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Africa Israel Investments Ltd.

Consolidated Financial Statements

At December 31, 2015

Africa Israel Investments Ltd. Consolidated Financial Statements At December 31, 2015

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 – 10

Consolidated Statements of Cash Flows 11 – 12

Notes to the Financial Statements 13 – 270

Appendix – List of Group Companies 271 – 280

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, 2015. 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 and investment property under construction; (4) controls over inventory of land and buildings held for sale; (5) controls over other inventory; (6) controls over sales and trade receivables; and (7) controls over management and control of projects in process (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, reaching 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, 2015.

We have also audited, in accordance with generally accepted auditing standards in Israel, the Company‟s consolidated financial statements as at December 31, 2015 and 2014 and for each of the three years the last one of which ended on December 31, 2015 and our report, dated March 28, 2016, included an unqualified opinion on those financial statements, based on our audits and the reports of the other auditors, as well as a direction of attention, as stated below:

A. That stated in Note 1B to the financial statements regarding the Company‟s financial position in light of the situation of the Russian economy and the impacts thereof on the Company‟s activities. There is uncertainty regarding the Company‟s ability to orderly and/or timely execute its business plans in connection with obtaining the cash it needs for payment of its liabilities. These plans include, among other things, selling real-estate assets, realizing investments in investee companies and receiving dividends, which do not depend solely on the Company and require obtaining consents of third parties. These factors, together with a negative net asset value in a significant amount (based on the present market values of the Company‟s marketable holdings plus the book value of its other assets and less its liabilities) along with additional factors detailed in the above-mentioned Note, raise significant doubts the continued existence of the Company as a “going concern”. In the financial statements, no adjustments were made with respect to the value of the assets and liabilities and the classification thereof, which may be required if the Company is not able to continue operating as a “going concern”.

B. That stated in Note 2F to the financial statements regarding correction of an error found in the subsidiary, Africa Israel Industries Ltd., as a result of which the Company restated its financial statements as at December 31, 2014, 2013 and 2012 and for each of the years ended on those dates, in order to retroactively reflect therein the impact of the correction of the said error.

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

March 28, 2016 2

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, 2015 and 2014, and the consolidated statements of income, comprehensive income, changes in shareholders‟ equity, and cash flows for each of the three years in the period ended on December 31, 2015. 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 consolidated subsidiaries and joint ventures, whose assets constitute about 1% and about 2% of the total consolidated assets as at December 31, 2015 and 2014 respectively, and whose revenues constitute about 1%, about 3% and about 3% of the total consolidated revenues for the years ended on December 31, 2015, 2014 and 2013, respectively. In addition, we did not audit the financial statements of investee companies and jointly controlled entities accounted for using the equity method of accounting, the investment in which totaled about NIS 7,194 thousand and about NIS 135,308 thousand, as at December 31, 2015 and 2014, respectively, and the Group‟s share in their income (losses) was about NIS 23,234 thousand, about NIS 8,062 thousand and about NIS (22,090) thousand for the years ended December 31, 2015, 2014 and 2013, 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 the 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, 2015 and 2014, and the results of their operations, the changes in the shareholders‟ equity and their cash flows, for each of the three years in the period ended on December 31, 2015, in accordance with International Financial Reporting Standards (IFRS) and the provisions of the Securities Regulations (Annual Financial Statements), 2010.

Without qualifying our above-mentioned opinion, we direct attention to that stated below:

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, 2015, and our report dated March 28, 2016 included an unqualified opinion with respect to the effective maintenance of those internal control components.

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

March 28, 2016

Africa Israel Investments Ltd. Consolidated Statements of Financial Position In Thousands of New Israeli Shekels

At December 31 Note 2015 2014

Current Assets

Cash and cash equivalents 5 1,275,202 1,339,170 Short-term investments 6 443,210 790,479 Marketable securities 7 294,266 151,245 Trade receivables 8 1,107,239 *1,111,264 Other receivables and debit balances, including financial derivatives 8 365,829 *447,751 Income taxes receivable 38,229 *36,395 Inventory of buildings held for sale 9 2,488,512 2,085,093 Other inventories 10 513,234 *553,692 Assets held for sale 11 264,213 26,849 6,789,934 6,541,938 ------

Non-Current Assets

Investments in investee companies accounted for using the equity method of accounting 13 368,712 488,832 Loans to investee companies 37D 351,304 **383,005 Property, plant and equipment 14 1,075,230 1,205,502 Investment property 15 8,482,820 10,741,698 Investment property under construction 15 2,070,025 2,433,715 Long-term loans, investments and other debit balances 16 92,764 158,414 Inventory of real estate 1,922,918 1,878,280 Intangible assets 17 151,190 148,675 Excess of assets over liabilities in respect of employee benefits 1,630 1,477 Deferred tax assets 30 115,239 *104,557 14,631,832 17,544,155 ------

21,421,766 24,086,093

* Restated – see Note 2F. ** Reclassified – see Note 2I(1).

______Lev Leviev Avraham Novogrocki Menashe Sagiv Chairman of the Board of Directors CEO CFO

Approval date of the financial statements: March 28, 2016

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

Africa Israel Investments Ltd. Consolidated Statements of Financial Position In Thousands of New Israeli Shekels

At December 31 Note 2015 2014

Current Liabilities

Debentures 18 371,146 365,966 Short-term credit from banks and others 18 3,599,720 3,627,956 Contractors and suppliers 19 904,273 **799,840 Other payables and credit balances, including financial derivatives 20 559,918 *573,392 Income taxes payable 135,193 *96,613 Advances from customers 21 1,482,903 *1,123,872 Provisions 22 480,043 457,192 7,533,196 7,044,831 ------

Long-Term Liabilities

Debentures 18 4,229,282 4,118,414 Liabilities to banks 18 4,419,771 4,597,062 Other liabilities 18 639,119 884,407 Excess of losses over investments in investee companies accounted for using the equity method of accounting 13 4,245 **1,359 Employee benefits 17,960 19,000 Liabilities for deferred taxes 30 661,199 *965,389 9,971,576 10,585,631 ------

Equity 31

Share capital 384,867 384,866 Premium on shares 4,492,059 4,492,044 Capital reserves (2,125,483) *(2,225,994) Retained earnings (1,432,645) *315,855 Total equity attributable to the owners of the Company 1,318,798 2,966,771 Non-controlling interests 2,598,196 *3,488,860 Total equity 3,916,994 6,455,631 ------

21,421,766 24,086,093

* Restated – see Note 2F. ** Reclassified – see Note 2I(1).

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

Africa Israel Investments Ltd. Consolidated Statements of Income In Thousands of New Israeli Shekels (unless stated otherwise)

For the Year Ended December 31 Note 2015 2014 2013 Revenues Construction and real estate transactions 3,212,497 2,978,859 3,193,070 Rental and operation of properties 687,582 862,476 840,704 Industry 1,739,174 *1,812,460 *1,991,960 Other activities 44,101 54,695 76,497 Share in income of investee companies accounted for using the equity method of accounting, net 13 36,272 – – Increase in fair value of investment property, net 15 – 570,737 384,798 Increase in fair value of investment property under construction, net 15 – – 220,776 Other income 23 63,115 56,232 300,183 5,782,741 6,335,459 7,007,988 ------Cost and expenses Construction and real estate transactions 24 2,971,847 2,773,938 2,928,392 Update of provision for decline in value of inventory of land and buildings, net 75,739 41,149 50,113 Maintenance, supervision and management of real estate and properties 25 151,643 215,580 257,592 Impairment in value of investment property, net 15 1,044,851 – – Impairment in value of investment property under construction, net 15 390,808 750,744 – Industry 26 1,735,036 *1,738,843 *1,861,468 Other activities 32,654 43,479 69,001 Share in losses of investee companies accounted for using the equity method of accounting, net 13 – 15,061 24,903 Administrative and general expenses 28 230,627 *276,181 257,192 Amortization of intangible assets and other expenses 27 97,576 99,302 98,620 6,730,781 5,954,277 5,547,281 ------

Operating income (loss) (948,040) 381,182 1,460,707 ------

Financing expenses 29 (1,646,384) (1,746,259) (1,279,040) Financing income 29 56,652 257,726 138,282 Financing expenses, net (1,589,732) (1,488,533) (1,140,758) ------

Operating income (loss) before taxes on income (2,537,772) (1,107,351) 319,949

Tax benefit (taxes on income) 30 234,399 *14,905 *(200,383)

Net income (loss) for the year (2,303,373) (1,092,446) 119,566

Allocated to: The owners of the Company (1,751,940) *(848,736) *(98,361) Holders of non-controlling interests (551,433) *(243,710) *217,927 Net income (loss) for the year (2,303,373) (1,092,446) 119,566

Loss per share* 32

Basic and diluted loss per share (in NIS) (8.52) *(4.41) *(0.60)

* Restated – see Note 2F.

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

Africa Israel Investments Ltd. Consolidated Statements of Comprehensive Income In Thousands of New Israeli Shekels

For the Year Ended December 31 2015 2014 2013

Net income (loss) for the year (2,303,373) *(1,092,446) *119,566 ------

Components of other comprehensive income (loss) that after the initial recognition in the statement of comprehensive income were or will be transferred to the statement of income

Foreign currency translation differences in respect of foreign activities (387,679) (4,553) (696,344)

Foreign currency translation differences in respect of foreign activities recorded in the statement of income – – 114,153

Realization of capital reserve in respect of acquisition in stages – – (14,309)

Change in fair value of cash flow hedging instruments, net of tax 6,149 (9,390) 22,004

Realization of capital reserve in respect of translation differences relating to foreign activities, net of tax (see Note 4A(1) ) 384,701 – –

Realization of capital reserve in respect of a cash flow hedge due to sale of investee company – 9,624 –

Total other comprehensive income (loss) for the year that after the initial recognition in the statement of comprehensive income was or will be transferred to the statement of income, net of tax 3,171 (4,319) (574,496) ------

Components of other comprehensive income (loss) that will not be transferred to the statement of income

Re-measurement of defined benefit plan 1,125 (981) (2,115)

Total other comprehensive income (loss) for the year that will not be transferred to the statement of income, net of tax 1,125 (981) (2,115) ------

Total comprehensive loss for the year (2,299,077) (1,097,746) (457,045)

Total comprehensive loss allocated to: The owners of the Company (1,581,603) *(843,318) *(463,684) Holders of non-controlling interests (717,474) *(254,428) *6,639 Total comprehensive loss for the year (2,299,077) (1,097,746) (457,045)

* Restated – see Note 2F.

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

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 Capital transactions reserve with from holders of Premium cash Other non- Non- Share on flow capital Translation controlling Retained controlling Total capital shares hedges reserves adjustments interests earnings Total interests equity In Thousands of New Israeli Shekels

For the year ended December 31, 2015

Balance at January 1, 2015 384,866 4,492,044 (9,188) 24,444 (1,773,972) *(467,278) *315,855 2,966,771 *3,488,860 6,455,631

Total comprehensive loss for the year Loss for the year – – – – – – (1,751,940) (1,751,940) (551,433) (2,303,373) Other comprehensive income (loss) for the year, net of tax – – 2,970 – 166,231 – 1,136 170,337 (166,041) 4,296 Total comprehensive loss for the year – – 2,970 – 166,231 – (1,750,804) (1,581,603) (717,474) (2,299,077)

Transactions with owners recorded directly to equity Issuance of ordinary shares and options for ordinary shares, net 1 15 – – – – – 16 – 16 Share-based payments (net of tax) – – – – – – 149 149 7,477 7,626 Options for shares of subsidiaries that expired – – – – – – 1,275 1,275 (2,693) (1,418) Exercise of options for shares of subsidiaries – – – – – – 880 880 (850) 30 Dividend paid to holders of non-controlling interests – – – – – – – – (100,663) (100,663) Acquisition of non-controlling interests (see Note 12B) – – – – – (68,690) – (68,690) (76,461) (145,151) Balance at December 31, 2015 384,867 4,492,059 (6,218) 24,444 (1,607,741) (535,968) (1,432,645) 1,318,798 2,598,196 3,916,994

* Restated – see Note 2F.

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

Africa Israel Investments Ltd. Statements of Changes in Shareholders‟ Equity In Thousands of New Israeli Shekels

For the year ended December 31, 2014

Balance at January 1, 2014 380,647 4,191,341 (8,343) 24,444 (1,780,978) (469,775) *1,163,860 3,501,196 *3,768,656 7,269,852

Total comprehensive loss for the year Loss for the year – – – – – – *(848,736) (848,736) *(243,710) (1,092,446) Other comprehensive income (loss) for the year, net of tax – – (845) – 7,006 – (743) 5,418 (10,718) (5,300) Total comprehensive loss for the year – – (845) – 7,006 – (849,479) (843,318) (254,428) (1,097,746)

Transactions with owners recorded directly to equity Conversion of loan into equity of subsidiary – – – – – – – – 86 86 Issuance of ordinary shares and options for ordinary shares, net 4,219 300,703 – – – – – 304,922 – 304,922 Sale of shares of subsidiary – – – – – *2,182 – 2,182 *20,037 22,219 Share-based payments (net of tax) – – – – – – 398 398 17,776 18,174 Options for shares of subsidiaries that expired – – – – – – 761 761 (761) – Exercise of options for shares of subsidiaries – – – – – – 315 315 (303) 12 Dividend paid to holders of non-controlling interests – – – – – – – – (57,227) (57,227) Acquisition of non-controlling interests – – – – – 315 – 315 (4,976) (4,661) Balance at December 31, 2014 384,866 4,492,044 (9,188) 24,444 (1,773,972) (467,278) 315,855 2,966,771 3,488,860 6,455,631

* Restated – see Note 2F.

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

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 Capital transactions reserve Revaluation with from reserve holders of Premium cash Other for non- Non- Share on flow capital Translation acquisition controlling Retained controlling Total capital shares hedges reserves adjustments in stages interests earnings Total interests equity In Thousands of New Israeli Shekels

For the year ended December 31, 2013

Balance at January 1, 2013 377,746 3,976,642 (18,336) 24,444 (1,414,766) 8,595 (465,963) *1,261,977 3,750,339 *3,738,360 7,488,699

Total comprehensive income (loss) for the year Income (loss) for the year – – – – – – – *(98,361) (98,361) *217,927 119,566 Other comprehensive loss for the year, net of tax – – 10,620 – (366,212) (8,012) – (1,719) (365,323) (211,288) (576,611) Total comprehensive income (loss) for the year – – 10,620 – (366,212) (8,012) – (100,080) (463,684) 6,639 (457,045)

Transactions with owners recorded directly to equity Conversion of loan into equity of subsidiary – – – – – – – – – 11,909 11,909 Issuance of ordinary shares and options for ordinary shares, net* 2,900 214,596 – – – – – – 217,496 – 217,496 Exercise of options for Company shares 1 103 – – – – – – 104 – 104 Exercise of options for shares of subsidiaries – – – – – – – 1,038 1,038 (1,023) 15 Sale of shares of subsidiary – – – – – – (1,605) – (1,605) 18,332 16,727 Share-based payments (net of tax) – – – – – – – 925 925 21,845 22,770 Dividend paid to holders of non-controlling interests – – – – – – – – – (21,028) (21,028) Acquisition of non-controlling interests – – (627) – – (583) (2,207) – (3,417) (6,378) (9,795) Balance at December 31, 2013 380,647 4,191,341 (8,343) 24,444 (1,780,978) – (469,775) 1,163,860 3,501,196 3,768,656 7,269,852

* Restated – see Note 2F.

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

Africa Israel Investments Ltd. Consolidated Statements of Cash Flows In Thousands of New Israeli Shekels

For the Year Ended December 31 2015 2014 2013

Cash flows from operating activities Net income (loss) for the year (2,303,373) *(1,092,446) *119,566 Adjustments: Share in losses (income) of investee companies accounted for using the equity method of accounting (36,272) 15,061 24,903 Gain from decline in rate of holdings and sale of investee companies (39,101) (5,866) (126,886) Loss on sale of financial assets in investee companies – – 37,858 Depreciation and amortization and decline in value of property, plant and equipment 131,250 114,813 81,897 Update of provision for decline in value of inventory of land and buildings 75,739 41,149 50,113 Decline in value of investments, net 23,631 1,863 4,612 Change in fair value of investment property, net 1,044,851 (570,737) (384,798) Change in fair value of investment property under construction, net 390,808 750,744 (220,776) Gain on business combination – – (22,820) Capital gains on sale of property, plant and equipment and investment property, net (102) (1,530) (97,515) Share-based payments 7,626 18,174 22,770 Loss (gain) from marketable securities, net (6,581) 3,812 4,869 Taxes on income recognized in the statement of income (234,399) *(14,905) *200,383 Change in respect of put options to holders of non-controlling interests – – (439) Financing expenses, net 1,594,973 1,479,090 1,133,809 Change in inventory real estate (344,055) **(343,773) **(348,551) Change in long-term debt – – 224 Change in inventory of buildings held for sale (91,061) (62,159) 339,221 Change in other inventories 39,819 *1,799 *18,727 Change in trade receivables and other receivables and debits 33,998 *21,861 *(95,895) Change in contractors, trade payables and other payables and credits 112,875 *46,914 *(191,226) Change in advance deposits from customers 411,628 *353,221 121,031 Change in provisions and employee benefits 26,614 16,049 96,033 Income taxes paid, net (53,890) (23,598) (54,675)

Net cash provided by operating activities 784,978 749,536 712,435 ------

* Restated – see Note 2F. ** Retroactive adjustment in respect of change of accounting policy – see Note 2J.

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

Africa Israel Investments Ltd. Consolidated Statements of Cash Flows In Thousands of New Israeli Shekels

For the Year Ended December 31 2015 2014 2013 Cash flows from investing activities Initial consolidation of subsidiaries 236 – (796,817) Income tax paid on sale of properties and investee companies (6,702) (18,832) (9,394) Investment in associated and other companies (11,554) (15,473) (36,394) Repayment (provision) of loans to associated companies, net 6,972 (29,741) 57,704 Investment in intangible assets (14,406) (18,059) (18,235) Proceeds from sale of shares of investee companies and return of investment 185,852 136,937 25,219 Investment in investment property and investment property under construction (673,670) (750,603) (552,920) Investment in property, plant and equipment (49,451) (215,248) (203,944) Proceeds from sale of property, plant and equipment 1,210 48,719 3,942 Proceeds from sale of investment property, net 362,422 148,485 471,920 Investment in long-term deposits and loans (13,406) (99,504) (12,297) Repayment of long-term deposits and loans 9,934 3,247 26,242 Acquisition of marketable securities (199,801) (7,815) (272,033) Sale of marketable securities 60,415 247,087 206,348 Dividends received 21,509 34,459 25,235 Interest received 33,691 39,026 38,695 Short-term investments, net 421,690 (507,215) 70,852 Net cash provided by (used in) investing activities 134,941 (1,004,530) (975,877) ------Cash flows from financing activities Interest paid (751,322) (778,245) (790,236) Dividend paid to holders of non-controlling interests (100,663) (57,227) (21,028) Acquisition of non-controlling interests (146,444) (4,661) (8,370) Issuance of capital to the owners of the Company less issuance expenses 30 305,927 217,496 Sale of put option of holders of non-controlling interests – – (9,555) Issuance of options for debentures – 15,520 – Dividend paid to the shareholders (10) – – Proceeds from sale of options for shares of shares of the Company and subsidiaries 16 12 119 Proceeds from sale of shares in subsidiary – 22,219 16,727 Repayment of derivative instrument exercised (5,884) (2,571) – Receipt of long-term loans, and liabilities and issuance of debentures 1,711,116 3,265,427 2,611,521 Repayment of long-term loans, debentures and liabilities (1,573,744) **(2,612,409) **(1,367,452) Short-term credit, net (100,283) 52,872 (688,274) Net cash provided by (used in) financing activities (967,188) 206,864 (39,052) ------Decrease in cash and cash equivalents (47,269) (48,130) (302,494) Cash and equivalents at the beginning of the year 1,339,170 1,365,157 1,746,507 Effect of exchange rate fluctuations on balances of cash and cash equivalents (16,699) 22,143 (78,856) Cash and cash equivalents at the end of the year 1,275,202 1,339,170 1,365,157

** Retroactive adjustment in respect of change of accounting policy – see Note 2J.

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

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

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, 2015, 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 (hereinafter – “the Controlling Shareholder”), 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 Global Financial Events on the Group‟s Activities

1. Impact of the Economic Situation in Russia on the Group‟s Activities

During 2014, a political conflict broke out between and Ukraine and Russia. The political conflict resulted in imposition of sanctions by the United States and other countries against Russia, and vice-versa, a decline in foreign investments in Russia and an adverse impact on the exchange rate of the ruble. The uncertain political situation and the increased sanctions during the year unfavorably impacted the economic activities in Russia during 2014.

As a result of that stated above, there has been a deterioration of the Russian economy. During 2014 and particularly in the second half of the year, there was a significant drop in the world oil prices, where fuel is a significant resource for export and production of revenues in the Russian economy. The exchange rate of the ruble against the U.S. dollar dropped by about 72% in 2014 and the international rating companies gradually reduced the Russia‟s credit rating.

During 2015, the exchange rate of the ruble against the U.S. dollar weakened at the rate of about 30% whereas the price of a barrel of oil declined by about 34%. From the date of the statement of financial position and up to shortly before the approval date of the financial statements, the exchange rate of the ruble against the U.S. dollar strengthened by about 6% and the price of a barrel of oil increased by about 10%.

In light of the devaluation of the Russian ruble, inflationary pressures and instability in the short run, during 2014 the Central Bank of Russia increased the short-term inter-bank interest rate from 5.5% to 17%. In 2015, due to a moderation of the inflationary pressures, the Central Bank of Russia lowered the above-mentioned interest rate to 11%.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

1. Impact of the Economic Situation in Russia on the Group‟s Activities (Cont.)

Continuation of the above-mentioned events, and/or an increase in the severity thereof, has an adverse effect on various facets of the Group‟s activities in Russian and/or data appearing in the financial statements, among others, as follows:

– An unfavorable impact on the revenues in all that relating to the activities in Russia due to a decline in the demand in Russia in the commercial sector and in the residential sector;

– An increase in the Group‟s costs with respect to its activities in Russia;

– A decrease in the value of the real estate properties as a result of the decrease in the revenues and/or an increase in the risk premium in the economy and, in turn, an increase in the discount rate taken into account when determining the value;

– An increase in the financing expenses and/or an adverse impact on the available sources of financing.

– From an accounting standpoint, a devaluation of the ruble could have a negative impact on the Company‟s shareholders‟ equity.

As a result of that stated above, the subsidiary, AFI Development, through which the Group‟s activities in Russia are carried out (hereinafter – “AFI Development”), recorded in the fourth quarter of 2015 a loss in the amount of about NIS 1.7 billion, which stems mostly from a decline in the value of the investment properties and the investment properties under construction.

It is noted that due to the uncertainty prevailing in light of the events described above, AFI Development is reviewing the development plans and timetables of a number of its projects.

Since AFI Development is a very significant holding of the Company, an adverse impact on its business results and the value of the assets has a very material impact on the Group‟s financial position and business results.

2. Management‟s Plans regarding the Company‟s Financial Position

As at the date of the statement of financial position, the Company had negative consolidated working capital, in the amount of about NIS 743 million.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

2. Management‟s Plans regarding the Company‟s Financial Position (Cont.)

From the financing standpoint, the Group identifies extreme caution on the part of the banks in providing credit to the real estate sector, which is expressed both by means of an impact on their readiness to provide credit to the real estate sector as well as through stricter credit terms and higher costs. As at the date of the statement of financial position, the Company was able to obtain financing from banks as stated in connection with development of certain projects the construction of which has commenced and it estimates that it will be able to receive financing for certain projects scheduled for development in the upcoming year in accordance with its work plan, as well as to refinance projects the loans of which are scheduled for repayment in the upcoming year pursuant to the original repayment schedule. Nonetheless, continuation or worsening of the present crisis could have a significant unfavorable impact on the Group‟s ability to obtain credit for further projects in its activity countries.

The Group is taking action to increase its liquid balances and to decrease its short-term liabilities, by means of a number of steps:

– Realization of rental properties in countries wherein the Group carries on activities and/or return of monies through re-financing, and/or sale of investments in investee companies.

– Entering into new financing agreements with respect to a number of loans provided in connection with rental properties in Israel, in the amount of about NIS 514 million, and in Europe, in the amount of about NIS 90 million, which are expected to be repaid within the next twelve-months, with respect to which the subsidiary, Africa Properties and the subsidiary, AFI Europe, are carrying on contacts with the lenders and they expect that they will sign new agreements prior to the final repayment dates.

– Extension of the repayment dates of short-term loans taken out to finance construction of rental properties in Israel and Europe and replacement thereof with long-term loans.

– Floating of debentures and/or expansion of existing series by the Group companies.

In light of the economic and political uncertainty in some of the Group‟s activity countries, the Group is carefully examining its targets in the real estate sector, and is focusing on the following items:

– Projects that are in various stages of execution and that will be completed in 2016-2018.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

2. Management‟s Plans regarding the Company‟s Financial Position (Cont.)

– Examination of the “release” of new projects in various different countries with emphasis on Russia and Eastern Europe. With respect to these projects, the Group‟s policy is to re-examine the commencement date of the project and the infrastructures available to the Group to begin construction of the project, taking into account the existence of a number of preconditions, including, assurance of appropriate financing for each project, analysis of the macro-economic environment and the level of demand, prior to starting performance, along with the macro market conditions in the various countries wherein the activities are carried on.

– Concurrently, the Group is endeavoring to upgrade the lands on which it has not yet commenced construction, by means of obtaining the approvals required for the said construction.

The Group examines on an ongoing basis possibilities to continue developing large-scale real estate and infrastructure projects in and outside of Israel, while taking strict care to disperse and allocate the resources to a number of projects, in order to reduce the exposure to any particular project. Continuation of the Group‟s business initiation and development will be executed through use of the Group‟s extensive land reserves in and outside of Israel, in the locations wherein the Group carries on activities, while giving due consideration to the lack of economic stability.

In general, the Company, as an investments‟ company, usually holds its investments for the long-term. However, where a business opportunity arises or there is an immediate need to increase liquidity (including in order to reduce liabilities), the Company considers possibilities for realizing its investments, taking into account, among other things, utilization of the full potential for improving of the investment, its connection to the core business of the Company Group and other relevant circumstances.

Against the background of that stated above, during 2015, the Group took a number of steps, mainly issuance of debentures, signing of new financing agreements, receipt of dividends from investee companies, sale of properties and sale of holdings in investee companies in order to improve its liquidity position. Regarding this matter – see Notes 4A(1), 4A(3)(c), 4A(3)(f), 4B(1), 4B(5), 4B(8), 4C(2), 4C(5), 4C(7), 4E(3), 4G(1), 4G(2), 18E(2)(a)ii, 18E(2)(a)iv, 18E(2)(b)iii, 18F, 39G and 39H, below.

It is noted that for purposes of advance planning of its financial and operational courses of action, and in order to comply with the disclosure requirements under the Securities Regulations (Periodic and Immediate Reports), 1970, in the Report of the Board of Directors published by the Company as part of its financial reports, Company Management included a forecast of the Company‟s anticipated cash flows for the period of the next 24 months ending on December 31, 2017 (hereinafter – “the Forecast Period”).

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

2. Management‟s Plans regarding the Company‟s Financial Position (Cont.)

In the Report of the Board of Directors, Company Management included a forecast of the Company‟s anticipated cash flows on a solo basis (separate-company statement of cash flows), which takes into account, among other things, cash flows from investee companies, including receipt of dividends and equity repayments, while considering existing restrictions or those that may exist with respect to transfer of monies from investee companies to the Company, and cash the Company will receive from sale of assets and holdings in investee companies.

As at the date of the statement of financial position, the Company‟s total liquid balances (including liquid balances held by the Company‟s wholly-owned investee companies, except for AFI USA and Danya Cebus), amounts to about NIS 580 million.

During the Forecast Period, the Company is expected to repay principal and interest of the debentures, in the amount of about NIS 1,104 million, this being after taking into account acceleration of payments of principal and interest to the holders of its debentures, in accordance with the “Interim Framework” approved by the Company‟s Board of Directors and the General Meetings of each of the debenture series. For additional information – see Note 1B(3) below. In addition, the Company is expected to repay in the same period, interest and principal, in respect of loans from banks and others, in the additional amount of about NIS 50 million.

The Company expects to increase the amount of its liquid balances during the Forecast Period, by means of the following actions:

– Sale of investments in investee companies, real estate properties and inventories of real estate (land), which are expected to generate for the Company in the future about NIS 643 million.

– Receipt of dividends to be distributed by investee companies, which are expected to generate for the Company in the future about NIS 226 million.

Due to the nature of things, Management‟s plans detailed above, and particularly the plans with respect to sale of properties and/or investments in investee companies, do not depend solely on the Company and they require obtaining the consent of third parties.

Notwithstanding the positive cash-flows forecast presented by the Company for the upcoming two years, as at the approval date of the report, there are significant doubts regarding the Company‟s continued existence as a “going concern” due to, among others, the following reasons:

– The amount of the cash required by the Company in order to pay its liabilities significantly exceeds the balance of the cash on hand.

– As at the date of the statement of financial position, the value of the Company‟s net assets (based on the current market values of its marketable holdings plus the book value of its other assets and less its financial liabilities) is a large negative amount. 17

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

2. Management‟s Plans regarding the Company‟s Financial Position (Cont.)

– The yield rate of the Company‟s debentures is two-digit in such a manner that, as a practical matter, eliminates the possibility of re-cycling (re-financing) the Company‟s financial liabilities by means of raising debt.

– As at the date of the statement of financial position the Company is in compliance with the financial covenants provided vis-à-vis the debenture holders, however, with reference to some of the financial covenants provided vis-à-vis holders of the debentures (Series ZB) the Company is very close to the required minimum. In light of this, the need arises to arrange (revise) the financial covenants applicable to the Company under the trust indentures in favor of the holders of the debentures (Series Z, ZA and ZB), and taking into account the period of the “Interim Framework” agreed to with them, as described in Note 1B(3), below, whereby they agreed not to call the debentures for immediate repayment due to non-compliance with financial covenants, which is limited up to November 17, 2016, the period of time to make the arrangement (revision) as stated is limited to this period.

– The sum total of the factors described above significantly limits the Company‟s financial flexibility and business operation, including in connection with re-cycling (re-financing) debt in the capital market or financial institutions.

The cumulative impact of these factors creates uncertainty regarding the Company‟s ability to execute its business plans in an orderly and/or timely manner and with respect to its ability to pay its liabilities in an orderly and/or timely manner. It is noted that in the financial statements, no reclassifications or adjustments were included with reference to the values of the Company‟s assets and liabilities, which may be required if the Company is not able to continue operating as a “going concern”.

3. Proposal for an Interim Framework with the Holders of the Debentures

Further to discussions held between the Company‟s management and the trustee for the holders of the Company‟s debentures (hereinafter – “the Trustee”) and significant holders from among the holders of the said debenture series, as well as among the holders of the debenture series themselves, an interim framework was formulated by the parties between the Company and the holders of the Company‟s debentures (Series Z, ZA and ZB) (hereinafter together – “the Debentures”) for the period up to November 17, 2016 (hereinafter – “the Interim Framework” or “the Framework” and “the Framework Period”, respectively).

On February 18, 2016, the Company‟s Board of Directors approved the Interim Framework, and on February 21, 2016, each of the holders of the Company‟s debentures (Series Z, ZA and ZB) (as applicable) made a special resolution to ratify the Interim Framework. Set forth below are the highlights of the Interim Framework:

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

3. Proposal for an Interim Framework with the Holders of the Debentures (Cont.)

1.1 Advancement of Repayments

1.1.1 The Company advanced to March 14, 2016 (hereinafter – “the Payment Date”) (which constituted the next payment date of the interest to the holders of the debentures (Series ZB) as determined by the Trustee), payments of principal and interest on the debentures (Series Z and ZA) in the aggregate amount of about NIS 361 million (of which about NIS 78 million was paid from the balance of the proceeds from issuance of the debentures (Series ZB) that was deposited with the Trustee for the holders of the debentures (Series Z and ZA) for purposes of payment of principal and interest payments on the debentures (Series Z and ZA), which were scheduled to fall in May 2016, with no compensation for early repayment and without payment of interest in respect of advancement period (in order to remove doubt it is clarified that in May 2016 payment will be made of interest in respect of the balance of the principal of the debentures (Series Z and ZA) for the period from the advancement date of the payment up to May 16, 2016) in the aggregate amount of about NIS 33 million.

1.1.2 The Company also advanced to the Payment Date part of the first principal payment of the debentures (Series ZB), in the amount of about NIS 58 million, which was scheduled to fall in March 2018, with no compensation for early repayment and without payment of interest in respect of advancement period. In addition, the accrued interest was paid in respect of the debentures (Series ZB), which was paid on the Payment Date, in the amount of about NIS 20.5 million.

1.1.3 On the basis of the projected cash flows, which will be published in August 2016 (together with the Company‟s financial statements as at June 30, 2016), the Company will examine the possibility of advancing to September 2016 the interest payments on the debentures (Series Z and ZA) which are scheduled to fall in November 2016, so that they will be paid together with the interest payments on the debentures (Series ZB).

