010 *2009 *2008

Revenues Construction and real estate transactions 28 2,706,043 2,491,739 2,783,908 Rental and operation of properties 440,152 487,926 564,452 Industry 1,876,727 1,383,938 1,915,557 Other activities 28,246 11,860 20,550 Share in income of investee companies accounted for using the equity method of accounting, net 15 365,167 – – Increase in fair value of investment property, net 17 221,242 – 166,660 Other income 29 286,786 264,064 194,653 5,924,363 4,639,527 5,645,780 ------------- ------------- -------------Cost and expenses Construction and real estate transactions 30 2,363,278 2,201,499 2,630,412 Update of provision for decline in value of inventory of land and buildings 28 (60,195) 577,125 1,365,968 Maintenance, supervision and management of real estate and properties 31 107,743 186,674 191,460 Decline in value of investment property, net 17 – 245,951 – Decline in value of investment property under construction, net 18 20,290 156,494 2,060,671 Industry 32 1,724,479 1,300,536 1,815,630 Other activities 39,440 2,412 3,232 Share in losses of investee companies accounted for using the equity method of accounting, net 15 – 249,002 519,679 Administrative and general expenses 34 296,731 272,783 361,634 Amortization of intangible and other expenses 33 255,139 316,137 379,929 4,746,905 5,508,613 9,328,615 ------------- ------------- -------------

Operating income (loss) 1,177,458 (869,086) (3,682,835) ------------- ------------- -------------

Financing expenses 35 (1,130,883) (1,404,568) (1,532,785) Financing income (see Note 1C) 35 1,729,598 1,891,138 461,965 Financing income (expenses), net 598,715 486,570 (1,070,820) ------------- ------------- -------------

Operating income (loss) before taxes on income 1,776,173 (382,516) (4,753,655)

Taxes on income 36 (155,825) (327,434) (174,952)

Income (loss) from continuing activities 1,620,348 (709,950) (4,928,607)

Income (loss) from discontinued activities (after taxes) 5 213,327 (53,428) (18,618)

Income (loss) for the year 1,833,675 (763,378) (4,947,225)

Allocated to: The owners of the Company 1,702,056 (673,023) (4,860,956) Rights not conferring control 131,619 (90,355) (86,269) Income (loss) for the year 1,833,675 (763,378) (4,947,225)

Income (loss) per share attributed to the owners of the Company

Basic income (loss) per share (in NIS) 38 17.96 **(12.14) **(91.67)

Diluted income (loss) per share (in NIS) 38 17.94 **(12.14) **(91.67)

* Restated due to discontinuance of activities – see Note 5. ** Restated due to issuance of rights – see Note 1C. *** Regarding income (loss) per share from discontinued activities – see Note 5.


7

Africa Israel Investments Ltd. Consolidated Statements of Comprehensive Income

In Thousands of New Israeli Shekels For the Year Ended December 31 2010 2009 2008 Income (loss) for the year 1,833,675 (763,378) (4,947,225) Other components of comprehensive income (loss) Foreign currency translation differences in respect of foreign activities (834,266) 145,713 (1,037,627) Change in fair value of cash flow hedges, net of tax 39,389 (4,312) (52,983) Change in fair value of financial assets available for sale, net of tax 3,694 (33,217) – Loss from decline in value of financial assets available for sale transferred to the statement of income, net of tax – 33,217 – Loss of control in subsidiary, net of tax – (14,893) – Realization of comprehensive income of investee company accounted for using the equity method of accounting, net of tax (594) 15,857 – Total comprehensive income (loss) for the year 1,041,898 (621,013) (6,037,835) Total comprehensive income (loss) allocated to: The owners of the Company 1,290,425 (555,809) (5,651,480) Rights not conferring control (248,527) (65,204) (386,355) Total comprehensive income (loss) for the year 1,041,898 (621,013) (6,037,835)


8

Africa Israel Investments Ltd. Statements of Changes in Shareholders’ Equity

In Thousands of New Israeli Shekels

Attributable to the owners of the Company

Reserve for transactions Capital with Holders reserve Revaluation holders of of Share from reserve rights rights capital Premium cash Other for not not and on flow capital Translation acquisition conferring Retained conferring Total premium shares hedges reserves adjustments in stages control earnings Total control equity

Balance at January 1, 2010 368,604 1,812,964 (30,078) 24,444 (1,299,925) 10,414 – 249,293 1,135,716 *3,184,686 4,320,402

Net income for the year – – – – – – – 1,702,056 1,702,056 131,619 1,833,675 Other comprehensive loss for the year – – 24,914 3,694 (440,239) – – – (411,631) (380,146) (791,777) Total comprehensive income (loss) for the year – – 24,914 3,694 (440,239) – – 1,702,056 1,290,425 (248,527) 1,041,898

Issuance of ordinary shares, net** 6,237 1,739,693 – – – – – – 1,745,930 – 1,745,930 Share-based payments (net of tax) – – – – – – – 4,502 4,502 948 5,450 Dividend to holders of rights not conferring control – – – – – – – – – (15,430) (15,430) Issuance of capital to holders of rights not conferring control – – – – – – – – – 120,538 120,538 Acquisition and sale of rights not conferring control – – 3,265 – 139,205 (1,819) (784,459) – (643,808) 1,465,926 822,118 Balance at December 31, 2010 374,841 3,552,657 (1,899) 28,138 (1,600,959) 8,595 (784,459) 1,955,851 3,532,765 4,508,141 8,040,906

* Retroactive application of new accounting standard – see Note 2H(1). ** See Note 1C.


9

Africa Israel Investments Ltd. Statements of Changes in Shareholders’ Equity



Capital Holders reserve Revaluation of Share for reserve rights capital Premium cash Other for not and on flow capital Translation acquisition Retained conferring Total premium shares hedges reserves adjustments in stages earnings Total control equity

Balance at January 1, 2009 368,604 1,812,964 (37,750) 24,444 (1,419,576) 20,523 916,296 1,685,505 *3,452,049 5,137,554

Loss for the year – – – – – – (673,023) (673,023) (90,355) (763,378) Comprehensive income for the year – – 7,672 – 119,651 (10,109) – 117,214 25,151 142,365 Total comprehensive loss for the year – – 7,672 – 119,651 (10,109) (673,023) (555,809) (65,204) (621,013)

Share-based payments (net of tax) – – – – – – 6,020 6,020 (1,416) 4,604 Exit of subsidiary from the consolidation to an associated company – – – – – – – – (66,872) (66,872) Dividend paid to holders of rights not conferring control – – – – – – – – (222,513) (222,513) Entry into the consolidation – – – – – – – – 9,237 9,237 Issuance of capital holders of rights not conferring control – – – – – – – – 62,717 62,717 Acquisition and sale of rights not conferring control – – – – – – – – 16,688 16,688 Balance at December 31, 2009 368,604 1,812,964 (30,078) 24,444 (1,299,925) 10,414 249,293 1,135,716 *3,184,686 4,320,402


Capital Holders reserve Revaluation of Share for reserve rights capital Premium cash Other for not and on flow capital Translation acquisition Retained conferring Total premium shares hedges reserves adjustments in stages earnings Total control equity

Balance at January 1, 2008 368,113 800,807 – 24,444 (666,802) 20,523 6,174,572 6,721,657 *4,550,424 11,272,081

Loss for the year – – – – – – (4,860,956) (4,860,956) (86,269) (4,947,225) Comprehensive loss for the year – – (37,750) – (752,774) – – (790,524) (300,086) (1,090,610) Total comprehensive loss for the year – – (37,750) – (752,774) – (4,860,956) (5,651,480) (386,355) (6,037,835)

Issuance of ordinary shares, net** 477 1,011,362 – – – – – 1,011,839 – 1,011,839 Share-based payments (net of tax) – – – – – – 2,680 2,680 6,228 8,908 Debentures converted into shares 14 795 – – – – – 809 – 809 Dividend to equity holders – – – – – – (400,000) (400,000) – (400,000) Dividend paid to holders of rights not conferring control – – – – – – – – (240,520) (240,520) Rights not conferring control in business combinations – – – – – – – – (482,238) (482,238) Issuance of capital to holders of rights not conferring control – – – – – – – – 58,881 58,881 Acquisition of rights not conferring control – – – – – – – – (54,371) (54,371) Balance at December 31, 2008 368,604 1,812,964 (37,750) 24,444 (1,419,576) 20,523 916,296 1,685,505 *3,452,049 5,137,554

* Retroactive application of new accounting standard – see Note 2H(1). ** Less issuance expenses in the amount of NIS 5,031 thousand.

10


11

Africa Israel Investments Ltd. Consolidated Statements of Cash Flows


For the Year Ended December 31 2010 2009 2008 Cash flows from operating activities Net income (loss) for the year 1,833,675 (763,378) (4,947,225) Adjustments: Share in losses (income) of investee companies accounted for using the equity method of accounting, net (352,615) 252,758 533,074 Gain from decline in rate of holdings (483,950) (49,769) (34,303) Depreciation and amortization and decline in value of property, plant and equipment 258,655 157,987 120,960 Update of provision for decline in value of inventory of land and buildings (60,195) 577,125 1,365,968 Decline in value of investments, net 10,781 97,248 44,672 Loss from decline in value of intangible assets – 32,959 155,662 Change in fair value of investment property under construction, net 20,290 156,494 2,060,671 Capital losses (gains) on sale of property, plant and equipment and investment property, net 8,714 53,632 (118,122) Share-based payments 5,450 4,604 8,908 Marketable securities, net 20,386 75,961 36,562 Change in fair value of investment property, net (221,242) 245,951 (165,585) Taxes on income 158,776 310,665 171,538 Change in time value in respect of put options to holders of rights not conferring control (586) 1,391 5,260 Financing (income) expenses, net (562,736) (559,793) 1,229,710 Change in real estate category 53,572 103,542 (95,470) Change in long-term debt 33,772 308,635 (336,070) Change in inventory of buildings held for sale 472,719 (30,984) (630,035) Change in other inventories (200,537) 61,828 32,298 Change in trade receivables and other receivables and debits (88,659) 354,017 161,573 Change in contractors, trade payables and other payables and credits 136,536 (507,552) 141,916 Change in advance deposits from customers 79,902 50,122 (183,563) Change in provisions and employee benefits 21,319 13,637 22,599 Income taxes paid, net (29,208) (6,053) (238,252) Net cash provided by (used in) operating activities 1,114,819 941,027 (657,254) ------------- ------------- -------------


12

Africa Israel Investments Ltd. Consolidated Statements of Cash Flows


For the Year Ended December 31 2010 2009 2008

Cash flows from investing activities Initial consolidation of subsidiary – (75,666) (181,097) Investment in associated and other companies (10,831) (76,613) (284,936) Repayment (provision) of loans to associated companies, net 327,584 (8,017) (209,229) Investment in intangible assets (4,785) (11,527) (9,767) Proceeds from sale of shares of investee companies 379,937 373,951 580,624 Investment in investment property and investment property under construction (638,446) (1,516,903) (2,803,281) Investment in property, plant and equipment (108,151) (85,504) (310,029) Proceeds from sale of property, plant and equipment 3,886 14,527 162,463 Proceeds from sale of investment property 32,869 763,537 587,250 Investment in long-term deposits and loans (62,265) (113,522) (4,678) Repayment of long-term deposits and loans 213,048 81,586 212,772 Acquisition of marketable securities (424,921) (581,712) (2,242,642) Sale of marketable securities 441,251 433,152 3,234,230 Dividends received 14,227 26,863 38,313 Interest received 120,525 154,149 89,722 Short-term investments, net 133,590 30,324 (110,268)

Net cash provided by (used in) investing activities 417,518 (591,375) (1,250,553) ------------- ------------- -------------

Cash flows from financing activities Interest paid (880,078) (960,753) (1,132,869) Dividend paid to holders of rights not conferring control (15,430) (222,513) (240,520) Dividend paid to the equity holders – – (400,000) Acquisition of rights not conferring control (22,805) *(5,516) *(121,599) Issuance of capital to the owners of the Company 380,559 – 1,016,870 Issuance expenses – – (5,031) Proceeds from issuance of rights in subsidiaries 3,278 – – Issuance of capital to holders of rights not conferring control 118,884 64,621 58,881 Receipt of long-term loans and liabilities 1,132,763 3,642,624 4,566,102 Repayment of long-term loans and liabilities (1,511,412) (2,321,485) (1,939,481) Short-term credit, net (94,787) (1,416,157) (1,818,976)

Net cash used in financing activities (889,028) (1,219,179) (16,623) ------------- ------------- -------------

Increase (decrease) in cash and cash equivalents 643,309 (869,527) (1,924,430)

Cash and equivalents at the beginning of the year 1,560,504 2,263,510 4,502,529

Cash from discontinued operations (24,457) – –

Effect of exchange rate fluctuations on balances of cash and cash equivalents (23,630) 166,521 (314,589)

Cash and cash equivalents at the end of the year 2,155,726 1,560,504 2,263,510 * Retroactive application of new accounting standard – see Note 2H(1).


13

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements


All amounts are presented In Thousands of New Israeli Shekels unless indicated otherwise Note 1 – General

A. The Reporting Entity Africa Israel Investments Ltd. (hereinafter – “the Company”) is an Israeli-resident

company that was incorporated in Israel and its registered address is Derech Hahoresh 4, Yehud. The Group’s consolidated financial statements as at December 31, 2010, include the financial statements of the Company and those of its subsidiaries (hereinafter – “the Group”) as well as the Group’s rights in associated companies and jointly controlled entities. The Company’s controlling shareholder is Mr. Lev Leviev, who holds the Company directly as well as through companies he wholly owns and controls.

The Group is engaged in holdings and investments in a variety of sectors in and outside of

Israel. The Company’s securities are registered for trading on the Tel-Aviv Stock Exchange.

B. Impacts of the Global Financial Crisis on the Group’s Activities Since September 2008 and thereafter, the global financial crisis has taken a dramatic turn

for the worse and the extent of its impact has increased on both the world economy and the Israeli economy. As a result of the said crisis, which has triggered the collapse of significant players in the world credit market, there has been a decline in the amount of credit extended by banks and non-bank lenders (in and outside of Israel), and a process of a general economic slowdown has taken hold in a large number of countries throughout the world, including countries in which the Group companies operate.

The financial crisis has affected the Israeli economy and capital markets, in general, and

the Group companies, in particular, including by causing an increase in the interest rates paid on bank loans, stricter terms for receipt and/or renewal of financing, an adverse effect on the Company’s ability to sell its properties, a decline in the fair value of investment and real estate properties, a slowdown in the rate of sales of residential units and construction of residential projects by the Group companies and a decrease in the demand for rental properties. In addition, in certain cases the crisis has given rise to an increase in the discount rates, which in turn affects the results of the Company’s operations.

The financial crisis has caused a number of the Group companies not to comply with

financial covenants with respect to part of the liabilities (as stated in Note 23) and the need to make a significant change in the terms of the loans by means of, among other things, active requests by the Group to financers and lenders, in order to conform the loans and financing terms of the Group’s projects in and outside of Israel to the present financial situation.

In light of the credit bottleneck caused by the said crisis, and taking into account the

significant credit available to the Group at the outbreak of the crisis, on August 30, 2009, the Company’s Board of Directors authorized Company Management to start talks with the holders of the Company’s debentures in order to formulate a plan for reorganization of the Company’s liabilities to the holders of all its different debenture series and on May 16, 2010, the debt arrangement process was completed. For details regarding the debt arrangement and its impact on the Company’s financial statements – see Section C., below.

14


At December 31, 2010 Note 1 – General (Cont.)

B. Impacts of the Global Financial Crisis on the Group’s Activities (Cont.) At the present time, the markets are still in a crisis condition, however, the indicators have

strengthened that it may be concluded that in mid 2009 the worldwide recession bottomed out (this can be learned mainly from the rise in the prices of securities on the world stock markets, relaxation of the global credit bottleneck, and from appearance of signs of renewal of capital fundraisings by means of issuance of debentures and shares). Nevertheless, it is noted that the demand and worldwide activities are still at a low level.

It is not possible know whether the full impacts of the crisis, as stated, have been

exhausted, and there is a fear of a worsening of the recession in more and more of the world’s economies.

The above-mentioned developments impact and may continue to impact in the future, both

directly and indirectly, the Group’s business activities, including the value of its assets, its liquidity, its ability to sell off its properties, as well as its ability to raise capital and comply with its financial covenants.

C. Debt Arrangement On February 9, 2010, the Company published an Immediate Report regarding convening

of a meeting of the holders of the Company’s debentures, for approval of the arrangement with the holders of the Company’s debentures, as well as an Immediate Report regarding convening of a meeting of the Company’s shareholders for approval of the above-mentioned arrangement, pursuant to Section 350 of the Companies Law.

(1) Set forth below are the highlights of the arrangement with the holders of the

Company’s debentures:

(a) Under the proposed arrangement, the Company’s controlling shareholder (including through a company in his control and/or a trustee on behalf of either) and/or any representative thereof shall invest in the Company the amount of NIS 750 million on the dates and under the terms set forth hereinafter:

– No later than the execution date of the arrangement, an issuance of rights to

the Company’s shareholders will be completed, designed to raise capital in the amount of no less than about NIS 400 million (hereinafter – “Initial Rights Offer”). The controlling shareholder (as defined in the arrangement) undertook to respond to the Initial Rights Offer and invest in the Initial Rights Offer pro rata to his share in the Company’s current share capital (about 74.8254%), that is, a total of NIS 300 million and partial linkage differences (defined hereinafter) (hereinafter – “the Initial Investment”). See also Section 2A below.

– After the Execution Date, the controlling shareholder committed as part of

the commitment certificate, to invest NIS 450 million including partial linkage differences (as defined below) (hereinafter – “the Additional Investments”), on the dates and under the terms as follows:

15



C. Debt Arrangement (Cont.)

(1) Set forth below are the highlights of the arrangement with the holders of the Company’s debentures: (Cont.)

(a) (Cont.)

– (Cont.)

(i) An additional amount of NIS 100 million no later than one year from the Execution Date;

(ii) An additional amount of NIS 100 million no later than two years from the Execution Date;

(iii) An additional amount of NIS 100 million no later than three years from the Execution Date;

(iv) An additional amount of NIS 150 million no later than four years from the Execution Date.

The Additional Investments (or a part thereof, as set forth below) are to be

executed in the form of private placements: however the controlling shareholder may decide, prior to the Execution Date of each investment increment, that execution of any of the investment increments set forth in Sections (i)-(iv) above (the above amounts represent the share of the controlling shareholder only) (or any part thereof) will be executed in the form of an issuance of rights, in place of a private placement, provided that (a) the share of the controlling shareholder in the rights issuance is no less than NIS 25 million (with this amount being linked to the partial linkage differences); (b) the Company’s Board of Directors approves the rights issue in place of the private placement, and; (c) the rights issuance shall not postpone the investment of the relevant amounts by the controlling shareholder in full and in a timely manner.

Investments of monies under this Section shall be executed according to a

share price of NIS 36.12681 (hereinafter – “the Base Share Price”). The Base Share Price shall be subject to adjustments in respect of distributions of bonus shares and dividends, provided that the reduction of the Base Share Price resulting from the said dividend distribution does not exceed 5% of the Base Share Price in any year, cumulatively, beginning on the date of the repayment of the debentures (Series Y) and onward. To the extent that investments of the monies are executed in the form of an issue of rights, the said investments will be executed according to a share price that does not exceed 90% of the average closing price of a Company share on the TASE in the three trading days preceding the date of the resolution by the Company’s Board of Directors regarding execution of the rights issuance.

– The amounts of the Initial Investment and the Additional Investments, shall

be linked to one-half of the rate of increase in the CPI compared to the index for September 2009 published on October 15, 2009 (hereinabove and hereinafter – “the Partial Linkage Differences”).

16





(a) (Cont.)

– No later than the Execution Date, the Company shall issue to the trustee of the debenture holders (Series Z) shares, the number of which shall be equal to the Additional Investments including the Partial Linkage Differences up to the issuance date; divided by the Base Share Price (hereinafter – “the Agreed Relief Shares”). So long as the Agreed Relief Shares are held by the Share Trustee they will constitute dormant shares, which do not grant any party, including the controlling shareholder, the new debenture holders, or the Share Trustee, any rights in the Company, its capital or voting rights (including the right to receive dividends) and/or any other right (including the right to participate in an issue of rights) (see also Section (2)(b), below). Immediately prior to execution of any investment increment of any Additional Investment, the Company will issue to the Share Trustee additional shares, the quantity of which shall be equal to the difference between the balance of the Additional Investments linked to the Partial Linkage Differentials (up to the issuance date), divided by the Base Share Price, adjusted for the distribution of dividends and bonus shares; and the quantity of Agreed Relief Shares held by the Share Trustee in trust.

– Immediately after execution of each Additional Investment, the Share Trustee

shall transfer to the controlling shareholder ordinary shares of the Company, from the Agreed Relief Shares, in a quantity equal to the amounts of the Additional Investments, including the Partial Linkage Differentials; divided by the Base Share Price subject to adjustments in respect of distributions of dividends and bonus shares. It is clarified that the controlling shareholder may execute each Additional Investment in several parts or at once, at his discretion. In the event that the Controlling Shareholder breaches his obligation to invest the first or second increment of the Additional Investments in entirety and/or in a timely manner, the Share Trustee shall transfer a relative share of the Agreed Relief Shares to the new debenture holders (as defined below) who shall hold shares on the entitlement date (as published by the Share Trustee). In the event that the Controlling Shareholder breaches his obligation to invest the third or fourth increment of the Additional Investments in entirety and/or in a timely manner, the Share Trustee shall transfer the relative share of the Agreed Relief Shares to the Bondholders (Series Z) who shall hold shares on the entitlement date.

17





(b) No later than the Execution Date, the Company shall repay, as a partial

repayment, to all holders of the debentures holding debentures on the determining date, the amount of NIS 559 million (hereinafter – “the Cash Payment”) under the following terms and in the following manner (this amount includes NIS 3.6 million paid to holders of the debentures (Series I) in January 2010 for accumulated interest in respect of the debentures (Series I) up to January 5, 2010):

(c) On the Execution Date, the Company shall issue to all the debenture holders who

hold debentures on the determining date in respect of the balance of their holdings in the debentures after the Cash Payment and execution of the partial repayment as set forth in Section (b) above), two new series of debentures whose terms are as follows (see also Section 2(c), below):

i. NIS 1,016 million par value of registered debentures (Series Y) of the

Company of par value NIS 1 each, payable in a single installment at the end of twenty-four months (24) from the Execution Date. The Debentures (Series Y) shall be linked to the CPI (principal and interest), and the base index is the index known on the Determining Date, and shall bear fixed annual interest from the Execution Date at the rate of 4.5%, payable together with the Debentures (Series Y) principal on the final redemption date of the Debentures (Series Y), as stated above. The Debentures (Series Y) shall be secured by collateral as set forth below. On the Execution Date, the Debentures shall be replaced by Debentures (Series Y) in the matter set forth in the arrangement.

ii. NIS 3,626 par value of registered debentures (Series Z), with a par value of

NIS 1 each, repayable in thirteen (13) consecutive annual installments beginning after the elapse of three years from the Execution Date (that is, one payment of principal in each of the years from 2013 to 2025). The Debentures (Series Z) shall be linked to the CPI known on the Determining Date, and shall bear effective annual interest at an average rate of 7% per annum, to be increased gradually from 6% per year to 10.75% per year, all as set forth in the arrangement. The interest in respect of the Debentures (Series Z) is payable in consecutive semi-annual installments beginning six months after the Execution Date, in each of the years from 2010 to 2025. The Company shall take steps to have the Debentures (Series Z) rated by a rating company certified by the Supervisor of the Capital Market, no later than one year from the Determining Date. Furthermore, the Company shall take steps to maintain the rating of the Debentures (Series Z) by said rating company during the entire term of the Debentures (Series Z). On the Execution Date, the Debentures (Series Z) will be substituted replaced in the manner set forth in the arrangement. The debentures (Series Y) and the debentures (Series Z), will be referred to hereinafter and hereinabove, together, a “the New Debentures”).

18





(c) (Cont.)

iii. It is noted that the arrangement defines provisions regarding the matter of early redemption of the New Debentures, whether the Company elects to make an early repayment as stated, or whether the Company is obligated to make the said early repayment, as well as provisions concerning damages to the holders of the New Debentures (in certain cases) in respect of a voluntary early repayment of the Debentures (Series Z), all as set forth in the arrangement. As at the date of the report, there is no violation requiring early repayment of the debentures.

(d) On the Execution Date, the Company is to issue to the debenture holders who

hold debentures on the Determining Date, in respect of the balance of their holdings in the debentures (after the Cash Payment and the partial redemption as set forth in Section (b) above, and issuance of the New Debentures as set forth in Section (c) above), ordinary shares of NIS 0.1 par value each of the Company, in a quantity equal to the debt converted into Company shares (that is, a total of NIS 1.4 billion) divided by the Base Share Price. Company shares so issued to the debenture holders shall be listed for trading from the date of issue, (see also Section 2(e) below).

(e) On the Execution Date, the Company will transfer to the debenture holders who

hold debentures on the Determining Date, in respect of the balance of their holdings in the debentures, 92,720,923 global depository receipts (GDRs) representing 17.7% of the shares of AFI Development PLC, and shares of Africa Israel Properties (hereinafter in this Section – “AFI Development” and “Africa Properties,” respectively, and jointly – “the Shares of the Subsidiaries”), such that the value (defined below) of the Shares of the Subsidiaries amounts to the amount of the debt converted into the Shares of the Subsidiaries.

“The debt converted into the Shares of the Subsidiaries” – a total amount of

NIS 1.2 billion. Shares of the Subsidiaries transferred to the debenture holders shall be listed for

trading from the date of their transfer. “Value” – for purposes of this Section, shall be determined on the basis of the

average of the market value and the book value known on the Determining Date of each of the Subsidiaries.

Based on the conditions, on the execution date of the arrangement, the Company

transferred to the New Debenture holders 92,720,923 global deposit receipts (GDRs) and 3,372,948 shares of Africa Properties – see Section 2(d) below.

19





(f) The Company has tax arrangements granted by the Tax Authorities and VAT

Authorities regarding the arrangement that govern the various tax aspects – all as detailed in the arrangement.

(g) To secure the Company’s obligations under the New Debentures, the Company

shall pledge on the Execution Date, in favor of the trustees of the New Debenture Holders, pro rata to the par value amount of the New Debentures part of the Company’s share holdings and accompanying rights in Africa Properties, the Company’s rights in the shareholders’ loans granted to Africa Properties and management fees from Africa Properties as well as part of the rights in AFI Development.

The Company may exchange the Pledged Assets or any part thereof for the Shares

of the Subsidiaries and/or other negotiable securities held by the Company, subject to several conditions defined in the arrangement.

No later than the date of the final, full, and precise repayment of the New

Debentures, the Company undertakes, in respect of each of its own (solo) assets, existing now or hereafter on the Determining Date of the Arrangement (jointly hereinafter – “the Company’s Assets”), to refrain from pledging, mortgaging, assigning through a lien, or granting it as other collateral of any other kind or as other guarantee for any debt of the Company or of others, in favor of any third party, without approval of the New Debenture Holders, as the case may be, to be adopted by regular majority. It is clarified that the restrictions imposed on the Company under the negative pledge, shall also apply to transfer of any of the Company’s Assets with no consideration.

This undertaking shall not apply to any of the following actions or transactions:

i. A specific charge on any asset, the purchase and/or development of which were financed by any third party, provided that the charge secures only the amount of financing provided by the third party for the purchase and/or development of said asset (as the case may be)(lien in rem);

ii. Granting a specific charge on any of the Company’s Assets in favor of a

buyer or the entity that finances purchase of the Asset by the buyer, provided that the charge secures only the transfer of rights in the Asset in the Buyer’s favor and/or satisfaction of the Company’s obligations under its agreement with the Buyer, and prior to creation of the charge, the Buyer transfers to the Company (or to its trustee, including a joint trustee with the Buyer) the entire consideration (or a material part thereof) in respect of the purchase of the asset;

20





(g) (Cont.)

iii. A charge and/or other security interest of any kind on the Company’s Assets, against receipt of financing to be used to discharge liabilities to the New Debenture Holders and the banks, provided that the ratio between the amount discharged to the New Debenture Holders and the amount discharged to banks is not smaller than the ratio between the debt balance in respect of the New Debentures and the debt balance to the banks on the date of the discharge of the liabilities; and the charge and/or security interest shall secure only the amount of financing provided by the third part to discharge the liabilities to the financial creditors, as stated above.

iv. A charge in favor of banks against the assets and/or projects set forth in the

arrangement.

(h) The Company undertakes that, until the final and absolute repayment of the New Debentures, the ratio between the net financial debt and the CAP, as defined in Appendix R to the Proposed Arrangement, shall not exceed 70% (subject to the allowance of a minor deviation of no more than 10% in the stated ratio in the first two years subsequent to the Execution Date, and 5% thereafter) (hereinafter – “the Financial Covenants”). Subject to the restrictions defined, any breach by the Company of its obligation to comply with the Financial Covenants shall constitute grounds for a demand for immediate repayment based on the New Debentures, in addition to the grounds for action set forth in the deeds of trust concerning the New Debentures. As at the date of the report, the Company is in compliance with the covenants determined.

(i) The Company may make a distribution, as defined in the Companies Law,

exclusively subject to the following cumulative conditions: the Company is in compliance with the Financial Covenants on the date of the decision to make a distribution; the distribution does not constitute or cause any non-compliance with the Financial Covenants; the Company transferred to the trustees a confirmation signed by the Company regarding this matter and a copy of the transcript of the decision of the Company’s Board of Directors with respect to the distribution, wherein the Board of Directors confirms that, in its opinion and after having reviewed the Company’s situation, it concluded that no reasonable risk exists that the distribution will prevent the Company from being able to repay the New Debentures based on their terms.

21





(i) (Cont.) Notwithstanding that stated above, to the extent that the debentures (Series Y)

have not yet been repaid, the Company may not make a distribution, as this term is defined in the Companies Law, without approval of the New Debenture Holders, adopted by a regular majority at a meeting of the New Debenture Holders prior to the distribution declaration date. The Company will take steps to convene said meeting prior to the distribution declaration date. The restriction on making a “distribution” under this Section shall not apply after the earlier of repayment of debentures (Series Y) or the Controlling Shareholder performs his obligation to make additional investments in the amount of NIS 200 million, as stated in Section (a) above. In the event that the Controlling Shareholder breaches his obligation to make one or more of the payments which he undertook to pay over the four years subsequent to the Execution Date (that amount to a total of NIS 450 million), as stated in Section (a) above (hereinafter – “the Controlling Shareholder’s Investment Obligation”), all the funds that the Controlling Shareholder is entitled to receive in respect of any distribution by the Company shall be applied to payments on account of the Controlling Shareholder’s Investment Obligation, the payment date of which has not yet occurred. The Company will set off from the amounts of said distribution, [amounts] in respect of the Controlling Shareholder’s Investment Obligation, and any said set-off is deemed performance of the Controlling Shareholder’s Investment Obligations whose payment date has not yet occurred, and which shall grant the Controlling Shareholder the right to receive Agreed Relief Shares. The arrangement under this Section shall remain in force until the earlier of full satisfaction of the Controlling Shareholder’s Investment Obligations or the elapse of four (4) years from the Determining Date.

(j) As part of the arrangement, restrictions were placed on sale of Company shares by

the controlling shareholder. (k) The Company may not extend any of the New Debentures series without approval

of separate meetings of the New Debenture Holders, by resolution adopted by a regular majority. In addition, so long as the debentures (Series Z) have not yet been repaid in full, the Company may not issue additional series of debentures whose terms are identical, similar, or preferred compared to the terms of the New Debentures, according to criteria set forth in the Proposed Arrangement, and subject to specific restrictions defined. Further, the Company may, at any time, purchase new debentures at any price it deems fit, without detracting from the obligation to repay the outstanding the New Debentures, provided that purchase of the new debentures by the Company in transactions over the counter shall not be performed from a Related Holder (as defined below). The new debentures so purchased and/or held by the Company shall be voided upon their purchase and stricken from trading, and the Company may not re-issue them.

22





(k) (Cont.) Any Company (direct or indirect) subsidiary and/or company controlled by the

Company and/or the Company’s Controlling Shareholder and/or company controlled by the Company’s Controlling Shareholder (hereinabove and hereinafter – “a Related Holder”) may, from time to time, purchase and/or sell new debentures on the open market, at a price as they deem fit and to sell them accordingly. As long as the new debentures are held by a Related Holder, they shall not grant to the Related Holder any voting right in meetings of the holders of the new debentures and shall not be taken into account in calculating the legal quorum required to initiate the meeting, and the Company may not purchase these debentures in transactions over the counter.

(l) During five (5) years from the Execution Date, the trustee of holders of the

debentures (Series Z) may decide to appoint an independent director to the Company’s Board of Directors. The Independent Director shall be appointed as a member of the Board of Directors in addition to the two outside directors of the Company, which the Company is required to appoint by law. Such a director was appointed in the period of the report.

(m) On the Execution Date and as an integral part of the Proposed Arrangement, the

debenture holders shall waive all demands, claims, and/or suits against the Company, the Controlling Shareholder, its directors and officers, advisors, employees, and all parties acting in its behalf, whether these are or are not known to them, concerning the purchase and/or holding of the debentures.

(2) Execution of the debt arrangement On March 14, 2010, the meeting of the Company’s debenture holders and the meeting

of the Company’s shareholders approved the arrangement, and on March 21, 2010, the District Court of Tel-Aviv approved the arrangement.

On February 26, 2010, the Company published a prospectus from an issuance by

means of rights the purpose of which was to raise about NIS 400 million, and it increased its authorized capital to about 150,000,000 ordinary shares.

On April 19, 2010, the Company published an amendment to the prospectus for

issuance of rights dated February 26, 2010 (hereinafter – “the Amendment to the Prospectus”) for issuance of rights to the Company’s shareholders in the amount of about NIS 400 million. Pursuant to the terms of the arrangement, the Company’s controlling shareholder committed, including through companies he controls, to exercise all the rights issued to him as part of the said rights’ offering, in amount of about NIS 300 million.

23




(2) Execution of the debt arrangement (Cont.) As agreed between the Company and the Joint Representatives of the Debenture

Holders, the execution date of the arrangement was set as May 16, 2010, and as a result the Company executed the following actions:

(a) The Company offered its shareholders 11,097,857 ordinary registered shares of

NIS 0.1 par value each of the Company by means of rights. Up to the final day for exercise of the rights, which fell on May 10, 2010, notifications were received for acquisition of 10,534,388 ordinary registered shares of NIS 0.1 par value each of the Company.

In consideration for the rights exercised, the Company received the gross amount

of about NIS 380 million. The controlling shareholder exercised all the rights to which he was entitled based

on the shelf offer prospectus, in accordance with the rate of his holdings in the Company’s issued shares (74.8%) and acquired 8,304,018.

As a result of the rights’ issuance, the Company restated the basic and diluted loss

per share data for the year ended December 31, 2009 and for the year ended December 31, 2008.

Set for below is the impact of the restatement:

Impact As presented As of the in these previously retroactive financial reported application statements In NIS

For the year ended December 31, 2009 (audited) (12.16) 0.02 (12.14)

For the year ended December 31, 2009 (audited) (91.85) 0.18 (91.67)

(b) The Company issued to a trustee 12,456,126 ordinary shares of the Company,

which constitute the agreed relief shares in accordance with the arrangement. (c) The Company issued marketable debentures (Series Y), in the aggregate stated

principal amount of about NIS 1,016 million, with an annual effective interest rate of about 10%, and marketable debentures (Series Z) in the aggregate stated principal amount of about NIS 3,626 million with an annual effective interest rate of about 14%.

24




(2) Execution of the debt arrangement (Cont.)

(d) The Company transferred to the debt holders the total amount of 3,372,948 ordinary shares of NIS 1 par value each of Africa Properties, such that the Company’s rate of holdings in Africa Properties declined from about 68% to about 56%, and a total of 92,720,923 Global Deposit Certificates registered for trading on the London Stock Exchange and representing ordinary shares of AFI Development of $0.001 par value each, such that the Company’s rate of holdings in AFI Development declined from 71.7% to about 54%.

(e) The Company issued to the debenture holders 39,383,506 ordinary shares of

NIS 0.1 par each of the Company and also made a cash payment of about NIS 450 million as partial redemption to all the debenture holders (plus redemption of the debentures in cash of about NIS 109 million, which was paid in January 2010).

In May 2010, trading in the debentures was suspended. As a result, Midrug gave

notice of discontinuing rating of the Company’s debentures in light of suspension of their trading. On May 16, 2010 trading commenced in the components of the arrangement package listed for trading on the Stock Exchange.

In addition, as part of the debt arrangement with the debenture holders, an agreement

was signed with the banks whereby the repayment dates of the Company’s loans, in the amount of about NIS 400 million, will be extended, and therefore they were reclassified in the financial statements from short-term liabilities to long-term liabilities.

(3) The accounting treatment of the debt arrangement is detailed below:

(a) The Company’s shares issued as well as the shares of the subsidiaries given were recorded based on their fair value on the date of their issuance/transfer.

(b) The debentures issued as part of the arrangement have significantly different

economic terms and characteristics than the old debentures, and with respect to each of the old debenture series there is a change in the present value of more than 10% pursuant to the calculation included in the Standard (IAS 39). Therefore, an elimination was made of the old debentures and the new debentures were recorded based on their fair values on the date of their issuance.

(c) The difference between the fair value of the shares of the subsidiaries

AFI Development and Africa Properties given, and the increase in the rights that do not confer control, was recorded in a reserve for transactions with holders of rights not conferring control.

(d) The liability of the controlling shareholder to make an additional capital

investment in the Company in the future was broken down into two components:

25




(3) The accounting treatment of the debt arrangement is detailed below: (Cont.)

(d) (Cont.)

– A fixed component – an additional investment of NIS 450 million constituting an additional capital component in the exchange package. On the issuance date of the dormant shares, their fair value was recorded as a premium on shares.

– A variable component – the liability of the controlling shareholder to invest

monies in an amount equal to the linkage differences accrued on the fixed component pursuant to the linkage mechanism provided in the arrangement. Since the quantity of shares to be issued by the Company in respect of the variable component is not known in advance, and since the amount of money the Company will receive in respect of these shares in the future is not fixed, the variable component constitutes a derivative instrument that was recognized as a liability in the amount of its fair value and will be updated every period through the statement of income.

The total gain recorded as a result of the debt arrangement in the period of the

report amounts to about NIS 1.45 billion and it is calculated as the difference between the fair value of the components of the consideration and the carrying value of the old debentures in the books. This gain is presented in the “financing income” category in the statement of income.

(4) Regarding a request to file a class action claim on behalf of a purchaser of debentures

(Series I) of the Company – see Note 43C.

D. Definitions In these financial statements:

1. International Financial Reporting Standards (hereinafter – “IFRS”) – standards and interpretations adopted by the International Accounting Standards Board (IASB) that include International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS), including interpretations to these standards by the International Financial Reporting Interpretations Committee (IFRIC) or interpretations by the Standing Interpretations Committee (SIC), respectively.

2. The Company – Africa Israel Investments Ltd. 3. The Group – the Company and its subsidiaries. 4. Subsidiaries – companies the financial statements of which are fully consolidated,

directly or indirectly, with the Company’s financial statements.

26



D. Definitions (Cont.)

5. Investee companies – subsidiaries and companies, including a partnership or joint venture, where the Company’s investment therein is included, directly or indirectly, in the financial statements based on the equity method of accounting.

6. Related party – within the meaning thereof in International Accounting Standard 24 regarding “Related Parties”.

7. Interested parties – within the meaning thereof in Paragraph (1) of the definition of an “interested party” in a company in Section 1 of the Securities Law, 1968.

8. CPI/Index – the Consumer Price Index published by the Central Bureau of Statistics.

Note 2 – Basis of Preparation of the Financial Statements

A. Declaration of compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements were prepared by the Group in accordance with

International Financial Reporting Standards (IFRS). The Group adopted IFRS for the first time in 2008, where the transition date to IFRS is January 1, 2007 (hereinafter – “the Transition Date”).

These financial statements were also prepared in accordance with the Securities

Regulations (Annual Financial Statements), 2010. The consolidated financial statements were approved for publication by the Company’s

Board of Directors on March 30, 2011. B. Functional currency and presentation currency The consolidated financial statements are presented in New Israeli Shekels (NIS), which is

the Company’s functional currency, and the amounts are rounded to the nearest thousand. The NIS is the currency that represents the main economic environment in which the Company operates.

C. Basis of measurement The statements were prepared on the basis of historical cost, with the exception of the

following assets and liabilities:

Financial instruments at fair value through the statement of income; Financial instruments classified as “available for sale”; Investment property and investment property under construction; Non-current assets held for sale and a group of assets held for sale; Inventory; Deferred tax assets and liabilities; Provisions: Assets and liabilities in respect of employee benefits; Investments in associated companies and jointly-controlled, equity-basis entities.

27


At December 31, 2010 Note 2 – Basis of Preparation of the Financial Statements (Cont.)

C. Basis of measurement (Cont.) For information regarding measurement of these assets and liabilities – see Note 3

“Significant Accounting Policies”. The value of non-monetary assets and equity items measured on the basis of historical cost

was adjusted for changes in the CPI up to December 31, 2003, since up to this date Israel’s economy was considered a hyper-inflationary economy.

D. Operating cycle The Group has various different operating cycles. The normal operating cycle in the

construction sector is usually longer than one year and is generally up to two and a half years. The normal operating cycle in the construction sector in the infrastructures sector is longer than one year and may continue up to five years. The normal operating cycle in the real estate development area is longer than one year and is generally up to three years. With respect to the rest of the Group’s activities, the operating cycle is one year. As a result, the current assets and the current liabilities include items the realization of which is intended and anticipated to take place over the Group’s regular operating cycle – based on the type of activities.

E. Format for analysis of the expenses recognized in the statement of income The format for analysis of the expenses recognized in the statement of income is according

to the classification method based on the activity nature of the expense. Additional information regarding the substance of the expense is including in the notes to the financial statements.

F. Use of estimates and judgment In preparation of the financial statements in accordance with IFRS, Company management

is required to use judgment when making estimates, assessments and assumptions that affect implementation of the policies and the amounts of assets, liabilities, income and expenses. It is clarified that the actual results are likely to be different from these estimates.

When formulating the accounting estimates used in preparation of the Company’s financial

statements, Company management is required to make assumptions regarding circumstances and events involving significant uncertainty. When using its judgment in making the estimates, Company management bases itself on past experience, various facts, external factors and reasonable assumptions regarding the appropriate circumstances for each estimate.

The estimates and the assumptions used for preparing the financial statements are reviewed

on an ongoing basis. Changes in accounting estimates are recognized in the period during which the estimate was revised and in every future period affected.

28



F. Use of estimates and judgment (Cont.) Change in estimates During the year ended December 31, 2010, a subsidiary examined the useful lives of

property, plant and equipment items and as a result the anticipated useful lives of certain property, plant and equipment items in the steel segment were changed. The impact of these changes in the years 2010, 2011 and 2012, is anticipated to be a decrease in the depreciation expenses of about NIS 5,089 thousand, NIS 4,819 thousand and about NIS 4,422 thousand, respectively.

Information with respect to assumptions made by the Group regarding the future and other

main uncertainty factors in connection with estimates where there is significant risk that their results will involve a material adjustment of the book values of assets and liabilities during the upcoming fiscal year is included in the following notes:

– Note 36, “Taxes on Income” – in connection with use of tax losses and recording of

tax expenses. – Note 27, “Provisions”. – Note 43, “Contingent Liabilities”. – Notes 17 and 18, “Investment Property” and “Investment Property under

Construction” – in connection with the measurement thereof at fair value. – Note 16, “Property, Plant and Equipment” – in connection with examination if the

amount at which the investment in non-monetary assets is presented can be recovered out of the anticipated discounted cash flows from the asset.

– Note 28, regarding recording revenues and expenses from work under an execution

contract in construction contractor projects on the statement of income in accordance with International Standard 11, based on the percentage of completion of the contract, where the results thereof can by reliably estimated.

– Note 19, regarding measurement of a financial asset in a project under the PPP method

(in the Highway 431 project), which expresses the debt of the public sector, and which bears financing income estimated based on the specific yield appropriate to assets having similar financial characteristics.

– Notes 12 and 20 regarding inventory of buildings held for sale and inventory of lands,

with respect to determination of the need to write down to net realizable value of the balances of inventory of lands and the inventory of buildings held for sale.

G. Change in classification In the statement of financial position as at December 31, 2009, the Company reclassified

various asset and liability items in amounts that are not material.

29



H. Changes in accounting policies

(1) Business combinations and transactions with holders of rights not conferring control

Commencing from January 1, 2010 the Group applies IFRS 3 Business Combinations

(2008) and the amendment to IAS 27 from 2008 Consolidated and Separate Financial Statements (2008) (hereinafter – “IFRS 3” and “IAS 27”, respectively). In addition, commencing from this date, the Group is making early application of the following amendments to IFRS 3, which were published as part of the Improvements Project for 2010: an amendment with respect to the matter of a transitional rule relating to contingent consideration in a business combination occurring prior to the commencement date of IFRS 3; an amendment with respect to the matter of measurement of rights not conferring control, and an amendment with respect to the matter of share-based payment transactions that are not replaced or that are voluntarily replaced.

For additional information regarding the Group’s accounting policies in connection

with business combinations and transactions with holders of rights not conferring control – see Note 3 “Significant Accounting Policies”.

The changes in the accounting polices detailed above are being applied prospectively,

except for the impact of the retroactive application in respect of presentation of options of subsidiaries, in the amounts of about NIS 17,757 thousand and about NIS 19,173 thousand as at December 31, 2009 and December 31, 2008, respectively, which are now presented in the category “holders of rights not conferring control” in the statement of financial position.

In addition, acquisition of rights not conferring control, in the amount of about

NIS 5,516 thousand, for the year ended December 31, 2009 and about NIS 121,599 thousand, for the year ended December 31, 2008, were reclassified in the statements of cash flows from investing activities to financing activities, pursuant to the transitional rules of IAS 7, Statement of Cash Flows, as a result of the initial application of IFRS 3 and IAS 27.

In respect of partial realization of the Group’s holdings in the subsidiaries Africa

Properties and AFI Development, during the year ended December 31, 2010, the Group recognized the amount of about NIS 784 million, which was recorded to equity instead of on the statement of income, as would have been the case if the new Standard had not been adopted.

(2) Leases Commencing from January 1, 2010, the Group applies the amendment to IAS 17,

“Leases – Classification of Leases of Land and Buildings” (hereinafter – “the Amendment”), which was published as part of the Improvements to IFRS project from 2009.

30



H. Changes in accounting policies (Cont.)

(2) Leases (Cont.) In accordance with the Amendment, the requirement no longer exists to classify a

lease of land as an operating lease in every case that the ownership is not expected to pass to the lessee at the end of the lease period. In accordance with the amended standard, the requirement is to examine the land lease in accordance with the regular criteria for classifying a lease as a financing lease or as an operating lease.

In addition, it is provided that in a lease of land and buildings, the land component and

buildings component are to be examined separately for purposes of classification of the leased items, based on these criteria, where a significant consideration regarding classification of the land is the fact that land normally has an indefinite useful life.

The Amendment is being applied retroactively with respect to existing leases where

the required information is available on the commencement date of the lease. Where the required information is not available, land leases will be re-examined on the adoption date of the standard.

The Group has lands (that are not investment property measured at fair value) held as

part of a lease arrangement with the Israel Lands Administration, where the payment in respect thereof is made every period. As a result of application of the new standard, the Group recognizes an asset and a liability in respect of a financing lease based on the lower of the fair value of the land or the present value of the minimum lease payments on the date of the lease undertaking.

The Group has lands leased from the Israel Lands Administration where the related

lease fees were paid in advance on the date of the lease undertaking. Amounts paid in respect of the above-mentioned leases, totaling about NIS 74,332 thousand as at December 31, 2009, and that were presented in the statement of financial position in the “prepaid expenses in respect of long-term operating leases” category, are now presented as part of the “property, plant and equipment” category, in light of the fact that pursuant to the Amendment leases are classified as financing leases.

(3) Decline in value of assets Commencing from January 1, 2010, the Group applies the amendment to IAS 36

“Decline in Value of Assets – Allocation of Goodwill to Cash Generating Units” (hereinafter – “the Amendment”), which was published as part of the Improvements to IFRS project from 2009. In accordance with the Amendment, for purposes of impairment testing, the largest cash-generating unit to which goodwill is to be allocated should not exceed the operating segment level as defined in IFRS 8 before applying the aggregation criteria in Section 12 of IFRS 8. The Amendment is being applied prospectively. The Group elected to examine decline in value of the goodwill in accordance with the Amendment’s transitional rules on the fixed date for the annual examination.

31




(4) Exchange of debt and equity instruments Commencing from January 1, 2010, the Group is making early application of

IFRIC 19 – Settlement of Financial Liabilities by means of Equity Instruments (hereinafter – “the Interpretation”). The Interpretation provides the accounting treatment for an exchange of debt and equity instruments. Equity instruments issued at the time of settlement and elimination of the liability, in whole or in part, will be considered “consideration paid” for purposes of calculation of the gain or loss on elimination of the financial liability. The equity instruments will be initially measured at their fair values, unless it is not possible to reliably measure such value, in which case the instruments issued will be measured based on the fair value of the liability eliminated. Every difference between the amortized cost of the financial liability and the initial measurement of the equity instruments is to be recognized in the statement of income. Application of the Interpretation is on a retrospective basis.

(5) Contracts for business combinations Commencing from January 1, 2010, the Group applies the amendment to IAS 39 –

“Financial Instruments: Recognition and Measurement, Removal from Application of Business Combination Contracts” (hereinafter – “the Amendment”), which was published as part of the Improvements to IFRS project from 2009. The Amendment clarifies that only forward contracts between the buyer and the seller in respect of sale or acquisition of a controlled entity, as part of a business combination on a future acquisition date, are not included in IAS 39, this being where the period of the forward contract does not exceed the normal period required for obtaining the approval necessary for the transaction. In addition, the Amendment clarifies that the said exception does not apply where acquisitions and sales of investee companies accounted for using the equity method of accounting are involved.

The Amendment is being applied prospectively to all contracts that have not yet

expired as at January 1, 2010. The impact of application of the Amendment is not significant to the Group’s results of operations and financial position.

(6) Presentation of statement of changes in equity Commencing from January 1, 2010, the Group is making early application of the

amendment to IAS 1 – “Presentation of Financial Statements”, which was published as part of the Improvements to IFRS project for 2010, whereby the Group presents in the statement of changes in equity, for every component of the equity, a reconciliation between the book value at the beginning of the period and the book value at the end of the period, while providing separate disclosure for every change as a result of income or loss, other comprehensive income and transactions with owners in their capacity as owners. The Group includes disclosure for the said reconciliation while providing separate disclosure for every change as a result of every component of other comprehensive income as part of Note 37 “Capital and Reserves”.

32




(7) Non-Current Assets Held for Sale and Discontinued Operations Commencing from January 1, 2010, the Group is applying the amendment to IFRS 5

that was published as part of the annual Improvements project of IFRS for 2008. Pursuant to the amendment, where the parent company decides to sell part of its holdings in a subsidiary, such that after the sale the parent company remains with rights that do not confer control, all the subsidiary’s assets and liabilities are to be classified as held for sale, and the relevant provisions of IFRS 5 will apply, including, where applicable, provisions relating to presentation of discontinued operations.

I. Accounting policies for new transactions or events Accounting under non-vesting conditions of share-based payment transactions The fair value on the grant date of share-based payment grants to employees is recorded as

a salary expense along with a corresponding increase in equity over the period in which unconditional entitlement to the grants is obtained. For purposes of measurement of the fair value of equity instruments granted in respect of a share-based payment that are contingent on non-vesting conditions, the Group takes these conditions into account and, therefore, it recognizes an expense in connection with these grants, without considered whether these conditions will exist.

J. Capital management – objectives, procedures and processes Management’s policy is to maintain a strong capital base in order to preserve the

Company’s ability to continue operating so that it may provide a return on capital to its shareholders, benefits to other holders of interests in the Company, such as credit providers and employees of the Company, and support future development of the business. The Board of Directors monitors the level of dividends to the ordinary shareholders. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements, except for financial covenants that the Company and subsidiaries have committed to various lenders to comply with (see Note 23C). Nonetheless it is clarified that as part of the debt arrangement as detailed in Note 1C, the Company is subject to additional restrictions in connection with distribution of dividends until repayment of the debentures (Series Y) that were issued as part of the arrangement.

K. Timing difference with respect to the financial statements of an associated company Commencing from the first quarter of 2007, the Company includes its share in the results

of Alon Israel Fuel Company Ltd. (an associated company, hereinafter – “Alon”) with a lag of three months. As a result, the Company’s financial statements as at December 31, 2008 include the Company’s share in the results of Alon’s activities for the period from October 1, 2007 and up to September 30, 2008 and the financial statements as at December 31, 2009, include the Company’s share in the results of Alon’s activities for the period from October 1, 2008 up to the realization date of the Company’s holdings in Alon (see Note 7I).

33


At December 31, 2010 Note 3 – Significant Accounting Policies The accounting policies detailed below were applied consistently by the Group entities in all

periods presented in these consolidated financial statements, except as described in Note 2H “changes in accounting policies”, regarding the basis for preparation of the financial statements.

A. Basis for consolidation Due to the initial application of IFRS 3 (2008) and IAS 27 (2008), the Group changed the

accounting policies applied with respect to business combinations and transactions with holders of rights not conferring control. For additional information – see Note 2H(1), “Basis of Preparation of the Financial Statements”

(1) Business combinations The Group applies the “acquisition method” to all business combinations. The

acquisition date is the date on which the Group obtains control over the acquired entity.

Control is the power to govern the financial and operating policies of an entity so as to

obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable are taken into account. The Company exercises discretion in determining the acquisition date and whether control has been obtained.

Accounting treatment of business combinations after January 1, 2010 For acquisitions after January 1, 2010, the Group recognizes goodwill at acquisition

according to the fair value of the consideration transferred including any amounts recognized in respect of rights that do not confer control in the acquired entity as well as the fair value as at the acquisition date of any pre-existing equity right of the acquirer in the acquired entity, less the net amount of the identifiable assets acquired and the liabilities assumed.

On the acquisition date, the acquirer recognizes a contingent liability assumed in a

business combination if there is a present obligation resulting from past events and its fair value can be reliably measured.

If the Group pays a bargain price for the acquisition (including, as such, negative

goodwill), it recognizes the resulting gain in the statement of income on the acquisition date.

Furthermore, as from January 1, 2010 goodwill is not adjusted in respect of utilization

of carryforward tax losses that existed on the date of the business combination, also with respect to previous business combinations occurring prior to that date.

The consideration transferred includes the fair value of the assets transferred to the

previous owners of the acquired entity, the liabilities incurred by the Group to the previous owners of the acquired entity and equity instruments that were issued by the Group.

34


At December 31, 2010 Note 3 – Significant Accounting Policies (Cont.)

A. Basis for consolidation (Cont.)

(1) Business combinations (Cont.) Accounting treatment of business combinations after January 1, 2010 (Cont.) In a business combination executed in stages, the difference between the fair value on

the acquisition date of the Group’s pre-existing equity rights in the acquired entity and the carrying amount on that date is recognized in the statement of income in the “other income” or “other expense” category.

In addition, the consideration transferred includes the fair value of any contingent

consideration. Subsequent to the acquisition date, the Group recognizes changes in fair value of the contingent consideration classified as a financial liability in the statement of income. Changes in the liability in respect of contingent consideration in business combinations occurring prior to January 1, 2010, will continue to be recognized in goodwill and will not be recognized in the statement of income.

If the business combination settles a pre-existing relationship between the acquirer and

the acquired entity, the Group deducts/adds from/to the consideration transferred in the business combination the lower of the amount of an settlement provision stipulated in the contract and the amount by which the contract is favorable or unfavorable from the acquirer’s standpoint, compared with the terms of current market transactions in identical or similar contracts, and it recognizes this amount in the statement of income in the “other income” or “other expense” category.

Where a share-based payment grant is replaced (hereinafter – “the Replacement

Grant”), in exchange for a grant held by employees of the acquired entity, whether or not the acquirer is required to replace share-based payment transactions, the part of the measurement based on the market value of the Replacement Grant, which is part of the transferred consideration, is the part that can be attributed to services provided before the business combination. The unvested part of the Replacement Grant that is attributed to post-acquisition services is recognized as a compensation expense following the business combination.

The aforesaid accounting treatment is also applied in respect of business combinations

wherein there is a share-based payment grant held by the acquired entity’s employees that is not replaced in the business combination.

Costs associated with the acquisition that were incurred by the acquirer in the business

combination such as: brokers’ commissions, advisory, legal, valuation and other professional or consulting fees, other than those associated with an issuance of debt or equity instruments relating to the business combination, are expensed in the period the services are received.

35




(1) Business combinations (Cont.) Accounting treatment of business combinations between January 1, 2007 and

January 1, 2010 For acquisitions between January 1, 2007 (the date of transition to IFRS) and

January 1, 2010, the goodwill recognized constitutes the excess of the cost of the acquisition over the Group’s interest in the amount recognized (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquired entity. When the excess is negative, a bargain purchase gain is recognized in the statement of income on the acquisition date.

Transaction costs incurred by the Group in connection with the business combination,

other than those associated with an issuance of debt or equity instruments, were recognized as part of the cost of the acquisition.

Accounting treatment of business combinations prior to January 1, 2007 (the transition

date to IFRS) On the date of transition to IFRS, the Group adopted the relief provided in IFRS 1 and

elected not to retrospectively implement the provisions of IFRS 3 (2004) with respect to business combinations, acquisitions of affiliates, acquisitions of jointly controlled entities and acquisition of minority interests prior to the transition date. Therefore, in respect of acquisitions prior to January 1, 2007 the goodwill recognized and the excess cost created represent the amounts recognized by the Group under Israeli GAAP.

(2) Subsidiaries Subsidiary companies are entities that are controlled by the Group. The financial

statements of subsidiary companies are included in the consolidated financial statements from the date control was acquired until the date control ceases to exist. The accounting policies of subsidiary companies were changed as necessary so that they will correspond to the accounting policies adopted by the Group.

(3) Rights not conferring control Rights not conferring control comprise the equity of a subsidiary that cannot be

attributed, directly or indirectly, to the parent company and they include additional components such as: share-based payments that will be settled with equity instruments of subsidiaries and options for shares of subsidiaries. See also Note 2H(1) “changes in accounting policies” regarding the impacts of retroactive classification of this qualification.

36




(3) Rights not conferring control (Cont.) Rights not conferring control that are instruments giving rise to a present ownership

interest and entitle the holder to a share of the net assets in the event of liquidation (for example: ordinary shares), are measured at the date of the business combination at either fair value, or at their proportionate interest in the identifiable assets and liabilities of the acquired entity, on the basis of each separate transaction. Choice of this accounting policy is not permitted with respect to other instruments meeting the definition of rights not conferring control (for example: options for ordinary shares). Such instruments will be measured at fair value or in accordance with other relevant IFRS.

For acquisitions between January 1, 2007 and January 1, 2010, rights not conferring

control were measured on the date of the business combination at their proportionate interest in the identifiable assets and liabilities of the acquired entity.

Regarding acquisitions after the transition date, the Group adopted the relief provided

in IFRS 1 and elected not to retrospectively implement the provisions of IFRS 3 (2004), as described above.

Allocation of comprehensive income to the shareholders Commencing from January 1, 2010, profit or loss and any part of other comprehensive

income are allocated to the owners of the Company and the holders of rights not conferring control, even when the result is a negative balance of the holders of rights not conferring control. Up to that date, profits or losses and parts of other comprehensive income were not allocated to the holders of rights not conferring control if the result was a negative balance, unless the minority had a contractual obligation and the ability to make an additional investment in order to cover the losses.

Transactions with holders of rights not conferring control while maintaining control Up to January 1, 2010, with respect to an acquisition of rights not conferring control,

additional goodwill was recognized and the impact with respect to a sale of rights not conferring control was recorded on the statement of income. Commencing from January 1, 2010, transactions with holders of rights not conferring control while maintaining control are accounted for as equity transactions. Any difference between the consideration paid or received and the change in the rights not conferring control is recorded to the share of the Company’s owners.

The amount of the adjustment to the rights not conferring control is calculated as

follows: For a rise in the holding rate – according to the proportionate share acquired from the

balance of the rights not conferring control in the consolidated financial statements immediately preceding the transaction.

37




(3) Rights not conferring control (Cont.) Transactions with holders of rights not conferring control while maintaining control

(Cont.) For a decrease in the holding rate – according to the proportionate share realized by

the owners of the subsidiary in the net assets of the subsidiary, including goodwill. In addition, when the holding rate in the subsidiary changes, while maintaining

control, the Company reallocates the accumulated amounts that were recognized in other comprehensive income to the owners of the Company and the holders of rights not conferring control.

The cash flows deriving from transactions with holders of rights not conferring control

while maintaining control, which were classified in the past in the statement of cash flows under “investing activities”, are now classified under “financing activities”. See also Note 2H(1) regarding “changes in accounting policies” with respect to the effects of the retrospective implementation of this classification.

Issuance of put option to holders of rights not conferring control A put option issued by the Group to holders of rights not conferring control that is

settled in cash or another financial instrument is recognized as a liability at the present value of the exercise price. In subsequent periods, changes in fair value of the liability in respect of put options issued after January 1, 2010 are recognized in the statement of income.

Changes in liabilities in respect of a put option issued by the Group to holders of

rights not conferring control before January 1, 2010, will continue to be recognized in goodwill and will not be recognized in the statement of income.

The Group’s share of the acquired company’s income includes the share of the holders

of rights not conferring control to which the Group issued a put option. (4) Loss of control Upon the loss of control, the Group eliminates the assets and liabilities of the

subsidiary, any rights not conferring control and the other components of equity related to the subsidiary. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value on the date that control is lost. The difference between the proceeds and the fair value of the retained interest, on the one hand, and the balances eliminated, on the other hand, is recognized in the statement of income in the “other income” or “other expenses” category. Commencing from that date, the retained interest is accounted for using the equity method of accounting or as an available-for-sale asset depending on the level of influence retained by the Group in the relevant company.

38




(4) Loss of control (Cont.) The amounts recognized in capital reserves through other comprehensive income with

respect to the same subsidiary are reclassified to the statement of income or to retained earnings in the same manner that would have been applicable if the subsidiary had itself realized the same assets or liabilities.

(5) Investment in associated companies and jointly-controlled entities (accounted for

using the equity method of accounting) Associated companies are entities wherein the Group has significant influence over the

financial and operating policies, however control thereof has not been achieved. Jointly-controlled entities are entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. The investment in associated companies and jointly-controlled entities are accounted for using the equity method of accounting, and are recognized initially at cost. The cost of the investment includes transaction costs. When a company first obtains significant influence in an investment that was accounted for as available-for-sale until the date of obtaining significant influence, accumulated other comprehensive income in respect of that investment is transferred at that date to the statement of income. The consolidated financial statements include the Group’s share of the income and expenses, profit or loss and other comprehensive income of investee companies accounted for using the equity method of accounting after adjustments to conform the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control no longer exists. When the Group’s share of losses exceeds its interest in an investee companies accounted for using the equity method of accounting the carrying amount of that interest (including any long-term investment) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

(6) Loss of significant influence or joint control The Group discontinues applying the equity method from the date it loses significant

influence or joint control and it accounts for the investment as a financial asset, associated company, jointly controlled company or subsidiary, as the case may be.

On the aforesaid date, the Group measures any investment it retains in the former

associated company or jointly-controlled entity and recognizes gain or loss for any difference between the sum of the fair value of the retained interest and any proceeds received from the partial disposal of the investment in the affiliated company or jointly-controlled entity, and the carrying amount of the investment on that date.

39




(6) Loss of significant influence or joint control (Cont.) The amounts recognized in capital reserves through other comprehensive income with

respect to the same associated company or jointly-controlled entity are reclassified to income or loss or to retained earnings in the same manner that would have been applicable if the associated company or jointly-controlled entity had itself realized the same assets or liabilities.

(7) Change in interest held in associated companies while retaining significant

influence When the Group increases its interest in an associated company accounted for by the

equity method of accounting while retaining significant influence, it implements the acquisition method only with respect to the additional interest obtained whereas the previous interest is not re-measured and remains the same.

When there is a decrease in the interest in an associated company accounted for by the

equity method of accounting while retaining significant influence, the Group eliminates a proportionate part of its investment and recognizes gain or loss on the sale in the “other income” or “other expenses” expenses. The cost of the rights sold for purposes of calculating the gain or loss from the sale, is determined on a weighted-average basis.

Furthermore, on the same date, a proportionate part of the amounts recognized in

capital reserves through other comprehensive income with respect to the same associated company are reclassified to income or loss or to retained earnings in the same manner that would have been applicable if the associated company had itself realized the same assets or liabilities.

(8) Jointly-controlled operations (joint ventures) Joint operations (joint ventures) are joint transactions wherein each party uses its own

assets for purposes of the joint operations. The consolidated financial statements include the assets that the Group controls and the liabilities that it incurs in the course of pursuing the joint operation, and the expenses the Group incurs and its share of the income that it earns from the joint operation.

(9) Transactions eliminated in the consolidation Intra-group balances, and any unrealized income and expenses arising from intra-

group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates and jointly-controlled entities are eliminated against the investment to the extent of the Group’s interest in these investments. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

40



B. Foreign currency

1. Transactions in foreign currency Transactions in foreign currency are translated to the relevant functional currencies of

the Group at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for the effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on re-translation are recognized in profit or loss, except for differences arising on the re-translation of available-for-sale equity instruments, loans to foreign operations constituting part of the net investment in the foreign operations or cash flow hedges, which are recognized in other comprehensive income. Non-monetary items denominated in foreign currency and measured at historical cost are translated based on the exchange rate in effect on the date of the transaction.

2. Foreign activities The assets and liabilities of foreign activities, including goodwill and fair value

adjustments arising on acquisition, are translated into NIS at the exchange rates at the reporting date. The income and expenses of foreign activities, excluding foreign activities in hyperinflationary economies, are translated into NIS at exchange rates at the dates of the transactions.

Exchange rate differences are recognized directly in equity since January 1, 2007, the

date of transition to IFRS and are presented in the equity section as part of translation reserve with respect to foreign activities (hereinafter – “the Translation Reserve”). Where the foreign activities is a subsidiary that is not wholly owned by the Group, the relative share of the exchange rate differences in respect of the foreign activities is allocated to the holders of rights not conferring control.

When a foreign operation is disposed of such that control, significant influence or

joint control is lost, the cumulative amount in the Translation Reserve related to that foreign operation is reclassified to the statement of income as a part of the gain or loss on disposal.

As of January 1, 2010, when the Group’s interest in a subsidiary that includes a

foreign operation changes, while maintaining control over the subsidiary, a proportionate part of the cumulative amount of the translation differences that was recognized in other comprehensive income is reallocated to the holders of rights not conferring control.

41



B. Foreign currency (Cont.)

2. Foreign activities (Cont.) Where the Group realizes part of an investment that is an associated company or

jointly-controlled entity including foreign activities, while maintaining significant influence or joint control, the proportionate part of the cumulative amount of the exchange rate differences are reclassified to the statement of income.

Where settlement of loans provided to or received from foreign activities is not

planned and is not expected in the foreseeable future, the net gains and losses deriving from translation differences in respect of these monetary items are included as part of the investment in the foreign activities, recognized in other comprehensive income and presented in the equity section in the Translation Reserve.

C. Financial instruments

1. Non-derivative financial assets Initial recognition of financial assets The Group initially recognizes loans and receivables and deposits at the time they are

created. The rest of the financial assets that are acquired in the regular way, including assets designated at fair value through the statement of income, are initially recognized at the time of entering into the transaction (the trade date) when the Group becomes a party to the instrument’s contractual conditions, that is, when the Group undertakes to buy or sell the asset. Non-derivative financial instruments include investments in shares and debt instruments, trade and other receivables, including receivables as part of concession arrangements, and cash and cash equivalents.

Elimination of financial assets Financial assets are eliminated when the contractual rights of the Group to the cash

flows deriving from the financial assets expire, or when the Group transfers the financial assets to others without retaining control or effectively transfers all of the risks and rewards deriving from the asset.

Every right in financial assets transferred that is created or reserved by the Group is

recognized separately as an asset or liability. Sales of financial assets made in the usual manner are recognized on the transaction

date, that is, on the date the Group undertook to buy or sell the asset.

42



C. Financial instruments (Cont.)

1. Non-derivative financial assets (Cont.) Regarding offset of financial assets and financial liabilities – see Section (2) below. The Group classifies financial assets in categories as follows: Held-to-maturity investments Where the Group has the express intent and ability to hold debt instruments to

maturity, they are classified as held-to-maturity. Held-to-maturity investments are initially measured at fair value plus attributable transaction costs. After the initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method, less any impairment losses.