1.2 Commitments of the Company in the Framework Period

The Company undertook that during the Framework Period it will act in accordance with the provisions set forth below (in order to remove doubt, all the commitments below are at the separate-company (solo) level only):

1.2.1 Not to make any payments to the Company‟s controlling shareholders and/or to their relatives and/or to entities controlled by any of them, directly or indirectly, and that are not controlled by the Company (hereinafter – “the Controlling Shareholders”), except pursuant to the employment agreements or agreements for provision of services that were duly approved at the time of entering into the Framework Period. It is hereby clarified that the Company shall not pay to its Controlling Shareholders during the entire Framework Period payments in respect of loan repayments of whatever type or kind; 19

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

3. Proposal for an Interim Framework with the Holders of the Debentures (Cont.)

1.2 Commitments of the Company in the Framework Period (Cont.)

1.2.2 Not to flow monies during the Framework Period into investee companies (equity and/or debt), unless advance notice is provided to the Trustee at least 21 days in advance;

1.2.3 Not to make new contributions in the Framework Period in a total amount of more than NIS 150 thousand;

1.2.4 Not to place a lien on any of its assets unless advance notice is provided to the Trustee at least 21 days in advance;

1.2.5 Not to strengthen the position of a Company creditor unless advance notice is provided to the Trustee at least 21 days in advance;

1.2.6 Not to enter into any transactions and not to execute any business actions involving sale of any of its significant assets for a consideration that is more than 5% lower than the value thereof in the Company‟s books based on its financial statements as at December 31, 2015, unless advance notice is provided to the Trustee at least 21 days in advance;

Regarding this matter: “significant asset” – an asset the value of which in the Company‟s books exceeds NIS 150 million, and excluding an asset pledged for the benefit of the debenture holders.

1.2.7 It is clarified that nothing in the provisions of the Framework adversely impact the collaterals provided by the Company for the benefit of each of the debenture series (as applicable).

Every dividend distributed in the Framework Period (if distributed) in respect of shares of Africa Israel Properties Ltd. (hereinafter – “Africa Properties”) that are pledged in favor of holders of the debentures (Series Z and ZA) (hereinafter – “the Pledged Africa Properties Shares”), is to be deposited in the trust account of the Trustee, which is pledged in favor of the holders of the debentures (Series Z and ZA) (hereinafter – “the Trust Account”).

It is agreed that out of every dividend distributed in respect of the Pledged Africa Properties Shares, an amount of up to NIS 30 million will serve for payment of interest to the holders of the debentures (Series Z and ZA), the repayment dates of which begin starting from November 2016, whereas the balance of the amount of the dividend will serve to make principal payments on with respect to the debentures (Series Z and ZA), including in cases of advancing the principal payments to the holders of the debentures (Series Z and ZA).

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

3. Proposal for an Interim Framework with the Holders of the Debentures (Cont.)

1.3 Consents of the Debenture Holders during the Framework Period

1.3.1 Subject to the Company complying with all its commitments as stated in the Framework as well as making the principal and/or interest in the Framework Period, the debenture holders will waive in the Framework Period only their right to call the debentures for immediate repayment in cases of the grounds for calling the debentures for immediate repayment deriving from one or more of the following:

1.3.1.1 Non-compliance by the Company with the financial covenants the Company is required to comply with in accordance with these terms of the debenture series. For detail regarding the financial covenants of the debentures (Series Z, ZA and ZB) – see Note 18D below;

1.3.1.2 Reduction of the Company‟s credit rating;

1.3.1.3 Inclusion of a direction of attention by its auditing CPAs, regarding significant doubts with respect to continuation of the Company‟s activities as a “going concern” (a going concern caveat) in the Company‟s financial statements;

1.3.1.4 “Basket” causes of action that are embedded in a concern with respect to the Company‟s ability to meet its liabilities, and/or a tangible degradation of the Company‟s business and/or a fear of harm to the rights of the holders of the debentures (hereinafter together – “the Basket Causes of Action”), this being to the extent that their causes of action are embedded in events and/or circumstances the occurred and/or were known prior to the beginning of the Framework Period. In order to remove doubt, it is clarified that nothing in that stated above detracts from the rights of the debenture holders to make use of the Basket Causes of Action based on events and/or a change in circumstances that will apply and/or that will become known during the Framework Period. It is further clarified regarding this matter that declines in the fair value of the real estate investment property assets and/or reductions due to declines in value of other assets, on the basis of valuations (hereinafter – “the Reductions”), will not be considered, in and of themselves as events and/or circumstances that occurred after commencement of the Framework Period, and the existence of the Basket Causes of Action shall be examined in light of the events and/or circumstances that led to the Reductions.

Nothing stated in this section above detracts from the authorities and duties of the Trustee in accordance with law and pursuant to the trust indentures to act to protect the rights of the debenture holders.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

B. Impacts of Global Financial Events on the Group‟s Activities (Cont.)

3. Proposal for an Interim Framework with the Holders of the Debentures (Cont.)

1.3 Consents of the Debenture Holders during the Framework Period (Cont.)

1.3.2 If and to the extent the Company will request to advance additional payments during the Framework Period to all the debenture holders of all the debenture series, it will be permitted to do so against payment of the par value of the debentures, with no payment of compensation in respect of early repayment and without payment of interest in respect of the period of the advancement, provided that the said advancement is made concurrently to all the debenture series a pro rata to the balances of the debentures.

1.3.3 In a case where the Company breaches any of its commitments under the Framework and/or gives notice of its intention to act contrary to its commitments as stated without the consent of the debenture holders, the validity of the waiver set forth above will expire immediately and the debenture holders will be permitted to call the debentures for immediate repayment even in the cases detailed in this section.

1.3.4 It is agreed that in a case where the Company will give an advance notice as stated in sections 1.2.2, 1.2.4, 1.2.5 and/or 1.2.6 above, of its intention to take any of the actions detailed in those sections and to the extent that such action, as stated, provides a basis for any of the Basket Causes of Action, the debenture holders will be permitted to view this as an event or change in circumstances that occurred after commencement of the Framework Period, for purposes of that stated in section 1.3.1.4 above, which are excepted from the scope of the waiver relating to calling for immediate repayment due to any of the Basket Causes of Action.

Pursuant to the Interim Framework described above, on March 14, 2016, the Company paid the amount of NIS 361 million as payments of principal and interest of the debentures (Series Z and ZA) and the amount of NIS 78.5 million as payments of principal and interest of the debentures (Series ZB).

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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(1) Set forth below are the highlights of the debt arrangement

(a) Under the arrangement, the Company‟s controlling shareholder (including through a company under his control and/or a trustee on behalf of either) and/or any representative thereof invested in the Company the amount of NIS 750 million on the dates and under the terms set forth in the arrangement. The amounts were transferred on the eve of the arrangement by means of an issuance of rights up to the end of four years from the execution date of the arrangement.

(b) 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.

(c) 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.

Up to 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);

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(1) Set forth below are the highlights of the debt arrangement (Cont.)

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;

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.

(d) The Company undertakes that, during the period up to the final and absolute repayment of the New Debentures, the ratio between the net financial debt and the CAP, as defined in the 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 statement of financial position, the Company is in compliance with the covenants determined.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(1) Set forth below are the highlights of the debt arrangement (Cont.)

(e) 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.

(f) As part of the arrangement, restrictions were placed on sale of Company shares by the controlling shareholder.

(g) The Company may not expand 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. Any Company subsidiary (direct or indirect) 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.

(h) 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(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.

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 Company‟s 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.

(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%.

(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).

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

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

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.

As stated above, set forth below regarding execution of the issuances by means of rights from the date of the debt arrangement

Number of Out of the ordinary proceeds Number Proceeds shares the amount of received issued received options from (shares of from the issued exercise Issuance NIS 0.1 Gross controlling and of date par value proceeds shareholder exercised options NIS millions NIS millions NIS thousands

May 2010 10,534,388 380.57 301 May 2011 13,068,538 215.6 102.56 April 2012 15,993,466 214 102.266 May 2013 28,999,563 217.5 103.656 10,534 3 May 2014 42,190,883 306.3 156 1,386 16 Total 110,786,838 1,333.97 765.482 11,740 19

(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 non-controlling interests.

(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:

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(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 2010 amounted 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) Addition to the Company‟s liability certificate to make additional investments by the controlling shareholder in accordance with the debt arrangement

In May 2011, the Company‟s General Meeting approved (after receiving of approval of the Company‟s Board of Directors and of its Audit Committee, and after receiving of approval of the General Meeting of the holders of the Company‟s debentures (Series Z)), the Company‟s agreement to an addition to the irrevocable liability certificate signed by the controlling shareholder (on March 21, 2010) to make the controlling shareholder‟s additional investments in accordance with the arrangement (hereinafter, as applicable – “the Liability Certificate” and “the Addition”), and that constitutes an appendix to the trust indenture for the debentures (Series Z) signed between the Company and the trustee, regarding additional ways for making the additional investments (as defined in the Liability Certificate) of the controlling shareholder in the Company‟s capital, all subject to and in accordance with the conditions set forth in this section below. Pursuant to the Liability Certificate, execution of the additional investments is limited to two ways: a private issuance or an issuance of rights.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(4) Addition to the Company‟s liability certificate to make additional investments by the controlling shareholder in accordance with the debt arrangement (Cont.)

As part of the appendix, additional alternatives were provided for execution of the additional investments, as follows:

– An issuance to the public of Company shares, subject to the price per share in the issuance as stated not being less than 80% of the average closing prices of a Company share on the Stock Exchange in the three trading days preceding the approval date of the issuance by the Company‟s Board of Directors (hereinafter – “the Minimum Price”). In a case as stated against investment of the investment increment shares will be issued to the controlling shareholder based on the share price in the issuance. In order to remove doubt, it is clarified that if the share price in the issuance as stated is less than the Minimum Price, no account will be taken of amounts paid by the controlling shareholder as part of the issuance as stated for purposes of compliance with the commitment to make the additional investments.

– Issuance of rights or another issuance to the public of units, including options for shares and/or debentures (whether or not convertible) and/or options for debentures as stated. In a case as stated as execution of the investment increment, as detailed below, account will be taken:

In the acquisition stage of the units – only of that part of the unit price allocated in accordance with the issuance conditions to shares and/or a security convertible into shares and not to debentures or a security convertible into debentures or options for debentures, which will be included in every unit as stated.

In order to remove doubt it is clarified that in a case where a unit in a rights‟ offering includes additional securities as stated above, the share price restriction as stated in the Liability Certificate, that is 90% of the average closing price of a Company share on the stock exchange in the three trading days preceding the decision by the Company‟s Board of Directors to execute a rights‟ offering will not apply.

In the exercise stage of the convertible security for shares – every amount in the amount of the exercise price / conversion price of the convertible security, on the exercise date. That stated above will also apply with respect to sale of convertible securities offered to the public and acquired by the controlling shareholder in the secondary market (however in a case as stated the acquisition price in the secondary market will not be taken into account).

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

C. Debt Arrangement (Cont.)

(4) Addition to the Company‟s liability certificate to make additional investments by the controlling shareholder in accordance with the debt arrangement (Cont.)

– An exchange tender offer of Company debentures for Company shares. In a case as stated execution of the investment increment will be calculated in accordance with the balance of the cash flows of the Company‟s debentures (principal plus interest and linkage differences) discounted based on the prevailing market interest on the exchange date. Discounting of the Company‟s exchanged debentures by the controlling shareholder will be calculated from the exchange date and up to the final repayment date determined in connection with the exchanged debentures, taking into account the repayment dates of the exchanged debentures.

D. Irregularities in the financial reports of Africa Industries, the consequences deriving therefrom on the financial position of Africa Industries and the plans of the management of Africa Industries in this regard:

(1) On March 18, 2015, the Board of Directors of Africa Industries decided to terminate the employment of the former CEO of Africa Industries, Mr. Avi Motola (who also served as the CEO of Negev Ceramics).

On March 29, 2015, Africa Industries reported for the first time with respect to a contact made to the management of Africa Industries by a party in the Africa Industries Group, in connection with concerns of irregularities with respect to recording of income of one of the wholly-owned subsidiaries (indirectly) of Africa Industries, which operates in the area of home design.

As a result of the above-mentioned contact, the management of Africa Industries started an immediate examination of the matter, with the assistance of its Internal Auditor. In addition, the Board of Directors of Africa Industries instructed with respect to appointment of an outside examiner on its behalf for purposes of examining the matter and all the ramifications stemming from the said irregularities.

As part of the above-mentioned examinations, it became clear that over the course of a number of years and up to the end of 2014, revenues were improperly recorded early, duplication of revenues was made, trade receivables included in the financial statements of companies of the Negev Group for these years were erroneously recorded, and an artificial increase was recorded of the inventory categories of companies in the Negev Group. That stated above is in addition to irregularities found in the recording of the revenues of one of the companies in the Negev Group.

It was further found that the cumulative impact of the errors in the financial statements of Africa Industries on the equity attributable to the owners of Africa Industries as at December 31, 2014, amounts to a reduction of about NIS 73 million and the cumulative impact on the equity attributable to the owners of the Company amounts to a reduction of about NIS 43 million (this amount is after a revision made in the Company‟s financial statements for 2014). 30

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(1) (Cont.)

In light of the findings of the examinations, as stated above, Africa Industries restated its financial statements for 2014 in order to retroactively reflect therein the impacts of that stated above, wherein Africa Industries also included, aside from revised data for the period of the report, revised comparative data for the prior reporting periods wherein misstatements were included due to the errors referred to above.

The Company examined the said adjustments and their impact on its financial statements. In light of the findings of the examinations, as stated above, in its financial statements as at December 31, 2015, the Company made a restatement of the comparative data for the years ended December 31, 2014 and 2013. See Note 2F below.

In addition to that stated above, after completion of the examination processes and quantification of the direct damages caused due to the deficiencies and correction of the financial statements of Africa Industries and the Company in accordance with that required, Africa Industries examined information in connection with additional suspicions that it became aware of as part of during the examination processes, as stated above, regarding which an evidentiary basis has not yet be established. The above-mentioned information was sent to the investigating authorities, and to the best of the knowledge of Africa Industries the said information is still being examined by them. After completion of the examination processes and summation of the full amount of its damages, Africa Industries intends to take legal action against the former officers of Negev in order to recover its damages from them.

Restatement of the financial statements of Africa Industries caused a worsening in some of the financial covenants it is required to comply with under its financing agreements (some of which were violated even on the basis of the data prior to the restatement) and non-compliance with other financial covenants. For details regarding the financial covenants of Africa Industries – see Notes 4D(6) and 18D, below.

The impacts of the restatement together with the non-compliance with the financial covenants caused the management of Africa Industries to act in order to improve the financial positions of companies in the Africa Industries Group.

The plans of the management of Africa Industries include, among other things: in the area of home design – Africa Industries has prepared an efficiency plan that includes reduction of administrative and general expenses and selling expenses and also took steps to reduce the number of its personnel along with a temporary reduction of the factory‟s output and the production costs, where the management of Africa Industries to examine further efficiency measures. Taking into account the efficiency plan, Africa Industries together with its financial advisors, has prepared a financing plan that presents the ability to service bank debt while breaking down the bank debt into long-term and short-term.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(1) (Cont.)

On the basis of the financing plan, negotiations are being held with the financing parties in order to reach agreement with respect to spreading out the debt to long term as well as in connection with approval of signed credit frameworks for the current operating activities of the Negev Group. Up to the time of formulation of the financing plan for the Negev Group, the ability exists to finance its activities out of the existing credit frameworks without the need for additional credit and, accordingly, Africa Industries expects that the Negev Group will comply with all of its obligations in the foreseeable future.

In the steel area – Africa Industries is making efforts to correct violations of the bank covenants through, among other things, increasing the tangible capital of the subsidiary of Africa Industries, Packer Plada Industries Ltd. Here as well, Africa Industries expects that until the violation is rectified, the Packer Plada Group has the ability to continue financing its activities out of its existing credit frameworks and to comply with all of its obligations in the foreseeable future.

At the level of Africa Industries on a separate-company (solo) basis – for purposes of complying with its liabilities, Africa Industries expects to receive cash flows in the upcoming months from some of the foreign investee companies held by the Africa Industries Group, in the amount of about NIS 14 million. In addition, Africa Industries has the alternative of selling dormant shares it holds of Africa Industries, in an amount equal to about 9.5% of the issued share capital of Africa Industries (after the sale thereof), the value of which, as at the approval date of the financial statements, amounts to about NIS 19 million.

In the medium time range – Africa Industries is planning to sell assets. For this purpose, the management of Africa Industries is taking action aimed at selling off assets and activities – both in the steel area and in the home design sector. With reference to some of the activities, preliminary negotiations are being carried on with potential purchasers. The expected proceeds to be received from realization of these assets exceed the amount of the projected repayments of Africa Industries to the institutional entities in the relevant periods.

Notwithstanding the uncertainty involved with the time and extent of realization of the assets of Africa Industries and the dependency of completion of these processes on the consent of the financing entities, Africa Industries expects that its existing assets permit it to make full repayment of its liabilities up to March 2018. Moreover, Africa Industries estimates based on its assets and the range of the business activities it has, that it has repayment capacity and it will be able to pay the balance of its liabilities. For purposes of formulating the said estimates, Africa Industries prepared realization scenarios, evaluated the reasonableness thereof, and examined the conditions for the realizations within the timeframes required by Africa Industries.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(1) (Cont.)

The Board of Directors of Africa Industries determined that Africa Industries has repayment capacity and that it is able to service its liabilities in an orderly manner and as they come due and that it intends to do so.

(2) On September 21, 2015, the Company provided a loan to Africa Industries, in the amount of NIS 50 million (hereinafter – “the Loan”), after receipt of approval of the competent authorities and approval of the General Meeting of Africa Industries and after receiving the consent of the institutional entities that provided Africa Industries the Institutional Loan.

Set forth below are the main terms of the Loan:

a. Terms of the loan

The loan will be granted to Africa Industries by the Company no later than September 24, 2015, subject to receipt of all the required approvals.

b. Interest terms

The loan will bear variable interest at the rate of “prime” plus a margin of 1.5% per year (except in the Postponement Period, as defined below).

c. Repayment date

The loan and the related interest are to be repaid in one payment on December 31, 2017 (hereinafter – “the Repayment Date”). Notwithstanding that stated above, Africa Industries will be permitted to request to extend the Repayment Date to December 31, 2018, by means of delivery of a written notification to the Company, and subject to receipt of the Company‟s consent (hereinafter – “Postponement of the Repayment Date”).

In the event of Postponement of the Repayment Date the interest in the period between December 31, 2017 and December 31, 2018 (heretofore and hereinafter – “the Postponement Period”) will be at the rate of “prime” plus a margin of 2% per year and the Repayment Date with respect to the terms of the loan will be at the end of the Postponement Period, that is, December 31, 2018.

Notwithstanding that stated above, Africa Industries will be permitted to repay the loan at any time (including payment of the interest up to the date of the early repayment), even prior to the Repayment Date. Africa Industries will not be subject to an early repayment penalty of whatever type, in connection with early repayment of the loan.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(2) (Cont.)

d. Security

For purposes of securing the loan, Africa Industries is taking action to create a first-priority lien in favor of the Company, on one of the following two alternatives: 1) all of its rights in Koa Gaz LLC, a private wholly-owned (indirectly) company of Africa Industries (hereinafter – “Koa Gaz”), in a land site that is used for production and shipment of construction and infrastructure materials in the Kraskovo District in Moscow, Russia (hereinafter – “Koa Gaz Site”), or 2) all of the rights of Africa Industries (indirectly) in the share capital of Koa Gaz, subject to the commitment of Koa Gaz not to create a lien on its rights in the Koa Gaz Site (hereinafter – “the Loan Security”).

e. Realization of the Koa Gaz Site

Notwithstanding that stated in Section C., above, any amount received by Africa Industries during the loan period (up to the Repayment Date) as a result of realization of the Koagas Site / shares of Koagas, is to be paid immediately to the Company on account of the balance of the loan, and is to serve for purposes of making early repayment of the balance of the loan, as stated, subject to the conditions determined between the parties, as detailed in the Report Convening the General Meeting of the Shareholders.

f. Grounds for demanding immediate repayment

A number of grounds were provided between the parties in connection with calling the loan for immediate repayment – all as detailed in the Report Convening the General Meeting of the Shareholders.

g. Restrictions on distribution of a dividend by Africa Industries

Africa Industries undertook vis-à-vis the Company that it will not distribute a dividend and will not make a decision regarding distribution of any dividend amounts prior to making full repayment of the loan (principal and interest).

(3) On June 17, 2015, a request was received in the offices of Africa Industries for certification of a claim as a class action and a class action claim against Africa Industries, the Company, officers and directors (former and present) of Africa Industries and of the Company (including the former CEO of Africa Industries, the Company‟s present CEO, the CEO of Africa Industries and the Chairman of the Company‟s Board of Directors who is the controlling shareholder of Africa Industries), and the auditing CPAs of Africa Industries (hereinafter – “the Claim” and “the Defendants”, respectively), which were filed in the District Court of Tel-Aviv– Jaffa by the representative plaintiff (hereinafter – “the Plaintiff”).

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(3) (Cont.)

The subject matter of the Claim is monetary damages allegedly caused to the Plaintiff due to apparent violations by the Defendants of the Securities Law, 1968 (hereinafter – “the Securities Law”), the Companies Law, 1999 (hereinafter – “the Companies Law”), the Torts Ordinance [New Version] (hereinafter – “the Torts Ordinance”) and the Contracts Law (General Part), 1973 (hereinafter – “the Contracts Law”). All that stated above is based on the reports of Africa Industries and the Company in connection with irregularities found in the management of subsidiaries of Africa Industries in the Home Design area, which even gave rise to restatement of the data in the financial statements of Africa Industries and of the Company in the prior years.

The Plaintiff contends that the Defendants allegedly violated the provisions of the Securities Law, by commission and by omission, in that as part of the financial statements of Africa Industries and of the Company that were signed by the various Defendants, as applicable, misstatements were apparently presented that included misleading details.

Pursuant to the Claim, the Group the Plaintiff seeks to represent is every party that held shares of Africa Industries and/or of the Company during the discovery period (in whole or in part), that is, from March 19, 2015 through May 19, 2015, excluding the Defendants.

In the Plaintiff‟s estimation, in accordance with an expert‟s opinion that was attached to the Request for certification of the Claim, the damages of the members of the group it seeks to represent allocable to the shareholders of Africa Industries are about NIS 17.4 million, the damages of the members of the group it seeks to represent allocable to the shareholders of the Company are about NIS 54.3 million, and in total, in the Plaintiff‟s estimation, about NIS 71.7 million.

The Company, Africa Industries and additional Defendants filed a request for postponement of the proceedings in light of various restrictions imposed on them by the Securities Authority regarding the manner of conducting their defense, this being due to the pending investigation being carried on by the Securities Authority. At the same time, a request was filed for extension of the time for filing the response on their behalf until after the Court‟s decision on the request for postponement of the proceedings.

The Court granted the request for postponement of the proceedings and order the for postponement thereof until the end of April 2016, where up to this time the Securities Authority is expected to conclude it investigation, and if it does so, the responses to the request for certification are to be filed up to June 1, 2016.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 1 – General (Cont.)

(3) (Cont.)

As at the approval date of the financial statements, the Company, the subsidiary of Africa Industries and their legal advisors are studying the details of the Claim and, accordingly, in it not possible to estimate the chances of its approval as a class action, and should it be so approved, in it not possible to estimate the chances of it succeeding.

(4) In light of discovery of the irregularities, as stated, and pursuant to the decision of the Board of Directors of Africa Industries to revoke the rights of Mr. Motolo, the former CEO of Africa Industries, and Mr. Ivschitz, the former CFO of Negev Ceramics, on May 21, 2015, the balance of the options held by Mr. Motolo (10,040 options) and by Mr. Ivschitz (3,514 options) expired.

E. Definitions

In these financial statements:

1. Subsidiaries – companies, including partnerships, the financial statements of which are fully consolidated, directly or indirectly, with the Company‟s financial statements.

2. 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.

3. Related party – within the meaning thereof in International Accounting Standard 24 (2009) regarding “Related Parties”.

4. 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.

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).

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 28, 2016.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

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, derivatives and others, measured at fair value through the statement of income; – Investment property and investment property under construction measured at fair value; – Non-current assets held for sale and disposal groups held for sale; – Deferred tax assets and liabilities; – Provisions; – Assets and liabilities in respect of employee benefits; – Investments in associated companies and joint ventures.

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 generally continues up to two and a half years. The normal operating cycle 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 in a period of more than one year.

The Company expects that the amount of NIS 1,524,230 thousand out of the assets and the amount of NIS 466,439 thousand out of the liabilities will be realized more than 12 months from the end of the period of the report.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

E. Use of estimates and judgment

Use of estimates

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 accounting 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.

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:

Main Possible Estimate Assumptions Consequences Reference

Recoverable Pre-tax discount rate and a Recognition of For further information amount of cash budgeted EBITDA growth rate. loss from and a sensitivity analysis producing unit impairment in for changes in these containing value. assumptions – see goodwill. Note 17, Intangible Assets.

Recognition of Expectation of taxable income in Recognition or For further information deferred tax the future against which cancellation of a regarding losses for asset in respect carryforward losses can be deferred tax which a deferred tax of tax losses. utilized. asset to the asset was recognized – statement of see Note 30, Taxes on income. Income.

Assessment of Whether it is more likely than not Cancellation or For further information probability of that there will be an outflow of creation of a regarding the Company‟s contingent economic resources in respect of provision in exposure to claims – see liabilities. legal claims filed against the respect of a Note 36, Contingent Company and its investees claim. Liabilities.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

E. Use of estimates and judgment (Cont.)

Main Possible Estimate Assumptions Consequences Reference

Measurement The expected rate of return on the Income or loss For information of fair value investment property, occupancy in respect of regarding the effect of of investment rate, operating cash flows and change in the changes in the expected property and budgeted costs to complete. fair value of rates of return on the fair investment investment value of the investment property property and property – see Note 15, under investment Investment Property and construction. property under Investment Property construction. under Construction.

Work The Group estimates the total The revenues For information performed revenues, expected expenses, and expenses regarding an impairment based on an percentage of completion and from recognized in the value execution anticipated completion date of each construction of inventory – see contract in project once a quarter. When work, and the Note 9 “Inventory of construction exercising its judgment in making trade Buildings held for Sale”. and these estimates, the Group bases receivables, contracting itself on the situation in the market, trade payables projects. past experience, various facts, and external factors and assumptions in subcontractors, accordance with the circumstances and net deposits specific to each estimate, including with respect to agreements with customers, price construction offers and agreements with work in subcontractors and suppliers. progress.

Decline in Decline in value of inventory of Recording of a For information value of lands and buildings held for sale is loss or regarding an impairment inventory of examined based on the expected cancellation of a recognized in the value lands and selling prices in the ordinary course loss from of inventory – see buildings held of business, less an estimate of the impairment in Note 9 “Inventory of for sale. required completion costs, credit value. Buildings held for Sale”. costs, and costs required to sell the inventory. In addition, part of the inventory of lands and buildings held for sale is examined based on the approach of comparison to similar properties.

Start date for The date on which it is possible to Change in the recognition of reliably estimate for costs involved gross profit from revenue from with execution of the contract, from the contract income from which revenues are recognized work in based on the percentage of accordance completion method. with construction contracts

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

E. Use of estimates and judgment (Cont.)

Uncertain tax The extent of the uncertainty Recognition of For further information positions. regarding acceptance of the Group‟s additional regarding losses for tax positions and the risk of expenses for which a deferred tax incurring additional tax and interest taxes on income. asset was recognized – expenses, based on analysis of a see Note 30, Taxes on number of factors including Income. interpretations of the tax laws and the Group‟s past experience.

Determination of fair value

For purposes of preparation of the financial statements, the Group is required to determine the fair value of certain assets and liabilities. Additional information regarding the assumptions used in determination of fair value is included in the following notes:

– Note 15 “Investment Property and Investment Property under Construction”;

– Note 11 “Assets Held for Sale”; and

– Note 35 “Financial Assets”.

In determination of the fair value of assets and liabilities, the Group uses observed data from the market to the extent possible. Measurements of fair value are broken down into three graduated levels of the fair value based on the data used in the estimate, as follows:

– Level 1: Quoted prices (unadjusted) in an active market for the same assets and liabilities.

– Level 2: Observed data from the market, directly or indirectly, not included in Level 1 above.

– Level 3: Data not based on observed market data.

F. Restatement

(1) Further to that stated in Note 1D, regarding irregularities in the financial reports of Africa Industries, the Company restated in these financial statements revised comparative data with respect to prior reporting periods wherein there were errors as a result of the above-mentioned misstatements. Set forth below is detail of the revisions:

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(1) (Cont.)

Impact of the revision of the statements of financial position

As at December 31, 2014 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Trade receivables 1,190,034 *(78,770) 1,111,264 Other receivables and debit balances, including derivative instruments 460,984 *(13,233) 447,751 Income tax receivable 31,980 4,415 36,395 Other inventory 562,698 (9,006) 553,692 Deferred tax assets 108,596 (4,039) 104,557 Deposits from customers (1,153,435) *29,563 (1,123,872) Payables and other credits, including derivative instruments (570,393) (2,999) (573,392) Income taxes payable (96,978) 365 (96,613) Liability for deferred taxes (967,649) 2,260 (965,389) Retained earnings (361,627) 45,772 (315,855) Non-controlling interests (3,504,785) 15,925 (3,488,860) Capital reserves 2,228,795 (2,801) 2,225,994

* After impact of reclassification – see Note 2I(2).

Impact of the revision of the equity

As at January 1, 2014 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Retained earnings 1,205,103 (41,243) 1,163,860 Non-controlling interests 3,781,255 (12,599) 3,768,656

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(1) (Cont.)

Impact of the revision of the statements of comprehensive income

For the year ended December 31, 2014 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Income from industry 1,802,724 9,736 1,812,460 Costs and expenses in industry (1,731,170) (7,673) (1,738,843) Administrative and general expenses (274,638) (1,543) (276,181) Taxes on income 20,479 (5,574) 14,905 Loss for the period (1,087,392) (5,054) (1,092,446) Loss attributable to: The owners of the Company (844,207) (4,529) (848,736) Non-controlling interests (243,185) (525) (243,710) Loss per share – in NIS (4.39) (0.02) (4.41)

For the year ended December 31, 2013 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Income from industry 2,001,010 (9,050) 1,991,960 Costs and expenses in industry (1,837,835) (23,633) (1,861,468) Taxes on income (202,398) 2,015 (200,383) Income for the period 150,234 (30,668) 119,566 Income (loss) attributable to: The owners of the Company (74,869) (23,492) (98,361) Non-controlling interests 225,103 (7,176) 217,927 Loss per share – in NIS (0.45) (0.15) (0.60)

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) Set forth below is revised comparative data wherein there were misstatements as a result of the errors, as stated, that were not included as part of the comparative data in the Company‟s financial statements as at December 31, 2015:

Comparative Data As at December 31, 2013 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels Current Assets Cash and cash equivalents 1,365,157 – 1,365,157 Short-term investments 287,291 – 287,291 Marketable securities 394,531 – 394,531 Trade receivables 1,224,988 (55,534) 1,169,454 Receivables and other debits, including derivative instruments 667,108 7,345 674,453 Income taxes receivable 39,151 5,455 44,606 Inventory of buildings held for sale 1,667,527 – 1,667,527 Other inventory 568,939 (12,845) 556,094 Assets held for sale 233,025 – 233,025 6,447,717 (55,579) 6,392,138 ------Non-Current Assets Investments in equity-accounted investees 505,773 – 505,773 Loans to investee companies 380,666 – 380,666 Property, plant and equipment 1,197,368 – 1,197,368 Investment property 11,124,395 – 11,124,395 Investment property under construction 2,880,595 – 2,880,595 Long-term loans investments and other debit balances 73,661 – 73,661 Inventory of real estate 1,773,634 – 1,773,634 Intangible assets 170,732 – 170,732 Excess of assets over liabilities in respect of employee benefits 1,496 – 1,496 Deferred tax assets 80,527 3,120 83,647 18,188,847 3,120 18,191,967 ------24,636,564 (52,459) 24,584,105

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) (Cont.)

Comparative Data As at December 31, 2013 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels Current Liabilities Debentures 388,674 – 388,674 Short-term credit from banks and others 3,835,365 – 3,835,365 Contractors and suppliers 727,615 – 727,615 Payables and other credits, including derivative instruments 847,370 – 847,370 Income taxes payable 81,000 – 81,000 Advance deposits from customers 812,875 1,383 814,258 Provisions 428,159 – 428,159 Total current liabilities 7,121,058 1,383 7,122,441 ------Long-Term Liabilities Debentures 3,592,337 – 3,592,337 Liabilities to banks 4,905,066 – 4,905,066 Other liabilities 709,165 – 709,165 Excess of losses over investments in equity-accounted investee companies 3,234 – 3,234 Employee benefits 20,959 – 20,959 Deferred tax liabilities 961,051 – 961,051 Total long-term liabilities 10,191,812 – 10,191,812 ------

Equity Share capital 380,647 – 380,647 Premium on shares 4,191,341 – 4,191,341 Capital reserves (2,234,652) – (2,234,652) Retained earnings 1,205,103 (41,243) 1,163,860 Total equity attributable to the owners of the Company 3,542,439 (41,243) 3,501,196 Non-controlling interests 3,781,255 (12,599) 3,768,656 Total equity 7,323,694 (53,842) 7,269,852 ------Total liabilities and equity 24,636,564 (52,459) 24,584,105

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

Comparative Data As at December 31, 2012 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels Current Assets Cash and cash equivalents 1,746,507 – 1,746,507 Short-term investments 326,339 – 326,339 Marketable securities 335,128 – 335,128 Trade receivables 1,245,898 (46,074) 1,199,824 Receivables and other debits, including derivative instruments 561,501 5,012 566,513 Income taxes receivable 40,111 4,680 44,791 Inventory of buildings held for sale 1,891,011 – 1,891,011 Other inventory 562,541 (12,711) 575,252 Assets held for sale 531,351 – 531,351 7,240,387 (23,671) 7,216,716 ------Non-Current Assets Investments in equity-accounted investees 859,112 – 859,112 Loans to investee companies 793,466 – 793,466 Property, plant and equipment 1,055,090 – 1,055,090 Investment property 9,919,112 – 9,919,112 Investment property under construction 2,896,344 – 2,896,344 Long-term loans investments and other debit balances 136,440 – 136,440 Inventory of real estate 1,472,360 – 1,472,360 Intangible assets 169,704 – 169,704 Excess of assets over liabilities in respect of employee benefits 1,582 – 1,582 Deferred tax assets 63,170 1,880 65,050 17,366,380 1,880 17,368,260 ------24,606,767 (21,791) 24,584,976

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) (Cont.)

Comparative Data As at December 31, 2012 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels Current Liabilities Debentures 640,899 – 640,899 Short-term credit from banks and others 2,460,863 – 2,460,863 Contractors and suppliers 724,399 – 724,399 Payables and other credits, including derivative instruments 1,227,425 – 1,227,425 Income taxes payable 68,489 – 68,489 Advance deposits from customers 965,814 1,385 967,199 Provisions 352,455 – 352,455 Liabilities to holders of non-controlling interests 9,994 – 9,994 Total current liabilities 6,450,338 1,385 6,451,723 ------Long-Term Liabilities Debentures 3,471,887 – 3,471,887 Liabilities to banks 5,832,649 – 5,832,649 Other liabilities 537,836 – 537,836 Excess of losses over investments in equity-accounted investee companies 4,270 – 4,270 Employee benefits 19,726 – 19,726 Deferred tax liabilities 778,188 – 778,188 Total long-term liabilities 10,644,556 – 10,644,556 ------

Equity Share capital 377,746 – 377,746 Premium on shares 3,976,642 – 3,976,642 Capital reserves (1,866,026) – (1,866,026) Retained earnings 1,279,728 (17,753) 1,261,975 Total equity attributable to the owners of the Company 3,768,090 (17,753) 3,750,337 Non-controlling interests 3,743,783 (5,423) 3,738,360 Total equity 7,511,873 (23,176) 7,488,697 ------Total liabilities and equity 24,606,767 (21,791) 24,584,976

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) (Cont.)

Comparative Data As at January 1, 2012 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Retained earnings 2,276,368 (9,736) 2,266,632 Non-controlling interests 4,306,366 (2,974) 4,303,392

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) (Cont.) Comparative Data For the Year Ended December 31, 2012 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels Revenues Construction and real estate transactions 3,693,364 – 3,693,364 Rental and operation of properties 732,395 – 732,395 Industry 2,064,820 (21,277) 2,043,543 Other activities 65,105 – 65,105 Share in losses of equity-accounted investee companies, net 81,481 – 81,481 Other income 147,577 – 147,577 6,784,742 (21,277) 6,763,465 ------Costs and Expenses Construction and real estate transactions 3,446,323 – 3,446,323 Update of provision for impairment in value of inventory of land and buildings, net 266,306 – 266,306 Maintenance, supervision and management of land and properties 214,254 – 214,254 Decrease in fair value of investment property, net 21,432 – 21,432 Decrease in fair value of investment property under construction, net 835,444 – 835,444 Industry 1,930,014 (7,885) 1,922,129 Other activities 76,775 – 76,775 Administrative and general expenses 286,792 – 286,792 Amortization of intangible assets and other expenses 217,576 – 217,576 7,294,916 (7,885) 7,287,031 ------Operating income (510,174) (13,392) (523,566) ------Financing expenses (1,145,165) – (1,145,165) Financing income 361,531 – 361,531 Financing expenses, net (783,634) – (783,634) ------Loss before taxes on income (1,293,808) (13,392) (1,307,200) Taxes on income (72,963) 2,926 (70,037) Loss from continuing operations (1,366,771) (10,466) (1,377,237) Loss from discontinued operations (after tax) (28,761) – (28,761) Loss for the year (1,395,532) (10,466) (1,405,998)

Loss allocable to: The owners of the Company (1,002,627) (8,017) (1,010,644) Non-controlling interests (392,905) (2,449) (395,354) Loss for the year (1,395,532) (10,466) (1,405,998)

Loss per share Basic and diluted loss per share (in NIS) (6.89) (0.05) (6.94)

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

F. Restatement (Cont.)

(2) (Cont.)

Information regarding the Home Design segment

For the year ended December 31, 2014 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Total revenues from outside parties 772,500 9,736 782,236

Segment results (36,331) 520 (35,811) Segment loss before taxes (36,331) 520 (35,811)

Segment assets – December 31, 2014 1,402,814 (102,719) *1,300,095 Segment liabilities – December 31, 2014 1,215,584 (43,822) *1,171,762

* After impact of reclassification – see Note 2I(2).

For the year ended December 31, 2013 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Total revenues from outside parties 849,443 (9,050) 840,393

Segment results 33,658 (32,683) 975 Segment income before taxes 33,658 (32,683) 975

Segment assets – December 31, 2013 1,280,563 (52,459) 1,228,104 Segment liabilities – December 31, 2013 1,060,104 1,383 1,061,487

For the year ended December 31, 2012 As reported As Impact in these previously of the financial reported restatement statements In Thousands of New Israeli Shekels

Total revenues from outside parties 773,862 (19,885) 753,977

Revenues from inter-segment sales 35,753 (1,392) 34,361

Segment results 39,769 (13,392) 26,377 Segment income before taxes 39,769 (13,392) 26,377

Segment assets – December 31, 2012 962,975 (8,690) 954,285 Segment liabilities – December 31, 2012 787,712 (162) 787,550

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

G. Changes in accounting policies

Commencing from January 1, 2015, the Group applies the following new standards and amendments:

Standard/ Effective date interpretation/ and transitional amendment Main changes provisions Effects

Improvements to As part of the Improvements to IFRSs projects, the IASB The Amendments Application of IFRSs 2010-2013 published amendments to 8 IFRS. The amendments that are to be applied the Amendments and 2011-2013 are relevant to the Group and have an effect on the prospectively for did not have a projects financial statements are: plans the grant date significant of which is on or impact on the – An amendment to IFRS 8, Operating Segments, on after July 1, 2014. Company‟s disclosure concerning the entity‟s aggregation of financial operating segments and its assets. The amendment adds statements. requirements regarding disclosure of management‟s judgments in applying the aggregation criteria to operating segments. The amendment also clarifies that an entity shall only provide reconciliations of the total of the reportable segments‟ assets to the entity‟s assets if this information is reported regularly to the chief operating decision maker.

– An amendment to IAS 24, “Related Party Disclosures”, on definition of the term “related party”. The definition of the term was expanded so at to include entities that provide key management personnel (KMP) services to the reporting entity, directly or through another entity of the Group. Separate disclosure is to be provided of the amounts recognized as an expense in respect of the management services provided by the management entity. Nevertheless, there is no requirement to disclose the amounts paid to specific people in the management entity who provide such services.

H. 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 18D). Nonetheless it is clarified that as part of the debt arrangement, the Company is subject to additional restrictions in connection with distribution of dividends.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

H. Capital management – objectives, procedures and processes (Cont.)

Set forth below is the Group‟s adjusted rate of debt to equity

At December 31 2015 2014 In Thousands of NIS

Total liabilities 17,504,710 *17,630,462 Less liquid balances (2,012,678) (2,280,894) Net debt 15,492,032 15,349,568

Total equity 3,917,056 *6,455,631

Adjusted rate of debt to equity as at December 31 3.96 *2.38

* Restated – see Note 2F.

I. Reclassification

(1) In the statement of financial position, as at December 31, 2014, the amount of NIS 2,086 thousand was reclassified from the category “loans to investee companies” to the category “excess of losses on investments in companies accounted for using the equity method of accounting”.

(2) In the statement of financial position, as at December 31, 2014, the amount of NIS 31,947 thousand was reclassified from the category “trade receivables” to the category “advances from customers”. In addition, the amount of NIS 12,548 thousand was reclassified from the category “other receivables and debit balances” to the category “contractors and suppliers”.

J. Retroactive adjustment in respect of change in accounting policy

The Company changed its accounting policy with respect to classification of the cash flows used for payment of liabilities to sellers of real estate as part of combination transactions in exchange for transfer of part of the revenues from the venture. Up to December 31, 2014, the cash flows, as stated, were classified in the statement of cash flows as part of financing activities. Commencing with the financial statements as at March 31, 2015, the cash flows, as stated, are classified in the statement of cash flows as part of operating activities. The Company believes that the accounting policy adopted as part of the said change is more reliable and relevant since combination transactions in exchange for transfer of part of the revenues reflect acquisition of inventory of real estate for purposes of the main business activity.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 2 – Basis of Preparation of the Financial Statements (Cont.)

J. Retroactive adjustment in respect of change in accounting policy (Cont.)

Set forth below is information with respect to the impact of the retroactive adjustment due to the change in the accounting policy in the statements of cash flows:

Impact of the As reported As change in in these previously accounting financial reported restatement statements In Thousands of New Israeli Shekels

For the year ended December 31, 2014 Cash flows from operating activities 784,579 (35,043) 749,536 Cash flows from financing activities 171,821 35,043 206,864

For the year ended December 31, 2013 Cash flows from operating activities 754,433 (41,998) 712,435 Cash flows from financing activities (81,050) 41,998 (39,052)

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 2G and 2J, Basis for Preparation of the Financial Statements.

A. Basis of the consolidation

(1) Business combinations

The Group applies the acquisition method to all business combinations. The acquisition date is the date on which the acquiring entity obtains control over the acquired entity.

Control exists when the Group, or a holder of rights, is exposed to the variable yields from its involvement in the acquired entity and it has the ability to impact these yields by means of its influence over the acquired entity. In assessing control, actual rights held by the Group and others are taken into account.

The Group recognizes goodwill on the acquisition date according to the fair value of the consideration transferred including any amounts recognized in respect of non-controlling interests 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(1) Business combinations (Cont.)

If the Group makes an acquisition at a bargain price (which includes negative goodwill), it recognizes the income created therefrom in the statement of income at the time of the acquisition.

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. 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 expenses” 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, whereas contingent consideration classified as an equity instrument is not re-measured. Changes in the liability in respect of contingent consideration in business combinations occurring prior to January 1, 2010, continue to be recognized in goodwill and are 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 expenses” 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, part of the consideration transferred is allocated to services provided before the business combination, in accordance with a measurement based on the market value of the Replacement Grant compared with a measurement based on the market value of the original grant of the acquired entity. 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(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) Non-controlling interests

Non-controlling interests 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.

Measurement of non-controlling interests on the date of the business combination

Non-controlling interests 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 non-controlling interests (for example: options for ordinary shares). Such instruments will be measured at fair value or in accordance with the provisions of other relevant IFRSs.

Allocation of comprehensive income to the shareholders

Income or loss and any part of other comprehensive income are allocated to the owners of the Company and the holders of non-controlling interests, even when the result is a negative balance of the holders of the non-controlling interests.

Transactions with holders of non-controlling interests while maintaining control

Transactions with holders of non-controlling interests while maintaining control are accounted for as equity transactions. Any difference between the consideration paid or received and the change in the non-controlling interests is recorded directly in equity to a reserve for transactions with holders of non-controlling interests.

The amount of the adjustment to the non-controlling interests is calculated as follows:

For a rise in the holding rate – according to the proportionate share acquired from the balance of the non-controlling interests in the consolidated financial statements immediately preceding the transaction.

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. 54

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(3) Non-controlling interests (Cont.)

Transactions with holders of non-controlling interests while maintaining control (Cont.)

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 to the non-controlling interests.

Issuance of a put option to holders of non-controlling interests

Pursuant to the Group‟s accounting policies, a put option issued by the Group to holders of non-controlling interests 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, using the effective interest rate method.

Changes in liabilities in respect of a put option issued by the Group to holders of non-controlling interests before January 1, 2010, are continuing 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 non-controlling interests to which the Group issued a put option, even in cases wherein the non-controlling interests have access to the yields deriving from the rights in the investee company.

Dividends distributed to holders of non-controlling interests in a subsidiary, which hold put options, are recognized in equity.

(4) Loss of control

Upon the loss of control, the Group eliminates the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. If the Group retains any investment in the former subsidiary, then such investment 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 investment is accounted for using the equity method of accounting or as a financial available-for-sale asset depending on the level of influence retained by the Group in the relevant company.

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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(5) Investment in associated companies and joint ventures

Pursuant to the Company‟s accounting policies, associated companies are entities with respect to which the Group has significant influence over the financial and operating policies, but control thereof has not been achieved. Significant influence is presumed to exist when the Group holds between 20% and 50% of another entity. In assessing the existence of significant influence, potential voting rights that are currently exercisable or convertible into shares of the investee are taken into account. Joint ventures are joint arrangements wherein the Group has rights in the arrangement‟s net assets.

Investments 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. Transaction costs that relate directly to an expected acquisition of an associated company or a joint venture are recognized as an asset as part of the “deferred expenses” category in the statement of financial position. These costs are added to the cost of the investment on the acquisition date. When a company first obtains significant influence or joint control in an investment that was accounted for as available-for-sale up to the date of obtaining the significant influence or the joint control, 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 that constitutes part of the investment in the investee) is reduced to zero. Where the Group‟s share of a long-term investment constituting part of the investment in an investee is different than its share in the investee‟s capital, the Group continues to recognize its share in the investee‟s losses, after zeroing out the capital investment, based on the rate of its economic entitlement in the long-term investment, after zeroing out the rights, as stated. The Group does not recognize further losses of the investee company, unless the Group has an obligation to support the investee or has made payments on its behalf.

(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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(6) Loss of significant influence or joint control (Cont.)

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 in the “other income” or “other expenses” category 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.

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.

Where the Group loses significant influence and obtains joint control in a joint venture, or vice-versa, the change is treated as described in Section 7 below.

(7) Change in interest held in associated companies while retaining significant influence or joint control, including transition from significant influence to joint control and vice-versa

When the Group increases its interest in an associated company accounted for by the equity method of accounting while retaining significant influence or joint control, 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 a 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.

The said accounting treatment is also relevant in cases where an investment in an associated company becomes an investment in a joint venture, and vice-versa.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

A. Basis for the consolidation (Cont.)

(8) Joint operations

Where the Group has rights in assets and obligations for liabilities relating to joint operations it recognizes assets, liabilities, revenues and expenses of the joint operations based on its rights in these items, including its share in items held or incurred jointly. Gains or losses from transactions with joint operations are recognized only to the extent of the share of the parties having responsibility for the joint operations. Where these transactions provide evidence of a decline in value of the said assets, such losses are recognized in full by the Group.

(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 associated companies 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.

(10) Acquisition of a property company

Upon the acquisition of a property company, the Group exercises discretion when examining whether the transaction constitutes acquisition of a business or acquisition of an asset, for the purpose of determining the accounting treatment of the transaction. When examining whether a property company constitutes a business, the Group examines, inter alia, the nature of the processes in place in the property company, including the extent and nature of the management, security, cleaning and maintenance services that are provided to the tenants. Transactions in which the acquired company is a business are accounted for as a business combination as described above. Conversely, transactions in which the acquired company is not a business are accounted for as the acquisition of a group of assets and liabilities. In such transactions, the acquisition cost, which includes transaction costs, is allocated proportionately to the acquired identifiable assets and liabilities, based on their proportionate fair value on the acquisition date. In the latter case, no goodwill is recognized and no deferred taxes are recognized in respect of the temporary differences existing on the acquisition date.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

B. Foreign currency

1. Transactions in foreign currency

Transactions in foreign currency are translated into the relevant functional currencies of the Group at the exchange rates in effect on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate on that date. The foreign currency gain or loss on monetary items is the difference between the 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 into the functional currency at the exchange rate on the date the fair value was determined. Non-monetary assets and liabilities denominated in foreign currencies that are measured at historical cost are translated using the exchange rate in effect on the date of the transaction.

Exchange rate differences arising on translation into the functional currency are recognized in the statement of income, except for differences that are recognized in other comprehensive income deriving from translation of derivatives used to hedge cash flows, with respect to the effective part of the hedge.

2. Foreign operations

The assets and liabilities of foreign operations, 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 operations were translated into NIS using the exchange rates in effect on the dates of the transactions.

The exchange rate differences in respect of the translation are recognized in other comprehensive income and are presented in the equity section as part of translation reserve with respect to foreign activities (hereinafter – “the Translation Reserve”).

Where the foreign operations are 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 non-controlling interests.

When foreign operation are 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 and is recorded in the “other income (expenses)” category.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

B. Foreign currency (Cont.)

2. Foreign operations (Cont.)

The financial statements of a foreign operation not directly held are translated into NIS according to the step-by-step consolidation method, whereby the financial statements of the foreign operation are first translated into the functional currency of the direct parent company and thereafter are translated into the functional currency of the ultimate parent company. Therefore, when a foreign operation not directly held is disposed of, the Group reclassifies to profit or loss the cumulative amount in the translation reserve that would have been created if the foreign operation had been translated directly into NIS.

In addition, upon changes in the Group‟s interest in a subsidiary that includes foreign operations, 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 non-controlling interests.

Where the Group realizes part of an investment that is an associated company or jointly-controlled entity, including foreign operations, while maintaining significant influence or joint control, the proportionate part of the cumulative amount of the exchange rate differences is reclassified to the statement of income.

In general, exchange rate differences in respect of loans received from or provided to foreign activities, including foreign activities that are subsidiaries, are recognized in the statement of income in the consolidated financial statements.

Where settlement of loans provided to or received from foreign operations 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 net 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. Financial instruments

1. Non-derivative financial assets (Cont.)

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 rights to receive the cash flows deriving from the financial assets in a transaction wherein all the risks and rewards deriving from the assets are effectively transferred.

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

Regarding offset of financial assets and financial liabilities – see Section (2) below.

Classification of financial assets into categories and the accounting treatment of each group

The Group classifies financial assets in categories as follows:

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 classified as held-for-trading include securities that are held to support the Group‟s short-term liquidity needs.

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. These assets are initially recognized at fair value plus allocable transaction costs. 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. Financial instruments (Cont.)

1. Non-derivative financial assets (Cont.)

Loans and receivables (Cont.)

Loans and receivables include cash and cash equivalents, trade and other receivables, investments in non-marketable debentures as well as receivables in respect of a concession arrangement for provision of services.

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.

Cash and other financial assets restricted as to use in accompaniment accounts

As part of the project accompaniment agreements signed with banks, it was provided that receipts from purchasers of residential units will be deposited in closed accompaniment accounts. The amounts deposited in the accompaniment accounts are intended to serve solely for the benefit of the projects in accordance with the terms provided in the accompaniment agreements and, therefore, they were presented as part of the “short-term investments” category.

2. Non-derivative financial liabilities

Non-derivative financial liabilities include bank overdrafts, liabilities to banks, debentures, financing lease liabilities, short-term credit from banks and others, contractors and suppliers and trade and other payables.

Initial recognition of financial liabilities

The Group initially recognizes debt instruments issued on the date they are created. The rest of the financial liabilities are initially recognized on the trade date when the Group becomes a party to the instrument‟s contractual conditions.

Financial liabilities are initially recognized at fair value plus all attributable transaction costs. After the initial recognition, financial liabilities are measured at amortized cost in accordance with the effective interest method.

Transaction costs directly attributable to an expected issuance of an instrument that will be classified as a financial liability are recognized as an asset as part of deferred expenses in the statement of financial position. These transaction costs are deducted from the financial liability upon its initial recognition, or are amortized as financing expenses in the statement of income when the issuance is no longer expected to occur.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. Financial instruments (Cont.)

2. Non-derivative financial liabilities (Cont.)

Elimination of financial liabilities

Financial liabilities are eliminated when the Group‟s obligation, as detailed in the agreement, expires or is settled or cancelled.

Change in terms of debt instruments

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.

In such cases, the entire difference between the amortized cost of the original financial liability and the fair value of the new financial liability is recognized in profit or loss in the “financing income” and/or “financing expenses” categories.

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 different by at least ten percent than 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.

At the time of exchange of debt instruments with equity instruments, equity instruments issued upon the cancellation and elimination of all or part of a liability, are considered part of “consideration paid” for purposes of calculating the gain or loss from the elimination of the financial liability. The equity instruments are initially recognized at fair value, unless fair value cannot be reliably measured – in which case the issued instruments are measured at the fair value of the eliminated liability. Any difference between the amortized cost of the financial liability and the initial measurement amount of the equity instruments is recognized in the statement of income in the “financing income” and/or “financing expenses” categories.

Offset of financial instruments

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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. Financial instruments (Cont.)

3. Derivative financial instruments including cash flow hedges

The Group holds derivative financial instruments for purposes of hedging foreign currency and interest risks, and derivatives not used for hedging.

Hedge accounting

Upon initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and the hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, as well as the manner in which the Group will assess the effectiveness of the hedging relationship.

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 must be expected to occur at a high level and to cause 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 directly to a hedge reserve. With respect to the non-effective part, the changes in fair value are recorded in 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. Where 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. 64

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. 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 in 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” category.

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.

4. 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.

5. 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.

6. Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and options for ordinary shares are presented as a deduction from equity.

Incremental costs directly attributable to an expected issuance of an instrument that will be classified as an equity instrument are recognized as an asset in the “other receivables and debit balances” category in the statement of financial position. The costs are deducted from the equity upon the initial recognition of the equity instruments, or are amortized as financing expenses in the statement of income when the issuance is no longer expected to take place. 65

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

C. Financial instruments (Cont.)

7. Issuance of a securities‟ package

The consideration received from the issuance of a package of securities is attributed initially to financial liabilities that are measured each period at fair value through profit or loss, 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 issuance 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 package, as described above.

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, an estimate of the costs of dismantling and removing the items and restoring the site on which they are located (when the Group has an obligation to dismantle and remove the asset or to restore the site), and capitalized borrowing costs. Purchased software that is integral to the functioning of the related equipment is recognized as part of that equipment.

Spare parts, auxiliary equipment and back-up equipment are classified as property, plant and equipment when they meet the definition of property, plant and equipment in accordance with IAS 16 – otherwise they are classified as inventory.

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 in “other income” or “other expenses” in the statement of income.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

D. Property, plant and equipment (Cont.)

2. 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.

3. 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.

An asset is depreciated from the date it is ready for use, meaning the date it reaches the location and condition required for it to operate in the manner intended by Management.

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 items 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 under financing lease agreements, including lands, are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Owned land is not depreciated.

The annual depreciation rates are as follows:

Buildings and various structures 2 – 4 Plants, systems, and machinery and equipment for construction and production 2.5 – 33 (mainly 20%) Vehicles 14 – 20 Computers 33 Furniture and general equipment 6 – 33 (mainly 7%) Leasehold improvements The shorter of the lease period or the useful life.

The estimates regarding the depreciation method, useful lives of the assets and residual value are examined at least at the end of every year and are revised where necessary.

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. 67

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

E. Intangible assets (Cont.)

1. Goodwill (Cont.)

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

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 in the statement of income according to the straight-line method, commencing from the date the assets are available for use, since this method reflects 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 20 – 25 Trademarks 7 – 8 Concessions 5 Software 10 – 25 Non-competition agreements 14 – 25

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

E. Intangible assets (Cont.)

4. Amortization (Cont.)

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 revised where necessary.

The Group examines the estimated 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.

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 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.

When investment property measured according to fair value is transferred to 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.

Gain or loss on elimination of investment property is determined based on comparing the amount of the consideration upon elimination of and its carrying value in the books and is recognized in the “other income” or “other expenses” category, as applicable, in the statement of income.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

G. Inventories

Inventories are measured at the lower of cost or 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.

2. Raw materials, auxiliary and packaging materials – on a “weighted-average” basis.

3. 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.

H. Inventory of real estate (land) and residential apartments

Inventory of real estate (land) 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 K 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 a liability for provision of the construction services.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

H. Inventory of real estate and residential apartments (Cont.)

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.

Contingent consideration for acquisition of additional rights in an inventory of land that does not constitute a business

Where pursuant to the original agreement under which the Company acquired an inventory of land, which does not constitute a “business”, the Company is required to pay in respect of additional rights in the said inventory of land, the rights are recorded on the date of their receipt as inventory of land against a liability.

I. 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.

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.

J. Capitalization of borrowing costs

Specific and non-specific borrowing costs were capitalized to qualifying assets throughout the period required for completion and construction until they are ready for their intended use. Non-specific borrowing costs are capitalized in the same manner to the same investment in qualifying assets, or portion thereof, which was not financed with specific credit by means of a rate which is the weighted-average cost of the credit sources which were not specifically capitalized. Exchange rate differences from credit in foreign currency are capitalized if they are considered an adjustment of the interest costs. Other borrowing costs are expensed as incurred.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

K. Impairment of value

1. Non-derivative 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:

(a) Breach of a contract by the debtor; (b) Reorganization of the amount due to the Group based conditions the Group would not have considered in other circumstances; (c) Existence of signs that the debtor or issuer of the debt will go bankrupt; (d) Unfavorable changes in the status of the payments of debtors; (e) Changes in the economic environment indicating insolvency of debt issuers or absence of an active market for the security; (f) Observed data indicating the existence of measureable decline in the cash flows expected from a group of financial assets.

Evidence of impairment of debt instruments

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 a collective 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

K. Impairment of value (Cont.)

1. Non-derivative financial assets (Cont.)

Accounting for impairment losses of financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset‟s original effective interest rate. Losses are recognized in the statement of income and are presented as a provision for loss against the trade receivables, receivables, loans and held-to-maturity investments. Interest income on the impaired assets is recognized using the interest rate that was used to discount the future cash flows for the purpose of measuring the impairment loss.

Cancellation of impairment loss

An impairment loss is cancelled if the cancellation can be related objectively to an event occurring after the impairment loss was recognized (such as repayment by the debtor). For financial assets measured at amortized cost and available-for-sale financial assets that are debt securities, the cancellation is recognized in the statement of income.

2. Non-financial assets

Timing of examination of impairment in value

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 are any signs indicating impairment. If any such signs exist, 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 and other assets having an indefinite useful life, or more frequently if there are signs of a decline in value.

Determination of cash-producing units

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”).

Measurement of recoverable value

The recoverable amount of an asset or cash-producing unit is the higher of its value in use and its fair value less selling costs. 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, in respect of which the future cash flows expected to derive from the asset or the cash-producing unit were not adjusted.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

K. Impairment of value (Cont.)

2. Non-financial assets (Cont.)

Allocation of goodwill to cash-producing units

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 testing impairment of goodwill, where the non-controlling interests were initially measured according to their relative share of the acquired entity‟s net assets, the carrying amount of the goodwill is adjusted according to the rate the Company holds in the cash-producing unit to which the goodwill is allocated.

The Company‟s headquarters assets

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 headquarters assets, 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 of cash-producing units serving the headquarters is determined.

Recognition of loss from impairment in value

Losses from impairment in value are recognized where the carrying amount of the asset or the cash-producing unit to which it belongs exceeds its recoverable amount, and are recorded in the statement of income. Regarding cash-producing units that include goodwill, an impairment loss is recognized when the carrying amount of the cash-producing unit, after gross-up of the goodwill, exceeds its recoverable amount. Losses from impairment 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

K. Impairment of value (Cont.)

2. Non-financial assets (Cont.)

Allocation of loss from impairment in value to non-controlling interests

An impairment loss is allocated between the owners of the Company and the holders of non-controlling interests on the same basis that the income or loss is allocated. Nevertheless, if an impairment loss allocated to holders of non-controlling interests 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.

Cancellation of impairment loss

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 joint ventures

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 1 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.

In assessing value in use of an investment in an associated company or the joint venture, the Group estimates its share of the present value of estimated future cash flows that are expected to be generated by the associated company or the joint venture, including cash flows from operations of the associated company or the joint venture 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 application of the equity method, exceeds its recoverable amount, and it is recorded in the statement of income.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

K. Impairment of value (Cont.)

3. Investments in associated companies and joint ventures (Cont.)

An impairment loss is not allocated to any asset, including goodwill, which is part of the carrying amount of the investment in an associated company or in a 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 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.

L. Non-current assets and disposal groups held for sale

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. The Group also classifies this way non-current assets and/or disposal groups where the Company is committed to a sale plan that involves losing control over a subsidiary, whether or not the Company will retain any non-controlling interests in the subsidiary after the sale.

Immediately before their classification as “held for sale”, the assets (or the components of the disposal group) are re-measured in accordance with the Group‟s accounting policies. Thereafter, the assets (or the components of the disposal group) are measured at the lower of their carrying amount or the fair value less selling costs, unless investment property is involved.

Any impairment loss on a disposal group is allocated first 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 of an asset 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.

In subsequent periods, depreciable assets classified as held for sale or distribution are not depreciated on a periodic basis, and investments in associated companies classified as held-for-sale are not accounted for by the equity method of accounting.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

M. 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 constituting market 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.

N. 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 the adjustment is recognized as financing expenses.

The Group recognizes an indemnification asset if, and only if, it is virtually certain that the indemnification will be received if the Company settles the obligation. The amount recognized in respect of the indemnification does not exceed the amount of the provision.

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.

3. Provision for completion

The Group recognizes provisions for completion including the anticipated costs to complete the project.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

O. Revenues

1. Sale of goods

Revenue from the sale of goods in the ordinary course of business 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 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.

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.

The Group manufactures and sells a range of finishing products for construction and renovations (to contractors and merchants). The revenue in respect of sale of merchandise is recognized when an entity belonging to the Group has delivered merchandise to a wholesaler, where the wholesaler has full discretion regarding the sale channel and sale price of the merchandise, and there is no unfulfilled obligation that can impact acceptance of the merchandise by the wholesaler. Delivery of the wholesaler is not considered to have taken place until the merchandise is sent to the predetermined location, the risks of obsolescence and loss have been transferred to the wholesaler, and the wholesaler has accepted the merchandise pursuant to the terms of the sale contract, the acceptance terms have expired or the Group has objective evidence that all the acceptance criteria have been fulfilled. Finishing products for construction and renovations are frequently sold based on quantity discounts – the customers reserve the right to return defective merchandise in the wholesale market. The sales are recognized on the basis of the price stipulated in the sale contract, less quantity discounts and estimated returns as at the date of sale. Prior experience accumulated serves in making estimates and provisions with respect to the discounts and returns. The sales do not include a financing component, since they are made with a credit period of 120 days, which is considered consistent with that customary in the market.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

O. Revenues (Cont.)

1. Sale of goods (Cont.)

The Group operates a chain of stores for sale of finishing products for construction and renovations. Sale of the merchandise is recognized where one of the Group entities sells a product to a customer. Retail sales are usually made in cash or through use of credit cards.

The Group‟s policy is to sell its products to retail customers with a right of return within a time period specified in advance.

The Group does not have any customer loyalty plans.

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 residential unit to the purchaser.

3. Provision of 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 the 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 include 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.

The stage of completion is assessed by reference to surveys of the work performed.

Where 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

O. Revenues (Cont.)

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 Section 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, if it is possible to separately identify these amounts.

P. Government grants

Unconditional 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. Unconditional government grants are recognized when the Group is entitled to receive them. 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.

Q. Leases

1. 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 and a liability is recognized at an amount equal to the lower of its fair value and the present value of the minimum future lease payments. When measuring the liability for non-capitalized leases of land from Israel Lands Administration, the Group discounts the future minimum lease payments at a real interest rate of 5% on the basis of the discount rate used by Israel Lands Administration at the date of the lease agreement. 80

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

Q. Leases (Cont.)

1. Leased assets (Cont.)

Future payments for exercising an option to extend the lease from Israel Lands Administration are not recognized as part of an asset and corresponding liability since they constitute contingent lease payments that are derived from the fair value of the land on the future dates of renewing the lease agreement. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are classified as operating leases, and the leased assets are not recognized in the Group‟s statement of financial position. That stated above is except for operating leases of real estate the Group has chosen to classify as investment property, in which case the investment property is recognized in the Group‟s statement of financial position at fair value, and the lease is accounted for as a finance lease at initial recognition.

When a lease includes both a land component and a buildings component, each component is considered separately for the purpose of classifying the lease, with the principal consideration regarding the classification of land being the fact that land normally has an indefinite useful life.

2. Lease payments

Payments made under operating leases, other than conditional lease payments, 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 operating leases are recognized in the statement of income as incurred.

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. Minimum lease payments are updated in respect of contingent lease payments when the contingency is clarified.

3. 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.

An arrangement is a lease or contains a lease if the following two criteria are met:

– Fulfillment of the arrangement is dependent on the use of a specific asset or assets; and

– The arrangement includes a right to use the asset.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

Q. Leases (Cont.)

3. Determination whether an arrangement includes a lease (Cont.)

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.

R. Financing income and expenses

Financing income includes interest income on amounts invested, 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.

Changes in the fair value of financial assets presented at fair value through the statement of income include income from dividends and interest.

Financing expenses include interest expenses on loans received, changes in the time value of provisions, changes in the fair value of contingent consideration in business combinations, 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 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.

In the statements of cash flows, interest and dividends received are presented as part of the cash flows from investing activities. Interest and dividends paid are presented as part of the cash flows from financing activities. Accordingly, credit costs capitalized to qualifying assets are presented together with the interest paid as part of the cash flows from financing activities.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

S. Taxes on income

Taxes on income include current and deferred taxes. Current and deferred taxes are recorded in the income statement unless the tax stems from a business combination or they are recognized directly in shareholders‟ equity or in other comprehensive income to the extent they derive from items recognized directly in shareholders‟ equity or in other comprehensive income.

Current taxes

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. Current taxes also include taxes in respect of prior years and additional taxes in respect of distribution of dividends.

Offset of current tax assets and liabilities

The Group offsets current tax assets and liabilities if there is a legally enforceable right to offset current tax liabilities and assets, and there is intent to settle current tax liabilities and assets on a net basis or the tax assets and liabilities will be realized concurrently.

Uncertain tax positions

A provision for uncertain tax positions, including additional tax and interest expenses, is recognized when it is more probable than not that the Group will have to use its economic resources to pay the obligation.

Deferred taxes

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 does 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 the Group controls the reversal date of the difference and to the extent that it is probable that they will not reverse in the foreseeable future – whether by means of sale of the investment or distribution of dividends in respect of the investment.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

S. Taxes on income (Cont.)

Deferred taxes (Cont.)

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.

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 it is no longer probable that the related tax benefit will be realized.