Held-to-maturity investments include investments in debentures. Financial assets at fair value through the statement of income A financial asset is classified as measured at fair value through the statement of

income if it is classified as held for sale or if it is designated as such at the time of the initial recognition. Financial assets are designated at fair value through the statement of income if the Group maintains investments of this type and makes buy-sell decisions in respect thereof based on fair value, in accordance with the manner in which the Group has documented the risk management or investment strategy, if the designation is intended to prevent an accounting mismatch, or if it is a hybrid instrument including an embedded derivative. At the time of the initial recognition, allocable transaction costs are recorded on the statement of income as incurred. These financial assets are measured at fair value and the changes therein are recorded in the statement of income.

Financial assets designated at fair value through the statement of income include

equity investments that would otherwise have been classified as available-for-sale. Loans and receivables Loans and other receivables are non-derivative financial assets bearing payments that

are fixed or that can be fixed and that are not traded on an active market. After the initial recognition, the loans and other debit balances are measured based on amortized cost using the effective interest method while taking into account transaction costs and less provisions for decline in value.

Loans and receivables include trade and other receivables, as well as receivables in

respect of a concession arrangement for provision of services.

43




1. Non-derivative financial assets (Cont.) Cash and cash equivalents Cash and cash equivalents include cash balances or deposits that are available for

immediate withdrawal. Cash equivalents include highly liquid short-term investments (where the period of time from the original date of deposit up to the redemption date is up to 3 months) that can be easily converted into known amounts of cash and that are exposed to insignificant risk regarding changes in value.

Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets designated as

financial assets available-for-sale or that were not classified in any of the other categories. The Group’s investments in shares and certain debt instruments are classified as available-for-sale financial assets. At the time of their initial recognition and subsequent thereto, these investments are measured at fair value and changes therein, other than impairment losses, gains or losses from exchange rate changes and accrual of the effective interest on available-for-sale monetary items, are recognized directly in other comprehensive income and are presented in a capital reserve for available-for-sale financial assets. A dividend received in respect of available-for-sale financial assets is recognized in the statement of income on the date of the entitlement to the payment. When the investment is eliminated, the cumulative gain or loss in the capital reserve for available-for-sale financial assets is transferred to the statement of income.

2. Non-derivative financial liabilities The Group initially recognizes debt instrument issued on the date they are created. The

rest of the financial liabilities are initially recognized at the time of entering into the transaction where the Group becomes a party to the instrument’s contractual conditions.

Financial liabilities are eliminated where the Group’s obligation, as detailed in the

agreement, expires or is settled or cancelled. Financial liabilities (except for financial liabilities designated at fair value through the

statement of income) are initially recognized at fair value plus all allocable transaction costs. After the initial recognition, financial liabilities are measured at amortized cost in accordance with the effective interest method.

44




2. Non-derivative financial liabilities (Cont.) Exchange of debt instruments, having materially different terms, between an existing

borrower and lender is treated as settlement of the original financial liability and recognition of a new financial liability at fair value. In addition, a significant change in the terms of an existing financial liability, or a part thereof, is treated as settlement of the original financial liability and recognition of a new financial liability.

The terms are materially different if the present value of the discounted cash flows

under the new terms, including any commissions paid, less commissions received and capitalized using the original effective interest rate, is at least ten percent of the discounted present value of the remaining cash flows of the original financial liability.

In addition to the said quantitative test, the Group examines, among other things,

whether there have been changes in various economic parameters embedded in the exchanged debt instruments. Therefore, exchanges of debt instruments linked to the index with instruments that are not linked to the index are considered exchanges having materially different terms even if they do not meet the quantitative test described above.

The Group has non-derivative financial liabilities as follows: liabilities to banks,

debentures short-term loans and credit from banks and others, contractors, trade and other payables.

A financial asset and a financial liability are offset and the amounts are presented on a

net basis in the statement of financial position where the Group has a currently enforceable legal right to offset the amounts recognized and the intention is to settle the asset and liability on a net basis or to realize the asset and settle the liability concurrently.

3. Derivative financial instruments including cash flow hedges The Group companies hold derivative financial instruments for purposes of hedging

foreign currency and interest risks. Embedded derivatives are separated from the host the contract and are treated separately if: (a) there is no close relationship between the economic characteristics and risks of the host contract and of the embedded derivative; (b) a separate instrument having the same terms as the embedded derivative would have met the definition of a derivative; and (c) the integrated (hybrid) instrument is not measured at fair value through the statement of income.

On the start date of the accounting hedge, the Group formally documents the hedge

ratio between the hedging instrument and the hedged instrument, including the purpose of the Group’s risk and strategic management for executing the hedge and the manner in which the Group will evaluate the effectiveness of the hedge ratio.

45




3. Derivative financial instruments including cash flow hedges (Cont.) The Group evaluates at the time of creating the hedge and in subsequent periods

whether the hedge is projected to be highly effective by achieving offsetting changes in fair value of cash flows that can be attributed to the hedged risk during the period with respect to which the hedge is designated, as well as whether the actual results of the hedge are within a range of 80-125 percent.

Regarding a cash flow hedge, a projected transaction constituting a hedged item is

projected to be at a high level and causes changes in the cash flows that are ultimately expected to impact the profit or loss.

Derivatives are initially recognized according to fair value and the allocable

transaction costs are charged to the statement of income as incurred. After the initial recognition, the derivatives are measured at fair value, where the changes in the fair value are treated as described below.

Cash flow hedges Changes in the fair value of derivatives used to hedge cash flows, in respect of the

effective part of the hedge, are recorded in other comprehensive income direct to a hedge reserve. With respect to the non-effective part, the changes in fair value are recorded on the statement of income. The amount accumulative in the hedge reserve is reclassified to the statement of income in the period in which the cash flows impact the statement of income and are presented in the same category in the statement of income in which the hedged item is presented.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or

is sold, terminated or exercised, then hedge accounting is discontinued. The cumulative gain or loss previously recognized in the hedge fund through the statement of other comprehensive income remains in the reserve until the forecasted transaction occurs or is no longer expected to occur. Where the forecasted transaction is no longer expected to occur, the cumulative gain or loss in respect of the hedging instrument accumulated in the hedge reserve is reclassified to the statement of income. When the hedged item is a non-financial asset, the amount recorded in the hedge reserve is transferred to the carrying amount of the asset at the time of its recognition. In other cases the amount recognized in the hedge reserve is transferred to the statement of income in the same period that the hedged item is recorded in the statement of income.

46



D. Financial instruments (Cont.)

3. Derivative financial instruments including cash flow hedges (Cont.) Economic hedges The Group uses derivative financial instruments in order to reduce its exposure to raw

material price risks, such as bitumen and iron. The transactions executed by the Group to reduce the economic exposure, as stated above, do not comply with the hedging conditions provided in the international standards and, therefore, the said financial instruments are measured at fair value where the changes in the fair value are recorded on the statement of income every period. The changes in the fair value of derivative financial instruments with respect to raw material prices are classified as part of the construction cost, whereas the changes in the fair value of derivative financial instruments with respect to currency rates are classified as part of the “financing” section.

The fair value of futures contracts on commodities is the contract price denominated in

the market on the date of the statement of financial position, which is the present value of the denominated price of the future transaction.

Derivatives not used for hedging purposes Changes in fair value of derivatives not used for hedging purposes are recognized

immediately in the statement of income as financing income or expenses. Included in the above, the Group applies the said accounting treatment to changes in the fair value of the conversion component of CPI-linked convertible debentures and options that do not have a fixed exercise premium.

Separated embedded derivatives Changes in the fair value of embedded derivatives that were separated are recorded

immediately in the statement of income as financing income or expenses. 4. Compound financial instruments Complex financial instruments issued by the Group include debentures convertible

into shares at the election of the holder, where the number of shares to be issued in exchange for them does not change and the conversion price is fixed.

The liability component of a complex financial instrument is initially recognized at the

fair value of a similar liability not convertible into shares. The equity component is initially recognized based on the difference between the fair value of the aggregate complex financial instrument and the fair value of the liability component. Direct costs that can be attributed to the transaction are allocated to the liability component and the equity component in proportion to their values at the time of the initial recognition.

47




4. Compound financial instruments (Cont.) Subsequent to the initial recognition, the liability component of the complex financial

instrument is measured at amortized cost in accordance with the effective interest method. The equity component of the complex financial instrument is not re-measured after the initial recognition.

Interest, dividends, losses and gains attributed to financial liabilities are recorded on

the statement of income. Upon conversion of the financial liability is classified to equity, without recognition in the statement of income.

5. CPI-linked assets and liabilities not measured at fair value The value of CPI-linked financial assets and liabilities that are not measured at fair

value is re-measured every period in accordance with the actual increase in the CPI. 6. Financial guarantees On the date of the initial recognition, a financial guarantee is recognized at its fair

value. In succeeding periods a financial guarantee is measured based on the higher of the amount recognized in accordance with the provisions of IAS 37 and the liability initially recognized after it was reduced in accordance with IAS 18. Every update of the liability in accordance with that stated is recorded in the statement of income.

7. Share capital Ordinary shares Incremental costs directly attributable to the issuance of ordinary shares and options

for ordinary shares are presented as a deduction from equity. 8. Issuance of parcel of securities The consideration received from the issuance of a parcel of securities is attributed first

to financial liabilities that are measured each period at fair value through the statement of income, and then to financial liabilities that are measured only upon initial recognition at fair value. The remaining amount is the value of the equity component.

Direct identifiable costs are attributed to the specific securities in respect of which

they were incurred, whereas joint issuance costs are attributed to the securities on a proportionate basis according to the allocation of the consideration from the issuance of the parcel, as indicated in above.

48



D. Property, plant and equipment

1. Recognition and measurement Property, plant and equipment items are measured at cost less accumulated

depreciation and accrued impairment losses. Cost includes expenditures that are directly attributable to acquisition of the asset. The

cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to the required location and condition so that it can be used in the manner intended by Management, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functioning of the related equipment is recognized as part of that equipment.

When major parts of a property, plant and equipment item (including costs of major

periodic inspections) have different useful lives, they are accounted for as separate items (major components) of the property, plant and equipment.

Changes in the obligation to dismantle and remove the items and to restore the site on

which they are located, other than changes deriving from the passing of time, are added or deducted from the cost of the asset in the period in which they occur. The amount deducted from the cost of the asset shall not exceed the balance of its book value, and any balance is recognized immediately in the statement of income.

Gain or loss on disposal of an item of property, plant and equipment is determined by

comparing the proceeds from disposal with the carrying amount of the asset, and is recognized net within “other income” or “other expenses” in the statement of income.

2. Reclassification to investment property When the use of a property changes from use by the owner to investment property,

which is to be measured at fair value, the property is re-measured based on fair value and is reclassified as investment property. Any gain arising on re-measurement is recognized in other comprehensive income and presented in a revaluation reserve in the equity section, unless the income cancels a prior loss from decline in value of the property, in which case the income is recorded first in the statement of income. Any loss is recognized directly in the statement of income.

3. Subsequent costs The cost of replacing part of a property, plant and equipment item is recognized as

part of the carrying amount of the item if it is probable that the future economic benefit embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is eliminated. The costs of current ongoing servicing are recognized in the statement of income as incurred.

49



D. Property, plant and equipment (Cont.)

4. Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its

useful life. The depreciable amount is the cost of the asset, or other amount that replaces the cost, less the asset’s residual value.

Depreciation is recognized in the statement of income on a straight-line basis over the

estimated useful lives of each part of the property, plant and equipment item since this method reflects the format of the anticipated consumption of the future economic benefits embedded in the asset in the best possible manner. Leased assets are depreciated over the shorter of the lease term and their useful lives. Owned land is not depreciated.

The annual depreciation rates are as follows:

%

Buildings and various structures 2 – 4 Plants, systems, construction and production machinery and equipment 2.5 – 33 (mainly 20%) Vehicles 14 – 20 Computers 33 Furniture and general equipment 6 – 33 (mainly 7%)

The estimates regarding the depreciation method, useful lives of the assets and

residual value are examined at least at the end of every year. E. Intangible assets

1. Goodwill Goodwill arising as a result of acquisition of subsidiaries is included in the “intangible

assets” category. For information regarding measurement of goodwill upon its initial recognition – see Section A(1) above.

In subsequent periods goodwill is measured according to cost after deduction of

accrued losses from declines in value. 2. Other intangible assets Other intangible assets, including in respect of concession agreements, which are

acquired by the Group and which have defined useful lives, are measured at cost less accumulated amortization and accumulated impairment losses.

50



E. Intangible assets (Cont.)

3. Subsequent costs Subsequent costs are recognized as an intangible asset only when they increase the

future economic benefit embodied in the specific asset to which they relate. All other costs, including those relating to internally generated goodwill or trademarks are recognized in the statement of income as incurred.

4. Amortization Amortization is the systematic allocation of the amortizable amount of an asset over

its useful life. The amortizable amount is the cost of the asset less its residual value. Amortization is recorded on the statement of income according to the straight-line

method, except for intangible assets in connection with concession agreements that are amortized based on the “units of production” method, over the estimated useful economic life of the intangible assets, commencing from the date the assets are available for use, since these method reflect the format of the anticipated consumption of the future economic benefits embedded in the asset in the best possible manner. Goodwill and intangible assets with an undefined useful life are not amortized on a systematic basis but, rather, are examined each period for indications of a decline in value.

Intangible assets created by the Group are not amortized on a systematic basis so long

as they are not available for use, that is, they are not in the location and position required so that they can operate in the manner Management intended for them. Therefore, intangible assets, such as development costs, are examined for decline in value once a year, up to the time they become available for use.

The annual amortization rates are as follows:

%

Customer lists 14 Software 25 – 33 Non-competition agreements 14 – 25

The estimates regarding the amortization method, useful lives of the assets and

residual value are examined at least at the end of every fiscal year and are adjusted where necessary.

The Group examines the useful life of an intangible asset that is not periodically

amortized in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.

51



F. Investment property Investment property is property (land or building – or part of a building – or both) held (by

the Company as the owner or under a financing lease) either to earn rental income or for capital appreciation or for both, but not for:

1. Use in the production or supply of goods or services or for administrative purposes; or 2. Sale in the ordinary course of business.

Furthermore, leased properties that are leased out by the Company under an operating lease

are classified and treated as investment property. Investment property is initially measured at cost including capitalized borrowing costs. The

cost includes expenditures that are directly attributable to acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labor, and any other costs directly attributable to bringing the property to the condition required so that it can function in the manner intended by management.

In subsequent periods the investment property is measured at fair value with any changes

therein recognized in the statement of income. Real estate under construction for future use as investment property is measured at fair value, where it is possible to reliably measure its value. Where it is not possible to reliably measure the fair value, investment property under construction is measured at cost in the construction period up to the earlier of the date the construction is completed or the date on which it is possible to reliably measure the fair value.

When investment property measured according to fair value becomes property, plant and

equipment (property used by the owner) or inventory, its fair value becomes the cost of the property, plant and equipment or inventory, for the subsequent accounting treatment.

G. Leased assets Leases, including leases of lands from the Israel Lands Administration or from other third

parties, where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased assets are measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Future payments for exercise of an option to extend the lease period with the Israel Lands Administration are not recognized as part of the related asset and liability since they are constitute contingent lease fees, which derive from the fair value of the land on the future renewal dates of the leased asset. Subsequent to the initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

52



G. Leased assets (Cont.) Other leases are classified as operating leases, except for leases of land classified as

investment property, where the leased assets are not recognized in the Group’s statement of financial position. Property under an operating lease classified by the Group as investment property is recognized in the Group’s statement of financial position at their fair value, and on the initial recognition date, the lease is accounted for as a financing lease.

Prepaid lease fees to the Israel Lands Administration in respect of land leases classified as

operating leases are presented in the statement of financial position as property, plant and equipment, and are recorded in the statement of income over the lease period. The lease period and amortization take into consideration an option to extend the lease period if at the beginning of the lease it was probable that the option will be exercised.

For further information regarding the change in accounting policies relating to the

classification of leases of land and buildings – see Note 2H(2) “Basis of Preparation of the Financial Statements”.

H. Inventories Inventories are measured at the lower of cost and net realizable value. The cost of the

inventories includes the costs incurred in acquiring the inventories and in bringing them to their existing location and condition. In the case of inventories of work in progress and finished goods, the cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

The cost of the inventories is determined in accordance with the following bases:

1. Aggregates, construction and auxiliary materials, work tools, guardrails and infrastructure equipment – on a “moving average” basis.

1. Raw materials, auxiliary and packaging materials – on a “weighted-average” basis. 2. Work in process and finished goods – based on the production costs:

(a) Raw and auxiliary materials component – on a “weighted-average” basis. (b) Labor and indirect expenses component – on a “first-in, first-out” basis.

4. Cost of purchased goods – on a “weighted-average” basis.

The net realizable value is an estimate of the selling price in the ordinary course of business, less the estimated completion costs and selling expenses.

53



I. Inventory of real estate and residential apartments Inventory of real estate and residential apartments is measured at the lower of cost and net

realizable value. Cost of inventory includes the direct costs of acquiring the inventory (including purchase taxes and prepaid lease fees), materials, employee benefits, work performed by subcontractors and credit costs to be capitalized based on that stated in Section J below. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

The inventory of real estate is presented at cost (including development and preparation

expenses). The cost of the real estate may not exceed the net realizable value. The net realizable value represents an estimate of the selling price in the ordinary course of business of the residential project expected to be constructed on the real estate less an estimate of the cost of constructing the residential project and less an estimate of the cost required to execute the sale.

Land acquired by the Company in a combination transaction in exchange for the provision of

construction services to the seller is recognized as an asset in the statement of financial position at the fair value of the part of the land relating to the residential units to be sold to outside purchasers, on the date the contractual conditions permit the Company to commence the activities required for preparation of the venture to be constructed on the land, along with recognition of an liability for provision of the construction services.

Land acquired by the Company in a combination transaction in exchange for transfer of part

of the venture’s revenues is recognized in an amount equal to its fair value against recognition of a financial liability. In subsequent reporting periods, the financial liability is measured at an amount equal to the present value of the cash flows expected to be paid in the future, where such cash flows are discounted each period using the liability’s original interest rate, and the changes in the fair value are recorded on the statement of income each period.

In a transition from inventory to investment property, which is measured at fair value, any

difference between the fair value of the real estate on that date and it prior carrying value in the books is recorded directly to the statement of income.

J. Construction work in progress Construction work in progress represents the gross unbilled amount expected to be collected

from customers for contract work performed to date. The amount is measured at cost plus profit recognized to date less progress billings and recognized losses. The cost includes all expenditures related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity.

54



J. Construction work in progress (Cont.) Construction work in progress is presented as part of the “trade and other receivables”

category in the statement of financial position in respect of all the contracts wherein the costs incurred plus the revenues recognized exceed the collection from customers. If the payments received from customers exceed the costs incurred plus the income recognized, the difference is presented as deferred income in the statement of financial position.

K. Capitalization of borrowing costs Specific and non-specific credit (borrowing) costs relating to an acquisition or construction of

qualifying assets, the preparation of which for their intended use or sale requires a significant period of time, are capitalized to the cost of those assets up to the date they are substantially ready for their intended use or sale.

Revenues deriving from a temporary investment of specific credit received for purposes of

investment in qualifying assets are deducted from the credit costs that may be capitalized. All other credit costs are recognized in the statement of income as incurred. L. Impairment of value

1. Financial assets A decline in value of a financial asset not presented at fair value through the statement

of income is examined when there is objective evidence that a loss event has occurred after the initial recognition date and this loss event had a negative impact on the estimate of the future cash flows from the asset that can be reliably estimated.

Objective evidence that a decline in value of financial assets has occurred could

include breach of a contract by the debtor, reorganization of the amount due to the Group based conditions the Group would not have considered in other circumstances, existence of signs that the debtor or issuer of the debt will go bankrupt, unfavorable changes in the status of the payments of debtors, changes in the economic environment indicating insolvency of debt issuers or absence of an active market for the security.

In examination of decline in value of financial assets available for sale that are equity

instruments, the Group also examines the difference between the fair value of the asset and its original cost, while taking into account the standard deviation of the instrument’s rate, the length of time the asset’s fair value is less than its original cost and changes in the technological, economic and/or legal environment, and/or the environment in the market in which the company issuing the instrument operates. In addition, a large or continuing decline in the fair value below the original cost is objective evidence of decline in value.

55



L. Impairment of value (Cont.)

1. Financial assets (Cont.) The Group examines evidence of a decline in value with respect to loans, trade and

other receivables and investments held to maturity both at the level of the individual asset and on a collective basis. Trade receivables, loans, other receivables and investments held to maturity that are significant individually are examined on a specific basis for impairment in value. Such trade receivables, loans, other receivables and investments held to maturity with respect to which a specific impairment in value was not found are grouped together and examined for a decline in value on a collective basis in order to identify a decline in value that has not yet been found. Regarding trade receivables, loans, other receivables and investments held to maturity that are not significant on an individual basis, a collective examination for decline in value is made by means of grouping them together based on similar risk characteristics.

When making an examination for decline in value, the Group uses historical trends of

the probability of a violation, timing of receipt of the repayment and the total actual loss based on Management’s judgment regarding the question whether the actual losses are expected to be larger or smaller compared with the losses exceeding the historical trends in light of the economic situation and the existing credit conditions.

A loss from decline in value of a financial asset measured at amortized cost is

calculated as the difference between its book value and the present value of the estimated future cash flows discounted at the original effective interest rate. Losses are recorded on the statement of income and are presented as an allowance for loss against the balance of the trade receivables, other receivables, loans and investments held to maturity. Interest income in respect of assets the value of which has been impaired is recognized using the interest rate used to discount the future cash flows for purposes of measuring the loss from decline in value. Losses from decline in value of financial assets available-for-sale are recognized by transferring the cumulative loss recorded in the capital reserve in respect of available-for-sale assets, to the statement of income. The cumulative loss eliminated from the other comprehensive income and recognized in the statement of income is the difference between the acquisition cost less principal repayments and amortization, and the present fair value less declines in value that were previously recognized in the statement of income. Changes in the provision for decline in value as a result of the passage of time are presented as a component of financing income.

A loss from impairment in value is cancelled when such recovery is objectively

attributable to an event that occurred after recognition of the loss from impairment in value (such as payment by the debtor). Cancellation of a loss from impairment in value in respect of financial assets measured according to amortized cost and of financial assets classified as available-for-sale that are debt instruments, is recorded on the statement of income. Cancellation of a loss from impairment in value in respect of financial assets classified as available-for-sale that are equity instruments, is recorded directly to the other comprehensive income.

56




2. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than investment

property, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. In subsequent periods the Group estimates, once a year and on the same date for each asset, the recoverable amount of goodwill if there are signs of a decline in value.

The recoverable amount of an asset or cash-producing unit is the higher of its value in

use and its net selling price (fair value less costs to sell). In determining the value in use, the Group discounts the expected future cash flows to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that produces cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-producing unit”). For purposes examining a decline in value of goodwill, cash-producing units to which goodwill was allocated are grouped such that the level at which the decline in value is examined reflects the lowest level at which the goodwill can be monitored for internal reporting purposes, however, in any case, that is not larger than a reporting segment (prior to grouping together of similar segments). In cases where there is no monitoring of the goodwill for internal management purposes, the goodwill is allocated to activity segments (prior to grouping together of similar segments) and not to cash-producing units (or groups of cash-producing units) that are smaller than an activity segment. Goodwill acquired in a business combination is allocated to cash-producing units that are expected to benefit from the synergy of the combination.

For purposes of examination of decline in value of goodwill, the book value of the

goodwill is grossed-up based on the rate at which the Company holds in the cash-producing unit to which the goodwill is allocated.

The Company’s headquarters assets do not produce separate cash flows and they serve

more than one cash-producing unit. Part of the headquarters assets is allocated to cash-producing units on a reasonable and consistent basis and is examined for decline in value as part of examination of a decline in value of the cash-producing units to which they are allocated.

Other assets of the Company’s headquarters, which cannot be reasonably and

consistently allocated to cash-producing units are allocated to a group of cash-producing units if there are signs that there has been a decline in value of an asset belonging to the Company’s headquarters or there are signs of a decline in value of the group of cash-producing units. In this case, the recoverable value of the group cash-producing units serving the headquarters is determined.

57




2. Non-financial assets (Cont.) Losses from decline in value are recognized if the carrying amount of the asset or the

cash-producing unit to which it belongs exceeds its recoverable amount, and are recorded on the statement of income. Losses from decline in value recognized in respect of cash-producing units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the cash-producing unit, on a pro rata basis.

Regarding cash-generating units that include goodwill, an impairment loss is recognized

when the carrying amount of the cash-generating unit, after gross-up of the goodwill, exceeds its recoverable amount.

An impairment loss is allocated between the owners of the Company and the holders of

rights not conferring control on the same basis that the income or loss is allocated. Nevertheless, if an impairment loss allocated to holders of rights not conferring control relates to goodwill that was not recognized in the consolidated financial statements, the said impairment is not recognized as an impairment loss of goodwill. In such cases, only an impairment loss relating to goodwill that was allocated to the owners of the Company is recognized as an impairment loss of goodwill.

A loss from decline in value of goodwill is not reversed. In respect of other assets,

impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

3. Investments in associated companies and jointly-controlled entities equity accounted for

using the equity method of accounting An investment in an associated company or a jointly-controlled entity is tested for

impairment when objective evidence indicates there has been impairment (as described in Section (2) above).

Goodwill that is part of the carrying amount of an investment in an associated company

is not recognized separately, and therefore is not tested for impairment separately. If objective evidence indicates that the value of the investment may have been impaired,

the Group estimates the recoverable amount of the investment, which is the greater of its value in use and its net selling price.

58




3. Investments in associated companies and jointly-controlled entities equity accounted for using the equity method of accounting (Cont.)

In assessing value in use of an investment in an associated company, the Group estimates

its share of the present value of estimated future cash flows that are expected to be generated by the associated company, including cash flows from operations of the associated company and the consideration from the final disposal of the investment, or the present value of the estimated future cash flows that are expected to be derived from dividends that will be received and from the final disposal.

An impairment loss is recognized when the carrying amount of the investment, after

applying the equity method, exceeds its recoverable amount, and it is recorded in the statement of income.

An impairment loss is not allocated to any asset, including goodwill, which is part of the

carrying amount of the investment in the associated company or in the jointly-controlled entity.

An impairment loss is reversed only if there has been a change in the estimates used to

determine the recoverable amount of the investment after the last impairment loss was recognized, and only to the extent that the investment’s carrying amount, after the reversal of the impairment loss, does not exceed the carrying amount of the investment that would have been determined by the equity method if no impairment loss had been recognized.

M. Non-current assets and disposal groups held for sale or distribution Non-current assets (or groups of assets and liabilities for disposal) that are expected to be

recovered primarily through sale rather than through continuing use are classified as held for sale or distribution. This applies also to when the company is obligated to plan a sale that involves losing control over a subsidiary, whether or not the company will retain any rights not conferring control in the subsidiary after the sale. Immediately before their classification as held for sale or distribution, the assets (or components of a disposal group) are re-measured in accordance with the Group’s accounting policies. Thereafter, generally, the assets (or disposal group) are measured at the lower of their carrying amount or the fair value less selling costs. In subsequent periods, depreciable assets classified as held for sale or distribution are not periodically depreciated, and investments in associated companies classified as held-for-sale are not accounted for by the equity method. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to assets not in the scope of the measurement requirements of IFRS 5 such as: inventories, financial assets, deferred tax assets, assets of employee benefit plans and investment property measured at fair value, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurement are recognized in the statement of income. Gains are recognized up to the cumulative amount of a previously recorded impairment loss.

59



N. Employee benefits

1. Post-employment benefits The Group has a number of post-employment benefit plans. The plans are usually

financed by deposits with insurance companies or with funds managed by a trustee, and they are classified as defined contribution plans and as defined benefit plans.

(a) Defined contribution plans The Group’s obligations to make deposits in defined contribution plans are

recognized as an expense in the statement of income in the period during which the employees provided the services. Liabilities to make a deposit in a defined contribution plan that are payable more than 12 months from the end of the period in which the employees provided the service, are recognized at their present value.

(b) Defined benefit plans The Group’s net obligation relating to a defined benefit plan in respect of

post-employment benefits is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. This benefit is presented at its present value net of the fair value of the plan assets. The discount rate is the yield at the reporting date on government debentures denominated in the same currency, that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the “projected unit credit” method.

When the calculation results in an asset for the Group, an asset is recognized up to

the net present value of economic benefits available in the form of a refund from the plan or a reduction in future contributions to the plan. An economic benefit in the form of refunds or reductions in future contributions is considered available when it can be realized over the life of the plan or after settlement of the obligation.

All actuarial gains and losses arising from defined benefit plans are recognized in

the statement of income in the period in which they accrue. The Group offsets an asset relating to one benefit plan from the liability relating

to another benefit plan only when there is a legally enforceable right to use the surplus of one plan to settle the obligation in respect of the other plan, and there is intent to settle the obligation on a net basis or to concurrently realize the surplus of one plan and settle the obligation in the other plan.

60



N. Employee benefits (Cont.)

2. Other long-term employee benefits The Group’s net obligation in respect of long-term employee benefits other than

post-employment plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The amount of these benefits is discounted to its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on government debentures denominated in the same currency, that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed using the “projected unit credit” method. Actuarial gains or losses are recognized in the statement of income in the period in which they accrue.

3. Severance benefits Severance benefits are recognized as an expense when the Group is clearly obligated

to pay them, without any reasonable chance of cancellation, in respect of termination of employees, before they reach the normal retirement age according to a formal, detailed plan, or to provide retirement benefits as a result of a offer made in order to encourage voluntary retirement. The benefits given to employees upon voluntary retirement are charged when the Group proposes a plan to the employees encouraging voluntary retirement, it is expected that the proposal will be accepted and it is possible to reliably estimate the number of employees that will accept the proposal. If the benefits are payable after more than 12 months from the end of the reporting period they are discounted to their present value. The discount rate is determined based on the yield as at the date of the report on government debentures that are denominated in the same currency and have the same maturity date as the Group’s obligation.

4. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and

are expensed as the related service is provided or upon the actual absence of the employee when the benefit is not accumulated (such as maternity leave).

A liability is recognized for the amount expected to be paid under short-term cash

bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be reliably estimated.

In the statement of financial position the employee benefits are classified as current

benefits or as non-current benefits according to the time the liability is due to be settled.

61



N. Employee benefits (Cont.)

5. Share-based payment transactions The fair value on the date of the grant of share-based payment grants to employees is

charged as a salary expense with a corresponding increase in equity (in the retained earnings category) over the period in which the unconditional entitlement to the grants vests. The amount recorded as an expense in respect of share-based payment grants, which are contingent on vesting conditions that are service conditions or performance conditions that are not market conditions, are adjusted in order to reflect the number of options that are expected to vest. With respect to share-based payment grants that are contingent on conditions that are not vesting conditions or vesting conditions that are performance conditions, the Group takes these conditions into account when estimating the fair value of the equity instruments granted and, therefore, the Group recognizes an expense in respect of these grants without reference to whether such conditions are fulfilled.

The Company elected not to apply the IFRS provisions for share-based payments

granted prior to November 7, 2002 and that had not yet vested on the standard’s application date.

O. Provisions A provision is recognized if, as a result of a past event, the Group has a present legal or

constructive obligation that can be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. The provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability. The book value of the provision is adjusted every period to reflect the passage of time and is recognized as financing expenses.

1. Warranty A provision for warranties is recognized when the underlying products or services are

sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

2. Legal claims A provision for claims is recognized if, as a result of a past event, the Company has a

present legal or constructive obligation and it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the amount of obligation can be estimated reliably. When the value of time is material, the provision is measured at its present value.

62



O. Provisions (Cont.)

3. Provision for extensive restoration A subsidiary has a legal obligation to make extensive restoration of Highway 431. The

company has recognized a provision for extensive restoration over the operating period of the Highway up to restoration date, after taking into the time value factor.

4. Provision for completion The Group recognizes provisions for completion including the anticipated costs to

complete the project.

Indemnification from an insurance company in respect of outstanding claims against the Company required for elimination of a provision for the claim is recognized where it is virtually certain that the indemnification will be received if the Company settles the obligation. The indemnification is recognized as an asset in the statement of financial position and does not exceed the amount of the provision in respect thereof.

P. Revenues

1. Sale of goods Revenue from the sale of goods is measured at the fair value of the consideration

received or receivable, net of returns, trade discounts and volume rebates. When the credit period is short and constitutes the accepted credit in the industry, the future consideration is not discounted.

In cases where the credit period is longer than the usual credit period in the industry,

the Group recognizes the future consideration discounted through use of the customer’s discount rate. The difference between the fair value and the denominated amount of the future consideration is recognized as interest income over the unusual credit period.

The Group recognizes the revenue when there is convincing evidence (generally

performance of the sale agreement) that the significant risks and rewards from ownership of the merchandise are transferred to the buyer, receipt of the consideration is expected, it is possible to reliably estimate the chance that the goods will be returned and the costs that were incurred or will be incurred for the transaction can be reliably estimated, when the management has no ongoing involvement in the goods and the revenue can be reliably estimated. If it is expected that a discount will be granted and the amount thereof can be reliably estimated, the discount is deducted from the revenue from sale of the merchandise.

63



P. Revenues (Cont.)

1. Sale of goods (Cont.) The timing of the transfer of the risks and rewards changes in accordance with the

specific conditions of the sale contract. Regarding sale of products in Israel, transfer of the existing risks and rewards usually takes place when the merchandise reaches the customer’s warehouse, however regarding certain international shipments the transfer takes place when the merchandise is loaded on the transportation vehicles of the party making the delivery.

2. Sale of real estate and residential units Revenue from a sale of inventory of real estate and residential units is measured at the

fair value of the consideration received or receivable. The Group recognizes revenue when the significant risks and rewards of ownership are transferred to the buyer, receipt of the consideration is expected, the associated costs and possible return of the inventory can be reliably estimated, there is no continuing management involvement with the inventory, and the amount of revenue can be reliably measured.

Regarding the sale of residential units, generally transfer of the risks and rewards of

ownership occurs upon delivery of the unit to the purchaser. In combination transactions wherein the Group provides construction services to the

landowner in exchange for receipt of the land, the Group recognizes income in accordance with the provisions of IAS 11 using the percentage of completion method, in cases where there is a continuing transfer of risks and rewards in respect of the work performed. The percentage of completion as stated is determined based on the rate of the contract costs incurred up to the examination date to the estimate of the total contract costs to be incurred.

3. Services Revenue from services rendered is recognized in the statement of income in

proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

4. Construction contracts Revenues and expenses from construction contracts are recognized in the statement of

income, in proportion to the stage of completion of the contract, where it is possible to reliably estimate its results. Contract revenues includes the initial amount included in the contract plus any amounts relating to changes in the contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and such revenue can be reliably measured.

64



P. Revenues (Cont.)

4. Construction contracts (Cont.) The stage of completion is assessed by reference to surveys of work performed. When the outcome of a construction contract cannot be reliably estimated, contract

revenue is recognized only to the extent of the contract costs incurred where it is reasonable that they will be recovered. An expected loss on a contract is recognized immediately in the statement of income.

5. Commissions Where the Group operates in the framework of the transaction as an agent and not as

the owner, revenue is recognized in the amount of the net commission. 6. Rental income Rental income from investment property is recognized in the statement of income on a

straight-line basis over the term of the lease. In operating lease arrangements wherein at the beginning of the lease period lease rentals are not received, or reduced lease rentals are received, and where additional benefits are granted to the lessee, the Group recognizes income on a straight-line basis over the term of the lease.

7. Concession contracts Revenue relating to construction services under a service concession arrangement is

recognized based on the stage of completion of the work performed, consistent with the Group’s accounting policy for recognition of revenue on construction contacts (see 4., above). Revenue from provision of operating or other services is recognized in the period in which the services are provided by the Group. When the Group provides more than one type of service in a service concession arrangement the consideration received is allocated by reference to the relative fair values of the services provided.

Q. Government grants Government grants are recognized initially when there is reasonable assurance that they

will be received and the Group will comply with the conditions entitling their receipt. Grants that compensate the Group for expenses borne by the Group are presented as a reduction of the related expense. Government grants received for purposes of acquisition of an asset, are presented as a deduction from the related asset and are recorded in the statement of income on a systematic basis over the useful life of the asset.

65



R. Leases Payments made under operating leases are recognized in the statement of income on a

straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense on a straight-line basis, over the term of the lease.

Minimum lease payments made under financing leases are apportioned between the

financing expense and reduction of the outstanding liability. The financing expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency is clarified.

Determination whether an arrangement includes a lease: At the beginning of the arrangement or at the time of its re-examination, the Group

determines whether an arrangement is a lease or includes a lease. A specific property is subject to a lease if existence of the arrangement depends on use of the property or specific properties. An arrangement transfers a right to use the property if it transfers the right to control use of the property.

Payments and other consideration required under the arrangement are separated at the

beginning of the arrangement or at the time of re-examination of the payments for the lease and the other components based on their relative fair values.

Regarding a financing lease, if it is not practical to separate the payments in a reliable

manner, the Group recognizes an asset and a liability in an amount equal to the fair value of the base asset. In succeeding periods, the liability is reduced upon execution of the payments and an embedded financing expense is recognized in connection with the liability using the purchaser’s incremental interest rate.

S. Financing income and expenses Financing income includes interest income on amounts invested (including in respect of

available-for-sale financial assets), dividend income, gains on the sale of available-for-sale financial assets, changes in the fair value of financial assets at fair value through the statement of income, exchange rate gains and gains on hedging instruments that are recognized in the statement of income. Interest income is recognized as it accrues in the statement of income, using the effective interest method. Dividend income is recognized in the statement of income on the date the Group receives the right to the payment. If the dividend is received in respect of publicly-traded shares, the Group recognizes the dividend income on the ex-dividend date.

The financing income also includes financing income from the financial asset under

concession agreements in accordance with the rates of return determined.

66



S. Financing income and expenses (Cont.) Financing expenses include interest expenses on loans received, changes in time value of

provisions, changes in the fair value of contingent consideration, losses on sale of assets classified as available-for-sale, changes in the fair value of financial assets at fair value through the statement of income, impairment losses recognized on financial assets (except losses in respect of impairment of trade receivables presented as part of administrative and general expenses), and losses on derivative financial statements instruments recognized in the statement of income. Credit costs that are not capitalized to qualifying assets, are recognized in the statement of income using the effective interest method.

Exchange rate gains and losses are reported on a net basis as financing income or financing

expenses, depending on the fluctuations in the exchange rate, and depending on their position (gain or loss on a net basis).

T. Taxes on income Taxes on income include current and deferred taxes. Taxes on income are recorded in the

income statement unless the tax stems from a business combination or they are recognized directly in shareholders’ equity on in other comprehensive income to the extent they derive from items recognized directly in shareholders’ equity on in other comprehensive income.

The current tax is the amount of tax expected to be paid (or received) on the taxable

income for the year, calculated using the applicable tax rates in accordance with the laws enacted or substantively enacted at the reporting date.

Recognition of deferred taxes is based on temporary differences between the carrying

amounts of assets and liabilities for financial reporting purposes and the amounts thereof for tax purposes.

The Group does not recognize deferred taxes for the following temporary differences: the

initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that down not affect either the accounting or the taxable income, and differences relating to investments in subsidiaries, jointly-controlled entities and associated companies, to the extent that it is probable that they will not reverse in the foreseeable future and to the extent that the Group controls the reversal date of the difference.

The deferred taxes are measured at the tax rates expected to apply to the temporary

differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

The Company offsets deferred tax assets and liabilities if there is a legally enforceable

right to offset current tax assets and liabilities, and they relate to the same taxable income taxed by the same taxing authority on the same taxable entity, or to different tax entities, where they intend to settle current tax assets and liabilities on a net basis or the tax assets and liabilities will be realized concurrently.

67



T. Taxes on income (Cont.) A deferred tax asset is recognized to the extent that it is probable that future taxable

income will be available against which the temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

The Group may be required to pay additional tax if dividends are distributed between

Group companies. This additional tax was not included in the financial statements, since the policy of the Group companies is to not distribute a dividend that creates an additional tax liability for the recipient company in the foreseeable future. In cases wherein an investee company is expected to distribute a dividend from income involving additional tax for the Company, the Company creates a tax provision in respect of the additional tax it may be required to pay in respect of the dividend distribution.

Additional income taxes that arise from the distribution of dividends by the Company are

recognized at the same time that the liability to pay the related dividend is recognized. Deferred tax in respect of intercompany transactions in the consolidated financial

statements is recorded according to the tax rate applicable to the buying company. U. Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate

major line of business or geographical area of operations that has been disposed of or is held for sale or distribution, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative figures in the income statement are restated as if the operation had been discontinued from the start of the earliest comparative period.

V. Income (loss) per share The Group presents basic and diluted income (loss) per share data for its ordinary shares.

The basic income (loss) per share is calculated by dividing the income or loss attributable to the Group’s ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. The diluted income (loss) per share is determined by adjusting the income or loss attributable to ordinary shareholders and the weighted-average number of ordinary shares outstanding for the effect of all dilutive potential ordinary shares, which include convertible notes, share options and share options granted to employees.

W. Segment reporting An activity segment is a component of the Group meeting the following three conditions:

1. It engages in business activities from which revenues are to be produced and with respect to which expenses are to be incurred, including revenues and expenses relating to transactions between the Group companies;

68



W. Segment reporting (Cont.)

2. The operating activities are reviewed on a regular basis by the Group’s main decision makers in order to make decisions regarding resources to be allocated to it and in order to evaluate its performance; and

3. There is available financial information in respect thereof.

X. Transactions with controlling interest Assets and liabilities included in a transaction with a controlling interest are measured at

fair value on the date of the transaction. As the transaction is on the equity level, the Company includes the difference between the fair value and the consideration from the transaction in its shareholders’ equity.

Y. Service concession agreements In the framework of service concession arrangements with government bodies for the

construction and operation of infrastructures in consideration for fixed and variable payments, the Group recognizes a financial asset commencing from the start of construction of the project where it has an unconditional right to receive cash or another financial asset in exchange for the construction or the upgrade. The financial asset reflects the unconditional payments receivable in the future from the public entity and bears interest at an appropriate rate determined based on the customer’s risk. In addition, the Company recognizes an intangible asset the fair value of the construction services with respect to the facility in excess of the amount guaranteed by the customer (the financial asset as stated above), reflecting its right to collect usage fees from the public with respect to the facility.

Financial assets as stated are measured on the initial recognition date at fair value and in

subsequent periods based on amortized cost. Intangible assets as are measured on the initial recognition date at fair value and in

subsequent periods based on cost, including capitalized credit costs and less depreciation, amortization and losses from declines in value.

If the payment received by the Group for the construction services is composed partly of a

financial asset and partly of an intangible asset, the Group treats each component of the consideration separately. The consideration received or where there is a right to receive it in respect of the two components is initially recognized at fair value.

Z. New standards and interpretations not yet adopted

– As part of the Improvements to IFRS Project 2010, in May 2010 the IASB published and approved 11 amendments to IFRS and one interpretation covering a variety of accounting issues. Most of these amendments will apply for periods commencing on or after January 1, 2011, with the possibility for early adoption, subject to the conditions detailed for each amendment.

69



Z. New standards and interpretations not yet adopted (Cont.)

– (Cont.) Set forth below is detail of the amendments that are likely to be relevant to the

Company, which may have an impact on the financial statements:

– Amendment to IAS 34, Financial Reporting for Interim Periods, Significant Events and Transactions (hereinafter – “the Amendment”). Pursuant to the Amendment, the list of events and transactions requiring disclosure in interim-period financial statements was expanded, such as recognition of a loss from decline in value of financial assets and a change in the classification of financial assets as a result of a change in their designation or use. In addition, the materiality threshold was eliminated from the minimum disclosure requirements existing in the present standard prior to the Amendment. The Amendment applies to periods commencing on or after January 1, 2011.

– Amendment to IFRS 7, Financial Instruments: Disclosures (hereinafter – “the

Amendment”). Pursuant to the Amendment, an express declaration was added that the interaction between the qualitative and the quantitative disclosures permits users of the financial statements to evaluate in the best possible manner the Company’s exposure to risks deriving from financial instruments. In addition, the section stating that quantitative disclosures are not required where the risk is negligible was removed. Further, certain disclosure requirements regarding credit risk were revised and others were removed. The Amendment applies to periods commencing on or after January 1, 2011. Early application is permissible with disclosure.

– Amendment to IFRS 9 (2010), Financial Instruments (hereinafter – “the Standard”).

This Standard is one of the stages in a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (hereinafter – IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets and financial liabilities. In accordance with the Standard, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with the Standard, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other debt assets are measured at fair value through the statement of income. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host. Instead, the entire hybrid contract is assessed for classification using the principles above. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in the statement of income.

70




– (Cont.) Nevertheless, the Standard allows an entity on the initial recognition of an equity

instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to the statement of income at a later date, not even upon sale of the asset. Dividends on equity instruments where revaluations are measured through the other comprehensive income are recognized in the statement of income unless they clearly constitute return of an initial investment.

The Standard generally preserves the instructions regarding classification and

measurement of financial liabilities that are provided in IAS 39. Nevertheless, unlike IAS 39, IFRS 9 (2010) requires as a rule that the amount of change in the fair value of financial liabilities designated at fair value through the statement of income, other than loan grant commitments and financial guarantee contracts, attributable to changes in the credit risk of the liability be presented in other comprehensive income, with the remaining amount being included in the statement of income. However, if this requirement increases an accounting mismatch in profit or loss, then the whole fair value change is presented in the statement of income. Amounts thus recognized in other comprehensive income may never be reclassified to profit or loss at a later date, not even upon sale of the asset. The new Standard also eliminates the exception that permitted measuring at cost derivatives that are liabilities relating to an unquoted equity instrument the fair value of which cannot be reliably measured and that are to be settled by delivery of such an instrument. Such derivatives are to be measured at fair value.

The Standard applies to annual periods commencing on January 1, 2013 or thereafter.

Early application is possible, subject to provision of disclosure and concurrent adoption of the amendments to other IFRS as detailed in the appendix to the Standard. The Standard is to be applied retroactively, except for certain relief provisions in accordance with the transitional rules set forth in the Standard. In particular, if an entity chooses to apply the Standard prior to January 1, 2012, it is not required to restate the comparative figures.

The Group has not yet commenced examining the impacts of adoption of the Standard

on the financial statements. – IAS 24 (2009) Related Party Disclosures (hereinafter – “the Standard”). The new

standard includes changes in the definition of a related party and changes with respect to disclosures required by entities related to government. The Standard is to be applied retrospectively for annual periods beginning on or after January 1, 2011. The Group is in the process of reassessing its relationships with related parties for the purpose of examining the effects of adopting the Standard on its financial statements.

71




– Amendment IFRIC 14, Advance Deposits on Account of Minimum Deposit Requirements. As part of the Amendment it was provided that when measuring plan assets with respect to defined benefit plans, advance deposits on account of minimum deposit requirements will be included as part of the available economic benefits in the form of refunds from the plans or reduction of the future deposit to the plan. The interpretation is to be applied retroactively to annual reporting periods commencing on or after January 1, 2011. At this stage, Group management is not able to estimate the impact of implementation of the interpretation on its financial position and results of operations.

– Amendment IAS 32, Presentation of Financial Instruments. As part of the Amendment it was provided that derivative instruments issued as part of an issuance of rights to existing shareholders permitting the holder to acquire a fixed number of equity instruments in exchange for a fixed amount of cash or another financial instrument, denominated in a currency other than the Company’s functional currency, are to be classified as equity instruments provided the rights were offered to all holders of the entity’s equity instruments, in accordance with the rates of their holdings. The Amendment is to be applied retroactively to annual reporting periods commencing on or after January 1, 2011. At this stage, Group management is not able to estimate the impact of implementation of the Amendment on its financial position and results of operations.

– Amendment IAS 27 (Amended) Consolidated and Separate-Company Financial Statements. As part of the Amendment the transitional rules of amendments to other standards as a result of adoption of IAS 27 (Amended) “Consolidated and Separate-Company Financial Statements” were clarified – namely, Amendment IAS 21 “Impact in Changes in Foreign Currency Exchange Rates”, IAS 28 “Investments in Associated Companies”, and IAS 31 “Rights in Joint Transactions”, and it was provided that these amendments to the other standards are to be applied prospectively commencing from the date of adoption of the provisions of IAS 27 (Amended). The Amendment is to be applied to annual reporting periods commencing on or after January 1, 2011. Early application is permissible. At this stage, Group management is not able to estimate the impact of implementation of the Amendment on its financial position and results of operations.

– Amendment IAS 12, Taxes on Income. As part of the Amendment it was provided that investment property measured at fair value in accordance with the provisions of IAS 40 shall be viewed as if return of the value thereof in the books is by means of sale. Accordingly, deferred taxes will be calculated in accordance with the tax rates and basis that will apply at the time of sale of the asset. The said assumption may be rebutted in a case where the investment property is depreciable and is held pursuant to a business model the purpose of which is significant utilization over time of the economic benefits embedded in the investment property not be means of sale (but rather by means of use). The Amendment is to be applied retroactively to annual reporting periods commencing on or after January 1, 2012. Early application is permissible. At this stage, Company management is not able to estimate the impact of implementation of the standard on its financial position and results of operations.

72


At December 31, 2010 Note 4 – Determination of Fair Value As part of its accounting policies and disclosure requirements, the Group is required to determine

the fair value of both financial and non-financial assets and liabilities. The fair values have been determined for purposes of measurement and/or disclosure based on the methods described below. Additional information regarding the assumptions used in determining the fair values is disclosed in the notes relating to that asset or liability.

A. Property, plant and equipment The fair value of property, plant and equipment recognized in a business combination is

based on market values. The market value of property, plant and equipment is an estimate of the amount at which the property, plant and equipment would be exchanged on the estimation date in a transaction between a willing buyer and a willing seller acting wisely. The market value of the items located in the plants, furniture and equipment as well as facilities is based on quoted prices of similar items, if available, and replacement costs where quotes as stated are not available. Estimates of depreciated replacement costs take into account adjustments in respect of physical erosion and functional and economic obsolescence of the property, plant and equipment item.

B. Intangible assets The fair value of customer accounts acquired in a business combination is determined

using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.

The fair value of other intangible assets is based on the discounted cash flows expected to

be derived from the use and eventual sale of the assets. C. Investment property (including investment property under construction) The Group estimates the value of its portfolio of investment property at least once a year

and at any time there is an indication of a significant change in value, by means of an external, independent appraiser having appropriate recognized professional qualifications and up-to-date experience in connection with location and type of property the valuation is being made. The fair values are based on market values. The market value of investment property is an estimate of the amount at which it would be sold on the valuation date in a transaction between a willing buyer and a willing seller acting wisely.

Absent current prices in an active market, the valuations are made taking into account an

estimate of the cash flows expected to be received from rental of the property. Estimation of the value of the real estate is based on the net annual cash flows discounted using a rate of return reflecting the specific risks embedded in the net cash flows. Where rental agreements actually exist, with respect to which the payments are significantly different than the projected rental payments, an adjustment is made in order to reflect the actual rental payments in the contract period.

73


At December 31, 2010 Note 4 – Determination of Fair Value (Cont.)

C. Investment property (including investment property under construction) (Cont.) Regarding investment property under construction, its fair value is estimated by means of

making an assessment of the fair value of the investment property after completion of its construction, less the present value of the estimated construction costs expected to be incurred for purposes of its completion and less a developer’s profit, while taking into account a rate of return that corresponds to the relevant risks characterizing the investment property.

In determination of the fair value, account was taken of, among other things, the discount

rates used for discounting the future cash flows, the length of the lease period, the strength of the tenants, the extent of the vacant areas in the property, the length of the lease contracts and period of time necessary to rent out the buildings after they are vacated, the length and extent of the vacant areas of the properties, adjustment of the lease rentals in properties wherein the rents exceed the market rents (over-rented) or the rents are less than the market rents (under-rented), consequences stemming from investments required for development, completion of the project and/or maintenance of the currently existing situation, and deduction of uncovered operating costs in cases where the properties are managed by management companies having deficits.

Where relevant, the valuations reflect the type of tenants actually renting the properties or

responsible for fulfilling the rental obligations or those likely to occupy the rented premises after rental of vacant premises, including, a general estimate with respect to the reliability of their credit, allocation of the responsibility between the Group and the tenant regarding maintenance and insurance of the property, and the remaining economic useful life of the real estate.

D. Inventory The fair value of inventory acquired in a business combination is determined based on an

estimate of the selling price of the inventory in the ordinary course of business less an estimate of the completion and selling costs, as well as a reasonable margin based on the efforts required to complete and sell the inventory.

E. Investments in shares and debt instruments The fair value of financial assets measured at fair value through the statement of income,

investments held to maturity and financial assets classified as “available-for-sale” is determined with reference to their average quoted closing bid price on the date of the report. If there is no quoted price, the fair value is measured taking into account data observed in the market (such as use of an interest curve), and by means of estimation techniques including discounting of cash flows, while taking into account the projected future cash flows and the customary discount rate in the market.

For additional information with respect to the hierarchy of fair value – see Note 41

“Financial Instruments”.

74



F. Trade and other receivables The fair value of trade and other receivables, excluding construction work in progress, but

including receivables pursuant to concession agreements, presented for disclosure purposes, is determined based on the present value of future cash flows, discounted at the market rate of interest at the reporting date. In periods subsequent to the initial recognition, the fair value of trade and other receivables is calculated for disclosure purposes only, as well as for measurement purposes as part of business combinations.

G. Derivatives The fair value of forward exchange contracts and foreign currency options is based on their

quoted price, if available. If a quoted price is not available, then the fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government debentures), whereas regarding options, the fair value is estimated according to the Black and Scholes formula.

The fair value of interest swap contracts is based on quotes from banks/brokers. The

reasonableness of the quotes is examined by means of discounting the estimated future cash flows in accordance with the terms and the length of the period up to redemption of each contract, while using market interest rates of a similar instrument as at the measurement date.

The fair value of the Company’s liability to issue shares to the controlling shareholder in

an amount equal to the “partial linkage differences” on the amount of the “additional investment”, as described in Note 1C, is based on a model for pricing options. The value of the options is estimated as the maximum difference between the value of the shares on the exercise date versus the exercise price (NIS 100 million linked in part to the CPI) and zero. In addition, the “partial linkage differences” were calculated at every date based on simulation of the future price of the share and the rate of increase in the CPI. Deducted from the linkage differences are payments of the controlling shareholder should he decide to exercise the option.

The fair value of the derivative reflects the credit risk of the parties to the instrument and

therefore the valuation method takes into account the credit risk of the parties to the derivative when appropriate.

For additional information with respect to the hierarchy of fair value – see Note 44

regarding “financial instruments”. H. Non-derivative financial liabilities The fair value, which is determined for disclosure purposes, is based on the present value

of the future cash flows in respect of the principal and interest components, discounted based on the market interest rate as at the date of the report. The market interest rate in respect of financing lease contracts is determined with reference to similar lease contracts.

75



I. Share-based payment transactions The fair value of employee share options and of share appreciation rights is measured

using the Black and Scholes model. The model’s assumptions include the share price on the measurement date, exercise price of the instrument, expected volatility (based on a weighted-average of the historic volatility of the Company’s shares over the forecasted period of the options adjusted for changes expected due to publicly available information), the expected life of the instruments (based on past experience and the general behavior of the option holders), expected dividends, and the risk-free interest rate (based on government debentures). Service and non-market performance conditions are not taken into account in determining the fair value.

J. Contingent consideration in business combination The fair value of contingent consideration is calculated at the time of the business

combination using the income approach based on the expected payment amounts and their associated probabilities (the expected value taking into account the probability of the payments). The contingent consideration is to be paid over the long run and, therefore, it is recognized based on present value, using the market interest rate at the reporting date. In subsequent periods, the fair value of contingent consideration classified as a financial liability is measured in the same manner at each reporting date.

76


At December 31, 2010 Note 5 – Discontinued Operations

A. In December 2010, the Group sold 50% of its holdings in Africa Israel Hotels Ltd. (hereinafter – “Africa Hotels”) (see also Note 7J(1)). As at December 31, 2009, the segment was not a discontinued operation and was not classified as “held for sale”. The comparative figures for 2008 and 2009 were restated in the statement of income, in order to present separately the discontinued operations from the continuing operations.

Regarding exit from the consolidation in the statement of financial position – see Note 6.

For the year ended December 31 2010 2009 2008 In thousands of NIS

Results of discontinued operations Revenues 373,936 388,766 377,837 Expenses (431,246) (478,900) (404,836) Loss before taxes on income (57,310) (90,134) (26,999) Tax benefit (taxes on income) (20) 19,692 4,656 Loss after taxes on income (57,330) (70,442) (22,343) Gain on sale of discontinued operations 257,309 – – Income (loss) for the year 199,979 (70,442) (22,343) Allocated to: The Company’s owners 199,981 (70,429) (22,335) Holders of rights not conferring control (2) (13) (8) Income (loss) for the year 199,979 (70,442) (22,343) Basic and diluted income (loss) per share (in

NIS) 2.11 (1.27) (0.42)

Cash flows from discontinued operations Net cash provided by operating activities 67,649 40,854 53,038 Net cash provided by (used in) investing activities (18,914) 63,650 (47,065) Net cash used in financing activities (68,427) (170,992) (165,756) Net cash used in discontinued operations (19,692) (66,488) (159,783)

77


At December 31, 2010 Note 5 – Discontinued Operations (Cont.)

B. In February 2011, Danya Cebus Ltd. signed an agreement with the Tashtiot Fund for sale of 75% of its holdings in the shares of Netivei Hayovel Ltd., constituting its concessionaire segment (see also Note 46(E)) and, accordingly, the balances relating to Netivei Hayovel were reclassified to the categories “assets held for sale” and “liabilities held for sale” – see Note 14. As at December 31, 2009, the segment was not a discontinued operation and was not classified as “held for sale”. The comparative figures for 2008 and 2009 were restated in the statement of income, in order to present separately the discontinued operations from the continuing operations. The management of Danya Cebus Ltd. committed to a plan for sale of the segment.

For the year ended December 31 2010 2009 2008 In thousands of NIS

Results of discontinued operations Revenues 138,403 154,771 134,386 Expenses (122,125) (134,834) (129,419) Income before taxes on income 16,278 19,937 4,967 Taxes on income (2,930) (2,923) (1,242) Net income for the year 13,348 17,014 3,725 Basic and diluted income per share (in NIS) 0.14 0.31 0.07 Cash flows from discontinued operations Net cash provided by (used in) operating activities 51,422 326,324 (364,620) Net cash used in investing activities (714) (74,584) – Net cash provided by (used in) financing activities (35,423) (243,382) 365,420 Net cash provided by discontinued operations 15,285 8,358 800

C. Set forth below is combined data for discontinued operations:

For the year ended December 31 2010 2009 2008 In thousands of NIS Africa Israel Hotels 199,979 (70,442) (22,343) Netivei Hayovel 13,348 17,014 3,725 Net income (loss) for the year 213,327 (53,428) (18,618)

For the year ended December 31 2010 2009 2008 In NIS Africa Israel Hotels 2.11 (1.27) (0.42) Netivei Hayovel 0.14 0.31 0.07 Basic and diluted income (loss) per share 2.25 (0.96) (0.35)

78


At December 31, 2010 Note 6 – Acquisition and Sale of Subsidiaries and Minority Interests

A. Exit from the consolidation As described in Note 5A, in December 2010, the Group sold 50% of its holdings in Africa

Israel Hotels. The impact of the sale on the Group’s assets and liabilities as at the date of the sale is shown below:

Total NIS ‘000 Net assets eliminated 140,246 Recording of investment in investee company (180,000) Recording of loans to investee company (37,555) Recording of balance of receivables in respect of sale of company (20,000)

(97,309) Gain on sale 257,309

Total proceeds for the shares 160,000

B. Acquisition and sale of rights not conferring control Regarding decline in the rate of holdings in AFI Development and Africa Properties, as

part of the debt arrangement – see Note 1C. In addition, during the year, minority interests were acquired and sold in insignificant amounts that gave rise to negligible changes in the ownership percentages in the subsidiaries.

Note 7 – Group Activities and Significant Events

A. Real Estate Activities Overseas

(1) Real Estate Activities in the United States

a. The Company’s operations in the USA are conducted through a subsidiary, AI Holdings (USA) Corp. (hereinafter – “Africa USA”) either independently or jointly with local partners. The operations in the USA are concentrated in New York and Miami, and include construction of apartments for sale or rent, and construction and lease of commercial and office areas.

As at the date of the report, the Company has reserves of land, work in progress,

fixed assets, investment property, and investment property under construction in the USA having a monetary scope of about NIS 2 billion (2009 – NIS 2.3 billion).

During the year, the Company recorded income from increase in value of its

properties in the USA in the total net amount of about NIS 0.2 billion (2009 – the Company recorded a loss of about NIS 0.9 billion).

79


At December 31, 2010 Note 7 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(1) Real Estate Activities in the United States (Cont.)

b. In April 2007, a wholly owned subsidiary of the Company (indirectly) (hereinafter – “the Subsidiary”), signed an agreement for acquisition of all the rights in “The New York Times Building”, a building which includes office and commercial space, located in Times Square, in Manhattan, New York.

The bank financing for acquisition and renovation of the property in the aggregate

amount of $711 million was provided by a foreign bank in several frameworks, at an average interest rate of Libor + 2.5%, for a period of three years. The loan proceeds were used to pay the balance of the acquisition price, finance the construction work on the property and pay expenses accompanying the financing. The loan is secured primarily by a first priority lien on the property, as well as on the rights in the subsidiary and the various property companies.

Africa USA did not comply with financial covenants determined in the lending

agreements signed in connection with this property with respect to minimum shareholders’ equity and regarding the minimum liquidity ratio of Africa U.S.A. in such a manner that the lenders have the right to demand immediate repayment of all the loans, at different levels, provided for acquisition and renovation of the property.

In December 2009, Africa U.S.A. and the subsidiary signed a number of

agreements to reorganize their rights and obligations in connection with the Times Building and the financing provided for it (hereinafter in this Section together – “the Agreement”).

The transaction that is the subject of the Agreement was completed in 2009 and as

a practical result the balance of the financing in connection with the Times Building was reduced from the net amount of about $652 million (as at the date of the Agreement, the balance of the loan in this project amounted to about a gross $711 million, against which there was a reserve balance of about $59 million received in the past by the Times Building Company and not yet used), to the amount of about $266 million (as at the date of the transaction) (plus $72.3 million to be provided as a revolving credit line as detailed below), against a cash payment of $30 million ($25 million of this cash balance was transferred to the Times Building by the Company, and the balance – by one of the lenders who became a partner in the Times Building); the balance of the financing is to be repaid at the end of 5 years and was reorganized, and the guarantees provided by Africa USA to the lenders in connection with the original financing were cancelled and/or reduced in the estimated amount of $70 million to $90 million; in addition, the different lenders were granted various rights: about half of the capital rights in the Times Building Company, an option to acquire areas in the Times Building, a contingent liability for payment of $2.5 million (the first ones received by Africa USA from The Clock Tower), 5% of the rights of Africa USA in The Clock Tower, and a subordinated liability certificate in the amount of $28 million – all as detailed below:

80





b. (Cont.)

1. The senior mortgage loan provided by one of the lenders as part of the financing for this project (hereinafter – “the Senior Lender”) in the amount $325 million, was reduced by $59 million that was paid to the Senior Lender out of a reserve balance previously held by the Senior Lender and was not paid to the Times Building Company. The balance of this senior loan was replaced by a new loan secured by a lien on the Times Building (with no right of recourse to Africa USA, except in extraordinary circumstances), in the principal amount of about US$266 million, for a period of 5 years. The financial conditions of the new loan were relaxed compared with those included in the original senior loan. The new loan is composed of two parts: one, in the amount of about $106 million, bearing variable annual interest at the rate of Libor + 4.75%; and the other in the amount of about $160 million, bearing fixed annual interest at the rate of 6.85%. In addition, the Senior Lender was granted an option to acquire about 6,700 square meters of areas in the Times Building not designated for commercial use or luxury residential units and that are not leased out for an aggregate consideration of about $17.5 million. If these areas are sold prior to the Senior Lender exercising its option, the Senior Lender will have an option to (a) acquire about 1,480 square meters of the areas designated for luxury residential units, or (b) to receive a cash payment out of the sales proceeds, as stated, in exchange for the amount of about $17.5 million.

In addition, the Senior Lender provided a revolving credit line in the

maximum amount of about $72.3 million for payment of the financing, maintenance and building renovation costs.

2. Two of the mezzanine loans (out of four mezzanine loans granted as part of

the financing for this project) in the cumulative amount of about $79 million, were acquired by the Times Building Company in exchange for about $10 million and provision of a contingent liability for payment of the first $2.5 million received from exercise of the rights of Africa USA in The Clock Tower.

81





b. (Cont.)

3. The third mezzanine loan in the amount of $79 million was converted (upon execution of an investment of $5 million in the Times Building Company by this lender (hereinafter – “the Lender Partner”)) to 50% of the preferred equity rights in the Times Building in the amount of about $50 million that was granted to the Lender Partner (Africa USA was granted similar equity rights but with relatively inferior distribution rights compared with the Lender Partner) and 49.9% of the common equity rights in the Times Building Company. As part of the Agreement, arrangements were made for joint management of the Times Building Company, among other things, through a committee including three representatives on behalf of Africa USA and three representatives on behalf of he Lender Partner. Subject to the authorities of management committee, as stated, Africa USA remained the managing shareholder of the Times Building Company.

4. A second priority loan and a fourth mezzanine loan (that were both provided

by the same lender) in the cumulative amount of about $228 were acquired by the Times Building Company in consideration of a payment of $20 million and a grant of participation rights at the rate of 5% of the distributions received from Africa USA from The Clock Tower. In addition, this lender was issued a subordinated liability note in the amount of $28 million accruing annual interest at the rate of 8%, that is to be repaid only after the senior loan is repaid and after full payment of part of the preferred equity rights of Africa USA in the Times Building Company.

Subsequent to the date of the statement of financial position, the Times

Building Company acquired the subordinated liability note, in exchange for $1.7 million. This transaction is not expected to have an impact on the Group’s consolidated financial statements.

5. As part of the Agreement, a guarantee provided by Africa USA to the various

mezzanine lenders for payment in the overall amount of about $60 million was cancelled. In addition, in the estimation of Africa USA, the extent of its exposure in respect of the carry guarantee it provided to the lenders to assure financing of the operating and financing expenses of the Times Building, will be reduced from the estimated amount of between $20 million and $30 million to the estimated amount of between $7 million and $9 million.

82





b. (Cont.) Africa USA and the Lender Partner intend to act to change the zoning of the

Times Building, which is presently zoned mainly for use as office space and partly for commercial use, in order to increase the commercial space in the building (the underground level and the first 4 floors in the Times Building), conversion of the office space on floors 5 through 11 into a hotel and conversion of the office space on the upper 4 floors to luxury apartments.

For purposes of implementation of the Agreement’s provisions and financing

acquisition of part of the loans, as described above, the Company transferred the amount of $25 million in cash to Africa USA.

As a result of implementation of the Agreement’s provisions, that is granting of

the rights in the Times Building Company to the Lender Partner, reduction of the senior debt and acquisition of the mezzanine loans, Africa USA and the Lender Partner hold jointly all the rights in the Times Building Company, and Africa USA recorded income of about $383 million in its financial statements for 2009 in the financing income category. Furthermore, the rate of Africa USA’s exposure in respect of guarantees it provided, as described above, was reduced in the estimated amount of between $70 million and $90 million. In addition, due to the decline in the rate of holdings of Africa USA in the Times Building Company and the joint management thereof together with the Lender Partner, this company ceased being consolidated in the financial statements of Africa USA (or in the Company’s financial statements) and, accordingly, the balance of the debt in respect of the Times Building is no longer consolidated in the financial statements of Africa USA (or in the Company’s financial statements), which had a favorable impact on Africa USA’s compliance with the financial conditions it undertook vis-à-vis the various lenders.

c. In December 2007, the Company, through foreign subsidiaries, entered into an

agreement for sale of their rights in an undeveloped real estate property in Miami, in the United States, known as “Block 42”, for an aggregate consideration of $88.7 million, subject to possible adjustments on the closing date of the transaction.

According to this agreement, as amended the amount of $18 million was paid to

the Company on account of the consideration (hereinafter – “the Deposit”). In January 2009, a notice was received on behalf of the purchaser whereby

circumstances occurred, among other things, as those defined by it as “an act of G-d”, which confer upon it the right to retract its obligation to complete the transaction and to cancel the transaction, as well as to return of the deposit amounts it provided in connection with the above-mentioned transaction.