Deferred tax assets that were not recognized are estimated at every reporting date and are recognized if the expectation has changed such that it is expected that there will be taxable income in the future against which they can be utilized.

Offset of deferred tax assets and liabilities

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.

Additional tax in respect of dividend distribution

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.

Intercompany transactions

Deferred tax in respect of intercompany transactions in the consolidated financial statements is recorded according to the tax rate applicable to the buying company.

T. 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 for purposes of 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

T. Discontinued operations (Cont.)

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.

U. 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.

V. Transactions with a controlling shareholder

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.

W. 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 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, from that date, the Company recognizes an intangible asset representing the fair value of the construction services of 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 using 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 stated 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.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

X. New standards and interpretations not yet adopted

Standard/interpretation/ Effective date and amendment Topic transitional provisions Expected effects

(1) IFRS 9 (2014), A final version of the standard, which includes revised guidance IFRS 9 (2014) is effective The Group is examining the Financial on the classification and measurement of financial instruments, for annual periods consequences of the Standard on the Instruments and a new model for measuring impairment of financial assets. beginning on or after financial statements with no intention This guidance has been added to the chapter dealing with general January 1, 2018 with early of making early application. hedge accounting requirements issued in 2013. adoption being permitted. It will be applied Classification and measurement retrospectively with some In accordance with IFRS 9 (2014), there are three principal exemptions. categories for measuring financial assets: amortized cost, fair value through profit and loss and fair value through other comprehensive income. The basis of classification for debt instruments is the entity‟s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. Investments in equity instruments will be measured at fair value through profit and loss (unless the entity elected at initial recognition to present fair value changes in other comprehensive income).

IFRS 9 (2014) requires that changes in fair value of financial liabilities designated at fair value through profit or loss that are attributable to changes in its credit risk, should usually be recognized in other comprehensive income.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

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

Standard/interpretation/ Effective date and amendment Topic transitional provisions Expected effects

(1) IFRS 9 (2014), Hedge accounting – general Financial Under IFRS 9 (2014), additional hedging strategies that are used Instruments (Cont.) for risk management will qualify for hedge accounting. IFRS 9 (2014) replaces the present 80%-125% test for determining hedge effectiveness, with the requirement that there be an economic relationship between the hedged item and the hedging instrument, with no quantitative threshold. In addition, IFRS 9 (2014) introduces new models that are alternatives to hedge accounting as regards credit exposures and certain contracts outside the scope of IFRS 9 (2014) and sets new principles for accounting for hedging instruments. In addition, IFRS 9 (2014) provides new disclosure requirements.

Impairment of financial assets IFRS 9 (2014) presents a new „expected credit loss‟ model for calculating impairment. For most financial assets, the new model presents a dual measurement approach for impairment: if the credit risk of a financial asset has not increased significantly since its initial recognition, an impairment provision will be recorded in the amount of the expected credit losses that result from default events that are possible within the twelve months after the reporting date. If the credit risk has increased significantly, in most cases the impairment provision will increase and be recorded at the level of lifetime expected credit losses of the financial asset.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

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

Standard/interpretation/ Effective date and amendment Topic transitional provisions Expected effects

(2) IFRS 15, Revenue IFRS 15 replaces the current guidance regarding recognition of IFRS 15 is applicable for At this early stage, the Group is not from Contracts with revenues and presents a new model for recognizing revenue from annual periods beginning able to estimate the impact of Customers contracts with customers. IFRS 15 provides two approaches for on or after January 1, 2017 implementation of the Standard on its recognizing revenue: at a point in time or over time. The model and earlier application is financial position and results of includes five steps for analyzing transactions so as to determine permitted. IFRS 15 operations. The Group will examine the when to recognize revenue and at what amount. Furthermore, includes various impact of the implementation of the IFRS 15 provides new and more extensive disclosure alternative transitional provisions of the Standard on the requirements than those that exist under current guidance. provisions, so that contracts with its customers and will companies can choose examine whether there will be a between one of the significant impact on the timing and following alternatives at manner of recognition of the revenue initial application: full from these contracts that is capable of retrospective application, impacting the Group‟s financial full retrospective statements. application with practical expedients, or application as from the mandatory effective date, with an adjustment to the balance of retained earnings at that date in respect of transactions that are not yet complete.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 3 – Significant Accounting Policies (Cont.)

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

Standard/interpretation/ Effective date and amendment Topic transitional provisions Expected effects

(3) Amendment to The Amendment clarifies that when an entity acquires an interest The Amendment is to be The Group has not yet commenced IFRS 11 Joint in a joint operation that meets the definition of a business, it is applied on a prospective examining the effects of adopting the Arrangements: required to apply business combination accounting per its basis for annual periods Amendment on the financial Accounting for definition in IFRS 3 Business Combinations (hereinafter: beginning on or after statements. Acquisitions of business combination accounting”). The Amendment also January 1, 2016 with Interests in Joint provides that when additional interests are acquired in a joint earlier application being Operations operation while retaining joint control, business combination permitted. accounting should be applied only to the additional interests.

(4) Amendments to The Amendments specify that when a company loses control in a The Amendments are to be The Amendment may affect the IFRS 10, subsidiary or group of assets that constitutes a business in a applied on a prospective accounting treatment of the Group‟s Consolidated transaction with its associate or joint venture, the full amount of basis for annual periods future transactions. Financial the profit should be recognized. Conversely, when a company beginning on or after Statements, and loses control in a subsidiary or group of assets that does not January 1, 2016 with IAS 28, constitute a business in a transaction with its associate or joint earlier application being Investments in venture, the profit should be partly eliminated, so that the profit permitted. Associates and recognized is only the profit on the sale to external parties. Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events

A. Real Estate Activities Overseas

(1) Real Estate Activities in the United States

a. In May 2015, a foreign company in the United States in which the Company holds, indirectly through AFI USA, 50.1% of the shares (hereinafter – “the Seller”), signed an agreement (hereinafter – “the Agreement”) with a third party that is not related to the Group (hereinafter – “the Purchaser”) for sale of the balance of its rights in the “Times Square” building, in New York in the United States (hereinafter – “the Property”), for a consideration of about NIS 1.1 billion (about US$295 million) (hereinafter – “the Consideration”).

In the first quarter of 2015, the Seller recognized income from revaluation of the property to the selling price, in the amount of about NIS 60 million (the Company‟s share is about NIS 30 million).

During the second quarter of 2015, the investment in the joint venture that holds the “Times Square” building was presented as an investment held for sale in the category “assets held for sale”, since in the second quarter of 2015, all the conditions were fulfilled in order to present the investment as “held for sale”. On the date of the classification, AFI USA recognized selling expenses in the amount of about U.S.$6 million (about NIS 22 million).

On October 29, 2015, the transaction was closed, and the Seller received total cash flows, net (after repayment of the loan used to acquire the Property and selling expenses), in the amount of about NIS 133 million (about U.S.$35 million) (the Company‟s share).

In addition, upon completion of the transaction, the Company realized (e.g., reclassified) the capital reserve for translation differences in respect of its activities in the United States, in the amount of NIS 384 million, to the statement of income.

(2) Real Estate Activities in Russia

a. As at the date of the statement of financial position, the subsidiary AFI Development, through which the Group‟s activities in Russia are carried out (hereinafter – “AFI Development”) has an inventory of land, buildings held for sale, property, plant and equipment, investment property and investment property under construction in Russia, in the aggregate monetary amount of about NIS 5.6 billion (about US$1.4 billion) (as at December 31, 2014 – about NIS 7.8 billion) (about US$2 billion)). As at December 31, 2015, AFI Development executed valuations for most of its investment property and investment property under construction, by means of external independent appraisers.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(2) Real Estate Activities in Russia (Cont.)

a. (Cont.)

During 2015, AFI Development recorded a decrease in the fair value of investment property, in the amount of about NIS 1.3 billion, a decrease in the fair value of investment property under construction, in the amount of about NIS 395 million, and a decline in value of the inventory of lands, in the amount of about NIS 49 million (2014 – an increase in the fair value of investment property, in the amount of about NIS 406 million, a decrease in the fair value of investment property under construction, in the amount of about NIS 770 million, and a decline in value of the inventory of lands, in the amount of about NIS 29 million).

As stated in Note 1B(1) above, during 2014, a political conflict broke out between the Ukraine and Russia. The political conflict triggered sanctions by the United States, the European Commonwealth and other countries against Russia and vice-versa, a decline in foreign investments in Russia and an unfavorable impact on the exchange rate of the ruble. The uncertainty with respect to the political/domestic situation, and the increase in the sanctions adversely impacted the scope of the economic activities in Russia during the year.

In addition, commencing from July 2014, a significant decline in the worldwide fuel prices began, where fuel is a major resource for export and production of revenues in the Russian economy.

During 2015, the exchange rate of the ruble against the dollar weakened at the rate of about 30%, while the price of a barrel of fuel dropped by about 34%. From the date of the statement of financial position and up to shortly before the approval date of the financial statements, the exchange rate of the ruble against the dollar strengthened by about 6% and while the price of a barrel of fuel rose by about 10%.

In light of the devaluation of the Russian ruble, inflationary pressures and lack of stability in the short run, during 2014 the Central Bank of Russia raised the short-term inter-bank interest rate from about 5.5% to about 17%. In 2015, due to a certain moderation in the inflationary pressures, the Central Bank of Russia lowered the said interest rate to 11%.

These changes had a negative impact on the parameters and assumptions taken into account for purposes of updating the valuations of the real-estate properties as at December 31, 2015.

Set forth below is the composition of the category “decrease in the fair value of investment property” of the properties of AFI Development in Russia for the year ended December 31, 2015:

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(2) Real Estate Activities in Russia (Cont.)

a. (Cont.)

Millions of U.S.$

Increase in fair value deriving from devaluation of the Russian ruble verses the U.S.$ 111 Real decline in the fair value (443) Total decrease in the fair value of investment property, net, as recorded in the statement income (332)

Set forth below is the composition of the category “decrease in the fair value of investment property under construction” of the properties of AFI Development in Russia for the year ended December 31, 2015:

Millions of U.S.$

Increase in fair value deriving from devaluation of the Russian ruble verses the U.S.$ 32 Real decline in the fair value (134) Total decrease in the fair value of investment property, net, as recorded in the statement income (102)

b. During January 2015, a subsidiary of AFI Development, which holds the rights in the Ozerkovsky III project (hereinafter – “the Subsidiary” and “the Project”, respectively) signed an agreement for extension of a loan, in the amount of U.S.$205 million, with the lending bank, such that the repayment date was postponed from January 2015 to January 2018 (hereinafter – “the Loan” and/or “the Agreement”). In addition, it was determined that upon the signing, the Subsidiary will repay U.S.$10 million of the loan principal. Pursuant to the agreement, about 10% of the remaining loan principal is to be repaid in installments, and about 90% of the loan principal is to be repaid in January 2018. Financial covenants were also provided in the agreement as follows:

– The ratio of the cash-flow revenues of the property on a NOI basis to the debt payments including principal and interest (DSCR) in the next twelve months shall be higher than 1.2, and are to be calculated starting from the fourth quarter of 2015.

– Minimum LTV ratio – 65% calculated commencing from January 2015.

During January 2015, pursuant to the above-mentioned agreement, the Subsidiary repaid US$10 million of the loan principal.

As at the date of the statement of financial position, the balance of the loan principal was about US$193 million – this being after repayments of principal in accordance with the loan‟s repayment schedule. 92

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(2) Real Estate Activities in Russia (Cont.)

b. (Cont.)

Pursuant to the above-mentioned agreement, in a case of violation of the financial ratios stipulated therein, the Subsidiary will be required to repay a proportionate amount of the loan that will permit compliance with the financial ratios, prior to it being in violation within 90 days of the date of the payment demand from the financing bank.

Based on an independent valuation of the Project and in accordance with the loan agreement, as at December 31, 2015, the Subsidiary was not in compliance with the minimum LTV ratio, as described above. Pursuant to the loan agreement, in a case of violation of the said ratio, the bank has the possibility of requiring the Subsidiary to repay a proportionate amount of the loan that will permit compliance with the above-mentioned financial ratio.

In addition, based on the Subsidiary‟s results, the Subsidiary was not in compliance with the DSCR ratio described above.

Due to the fact that the Subsidiary was not in compliance with the financial ratios determined for it, the Subsidiary reclassified in its financial statements the full amount of the loan balance, in the amount of US$193 million, to current liabilities.

During November 2015, a subsidiary of AFI Development, which holds rights in the Ozerkovsky III project, received notice from the financing bank of its decision to postpone the date for examination of compliance with the financial ratios the Subsidiary committed to the bank to maintain as part of the loan agreement in connection with the above-mentioned Project, such that they will be calculated for the first time at the beginning of the second quarter of 2017. For purposes of securing payment of the amount of the loan covered by the loan agreement by the Subsidiary, an additional subsidiary of AFI Development, which holds rights in the AFIMALL shopping mall (hereinafter – “the Additional Subsidiary”) will provide a guarantee in favor of the financing bank and will create a second-priority lien on its rights in the AFIMALL shopping mall in favor of the financing bank.

It is further noted that the rights in the AFIMALL shopping mall are also pledged in favor of the financing bank under a first-priority lien – this being in order to assure the loan provided to the Additional Subsidiary in connection with the AFIMALL shopping mall.

The notification of the financing bank will be legally binding only after the parties sign an addendum to the loan agreement, as stated, which as at the date of the statement of financial position had not yet been signed since the parties are still carrying on negotiations with respect to the terms of the agreement.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(2) Real Estate Activities in Russia (Cont.)

c. In September 2015, AFI Development reclassified the Pablitchkia project Stage 2 (hereinafter – “the Project”) from the category “investment property under construction” to “inventory of buildings held for sale” – this being due to a change in the use and commencement of development of the Project with the intention of selling it in the future. The amount reclassified, U.S.$69.3 million, constitutes the fair value of the Project as at the date of the reclassification. The fair value is based on an independent valuation made on June 30, 2015, and in accordance with the estimates of the management of AFI Development it is not significantly different than the fair value as at the date of the change in use. As at the date of the statement of financial position, the balance of the Project was about U.S.$57.8 million (after a write down for decline in value, in the amount of about U.S.$13.4 million, that was made in the fourth quarter of 2015).

(3) Real Estate Activities in Central and Eastern Europe

The Company‟s operations in Central and Eastern Europe are performed through AFI Europe N.V. (hereinafter – “AFI Europe”), a wholly owned subsidiary of Africa Israel Properties Ltd. The Company‟s Central and Eastern European operations are concentrated in the Czech Republic, Romania, Germany, Bulgaria, Hungary, Poland, Serbia, and Latvia.

a. During February 2015, AFI Europe, won a tender for acquisition of a building in Warsaw, Poland, for a consideration of about €2.2 million (hereinafter – “the Acquisition Transaction”). AFI Europe intends to develop the property for residential and commercial uses on an aggregate area measuring about 5,000 square meters. The Acquisition Transaction was completed in March 2015.

b. In March 2015, a Polish subsidiary of AFI Europe signed a preliminary agreement for acquisition of land, for the total amount of about €3,200 thousand, in the City of Krakow, in Poland, on which an office building project held for rent is planned to be constructed, on an aggregate area measuring 16,400 square meters. The acquisition transaction was completed during June 2015. In addition, a conditional agreement was signed for acquisition of an adjacent land parcel, on which an office building project held for rent is planned to be constructed, on an aggregate area measuring 7,950 square meters, for a consideration of about €1.5 million. This transaction was completed during December 2015.

c. During April 2015, an agreement was signed between a German subsidiary of AFI Europe and a third party (hereinafter – “the Purchaser”), whereby AFI Europe will sell to the Purchaser its ownership rights in a rental property located in the City of Aakon in Germany, in exchange for a consideration of about €5,700 thousand. The transaction was closed in July 2015. Africa Properties recognized revaluation income of €473 thousand (about NIS 2 million) in accordance with the sale price.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

A. Real Estate Activities Overseas (Cont.)

(3) Real Estate Activities in Central and Eastern Europe (Cont.)

d. During July 2015, a Romanian subsidiary of AFI Europe signed a conditional preliminary agreement for acquisition of land on an area measuring about 39,000 square meters, in Barashov, Romania, for an amount of €9.7 million, upon existence of certain conditions that were stipulated in the agreement, among others, obtaining an appropriate Urban Planning Scheme. AFI Europe intends to construct on the land about 40,000 square meters of commercial space and about 12,000 square meters of office space. In March 2016, the Romanian subsidiary completed the transaction and transferred the consideration to the seller.

e. For additional details regarding a notification from the authorities delivered to a subsidiary of Africa Properties in Romania (Cotroceni Park S.A., which owns the rights in a shopping mall in Bucharest, hereinafter – “the Investee Company”), for payment of additional property tax in respect of prior years, in the amount of about €4.6 million (including interest and penalties), this being as part of an investigation of the State‟s authorities in Romania – see Note 36(1)(e)(ii).

f. During November 2015, a Polish subsidiary of AFI Europe signed a sale agreement with a third party for sale of its rights in a shopping center in Krakow for the amount of 13,620 thousand zlotys (about €3.2 million) (hereinafter – “the Property”). As at the date of the statement of financial position, the Property with a value of NIS 13.6 million is classified in the category “assets held for sale”. In January 2016, the transaction was completed and AFI Europe received cash flows of about €1.4 million. AFI Europe did not record a gain or loss in respect of the sale.

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”)

(1) In January 2015, a subsidiary in Israel (which is wholly-owned by Africa Properties) signed an option for sale of its share in land in the Lod area to a third party (hereinafter – “the Land”), for a consideration of about NIS 15.5 million (the share of Africa Properties in the consideration), which is expected to be received in 2015– 2016. In consideration for the option, Africa Properties received the amount of NIS 750 thousand, which in the case of execution of the transaction will be offset against the total sale consideration. In July 2015, Africa Properties received a notification from the buyer of exercise of the option. Accordingly, Africa Properties recorded an increase in the fair value of the property in the amount of NIS 1 million. In the statement of financial position as at December 31, 2015, the land is presented in the category “assets held for sale”, this being until the closing of the transaction, which is expected to take place in June 2016.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.)

(2) In May 2014, Africa Properties and Africa Residences (hereinafter – “the Subsidiaries”) received notification that their joint bid was the winning bid in the tender for acquisition of land in Herzliya with respect to construction of a residential project held for rent (hereinafter – “the Tender” and “the Project”, respectively).

Pursuant to the terms of the bid, the Subsidiaries acquired the land (in equal shares between them), in exchange for a consideration of about NIS 75 million, plus VAT, and will act to construct about 273 residential units (subject to certain planning preferences), which will be rented out in accordance with the terms of the Tender during a period of at least 20 years. In July 2014, the Subsidiaries acquired the land in Herzliya, each from their own financial sources, and commenced construction of the Project. The construction work has commenced and is expected to be completed within 39 months from the Effective Date.

In January 2015, the Subsidiaries (hereinafter – “the Borrowers”) signed an agreement with an institutional entity (hereinafter – “the Lender”) for receipt of financing in connection with the planning and construction of the Project (hereinafter – “the Loan Agreement”). The Lender committed to provide financing for the Project, in an aggregate amount of up to NIS 300 million, where the loan period was set such that about 3.25 years relate to the construction period of the Project (hereinafter – “the Construction Period”) while the other 21 years relate to the rental period of the residential units in the Project (hereinafter – “the Operation Period”). In addition, it was agreed with respect to extension of the loan period for an additional period of up to several years, under certain conditions.

A number of financial conditions were stipulated in the Loan Agreement, such as, events that trigger calling of the loan for immediate repayment, the right of the Borrowers to withdraw the increase, the right of the Borrowers to distribute surplus earnings, the right of the Borrowers to reduce the Lender‟s right of recourse to them, and others. With respect to events that trigger calling of the loan for immediate repayment, financial conditions were stipulated with reference to the coverage ratio of the cash flows available for servicing the debt in the 12-month period preceding the date of the relevant examination to the total debt service payments in this period (ADSCR); the coverage ratio of the cash flows available for servicing the projected debt to the unpaid balance of the Project loans on the date of the relevant examination (LLCR); a future coverage ratio; and minimum rating of the debt by the rating companies. In addition, a mechanism was provided in the Loan Agreement for remedying violations of the above-mentioned financial covenants.

In order to secure repayment of the loan, a pledge will be made in favor of the Lender of, among other things, all the rights of the Borrowers in the Project lands, all the rights of the Borrowers in the lease agreements with the tenants in the Project (including collaterals given to them by the tenants), all the rights of the Borrowers in accordance with the Tender documents vis-à-vis the State of Israel, all the rights of the Borrowers in the construction agreement with Danya Cebus, all the rights of the Borrowers vis-à-vis the Project‟s operating contractor (to the extent it is a party that is not the Borrowers themselves or a party they control), and all the rights of the Borrowers with respect to the significant project documents and joint-venture documents. 96

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.)

(2) (Cont.)

In November 2015, all the pre-conditions were fulfilled for provision of the Loan, and the Loan was provided to the Borrowers.

(3) For details regarding tax assessments received by Africa Properties and its wholly-owned subsidiary (hereinafter – “the Subsidiary”) during December 2013 in respect of the years 2008 through 2010 for Africa Properties and the years 2009 and 2011 for the Subsidiary, in the aggregate amount of about NIS 256 million (which includes linkage differences and interest) and the Orders received as a result thereof – see Note 30E(4), below.

(4) Africa Properties recorded in its consolidated financial statements for the year ended December 31, 2015, which also include the real estate activities in Central and Eastern Europe, income from increase in value of investment property, in the amounts of NIS 238,886 thousand (2014 – NIS 157,142 thousand). The main revaluation is a revaluation, in the amount of about NIS 140 million, which was recorded in respect of an increase in the fair value of the Cotroceni shopping mall in Romania. In addition, in 2015, Africa Properties recorded a loss from decrease in value of investment property under construction, in the amount of NIS 15,969 thousand (2014 – an increase of NIS 8,368 thousand).

In addition, Africa Properties examined the net realizable value of the inventory of real estate (land) and the inventory of buildings held for sale, and as a result, in 2015, it recorded a loss from write down of inventory, in the amount of NIS 26,304 thousand, stemming from a reduction to net realizable value of land in Romania and land in Latvia.

(5) In July 2015, Africa Properties signed an agreement for sale to a third party (concurrent with the signing of a parallel agreement with additional rights‟ holders, hereinafter – “the Parallel Agreement”) for sale of the rights of Africa Properties in the Psagot House in Tel-Aviv (hereinafter – “the Property”) in exchange for a consideration of about NIS 85 million (hereinafter – “the Consideration”). The rights of all the sellers in the Property are held jointly, where Africa Properties holds 5% of the ownership rights in two-thirds of the lower part of the Property and 50% of the ownership rights in the top ten floors of the Property, including parts of the 17th floor (hereinafter – “the Rights of Africa Properties Being Sold”).

In November 2015, Africa Properties completed the transaction, which provided it total cash flows, net (after repayment of its share in the loan used to construct the property and the selling expenses), in the amount of about NIS 40 million, of which about NIS 6 million was deposited in trust. Africa Properties did not record a significant gain or loss on completion of the transaction.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.)

(6) In September 2015, Africa Properties, together with Melisron (a joint venture in equal shares) won a tender for lease of a lot on an area measuring about 13 thousand square meters located in the southern part of the government complex (Hakiriya) in Tel-Aviv, for construction of office space and commercial areas (hereinafter – “the Lot”). Based on the zoning applicable to the Lot, it is permissible to build thereon about 114 thousand square meters of space designated to be marketed. The consideration was set at about NIS 536 million plus VAT (hereinafter – “the Consideration”).

In addition, Africa Properties will bear its share of the development expenses, in the amount of about NIS 42 million, and the Property Tax, in the amount of about NIS 35 million. At the time of the win, Africa Properties paid on account of its share of the Consideration, the amount of about NIS 24 million (plus VAT). During October 2015, an agreement was signed between the Company and Melisron, on the one side, and Israel Lands Authority, on the other side, for lease of the Lot for a period of 49 years (with an option to extend for an additional period of 49 years) and the balance of the Consideration was paid. Upon signing of the lease agreement, Africa Properties received a bank loan for financing its share in the transaction, in the amount of about NIS 160 million for a period of two years (bearing interest at the rate of prime+1.5%).

(7) In December 2014, Africa Properties signed a set of agreements with the Weizmann Science Institute (hereinafter – “the Institute”) whereby the balance of the lease period of Africa Properties in the leased premises, as stated in Note 15E(2) below, will be cancelled, while compensation will be received for loss of the revenues (except for two buildings that are leased under a sublease by Africa Properties to third parties) and such lease period will reach its conclusion on the completion date of the transaction (subject to its completion).

As part of the transaction, the parties will make a land consolidation with respect to all their rights in the Park (that is, the part that is presently owned by Africa Properties directly and/or through a subsidiary of Africa Properties (as stated in Note 15E(1) below) and the lands of the Institute – the leased portion after cancellation of the lease agreement) (hereinafter – “the Land Consolidation”), such that after execution of the Land Consolidation the share of Africa Properties and the subsidiary in the rights in the Park will stand at 60% and the share of the Institute will stand at 40%.

It is noted that the Land Consolidation will not include two undeveloped lots, on an area measuring about 20 thousand square meters (that include building rights in accordance with the existing Urban Planning Scheme for construction of about 27.5 thousand square meters of office space held for rent), which will continue to be wholly owned by Africa Properties (hereinafter – “the Additional Lots”), this being in addition to the two subleased buildings, as stated above.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

B. Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.)

(7) (Cont.)

Africa Properties has a “put” option that will effectively require the Institute to acquire from it 40% of each of the Additional Lots, this being upon receipt of a building permit with respect to the relevant Lot, in exchange for a consideration that will be fixed pursuant to a mechanism to be determined by the parties, and the Institute has a “call” option for acquisition of 40% of each of the Additional Lots at any time (even before receipt of a building permit as stated).

As part of the transaction, the manner of management of the Park by Africa Properties and the Institute was arranged, and it was determined that the current management of the Park will be performed by Africa Properties in exchange for a consideration equal to 3% of the Institute‟s share in the rents and management fees paid by the tenants in the Park.

The total payments of the Institute to Africa Properties, payment of the compensation in respect of cancellation of the lease and the payment for the Land Consolidation amount to a total of about NIS 201.2 million (of which about NIS 26 million relating to balancing payments), which are to be made to Africa Properties on the closing date of the transaction (with the addition of linkage to the CPI and annual interest of about 3.825%, in respect of the period commencing from the signing date).

Completion of the transaction was subject to fulfillment of a number of preconditions, which were fulfilled in October 2015.

Accordingly, the Subsidiary made an accounting with the Institute with respect to the Institute‟s share of the revenues and expenses commencing from December 23, 2014 (the signing date of the agreement) and up to the closing date, and received on the closing date cash flows in the amount of about NIS 188 million. On the closing date of the transaction, the Subsidiary did not record a significant gain or loss.

(8) On November 19, 2015, the Board of Directors of Africa Properties decided to distribute a dividend, in the amount of NIS 200 million (which constitutes about NIS 7 per share of NIS 1 par value) to the holders of the shares of Africa Properties on December 1, 2015. The Company‟s share in the dividend is about NIS 112 million. The dividend was received by the Company during December 2015.

C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”)

(1) In March 2015, a notice was received from the Israel Lands Administration of a win by Africa Residences in a tender for an undertaking in a lease contract in connection with land in the City of Modi‟in, on an area measuring about 14 dunams, also known as Block 5640, Parcels 6 and 38 (hereinafter – “the Land”), for construction of 196 residential units and about 4,000 square meters of commercial areas, for a consideration of NIS 82 million (not including VAT) plus developments costs, in the amount of about NIS 39.8 million.

In April 2015, Africa Residences paid the consideration and the developments costs, as stated, from its own sources and from the proceeds of a bank loan.

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”) (Cont.)

(2) In March 2015, Africa Residences, declared distribution of a dividend, in the amount of NIS 50 million, which was paid in April 2015 (the Company‟s share – about NIS 37 million).

(3) For details regarding an undertaking of Africa Properties and Africa Residences with an institutional entity for receipt of financing for the planning and construction of a residential project held for rent in Herzliya – see Note 4B(2), above.

(4) In February 2015, Africa Residences signed an agreement for acquisition of the rights of a third party that is not related to Africa Residences and/or to the controlling shareholders thereof, constituting 37.5% of Parcel 26 in Block 6213, which is part of the Sumail site (hereinafter – “the Site”), for a consideration of NIS 140.5 million. For details regarding additional rights of the Group in the Site – see Note 37K(5), below.

(5) On June 1, 2015, Africa Residences signed (by itself and through its wholly-controlled subsidiary), together with the partners that are not related to Africa Residences (hereinafter – “the Partners” and all together – “the Sellers”) an agreement for sale of their rights in the North Hod Hacarmel project, to a party that is not related to any of the Sellers (hereinafter respectively – “the Property Being Sold”, “the Project” and “the Purchaser”).

The Property Being Sold includes all the rights of the Sellers in the land known as part of Parcels 50 and 54 in Block 11238 (hereinafter – “the Land”), which is located in Haifa, where in addition to the monetary consideration the Purchaser undertakes various obligations to the City of Haifa with respect to the Property Being Sold, including payment of the entire Betterment imposition, if any, in connection with the Property.

The proceeds in respect of the Property Being Sold amounts to about NIS 52 million (plus VAT as per law), of which the share of Africa Residences amounts to about NIS 38 million (plus VAT as per law) (hereinafter – “the Share of Africa Residences in the Proceeds”). Out of the Share of Africa Residences in the Proceeds, on June 1, 2015, the amount of about NIS 30 million was paid to Africa Residences against recording of a caveat in favor of the Purchaser. On June 25, 2015, the possessory interest in the Property Being Sold was delivered to the Purchaser against payment of the balance of the Proceeds (the share of Africa Residences) in the amount of about NIS 8 million (plus VAT as per law).

The Company recorded a pre-tax gain in its financial statements in respect of sale of the Property Being Sold, in the amount of about NIS 22 million, after amortization of original difference, in the amount of about NIS 11 million.

100

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”) (Cont.)

(6) As at December 31, 2012, the category “long-term loans, investments and debit balances” included loans, the balance of which in the books of Africa Residences amounted to about NIS 20,492 thousand, which Africa Residences provided to an unrelated entity (hereinafter – “the Borrower” and/or “Shoval Eyal”), in connection with a tender of the Israel Lands Administration (hereinafter – “ILA”) for provision of permission to plan and an option to acquire rights in real estate, won by the Borrower (hereinafter – “the MKBT Contract”).

It is emphasized that as at the date of the financial statements, the participation of Africa Residences in the project depends on the Borrower and it has no ability or contractual or other legal right to assure its participation in the project.

To the best of the knowledge of Africa Residences, the dates set in the tender for approval of the planning and the resulting option have expired.

During 2010–2011, meetings were held with ILA regarding evaluation of the Borrower‟s planning right.

In 2013, Africa Residences was notified by the Borrower that it received a notice on behalf of the Administration whereby, in light of rejection of the appeal filed by the Administration with respect to the decision of the Subcommittee for Objections not to advance an Urban Planning Scheme with respect to the real estate in the format proposed, the Administration intends to directly advance the required planning processes, and under these circumstances, there is no basis for continuing the compromise negotiations carried on between the Borrower and the Administration in connection with the Borrower‟s right to exercise the Option and/or to receive a different right in the said real estate. In addition, the Borrower gave notice that it totally rejects all that stated in the Administration‟s notice.

Nonetheless, in light of the notice received on behalf of the Administration, based on the opinion of the Borrower‟s legal advisors whereby against the background of the recent developments that have taken place regarding the matter and taking into account, among other things, the additional planning difficulties that have arisen in connection with the real estate, they are not able to estimate the Borrower‟s chances of success with respect to the claims it may file against the Administration for enforcement and/or damages relating to its expenses, the management of Africa Residences believes that it is unable to reliably base its assessment regarding the ability to collect the loans Africa Residences made to the Borrower, including the scope of the amounts it will be able to collect in respect thereof.

Accordingly, Africa Residences recorded a loss in respect of a provision for decline in value in its financial statements for 2013, in the amount of the loans recorded in the books of Africa Residences, namely, about NIS 20.5 million (about NIS 15.4 million net of the tax effect).

101

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

C. Africa Israel Residences Ltd. (a subsidiary, hereinafter – “Africa Residences”) (Cont.)

(6) (Cont.)

In order to remove doubt it is clarified that recording of the provision does not detract from the rights of Africa Residences to full repayment of the loans it granted to the Borrower.

In April 2015, Africa Residences reached agreements with Shoval Eyal for joint cooperation and provision of a loan of up to about NIS 1.9 million in connection with filing of a claim against the Israel Lands Administration for enforcement of the option and/or compensation for its expenses. Further to that stated, during October 2015, Shoval Eyal filed a claim against the Israel Lands Administration, in the amount of NIS 300 million.

(7) On March 7, 2016, the Board of Directors of Africa Residences decided to distribute a dividend, in the amount of NIS 70,000 thousand to the holders of the ordinary shares (the Company‟s share – about NIS 52 million).

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”)

(1) On March 18, 2015, it was decided by the Board of Directors of Africa Industries to conclude the employment of Mr. Avi Motola as the CEO of Africa Industries.

(2) Regarding irregularities in the financial reports of Africa Industries and the consequences deriving therefrom on the Company‟s statement of financial position – see Note 1D and Note 2F, above.

(3) On June 9, 2015, Africa Industries gave notice that, to the best of its knowledge, the Securities Authority started an investigation in connection with irregularities found in its subsidiaries in the Home Design area. For details – see Note 1D and Note 2F, above.

(4) On February 7, 2013, Africa Industries received notice of a decision of the Chairman of the Securities Authority to start an administrative enforcement proceeding against Africa Industries and three of its officers (including the CEO of Africa Industries at that time, who also served at that time as the Company‟s CEO) (hereinafter – “the Officers”). The action referred to above is due to alleged negligence with respect to three administrative violations of the provisions of the Securities Law, in connection with negligent non-disclosure of the significant information relating to the negotiations (that were allegedly carried on) between the subsidiary, Negev Ceramics, and the foreign distribution company, Olympia Tile International Inc., at the time of the tender offer published by Africa Industries for shares of Negev Ceramics, in January 2012.

102

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”) (Cont.)

(4) (Cont.)

On August 27, 2013, it was decided by the Administrative Enforcement Committee to charge Africa Industries and the Officers for monetary sanctions in respect of negligent commission of three administrative violations. Accordingly, a monetary sanction was imposed on Africa Industries, in the amount of NIS 5 million.

Africa Industries and the Officers deny the violations attributed to them pursuant to the notification and submitted an administrative petition against the decision of the Administrative Enforcement Committee to the Economic Division of the District Court.

On January 28, 2015, Africa Industries received a judgment with respect to the administrative petition whereby the Court decided to reject the administrative petition, except in connection with the amount of the economic sanction imposed on Africa Industries, with respect to which the Court decided to reduce the amount and to set it at NIS 4 million.

(5) As at the date of the statement of financial position, as part of closing of stores and examination of decline in value of property, plant and equipment of a subsidiary of Africa Industries, Africa Industries recognized a loss from decline in value of property, plant and equipment in the year ended December 31, 2015, in the amount of NIS 24,552 thousand, which are included in the “other expenses” category in the statement of income.

(6) During 2013 and 2014, Africa Industries signed a private loan agreement and a revision to the loan agreement, respectively (hereinafter – “the Loan Agreement”) with two institutional entities that are not related to the Company Group and/or the controlling shareholder therein (hereinafter – “the Lenders”), whereby the Lenders provided Africa Industries a loan, the balance of which as at the date of the statement of financial position is about NIS 170 million. As part of the Loan Agreement the following financial covenants were provided:

(i) The ratio of the shareholders‟ equity based on the consolidated financial statements of the subsidiary of Africa Industries, Negev Ceramics Ltd. (hereinafter – “the Financial Statements of Negev” and “Negev”, respectively), shall not be less than 13%.

(ii) The ratio of the total debt of Africa Industries to the EBITDA of Negev shall not exceed 6.

EBITDA will be calculated on a cumulative bass of the consolidated financial statements of Negev for the last four quarters that ended as close as possible before the period relevant to the calculation.

(iii) The minimum shareholders‟ equity (solo) of Africa Industries shall not drop below NIS 330 million.

103

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”) (Cont.)

(6) (Cont.)

As at the date of the statement of financial position, Africa Industries was not in compliance with the financial covenants described above.

On March 21, 2016, Africa Industries received a waiver letter in connection with non-compliance with the financial covenants, as stated (hereinafter – “the Waiver Letter”). The Waiver Letter will remain in effect until the earlier of the following: (a) March 31, 2017; (b) the date on which Africa Industries violates any of its commitments pursuant to the Waiver Letter; (c) the date on which a violation event occurred and/or any cause of action arose to the lenders for calling the loan for immediate repayment, and with respect to which an express written waiver was not given.

The highlights of the Waiver Letter are set forth below:

a) Up to examination of the ratio in accordance with the financial statements of Africa Industries as at financial statements December 31, 2016, Africa Industries will not be required to comply with the shareholders‟ equity covenant of Negev; provided that the cash flows from the current operating activities as reflected by Negev‟s consolidated financial statements is positive at all times during this period.

b) Up to examination of the ratio in accordance with the financial statements of Africa Industries as at December 31, 2016, Africa Industries will not be required to comply with the total debt to EBITDA ratio condition of Negev; provided that at all times commencing from the reviewed financial statements as at June 30, 2016, the total debt ratio will be better than the total debt ratio pursuant to the consolidated financial statements of Africa Industries as at December 31, 2015, which as at the date of the statement of financial position is about 73%.

c) Up to examination of the ratio in accordance with the financial statements of Africa Industries as at December 31, 2016, Africa Industries will not be required to comply with the shareholders‟ equity covenant of Africa Industries, provided that at all times during this period the shareholders‟ equity of Africa Industries does not fall below NIS 100 million.

d) Commencing from April 1, 2016, in respect of every interest period, additional interest will apply to the loan in excess of the annual interest rate applicable based on the original loan agreement, at the additional annual rate of 1.5%.

e) Africa Industries committed not to pledge and/or assign and/or transfer and/or sell shares it holds in controlled companies, and in a case wherein any of the holdings detailed above are sold, the proceeds will be used for repayment of the loan amount.

104

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”) (Cont.)

(6) (Cont.)

f) Africa Industries committed to make partial early repayment of payment of the loan principal that is scheduled to be paid on September 30, 2016 (hereinafter – “the September Payment”), as follows:

– Up to and no later than April 30, 2016 – it shall pay the lenders the amount of NIS 2 million.

– Up to and no later than June 30, 2016 – it shall pay the lenders the amount of NIS 2 million.

– Up to and no later than July 30, 2016 – it shall pay the lenders the amount of NIS 4 million.

– In addition, in any case where additional amounts are received, Africa Industries commits (a) to notify the lenders of this fact immediately; and (b) to make use of all the amounts received as stated (except where it was provided between the parties that such amounts shall serve Africa Industries for its operating activities), in order to advance payments on account of the September payment.

g) Africa Industries committed not to take out credit from any party, including any third party and including any related party (except credit from a related party the repayment of which is unequivocally subordinate to the lenders and is deferred until full and final repayment of the loans), unless advance approval was received from the lenders in writing. For purposes of this Section “credit” – including monetary credit, contingent credit, guarantees and any monetary debt or liability.

h) Provisions were stipulated regarding transfer of information and reports to a representative on behalf of the lenders, who will be permitted to meet with the management of Africa Industries, and in a case of existence of a fear of making a decision that will adversely impact the rights of the lenders, will also be able to be present at meetings of the Board of Directors of Africa Industries at which such matter will be addressed.

i) An additional ground was added to the loan agreement for calling for immediate repayment, in a case where a “going concern” caveat is included in the financial statements of Africa Industries or in the financial statements of Negev.

j) The provisions of sections d–h (inclusive) above will also apply after the end of the Waiver Period, and this being up to the earlier of the following dates: (a) full and final repayment of the loans; or (b) the date on which Africa Industries will be in compliance with all the terms of the loan agreement, including the financial covenants.

105

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

D. Africa Israel Industries Ltd. (a subsidiary, hereinafter – “Africa Industries”) (Cont.)

(6) (Cont.)

Africa Industries will be permitted to make early repayment of the loan, commencing from the end of 3 years from the date of provision of the loan and up to the end of the loan period, in exchange for payment of an early repayment commission, in accordance with the formula provided in the agreement.

On March 10, 2016, Africa Industries made early repayment of the current payment that was scheduled to be paid on March 31, 2016.

E. Danya Cebus Ltd. (a subsidiary, hereinafter – “Danya Cebus”)

(1) For information regarding the Company‟s request to all the shareholders of Danya Cebus (except for Africa Israel Trade and Agencies Ltd., a wholly-owned subsidiary of Africa Investments that holds 14,473,692 ordinary shares of NIS 1 par value of Danya Cebus) with respect to an offer to acquire from them, in a full tender offer, all of their shares – see Note 12B(2).

(2) On June 11, 2015, Danya Cebus was informed by City Transportation Lanes Ltd. (hereinafter – “CTL”), that its offer, together with an international company (hereinafter – “the Foreign Company”), which is not related to Danya Cebus and/or its controlling shareholders, in the framework of a designated partnership to be set up (hereinafter together – “the Partnership”) (Cebus will hold 49% of the rights in the Partnership and the Foreign Company will hold 51% of the rights in the Partnership), was declared the winning bid in a tender for performance of the digging work in the “Carlibach Station”, which is located in the western section of the Red Line of the Tel-Aviv Light Train (hereinafter – “the Tender”) that was published by CTL.

Pursuant to the terms of the Tender and the Partnership‟s offer, in respect of the work detailed above, the Partnership will be entitled to a consideration of about NIS 568 million (plus VAT as per law), which is to be paid based on the rate of the performance of the said work.

The performance period is about 54 months (based on milestones defined in the Tender), from the date of the Work Commencement Order. The Partnership has commenced the work that is the subject of the Tender. In addition, the Partnership has provided a performance guarantee, as is customary.

(3) In July 2015, the Board of Directors of Danya Cebus declared a dividend, in the amount of NIS 50 million, which was paid in August 2015.

(4) On July 30, 2015, Danya Cebus together with an international company (hereinafter – “the Foreign Company”), as stated in Note 4E(2) above, submitted a bid in a tender for planning tunnels and construction of underground stations of the eastern portion of the Red Line – The Light Rail in Tel-Aviv, which was published by Municipal Transportation Lanes Ltd.

106

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

E. Danya Cebus Ltd. (a subsidiary, hereinafter – “Danya Cebus”) (Cont.)

(4) (Cont.)

On December 21, 2015, a notification was delivered to the partnership whereby its bid was declared as the winning bid in the tender.

As part of the tender, the bidders were required to submit bids for execution of work, as stated, with respect to construction of the eastern section of the Red Line, which includes, among other things, construction of 3 underground stations, two parallel tunnels having a length of about 3.5 kilometers each using the “tunnel boring machine” (TBM) method, from the depot entrance up to the Ben-Gurion station, and from the Schenker entrance up to two crossings connecting west of the Gai-ah Intersection, and construction of an additional connecting tunnel, having a length of about 400 meters from the Schenker entrance up to the Aim-Hamoshavot station, using the New Austrian Method (NATM).

Pursuant to the terms of the tender and the bid submitted, the consideration for the work is estimated at about NIS 1.7 billion, plus VAT as per law (the share of Danya Cebus is about NIS 0.8 billion), which is to be paid based on the rate of execution of the said work.

The execution period is about five and a half years (based on milestones defined as part of the tender), which commenced on December 29, 2015 (the signing date of the binding agreement).

In addition, the partnership provided a performance guarantee as is customary in tenders of this type.

(5) In 2014, Danya Cebus signed a joint cooperation agreement (hereinafter – “the Agreement”) with a third party that is not related to Danya Cebus and/or its controlling shareholders, for establishment of a company (hereinafter – “the Joint Company”), that will act to locate and execute contractor work in a country in the western part of the African continent. Pursuant to the Agreement, Danya Cebus will hold 45% of the rights in the Joint Company while a foreign company will hold 55% of the rights in the Joint Company.

Since Danya Cebus has not yet commenced execution and/or performance of the above-mentioned format for a long time after the signing of the Agreement, in October 2015, Danya Cebus notified the foreign company of its cancellation.

107

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

F. Africa Israel Hotels Ltd. (a jointly-controlled company accounted for using the equity basis of accounting, hereinafter – “Africa Hotels”) (Cont.)

On October 18, 2015, Africa Israel Hotels received a monetary claim filed by Barinx Limited, Aimtrust Limited and their shareholders, Tunia Halperin, Asaf Rozin and Ehud Almog (hereinafter – “the Plaintiffs”), which to the best of the knowledge of Africa Israel Hotels are the controlling shareholders in the Sunguard Company, in the District Court of Tel-Aviv–Jaffa (hereinafter – “the Court”) against Africa Israel Hotels, a Cyprus subsidiary of Africa Israel Hotels, officers therein (former and present) and others (hereinafter – “the Claim” and “the Defendants”). The Plaintiffs contend that the Defendants caused them to lose monies they invested in hotels in Romania (hereinafter – “the Hotels”), potential profits from operation of the Hotels, the value of their holdings (40%) in the Hotels, the possibility of exercising a “put” option in connection with the Hotels or their holdings (40%) in the Hotels. As part of the Claim, the Plaintiffs are requesting from the Court to instruct the Defendants, jointly and severally, to pay the Plaintiffs compensation, in the amount of NIS 75 million, in respect of the following contractual and tort causes of action: breach of contract, breach of a contractual duty, causation of a breach of contract, negligence, breach of a legislative duty, unjust enrichment, deception, prejudicing the minority, breach of the duty of trust, false allegations slander and violation of privacy. At the present time, Africa Israel Hotels is studying the Claim and is preparing to file a statement of defense. Nonetheless, at this preliminary stage, it is not possible to assess the chances that the Claim will be realized.

G. Additional information at the level of the Group and the Company

(1) The Company and the other shareholder (hereinafter – “the Partner”) (in equal shares) in Rennanot Initiations and Investments Ltd. (hereinafter – “Rennanot”) and Rennanot (the Company, the Partner and Rennanot will be referred to hereinafter together as – “the Parties”) reached agreements among themselves in connection with cancellation of an agreement they entered into in 1996, relating to the investment of the Company and Rennanot in execution of a residential project in Kibbutz Galilee Yam (this agreement, together with the summaries prepared between the parties from time to time, with respect to execution of this project, will be referred to hereinafter as – “the Joint Cooperation Agreement”), and with reference to reciprocal return of amounts and properties that were transferred between the Company and Rennanot as part of the Joint Cooperation Agreement.

During May 2015, for purposes of arranging the terms of the separation and cancellation of the Joint Cooperation Agreement, the Parties entered into a transaction cancellation agreement (hereinafter – “the Cancellation Agreement”) wherein it was provided, among other things, that the Company is to return to Rennanot the shares issued to it under the Joint Cooperation Agreement, and Rennanot and/or the Partner is/are to return to the Company various amounts the Company expended under the Joint Cooperation Agreement (including a shareholders‟ loan the Company provided to Rennanot), in the aggregate amount of NIS 66 million (hereinafter – “the Return Amounts”) (plus VAT, if applicable), and they will see to cancellation of the financial guarantee the Company provided to the bank financing the activities of Rennanot, in order to secure the Rennanot‟s liabilities to the bank.

108

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

G. Additional information at the level of the Group and the Company (Cont.)

(1) (Cont.)

At the time of the signing of the Cancellation Agreement, amounts were paid to the Company in an amount equal to the Return Amounts (part of which as a short-term loan, which Rennanot made to the Company, in an amount equal to part of the Return Amounts, in respect of which a request will be submitted for receipt of approval for the capital reduction, as described above), and the Company deposited a transfer note, in respect of the Company‟s holdings in Rennanot.

As a result of cancellation of the Joint Cooperation Agreement in May 2015, as described above, the Company received about NIS 66 million as free cash flows and recorded in its financial statements as at December 31, 2015, a gain of about NIS 40 million.

(2) On September 9, 2015, the Company signed an agreement with a third party that is not related to the Company and/or its controlling shareholder (hereinafter – “the Purchaser”), for sale of an area measuring about 12.3 thousand square meters out of its rights in a lot having an aggregate area of about 31 thousand square meters located in Savyon (hereinafter – “the Property Being Sold” and “the Lot”, respectively).

The Property Being Sold includes a commercial center, parking areas and two office buildings situated on the Lot on a total built-up area of about 2.5 thousand square meters, as well as unutilized building rights on the Lot of about 1 thousand square meters, for an aggregate consideration of about NIS 46.25 million (with the addition of VAT) (hereinafter – “the Consideration” and “the Sale Agreement”, respectively).

It is noted that the Property Being Sold does not include the balance of the unutilized building rights on the Lot of about 3,000 square meters.

Together with the Sale Agreement, the parties signed a joint cooperation agreement that arranges, among other things, the set of relationships between the parties in all that related to their rights in the Lot.

On the signing date of the Sale Agreement, the Purchaser paid the Company the amount of NIS 11 million.

On December 20, 2015, (hereinafter – “the Completion Date”) the transaction was completed, after all the obligations to record liens and caveats were executed.

It is noted that on the Completion Date the Company was paid the amount of about NIS 35.25 million (including VAT), constituting the balance of the Consideration in respect of the Property (this amount includes the amount of about NIS 3.8 million that was transferred to the trustee for purposes of assuring receipt of approvals and completion of the registration requirements with reference to the rights in the Property).

109

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

G. Additional information at the level of the Group and the Company (Cont.)

(2) (Cont.)

In respect of the transaction, the Company received total net cash flows, in the amount of about NIS 44.5 million. The Company did not record a significant gain or loss in respect of the transaction.

(3) On February 4, 2016, the Company and Netz Hotels Ltd. (hereinafter – “Netz Hotels”) signed a revision to an agreement for sale of shares of Africa Israel Hotels Ltd. (hereinafter – “Africa Hotels”) to which the Company is party (hereinafter – “the Sale Agreement” and “the Revision to the Agreement”, respectively) whereby the Company and Netz Hotels (hereinafter – “the Parties”) reached new agreements in connection with the commitment to acquire 50% of the balance of the shareholders‟ loan the Company provided to Africa Hotels (hereinafter – “the Shareholders‟ Loan”), the amount of which (100%) as at the date of the Revision to the Agreement undertaking was NIS 31,127 thousand as well as additional agreements, subject to the consent of the Parties to a final compromise and reciprocal waiver of contentions and/or demands, the highlights of which are detailed below:

a) Netz Hotels will acquire 50% of the unpaid balance of the Shareholders‟ Loan (hereinafter – “the Half of the Loan”) up to December 31, 2020 (hereinafter – “the Revised Repayment Date”), in accordance with the updated amount of the loan as at the Revised Repayment Date. The Revised Repayment Date will be automatically extended for an additional five years, every five years, subject to Netz Hotels complying with its obligations under the Revision to the Agreement.

b) Commencing from January 1, 2014 (retroactive) and up to full repayment of half of the unpaid balance of the Shareholders‟ Loan to the Company, the annual interest rate in respect of the debt relating to acquisition of the Shareholders‟ Loan will be 6.25% (in place of 4.5%) and commencing from January 1, 2018, the interest rate will be 7.5% (in place of 6.25%), this being in addition to linkage differences.

c) As a replacement for the purchase obligation, as stated in Section A above, it was agreed that the Parties will cause that Africa Hotels will repay the full amount of the unpaid balance of the Shareholders‟ Loan as a result of sale of any asset out of the assets of Africa Hotels and/or as a result of a distribution that was supposed to have been paid to Netz Hotels and/or any payment and/or other right that was supposed to have been transferred to Netz Hotels vis-à-vis Africa Israel Hotels, at their values after withholding of tax at the source, to the extent that this does not contradict obligations vis-à-vis the lending parties of Africa Israel Hotels. If there is a contradiction, the Parties and Africa Israel Hotels will take action vis-à-vis the lending parties to the extent possible in order to permit the repayment as stated.

110

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 4 – Group Activities and Significant Events (Cont.)

G. Additional information at the level of the Group and the Company (Cont.)

(3) (Cont.)

d) From the date of revision of the agreement and thereafter, every right that Netz Hotels has to receive rights and/or payments and/or assets from Africa Hotels, including a right to repayment of shareholders‟ loans (including additional existing or future shareholders‟ loans), a right to receive payments and/or a distribution of assets in any legal manner, and a right to receive dividends, will be subordinate to the full amount of the Company‟s Shareholders‟ Loan.

e) To the extent that Netz Hotels does not acquire half of the Shareholders‟ Loan, including in a case where half of the loan is repaid by means of repayment by Africa Hotels itself, Netz Hotels will refrain from taking any action that will cause that any payment will be executed from Africa Hotels to Netz Hotels prior to the full amount of the Company‟s Shareholders‟ Loan being repaid, including that distribution of a dividend will not be approved prior to repayment of the shareholders‟ loans to the shareholders (where, as stated, first the Company‟s Shareholders‟ Loan will be repaid with preference over the other loans).

(4) In 2015, associated companies accounted for using the equity method of accounting distributed dividends to their shareholders, in the aggregate amount of about NIS 21 million. The Company‟s share in these dividends is about NIS 17 million.

Note 5 – Cash and Cash Equivalents

At December 31 2015 2014 In Thousands of NIS

Bank balances 335,938 463,119 Demand deposits 939,264 876,051

Cash and cash equivalents 1,275,202 1,339,170

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 35 “Financial Instruments”.

111

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 6 – Short-Term Investments

Interest At December 31 Rate 2015 2014 12/31/2015 In Thousands of NIS

Deposit in euro 0%–0.5% 60,288 72,219 Deposit in shekels (1), (2) 0.06%–0.2% 312,663 646,434 Deposit in dollars 0.01%–0.15% 25,562 22,629 Deposit in other foreign currency 2.35% 394 4,988 Other – mutual funds (2) 44,303 44,209 443,210 790,479

(1) The balance as at December 31, 2015, includes the amount of about NIS 78 million that was received from issuance of debentures (Series ZB) of the Company in September 2014, which is designated for use for purposes of repayments of principal and interest in respect of the debentures (Series Z and ZA) of the Company in the 12 months following the date of the statement of financial position (as at December 31, 2014 – about NIS 465 million).

(2) As part of project accompaniment agreements signed with banks, it was provided that receipts from purchasers of residential units will be deposited in closed accompaniment accounts. The amounts deposited in the accompaniment accounts are intended to serve solely for the benefit of the projects, pursuant to the terms provided in the accompaniment agreements and, accordingly, they were presented in the “short-term investments” category. As at December 31, 2015, the total cash in the accompaniment accounts is about NIS 274,899 thousand (December 31, 2014 – NIS 223,947 thousand).

Note 7 – Marketable Securities

At December 31 2015 2014 In Thousands of NIS

Shares (1) 24,970 16,562 Participation certificates in mutual funds (1) 1,975 695 Government debentures (1) 10,534 50,682 Corporate debentures (1) 129,859 63,166 Short-term Treasury notes (1) 108,442 11,007 Basket certificates (1) 18,486 9,133 294,266 151,245

(1) Financial instruments presented at fair value through the statement of income.

112

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 8 – Trade and Other Receivables, Including Derivative Instruments

At December 31 2015 2014 In Thousands of NIS

Current Assets

Trade receivables Tenants, lessees and others 136,717 113,207 Construction work in progress (1) 393,081 314,255 Customers of industrial companies 691,822 *755,452 Less: allowance for doubtful debts (114,381) *(71,650) 1,107,239 1,111,264

Other receivables, including derivative instruments Prepaid expenses and advances to suppliers 153,582 *166,242 Short-term loans 2,216 14,299 Receivables in respect of property, plant and equipment and investment property 36,488 18,535 Receivables in respect of sale of investee company 105 2,290 Accrued income 11,348 31,000 Employees 1,016 1,506 Institutions 47,665 110,172 Insurance indemnification with respect to contingencies 43,338 41,086 Interested and related parties and associated companies 13,550 7,886 Other receivables 56,521 54,735 365,829 447,751 * Restated – see Note 2F.

See Note 35 regarding linkage basis of trade receivables and other receivables and debit balances

At December 31 2015 2014 In Thousands of NIS

(1) Construction work in progress Costs incurred 5,673,106 5,218,317 Plus income recognized 187,637 201,864 Less losses recognized (111,615) (123,585) Less deposits received (5,356,047) (4,982,341)

393,081 314,255

See Note 37 regarding interested and related parties.

113

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 9 – Inventory of Buildings for Sale

At December 31 2015 2014 In Thousands of NIS

Residential construction* 2,914,779 2,466,903 Less – decline in value (426,267) (381,810) 2,488,512 2,085,093

* Includes credit costs capitalized during the period 14,194 12,126

Note 10 – Other Inventory

At December 31 2015 2014 In Thousands of NIS

Steel and ceramics Raw and auxiliary materials and packagings 188,841 *196,963 Work in process 7,383 5,334 Finished and purchased goods 300,628 *325,859 Inventory in transit 12,223 20,187

Total inventory of industrial company 509,075 548,343 ------

Construction and auxiliary materials 2,886 4,857 Work tools and other materials 1,273 492 4,159 5,349 ------

513,234 553,692 * Restated – see Note 2F.

Note 11 – Assets and Liabilities Held for Sale

At December 31 2015 2014 In Thousands of NIS

Assets classified as held for sale Investment property 244,684 26,849 Investment property under construction 19,529 – 264,213 26,849

The assets classified as “held for sale” are assets with respect to which there is a sale contract or a binding memorandum of understanding and it is expected that they will be realized within 12 months from the date of the statement of financial position and, accordingly, these assets are classified at Level 2 in the fair value hierarchy, and measurement of the fair value of the assets, as stated, is based on the actual selling price.

114

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 12 – Subsidiaries

A. Details regarding subsidiaries

(1) Subsidiaries

Set forth below is a list of the Group‟s significant subsidiaries:

Ownership rights of the Group in the subsidiary Location of company’s for the year ended Name of Company main activities 2015 2014

Africa Israel Properties Ltd. Israel, Central and Eastern Europe 56% 56% AFI Development Russia 64.9% 64.9%

Regarding the existing limitations on the Group with respect to use of its assets or settlement of its liabilities – see Note 18D “Financial Covenants of Africa Industries” and Note 18G “Collaterals for Credit Received”.

115

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 12 – Subsidiaries (Cont.)

A. Details regarding subsidiaries (Cont.)

(2) Non-controlling interest in subsidiaries

Set forth below is a table summarizing information in respect of the Group‟s subsidiaries, including adjustments to fair value made on the acquisition date, except for goodwill, regarding which there are non-controlling interests that are significant to the Group (not including elimination of intercompany transactions)

As at December 31, 2015 and for the year then ended Rate of Income ownership Book (loss) rights of value allocated holders of of Other Total to holders non- Non- Non- Total non- compre- compre- of non- controlling Current current Current current net controlling Net hensive hensive controlling interests assets assets liabilities liabilities assets interests Revenues income loss income interests In NIS thousands

Africa Israel Properties 44.04% 771,416 6,918,602 1,329,104 3,762,064 2,598,850 1,242,211 645,462 216,794 (274,930) (58,136) 105,199

AFI Development 35.12% 1,093,095 4,806,577 1,156,756 1,654,093 3,088,823 1,113,004 376,447 (1,801,078) (93,993) (1,895,071) (636,220)

Total 1,864,511 11,725,179 2,485,860 5,416,157 5,687,673 2,355,215 1,021,909 (1,584,284) (368,923) (1,953,207) (531,021)

For the year ended December 31, 2015 Cash flows provided by Rate of financing ownership activities without Dividends rights of Cash flows Cash flows dividends to paid to Total holders of provided by used in holders of holders of decrease in non-controlling operating investing non-controlling non-controlling cash and cash interests activities activities interests interests equivalents In NIS thousands

Africa Israel Properties 44.04% 291,701 (312,384) 9,056 (88,073) (99,700)

AFI Development 35.12% 134,002 (57,893) (310,996) – (234,887)

Total 425,703 (370,277) (301,940) (88,073) (334,587)

116

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 12 – Subsidiaries (Cont.)

A. Details regarding subsidiaries (Cont.)

(2) Non-controlling interest in subsidiaries (Cont.)

As at December 31, 2014 and for the year then ended Rate of income ownership Book (loss) rights of value allocated holders of of Other Total to holders non- Non- Non- Total non- compre- compre- of non- controlling Current current Current current net controlling Net hensive hensive controlling interests assets assets liabilities liabilities assets interests Revenues income loss income interests In NIS thousands

Africa Israel Properties 44.04% 623,746 7,187,899 1,031,971 3,922,799 2,856,875 1,355,301 726,033 281,963 (36,946) 245,017 133,062

AFI Development 35.12% 1,050,629 7,312,156 1,158,560 2,219,390 4,984,835 1,760,691 934,994 (1,041,075) (589,599) (1,630,674) (388,076)

Total 1,674,375 14,500,055 2,190,531 6,142,189 7,841,710 3,115,992 1,661,027 (759,112) (626,545) (1,385,657) (255,014)

For the year ended December 31, 2014 Cash flows provided by Rate of financing ownership activities without Dividends Total rights of Cash flows Cash flows dividends to paid to increase holders of provided by used in holders of holders of (decrease) in non-controlling operating investing non-controlling non-controlling cash and cash interests activities activities interests interests equivalents In NIS thousands

Africa Israel Properties 44.04% 417,559 (139,597) (105,796) (33,000) 139,166

AFI Development 35.12% 230,384 (414,102) (150,927) – (334,645)

Total 647,943 (553,699) (256,723) (33,000) (195,479)

117

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 12 – Subsidiaries (Cont.)

A. Details regarding subsidiaries (Cont.)

(2) Non-controlling interest in subsidiaries (Cont.)

As at December 31, 2013 and for the year then ended Rate of Net ownership income rights of Book (loss) holders value allocated of of Other Total to holders non- Non- Non- Total non- compre- compre- of non- controlling Current current Current current net controlling Net hensive hensive controlling interests assets assets liabilities liabilities assets interests Revenues income loss income interests In NIS thousands

Africa Israel Properties 44.01% 543,379 7,378,324 2,421,666 2,808,814 2,691,223 1,276,662 706,285 154,186 (83,344) 70,842 70,780

AFI Development 35.12% 1,543,578 8,130,602 456,259 3,214,899 6,003,022 2,122,327 1,355,641 368,584 (20,541) 348,043 132,592

Total 2,086,957 15,508,926 2,877,925 6,023,713 8,694,245 3,398,989 2,061,926 522,770 (103,885) 418,885 203,372

For the year ended December 31, 2013 Cash flows provided by (used in) Rate of financing ownership activities without Dividends rights of Cash flows Cash flows dividends to paid to Total holders of provided by used in holders of holders of increase in non-controlling operating investing non-controlling non-controlling cash and cash interests activities activities interests interests equivalents In NIS thousands

Africa Israel Properties 44.01% 281,008 (115,639) (74,819) (1,498) 89,052

AFI Development 35.12% 86,626 (745,884) 745,337 – 86,079

Total 367,634 (861,523) 670,518 (1,498) 175,131

B. Transactions with holders of non-controlling interests

(1) On August 19, 2015, the subsidiary, AFI Development, acquired the balance of the shares (10%) in a company that owns the Botanic Gardens project in Moscow, in the amount of about U.S.$1.6 million (about NIS 6.2 million). The impact on the equity attributable to the owners of the Company is a decrease, in the amount of about NIS 23.4 million.

118

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 12 – Subsidiaries (Cont.)

B. Transactions with holders of non-controlling interests (Cont.)

(2) The securities of Danya Cebus were registered for trading on the Tel-Aviv Stock Exchange up to July 22, 2015.

On June 17, 2015, the Company contacted all the shareholders of Danya Cebus (except for Africa Israel Trade and Agencies Ltd., a wholly-owned subsidiary of Africa Investments that holds 14,473,692 ordinary shares of NIS 1 par value of Danya Cebus) with respect to an offer to acquire from them, in a full tender offer, all of their shares, the validity of which was contingent on acquisition of all the shares offered for purchase (5,192,036), pursuant to Section 336 of the Companies Law – all in accordance with the terms of the specification that was submitted by the Company on June 17, 2015, as amended on July 6, 2015 (hereinafter – “the Specification”).

Pursuant to the tender offer, the Company offered to purchase from all the offerees, all of their shares, at a price of NIS 23 per share. On July 6, 2015, the Company published an amendment to the tender offer, whereby the amount it offers for each share increased to NIS 27 per share.

On July 12, 2015, the published the results of the tender offer, whereby acceptance notifications were received with respect to tender offer, as stated.

Pursuant to the notification of the bid coordinator, Bank Leumi L‟Israel Ltd., shareholders holding 4,630,300 shares responded to (accepted) the tender offer, who indicated that they have no personal interest in acceptance of the tender offer, and acceptance notifications were not received on behalf of registered shareholders.

In light of fulfillment of the conditions of Section 337(A) of the Companies Law and since the rate of holdings of the offerees (registered and unregistered) who did not respond to the offer constituted less than five percent (5%) of the issued share capital of Danya Cebus, and more than half of the offerees that do not have a personal interest in acceptance of the tender offer responded to (accepted) it, all of the shares the Company requested to acquired were transferred to its ownership. During July 2015, the Company paid about NIS 140 million for the shares offered to be acquired. The expected impact on the equity allocable to the owners of the Company is a reduction of about NIS 47 million.

As a result of completion of the tender offer, the Company holds, directly and indirectly, 100% of the issued share capital of Danya Cebus. Therefore, Danya Cebus has become a private company and its shares were eliminated (delisted) from trading on the Tel-Aviv Stock Exchange.

It is noted that in the period of the report, options a subsidiary of Danya Cebus, Africa Residences, were exercised, which caused a decline in the rate of the holdings of Danya Cebus in Africa Residences from 74.4% to 74.22%. As a result, Danya Cebus recorded a capital reserve for transactions with the minority, in the amount of about NIS 1.3 million.

119

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 13 – Investee Companies Accounted for using the Equity Method of Accounting

A. Joint ventures

(1) Condensed data regarding significant joint ventures

a. General information

Main Location Name of Company of Business General Information

Africa Hotels Israel Africa Hotels is engaged in hotel, tourism, recreation and spa activities in and outside of Israel.

For details regarding loans and capital notes provided to joint ventures – see Note 37D below in connection with “Related and Interested Parties”.

b. Condensed financial information regarding the financial position

Rate of Non- Total Company‟s Book ownership/ Current Non- Current current net share value participation assets current liabilities liabilities assets in net Other of the in income (1) assets (2) (3) 100% assets adjustments investment In thousands of NIS

As at December 31, 2015 Africa Hotels 50.0% 61,980 686,380 184,901 428,808 134,651 67,326 71,510 138,836

As at December 31, 2014 Africa Hotels 50.0% 72,459 710,146 229,820 417,310 135,475 67,738 76,522 144,260

(1) Of which cash and cash equivalents in the amount of NIS 3,327 thousand (December 31, 2014 – NIS 7,751 thousand).

(2) Of which current financial liabilities, not including trade payables, other payables and other provisions in the amount of NIS 97,934 thousand (December 31, 2014 – NIS 145,382 thousand).

(3) Of which non-current financial liabilities except for other provisions in the amount of NIS 388,106 thousand (December 31, 2014 – NIS 377,001 thousand).

120

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 13 – Investee Companies Accounted for using the Equity Method of Accounting (Cont.)