83





c. (Cont.) Further to that stated above, in August 2009, a compromise agreement was signed

between the seller and the purchaser including, among other things, the following agreements:

– The transaction price was reduced to about $39 million. – The purchaser made an additional deposit with the sellers of about $1 million

(hereinafter – “the Additional Deposit”), which will also be recorded on the closing date of the transaction on account of the transaction consideration. The amount of the Additional Deposit will not be returned to the purchaser unless the sellers breach their obligation to transfer ownership of the property sold.

– It was agreed that closing of the transaction will take place on September 14, 2009. Nonetheless, the purchaser is entitled to give notice of postponement of the closing date of the transaction to October 14, 2009 subject to deposit of a further sum of $1 million as a deposit in the hands of the seller (this amount as well will not be returned to the purchaser unless the sellers breach their obligation to transfer ownership of the property sold), along with payment of a reimbursement of the property’s financing and operating expenses in respect of the postponement period.

– On the closing date of the transaction, the purchaser will pay the amount of about $16.5 million (or $15.5 million if the purchaser’s right to postpone the closing date of the transaction was exercised). The purchaser was given an option to receive from the sellers a loan in the amount of about $3.5 million for payment of the balance of the consideration. The sellers’ loan plus interest agreed to in respect thereof are to be repaid mostly (about $2.75 million) at the end of 12 months from the closing date of the transaction and the balance thereof at the end of 24 months from the closing date of the transaction. In order to secure the loan, the purchaser will place a lien in favor of the sellers on its rights in two lots out of the property being sold.

– It was agreed that on the closing date of the transaction, the purchaser’s claim will be rejected and cancelled.

The said transaction was closed during September 2009 and as part of the closing

the purchaser exercised the right it was granted as detailed above. As a result of the closing, the Company recorded a capital gain in its financial statements in the amount of about $7 million.

d. In June 2007, a wholly owned subsidiary (indirectly) (hereinafter – “the

Subsidiary”) signed an agreement in connection with acquisition of rights in a real estate property in Las Vegas, in the United States (the share of the Subsidiary in the project is about 49%), including land on an area measuring about 60.5 acres (about 240 dunams).

84





d. (Cont.)

In August 2009, upon reaching the repayment date of the bank loans provided to the project, the said loans were not repaid and, as a result, the Joint Company and the partners in the project received a warning from the lending parties. In light of the financial crisis and its impact on the U.S. real estate market, mainly due to the credit bottleneck, the Group has decided that it does not intend to continue investing additional monies in development of the project or repayment of the existing loans. In light of that stated above, in its financial statements as at December 31, 2008, the Company wrote off the full amount of its investment in the project, in the amount of about $102 million.

As at the signing date of the financial statements, the Group is carrying on negotiations with the bank in connection with transfer of the property to the bank’s ownership.

e. In August 2009, the Company signed an agreement with a foreign bank whereby the Company acquired the mezzanine loan provided by the bank to Africa U.S. in connection with the Marquis building in Miami, Florida. As at July 31, 2009, the balance of the loan was about $43 million. In consideration for acquisition of the loan, the Company paid out of its own sources the amount of about $13 million. Collaterals provided to the bank by the Company and/or by a company it controls to secure the loan were cancelled.

With respect to acquisition of loan and after payment of the expenses involved with execution of the transaction, the Company recorded a gain in its financial statements for 2009, in the amount of about $28 million.

f. In February 2010, Africa USA signed agreements for sale of a number of parcels of land zoned for residential use in Miami. As a result of completion of the transaction, the Company recorded a loss in its financial statements for 2010 in the amount of about $6 million. Against this loss, financing income was recorded in the amount of about $10 million based on a forgiveness of indebtedness made in respect of those projects by the lending bank.

g. In January 2010, an agreement was signed for refinancing the loan in respect of the Clock Tower project in New York, for a period of 18 months with an option to extend for a period of an additional 18 months at an interest rate of 10%. In addition, the party financing the project provided credit in the amount of about $16 million for purposes of the interest payments in respect of the said loan as well as for maintenance costs of the property. The lender received an “equity kicker” possibility for acquisition of 10% of the residential areas in the property (for a period that will end on the earlier of sale of the final residential unit in the project or within 25 years from January 2010), based on the value reflected by the market value of the property in the Company’s books as at December 31, 2009.

85





h. In August 2010, a subsidiary in the United States did not comply with the sales’ targets determined in the financing agreement for the Marquis project (the amount of the loan as at December 31, 2010 is about $108 million) and in December 2010 the parties signed an amendment to the financing agreement, the main terms of which are set forth below:

The repayment date of the loan was postponed to July 2012, and upon fulfillment

of certain conditions provided the repayment date of the loan will be postponed by an additional 6 to 18 months beyond the aforementioned date.

To the extent monies remain in the project’s accounts, after full repayment of the

loan, including accrued interest on the loan and repayment of other amounts and payments due to the lender in accordance with the loan agreement as amended, and after payment to the borrower of an estimated amount of about $5.2 million, in respect of its share in the additional anticipated investments in the project, as detailed below – 70% of the balance of the monies as stated will be transferred to the borrower and 30% will be transferred to the lender.

The Company recognized a liability in respect of the part to be transferred to the

lender, as stated, based on its fair value, in the amount of about $700 thousand. The interest rate applicable to the loan will remain unchanged, that is, interest will

apply to the balance of the loan at the rate of Libor (monthly) plus 3.5%, where the minimum Libor rate will be 3.5%.

The project expenses will be financed as follows: (a) the borrower will bear the

amount of up to about the first US$5.2 million; (b) the lender will bear the amount of up to about an additional US$5.2 million; and (c) the balance of the amount will be divided such that the borrower will bear about 70% of the said balance and the lender will bear about 30% of the said balance – all based on a monthly calculation.

Pursuant to the agreements in the amendment to the loan agreement, AFI USA

provided a guarantee for the benefit of the lender to secure the following liabilities of the borrower: (1) the borrower’s liability to bear its share in the project expenses, as detailed above; (2) the borrower’s liability to pay the full amount of the loan principal, the interest and every other monetary liability under the loan agreement, up to a maximum amount equal to the lower of: (i) US$2 million; and (ii) the total amounts paid by the lender in connection with its share in the project expenses, as detailed above.

86





h. (Cont.)

To the extent the borrower executes a refinancing for the project, the lender will have the right to join as a shareholder of the borrower, in such a manner that the following conditions, among others, will apply: (a) the lender will be entitled to 30% of all the income, losses and distributions of the borrower; (b) every transaction between the borrower and AFI USA and/or companies related to it will require the lender’s approval; (c) the lender will have the right to join (tag along) in a case of transfer of rights of AFI USA in borrower; (d) the lender will not be required to provide guarantees for the borrower’s liabilities and/or to undertake liabilities in connection with the borrower and will not be diluted if additional financing is provided to the borrower; (e) AFI USA will retain control of the borrower, and others. In such a case, the borrower’s incorporation documents will be amended accordingly.

Notwithstanding that stated above, the rights will be granted to the borrower to pay the lender the amount of US$50 million that will be offset against the balance of the debt of AFI USA, in exchange for the lender’s waiver of its right to join as a shareholder of the borrower.

i. In May 2010, a subsidiary in the United States signed an agreement for receipt of a mezzanine loan, in the amount of $25 million in the 88 Leonard project. Pursuant to the terms of the loan, the interest is to be paid in monthly installments based on an annual interest rate of 15% and the principal is to be repaid in monthly installments of about $83 thousand up to May 2012, and of about $125 thousand commencing from May 2012. The balance of the accumulated principal and interest are to be paid in June 2015. For the benefit of the loan, AFI USA and the subsidiary provided guarantees and liens as detailed in the agreement.

j. In July 2010, agreements were signed for reorganization of the financing for the Apthorp project in Manhattan, New York (a project held indirectly at the rate of 50% by the subsidiary AFI USA). As part of the agreements it was provided that, among other things, the repayment of the senior loan (in the amount of about $335 million) will be postponed by about 3 years and the interest thereon will be set at the annual rate of Libor plus 5%. In addition, it was agreed that a mezzanine loan, in the amount of about $85 million (out of a mezzanine loan in the amount of about $122.75 million) will be cancelled and in its place a new mezzanine loan will be provided in the amount of about $15 million. In addition, accrued interest will be cancelled, in the amount of about $6.35 million as at June 30, 2010 (out of a total of about $7.6 million). In addition, a mechanism was determined for distribution of surplus cash after full repayment of the loans and the accrued interest thereon, between the mezzanine lenders and the project companies, such that the mezzanine lenders are entitled to receive an additional amount estimated at up to about $12.2 million subject to there being sufficient cash balances from sales of residences in the project.

87





j. As a result of application of the provisions of the new agreements, the present balance of the financing in connection with the project was reduced from the amount of about $450 million to amount of about $374 million. As a practical result, the Group recorded income of about $38 million in the category “Company’s share in income of investee companies accounting for using the equity method of accounting” in its financial statements for 2010.

(2) Real Estate Activities in Russia

a. As at the date of the report, the Company has an inventory of land, work in progress, property, plant and equipment, investment property, investment property under construction in Russia and properties intended for sale in the amount of about NIS 6.5 billion (2009 – about NIS 6.4 billion).

During the year the Company wrote down its assets in Russia by a total of about

NIS 100 million (2009 – about NIS 53 million). b. The companies operating in Russia operate in an environment that is politically

and economically unstable, and are subject to operational risks that are not typical of other countries. The financial statements of these companies reflect management’s estimates regarding the impact of the aforesaid instability on the financial results. It should be noted that the actual results may be materially different from these estimates.

c. In 2000, the Company (through a subsidiary) signed an agreement in-principle

with a foreign company (hereinafter – “the Partner”) that primarily covers cooperation in transactions involving acquisition of real estate and investments in real estate projects in Russia and in the former Soviet Union.

The agreement in-principle provides, among other things, that the parties will

enter into undertakings with owners of rights to purchase rights in real estate through joint companies that they will set up, in which the share of the subsidiary will be 80% and the share of the foreign company will be 20%.

As part of the preparatory activities in contemplation of a decision whether to

issue the operations of the Company group in Russia, the subsidiary signed agreements in November 2006 regulating the continued cooperation in the real estate segment in Russia and the Commonwealth of Nations.

88




(2) Real Estate Activities in Russia (Cont.)

c. (Cont.) Pursuant to the agreements signed, the rates of holdings of the Subsidiary and the

Partner in the holding company that manages most of Group’s activities in Russia (hereinafter – “the Joint Company”) were modified through a transfer of shares in exchange for their nominal value, and will be set at 88% for the Subsidiary and 12% the Partner (instead of 80% for the Subsidiary and 20% the Partner). It was also agreed that the Partner will not be required to provide financing for the Joint Company, that the Joint Company will repay to the Partner the amounts it provided to the Joint Company up to now (in the total amount of $6 million), and that until additional financing is provided to the Joint Company such that together with the loans provided by the Subsidiary and the Partner for the benefit of AFI Development reaches the amount $500 million, to the extent it is provided based on its discretion, the Partner’s share will not be diluted to less than 12%. Furthermore, the Partner’s employment conditions as manager of the Joint Company were arranged in the agreements.

In addition, concurrent with the signing of the new agreement, the Subsidiary and

the foreign company signed a loan agreement whereby the Subsidiary provided the foreign company a loan in the amount of about $50 million as at December 31, 2006. The proceeds of the loan were used by the Partner to provide its share in the shareholders’ equity of AFI Development immediately prior to the issuance. The loan was provided for a period of 15 years bearing interest at the rate of Libor + 1.85%, to be paid on the loan’s repayment date (and in cases of partial repayment, the interest accrued on the amount repaid will be paid). It was agreed that the loan will be repaid only: (i) out of the full amounts of dividends and other distributions received by the foreign company in connection with its holdings in AFI Development and (ii) from other proceeds or receipts received by the foreign company from the sale or transfer of shares of AFI Development, up the number of representative shares, as at the date of calculation of 150% of the amount of the loan.

It was further agreed that until full repayment of the loan, up to full repayment of

the loan, the foreign company will not be entitled to place a lien on its shares in AFI Development, up to the number of shares serving as security. Agreement was also reached with respect to placing restrictions on the transfer of holdings in the foreign company.

89





c. (Cont.) It is noted that after distribution of the dividend in AFI Development in December

2009, and pursuant to the terms of the loan agreement, part of the loan was repaid, in the amount of about US$9.75 million (including interest of about US$0.75 million). As at December 31, 2010, the outstanding balance of the loan (principal and interest) was about US$38 million, after a reduction for decline in value, in the amount of about $6 million, which was recorded as a result of a transaction involving acquisition of the Partner’s share that was signed after the date of the report – see also Note 46A.

d. In May 2007, AFI Development issued global deposit certificates (GDR), which

represent shares of AFI Development (Class A) at a ratio of one deposit certificate per share. The global deposit certificates were registered for trading on the main stock exchange in London (LSE).

During 2010, the Company executed a structural change transaction whereby it

will hold AFI Development directly – a transaction that received approval of the Taxes Authority (see also Note 36(13)). As at the date of the report, Africa Israel held 54% of AFI Development directly (see also Note 1C regarding sale of holdings in AFI Development as part of the debt arrangement executed by the Company). As at the signing date, the Company holds about 57% of AFI Development – see also Note 46(a).

In January 2010, the Board of Directors of AFI Development resolved to instruct

AFI Development’s management to take action to register the shares of AFI Development for trading on the Primary List of the main stock exchange in London (LSE). In May 2010, a General Meeting of the shareholders of AFI Development was held where the required resolutions were passed for issuance and registration for trading of the securities of AFI Development on the Primary List on the London Stock Exchange. In July 2010, AFI Development received all the required approvals for publication of a prospectus and completion of the registration for trading. Pursuant to the decision of the General Meeting of AFI Development, class “B” shares will be issued as bonus shares to parties that held GDRs of AFI Development at the end of trading on the London Stock Exchange on July 2, 2010, and the accounts of the holders of the Global Deposit Certificates (GDR) of AFI Development on the said date will be credited correspondingly. Trading in the class “B” shares began on July 5, 2010. The trading in the GDRs of AFI Development continued as usual.

e. In May 2008, AFI Development sold its rights (50%) in the “Aquamarine II”

office building, which comprises part of the second stage of the project in the Ozrekovskaya complex in central Moscow.

90





e. (Cont.) Up to the sale, the building was leased in entirety to a single tenant, and the

annual rentals according to the lease agreement amounted to $14 million per year. The consideration for the rights in the building sold was set at $207 million (in respect of 100% of the rights).

As a result of the value determined for the building in the sale transaction,

AFI Development revised the property’s value in its financial statements in the first quarter of 2008, and recognized income in the amount of about $35 million.

f. In August 2009, AFI Development signed an agreement for sale of its rights in the

Kosineskia Project including three office buildings having a built-up area of about 116,700 sq.m. to a foreign company (hereinafter – “the Purchaser”). The consideration for the rights in the property sold was set at $195 million.

The amount of $60 million was received by AFI Development on account of the

consideration. The balance of the consideration, in the amount of $135 million, is to be paid to AFI Development in monthly installments during a period of a year. The Purchaser was entitled to accelerate the payments compared with the timetables set in the agreement and if it does so it would be entitled to a discount at a variable rate of up to 7.7% (the rate of the discount will be reduced to the extent the scope of acceleration of the payments is reduced, where the maximum discount will be granted where the purchaser pays the entire consideration within 30 days).

Up to December 31, 2009, AFI Development received proceeds of $70 million.

Since then AFI Development is carrying on negotiations with the Purchaser with respect to postponement of the original repayment dates of the balance of the consideration up to the end of 2010. Due to this fact, calculation of the expected cash flows was made and the asset was set, as at December 31, 2009, at about $190 million.

In light of that stated above, in 2009 AFI Development recorded a revaluation

gain of about $44.2 million, due to adjustment of the book value of the property being sold to the value reflected by the transaction.

In 2010, AFI Development received additional consideration of $3 million in

connection with the property. As at the date of the financial statements, the transaction had not been completed, the full proceeds had not been received and ownership of the property was still with AFI Development. Due to the existing uncertainty regarding completion of the transaction and the timing thereof, in 2010 AFI Development decided to reclassify its rights in the Kosineskia Project to “investment property under construction” and to remove it from the category “assets intended for sale”.

91





f. (Cont.) As a result of the said reclassification and receipt of an updated appraisal for the

property, AFI Development recorded a decline in value in the financial statements for 2010 in the amount of about $20 million, net, after deduction of $25 million in respect of part of the consideration received as at the date of the report constituting liquidated damages under the sale agreement in a case where the buyer does not complete the transaction, in accordance with the agreement of undertaking and a legal opinion received by AFI Development.

The Purchaser filed a claim against AFI Development wherein it is demanding,

among other things, a reimbursement of about $47 million out of its payments to AFI Development (constituting total payments of about $73 million less the liquidated damages in the agreement in the amount of about $25 million), reimbursement of expense of about $17 million in respect of damages it suffered and reimbursement of additional expenses, in the amount of about $2.5 million for every month of delay in the above-mentioned payments.

As at the date of the financial statements, no supporting documentation has been

provided by the Purchaser in connection with these claims. AFI Development intends to respond on the dates provided by law. In the estimation of AFI Development’s management, based on its legal advisors, the defense chances against this proceeding exceed 50%. AFI Development is negotiating with the Purchaser regarding the possibility of a compromise.

g. The AFIMALL City Shopping Mall (formerly the Moscow City Shopping Mall,

hereinafter – “AFIMALL”), is a shopping mall in the center of the City of Moscow that includes commercial areas, retail areas and office space, as well as an auditorium for presentations. The project’s total built-up area (GBA – gross building area) is about 179,400 square meters, plus the auditorium area, as stated, of about 21,700 square meters. Construction of the shopping mall is being executed by AFI Development. The project is being constructed based on an investment agreement signed with City of Moscow whereby upon completion of construction of the project the City will be granted the right to receive 25% of the project’s profits and Company will receive lease rights for 49 years, as is customary.

In March 2011, the mall was opened (a technical opening) to the public. The total

investment in the project up to its completion is expected to amount to about $536 million, and the value of the property in the statements, as at December 31, 2010, is about $732 million.

92





g. (Cont.) In March 2011, AFI Development reached a non-binding understanding with the

City of Moscow regarding acquisition of the City’s share in AFIMALL, constituting 25% of the rights in this project, as well as acquisition of a site having about 2,700 parking spaces nearby to AFIMALL, for a consideration of about $310 million.

In July 2010, the subsidiary of AFI Development signed an agreement with Bank

VTB for extension and change of the financing agreement between the company and the bank in the Moscow City Shopping Mall project from August 2008. Pursuant to the agreement, the repayment date of the credit was extended by two additional years, up to August 2013 and the interest rate was reduced from 16% to 13.25% per year. As at December 31, 2010, the scope of the credit in the project was about 8,502 million rubles (about NIS 990 million). The loan is secured by a lien on the rights of AFI Development in the project and a guarantee of AFI Development.

h. In September 2010, AFI Development signed an agreement for receipt of

financing, in the amount of $74 million, for completion of the construction work in the Ozerkovskaya Embankment Project (Phase III) (the project is held by AFI Development at the rate of 50%). The loan was provided for a period of 5 years and bears interest at the rate of 13%, after presentation of the amount of the mortgage to the financing bank, the interest will be reduced to 11.75% (the loan is denominated in rubles). As at the date of the report, the balance of the loan is about $20 million.

i. In the period of the report, AFI Development received financing in the amount of

about $20 million from Sberbank. The loan is denominated in rubles and is to be used for completion of the Kalinina project (a sanatorium hotel in the City of Zilznovodsk in Russia). The loan bears interest of 16.25% – commencing from October 2010 the interest will be reduced to 13.5%.

As at December 31, 2010, the scope of the credit for the project is about 76

million rubles ($2,508 thousand). j. During 2010, AFI Development progressed the Kuntsevo project with the City of

Moscow, including certain progress with respect to obtaining the approvals required for purposes of planning this project. Nonetheless, in light of the recent changes in the City of Moscow, AFI Development estimates that there may be additional delays in connection with the project’s progress and obtaining the above-mentioned approvals. There is no certainty if and when the approvals will be obtained and, therefore, at this stage AFI Development has decided to write off the full amount of the project, in the amount of about $78 million.

93





k. As a result of changes in the City of Moscow, AFI Development is conducting negotiations with the City with respect to continuation of the Tevreskia project, including the possibility of canceling the rights in the project against indemnification that will include additional construction rights in the Tevreskia Zestaba Plaza 1 and/or Plaza 2 and/or Plaza 2A and/or Plaza 4, such that the compensation will be at least equal to the market value of the Tevreskia shopping center project as included in the financial statements as at December 31, 2010, in the amount of about $74 million.

In March 2011, AFI Development reached a non-binding understanding with the

City of Moscow whereby AFI Development will deliver to the City of Moscow the development rights in the Tevreskia shopping center in exchange for compensation in respect of the full amount of the expenses invested by AFI Development in this project. Compensation, as stated, may be awarded by means of provision of additional construction rights in adjacent projects of AFI Development, that will be remain in the hands of AFI Development with their present designations for development as commercial areas and residential units.

l. In 2007, AFI Development received financing, in the amount of about $280

million, and the balance of the loan as at December 31, 2010, is about $78 million. The loan was taken out in order to finance construction of the Tevreskia shopping mall project and it bears annual interest at the rate of Libor + 8%. The loan is secured by a lien of 51% of the rights of AFI Development in the equity of the company holding the project, as well as by a mortgage on the property when its construction is completed.

(3) Real Estate Activities in Eastern Europe

a. The Company’s operations in Eastern Europe are performed through AFI Europe N.V. (hereinafter – “AFI Europe”), a wholly owned subsidiary of Africa Israel Properties Ltd. The Company’s East European operations are concentrated in the Czech Republic, Romania, Bulgaria, Hungary, Poland, Serbia, and Latvia.

As at the date of the report, AFI Europe owns an inventory of lands, work in

progress, fixed assets, investment property, and investment property under construction, having a monetary value of about NIS 4,783 million (2009 – NIS 5,699 million).

During the year AFI Europe recorded a net decline in the value of its assets in

East Europe by NIS 44 million (2009 – NIS 20 million).

94




(3) Real Estate Activities in Eastern Europe (Cont.)

b. Africa Properties examined the possibility of issuing a subsidiary of AFI Europe. The Board of Directors of Africa Properties instructed the subsidiary’s management to take the actions necessary to advance the subsidiary’s preparations for the possibility of issuing its shares and registering them for trading on a stock exchange in Europe. Further to that stated above, the subsidiary acted to advance transaction processes with investment banks, appraisers and other consultants, and submission of a prospectus for approval of the authorities, in such a manner that upon existence of appropriate market conditions, and to the extent Africa Properties so decides, it will be possible to execute an issuance as stated, without any delay stemming from procedures normally involved with an issuance.

In November 2010, AFI Europe published a prospectus (hereinafter – “the

Prospectus”) regarding an offer to the public of its shares, directed at institutional and private investors in Poland, as well as to institutional investors outside of Poland (but not in the United States), and registration of the shares for trading on the Warsaw Stock Exchange (WSE), in Poland (hereinafter – “the Issuance”).

In light of the unstable market conditions existing in the relevant international

capital markets, in December 2010 it was decided to postpone the Issuance processes. If and when it is decided to renew the Issuance processes, AFI Europe will submit to the authorities in the Netherlands a revision to a prospectus that was approved by the authorities.

c. In September 2007, AFI Europe, through a wholly owned company, acquired five

parcels of land, on an overall area of about 156 thousand square meters, in the area of New Bucharest, in the northwestern section of Bucharest, Romania, in exchange for a consideration of about €78 million. Most of the consideration, as stated, was already paid to the seller of the land, whereas about €15 million plus annual interest at the rate of 8.5% commencing from March 2009, was scheduled for repayment in June 2010.

For purposes of securing payment of the balance, as stated, AFI Europe provided

a company guarantee to the seller, and also recorded a mortgage in favor of the seller on part of the land acquired.

In May 2010, prior to the repayment date of the payment as stated, the subsidiary

received notice that collection proceedings will be started against it in Romania, including realization of the mortgage on part of the land acquired, unless the subsidiary pays the amount of €8.2 million within 15 days as “liquidated damages” in respect of the prior payments on account of the consideration for the land that were paid by the subsidiary after the payment dates provided for their execution in the agreement covering acquisition of the land.

95





b. (Cont.) Since the subsidiary contends that the above-mentioned compensation demand is

not justified, it filed an objection in the court in Romania to payment of the compensation as stated, along with a request to stay the collection proceedings. The request to stay the collection proceedings was rejected, whereas the hearing with respect to the dispute as to payment of the compensation was set for November 2010.

As a result of the dispute that arose between the subsidiary and the seller, the

subsidiary did not pay the amount that was due for payment in June 2010, as detailed above.

In November 2010, the parties signed an agreement in order to settle all the legal

disputes between them. In the period of the report, the subsidiary paid €8 million, part of which in respect of compensatory damages and part of which on account of the balance of the debt. The balance of the debt, in the amount of about €15.5 million, is to be paid in 8 quarterly payments.

In its financial statements as at December 31, 2010, the subsidiary recorded an

appropriate provision in connection with the above-mentioned matter. As part of the compromise agreement, the Group committed to construct offices

for the seller on an area of about 4,000 square meters for a consideration of about €3.5 million plus VAT.

For purposes of securing the subsidiary’s commitments, the seller received a

guarantee of the subsidiary as well as a lien on land owned by the subsidiary. d. During the last quarter of 2009, construction of the Cotroceni Shopping Mall was

completed, which was constructed by AFI Europe in Romania and which was opened to the general public.

e. In September 2010, AFI Europe signed a preliminary agreement (hereinafter –

“the Agreement”) through its wholly owned subsidiary, providing the conditions for sale and transfer of land with an aggregate area of about 30 thousand square meters. The land is located in the New Bucharest area in the northwestern section of Bucharest Romania. The amount of the Agreement is €16 million plus VAT.

96





e. (Cont.) The consideration is to be paid as follows:

1. The amount of €2 million plus VAT is to be paid within 8 weeks from the signing date of the agreement, subject to a due diligence examination to be performed by the purchaser. Up to the approval date of the financial statements, this payment had been transferred to AFI Europe;

2. The amount of €5 million plus VAT is to be paid upon transfer of ownership

of the land to the purchaser by means of signing a final agreement on the earlier of May 1, 2011 or 15 days after receipt of the building permit; and

3. 4 annual payments of €2.25 million plus VAT each to be paid commencing

from May 30, 2012.

Part of the above-mentioned land was classified in the financial statements to category “assets held for sale”. The Agreement is contingent on conditions provided that had not yet been fulfilled as at the approval date of the financial statements.

The Group is not expected to realize a significant gain or loss from this

transaction. f. AFI Europe holds four limited partnerships registered in Germany (hereinafter,

together – “the German Partnerships”), which hold a portfolio of rental properties located throughout Germany (hereinafter – “the German Properties Portfolio”). The rights in each of the German Partnerships are held by AFI Europe through a separate holding company registered in the Netherlands (hereinafter, together – “the Dutch Companies”).

Up to June 2008, AFI Europe held all of the issued share capital of the Dutch

Companies, where each of these holds 70% of the rights in the capital of each of the German Partnerships and a parallel voting percentage at General Meetings of the Partners of these partnerships. The balance of the rights in the German Partnerships and the voting percentage at the General Meetings of their partners, are held by two companies controlled by two Israeli businessmen (hereinafter, together – “the Israeli Partnerships”), at the rate of 15% each. In addition, AFI Europe holds a company registered in Germany, which serves as the General Partner in each of the German Partnerships.

97





f. (Cont.) Pursuant to the agreements of the German Partnerships, the General Partner is

responsible by virtue of its status for the current ongoing management of the rental properties constituting the German Properties Portfolio, where decisions that are not in the ordinary course of the German Partnerships’ business, as well as other significant decisions, are subject to approval by the General Meetings of the Partners in which, as stated, the Dutch Companies hold 70% of the voting rights. Taking into account all that stated above, up to June 30, 2008, the Dutch Companies and the German Partnerships were consolidated in the financial statements of AFI Europe and of the Group.

On May 21, 2008, AFI Europe signed an agreement for sale of shares (as

amended on August 30, 2008) (hereinafter – “the Sale Agreement”) constituting 30% of the issued share capital of the four Dutch Companies (and part of the shareholders’ loans provided by AFI Europe to the Dutch Companies) to Prevzon Holdings Ltd., a company registered in Cyprus (hereinafter – “Prevzon”), controlled by Mr. Dennis Katziv, a foreign businessman. The consideration pursuant to the Sale Agreement in respect of the rights acquired in the Dutch Companies amounted to about €3,074 thousand. As part of the Sale Agreement it was provided that Prevzon will have the right to appoint two directors out of the four directors of each of the Dutch Companies, so long as it holds at least 20% of the issued share capital of the Dutch Company, and the Chairman of the Board of Directors of the Dutch Companies will not have an additional vote. In addition, various limitations were provided in the Sale Agreement in connection with transfer of shares in the Dutch Companies, as is customary in transactions of this type.

It was further provided as part of the Sale Agreement that the parties will act to

implement a mechanism for making decisions in each of the German Partnerships whereby AFI Europe and Prevzon will participate in the voting with respect to making decisions at the General Meetings of the Partners of the German Partnerships, in accordance with their rates of holdings, indirectly, in each of the German Partnerships, that is, 49% of the voting rights will belong to AFI Europe and 21% of the voting rights will belong to Prevzon (hereinafter – “the Direct Voting Mechanism”).

Taking into account the right granted to Prevzon to appoint half of the directors of

the Dutch Companies and in light of the intention to implement the Direct Voting Mechanism at the General Meetings of the Partners of the German Partnerships in such a manner that the rate of the voting rights of the Dutch Companies will drop to 49% upon completion of the Sale Agreement, AFI Europe viewed itself as no longer controlling the German Partnerships and their consolidation was discontinued in the financial statements of the German Partnerships and of the Group as at June 30, 2008 and thereafter.

98





f. (Cont.)

As a result of a contact by the staff of the Securities Authority, it was clarified that the Direct Voting Mechanism in the German Partnerships will not be formally implemented, since implementation thereof requires revision of the German Partnerships’ documents (constituting their incorporation documents), a process that requires the unanimous consent of each of the partners in the German Partnerships.

In light of that stated above, even though the Group and AFI Europe have

effectively lost control over the Dutch Companies, and as a practical result the German Partnerships as well, due to non-implementation of the Direct Voting Mechanism in the German Partnerships the Dutch Companies remain 70% owners of the rights in the German Partnerships and, therefore, the controlling interests in these partnerships. In addition, as part of sale of 30% of the shares of the Dutch Companies to Prevzon, Prevzon was granted the right to appoint half of the directors in these companies, and as a practical result of that stated above, AFI Europe and the Group have joint control over the Dutch Companies. It is noted that in accordance with the Group’s accounting policies, the equity method of accounting is applied both with respect to associated entities and in connection with jointly-controlled entities. Therefore, determination that the Group has jointly-control over the Dutch Companies (instead of significant control) has no impact on presentation of the investments in these entities.

In addition, financing of acquisition of the German Properties Portfolio in 2007

and acquisition of the rights by Prevzon in 2008 were executed, among other things, by means of provision of shareholders’ loans. The share of AFI Europe in the shareholders’ loans was higher than its rights in the capital of the German Partnerships. Later on, as well, AFI Europe provided loans to the German Partnerships at a rate higher than its share in the rights in the capital of these partnerships. In light of the losses of the German Partnerships stemming from the decline in value of the real estate investment properties constituting the German Properties Portfolio, which created a deficit in the capital of the German Partnerships and deficit in the capital of the Dutch Companies, and as a result of the contact of the staff of the Securities Authority, AFI Europe and Africa Properties decided to amend their financial statements for the relevant periods by means of a restatement, such that the share of AFI Europe in the losses of the German Partnerships will be at the rate of its share in the shareholders’ loans and at the rate of its indirect rights in the capital of the German Partnerships.

Due to the insignificance of the amounts in relation to its financial statements, the

Group recorded the entire impact (loss of about NIS 20 million) in the category “share in losses of investee companies accounted for by the equity method of accounting, net” in 2010.

99




(4) In December 2009, a subsidiary of the Company signed an agreement to sell all of its holdings (40%) in a property company in the Philippines to a foreign company (which holds the remaining 60% of the property company’s issued and paid-up capital), and to waive an option granted to the subsidiary to acquire 40% of the rights in additional lands in the site, in exchange for a consideration of about 383 million Philippine pesos (about NIS 30 million).

In addition, a subsidiary of Africa Properties signed an agreement to sell its entire

holdings (40%) in a property company in the Philippines to the foreign company in exchange for a consideration of about 780 million Philippine pesos (about NIS 60 million).

In February 2010, the transactions described above were completed and the Group

recorded a capital loss in respect thereof in the amount of about NIS 3.3 million.

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”)

(1) In January 2009, Africa Properties signed a memorandum of understanding (hereinafter – “the Agreement”) with a company controlled by foreign investors, for sale of 51% of the holdings of Africa Properties in One-Half Jubilee in such a manner that upon completion of the transaction Africa Properties will hold 49% of the rights in One-Half Jubilee and the purchaser will hold 51% of the rights therein.

One-Half Jubilee owns the rights in two projects: a project known as “The Jubilee

Tower” in Tel-Aviv, in which, among others, the “Government Complex” is a tenant, and the student dormitories project on Mt. Zofim in Jerusalem.

Pursuant to the Agreement, Africa Properties sold to the purchaser 51% of One-Half

Jubilee’s issued share capital and assigned to the purchaser its right vis-à-vis One-Half Jubilee to repayment of 51% of the shareholders’ loans provided to One-Half Jubilee by Africa Properties (hereinafter together – “the Rights Being Sold”), in exchange for an aggregate consideration of NIS 135 million. The value of the projects was appraised for purposes of execution of the transaction at NIS 1.05 billion. The value of the rights in One-Half Jubilee is net of bank credit, totaling about NIS 760 million, which was provided for financing of the projects, and other liabilities.

As part of the Agreement it was provided that Africa Properties is to provide One-Half

Jubilee engineering, marketing and financial management services, in exchange for payment of management fees to Africa Properties. The Agreement also contains customary provisions regarding the relationship of the partners in One-Half Jubilee. Acquisition of the Rights Being Sold is made “as is” where the purchaser and Africa Properties will act together to finance One-Half Jubilee’s additional investments, such as in expansion of the parking facility in The Jubilee Tower.

100



B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.)

(1) (Cont.) In June 2009 the above-mentioned transaction was closed. As a result of closing of the

transaction, Africa Properties recorded a pre-tax capital loss in the amount of about NIS 4.6 million in its financial statements for 2009.

In the financial statements as at December 31, 2010, the investment of Africa

Properties in One-Half Jubilee Ltd. is presented based on the equity method of accounting.

(2) Africa Properties, through One-Half Jubilee, constructed an office building having

37 floors. 25 floors in the office building constructed by One-Half Jubilee and part of the parking areas serve as a district government office complex and are leased for a period of 20 years.

As part of the lease agreement signed by One-Half Jubilee with the Government, the

State has been given an option to acquire all or part of the premises from One-Half Jubilee commencing from the end of the fifth year and up to the end of the nineteenth year of the lease period. The consideration for acquisition of the premises is a function of various components relating to such premises, pursuant to a formula provided in the agreement.

In September 2009, One-Half Jubilee signed an agreement for sale of five floors in the

Hakirya Tower in Tel-Aviv, in exchange for about NIS 92 million. The consideration was paid in November 2009 and at that time possession of the property was transferred to the purchasers. The said sale produced an insignificant loss for the company.

Subsequent to the date of the report, an addendum to the lease agreement with the

State of Israel was signed that includes, among other things, an update of the lease rentals and postponement of the initial date for exercise of the existing option held by the State of Israel up to January 1, 2025.

(3) In April 2009, Africa Properties together with its 100% owned subsidiary signed a

memorandum of understanding (hereinafter – “the Agreement”) with Melisron Ltd. (hereinafter – “Melisron”) for sale of all of the holdings of Africa Properties (73.4%) in Merkarka’ay Mercaz Ltd. (hereinafter – “Merkarka’ay Mercaz”), which owns the rights in the Ramit Aviv Shopping Mall site in Tel-Aviv, and sale of all of the subsidiary’s rights in the Savyonim Shopping Mall in Yehud.

In June 2009, the above-mentioned two transactions were closed. Set forth below are

details in connection with the said transactions:

101




(3) (Cont.)

(a) The consideration for the shares of Merkarka’ay Mercaz was set based on 73.4% of the shareholders’ equity of Merkarka’ay Mercaz, as determined in accordance with generally accepted accounting principles, as at the closing date. In calculation of the shareholders’ equity, the value of the Ramit Aviv Shopping Mall site in Tel-Aviv was taken into account at the amount of NIS 1,530 million and dividends were deducted from this amount that were distributed up to the closing date (as stated below). To the above-mentioned amount, the sum of NIS 14 million was added.

For purposes of closing the transaction for sale of the shares of Merkarka’ay

Mercaz, in June 2009, a number of transactions were executed, as follows: Melisron and Migdal Real Estate Holdings Ltd. (hereinafter – “Migdal”), which

holds 26.6% of the shares of Merkarka’ay Mercaz, provided financing to Merkarka’ay Mercaz, in the aggregate amount of NIS 585 million, based on their share in this company after closing of the transaction.

Concurrently, on the same date, Merkarka’ay Mercaz distributed a dividend to the

existing shareholders – Africa Properties and Migdal – in the amount of NIS 676 million. The share of Africa Properties in this dividend was about NIS 496 million.

After execution of the above-mentioned transactions, on June 30, 2009, the

consideration was transferred from Melisron to Africa Properties for the shares of Merkarka’ay Mercaz.

As a result of closing the transaction for sale of the shares Merkarka’ay Mercaz,

in 2009 Africa Properties recorded a pre-tax capital gain in the amount of about NIS 10.3 million.

(b) The consideration for the rights of the subsidiary in Savyonim Shopping Mall was

set at NIS 193 million, plus Value Added Tax. As a result of sale of the Savyonim Shopping Mall, in 2009, the subsidiary recorded a pre-tax capital loss of NIS 14 million.

(4) In April 2009, Africa Properties signed a memorandum of principles (hereinafter –

“the Agreement”) with a company controlled by foreign investors (hereinafter – “the Purchaser”) for sale of 95% of its rights in a property known as “Africa Israel Tower” on Ahad Ha’am St. in Tel-Aviv (hereinafter – “the Property”) and 50% of the unutilized building rights in the Property, for a consideration of NIS 166,530 thousand, plus Value Added Tax as per law (hereinafter – “the Consideration”).

In August 2009, this transaction was closed.

102




(4) (Cont.) Pursuant to the Agreement, Africa Properties sold to the Purchaser 95% of its rights in

the Property’s built-up areas, and retained ownership in the remaining 5%. Africa Properties provided the Purchaser an option, exercisable within two years from the signing date of the Agreement, to acquire from Africa Properties the remaining 5% as stated above, in exchange for a consideration of NIS 7,700 thousand, plus VAT as per law. In a case where the Purchaser does not exercise the option, Africa Properties will have the right to compel the Purchaser, within a period of 12 months beginning at the end of the above-mentioned two-year period, to acquire from Africa Properties the remaining 5% as stated above, in exchange for the aforesaid amount.

Pursuant to the Agreement, Africa Properties sold to the Purchaser 50% of the balance

of the unutilized building rights in the Property, for a consideration of an additional NIS 19,795 thousand, and retained ownership in the remaining 50%. The building rights will be utilized by the parties under the conditions and in the manner as they will agree between them, as partners, and they will share equally in all the expenses and payments involved in utilization of the building rights. Any transfer and/or sale of the share of either of the parties in the building rights will be subject to a right of first refusal of the other party as well as the right of the other party to join the sale.

Africa Properties provided the Purchaser an option, exercisable during a two-year

period from its delivery date, to acquire the remaining 50% of the above-mentioned building rights, in exchange for a consideration in the amount of NIS 20 million, plus VAT.

In 2009, entire amount of the consideration was received. Africa Properties recorded a

capital gain in the amount of NIS 206 thousand from this transaction. The remaining 5% of the rights in the property, in the amount of NIS 7.7 million, are

presented in the financial statements as at December 31, 2010, as part of the category “assets held for sale”, due to the intention of exercising the above-mentioned option.

(5) In September 2009, the General Meeting of Africa Properties approved an

extraordinary private offer of shares of Africa Properties in an overall scope of about NIS 194 million to institutional entities, private entities (hereinafter – “the Regular Offerees”) and to the Company (hereinafter – “the Private Offeree”), after receiving approval of the Audit Committee and Board of Directors of Africa Properties for the format of the private offer, and after receiving approval of the Board of Directors of Africa Properties for the results of the tender held in order to fix the share price in the private offer (hereinafter – “the Tender”).

103




(5) (Cont.) As part of the private offer as stated, Africa Properties issued a total of 4,379,560

shares, of which 1,412,804 shares were issued to the Regular Offerees and 2,966,756 shares were issued to the Company.

The total proceeds to Africa Properties in the private offer amounted to about NIS 194

million, where about NIS 62 million was received from the Regular Offerees in cash and NIS 132 million was paid by the Company by means of conversion of existing loans of the Company Group to Africa Properties, with no cash payment.

To the best of the Company’s knowledge, pursuant to the provisions of the Securities

Law and in accordance with the Securities Regulations (Details Regarding Sections 15A through 15C to the Law), 2000, restrictions apply to the Regular Offerees and to the Company regarding execution of transactions in the shares issued as part of the private offering as stated.

Africa Properties paid Africa Issuances Ltd. (a subsidiary), which administrated the

Tender, 2% of the proceeds received from the Regular Offerees (about NIS 1.2 million).

As part of the private offer, it was agreed between Africa Properties and the Company

that in light of the fact that out of number of shares offered, most of the shares were offered to the Company (67.64%), this private offer will not be considered a private offer qualifying for an issuance grant, as stated in the management services agreement between Africa Properties and the Company.

As a result of completion of the private offer as stated, the rate of the Company’s

holdings in Africa Properties decreased from 67.88% to 67.85%. (6) In November 2009, Africa Properties published a shelf prospectus wherein Africa

Properties expects to offer shares and/or debentures (including debentures convertible into shares) and/or marketable securities and/or options for shares and/or options for debentures.

(7) In April 2010, Africa Properties offered to its shareholders 8,433,105 ordinary

registered shares of NIS 1 par value each Africa Properties by way of a rights offering. Up to the last day for utilization of the rights, that is May 4, 2010, notifications were received for acquisition of 8,429,607 ordinary registered shares of NIS 1 par value each Africa Properties.

The Company exercised all the rights to which it was entitled pursuant to the shelf

offer report in accordance with the rate of its holdings in the issued share capital of Africa Properties (about 67.85%) and acquired 5,721,600 shares.

104




(7) (Cont.) In exchange for the rights exercised, Africa Properties total gross proceeds of about

NIS 378 million, of which about NIS 256 million from the Company. Out of the proceeds of the fundraising, Africa Properties repaid short-term loans taken out from the Company, in the amount of about NIS 250 million.

As a result of completion of the issuance as stated, the rate of the Company’s holdings

in Africa Properties increased from 67.85% to 67.86%. As at the date of the financial statements, the Company holds a 56% interest in Africa

Properties, due to delivery of shares of Africa Properties as part of the debt arrangement, as described in Note 1C.

(8) In June 2010, an agreement was signed between Africa Properties and its subsidiary

(held at the rate of 100%) and an Israeli bank with respect to repayment of short-term credit, in the amount of NIS 352 million, and receipt of loans for five years, in the amount of NIS 360 million by Africa Properties and its subsidiary, in exchange for placing a lien on real estate properties of Africa Properties and its subsidiary in favor of the bank. In the loan agreement, financial covenants were provided in connection with the fair value of the pledged real estate properties, as well as with reference to the scope of the rental income from these properties. As at December 31, 2010, Africa Properties is in compliance with these financial covenants.

C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”)

(1) In 2010, Africa Residences closed transactions for sale of rights in real estate and recognized total after-tax income of about NIS 32.5 million. Subsequent to the date of the report, additional transactions for sale of real estate were closed in respect of which Africa Residences is expected to record income of about NIS 6 million in its financial statements for the first quarter of 2011.

In addition, in 2009, Africa Residences purchased land zoned for residential uses for a

total amount of about NIS 130 million. (2) In December 2010, Africa Residences, together with its partner, in equal shares

between them, signed an agreement with the seller (hereinafter – “the Agreement” and “the Seller”, respectively) for acquisition of an option right granted to the Seller, pursuant to an agreement signed in 1995 between the Seller and the Israel Lands Adminstration (hereinafter – “ILA”) for provision of permission to plan a real estate site in Rosh HaAyin (hereinafter – “the Property”), and an option to acquire rights therein for construction of about 992 residential units, of which about 128 residential units are land attached (ground floor) and 864 residential units are expansive construction, on an area measuring about 163 dunams (hereinafter – “the Option”).

105



C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”) (Cont.)

(2) (Cont.) In exchange for acquisition of the Seller’s rights in the right granted by the Option,

Africa Residences and its partner will pay the Seller NIS 120 million (linked to the CPI), plus VAT, along with the addition of amounts received from sale of rights in the project to purchasers, in accordance with milestones provided in the Agreement. In addition, Africa Residences and its partner will pay an amount not exceeding NIS 185 million (linked to the CPI), plus VAT, as will be required, to ILA and the developer in respect of the development work on the Property.

The validity of the Agreement is conditional upon fulfillment of two cumulative

preconditions, no later than December 1, 2013 (Africa Residences and its partner have a right to extend this date by an additional year), as follows:

(a) Signature on an agreement of principles with ILA in accordance with the

principles provided in the Agreement, with respect to, among other things, the manner of exercising the Option and the location of certain lots in the Property.

(b) Receipt of ILA’s approval for transfer of the Seller’s rights in the Option, from

the Seller to Africa Residences and its partner. (3) In December 2010, Africa Residences signed an agreement with a third party

(hereinafter – “the Partner”), which is a partner with Africa Residences in the “Hatzar HaNaviyim” project in Jerusalem (wherein Africa Residences and the Partner each hold 50% of the rights) (hereinafter – “the Hatzar HaNaviyim Project”), whereby:

Africa Residences will acquire from the Partner all the Partner’s rights (lease rights) in

real estate that is the subject of the Hatzar HaNaviyim Project (hereinafter – “the Real Estate” and “the Hatzar HaNaviyim Agreement”, respectively), in such a manner that after completion of the transaction, Africa Residences will hold all (100%) of the rights in the Hatzar HaNaviyim Project.

In exchange for the Partner’s rights in the Real Estate, Africa Residences will pay the

Partner NIS 9 million (plus VAT), to be paid as follows: NIS 1.5 million will be paid within 2 business days of the signing date of the Hatzar HaNaviyim Agreement, and the balance of the above-mentioned amount will be paid after and subject to completion of the transaction and delivery of the possessory interest in the Real Estate to Africa Residences.

In addition, commencing from the completion date of the transaction, Africa

Residences will undertake all the Partner’s liabilities to a bank in Israel (hereinafter – “the Bank”) in connection with the financing provided by the Bank to the Partner for purposes of acquisition of the Partner’s share in the Real Estate, in the amount of about NIS 54 million as at the date of the report.

106



C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”) (Cont.)

(3) (Cont.) Completion of the transaction is subject to receipt of the registered owner of the Real

Estate for execution of the transaction, as well as completion of the registration in the Land Registration Office of extension of the lease period relating to the Real Estate, within 135 days from signing date of the Hatzar HaNaviyim Agreement. Nonetheless, it is noted that Africa Residences is entitled to waive fulfillment of any of the above-mentioned conditions.

Further to that stated above, in December 2010, Africa Residences signed an

additional agreement with the Partner (which is also a partner with Africa Residences in the “HaRav Kook” project in Jerusalem, wherein Africa Residences holds 77.5% of the rights, and the Partner holds 22.5% of the rights (hereinafter – “the HaRav Kook Project”)), whereby the Partner will acquire part of the commercial areas in the HaRav Kook Project, in exchange for NIS 9 million (plus VAT). Completion of this transaction is subject to completion of the transaction that is the subject of the Hatzar HaNaviyim Agreement.

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”)

(1) In February 2008, Africa Industries signed an agreement with the owners of the APOGEY group (companies registered in Russia) (hereinafter – “APOGEY”, “the Sellers” and “the APOGEY Group”, respectively), for acquisition of 65% of the issued share capital of Cloudwalk, which holds the companies constituting the APOGEY Group, in exchange for a consideration of about $12.2 million, of which about $5.9 million in exchange for 65% of the shares of Cloudwalk, and the balance of about $6.3 million against provision of a capital note to Cloudwalk.

As part of the said agreement, Africa Industries was granted a “call” option for the

balance of Cloudwalk’s shares (35%). The Call Option may be exercised by Africa Industries beginning from the fifth year from the closing date (March 6, 2008) and ending six years from the closing date, and the Sellers were granted a “put” option for 3 years to sell the remainder of their holdings in Cloudwalk’s shares (35%), which may be exercised at the end of 3 years from the closing date and ending 6 years from the closing date. In addition, it was agreed between the shareholders that subject its financial situation Africa Industries will distribute a dividend every year of at least 25% of its earnings as a dividend to the shareholders. In July-August 2009, Africa Industries provided Cloudwalk a loan in the aggregate amount of about $3 million, and the other shareholders of Cloudwalk provided it a loan in the aggregate amount of about $1.6 million.

(2) Pursuant to a decision of the Board of Directors of Africa Industries in May 2010,

Africa Industries executed an acquisition of its own shares, in the amount of about NIS 23 million and, therefore, the rate of the Company’s holdings in Africa Industries increased from 70.9% to about 76.6%.

107



D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”) (Cont.)

(3) In September 2010, Negev Ceramics Ltd. (a subsidiary of Africa Industries, hereinafter – “Negev”) signed a memorandum of understanding with the controlling shareholders in Orgal A.L.P. (2007) Ltd. (hereinafter – “Orgal”), a company engaged in marketing construction finishing materials and that is, among other things, the holder of the exclusive concession for distribution and marketing of GROHE faucets (hereinafter – “the Concession”), for acquisition of shares constituting 75% of Orgal’s issued and paid-up share capital. The consideration was set at about NIS 28 million, which reflects an aggregate value of about NIS 37.4 million for Orgal’s shares. It was agreed between the parties that 80% of the consideration will be paid to the sellers on the closing date of the transaction, and the balance is to be paid subject to Orgal continuing to hold the concession beyond the period provided in the memorandum of understanding.

In addition, as part of the memorandum of understanding, a “put” option was granted

to the sellers and a “call” option was granted to the company for acquisition of the balance of the sellers in Orgal (25%), which may be exercised during a fixed period of time after publication of Orgal’s audited financial statements for 2012. The consideration in respect of the balance of the holdings will be determined based on Orgal’s average operating income before financing, taxes, depreciation and amortization (EBITDA) in the years 2011 and 2012.

In January 2011, Negev completed acquisition of 75% of the issued and paid-up

capital of Orgal. On the completion date of the transaction, the sellers gave notice that they are exercising their contractual right to withdraw a dividend in the aggregate amount of NIS 12 million, and in accordance with the provisions of the agreement the consideration paid to them by Negev for the shares being sold was reduced to NIS 15.7 million. As a result, Negev acquired control over Orgal and Orgal will become a subsidiary in the consolidated financial statements commencing from the first quarter of 2011.

(4) In December 2010, Negev signed an agreement with H.G.J.J. Construction Marketing

and Supply Company Ltd. (hereinafter – “the Seller”), the controlling interest in H.G.J.J. Construction Products Marketing Ltd. (hereinafter – “HGJJ Construction”) and in Via Arkadia Home Design Ltd. (hereinafter – “Via Arkadia”) (private companies registered in Israel, hereinafter together – “the Subsidiaries”) for acquisition of all the Seller’s holdings in the Subsidiaries. As part of the agreement, it was provided that, among other things, on the closing date of the transaction, HGJJ Construction will hold all the issued and paid-up share capital of H.H. (Building Lots) Ltd. (a private company registered in Israel) (hereinafter – “HH”) (HGJJ Construction, Via Arkadia and HH will be referred to above and below, together as – “the Arkadia Group”), and that on the closing date of the transaction, aside from the said holdings, HGJJ Construction and/or Via Arkadia will not hold holdings and/or securities in any companies, and regarding this matter, including the existing holdings of the Subsidiaries in any companies on the signing date of the agreement (the above-mentioned companies will be referred to hereinafter together with the Seller as – “the Seller Group Companies”).

108




(4) (Cont.) As at the date of the report, the Seller signed several agreements with institutional

customers for supply of products to the construction industry, supplied to the Seller by HGJJ Construction (hereinafter – “the Tender Activities”), and for this purpose a subcontractor agreement will be signed between the Seller and HGJJ.

Taking into account the financial-statement data of the Subsidiaries (among other

things, the negative shareholders’ equity of the Subsidiaries as at September 30, 2010) and the “going concern” caveats in the said financial statements of the Subsidiaries, Negev will pay the Seller, in exchange for the shares of HGJJ Construction, NIS 1, and in exchange for the shares of Via Arkadia Negev will pay NIS 1.

Closing of the transaction is subject to fulfillment of a number of preconditions, the

main ones being: (a) receipt of unconditional and unqualified approval from the Supervisor of Restrictive Business Practices in accordance with the Restrictive Business Practices Law, 1998; (b) the company and the Seller will reach understandings with the banks in connection with reorganization of the liabilities of the companies in the Arkadia Group; (c) release of guarantees of each party in the Arkadia Group vis-à-vis third parties given to secure liabilities of any of the Seller Group Companies and release of guarantees given to secure liabilities of any party from the Arkadia Group, as well as obtaining consents from the various third parties; (d) receipt of approvals from Negev’s competent authorities, of the Seller and the Subsidiaries; and (e) within 30 days of the signing date of the agreement, an agreed outline will be signed by the parties for execution of structural and organizational changes between the Seller Group Companies themselves and/or the Arkadia Group.

It is hereby clarified that Negev will be permitted to waive fulfillment of the

preconditions or any part thereof, based on its exclusive discretion, except in connection with the preconditions in subsections (b), (c) and (d), which the company and the Seller may waive jointly. If all the preconditions are not fulfilled within 90 days of the signing date of the agreement, the agreement will be null and void.

Subsequent to the date of the statement of financial position, Negev received approval

from the Supervisor of Restrictive Business Practices. Notwithstanding that stated above it is agreed that even if all the preconditions are

fulfilled, the company will have the exclusive right, based on its complete discretion, not to execute the transaction, but only where Negev provides the Seller written notice no later than 90 days from the signing date of the agreement of its wish not to execute the transaction and to cancel the agreement. Commencing from the signing date of the agreement and up to its completion date, Negev will perform comprehensive due diligence examinations to its full satisfaction in connection with the Arkadia Group and, if necessary, also with respect to the Seller Group Companies.

109




(4) (Cont.) Negev intends to finance its liabilities under the agreement through receipt of bank

financing. The company has not yet signed financing agreements with a bank. Negev intends to manage the activities of the Subsidiaries independently and to use

the trademarks “Via Arkadia” and “Super Ceramics” for marketing, sale and distribution of Negev’s products in all the marketing channels, to a wide range of Negev customers.

As at the signing date of the financial statements, the transaction had not yet been

completed. In March 2011, an addendum to the agreement was signed whereby the dates

stipulated in the agreement for completion of the due diligence examinations, for completion of most of the preconditions and with respect to the company’s ability to provide notification of its wish not to execute the transaction, were extended up to April 28, 2011.

E. Danya Cebus Ltd. (a subsidiary, hereinafter – “Danya Cebus”)

(1) Sale of Africa Residences to Danya Cebus In November 2010, the Company signed an agreement with Danya Cebus for sale of

all the Company’s holdings (74.47%) in Africa Residences for a consideration of about NIS 648 million (less a dividend adjustment amount, should a dividend be distributed by Africa Residences up to the completion date) (hereinafter – “the Consideration”). The Consideration reflects a company value for Africa Residences (100%) of NIS 870 million. The Consideration is to be paid in full on the closing date against transfer of the shares of Africa Residences. Notwithstanding that stated above, Danya Cebus has been given a right to postpone the payment date of part of the Consideration, in the amount of NIS 180 million for a period of up to 120 days after the closing date, where such amount will bear interest at the rate of prime + 2% and subject to Danya Cebus creating, for purposes of security, a second priority lien on its holdings in Netivei Hayovel Ltd. (the concessionaire in Highway 431), or providing the Company an alternative collateral to the Company’s satisfaction.

The Consideration was determined in negotiations between the parties and based on,

among other things, an opinion received by Danya Cebus from an independent appraiser in connection with Africa Residences whereby the value of Africa Residences (100%) was estimated between NIS 800 million to NIS 890 million.

110



E. Danya Cebus Ltd. (a subsidiary, hereinafter – “Danya Cebus”) (Cont.)

(1) (Cont.) The appraisal was based on, among other things, initial indications of fair value of

lands of Africa Residences (hereinafter – “the Value Indications”) performed by a real estate appraiser. With respect to eight land parcels, the Value Indications point to values lower than the values in the financial statements of Africa Residences as at September 30, 2010, where with respect to four of these land parcels the differences are significant. All the above-mentioned land parcels are classified in the financial statements as inventory of real estate and, accordingly, the provisions of International Accounting Standard No. 2 “Inventory” apply to them. Classification of these land parcels as inventory is based on the company being an initiations company engaged in initiations, planning, development, construction and marketing of residential units on these land parcels. The business strategy of Africa Residences focuses on acquisition of lands in the ordinary course of its business for purposes of their development and construction thereon of residential projects. However, in the past there were cases where it sold land parcels prior to construction of residential projects thereon, however the existence of these isolated sales do not indicate a change in its business strategy but, rather, generally express taking advantage of business opportunities. In accordance with Section 32 of IAS 2, if there is an indication of decline in value of an inventory item intended for use as an input in the production of a final product, a write-down due decline in value of the item is not to be made, unless the net realizable value of the final product reflects a decline in value compared with the cost of the inventory item in the financial statements. In light of the differences raised by the Value Indications, Africa Residences performed various examinations in order to examine the need to execute provisions for decline in value in the financial statements as at September 30, 2010 in connection with these land parcels. As part of the examinations performed in order to determine the net realizable value of the above-mentioned land parcels, account was taken of the anticipated expenses and revenues of the projects to be constructed on the lands in light the plans of Africa Residences to develop them, while capitalizing them using a discount rate of 6% (which is higher than the average interest rate in respect of the debt of Africa Residences). Examinations performed by Africa Residences indicate that the net realizable value of these land parcels exceeds their values in the financial statements. In order to complete the picture, it is noted that in connection with six other land parcels of Africa Residences, Value Indications were received in amounts significantly exceeding their values in the financial statements. However, as explained above, due to their classification as inventory, this does not impact the data appearing in the Group’s financial statements.

As part of the Agreement it was provided that if and to the extent significant events

occur with respect to Africa Residences (including taking into account the financial statements of Africa Residences as at September 30, 2010) the appraiser will determine the need to update his opinion, if applicable, and if and to the extent the opinion is updated (upward or downward) at a rate of more than 1.7% of the upper range of the opinion, the parties will deliberate between them, in good faith, update of the Consideration, subject to receipt of all the required approvals.

111




(1) (Cont.) As part of the Agreement, the Company made a series of representations to Danya

Cebus, among others with respect to the shares of Africa Residences, the activities of Africa Residences and the appropriateness of its reports in accordance with the Securities Law (including the financial statements of Africa Residences). Further to that stated, the Company committed to indemnify Danya Cebus for any direct damage actually caused to it due to the inaccuracy of any of the representations or as a result of a tax payment imposed on Africa Residences relating to the period prior to the closing date of the transaction, subject to conditions and qualifications provided in the agreement, including, that the indemnification commitment will only apply in the case of a damage event (one or more), the cumulative monetary value of which is more than NIS 15 million less a minimum amount of NIS 5 million.

It was further provided that the transaction is to be closed up to no later than

December 30, 2010 (or a later postponed date agreed-to between the parties, however not later than January 31, 2011) (heretofore and hereinafter – “the Closing Date”), subject to fulfillment of a number of preconditions. In a case where the preconditions are not fulfilled on the Closing Date, each of the parties will be permitted to cancel the agreement.

In November 2010, the audit committees and boards of directors of the Company and

of Danya Cebus approved the agreement. In December 2010, the transaction was completed and the Company transferred the

shares of Africa Residences to Danya Cebus. On the completion date of the transaction, Danya Cebus paid the Company NIS 480

million. Danya Cebus notified the Company that it requests to exercise its right under the

agreement to postpone the payment date of about NIS 168 million, constituting the balance of the Consideration under the agreement, up to no later than the end of 120 business days from the closing date of the transaction. Pursuant to the provisions of the agreement, the amount of the above-mentioned postponed payment, is to be paid to the Company together with annual interest at the rate of prime + 2% in respect of the period commencing from the closing date of the transaction and up to the actual payment date of the above-mentioned postponed amount.

112




(1) (Cont.) It is noted that the Company gave notice in the framework of the closing of the

transaction that notwithstanding that stated in the agreement, on the closing of the transaction Danya Cebus is not required to create a second priority lien in favor of the Company on all the holdings of Danya Cebus in the shares of Netivei Hayovel Ltd. and/or provide other alternative collateral to secure payment of the above-mentioned postponed amount, where during 60 days following completion of the transaction, the parties will conduct negotiations regarding provision of collateral (if any) to secure payment of the postponed amount as stated. All of this is with detracting from the unequivocal and unconditional liability of Danya Cebus to pay the above-mentioned postponed amount and the interest in respect thereof as stated above.

In accordance with generally accepted accounting principles, as a result of closing of

the transaction, the Company did not record a gain in its financial statements. Up to completion of the payment in respect of the final receipt, the Company’s free cash flows from this transaction will amount to about NIS 648 million.

As a result of completion of the transaction, part of the proceeds were used to make

early repayment (as defined in the debt arrangement) of part of the balance of the Company’s debentures (Series Y) – see also Note 23E(1)(c).

(2) Highway 431

a. In July 2005, an agreement was signed between the State of Israel and Netivei Hayovel Ltd. (hereinafter in the Section – “the Concessionaire”), a wholly owned subsidiary of Danya Cebus, for the financing, construction, operation and maintenance of Highway 431 as a PFI (Private Finance Initiative) (hereinafter – “the Concession Agreement”).

In July 2006, the project’s financial closing was held in the framework of which

the main project agreements – the financing agreements, the project construction agreement and project operation and maintenance agreement – were signed by the parties involved, including the Concessionaire, Danya Cebus and Danya Cebus Operator Ltd., which is a wholly owned subsidiary of Danya Cebus (hereinafter – “the Operator Company”). At the same time, the Concessionaire and the State also signed an amendment to the Concession Agreement.

In February 2009, the Concessionaire received (temporary) authorization to open

the Highway to traffic, and from this date the Concessionaire is responsible for operation and maintenance of the Highway for the balance of the concession period up to July 2031.

113




(2) Highway 431 (Cont.)

a. (Cont.) Highway No. 431 is a wide, express, suburban highway, which connects between

Highway No. 20 (Netivei Ayalon South) in the west and Highway No. 1 (Jerusalem–Tel-Aviv) in the east, south of Rishon Lezion and Ramlei. The length of the Highway is 23 kilometers, and includes 12 intersections.

Pursuant to the Concession Agreement, the Concessionaire is responsible, to

finance and construct the Highway based on timetables determined and, thereafter, to operate and maintain the Highway until the end of the concession period, at which time the Project will be returned to the State.

Based on the Concession Agreement, the concession period is about 25 years

from the Determining Date, as defined below (hereinafter – “the Concession Period”), of which the construction period is about 2.5 years (the contractual end of the construction period was in January 2009 while, as a practical matter, the full length of the Highway was opened to traffic on February 4, 2009) and the operation and maintenance period is about 22.5 years. At the end of the Concession Period, the Concessionaire will return the Highway to the State for no charge.

In consideration for fulfillment of the Concessionaire’s undertakings under the

Concession Agreement, the State will pay the Concessionaire the following amounts:

1) A construction grant in the amount of NIS 400 million (hereinafter – “the

Construction Grant”), which is to be paid in three installments based on the progress of the construction work – upon the opening of Section A to traffic, upon the opening of Section E to traffic, and upon the opening of the entire Highway to traffic.

2) A fixed, semi-annual payment, in the amount of about NIS 58.9 million,

during the operation and maintenance period (hereinafter – “the Fixed Payment”).

3) A payment in the amount of 2 agurot for every kilometer traveled by vehicles

on the Highway, commencing from the date of the opening of the project to traffic (hereinafter – “the Variable Payment”).

114





a. (Cont.) The amount of the Construction Grant and the Fixed Payment noted above are

subject to certain adjustments provided in the Concession Agreement, including adjustments due to changes in the yields on debenture series from the date of submission of the tender bid up to the date of opening the Highway to traffic. The said payments are in December 2004 prices and are linked to the indices basket as defined in the Concession Agreement. The Variable Payment will be linked to the Consumer Price Index for the entire Concession Period.

It is noted that the State is permitted to terminate the Concession Agreement for

various reasons that are defined in the Concession Agreement, including, due to a breach on the part of the Concessionaire, due to a continuing act of G-d and for reasons of convenience. Various compensation mechanisms are defined for the different termination causes stated in the in the Concession Agreement. As at the signing date of the report, there are no violations in the project that are sufficient to cause a significant adverse effect on the project.

To guarantee compliance with its undertakings, the Concessionaire committed to

provide the State an irrevocable and unconditional autonomous guarantee, the amount of which has varied based on the execution status of the Project. As at December 31, 2010, a guarantee in the amount of NIS 29 million is outstanding in favor of the State. This guarantee is expected to decline to NIS 10 million three years after the end of the construction period, that is, NIS 12 million. The bank guarantee will be increased to NIS 50 million 3 years before the end of the Concession Period and will remain in force for two years after the end of the Concession Period and approval to return the Highway to the State is obtained. The above-mentioned amounts are in December 2004 terms unless indicated otherwise.

Regarding an undertaking subsequent to the date of the report for sale of 75% the

holdings of Danya Cebus in the shares of Netivei Hayovel, as a result of which the assets and liabilities of Netivei Hayovel were reclassified to “assets and liabilities held for sale” – see Note 46(E).

115





b. Financing Agreements In July 2006 the financing agreements were signed between the Concessionaire

and the organizer of the financing – Bank Hapoalim Ltd. – and the rest of the parties financing the project (hereinafter – “the Financing Agreements”). The Financing Agreements included 2 short-term loans intended to finance construction of the Project: a construction loan – which was repaid by a long-term loan, and a bridge loan – which was repaid by the construction grant. In addition, the Financing Agreements included a loan for financing debt principal service. This loan was repaid through the first receipt from the State in the operation period.

In March 2009, S&P Maalot awarded an initial rating of ilAA for the long-term

liability in the amount of up to NIS 1.4 billion issued by the Concessionaire on the conversion date as stated.

In April 2009, the long-term loan was withdrawn, in the amount of NIS 1,315

million, from a consortium of lenders including Bank Hapoalim and a number of institutional entities.

To ensure compliance with its commitments, in the framework of the Financing

Agreements the Concessionaire placed a series of fixed and floating liens in favor of the lending parties on all its existing and/or future assets. In addition, in this framework, Danya Cebus placed a lien in favor of the lending parties on all its shares in the Concessionaire, its rights to repayment of shareholders’ loans, and all its remaining derivate rights in connection with the project. Furthermore, the Company committed to the lending parties not to sell or transfer its holdings in Danya Cebus prior to opening the Highway to traffic, in such a manner as to transfer control in Danya Cebus without the approval of the lending parties.

c. Construction Agreement In July 2006, the Construction Agreement for Highway 431 was signed between

Danya Cebus (hereinafter also – “the General Contractor”) and the Concessionaire. This agreement is in a “turn key” format, in the framework of which Danya Cebus committed to construct the project on a “back-to-back” basis with the Concessionaire’s obligations to the State in this context deriving from the Concession Agreement, at a fixed price and in accordance with defined schedules.

116





c. Construction Agreement (Cont.) The contract price was set at about NIS 1,487 million, including filling stations

(linked to the indices basket – base index of December 2004). The contract price is fixed and includes all the risks involved with execution of the construction work on the project, however it does not include several items, such as additional amounts which the Concessionaire will receive from the State in connection with the construction work pursuant to the provisions of the Concession Agreement, including for modifications and additions that the State demands, to the extent they are approved and paid by it. The Construction Agreement provides that the total liability of the General Contractor under the Construction Agreement will not exceed the contract price.

The Construction Agreement defined the guarantees the contractor is required to

provide. As at December 31, 2010, the balance of the guarantees under the Construction Agreement was NIS 40 million. In addition, in accordance with the accountings between Danya Cebus and the State, Danya Cebus provided a guarantee in the amount of NIS 23 million. As at the signing date of the report, this guarantee was cancelled.