A. Joint ventures (Cont.)

(1) Condensed data regarding significant joint ventures (Cont.)

c. Condensed financial information regarding the results of operations

Company‟s Total share in other compre- Rate compre- Company‟s hensive of Income Other hensive share in income ownership/ (loss) compre- income compre- (loss) participation from hensive (loss) hensive presented in continuing income (1), (2), income Other in the income Revenues operations (loss) (3), (4) (loss) adjustments books In thousands of NIS

For the year ended December 31, 2015 Africa Hotels 50.0% 383,818 (2,090) 4,143 2,053 1,027 (8,521) (7,494)

For the year ended December 31, 2014 Africa Hotels 50.0% 358,634 (17,016) 658 (16,358) (8,179) (4,506) (12,685)

For the year ended December 31, 2013 Africa Hotels 50.0% 376,866 5,817 (21) 5,796 2,898 (6,380) (3,482)

(1) Of which depreciation and amortization in the amount of NIS 70,555 thousand (for the year ended December 31, 2014 – NIS 66,273 thousand and for the year ended December 31, 2013 – NIS 66,476 thousand).

(2) Of which interest income in the amount of NIS 69 thousand (for the year ended December 31, 2014 – NIS 1 thousand and for the year ended December 31, 2013 – NIS 11 thousand).

(3) Of which interest expenses in the amount of NIS 18,208 thousand (for the year ended December 31, 2014 – NIS 21,599 thousand and for the year ended December 31, 2013 – NIS 23,217 thousand).

(4) Of which tax expenses in the amount of NIS 4,714 thousand (for the year ended December 31, 2014 – NIS 1,464 thousand and for the year ended December 31, 2013 – NIS 119 thousand).

121

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 13 – Investee Companies Accounted for using the Equity Method of Accounting (Cont.)

A. Joint ventures (Cont.)

(2) Joint ventures that are not significant individually

Group‟s share in comprehensive Book value of income (loss) the investments for the year ended as at December 31 December 31 2015 2014 2015 2014 NIS thousands

Joint ventures 128,936 124,471 25,396 (11,307)

B. Associated companies

Associated companies that are not significant individually

Group‟s share in comprehensive Book value of income the investments for the year ended as at December 31 December 31 2015 2014 2015 2014 NIS thousands

Associated companies 34,662 31,027 18,370 25,195

122

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 14 – Property, Plant and Equipment

A. Composition:

Land, buildings and Facilities Hotels Industrial plants Office facilities and Land Land Machinery furniture for construction and and and and self-use equipment buildings buildings equipment Vehicles equipment Total In Thousands of NIS

Cost

Balance at January 1, 2014 254,377 194,038 158,109 325,282 845,930 25,013 145,835 1,948,584

Additions 22,299 20,017 297 49,063 103,096 2,367 13,614 210,753 Deletions (844) (14,446) (1,571) – (1,776) (2,937) (5,886) (27,460) Impact of changes in exchange rates (25,379) (1,074) (79,593) (27,124) (4,388) (2,213) (3,845) (143,616) Balance at December 31, 2014 250,453 198,535 77,242 347,221 942,862 22,230 149,718 1,988,261

Additions 8,451 16,350 128 5,337 25,492 777 6,724 63,259 Deletions (17,362) (1,557) (4) (37) (36,692) (1,073) (1,769) (58,494) Transfer from inventory to buildings held for sale – – 824 – – – – 824 Impact of changes in exchange rates (3,879) (920) (30,202) (11,108) (1,801) (1,085) (5,070) (54,065) Balance at December 31, 2015 237,663 212,408 47,988 341,413 929,861 20,849 149,603 1,939,785

123

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 14 – Property, Plant and Equipment (Cont.)

A. Composition: (Cont.)

Depreciation and losses from decline in value

Balance at January 1, 2014 64,315 153,356 10,026 66,711 328,926 15,842 112,040 751,216

Depreciation for the year 14,071 16,236 (4,524) 5,056 24,307 1,491 11,729 68,366 Deletions – (12,968) (1,270) – (1,452) (2,637) (4,666) (22,993) Impact of changes in exchange rates – (1,313) (3,900) (1,596) (2,557) (1,732) (2,732) (13,830) Balance at December 31, 2014 78,386 155,311 332 70,171 349,224 12,964 116,371 782,759

Depreciation for the year 16,576 18,712 824 11,260 35,997 1,459 10,494 95,322 Update of decline in value, net – – – – 7,574 – – 7,574 Deletions (6,274) (1,489) (4) (35) (1,418) (840) (1,264) (11,324) Impact of changes in exchange rates – (760) (2,968) (610) (1,174) (821) (3,443) (9,776) Balance at December 31, 2015 88,688 171,774 (1,816) 80,786 390,203 12,762 122,158 864,555

Book Value

January 1, 2014 190,062 40,682 148,083 258,571 517,004 9,171 33,795 1,197,368

December 31, 2014 172,067 43,224 76,910 277,050 593,638 9,266 33,347 1,205,502

December 31, 2015 148,975 40,634 49,804 260,627 539,658 8,087 27,445 1,075,230

124

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 14 – 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 18G.

C. Additional Details regarding Rights in Land used by the Group as Property, Plant and Equipment

1. 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.

2. Land in Rishon Lezion is leased under a financing lease for a period of 25 years commencing from July 2011 (after the passage of 14 years from the commencement date of the lease, each party has the possibility of ending the lease).

Land in Yeruham is leased under a financing lease for a period of 20 years commencing from November 1, 2013 (after the passage of 12 years from the commencement date of the lease, each party has the possibility of ending the lease).

As at December 31, 2015, the value of the assets under the financing leases was NIS 149,062 thousand (December 31, 2014 – NIS 157,044 thousand).

3. The land of the factories are located in Kiryat Malachi, Ashkelon, and Haifa, on an aggregate area of about 164 dunams in accordance with lease contracts. The lease period pursuant to the said contracts is 49 years and ends in 2054. Pursuant to the said contracts, Africa Industries has permission to extend of the lease contracts for an additional 49 years.

125

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction

A. Movement in in the book value of investment property

For the Year Ended December 31 2015 2014 In Thousands of NIS

Balance at January 1 10,741,698 11,124,395 Additions: Acquisitions 76,565 108,918 Transfer from investment property under construction 140,870 91,949 217,435 200,867 Eliminations: Sales 315,971 23,368 Classified as held for sale 271,022 18,250 Company that exited the consolidation – 394,296 586,993 435,914

Translation differences (844,469) (718,387) Changes in fair value, net* (1,044,851) 570,737

Balance at December 31 8,482,820 10,741,698

* In 2015, the change stems mainly from a change in the assumptions used in valuing the AFI MALL Shopping Mall in Moscow, which reflected an increase in the rate of the vacant areas in the long term from 3% to 8.3%, due to a general increase in the rate of the vacant areas in the retail market, and a decline in the rental income per square meter. For additional details – see Note 4A(2)(a).

126

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

B. Movement in in the book value of investment property under construction

For the Year Ended December 31 2015 2014 In Thousands of NIS

Balance at January 1 2,433,715 2,880,595 Additions: Acquisitions 400,043 391,995 Capitalized costs and expenses (1) 227,759 141,388 627,802 533,383 Eliminations: Classified as held for sale 19,529 – Realizations – 79,296 Transfer to inventory of buildings held for sale 269,362 – Transfer to investment property 140,870 91,949 429,761 171,245

Translation differences (170,923) (58,274) Changes in fair value, net (390,808) (750,744)

Balance at December 31 2,070,025 2,433,715

(1) Of which about NIS 11 million of financing costs capitalized in 2015 (2014 – NIS 2 million).

127

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value

(1) Hierarchy of fair value

The Group‟s real estate properties are measured at fair value at Level 3 in the far value hierarchy since there was no reliable comparative information in respect thereof and since significant data used in measurement of the fair value is not observed in the market.

(2) Details regarding measurement of fair value of investment property under construction at Level 3

For purposes of determining the fair value of investment property under construction Company management based itself on valuations executed at least once a year by outside independent appraisers having the required know-how, experience and expertise. The outside appraisers determine the fair value using accepted valuation methods for real estate properties, mainly the DCF method and the extraction method, and in certain cases the comparative approach.

In determination of the fair value, account is taken of, among other things and to the extent relevant, the location of the project and its zoning, the duration of construction of the project, the amount of the rentals it will produce and the appropriate occupancy rates, the additional cost required for its construction until it is placed into its regular service and the rate for discounting the cash flows and the rate of return to capitalization in the representative year. A change in the value of any or all of these components, could have a significant impact on the fair value of the property as estimated by the outside independent appraiser.

128

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(2) Details regarding measurement of fair value of investment property under construction at Level 3 (Cont.)

Set forth below is detail of the fair value and the significant data that are not observable in connection with the investment property under construction:

As at December 31, 2015 Fair Discount Rate of return for value rate representative year NIS „000 % %

Russia 932,285 19–29 9.5–13 Romania 251,236 8–9 8–9 Czech Republic 36,939 6.9 6.9 Serbia 153,488 9.5 9.5 Bulgaria 47,250 – – Poland 21,565 – – Israel 627,262 6–9.75 6–9.75 2,070,025

As at December 31, 2014 Fair Discount Rate of return for value rate representative year NIS „000 % %

Russia 1,678,003 20–29 9.5–13 Romania 265,093 8.5–9 8.5–9 Czech Republic 15,374 7.5 7.5 Serbia 116,943 9.5 9.5 Bulgaria 54,470 – – Israel 303,832 6–9.75 6–9.75 2,433,715

129

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(3) Data regarding measurement of fair value of investment property at Level 3

Fair value as at Reciprocal relationship December 31, Valuation between the significant 2015 techniques for data that is not observable Name of in The significant data that determination and measurement property NIS thousands is not observable of fair value of the fair value

Rental property – office space NIS 339,332 Discount rate: 6.9% – 10.4% Discounted cash flows: The fair value will increase in the Czech Republic Occupancy rate: 75% valuation model that (decrease) if: Average monthly rent per sq.m.: €13.5 estimates the present value * The average rent is of the cash flows deriving higher (lower); Rental property – office space NIS 365,034 Discount rate: 8% – 8.05% from each of the properties, * The expected annual in Romania Occupancy rate: 97% where it takes into account growth in the rent is Average monthly rent per sq.m.: €13.8 the levels of the rents and higher (lower); the expected rates of * The “vacancy” period is Rental property – commercial NIS 2,134,730 Discount rate: 7.56% – 8.18% increase of these levels, shorter (longer); space in Romania Occupancy rate: 98% occupancy rates and * The rate of the Average monthly rent per sq.m.: €25.9 “vacancy” periods that are unoccupied areas is expressed as the rates of the lower (higher); Rental property – residential NIS 466,282 Discount rate: 4.85% – 9.1% unoccupied areas, * The risk-adjusted and commercial space in Occupancy rate: 88% construction costs, discount rate is higher Germany Average monthly rent per sq.m.: €8 commencement and (lower);

completion dates, rent * The yield rate is lower Rental property – office space NIS 561,890 Discount rate: 9% – 10% incentives, such as periods (higher). in Serbia Occupancy rate: 92% wherein no rent is paid, Average monthly rent per sq.m.: €16 taxes (*) and other costs that

Rental property – office space NIS 104,866 Discount rate: 10.25% are not covered by the in Bulgaria Occupancy rate: 21% tenants. The projected cash Average monthly rent per sq.m.: €6.7 flows are capitalized using discount rates adjusted for Rental property – office space NIS 837,186 Discount rate: 7.25% – 9.2`5% the risk levels and the in Israel Occupancy rate: 92% representative year is Average monthly rent per sq.m.: NIS 57.4 capitalized using the long-term yield rate. In Rental property – commercial NIS 2,673,787 Discount rate: 16% addition to other space in Moscow, Russia Occupancy rate: 78% considerations, the discount Average annual rent per sq.m.: $924 rates take into account the Yield for representative year: 10% type of property Expected annual increase in rent: 0% (commercial, office, other), quality of the structure and Rental property – office space NIS 969,697 Discount rate: 14% – 18% its location, the financial in Moscow, Russia Occupancy rate: 46%* strength of the tenants and Average annual rent per sq.m.: $200–$500 the terms of the rental Yield for representative year: 9.5% – 15.5% agreements. Expected annual increase in rent: 3% – 5%

Other properties NIS 30,016

Total NIS 8,482,820

* Not including investment property in Russia, having a value of U.S.$199 million (about NIS 776 million) as at December 31, 2015, on an area of 46.2 thousand square meters, the occupancy rate of which as at December 31, 2015, was about 2%.

130

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(3) Data regarding measurement of fair value of investment property at Level 3 (Cont.)

Fair value as at Reciprocal relationship December 31, Valuation between the significant 2014 techniques for data that is not observable Name of in The significant data that determination and measurement property NIS thousands is not observable of fair value of the fair value

Rental property – office space NIS 365,902 Discount rate: 7.1% – 10% Discounted cash flows: The fair value will increase in the Czech Republic Occupancy rate: 75% valuation model that (decrease) if: Average monthly rent per sq.m.: €13.1 estimates the present value * The average rent is of the cash flows deriving higher (lower); Rental property – office space NIS 264,087 Discount rate: 8.25% from each of the properties, * The expected annual in Romania Occupancy rate: 100% where it takes into account growth in the rent is Average monthly rent per sq.m.: €14.6 the levels of the rents and higher (lower); the expected rates of * The “vacancy” period is Rental property – commercial NIS 2,206,903 Discount rate: 8% – 8.48% increase of these levels, shorter (longer); space in Romania Occupancy rate: 97% occupancy rates and * The rate of the Average monthly rent per sq.m.: €25.9 “vacancy” periods that are unoccupied areas is expressed as the rates of the lower (higher); Rental property – residential NIS 531,016 Discount rate: 4.85% – 9.35% unoccupied areas, * The risk-adjusted space in Germany Occupancy rate: 88% construction costs, discount rate is higher Average monthly rent per sq.m.: €7.6 commencement and (lower);

completion dates, rent * The yield rate is lower Rental property – office space NIS 604,701 Discount rate: 9% – 10% incentives, such as periods (higher). in Serbia Occupancy rate: 89% wherein no rent is paid, Average monthly rent per sq.m.: €16.4 taxes (*) and other costs that

Rental property – office space NIS 125,986 Discount rate: 10.25% are not covered by the in Bulgaria Occupancy rate: 20% tenants. The projected cash Average monthly rent per sq.m.: €7.6 flows are capitalized using discount rates adjusted for Rental property – commercial NIS 15,059 Discount rate: 9.11% the risk levels and the space in Poland Occupancy rate: 97% representative year is Average monthly rent per sq.m.: €11.1 capitalized using the long-term yield rate. In Rental property – office space NIS 1,202,205 Discount rate: 7.25% – 8.75% addition to other in Israel Occupancy rate: 95% considerations, the discount Average monthly rent per sq.m.: €61.5 rates take into account the type of property Rental property – commercial NIS 3,889,000 Discount rate: 17% (commercial, office, other), space in Moscow, Russia Occupancy rate: 85% quality of the structure and Average monthly rent per sq.m.: $1,147 its location, the financial Yield for representative year: 10% strength of the tenants and Expected annual increase in rent: 2.5% the terms of the rental starting from 2017 agreements.

Rental property – office space NIS 1,459,933 Discount rate: 14.5% – 19% in Moscow, Russia Occupancy rate: 88%* Average monthly rent per sq.m.: $250–$650 Yield for representative year: 10% – 15.5% Expected annual increase in rent: 0% – 3%

Other properties NIS 76,846

Total NIS 10,741,698

* Not including investment property in Russia, having a value of U.S.$300 million (about NIS 1.2 billion) as at December 31, 2014, on an area of 46.2 thousand square meters, the occupancy rate of which as at December 31, 2014, was about 1%.

131

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(4) The Russian Federal Law, dated November 2, 2013, presented changes in calculation of Property Tax for office space and commercial areas as well as for properties owned by foreign entities that do not operate in Russia through a representative office. The Law entered into effect commencing from January 1, 2014. Up to that time, the Property Tax was calculated at the rate of 2.2% of the value of the property as presented in the reports of the owner of the property. Commencing from 2014, the cadastral value of a certain area (not including the land on which the property is situated) will constitute the basis for calculation of the Property Tax payment. The tax rate will be determined by the local (regional) authorities in accordance with the Federal Law. The government of Moscow announced the final tax rates for properties located in Moscow: 0.9% (2014); 1.2% (2015); 1.5% (2016); 1.8% (2017) and 2.0% (2018).

(5) Sensitivity analysis for changes in fair value of main investment properties

(A) Cotroceni Shopping Mall (Bucharest, Romania)

Sensitivity analysis for change in the discount rate:

As at December 31, 2015 +0.5% *7.56% –0.5%

Fair value (in thousands of euros) 406,752 433,990 465,104 Fair value (in thousands of shekels) 1,727,394 1,843,068 1,975,204

As at December 31, 2014 +0.5% *8% –0.5%

Fair value (in thousands of euros) 377,286 401,000 427,880 Fair value (in thousands of shekels) 1,782,525 1,894,565 2,021,562

Sensitivity analysis for change in the expected rent (ERV):

As at December 31, 2015 –10% *€33,208,000 +10%

Fair value (in thousands of euros) 398,307 433,990 469,667 Fair value (in thousands of shekels) 1,691,530 1,843,069 1,994,582

As at December 31, 2014 –10% *€32,318,000 +10%

Fair value (in thousands of euros) 368,595 401,000 433,433 Fair value (in thousands of shekels) 1,741,464 1,798,565 2,047,798

* Data according to which the fair value was calculated as at the date of the statement of financial position.

132

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(5) Sensitivity analysis for changes in fair value (Cont.)

(B) AFIMALL Shopping Mall (Moscow, Russia)

Sensitivity analysis for change in the discount rate:

As at December 31, 2015 +1% *10% –1%

Fair value (in thousands of U.S. dollars) 645,900 685,200 733,200 Fair value (in thousands of shekels) 2,520,302 2,673,650 2,860,946

As at December 31, 2014 +1% *10% –1%

Fair value (in thousands of U.S. dollars) 949,424 1,000,000 1,060,691 Fair value (in thousands of shekels) 3,692,310 3,889,000 4,215,027

Sensitivity for change in the average rent in the representative year:

As at December 31, 2015 *€1,103 per sq.m. –5% per year +5%

Fair value (in thousands of U.S. dollars) 649,400 685,200 721,000 Fair value (in thousands of shekels) 2,533,959 2,673,650 2,813,342

As at December 31, 2014 *€1,147 per sq.m. –5% per year +5%

Fair value (in thousands of U.S. dollars) 966,543 1,000,000 1,033,457 Fair value (in thousands of shekels) 3,758,886 3,889,000 4,019,114

* Data according to which the fair value was calculated as at the date of the statement of financial position.

133

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(5) Sensitivity analysis for changes in fair value (Cont.)

(B) AFIMALL Shopping Mall (Moscow, Russia) (Cont.)

Sensitivity for change in the occupancy rate in the representative year:

As at December 31, 2015 –2% *97% +2%

Fair value (in thousands of U.S. dollars) 671,000 685,200 699,400 Fair value (in thousands of shekels) 2,618,242 2,673,650 2,729,059

As at December 31, 2014 –2% *97% +2%

Fair value (in thousands of U.S. dollars) 982,016 1,000,000 1,022,800 Fair value (in thousands of shekels) 3,819,060 3,889,000 3,977,669

* Data according to which the fair value was calculated as at the date of the statement of financial position.

134

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(6) Valuation processes applied by the Company

The Group estimates the value of its 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 outside independent appraiser, who has recognized appropriate professional qualifications and up-to-date experience regarding the location and type of real estate with respect to which the valuation is being made. The fair value amounts are based on market values. The market value of investment property is an estimate of the amount the investment property could be sold for on the execution date of the valuation, in a transaction between a willing buyer and a willing seller, both acting wisely.

In the absence of current comparative prices in an active market, valuations of the investment property are made based on a calculation of the estimated discounted cash flows expected to be received from rental of the real estate asset. Valuation of the investment property is based on the net annual cash flows, capitalized using a discount rate that reflects the specific risks embedded in the net valuations of the investment property. Where lease agreements exist, where the payments in respect thereof are significantly different than the projected rents, adjustments are made in order to reflect the actual rent payments during the agreement period.

The valuations reflect the type of the tenants occupying the leased property or that are responsible for fulfilling the lease obligations or those that are expected to occupy the premises after rental of a vacant area, including a general valuation of the reliability of their credit, allocation of the responsibility between the Group and the lessee with reference to maintenance and insurance of the property, and the remaining economic life of the investment property.

The fair value of investment property under construction is appraised by estimating 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 reasonable developer‟s profit (or another estimate that reflects the developer‟s profit), where relevant, while using a discount rate that has been adjusted for the relevant and characteristic risks of the investment property.

In determination of the fair value, account is taken of, among other things, the discount rates used to capitalize the future cash flows, the length of the lease period, the financial strength of the tenants, the scope of the property‟s vacant areas, the length of the lease agreements, and the length of time that will be necessary in order to rent the buildings after they are vacated, the length and scope of the unoccupied areas (vacancy) of the properties, adjustment of the rents with respect to properties wherein the level of the rents is higher than the market rents (over-rented), or lower than the market rents (under-rented), consequences deriving from investments required for development, completion of the project and/or maintenance of the existing condition, and less operating costs that are not covered in cases where the properties are managed by management companies having deficit balances.

135

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

C. Determination of fair value (Cont.)

(6) Valuation processes applied by the Company (Cont.)

All the valuations are passed on for review by the Company‟s CFO. In addition, significant valuations are passed on for review by the Company‟s Financial Statements Review Committee. Furthermore, an in-principal and in-depth discussion is held in connection with assessments and estimates used by the Company by the Financial Statements Review Committee.

The main data that is not observable in the market relates to the following items:

– Marginal developer‟s profit (or other parameters reflecting the developer‟s margin), which are based on professional valuations regarding the compensation the developer will require in respect of its risk factors relevant to the property.

– The rate of return on investment property (on the basis of which the cash flows of the representative year are discounted), which is based on professional publications in the relevant markets and comparison to similar transactions.

– Premium (discount) in respect of the quality of the building and the lease terms, which is based on comparison to similar transactions.

– The market value of the rent payments (market rent) which is based on professional publications in the relevant markets and comparison to similar transactions, to the extent such information was available for the location of the property.

– Construction costs per square meter, which are based on market surveys made by the appraiser.

– The discount rate, which is based on the risk free interest rate of the country, adjusted for the premium relating to the specific risks embedded in the property.

136

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

D. Amounts Recognized in the Statement of Income

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Rental income from investment property 687,582 862,476 840,704 Direct operating expenses deriving from investment property that produced rental income during the period (151,643) (215,580) (257,592) 535,939 646,896 583,112

Gain on realization of investment property and investment property under construction, net 365 973 98,792

Revaluation (reduction) of fair value of investment property, net (1,044,851) 570,737 384,798

E. Details regarding Rights in Lands used by the Group as Investment Property

(1) A subsidiary has rights in land in Nes Ziona acquired from the Weizmann Institute of Science under a perpetual lease. Buildings were constructed on the aforesaid land that are leased out to the high-tech industry and that have been leased out in exchange for economic lease fees.

For details regarding lease cancellation agreements and consolidation of real estate signed in 2014 and that were completed during 2015 – see Note 4B(7).

(2) Investment property including buildings held for rent in Nes Ziona located on leased land (hereinafter – “the Park”) regarding which a lease agreement was signed between Africa Properties and the Weizmann Institute of Science (hereinafter – “the Institute”), whereby Africa Properties received a lease right in the land in order to construct a high-tech park approved by the Institute. Based on the terms of the lease agreement, the land the buildings constructed, together with their related facilities, will become the Institute‟s property, for no consideration, and the end of the lease period in 2029.

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 annual lease fees net of reimbursements from sub-lessees of the land, amount to about NIS 3.8 million.

For details regarding lease cancellation agreements and consolidation of real estate signed in 2014 and that were completed during 2015 – see Note 4B(7).

137

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

E. Details regarding Rights in Lands used by the Group as Investment Property (Cont.)

(3) The Africa House in Yehud (in which the share of Africa Properties is 40%) 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.

(4) Rights in land in Lod owned by a subsidiary 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.

For details regarding an agreement signed subsequent to the date of the statement of financial position for sale of the buildings constructed on the land – see Note 39G.

(5) Lands used for a country club in Savyon leased under a capitalized lease from the ILA until the year 2062.

(6) Real estate in Prague (Czech Republic) – the Group has rights in land and buildings acquired 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.

F. Details regarding Rights in Lands used by the Group as Investment Property under Construction

(1) 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 agreements have two terms: an initial period of up to five years during the development period and after the development period there is an option to renew the agreement for a long period of up to 49 years.

According to Russian law, upon completion of construction the developer is entitled to receive lease rights (including 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, or in exceptional cases ownership rights for the land on which the building is situated and that is needed for its use. 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, there is also an option for a long-term lease prior to commencement of the construction, whereby a lease may be executed by means of one significant payment that is updated from time to time by the City of Moscow based on the size and location of the land. The Company has such rights in two land parcels for a period of 49 years.

138

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 15 – Investment Property and Investment Property under Construction (Cont.)

F. Details regarding Rights in Lands used by the Group as Investment Property under Construction (Cont.)

(1) (Cont.)

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.

(2) With respect to the RGM, which is held by a subsidiary of Africa Properties and includes about 163 dunams in a land site on an aggregate area measuring about 3,000 dunams, development contracts have been signed.

G. Collaterals

Most of the investment properties and investment properties under construction are subject to liens to secure loans received. See also – Note 18G below.

139

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 16 – Loans, Investments and Long-Term Debit Balances

A. Breakdown based on Type of Investment At December 31 2015 2014 In Thousands of NIS

Loans and receivables (see Section B)* ** 92,520 158,251 Other receivables 244 163 92,764 158,414

* Includes financial assets held to maturity measured at amortized cost – linked to the U.S. dollar, in the amount of about NIS 10 million, as at December 31, 2015 and 2014, respectively.

** As at December 31, 2014, includes the amount of about NIS 78 million that was received from issuance of debentures (Series ZB) of the Company in September 2014, which is designated to be used for repayment of principal and interest in respect of debentures (Series Z) and (Series ZA) of the Company in a period of more than the 12 months following the date of the statement of financial position.

B. Details with respect to Investments in Loans and Long-Term Debit Balances

Detail of linkage bases and interest conditions

As at December 31, 2015 Unlinked shekels Shekel linked to the CPI Shekel linked to or stated in the dollar Other Stated interest rate 0%–5% 0%–2% 4%–6% Total 0%–5% 5%–8.1% Total currencies Total In thousands of NIS

Long-term loans and debit balances 28,346 160 11,940 12,100 – 46,202 46,202 5,872 92,520

As at December 31, 2014 Unlinked shekels Shekel linked to the CPI Shekel linked to or stated in the dollar Other Stated interest rate 0%–5% 0%–2% 4%–6% Total 0%–5% 5%–8.5% Total currencies Total In thousands of NIS

Long-term loans and debit balances 107,734 2,058 10,362 12,420 8,910 19,531 28,441 9,656 158,251

140

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 17 – Intangible Assets

Customer Goodwill Portfolio Software Other Total In Thousands of NIS

Cost Balance at January 1, 2014 242,929 3,925 121,386 31,864 400,104 Acquisitions – – 16,648 – 16,648 Deletions – – (524) – (524) Impact of changes in the currency exchange rates (95) – (49) – (144) Balance at December 31, 2014 242,834 3,925 137,461 31,864 416,084

Acquisitions – – 14,696 – 14,696 Deletions (82,432) – (254) – (82,686) Impact of changes in the currency exchange rates (788) – (29) – (817) Balance at December 31, 2015 159,614 3,925 151,874 31,864 347,277

Amortization and Losses from Decline in Value Balance at January 1, 2014 140,892 1,900 76,900 9,680 229,372 Amortization for the year 27,433 956 8,453 1,775 38,617 Deletions – – (524) – (524) Impact of changes in the currency exchange rates (11) – (45) – (56) Balance at December 31, 2014 168,314 2,856 84,784 11,455 267,409

Amortization for the year – 266 8,961 2,253 11,480 Deletions (82,432) – (254) – (82,686) Impact of changes in the currency exchange rates (93) – (23) – (116) Balance at December 31, 2015 85,789 3,122 93,468 13,708 196,087

Depreciated Cost per Books

As at January 1, 2014 102,037 2,025 44,486 22,184 170,732

As at December 31, 2014 74,520 1,069 52,677 20,409 148,675

As at December 31, 2015 73,825 803 58,406 18,156 151,190

141

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 17 – Intangible Assets (Cont.)

Examination of Decline in Value of 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.

Goodwill in subsidiaries of Africa Industries

A. Examination of decline in value of cash-producing units including goodwill

The book value of the goodwill allocated to each cash-producing unit is as follows:

As at December 31 2015 2014 In Thousands of NIS

Activities of Packer Plada and its subsidiaries 8,371 8,371 Activities of Packer Building Iron 17,245 17,245 Orgal activities 6,957 6,957 Via Arkadia activities 35,074 35,074 67,647 67,647

The recoverable amount of these cash-producing units was calculated by external independent appraisers and was determined based on the usage value computed on the basis of the forecasted cash flows relying on management-approved financial budgets of 3–5 years that were approved by management. The cash flows beyond these periods were calculated using a fixed annual growth rate, estimated in the range of 1.4% to 3% per year, as well as on additional key assumptions used in computing the usage value as stated.

B. Key assumptions used in calculation of the recoverable value

The key assumptions used in calculation of the recoverable amount are discount rates, long-term growth rates and the growth rate of the operating income

Pre-Tax Long-Term Discount Rate (1) Growth Rate (2) 2015 2014 2015 2014

Packer and subsidiaries activities 11.4 11.3 1.5 2.8 Packer Building Iron 12.1 12.4 3.0 3.0 Orgal activities 20.0 18.4 1.4 1.4 Via Arkadia activities 17.9 16.0 1.4 1.4

142

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 17 – Intangible Assets (Cont.)

Examination of Decline in Value of Cash-Producing Unit including Goodwill (Cont.)

Goodwill in subsidiaries of Africa Industries (Cont.)

B. Key assumptions used in calculation of the recoverable value (Cont.)

1) Pre-tax discount rate –

The recoverable amount of cash-producing units is determined based on IAS 36, which provides that estimates of future cash flows are to be capitalized using a pre-tax discount rate that reflects the current market estimates of the time value of the money and the risks specific to the property.

Estimation of the after-tax discount rate was made based on past experience and on the weighted-average cost of raising capital in the industry.

Estimation of the pre-tax discount rate was based on the risk free interest rate on government debentures having a life of 10 years adjusted for the risk premium in order to reflect the risk deriving from an investment in capital and the systematic risk of that division.

2) Long-term growth rate

The steel activities, which include the activities of Packer Plada and Packer Building Iron, have cash flows ranging between 4 and 5 years, as included in their DCF model. The long-term growth rate was based on the growth rate of the industrial production.

For purposes of examining decline in value, the goodwill was attributed to the subsidiary Packer Plada Industries, wherein the goodwill was monitored for internal management purposes, which is not higher than the activity sector.

The recoverable value of Packer Plada Industries was based on its value in use and was determined with the assistance of an independent appraiser.

Based on the examination performed, it was determined that the recoverable value of the activities described above, are not less than the value thereof in the books and, therefore, no loss from decline in value of goodwill was recorded for each of the said cash-producing units.

Based on a sensitivity analysis performed by an outside independent appraiser, if the discount rate taken into account increases by 0.5% or the fixed growth rate declines by 0.5%, it is expected that a provision for decline in value for the cash-producing units will be required as follows (in millions of NIS):

Packer and subsidiaries activities 9–39 Packer Building Iron 9–13 Orgal activities – Via Arkadia activities –

143

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 17 – Intangible Assets (Cont.)

Examination of Decline in Value of Cash-Producing Unit including Goodwill (Cont.)

Goodwill in subsidiaries of Africa Industries (Cont.)

C. Examination of decline in value of cash-producing unit that includes the production activities in Negev (Cont.)

Further to the actions of the management of Africa Industries in the area of home design as part of implementation of the efficiency plan, which included, among other things, conforming the scope of the manufacturing in Negev‟s plant to the level of the demand and non-compliance with the sales‟ forecast of the plant‟s products, Africa Industries estimated the recoverable value of the manufacturing activities. (For information regarding the efficiency plan – see Note 1D).

For purposes of examining decline in value, the manufacturing activities of Negev were defined as a cash-producing unit, which includes mainly Negev‟s plant in Yeruham and the working capital attributed to it. The manufacturing activities as stated constitute the smallest group of identified assets that produce positive cash flows that are essentially independent of the positive cash flows from other assets.

The recoverable value of the manufacturing activities was based on its value in use and was determined with the assistance of an independent appraiser who estimated that the recoverable value of the activities is higher than their carrying value in the books and, accordingly, no loss from decline in value was recorded.

Set forth below are the key assumptions used in calculation of the recoverable value:

The value in use was determined by discounting the future cash flows that will be produced by the continued use of the cash-producing unit, which were estimated based on the projected results of operations and on the business plan that includes a five-year forecast for the activities. The management of Africa Industries believes that this forecast period is justified. In determination of the recoverable value, a pre-tax discount rate of 14.4% was used.

Set forth below is detail of the main assumptions used in determination of the future cash flows from Negev‟s manufacturing activities:

– The growth rate of the revenues in 2016 was estimated at about 37%, in 2017 at about 22.1%, in the years 2018–2020 the growth rate will decline to the range of 8.2%–9.1% and enters into a rate of 2% in the representative year.

– The rate of the gross profit based on the assumptions for the forecast years is in the range of 39.2%–42.1%.

– The rate of the projected operating income for the forecast years is in the range of 17.9%–23.7%.

144

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 17 – Intangible Assets (Cont.)

Examination of Decline in Value of Cash-Producing Unit including Goodwill (Cont.)

Goodwill in subsidiaries of Africa Industries (Cont.)

C. Examination of decline in value of cash-producing unit that includes the production activities in Negev (Cont.)

Based on a sensitivity analysis performed by an outside independent appraiser, if the discount rate taken into account increases by 0.5% or the fixed growth rate declines by 0.5%, it is expected that a provision for decline in value for the cash-producing unit will be required in the amount of about NIS 5 million up to about NIS 10 million.

The estimates and assumptions were determined in accordance with the assessments of the management of Africa Industries regarding the future trends in the industry, and they are based on external and internal sources (historical data).

Note 18 – 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 35 “Financial Instruments”.

A. Composition

Current Liabilities

At December 31 2015 2014 In Thousands of NIS

Credit from banks: Revolving credit 4,956 11,251 Short-term loans 1,613,243 1,707,194

Credit from others: Short-term loans 232,865 203,172

Current maturities of credit from banks and others: Current maturities of loans from banks 1,432,317 1,645,825 Current maturities of other credit 316,339 60,514 3,599,720 3,627,956 Current maturities of debentures 371,146 365,966

3,970,866 3,993,922

145

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

A. Composition (Cont.)

Non-Current Liabilities

At December 31 2015 2014 In Thousands of NIS

Liabilities from banks: Loans from banks 5,852,088 6,242,887 Less current maturities (1,432,317) (1,645,825) 4,419,771 4,597,062 ------Other long-term liabilities: Liability in respect of financing lease 128,611 132,283 Financial guarantees 250 73 Long-term liabilities to institutions 644,161 593,785 Long-term loans from others (1) 182,436 218,780 Total other long-term liabilities 955,458 944,921 Less current maturities (316,339) (60,514) 639,119 884,407 ------Debentures: Non-convertible debentures 4,600,428 4,484,380 Less current maturities (371,146) (365,966) 4,229,282 4,118,414 ------

9,288,172 9,599,883

(1) Includes derivative financial instruments measured at fair value, in the amount of about NIS 15,243 thousand and about NIS 14,832 thousand, as at December 31, 2015 and 2014, respectively.

146

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

B. Details Regarding Interest and Linkage

Stated Interest At December 31 12/31/15 2015 2014 % In Thousands of NIS

Revolving credit from banks: In Israeli currency 3.6–3.9 4,956 11,251 Short-term loans from banks: In Israeli currency 1.5–13.6 1,498,663 1,657,410 In U.S. dollars 1.1–1.38 18,339 – In euro 3.87–4.87 78,842 48,281 In other currency 3–12 17,399 1,503 Short-term loans from others: In euro 1.5–5.62 12,855 5,148 CPI-linked Israeli currency 5.04 169,898 198,024 In unlinked Israeli currency 1.1 50,112 – Non-convertible debentures: In Israeli currency* 3.7–10.75 4,600,428 4,484,380 Loans from banks: In Israeli currency 1.75–6 1,299,063 1,143,806 In U.S. dollars 5.35–7.35 1,865,083 1,928,984 In euro 1.77–5.12 2,076,432 2,303,545 In other currency 2.47–9.5 611,510 866,552 Liability in respect of financing lease: In Czech Kronas 28,649 31,135 In Israeli currency 4.7–12.5 99,962 101,148 Long-term loans from others 0–12.5 826,597 812,565 Financial guarantees 250 73

Total loans and credit from banks and others 13,259,038 13,593,805

* See Section E below regarding the effective interest.

See Section G below regarding collaterals and liens.

147

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants

With respect to all the Company‟s loans, the credit agreements include contractual covenants and restrictions regarding distribution of dividends. As at the approval date of the statement of financial position, the Company is in compliance with these contractual covenants and restrictions.

The Group companies constitute a “Group of Borrowers” (as this term is defined in the provisions of Proper Banking Management of Bank of Israel regarding “Limitations on Debts of a Single Borrower and of a Group of Borrowers”). As a result, the Israeli banks are subject to restrictions with respect to the maximum amount of credit they are permitted to provide to each of the Group companies, which are impacted by the total amount of credit they provided to the Africa Investments Group and to the controlling shareholder thereof.

Set forth below are special contractual restrictions and financial covenants relating to the Company‟s significant loans.

Compliance with financial Description of the Financial covenants covenants and presentation Developments after the liabilities and and other on the date of the date of the statement identity of the lender contractual restrictions statement of financial position of financial position

Liabilities of the Company

Debentures (Series Z) Commencing from the entry date The Company is in For details regarding the and (Series ZA) and bank of the debt arrangement into compliance with the financial Company‟s financial loans the balance of effect, as described in Note 1C, covenants determined. position and the Interim which as at above, the Company undertook Therefore, the liabilities are Framework signed – see December 31, 2015 is that during the period up to final presented as part of the Note 1B(2) and about NIS 2,406 million. and unequivocal repayment of the non-current liabilities. Note 1B(3), above. new debentures, the ratio of the net financial debt to CAP, as these terms are defined in the arrangement, shall 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%).

Debentures (Series ZB) As part of issuance of the The Company is in For details regarding the the balance of which as debentures (Series ZB), the compliance with the financial Company‟s financial at December 31, 2015 is Company is required to maintain a covenants determined. position and the Interim about NIS 651 million. ratio of net separate-company Therefore, the liabilities are Framework signed – see (solo) debt to CAP of not more presented as part of the Note 1B(2) and than about 65%, a ratio of equity non-current liabilities. Note 1B(3), above. to total assets of not less than 18% and equity attributable to the owners of not less than NIS 1.2 billion.

148

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies

Africa Properties

Debentures (Series F) the 1) The ratio of the shareholders‟ Africa Properties is in For details regarding an balance of which as at equity to the total assets not on a compliance with the financial expansion made of the December 31, 2015 consolidated basis will not be less covenants determined. debentures (Series F) amounts to about NIS than the rate of 40%. Therefore, the liabilities are subsequent to the date of 149 million. 2) The ratio of the debt (solo) to the presented as part of the the statement of financial equity and the debt (CAP) will not non-current liabilities. position – see Note 39H. exceed 60% (where in calculation of the capital the balances of the deferred taxes will be included). 3) The ratio of the debt (consolidated) to the equity and the debt (CAP) will not exceed 75% (where in calculation of the capital the balances of the deferred taxes will be included). 4) In addition, 16,687,814 ordinary shares of €0.01 par value each of AFI Europe were pledged for the benefit of the Trustee, under a first-priority lien solely for the benefit of the Trustee. In this framework, Africa Properties committed that so long as the company‟s debentures will be outstanding, the ratio of the net debt to the pledged shares will not exceed 60%. 5) Furthermore, Africa Properties committed that it will not be permitted to make a dividend distribution to its shareholders, if as a result of the distribution the ratio of the shareholders‟ equity to the total assets calculated on the basis of its audited or reviewed financial-statement data (as applicable) not on a consolidated basis, most recently published prior to the dividend distribution, will be less than 40% and/or the debt to CAP ratio will be more than 60%.

149

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Properties (Cont.)

Debentures (Series E), 1) The ratio of the shareholders‟ Africa Properties is in For details regarding the balance of which as equity to the total assets not compliance with the financial changes in the liens at December 31, 2015 on a consolidated basis will covenants determined. subsequent to the date of amounts to about not be less than the rate Therefore, the liabilities are the statement of financial NIS 486 million. of 40%. presented as part of the position – see Note 39H. 2) The ratio of the debt to the non-current liabilities. equity and the debt (CAP) will not exceed 60%. 3) In addition, 62,182,185 ordinary shares of €0.01 par value each of AFI Europe were pledged for the benefit of the Trustee, under a first-priority lien solely for the benefit of the Trustee. In this framework, the company committed that so long as the company‟s debentures will be outstanding, the ratio of the net debt to the pledged shares will not exceed 60%. 4) Furthermore, the company committed that it will not be permitted to make a dividend distribution to its shareholders, if as a result of the distribution the ratio of the shareholders‟ equity to the total assets calculated on the basis of its audited or reviewed financial-statement data (as applicable) not on a consolidated basis, most recently published prior to the dividend distribution, will be less than 40% and/or the debt to CAP ratio will be more than 60%.

150

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Properties (Cont.)

Bank loan to Africa The ratio of the cash flow Africa Properties and its None. Properties and its revenues of the pledged assets on subsidiary are in compliance subsidiary (held at the an NOI basis to the debt with the financial covenants rate of 100%), the payments, including principal and determined. Due to the fact balance of which as at interest (DSCR) shall be higher that pursuant to the agreement December 31, 2015 is than 1.2, and commitment that with the lending bank, the loan about NIS 514 thousand. there will not be a decline at the is to be repaid in the Real estate assets of rate of more than 5% in the value 12 months after the date of the Africa Properties and its of the pledged assets in the first statement of financial position, subsidiary were pledged two and one-half years from the the loan is classified as a in favor of the bank. receipt date of the loan and that current liability. there will not be a decline at the rate of more than 10% in the value of the pledged assets in the balance of the loan period.

151

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Properties (Cont.)

Debentures (Series G) 1) The ratio of the shareholders‟ Africa Properties is in None. the balance of which as equity to the total assets not on a compliance with the financial at December 31, 2015 consolidated basis will not be less covenants determined. amounts to about NIS than the rate of 40%. Therefore, the liabilities are 403 million. 2) The ratio of the shareholders‟ presented as part of the equity on a consolidated basis non-current liabilities. shall not be less than 20%. 3) The ratio of the debt (solo) to the equity and the debt (CAP) will not exceed 60% (where in calculation of the capital the balances of the deferred taxes will be included). 4) The ratio of the debt (consolidated) to the equity and the debt (CAP) will not exceed 75% (where in calculation of the capital the balances of the deferred taxes will be included). 5) Furthermore, Africa Properties committed that it will not be permitted to make a dividend distribution to its shareholders, if as a result of the distribution the ratio of the shareholders‟ equity to the total assets calculated on the basis of its audited or reviewed financial-statement data (as applicable) not on a consolidated basis, most recently published prior to the dividend distribution, will be less than 40% and/or on a consolidated basis will be less than 20% and/or the debt to CAP ratio (solo) will be more than 55% and/or the debt to CAP ratio (consolidated) will be more than 70%.

152

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

AFI Europe (Cont.)

Non-recourse bank loan 1) The ratio of the cash flow AFI Europe and its subsidiary None. for financing the revenues of the property on a are in compliance with the Cotroceni shopping mall NOI basis to the debt financial covenants. project in Bucharest payments, including principal Therefore, the liabilities are Romania, of a subsidiary and interest (DSCR) in the presented as part of the of AFI Europe, the next 12 months shall be non-current liabilities. balance of which as at higher than 1.1, and as long as December 31, 2015 is this ratio is less than 1.15 about NIS 870 million. limitations will apply to the property company with respect to withdrawal of surplus monies; 2) Ratio of the minimum LTV – 70%, and as long as this ratio is more than 67.5% limitations will apply to the property company with respect to withdrawal of surplus monies; 3) The ratio of the cash flow revenues of the pledged property to the total debt payments, including principal and interest (DSCR) shall be higher than 1.1, and as long as this ratio is less than 1.15 limitations will apply to the property company with respect to withdrawal of surplus monies; 4) The ratio of the cash flow revenues of the pledged property to the total debt payments, including principal and interest (DSCR) in the twelve months ended shall be higher than 1.3, and as long as this ratio is less than 1.35 limitations will apply to the property company with respect to withdrawal of surplus monies;

153

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

AFI Europe (Cont.)

Portfolio financing of 1) The ratio of the cash flow AFI Europe and its subsidiary None. properties of subsidiaries revenues of the property on a are in compliance with the of AFI Europe in NOI basis to the debt financial covenants Germany, on a payments, including principal, determined. Therefore, the non-recourse basis, the interest and hedging costs liabilities are presented as part balance of which as at (DSCR) shall be higher of the non-current liabilities. December 31, 2015 is than 1.1; about NIS 272 million. 2) Ratio of the minimum LTV – 79% in the first three years and 74% in the following two years (calculation of the LTV is to be made on the basis of all the properties except for six properties that were excepted); 3) The ratio of the cash flow revenues of the property to the balance of the loan will be higher than 6.4%.

154

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Industries

Bank loans of a 1) Maintenance of tangible As at the date of the statement Regarding non- subsidiary of Africa shareholders‟ equity that is of financial position, Africa compliance with the Industries and credit of not less than 15% of the total Industries is not in compliance financial covenant, investee companies of consolidated statement of with the financial covenants Africa Industries is Africa Industries for financial position of Africa determined set forth above. carrying on contacts with which Africa Industries Industries. Therefore, the balance of the the lenders in order to is guarantor, the balance 2) Tangible shareholders‟ equity loan is presented as part of the receive a waiver letter. of which as at that is not less than NIS 240 current liabilities in the December 31, 2015 is million linked to the CPI. statement of financial position. about NIS 78 million. 3) The ratio of the combined shareholders‟ equity of 3 entities held by Africa Industries on the basis of the shareholders‟ equity appearing in the financial statements of each of them, and the debts and liabilities of Africa Industries less cash and cash equivalents based on the solo financial statements of Africa Industries shall not be less than a ratio of 1.5. In addition, further liabilities were imposed on Africa Industries in connection with non-payment of shareholders‟ loans, non-payment of dividends, etc.

Bank loans of a Maintenance of shareholders‟ Regarding some of the bank Africa Industries has subsidiary of Africa equity or tangible shareholders‟ loans, Africa Industries is not received waiver letters Industries, the balance of equity that is not less than 22% of in compliance with the from some of the banks which as at the total consolidated statement of liability to maintain a ratio of and is now carrying on December 31, 2015 is financial position of the tangible shareholders‟ equity. contacts with the other about NIS 635 million. subsidiary of Africa Industries As a result, the loans are banks for receipt of and the shareholders‟ equity will presented as part of the current waiver letters. It is noted not be less than NIS 120 million. liabilities. that as part of receipt of the waiver letters, reciprocal guarantees were signed between companies in the Africa Industries Group in the steel area.

155

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Industries (Cont.)

Institutional loan of 1) The ratio of the shareholders‟ As at the date of the statement On March 10, 2016, Africa Industries, the equity based on the of financial position, Africa Africa Industries made balance of which as at consolidated financial Industries is not in compliance early repayment in December 31, 2015 was statements of Negev shall not with the financial covenants respect of the current about NIS 170 million. be less than 13%. determined set forth above. payment that was 2) The ratio of the total debt of Therefore, the balance of the supposed to be paid on Africa Industries to the loan is presented as part of the March 31, 2016. For EBITDA of Negev shall not current liabilities in the details regarding a exceed 6. statement of financial position. waiver letter with respect Regarding this matter “total to compliance with the debt” – the amount of the financial covenants that balance of the loan, divided was received by Africa by the rate of holdings of Industries on March 21, Africa Industries in the shares 2016 – see Note 4D(6) of Negev, plus the net above. financial debt of Negev less 75% of Negev‟s operating working capital. Regarding this matter “EBITDA” – the operating income (based on the statement of income) plus depreciation and amortization (based on the statement of cash flows), less other expenses (income), net, and less non-recurring categories (if any in the consolidated statement of income). EBITDA will be calculated on a cumulative basis of the financial statements for each of the last four quarters that ended, as close as possible, prior to the date relevant for the calculation. 3) The minimum shareholders‟ equity (solo) of Africa Industries shall not drop below NIS 330 million.

156

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Residences

Debentures (Series B) as 1) The equity attributed to the Africa Residences is in None. at December 31, 2015, shareholders of Africa compliance with the financial the balance thereof is Residences shall not be less covenants determined. about NIS 270 million. than NIS 450 million. Therefore, the liabilities are 2) The ratio of the net debt to the presented as part of the total capital plus net debt non-current liabilities. (CAP) shall not exceed 70%. Africa Residences committed, among other things, that so long as the debentures (Series B) are outstanding (that is, so long as the debentures have not been fully paid or settled in any way, including through a self-acquisition and/or early repayment): 1) Not to make a distribution decision, as a result of which the equity attributed to the shareholders of Africa Residences will drop below NIS 450 million; and not to make a distribution decision in a case where the equity attributed to the shareholders of Africa Residences is less than NIS 450 million. 2) Not to create a floating lien on its assets, in whole or in part. Notwithstanding that stated above, Africa Residences will be permitted to create a floating lien as stated, subject to it also creating at this time a floating lien in favor of the holders of the debentures, where the security level is equal as between all the holders of the floating liens.

157

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Africa Residences (Cont.)

Debentures (Series C) as 1) The equity attributed to the Africa Residences is in None. at December 31, 2015, shareholders of Africa compliance with the financial the balance thereof is Residences shall not be less covenants determined. about NIS 191 million. than NIS 400 million. Therefore, the liabilities are 2) The ratio of the net debt to the presented as part of the total capital plus net debt non-current liabilities. (CAP) shall not exceed 70%.

Danya Cebus

Frameworks granted to 1) The tangible shareholders‟ Danya Cebus is in compliance None. Danya Cebus in order to equity of Danya Cebus (solo), with the financial covenants comply with bank shall not drop below, at any determined. Therefore, the guarantees in favors of time, 15% of the total assets liabilities are presented as part customers that have in the statement of financial of the non-current liabilities. ordered work. position of Danya Cebus based on its separate financial statements (as defined for this purpose, that is, with the addition of, among other things, subordinated shareholders‟ loans net of among other things, debit balances of interested parties that are not in the ordinary course of business, deferred expenses and intangible assets, and after eliminating, among other things, reserves in respect of revaluation of property, plant and equipment). 2) The tangible shareholders‟ equity of Danya Cebus based on its consolidated financial statements shall not fall below, at any time, NIS 200 million. 3) 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.

158

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Danya Cebus (Cont.)

Bank loan taken out for 1) If Danya Cebus signs, for the Danya Cebus is in compliance None. purposes of acquiring benefit of other creditors, on with the financial covenants Africa Residences, the additional and/or improved determined. Therefore, the balance of which as at financial conditions compared liabilities are presented as part December 31, 2015 is with the conditions for the of the non-current liabilities. about NIS 348 million. 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. 2) Financial conditions of Africa Residences: a) The ratio between the net financial debt and the shareholders‟ equity plus the net financial debt, shall not exceed 0.6. b) The tangible shareholders‟ equity shall not fall below NIS 450 million. c) The shareholders‟ equity after distribution of a dividend shall not fall below NIS 500 million. d) 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 60 million.

159

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

Danya Cebus (Cont.)

2) Financial conditions of Africa Residences: (Cont.) e) If Africa Residences commits to additional and/or improved financial conditions in favor of other creditors in connection with directives to a bank, Africa Residences shall also commit to the same conditions, with the necessary modifications in favor of the bank, and in any event they shall be considered as also applying to the financing agreement, in favor of the bank, even if not committed to by Africa Residences. 3) The ratio of the unpaid balance of the credit of the means of control to the value of the shares of Africa Residences shall not exceed 70%.

160

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

AFI Development

Bank loans and services 1) The financial covenants in The subsidiary of None. by a bank and/or connection with the revenues AFI Development is in guaranteed thereby to the of the shopping mall were compliance with the financial subsidiary of defined such that the shopping covenants determined. AFI Development, in mall‟s quarterly revenue Therefore, the liabilities are connection with the (including VAT) will not drop presented as part of the AFIMALL project, the below an agreed amount, non-current liabilities. balance of which as at which gradually increases December 31, 2015 is from 651 million rubles in the about US$416 million. third quarter of 2012 up to 1,139 million rubles in the first quarter of 2018. It is noted that if AFI Development‟s subsidiary does not comply with the said commitment, the financing bank will be entitled to receive increased interest on the balance of the loan for the following quarter. 2) Liquidation value (immediate realization value) higher than the principal and interest for six months. Non-compliance with the financial covenant gives the bank the right to demand immediate repayment of the loan.

161

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

C. Contractual limitations and financial covenants (Cont.)

Liabilities of Investee Companies (Cont.)

AFI Development (Cont.)

Bank loan to the 1) A decline in value of the The subsidiary of None. subsidiary of property acquired at a rate of AFI Development is in AFI Development, in more than 15% will be compliance with the financial connection with the grounds for calling the loan covenants determined. Uzrakovsky 3 project, for immediate repayment. Therefore, the liabilities are the balance of which as 2) A minimum LTV ratio of presented as part of the current at December 31, 2015 is 65%. The LTV is calculated liabilities. about US$193 million. on a quarterly basis as the For details regarding total amount of the loan negotiations being carried on divided by the fair value of with the lending bank with the property. respect to postponement of the 3) Debt coverage ratio – the cash date for examining compliance flows from the property will with the financial ratios the be 1.2 times the debt service subsidiary committed to for the next twelve months. comply with as part of the loan The ratio will be examined agreement, such that they will commencing from the fourth be calculated for the first time quarter of 2015. at the beginning of the second 4) In a case of sale of the offices, quarter of 2017 – see at least 70% of the Note 4A(2)(b), above. consideration is to be repaid to the bank.

162

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures

(1) Company debentures

(a) Set forth below are details regarding the Company‟s outstanding debentures:

1. Marketable debentures (Series Z) that were issued in May 2010, in the total denominated principal amount of about NIS 3,626 million. The debentures are scheduled for repayment in twelve equal annual payments commencing from May 2013, are linked to the CPI and bear interest at the average annual interest rate of 7% (where the interest rate will increase gradually from 6% per year to 10.75% per year), which is to be paid semi-annually commencing from November 2010. The effective annual interest rate in respect of the series is about 14%.

2. On December 26, 2012, the Company published a shelf prospectus (amended) (hereinafter – “the Shelf Prospectus”), whereby the Company made an offer to the holders of the debentures (Series Z) (hereinafter, respectively – “the Offerees” and “the Debentures (Series Z)”) to acquire from them up to NIS 2,637,842,905 par value Debentures (Series Z), which were held by each of them (and that constituted about 75% of the par value of the Debentures (Series Z) outstanding as at the date of the Shelf Prospectus), by means of an exchange tender offer (hereinafter – “the Exchange Tender Offer”), in consideration of issuance of up to NIS 2,852,352,290 par value debentures (Series ZA), which will be registered for trading on the stock exchange.

As stated above, the general conditions of the debentures (Series ZA) and of the trust indenture for their holders are essentially similar to the general terms of the debentures (Series Z) and the trust indenture for their holders, including, in respect of restrictions with respect to a self-acquisition of the debentures by a subsidiary, expansion of the debenture series, issuance of new debentures, compliance with financial covenants, distribution of dividends, commitments of the controlling shareholder to make additional investments and the sanctions for their violation, grounds for calling for immediate repayment, appointment of an independent director by the trustee and commitment regarding a negative pledge.

It is noted, the changes made to the general conditions of the debentures (Series ZA) compared with the debentures (Series Z) are not significant and they were made based on the requests of the Securities Authority and/or the Stock Exchange. Included in this, the debentures (Series ZA) will participate in the collaterals securing the Company‟s obligations to the holders of the debentures (Series Z).

163

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(1) Company debentures – (Cont.)

(a) (Cont.)

2. (Cont.)

The debentures (Series ZA) are linked (principal and interest) to the Consumer Price Index published in December 2012 for November 2012, bear interest at the annual rate of 6.8% and are repayable in 12 payments, to be made as follows:

(i) A first payment at the rate of 18% of the amount of the principal paid on January 22, 2013 (hereinafter – “the First Payment”); (ii) a first payment at the rate of 5% of the amount of the principal to be paid on May 16, 2015; (iii) the balance of the principal of the debentures (Series ZA) is to be paid in 10 equal annual successive and continuous payments commencing from May 16, 2016 and running up to May 16, 2025 (that is, one equal principal payment at the rate of 7.7% of the amount of the principal in each of the years 2016 through 2025, respectively (from the standpoint of the dates and number of payments) based on the repayment schedule of the balance of the principal of the debentures (Series Z)).

The interest on the debentures (Series ZA) is to be paid semi-annually on May 16 and November 16 of each of the years 2013 through 2025, commencing from May 16, 2013 and running up to the date of the final payment on May 16, 2025. Notwithstanding that stated above, the first interest payment on the debentures (Series ZA) was made on January 22, 2013 together with the first payment in respect of the principal as stated above (hereinafter – “the First Interest Payment”).

Based on the results of the Exchange Tender Offer, which received on January 1, 2013, holders of NIS 1,468,484,494.18 par value debentures (Series Z), constituting about 41.75% of the total outstanding debentures (Series Z) responded, and in exchange, on January 1, 2013, the Company issued NIS 1,587,901,654 par value debentures (Series ZA) (constituting about 55.67% of the total outstanding debentures (Series ZA) issued as part of the Exchange Tender Offer).

Based on the results of the exchange, the First Payment amounted to about NIS 286 million. The First Interest Payment amounted to about NIS 6 million.

164

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(1) Company debentures – (Cont.)

(a) (Cont.)

2. (Cont.)

Taking into account the terms of the debentures (Series Z) compared with the debentures (Series ZA), execution of the said exchange offer did not rise to the level of an exchange of debt instruments having significantly different terms. Therefore, and in accordance with international accounting standards, the Company did not record a gain or loss in its books on the execution date of the exchange offer but, rather, on the execution date of the exchange offer, a new effective interest rate was determined equal to 13.14% for the debentures (Series ZA).

Regarding early repayment of the debentures (Series Z and ZA) in February 2015 – see Note 18E(1)(b) below.

3. In July 2014, the trustee for the Company‟s debentures (Series Z) and (Series ZA), Hermatik Trust (1975) Ltd. (hereinafter – “the Trustee”), convened General Meetings of the holders of the debentures (Series Z) and (Series ZA) (hereinafter – “the Meetings”). At the Meetings, approval was granted for, among other things, additions to the trust certificates for the holders of the debentures (Series Z) and (Series ZA) whereby the Company will be permitted to issue additional series of debentures that will be secured by liens on the Company‟s assets and/or other collaterals on the Company‟s assets, including with reference to preferred collaterals on the debentures (Series Z) and (Series ZA), and the consent of the holders of the debentures (Series Z) and (Series ZA) was received to issue new series of debentures that will be secured by liens on marketable securities of AFI Development, which are held by the Company and that are not pledged to secure the Company‟s debentures (Series Z) and (Series ZA).

On September 16, 2014, a public tender was held, wherein the Company raised NIS 545,083 thousand before the issuance expenses (hereinafter – “the Proceeds”) against issuance of 516,666 packages where each such package contains NIS 1,000 par value debentures (Series ZB) and 5 options for NIS 100 par value each debentures (Series ZB). The options may be exercised in exchange for a payment of NIS 97 for each option. The exercise period of the options is from September 16, 2014 up to December 1, 2014.

The Company received exercise notifications with respect to 1,295,773 options, and accordingly the Company issued an additional NIS 129,577,300 par value debentures (Series ZB). The Proceeds received by the Company as a result of the said exercise is about NIS 126 million (before expenses).

165

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(1) Company debentures – (Cont.)

(a) (Cont.)

3. (Cont.)

The part of the Proceeds, in the amount of about NIS 15,520 thousand, which was allocated to the options, was determined based on their fair value, based on the closing price of the options at the end of the first day of trading (September 18, 2014).

The balance of the Proceeds, in the amount of about NIS 529,563 thousand, was allocated to the debentures (Series ZB). Accordingly, the balance of the premium in the issuance is about NIS 12,897 thousand.

The issuance expenses amounted to about NIS 7.1 million and were allocated proportionately to the debentures and the options. The issuance expenses that were allocated to the options were recognized immediately in the statement of income, whereas the issuance expenses that were allocated to the debentures, which amounted to about NIS 6.9 million, were offset against the balance of the premium in the issuance.

The interest on the debentures (Series ZB) was set at the annual rate of 5.7%, linked to the CPI. The principal of the debentures is linked to the CPI and is schedule for repayment in six equal annual payments in the years 2018 through 2023.

The effective interest rate on the debentures was set at the rate of about 5.47%.

As part of the Company‟s commitments to the holders of the debentures (Series Z, Series ZA and Series ZB), it will use the Proceeds of the issuance for repayment of the debentures (Series Z and ZA) and for repayment of the debt to banks.

166

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(1) Company debentures – (Cont.)

(b) Partial early repayment of debentures (Series Z and ZA)

In January 2015, the Company‟s Board of Directors decided to make early repayment of part of the debentures (Series Z) in the amount of NIS 198.156 million, which was made on February 1, 2015 (hereinafter – “the Early Repayment Date”), and to make early repayment of part of the debentures (Series ZA) in the amount of NIS 99.848 million, which was made on the Early Repayment Date (hereinafter – “the debentures (Series Z) and (Series ZA)” and “the Early Repayment”, respectively). The Early Repayment, as stated, reflects advancement of the upcoming principal payment of each of the debenture series (Series Z) and (Series ZA) (of May 2015), and the source of the Early Repayment amounts detailed above is the proceeds from issuance of the Company‟s debentures (Series ZB), as detailed in Note 18E(1)(a)(iii).

In March 2015, Midroog lowered the rating of all of the Company‟s debentures from A3 to Baa1 with negative outlooks. As a result of the lowering of the rating of the debentures (Series ZB), an update was made of the interest rate on the debentures (Series ZB), such that the forecasted payments on the debentures (Series ZB) reflect the updated interest rate (an increase from 5.7% to 5.95%) commencing from the beginning of the next interest period, starting from September 1, 2015.

During October 2015, Midroog Ltd. gave notice of a reduction of the rating of the Company‟s outstanding debentures from Baa1 to Baa2 with a negative rating outlook. As a result of the above-mentioned rating reduction and in accordance with the trust indenture for the debentures (Series ZB), the Company will make an update of the interest rate on the debentures (Series ZB), such that the projected interest payments on the debentures (Series ZB), will reflect the updated interest that increased from the rate of 5.95% to the rate of 6.2%, commencing from the next interest period, that is, from March 1, 2016.

In respect of the interest period ending on February 29, 2016, no additional interest will be paid.

For details regarding reduction of the rating of the Company‟s outstanding debentures as at the date of the statement of financial position – see Note 39C, below.

For details regarding the Interim Framework with the holders of the debentures up to November 17, 2016 – see Note 1B(3), above.

167

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(2) Debentures of subsidiaries –

(a) Africa Properties

(i) In May 2007, Africa Properties completed issuance of a series of debentures (Series C) in the total amount of NIS 500 million par value, bearing annual interest at the rate of 4.15% 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.

In April 2012, a public tender was held wherein Africa Properties issued additional debentures (Series C) and raised the amount of about NIS 134.17 million (gross). The debentures bear interest at the annual rate of 4.15% and are repayable in four annual payments in the years 2012 through 2015. The issuance expenses amounted to about NIS 0.7 million.

In 2015, Africa Properties made the final payment in connection with the debentures (Series C).

(ii) In January 2011, a tender to the public was held wherein Africa Properties raised a gross 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. The debentures were secured by a lien on holdings of Africa Properties in a subsidiary, AFI Europe. The proceeds of the fundraising were used to repay debenture principal of the existing series. Regarding the financial covenants Africa Properties committed to comply with – see Section C above.

In February 2013, Africa Properties issued to institutional investors additional debentures (Series E) in the amount of NIS 130 million par value, for a price of NIS 101.8 for every NIS 100 par value debentures (Series E), in exchange for a total consideration of about NIS 132.4 million. The terms of the additional debentures will be the same as the debentures (Series E) issued in the past by Africa Properties. The issuance expenses amounted to about NIS 0.5 million. The effective interest is 6.9%.

During September 2015, Africa Properties made an expansion of the debentures (Series E), whereby Africa Properties raised the gross amount of about NIS 126 million, against issuance of NIS 112.5 million par value debentures. The issuance expenses amounted to about NIS 0.4 million. The effective interest is 3.6%.

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(2) Debentures of subsidiaries – (Cont.)

(a) Africa Properties (Cont.)

(iii) In August 2013, a tender was held wherein Africa Properties raised the gross amount of about NIS 126 million, against issuance of NIS 126 million par value debentures, and the interest on the debentures (Series F) was set at the rate of 4.8% per year (about 5% effective interest for the year), linked to the Consumer Price Index (CPI). The debentures are repayable in five annual installments, in the years 2017 through 2021. The debentures are secured by a lien on the holdings of Africa Properties in AFI Europe, a private company wholly owned (indirectly) by Africa Properties. Regarding the financial covenants Africa Properties committed to comply with – see Section C above. The issuance expenses amounted to NIS 1.2 million.

In October 2013, Africa Properties issued to institutional investors, an additional NIS 23.7 million par value debentures (Series F), at a price of NIS 99 for each NIS 100 par value of debentures (Series F), in exchange for an aggregate consideration of about NIS 23.5 million. The terms of the additional debentures are the same as the debentures (Series F) issued by Africa Properties.

For details regarding the expansion made by Africa Properties of the debentures (Series F) subsequent to the date of the statement of financial position – see Note 39H, below.

(iv) In May 2015, a public tender was held wherein Africa Properties raised a gross about NIS 200 million, against issuance of NIS 200 million par value debentures (Series G). The interest rate was set at 3.7% per year, linked to the CPI. The issuance expenses amounted to about NIS 2 million. The debentures are repayable in three annual payments in the years 2021-2023. The debentures were not secured by a lien. Regarding financial covenants Africa Properties committed to comply with in the issuance – see Section C, above.

In February and March 2015, Africa Properties made an expansion of the debentures (Series G) whereby it raised a gross about NIS 206 million against issuance of NIS 220 million par value debentures at an effective interest rate of 5%–5.5%. The issuance expenses amounted to NIS 1.7 million.

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(2) Debentures of subsidiaries – (Cont.)

(b) Africa Residences

(i) 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 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 (hereinafter – “the Additional Debentures”).

The effective interest respect of the Additional Debentures as at the issuance date is 6.3% per year.

The balance of the Additional Debentures as at December 31, 2015 is NIS 37,177 thousand par value.