The Construction Agreement also includes the General Contractor’s commitment

for a two-year inspection period (that may be extended upon the existence of certain conditions), including provision of a guarantee in respect thereof in the amount of 2.5% of the contract price.

Shortly after discovery of the significant increase in the estimated costs of

Project 431, in February 2008 Danya Cebus conducted a series of tests, among other things, to quantify the scope of the increase in costs and define its underlying factors. Further to that stated above and in addition thereto, the Board of Directors of Danya Cebus decided to employ the services of an outside party (Mr. Ofer Alkalai, CPA, from the Office of Alkalai Monrov & Co.) to conduct an external examination (hereinafter – “the External Examination”) relating to Project Highway 431. Furthermore, the Securities Authority appointed an accounting firm to conduct an external audit, mainly with regard to Project 431 (hereinafter – “the Authority’s Examination”). As a result of the clarifications made and the Authority’s request, Danya Cebus amended, by means of a restatement, its financial statements for 2006, first quarter of 2007 and the second quarter of 2007 (hereinafter – “the Relevant Periods”). The impact of the restatement as stated above constitutes a timing difference in the recognition of income/loss in the Relevant Periods, and it has no impact on the total loss reported.

Due to the insignificant impact of that stated above on its financial statements, the

Group did not restate its financial statements for the Relevant Periods.

117





d. Operating and Maintenance Agreement In July 2006 the Operator Company signed an agreement with the Concessionaire

pursuant to which the Operator Company assumed the Concessionaire’s obligations vis-à-vis the State under the Concession Agreement relating to operation and maintenance of the Highway during the concession period, including fines imposed on the Concessionaire, if any, in respect of non-compliance with the required level of availability or other operation and maintenance requirements contained in the Concession Agreement, however not including all that relating to extensive restoration.

In consideration of fulfillment of all its obligations, the Operator Company is

entitled to a fixed semi-annual payment in respect of every six months of operation, as defined in the Operation and Maintenance Agreement. In addition, the Operation and Maintenance Agreement provides a mechanism for updating the payment due to the Operator Company as a result of a change in the actual scope of the traffic compared with that projected in the base traffic forecast. The total amount of the Operator Company’s liability is limited to NIS 60 million (linked to the CPI of December 2004), except for its liability in respect of violations of the minimum maintenance standard or due to non-availability, which is unlimited in amount.

Pursuant to the Operation and Maintenance Agreement, the Operator Company

undertook to provide a performance guarantee to the State covering the operation period in accordance with the concession agreement (commencing from the end of the third year from the grant date of the authorization to open the Highway for traffic), in the amount of NIS 10 million, which towards the end of the concession period will be replaced by a guarantee in the amount of NIS 50 million (in nominal amounts according to the CPI of December 2004). Furthermore, pursuant to the Operation and Maintenance Agreement, to guarantee performance of its obligations thereunder, Danya Cebus provided an owners’ guarantee (i.e., a guarantee of the company Danya Cebus) in favor of the Concessionaire, and also committed to provide a bank performance guarantee at the commencement of the operation period, in the amount of NIS 9 million, which upon the satisfaction of certain conditions, will be reduced to NIS 6 million from the elapse of five years onward (in December 2004 prices).

118





d. Operating and Maintenance Agreement (Cont.) In addition, in the framework of the Financial Closing, the Operator Company,

the Concessionaire, and the financing parties entered into a direct agreement, which is intended, primarily, to arrange the rights of the financing parties in a case where the Concessionaire is unable or there is a possibility that it will be unable to be involved in the project. As part of this agreement, the Operator Company undertook, among other things, to refrain from terminating the Operation and Maintenance Agreement without giving the lending parties the opportunity to remedy the breach, and a mechanism was provided for appointment of a “substitute party” in place of the Concessionaire.

As the construction work on Highway 431 progressed, a decision was made to

enter into an agreement with Netivei 431 – Operations and Control Ltd. (hereinafter – “the Operating Contractor”) (hereinafter – “431 Operating Agreement”) in a manner such that the Operating Contractor will function as the sub-contractor of the Operator Company for the operation and maintenance of Highway 431. It should be noted that the Operating Contractor is a related company of the Operator Company of Highway 6 – Derech Eretz Operator Ltd (24.5% of the Operating Contractor’s issued share capital is owned by the Company).

In December 2008, the General Meeting of Danya Cebus approved the details of the

agreement in this matter, the agreement between the Operator Company and the Operating Contractor, concerning the operation and maintenance of Project 431. Under the 431 Operating Agreement, the Operator Company will appoint the Operating Contractor as a sub-contractor to render operating and maintenance services to project 431 on a back-to-back basis with its operation and maintenance undertakings of the Operator Company toward the Concessionaire (see above), subject to several primary exceptions.

The main undertakings of the Operating Contractor include, among other things,

operation and maintenance of Project 431, traffic management and control in the Project, and ensuring availability, all pursuant to the provisions of the Concession Agreement concerning Project 431. In this framework, the Operating Contractor will be liable toward the Operator Company for any fines imposed by the State in respect of non-compliance with the Project 431 operation and maintenance requirements or availability requirements.

119





d. Operating and Maintenance Agreement (Cont.) Notwithstanding that stated above, it was agreed that the Operating Contractor’s

liability for fines in respect non-availability, as stated, will not apply in a number of cases, such as, cases of fines for non-availability that are imposed beyond a minimum level determined, due to performance of completion work with respect to the construction work on the project by the Construction Contractor, repair of defects of the Construction Contractor during the warranty period, performance of additional initiations by third parties, and fines relating to certain events up to a limit of NIS 500,000 per year. It is noted that the liability of the Operating Contractor by virtue of the 431 Operating Agreement for the entire 12-month period will be limited to the amount of the consideration due to the Operating Contractor in respect of that period, this being aside from its liability for a variance from the minimal required maintenance level or due to non-availability – which are not limited as to amount.

In exchange for fulfillment of its obligations, the Operating Contractor will be

entitled to a payment of about NIS 7.7 million for a 6-month period from the receipt date of the authorization for opening of the entire Highway 431 (linked to the CPI of May 2008, hereinafter – “the Base Index”) – half of the above-mentioned amount will be paid to the Operating Contractor every three months, as an advance deposit on account of the semi-annual payment. For purposes of assuring of its obligations under the 431 Operating Agreement, the Operating Contractor committed to provide a bank guarantee, in the aggregate amount of about NIS 3.1 million per year (linked to the Base Index) – this guarantee will increase after two years to NIS 6 million. It is clarified that the Operating Contractor will not be required to provide the guarantees to the State required under the Concession Agreement during the Operating Period under the 431 Operating Agreement and/or the shareholders’ guarantees.

In general, the validity of the 431 Operating Agreement is concurrent with the

Concession Period of Project 431 (that is, up to 2031), however, each of the parties is permitted to bring it to an end every 5 years. It was also agreed that upon occurrence of a number of events, the parties will be permitted to cancel the 431 Operating Agreement or to bring it to an end. Among other things, it was agreed that the Operating Contractor will be permitted to bring the agreement to an end if it is not able, within two years, to cancel the fines that may be imposed on the Concessionaire under the Concession Agreement due to a non-availability event deriving from delay in arrival of the police examiner in a case of a traffic accident with injured parties.

120





e. Services Agreement In July 2006, the Concessionaire and Danya Cebus signed an agreement for

provision of services, in the framework of which Danya Cebus undertook to provide the Concessionaire various services, such as, bookkeeping services, accounting services, legal consulting and administrative items, in exchange for a monthly fee of NIS 88 thousand during the Construction Period and NIS 108 thousand during the operating period (the amounts are linked to the CPI of December 2004). The period of the agreement is concurrent with the Project’s Concession Period. Each party is permitted to terminate the agreement for reasons of convenience by means of provision of advance notice however Danya Cebus may not exercise this right during the Construction Period and in the succeeding 12 months.

Performance Status

1. Danya Cebus completed construction of the Highway 431 project (except for an insignificant amount of finishing work) and opened the entire Highway to traffic in February 2009. The total cost of the contracting work performed on the project amounted to NIS 2,050.5 million (in prices of December 2009).

2. In February 2010, a compromise agreement was signed between Danya Cebus and the

Concessionaire, on the one side, and the State, on the other side, arranging all aspects of the disputes discussed between the parties (hereinafter – “the Compromise Agreement”) in connection with the construction and operation of the Project. As part of the Compromise Agreement, the State paid NIS 48 million, plus VAT as per law. In addition, the parties agreed to a mutual waiver and settlement of all their contentions and claims in connection with construction of the Project, including waiver by the State of fines up to the signing date of the Compromise Agreement, all subject to a number of exceptional matters. It was further agreed that the Concessionaire will perform certain completion work in the Project on the dates agreed to, and the during the period of their execution, the amounts presently being retained by the State out of the Construction Grant will be released to the Concessionaire, in the aggregate amount of about NIS 8.5 million (in base prices). With respect to non-compliance with the completion dates, an agreed-to compensation mechanism has been provided. As at the date of the report, Danya Cebus completed the required work.

In addition, the manner of settlement in respect of certain change orders provided to

the Concessionaire during the Project’s construction work and up to the date of this report was agreed to. Further to that stated above, the State returned to the Concessionaire the balance of a bank guarantee, which was provided in order to assure fulfillment of the Concessionaire’s obligations as a condition for receipt of prior payments out of the Construction Grant.

121




(3) Sharona project In December 2009, Danya Cebus signed a contracting agreement with Gindi Holdings

Development 2009 Ltd. (hereinafter – “Gindi Holdings”), to perform contracting work on the “Sharona” project south of the Kirya in Tel-Aviv (hereinafter – “the Project”), in the framework of which Danya Cebus will construct 3 towers, having 324 residential units, commercial areas and office space, on a total built-up area of about 65,000 square meters, as well as a parking facility on a built-up area of about 40,000 square meters, for a consideration of about NIS 326 million (plus VAT), based on the rate of progress of the work (hereinafter – “the Sharona Project”). The timetables for performance and completion of the work was set at 44 months from the issuance date of the permit allowing commencement of the excavation work in part of the project, whereas the timetable for completion and delivery of units and areas of the commercial floors, offices and basements was set at 30 months from the issuance date of the permit allowing commencement of the excavation work as stated – all subject to exceptions provided by the parties.

In addition, as part of the Sharona agreement, it was provided that Danya Cebus will

pay Gindi Holdings compensation in a case of delays in completion of the work based on the timetable stipulated and that it will provide Gindi Holdings guarantees and collaterals as is customary in undertakings of this type.

(4) One & Only project In July 2010, Danya Cebus signed a contracting agreement with Gindi Holdings

Development Ltd. (hereinafter – “the Customer”), to perform contracting work on the “One & Only” project in Petah Tiqwa (hereinafter – “the Project”), pursuant to which, Danya Cebus is constructing 8 towers having 523 residential units on a built-up area of about 80,000 square meters as well as a parking facility on a built-up area of about 10,000 square meters, for a consideration of about NIS 265 million (plus VAT), based on the progress of the work (hereinafter – “the Contracting Agreement”). The timetables for performance and completion of the work pursuant to the Contracting Agreement is up to 18 months for low buildings and up to 24 months for high buildings (commencing from issuance date of the Work Commencement Order with respect to each building, as applicable), plus an extension of up to 4 months with no payment of compensation or a fine (“grace period”). Danya Cebus committed to pay compensation in a case of delays in completion of the work beyond the dates set forth above, and also committed to provide the Customer guarantees and collaterals as is customary in undertakings of this type.

122



F. Cross Israel Highway Project

(1) In February 1998, a Concession Contract was signed between the Government of Israel (hereinafter – “the State”) and Derech Eretz Highways (1997) Ltd. (hereinafter – “Derech Eretz” or “the Concessionaire”) (an associated company) for construction of the Cross Israel Highway (hereinafter – “the Highway” or “the Project”) having a length of 86 kilometers. The Contract defines, among other things, the conditions for granting the concession and its validity, the rights and obligations of the Concessionaire, the rights and obligations of the State, the construction and establishment, operation of the Highway including rights to collection of a toll charge, and traffic enforcement and management.

In October 1999, regulation of the financing agreements (hereinafter – “the Financial

Close”) relating to the Project was completed, in the framework of which the financing agreements for the Project, agreements with the State, the Construction Agreement, the Operating Agreement, and the accompanying agreements were signed by the parties involved, which are required for execution of the Project (hereinafter – “the Agreements”). Upon the existence of certain conditions provided in the Concession Contract, the Concessionaire will be required to widen the Highway. Some of the Agreements were concluded between Derech Eretz and various third parties, where the shareholders (including the Company) are not a party to thereto, whereas some of the Agreements were concluded between the shareholders (including the Company or entities related thereto) and Derech Eretz and/or third parties. In most of the Agreements signed between the shareholders or entities related thereto, the responsibility of shareholders or the related entities to the other party is joint and several.

The concession period for operation of the Highway is 30 years, commencing from

July 19, 1999, which was defined as the determining date. At the end of the concession period, Derech Eretz is required to transfer the Highway to the State for no consideration.

In the Concession Contract signed between the State and the Derech Eretz, there is a

commitment on the part of the State to ensure the proceeds from the toll fees, which is reflected in a mechanism stabilizing the income from the toll fee, based on the State’s forecast of the number of motor vehicles that will use the Highway which constituted the basis for the Financial Closing (hereinafter – “the State’s Forecast”) as follows:

– If the actual number of motor vehicles that use the Highway is lower than the State’s Forecast, the State shall pay to the Concessionaire approximately 72% of the difference in the income from the toll fees.

– If the actual number of motor vehicles that use the Highway is greater than the State’s Forecast, the Concessionaire shall pay to the State approximately 51% of the difference in the income from the toll fees.

– The toll fees shall be updated every three years according to the number of motor vehicles that use the Highway.

123



F. Cross Israel Highway Project (Cont.)

(2) The shareholders in Derech Eretz were: the Company, Housing and Construction Holdings Ltd. (hereinafter – “Housing and Construction”), and Canadian Highways Investment Corporation (hereinafter – “CHIC”), which held 37.5%, 37.5% and 25% of the issued share capital of Derech Eretz, respectively.

(3) The Project’s planning and construction work was executed by a partnership named

Derech Eretz Construction Joint Venture (hereinafter – “CJV”), which was registered in October 1999 by its component members: Danya Cebus; Solel Boneh Ltd. – a subsidiary of Housing and Construction Holdings Ltd. (hereinafter – “Solel Boneh”); Solel Boneh – Roads Development Ltd. – a company 100% controlled by Solel Boneh (hereinafter – “Solel Boneh Development”); and Canadian Highways Investment International Corporation Pte. Ltd. (hereinafter – “CHIC International”) – a Singapore company from the CHIC Group (hereinafter – “the Contractor”).

The rates of ownership of the aforementioned four companies in the Partnership and

the Contractor are as follows: Danya – 33.3%, Solel Boneh and Solel Boneh Development (jointly and severally) – 33.3%, and CHIC International – 33.3%.

CJV undertook all the liabilities of Derech Eretz relating to the planning and

construction of the Cross Israel Highway. In 2009, an agreement was signed between CJV and the shareholders of the Company,

wherein the shareholders agreed to provide a loan to the CJV in an amount up to NIS 40 million, bearing interest at an annual rate of 4% linked to the Consumer Price Index. CJV will use this loan to finance completion of the expansion work, while deferring payments due to it from the Company. In the event this loan is not repaid by February 2010, it will bear interest at an annual rate of 5.5% linked to the CPI. In 2010, as a result of the sale transaction described below, the Company’s share in the loan, in the amount of about NIS 16.5 million, was repaid.

(4) The Company holds a 24.5% interest in the share capital of Derech Eretz Highways

Management Corporation Ltd., the company which is responsible for operating and maintaining the Cross Israel Highway during the concession period under the operation and maintenance agreement between it and Derech Eretz (hereinafter – “the Operating Company”). The other shareholders in the Operating Company are Housing and Construction Holdings Ltd. (24.5%) and Canada Israel Highways Management Ltd (51%).

124




(4) (Cont.) The Operating Agreement is for the Concession period (subject to prior exit dates as

defined therein). Pursuant to the Operating Agreement, the Operating Company will collect the toll fees and other payments in respect of special services (as defined in the Operating Agreement) from the users of the Highway on behalf of the Concessionaire. In consideration for preparing the Highway for operation and providing operating and maintenance services during the period of the Operating Agreement, the Operating Company will receive from the Concessionaire amounts as determined in the Operating Agreement. Based on the Operating Agreement and following approval of the substantial completion by the Appointed Authority, commencing from the construction completion date, the payment made by the Concessionaire to the Operating Company will be adjusted in accordance with the actual scope of the traffic.

(5) Pursuant to the provisions of the Concession Contract, an agreement was signed

between the State, Derech Eretz and the shareholders of Derech Eretz (including the Company), under which Derech Eretz granted to the State, at no cost, 49 options for profit participation certificates (hereinafter – “the Options”) which give their holders the right to acquire certificates that convey a 49% interest in every dividend distribution made by Derech Eretz and certificates to participate in 49% of principal and interest repayments of the shareholders’ loans and a proportionate share of mezzanine loan that was not used for repayment of the shareholders’ loans. The exercise period of the options begins one year after completion of the construction and runs up to the end of the Concession period. The exercise price for the Options is to be determined based on NIS 147 million, linked to the Consumer Price Index of April 1996 and bearing interest at the annual rate of 8%.

The State is entitled to sell the Options to third parties, subject to a right of first refusal

by Derech Eretz. Where a profit participation certificate is not held by the State, a government corporation or a trustee of the State, the holder thereof may convert it at any time into securities of Derech Eretz at no additional cost. The State notified Derech Eretz of its intention to sell the Options provided to it in the options’ agreement and thus to exercise the option. Derech Eretz is cooperating with the State as it is required to do pursuant to the agreements signed with the State.

For purposes of calculation of the Company’s share in the income of the

Concessionaire, the Company’s share was reduced due to the options issued by the Concessionaire to the State, as stated.

125




(6) In January 2006, a second addendum to the Concession Contract (hereinafter – “the Second Addendum”), was signed between the State and Derech Eretz, pursuant to which the Concession Contract also includes an additional section of the Highway (hereinafter – “Section 18”) and Derech Eretz undertakes to construct, operate and maintain Section 18 (the Concession Contract and the Second Addendum, as amended on February 6, 2007 will hereinafter be referred to as – “the Expanded Concession Contract”). For this purpose, Derech Eretz set up a wholly owned subsidiary named Derech Eretz Highways Section 18 (2007) Ltd. (hereinafter – “Section 18 Company”), which assumed all of the Concessionaire’s liabilities to the State under the Expanded Concession Contract in connection with execution of the Section 18 project. On June 24, 2007, the financial closing for the Section 18 project took place where the financing agreements were signed along with additional accompanying agreements and documents required for the Second Appendix to enter into effect (hereinafter – “the Financial Close”).

For purposes of construction of the Section 18 project, Section 18 Company entered

into an agreement with a new partnership called “Derech Eretz Joint Venture 18”, which was established between Danya Cebus (50%), and Solel Boneh and Solel Boneh Development and highways (50%) (hereinafter – “JV18”), whereby JV18 will undertake all the liabilities of Section 18 Company under the Expanded Concession Agreement (hereinafter – “the Construction Agreement”) in all that related to construction of Section 18. It is noted that the planning in the Section 18 project is being performed entirely by the State, where JV18 assumes the full liability for it.

On September 2, 2010, a directive was signed with respect to operation and

maintenance of Sections 19 and 20 of the Highway, for a 3-year period commencing on December 1, 2009 and up to November 30, 2012. As part of the said directive, it was determined, among other things, that: the provisions of the Concession Contract in connection with its operation and maintenance will apply to Sections 19 and 20; Derech Eretz will not be responsible for comprehensive restoration and execution of expansions in these sections; and the Appointed Authority is permitted to instruct Derech Eretz to construct a traffic administration and control system, the consideration and timetables for which will be determined through agreement of the parties. At the same time, a Fourth Addendum to the Operating Agreement between Derech Eretz and the Operator is to be signed, whereby the Operator will undertake (back-to-back) all the rights and obligations of Derech Eretz in accordance with the said directive. A violation of the said directive will not constitute a violation on the part of Derech Eretz of the Concession Contract and the Appointed Authority will not be entitled to foreclose on the perpetual guarantee, in whole or in part.

(7) As part of the agreements signed, the shareholders of Derech Eretz (including the

Company) undertook various liabilities, whether as direct liabilities or guarantees.

126




(8) Tax Ruling In August 2004, the Concessionaire received an advance tax ruling from the Income

Tax Authorities, pursuant to which the Concessionaire, if it complies with the conditions set forth below, it will report its taxable income for tax purposes (in the tax reconciliation statement) in accordance with the method indicated in the preliminary confirmations received in the past, that is, based on “traditional accounting” (“investment in leased real estate” considered to be a “fixed asset”, amortization of the investment in leased real estate based on the income tax rules (deduction of lease fees), and provision of a deduction for inflation in respect of the said amortization, deduction of financing expenses (subject to Section 17(1) of the Ordinance) etc.), all as arises from the rulings it received in the past.

In November 2006, Derech Eretz received approval from the tax authorities pursuant

to which the approval granted in August 2004 also applies to Section 18. (9) In August 2010, the Company signed a memorandum of understanding (hereinafter –

“the Memorandum of Understanding”) with the Israel Infrastructures Fund Group (hereinafter – “the Purchaser”) for sale of all its holdings (37.5%) in the issued and paid-up share capital of Derech Eretz. On December 30, 2010, the closing of the transaction took place and on December 31, 2010 the transfers of the monies and cancellation of the bank guarantees that were supposed to be effected on completion date of the transaction were also completed. In addition to sale of its holdings, as part of the transaction the Company was repaid the full amount of the shareholders’ loans it provided to Derech Eretz, directly or indirectly, and in total the Company received (in consideration for the holdings sold and repayment of loans) about NIS 502 million. Furthermore, the Company was released from certain bank guarantees in the updated amount (including CPI linkage differences), in the amount of about NIS 75 million.

The transaction does not include sale of the Company’s rights in Derech Eretz

Management Corporation Ltd. (24.5%), which serves as the operator of Cross Israel Highway, rights the Company will continue to hold, and does not include the rights of Danya Cebus in Derech Eretz Construction Joint Venture, a partnership that is presently executing expansion work in Highway 6.

As part of the Memorandum of Understanding, the Purchaser committed to provide

Danya Cebus an option, whereby for a consideration of NIS 5 million (plus VAT if applicable) to be paid by Danya Cebus to the Purchaser in 5 equal annual payments, the Purchaser will act to advance Danya Cebus as a subcontractor for performance of certain future work in connection with Cross Israel Highway, as detailed in the Memorandum of Understanding, provided the undertaking of Danya Cebus to perform the work as stated will be at market terms (hereinafter – “the Option”). The Option will be exercisable by Danya Cebus within 60 days from the closing date of the transaction. Subsequent to the date of the financial statements, Danya Cebus decided to exercise the Option and paid the first payment in the amount of NIS 1 million.

127




(9) (Cont.) As a result of completion of the transaction, the Company recorded a pre-tax gain in

its financial statements for 2010 of about NIS 200 million and it received free cash flows of about NIS 500 million.

As a result of completion of the transaction, subsequent to the date of the financial

statements, part of the proceeds were used to make early repayment (as defined in the debt arrangement) of part of the Company’s debentures (Series Y) – see also Note 23E(1)(c).

G. Prison Project In January 2006, an agreement for a period of 25 years (including the construction period)

was signed for execution of a PFI project involving the planning, construction, operation, management and financing of a prison facility south of Be’er Sheva, between the Government of Israel and the Prisons Service (hereinafter – “the Customer”), on one side, and A.L.A. Management and Operation (2005) Ltd., a private company owned jointly (in equal shares) by the Company and Minerav Engineering and Construction (1983) Ltd. (hereinafter – “the Bidder” or “the Concessionaire”), on the other side.

The prison is planned to include approximately 800 prison cells. The total annual proceeds

expected to be paid to the Bidder in respect of operation of the prison over a period of about 22 years is estimated at NIS 71 million for each year of operation. In addition, the Bidder is entitled to a construction grant of about NIS 47 million payable to the Bidder upon completion of the construction and receipt of the State’s approval for operation of the prison.

In October 2006, the agreement entered into effect and the Bidder commenced

construction of the project. In March 2007, the Financial Closing of this project was concluded. Construction work on

the project, which commenced in October 2006, was performed through a joint transaction of Minerav Engineering and Danya Cebus, and was completed during 2009.

In 2005, a petition was filed to the High Court of Justice challenging the legality of the law

permitting the operation of a prison under private management (hereinafter – “the Petition”). In March 2009, the High Court of Justice issued an interim order preventing operation of the prison by the Company and the State of Israel. The interim order will remain in force until another decision is rendered by the Court.

In November 2009, the High Court of Justice rendered a decision whereby based on

Amendment No. 28 to the Prisons Law, by virtue of which a prison may be privately operated, is not legal and, therefore, it is null and void. In light of the decision, it is not possible to continue execution of the project as stated.

128



G. Prison Project (Cont.) Up to now, the Concessionaire has invested in construction of the project and preparation

for its operation the amount of about NIS 250 million (the Company’s share in the project is 50%).

In March 2010, an agreement was signed between A.L.A. and the State of Israel arranging

the ending of the project (hereinafter – “the Project Termination Agreement”). In April 2010, the Company was informed by representatives of the State of Israel that approval was received from the Knesset Finance Committee pursuant to the Budget Foundation Law, which was determined as precondition in the Agreement for Ending of the Project.

In the framework of the Project Termination Agreement, A.L.A. will receive a return of all

the expenses invested in construction of the project, preparation for its operation and maintenance thereof, including overhead and indirect and contingent expenses, in the amount of NIS 250 million plus VAT, as well as compensation in respect of accompanying expenses and costs and losses. The aggregate amount to be paid to A.L.A. is about NIS 279 million plus VAT. As at the signing date of the financial statements, this amount had been had been paid in full, except for the amount of a NIS 1 million.

Pursuant to the Project Termination Agreement, in April 2010 A.L.A. delivered the prison

to the State, and the construction contractor provided bank guarantees to assure A.L.A.’s liabilities to the State (in place of the guarantees A.L.A. had previously provided to the State).

As a result of that stated above, the Company recorded income in its financial statements

for 2010 in the amount of about NIS 14 million. H. Light Train Project In December 2006, the Tenders Committee informed the Company that the Metropolitan

Transportation Solution Ltd. group (hereinafter – “MTS”) was awarded the tender for construction of the “Light Train” in Tel-Aviv. The tender is for a BOT venture for construction and operation of the “Light Train” system in Tel-Aviv, pursuant to a concession to be granted to the winner by the State for a period of 32 years. The train route is planned to cover a distance of 22 kilometers, running from the Central Bus Station in Petach Tiqwa through Bnei Barak, Ramat Gan, Tel-Aviv–Jaffa and Bat Yam, of which a section of 11 kilometers will be in an underground tunnel. The primary matter of competition in the tender is the amount of the construction grant to be paid by the customer, in increments.

Composition of the shareholders of MTS (hereinafter, “the Concessionaire”) is as follows:

the Company owns 20% of the issued share capital, Egged Holdings – 20%, Siemens AG, Transportation System Turnkey Division – 20%, CCECC – 20%, and Sorares da Costa Concessoes SGPS SA – 20%.

129



H. Light Train Project (Cont.) In May 2007, a concession agreement was signed between the MTS Group and the State,

by virtue of which the MTS Group was granted the concession for construction and operation of the “red line” for the Light Train project in Tel-Aviv and the surrounding area, for a period of 32 years.

Pursuant to the terms of the concession agreement signed on May 28, 2007, the planned

project schedule is as follows: financial closing to be concluded within one year of the signing date of the concession agreement, a construction period of 5 years from the financial closing date, and 27 years of operation from the end of the construction period. It should be clarified that the said schedule is subject to amendment, and subject to various delays that may occur as a result of various factors.

The project is planned to be constructed by the construction contractor (hereinafter – “EPC”)

in which the partners are: Danya Cebus, China Civil Engineering Construction Corporation (hereinafter – “CCECC”), Soares da Costa Construcao, SA (hereinafter – “SDC”), and Siemens, for a consideration of about €1.34 billion. The construction contractor and the partners therein will assume, jointly and severally, all the Concessionaire’s undertakings in the MTS project (on a back-to-back basis) with regard to project planning and construction, including the timetables and work quality. In this framework, the construction contractor will also perform advance-planning work prior to the financial closing (hereinafter – “the Preliminary Planning Work”).

The detailed construction agreements have not yet been signed, and the financial closing of

the project, which is a condition precedent for execution of the project, has not yet been performed. During the period, commencing from the planned date of the original financial close, MTS and the financing parties submitted a number of requests to the State to extend the date set for the financial close. The State approved these postponements, among other things, while increasing the tender guarantee by about NIS 20 million to about NIS 120 million.

Pursuant to the terms of the Concession Contract, against performance of the preliminary

planning work by the Concessionaire, the State is to pay amounts at the rate of up to 1.8% of the Construction Grant, during the 12 months from the signing date of the Concession Contract. Up to the date of this report, the Concessionaire had received grants from the State (on account of the Construction Grant, as stated), in the amount of about NIS 92 million. As at December 31, 2010, the amount of the Company’s share in the investment in the project amounted to about NIS 112 million.

130



H. Light Train Project (Cont.) During November 2009, the State notified the Concessionaire that it is examining the plans

in connection with the Light Train project, and in this framework it is considering bringing the concession agreement to an end. After a hearing process was held, the purpose of which was to examine the Concessionaire’s ability to reach a financial close prior to the Government making its decision with respect to the future of the project, and after additional discussions were held relating to the project as stated, in August 10, 2010, the Concessionaire and its shareholders, including the Company, received notification from the State of Israel (from the Appointed Authority for the Red Line of the Light Train) of cancellation of the concession agreement and of the State’s intention to foreclose within 30 days the Concessionaire’s offer guarantees in an amount totaling about NIS 139 million (as at that date and after linking the amount of the guarantee to the CPI) (of which the Company’s share is 20%). The State contends that the notification derives from the failure on the part of the concessionaire to comply with its obligations pursuant to the concession agreement and the lack of success in reaching a financial close. On August 19, 2010, the Concessionaire notified that it rejects the State’s proposal with respect to the matters that were being negotiated by the parties. The Concessionaire and its shareholders have various contention against the State in connection with the project, including a contention that the State breached the concession agreement and, as a practical result, against the State’s right to foreclose the guarantees.

In September 2010, the Concessionaire and its shareholders (including the Company)

received a notice whereby the State of Israel submitted a request to foreclose the Concessionaire’s offer guarantees, including the guarantee provided at the request of the Company, which totaled at that date NIS 28 million. On September 20, 2010, the said guarantee was foreclosed.

Foreclosure of the guarantees has no impact on the Company’s income and loss data in its

financial statements since in prior periods the Company recorded a provision in its financial statements for the full amount of the exposure with respect to non-performance of the project.

In October 2010, the Concessionaire filed a claim and request for a temporary order to the

arbitrators (a panel for settlement of disputes provided in the concession agreement), in the framework of which the arbitrators were requested, among other things, to announce that the State’s notification from August 10, 2010 regarding cancellation of the concession agreement and regarding foreclosure of the guarantees is null and void since, among other things, the Concessionaire did not violate the concession agreement. The arbitrators were also requested to order the State to return the amounts foreclosed and to require the State to compensate the Concessionaire for the damages it was caused due to the State’s actions and its breach of the concession agreement. In addition, the arbitrators were requested to provide temporary relief by prohibiting the State from acting in accordance with the cancellation notification and/or to take any action to remove the Concessionaire from the project until issuance of the arbitrators’ decision with respect to claim.

131



H. Light Train Project (Cont.) In November 2010, the Concessionaire deposited, in connection with its claim in

arbitration and pursuant to the decision of the arbitrators, 5 bank guarantees in the aggregate amount of about NIS 9.25 million.

In December 2010, the State submitted its statement of defense. In December 2010, the decision of the arbitrators was announced wherein the

Concessionaire’s request for a temporary restraining order was rejected. In January 2011, the State submitted a monetary claim to the arbitrators against the

Concessionaire, in the amount of about NIS 723.5 million. In its claim, the State contended that the Concessionaire is the party that breached the concession agreement in that, among other things, it failed to reach the financial close. In its claim, the State attached an “Indemnification Liability Certificate” equal to 1% of the amount of the claim.

In January 2011, the Concessionaire filed a request to require the State to deposit an

unconditional bank guarantee in an amount equal to 1% of the claim, as a precondition for hearing it. In its request, the Concessionaire contends the concession agreement provides that deposit of a bank guarantee as stated is a precondition to hearing a monetary claim filed by one of the parties to the agreement, and an “Indemnification Liability Certificate” does not fulfill the requirements of the concession agreement. In February 2011, the arbitrators’ decision was announced wherein the Concessionaire’s request to require the State to deposit a bank guarantee in the amount of about NIS 7 million (together with CPI linkage differences) within 21 days of the date of the decision. In March 2011, the said bank guarantee was deposited by the State.

In February 2011, the Concessionaire filed a statement of defense against the State’s claim.

Later on, the Concessionaire filed a request to amend its statement of claim and to amend the statement of defense in the State’s claim (in order to add a certain argument). The arbitrators permitted the amendments and gave the State time to submit an amended statement of defense in the Concessionaire’s claim and a statement of reply in the State’s claim, and set a date for discovery of documents.

In light of the early stage of the proceedings, the Concessionaire and its legal advisors are

not able to estimate, at this juncture, the probability that use of the Concessionaire’s economic resources will be required to settle the obligation required in the State’s claim.

Even though the Concessionaire’s shareholders (including the Company) are not a party to

the arbitration proceedings, it is possible that the State will start a separate legal proceeding against the said shareholders, among other things, on the basis of its contentions in connection with the obligation of the shareholders (as part of the concession agreement) to provide amounts to ensure fulfillment of the Concessionaire’s liabilities and to pay the State the said amounts based on its demand. The State has not yet started a proceeding as stated and, therefore, it is not possible, at this point, to estimate whether such a proceeding will ultimately be started.

132



H. Light Train Project (Cont.) It is noted that the Company will guarantee fulfillment of Danya Cebus’ obligations under the

project agreements, as far as required. Furthermore, the Company undertook to furnish the guarantees that Danya Cebus will be required to furnish under the project, in consideration for the issuance cost of the said guarantees, and a 15% commission.

As at December 31, 2010, Danya Cebus’ share of the investment in the project amounted to

about NIS 60 million. As at December 31, 2010, the extent of the exposure of Danya Cebus (the total investment less the advance payments received) is about NIS 30 million.

As part of the agreement for assignment of rights the Company signed with Danya Cebus, the

Company undertook to indemnify Danya Cebus in respect of the project’s preliminary planning expenses.

In addition, pursuant to the arbitrator’s decision and as part of the arbitration proceedings,

the Company provided the Concessionaire a guarantee in the amount of NIS 2 million. In light of that state above regarding the arbitration proceedings being carried on between

the Concessionaire and the State in connection with the Light Train project, and the Concessionaire’s position as noted above that it did not breach the concession agreement, the Group is not able to assess the chances the project will be realized.

I. Alon – The Israel Fuel Company Ltd. (Affiliated Company at the rate of about 26%,

hereinafter – “Alon”) In September 2010, the Company (through an investee company) signed an agreement

with Alon whereby the Company will sell and transfer the entire amount of its holdings in Alon against receipt of securities of public companies in the Alon Group, in Israel and in the United States, a transaction where it is expected that as a practical result thereof the Company Group will no longer be considered a single borrower group together with the Alon Group. Set forth below are the highlights of the transaction:

The Company will sell and transfer to Alon 2,200,428 shares of Alon it owns, constituting

26.14% of Alon’s issued share capital (hereinafter – “the Shares Being Sold”). In exchange for the Shares Being Sold, Alon will transfer and/or allot securities to the

Company as follows:

(a) 2,579,774 shares of Alon USA Energy Inc. (hereinafter – “Alon USA”) that are registered for trading constituting, as at the date of the agreement, about 5.51% of the issued share capital of Alon USA; as well as the right to receive additional shares of Alon USA, on demand one time only, on one of a number of dates provided, commencing from January 2010 and up to July 2011, in an amount estimated at between 3,287,000 and 3,674,000 shares of Alon USA (in accordance with the formula provided whereby the later the exercise date of the right the larger the number of shares the Company is entitled to receive) (hereinafter – “the Additional Alon USA Shares”). The Additional Alon USA Shares constitute, as at the date of the agreement, about 6.6% to 7.27% of the issued share capital of Alon USA (after the issuance).

133



I. Alon – The Israel Fuel Company Ltd. (Affiliated Company at the rate of about 26%, hereinafter – “Alon”) (Cont.)

(a) (Cont.) Alon undertook to act to register the Alon USA shares transferred to the Company for

trading. To secure Alon’s commitment to transfer the Additional Alon USA Shares, Alon will record a lien to the subsidiary’s benefit on a number of Alon USA shares it holds in the same amount as the estimated amount of the Additional Alon USA Shares;

(b) An option for acquisition of 982,863 shares (subject to customary adjustments) of Dor

Alon Energy Israel (1988) Ltd. (hereinafter – “Dor Alon”), owned by Alon, constituting as at the signing date of the agreement about 7% of the issued share capital of Dor Alon (hereinafter – “the Dor Alon Option”). The Dor Alon Option may be exercised (once only), during a period of 36 months from the signing date of the agreement (subject to events provided that may shorten the period, hereinafter – “the Acceleration Events”). The Dor Alon Option is exercisable in exchange for a payment to Alon of an amount equal to NIS 55 per share of Dor Alon (linked to the CPI and subject to customary adjustments) (hereinafter – “the Exercise Price”). In the framework of the agreement, the parties provided additional consents, including: cancellation of the existing shareholders’ agreement between the Company and the other shareholders in Alon; Alon’s commitment to release the Company and any other company in the Company Group from guarantees given to secure Alon’s liabilities, if any; Alon’s commitment whereby so long as the Company holds at least 5% of the issued share capital of Alon USA will use its voting power in Alon USA to appoint a director in Alon USA that the Company recommends; provision of a right of first refusal to Alon in connection with any separate sale (or group of sales within a period of 14 days) of shares of Alon USA in excess of 4% of the issued share capital of Alon USA.

In September 2009, after receipt of the approvals required by law, the transaction was

closed and the Company recorded a pre-tax gain in respect of the transaction, in the amount of about NIS 11 million.

As a result of closing of the transaction and cancellation of the agreement between the

Company and the other shareholders in Alon, the Company Group and the Alon Group are no longer considered a single borrower group for purposes of the provisions of the Proper Banking Law.

In light of splitting up the gas exploration activities of Dor Alon as part of a new company

the shares of which will be distributed to Dor Alon’s shareholders, on January 27, 2010 the Company gave notice of exercise of the Dor Alon Option and, accordingly, the Company acquired 982,863 ordinary shares of Dor Alon, constituting about 7% of Dor Alon’s issued share capital in exchange for a payment in the aggregate amount of about NIS 54 million. Upon execution of the split-up of Dor Alon’s gas exploration activities, the Company also received shares of Alon Gas Exploration, and as at December 31, 2010, the Company holds about 6.7% of the issued share capital of Alon Gas Exploration (during the period of the report the Company sold shares of Dor Alon at an insignificant gain).

134



J. Africa Israel Hotels Ltd. (a Subsidiary, hereinafter – “Africa Hotels”)

(1) In October 2010, the Company signed an agreement with a group of private purchasers, who are not related to the Company or the its controlling shareholder (hereinafter together – “the Purchaser”) for sale of 50% of its holdings in Africa Hotels (hereinafter – “the Shares Being Sold”).

The consideration for the Shares Being Sold was set at NIS 180 million (hereinafter –

“the Consideration”). It was agreed between the parties that the full consideration will be paid to the

Company upon completion of the transaction and, in addition, that within 36 months from the closing date of the transaction the Purchaser will acquire from the seller half of the balance of the unpaid shareholders’ loan provided by the Company to Africa Hotels (the balance of the shareholders’ loan as at the signing date of the transaction was about NIS 36 million).

Closing of the transaction is subject to fulfillment of a number of preconditions. The transaction was closed on December 30, 2010 (hereinafter – “the Closing Date”).

At the time of completion of the transaction, it was agreed between the Company and the Purchaser to make changes in the format of the transaction whereby sale of the shares of Africa Hotels will be split into two stages, such that on the completion date the amount of NIS 160 million will be paid for par of the Shares Being Sold, and 12 months later (subject to a mechanism permitting an extension of an additional 3 months) the balance of the consideration will be paid (NIS 20 million linked to the CPI and bearing interest at the annual rate of 7%) in exchange for the rest of the Shares Being Sold. It was further provided that commencing from the closing date and up to the date on which the Purchaser committed to complete acquisition of the balance of the Shares Being Sold, the Purchaser’s voting and control rights in Africa Hotels will be at the rate of 50% and management of Africa Hotels will be executed jointly by the Purchaser and Africa Hotels (as if the Purchaser holds 50% of the issued share capital of Africa Hotels).

Accordingly, on the closing date, the Purchaser paid NIS 160 million, and received

25,999,165 shares of Africa Hotels, about 44.44% of the issued share capital of Africa Hotels.

Pursuant to generally accepted accounting principles, due to the decline in the

Company’s holdings in Africa Hotels, and the management and control thereof jointly with the Purchaser, Africa Hotels ceased to be a subsidiary in the Company’s consolidated financial statements, the Company’s statement of financial position as at December 31, 2010 does not include the assets and liabilities of Africa Hotels and the investment in Africa Hotels is recorded in accordance with the equity method of accounting – see also Note 5 “Discontinued Operations”.

135



J. Africa Israel Hotels Ltd. (a Subsidiary, hereinafter – “Africa Hotels”) (Cont.)

(1) (Cont.) As a result of closing of the transaction, the Company recorded a pre-tax gain in its

financial statements of about NIS 257 million, and received free cash flows of about NIS 160 million. In addition, 12 months after the closing date, the Company is expected to receive additional free cash flows of about NIS 20 million (linked to the CPI and bearing interest at the annual rate of 7%) and to receive the amount of about NIS 18 million (where such amount bears CPI linkage differences and interest at the annual rate of 4.5%) to be paid 36 months from the closing of the transaction (in respect of the Purchaser’s liability to acquire from the Company its rights in half of the shareholders’ loans the Company provided to Africa Hotels).

(2) During 2010, an investee partnership of Africa Hotels, which owns an attractions park

in the City of Eilat, signed a lease, operation and management agreement covering the park with a third party (hereinafter – “the Lessee”), whereby the Lessee will lease the real estate, including the park, in exchange for fixed annual rental fees (hereinafter – “the Rental Fees”) for a period of five and a half years (hereinafter – “the Initial Lease Period”) with an option to extend the lease period for an additional four and a half years (hereinafter – “the Option”). It is clarified that the Option is a unilateral option that may be exercised by the Lessee subject to its compliance with a cumulative operating income target during the Initial Lease Period. In addition, the partnership will be entitled to additional consideration to be derived from the park’s operating income. The Lessee will be entitled to variable management fees and incentive fees at graduated rates to be derived from the operating income, as this term is defined in the agreement.

The park was conveyed to the Lessee in July 2010. As part of the agreement’s conditions, for purposes of adding additional or new

attractions, the Lessee will provide the partnership a loan, in the amount of up to about NIS 3.75 million, part of which is to be repaid in four installments of principal and interest commencing from May 2011, and part in single payment.

The agreement does not cover the restaurant operated on the park’s premises and the

partnership’s rental revenues from the restaurant will remain in its hands. (3) At the beginning of 2010, Africa Hotels decided to put up for sale its holdings in the

Best Western Forum Hotel & Conventions Center, located in Schwieberdingen, Germany. The Hotel’s activities were discontinued in September 2009 and at the same time the agreement with Best Western Hotels GmbH, which owns the trademark, was also ended.

136



J. Africa Israel Hotels Ltd. (a Subsidiary, hereinafter – “Africa Hotels”) (Cont.)

(4) In December 2009, Africa Hotels signed an agreement with a third party, which is a private company registered in Israel (hereinafter – “the Purchaser”) for sale of all its holdings in Tiberius Hot Springs Ltd. a wholly owned subsidiary of Africa Hotels (hereinafter – “the Shares Being Sold”). Tiberius Hot Springs Ltd. operates, among other things, the “Tiberius Hot Springs” recreation center and spa, the Holiday Inn Tiberius hotel, and a school for the hotel and other professions.

The consideration for the Shares Being Sold was set at NIS 97 million. In addition,

indemnification and compensation principles were agreed to in respect of claims and events that preceded the sale. On the signing date of the agreement, the Purchaser made an advance deposit in trust on account of the consideration for the Shares Being Sold in the amount of NIS 87 million. As part of the agreement it was provided that the balance of the consideration, in the amount of NIS 10 million, is to be paid immediately upon receipt of approval of the Supervisor of Restrictive Business Practices. In December 2009 the transaction was completed, after receipt of approval of the Supervisor of Restrictive Business Practices.

As a result of completion of the transaction, Africa Hotels received free cash flows of

about NIS 76 million, after part of the consideration was used to repay a loan in the company sold and to cover expenses, and an additional about NIS 10 million remained as a cash balance in the accounts of the company sold as repayment of a debt of Africa Hotels to the company sold. In respect of the said sale, Africa Hotels recorded a capital loss in its financial statements for 2009 in the amount of about NIS 12.9 million.

During January 2010, Africa Hotels signed a management agreement with Tiberius

Hot Springs Ltd., the holdings in which, as noted above, were sold. Pursuant to the said management agreement, management rights with respect to the hotel complex of the Holiday Inn Tiberius hotel, the “Tiberius Hot Springs” bathing center, the college activities existing on an area located adjacent to the hotel, and additional commercial buildings, were transferred to Africa Hotels – all of this during 2010.

As agreed between the parties, pursuant to the said management agreement Africa

Hotels is under an obligation that the management activities will produce minimum operating income, as agreed between the parties (subject to detailed definitions appearing in the said management agreement). In a case where the operating income exceeds this amount, Africa Hotels will be entitled to management fees equal to the excess of the operating income over this amount, whereas in a case where the operating income is less than this amount, Africa Hotels will be required to pay Tiberius Hot Springs Ltd. the difference between the actual operating income and the minimum amount agreed to as stated.

The management agreement expired at the end of 2010 and was not renewed.

137



K. Company Investments in the Textiles’ Sector In January 2009, the Company signed a memorandum of principles and a revision of the

memorandum of principles with international investors for sale of all its rights (50%) in the Gottex Group to the two other shareholders holding the Group (hereinafter – “the Purchaser”). The Gottex Group owns the following companies: Gottex Models Ltd., Christina America Inc., Gottex Trademarks and Gottex Fashions Ltd. Upon and subject to closing of the transaction, the Company will cease to hold any shares in the Gottex Group and the Purchaser will hold 100% of the rights therein.

Pursuant the memorandum of understanding, the Company will sell to the Purchaser and/or

companies it controls, 50% of the issued share capital and rights in the Gottex Group and will assign to the Purchaser its right vis-à-vis the Gottex Group to repayment of the shareholders’ loans provided to the Gottex Group by the Company, in consideration for release of the Company, as from the closing date, from all its liabilities and guarantees in connection with the Gottex Group, except for a guarantee in the total amount equal to $20 million, which was released in full during the year since completion of the transaction, and in consideration of the following amounts:

1. About NIS 166 million constituting immediate consideration. 2. Conditional consideration in the amount of up to $7.5 million that will be paid based

on the business results of sale of the trademarks “Zara” and “Pull and Bear” in Israel during a four-year period commencing on November 1, 2008.

Collaterals were deposited with the Company in order to secure the purchasers’ obligation

to release the Company from the above-mentioned guarantees. The Company undertook that upon the closing of the transaction the Africa Group will

refrain from competing, directly or indirectly, with the activities of the Gottex Group for the periods provided in the memorandum of understanding.

On August 25, 2009, the sale transaction was closed. The total amount of about NIS 71 million was paid as an advance deposit prior to the

closing date of the transaction. On the closing date of the transaction, the amount of NIS 50 million was paid, and the balance of the immediate consideration (about NIS 45 million) is to be paid at later dates as agreed between the parties. Up to the signing date of the financial statements, the full amount of the consideration was received.

Due to closing of the transaction, the Company recorded a pre-tax capital gain in its

financial statements for 2009 in respect of the transaction, in the amount of about NIS 55 million. In addition, a deferred gain in the amount of about NIS 38 million was realized, which will be recognized over a period of 3–5 years commencing from 2009.

138



L. Anglo Saxon Property Agency (Israel 1992) (hereinafter – “Anglo Saxon”) In October 2009, a memorandum of understanding was signed, subject to the signing of an

agreement between the parties (as detailed below), between the Company (through a wholly owned company) and a third party (hereinafter – “the Purchaser”) in connection with sale of the Company’s holdings in Anglo Saxon. Pursuant to the terms of the transaction, in consideration for sale of the above-mentioned shares being sold, the Company will be paid an aggregate amount of NIS 20 million. In addition, in accordance with the terms of the transaction, the Company is permitted to withdraw from Anglo Saxon the balance of the excess of its assets over its liabilities on the closing date of the transaction.

In December 2009, the transaction was completed. As a result of completion of the

transaction, the Company recorded a pre-tax gain in the amount of about NIS 14.4 million. M. Africa Israel Investments House Ltd. (a subsidiary, hereinafter – “Investments

House”) In November 2009, an agreement was signed between Africa Israel Investments House

Ltd. (a wholly owned investee company) and its two subsidiaries, Africa Israel Mutual Funds Management Ltd. and Africa Israel Investments Portfolio Management Ltd., on the one side (hereinafter together – “the Africa Companies”), and Meitav Investments House Ltd. and its subsidiaries (hereinafter together – “Meitav”), on the other side, regarding sale of the mutual fund management activities and investments portfolio management activities of the Africa Companies to Meitav. In December 2009, the said transaction was completed after the preconditions for its completion were fulfilled.

Pursuant to the terms of the transaction, in exchange for sale of the mutual fund

management activities, on the closing date of the transaction immediate consideration of NIS 10 million will be paid (hereinafter – “the Immediate Consideration for Management of the Funds”) and, in addition, the Company and/or Africa Companies will be entitled to additional contingent consideration of up to NIS 3 million, based on the amount of the management fees from customers of the Africa Companies that actually move over to Meitav and sign a portfolio management agreement with it, of which a non-refundable deposit of NIS 1.5 million is to be paid on the closing date of the transaction (hereinafter – “the Deposit”). In addition, the Africa Companies will be entitled to an additional contingent consideration not in excess of NIS 3 million, to the extent there is a future increase in the management fees from the customers transferred, as well as from certain new customers having a connection to the Company Group (the settlement with respect to this matter will be made at the end of 6 months and at the end of 12 months from the closing date of the transaction).

The entire consideration to be paid in respect of the transaction may not exceed, in any

case, NIS 16 million. In accordance with the above, upon closing of the transaction, the amount of about NIS 11.5 million (constituting the Immediate Consideration for Management of the Funds and the Deposit) was paid to the Company, less NIS 750 thousand that was paid by Meitav as part of the above-mentioned memorandum of understanding.

139



M. Africa Israel Investments House Ltd. (a subsidiary, hereinafter – “Investments House”) (Cont.)

As a result of closing the transaction in respect of the Immediate Consideration for

Management of the Funds and the Deposit, the Company recorded in its financial statements a pre-tax gain in the amount of NIS 10 million, and an additional gain was created in the amount of NIS 1.5 million that will be recognized over a period of 3 years.

In addition, in December 2009, the Board of Directors of Africa Israel Issuances Ltd.

(wholly owned investee company) decided to discontinue the underwriting activities, and to changing to a status of an inactive underwriter.

In light of all that stated, as at the signing date of the financial statements, the Company’s

activities in the capital market amounts solely to making its own behalf (Nostro). In October 2010, the transaction for sale of all the issued and paid-up share capital of

Africa Underwriting to a third party was completed, in exchange for an aggregate consideration of about NIS 1.7 million, plus an additional amount of about NIS 1.4 million, to be paid to the Group subject to withdrawal of a claim being maintained against the Company and other companies. In respect of this transaction, the Company recorded a capital gain of NIS 299 thousand in its financial statements for the fourth quarter of 2010.

In December 2010, an agreement was signed between the Company and a third party for

sale of 30% of issued share capital of Africa Finances, for a consideration of NIS 250,000. As part of the transaction, shares of Africa Finances (constituting about 20% of the issued share capital of Africa Finances) were transferred to a trustee, as part of an incentive plan for senior employees of Africa Finances (pursuant to Section 102 of the Income Tax Ordinance).

In January 2011, the transaction was completed. Completion of the transaction had no

impact on the Group’s results of operations. In December 2010, Africa Finances transferred all its holdings (100%) in Africa Israel

Investments House to the Company. N. In February 2009, the Company’s Board of Directors approved the Company’s

undertaking in 10 sale agreements for sale of 10 undeveloped lots in Savyon (hereinafter – “the Lots”). The consideration for the Lots will be paid by the purchasers in cash and/or in various debentures of the Company, which are registered for trading on the stock exchange, where the debentures will be “acquired” based on a key of 65 agurot for every NIS 1 par value of debentures.

The subject matter of the transaction is 6 Lots on an area measuring 1 dunam and 4 Lots on

an area measuring ½ dunam. The aggregate consideration for all the Lots was set at NIS 12.42 million in cash and NIS 33.2 million par value debentures based on the following detail:

140



N. (Cont.) NIS 3,249,996 par value debentures (Series L). NIS 18,796,016 par value debentures (Series N and P). NIS 4,413,996 par value debentures (Series O). NIS 4,169,996 par value debentures (Series U). NIS 2,569,996 par value debentures (Series V). Upon completion of the transaction as stated, the Company recorded a total pre-tax

accounting gain in respect thereof in its financial statements for 2009, in the amount of about NIS 27.62 million (of which a pre-tax gain of NIS 11.6 million with respect to acquisition of the debentures).

O. Tadiran Telecom Ltd. (hereinafter – “Tadiran Telecom”) In June 2010, the Company, through a subsidiary, signed an agreement with a third party

(hereinafter – “the Purchaser”) for sale of all the holdings (75%) of Afran (in which the Company holds a 50.1% interest and the Company’s controlling shareholder 49.9%) in Tadiran Telecom. Pursuant to the agreement, Afran and/or its shareholders will repay most of Tadiran Telecom’s liabilities to two banks, in the amount of about $7.15 million (the Company’s share about $3.6 million) and $1.8 million provided to Tadiran Telecom as part of foreclosure of guarantees, as detailed below (the Company’s share in this repayment amounts about $0.9 million). In addition, about $3.2 million was provided to the trustee for Tadiran Telecom employees (the Company’s share about $1.6 million). In addition, provisions were stipulated regarding assignment of rights to repayment of shareholders’ loans made to Tadiran Telecom, and Afran undertook to provide Tadiran Telecom an additional $120 thousand as participation in various expenses, as well as to bear fees of an attorney to be chosen by Afran for purposes of executing a prospectus for Tadiran Telecom in order to implement a plan for issuance of shares to employees.

In July 2010, the transaction was completed, after all the preconditions for its completion

were fulfilled. As a result of completion of the transaction, the Group recorded income attributable to the owners in an insignificant amount.

141


At December 31, 2010 Note 8 – Cash and Cash Equivalents At December 31 2010 2009 In Thousands of NIS Bank balances 577,750 962,764 Demand deposits 1,577,976 597,740

Cash and cash equivalents 2,155,726 1,560,504 Includes cash in accompaniment accounts in the amount of NIS 163,302 thousand (2009 –

NIS 146,379 thousand). These monies are not available for use but, rather, only for construction of inventory of residential units held for sale with respect to the projects for which they were received and after receiving approval from the financing bank.

The Group’s exposure to interest rate risk and currency risk and a sensitivity analysis with

respect to the financial statements is provided in Note 41 regarding financial assets. Note 9 – Short-Term Investments Interest At December 31 Rate 2010 2009 % In Thousands of NIS Deposit in euro 2–4 55,317 41,200 Deposit in shekels 1–5 63,017 174,943 Linked to the dollar (1) 0.15 73,190 137,828 191,524 353,971

(1) Includes the amount of about NIS 61 million (2009 – about NIS 128 million) constituting monies in trust and designated deposits.

Note 10 – Marketable Securities At December 31 2010 2009 In Thousands of NIS Shares (1) 125,297 97,425 Mutual fund participation certificates 32,410 52,164 Government debentures 161,987 148,894 Corporate debentures 74,404 219,105 Short-term Treasury notes 30,608 49,414 Basket certificates – 146 424,706 567,148

(1) Includes shares in the amount of about NIS 55 million (2009 – about NIS 67 million) constituting marketable securities available for sale.

142


At December 31, 2010 Note 11 – Trade and Other Receivables, Including Derivative Instruments At December 31 2010 2009 In Thousands of NIS

Current Assets

Trade receivables Tenants, lessees and others 151,683 60,217 Construction work in progress (1) 234,018 237,032 Customers of hotel companies – 44,210 Customers of industrial companies 615,223 574,520 Less: allowance for doubtful debts (63,834) (50,203) 937,090 865,776

Other receivables, including derivative instruments Prepaid expenses and advances to suppliers 273,790 210,397 Current maturities of long-term loans, investments and other debit balances 2,127 36,015 Short-term loans 167,732 6,412 Receivables in respect of property, plant and equipment and investment property 17,928 52,705 Receivables in respect of sale of company – 30,462 Derivative financial instruments 94,051 19,452 Accrued income 15,100 95,034 Employees 1,564 1,278 Institutions 228,815 257,962 Insurance indemnification with respect to contingencies 17,927 15,821 Interested and related parties and associated companies 161,082 34,233 Other receivables 84,735 171,304 1,064,851 931,075

At December 31 2010 2009 In Thousands of NIS

(1) Construction work in progress Costs incurred 4,465,952 4,909,771 Plus income recognized 145,131 81,993 Less losses recognized (297,473) (221,743) Less deposits received (4,079,592) (4,532,989)

234,018 237,032 See Note 44 regarding interested and related parties.

143


At December 31, 2010 Note 12 – Inventory of Buildings for Sale At December 31 2010 2009 In Thousands of NIS Residential construction* 3,931,555 4,626,817 Less – decline in value (924,052) (1,188,181) 3,007,503 3,438,636 * Includes credit costs capitalized during the period 2,775 44,983 Inventory of buildings for sale where the risks are passing to the customer on a continuous basis: Costs incurred plus income recognized – 2,307 Note 13 – Other Inventory At December 31 2010 2009 In Thousands of NIS Steel and ceramics Raw and auxiliary materials and packagings 163,846 87,668 Work in process 2,968 2,822 Finished and purchased goods 341,103 233,779 Inventory in transit 37,231 25,501

Total inventory of industrial company 545,148 349,770 ----------- -----------

Guardrails and infrastructure equipment 839 2,404 Construction and auxiliary materials 6,274 5,042 Work tools and other materials 1,206 6,979 8,319 14,425 ----------- -----------

553,467 364,195

144


At December 31, 2010 Note 14 – Assets and Liabilities Held for Sale

December 31 2010 In NIS ‘000

Assets classified as held for sale Current assets 193,350 Long-term debt in respect of the Highway 431 – see Note 5 1,396,574 Investment property 7,712 Inventory of real estate 184,264 Deferred tax asset 2,398 1,784,298 Liabilities classified as held for sale Credit from banks 44,810 Long-term loans from banks in respect of the Highway 431 project – see Note 5 1,318,472 Short-term credit from banks and others 256,944 1,620,226

Note 15 – Investments in Investee Companies

A. Investee Companies Accounted for using the Equity Method of Accounting

(1) Condensed financial data with respect to investee companies accounted for using the equity method of accounting, without adjustment for the ownership rates held in the Group

Set forth below is condensed data with respect to the financial position and results of

operations:

Jointly Controlled Entities Associated Companies As at December 31 As at December 31 2010 2009 2010 2009 In Thousands of NIS Current assets 698,614 646,443 469,785 1,147,146 Non-current assets 6,969,381 6,094,717 2,920,331 11,669,139 Total assets 7,667,995 6,741,160 3,390,116 12,816,285 Current liabilities 1,495,911 1,100,192 2,428,593 2,850,570 Non-current liabilities 4,859,873 4,806,150 1,118,706 10,531,139 Total liabilities 6,355,784 5,906,342 3,547,299 13,381,709 Revenues 2,142,945 1,029,837 495,746 2,001,721 Expenses (1,789,694) (973,219) (462,056) (1,923,033) Income (loss) for the year 353,251 56,618 33,690 78,688

145


At December 31, 2010 Note 15 – Investments in Investee Companies (Cont.)

A. Investee Companies Accounted for using the Equity Method of Accounting (Cont.)

(2) Additional information regarding associated companies and jointly-controlled entities held directly by the Company

General Information

Scope of Amount provided investment by the Company to in Company’s the associated company associated State of rights in Loans/ Financial company’s incorporation capital balances guarantees capital % NIS thousands

2010 Kalia Investments & Development Ltd. of The North Dead Sea Ltd. Israel 33.33 2,346 – 1,366 Armon Hahagmon Ltd. (Kasar El-Motoran) Israel 50 50,023 – 33,099 Renanot Enterprises & Investments Ltd. Israel 50 6,488 – (2) Afriram Ltd. Israel 40 25,845 14,108 (14,005) Savyon Nurseries Ltd. Israel 21 8,612 – 811 Africa Israel Hotels Ltd. Israel 50.00 27,555 59,404 180,000 Vash Telcanal Ltd. Israel 46.19 43,587 9,361 (45,272) A.L.A. Management and Operation Ltd. Israel 50 – – (1,106) Derech Eretz Management Corporation Ltd. Israel 24.50 – – 4,788 MTS Ltd. Israel 20 – 44,000 – Road Systems Section 18 Ltd. Israel 24.50 – – 282 Netiv Carmel Operating Systems Ltd. Israel 24.50 – – 401 Advanced Solutions Roads Systems Ltd. Israel 24.50 – – 562 Advanced Roads Systems Ltd. Israel 24.50 – – 29 Netivei 431 Operating and Control Ltd. Israel 24.50 – – 587 Safe Way on the Roads Ltd. Israel 24.50 – – 301 North Way Operating and Control Ltd. Israel 24.50 – – 176 A.M.T. Naveh Savyon Ltd. Israel 33.33 – – 1,314 Savyone LP USA 48.95 – – 2,469 164,456 126,873 165,800 2009 Kalia Investments & Development Ltd. of The North Dead Sea Ltd. Israel 33.33 2,287 – 1,366 Armon Hahagmon Ltd. (Kasar El-Motoran) Israel 50 48,529 1,557 26,013 Renanot Enterprises & Investments Ltd. Israel 50 6,606 – (2) Afriram Ltd. Israel 40 23,708 13,837 (14,010) Savyon Nurseries Ltd. Israel 21 507 – 811 Derech Eretz Highways (1977) Ltd. Israel 37.50 314,139 – (73,403) Vash Telcanal Ltd. Israel 46.19 33,387 16,500 (40,345) A.L.A. Management and Operation Ltd. Israel 50 19,351 70,071 (32) Derech Eretz Management Corporation Ltd. Israel 24.5 – – 2,542 MTS Ltd. Israel 20 – 44,250 – Road Systems Section 18 Ltd. Israel 24.50 – – 827 A.M.T. Naveh Savyon Ltd. Israel 33.33 – – 1,818 Savyone LP USA 48.95 – – 3,815 448,514 146,215 (90,600)

146




(3) Details regarding amounts recognized in respect of decline in value of investments in associated companies

For the Year Ended December 31 2010 2009 In Thousands of NIS Total – 168,291

(4) Financial statements attached

The Group attaches to these financial statements the financial statements of the following associated companies:

Derech Eretz Construction Joint Venture – Registered Partnership Derech Eretz Joint Venture 18 – Registered Partnership One Half-Jubilee. (5) Condensed information regarding associated companies and jointly-controlled

entities accounted for using the equity method of accounting, without adjustment for ownership rates held by the Group

(a) Condensed information with respect to financial position

Equity Equity allocated allocated to to the holders of Non- Non- owners rights not Rate of Current current Total Current current Total of the conferring ownership assets assets assets liabilities liabilities liabilities Company control % In NIS thousands

At December 31, 2010 Jointly-controlled entity A 50 135,248 561,173 696,421 27,719 517,225 544,944 151,477 –

At December 31, 2009 Jointly-controlled entity A 50 152,117 303,941 456,059 36,268 462,512 498,780 (42,721) –

(b) Condensed information with respect to results of operations

Income (loss) Income (loss) Income allocated to allocated to (loss) the owners holders of rights Rate of Gross Operating for the of the not conferring ownership Revenues profit income period Company control % In NIS thousands

Year ended December 31, 2010 Jointly-controlled entity A 50 87,211 30,175 223,634 201,275 201,275 –

Year ended December 31, 2009 Jointly-controlled entity A 50 36,380 27,146 26,615 (21,828) (21,828) –

Year ended December 31, 2008 Jointly-controlled entity A 50 234,926 83,121 81,955 11,722 11,722 –

147




(6) Details in respect of investments in capital notes, loans and other long-term debit balances

Details of linkage bases and interest terms


Linked or stated in Unlinked shekel Linked shekel Dollar-linked shekel or stated in dollars in other

0%–5% 5%–10% Total 0%–4% 4%–8% Total 0%–5% 5%–7% 7%–9% Total currencies

Total

In NIS Thousands

Loans and long-term debit balances 8,788 27,555 36,343 47,589 140,187 187,776 718 4,549 7,213 12,480 164,507 401,106 Capital notes 43,655 – 43,655 – 146,927 146,927 – – 291,346 291,346 – 481,928 79,998 334,703 303,826 164,507 883,034


Linked or stated in Unlinked shekel Linked shekel Dollar-linked shekel or stated in dollars in other

0%–5% 5%–10% Total 0%–4% 4%–8% Total 0%–5% 5%–7% 7%–9% Total currencies

Total

In NIS Thousands

Loans and long-term debit balances 10,905 35,031 45,936 51,158 581,481 632,639 44,922 5,689 312,620 363,231 181,297 1,223,103 Capital notes 49,656 – 65,865 – – – – – – – – 65,865 111,801 632,639 363,231 181,297 1,288,968

(6) Details in respect of investments in capital notes, loans and other long-term debit

balances (Cont.) Details of repayment dates Set forth below is detail of the repayment dates of investments in capital notes, loans

and long-term debit balances:

December 31 2010 NIS ‘000 2013 33,387 2014 10,200 More than 5 years 291,347 Not yet determined 548,100

883,034

148



B. Subsidiaries

(1) Additional information regarding subsidiaries held directly by the Company

General Information Amount provided by the Scope of Company’s Company to the subsidiary investment in State of rights in Loans/ Financial subsidiary’s Market incorporation capital balances guarantees capital value % NIS thousands

2010 Africa Israel Properties Ltd.*** Israel 56 23,615 372,458 1,380,501 892,450 Cebus Rimon Buildings and Development Industries Ltd. Israel 100 – – 6,864 – Africa Israel (Financing) 1985 Ltd. Israel 100 1,076,710 – 35,144 – Africa Israel Trade and Agencies Ltd. Israel 100 – – 113,906 – Danya Cebus Ltd.* Israel 22.07 – – (11,592) 423,202 Africa Israel International Holdings Ltd. Israel 100 (251,229) – 206,243 – AFI Development Cyprus 54 – 35,490 3,312,401 2,113,277 Africa Israel Communications Ltd. Israel 50.1 9,751 – (10,032) – Africa Israel Industries Ltd. Israel 76.6 – – 333,436 287,924 Bat Savyon Ltd. Israel 100 – – (5,914) – Africa Israel Financial and Strategic Properties Ltd.** Israel 100 2,748 – (4,482) – Africa Israel Investments House Ltd. Israel 100 (21,317) – 26,088 – Africa Israel International Investments (1997) Ltd. Israel 100 3,559,090 301,665 (2,939,660) – Africa Israel Tourism Holdings Ltd. Israel 100 – – 95,470 – 4,399,368 709,613 2,538,373 3,716,853

2009 Africa Israel Properties Ltd. Israel 67.85 23,090 399,981 1,600,937 750,816 Cebus Rimon Buildings and Development Industries Ltd. Israel 100 – – 7,456 – Africa Israel Residences Ltd. Israel 74.95 – 32,353 432,522 612,005 Africa Israel (Financing) 1985 Ltd. Israel 100 281,518 133,260 35,430 – Africa Israel Trade and Agencies Ltd. Israel 100 – 547 67,362 – Danya Cebus Ltd.* Israel 22.07 – – 150,558 205,368 Africa Israel Hotels Ltd. Israel 100 27,613 74,026 123,569 – Africa Israel International Holdings Ltd. Israel 100 1,519,395 183,649 3,182,001 – Africa Israel Communications Ltd. Israel 50.1 5,855 29,841 (38,275) – Africa Israel Industries Israel 70.91 – – 294,033 145,921 Bat Savyon Ltd. Israel 100 – – (5,747) – Africa Israel Financial and Strategic Properties Ltd. Israel 100 120,794 – (78,282) – Africa Israel International Investments (1997) Ltd. Israel 100 3,517,565 356,360 (3,065,026) – Africa Israel Tourism Holdings Ltd. Israel 100 – – 95,470 – 5,495,830 1,210,017 2,802,008 1,714,110

* Also held by Africa Israel Trade and Agencies Ltd. at the rate of 50.93% and therefore it is consolidated in the Company’s financial statements.

** Regarding a transaction for sale of 50% of the Company’s holdings after the date of the report – see Note 7M. *** See also Note 1C regarding sale of holdings as part of the debt arrangement.

149



B. Subsidiaries (Cont.)

(2) Details regarding dividends from subsidiaries received by the Company or to which the Company is entitled

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS From subsidiaries 15,629 60,877 304,089

C. Details regarding convertible securities investee companies

(1) As part of the concession contract for Cross Israel Highway, the State was granted options to acquire participation certificates that confer a right to 49% of every dividend distribution or repayment of subordinated debt – see Note 7F.

(2) Regarding options to employees granted in investee companies – see Note 39B.

150


At December 31, 2010 Note 16 – Property, Plant and Equipment

A. Composition:

Land, buildings and Facilities Hotels Industrial plants Office facilities and Land Machinery Land Machinery furniture for construction and and and and and self-use equipment buildings equipment buildings equipment Vehicles equipment Total In Thousands of NIS

Cost Balance at January 1, 2009 207,313 156,680 1,250,327 402,693 188,449 393,675 27,725 96,972 2,723,834 Additions 13,322 3,993 74,447 12,598 3,577 16,611 2,205 12,034 138,787 Exit from the consolidation – – (183,198) (87,474) – – (56) – (270,728) Transfer to properties held for sale (204) – – – – – – – (204) Deletions (170) (6,953) (3,832) (76) (507) (1,852) (7,019) (3,708) (24,117) Impact of changes in exchange rates (5,175) 218 3,685 (742) (3,300) (152) 940 (436) (4,962) Balance at December 31, 2009 215,086 153,938 1,141,429 326,999 188,219 408,282 23,795 104,862 2,562,610 Additions 9,225 10,221 16,459 – 1,076 23,473 5,345 6,900 72,699 Transfer from inventory of buildings held for sale – – 17,777 – – – – – 17,777 Exit from the consolidation – – (991,191) (326,999) – – (81) – (1,318,271) Deletions (1,777) (5,700) (105) – (5,885) (16,018) (1,649) (3,949) (35,083) Impact of changes in exchange rates (9,758) (2,689) (13,237) – (4,363) (547) (574) (3,884) (35,052) Balance at December 31, 2010 212,776 155,770 171,132 – 179,047 415,190 26,836 103,929 1,264,680

151


At December 31, 2010 Note 16 – Property, Plant and Equipment (Cont.)

A. Composition: (Cont.)

Land, buildings and Facilities Hotels Industrial plants Office facilities and Land Machinery Land Machinery Vehicles furniture for construction and and and and and and self-use equipment buildings equipment buildings equipment jet equipment Total In Thousands of NIS

Depreciation and losses from decline in value Balance at January 1, 2009 31,815 106,766 192,228 288,059 56,557 272,911 17,364 65,199 1,030,899 Depreciation for the year 4,826 9,742 22,239 15,209 3,692 17,105 2,633 9,433 84,879 Loss from decline in value – 12,669 49,919 – – – – – 62,588 Deletions (156) (1,431) – – (397) (1,325) (4,607) (2,396) (10,312) Exit from the consolidation – – (117,216) (71,916) – – (56) – (189,188) Impact of changes in exchange rates (88) 34 – – (5) (156) 37 1,012 834 Balance at December 31, 2009 36,397 127,780 147,170 231,352 59,847 288,535 15,371 73,248 979,700 Depreciation for the year 5,628 13,012 205 – 2,410 11,568 2,139 7,425 42,387 Loss from decline in value – – 64,153 – – – – – 64,153 Deletions (1,621) (3,346) – – (5,095) (15,614) (1,372) (2,475) (29,523) Exit from the consolidation – – (147,173) (231,352) – – (16) – (378,541) Impact of changes in exchange rates (67) (1,006) (4,211) – (374) (187) (376) 1,064 (5,157) Balance at December 31, 2010 40,337 136,440 60,144 – 56,788 284,302 15,746 79,262 673,019 Book Value

January 1, 2009 175,498 49,914 1,058,099 114,634 131,892 120,764 10,361 31,773 1,692,935

December 31, 2009 178,689 26,158 994,259 95,647 128,372 119,747 8,424 31,614 1,582,910

December 31, 2010 172,439 19,330 110,988 – 122,259 130,888 11,090 24,667 591,661

152


At December 31, 2010 Note 16 – Property, Plant and Equipment (Cont.)

B. Collaterals There are liens on most of the property, plant and equipment items to secure loans

received. See also Note 24G. C. Additional Information Some of the lands owned in Israel have not yet been registered in the names of the Group

companies in the Land Registry Office, mostly due to registration arrangements or technical problems. In addition, the Group has lease rights from the Israel Lands Administration since leases from the Israel Lands Administration constitute operating leases. The amounts paid to the Administration represent prepaid lease fees.

1. Land in Lod, the cost of which, as at December 31, 2010 is NIS 6,658 thousand

(December 31, 2009 – NIS 6,885 thousand), leased from the Israel Lands Administration (ILA). For part of the land, the lease period runs until 2043, under a lease capitalized at the rate 91% (a lease agreement has not yet been signed), while for the other part, the lease runs until 2040, and is fully capitalized. The Company has an option to extend the lease periods for an additional 49 years. Situated on the land is an industrial plant for the production of prefabricated elements, which is owned by a subsidiary.

2. Real estate held under a capitalized lease from the ILA, the balance of which as at

December 31, 2010 is NIS 7,852 thousand (December 31, 2009 – NIS 8,181 thousand), on which the plants of certain subsidiaries are located. The leasehold rights are for a period of 49 years ending in the years 2014–2054, with the possibility of extending the lease period by an additional 49 years.

153


At December 31, 2010 Note 17 – Investment Property

As at December 31 2010 2009 In Thousands of NIS Balance at January 1 5,387,076 6,448,833 Additions: Acquisitions 31,697 35,853 Transfer from investment property under construction 108,000 2,755,979 Transfer from property, plant and equipment 1,272 – Addition in respect of initially consolidated subsidiary – 67,167 140,969 2,858,999 Eliminations: Sales 39,582 537,630 Classified as held for sale 7,712 1,037 Company that exited the consolidation – 3,199,950 47,294 3,738,617

Translation differences (509,716) 63,812 Changes in fair value, net 221,242 (245,951)

Balance at December 31 5,192,277 5,387,076

A. Determination of Fair Value

The fair value of investment property was determined on the basis of valuations performed by outside, independent appraisers having appropriate professional qualifications with respect to the location and type of the investment property appraised. The fair value was determined on the basis of transactions recently executed in the market involving similar properties and similar locations to the property owned by the Company, should there have been any such transactions, as well as based on discounting of the future cash flows expected to derive from the properties. The range of the discount rates used in estimating the fair values is shown below:

In Percentages Eastern Israel Russia Europe U.S.

Office and commercial space 2010 7.5–12.0 10.0–14.0 7.5–10.5 6.0–7.5 2009 7.5–10.0 12.7–16.5 7.5–10.0 6.0–8.0

The methods by which the fair value of investment property was determined are detailed in Note 4 regarding determination of fair value.

154


At December 31, 2010 Note 17 – Investment Property (Cont.)

B. Amounts Recognized in the Statement of Income

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS

Rental income from investment property 440,152 487,926 564,452 Direct operating expenses deriving from investment property that produced rental income during the period (107,743) (186,674) (191,460) 332,409 301,252 372,992

Revaluation of fair value of investment property, net 221,242 (246,004) 125,548 Movement in provisions for completion – 53 40,037

Increase (decrease) in fair value of investment property, net 221,242 (245,951) 165,585

C. Details regarding Rights in Lands used by the Group as Investment Property

(1) Land in Yehud on which the Company built a commercial center that is leased from the ILA under a capitalized lease until the year 2042.

(2) A subsidiary has land in Lod that is held under a capitalized lease from the ILA for a

period of 49 years ending in 2052 with an option to extend the lease for an additional 49 years. Located on the land are buildings for high-tech industries and offices. The lease rights have not yet been recorded in the name of the subsidiary.

(3) Investment property held for rent in Nes Ziona that are leased from the Weizmann

Institute of Science (under a non-capitalized lease). On the above tract of land, a subsidiary has erected an industrial park for high-tech industries. The lease period for the land is until 2029. Under an agreement with the Weizmann Institute, at the end of the lease period, the land and buildings erected thereon will become the property of the Institute, at no cost.

With respect to this lease, the subsidiary is to pay annual lease rentals at the rate of 7%

of the value of the land without development and enhancements made by the lessee, as will be valued every ten years by a real estate appraiser.

The last valuation in respect of the area developed in the first stage is based on the

land prices in 2001, while in respect of the area developed in the second stage it is based on the land prices in 1999. The lease rentals are linked to the CPI.

155


At December 31, 2010 Note 17 – Investment Property (Cont.)

C. Details regarding Rights in Lands used by the Group as Investment Property (Cont.)

(4) A subsidiary has rights in land and buildings for rent in Migdal Ha’Emek used as a high-tech industrial park is. The rights in the land are held under a lease capitalized at the rate of 91% up to 2044, with an option to extend for an additional 49-year period.

(5) The Africa House in Yehud is located on land held under capitalized lease terms for a

period of 49 years (up to 2042) with an option to extend for an additional 49 years. (6) A subsidiary’s share in the acquisition cost of fully capitalized lease rights (91%) of

land on which a shopping mall was constructed located in the Talpiot Industrial Area in Jerusalem, with additional costs accompanying the acquisition, in the amount of about NIS 4 million. The lease rights were acquired for a period of 49 years ending in 2051. There is an option to extend on terms that will be customary in that period.

(7) Land Nes Ziona of a subsidiary acquired from the Weizmann Institute of Science

under a perpetual lease. Buildings were constructed on this land that are leased out to the high-tech industry, which have been leased out in exchange for economic lease fees.

(8) Land in Savyon leased under a non-capitalized lease from the ILA until the year 2002.

The Company has an option to extend the lease for an additional period of 49 years. The Company has notified the ILA of its decision to exercise the said option to extend the lease for an additional 49 years and as part of lease renewal process capitalized lease fees of NIS 3.4 million were paid.

(9) Rights in lands in New York, in the United States were leased from the landowner up

to 2102, in exchange for annual lease fees. A project of apartments held for rent has been constructed on the land.

(10) Real estate in Prague (Czech Republic) – land rights acquired in Prague by

subsidiaries and leased out upon completion of the renovations. The lands were leased from the Czech authorities for periods of 50 years, up to March 31, 2048, in consideration of annual lease fees.

(11) Real estate in Amsterdam (The Netherlands) – rights in land and a building acquired

in Amsterdam by a subsidiary on which there are about 3,000 square meters of offices for rent that are leased out in part. The land is leased from the Municipality of Amsterdam until 2040.

(12) For details regarding leased lands in Russia – see Note 18.

D. Collaterals Most of investment properties are subject to leases to secure loans received. See Note 24G.

156


At December 31, 2010 Note 18 – Investment Property under Construction As at December 31 2010 2009 In Thousands of NIS Balance at January 1 5,265,491 7,212,775 Additions: Acquisitions 497,833 722,454 Additions in respect of initially consolidated subsidiary – 79,656 Transfer from assets held for sale – see Note 7A(2)(f) 644,796 – Capitalized costs and expenses 209,761 898,607 1,352,390 1,700,717 Eliminations: Sales – 20,168 Company that exited the consolidation – 20,497 Classified as held for sale – 717,416 Transfer to investment property 108,000 2,755,979 108,000 3,514,060

Translation differences (437,790) 22,553 Loss from decline in value / changes in fair value, net (see Section A, below) (20,290) (156,494)

Balance at December 31 6,051,801 5,265,491 Determination of fair value The fair value of investment property was determined on the basis of valuations performed by

outside, independent appraisers having appropriate professional qualifications with respect to the location and type of the investment property appraised. The fair value was determined on the basis of transactions recently executed in the market involving similar properties and similar locations to the property owned by the Company, should there have been any such transactions, as well as based on discounting of the future cash flows expected to derive from the properties. The range of the discount rates used in estimating the fair values is shown below:

In Percentages Eastern Israel Russia Europe U.S.

Office and commercial space 2010 7.7–8.2 9.0–15.1 7.7–10.0 8.0 2009 8.5 11.5–16.0 9.0–9.75 8.0 The methods by which the fair value of investment property under construction was determined

are detailed in Note 5 regarding determination of fair value.

157


At December 31, 2010 Note 18 – Investment Property under Construction (Cont.) Details regarding rights in real estate used by the Group as Investment Property under

Construction The Company’s rights in most of the lands included in its properties’ portfolio in the

Commonwealth of Nations (including investment property, investment property under construction, lands intended for construction of hotels and lands intended for construction of residential units) are lease rights from the country’s authoritative bodies or from the authoritative bodies of the relevant municipalities. In general, the terms of these agreements vary: short-term agreements signed for periods of less than one year generally during the development period and long-term agreements after completion of the project for a period of up to 49 years. According Russian law, upon completion of construction the developer is entitled to receive long-term lease rights for the land on which the building is situated and that is needed for its use, usually for period of 49 years. Since most of the Company’s investment properties are located on lands intended for very expansive future development, long-term lease agreements have not been signed with respect thereto.

In addition to that stated above, the Company’s rights in the AFIMALL derive from an

investment agreement signed with the City of Moscow whereby upon completion of the project the City will receive 25% of the holdings in AFIMALL. According Russian law, upon completion of construction the developer is entitled to receive long-term lease rights for the land on which the building is situated and that is needed for its use, usually for period of 49 years.

Nonetheless, a use right as stated does not apply to the expanded areas, on which

AFI Development intends to develop the project. To the extent AFI Development does not sign lease or investment agreements in connection with the lands it intends to fully develop, there is no certainty that it will be able to develop the said projects as planned.

In addition, a number of AFI Development’s projects are subject to short-term lease agreements

that must be renewed prior to completion of the projects to which they relate. As at the date of the report, there are a number of cases where the period of the lease agreements has expired. In most of the said cases, AFI Development is continuing to use the lands and to pay the lease rentals. Pursuant to Russian law, lease agreements that have expired are considered to remain in effect for an unlimited period of time if the lessee (the Group) continues to use the land and the owners do not object. In such a case, each side may cancel the property lease agreement at any time, upon provision of advance notice of 3 months. The lease agreement may stipulate a different time period for its cancellation. In such a case, the Group estimates that in cases where it has signed lease agreements that have expired, the probability that the lessor (the City) will object to extension of the lease’s validity is low. It is further noted that where lands designated for development or construction are involved, generally notification of termination of the lease will not be provided by the lessor (the City) so long as construction and development of the project are continuing based on the approved timetables. In addition, in cases where construction of the structure on the said land has been completed, the owner of the structure is granted an exclusive right, based on his exclusive discretion, to lease or purchase the lot on which his building stands. Furthermore, the owner of the structure has additional rights in connection with extension of the lease agreement (such as a right of first refusal) and various defenses against a unilateral cancellation of the lease agreement by the City.

158


At December 31, 2010 Note 19 – Loans, Investments and Long-Term Debit Balances

A. Breakdown based on Type of Investment At December 31 2010 2009 In Thousands of NIS Financial assets presented at fair value through the statement of income 231 126,057 Financial assets available for sale – investment in shares 736 4,359 Loans and receivables (1) 163,401 1,757,020 164,368 1,887,436

(1) As at December 31, 2009 – includes long-term debt in the amount of NIS 1,403,264 thousand in respect of a concession agreement with the State in connection with Highway 431. The weighted-average interest rate with respect to the financial asset is 5.3%. With respect to a transaction for sale of the project – see Note 5 “Discontinued Operations”.

B. Details with respect to Investments in Loans and Long-Term Debit Balances

Detail of linkage bases and interest conditions

As at December 31, 2010 Unlinked shekels Shekel linked to the CPI Shekel linked to or stated in the

dollar

Stated interest rate 0%–5% 0%–2% 4%–6% Total 0%–2% 5%–7% Total Total In thousands of NIS

Long-term loans and debit balances 54,595 33,699 27,417 61,116 13,500 36,317 49,817 165,528 Less current maturities – – (2,127) (2,127) – – – (2,127)

Long-term loans and debit balances, net 54,595 58,989 49,817 163,401

As at December 31, 2009 Linked to Unlinked or stated shekels Shekel linked to the CPI Shekel linked to or stated in the dollar in other Stated interest rate 0%–5% 0%–2% 4%–6% Total 0%–2% 2%–5% 5%–7% Total currencies Total In thousands of NIS

Long-term loans and debit balances 97,543 19,080 1,482,600 1,501,680 1,116 169,267 20,453 190,836 2,976 1,793,035 Less current maturities – – (36,015) (36,015) – – – – – (36,015)

Long-term loans and debit balances, net 97,543 1,465,665 190,836 2,976 1,757,020

159


At December 31, 2010 Note 19 – Loans, Investments and Long-Term Debit Balances (Cont.)

B. Details with respect to Investments in Loans and Long-Term Debit Balances (Cont.)

Set forth below is detail of the repayment dates of long-term investments in loans and debit balances, after deduction of the current maturities:

December 31 2010 NIS ‘000 2011 52,250 2012 2,697 2013 14,815 2014 692 More than 5 years 37,329 Not yet determined 55,618

163,401

Note 20 – Inventory of Real Estate

A. Composition As at December 31 2010 2009 In Thousands of NIS Freehold 1,338,784 1,782,420 Leasehold 301,168 203,908 1,639,952 1,986,328

B. Additional Information Part of the inventory of real estate has been leased from the Israel Lands Administration.

These rights have not yet been registered in the names of the Group companies, due to technical reasons. For most of the lands, a development agreement has been signed with the Administration whereby the Group companies are to execute development and construction work on the above-mentioned lands at the end of three to six years.

160


At December 31, 2010 Note 21 – Intangible Assets

Customer Goodwill Portfolios Software Other Total In Thousands of NIS

Cost Balance at January 1, 2009 278,199 16,002 64,448 8,226 366,875 Acquisition of minority interests 1,818 – – – 1,818 Acquisitions – – 10,969 – 10,969 Exit from the consolidation (1,184) – – (4,458) (5,642) Impact of changes in the currency exchange rates (68) (1,747) (47) – (1,862) Balance at December 31, 2009 278,765 14,255 75,370 3,768 372,158 Acquisitions – – 12,068 – 12,068 Deletions – – (49) – (49) Exit from the consolidation – – (4,409) (432) (4,841) Impact of changes in the currency exchange rates (11,815) (645) 29 – (12,431) Balance at December 31, 2010 266,950 13,610 83,009 3,336 366,905 Depreciation and Losses from Decline in Value Balance at January 1, 2009 157,041 6,089 47,308 1,133 211,571 Depreciation for the year – 1,745 5,281 870 7,896 Loss from decline in value 36,299 – – – 36,299 Impact of changes in the currency exchange rates 2,405 (267) 7 – 2,145 Balance at December 31, 2009 195,745 7,567 52,596 2,003 257,911 Depreciation for the year – 1,251 4,955 521 6,727 Deletions – – (25) – (25) Exit from the consolidation – – (3,094) (204) (3,298) Impact of changes in the currency exchange rates (7,932) 76 (8) – (7,864) Balance at December 31, 2010 187,813 8,627 54,431 2,320 253,191 Depreciated Cost per Books

As at January 1, 2009 121,158 9,913 17,140 7,093 155,304

As at December 31, 2009 83,020 6,688 22,774 1,765 114,247

As at December 31, 2010 79,137 4,983 28,578 1,016 113,714

161


At December 31, 2010 Note 21 – Intangible Assets (Cont.) Examination of Decline in Value for Cash-Producing Unit including Goodwill For purposes of examining decline in value, the goodwill is allocated between the Group’s cash

producing units, which constitute the lowest level in the Group wherein the goodwill is monitored for internal management purposes.

The Company made an internal examination of the effect of the crisis on, among other things, the

recoverable amount of the goodwill allocable to the activities in Eastern Europe. In addition, the Company examined the goodwill relating to the investments house that manages

the Group’s activities in the capital market, including underwriting and management of issuances, mutual funds and investment portfolios. In light of the difficult situation in the capital markets and discontinuance of the activities of investments house, as described in Note 7M, in 2009 the Company wrote off the full amount of the goodwill relating to these activities.

In respect of an investment in a subsidiary in Israel, as at December 31, 2009 the Company

recorded a write down on its books based on a valuation it received for the subsidiary. Further, the Company adjusts the goodwill for a change in estimate of liabilities with respect to a

“put” option to the holders of interest not conferring control in connection with a subsidiary. During the fiscal year, the Group estimated the recoverable amount of the goodwill and

determined that there has been no decline in value. Note 22 – Employee Benefits The Group’s employee benefits include post-employment benefits, short-term benefits and

share-based payments. Regarding post-employment benefits, the Company has defined benefit plans wherein it deposits

amounts in central severance pay funds, appropriate insurance policies and insurance policies issued by a related party (hereinafter – “Assets in respect of Employee Benefits that are Not Plan Assets”). The defined benefit plans entitle the eligible employees to a single lump-sum payment based on their last salary for every year worked. In addition, the Company has a defined contribution plan covering some of its employees that are covered by Section 14 of the Severance Pay Law, 1963.

Regarding share-based payments – see Note 39. Danya Cebus is a member of the Union of Contractors and, accordingly, its employees from the

grade of foreman and below are covered by a collective bargaining labor agreement for workers in the construction and public works sector, which was signed between the Contractors and Builders Association and the General Federation of Labor – Construction Workers Union, on January 21, 2010, and entered into effect on July 5, 2010 (hereinafter – “the Collective Agreement”).

162


At December 31, 2010 Note 22 – Employee Benefits (Cont.) According to the Collective Agreement, Danya Cebus is required to provide a comprehensive

pension for all employees from the grade of foreman and below (budget of 17.5% in a new fund and 20.5% in an “old” fund) and for an employee insured by a provident fund or insurance that is not a pension fund – a budget 18.33% plus acquisition of insurance covering disability at a rate equal to the lower of 2.5% or a rate that conveys to the employee compensation for disability at the rate of 75% of the wages – all of the above from the entry date of the agreement into effect. In addition, the agreement preserves the insurance rights in a comprehensive pension fund as they were on the eve of the agreement’s entry into effect.

Some of the veteran employees are insured by a comprehensive pension and some of them are

insured by Managers’ Insurance. Pursuant to a legal opinion received by Danya Cebus, its risk is low, if not very low, in respect of a claim by the employees insured by Managers’ Insurance and who approved or ratified their choice for this in writing, to complement rights as if they were insured in a pension fund.

The liabilities of Danya Cebus for employee severance pay are fully covered by the amounts

provided for this purpose and by regular current payments to pension funds and/or insurance companies and/or severance pay funds in banks and/or severance pay funds.

In addition, the general labor agreement preserves the obligation to transfer payments to an

advanced continuing education fund for foremen functioning as active foreman with at least 10 years of service in the construction industry, holding a license as a foreman from the Ministry of Labor and engineers having at least 3 years of service and serving in the position of foremen – all from the entry date of the agreement into effect (from the date of entry into effect, every foreman is entitled to an advanced education fund commencing from the first day of his service, whereas a party that is not a foreman – at the end of three years of service in the construction industry in Israel). For some of these employees provisions were not made for the full amounts based on the collective agreement covering advanced continuing education. Danya Cebus made a monetary provision on its books that, in its estimation, is adequate.

163


At December 31, 2010 Note 23 – Employee Benefits (Cont.)

At December 31 2010 2009 In Thousands of NIS Present value of unfunded liabilities 22,395 10,514 Present value of funded liabilities 31,512 52,106 Total present value of liabilities 53,907 62,620 Fair value of plan assets (41,002) (40,385) Liability recognized in respect of defined benefit plan 12,905 22,235 Liability in respect of other long-term benefits 2,105 2,936

Total employee benefits 15,010 25,171 Presented in the following categories: Excess of assets over liabilities in respect of employee

benefits (1,626) (2,332)

Other payables and credit balances 1,887 8,244 Long-term employee benefits 14,749 19,259 15,010 25,171

Actuarial assumptions The main actuarial assumptions as at the report date (based on a weighted-average): 2010 2009 % % Discount rate at December 31 (*) 4.1–5.0 2.27–5.05 Expected rate of return on plan assets at January 1 4.1–5.0 3.00–5.05 Rate of future salary increases 2.8–3.0 (3.86)–4.65

* The discount rate that was used in the calculation is based on the yields on government debentures bearing fixed interest having the same average life as the average life of the gross liability.

In July 2010, the Company’s Board of Directors approved granting special bonuses in respect of

extraordinary efforts and/or exceptional achievements, as detailed below: To Mr. Ron Fainaro, the Company’s CFO, a bonus in the aggregate amount of NIS 1.25 million. To Mr. Richard Marin, CEO of Africa’s subsidiary in the United States, a bonus in the aggregate

amount of $1.25 million. In order to complete the picture, it is noted that in addition to the special bonuses as indicated

above, the Company’s Board of Directors approved distribution of bonuses in the aggregate amount of NIS 0.9 million to 5 officers and managers employed by the Company (not including the Company’s CEO and Deputy Chairman of the Board of Directors), in amounts that in the Company’s estimation do not rise to the level of an extraordinary transaction.

164


At December 31, 2010 Note 23 – Employee Benefits (Cont.) In addition, the Boards of Directors of subsidiaries decided to distribute bonuses in the aggregate

amount of NIS 4 million to additional officers and managers in the Group. Further, in January 2011, the Company’s Board of Directors approved the grant of a special

bonus to Mr. Izzi Cohen, the Company’s CEO, further to approval thereof by the Company’s Audit Committee, in the amount of NIS 6.5 million.

Note 23 – Loans and Credit from Banks and Other Lenders This note provides information regarding the contractual conditions of the Group’s

interest-bearing loans and credit measured at amortized cost. Additional information regarding the Group’s exposure to interest, foreign currency and liquidity risks is provided in Note 41 regarding financial instruments.

A. Composition Current Liabilities

At December 31 2010 2009 In Thousands of NIS Credit from banks: Revolving credit 70,824 72,906 Short-term loans 1,747,572 3,150,417 Credit from others: Short-term loans 193,150 192,090 Current maturities of credit from banks and others: Current maturities of loans from banks 258,827 561,364 Current maturities of other credit – 7,662 2,270,373 3,984,439 Debentures 1,277,346 7,576,961

3,547,719 11,561,400

165


At December 31, 2010 Note 23 – Loans and Credit from Banks and Other Lenders (Cont.)

A. Composition Non-Current Liabilities

At December 31 2010 2009 In Thousands of NIS Liabilities to banks: Loans from banks 5,223,908 6,030,382 Less current maturities (258,827) (561,364) 4,965,081 5,469,018 ------------- ------------- Other long-term liabilities: Liabilities to sellers of land (see Section G) 13,850 43,457 Liability in respect of financing lease 34,942 38,097 Financial guarantees 9,542 123,331 Long-term loans from others 537,289 580,208 Total other long-term liabilities 595,623 785,093 Less current maturities – (7,662) 595,623 777,431 ------------- ------------- Debentures: Non-convertible debentures 5,262,113 9,277,984 Less current maturities (1,277,346) (7,576,961) 3,984,767 1,701,023 ------------- -------------

9,545,471 7,947,472

166



B. Details Regarding Interest and Linkage

Stated At December 31 Interest 2010 2009 % In Thousands of NIS

Revolving credit from banks: In Israeli currency 70,824 72,906 Short-term loans from banks: In Israeli currency 2.00–5.00 781,208 1,475,329 In U.S. dollars 7.00–14.0 747,089 1,088,310 In euro 3.50–7.50 132,822 250,775 In other currency 11.00–17.65 86,453 336,003 Short-term loans from others: In Israeli currency 5.50 180,340 129,583 In euro 2.00–7.50 12,810 62,507 Non-convertible debentures: In Israeli currency* 4.50–7.00 4,807,333 8,794,486 In U.S. dollars 0.15–0.32 454,780 483,498 Loans from banks: In Israeli currency 3.65–6.50 1,217,599 1,810,504 In U.S. dollars 10.95–15.00 1,659,860 700,519 In euro 2.20–8.00 2,164,214 2,556,604 In other currency 3.08–7.73 182,235 962,755 Liability in respect of financing lease: In Czech Kronas 34,942 38,097 Liabilities to sellers of land: In Israeli currency 13,850 43,457 Long-term loans from others 537,289 580,208 Financial guarantees 9,542 123,331

Total loans and credit from banks and others 13,093,190 19,508,872

* See Section E below regarding the effective interest.

See Section G below regarding collaterals and liens.

167



C. Balances based on Repayment Dates

December 31, 2010 Banks and Debentures Others Total In Thousands of NIS 2012 267,434 374,786 642,220 2013 468,384 1,588,914 2,057,298 2014 404,855 1,566,051 1,970,906 2015 337,322 951,297 1,288,619 More than 5 years 2,506,772 861,594 3,368,366 Not yet determined – 204,212 204,212 Repayment subject to rate of construction and sale of the units in projects constructed – 13,850 13,850

Total non-current liabilities less current maturities

3,984,767 5,560,704 9,545,471

D. Contractual limitations and financial covenants

(1) Commencing from the entry date of the debt arrangement into effect, as described in Note 1C, the Company undertook that during the period up to final and unequivocal repayment of the new debentures, the ratio of the net financial debt to CAP, as these terms are defined in the arrangement, will not exceed 70% (subject to the possibility of a negligible deviation at a rate of up to 10% of the fixed ratio during the first two years after the execution date, and thereafter at a rate of up to 5%) (hereinafter – “the Financial Covenants”). Subject to qualifications provided, a violation of the Company’s undertaking to comply with the Financial Covenants will constitute grounds for calling all of the Company’s debt for immediate repayment in accordance with the new debentures, in addition to the causes of action detailed in the trust documents relating to the new debentures. As at the signing date of the financial statements, the Company is in compliance with the Financial Covenants determined.

Furthermore, the Company has an obligation to another bank to comply with financial

covenants including, among others, the ratio of the EBITDA to interest expenses and a net debt to CAP ratio.

In September 2009, the Company reached an agreement with the lender regarding

postponement of measurement of compliance with the financial covenants by 18 months. As at the signing date of the financial statements, the Company is in compliance with the Financial Covenants determined.

168



D. Contractual limitations and financial covenants (Cont.)

(2) Africa Properties – In February 2004, a trust indenture was signed between Africa Properties and the

Trust Company of Union Bank Ltd., which serves as the trustee for the Debentures (Series A) issued by Africa Properties (as at December 31, 2010, the balance of the Debentures (Series A) amounted to about NIS 77 million).

In the framework of the trust indentures, Africa Properties committed to comply, at all

times, so long as the debentures have not been fully repaid, with certain financial covenants, including, among others, the following:

1) The ratio of the debt to the total capital and debt, as defined in the trust

documents, shall not exceed 60%. 2) The ratio of the depreciated cost of the pledged assets of Africa Properties, as

defined in the trust documents, and the total depreciated cost of its assets shall not exceed 40%.

3) The ratio of the total annual investments of Africa Properties in new assets under

construction, as defined in the trust documents, and the total depreciated cost of the real estate assets less the investment in new assets under construction, shall not exceed 15%.

4) Africa Properties shall be permitted to distribute dividends and/or to provide loans

to Group companies, as defined in the trust documents, subject to the ratio of the debt to the total capital and debt not exceeding 60%.

5) Africa Properties shall not pay any amount for repayment of loans it received by

Group companies, as defined in the trust documents, in excess of the amount of the issuance proceeds.

In a case of violation of one of the financial covenants detailed above, and such

violation is not corrected by the end of the calendar quarter succeeding the calendar quarter in which the violation took place, the trustee shall be entitled to call the unpaid balance of the debentures for immediate repayment, in whole or in part.

At all dates provided for examination of the financial covenants Africa Properties was

in compliance with the requirements provided. In addition, as part of the financing agreements with banks in Israel, Africa Properties

committed to comply, at all times, so long as the loans have not been fully repaid, with financial covenants including, among others: value of the shares pledged, ownership of the shares pledged, rate of NOI and fair value of the properties pledged. As at the date of the statement of financial position, Africa Properties is in compliance with these financial covenants.

169




(3) AFI Europe – As part of the financing agreements, the companies in the Group companies in Europe

committed to the banks to comply with certain financial ratios provided in the agreements, as well as to maintain minimum cash balances.

The main covenants provided are:

(a) Compliance with the ratio determined between the net periodic rental revenues and the periodic loan repayments, and other similar ratios;

(b) Maintenance of a ratio determined between the outstanding balance of the loan

and the fair value of the project that is the subject of the loan; (c) In addition, it is customary that various reporting requirements are provided in the

financing agreements and a requirement to hold a minimum cash balance.

As at December 31, 2010, the Group companies in Europe are in compliance with the financial covenants determined for them, except for two subsidiaries of AFI Europe in Latvia having negative equity, which constitutes a violation by each of them of the conditions in the loan agreements with a bank. In addition, with respect to non-recourse loans provided by the bank to one of the subsidiaries (the one that holds the rights in the “Metroplia” in Riga) the minimum ratio provided in the loan agreement between the outstanding balance of the loan and the fair value of the relevant properties serving as securing for repayment of the loan is not satisfied, and there is also a further violation of the loan agreement relating to a delay in making certain payments on account of the loan that were supposed to be made upon completion of sale of the residential units in the project.

As at the date of the report, contacts are underway with the bank in connection with

the above-mentioned violations. It is clarified that in accordance with the conditions of the agreements as stated, each of the subsidiaries has the right to correct the violation within 10 days from the time of the bank’s request to correct the violation before the bank has the right to demand early repayment of each of the loans. As at the date of the report, the bank had not contacted the subsidiaries with a demand to rectify the violations. In addition, in a case where the bank contacts the subsidiaries with a demand to rectify the violations as stated, the subsidiaries have the ability to rectify the said violations within the required timeframe.

(4) Africa Industries (Subsidiary) – A subsidiary of Africa Industries has commitments to banks, mainly to maintain

tangible shareholders’ equity, as defined in the commitments, will not drop below 22% of the total assets in the statement of financial position and will not be less than NIS 120 million. As at December 31, 2010, the subsidiary was in compliance with the said conditions.

170




(4) Africa Industries (Subsidiary) – (Cont.)

A foreign subsidiary of Africa Industries has a commitment to banks to maintain a ratio of inventory to liabilities of not less than 0.6. As at December 31, 2010, the subsidiary was in compliance with the above-mentioned condition.

(5) Danya Cebus

As part of the activities of Danya Cebus to expand the framework provided to it in order to provide bank guarantees in favor or customers ordering work, in May and July 2010, Danya Cebus agreed to financial covenants with two banks, as follows:

(a) The tangible shareholders’ equity of Danya Cebus (as defined for this purpose, that is, plus, among other things, subordinated shareholders’ loans, less, among other things, debt balances of interested parties that are not in the ordinary course of business, deferred expenses and intangible assets, after eliminating, among other things, rights not conferring control and revaluation reserves with respect to property, plant and equipment) shall not drop below, at any time, 15% of the total assets in the statement of financial position of Danya Cebus based on its consolidated financial statements, proforma to be prepared for this purpose after eliminating balance sheet balances of “PPP” type projects (such as Highway 431).

(b) The tangible shareholders’ equity of Danya Cebus based on its consolidated financial statements shall not fall below, at any time, NIS 200 million.

(c) Danya Cebus shall not have a net loss during more than five successive quarters, and its cumulative net loss during five successive quarters (or a part thereof) shall not exceed NIS 75 million at any time.

As part of the loan taken out in connection with the transaction for acquisition of Africa Residences, Danya Cebus also signed, in addition to the financial covenants set forth above, on the following conditions:

(a) The minimum ratio during the first two quarters of the loan period shall not drop below 1. Commencing from the third quarter (after the first principal payment in the amount of NIS 80 million), and during the entire term of the loan, the minimum ratio shall not drop below 1.2.

For purposes of determining the minimum ratio, the value of the shares of Africa Residences acquired will be determined with reference to the shareholders’ equity of Africa Residences (BV). The above-mentioned measurement is to be made based on the financial statements of Africa Residences.

(b) If Danya Cebus signs, for the benefit of other creditors, on additional and/or improved financial conditions compared with the conditions for the bank, Danya Cebus will also sign on the same conditions, with the required changes, for the benefit of the bank, and in any case they will be seen as also applying to the financing agreement, for the benefit of the bank, even if not signed by Danya Cebus.

171




(5) Danya Cebus (Cont.)

(c) Financial conditions of Africa Residences:

(i) The ratio between the net financial debt and the shareholders’ equity plus the net financial debt, shall not exceed 0.6.

(ii) The tangible shareholders’ equity shall not fall below NIS 450 million. (iii) The shareholders’ equity after distribution of a dividend shall not fall below

NIS 500 million. (iv) The cumulative net income, based on the financial statements of Africa

Residences, in the last 8 quarters of each reporting period, shall not fall below NIS 40 million.

(v) If Africa Residences signs, for the benefit of other creditors, on additional

and/or improved financial conditions compared with the conditions for the bank, Africa Residences, will also sign on the same conditions, with the required changes, for the benefit of the bank, and in any case they will be seen as also applying to the financing agreement, for the benefit of the bank, even if not signed by Africa Residences.

As at the date of the report, Danya Cebus was in compliance with all the financial

covenants determined for it. (6) Africa USA –

(a) Regarding agreements to reorganize the debt of the Times project – see Note 7A(1)(b).

As part of the agreements as stated, financial covenants were determined for the

company in connection with the Times project whereby the company must comply with a minimum shareholders’ equity requirement of $100 million commencing from June 2011 and $150 million commencing from June 2012, as well as a level of liquidity of $5 million commencing from June 2011 and $10 million commencing from June 2012.

(b) In addition to that stated above, as part of the financing agreements the Group

companies in the U.S. committed to the banks to comply with financial covenants, the main ones of which are a minimum asset value, a minimum shareholders’ equity and a liquidity level as provided in the agreements. Further, the companies made a commitment with respect to the ratio of the debt to the value of the assets.

As at the date of the financial statements, the various companies are in

compliance with the financial covenants.

172




(7) Africa Residences – Africa Residences signed an agreement with a bank for purposes of provision of credit

and services to Africa Residences by the bank and/or with its guarantee, in respect of bank accompaniment for 3 projects, as well as in connection with provision of bank credit to Africa Residences that is not designated for a particular use. Under the agreement, Africa Residences committed to comply with financial covenants, including, among others: (1) compliance with a net financial debt (as defined in the agreement) to net capital ratio (as defined in the agreement); (2) a commitment that the total tangible shareholders’ equity of Africa Residences will not drop below a certain amount; (3) a commitment that after distribution of a dividend to the shareholders, the tangible shareholders’ equity will not fall below a certain amount.

Limitations were also provided with respect to net losses (within the meaning thereof

in the statement of income of Africa Residences), as defined in the agreement. If Africa Residences does not comply with the said financial covenants, the bank will be permitted to call the credit and banking services provided to Africa Residences by it and/or with its guarantee for immediate repayment.

As at the date of the report, Africa Residences was in compliance with these financial

covenants.

E. Debentures

(1) Company debentures Further to that stated in Note 1C, in March 2010, the Company’s debt arrangement

was approved by the District Court of Tel-Aviv. Pursuant to the provisions of the debt arrangement, every debenture holder is entitled the arrangement package, which includes, among other things, cash, shares, and new debentures. Against receipt of the arrangement package, trading in the Company’s existing debentures ceased at the end of trading on May 10, 2010.

(a) Set forth below are details regarding the Company’s new debentures (Series Y

and Series Z), which were issued in May 2010:

(i) Marketable debentures (Series Y), in the aggregate stated principal amount of about NIS 1,016 million. The debentures are repayable in a single payment in May 2012, linked to the CPI and bearing annual interest at the rate of 4.5% payable on the repayment date of the principal. The annual effective interest rate in respect of this Series is about 10%.

See Section C below in connection with early repayment of the debentures

(Series Y).

173



E. Debentures (Cont.)

(1) Company debentures – (Cont.)

(a) (Cont.)

(ii) Marketable debentures (Series Z) in the aggregate stated principal amount of about NIS 3,626 million. The debentures are repayable in thirteen equal annual payments commencing from May 2013, linked to the CPI and bearing annual effective interest at the average rate of 7% (where the interest rate will increase gradually from 6% per year up to the rate of 10.75%) payable semi-annually, commencing from November 2010. The annual effective interest rate in respect of this Series is about 14%.

As part of the debt arrangement, the Company is obligated to make early

repayment of the debentures upon occurrence of certain events as described in Note 1C.

(b) Plan for acquisition of its own debentures – In December 2010, the Company’s Board of Directors approved a plan for

acquisition of the Company’s own debentures (Series Y and Series Z) (hereinafter, together – “the Debentures”). Nonetheless, it was provided that the debentures (Series Z) will be acquired only upon fulfillment of one of the following:

(i) The debentures (Series Y) are repaid in full; or (ii) After each acquisition, as stated of debentures (Series Z) the Company

remains with liquid sources sufficient for full repayment of its liabilities in accordance with its obligations in accordance with the debentures (Series Y).

Set forth below are the highlights of the self-acquisition plan: The debentures will be acquired by the Company and/or companies it wholly

owns (hereinafter – “a Subsidiary”) and/or a general partnership the partners of which are the Company and a Subsidiary (hereinafter – “a Subsidiary Partnership”). The debentures acquired by the Company, to the extent acquired, will be cancelled and removed from trading on the stock exchange and the Company will not be permitted to re-issue them.

The scope of the plan is up to NIS 1.5 billion (which will be reduced by amounts

expended as part of early repayment of debentures (Series Y) and/or a tender for them in accordance with the conditions of the arrangement with the holders of the Company’s debentures).

174





(b) (Cont.) The period of the plan is from January 1, 2011 and up to December 31, 2011. The

acquisitions will be executed as part of the trading on the Tel-Aviv Stock Exchange Ltd. and/or as part of “over-the-counter” trading, in accordance with the discretion of Company management. The debentures will be acquired, from time to time, on dates, in amounts and at various prices, in accordance with the discretion of Company management, and taking into account, among other things, the market conditions and prices of the debentures on the Stock Exchange.

(c) Further to that stated in Notes 7F(9), 7E(1) and 7J(1) regarding completion of the

transactions for sale of all its holdings in Africa Israel Residences Ltd. and in Derech Eretz Highways (1997) Ltd., and sale of half its holdings in Africa Israel Hotels Ltd., for an aggregate consideration of about NIS 1.35 billion (of which as at the date of the report the Company had received about NIS 1.13 billion while the balance is to be received in the upcoming period), the Company’s Board of Directors approved early repayment of all the Company’s debentures (Series Y), the scope of which as at the date of this report was about NIS 1.08 billion (principal and accrued interest and linkage differences). That stated above is in addition to approval of a plan for acquisition by the Company of its own debentures – as described above.

The early repayment was executed in accordance with the terms of the debt

arrangement and the debentures (Series Y), which provide that the amount of the early repayment will be equal to the liability value of the debentures (Series Y) (the par value) on the early repayment date (that is, the amount of the principal plus the interest and linkage differences accrued thereon, commencing from the issuance date of the debentures and up to the early repayment date, with no early repayment penalty). It is noted that taking into account the fact that in accordance with International Financial Reporting Standards (IFRS), on the issuance date of the debentures (Series Y) the Company’s liabilities in respect thereof were recorded in its financial statements at a discount, based on their fair value (which was less than their liability value at that time, that is, less than their par value), and in light of the fact that the early repayment was executed in accordance with the liability value of the debentures (Series Y), in respect of the early repayment, as stated, the Company recorded a loss in its financial statements for the fourth quarter of 2010, in the amount of about NIS 62 million, which constitutes the balance of the discount created at the time of issuance of the debentures.

Accordingly, on January 20, 2011, early repayment was made of the debentures

(Series Y) in the amount of (principal, interest and linkage differences) about NIS 1,084 million.

175





(d) Set forth below are details regarding the Company’s old debentures (Series I, J, K, L, M, N, O, P, Q, R, S, U, V, X) that were in effect up to the execution date of the debt arrangement, as stated in Section (1) above:

(i) Debentures (Series I) – issued in December 2005 and January 2006 in the

principal amount of about NIS 500 million, linked to the Consumer Price Index and bearing annual interest at the rate of 4.2%, payable quarterly, scheduled for repayment in one payment of principal in November 2009. In May 2009, the debentures (Series I) were registered for trading. In light of the debt arrangement process, the said debentures were not repaid in full on time.

(ii) Debentures (Series J) – issued from December 2005 to February 2006, in the

principal amount of about NIS 500 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.4%, payable quarterly scheduled for repayment in one payment in December 2012. In May 2009, the debentures (Series J) were registered for trading.

(iii) Debentures (Series K) – issued during 2006, in the total principal amount of

about NIS 500 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.1%, payable quarterly, repayable in one lump-sum payment of principal in March 2011. In May 2009, the debentures (Series K) were registered for trading.

(iv) Debentures (Series L) – issued in September 2006, in the total principal

amount of about NIS 394.5 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.2%, payable quarterly, repayable in five equal annual payments commencing from September 2010. In June 2007, the debentures (Series L) were registered for trading.

(v) Debentures (Series M) – issued in September 2006, in the total principal

amount of about NIS 155.5 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.35%, payable quarterly, repayable in four equal annual payments commencing from September 2015, are. In June 2007, the debentures (Series M) were registered for trading.

(vi) Debentures (Series N) – issued in December 2006 and January 2007, in the

total principal amount of about NIS 750 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.4% (which will decline to 4.9% commencing from the date the debentures are registered for trading), payable quarterly, repayable in five equal annual payments commencing from December 2014, are. In June 2007, the debentures (Series N) were registered for trading.

176





(d) (Cont.)

(vii) Debentures (Series O) – issued December 2006 and January 2007, in the total principal amount of about NIS 250 million, linked to the Consumer Price Index and bearing annual interest at the rate of 5.05% (which will decline to 4.8% commencing from the date the debentures are registered for trading), payable quarterly, repayable in three equal annual payments commencing from December 2010. In June 2007, the debentures (Series O) were registered for trading.

(viii) Debentures (Series P) – issued in March 2007, in total principal amount of

about NIS 730 million, linked to the Consumer Price Index, and bearing annual interest of 5.2% (which will decline to 4.7% commencing from the date the debentures are registered for trading), payable semi-annually, repayable in three annual payments in March in each of the years 2015 through 2017. In June 2007, the debentures (Series P) were registered for trading.

(ix) Debentures (Series Q) – issued in March 2007, in total principal amount of

about NIS 178 million, linked to the Consumer Price Index, and bearing annual interest of 4.65% (which will decline to 4.25% commencing from the date the debentures are registered for trading), payable semi-annually, repayable in two annual payments in March in each of the years 2010 through 2011. In June 2007, the debentures (Series Q) were registered for trading.

(x) Debentures (Series R) – issued in March 2007, in total principal amount of

about NIS 100 million, unlinked, and bearing annual interest of 6.55% (which will decline to 6.15% commencing from the date the debentures are registered for trading), payable semi-annually, repayable in one payment in March 2012. In June 2007, the debentures (Series R) were registered for trading.

(xi) Debentures (Series U) – issued in September 2007, in a total principal

amount of about NIS 966 million, which were offered in one million units by means of a tender on the unit price. The gross proceeds received by the Company in the public offer amounted to about NIS 956 million, linked to the Consumer Price Index and bearing interest at the annual rate of 4.8% payable semi-annually, repayable in 5 equal semi-annual payments to be paid in September and March of each of the years 2012 through 2014. In January 2008, the Company issued, based on the shelf prospectus and by expanding the series, NIS 750 million debentures (Series U).

177





(d) (Cont.)

(xii) Debentures (Series V) – issued in October 2007, in the total principal amount of about NIS 705 million, which were offered in 705,000 units by means of a tender on the interest. The gross proceeds received by the Company in the public offer amounted to about NIS 705 million, linked to the Consumer Price Index and bearing interest at the annual rate of 5.1% payable semi-annually, repayable in three equal semi-annual payments to be paid in April and October of each of the years 2015 through 2017.

(xii) Debentures (Series X) – issued in October 2007, in the total principal amount

of about NIS 320 million, which were offered in 320,000 units by means of a tender on the interest. The gross proceeds received by the Company in the public offer amounted to about NIS 320 million, unlinked and bearing interest at the annual rate of 5.9% payable semi-annually, repayable in two equal semi-annual payments to be paid in April and October of each of the years 2010. In light of the debt arrangement proceedings, the debentures were not repaid on time.

(e) In January–February 2009, the Company made an acquisition of its own

debentures as part of transactions involving real estate lots – see Note 7N.

(2) Debentures of subsidiaries –

(a) In February 2004, Africa Israel Properties Ltd., issued a series of registered, non-marketable debentures (Series A) with an aggregate principal par value of NIS 261 million (out of a series of NIS 400 million), to institutional investors, which are scheduled for repayment in the years 2006 through 2013 in 8 equal annual installments, bearing interest at the annual rate of 5.6%, and linked (principal and interest) to the Consumer Price Index of December 2003.

(b) In January 2005, for purposes of financing Project 88 Leonard in New York,

which includes 350 residential units for rent, the Company issued through a subsidiary (indirect) operating in the United States, two series of non-marketable debentures, in a total principal amount of $120 million. In 2007, an additional series was issued in the amount of $12 million. The debentures are repayable in November 2037 and they bear variable interest payable on a weekly basis.

For purposes of securing repayment of the debentures, the subsidiary placed a lien

on its rights in the project

178




(2) Debentures of subsidiaries – (Cont.)

(c) In June 2006, Africa Residences made an initial public offering pursuant to a prospectus of 260 million registered debentures (Series A) of NIS 1 par value each, repayable in 8 equal annual installments in December of each of the years 2009 to 2016. The debentures are linked to the Consumer Price Index and bear annual interest at the rate of 5.9%, as fixed in the tender, which is payable semi-annually. The proceeds of the package issued allocated to the debentures amounted to about NIS 281 million and after allocation of the issuance expenses the net proceeds amounted to about NIS 269 million. The effective interest on the debentures as at December 31, 2010 and as at the issuance date is 5.31% per year. In November 2009, Africa Residences issued an additional NIS 37,419,815 par value debentures (Series A) to institutional investors, in exchange for NIS 42 million.

The effective interest respect of the additional debentures as at December 31,

2010 and on the issuance date is 6.3% per year. Limitations regarding resale apply to the said debentures as provided in

Section 15C of the Securities Law, 1968, and the regulations promulgated thereunder.

The debentures are rated by Midrug Ltd. with a rating of A3, with a stable rating

outlook, in accordance with the rating awarded to the company in February 2011. (d) Pursuant to a shelf prospectus it published in August 2007, in September 2007

Africa Industries issued NIS 350,000 thousand debentures (Series A), repayable (principal) in four equal annual payments, payable on September 30 of each of the years 2011–2014, bearing annual interest at the rate of 5.8% as determined in the tender. The interest is payable semi-annually on March 31 and September 30 of each of the years 2008–2014 linked (principal and interest) to the Consumer Price Index. The proceeds from the issuance amounted to NIS 350 million (gross).

In December 2008, the Board of Directors of Africa Industries approved a program

to acquire debentures (Series A) of Africa Industries in a total monetary amount of up to NIS 60 million. Under the plan approved, in December 2008, Africa Industries purchased debentures (Series A) having a par value of about NIS 95,551 thousand in the total monetary amount of about NIS 60 million. In respect of the said purchase, Africa Industries recorded a gain of about NIS 40 million in 2008.

179




(2) Debentures of subsidiaries – (Cont.)

(e) In May 2007, Africa Properties issued a series of debentures (Series C), and another series of debentures (Series D), in the total amount of NIS 600 million.

The debentures (Series C), in the amount of NIS 500 million par value, bear

annual interest at the rate of 4.4% and are repayable in 6 equal annual payments in each of the years 2010 up to and including 2015. The interest is payable semi-annually. The debentures (Series C) are linked (principal and interest) to the Consumer Price Index.

The debentures (Series D), in the amount of NIS 100 million par value, bear

annual interest at the rate of 5.9% and are repayable in 4 equal annual payments in each of the years 2010 up to and including 2013. The interest is payable annually. The debentures (Series D) are not linked (principal and/or interest).

Pursuant to the terms of the debentures (Series C) and the debentures (Series D),

if during the period of the debentures (Series C) and the debentures (Series D) Africa Properties publishes (based on its sole discretion) a prospectus offering its securities on the Tel-Aviv Stock Exchange Ltd. (hereinafter – “the Stock Exchange”) and/or a registration prospectus for listing its securities on the Stock Exchange, Africa Properties will be required to register the debentures (Series C) and the debentures (Series D) for trading on the Stock Exchange.

Pursuant to the terms of the debentures, if the debentures (Series C) and the

debentures (Series D) are registered for trading on the Stock Exchange, the annual interest rates to be borne by the debentures (Series C) and the debentures (Series D) in respect of the period commencing from their registration date, will be the rates determined as stated above, less 0.25%.

It is hereby clarified that Africa Properties has not undertaken to register the

debentures (Series C) and/or the debentures (Series D) for trading on the Stock Exchange, except as stated above.

During 2009, Africa Properties made early redemption of NIS 18,835 thousand

par value debentures (Series C) in exchange for a payment in the amount of NIS 17,899 thousand. As a result, in 2009 Africa Properties recorded a financing income in the amount of NIS 3,117 thousand.

In August 2010, Africa Properties registered the debentures (Series C) for trading

on the Tel-Aviv Stock Exchange. Accordingly, the interest rate stated in these debentures dropped from 4.4% to 4.15% (annual interest linked to the CPI).

(f) Regarding issuance of debentures (Series E) executed by Africa Properties

subsequent to the date of the report – see Note 46I.

180



F. Liabilities to Sellers of Real Estate The contractual obligations to sellers of real estate are in respect of payment of certain

portions of the receipts from sales of units and/or transfer of areas in projects to be built on the land.

G. Collaterals in respect of Credit Received

At December 31 2010 2009 In Thousands of NIS Amount of credit secured by liens 10,880,012 6,593,258 Book value of pledged assets 13,255,419 10,896,789

(1) In order to secure loans taken out (generally from banks) for purposes of financing construction or investment, the financing entities have been given collaterals that include a first-priority lien on assets of certain group companies, including rights in lands of certain projects with respect to which the loans were taken out; a first-priority lien on rights of certain group companies, including future receipts, contracting agreements and long-term lease contracts; and a lien in favor of the lenders on shares of investee companies. In addition, fixed liens have been recorded on goodwill and unpaid share capital.

Furthermore, a number of group companies have committed to the lending parties not

to make any change in the status of the pledged assets, not to sell, transfer of lease a significant part of these assets, not to change the holdings’ structure of the relevant companies, not to change incorporation documents or to change the scope of the project without prior consultation with the lending party providing the credit.

(2) By Africa Industries and its subsidiaries –

(a) Fixed and/or floating liens on assets of Africa Industries and on assets of its subsidiaries, including their unpaid share capital with no limitation as to amount.

(b) A first-priority lien on real estate in Kiryat Malachi, Ashkelon and Haifa with no

limitation as to amount. (c) Notes and checks receivable deposited with banks for collection.

(3) With respect to credit it received from banks, the Company has provided a negative pledge, in language identical to the negative pledge given for the benefit of the holders of the Company’s debentures in the arrangement with them, as stated in Note 1C.

Regarding collaterals in respect of credit received – see also Notes 7, 42 and 43.

181


At December 31, 2010 Note 24 – Contractors and Suppliers At December 31 2010 2009 In Thousands of NIS Open accounts 762,195 718,943 Checks and notes payable 43,413 41,082 805,608 760,025 Regarding the Group’s exposure to currency and liquidity risk in connection with suppliers – see

Note 41 relating financial instruments.

Note 25 – Other Payables and Credit Balances At December 31 2010 2009 In Thousands of NIS Income received in advance 15,740 16,633 Tenant deposits 109,052 14,286 Accrued expenses 44,925 117,377 Liabilities to employees and other salary-related liabilities 70,297 68,292 Value Added Tax 16,900 27,318 Liabilities to interested and related parties 2,464 4,397 Liabilities to associated companies 422 290 Interest payable on long-term liabilities 82,983 142,818 Payables in respect of property, plant and equipment and other assets 237,357 407,500 Derivative financial instruments 16,455 63,890 Payables in respect of sale of investee company 372 12,275 Other payables and credit balances 291,657 337,880 888,624 1,212,956 Regarding the Group’s exposure to currency and liquidity risk in connection with suppliers – see

Note 41 relating financial instruments.

182


At December 31, 2010 Note 26 – Advances from Customers

At December 31 2010 2009 In Thousands of NIS Advances from customers in an industrial company 68,410 57,264 Advances from customers in respect of residential units 732,278 665,958 Deferred income in respect of construction in progress (1) 13,472 19,685 814,160 742,907

(1) Deferred income in respect of construction in progress For the Year Ended December 31 2010 2009 In Thousands of NIS

Opening balance in advances in respect of work in progress 19,685 42,189 Receipts and work in progress added during the period 197,220 692,632 Portion recorded on the statement of income during the period (203,433) (715,136)

Ending balance in advances in respect of work in progress 13,472 19,685

Note 27 – Provisions

A. Current Provisions Provisions Legal Provisions for and other for Warranty completio

n claims loss Total

In Thousands of NIS

Balance at January 1, 2010 37,571 165,755 78,929 133,502 415,757 Provisions recorded during the period 19,113 165,741 12,116 (23,771) 173,199 Provisions used during the period (6,714) (117,588) (23,613) (23,667) (171,582) Provisions eliminated during the period (2,227) (5,269) (2,178) (25,359) (35,033) Translation differences – (1,691) (2,831) – (4,522) Balance at December 31, 2010 47,743 206,948 62,423 60,705 377,819

B. Non-Current Provisions

As at December 31, 2009, a non-current provision for completion was recorded in the amount of NIS 3,139 thousand.

C. For details regarding legal claims – see Note 43.

183


At December 31, 2010 Note 28 – Gross Profit on Construction and Real Estate Transactions

For the Year Ended December 31, 2010 Initiated construction projects Construction work in progress Residential Residential Infra- Grand Note units for sale Land Total construction structures Total Total

Revenues 1,166,790 270,637 1,437,427 1,134,033 134,583 1,268,616 2,706,043 Costs 30 804,027 361,497 1,165,524 1,084,085 113,669 1,197,754 2,363,278 Update of decline in value of inventory of land and buildings (59,254) (941) (60,195) – – – (60,195) Gross profit (loss) 422,017 (89,919) 332,098 49,948 20,914 70,862 402,960

Cumulative as at December 31, 2010 Initiated construction projects Construction work in progress Residential Residential Infra- Grand Note units for sale Land Total construction structures Total Total

Revenues 1,482,614 304,879 1,787,493 3,841,828 2,236,043 6,077,871 7,865,364 Costs 30 1,106,973 270,555 1,377,528 3,730,094 2,412,765 6,142,859 7,520,387 Update of decline in value of inventory of land and buildings 1,182,603 179,846 1,362,449 – – – 1,362,449 Gross profit (loss) (806,962) (145,522) (952,484) 111,734 (176,722) (64,988) (1,017,472)


Revenues 679,797 474,149 1,153,946 1,075,652 262,141 1,337,793 2,491,739 Costs 30 545,861 360,530 906,391 1,001,552 293,556 1,295,108 2,201,499 Decline in value of inventory of land and buildings 319,022 258,103 577,125 – – – 577,125 Gross profit (loss) (185,086) (144,484) (329,570) 74,100 (31,415) 42,685 (286,885)


Revenues 4,134,218 442,136 4,576,354 3,590,013 2,267,505 5,857,518 10,433,872 Costs 30 2,820,278 346,250 3,166,528 3,461,027 2,474,619 5,935,646 9,102,174 Decline in value of inventory of land and buildings 1,415,624 389,093 1,804,717 – – – 1,804,717 Gross profit (loss) (101,684) (293,207) (394,891) 128,986 (207,114) (78,128) (473,019)

184


At December 31, 2010 Note 29 – Gross Profit on Construction and Real Estate Transactions (Cont.)


Revenues 777,802 30,225 808,027 751,758 1,224,123 1,975,881 2,783,908 Costs 30 672,610 19,758 692,368 850,445 1,087,599 1,938,044 2,630,412 Decline in value of inventory of land and buildings 912,252 453,716 1,365,968 – – – 1,365,968 Gross profit (loss) (807,060) (443,249) (1,250,309) (98,687) 136,524 37,837 (1,212,472)


Revenues 4,041,523 30,225 4,071,748 2,149,959 1,997,647 4,147,606 8,219,354 Costs 30 2,870,858 19,758 2,890,616 2,133,780 2,181,792 4,315,572 7,206,188 Decline in value of inventory of land and buildings 953,350 613,836 1,567,186 – – – 1,567,186 Gross profit (loss) 217,315 (603,369) (386,054) 16,179 (184,145) (167,966) (554,020)

Note 29 – Other Revenues


Management fees, technical supervision and sundry 30,264 4,811 26,582 Net gain from sale of property, plant and equipment 297 880 118,122 Capital gain from realization of investments in investee companies 231,751 69,273 34,303 Acquisition of loan of investee company (see Note 7B1(e)) – 107,935 – Other 24,474 81,165 16,646

286,786 264,064 194,653

185


At December 31, 2010 Note 30 – Costs and Expenses in Construction and Real Estate Transactions For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Land 341,521 413,188 208,122 Salaries and related expenses 102,637 115,634 143,018 Building materials 783,702 331,628 433,159 Subcontractors 921,281 1,136,466 1,791,902 Depreciation 10,122 6,789 7,355 Marketing and advertising 41,983 40,762 27,844 Other 162,032 157,032 19,012

2,363,278 2,201,499 2,630,412 Includes provision for loss on projects recorded in the period 52,617 79,679 60,269 Note 31 – Expenses for Maintenance, Supervision and Management of Real Estate and Other

Properties For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Salaries and salary-related expenses 10,611 18,013 26,228 Depreciation 3 9 868 Other 97,129 168,652 164,364

107,743 186,674 191,460

186


At December 31, 2010 Note 32 – Costs and Expenses in Industry


Cost of sales –

Materials consumed 489,937 407,746 565,015 Salaries, wages, and related expenses 79,545 75,999 76,146 Outside services 13,678 6,513 10,958 Depreciation 12,330 19,140 20,235 Selling and marketing expenses 217,025 184,944 196,460 Other expenses 73,410 64,665 84,966

885,925 759,007 953,780

Purchase of goods 945,825 565,348 890,858 Changes in inventory of work in process (146) (3,099) 3,559 Changes in inventory of finished goods and products (107,125) (20,720) (32,567)

1,724,479 1,300,536 1,815,630

Note 33 – Amortization of Intangible Assets and Other Expenses

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Loss from decline in rate of holdings – 6,589 – Write down of investments and other assets 130,207 138,939 324,728 Capital loss 13,877 54,718 36,117 Other 111,055 115,891 19,084 255,139 316,137 379,929

Note 34 – Administrative and General Expenses

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Wages, salaries and related expenses 121,632 107,430 103,402 Legal and professional expenses 49,529 37,592 31,851 Share-based payment 5,012 5,390 3,553 Management fees 605 588 5,372 Provision for doubtful debts 20,514 884 32,202 Depreciation and amortization 15,428 17,848 40,810 Other 84,011 103,051 144,444 296,731 272,783 361,634

187


At December 31, 2010 Note 35 – Financing Income and Expenses For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Interest income from bank deposits 52,262 33,785 218,866 Gain on self-acquisition of debentures – 18,263 63,800 Interest income from loans and receivables 1,782 148,166 115,046 Increase in fair value of financial assets held for trade 26,186 37,041 4,724 Increase in fair value of financial assets designated at “fair value through the statement of income” 33,607 73,332 19,126 Net gain from change in exchange rates 19,228 79,658 26,407 Gain from debt arrangement* 1,492,391 1,470,465 – Other 104,142 30,428 13,996

Financing income recorded on the statement of income 1,729,598 1,891,138 461,965 ----------- ----------- -----------

Interest expenses and linkage on financial liabilities measured at amortized cost 1,125,943 1,313,271 1,344,218 Loss from change in exchange rates 45,045 22,230 144,974 Decline in fair value of financial statements held for trade 17,706 63,325 2,543 Decline in fair value of financial statements designated at “fair value through the statement of income” 18,027 49,689 230,642 Loss from decline in value of financial assets held for sale – 33,217 – Loss from decline in value of securities held to maturity – – 68,821 Other 104,721 100,802 33,918

Financing expenses 1,311,442 1,582,534 1,825,116 Less capitalized credit costs (180,559) (177,966) (292,331) Financing expenses recorded on the statement of income 1,130,883 1,404,568 1,532,785 ----------- ----------- -----------

Net financing income (expenses) recorded on the statement of income 598,715 486,570 (1,070,820)

(*) Most of the gain in the period of the report is gain from the debt arrangement with the holders of the Company’s debentures as stated in Note 1C(3). (See Note 7A(1)(b) regarding the debt arrangement with the respect to the Times project in 2009).

188


At December 31, 2010 Note 36 – Taxes on Income

A. Details regarding the tax environment in which the Group operates

(1) Amendments to the Income Tax Ordinance and the Land Betterment Law

(a) On July 25, 2005, the Law for Amendment of the Income Tax Ordinance (No. 147 and Temporary Order), 2005, was passed by the Israeli Parliament (Knesset), which provided, among other things, a gradual reduction of the Companies Tax rate down to 25% in the 2010 tax year and thereafter.

On July 14, 2009, the Economic Efficiency Law (Legislative Amendments for

Implementation of the Economic Plan for the years 2009 and 2010), 2009, was passed by the Israel Knesset, which provided, among other things, an additional gradual reduction in the Companies Tax rate to 18% in 2016 and thereafter. Pursuant to the said Amendments, the Companies Tax rates applicable in the 2009 tax year and thereafter are as follows: in the 2009 tax year – 26%, in the 2010 tax year – 25%, in the 2011 tax year – 24%, in the 2012 tax year – 23%, in the 2013 tax year – 22%, in the 2014 tax year – 21%, in the 2015 tax year – 20% and in the 2016 tax year and thereafter the applicable Companies Tax rate will be 18%.

The current taxes and the balance of the deferred taxes for the periods reported in

these financial statements are calculated in accordance with the new tax rates as provided in the Economic Efficiency Law.

(b) On September 17, 2009, the Income Tax Regulations (Determination of Interest

Rate for purposes of Section 3(J)) (Amendment), 2009, were published, wherein the provisions of the Income Tax Regulations (Determination of Interest Rate for purposes of Section 3(J)), 1986, were comprehensively changed.

The Amendment applies to a loan granted commencing from October 1, 2009,

and it also provides transitional rules in connection with loans granted prior to the Amendment’s effective date.

Commencing from October 1, 2009, the annual interest rate for purposes of

Section 3(J) of the Ordinance, with respect to taxpayers subject to its provisions granting a loan in shekels, was set at 3.3% per year (unlinked). This interest rate applies to the period from October 1, 2009 through December 31, 2009. The annual interest rate for purposes of Section 3(J) of the Ordinance commencing from January 1, 2010 is 3% per year (unlinked). This rate may change for the 2011 tax year depending on the total average cost of unlinked credit provided to the public by the banks and publication in the official lists of the updated interest rate for purposes of Section 3(J) of the Ordinance by the Minister of Finance.

On the other hand, where the loan is provided in foreign currency (as defined in

the Regulations), the interest rate for purposes of Section 3(J) was set at the rate of change in the exchange of that currency plus 3%.

In addition, a special provision was provided regarding determination of the

interest rate for a shekel or foreign currency loan granted in a period of up to 14 days before or after a loan was received on identical terms from a party that is not a relative.

189


At December 31, 2010 Note 36 – Taxes on Income (Cont.)

A. Details regarding the tax environment in which the Group operates (Cont.)

(2) Taxes under Inflationary Conditions The Income Tax Law (Adjustments for Inflation), 1985 (hereinafter – “the Law”) has

been in effect since 1985. The Law introduced measurement of the results for tax purposes on a real basis. The various adjustments required by the Law are intended to result in taxation of income on a real (inflation-adjusted) basis. In light of the fact that the financial statements are not adjusted to the Consumer Price Index (CPI) since the date the Israeli economy ceased to be considered a hyper-inflationary economy, differences have been created between the income in the financial statements and the adjusted income for income tax purposes and, therefore, also temporary differences between the values of assets and liabilities in the financial statements and their tax bases.

On February 26, 2008, the Knesset enacted the Income Tax Law (Adjustments for

Inflation) (Amendment No. 20) (Limitation of Effective Period) – 2008 (hereinafter – the Amendment). In accordance with the Amendment, the effective period of the Adjustments Law will cease at the end of the 2007 tax year and as from the 2008 tax year the provisions of the law will no longer apply, other than the transitional provisions intended to prevent distortions in the tax calculations.

In accordance with the Amendment, as from the 2008 tax year income for tax

purposes will no longer be adjusted to a real (net of inflation) measurement basis. In addition, index linkage of the amounts of depreciation on fixed assets and carried forward tax losses will be discontinued in such a manner that these amounts will be adjusted until the end of the 2007 tax year after which they will cease to be linked to the CPI. The impact of the Amendment was reflected in calculation of the current taxes and deferred taxes in 2008.

(3) Danya Cebus

(a) Danya Cebus and some of its investee companies are “Industrial Companies” as defined in the Law for Encouragement of Industry, and are entitled to accelerated depreciation rates and other benefits pursuant to this law.

(b) In connection with Project 431, the Income Tax Authority has made a number of

preliminary decisions, some of which are included as an appendix to the concession agreement and constitute an integral part thereof.

Based on those preliminary decisions, the Income Tax Authority will agree to

adopt in connection with the said project, for tax purposes, the traditional accounting standards, despite the fact that for accounting purposes the company has recognized a financial asset.

190




(4) Africa Industries

(a) Africa Industries and its subsidiaries are entitled to tax benefits by virtue of the Law for the Encouragement of Capital Investments in their capacity as an “Approved Enterprise” or a “Benefited Enterprise” as received by some their plants, and they are entitled to reduced tax rates subject to the conditions provided in the law.

In addition, Africa Industries and certain of its subsidiaries are “Industrial

Companies” within the meaning thereof in the Law for the Encouragement of Industry (Taxes), 1969. By virtue of this status, the companies are entitled to claim depreciation at accelerated rates in respect of equipment used in the industrial activities, as determined in the regulations.

(b) Africa Industries and some of its subsidiaries file a consolidated return pursuant to

the Law for Encouragement of Industry. Accordingly, each of the said companies is entitled to offset losses (incurred commencing from the year of the first consolidated return – 2008) against the taxable income of the other, subject to certain limitations.

(c) On December 31, 2008, Africa Industries submitted a request to the Income Tax

Authority for a structural change of its subsidiaries. The structural change constitutes an economic step the purpose of which is savings on administrative and operating costs, as well as with respect to reciprocal costs relating to the activities of the companies. On November 30, 2010, Africa Industries received approval from the Income Tax Authority for the merger.

(5) The tax system in Russia is a new system that is revised frequently and may even be

revised retroactively, including the imposition of penalties. The Russian tax laws are not clear and are subject to different interpretations by different tax authorities, in the various districts. In the opinion of the managements of the companies in Russia, the companies operate in compliance with the tax laws.

(6) The Group companies overseas are assessed under the tax laws in those countries and

the provisions for deferred taxes and carryforward losses were computed in accordance therewith.

191




(7) As part of a structural change executed, all the holdings of Africa Properties in shares of companies in Eastern Europe (the Czech Republic, Rumania, Bulgaria and Serbia) were transferred to AFI Europe in exchange for an issuance of shares. For this purpose Africa Properties received approval (an advance tax ruling) from the Taxes Authority for the above-mentioned transaction covering the tax aspects related thereto. The Taxes Authority approved transfer of the above-mentioned debts pursuant to the provisions of Section 104A of the Income Tax Ordinance with a tax deferral.

(8) Regarding the tax arrangement in connection with the holders of the Company’s

debentures – see Note 1C.

(9) The Company holds full ownership of Africa Israel International Holdings Ltd., an Israeli company that holds full ownership of AFI (East-Central Europe) Development s.a.r.l., a Luxembourg company that holds full ownership of Leentje Holding B.V., a Dutch company that holds full ownership of Moonbeam Enterprises Ltd., a Cyprus company. In 2010, the Company executed a structural reorganization such that it will hold AFI Development directly – a transaction that received approval of the Taxes Authority. As at the date of the report, Africa Israel holds 54% of AFI Development directly.

(10) The Group has many transactions the tax consequences of which are not certain. The

Company recognizes liabilities in respect of the tax results of these transactions based on Management’s estimates, which rely on professional advisors, relating to the timing and amount of the tax liability stemming from the transactions. Where the tax results of these transactions differ from Management’s estimates, the tax expenses and the deferred tax liabilities are increased/decreased on the date the final assessment is determined.

B. Composition of the Taxes on Income

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Current taxes 121,269 114,296 71,502 Deferred taxes 32,095 327,594 12,458 Impact of change in tax rates – (25,545) (6,016) Taxes in respect of prior years 2,461 (88,911) 97,008

Total taxes on income 155,825 327,434 174,952

192



C. Reconciliation between the theoretical tax on the pre-tax income and the income tax expense

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Income (loss) before taxes on income 1,776,173 (382,516) (4,753,655) Main tax rate applicable to the Company 25% 26% 27% Tax computed at the Company’s regular tax rate 444,043 (99,455) (1,283,487)

Increase (savings) in the tax liability due to:

Different tax rates in subsidiaries operating outside of Israel (805) 34,256 192,782 Elimination of tax calculated in respect of the Company’s share in losses (income) of equity-based investee companies (91,292) 64,741 140,313 Exempt income (10,290) (410,781) (27,045) Income subject to tax at a special rate 19,286 11,605 890 Non-deductible expenses 130,044 38,905 15,908 Utilization of losses and benefits from prior years for which deferred taxes were not recorded (323,314) (3,623) (20) Change in temporary differences for which deferred taxes were not recognized (78,734) 693,695 688,654 Tax losses and benefits from the period for which deferred taxes were not recorded 60,729 93,171 335,998 Taxes in respect of prior years 2,461 (88,911) 97,008 Impact of changes in tax rates – (25,545) (6,016) Other differences 3,697 19,376 19,967

155,825 327,434 174,952 Effective tax rate 8.77% (85.6%) (3.7%)

D. Deferred Tax Assets and Liabilities

(1) Deferred tax assets and liabilities recognized

The deferred taxes in respect of companies in Israel are calculated based on the tax rates expected to apply when the differences reverse, as detailed above. Deferred taxes in respect of subsidiaries operating outside of Israel are calculated based on the relevant tax rates in each country.

193



D. Deferred Tax Assets and Liabilities (Cont.)

(1) Deferred tax assets and liabilities recognized (Cont.)

The deferred tax assets and liabilities are allocable to the following items:

Inventory Investment of property buildings and Deductions Property held for investment and losses plant sale and property carried and real under forward for equipment estate construction tax purposes Others Total In Thousands of NIS

Balance of deferred tax asset (liability) at January 1, 2009 (65,353) 40,094 (602,058) 195,306 6,178 (425,833) Changes recorded on the statement of income 22,474 (18,848) (207,382) 31,130 (112,543) (285,169) Changes recorded to shareholders’ equity* – – – (8,519) 6,710 (1,809) Transfer to properties held for sale – (1,868) – – – (1,868) Exit from the consolidation – – 347,549 (15,132) (415) 332,002 Translation differences 651 (1,536) (1,228) 968 (1,839) (2,984) Balance of deferred tax asset (liability) at December 31, 2009 (42,228) 17,842 (463,119) 203,753 (101,909) (385,661)

Balance of deferred tax asset (liability) at January 1, 2010 (42,228) 17,842 (463,119) 203,753 (101,909) (385,661) Changes recorded on the statement of income (17,891) 6,565 (88,588) 30,581 37,238 (32,095) Changes recorded to shareholders’ equity* – – – 6,190 (6,835) (645) Transfer to properties held for sale – (2,398) – – – (2,398) Exit from the consolidation 49,826 – – (52,321) 3,957 1,462 Translation differences 954 2,110 31,368 (7,946) (1,220) 25,266 Balance of deferred tax asset (liability) at December 31, 2010 (9,339) 24,119 (520,339) 180,257 (68,769) (394,071)

* The deferred taxes recognized directly in shareholders’ equity in 2010 consist of a tax reserve in the amount of NIS 6,835 thousand in respect of transactions hedging cash flows recorded directly in a capital reserve for cash flow hedges and, on the other hand, a tax reserve in the amount of NIS 6,190 thousand in respect of a capital reserve for translation differences relating to foreign activities.

The deferred taxes recognized directly in shareholders’ equity in 2009 consist of a tax asset in the amount of NIS 6,710 thousand in respect of transactions hedging cash flows recorded directly in a capital reserve for cash flow hedges and, on the other hand, a tax reserve in the amount of NIS 8,519 thousand in respect of a capital reserve for translation differences relating to foreign activities.

194



D. Deferred Tax Assets and Liabilities (Cont.)

(1) Deferred tax assets and liabilities recognized (Cont.) The deferred taxes are allocable are presented in the consolidated statements of

financial position as follows:

At December 31 2010 2009 In Thousands of NIS Deferred tax assets – non-current assets 96,429 100,452 Deferred tax liabilities – non-current liabilities (490,500) (486,113)

(394,071) (385,661)

As at December 31, 2010, the Group had deferred tax assets in respect of losses available for carryforward in the aggregate amount of about NIS 180 million, based on the following detail:

NIS millions The Company 18 Investee companies in Israel 41 Investee companies outside of Israel 121

180

(2) Deferred tax assets and liabilities not recognized The Group did not recognize deferred taxes in the amount of about NIS 452 million

(2009 – NIS 492 million) in respect of losses for tax purposes. Pursuant to the existing tax laws, there is no time limit on the utilization of tax losses

and deductible temporary differences, except for a loss in the Company in the amount of about NIS 228 million, which in accordance with a tax arrangement with the Taxes Authority will expire in 2011. Deferred tax assets were not recognized for these items since it is not expected that there will be future taxable income against which they can be offset.

(3) Tax losses and deductions available for carryforward to future years The Group has tax losses available for carryforward to next year that total NIS 1,972

million as at the date of the financial statements (2009 – NIS 2,711 million), of which tax losses of NIS 228 million (2009 – NIS 1,333 million) were incurred by the Company.

The balance of the losses, as stated, with respect to which deferred taxes were not

recorded is NIS 1,297 million (2009 – NIS 1,795 million).

195



E. Tax Assessments The Company has received final tax assessments from the Income Tax Authorities up to

and including the 2008 tax year. Some of the subsidiaries have received final tax assessments up to 2004, while others have not received tax assessments since commencing their operations.

F. Non-application of International Financial Reporting Standards (IFRS) for tax

purposes On February 4, 2010, the Law for Amendment of the Income Tax Ordinance No. 174 –

Temporary Order for the Years 2007, 2008 and 2009 (hereinafter – “the Amendment to the Ordinance”), was published in the Official Publications. Pursuant to the Amendment to the Ordinance, Israeli Accounting Standard No. 29, regarding “Early Adoption of International Financial Reporting Standards (IFRS)” will not apply for purposes of determination of the taxable income in the said years, even if it was applied in preparation of the financial statements.

Subsequent to the date of the report, a memorandum law was published for amendment of

the Income Tax Ordinance, wherein the Temporary Order will be extended such that it will also apply to 2010.

The impact of the Amendment to the Ordinance on the financial statements is not

significant.

Note 37 – Capital and Reserves

A. Share Capital and Premium on Shares

Ordinary Shares of NIS 0.1 Par Value 2010 2009 In NIS Issued and paid-up share capital at January 1 5,536,055 5,536,055 Issued as a result of utilization of rights 1,053,439 – Issued as part of the debt arrangement 5,183,963 –

Issued and paid-up share capital at December 31 11,773,457 5,536,055 Authorized capital 15,000,000 7,000,000

196


At December 31, 2010 Note 37 – Capital and Reserves

A. Share Capital and Premium on Shares (Cont.)

(1) As at December 31, 2010, the total issued and paid-up of share capital includes 12,456,126 dormant shares of NIS 0.1 par value (see below).

(2) The holders of the ordinary shares have the right to receive dividends as they will be

declared from time to time and the right to vote at the Company’s General Meetings based on one vote per share.

(3) As stated in Note 1C, as part of the debt arrangement, in May 2010 the Company

issued 62,374,020 ordinary shares based on the following distribution:

– 10,534,388 ordinary shares of NIS 0.1 par value each of the Company by means of an issuance of rights pursuant to a shelf prospectus.

– 12,456,126 ordinary shares of the Company to the trustee. The shares constitute

the agreed relief shares in accordance with the arrangement, which so long as they are held by the trustee will constitute dormant shares.

– 39,383,506 ordinary shares of NIS 0.1 par value each of the Company to the

debenture holders.

(4) In June 2005, after all the required approvals were received, the Company completed execution of a first level, ADR (American Depository Receipt) plan in the United States relating to Company shares, together with a U.S. bank. As part of this plan, the bank issued deposit certificates in respect of Company shares that are offered for sale in the United States by the said bank and that are traded “over the counter”, in the ratio of two deposit certificates for one Company share.

Since the deposit certificates are not registered in the United States in the various

locations for trading securities, the Company is not required to submit additional reports in the United States beyond those it was previously required to submit.

B. Translation Reserve for Foreign Operations The translation reserve includes all the foreign currency exchange rate differences deriving

from translation of the financial statements of foreign operations as well as from translation of the defined liabilities hedging investments in foreign operations.

As at December 31 2010 2009 In Thousands of NIS Africa Israel International Properties (2002) Ltd. (226,219) (93,479) Africa Israel International Investments (1997) Ltd. (421,920) (388,265) Africa Israel International Holdings Ltd. (868,536) (772,941) Other (84,284) (45,240) (1,600,959) (1,299,925)

197


At December 31, 2010 Note 37 – Capital and Reserves (Cont.)

C. Hedge Fund The hedge fund includes the effective portion of the accrued change in the net fair value of

instruments hedging the cash flows and relating to hedged transactions not yet realized. D. Revaluation Fund in respect of Acquisitions in Stages The revaluation fund relates to revaluation of an investment in a company prior to its entry

into the consolidation. E. Dividends In 2008, the Company paid a dividend of NIS 400 million (about NIS 7.93 per ordinary

share). F. Commitment to Issue Shares Regarding an issuance of shares executed in May 2010 as part of the debt arrangement –

see Section A., above. Regarding the impact of a restatement on the earnings per share – see Note 38 “Earnings Per Share”.

Regarding a commitment to issue options to employees – see Note 39 “Share-Based

Payments”.

198


At December 31, 2010 Note 37 – Capital and Reserves (Cont.)

G. Other Comprehensive Income

Allocable to the Company’s owners Capital reserve Revaluation Rights Total from Other reserve for not other cash flow capital Translation acquisition conferring comprehensive hedges reserves adjustments in stages Total control income In thousands of New Israeli Shekels

2010 Foreign currency translation differences in respect of foreign operations – – (439,645) – (439,645) (394,621) (834,266) Change in fair value of hedge of cash flows, net of tax 24,914 – – – 24,914 14,475 39,389 Change in fair value of financial assets available for sale, net of tax – 3,694 – – 3,694 – 3,694 Realization of other comprehensive income of equity-based investee company, net of tax – – (594) – (594) – (594) Total other comprehensive income for the period, net of tax 24,914 3,694 (440,239) – (411,631) (380,146) (791,777) 2009 Foreign currency translation differences in respect of foreign operations – – 116,437 – 116,437 29,276 145,713 Change in fair value of hedge of cash flows, net of tax (4,971) – – – (4,971) 659 (4,312) Change in fair value of financial assets available for sale, net of tax – (33,217) – – (33,217) – (33,217) Loss from decline in value of financial assets available for sale transferred to the statement of income, net of tax – 33,217 – – 33,217 – 33,217 Exit from control of equity-based investee company, net of tax – – – (10,109) (10,109) (4,784) (14,893) Realization of other comprehensive income of equity-based investee company, net of tax 12,643 – 3,214 – 15,857 – 15,857 Total other comprehensive income for the period, net of tax 7,672 – 119,651 (10,109) 117,214 25,151 142,365 2008 Foreign currency translation differences in respect of foreign operations – – (752,774) – (752,774) (284,853) (1,037,627) Change in fair value of hedge of cash flows, net of tax (37,750) – – – (37,750) (15,233) (52,983) Total other comprehensive income for the period, net of tax (37,750) – (752,774) – (790,524) (300,086) (1,090,610)

199


At December 31, 2010 Note 38 – Income (Loss) per Share

A. Basic Income (Loss) per Share Calculation of the basic income (loss) per share for the three years the last one of which

ended on December 31, 2010, was based on the income (loss) allocated to the ordinary shareholders, divided by the weighted-average number of shares outstanding, calculated as follows:

Income (loss) allocated to the holders of the ordinary shares

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Income (loss) allocated to the holders of the ordinary shares 1,702,056 (673,023) (4,860,956)

Weighted-average number of ordinary shares For the Year Ended December 31 2010 *2009 2008 In Thousands of Shares of NIS 0.1 Par Value Balance at January 1 55,360 55,460 50,547 Impact of debentures converted into shares – – 53 Impact of shares issued during the

year 39,415 – 2,425

Weighted-average number of ordinary shares used for purposes of calculation of the basic income (loss) per share 94,775 55,460 53,025

* Adjusted based on composition of the benefit upon issuance of the rights executed in 2010.

200


At December 31, 2010 Note 38 – Income (Loss) per Share (Cont.)

B. Diluted Income (Loss) per Share

Calculation of the diluted income per share for the three years the last one of which ended on December 31, 2010 was based on the income (loss) allocated to the ordinary shareholders, divided by the weighted-average number of ordinary shares outstanding after adjustment in respect of all the potentially dilutive ordinary shares, calculated as follows:

Income (loss) allocated to the holders of the ordinary shares (diluted)


Income (loss) used for purposes of calculation of the basic income per share 1,702,056 (673,026) (4,860,956) Impact of calculation of income of investee companies – – (14,083) Interest expenses in respect of convertible debentures, net of tax – – 1,625

Income (loss) allocated to the holders of the ordinary shares (diluted) 1,702,056 (673,023) (4,873,414)

Weighted-average number of ordinary shares (diluted)

For the Year Ended December 31 2010 *2009 2008 In Thousands of Shares of NIS 0.1 Par Value

Weighted-average number of ordinary

shares used for purposes of calculation of the basic income (loss) per share 94,775 55,460 53,025 Impact of contingent obligation to issue shares 123 – – Impact of conversion of debentures into shares – – 234

Weighted-average number of ordinary

shares used for purposes of calculation of the diluted income (loss)per share 94,898 55,460 53,259

* Adjusted based on composition of the benefit upon issuance of the rights executed in 2010.

The average market value of the Company’s shares, for purposes of calculating the dilutive effect of the options for shares, was based on quoted market prices during the period in which the options were outstanding.

201


At December 31, 2010 Note 39 – Share-Based Payments

A. Share-Based Payments in the Company

(1) Pursuant to a decision of the Company’s Board of Directors (after receiving the approval of the Audit Committee) in April 2007 that was updated in May 2008, the General Meeting of the Company’s shareholders approved an options’ plan for Mr. Nadav Grinshpon, the Deputy Chairman of the Company’s Board of Directors (hereinafter – “Mr. Grinshpon”) the Company granted Mr. Grinshpon options that will be exercisable for 225,000 of the Company’s ordinary shares of NIS 0.1 par value each. Nonetheless, Mr. Grinshpon will not be entitled to receive all the shares as stated above but, rather, only the number of shares that reflects the benefit component deriving to him from exercise of the options based on the difference between the price per share according to the average closing prices of the share on the stock exchange during the 30 trading days preceding the exercise date and the exercise price.

Upon issuance of the options as stated above, the options’ plan from April 2007 was

cancelled and the 100,000 options that are the subject of the first plan are cancelled and will no longer confer on Mr. Grinshpon any benefit whatsoever.

The exercise price of each share is NIS 247.92 (linked to the CPI) and it was

determined on the basis of the average closing prices per share on the stock exchange in the 30 days preceding the approval date of the options’ plan by the Company’s Board of Directors. Mr. Grinshpon will not be required to actually pay the exercise price but, rather, only the par value of the exercise shares, and the exercise price will serve solely for purposes of determining the benefit component.

The options were granted in 4 separate equal portions: the first – is exercisable

beginning from the end of two years after the effective date; the second – is exercisable beginning from the end of three years after the effective date; the third – is exercisable beginning from the end of four years after the effective date; and the fourth – is exercisable beginning from the end of five years after the effective date. The exercise period for each portion will be 12 months from the vesting date of each portion, respectively.

The fair value of the options was calculated based on the Black and Scholes model.

The main assumptions underlying the calculation of the value of the options are: share price of NIS 171.9, exercise price as stated above, annual discount rate of 2.3%–2.9%, and annual standard deviation of 37.2%–42.6%. According to this calculation, the fair value of the options as at the grant date, which constitutes the total expected expense in the financial statements over the vesting period of the options, is about NIS 11 million.

(2) In October 2008, Mr. Izzi Cohen, the Company’s CEO, was granted options for

378,500 of the Company’s ordinary shares in four equal portions, one vesting each year beginning on June 15, 2010. Each portion may be exercised during the 12-month period from the vesting date. The exercise price of each option warrant (updated to December 2010) is NIS 250.98 (linked to the CPI) and was determined on the basis of the share’s closing price on the Tel-Aviv Stock Exchange over the 30 trading days preceding the date of approval of the option plan by the Board of Directors.

202


At December 31, 2010 Note 39 – Share-Based Payments (Cont.)

A. Share-Based Payments in the Company (Cont.)

(2) (Cont.) The number of shares actually issued will not be the entire number of shares referred

to above but, rather, a number of shares that reflects the benefit component deriving from exercise of the options, calculated based on the difference between the closing price of the Company’s shares on the exercise date and the exercise price.

In a case of termination of the CEO’s employment prior to the end of three years of

the agreement period, at the Company’s initiation, however not under circumstances justifying non-payment of severance benefits under law or in a case of a fundamental breach of the employment agreement by the CEO, the CEO will be entitled to additional rights including an enlarged adaptation grant and entitlement to a partial exercise of options in accordance with that stated in the agreement.

The said options’ plan was approved by the Company’s Board of Directors and Audit

Committee in August 2008. The fair value of the options was calculated based on the Black and Scholes formula.

The main assumptions that served as a basis for calculation of the fair value of the options are: share price of NIS 136.5, exercise prices as detailed above, annual discount rate of 2.3%–2.9%, and an annual standard deviation of about 37.3%–42.7%.

Based on the above calculation, the fair value of the options, as at the date of their

grant, which constitutes the anticipated expense in the financial statements over the vesting period of the options, is about NIS 9.8 million.

(3) In August 2008, the Company’s Board of Directors and Audit Committee approved an

options’ plan whereby the Company’s CFO, Mr. Ron Fainaro, will be granted 55,670 options exercisable for 55,670 of the Company’s ordinary shares pursuant to Section 102 of the Income Tax Ordinance under the “Capital Gains” track through a trustee. The options will be granted in 4 equal increments that will vest once a year commencing 24 months from the issuance date, where each share will exercisable during a 12-month period from the vesting date. The exercise price of each option (updated to December 2010) is NIS 243.09 (linked to the CPI).

The number of shares actually issued will not be the entire number of shares referred

to above but, rather, a number of shares that reflects the benefit component deriving from exercise of the options, calculated based on the difference between the average closing prices of the Company’s shares in the last 30 trading days preceding the exercise date and the exercise price. The options may be exercised subject to the offeree being an employee or officer of the Company on the exercise date.

The fair value of the options was calculated based on the Black and Scholes model.

The main assumptions that served as a basis for calculation of the value of the options are: price per share of 136.5, exercise price as detailed above, annual discount rate of 2.3%–2.9%, and annual standard deviation of about 38.1%–44.0%.

203



A. Share-Based Payments in the Company (Cont.)

(3) (Cont.) Based on the above calculation, as at the date of their issuance, the fair value of the

options, which constitute the total expected expense in the financial statements over the vesting period of the options is about NIS 1.6 million.

In December 2010, Mr. Ron Fainaro announced his resignation from his position.

According to the terms of the options’ plan, commencing from the date of discontinuance of his employment all the options granted to him that had not yet vested will expire. Accordingly, the Company cancelled the expense it recorded in the books in respect of the unvested options as at this date, in the amount of NIS 666 thousand.

Number of options for Company shares and weighted-average exercise price

Weighted-average exercise price Number of options 2010 2009 2008 2010 2009 2008 In thousands of New Israeli Shekels

Balance at January 1 249.27 243.71 367.00 659,170 659,170 100,000 Cancelled during the period (243.09) – (367.00) (41,752) – (100,000) Granted during the period – – 228.74 – – 659,170 Balance at December 31 617,418 659,170 659,170 Exercisable at December 31 249.69 243.71 228.74 617,418 659,170 659,170 Exercise price in prices of December 2010.

In determining the fair value of the services received in consideration for the options,

the expected fluctuation rate was determined on the basis of the historic fluctuations in the share price. The life of the options was determined according to Management’s estimates regarding employees’ holding period of the options, taking into consideration their position with the Company and the Company’s past experience regarding employee leaving their positions. The riskless interest rate was determined on the basis of shekel government debentures whose time to maturity is equal to the expected life of the options.

B. Share-Based Payments in Subsidiaries

(1) Following the issuance of AFI Development, and pursuant to a resolution of the Board of Directors in April 2007, AFI Development granted 2,626,635 options for deposit certificates of AFI Development to directors, officers and other Group employees convertible into 2,626,635 deposit certificates representing shares constituting (assuming exercise of all such options) about 0.5% of AFI Development’s issued share capital. The exercise price of each option is $14 (subject to adjustments), which is the price determined per deposit certificate as part of the issuance of AFI Development.

204



B. Share-Based Payments in Subsidiaries (Cont.)

(1) (Cont.) The exercise period of the options is as follows: one third of the number of the options

will be exercisable beginning from the end of two years from the determining date (April 13, 2007), one third of the options will be exercisable beginning from the end of three years from the determining date, and one third of the options will be exercisable beginning from the end of four years from the determining date. All the options are exercisable commencing from the vesting date and up to end of ten years from the determining date.

The options were granted in three equal portions as described below:

(a) In May and June 2007, the Company allotted 2,202,785 options to employees. The average fair value of each option was calculated based on the Black and

Scholes formula, according to which average economic value of each option is about $5. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $13.1, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%.

The estimate of the anticipated expiration of the options was based on the

Company’s estimate of the expected exit rate of the recipients of the options. Based on the assumptions detailed above, the entire expense over the full vesting period of the options is about $6 million.

As at the signing date of the financial statements, 1,534,340 options were

forfeited due to termination of the employment of a number of employees.

(b) In July 2007, after approval by the General Meeting, 169,540 options were issued to the daughter of the Company’s controlling interest.

The average fair value of each option was calculated based on the Black and

Scholes formula, according to which average economic value of each option is $3.6. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $10.7, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%.

Based on the assumptions detailed above, the entire expense over the full vesting

period of the options is about $0.6 million. (c) In July 2007, after approval by the General Meeting, 254,310 options were issued

to the Chairman of the Company’s Board of Directors who is also an employee of a company controlled by the Company’s controlling interest and who also serves as a director of AFI Development.

205




(1) (Cont.)

(c) (Cont.) The average fair value of each option was calculated based on the Black and

Scholes formula, according to which average economic value of each option is $3.6. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $10.7, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%.

The estimated expiration of the options is based on the Company’s estimate of the

expected attrition rate of the option recipients. Based on the assumptions detailed above, the entire expense over the full vesting period of the options is about $0.9 million.

As at the date of the statement of financial position, the Company holds 54% of the

share capital and voting rights in AFI Development. If all the above options are exercised and converted into shares, the rate of holdings will be reduced to 53.95%.

(2) (2a) In June 2006, the Board of Directors of Africa Residences approved a plan for

issuance of options to the Company’s employees. Pursuant to the plan, Africa Residences will issue to the Company’s employees who hold positions with Africa Residences or provide services to it (in the framework of the Management Agreement between the Company and Africa Residences, or that are slated to be employed by Africa Residences in the future (based on the appendix to the Management Agreement (hereinafter – “the Offerees”) 345,200 options exercisable for 345,200 shares of Africa Residences. The options’ plan entered into effect upon registration of the shares of Africa Residences for trading on the stock market and it is subject to obtaining the approvals required pursuant to Section 102 of the Income Tax Ordinance.

The exercise periods of the options are as follows: one-third (1/3) of the total

options may be exercised commencing with the end of three years from the Effective Date, an additional one-third (1/3) of the options may be exercised commencing with the end of four years from the Effective Date, and the balance of one-third (1/3) of the total options may be exercised commencing with the end of five years from the Effective Date. All of the options may be exercised beginning with the commencement date of the relevant exercise period and up to the end of six years from the allotment date.

The exercise price will be used solely to determine the amount of the benefit and

will not actually be paid. Regarding every exercise of options, the full amount of the exercise shares will not be issued but, rather, only that quantity of shares that reflects the benefit component embedded in the options exercised, as will be calculated on the exercise date of those options.

The options were granted on two dates as described below:

206




(2) (2a) (Cont.)

(i) In August 2006, Africa Residences issued 307,200 options to employees. The exercise premium for each option is NIS 82.67, which constitutes 90% of

the average opening prices per share of Africa Residences on the stock market in the 30 trading days beginning with the registration of the shares of Africa Residences for trading on the stock market. The said exercise premium is linked to the Consumer Price Index (based on the “known” index) and was subject to various adjustments.


Scholes model, and accordingly the average economic value of each option is NIS 40. The main assumptions that served as the basis for calculation of the economic value as stated are as follows: price per share is NIS 94.8, exercise prices as detailed above, annual discount rate ranging between 3.7% and 3.8%, expected life of the option ranging between 4.5 years and 5.5 years, and an annual standard deviation in the range of about 34%.

The estimate of the expected expiration of the options was based on the

estimate of the Company’s managers regarding the resignation rate of the option recipients. Based on the assumptions described above, the total expected expense over the entire vesting period of the options is about NIS 3.9 million.

(ii) In October 2006, Africa Residences issued 38,000 options to the daughter of

Company’s controlling interest. The issuance price of the options, as determined by the Company’s General Meeting, is the average of the closing prices of the shares of Africa Residences on the stock exchange during the 30 days preceding the General Meeting, and it amounted to NIS 96.63. The exercise premium is linked to the Consumer Price Index (based on the “known” index) and is subject to various adjustments.


Scholes model, and accordingly the average economic value of each option is NIS 47. The main assumptions that served as the basis for calculation of the economic value as stated are as follows: price per share is NIS 107.5, exercise prices as detailed above, annual discount rate of 3.8%, expected life of the option of 6 years, and an annual standard deviation in the range of about 34%.

Based on the assumptions described above, the total expected expense over

the entire vesting period of the options is about NIS 1.2 million. In November 2010, the options issued to the daughter of Company’s

controlling interest were forfeited due to discontinuance of the employer-employee relationship such that she no longer serves as an employee of Africa Investments.

207




(2) (2a) (Cont.)

(iii) As at December 31, 2010, 233,300 options to employees under the June 2006 employee option plan were forfeited due to termination of employment relations of employees who no longer serve as employees as Africa Residences and/or the Company. Including options issued to the daughter of Company’s controlling interest, as stated in subsection (ii) above.

(iv) As at the approval date of the financial statements, no options had been

exercised. (2b) Commencing from November 2008 and up to March 2011, Mr. Gil Dekel served

as the CEO of Africa Residences. In September 2008, the Board of Directors of Africa Residences approved a plan to allot 94,500 options to the CEO Mr. Gil Dekel. The options will be awarded in 4 equal portions that will vest once annually, beginning from the end of two years from the determining date, and each portion will be exercisable for a period of 12 months from the vesting date, provided that the CEO is employed by the Company on the exercise date, subject to specific exceptions.

The CEO will not be eligible to receive all the shares stemming from the exercise

of the options, but rather the number of shares that reflects the benefit component stemming from the exercise of the options, pursuant to the difference between the average share price in the 30 trading days preceding the exercise date, and the exercise price as defined hereinafter.

The exercise price of each option is the average closing price of the Company’s

shares on the stock market in the 30 trading days preceding the determining date, which is 41.44. The exercise price will be linked to the CPI. The CEO will not be required to actually pay the exercise price, but rather the nominal value of the underlying shares, and the exercise price will be used solely to determine the benefit component.

The average fair value of all the options granted to the CEO on the award date

was calculated based on the Black and Scholes model, and accordingly the average economic value of each option is NIS 5.52. The main assumptions that served as the basis for calculation of the economic value as stated are as follows: price per share on the issuance date is NIS 28.06, exercise prices as detailed above, annual discount rate ranging between 2.29% and 2.86%, the expected life of the option of 6 years, and an annual standard deviation in the range of about 32.5%.

Based on the assumptions described above, the total expected allotment over the

entire vesting period of the options is about NIS 0.5 million. As at the balance sheet date, the said options had not been issued to the CEO. The

options to which the CEO is entitled will expire within 90 days from the termination date of the CEO’s service.

208




(2) (2b) (Cont.) In light of the fact that as at the date of the report the options, as stated, had not

yet been issued, and taking into account the exercise price determined for them, which is lower than the up-to-date price of a share on the stock exchange, Mr. Dekel is entitled to a one-time payment in place of the options.

(2c) As at the date of the statement of financial position, the Company holds 74.47%

of the share capital and voting rights in Africa Residences. If all the aforesaid options are exercised and converted into shares, the holding will be reduced to 73.8%.

(3) In August 2007, the Board of Directors of Danya Cebus made a decision with respect

to an employee stock option plan (hereinafter – “the Options Plan”) pursuant to which a number of senior employees in Danya Cebus and in its subsidiaries, including the CEO (hereinafter in this section – “the Employees”) will be granted 580,335 options, constituting about 2.91% of Danya Cebus’ issued share capital, of which the CEO is entitled to 193,445 options (constituting about 0.97% of Danya Cebus’ issued share capital as stated), and the balance of 338,529 options are divided among 10 officers (including 2 CEOs of subsidiaries of Danya Cebus) in equal shares between them (constituting about 1.7% of the issued share capital) and 48,361 options for future offerees (constituting about 0.24% of the issued share capital). The effective date of the Options Plan is the date of the decision of the Board of Directors to adopt the Options Plan, that is, August 1, 2007.

Danya Cebus will issue to a trustee the full number of the options (580,335) subject to

completion of all the necessary actions and receipt of all the required approvals under law, including Section 102 of the Income Tax Ordinance.

The options will be exercisable up to 6 years from the determining date, in four equal

portions, beginning from the second year until five years from the determining date. The cost of the benefit represented by the options allotted as above, based on their fair

value on the award date, was a total of NIS 11,859 thousand. The average fair value of each option was calculated based on the Black and Scholes

formula and, accordingly, the average economic value of each option is NIS 23.94. The main assumptions that served as the basis for calculation of the economic value, as stated, are: a share price of NIS 62; exercise price NIS 55.8; life of the options determined according to Management’s estimate of the employees’ holding period of the options; a riskless interest rate of 2.6%–2.7%, and an annual standard deviation in the range of about 36%. The options have not yet been issued to the offerees.

209



C. Salaries Expense in respect of Share-Based Payments and Other Details


In respect of options for shares of the Company 4,502 6,020 2,680 In respect of options for shares of subsidiaries 948 (1,416) 6,228

Total 5,450 4,604 8,908

The data is after deduction of tax.

Note 40 – Management of Financial Risks The Group is engaged in various areas of activity – mainly real estate. Based on the nature of its activities, the Company has exposure to market risks deriving from

external factors, such as, the activities in the real estate sector in and outside of Israel, changes in the Consumer Price Index (CPI), changes in the in the Building Inputs Index, credit, interest and currency risks and changes in the level of interest prevailing in the economy. In addition, the Company has exposure to changes in the exchange rates of foreign currency in connection with its foreign investments, where such exposure derives from both the current ongoing activities of the investee companies overseas as well as from the manner of financing the investments.

Supervision of the Company’s market risks is accomplished through discussions held by

Company Management in appropriate frameworks together with reporting and discussions by the Board of Directors and in accordance with the appropriate decisions made.

The Company uses derivative financial instruments in an insignificant scope in order to reduce its

exposure to the above-mentioned risks. “Market risk” – the risk to the business results, shareholders’ equity, cash flows or Company

value, deriving from changes in the interest rate, foreign currency exchange rates, rate of inflation, raw material prices, other prices, prices of securities in and outside of Israel and economic indices having a significant impact on the Company’s assets and liabilities including the Company’s liabilities to suppliers, trade receivables and other properties and loans.

Currency risk The Company has loans and deposits in various currencies. Fluctuations in the foreign currency

rates (mainly with respect to the U.S. dollar and the euro) have a positive or negative impact on the Company’s financing income and expenses.

210


At December 31, 2010 Note 40 – Management of Financial Risks (Cont.) Currency risk (Cont.) The Company operates in various foreign countries wherein the reporting currency is not the

Israeli currency (the reporting currencies in the foreign countries in which the Company operates are mainly the U.S. dollar, the ruble and the euro) and, as a result, in a case of a change in the real exchange rate of the shekel vis-à-vis the U.S. dollar, the ruble or the euro, a risk to the Company’s reported results and its shareholders’ equity is created.

A weakening of the exchange rates of the currencies vis-à-vis the shekel has an adverse impact

on the Company’s reported results and its shareholders’ equity. Part of the payments for which the Company is obligated (mainly in the construction and industry

areas), which generally involve the cost of employing foreign workers, acquisition of certain raw materials and import from overseas of building inputs and/or equipment, are linked, directly or indirectly to foreign currency rates. Changes in the foreign currency rates could also have an indirect adverse impact on the Company’s activities due to an increase in the prices of raw materials and other inputs and, in turn, an increase in the cost of undertakings with suppliers, subcontractors and other service providers. Therefore, changes in foreign currency exchange rates could have an impact on the Company’s activities and the results thereof.

Changes in the Consumer Price Index (CPI) The Company is exposed to changes in the CPI due to the impact thereof on its CPI-linked

liabilities, including CPI-linked debentures issued by the Company. The Company does have a policy regarding the hedging of its CPI-linked debentures, and the extent thereof is determined based on the discretion of the Company’s employee responsible for risk management in accordance with the directions of the Board of Directors. In the period of the report, hedges were made with respect to part of CPI-linked liabilities in an immaterial amount.

Changes in interest rates The Company has a portfolio of short-term and long-term shekel liabilities bearing fixed and

variable interest. A change in the interest rate could cause an increase in the Company’s financing expenses and have an effect on its cash flows.

The Company does not enter into hedging transactions in respect of the aforementioned exposure. Liquidity risk The real estate business, including real estate initiatives and investment in income-producing

properties, includes significant components involving financing activities. Accordingly, the Group, the main business of which is in the real estate sector, relies to a large extent on the availability of monetary sources. The importance of the monetary sources is very high, both in the Company (the parent company) in its activities as a holding company, as well as in the subsidiaries, particularly for purposes of investing shareholders’ equity in order to develop new and existing ventures – for real estate activities and activities in other areas.

211


At December 31, 2010 Note 40 – Management of Financial Risks (Cont.) Liquidity risk (Cont.) The Company and the subsidiaries have a policy of maintaining liquidity levels that will permit

them to comply with their liabilities in an environment characterized by liquidity problems. The Company’s financing strategy in the long run is supported mainly by return of investment

and dividends from the subsidiaries, such that servicing of its debt necessarily relies on its ability to raise money in the capital market for refinancing purposes.

The Company’s liquidity could be adversely impacted if it does not have access to the capital

markets and/or to credit sources, or if it is not able to sell off its properties. In such a case, it would be expected that the Company’s credit costs will increase and its borrowing ability (without collaterals or against collaterals) could be unfavorably affected as a result of an increase in the interest rates, or the credit margins, or if the financing parties in the market will believe that there has been an increase in the Company’s liquidity risk. An inability to obtain financing in the long-term or short-term, unsecured debt markets, or a lack of access to the secured-loans market, could have a significant unfavorable impact on the Company’s liquidity.

In 2009, as a result of the severe worldwide crisis in the credit area, in general, and in the real

estate sector, in particular, the Company completed an arrangement of its debts, primarily due to liquidity problems, which stemmed both from its inability to sell off properties, as well as from cessation of the functioning of the credit market. During 2010, after completion of the arrangement and the onset of stability in the economic and financial environment, there was an improvement in accessibility to the credit markets and loan markets: the subsidiary Africa Israel Properties is repaying debt by means of issuance of debentures, Africa Hotels completed a process of reorganization of its liabilities, which included provision of new bank credit, and AFI Development received credit lines for purposes of financing construction of some of its projects.

Risk Management Policy – Financial Liabilities, Financial Investments, Currency

Exposure, Interest Rates As stated above, the Company maintains a portfolio of short-term and long-term liabilities in a

number of currencies with different linkage bases and interest rates. In the international activities, the Company is in the practice, in most transactions, of financing the activities with loans denominated in the same currency in which the revenues are received, including shareholders’ loans, and the Company generally does not hedge the linkage base of the results of the activities or the statement of financial position thereof against changes stemming from changes in the exchange rates of the various currencies against the shekel.

212


At December 31, 2010 Note 40 – Management of Financial Risks (Cont.) Risk Management Policy – Financial Liabilities, Financial Investments, Currency

Exposure, Interest Rates (Cont.) In the local market, the Company maintains a dynamic credit portfolio having different interest

rates and time periods, which is managed in accordance with the Company’s cash needs and the market conditions prevailing from time to time. In addition, occasionally the Company enters into hedging transactions for economic purposes, through use of forward contracts, SWAP transactions and options on the various foreign currency rates. There is no set policy regarding the extent of the hedging of the credit portfolio and it is determined based on the discretion of the Company’s employee responsible for risk management in coordination with the Company’s Board of Directors.

Supervision of the market risk management policy The Company does not have a policy with respect to hedging the market risks and it is

determined based on the instructions of the Board of Directors. Supervision of the Company’s market risks is accomplished through discussions held by

Company Management in appropriate frameworks together with reporting and discussions by the Board of Directors and in accordance with the appropriate decisions made.

Every quarter, at the time the Board of Directors is convened to approve the financial statements,

an explanation is provided with respect to the Company’s financing expenses. Note 41 – Financial Instruments

A. Credit Risk

1) Exposure to credit risk The book value of the financial assets represents the maximum credit exposure. The

maximum exposure to credit risk as at the date of the statement of financial position was as follows:

At December 31 2010 2009 In Thousands of NIS Cash and cash equivalents 2,155,726 1,560,504 Short-term investments 191,524 353,971 Financial assets measured at fair value through the statement of income 424,706 567,148 Loans and receivables 3,081,786 5,052,872

5,853,742 7,534,495

The above-mentioned balances are included in the categories cash and cash equivalents, short-term investments, marketable securities, trade receivables, other receivables, loans in associated companies and long-term investments, loans and other debit balances.

213


At December 31, 2010 Note 41 – Financial Instruments (Cont.)

A. Credit Risk (Cont.)

1) Exposure to credit risk (Cont.) The maximum exposure to credit risk in respect of receivables, loans and other

investments as at the balance sheet date, broken down by geographic areas, is as follows:

At December 31 2010 2009 In Thousands of NIS Local 3,887,168 4,784,222 United States 169,500 278,591 Russia 1,350,890 2,004,780 Eastern Europe 446,184 466,902

5,853,742 7,534,495

2) Aging of the receivables and losses from decline in value Set forth below is an aging of the trade receivables:

At December 31 2010 2009 Decline Decline Gross in value Gross in value In Thousands of New Israeli Shekels

Not overdue 766,588 1,858 737,996 1,644 Overdue 0–30 days 71,354 920 21,990 384 Overdue 31–120 days 57,514 8,667 38,190 1,415 Overdue 120 days up to one year 46,212 12,472 34,800 10,199 Overdue more than one year 76,246 39,917 83,003 36,561 1,017,914 63,834 915,979 50,203

214



B. Liquidity Risk

(1) Set forth below are the contractual repayment dates of financial statements liabilities (on the basis of SPOT rates), including an estimate of interest payments. This disclosure does not include amounts regarding which there are offset agreements.

At December 31, 2010 Contractual Up to More Book cash one 1–2 2–5 than five value flows year years years years In Thousands of New Israeli Shekels

Non-derivative financial liabilities Short-term loans from Non-convertible debentures 5,262,113 6,450,002 1,216,002 361,682 4,403,850 468,468 Loans from banks 5,223,908 6,287,139 1,040,143 490,337 4,000,895 755,764 Other liabilities 595,623 732,820 18,269 39,922 28,692 645,938

At December 31, 2009 Contractual Up to More Book cash one 1–2 2–5 than five value flows year years years years In Thousands of New Israeli Shekels

Non-derivative financial liabilities Short-term loans from Non-convertible debentures 9,277,984 9,531,112 7,617,480 394,909 761,528 757,195 Loans from banks 6,030,382 8,000,365 853,239 721,918 3,041,335 3,383,873 Other liabilities 785,093 1,047,907 13,799 134,529 67,058 832,521

The Company has derivative financial instruments the expiration dates of which are in the range

of one year. With respect to repayment of non-current financial assets – see Notes 15A(6) and 19B.

215



B. Liquidity Risk (Cont.)

(2) Exposure to CPI and foreign currency risk The Group’s exposure to CPI and foreign currency risk, based on the stated values, is

as follows:

At December 31, 2010 Linked to the CPI / building In foreign currency or linked thereto Other inputs Unlinked Dollar Euro Other items Total In Thousands of New Israeli Shekels

Assets:

Current assets: Cash and cash equivalents – 1,511,808 515,866 51,135 76,917 – 2,155,726 Short-term investments – 40,015 70,700 59,256 21,553 – 191,524 Marketable securities 157,683 145,759 51 – – 121,213 424,706 Trade receivables 251,144 503,726 88,856 24,185 69,179 – 937,090 Other receivables and current tax assets 126,861 153,906 577,483 26,869 117,274 94,901 1,097,294 Assets held for sale 1,465,715 113,694 10,451 – – 194,438 1,784,298

Long-term loans, investments and debit balances 61,117 49,933 51,939 – – 1,379 164,368

Loans to investee companies 343,383 71,142 11,763 164,507 291,347 892 883,034

Total assets 2,405,903 2,589,983 1,327,109 325,952 576,270 412,823 7,638,040 --------------- -------------- -------------- -------------- -------------- ------------ ----------------

Liabilities:

Current liabilities: Short-term credit from banks and others 95,586 853,246 747,089 145,633 86,451 83,541 2,011,546 Contractors and suppliers 85,909 267,142 222,151 70,520 159,886 – 805,608 Other payables, current tax liabilities and provisions 107,608 171,705 506,169 102,971 81,265 387,338 1,357,056 Liabilities held for sale 1,513,993 81,196 – – – 25,037 1,620,226

Long-term liabilities: (including current maturities)

Debentures 4,732,333 75,000 454,780 – – – 5,262,113 Liabilities to banks 407,144 810,454 661,580 2,164,213 1,180,517 – 5,223,908 Others liabilities 41,463 14,530 168,130 162,647 191,079 17,774 595,623

Total liabilities 6,984,036 2,273,273 2,759,899 2,645,984 1,699,198 513,690 16,876,080 -------------- -------------- -------------- -------------- -------------- ------------ ----------------

Total balance sheet

balance, net (4,578,133) 316,710 (1,432,790) (2,320,032) (1,122,928) (100,867) (9,238,040)

216




(2) Exposure to CPI and foreign currency risk (Cont.)

At December 31, 2009 Linked to the CPI / building In foreign currency or linked thereto Other inputs Unlinked Dollar Euro Other items Total In Thousands of New Israeli Shekels

Assets:

Current assets: Cash and cash equivalents – 505,019 823,281 104,176 128,028 – 1,560,504 Short-term investments – 175,003 129,972 41,140 7,856 – 353,971 Marketable securities 137,201 142,367 162,638 – – 124,942 567,148 Trade receivables 252,208 490,671 59,990 18,130 44,777 – 865,776 Other receivables and current tax assets 65,998 161,035 625,162 33,603 113,329 11,565 1,010,692

Long-term loans, investments and debit balances 1,465,664 97,545 190,836 – 2,976 130,415 1,887,436

Loans to investee companies 635,665 127,371 12,789 181,298 331,845 – 1,288,968

Total assets 2,556,736 1,699,011 2,004,668 378,347 628,811 266,922 7,534,495 ---------------- -------------- -------------- -------------- -------------- ------------ ----------------

Liabilities:

Current liabilities: Short-term credit from banks and others 76,849 1,548,223 1,117,492 313,282 306,833 52,734 3,415,413 Contractors and suppliers 65,223 374,821 144,655 72,260 103,066 – 760,025 Other payables, current tax liabilities and provisions 93,051 377,847 608,535 247,863 41,845 309,201 1,678,342 Liabilities held for sale – 26,681 – – – – 26,681

Long-term liabilities: (including current maturities)

Debentures 8,275,115 519,371 483,498 – – – 9,277,984 Liabilities to banks 1,494,221 316,294 700,507 2,556,603 962,757 – 6,030,382 Others liabilities 47,611 170,213 159,485 226,955 180,829 – 785,093

Total liabilities 10,052,070 3,333,450 3,214,172 3,416,963 1,595,330 361,935 21,973,920 ---------------- -------------- -------------- -------------- -------------- ------------ ----------------

Total balance sheet

balance, net (7,495,334) (1,634,439) (1,209,504) (3,038,616) (966,519) (95,013) (14,439,425)

217




(3) Sensitivity analysis A strengthening of the shekel against the following currencies as at December 31,

2010 and an increase in the CPI would increase (decrease) the income or loss in the amounts presented below. This analysis is made based on the assumption that all the other variables, particularly the interest rates, remain fixed. The analysis with respect to 2009 is made on the same basis.

At December 31, 2010 +10% +5% –5% –10% In Thousands of NIS

Exchange rate of the dollar 19,648 9,824 (9,824) (19,648) Exchange rate of the euro (389) (194) 194 389

+2% +1% –1% –2%

CPI (90,313) (45,156) 45,156 90,313

At December 31, 2009 +10% +5% –5% –10% In Thousands of NIS

Exchange rate of the dollar 8,360 4,180 (4,180) (8,360) Exchange rate of the euro (6,500) (3,250) 3,250 6,500 Exchange rate of the Swiss franc (3,654) (1,827) 1,827 3,654

+2% +1% –1% –2%

CPI (161,292) (80,646) 80,646 161,292

218



C. Interest Rate Risks

(1) Interest type Set forth below is detail regarding the type of interest on the Group’s interest-bearing

financial instruments:

At December 31 2010 2009 In Thousands of NIS

Fixed-interest instruments Financial assets 2,497,728 3,792,728 Financial liabilities (8,210,206) (13,797,984)

(5,712,478) (10,005,256)

Variable-interest instruments Financial assets 136,501 124,815 Financial liabilities (4,778,932) (5,507,600)

(4,642,431) (5,382,785)

(2) Fair value sensitivity analysis with respect to fixed-interest instruments

The Group’s fixed-interest assets and liabilities are not measured at fair value through the statement of income, and the Group does not designate derivatives (interest SWAP contracts) as hedging instruments in accordance with the fair value accounting hedge model. Therefore, the change in the interest rates as at the date of the financial statements is not expected to have an impact on the income or loss in respect of changes in the value of the fixed-interest assets and liabilities.

219



C. Interest Rate Risks (Cont.)

(3) Fair value sensitivity analysis with respect to variable-interest instruments A change in the variable interest as at the date of the report would have increased or

decreased the income or loss by the amounts presented below. This analysis is made based on the assumption that all the other variables, particularly the interest rates, remain fixed. The analysis with respect to 2009 is made on the same basis.

At December 31, 2010 +2% +1% –0.5% In Thousands of NIS

Shekel interest (43,392) (21,696) 10,848

+1% +0.5% –0.5%

Dollar interest (17,583) (8,791) 4,396 Euro interest (48,965) (24,482) 12,241

At December 31, 2009 +2% +1% –0.5% In Thousands of NIS

Shekel interest (18,457) (9,228) 4,614

+1% +0.5% –0.5%

Dollar interest (12,803) (6,402) 6,402 Euro interest (30,609) (15,304) 15,304

(4) Sensitivity analysis with respect to euro interest rate on derivative hedging instruments

The impact on the shareholders’ equity of an increase of 1% in the variable euro

interest would be an increase in capital of about NIS 46,412 thousand. On the other hand, in the case of a decline of 1% in the variable euro interest, there would be a decrease in capital of about NIS 47,668 thousand.

(5) The Group has derivative financial instruments for purposes of hedging the existing

exposure in respect of the variable interest rate on outstanding loans, in the form of a cash flow hedge.

220



D. Fair Value

(1) Fair value compared with book value The book value of certain financial assets and liabilities, including cash and cash

equivalents, trade receivables, other receivables, other short-term investments, revolving credit from banks, short-term loans and credit, trade payables other payables and proposed dividends, equal or approximate their fair values.

The fair value of the rest of the financial assets and liabilities presented in the balance

sheet are shown below: At December 31 2010 2009 Book Fair Book Fair value** value value** value

Long-term debt – financial asset* – – 1,470,912 1,686,981 Non-current liabilities Non-convertible debentures (5,344,382) (5,760,629) (9,768,447) (6,242,681) Long-term bank loans (5,818,890) (5,582,722) (6,343,996) (6,356,759) Other liabilities (571,580) (604,739) (786,841) (789,906) (11,734,852) (11,948,090) (16,899,284) (13,389,346)

* Since there are no financial assets having characteristics similar to the financial asset in the Group’s statement of financial position and since there is no specific credit rating for the financial asset, items which if they existed would assist in measuring the fair value of the financial asset, calculation of the fair value of the financial asset is based on the present value of the cash flows based on the interest rate for certain similar loans and with a similar credit rating as the rating for the long-term loan as at December 31, 2009. Set forth below is the interest rate:

December 31, 2009 – 4.80%

The fair value of marketable financial instruments is determined based on their stock

market values as at the date of the financial statements. The fair value of non-marketable financial instruments is determined by means of discounting their anticipated cash flows at the interest rates set forth below.

** The book value is before deduction of current maturities and includes accrued

interest.

221



D. Fair Value (Cont.)

(2) Interest rates used in determination of the fair values

At December 31 2010 2009 In %

Non-convertible debentures 2.93–10.99 6.83–127.63 Long-term loans from banks and others – shekel 3.90–5.80 2.25–6.00 Long-term loans from banks and others – dollar 6.00–15.00 0.25–14.0 Long-term loans from banks and others – euro 3.00–5.00 3.2–4.70

(3) Hierarchy of fair value The following table presents an analysis of the financial instruments measured at fair

value, using an evaluation method. The various levels were defined as follows:

– Level 1: Quoted prices (not adjusted) in an active market for identical instruments.

– Level 2: Observed data, direct or indirect, not included in Level 1 above. – Level 3: Data not based on observed market data.

Level 1 Level 2 Level 3 Total In Thousands of NIS

December 31, 2010

Financial assets held for trade: Marketable securities 424,706 – – 424,706 Financial derivatives – 94,051 – 94,051

Financial assets at fair value through the statement of income – 231 – 231

Financial liabilities available for sale – – 736 736 424,706 94,282 736 519,724

Financial liabilities – derivative instruments – 16,455 – 16,455 December 31, 2009

Financial assets held for trade: Marketable securities 567,148 – – 567,148 Financial derivatives – 19,452 – 19,452

Financial assets at fair value through the statement of income – 126,057 – 126,057

Financial liabilities available for sale – – 4,359 4,359 567,148 145,509 4,359 717,016

Financial liabilities – derivative instruments – 63,890 – 63,890

222



E. Financial guarantees The fair value and maximum exposure in respect of guarantees, and the book value

presented in the statement of financial position in the “other liabilities” category (for additional information – see Note 23 “Loans and Credit”) of the said liability, are as follows:

At December 31, 2010 Book Fair Maximum value value exposure In Thousands of NIS

Liability in respect of provision of guarantee to associated companies 9,542 9,542 1,184,202

At December 31, 2009 Book Fair Maximum value value exposure In Thousands of NIS

Liability in respect of provision of guarantee to associated companies 123,331 123,331 931,274

F. Changes in the Consumer Price Index (CPI) The Group has accounting exposure deriving from linkage of the principal and interest of

the financial liabilities to the CPI. Data with respect to the CPI and currency exchange rates

At December 31 Change 2010 2009 2010 2009

% % “In respect of” CPI (in points) 117.820 114.770 2.7 3.9 “Known” CPI (in points) 117.380 114.770 2.3 3.8 Building inputs index 128.500 123.700 3.9 – U.S. dollar exchange rate (in NIS) 3.549 3.775 (6.0) (0.7) Euro exchange rate (in NIS) 4.738 5.442 (12.9) 2.7 British pound exchange rate (in NIS) 5.493 6.111 (10.1) (10.1) Yen exchange rate (100 yen to NIS) 4.360 4.086 6.7 (2.6)

223


At December 31, 2010 Note 42 – Commitments Regarding commitments – see also Note 7 “Group Activities and Significant Events”. Regarding

collaterals in respect of credit received – see also Note 23G.

A. Construction and Real Estate Transactions

(1) There are commitments to local and other authorities, kibbutzim, contractors, planners and consultants, and contingent commitments for cooperation in the development of land and payments in respect of evictions and performance of development and construction work. In addition, there are agreements with purchasers of apartments, shops and buildings and commitments for their completion and delivery to the purchasers in the ordinary course of business of the member companies of the Africa Israel Group (including in the framework of joint ventures).

(2) One of the tenants in the Varna Business Park in Bulgaria (the rent paid by which

constitutes about 67% of the total rental revenues from this project), was given an option to purchase one of the buildings in the project that is presently leased to it in full. The said purchase option is exercisable up to November 2012, and if the tenant exercises an option to extend the lease period by an additional five years, the purchase option will be concurrently extended. The exercise price depends on the exercise date: in November 2011 – about €17.3 million; and in November 2012 – about €18 million.

B. Hotel Operations

(1) Africa Hotels has signed a number agreements with the Holiday Inn Worldwide chain that govern the rights and obligations of the companies of the Hotels Group, with respect to the operation of the chain’s hotels in Israel.

(a) Framework agreement The framework agreement extends the conditions of the prior framework

agreement (from September 2004) and includes, among other things, extension of the individual franchise agreements up to March 2014, while giving Africa Hotels an additional option up to March 2021.

Under the agreements, Africa Hotels pays royalties and marketing fees derived as

a fixed percentage of the total revenues from the rooms. In addition, every hotel is charged for payment of a fixed amount calculated based on the number of rooms.

As part of the new agreement, Africa Hotels relinquished the exclusivity it

enjoyed in connection with use of the “Holiday Inn” trademark while, at the same time, it was released from its obligation not to operate hotels in Israel under a different name.

224


At December 31, 2010 Note 42 – Commitments (Cont.)

B. Hotel Operations (Cont.)

(1) (Cont.)

(b) Individual franchise agreements The franchise agreements with the worldwide “Holiday Inn” and “Crowne Plaza”

chains are signed in respect of every hotel separately and, in principle, are similar to each other, with modifications as required. Under a franchise agreement, a hotel is entitled, among other things, to operate under the “Holiday Inn” or “Crowne Plaza” trade names in accordance with the classification of each hotel with respect to which a franchise agreement was signed. In addition, the franchisee is entitled to use the trademark and trademark as well as the chain’s international booking system. Failure to comply with the agreements signed separately with every hotel regarding these operations is grounds for revoking the franchise agreement.

In addition, it was provided that each hotel will comply with the standards

determined by the worldwide “Holiday Inn”, both with respect to the hotel’s building and the facilities and accessories installed therein, as well as the standard of services provided and to be provided by the hotel.

(2) In March 2006, Africa Hotels signed an agreement, through a subsidiary, with Kaneet

Hashalom Investments Ltd. (hereinafter – “Kaneet”) of the Azrieli Group. According to the agreement, the subsidiary leases from Kaneet 13 floors of the Square Tower located in the Azrieli Center in Tel-Aviv and additional areas on the ground floor and basement floor of the Square Tower, for the purpose of operating an urban business hotel.

According to the agreement, the subsidiary leases from Kaneet the aforesaid portion of

the structure, at an envelope standard, and it performed adaptation works to prepare it for operation as a hotel including about 272 rooms and suites. The lease term is 12 years from the opening of the hotel, and the subsidiary has two options for two additional lease periods – one for six years, and the second for six years and 11 months. According to the agreement, the subsidiary pays Keneet fixed rentals and additional rentals that will be calculated as a percentage of the proceeds. The hotel was partially opened for business in May 2008, and entirely opened in August 2008, and is known as Crowne Plaza City Center.

(3) In September 2007, a wholly owned subsidiary of Africa Hotels registered in Cyprus

entered into a framework agreement and accompanying agreements related to the performance thereof, with a company registered in Cyprus (hereinafter – “the Additional Company”), concerning the acquisition and management of four hotels in Bucharest, Romania. The Additional Company is controlled by shareholders of companies registered in Romania that own four hotels in Bucharest, of which one is under construction, including about 300 hotel rooms.

225




(3) (Cont.)

Under the framework agreement, Africa Hotels and the Additional Company set up a holding company registered in Romania that acquired from the sellers the rights in three hotels and acquired 100% of the shares of the company holding the hotel under construction, all for a total consideration of about €18.9 million.

The proportion of the holdings in the holding company will be 60% – Africa Hotels

and 40% – the Additional Company. Furthermore, a management company was set up and is held in the same proportion (where the subsidiary itself is the owner of 60% therein, indirectly) that will rent the hotels from the holding company and will operate them for hotel purposes.

Africa Hotels is conducting negotiations with its partners in the hotels in Romania and

with the lending bank, in order to reach control and management of the hotels of the hotels as it sees fit. If the negotiations do not ripen into agreements, Africa Hotels will make a decision accordingly. Since, and as noted above, the acquisition loans are “non-recourse” Africa Hotels does not expect that it will be caused any harm as a result of any decision made – including abandonment of the project.

Under the aforesaid acquisition agreement, Africa Hotels granted a put option to the

minority. The exercise price of the option will be set on the basis of the companies’ fair value to be determined as the higher of the following: (a) €36 million plus income accrued in the subsidiaries of Africa Hotels, and the amount of a loan assumed to renovate the Palace Hotel that was paid and settled up to that date, or (b) the product of the average EBITDA of the subsidiaries in the first three years of the Palace Hotel’s operations since its opening. If the put option is exercised, an amount equal to 40% of the balance of the loan used to renovate the Palace Hotel will be offset against the exercise price.

(4) In April 2008, Africa Hotels signed an agreement with Ashdod Hotels and

Investments Ltd. (hereinafter – “the Owners”) pursuant to which Africa Hotels will provide hotel management services to a hotel having 190 rooms being constructed in the southern part of the City of Ashdod on land owned by the Owners. The management agreement provides that the hotel under construction will bear the trade name “Crowne Plaza” where an approval in-principle was granted by IHG, the grantor of the franchise. The management will be for a period of 10 full calendar years from the opening date of the hotel (with an option for an additional 10 years). Arrangements were also provided in the agreement with respect to the current management, responsibility for maintenance and preservation of the Owners’ property, the financial operations, responsibility for the employees, etc.

As at the publication date of this report, the hotel had not yet been opened. (5) Regarding an undertaking of Africa Hotels in a management agreement with Tiberias

Hot Springs Ltd. – see Note 7J(4).

226




(6) Subsidiaries have commitments with third parties to manage and operate various hotels in Israel in consideration for management fees based on fixed sums and/or a specific percentage of the gross profit.

C. Communications Vash Telcanal Ltd (an affiliated company – “Vash Telcanal”) was awarded a tender in

September 2001 to receive a license to operate a Russian language television channel in Israel (hereinafter – “the Channel”) for a period of 10 years from the date of receiving the license in November 27, 2001. On November 12, 2002, the company started its broadcasts.

The terms of the license define, among other things, the conditions of granting the license, the license terms, the license owner’s obligations and rights, and the State’s obligations and rights, including:

(1) The term of the license may be extended for an additional 6 years. Furthermore, at the end of the first 4 years, the Commission will conduct an examination of the Channel’s operations. Based on the examination, the Commission may modify the terms of the license, and restrict, suspend or terminate the license completely.

As at December 31, 2010, Vash Telcanal had not completed certain obligations imposed on it by its license, regarding compliance with investment quotas in the channel, original productions, and dramatic and documentary programs. As at the approval date of the financial statements, Vash Telcanal is in the midst of contacts to renew its license. Despite the existing uncertainty, the company and its legal advisors believe that the chances the company’s license will be extended by the Cable and Satellite Broadcasting Council are high.

(2) The license defines restrictions on commitments with related parties, changes and restrictions on the controlling interests in the license owner, cross-ownership, and conflicts of interest. Furthermore, transfer, lien or encumbrance on the license is prohibited, except under circumstances defined in the license.

(3) The license regulates the establishment of the Channel, trial broadcasts, submission of reports during the set up period, approval for operations, and other issues that are related to the Channel’s manner of operations.

(4) The license authorizes the Minister of Communications to define the royalties that the license owner is to pay to the State.

(5) Rules regarding the insurance the company is required to take out.

(6) Provision of a bank guarantee in favor of the State.

(7) Obligation to meet a defined minimum quota of local productions.

D. Regarding undertakings with related parties – see also Note 44.

227


At December 31, 2010 Note 43 – Contingent Liabilities

A. Legal and other claims have been filed against the Company and some of the subsidiaries, in the aggregate amount of about NIS 722 million. As at December 31, 2010, a provision has been recorded in the consolidated financial statements to cover the above-mentioned claims, in the total amount of about NIS 57.6 million.

These amounts were provided, among other things, based on opinions received from the legal advisors of the relevant companies. In the opinion of the managements of the Company and the subsidiaries, the amount of the provisions is sufficient and constitutes appropriate coverage for the claims referred to above.

The following note includes a description of the main claims filed against the Group companies.

B. In December 2010, a monetary claim was filed by Prof. Yaron Zalica and Donni Marion

(hereinafter together – “the Plaintiffs”) in the amount of about NIS 11.6 million. The Plaintiffs contend that the Company is attempting to disavow its written obligation to pay them an initiator’s and brokerage commission in respect of the transaction for sale of the shares of Derech Eretz.

In January 2011, the Company filed a statement of defense on its behalf. The Company’s position, as raised in the statement of defense, is that Prof. Zalica contacted a Company employee who managed sale of the shares of Derech Eretz on behalf of the Company and presented himself as a party wishing to establish, incorporate and manage an entity that will acquire the Company’s shares in Derech Eretz at a price that will meet the Company’s expectations. The Company’s representative expressed readiness to negotiate with the group Prof. Zalica sought to incorporate as the managing party, while reserving the Company’s right to carry on negotiations with other parties.

The Company contends, among other things, that in May 2010, the Canadian company (which also holds shares in Derech Eretz) gave notice to the Company that in May it signed a memorandum of understanding with the Infrastructures Fund for sale of its share in Derech Eretz. In these circumstances, the Canadian company requested that the Company (as well as Housing and Construction – the additional partner in Derech Eretz) notify it if it intends to exercise its right of first refusal and to acquire from it its share in Derech Eretz on the terms it offered.

The Company’s position is that as a result of this notice the Company considered exercising the right of first refusal and to acquire the share of the Canadian company in Derech Eretz and even sent the Canadian company a notification regarding its readiness as stated. Mr. Marion was the party that acted on behalf of the Canadians to clarify the nature of Africa’s notification and was aware that Africa was considering exercising the right of first refusal.

The Company contends that as of June 2010, new and separate negotiations between Africa and the Infrastructures Fund with respect to acquisition of the Company’s share in Derech Eretz commenced. Under these circumstances, the Company contends that the Plaintiffs are not entitled to any commission payment from it.

The preliminary proceedings have not yet commenced. At this early stage, it is not possible to assess the claim’s chances of success.

228


At December 31, 2010 Note 43 – Contingent Liabilities (Cont.)

C. In November 2009, a request was filed in the District Court of Tel-Aviv to approve the filing of a class action (hereinafter – “the Claim”) on behalf of a purchaser of the Company’s debentures (Series I) (hereinafter – “the Debentures”), who is seeking to represent the group of purchasers of the Company’s debentures, who purchased the Debentures between the beginning of trading of the Debentures (June 1, 2009) and August 28, 2009 (the eve of the Company’s notice of starting talks with the holders of the Debentures to formulate a debt arrangement as described in Note 1C), and sold all or part of the Debentures they purchased in the period between August 30, 2009 and October 29, 2009. The Claim, as stated, was filed against the Company, the Company’s controlling shareholder, the Company’s CEO, the Company’s CFO and directors of the Company (some of them presently serving on the Company’s Board of Directors and some of them no longer serving).

The subject matter of the Claim, based on that stated therein, is damages caused to the

Plaintiff, as a result of violation of the provisions of the Securities Law. This is true, according to the Plaintiff, due to a deficiency in significant information and details and publication of a misrepresentation in the shelf prospectus the Company published on May 26, 2009, wherein the Company gave notice, among other things, of registration for trading of the debentures (Series I) in the amount of NIS 500 million par value, and in the Company’s financial statements for the first quarter of 2009 the Company published on May 31, 2009. This is allegedly the case since in the said financial statements no qualification was included with respect to the Company’s ability to pay its liabilities to holders of the Debentures or reference to the Company’s intention to take action to formulate an arrangement with the holders of the Company’s debentures (all series of the Company’s debentures).

Based on that stated in the Claim, the Plaintiff’s damages are quantified at about

NIS 52,599, whereas the amount of the Claim with respect to all the members of the group is estimated at about NIS 30 million.

It is hereby clarified that the Claim, as stated, does not deal with the present holders of the

Company’s debentures (Series I), with respect to which on November 9, 2009 the Company filed a request to convene a meeting of debenture holders and shareholders in order to approve the arrangement pursuant to Section 350 of the Companies Law.

The Company and the defendants filed a response to the request for approval of the Claim,

wherein they argued that the Company’s representations, its various publications and its full reports (as distinguished from the partial ones on which request relies) properly reflected its situation as at the date provided, there were no misrepresentations, and certainly there was no intention of misleading the investor public. At all times, including at the time of registration of the debentures (Series I) for trading and even prior thereto, the Company’s reports included a proper and full description of its situation, both in connection with estimates regarding its ability to meet its liabilities in the foreseeable future, as well as with respect to the conditions forming the basis for the said estimates, including with reference to the impact of the global economic crisis on the condition of its assets – all of this with the Company’s publication of appropriate warning signs relating to its situation and with respect to its ability to meet its liabilities.

229



C. (Cont.) The defendants further argued that the cumulative force of the circumstances that led the

Company to the conclusion that it must seek to reorganize its debts to holders of the Debentures became clear around the time of preparation of the Company’s financial statements for the second quarter of 2009. Therefore, there is no grounds for viewing the defendants as having concealed any information from the investors and all the contentions of the requesting party in connection with this matter are an attempt to create, after the fact, causes of action for lawsuits against the defendants.

A first pre-trial hearing in the case was set for September 2011. The Company believes that if the Court will be convinced that all the forecasts the

Company published up to the time of preparation of its financial statements for the second quarter of 2009 properly reflected its situation and that the aggregate events that occurred immediately prior to its decision to formulate a debt arrangement with the holders were not foreseeable, the chances that the Claim will be accepted will be less than 50%.

D. Construction and Real Estate Business

(1) In order to secure payments of apartment buyers, Group companies grant bank guarantees or insurance policies pursuant to the Sales Law (Residences) (Assurance of Investments of Residence Purchasers) – 1974. The companies assume obligations for an inspection and warranty period as stated in the Sales Law (Residences) – 1973. Against this obligation, the companies generally receive guarantees from the construction contractor. The Company does not generally receive guarantees from Danya Cebus.

(2) The Group companies have contingent liabilities as part of the customary warranty for

the quality of construction of apartments that have been completed and have been delivered to tenants.

(3) Within the framework of the purchase of land and land rights, there are commitments,

some of which are secured, made by the Company and subsidiaries to the sellers of the rights to execute the building plans and deliver apartments in the buildings to be constructed under the agreements.

(4) Legal and other claims have been filed against the Company and several subsidiaries,

mainly with respect to building and real estate transactions, where with respect to their execution, quality or interpretation there are disagreements between the parties. Provisions have been recorded in respect of these claims based on, among other things, opinions received from the legal advisors of the companies involved. In the opinion of Company management, the total amount of the provisions is sufficient and constitutes adequate coverage for the above-mentioned claims.

230



D. Construction and Real Estate Business (Cont.)

(5) As part of its operations as a building contractor, Danya Cebus is occasionally required to furnish various types of guarantees to third parties, including guarantees to perform contract terms, performance bonds, warranties for the quality of work, guarantees against advances received from the client, and guarantees to release proceeds of sales withheld by the customer. Furthermore, in certain tenders, Danya Cebus is required to submit guarantees to secure its participation in the tenders.

The total amount of guarantees provided by Danya Cebus to third parties (excluding

guarantees granted in respect of Project 431, JV18’s operations, and IMB’s operations) as at December 31, 2010, was NIS 420.5 million, of which about NIS 393.9 million in guarantees from financial institutions (banks and insurance companies), about NIS 14.3 million in company guarantees, and NIS 12.3 million in self-guarantees, capital notes, and other collaterals.

The amount of guarantees furnished by Danya Cebus in respect of Project 431 as at

December 31, 2010 was NIS 40.2 million (including a guarantee for the settlement arrangement with the State).

As at December 31, 2010, Danya Cebus’ share in guarantees provided by JV18 and its

share in guarantees provided by IMB, are negligible. (6) Other contingent liabilities are as follows:

(a) The balance of guarantees to banks and others in respect of investee companies:

At December 31 2010 2009 In Thousands of NIS 50,580 172,445

(b) Liabilities in respect of guarantees provided by banks to apartment purchasers

pursuant to the Sales Law (Apartments) (Assurance of Investments of Apartment Purchasers), 1974:

At December 31 2010 2009 In Thousands of NIS 963,241 773,073

(c) As at December 31, 2010, commitments for construction and performance of contractor work (orders’ backlog) – consolidated – is about NIS 2,183 million.

231




(7) In September 2010, a person who allegedly holds Company shares commencing from 2008 having a value of about NIS 1,900 (hereinafter – “the Plaintiff”) filed a request in the District Court of Petah Tiqwa for approval to file a derivative claim in the name of the Company against the members of the Company’s Board of Directors (in the period relevant to the claim, including the Company’s controlling shareholder who serves as the Chairman of the Company’s Board of Directors), in the amount of about NIS 86 million.

As part of the request (and the claim filed therewith), the Plaintiff raises contentions in

connection with a transaction executed by an indirect foreign subsidiary of the Company, whereby in March 2007 the subsidiary acquired a company that holds rights in real estate and lease rights (hereinafter – “the Property Company”) in a land section on an area measuring about 46 dunams in the City of Zafuruzia in the Ukraine (hereinafter – “the Land”), for a consideration of $22 million (hereinafter – “the Acquisition Transaction”).

Pursuant to the statements of claim, the claim is based mainly on the fact that in the

Company’s reports it was noted that the property that is the subject of the Acquisition Transaction constitutes rights in real estate and not a holding in the Property Company, and that the Property Company acquired the rights in the Land in 2006 as part of a set of agreements, where the value deriving from these agreements amounts to about $1.45 million.

Based on that stated above, and particularly in light of the difference between the

alleged value of the rights in the Land (based on, as stated, a set of agreements whereby the Property Company acquired the rights the Land in 2006) compared with the price of the Acquisition Transaction (in 2007), the Plaintiff contends that the directors removed $22 million from the Company, through their negligence and/or breach of their duty of caution and/or breach of their duty of skill and/or acted in a conflict of interests and/or did not examine appropriate alternatives and/or did not ask the questions and/or reported false reports, closed their eyes and/or acted in a manner lacking good faith and/or deceived and misled the Company and/or submitted to pressures of the controlling shareholder and/or violated their legislative duty and/or created a “formal cover”.

In December 2010, the Company filed a response wherein it rejected all the Plaintiff’s

contentions, among other things on the basis of documents indicating that the Plaintiff’s contentions in connection with the value of the transaction executed in 2007 are erroneous and are inconsistent with the facts as approved. The Company further argues that the claim should be summarily dismissed in light of the provisions of the creditors’ agreement made by the Company whereby the Company and its shareholders waive, among other things, any claim against the Company’s directors relating to the Company’s activities prior to the execution date of the arrangement.

232




(7) (Cont.) In a hearing held in February 2011, and in light of the Company’s request, the Court

ruled that the Plaintiff is to file a revised request wherein it is to detail the claims of deception he is raising in his request.

On March 10, 2011, the Plaintiff filed a revised request in accordance with the Court’s

decision, however a perusal of the request reveals that it is insufficient to constitute a basis as required for the contentions he seeks to attribute to the Company’s directors.

The Company is required to file a revised response on its behalf and a separate request

to summarily dismiss in light of the provisions of the creditors’ agreement, no later than April 2011.

An additional pre-trial hearing was scheduled for June 2011. Examination of the Plaintiff’s contentions against the Company’s arguments and the

documents attached to its response, although the revised response to the revised request filed by the Plaintiff has not yet been submitted, indicates that on the face of things, the chances that the claim will be accepted are less than 50%.

(8) During 2010, a claim was filed in the United States against (among others) the

Company and its subsidiaries (all the defendants in the claim will be referred to together hereinafter as – “the Defendants”) by representatives of the condominium and the tenants of the building at 15 Broad St. in Manhattan, New York (hereinafter – “the Plaintiffs”) in connection with claims of the Plaintiffs of defects in construction of the said project, for which the Defendants are responsible. The amount of the claim is about $20 million. In the estimate of Company management in the United States, the existing provision in the books in respect of this claim is sufficient.

233




(9) In June 2010, Africa Residences and Caesarea Investments Ltd. (hereinafter together with Africa Residences – “the Initiators”) received a demand to hold an arbitration proceeding from Ramat-Aviv Properties Ltd. (in voluntary liquidation) (hereinafter – “the Claimant”), regarding the Savyonei Ramat-Aviv project (hereinafter – “the Project”). The Claimant contends that in 1994 it signed an agreement with the Initiators whereby it sold to the Initiators the land site on which the Ramat-Aviv Hotel was previously built, in exchange for half of the proceeds to be received from the residential project the Initiators will construct on the site, after razing the Hotel. The Claimant contends that: (A) according to it, the Initiators delayed construction of the project in such a manner as to cause it damage, existing and expected, in the amount of about NIS 164 million; (B) according to it, its undertaking with the Initiators in a contract whereby the Claimant undertook to pay half of the cost of the improvements in the building specifications was made as a result of pressure of the Initiators. The Claimant is demanding that the Initiators return to it the amount it paid under this agreement, in the amount of about NIS 36 million; (C) according to it, the Claimant signed an agreement with the Initiators (relating to buildings 2, 3 and 4 that were constructed in 2004-2007) whereby its share in the project proceeds was reduced to the rate of 45% (instead of 50%), which it contends was signed due to misrepresentations presented to it by the Initiators, and therefore it should be cancelled and the amount of the reduction in the sum of about NIS 9.5 million should be returned to it; (D) according to it, the Initiators did not credit it for its share in respect of razing the Hotel that was located on the site, in the amount of about NIS 686 thousand; (E) according to it, the Initiators must compensate it for the interest payments it made to VAT and for additional expenses the Claimant bore in connection with the VAT payments, all of which stemmed from, so it alleges, from deficient advice of the Initiators, in the aggregate amount of about NIS 920 thousand; and (F) according to it, the Initiators overcharged it for development costs with respect to the public areas in the project, in the amount of about NIS 1.3 million.

In respect of all these contentions, the Claimant demanded that an arbitrator be

appointed who will hear the disputes between it and the Initiators. The parties have agreed to the identity of the arbitrator that will hear the claims of the

parties, however, as at the date of this report an initial meeting had not yet been held for setting the arbitration agenda and a detailed statement of contentions had not yet been submitted. Under these circumstances, it is not possible to know the facts are and on what documents they are based, or even the amounts claimed and the manner of their calculation. In any event, in the estimation of the management of Africa Residences, based on an opinion of their legal advisors, relying on a preliminary examination made, it appears that the Claimant’s contentions in Sections (A)-(C) are totally ungrounded (among other things since they are contrary to the written agreements), as well as the amounts claimed therein. On the surface, it would appear that there is also no basis for the rest of the Claimant’s contentions. Accordingly, no provision has been included in the Group’s financial statements in respect of this claim.

234




(10) Danya Cebus employs, directly or indirectly, thousands of Israeli and foreign workers, as well as workers coming from the Judea, Samaria and Gaza Strip territories. A significant portion of Danya Cebus’ employees constitutes foreign workers, which it employs based on its needs and the scope of its activities.

Every year the Government sets a quota for foreign workers for the construction

industry. Over the past several years, the Government has adopted a policy of reducing the employment of foreign workers, both through increasing the cost of their employment as well as by means of reducing the number of permits issued for their employment. As part of this policy, among other things, the Government has started collecting a permit application fee for foreign workers, imposing an annual charge, and making a levy on the employment itself. It is noted, that the Government is likely to impose additional taxes and levies that will act to further increase the employment cost of foreign workers. Further, conditions for the employment of foreign workers were determined, including filing of certain reports and deposit of monies in a fund for the benefit of foreign workers. In addition to the above-mentioned terms and limitations, the Government decided to totally prohibit the employment of foreign workers on projects executed for the Government, Government companies, statutory companies, local authorities and municipal corporations (“National Projects”).

The Government’s policy of cutting back the number of permits issued for

employment of foreign workers in the construction industry was manifest in a reduction of the quota from 30,000 in each of the years 2002 and 2003 to about 9,000 in 2008 and about 6,000 in 2009 and thereafter.

As a result of reducing the quotas, as noted above, Danya Cebus received an allocation

of permits for employment of foreign workers, up to change in the method for employing the workers as detailed below, which was less than the number it required based on the scope of its activities and its needs.

To the best of Danya Cebus’ knowledge, based on a Government Decision of

December 17, 2009, which amended Government Decisions of May 2009 and September 2006, the maximum quota of foreign workers in the construction industry was set as follows: commencing from October 2009 – 8,000, commencing from July 2010 – 5,000, commencing from January 2011 – 2,000, and commencing from 2012 permits will be issued only for employment of foreign experts. The above-mentioned Government Decisions, if applied, could have a significant adverse impact on Danya Cebus.

During 2004, Danya Cebus filed a petition with the Supreme Court sitting as the High

Court of Justice with respect to its inability to use the entire amount of the permits that was issued to it in 2003 because of the Government’s “closed skies” policy, by which the Government limited the entry of foreign workers into the country. During 2005, the Company filed a claim against the State, in the amount of NIS 42 million in respect of the damages it suffered as a result of its non-use of the permits for employment of foreign worker it received in 2003.

235




(10) (Cont.) On March 1, 2010, a compromise agreement was signed between the company and the

State to settle the claim, including all the Company’s contentions in connection with the permits. As part of the compromise agreement, the State will pay the company NIS 8 million within 30 days of approval of the compromise agreement by the court (which was issued on March 1, 2010).

In 2005, the method for employing foreign workers was changed. In accordance with

the change, the permits to employ foreign workers in the construction industry are provided to authorized entities that hold a license to employ foreign workers in the construction industry, and not to the construction companies themselves, all in accordance with the following:

* Granting of the permit to the authorized entity will be contingent upon the

payment of an annual charge to the State. In addition, receipt of the permit is conditioned on payment of permit fees for each foreign employee.

* As the employers of the foreign workers the authorized entities will be required to

pay the salaries of the foreign workers and to provide them all the conditions they are entitled to receive by law.

* Companies in the construction industry that request to employ foreign workers

will contact the approved companies in order to actually employ the foreign workers employed by the approved companies.

* An actual employer of foreign workers will be required to see to and to confirm

that the foreign workers it employs receive proper employment conditions and it will bear, in addition to the company, responsibility for a failure to provide such conditions to the workers, based on a procedure for employing foreign workers.

Danya Cebus set up a company named “Yovelim Personnel Ltd.”, which is its wholly

owned subsidiary, for purposes of receiving permits to employ foreign workers as described above. During 2008, this company received a license for employment of 350 foreign workers and Danya Cebus did not submit an application for permits. In 2009 and 2010, Danya Cebus did not renew the license required for the corporation, and did not submit an application to receive foreign workers. Recently, Danya Cebus contacted the relevant authority with a request to renew the license for 2011. Danya Cebus requested approval of a license for employment of 500 persons, and a decision with respect to the request has not yet been made. Danya Cebus employs the foreign workers it needs for its activities through other authorized entities.

236




(10) (Cont.)

Employment of foreign workers against the law could trigger stiff criminal sanctions, including fines amounting to thousands of shekels for each day a foreign worker is employed without a permit and the taking of measures against the registration of the contractor in the Contractors’ Registry.

Based on a legal opinion received by Danya Cebus, its exposure to risk is very low, if any at all, since all the foreign workers it employs are covered by the Human Resources Law, 1996, pursuant to which at the end of nine months of employment of a foreign worker, he becomes a regular employee of the company.

Russia – Russian law permits employment of foreign workers, both in the Company’s administrative offices and on the work sites, subject to obtaining an annual quota of staying approvals and work permits.

Romania – Romanian law permits employment of foreign workers (including in administrative positions) subject to receipt of work permits. There is an annual quota for foreign workers, which is published by the Government of Rumania every year. As at the date of the report, work permits have been issued for most of Danya Romania’s foreign workers.

(11) The Company and a subsidiary have a number of transactions with holders of rights in connection with agricultural lands leased from the Israel Lands Administration, which relate to Decision 727 of the Israel Lands Council (hereinafter – “Decision 727”). In August 2002, a decision was rendered by the Supreme Court sitting as the High Court of Justice that is known as “the East Keshet Ruling” (hereinafter – “the Decision”), pursuant to which, among other things, Decision 727 was cancelled for the reasons set forth in the Decision. As a result of the Decision, in September 2003 transitional rules were approved by the Board of Directors of the Israel Lands Administration in connection with the said decision. As a result of approval of the transitional rules, the Company and the rights holders agreed to cancel a number of transactions, while in connection with certain transactions the Company and the rights holders are deliberating their cancellation whereas with respect to other transactions the Company and/or the rights holders have submitted a demand to the Israel Lands Administration to realize them in accordance with Decision 727. The Israel Lands Administration rejected the requests of the Company and/or the lessees.

As things now stand, there is no legal certainty regarding the possibility of executing these transactions and, regarding some of the transactions, the Company is looking into other ways of executing them without there being any certainty that, in fact, it will be possible to execute them.

In the estimation of Company Management, the impact of the Supreme Court’s East Keshet decision on its financial statements and its results of operations is not expected to be material.

237




(12) In June 2009, copies of a class action claim and a request for certification of the filing of the class action claim (hereinafter – “the Claim”) were served on the Offices of Danya Cebus on behalf of a shareholder of Danya Cebus (hereinafter – “the Plaintiff”) against Danya Cebus, the Company, the former CEO of Danya Cebus and directors of Danya Cebus (some of them still serving on the Board of Directors at the present time and some no longer serving). The Claim’s cause of action, based on that stated therein, is damages allegedly caused to the Plaintiff, who acquired his shares in Danya Cebus on July 16, 2007, as a result of a violation of the Securities Law and the Regulations promulgated thereunder. This, according to the Plaintiff, is due to a late publication of an Immediate Report regarding an income caveat deriving from expected losses on the “Highway 431” project, which was published by Danya Cebus on March 3, 2008. Pursuant to that contended in the Claim, the Plaintiff’s damages are estimated at about NIS 2,166, whereas the amount of the Claim with respect to all the members of the group cannot be estimated at this point. In the estimation of Danya Cebus, in light of the findings of the examinations conducted regarding the matter even prior to the filing of the Claim, and based on an initial opinion of its legal advisors, it has good defenses against the Claim. Nonetheless, due to the early stage of the legal proceeding, and the legal clarification along with the accompanying facts, it is not possible at this juncture to assess the Claim’s chances of success.

(13) During the ordinary course of its business, the Company has guaranteed liabilities of

Africa Residences to commercial banks in connection with loans received by Africa Residences and/or loans received by third parties in accordance with liabilities of Africa Residences in an agreement to acquire land rights.

(14) Danya Cebus manufactures some of the elements needed for its activities, both in the

construction sector and in the infrastructures sector, in a factory located on two sites, managed by Cebus Rimon Industrialized Construction Ltd., a wholly owned subsidiary of Danya Cebus. The main manufacturing site of Cebus Rimon is located on an area measuring about 66 dunams located in Lod, which Cebus Rimon leases from a subsidiary of the Company. To the best of the knowledge of Danya Cebus, the City of Lod is advancing an Urban Planning Scheme, which if effected Danya Cebus will apparently be required to fully or partially vacate the site on which the factory is located. In such a case, Danya Cebus will be required to vacate the leased premises, as stated, and it will be required to find another site and transfer the Cebus Rimon factory to it. Danya Cebus estimates that the cost of transferring the Cebus Rimon factory to another site could involve a significant amount. It is further noted that if Danya Cebus is forced to vacate the site of the Cebus Rimon factory and it does not transfer the factory’s activities to an alternative site (that is, it decides to discontinue the factory’s activities), this could have a significant unfavorable impact on the Group’s activities – both in the area of construction contracting as well as with respect to infrastructure contracting.

(15) In August 2007, the District Court of Jerusalem issued a temporary Stay of

Proceedings Order against various companies in the Heftzibah Group (hereinafter – “Heftzibah”) as well as orders for appointment of receivers for some of its assets.

238




(15) (Cont.) Further to that stated above, Danya Cebus gave notice of realization of its right of

retention in various projects and the conducting of negotiations with the creditor banks and/or the receivers of Heftzibah in connection with the above-mentioned projects. During 2008, the approval processes with respect to the arrangements between Danya Cebus and various banks ended. Danya Cebus filed two debt claims in connection with the Heftzibah matter.

One of the claims is a debt claim in the amount of about NIS 58 million, which was

filed in March 2010. It is noted that in the debt claim Danya Cebus committed to amend the agreements to the extent additional amounts are received in respect of past debts. Upon receipt of the Court’s decision regarding the request of the receiver in the Hofim project to distribute an advance deposit to Danya Cebus in respect of this project, and transfer of the monies accordingly, the debt claim will be updated.

The second debt claim filed is in the amount of NIS 5.5 million and it was submitted

in May 2010 in respect of debts of another company from the Heftzibah group. As at the date of the report, decisions on the debt claims had not been rendered. (16) In March 2007, an arbitration decision was rendered in connection with a dispute

between Africa Properties and a third party with which a combination transaction is being executed.

The subject matter of the arbitration was a claim by the third party for compensation in

respect of delays in construction of the first stage of the project, a failure to construct the second stage of the project and additional causes of action in the aggregate amount of about NIS 45 million. Africa Properties claimed repayment of the loan it made to the third party along with other contentions, in the aggregate amount of about NIS 54 million.

The arbitrator’s decision rejected the third party’s claim for delays in construction of

the first stage of the project and partly accepted its claim delays in construction of the second stage of the project. On the other hand, Africa Properties’ claim in connection with repayment of the loan it made to the third party was accepted.

Ultimately, as at the date of the arbitration decision, payment to Africa Properties

(after such amounts were awarded to it) of about NIS 38 million was imposed on the third party.

The third party submitted a request for cancellation of parts of the arbitrator’s decision

(the value of which in Africa Properties’ estimation is about NIS 4 million) and the Court rejected the request. The third party submitted a request for leave to appeal to the Supreme Court, however such request was rejected and, thus, the arbitrator’s decision became final.

239




(16) (Cont.) In the year of account, the above-mentioned third party contacted the Chairman of the

Bar Association with a request to appoint an arbitrator in the dispute that he alleges arose between him and Africa Properties and the Company (as a guarantor for the liabilities of Africa Properties). In this framework the said third party estimated that the scope of his future claim against Africa Properties is about NIS 20 million. In the opinion of the management of Africa Properties, based on its legal advisors, Africa Properties has no exposure in respect of this matter and, accordingly, no provision has been included in the financial statements in respect thereof.

(17) In December 2007, a lawsuit was filed, in the amount of about NIS 9 million, in the

District Court, in connection with a demand for monetary compensation to the plaintiff, which rented the cinema site in the Ramat-Aviv Shopping Mall during a period of 10 years.

In February 2008, the statement of defense was submitted to the Court. In December 2008, a first pre-trial hearing was held where it was recommended to the

parties to avail themselves of a mediation proceeding prior to continuing the proceedings between them.

Pursuant to the Court’s recommendation, the parties entered into a mediation

proceeding. The said mediation proceeding was not successful and the case was returned for continuation of the proceedings before the Court.

The parties are conducting preliminary proceedings and a pre-trial hearing was set for

May 2011. In light of the early stage of the claim, it is difficult to assess its chances, however, on

the basis of an opinion of the Company’s legal advisors, it estimates that the claim’s chances of being accepted are low.

E. Communications

(1) In October 2006, NTV Global Networks (Israel) Ltd. and NTV Hungary Commercial Limited Liability Company, the operators of the NTV Mir activities, filed a petition with the Supreme Court sitting as the High Court of Justice wherein they requested, among other things, that the Minister of Communications use his powers to permit commercial advertisements in Israel on the cable channels, in general, and/or on the NTV Mir channel, in particular, and to determine that the decision of the High Court of Justice, as stated above, from October 28, 2004, does not apply to the NTV Mir channel. Concurrently, the parties requested an interim order to permit them to continue broadcasting Israeli advertisements as part of their broadcasts until a decision is made by the Minister of Communications.

240



E. Communications (Cont.)

(1) (Cont.) Upon filing of the petition and the request for an interim order, a temporary order was

issued delaying implementation of the decision of the Local Council that applies the said court decision to the NTV Mir channel. In November 2006, a decision was rendered rejecting the decision for an interim order. The aforesaid petition has not yet been set for hearing. Vash Telcanal believes that the chances the petition will be rejected are good.

(2) As at December 31, 2010, Vash Telcanal has a capital deficiency of about NIS 91

million, which includes an accumulated loss of roughly NIS 162 million. Financing of Vash Telcanal’s investments is by means of share capital, premium and capital notes, in the amount of about NIS 158 million and bank loans in the amount of about NIS 19 million (guaranteed by the shareholders). In the period of the report, Vash Telcanal had losses of about NIS 3.5 million (2009 – income of about NIS 6.5 million), the total sales’ turnover was about NIS 61 million (2009 – about NIS 63 million). The shareholders of Vash Telcanal, including the Company, have committed to financially support its activities.

(3) As part of the conditions of the broadcasting license received by Vash Telcanal, it is

required to make a minimum number of local productions, which are defined both as a function of broadcasting hours as well as in financial terms. As at December 31, 2010, Vash Telcanal did not complete certain obligations it is subject to under its license involving compliance with investment quotas in the channel, source productions and drama and documentary programs. Vash Telcanal is making efforts to comply with these obligations, both in connection with its work plan for 2011 and as part of the contacts it is carrying on with the Council for spreading these obligations over the next few years. Vash Telcanal believes that the chances its license will be renewed for the second license period are good.

F. Africa Israel Industries

(1) During the regular course of business legal claims have been filed against Africa Industries and its subsidiaries in the total amount of about NIS 14.5 million. As at December 31, 2010, Africa Industries recorded a provision, in the amount of about NIS 4.4 million, in respect of the claims, which in the estimation of management, based on opinions of its legal advisors, is sufficient to cover the liability that may arise, if any.

(2) In May 2009, a charge sheet was received in the offices of a subsidiary of Africa

Industries against the subsidiary and against two of its officers, in connection with management of a business without a business license on the property of the subsidiary in Rishon Lezion. The subsidiary is working with the relevant authorities in order to work out the business license matter.

241



G. Liability of Directors and Officers

(1) At the Company’s Annual General Meeting in November 2010, it was decided as follows:

To approve and ratify the undertaking between the Company with the Mivtachim

International Insurance Market Group (hereinafter – “Mivtachim”) in insurance policies for insurance of officers’ liability for the period from June 1, 2010 through October 31, 2011 (hereinafter – “the Insurance Period”), as follows:

Policy for insurance of officers’ liability insuring the liability of the officers of the

Company and of the its subsidiaries, except for the companies listed for trading, Africa Israel Residences Ltd., Africa Israel Properties Ltd., Africa Israel Industries Ltd., AFI Development PLC, Danya Cebus Ltd, and the subsidiaries of each of the said companies (“the said companies, not including the Company, will be referred to below together as – the Group Companies”) (hereinafter – “the Base Policy”). The limits of the Base Policy in respect of one claim or on a cumulative basis in respect of the entire Insurance Period is US$20 million (however regarding claims filed in Israel the policy covers litigation expenses in excess of the said liability limits equal to 20% of the liability limits as stated). The insurance fees (premium) for the Base Policy in respect of the Insurance Period amounts to about US$66.3 thousand. The insurance fees (premium) for the Base Policy of the Company and the Group companies in respect of the Insurance Period amounts to about US$399.1 thousand.

An excess group policy, for insurance of officers’ liability, taken out by the Company,

for itself and for its subsidiaries, including the Group Companies (hereinafter – “the Group Policy”). The limits of the Group Policy in respect of one claim or on a cumulative basis in respect of the entire Insurance Period is US$60 million (however regarding claims filed in Israel the policy covers litigation expenses in excess of the said liability limits equal to 20% of the liability limits as stated), this being in addition to the Base Policy. The insurance fees (premium) for the Group Policy in respect of the Insurance Period amounts to about US$194.4 thousand (of which the Company’s share is about US$32.3 thousand).

An additional excess group policy (umbrella), for insurance of officers’ liability, taken

out by the Company, for itself and for its subsidiaries, including the Group Companies, as an additional layer beyond the Company’s Base Policy, as stated in subsection (1)(a) above, and the Group Policy, as stated in subsection (1)(b) above, (hereinafter – “the Excess Policy”). The limits of the Excess Policy in respect of one claim or on a cumulative basis in respect of the entire Insurance Period is US$20 million (however regarding claims filed in Israel the policy covers litigation expenses in excess of the said liability limits equal to 20% of the liability limits as stated). The insurance fees (premium) for the Excess Policy in respect of the Insurance Period amounts to about US$55.25 thousand (of which the Company’s share is about US$9.2 thousand).

242



G. Liability of Directors and Officers (Cont.)

(1) (Cont.) Distribution of the insurance fees (premium) in respect of the Group Policy and the

Excess Policy between the Company and the other companies is determined (except as detailed above) as a derivative of the insurance fees (premium) in respect of the Base Policy, as follows: each company in the Company Group bears its share of the annual insurance fees (premium) in respect of the Group Policy or the Excess Policy (as applicable), equal to the share that constitutes the insurance fees (premium) in respect of the Base Policy, as stated in subsection (1)(a) above, out of the cumulative amount of the insurance fees (premium) to be paid by each of the said companies in respect of all the base policies for the relevant period. In this context it is further noted that the scope of the liability limit for each of the base policies of the Group’s divisions is the same.

The Company’s undertaking in the insurance policies was approved by the Company’s

Audit Committee and Board of Directors at their meetings on November 22, 2010. The participation of the companies listed for trading – AFI Development PLC, Africa Israel Residences Ltd., Africa Israel Industries Ltd., Danya Cebus Ltd. and Africa Israel Properties Ltd. in the Group Policy and the Excess Policy, was approved by the above-mentioned companies.

(2) In February 2000, Danya Cebus decided (after receiving the approval of its Board of

Directors and of the General Meeting of its shareholders) to grant to its directors and the other officers of the company (hereinafter – “the Officers”), an undertaking, in advance for indemnification in respect of any monetary obligation that will be imposed upon them and in respect of reasonable litigation expenses, directly or indirectly, relating to a prospectus published by Danya Cebus in February 2000. The indemnification liability will only apply in respect of a monetary obligation or expenses for which indemnification is permissible under law.

In addition, the aggregate amount of the indemnification that Danya will pay in

respect of the letters of indemnity, which will be issued to all of its Officers, may not exceed the lower of the two following amounts:

a. The amount of the overall gross proceeds in respect of the securities being offered

by Danya Cebus under the prospectus, including the proceeds that will be received upon the exercise of convertible securities offered to the public under the prospectus.

b. The NIS equivalent of US$20 million.

At an Extraordinary General Meeting of Danya held in January 2001, it was resolved that an undertaking be given to the directors and other officers to indemnify them up to an amount of US$10 million.

243



G. Liability of Directors and Officers (Cont.)

(2) (Cont.) In November 2006, Danya Cebus decided (after receiving the approval of its Board of

Directors and of its General Shareholders Meeting) to grant letters of indemnity to all its officers in connection with their activities relating to, directly or indirectly, the project for construction of Highway 431. The aggregate amount of the indemnity to be paid by Danya Cebus to all the parties entitled to indemnification under the letters of indemnity may not exceed $20 million (not including reasonable litigation expenses).

(3) In November 2009, the Board of Directors of Africa Properties decided, after

receiving the approval of the Audit Committee on the same date, to approve an advance commitment for indemnification by Africa Properties to its directors and other officers (including the secretary of Africa Properties, the controller and the internal auditor, and including every other position holder regarding whom it will decide to issue an indemnification certificate for events by virtue of the indemnification decision for events, and including officers that are the controlling shareholders of Africa Properties or their relatives), in connection with certain events that are anticipated in the opinion of the Board of Directors, in light of the actual activities of Africa Properties, provided the total amount of the indemnification amounts that will be paid, on a cumulative basis, to all those entitled to indemnification, pursuant to all the indemnification certificates for events issued to them in accordance with this decision, and in accordance with an indemnification certificate issued by Africa Properties in the past and/or that it will issue in the future (including, to remove doubt, the indemnification certificate in connection with the prospectus published by Africa Properties in September 2004), will not exceed 25% of the shareholders’ equity of Africa Properties (the capital attributable to the holders of its capital rights) based on the latest annual consolidated financial statements of Africa Properties published prior to the actual payment date of the indemnification.

(4) The General Meeting of Africa Industries decided, after receiving approval of the

Audit Committee and the Board of Directors, with respect to a commitment on the part of the subsidiary, including subsidiaries, in connection with indemnification of directors and officers of the company, including controlling shareholders, in accordance with the Companies Law, 1999. The indemnification relates to permitted indemnification events, as detailed in the indemnification certificate, relating to an action or inaction of the parties entitled to indemnification, which was committed as part of their duties in Africa Industries or on its behalf, including subsidiaries and related companies. The maximum amount of the indemnification may not exceed the higher of NIS 5 million or 25% of the company’s shareholders’ equity based on its latest annual or quarterly financial statements published prior to the filing date of the claim (where the above-mentioned amount constitutes the maximum amount of the indemnification, and any amount received, if received, from the insurance company will reduce this amount).

244


At December 31, 2010 Note 44 – Related and Interested Parties

A. The following data items relate to interested and related parties and they are included in the consolidated statement of financial position:

At December 31 2010 2009 In Thousands of NIS Receivables (1) 161,082 34,233 Payables (2,464) (4,397) Liability to pay bonus to the Company’s CEO presented as part of liabilities to employees for salary and wages (6,500) – Liability for issuance of shares to the controlling shareholder – see Note 1C – presented as part of “other long-term liabilities” (of which NIS 950,000 is presented in “other payables”) (9,560) – Loan from jointly-controlled entity – presented in “other long-term liabilities” (143,203) (169,617)

(1) The balance as at December 31, 2010 includes loans to an associated company in the amount of about NIS 97 thousand.

B. The following data items relate to interested and related parties and they are included in the

consolidated statement of income:

For the Year Ended December 31 2010 2009 2008 In Thousands of NIS Management fees paid to a company controlled by a controlling interest 605 588 569

All the transactions with interested parties were executed at regular commercial terms. C. Benefits to key management personnel (including directors) The Group’s senior directors and managers are entitled, in addition to their salary, to

non-cash benefits (such as, a vehicle, medical insurance, etc.). The Group deposits monies for them in a post-employment defined benefit plan.

Senior managers also participate in options’ plan granting options exercisable for

Company shares (see Note 39 – regarding share-based payments).

245


At December 31, 2010 Note 44 – Related and Interested Parties (Cont.)

C. (Cont.) The benefits in respect of employment of key management personnel (including directors)

include:

For the Year Ended December 31 2010 2009 2008 Number Number Number of of of Persons Amount Persons Amount Persons Amount NIS ‘000 NIS ‘000 NIS ‘000

Salaries, wages and bonuses 1 9,708 1 3,433 1 1,789 Post-employment benefits 1 – 1 – 1 1,470 Share-based payments 1 2,634 1 2,939 1 980 12,342 6,372 4,239

Regarding bonuses distributed – see Note 22 “Employee Benefits”. The benefits in respect of employment of key management personnel (including directors) not

employed by the Company include:

For the Year Ended December 31 2010 2009 2008 Number Number Number of of of Persons Amount Persons Amount Persons Amount NIS ‘000 NIS ‘000 NIS ‘000

Total benefits in respect of directors not employed by the Company 8 1,110 6 859 6 774 Total benefits in respect of key management personnel not employed by the Company 2 4,514 2 5,159 2 3,657 5,624 6,018 4,431

246



D. Agreements with Danya Cebus An agreement was signed between the Company and Danya Cebus, according to which the

Company undertook to submit construction work to Danya Cebus, or to cause that construction work be submitted to Danya Cebus, for execution by Danya Cebus, and Danya Cebus undertook to fully execute such construction work by itself or by means of another company in its Group. The construction work referred to is all the construction work in projects of the Company in which the Company has no partners and/or projects that are to be executed by companies or entities which are wholly owned and controlled (100%) by the Company, except where there is a reason, over which the Company has no control, preventing submission of the work to Danya Cebus and except where public companies are involved.

The Company also undertook to submit projects to Danya Cebus or to act to the best of its

ability, to cause that projects be submitted to Danya Cebus for execution, where the Company’s share in the project is less than 100% and/or where the projects will be executed by companies or entities in which the Company’s share is less than 100% (including combination agreements) if, considering the rights and obligations of the Company in each such project, the Company has the power and the right to cause that the construction work will be executed by Danya Cebus, and in accordance with the volume of work which the Company will have the power and the right to give to Danya Cebus.

Notwithstanding that stated above, it was agreed between the parties, that if Danya Cebus

believes that the receipt of certain construction work by it, should be considered as an “exceptional transaction”, which requires the approval of Danya Cebus’ General Shareholders’ Meeting (including a meeting convened at the call of Danya Cebus’ shareholders), in a manner which does not permit Danya Cebus to fulfill its aforementioned obligations, then the submission of the said construction work to Danya Cebus will require the advance approval of the Company.

Danya Cebus undertook to execute the construction work that it will receive, by itself or

through any other of its wholly owned and controlled entities, as stated above. The price to be paid by the Company in respect of execution of the work will be in

accordance with the going market price at the time the work is submitted. The form of the undertaking for execution of the projects (fixed price, or measurement of

quantities or RGI agreement or some other form of agreement) will be according to the usual form of agreement prevailing in the industry or prevailing between the parties. A formal agreement will be concluded between the parties in respect of each project, which will indicate the applicable conditions, as stated above.

In the agreement, Danya Cebus undertook to the Company that if Danya Cebus or any of

its subsidiaries will want to undertake, either directly or indirectly, real estate initiatives, each of such companies will be permitted to enter into agreements involving real estate initiatives only if the transaction meets all of the following cumulative conditions:

247



D. (Cont.)

1. The real estate initiative transaction involves residential construction and Danya Cebus’ share of the transaction does not exceed 200 residential units.

2. The real estate initiative transaction does not include land development. A real estate

initiative transaction in respect of which a building permit, which agrees with the planned construction as envisioned by the transaction, can be obtained within 18 months from the earliest agreement date of the transaction, will be considered as a real estate initiative transaction that does not include land development.

3. Danya Cebus or one of its subsidiaries will also serve as the executing contractor for

all the construction of the project that includes the said real estate initiative transaction, even if the initiative transaction relates only to a portion of the project.

4. The real estate initiative transaction constitutes a business opportunity for the Danya

Cebus Group and does not constitute a business opportunity for the Company. A transaction that can be considered as a joint business opportunity for both parties, or if it is unclear whether it is a business opportunity for one party or for the other party, will be considered as a business opportunity for the Company, and Danya Cebus will be precluded from undertaking such transaction.

5. The real estate initiative transaction was not included as part of a tender, neither a

public tender nor a closed tender, other than a closed tender which will be directed to a Danya Cebus Group company, and will not be directed to any company in the Africa Israel Group. The above notwithstanding, Danya Cebus will be permitted to enter into an agreement involving a residential initiative transaction of a volume not in excess of 100 residential units (Danya Cebus’ share), which will be included as part of a public tender, if the remaining conditions, enumerated in 1–3 above, are fulfilled.

Transactions involving real estate initiatives are defined as transactions of any type

involving the purchase of real estate rights (including contractual rights for the receipt of real estate rights, other than the purchase of fixed assets for self use) or acquisitions to which Section 9 of the Law for Real Estate Taxation (Land Appreciation, Sale And Purchase), 1963 applies and/or transactions for the purpose of developing real estate and/or transactions involving participation in the proceeds and/or transactions the characteristics of which are those of real estate initiatives and/or the purchase of rights in an entity that is presently engaged in or which will be engaged in the field of real estate initiative transactions, either in Israel or abroad.

In respect of each real estate initiative transaction that Danya Cebus and/or one of its

subsidiaries will undertake, the Company agrees to render, and Danya Cebus agrees to receive, services for the management of the selling and marketing of the project, in exchange for a fee of 3% of the sales revenues from such project.

248



D. (Cont.) It was further agreed, that if the Company will waive its above described rights, so that

Danya Cebus will be permitted to enter into a real estate initiative transaction relating to rental property, then the Company undertakes to render and Danya Cebus undertakes to receive from the Company, selling, marketing and maintenance management services in exchange for an overall fee of 10% of the sales and/or rental revenues from such project.

Regarding real estate initiative transactions that will be executed by Danya Cebus together

with partners and/or through companies in which its rate of holding is less than 100%, the above-mentioned services will be rendered to the project as a whole and/or according to Danya Cebus’ share in the project, and according to the power and the rights which Danya Cebus has, to cause that the above-mentioned services will be rendered by the Company, in accordance with Danya Cebus’ rights and obligations in each such project. If the services will be rendered for a part of a specific project, then the management fees will be paid according to the appropriate proportionate part of the sales revenues.

The above-described payments will in no way detract from any undertaking of Danya

Cebus to pay management fees in accordance with any other agreement between the parties.

The agreement is in force for a period of 5 years, beginning February 2000. Commencing

from February 2005 the agreement was extended automatically for an unlimited period of time, however, each party may terminate the agreement by giving 3 months advance written notice to the other party. In addition, provisions were included in the agreement for its cancellation if certain specific circumstances exist if Danya Cebus ceases to be a subsidiary of the Company.

The parties to the agreement further agreed that, if Danya Cebus will cease to be a

subsidiary of the Company, as such term is defined in the Restrictive Trade Practices Law, 1988, (hereinafter – “the Law”), and that in accordance with the Law as of such date, this agreement will be considered to be a restrictive trade agreement which is in violation of the Law, then it will automatically terminate (unless approval is received from the Commissioner of Restrictive Trade Practices of a request that the parties undertake to submit, of the validity of the provisions of this agreement). In the case of an automatic termination as described above, neither party will have cause for any claim or demand against the other party.

It was agreed that any differences of opinion relating to the agreement would be submitted

to a single arbitrator, who will be chosen by agreement between the parties. In the event that the parties cannot agree on a mutually acceptable arbitrator, then the arbitrator will be chosen by the senior partners of each of the CPA firms that audit the parties.

The rights and obligations of the parties to the agreement are personal, and such rights and

obligations may not be assigned to any third party whatsoever. The provisions of the agreement may be altered or cancelled by written mutual agreement.

249



D. (Cont.) The Company notified Danya Cebus that due to registration of Africa Properties for

trading on the stock exchange, the agreement will not continue to apply to Africa Properties. Transactions to be executed in the future by Africa Properties and Danya Cebus will be subject to the approvals required for the transaction, as applicable, in accordance with the Companies Law.

Up to the issuance date of Africa Residences (June 2006), Danya Cebus was not in the

practice of bringing contractor transactions with companies from the Africa Group or Africa partnerships that were made in the ordinary course of business and on the customary terms, for approval of the General Meeting of the shareholders. As part of the issuance prospectus of Africa Residences, Africa Residences declared that it is its intention to act to continue the undertaking with Danya Cebus in the framework of its activities (whether projects in which it has no partners or projects in which it has partners), in agreements for execution of construction projects, during the ordinary course of business and on regular market terms. Africa Residences also declared that it intends to sign an updated agreement for arrangement of the undertaking between them as part of a “framework agreement”, within the meaning of this term in the Companies Regulations (Relief in Transactions with Interested Parties), 2000, and that so long as an agreement such as that stated is not duly approved, the undertakings with Danya Cebus will be brought for approval in accordance with the Companies Law. As at the date of this report, a framework agreement, as stated, had not been signed between the parties, and most of the company’s undertakings with entities from the Africa Group are brought for approval in accordance with the provisions of the Companies Law (see details regarding transactions approved, as stated in Section R below).

E. Management services, consulting and accompaniment agreement in connection with

the Cross Israel Highway project Pursuant to the agreement that was signed in February 2000, between the Company and

Danya Cebus, the Company undertook to grant to Danya Cebus, individually and/or by means of its subsidiary, management services, consulting and accompaniment in connection with the Cross Israel Highway Project.

In exchange, Danya Cebus undertook to pay to the Company, commencing from October

1999, management fees equal to 2.5% of Danya Cebus’ total revenues determined based on Danya Cebus’ share in the total revenues of CJV according to CJV’s adjusted financial statements, including Danya Cebus’ share of the income of the “Contractor” for the Cross Israel Highway Project, but not more than 17.5% of Danya Cebus’ share of CJV’s pre-tax profits based on CJV’s adjusted financial statements, including Danya Cebus’ share of the “Contractor’s” profits from the Cross Israel Highway Project as defined in the Construction Agreement (hereinafter – the “Management Fees”). Danya Cebus will not be liable for payment of Management Fees for its income and/or profits under the subcontract agreement.

250



E. Management services, consulting and accompaniment agreement in connection with the Cross Israel Highway project (Cont.)

Calculation of the Management Fees is to be made once a quarter based on Danya Cebus’

adjusted financial statements. The Management Fees are to be paid by Danya Cebus to the Company on a current basis upon receipt of payments by Danya Cebus from CJV or the Contractor, in such a way that from every amount that Danya Cebus receives for its portion in CJV or the Contractor, whether from an advance or final payment, whether during the course of the Project or after its completion, Danya Cebus shall immediately transfer to the Company the proportionate part of the Management Fees as mentioned above, with the addition of linkage differences and interest that will be paid to Danya Cebus, to the extent paid.

If Danya Cebus should need to return advances to CJV that it received on account of

profits, whether during the course of the Project or after its completion, the Company shall return to Danya Cebus a proportionate part of the Management Fees from any amount that Danya Cebus is required to return as stated.

The agreement is to be in force so long as the CJV agreement remains in force and until

conclusion of Danya Cebus’ involvement in the Cross Israel Highway Project and receipt of all the income or payments of any type or kind, that are due to Danya Cebus for the Project in their entirety.

F. Agreements with Africa Properties In February 2008, the Company, directly and indirectly, signed a number of agreements with

Africa Properties as detailed below. These agreements were approved by the Audit Committee and the Board of Directors of Africa Properties, and by the General Meeting of Africa Properties’ shareholders in accordance with Section 275 of the Companies Law.

(1) Company’s undertaking with Africa Properties in an agreement for provision of

management services – In the framework of the new agreement for provision of management services, the

Company will provide Africa Properties, itself and/or through its subsidiaries, management, consulting and accompaniment services in connection with Africa Properties and its subsidiaries in and outside of Israel, effective from January 1, 2008 (hereinafter – “the New Management Services Agreement”).

251



F. Agreements with Africa Properties (Cont.)

(1) (Cont.) The New Management Services Agreement replaces the existing management services

agreement between the Company and Africa Properties from July 2004. The services pursuant to the New Management Services Agreement are to be provided in the areas detailed below: Chairman of the Board of Directors services, company CEO services, CFO services, services to the manager of the Ramit-Aviv Shopping Mall and to the manager of the Savyonim Shopping Mall, directors services (excluding outside directors), current management consulting services for ongoing and strategic business transactions (business development) of the company Group, internal audit, through the internal auditor of Africa Investments, computer network management services of the company Group, treasury and bookkeeping services, secretariat services for the companies in the company Group registered in Israel, administration, personnel and office rental services for the Company’s headquarters in Yehud (including accompanying expenses) (hereinafter – “the Management Services”).

In addition, commencing from the later of April 1, 2008 or from the approval date of

the New Management Services Agreement by the General Meeting of Africa Properties’ shareholders (in accordance with the provisions of the Companies Law, 1999) (hereinafter – “the Transfer Date”), 8 employees of the Company were transferred to Africa Properties (hereinafter – “the Transferred Employees”) who are actually engaged in, as at the date of this report, only provision of services under the existing management services agreement to the Africa Properties Group, in such a manner that they will be employed directly by Africa Properties, subject to receipt of the consent of the Transferred Employees for the said transfer, in writing.

In consideration for provision of the management services, Africa Properties is to pay

the Company the following amounts:

– Quarterly management fees in an amount equivalent to NIS 750 thousand (linked to the index).

– An amount equal to 3% of the quarterly net income, net of the tax effect on the

income based on Africa Properties’ quarterly consolidated financial statements, that is, plus Africa Properties’ share in the provision for taxes recorded in the financial statements of Africa Properties and of the companies in Africa Properties Group.

The total annual management fees may not exceed NIS 15 million. Since the Management Fees were determined without taking into account the cost of

the salaries of the Transferred Employees, Africa Properties paid the Company, on the date of the transfer, the full cost of the salaries of the Transferred Employees in respect of the period from January 1, 2008 (the date of entry into effect of the New Management Services Agreement) and up to the Transfer Date.

252




(1) (Cont.) It is hereby clarified that expenses and payments to third parties that are involved with

the management and activities of the companies in Africa Properties Group are not included in as part of the Management Services and the Company will not bear them. If the Company pays or incurs an expense, as stated, for any reason whatsoever, Africa Properties shall indemnify it for such payment or expense as stated.

The Company committed to Africa Properties to pay the full amount of the payments

in connection with employment of the Transferred Employees up to the Transfer Date and/or with respect to termination of their employment as required by the employment agreements with the Transferred Employees and in accordance with all law, including and without detracting payments for purposes of covering severance benefits of the Transferred Employees. In this context, the Company committed to indemnify Africa Properties for any payment Africa Properties bears relating to the Transferred Employees, directly or indirectly, in respect of the period up to the Transfer Date (hereinafter – “the Indemnification Commitment”).

It was agreed that the Indemnification Commitment will not apply in respect of

additional severance benefits due to wage increases of any of the Transferred Employees that enter into effect after the Transfer Date, if any.

The Indemnification Commitment will remain in force even in a case where the New

Management Services Agreement comes to an end. It was further agreed that notwithstanding that stated in the agreement signed between

Africa Properties and the Company in February 2008, which arranged the matter of transfer of an additional 10 employees of the Company to a subsidiary of AFI Europe (hereinafter – “the Agreement for Transfer of the Employees to AFI Europe”), the Company’s indemnification commitment provided as part of the Agreement for Transfer of the Employees to AFI Europe will not apply in respect of payment of severance benefits stemming from a wage increase of any of the employees transferred under the Agreement for Transfer of the Employees to AFI Europe that takes place after the actual transfer date of the employees (that is March 1, 2008).

This agreement entered into effect commencing from January 1, 2008 (hereinafter

above and below – “the Effective Date”) and will be valid for a period of two years commencing from the Effective Date and shall renew automatically for three additional periods of one year each. Notwithstanding that stated above, it is hereby agreed that each of the parties shall be permitted to bring the New Management Services Agreement to and end by means of a written notice delivered to the other side at least 90 days prior to the end of the agreement period.

253




(1) (Cont.) In November 2009, it was decided by the Audit Committee, the Board of Directors of

Africa Properties and the Board of Directors of the Company that the accounting mechanism for the additional management fees will be updated, such that the additional management fees due to the Company from Africa Properties will be paid based on the annual consolidated financial statements of Africa Properties, however in the case of a loss, the management fees will not be reduced below the base management fees. In addition it was decided that the above-mentioned update will apply retroactively commencing from the date the management services agreement entered into effect, that is, effective commencing from January 1, 2008. The impact of the change in the accounting mechanism in respect of the period from January 1, 2008 through December 31, 2009, is a reduction of the management fees in the amount of NIS 8.7 million, which was reflected in the fourth quarter of 2009.

Update of the accounting mechanism in connection with the management fees, as

stated, is subject to receipt of the approval under Section 1(2) of the Companies Regulations (Relief in Transactions with Interested parties), 2000.

(2) In December 2010, the Company signed, directly or indirectly a new management

agreement with Africa Properties, as detailed below. This agreement was approved by the Audit Committee and Board of Directors of Africa Properties on December 28, 2010, and was approved by the General Meeting of Africa Properties, pursuant to Section 275 of the Companies Law, on February 14, 2011.

Set forth below are the highlights of the agreement:

(i) Description of the agreement for provision of management services: The Company will provide Africa Properties, by itself and/or through any of its

subsidiaries and officers: (a) general management services and ongoing consulting services with respect to current and strategic business transactions; (b) directors’ services (except for outside directors) to Africa Properties and/or subsidiaries of Africa Properties the shares of which are traded on a stock exchange in or outside of Israel; and (c) additional services.

The services will be provided in accordance with the terms detailed in the

agreement. It is clarified in order to remove doubt that the services will include only the services referred to in the agreement and will not include other services or issuance of additional resources.

254




(2) (Cont.)

(ii) The consideration In consideration for provision of the management services, Africa Properties will

pay the Company, on a quarterly basis, an aggregate amount equivalent to NIS 187,500, linked to the rate of increase of the “known” CPI on the payment date compared with the CPI for January 2011. The consideration for the management services is to be paid to the Company within 30 days of the end of the calendar quarter. The Company will be entitled to an annual bonus in an amount of up to NIS 375,000 for every calendar work year in respect of a special effort and/or extraordinary achievements, subject to compliance with the targets in accordance with the annual work plan of Africa Properties and receipt of approval of the Audit Committee and Board of Directors of Africa Properties.

It is hereby agreed that if Africa Properties will employ a CEO directly, outside of the

framework of this agreement, the consideration for the management services to be paid by Africa Properties to the Company will be reduced by an amount equivalent to the full employment cost of the CEO, however not more than the fixed amount in consideration of the management services.

Nothing stated in the agreement prevents Africa Properties from providing itself to a

party serving as the CEO under this agreement, long-term equity compensation, such as securities of Africa Properties, “Phantom” options, and other similar customary compensation mechanisms, subject to obtaining approval from the Audit Committee and Board of Directors of Africa Properties.

In consideration for provision of the management services, Africa Properties is to pay

the Company for each director serving or that will serve in Africa Properties or a publicly-held subsidiary of Africa Properties, who is not an outside director (however not more than for five (5) directors serving in each company), the following amounts:

(i) An annual remuneration. (ii) Participation remuneration for every meeting in which the director participates.

Notwithstanding that stated above, it is hereby clarified that in a case where the CEO of Africa Properties who is employed in the framework of this agreement, also serves as a director of Africa Properties, no compensation amount, as stated above, is to be paid to the Company in respect of the CEO director.

255




(2) (Cont.) The annual remuneration amount and the participation remuneration are to be in fixed

amounts stipulated in the Second Addendum and in the Third Addendum, as applicable, of the Companies Regulations (Rules regarding Remuneration and Expenses for an Outside Director), 2000, as they will be updated from time to time, in accordance with the rating of Africa Properties based on its shareholders’ equity in accordance with its annual financial statements. The annual remuneration amount and the participation remuneration will be linked to the CPI in accordance with the Remuneration Regulations.

The participation remuneration is to be paid by Africa Properties to the Company

within 30 days of the end of the calendar quarter in respect of the meetings (including a meeting held through means of communications without convening) that took place during the calendar quarter preceding the payment date.

The annual remuneration is to be paid in four equal quarterly payments. Each

payment, as stated, is to be paid to the Company within 30 days of the end of each calendar quarter.

In consideration for provision of the additional services, Africa Properties is to pay the

Company a quarterly payment in an aggregate amount equivalent to NIS 573,000, linked to the rate of increase of the “known” CPI on the payment date compared with the CPI for January 2011.

The consideration for the additional services is to be paid to the Company within 30 days

of the end of each calendar quarter preceding the payment date. The amount of the consideration for the additional services will be examined once every

two years by the Audit Committee against the average actual cost of the additional services to the Company in the four calendar quarters preceding the examination date, on the basis of appropriate supporting documentation produced by the Company, to the satisfaction of the Audit Committee, and taking into account that extent of the actual utilization of the additional services by Africa Properties. If the Company ceases to provide Africa Properties one or more of the additional services, the amount of the consideration for the discontinued service will be deducted from the consideration for the additional services and commencing from that date the new consideration will be defined as the consideration for the additional services for purposes of this agreement, subject to receipt of all the approvals required by law.

VAT as per law is to be added to every payment in respect of the services under this

agreement and is to be paid against issuance of a tax invoice as per law. Africa Properties will deduct from the consideration for the services to be paid to the

Company any tax and/or mandatory payment, which according to law is to be deducted.

256




(2) (Cont.) It is hereby clarified that expenses and payments to third parties, involved with the

management and activities of Africa Properties, including, staying overseas, flight expenses, fees of attorneys and accountants, taxes, payments and various similar mandatory charges, are not included as part of the services and the Company will not bear them. In a case where the Company bears a payment or expense as stated, for whatever reason, Africa Properties will indemnify it in respect of the payment or expense as stated within 7 days of the date notification is provided to Africa Properties regarding the matter along with supporting documentation with respect to execution of the payment as stated.

The issuance grant it to be paid to the Company within 15 days of the publication date of

the first financial statements published by Africa Properties after the issuance. It is agreed and declared by the parties that the status of the Company as a provider of

services to Africa Properties is the status of an independent contractor and all the actions and/or inactions for which the Company and/or its employees and/or parties acting on its behalf are responsible, are to be executed or not executed as an independent contractor, on its sole risk and responsibility – in order to remove all doubt, it is clarified that there is no and will be no employer-employee relationship between Africa Properties and/or the Company and/or any of its employees, and the provisions of this agreement do not act to create an employer-employee relationship between any of them and the Company, for all intents and purposes.

It is also agreed that under that stated above the Company waives all contentions and/or

claims vis-à-vis Africa Properties, the grounds for which relate to employer-employee relationships or the termination thereof, and it is prevented from filing any claim against Africa Properties the causes of action of which relate to employer-employee relationships or the termination thereof.

Without detracting from the generality of that stated above, the Company declares and

undertakes that all the taxes and/or other mandatory charges that apply or will apply, from time to time, to any of its employees and/or to it, in respect of and/or in connection with provision of the services under provisions of this agreement and/or by force of law, and any tax and/or mandatory charge as stated due under law from the employee and/or from the Company – will be paid by the Company and/or the employee, as the case may be, and on their account.

Upon entry into effect of this agreement, the existing management agreement will be

cancelled. Subject to receipt of approval of the General Meeting of Africa Properties in accordance

with Section 275 of the Companies Law, 1999 (hereinafter – “the Companies Law”) this agreement will enter into effect commencing from January 1, 2011 (hereinafter – “the Effective Date”).

257




(2) (Cont.) This agreement will remain in effect for a period of 5 years, commencing from the date

of its entry into effect, where at the end of the period the agreement will renew for additional periods of two years each, or other period agreed to by the parties, which will not exceed two years, and subject to receipt of approval of the General Meeting of Africa Properties, in accordance with Section 275 of the Companies Law. Africa Properties will act in a timely manner to obtain approval of the Audit Committee and Board of Directors of Africa Properties for extension of the agreement. Notwithstanding that stated above, it is hereby agreed that each of the parties will be permitted to bring this agreement to an end by means of advance notice to the other party of at least 90 days prior to the end of one of the agreement periods.

(3) Africa Properties’ undertaking with Africa Israel Financing (1995) Ltd. (a subsidiary,

hereinafter – “Africa Financing”) in a financing agreement – Pursuant to the financing agreement, Africa Properties may, with the advance consent of

the two sides, deposit monies from time to time with Africa Financing and Africa Financing will receive the monies as stated as deposits. Similarly, Africa Financing may, with the advance consent of both sides, deposit monies from time to time with Africa Properties and Africa Properties will receive the monies as stated as a loan. In addition, at Africa Properties’ request and with the consent of Africa Financing, Africa Financing will deposit monies with Africa Properties from time to time and Africa Properties will receive the monies as stated as a loan by means of a deposit, all according to the terms detailed below:

The deposits and loans will be of the “on call” variety for a period not in excess of one

year from the date of deposit and will bear annual interest at a variable rate based on the prime rate that is in effect from time to time at Bank Leumi L’Israel Ltd. Calculation of the interest will be made once a month.

The maximum amount of the deposits to be deposited by one side with the other

pursuant to the financing agreement shall be as follows:

A. The maximum amount of the deposits to be deposited by Africa Financing with Africa Properties, at any given time, shall not exceed Africa Properties’ shareholders’ equity as it will be from time to time based on Africa Properties’ financial statements.

B. The maximum amount of the deposits to be deposited by Africa Properties with

Africa Financing, at any given time, shall not exceed 35% of Africa Properties’ shareholders’ equity as it will be from time to time based on Africa Properties’ financial statements.

258




(3) (Cont.) Africa Financing undertakes not to use the deposits, or any part thereof, for purposes of

acquisition of Africa Properties’ shares. Approval of the financing agreement as a “framework transaction” shall be valid for a

period of 5 years, unless the financing agreement is cancelled by either of the parties on an earlier date by means of sending a written notice to the other party three months in advance.

Every year during the period of the financing agreement Africa Properties’ Audit

Committee and its Board of Directors will examine the terms of the interest. In a case where in the opinion of the Audit Committee and/or Board of Directors the conditions provided in Regulation (5)1 of the Relief Regulations are not fulfilled (that is, the interest is on market conditions, in the ordinary course of business, and it does not adversely affect Africa Properties’ benefit), Africa Properties will not enter into new transactions with Africa Financing (a loan or deposit), pursuant to the financing agreement beyond those existing at the time of the deliberation by the Board of Directors and/or the Audit Committee, this being up to the time of receipt of approval of Africa Properties’ competent authorities, pursuant to Section 275 of the Companies Law, 1999. The conditions of the financing agreement will continue to apply to the balance of the deposits.

The Company will be a guarantor for fulfillment of all the liabilities of Africa

Financing under the financing agreement.

G. Agreements with AFI Development In April 2007, the Company signed an agreement with AFI Development whereby the

Company committed to AFI Development:

(1) The Company will not engage in real estate activities in Russia other than through AFI Development, except in the City of Kislovodask and in the Faram District in Russia. In March 2008, an amendment to the AFI Activity Areas Agreement was approved such that the Company undertakes not to engage in real estate activities in countries in the Commonwealth of Nations (including Russia).

(2) The Company will not be a controlling shareholder in a company engaging in

activities as stated, except in Danya Cebus, Africa Hotels, Africa Properties, Africa Residences, Africa Industries, Negev Ceramics and any other company that is controlled by the above-mentioned companies.

(3) The Company will not transfer new business opportunities to engage in activities as

stated to any party or entity except AFI Development. (4) The Company will not provide know-how and professional services in connection

with the activities as stated to any party or entity except AFI Development.

259



G. Agreements with AFI Development (Cont.) The Activity Areas Agreement will remain in effect, subject to exceptions, for a period of

seven years. In addition, the Activity Areas Agreement may be cancelled by means of an advance notice of either of the parties, if the Company ceases to be the controlling shareholder in AFI Development.

H. Management services agreement with Memorand Based on an agreement from April 1999 between Memorand Management (1998) Ltd.

(hereinafter – “Memorand Management”), a company owned and controlled by Mr. Lev Leviev, the Company’s controlling interest (hereinafter – “the Management Services Agreement”), the following provisions, among others, were stipulated:

Memorand Management will provide the Company management services, by means of

Mr. Lev Leviev who will serve as Chairman of the company’s Board of Directors. The Management Services Agreement will remain effective until it is cancelled, as follows:

– Each party may cancel the Management Services Agreement, for any reason whatsoever, by means of a written notification that will be delivered to the other party 30 days prior to the cancellation date. It is clarified that upon cancellation of the agreement, payment of the management fees to Memorand Management will be discontinued (however there will be no adverse impact on the continued service of Mr. Leviev as Chairman of the company’s Board of Directors).

– In addition, in any case of discontinuance of the service of Mr. Leviev as Chairman of

the company’s Board of Directors, for whatever reason, the Management Services Agreement will be discontinued immediately upon discontinuance of such service as stated.

The consideration for the management services was set at NIS 40 thousand per month

(linked to the CPI of January 1999), plus VAT as per law. The company will provide Mr. Leviev an appropriate vehicle and cellular telephone, and

will also bear all expenses and mandatory payments imposed on and/or involved with the vehicle and/or cellular telephone as part of the provision thereof to Mr. Leviev, including payment of the tax in respect of the benefit embedded in provision of the vehicle as stated. In addition, Mr. Leviev is entitled to reimbursement of expenses in the course of performance of his position as Chairman of the company’s Board of Directors, including travel and lodging expenses outside of Israel.

The officer liability and indemnification arrangements that apply in the company from time

to time, will also apply to Mr. Leviev as an officer of the company. As part of the interim agreement with the debenture holders, payment of the management fees was stayed until the arrangement is completed.

260



I. Consulting services agreement and options’ plan for Mr. Nadav Grinshpon In May 2008, the Board of Directors and the Audit Committee approved and in July 2008

the General Meeting of the shareholders approved a consulting agreement and options’ plan for Mr. Nadav Grinshpon (hereinafter – “Mr. Grinshpon”). Mr. Grinshpon serves as a Company director and Deputy Chairman of the Company’s Board of Directors, and functions as liaison between the Company CEO and it Board of Directors. Furthermore, Mr. Grinshpon assists in the burden of supervision and ongoing oversight of the Group companies’ operations, including serving as Chairman of the Board of several Group subsidiaries, and as a director in corporations related to the Company in Israel and overseas.

The scope of the services will not be less than 100 hours per month and the consideration

in respect of the services will be NIS 100 thousand per month, plus VAT as per law. The consideration will be linked to the rate of increase of the CPI relative to the index in respect of May 2008. In addition, Mr. Grinshpon will be entitled to an annual bonus, a vehicle and reimbursement of various expenses.

In addition, an options’ plan was approved for Mr. Grinshpon, as described in

Note 39A(1). In January 2009, Mr. Grinshpon notified the Company that as part of the Company’s

efficiency measures and with the aim of assisting the Company in its preparations for the worldwide economic crisis and its impacts on the Israeli economy, he has decided to forgo 10% of his salary for 2009. Based on directive of the Deputy Chairman of the Company’s Board of Directors, the salary reduction is continuing until further notice.

J. Employment agreements

(1) Ms. Tzvia Leviev Alazarov (hereinafter – “Ms. Alazarov”), the daughter of Mr. Lev Leviev, the Chairman of the Company’s Board of Directors and its controlling interest, has been employed by the Company in various positions commencing from 1997. Since October 2000, Ms. Alazarov served as the manager of the Marketing Division of the Company’s Residential Division. Between the months January 2006 through December 2006, Ms. Alazarov served as manager of the Company’s Shopping Malls Division. In March 2006, Ms. Alazarov was appointed Deputy CEO of marketing of the Company. In addition, Ms. Alazarov serves as a member of the Boards of Directors of subsidiaries and related companies of the Company. In 1999, an employment agreement was signed between the Company and Ms. Alazarov. As a practical matter, the terms of Ms. Alazarov’s employment agreement were changed based on decisions of Company management, from time to time.

In August 2010, Ms. Alazarov resigned from her position as Deputy CEO of

marketing of the Company, due to commencement of her position as manager of marketing, administration, properties and business development in AFI Development.

261



J. Employment agreements (Cont.)

(1) (Cont.) Based on the services agreement signed with Ms. Alazarov by AFI Development,

among other things, her monthly salary was set at $25 thousand (gross). In addition, Ms. Alazarov is entitled to be furnished with a residence and various sustenance expenses for her and her family, flight expenses, provisions for social benefits, a vehicle and other accompanying conditions. In addition, pursuant to the services agreement with Ms. Alazarov, she will be entitled to receive bonuses, to be paid to her in accordance with the policies of AFI Development, subject to the discretion of the CEO of AFI Development.

In addition, a decision was made whereby Africa Residences will issue options to

Ms. Alazarov exercisable for shares of Africa Residences and a decision whereby AFI Development will issue options exercisable for global deposit certificates representing shares based on a plan for issuance of options to employees of AFI Development. For details of the options’ plan – see Note 39B(2) and Note 39B(1). As a result of her resignation and move to AFI Development, the said options were forfeited.

Proximate to her resignation date from her position with the Company as stated above,

Ms. Alazarov’s gross monthly salary was about NIS 64 thousand. (2) In April 2008, the Company’s Board of Directors and Audit Committee approved the

employment conditions of the new CEO who started his position with the Company in June 2008. The employment conditions of the new CEO include, among others, a monthly salary of NIS 198,000 (linked to the index) and salary-related benefits, as well as eligibility for an adaptation grant equal to 6 salaries to be paid at the end of his employment.

In addition, the new CEO was granted options under the options’ plan described in

Note 39A(2). In January 2009, the CEO notified the Company that as part of the Company’s

efficiency measures and with the aim of assisting the Company in its preparations for the worldwide economic crisis and its impacts on the Israeli economy, he has decided to forgo 10% of his salary for 2009 (not including the matter of provisions for social benefits). Based on directive of the Company’s CEO, the salary reduction is continuing until further notice.

K. Agreements with Africa Residences In June 2006, as part of its preparations to issue securities to the public as part of an IPO

(initial public offering), a number of agreements were signed with Africa Residences as detailed below:

262



K. Agreements with Africa Residences (Cont.)

(1) Pursuant to a management agreement signed in June 2006, between the Company and Africa Residences, the Company provides Africa Residences, by itself or by means of its subsidiaries, management, consulting, and office accompaniment and administration services (hereinafter – “the Management Services”).

The management agreement entered into effect on July 1, 2006, and runs for a period

of five years commencing from the aforesaid date. Pursuant to approval of the Board of Directors and the Audit Committee of Africa

Residences from March 2007 and approval of the General Meeting from April 2007, Africa Residences entered into an agreement with the Company revising the agreement for receipt of management services from the Company whereby the quarterly management fees will be reduced from NIS 1.1 million to NIS 350 thousand, and Africa Residences will not be entitled to receive computer and communications equipment from the Company. Revision of the agreement entered into effect commencing from January 1, 2007.

(2) Pursuant to the addendum to the management services’ agreement (see subsection (1)

above), in August 2006 the Company employees that are effectively engaged in Africa Residences’ matters were transferred to Africa Residences such that they are employed directly by it, subject to their advance, written consent to the transfer.

The Company committed to Africa Residences to bear the full amount of the payments

relating to employment of the Residential Division employees up to the transfer date and/or in connection with termination of their employment as required by the employment agreements with the Residential Division employees and in accordance with law, including (and without detracting) amounts for purposes of severance payments to the Residential Division employees. In addition, the Company committed to indemnify Africa Residences in respect of every payment it bears, directly or indirectly, relating to the period up to the transfer date.

(3) In June 2006, an agreement was signed between the Company and Africa Residences

covering the areas of their activities and their legal relationships in this context (hereinafter – “the Activities Boundary Agreement”).

Under the terms of the Activities Boundary Agreement, the Company committed that,

commencing from the registration date of Africa Residences’ shares for trading (hereinafter – “the Effective Date”) and up to the end of five years, it will not engage in residential real estate initiation activities in the State of Israel and the Region (as this term is defined in the Income Tax Ordinance, hereinafter – “the Restricted Areas”) and will not hold an interest in the control group of another company that is engaged in residential real estate initiation activities in the Restricted Areas, except for a company as stated that is a “public company” as this term is defined in the Companies Law.

263




(3) (Cont.) Notwithstanding that stated above, it was agreed by the parties to the Activities

Boundary Agreement that the restriction shall not apply in any one of the following situations:

– With respect to residential real estate initiation activities that the Company and/or

a company controlled by it are involved in on the Effective Date, including (in order to remove all doubt), in connection with assets earmarked for residential purposes that were acquired by the Company and/or a company controlled by it prior to the Effective Date and/or that were managed by one of them prior to the Effective Date.

– With respect to residential real estate initiation activities in the framework of a

real estate project that does not, principally, constitute a property earmarked for residential purposes as defined above (such as, residential units in office buildings or hotels).

– With respect to residential real estate initiation activities regarding which

execution thereof by Africa Residences or a company controlled by it will cause the breach of a commitment made by Africa Residences to any third party whatsoever.

– With respect to residential real estate initiation activities on real estate regarding

which on the acquisition date of the rights therein it was the intention of the Company and/or a company controlled by it, as the case may be, not to make use thereof as a property earmarked for residential purposes.

– With respect to residential real estate initiation activities resulting from a tender

(or other similar competitive process) for acquisition of a property earmarked for residential purposes and/or management of its construction and the marketing thereof, regarding which Africa Residences does not meet one or more of the conditions thereof and it is not within its reasonable capability to meet such condition/s.

– With respect to a business opportunity in the residential real estate initiation

activities area that Africa Residences decided it is not interested in. – With respect to activities in the housing for the elderly area.

From its side, Africa Residences committed that commencing from the Effective Date it will not engage in real estate activities outside of the Restricted Areas, unless the Company has given its approval for such engagement.

264




(3) (Cont.) It was agreed between the parties that if the Company ceases to hold an interest in

Africa Residences’ control group, for any reason whatsoever, each of the parties to the agreement will be permitted to cancel the agreement within the agreement period (i.e., prior to the end of five years from the Effective Date).

In addition, it was agreed between the parties that if Africa Residences ceases to be a

“subsidiary” of the Company, within the meaning of this term in Restrictive Business Practices Law, 1988, and if in accordance with the provisions of the Restrictive Business Practices Law, as they will be in effect as at the said date, this agreement constitutes a restrictive agreement in violation of the provisions of the Restrictive Business Practices Law, then the Activities Boundary Agreement will automatically become ineffective (unless approval is received as required by the Restrictive Business Practices Law for fulfillment of these provisions based on a request the parties undertake to submit), as detailed in the Activities Boundary Agreement.

(4) In June 2006, agreements were signed between Africa Residences and Africa Israel

(Financing) 1985, Ltd. (a subsidiary company, hereinafter – “Africa Financing”) pursuant to which Africa Residences will be permitted, with mutual agreement, from time to time, at Africa Residences’ request and with the consent of Africa Financing, to borrow money from Africa Financing or to deposit money with Africa Financing.

The loans and deposits will be of the “on call” type, for a period not in excess of one

year and will bear variable interest at the prime rate that is in effect, from time to time, at Bank Leumi L’Israel less 1.25% per year. The maximum amount of the loans that Africa Residences may receive from Africa Financing under this agreement, at any given time, may not exceed NIS 250 million, and the maximum amount of the deposits that Africa Residences may deposit with Africa Financing, at any given time, may not exceed 33% of its shareholders’ equity.

The loan agreement will be effective for a period of five years from the registration

date of Africa Residences’ shares for trading on the stock exchange (June 2006), unless it is cancelled by one of the parties at an earlier time.

The deposit agreement will be effective for a period of two years from the date of its

approval by the General Meeting (December 2006), unless it is cancelled by one of the parties at an earlier time. In December 2008, the validity of this agreement expired.

The Company will be a guarantor of Africa Financing’s liabilities under these

agreements.

265




(5) In June 2006, an agreement was signed between the Company and Africa Residences pursuant to which the Company committed to irrevocably assign and endorse to Africa Residences, all of the Company’s rights and liabilities to provide project management services in respect of projects detailed in the agreement. The agreement for assignment of rights in project management agreements entered into effect upon registration of Africa Residences’ shares for trading on the stock exchange.

(6) In June 2006, a project management agreement was signed between the Company and

Africa Residences pursuant to which the Company committed to transfer to Africa Residences the management of two projects (“New Savyon” and “Kiryat Hasavyonim”) that are located on land regarding which the Company is the rights’ owner and regarding which on the signing date of this agreement there were no existing project management agreements.

In exchange for the management services, as stated above, it was agreed that the

Company will pay Africa Residences an amount equal to 4.75% of the total receipts (not including VAT) obtained from sale of the units in the project.

The project management agreement entered into effect in June 2006.

(7) In June 2006, an agreement was signed between the Company and Africa Residences

pursuant to which Africa Residences will provide economic services and Urban Planning Scheme and land registration services (hereinafter – “the Services”) to the Company.

The Services are to be provided to the Company by the employees of Africa

Residences’ Economics Department and of the Urban Planning Scheme and Land Registration Services Department.

This agreement is contingent on transfer of the Residential Division Employees,

pursuant to the addendum to the Management Agreement (see Section K(2)., above), and it will be valid for a period of two years from the transfer date of the employees as stated and will renew automatically for an additional year at the end of every calendar year.

Pursuant to approval of the Board of Directors and the Audit Committee of Africa

Residences from March 2007 and approval of the General Meeting from April 2007, the services will be provided to Africa Investments in an annual scope not in excess of 50% of the full-time positions of the employees of the departments and the quarterly consideration for the management fees will be NIS 350 thousand per quarter.

266




(8) In June 2006, an agreement was signed between the Company and Africa Residences for use of a trademark pursuant to which Africa Residences was granted the right to use the trademark, with no limitation as to time and for no consideration, in the course of its business and in the areas of its activities, so long as the Company holds more than 50% of the voting rights at the General Meeting of Africa Residences.

(9) In June 2006, Africa Residences decided to provide an indemnification commitment to

officers relating to its prospectus (hereinafter – “the Indemnification Decision”). The indemnification commitment will apply to every liability or monetary expense imposed on the officer stemming from his actions, as detailed in the Indemnification Decision. The cumulative amount of the indemnification to be paid by Africa Residences to all parties entitled to indemnification in respect of a monetary liability pursuant to a court decision may not exceed 25% Africa Residences’ shareholders’ equity based on the latest annual financial statements published prior to the actual payment date of the indemnification.

In addition, under the terms of the underwriting agreement, Africa Residences

committed to indemnify the underwriters for a liability imposed on them in connection with the prospectus, in accordance with the conditions set forth in the underwriting agreement. The amount of the indemnification may not exceed NIS 520 million.

(10) During 2006, the General Meeting of the shareholders of Africa Residences approved

an agreement for receipt of portfolio management services from Africa Israel Investment House Ltd., which was assigned to Africa Israel Investment Portfolio Management Ltd., an indirect investment company of the Company, as well as acquisition of mutual funds managed by a company controlled by the Company at a rate of up to 30% of the value of the securities’ portfolio, in exchange for a commission at an annual rate of 0.25% of the value of the securities’ portfolio (or 0.1% of the value of the securities’ portfolio if the mutual funds are acquired as described above). In December 2009, an agreement was signed with respect to sale of the investment portfolio management activities of the Africa companies to Meitav – as a practical result of which the agreement described above is no longer effective.

(11) Pursuant to approval of the Board of Directors and the Audit Committee of Africa

Residences from March 2007 and approval of the General Meeting from April 2007, the Company entered into an agreement with Africa Residences for provision of various management services to projects that are and/or were owned by the Company and/or its related companies, pursuant to which Africa Residences will provide the Company various services in connection with projects in which the Company and/or its related companies have and/or had rights, in exchange for quarterly management fees in the amount of NIS 300 thousand (subject to the amount of the services provided). The agreement entered into effect on January 1, 2007.

267



L. Financing agreement with Danya Cebus In March 2008, the Audit Committee and Board of Directors of Danya Cebus approved the

undertaking of Danya Cebus with Africa Israel Financing in an agreement for the reciprocal deposit of monies between the these two companies. Pursuant to the financing agreement, Danya Cebus will be able, with the advance agreement of both parties, to deposit monies, from time to time, with Africa Financing and Africa Financing will receive monies, as stated, as deposits. Similarly, Africa Financing will be able, with the advance agreement of both parties, to deposit monies, from time to time, with Danya Cebus and Danya Cebus will receive monies, as stated, as a loan by means of a deposit. The deposits and loans will be of the “on call” variety for a period not in excess of one year from the date of deposit and will bear annual interest at a variable rate based on the prime rate that is in effect from time to time at Bank Leumi. Calculation of the interest will be made once a month. The interest conditions will be examined every year during the period of the financing agreement by the Audit Committee and Board of Directors of Danya Cebus. The maximum amount of the deposits Africa Financing will make with Danya Cebus, at any given time, may not exceed NIS 200 million. The maximum amount of the deposits Danya Cebus will make with Africa Financing, at any given time, may not exceed 35% of Danya Cebus’ shareholders equity based on Danya Cebus’ financial statements. The Company is a guarantor of fulfillment of Africa Financing’s obligations under the financing agreement.

M. See Note 17E(1) regarding a transaction for sale of shares of Africa Residences to Danya

Cebus. N. Sale of properties in Russia In 2009 and 2010, a foreign subsidiary of the Company (hereinafter – “the Subsidiary”)

and AFI Development, signed an agreement whereby the Subsidiary sold to AFI Development all its holdings, at the rate of 88%, in a foreign subsidiary in the Ukraine, and the foreign partner, which held the other 12%, sold its share to AFI Russia.

The aggregate consideration paid by AFI Development to the Subsidiary in the framework

of the aforesaid transaction comes to about US$56.2 million. O. Contracting agreements between Danya Cebus and Africa Properties

(1) In July 2008, the Board of Directors and Audit Committee of Africa Properties approved Africa Properties’ undertaking with Danya Cebus in an agreement for execution of contracting work in connection with construction of a real estate project in Bnei Brak on a total built-up area of about 25,000 square meters, in exchange for a payment of about NIS 108,650 thousand (not including VAT and linked to the Buildings Input Index of February 2008), and subject to possible changes in the scope of the project and adjustments to the consideration, as detailed in the contracting agreement. The contracting agreement was approved by the General Meetings of the companies.

In December 2010, construction of the project was completed.

268



O. Contracting agreements between Danya Cebus and Africa Properties (Cont.)

(2) In June 2010, Danya Cebus signed a contracting agreement with Africa Israel Properties for execution of contracting work in the Psagot House (formerly the Africa Israel Tower), including planning, supply, construction and operation of the elevators in the property, for a consideration of about NIS 40.3 million.

P. Contracting agreements between Danya Cebus and AFI Development

(1) Danya Cebus, through its subsidiaries in Russia, serves as the general contractor for finishing work in the shopping mall project known as AFI Mall City or “Moscow City” or “Mall of Russia” in Moscow.

Commencing from November 2009, Danya Russia signed a number of agreements

with AFI Development PLC (hereinafter – “AFI Development”), a subsidiary of the Company, most of the consideration of which is to be paid on a contractual basis of measurement units in accordance with a fixed margin similar to the “cost+” contract method.

As at the date of the report, the total amount of the work being performed is about

NIS 366 million. In March 2011, Danya Rus, a subsidiary of Danya Cebus, signed a number of

addendums to the AFIMALL agreement with Bellgate Construction Ltd., a company controlled (indirectly) by the Company, for execution of additional work in the AFIMALL project located in Moscow, Russia, for an aggregate consideration of about US$10.5 million.

The AFIMALL project includes a contract for execution with Enka Insaat Ve Sanayi

Anonim Sirketi (hereinafter – “Enka”) and with Danya Rus. As at the date of the report, the total future liability under the above-mentioned contract is about $22 million.

(2) In March 2011, Danya Rus, a subsidiary of Danya Cebus, signed a number of

addendums to two agreements for execution of the Uzerkovskia project in Nevrazinia, Moscow, with Crown Investment Ltd., an associated company of the Company, in the amount of about $5.84 million.

(3) Uzerkovskia Boardwalk Stage 3 – the project includes a performance contract with

Danya Russia. As at the date of the report, the total future liability under the above-mentioned contract is about $29 million.

269



Q. Contracting agreements between Danya Cebus and AFI Europe In October 2007, Danya Romania signed an agreement with Africa Romania (a subsidiary

of the Company) (hereinafter – “the Romanian Agreement”) for construction of a shopping and amusement center (hereinafter – “the Shopping Center”) that will be located in the sixth quarter of Bucharest, Romania, on an area estimated at about 215,000 square meters, of which about 80,000 square meters of parking areas, with an overall monetary scope of about €157.7 million (hereinafter – “the Cotroceni Project”). The duration of performance of the work in accordance with the said agreement was set at 23 months from the signing date of the said agreement and the completion date of the Cotroceni Project was slated for the final quarter of 2009.

In 2009, the Shopping Center was opened (even though all the work had not yet been

completed) and Danya Cebus recorded cumulative revenues from the project in the amount of NIS 1,030.3 million (under the agreement from October 2007 as stated, as well as with respect to various additions and changes made in accordance with mechanisms provided in the original agreement, including linkages to the iron and cement prices as required for construction of the Cotroceni Project).

(1) In March 2010, Danya Cebus signed an addendum to the agreement (hereinafter – “the

Addendum to the Romanian Agreement”) whereby in respect of performance of additional construction work in the Cotroceni Project, the consideration under the Romanian Agreement will be increased by about €33 million (plus VAT in accordance with Romanian Law, to the extent applicable) (including a payment of about €2.5 million for work performed and/or to be performed by Danya Romania for tenants in the Cotroceni Project).

(2) In May 2010, Danya Romania signed a loan agreement with AFI Europe (the parent

company of Africa Romania), subject to receipt of approvals of the competent authorities, including the competent authorities of Africa Properties whereby Danya Romania provided Africa Europe a loan in the amount of €5.1 million (hereinafter – “the Loan Amount”) for purposes of financing the final payment of Africa Romania to Danya Romania in the Cotroceni Project. In light of this, the loan essentially constitutes “supplier credit” to Africa Romania in order to permit it to finance completion of the additional work in the project.

Danya Romania provided Africa Europe the amount of the loan composed of €4.3

million representing the amount of the final payment of Africa Romania to Danya Romania as part of the Romanian Agreement and the Addendum to the Romanian Agreement (hereinafter – “the Final Payment Amount”) and €0.8 million, representing the amount of the VAT in respect of the Final Payment Amount as stated (hereinafter – “the VAT Amount”).

The Loan Amount (including the Final Payment Amount and the VAT Amount) will

bear interest at the annual rate of Eurobar (for a period of three months) plus 5.6%. As at April 7, 2010, the interest rate in respect of the Loan was about 6.2% per year.

270



Q. Contracting agreements between Danya Cebus and AFI Europe (Cont.)

(2) (Cont.) The interest payments in respect of the Loan Amount are to be paid to Danya Romania

quarterly commencing from June 30, 2010, and up to the date of the final and full repayment of the loan and the interest thereon – at the end of two years from the date of its grant.

If AFI Europe is delinquent in any payment (including interest payments), the

delinquent payment will bear interest at the rate of Eurobar (for a period of three months) plus 9%, from the date of the delinquency and up to the actual payment date. As at the date of the report, the delinquency interest rate was about 9.6% per year.

In the period of the report, the General Meetings of Danya Cebus and of Africa Properties

approved the transactions as required with respect to transactions with controlling shareholders.

R. Contracting agreements between Danya Cebus and Africa Residences In 2010, Africa Residences, jointly with partners in joint ventures and severally, signed

contracting agreements with Danya Cebus in the aggregate amount of about NIS 92 million (2009 – NIS 309 million).

S. Contracting agreements between Africa Hotels and AFI Development Africa Hotels signed a management agreement with AFI Development whereby Africa

Hotels provides management services to the Acquamarine Hotel upon its completion. Pursuant to the said agreement, the period of the management agreement will be 15 years after the opening of the hotel, and the parties may agree to extend it by an additional 15 years. Upon completion of the said hotel (which was opened for the trial period in November 2009), Africa Hotels provided technical accompaniment services in connection with its construction, pursuant to the technical accompaniment services agreement signed with AFI Development.

In addition, Africa Hotels signed another management agreement with whereby Africa

Hotels provides management services to the Plaza sanatorium hotel, which is held by AFI Development, in exchange for variable annual management fees – up to the end of 2023.

T. Regarding acquisition by the controlling shareholder of shares issued – see Note 37A. U. Regarding a management agreement between the Company and Africa Industries signed

subsequent to the date of the report – see Note 46D. V. Regarding signing of sale agreements subsequent to the date of the report whereby the

Company will sell its rights in two projects to Africa Residences – see Note 46L.

271


At December 31, 2010 Note 45 – Activity Segments The Group has nine reportable segments, which constitute strategic business units. These

strategic business units include a variety of product and service activities that are managed separately:

A. Development of real estate for residences in Israel – initiation of projects intended for

residences in Israel by means of locating lands, acquisition thereof, construction of the buildings and sale of the units.

B. Rental properties in Israel – initiation, construction (including by means of renovation

and/or refurbishing), rental and operation of the buildings, mainly intended for industry, offices and commercial uses in Israel.

C. Development of real estate in Eastern Europe – development of real estate designated for

residential purposes, as well as initiation, construction, rental and operation of buildings, intended mainly for industry, offices and commercial use in Eastern Europe.

D. Development of real estate and rental properties in the United States – development of real

estate designated for residential purposes, as well as initiation, construction, rental and operation of buildings, intended mainly for offices and commercial use in the United States.

E. Development of real estate and rental properties in the Commonwealth of Nations –

development of real estate designated for residential purposes, as well as initiation, construction, rental and operation of buildings, intended mainly for offices and commercial use in the Commonwealth of Nations.

F. Construction contracting – performance of construction for residential and non-residential

purposes. G. Infrastructures – activities as concessionaire or performance contractor for traffic

infrastructures, such as, highways, railroad tracks and bridges. The activities in the infrastructures’ area are carried out mainly for the government sector by means of the PPP (Private Public Partnership) method wherein the private sector executes, finances and operates the project (for example projects of the BOT and PFI types).

H. Steel products – this products group includes processing and marketing tin and flat steel

products, profiles and pipelines, trade in aluminum and nierusta, galvanizing services, running of steel poles, trade in special steel and steel tools, manufacture and marketing of incubators, manufacture and marketing of communications’ encasements and steel electronic kits, as well as steel lighting stanchions.

I. Ceramic products – this products group includes marketing and sale of ceramic and

porcelain products, along with end products, plus additional products for residential construction, renovation and design for casual customers, residential projects, contractors, merchants and foreign customers.

Other activities include operation of hotels and management of investment portfolios. These

activities are not recognized as reportable segments.

272


At December 31, 2010 Note 45 – Activity Segments (Cont.) Information regarding the activities of the reportable segments is presented in the following tables.

The segment’s income is from outside parties before allocation of the increase in the fair value of investment property, other income and equity income. The segment’s performance was measured based on the segment’s income before equity in earnings of investees and taxes on income and after allocation of financing expenses. Inter-segment pricing was determined based on prices of transactions in the ordinary course of business.

A. Information regarding reportable segments

For the year ended December 31, 2010

Residen- Infra- Adjust- Common- Central Rental tial struct- Constr- ments wealth and property property ure uction Unallo- to United of Eastern in in contr- contr- Other Inter- cated consol- Consol- States Nations Europe Israel Israel acting acting Steel Ceramics segments segment amounts idated idated

In thousands of New Israeli Shekels

Total income from outside parties 549,405 143,760 402,784 77,313 731,213 134,583 1,134,033 1,352,826 523,901 374,042 – 1,244 (373,936) 5,051,168 Income from inter-segment sales – – – – – – 530,324 – 21,323 – (551,647) – – – Segment results 38,273 (69,429) (78,126) 37,920 134,695 20,157 42,592 42,654 38,084 664 (47,276) 1,206,038 44,760 1,411,006 Equity income (loss) of investee company 54,312 235,002 27,377 44,029 (171) 8,957 106 581 (251) (12,550) – (4,775) 12,550 365,167

Segment income (loss) before taxes 92,585 165,573 (50,749) 81,949 134,524 29,114 42,698 43,235 37,833 (11,886) (47,276) 1,201,263 57,310 1,776,173 Taxes on income 2,176 (94,321) (9,539) (10,060) (26,034) (7,351) (11,052) (11,244) (9,633) (20) – 21,233 20 (155,825) Financing income 41,387 107,918 17,895 12,943 9,156 1,093 13,421 12,067 1,811 14,469 – 1,501,983 (4,545) 1,729,598 Financing expenses (234,215) (52,286) (209,461) (44,491) (28,059) (415) (4,493) (45,193) (5,143) (44,466) – (503,643) 40,982 (1,130,883) Other significant non-cash items: Depreciation and amortization 317 3,554 2,596 – 793 2,925 9,238 11,208 11,400 30,767 – 8,327 – 81,126 Revaluation of investment property, net 160,415 38,064 (402) 22,763 – – – – – – – 402 – 221,242 Revaluation of investment property under construction 5,864 (18,327) (16,862) 511 – – – – – – – 8,524 – (20,290) Decline in value of inventory of buildings held for sale and inventory of land 87,176 – (26,981) – – – – – – – – – – 60,195 Segment assets at 12/31/2010 2,387,891 8,347,903 5,529,161 1,523,970 2,256,141 27,634 494,754 1,403,864 419,474 996,634 (47,690) 3,548,206 (485,126) 26,402,816 Investment in investee companies 156,191 631,892 276,137 46,169 (2,736) 56,454 – 6,042 – – – 10,473 180,000 1,360,623 Loans to investee companies 7,212 291,347 164,507 217,853 – 32,216 – 759 – – – 141,585 27,555 883,034 Segment liabilities at 12/31/2010 2,511,933 2,288,418 4,602,293 1,200,033 1,597,120 98,814 570,680 1,069,092 282,654 827,565 – 2,901,055 412,255 18,361,910

273


At December 31, 2010 Note 45 – Activity Segments (Cont.)





Total income from outside parties 393,622 118,311 301,598 185,779 627,000 262,143 1,089,559 922,083 461,855 400,626 – 1,653 (388,766) 4,735,463 Income from inter-segment sales – – – – – – 484,426 – 18,591 1,241 (504,258) – – – Segment results 317,635 (72,197) (89,382) 114,148 122,887 (32,933) 23,350 24,331 31,914 (77,693) 13,985 (595,937) 86,378 (133,514) Equity income (loss) of investee company (137,020) (9,349) 345 807 (628) 16,749 – 770 (835) (3,756) – (119,841) 3,756 (249,002)

Segment income (loss) before taxes 180,614 (81,546) (89,037) 114,955 122,259 (16,184) 23,350 25,101 31,079 (81,449) 13,985 (715,778) 90,134 (382,516) Taxes on income 22,302 127,425 85,576 (1,140) 8,499 (15,900) 6,249 5,803 6,951 (20,353) – 82,216 19,806 327,434 Financing income 1,488,193 92,503 10,740 52,489 – 768 12,185 33,960 708 12,371 – 181,415 5,806 1,891,138 Financing expenses (276,151) (207,747) (160,974) (28,412) (29,032) (9,480) (1,016) (46,635) (4,814) (49,042) – (635,507) 44,242 (1,404,568) Other significant non-cash items: Depreciation and amortization (2,007) (2,238) (3,674) – (848) (2,589) (10,200) (17,790) (11,539) (35,777) – (2,882) 35,777 (53,767) Revaluation of investment property, net (12,220) (120,871) (110,957) (2,348) – – – – – – – 445 – (245,951) Revaluation of investment property under construction (432,425) 119,892 196,714 (40,675) – – – – – – – – – (156,494) Decline in value of inventory of buildings held for sale and inventory of land (421,171) (52,941) (103,013) – – – – – – – – – – (577,125) Segment assets at 12/31/2009 2,702,351 8,805,741 *6,584,514 2,842,905 2,084,786 83,158 231,274 1,198,908 352,547 1,130,000 (23,522) 1,841,522 – 27,834,184 Investment in investee companies 113,807 420,011 348,604 50,297 5,134 11,300 – 6,979 – 4,710 – (40,247) – 920,595 Loans to investee companies 8,331 331,845 181,299 210,140 42,673 2,069 – – – 37,195 – 475,416 – 1,288,968 Segment liabilities at 12/31/2009 2,933,473 3,718,586 5,295,315 160,782 1,410,040 115,827 439,607 879,600 223,927 1,022,209 – 7,314,416 – 23,513,782

* Includes the Cotroceni Shopping Center in Romania the construction of which was completed in the final quarter of the year and the fair value of which as at

December 31, 2009 is about NIS 1,833 million.

274







Total income from outside parties 140,039 148,987 345,698 274,838 514,550 773,866 1,143,090

1,482,686 432,871 398,387 – 7,292 (377,837) 5,284,467

Income from inter-segment sales – – – – – – 642,686 – 18,890 – (661,576) – – – Segment results (3,133,650) (610,663) (279,983) 333,565 44,542 6,182 (16,805) (2,752) 27,367 (93,280) (35,119) (486,984) 13,604 (4,233,976) Equity income (loss) of investee company (508,538) 66,899 (72,011) (7,222) (335) 26,501 – 1,063 (670) (13,395) – (25,366) 13,395 (519,679)

Segment income (loss) before taxes (3,642,188) (543,764) (351,994) 326,343 44,207 32,683 (16,805) (1,689) 26,697 (106,675) (35,119) (512,350) 26,999 (4,753,655) Taxes on income (234,897) 15,656 (2,140) 94,557 6,293 (94) 3,547 (7,490) 7,173 15,932 (25,848) 300,091 2,172 174,952 Financing income 25,238 109,148 14,146 29,331 9,612 9,159 13,408 48,771 1,910 29,843 – 186,761 (15,362) 461,965 Financing expenses (363,219) (165,045) (146,354) (75,217) (35,003) (867) (8,764) (75,720) (6,797) (100,417) – (614,566) 59,184 (1,532,785) Other significant non-cash items: Depreciation and amortization (949) (29,549) (3,448) – (645) (2,925) (11,987) (18,788) (11,987) (39,654) – (2,580) 39,654 (82,858) Revaluation of investment property, net (168,985) (57,210) 189,481 208,513 – – – – – (1,075) – (5,139) 1,075 166,660 Revaluation of investment property under construction 1,531,035 468,215 54,512 6,909 – – – – – – – – – 2,060,671 Decline in value of inventory of buildings held for sale and inventory of land 1,011,365 67,151 287,452 – – – – – – – – – – 1,365,968 Segment assets at 12/31/2008 4,845,600 8,369,378 5,672,751 4,202,033 2,004,959 1,799,620 826,588 1,397,264 327,344 1,329,729 (59,206) 1,771,592 – 32,487,652 Investment in investee companies 270,844 435,898 366,590 (38,435) (10,781) 44,524 – 4,272 487 (6,180) – 305,893 – 1,373,112 Loans to investee companies 122,158 335,245 153,643 115,016 69,323 1,916 – – – 47,683 – 386,389 – 1,231,373 Segment liabilities at 12/31/2008 5,212,823 3,115,435 5,628,755 1,680,292 1,218,589 2,015,830 286,469 1,031,754 218,825 1,664,407 – 5,183,833 – 27,257,012

275



B. Entity level disclosures Information on the basis of geographic areas The Company’s place of residence is Israel and it operates and produces its revenues in

Israel, the United States, the Commonwealth of Nations and Europe. In presentation of the information on the basis of geographic segments, the segment

revenues are based on the geographic location of the customers. The assets are based on the geographic location of the assets.

For the Year Ended December 31 2010 2009 2008 NIS Thousands Revenues from Outsiders United States 549,405 393,622 140,039 Commonwealth of Nations 1,113,111 547,580 961,298 Europe 463,038 908,986 971,121 Israel 2,917,030 2,906,868 3,567,003 Other 8,584 8,064 22,843 Consolidated 5,051,168 4,765,120 5,662,304

At December 31 2010 2009 NIS Thousands Total Segment Assets United States 2,231,700 2,702,351 Commonwealth of Nations 7,814,826 8,912,859 Europe 5,272,051 6,602,248 Israel 1,159,458 9,616,614 Other 9,924,781 112 Consolidated 26,402,816 27,834,184

276


At December 31, 2010 Note 46 – Events Occurring Subsequent to the Date of the Statement of Financial Position

A. In January 2011, the Company signed an agreement for acquisition of the entire holdings of Nero Group and Nero Holdings, which are foreign companies controlled by the partner in the Company’s activities in the Commonwealth of Nations (hereinafter – “the Sellers” and “the Partner”, respectively) in AFI Development, constituting about 9.7% of the capital and voting rights in AFI Development (hereinafter – “the Holdings” and “the Agreement”, respectively). Pursuant to the Agreement, the Company will acquire 100% of the holdings for an aggregate consideration of about US$129 million. The transaction is to be executed in two stages.

In the first stage, immediately upon signing of the Agreement, the Sellers will transfer to

the Company part of the Holdings, constituting about 2.96% of the capital and voting rights in AFI Development, for a consideration of about US$45 million, which will not be paid by the Company to the Sellers but, rather, will be offset against the balance of the loan provided to the Partner (through one of the Sellers) on the eve of the issuance of AFI Development in May 2007 and that served the Partner in providing its share in the shareholders’ equity of AFI Development on the eve of its issuance (as at December 31, 2010, the balance of the loan (principal and interest) is about US$38 million, after reduction for decline in value of about US$6 million recorded in the financial statements for 2010).

In the second stage, which according to the Agreement is to take place on May 2, 2011, the

Sellers are to transfer to the Company the balance of the Holdings, constituting about 6.75% of the capital and voting rights in AFI Development, for a consideration of about US$84 million, which is to paid by the Company to the Sellers in cash. Completion of the transaction is subject to fulfillment of a number of preconditions, such as receipt of information and documents in connection with the Holdings and consent of a bank to which the Holdings are pledged.

The consideration pursuant to the Agreement as described above, assuming the two stages

of the transaction are completed, reflects a weighted-average price of about US$1.27 per share of Global Deposit Certificate of AFI Development.

To the extent any of the parties to the Agreement do not comply with their obligations to

complete the transaction in accordance with the provisions of the Agreement, the other party will have the right to cancel the Agreement and to cancel the shareholders’ agreement signed by the parties on the eve of the issuance of AFI Development – all in addition to the rights the other party has, as stated, under the applicable law.

B. In connection with early redemption of the Company’s debentures (Series Y) subsequent

to the date of the report – see Note 23E(1)(c). C. In January 2011, Negev signed a lease agreement for 24 years in respect of an area

measuring 10,000 square meters, for purposes of expansion of its logistics center in Ramat Eliahu. Negev is to pay NIS 10 per square meter per month, and is to invest NIS 30 million in upgrading the logistics center. Together with the new leased premises, the company’s logistics center will cover a total area of about 30 thousand square meters.

277


At December 31, 2010 Note 46 – Events Occurring Subsequent to the Date of the Statement of Financial Position (Cont.)

C. (Cont.) In addition, in February 2011, Negev’s Board of Directors approved a total investment of

up to NIS 140 million in renovation of Negev’s factory in Yeruham – an investment that is to be spread over a period of up to 3 years. The planned date for commencement of the factory’s activities in its new format is during 2014. In Negev’s estimation, the investment in the factory constitutes an important part of Negev’s strategy aimed at increasing its market share and expanding its activities in existing markets and growth in new and international markets.

D. In March 2011, the Company signed an agreement with Africa Israel Industries for

provision of management services to Africa Industries, whereby the Company will provide, itself and/or through any of its subsidiaries and officers: (a) directors’ services (excluding outside directors) to Africa Industries and to its subsidiaries the shares of which are traded on a stock exchange in or outside of Israel; and (b) current ongoing consulting services with respect to current and strategic business transactions (business development) of Africa Industries and its subsidiaries, and spokesperson, internal audit, public relations and company secretariat services, in an aggregate amount of 1.25 full-time monthly positions. The services will include only the services referred to above and will not include other services or issuance of additional resources.

In consideration for provision of the directors’ services, Africa Industries is to pay the

Company for each director presently serving or that will serve in Africa Industries, or one of its public subsidiaries, who is not an outside director (including directors that are controlling shareholders of the company or a relative thereof) (but not for more than five directors serving in each company), the following amounts:

(i) An annual remuneration (or proportionate part of this amount in respect of service for

part of the year). (ii) Participation remuneration for every meeting in which the director participates (or

proportionate part of this amount in respect of a meeting held without convening).

The annual remuneration amount and the participation remuneration are to be in fixed amounts stipulated in the Second Addendum and in the Third Addendum, as applicable, of the Companies Regulations (Rules regarding Remuneration and Expenses for an Outside Director), 2000, as they will be updated from time to time, in accordance with the rating of Africa Properties based on its shareholders’ equity in accordance with its annual financial statements. The annual remuneration amount and the participation remuneration will be linked.

In exchange for the management services, Africa Industries will pay the Company a

quarterly payment in an amount equivalent to NIS 125 thousand, linked to the CPI. The Company will be entitled to a special bonus in an amount of up to NIS 500 thousand for every calendar year in respect of extraordinary efforts and/or exceptional achievements.

The management agreement will enter into effect commencing from April 2011 for a

period of 3 years.

278



E. In February 2011, Danya Cebus signed an agreement with Israel Infrastructures Management 1 Ltd, which is acting for an entity owned and controlled, directly and indirectly, of the controlling interests therein and/or a partnership to be set up by a party as stated (hereinafter – “the Purchaser” and/or “the Infrastructures Fund”), for sale of 75% of its holdings in the issued and paid-up share capital of Netivei Hayovel Ltd. (hereinafter – “Netivei Hayovel”) and assignment of a proportionate part of the shareholders’ loans provided by Danya Cebus to Netivei Hayovel (the balance of which as at the signing date was about NIS 130.2 million) and assignment of a proportionate part of the rights and obligations of Danya Cebus, in its capacity as a shareholder of Netivei Hayovel (hereinafter – “the Agreement”).

Netivei Hayovel is a wholly owned subsidiary of Danya Cebus, which holds the

concession for financing, construction, operation, management and return to the State of Israel of Highway 431.

As at the signing date of the Agreement, the amount of the consideration was about

NIS 200 million, where this amount will be updated on the closing date of the transaction, based on a formula provided between the parties (hereinafter – “the Updated Consideration”).

As part of the Agreement, it was agreed that the parties will act to amend the agreements

signed in connection with the project, such that the obligation to provide the guarantee to the State of Israel under the concession agreement signed between Netivei Hayovel and the State of Israel will apply to the shareholders of Netivei Hayovel in accordance with their proportionate interests.

All the agreements between Netivei Hayovel and Danya Cebus and/or its related

companies, in its status as the construction contractor and/or operator and/or provider of services to Netivei Hayovel, will remain in effect in accordance with their terms, such that the full rights and obligations pursuant to these agreements will remain with Danya Cebus and will not pass over to the Purchaser.

Closing of the transaction is subject to fulfillment of a number of preconditions, the main

ones being: completion of due diligence examinations to the Purchaser’s satisfaction, signing of a shareholders’ agreement by the parties arranging their rights and obligations in all that relating to their holdings in Netivei Hayovel, receipt of approvals and/or consents on behalf of the State of Israel, the project’s lenders, authorities and/or other relevant parties, if applicable, receipt of an advance ruling from the Taxes Authority, and every other approval or additional consent required in accordance with law or the Agreement.

As at the publication date of this report, the Purchaser notified Danya Cebus that the

diligence examinations were completed to its satisfaction. The parties committed to cooperate and to make their best effort to fulfill the transaction’s

preconditions as early as possible, and in any case no later than March 31, 2011 or another date agreed to by the parties.

279



E. (Cont.) Subject to closing of the transaction, Danya Cebus is expected to record a pre-tax gain in

its financial statements, in the amount of about NIS 100 million. In addition, the Company presented in its financial statements the financial position and results of operations of Netivei Hayovel as at December 31, 2010, as discontinued operations. For additional details – see Note 5 regarding “Discontinued Operations”.

F. In January 2011, Danya Cebus filed a statement of claim, in the amount of about NIS 70

million, in an arbitration proceeding of Danya Cebus against a customer, Opera on the Sea Ltd. (hereinafter – “Opera”). On January 24, 2011, Opera submitted its statement of defense and a counterclaim, in the amount of about NIS 85 million. A hearing before the arbitrator has not yet been scheduled. On the basis of an opinion of its legal advisors, Danya Cebus was not required to record a provision in the financial statements.

G. In March 2011, AFI Development leased the entire office building in the Pavaeletskaya to

a single governmental tenant, in a short-term lease for 11 months that will be automatically extended for 3 years after AFI Development receives approval of ownership of the building. The lease is denominated in rubles and is expected to produce income, in annual terms, before VAT and before operating expenses, of about $4.7 million in the first year of operation.

H. In March 2011, Africa Industries acquired additional shares on the stock exchange of the

subsidiary Negev Ceramics and increased its holdings in the company from 74.72% to 81.31%.

I. On January 5, 2011, a tender was held for institutional investors in connection with

issuance of a new series of debentures by Africa Properties (Series E). The debentures were guaranteed by a lien on the holdings of Africa Properties in AFI Europe. As part of the issuance, Africa Properties committed to various conditions vis-à-vis the debenture holders, including limitations on distribution of a dividend, compliance with a shareholders’ equity to total assets ratio, compliance with a debt to debt plus equity ratio (CAP), compliance with a ratio of debt to the pledged shares of AFI Europe, restrictions on transfer of control, and others.

On January 18, 2011, Africa Properties published a shelf offer prospectus to raise up to

NIS 150 million (including the amount of NIS 120 million from institutional investors as stated above) whereby the tender to the public will be held on January 20, 2011.

On January 20, 2011, the tender to the public was held, wherein Africa Properties raised

NIS 150 million and the interest on the debentures (Series E) was set at 5.9% per year, linked to the CPI. The debentures are scheduled for repayment in seven annual payments in the years 2013 through 2019.

J. Regarding an understanding reached by AFI Development with the City of Moscow in

connection with delivery of the development rights in the Tevreksi shopping center – see Note 7A(2)(k).

280



K. In March 2011, the Company signed an agreement with Africa Israel Properties, and with a third party, which joined together as a joint venture in order to submit a bid in a tender for financing, planning, constructing, operating and maintaining the training complex of the Israel Defense Forces in the South, under the PPP/PFI method, whereby Africa Israel Properties will provide to the construction contractor various services in connection with preparation and formulation of the bid in the tender.

L. In March 2011, the Company and Africa Residences signed two sale agreements, whereby

the Company will sell its rights in the Savyonei Netzer project in Nes Ziona and in the Savyonei Yam project in Kiryat Yam, as follows:

(1) The Company will sell to Africa Residences its rights in part of the real estate and will

assign it part of its rights and obligations in accordance with a number of agreements with respect to the same part of the real estate (including pursuant to a contracting agreement between the Company and Danya Cebus), on which the Savyonei Netzer residential project in Nes Ziona is located, in exchange for a consideration of about NIS 17.65 million plus VAT as per law (to be paid under conditions and in increments as provided in this agreement). It is noted that after transfer of the said real estate to Africa Residences and assignment of the agreements as stated, the Company will guarantee fulfillment of the liabilities to pay a Betterment assessment relating to this project, in accordance with the development agreement with the City and based on the sale contracts with any of the purchasers of the residential units in the Savyonei Netzer project, with respect to which the Company committed to them to provide a guarantee, as stated.

It is noted that the validity of this agreement is contingent on a number of

preconditions, namely, receipt of approval in-principle from the lending bank in the Savyonei Netzer project, receipt of approval in-principle from the Israel Lands Administration and receipt of the approvals required pursuant to Section 275 of the Companies Law.

(2) The Company will sell to Africa Residences its rights in the real estate in the Savyonei

Yam project in Kiryat Yam, in the construction rights in the commercial center in this project, and in the unutilized construction rights in this project as stated and, in addition, it will assign to Africa Residences its rights and obligations in a number of agreements with consultants and supervisors, as well as a contracting agreement in connection with the Savyonei Yam project, in exchange for a consideration of about NIS 16.217 million plus VAT as per law (to be paid under conditions and in increments as provided in this agreement). It is noted that to the extent it will be required and/or the matter is required under the experts agreement as stated above, the Company will guarantee vis-à-vis Africa Residences compliance with the liabilities under the agreements.

Entry of this agreement into effect is contingent on receipt of the approvals required

pursuant to Section 275 of the Companies Law.

As a result of completion of the two sale transactions as detailed in this section above (if completed), the Company’s cash flows will increase by the amount of about NIS 33.5 million.

281

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control

by Holding Company as at the Report Date Control Ownership % %

Contracting and Construction Danya Cebus Ltd. (3) (37) 73 73Cebus Rimon Industrial Construction Ltd. (18) 100 100Forma Projects Ltd. (18) 100 100Yovelim Personnel Ltd. (18) 100 100 Industry, Trade and Communications Africa Israel Trade & Agencies Ltd. 100 100 Africa Israel Energy Ltd. (37) 51 51 Africa Israel Industries Ltd. (3) 76.6 76.6 Packer Plada Industries Ltd. (9) 100 100 Negev Ceramics (3) (9) 74.2 74.2 Shlomo Rappaport & Co. Ltd. (116) 100 100 Negev Ceramics Marketing (1982) Ltd. (116) 100 100 Maklef 51 Ltd. (48) 50 50 Negev Ceramics Marketing Nazareth Ltd. (116) 50 50 Elgal Marketing Com Ltd. (48) 50.1 50.1 N.D.R. Design Ltd. (48) 50 50 P.L.H. Lighting Engineering Ltd. (117) 25 25 Packer YDPZ Steel Services Ltd. (117) 100 100 Tenma Packer International Ltd. 100 100 Packer YDPZ Metals Ltd. (45) 100 100 Packer YDPZ Profiles Ltd. (117) 100 100 Packer YDPZ Profiles Marketing Ltd. (47) 100 100 Packer YDPZ Galvan Works Ltd. (47) 100 100 Packer YDPZ Steel Dyke Ltd. (117) 100 100 Packer YDPZ Quality Steel Ltd. (43) 100 100 Negev Romania S.R.L. (48) 100 100 Novo Collection East USA Inc. (48) 50 50 Cloudwalk Holdings Ltd. (9) 65 65 Kos Gas (51) 100 100 Afukol Painting Services Ltd. (54) 100 100 Packer YDPZ Investments Ltd. (117) 100 100 Contact Ziwad Electronics Ltd. (117) 50 50 Packer Plada Investments (1963) Ltd. (9) 100 100 Packer Plada Trading (1981) Ltd. (9) 100 100 Earsfield Special Steels B.V. (9) 100 100 Earsfield Steels Limited (50) 100 100 N. Packer Ltd. (9) 100 100 Packer Plada Financing and Issuances (1982) Ltd. (42) 100 100 Imku YDPZ Industries Ltd. (117) 100 100 Apogy Metal LLC (31) 100 100

282




Industry, Trade and Communications (Cont.) Mapal Communications Ltd. (2) (37) 17 17 Africa Israel Communications Ltd. 50.1 50.1 Af-Ran Industries Ltd. (39) 100 100 4 Harbor Court, LLC (39) 100 100 Vash Telecanal Ltd. (2) 46 46.19 Marlaz Media (2001) Ltd. 100 100 Real Estate Development Africa Israel Residences Ltd. (3) (6) (18) 74.47 74.47 E.M.T. Neve Savyon Ltd. (4) 33 33.3 Renanot Enterprises & Investments Ltd. (4) 50 50 Afriram Ltd. (2) 40 40 Mishtalot Savyon Ltd. 21 21 Armon Hahagmon Ltd. (Kasar El-Motoran) (4) 50 50 Nazareth Church Commercial Center (2006) Ltd. (119) 63 63 Rental Properties Africa Israel Properties Ltd. (3) (6) 56 56 Kiryat Hamada Migdal Ha-Emek Ltd. (5) 100 100 Haifa Quarries Ltd. (2) 45 45 Af-Sar Ltd. (28) 100 100 Flamingo Ltd. (28) 100 100 Givat Savyon Ltd. (28) 85 85 One Half Jubilee Ltd. (28) 49 49 Cebus Rimon Building Industries and Development Ltd. 100 100 Mercaz Savyonim Management and Holdings Ltd. (28) 100 100 Lev Talpiot Management and Holdings Ltd. (38) 40 40 AFI Europe (Israel Branch) (105) 100 100 City Center (M.A.T.) Management Ltd. (Israel Branch) (49) 100 100 Financing Africa Israel (Finance) 1985 Ltd. 100 100 Africa Israel Financial Properties and Strategies Ltd. 100 100 Bat Savyon Ltd. 100 100 Africa Israel Investments House Ltd. 100 100 Africa Israel Issuances Ltd. (104) 100 100 Africa Israel Mutual Funds Management Ltd. (104) 100 100 Africa Israel Financial Products Ltd. (104) 100 100 Africa Israel Investments Portfolio Management Ltd. (104) 100 100 Hotels Africa Israel Tourism Holdings Ltd. 100 100 Africa Israel Hotels Ltd. 50 50

283




Infrastructure + BOT Derech Eretz Highways Management Corporation Ltd. (2) 24.5 24.5 Ma’arechot Derachim Mitkadmot Ltd. (2) 24.5 24.5 Ma’arechot Derachim Section 18 Ltd. (2) 24.5 24.5 Derech Betuha Bakevashim Ltd. (2) 24.5 24.5 Derech Hazafon Operation and Control Ltd. (2) 24.5 24.5 Netivei 431 Operation and Control Ltd. (2) 24.5 24.5 Netivei Hacarmel Systems and Operation Ltd. (2) 24.5 24.5 Advanced Solutions – Road Systems Ltd. (2) 24.5 24.5 Derech Eretz Construction Joint Venture Limited Partnership (4) (18) 33.3 33.3 Netivei Hayovel Ltd. (18) 100 100 Derech Eretz Joint Venture 18 (4) (18) 50 50 Danya Cebus Operator Ltd. (18) 100 100 Netivei Hayovel (Hasharon) Ltd. (18) 100 100 IBM Israel Metro Builders (18) 40 40 MTS Ltd. 20 20 A.L.A. Management and Operation (2005) Ltd. (4) 50 50 Foreign Investment Companies Africa Israel International Holdings Ltd. (10) 100 100 Africa Israel International Investments (1997) Ltd. (10) 100 100 Africa Israel International Properties (2002) Ltd. (28) 100 100 Danya International Holdings Ltd. (18) 100 100 The Netherlands Africa-Israel (East Europe) Investments B.V. – Financing (17) 100 100 A.I.E.E. Overschie B.V. – Real Estate (21) 100 100 Lentjee Holdings B.V. – Holdings (24) 100 100 AFI Europe B.V. (21) 100 100 AFI Wilanow Holdings (105) 100 100 AFI Properties Berlin B.V. (105) 70 70 AFI Properties Development B.V. (105) 70 70 AFI Properties Logistics B.V. (105) 70 70 AFI Properties B.V. (105) 70 70 Danya Dutch B.V. – Holdings (26) 100 100 AFI Europe Infrastructure (105) 100 100 AFI Europe Financing B.V. 100 100

284




Cyprus Bellgate Construction Ltd. – Holdings (16) 100 100 Flagaro Investment Ltd. (16) 100 100 AFI Development 54 54 Borenco Enterprises (16) 100 100 Olpek Holdings Ltd. (4) 50 50 Westec Four Winds Limited (4) (16) 50 50 Severus Trading Ltd. (16) 100 100 Talena Development Ltd. (16) 100 100 Scotson Ltd. (16) 100 100 Slytherin Development Ltd. (16) 100 100 AFI Ukraine Ltd. (16) 100 100 Keyiri Trade & Invest Ltd. (16) 100 100 Rognerstar Finance Ltd. (16) 100 100 Beslaville Management Ltd. (16) 95 95 Amakri Management Ltd. (57) 100 100 Jaquetta Investment Ltd. (57) 100 100 Hermieison Investments Ltd. (62) 100 100 Bioka Investments Ltd. (16) 90 90 Bastet Estates Ltd. (16) 100 100 Rubiosa Management Ltd. (16) 100 100 Sherzinger Ltd. 100 100 Amerone Development Ltd. (16) 100 100 Bundle Trading Ltd. (150) 100 100 Buidola Properties Ltd. (16) 100 100 Couplest Estates Ltd. (16) 100 100 Sorinios Estates Ltd. (16) 100 100 Grifasi Investments Ltd. (16) 100 100 Occuper Holdings Ltd. (62) 100 100 AFI Development Hotels Ltd. (16) 100 100 Timerox Ltd. (60) 100 100 Inscribe Ltd. (16) 100 100 Resienta Holdings Ltd. (17) 88 88 Hegemony Ltd. (16) 100 100 Faringer Enterprises Ltd. (105) 100 100 Contonceni Investments Ltd. (105) 100 100 AFIEM Cyprus Ltd. (105) 100 100 Danya Cebus Cyprus Ltd. (26) 100 100 Krusto Enterprises Limited (16) (26) 100 100 Rumbrol Trading Limited (26) 97.6 97.6

285




Russia Stroycapital LLC (8) 60 60 Stroyinkom k LLC (12) 100 100 Maystroy LLC (16) 100 100 Avtostoyanka Tverskaya Zastava LLC (16) 100 100 Crown Invest. LLC (16) 50 50 Tine Management LLC (16) 100 100 Tain Investment LLC (16) 100 100 Inzhstory AG LLC (16) 100 100 Incomstroy AG LLC (16) 100 100 Rapo LLC (95) 100 100 Pso Dorokhovo LLC (100) 100 100 Semprex LLC (16) 100 100 Ultrainvest LLC (96) 100 100 Ultrastory LLC (96) 100 100 Aristeya LLC (97) 100 100 MKPK JSC (97) 98.8 98.8 Lessy Prof LLC (16) 100 100 Corin Development (16) 100 100 Ozerkovka LLC (98) 100 100 Armamd JSC (99) 100 100 Bizar LLC (16) 74 74 Volga Land Development LLC (98) 100 100 Christall Development LLC (16) 100 100 Volga Stroyinkom Development LLC (98) 100 100 North Investments LLC (12) 100 100 Favorit LLC (89) 100 100 Fima Gloria JSC (92) 100 100 Nordservice LLC (90) 90 90 KO Project LLC (87) 100 100 Titon LLC (86) 100 100 Zheldoruslugi LLC (101) 95 95 Izdatesltvo Nedra JSC (102) 90.17 90.17 Stroyincom Ecologiya LLC (35) 100 100 Real Project LLC (101) 95 95 AFI RUS LLC (16) 100 100 MTOK CJSC (91) 99.38 98.38 UMM “Stroyenergomekhanizatsiya” JSC (86) 100 100 AFI Region (12) 100 100 AFI Rus Management LLC (12) 100 100 Region k LLC (Kislovodosk) (36) 99 99 Kama Gate LLC (106) 50 50 AFI Rus Parking Management (58) 99 99 Extraplus LLC (56) 100 100 Danya Cebus Rus (27) 100 100 Danya Cebus PM (107) 100 100

286




Hungary AFI Europe Hungary Kft (105) 100 100 Pro-Mot Hungaria Kft (81) 50 50 Szeplinget Kft (105) 100 100 Akar-Lak (105) 100 100 Luxembourg AFI (East-Central Europe) Developments Sarl (17) 100 100 BVI Intrastar International Ltd. (105) 53.7 53.7 Galway Consolidated Ltd. (44) 53.7 53.7 Bugis Finance Ltd. (102) 100 100 Ropler Engineering Ltd. (16) 100 100 AFI D Finance Ltd. (16) 100 100 LL Avia Management Ltd. (400) 100 100 Serbia and Montenegro Airport City Belgrade d.o.o. (55) 53.7 53.7 Airport City Property Management d.o.o. (120) 53.7 53.7 Czech Republic AFI Europe Czech Republic s.r.o. (105) 100 100 M.I.C.C. Prague s.r.o. (105) 64 64 Adut s.r.o. (105) 63 63 Broadway Creseus s.r.o. (105) 100 100 Flora – Sen s.r.o. (81) 50 50 Balabenka s.r.o. (105) 100 100 Praha – Jeruzalem s.r.o. (105) 100 100 Tulipa City s.r.o. (105) 100 100 Bohemia – Sen s.r.o. (105) 100 100 National Technological Park (81) 50 50 Classic 7 s.r.o. (61) 100 100 Tulipa Modranska Rokle s.r.o. – Residential (105) 100 100 Tulipa Rokytka s.r.o. – Residential (105) 100 100 Tulipa Vokovice s.r.o. – Residential (105) 100 100 Poland Novo Maar SP. Z.O.O. (105) 100 100 Czerwone Maki Project SP. Z.O.O. (105) 100 100 Wilanow One SP. Z.O.O. (85) 30 30 AFI Management SP. Z.O.O. (105) 100 100

287




Bulgaria AFI Europe Bugaria EOOD (105) 100 100 Vitosha Gardens EOOD (105) 100 100 Malina Gardens EOOD (105) 100 100 AFI Lagera Tulip EOOD (105) 100 100 Plovdiv Logistic Center EOOD (105) 75 75 Business Park Varna AD (105) 100 100 Premium Property Management EOOD 100 100 Rumania Controceni Park S.A. (82) 98 98 Star Estate SRL (105) 100 100 Europe Logistic (105) 100 100 AFI Europe Management SRL (105) 100 100 ROI Management SRL (105) 100 100 Premier Solution & Team SRL (105) 100 100 Tulip Management SRL (105) 100 100 Plaza Arad Imobiliar SRL (105) 100 100 Danya Cebus Rom (29) 100 100 Veroskip Trading (105) 100 100 King Garden SRL (105) 100 100 Latvia AFI Management SIA (105) 100 100 AFI Investment SIA (105) 100 100 A.R. Holdings SIA (14) 100 100 B.R. Holdings SIA (105) 100 100 Anninmuizas IPASUMS SIA (84) 100 100 Germany AFI Germany GmbH (105) 100 100 AFI Germany Investment GmbH (105) 100 100 Harel Grundstucks GmbH (13) 49 49 Peerly Grundstucks GmbH (11) 49 49 Margalit Grundstucks GmbH (20) 49 49 Margalit Teltower Damm Grundstucks GmbH (15) 49 49 The Ukraine Or Avner LLC (108) 100 100 ABG Sozidatel (103) 100 100 Budinkom LLC (155) 100 100 AFI DS 1 LLC (57) 60 60 AFI DS 2 LLC (57) 93 93 AFI DS 3 LLC (57) 93 93

288




United States Savyon L.P. (31) 49 49 A.I. Holdings (USA) Corp. (30) 100 100 A.I. Properties and Development (USA) Corp. (46) 100 100 W Squared Managers LLC (32) 65 65 60 Spring Street LLC (64) 65 65 Spring Lafayette LLC (32) 65 65 20 Pine Street LLC (67) 100 100 20 Pine Street Managers LLC (67) 50 50 35 Front Street LLC (32) 52 52 84 Front Street LLC (32) 67 67 84 Front Street Management LLC (32) 65 65 15 Broad LLC (32) 65 65 15 Broad Street LLC (65) 100 100 15 Broad Street Managers LLC (32) 65 65 Empire Stores LLC (33) 49 49 Gowanus Village I LLC (53) 67 67 Gowanus Village II LLC (53) 67 67 85 Adams LLC (32) 70 70 Africa Israel of Florida LLC (72) 100 100 Contralto LLC (73) 100 100 159 NE 7th Avenue LLC (73) 100 100 Baritone LLC (73) 100 100 Tech Garage LLC (73) 100 100 Symphony II LLC (77) 100 100 LB Herald Ventures LLC (72) 65 65 Scribe LLC (115) 50 50 Park Fifth Associates LLC (118) 60 60 Leviev Fulton Club LLC (111) 50 50 LFC Mezz LLC (111) 50 50 AI Fulton LLC (32) 100 100 HRPV-I LLC (109) 17.5 17.5 HRP Myrtle Beach Partners LLC (110) 17.5 17.5 HRP Myrtle Beach Holdings LLC (112) 92.5 92.5 HRP Myrtle Beach Operations LLC (113) 100 100 23 Wall Commercial Owners LLC (32) 65 65 Brickell Park Garage LLC (73) 100 100 Brickell Ridge LLC (73) 100 100 Olympia Florida LLC (77) 100 100 Seagull Garage LLC (73) 100 100 Prime Garage LLC (73) 100 100 Eagle Garage LLC (73) 100 100 Tenor LLC (73) 100 100 Liberty Garage LLC (73) 100 100 Arena Garage LLC (73) 100 100 Internet Garage LLC (73) 100 100

289




United States (Cont.) Liberty II Garage LLC (73) 100 100 Market Garage LLC (73) 100 100 Independence Garage LLC (73) 100 100 Brickell Park Garage I LLC (73) 100 100 Brickell Park Garage II LLC (73) 100 100 Brickell Corridor LLC (73) 100 100 1680 Meridian Avenue LLC (73) 100 100 AI 23 Wall Street Managers LLC 100 100 19 N.E. 9th Street LLC (73) 100 100 N.E. Tenth Street LLC (73) 100 100 Irene Garage LLC (73) 100 100 Africa Israel Marquis Developers LLC (73) 100 100 Wall Street Commercial Owners LLC (32) 100 100 14 Wall Street Holdings 1 LLC (69) 100 100 Spring Street Commercial Owners LLC (32) 100 100 14 Wall/Spring Mezz LLC (70) 100 100 14 Wall/Spring Street LLC (71) 100 100 L.B. Broad Lessees LLC (32) 65 65 Broad Street Lessors LLC (40) 65 65 AI Broad Lessors LLC (1) (7) 65 65 AI Florida Holdings Inc. (46) 100 100 N.E. Miami Court LLC (54) 100 100 Block 42 Acquisition LLC (73) 100 100 Africa Israel Vitri Developers LLC (73) 100 100 Africa Israel Soleil Developers LLC (73) 100 100 Africa Israel Performing Arts Complex (73) 100 100 AI Nevada Holdings, Inc. (46) 100 100 AILA Corp. (46) 100 100 Afrinam LLC (80) 80.75 80.75 AI 229 West 43rd Street Member (32) 100 100 AI FM 229 West 43rd Street JV Holdings (41) 50.1 50.1 AI 229 West 43rd Street Senior Mezzanine LLC (52) 50.1 50.1 AI 229 West 43rd Street Property Owner LLC (19) 50.1 50.1 AI Spring Clock LLC (83) 100 100 AI Clock LLC (88) 100 100 AI Apthorp (32) 100 100 Apthorp Management LLC (79) 50 50 Apthorp Holdings LLC (78) 50 50 Apthorp Mezzanine LLC (78) 20 20 Apthorp Associates LLC (78) 20 20 AI Broad Corp. 100 100 Broad Street San Francisco LLC (75) 50 50 AI Nevada Holdco LLC (74) 100 100 AI Nevada TIC, LLC (76) 100 100 AI Arizona Inc. (46) 100 100

290




United States (Cont.) AI Phoenix, LLC (68) 100 100 AI – B.S.R., LLC (63) 50 50 85 Adams Street (66) 100 100 85 Adams Street Managers (32) 70 70 Africa Israel 1101 Brickell LLC 100 100 Africa Israel Eleven Biscayne LLC (77) 100 100 AI Gowanus Village (32) 100 100 AI 88 Leonard LLC (32) 100 100 AI W Squared LLC (32) 100 100 AI 23 Wall Street LLC (32) 100 100 AFI Management Company 100 100 Africa Israel Marquis Managers LLC 100 100 Leonard Holdings LLC (88) 100 100 AI Properties 23 Wall Manager 100 100 AI Properties 23 Wall Owners 100 100

(1) Subsidiary of Broad Street Lessors LLC. (2) Associated company, the investment in which is included on the equity basis. (3) The shares of this company are traded on the Tel-Aviv Stock Exchange. (4) Companies under joint control presented on the equity basis. (5) Subsidiary of Givat Savyon Ltd. (6) The debentures of this company are traded on the Tel-Aviv Stock Exchange. (7) Subsidiary of AI Properties and Developments (USA) Corp (64%) and AI Broad Corp (1%). (8) Subsidiary of Robiosa Management Ltd. (9) Subsidiary of Africa Industries Ltd. (10) Holds international companies operating overseas. (11) Held by AFI Properties B.V. (12) Subsidiary of Borenco Enterprises Ltd. (13) Held by AFI Properties Logistics B.V. (14) Subsidiary of AFI Investment SIA (15) Held by AFI Properties Development B.V. (16) Subsidiary of AFI Development Ltd. (17) Subsidiary of Africa Israel International Holdings Ltd. (18) Subsidiary of Danya Cebus Ltd. (19) Investee company of AI 229 West 43rd Street Senior Mezzanine LLC Ltd. (20) Held by AFI Properties Berlin B.V. (21) Subsidiary of Africa Israel International Properties (2002) Ltd. (22) Proportionately consolidated company of Africa Israel International Investments (1997) Ltd. (23) Subsidiary of Africa Israel (East Europe) Investments BV. (24) Subsidiary of AFI (East – Central Europe) Developments sarl. (25) Subsidiary of Lentjee B.V. (26) Subsidiary of Danya International Holdings. (27) Subsidiary of Rumbrol Trading Limited.

291


(28) Subsidiary of Africa Israel Properties Ltd. (29) Subsidiary of Danya Dutch B.V. (30) Subsidiary of Africa Israel International Investments (1997) Ltd. (31) Held by Cloudwalk Holdings Ltd. (32) Subsidiary of A.I. Properties and Developments (USA) Corp. (33) Associated company of A.I. Properties and Developments (USA) Corp. (34) Subsidiary of Broad Street Lessors LLC. (35) Subsidiary of Olpek Ltd. (36) Subsidiary of Stroyinkom k. (37) Held through the Company and through Africa Israel Trade and Agencies Ltd. (38) Associated company of Flamingo Ltd. (39) Held by Africa Israel Communications Ltd. (40) Subsidiary of AI Properties and Developments (USA) Corp (64%) and AI Broad Corp (1%). (41) Held by AI FM 229 West 43rd Street JV Holdings LLC (42) Subsidiary of Packer & Packer Ltd. (43) Subsidiary of Packer YDPZ Steel Dyke Ltd. (44) Subsidiary of Intrastar International Ltd. (45) Subsidiary of Packer YDPZ Steel Services Ltd. (46) Subsidiary of Africa Israel (USA) Corp. (47) Subsidiary of Packer YDPZ Profiles Ltd. (48) Investee company of Negev Ceramics Marketing (1982) Ltd. (49) Subsidiary of Haifa Quarries Ltd. (50) Subsidiary of Earsfield Special Steels B.V. (51) Subsidiary of Earsfield Steels Limited (52) Held by AI FM 229 West 43rd Street JV Holdings LLC. (53) Subsidiary of AI & Boymelgreen Gowanus LLC. (54) Subsidiary of Packer YDPZ Galvanizing Factories. (55) Subsidiary of Intrastar International Ltd. (85%) and Galway Consolidated Ltd. (15%) (56) Subsidiary of Hegemony Ltd. (57) Subsidiary of AFI Ukraine Limited. (58) Subsidiary of Inscribe Ltd. (59) Subsidiary of Africa Israel Financial Properties and Strategies Ltd. (60) Subsidiary of Beslaville Management Ltd. (61) Subsidiary of Faringer Enterprises Ltd. (62) Subsidiary of Grifasi Investment Ltd. (63) Subsidiary of AI Phoenix LLC. (64) Subsidiary of Spring – Lafayette LLC. (65) Subsidiary of 15 Broad Street Managers LLC. (66) Subsidiary of 85 Adams Street Managers LLC. (67) Subsidiary of 20 Pine Street Managers LLC. (68) Subsidiary of AI Arizona Inc. (69) Subsidiary of 14 Wall Street Mezz LLC. (70) Subsidiary of Spring Street Commercial Owners LLC. (71) Subsidiary of 14 Wall / Spring Mezz LLC. (72) Subsidiary of AI Florida Holdings Inc. (73) Subsidiary of Olympia Florida LLC. (74) Subsidiary of AI Nevada Holdings Inc. (75) Held by AI Broad Corp. (76) Subsidiary of AI Nevada Holdco LLC. (77) Subsidiary of Africa Israel of Florida LLC.

292


(78) Held by Apthorp Management, LLC. (79) Held by AI Apthorp, LLC. (80) Proportionately consolidated company of AILA Corp. (81) Investee company of AFI Europe N.V. (82) Subsidiary of Controceni Investment Ltd. (83) Held directly and indirectly by 14 Wall\Spring Mezz, LLC. (84) Subsidiary of B.R. Holdings SIA. (85) Held by AFI Wilanow Holdings B.V. (86) Subsidiary of Rognerstar Finance Ltd. (87) Subsidiary of Buildola Properties Ltd. (88) Subsidiary of 14 Wall Street Holdings 1, LLC. (89) Subsidiary of Keyiri Trade & Invest Ltd. (90) Subsidiary of Bioka Investments Ltd. (91) Subsidiary of Bundle Trading Ltd. (92) Subsidiary of Hermielson Investments Ltd. (94) The shares of this company are traded on a stock exchange in New York. (95) Held by Ultrainvest, Ultrastroy, Inzhstroy LLC. (96) Subsidiary of Slytherin Development Ltd. (97) Subsidiary of Severus Trading Ltd. (98) Subsidiary of Christall Development LLC. (99) Subsidiary of Maystroy LLC. (100) Subsidiary of Extraplus LLC. (101) Subsidiary of Beslavile Management Ltd. (102) Subsidiary of Talena Development Ltd. (103) Held by LLC OR AVNER (104) Held by Africa Israel Investments House Ltd. (105) Held by AFI Europe N.V. (106) Investee company of Krusto Enterprises Limited. (107) Subsidiary of Danya Cebus Cyprus Ltd. (108) Held by Amakri Management Ltd. and Jaquetta Investments Ltd. (109) Associated company of AI Myrtle Beach LLC. (110) Subsidiary of HRPV-I. (111) Held by AI Fulton LLC. (112) Subsidiary of by HRP Myrtle Beach Partners LLC. (113) Held by HRP Myrtle Beach Holdings LLC. (114) Held by LBN Management LLC. (115) Held by LB Herald Venture LLC. (116) Held by Negev Ceramics Ltd. (117) Held by Packer Plada Industries Ltd. (118) Subsidiary of Afrinam LLC. (119) Subsidiary of Armon Hahagmon (Caesar of Mutran) Ltd. (120) Held by Airport City Belgrade d.o.o.

africa israel investments ltd

Documents