(ii) In April 2012, Africa Residences issued to the public, based on a shelf offer report dated April 5, 2012, in accordance with an amendment to a prospectus dated April 3, 2012, 145,588 registered debentures (Series B) (hereinafter – “the Debentures”) of NIS 1,000 par value each, repayable in 7 payments, to be made as follows: (i) three equal annual payments, each in the amount of 6% of the original principal amount of the Debentures, to be paid on March 31, of each of the years 2014 through 2016; (ii) two equal annual payments each in the amount of 24% of the original principal amount of the Debentures, to be paid on March 31, of each of the years 2017 and 2018; (iii) one payment in the amount of 23% of the original principal amount of the Debentures, to be paid on March 31, 2019; and (iv) one payment in the amount of 11% of the original principal amount of the Debentures, to be paid on March 31, 2020.

The Debentures are linked (principal and interest) to the Consumer Price Index published in March 2012, in respect of February 2012, and bear interest at the annual rate of 4.7%, as determined in the tender, to be paid in semi-annual payments on September 30, and March 31 (where the first payment started on September 30, 2012 and the final payment will fall on March 31, 2020).

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(2) Debentures of subsidiaries – (Cont.)

(b) Africa Residences (Cont.)

(ii) (Cont.)

The proceeds from issuance of the Debentures amounted to about NIS 145,588 thousand, and after allocation of the issuance expenses, the net proceeds amounted to about NIS 143,887 thousand. The effective interest in respect of the Debentures on the issuance date was about 4.91%.

Regarding the financial covenants Africa Residences committed to comply with – see Section C above.

In October 2013, Africa Residences issued to the public, based on a shelf report dated October 28, 2013, pursuant to the prospectus dated August 29, 2013, 147,373 registered debentures (Series B) of NIS 1,000 par value each.

The proceeds from the issuance (gross) amounted to about NIS 168,150 thousand, and after allocation of the issuance expenses the proceeds amounted to a net about NIS 166,709 thousand. The effective interest as at the issuance date in respect of the debentures, including the additional debentures, is about 3.72%.

(iii) In May 2015, Africa Residences issued to the public pursuant to a shelf offer report dated May 21, 2015, based on a shelf prospectus of Africa Residences dated August 29, 2013, 192,969,000 registered debentures (Series C) of NIS 1 par value each, in units of 1,000 debentures (Series C) each, repayable in 6 unequal annual payments, to be paid in the following manner: (a) 5% of the principal of debentures (Series C) is to be paid on March 31, 2018; (b) 5% of the principal of debentures (Series C) is to be paid on March 31, 2018; (c) 5% of the principal of debentures (Series C) is to be paid on March 31, 2019; (d) 19% of the principal of debentures (Series C) is to be paid on March 31, 2020; (e) 33% of the principal of debentures (Series C) is to be paid on March 31, 2021; and (f) 33% of the principal of debentures (Series C) is to be paid on March 31, 2022.

The debentures (Series C) are not linked (principal and interest) and bear interest at the annual rate of 3.9%, as determined in the tender, which is to be paid in semi-annual payments on September 30 and March 31 (where the first payment will fall on September 30, 2015 and the final payment will fall on March 31, 2022) (hereinafter – “the Debentures (Series C)” or “the Debentures”).

The proceeds of the Debentures amounted to about NIS 192,969 thousand, and after allocation of the issuance expenses the net proceeds were about NIS 191,230 thousand. The effective interest in respect of the Debentures on the issuance date was about 4.07%. 171

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

D. Debentures (Cont.)

(2) Debentures of subsidiaries – (Cont.)

(b) Africa Residences (Cont.)

(iii) (Cont.)

At the time of issuance of the Debentures, Africa Residences undertook to comply with financial covenants as described in Note 18C above.

E. Significant Credit taken out during the Year

(1) During March 2015, a subsidiary of AFI Europe in Belgrade, Serbia, signed a refinancing agreement with the lending bank for Stage A of the project. The agreement provides that a loan, in the amount of about €16 million is to be repaid, and in its place the subsidiary will receive a loan in the amount of about €20.7 million, which will be classified as long-term. In June 2015, the loan was received for Stage A of the project and an additional financing agreement was signed for construction of an additional office building on an aggregate rental area measuring 11,882 square meters, in the amount of about €16 million.

(2) During June 2015, an agreement was signed regarding financing of an office building project in AFI Park 4+5 in Bucharest, Romania (hereinafter – “the Project”). The loan is in the amount of about €39 million and will bear interest at the annual rate of the 3M Euribor+3.4%. AFI Europe will receive 50% of the financing with no advance leasing conditions, and the balance of the financing upon reaching an occupancy rate of 40% in the Project. The final repayment date determined for the loan is December 31, 2017. The loan is secured by, among other things, a mortgage on the property, a lien on the shares of the subsidiary of AFI Europe and a guarantee of Africa Properties. In July 2015, the preconditions for receipt of the loan were fulfilled, with no advance leasing conditions and AFI Europe began to utilize the loan facility.

(3) During August 2015, a loan agreement was signed between a bank and three Czech subsidiaries of AFI Europe, whereby the subsidiaries were granted loans for 5 years for purposes of refinancing prior loans that were granted to them in connection with the Classic 7 Business Park office buildings project in Prague, in the Czech Republic (hereinafter – “the Project”) and financing of the construction and operation of one additional office building that was built as part of the third phase in the project, on an aggregate rentable area of 6,300 square meters.

One of the loans granted under the said agreement, in the amount of about CZK 532,250 thousand, bears interest at the annual rate of PRIBOR+2.6%, while the other two loans under the aforesaid agreement, the amounts of €13,684 thousand and €8,500 thousand bear interest at the annual rate of EURIBOR+2.6%. The loans are secured by, among other things, a mortgage on the properties and a cross guarantee between the subsidiaries holding the properties along with a pledge of the shares of the said subsidiaries. During September 2015, the preconditions for receipt of the loans were fulfilled. 172

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

E. Significant Credit taken out during the Year (Cont.)

(4) During September 2015, a Romanian subsidiary of AFI Europe, which holds a shopping mall in the City of Ploitsch in Romania, sign an agreement with a bank whereby the period of an existing loan, in the amount of €31,920 thousand, was extended, and in the fourth quarter of 2015 the bank also granted an additional sum, which brings the total amount of the loan to €38,000 thousand. The loan will bear interest at the annual rate of EURIBOR+3.95% and its final payment date is March 31, 2020.

(5) For details regarding an undertaking of Africa Properties and Africa Residences in an agreement with an institutional entity for receipt of financing for planning and construction of a residential property held for rent in Herzlyia, in an amount of up to about NIS 300 million – see Note 4B(2).

(6) For details regarding taking out of a loan by Africa Properties, in the amount of NIS 160 million, from a bank, for purposes of financing its share in a transaction for construction of a commercial and office space in the South Kirya complex in Tel-Aviv – see Note 4B(6).

(7) On August 13, 2015, Danya Cebus signed an agreement to receive a credit framework and loans with a bank (hereinafter – “the Credit Agreement”). Pursuant to the Credit Agreement, the bank will provide Danya Cebus a short-term credit framework, in the amount of NIS 50 million, which will bear interest of prime + a margin as agreed to with the bank. In addition, the bank will provide Danya Cebus a loan, in the amount of NIS 224 million, for a period of up to 7 years, that is to be repaid (principal and interest) in 7 equal annual payments, and that will bear variable interest of prime + a margin as agreed to with the bank. In addition, the bank will provide the company a loan, in the amount of NIS 96 million, for a period of up to 7 years, that is to be repaid (principal and interest) in one lump sum at the end of the period (“bullet”), which will bear variable interest of prime + a margin as agreed to with the bank and that will be repaid in the framework of this agreement. The bank also provided a loan, in the amount of NIS 30 million, for a period of 10 years, that is to be repaid (principal and interest) in 10 equal annual payments, and that will bear interest linked to the CPI plus a margin as agreed to with the bank. In total, pursuant to the Credit Agreement, the bank will provide Danya Cebus a credit framework, in the amount of NIS 50 million, and loans, in the amount of NIS 350 million.

It is noted that as part of the Credit Agreement, as stated, Danya Cebus will pay the balance of the loan (to that bank), which as at the date of the statement of financial position is in the amount of about NIS 180 million.

As part of the Credit Agreement, customary provisions were stipulated with reference to additional interest upon occurrence of a violation event, as defined in the Credit Agreement, delinquency interest, grounds for calling for immediate repayment, etc. In addition, financial covenants were provided that are customary in agreements of the type of the Credit Agreement that apply to Danya Cebus and Africa Residences, along with additional customary conditions, such as, limitations on distribution of dividends, commitments with respect to payments to interested parties, etc.

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 18 – Loans and Credit from Banks and Other Lenders (Cont.)

E. Significant Credit taken out during the Year (Cont.)

(7) (Cont.)

As part of the Credit Agreement, provisions were also included to accelerate repayment of the loan. As security for the company‟s compliance with its commitments pursuant to the Credit Agreement, Danya Cebus placed a lien on its shares in Africa Residences, including the fruits (earnings) deriving therefrom, and also placed a lien on part of the receipts to be paid to it by Netivei Hayovel.

For details regarding an undertaking of Danya Cebus with the Company in a loan agreement whereby Danya Cebus will provide the Company a loan, with interest terms that are identical to the interest terms stipulated in the credit agreement, as stated – see Note 37E(4).

F. Collaterals in respect of Credit Received At December 31 2015 2014 In Thousands of NIS

Amount of credit secured by liens 12,293,411 12,890,218

Book value of pledged assets* 18,305,659 21,502,704

* The book value of the pledged assets including the cost of shares of investee companies, as well as additional properties, some of which are held by those companies.

(1) In order to secure loans taken out (generally from banks) for various purposes (including financing construction or investments or current activities), all or some of the financing entities have been given different collaterals that include floating liens on assets of certain group companies, including rights in lands of certain projects with respect to which the loans were taken out; liens on rights of certain group companies, including future receipts, and liens on shares of investee companies. In addition, fixed liens have been recorded on goodwill and unpaid share capital of certain group companies.

Furthermore, a number of group companies have committed to all or some of their 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 receiving approval and/or making prior consultation with the lending party providing the credit.

(2) In order to secure loans received from banks, the Company 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. As at the date of the statement of financial position, the balance of the above-mentioned loan is about NIS 18 million.

Regarding collaterals in respect of credit received – see also Note 35 above.

174

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 19 – Contractors and Suppliers

At December 31 2015 2014 In Thousands of NIS

Open accounts 836,134 *667,719 Checks and notes payable 68,139 132,121 904,273 799,840 * Restated – see Note 2I(2).

Regarding the Group‟s exposure to currency and liquidity risk in connection with suppliers – see Note 35 “Financial Instruments”.

Note 20 – Other Payables and Credit Balances

At December 31 2015 2014 In Thousands of NIS

Deferred income 26,998 29,643 Tenant deposits 3,624 4,263 Accrued expenses 41,328 *60,974 Liabilities to employees and other salary-related liabilities 78,727 71,485 Value Added Tax 60,368 52,191 Liabilities to interested and related parties 2,066 3,645 Interest payable on long-term liabilities 102,373 82,629 Payables in respect of land and property, plant and equipment 5,002 – Derivative financial instruments 7,111 14,208 Advance deposits in respect of sale of investee companies – 14,505 Liabilities to sellers of land in combination transactions** 180,836 194,104 Other payables and credit balances 51,485 45,745 559,918 573,392

* Restated – see Note 2F(2). ** The amounts presented above are in respect of contractual liabilities incurred to sellers of the land payable at certain rates from the receipts from sale of residential units and/or for transfer of areas in projects constructed on the land.

Regarding the Group‟s exposure to currency and liquidity risk in connection with suppliers – see Note 35 “Financial Instruments”.

175

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 21 – Advances from Customers At December 31 2015 2014 In Thousands of NIS

Advances from customers in an industrial company 140,821 *121,515 Advances in respect of residential units and parking spaces 1,260,117 944,524 Deferred income in respect of construction in progress (1) 81,965 57,833 1,482,903 1,123,872

* Restated – see Note 2F(2). (1) Deferred income in respect of construction in progress For the Year Ended December 31 2015 2014 In Thousands of NIS

Opening balance in advances in respect of work in progress 57,833 68,974 Receipts and work in progress added during the period 822,824 330,164 Less part recorded on the statement of income during the period (798,692) (341,305)

Ending balance in advances in respect of work in progress 81,965 57,833

Note 22 – Provisions Provisions Legal Provisions for and other for Warranty completion claims loss Total In Thousands of NIS

Balance at January 1, 2014 80,256 262,590 77,930 7,383 428,159 Provisions recorded during the year 28,976 278,958 13,418 2,276 323,628 Provisions used during the year (17,148) (247,908) (8,118) – (273,174) Provisions eliminated during the year (5,702) (15,980) (2,368) – (24,050) Exchange rate differences – 2,657 (28) – 2,629 Balance at January 1, 2015 86,382 280,317 80,834 9,659 457,192

Provisions recorded during the year 28,885 227,838 20,109 – 276,832 Provisions used during the year (23,610) (185,102) (7,682) – (216,394) Provisions eliminated during the year (4,964) (30,979) (1,756) – (37,699) Exchange rate differences – 112 – – 112 Balance at December 31, 2015 86,693 292,186 91,505 9,659 480,043

For information regarding legal claims – see Note 36 below “Contingent Liabilities”.

176

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 23 – Other Revenues

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Management fees, technical supervision and sundry 1,019 2,621 1,444 Net gain from sale of property, plant and equipment 62 654 – Capital gain from realization of investments in investee companies* 39,390 5,866 126,858 Gain on bargain acquisition – – 22,820 Net gain on sale of investment property 365 973 103,560 Other 22,279 46,118 45,501

63,115 56,232 300,183

* In 2015 – stems from income in respect of cancellation of a joint cooperation agreement between the Company and other shareholders in Rennanot Initiations and Investments Ltd. For details – see Note 4G(1) above.

Note 24 – Costs and Expenses in Construction and Real Estate Transactions

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Land 168,352 213,631 195,631 Salaries and related expenses 263,256 229,660 222,808 Building materials 681,462 548,583 543,189 Subcontractors 1,673,043 1,588,071 1,621,114 Depreciation 17,059 16,213 13,767 Marketing and advertising 33,143 28,367 32,656 Other 135,532 149,413 299,227

2,971,847 2,773,938 2,928,392

Note 25 – Expenses for Maintenance, Supervision and Management of Real Estate and Other Properties For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Salaries and salary-related expenses 30,800 47,135 50,910 Depreciation 577 1,059 1,706 Maintenance and repairs 93,895 132,597 157,525 Advertising 20,897 23,717 21,087 Land lease 2,665 4,156 3,179 Other 2,809 6,916 23,185

151,643 215,580 257,592

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 26 – Costs and Expenses in Industry

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Cost of sales –

Materials consumed 561,772 608,894 664,041 Salaries, wages, and related expenses 116,953 94,607 106,244 Outside services 14,156 9,543 11,601 Depreciation 34,863 21,793 19,177 Selling and marketing expenses 336,641 *338,635 *319,773 Other expenses 93,325 70,093 97,724

1,157,710 1,143,565 1,218,560

Purchase of goods 601,031 *582,759 *610,890 Changes in inventory of work in process (1,955) *2,680 1,012 Changes in inventory of finished goods and products (21,750) 9,839 31,006

1,735,036 1,738,843 1,861,468 * Restated – see Note 2F above.

Note 27 – Amortization of Intangible Assets and Other Expenses

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Loss from sale of investments in investee companies 290 1,690 19,106 Write down of investments, property, plant and equipment and other assets (2) (3) 46,397 28,502 7,680 Loss from impairment in value of financial asset 3,410 – 20,492 Capital loss 298 195 6,880 Other (1) 47,181 68,915 44,462 97,576 99,302 98,620

(1) In 2014 – includes the amount of €4.6 million in respect of additional property tax a subsidiary of AFI Europe in Romania (hereinafter – “the Subsidiary”) was required to pay by the authorities in respect of prior years. For details – see Note 36(1)(e)(2).

(2) In 2015 – includes the amount of NIS 25 million in respect of a decline in value of property, plant and equipment stemming from closing of stores of a subsidiary and recording a provision for decline in value that was made in some of its branches.

(3) In 2015 – includes the amount of NIS 22 million stemming from recognition of selling expenses in respect of sale of a foreign company in the United States in which the Company held, indirectly, through AFI USA, 50.1% of the shares. For details – see Note 4A(1) above.

178

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 28 – Administrative and General Expenses

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Wages, salaries and related expenses 91,918 91,044 95,641 Legal and professional expenses 33,570 42,017 42,786 Share-based payment 7,626 18,174 22,770 Management fees 730 722 645 Provision for doubtful debts 13,082 *33,542 6,539 Depreciation and amortization 9,480 9,682 9,977 Other 74,221 81,000 78,834 230,627 276,181 257,192 * Restated – see Note 2F above.

179

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 29 – Financing Income and Expenses

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Financing income Interest income from bank deposits 6,427 21,683 25,042 Interest income from loans and receivables 1,082 1,250 2,099 Increase in fair value of financial assets held for trade 8,548 14,115 13,851 Increase in fair value of financial assets designated at fair value through the statement of income, net 5,846 13,520 99 Gain from change in exchange rates 14,271 15,010 6,401 Gain from write off of expired loan (1), (2) – 165,220 54,532 Other 20,478 26,928 36,258

Financing income recorded in the statement of income 56,652 257,726 138,282 ------

Financing expenses Interest expenses and linkage on financial liabilities measured at amortized cost 809,059 880,427 996,358 Loss from change in exchange rates (3) 818,986 816,057 227,256 Decline in fair value of financial assets held for trade – 11,675 8,158 Decline in fair value of financial assets designated at “fair value through the statement of income”, net 7,810 1,595 9,323 Other 48,566 59,193 67,635

Financing expenses 1,684,421 1,768,947 1,308,730 Less capitalized credit costs (38,037) (22,688) (29,690)

Financing expenses recorded on the statement of income 1,646,384 1,746,259 1,279,040 ------

Net financing expenses recorded in the statement of income (1,589,732) (1,488,533) (1,140,758)

(1) In 2014, includes income from acquisition of the balance of loans from a bank by AFI Europe. (2) In 2013, includes short-term loans were taken out by a subsidiary of AFI Development (hereinafter – “the Loans”) that were written off in the first quarter of 2013 on the basis of information that the Loans expired and that there is no legal or implied obligation to repay them. (3) In 2015, includes the amount of about NIS 384 million in respect of realization of a capital reserve for foreign activities. For details – see Note 4A(1), above.

180

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income

A. Details regarding the tax environment in which the Group operates

(1) Companies Tax rates

Set forth below are the tax rates relevant to the Company for 2013–2015: 2013 – 25%. 2014 – 26.5%. 2015 – 26.5%.

During January 2016, the plenary Knesset approved the Law for Revision of the Income Tax Ordinance (No. 216), 2016, which provided, among other things, a reduction of the Companies Tax rate, commencing from 2016 and thereafter, of 1.5% such that it will be 25%.

If the legislation had been effectively completed by December 31, 2015, the impact of the change on the financial statements as at December 31, 2015 would have been reflected in a decrease in the balances of the deferred taxes, in the amount of NIS 8,829 thousand, and a decrease in the balances of the deferred tax assets, in the amount of NIS 5,319 thousand. Update of the balances of the deferred taxes would have been recognized against deferred tax income, in the amount of NIS 3,510 thousand.

The current taxes for the periods reported are calculated in accordance with the tax rates shown in the table above.

(2) Danya Cebus

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.

(3) Africa Industries

(a) Subsidiaries of Africa Industries 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 (Taxes), 1969.

(c) Africa Industries and some of its subsidiaries are “Industrial Companies” within the meaning thereof in the Law for the Encouragement of Industry and are entitled to claim depreciation at accelerated rates and to additional benefits pursuant to this law.

181

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

A. Details regarding the tax environment in which the Group operates (Cont.)

(4) AFI Development

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.

(5) The Group companies overseas are assessed under the tax laws in those countries and the provisions for taxes, deferred taxes and carryforward losses were computed in accordance therewith.

(6) AFI Europe

In May 2006, all the rights of Africa Properties at that time, with reference to a number of real estate properties in the Czech Republic, Serbia, Bulgaria and Romania, as well as with respect to projects that were in various stages of development at that time in those countries, were transferred to AFI Europe by means of a transfer to AFI Europe of all the shares of Africa Properties in its subsidiaries which held, directly or indirectly, rights in those properties and/or executed those projects, in exchange for an issuance of shares of AFI Europe to Africa Properties. For this purpose, Africa Properties received approval (an advance tax ruling) from the Tax Authorities for the above-mentioned transaction covering the relevant tax aspects, along with deferral of the applicable tax pursuant to the provisions of Section 104A of the Income Tax Ordinance.

(7) 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.

182

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

A. Details regarding the tax environment in which the Group operates (Cont.)

(8) Africa Israel Residences Ltd. and Africa Israel Properties Ltd.

The project for construction of a residential project held for rent in Herzlyia, as detailed in Note 4B(2) was approved as a plan for construction of a “New Building held for Rent”, in accordance with the Law for Encouragement of Capital Investments, 1959. Pursuant to the Law, the tax rate applicable to the taxable income from the rental of a “New Building held for Rent” is 11%.

B. Composition of the Taxes on Income

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Current taxes 66,096 *80,656 *78,724 Deferred taxes (302,102) *(108,076) *119,555 Impact of change in tax rates – – *1,836 Taxes in respect of prior years 1,607 12,515 268

Total taxes on income (234,399) (14,905) 200,383

* Restated – see Note 2F above.

183

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

C. Reconciliation between the theoretical tax on the pre-tax income and the income tax expense

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Income (loss) before taxes on income (2,537,772) *(1,107,351) *319,949 Main tax rate applicable to the Company 26.5% 26.5% 25% Tax computed at the Company‟s regular tax rate (672,510) (293,448) 79,987

Increase (savings) in the tax liability due to:

Different tax rates in subsidiaries operating outside of Israel 106,988 (287,406) (41,319) Elimination of tax calculated in respect of the Company‟s share in losses (income) of equity-based investee companies (9,612) 3,991 6,226 Exempt income (117,499) (47,324) (31,536) Income subject to tax at a special rate (12,195) *(5,105) (1,018) Non-deductible expenses 151,216 *85,092 *56,187 Utilization of losses and benefits from prior years for which deferred taxes were not recorded (2,755) *(17,081) *(9,150) Temporary differences for which deferred taxes were not recognized (4,829) *99,051 (4,526) Tax losses and benefits from the period for which deferred taxes were not recorded 329,550 *96,435 *136,370 Taxes in respect of prior years 1,607 12,515 268 Impact of changes in tax rates – – *1,836 Other differences (4,360) *338,375 7,058

Total taxes on income (tax benefits) in the statement of income (234,399) (14,905) 200,383

Effective tax rate 9.24% 1.35% 62.63%

* Restated – see Note 2F above.

184

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

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.

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, 2014 (48,271) 30,577 (1,164,230) *368,288 (63,768) (877,404)

Changes recorded in the statement of income *(18,428) 4,997 (169,193) *232,049 58,651 108,076 Changes recorded to shareholders‟ equity** – – – – 2,398 2,398 Exit from the consolidation – – 39,596 (2,070) (2,070) 35,456 Translation differences 2,472 (10,422) 22,537 (89,222) (54,723) (129,358)

Balance of deferred tax asset (liability) at January 1, 2015 (64,227) 25,152 (1,271,290) 509,045 (59,512) (860,832)

Changes recorded in the statement of income (28,165) (25,976) 299,609 (12,250) 68,884 302,102 Changes recorded to shareholders‟ equity** – – – – (1,005) (1,005) Translation differences 2,103 (1,710) 73,359 8,828 (68,805) 13,775

Balance of deferred tax asset (liability) at December 31, 2015 (90,289) (2,534) (898,322) 505,623 (60,438) (545,960)

* Restated – see Note 2F above. ** The deferred taxes recognized directly in shareholders’ equity in 2015 consist of a reserve for taxes in the amount of NIS 1,005 thousand in respect of transactions hedging cash flows recorded directly in a capital reserve for cash flow hedges. The deferred taxes recognized directly in shareholders’ equity in 2014 consist of a reserve for taxes in the amount of NIS 2,398 thousand in respect of transactions hedging cash flows recorded directly in a capital reserve for cash flow hedges.

185

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

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 2015 2014 In Thousands of NIS

Deferred tax assets – non-current assets 115,239 *104,557 Deferred tax liabilities – non-current liabilities (661,199) *(965,389)

(545,960) (860,832) Restated – see Note 2F above.

As at December 31, 2015, the Group had deferred tax assets in respect of losses available for carryforward in the aggregate amount of about NIS 506 million, based on the following detail: NIS millions

The Company 3 Investee companies in Israel 158 Investee companies outside of Israel 345

506

(2) Items for which deferred taxes were not recognized

The Group did not recognize deferred taxes in the amount of about NIS 1,655 million (2014 – NIS 1,615 million) in respect of losses for tax purposes.

Pursuant to the existing tax laws, there is no time limitation on the utilization of tax losses and deductible temporary differences. Some of the losses of the foreign subsidiaries may be utilized in a limited future period or upon fulfillment of certain conditions.

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.

The Group did not recognize deferred tax assets and liabilities in respect of temporary differences relating to the investment in investee companies since the decision to sell these companies lies with the Group, and it does not intend to sell them in the near future.

(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 7,760 million as at the date of the financial statements (2014 – NIS 7,614 million), of which tax losses of NIS 1,798 million (2014 – NIS 1,564 million) were incurred by the Company.

As at December 31, 2015, the balance of the consolidated losses, as stated, with respect to which deferred taxes were not recorded is NIS 5,473 million (2014 – NIS 5,309 million).

186

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

E. Tax Assessments

(1) The Company has received final tax assessments from the Income Tax Authorities up to and including the 2009 tax year. Some of the subsidiaries have received final tax assessments up to 2006–2011, while others have not received tax assessments since commencing their operations.

(2) During December 2014, un-agreed tax assessments in accordance with Section 145(A)(2)(b) of the Income Tax Ordinance (hereinafter – “the Ordinance”) were received in the Company‟s offices with respect to a wholly-owned subsidiary of the Company (hereinafter – “the Subsidiary”) for the years 2009 through 2012 in the aggregate amount of about NIS 66.4 million (including linkage differences and interest).

The tax assessment of the Subsidiary for 2009 is based mainly on the reasons of the Assessing Officer, whereby: (a) capital losses are to be cancelled that were realized by the Subsidiary from realization of its holdings in its subsidiaries, in light of, among other things, the position of the Assessing Officer that the sale of all the holdings of the Subsidiary (100%) in its subsidiary to the Company should be viewed as an artificial transaction in accordance with Section 86 of the Ordinance, and accordingly, the loss realized on the said transaction must be cancelled; and (b) pursuant to the interpretation of the Taxes Authority of Section 94B of the Ordinance, the Assessing Officer determined that distributable earnings will not be allowed the source of which is equity income of foreign subsidiaries (indirect) of the subsidiary.

The tax assessments of the Subsidiary for 2010 through 2012 are based on cancellation of the carryforward losses of the Subsidiary from 2009, in accordance with the un-agreed tax assessment from 2009.

On January 24, 2016, Payment Orders were received in the Subsidiary‟s offices of the Subsidiary in respect of the said tax assessments of the Subsidiary for the years 2009 through 2012, in the aggregate amount of about NIS 70 million (including linkage differences and interest).

The Subsidiary disputes the positions of the Taxes Authority and it believes that it has good contentions against these positions, this being, among other things, based on the position of its various advisors. During February 2016, the Company filed appeal notifications with respect to the Orders in accordance with the provisions of law.

In the Company‟s estimation, based on its professional advisors, taking into account the contentions of the Subsidiary against the tax assessments, and the fact that the Company has included sufficient provisions in its consolidated financial statements in connection with the tax assessments, no material impact is expected on the Company‟s financial statements.

187

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

E. Tax Assessments (Cont.)

(3) On December 21, 2015, un-agreed tax assessments in accordance with Section 145(A)(2)(b) of the Income Tax Ordinance (hereinafter – “the Ordinance”) were received in the Company‟s offices with respect to a wholly-owned subsidiary of the Company (hereinafter – “the Subsidiary”) for the years 2011 through 2013 in the aggregate amount of about NIS 60 million (including linkage differences and interest).

The tax assessments of the Subsidiary for the years 2011–2013 are based on the determinations of the Assessing Officer, whereby:

(a) It must be determined that the capital reduction made by a wholly-owned U.S. subsidiary of the Subsidiary (hereinafter – “AFI USA”) in 2011–2013, in the aggregate amount of about NIS 370 million, which was classified by the Subsidiary as a return of investment, is a tax event at the equity level of the Subsidiary and the consideration for purposes of calculating the capital gains is equal to the amounts received by the Subsidiary as a result of the capital reduction: and

(b) In accordance with the interpretation of the Taxes Authority of the definition of the term “original price” in Section 88 of the Income Tax Ordinance, the Assessing Officer determined that the costs recorded in the Subsidiary‟s books are not to be considered as the original cost of the investment in AFI USA. The amount recognized by the Assessing Officer for the Subsidiary as the original cost is only about NIS 151 million.

The Subsidiary, based on its legal advisors, completely disagree with the positions of the Taxes Authority and it believes that it has significant contentions against these positions, this being, among other things, based on the extent of the total investment in AFI USA during the years (both directly and by means of conversion of loans into equity), which is substantially higher than the amount of the capital reductions made by AFI USA, and considering the amount of the losses recorded by AFI USA, which total in the aggregate, as at the date of the statement of financial position, about US$850 million.

In light of that stated above, the Company is of the opinion that both the provisions of the Income Tax Ordinance and the simple logic of the matter lead to the conclusion that neither the Company nor the Subsidiary realized any taxable income in connection with the capital reduction stated above.

On January 20, 2016, the Subsidiary filed appeals of the said assessments.

In the Company‟s estimation, based on the assessment of its professional advisors handling the matter, taking into account the contentions of the Subsidiary against the tax assessments, the Company does not expect a material impact from the above-mentioned tax assessments on the financial statements.

188

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

E. Tax Assessments (Cont.)

(4) During December 2013, Africa Properties and its subsidiary received tax assessments in accordance with Section 145(A)(2)(b) of the Income Tax Ordinance (hereinafter – “the Ordinance”) – with respect to Africa Properties for the years 2008 through 2010 and with respect to a wholly-owned subsidiary of Africa Properties (hereinafter – “the Subsidiary”) for 2009 and 2011, in the aggregate amount of about NIS 256 million (including linkage differences and interest).

The tax assessment with respect to Africa Properties for the said years is based mainly on the following reasons:

(a) Non-allowance of financing expenses deriving from exchange rate differences in respect of loans provided by Africa Properties to subsidiaries overseas.

(b) Distribution of a dividend to Africa Properties shortly before sale of shares of the subsidiary that held the Ramat Aviv shopping mall (hereinafter – “the Shopping Mall Company” and “the Shopping Mall”, respectively), out of revaluation gains, is an inappropriate avoidance or reduction of tax, within the meaning thereof in Section 86 of the Income Tax Ordinance and constitutes part of the consideration received for sale of the Shopping Mall Company and, accordingly, they are subject to Companies Tax pursuant to Section 126(A) of the Income Tax Ordinance.

Alternatively, the amounts received from the purchaser of the Shopping Mall (including the amount of the dividend distributed to the company that was financed by a loan provided by a purchaser of the Shopping Mall for the benefit of the Shopping Mall Company and that was transferred directly to the company by the purchaser of the Shopping Mall) are to be classified as consideration in respect of shares of the Shopping Mall Company.

Alternatively, the dividend distributed out of revaluation gains does not constitute a dividend the source of which is income, within the meaning thereof in Section 1 of the Income Tax Ordinance and, therefore, does not fall within the scope of Section 126(B) of the Income Tax Ordinance, which excepts from a liability for tax a dividend the source of which is income and that was received from a company that is subject to Companies Tax.

(c) The manner of calculation of the cost of the shares regarding the matter of the capital loss on sale of shares of a subsidiary should not be based on the “LIFO” method but, rather, in the manner used by Africa Properties in its financial statements.

Africa Properties did not include a provision in its consolidated financial statements in the respect of the tax assessment related to distribution of the dividend, as stated above, based on the opinion of its legal advisors, which relies on, among other things, the relevant legislative situation for 2009. Pursuant to the legislative situation existing at the time of distribution of the dividend, a dividend distributed out of accounting surpluses which include revaluation gains of a company that is subject to Companies Tax, is a dividend and does not constitute income in the hands of an Israeli resident company, as provided in Section 126(B) of the Ordinance.

189

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

E. Tax Assessments (Cont.)

(4) (Cont.)

Support for this position may be found in the determination of the legislator in Amendment 197 to the Ordinance, dated August 5, 2013, wherein Section 100A1 to the Ordinance was added (Section 40 of Amendment 197), and provided a tax arrangement dealing with taxation of distribution of a dividend out of revaluation gains. Based on the position of Africa Properties, determination of a special and detailed mechanism for taxation of distribution of revaluation gains constitutes a significant strengthening of the position that the relevant legislative situation prior to Amendment 197 was that Section 126(B) of the Ordinance also applies, subject to the circumstances enumerated, to a dividend distributed out of revaluation gains.

The tax assessment with respect to the Subsidiary for the said years is based mainly on the following reasons:

(a) A foreign subsidiary of the subsidiary is a “Controlled Foreign Corporation”, as defined in Section 75B of the Ordinance and, accordingly, income it accrues in respect of sale of a foreign company it controls is to be taxed as a deemed dividend.

(b) The capital gain from sale of shares of a foreign subsidiary controlled by the subsidiary was not calculated in accordance with a Tax Decision received by the subsidiary from 2007.

On May 11, 2015, Payment Orders were received in the offices of Africa Properties in respect of the said tax assessments of Africa Properties for the years 2008 through 2010 and in respect of the said tax assessment for 2011, in the aggregate amount of about NIS 280 million (including linkage differences and interest).

Africa Properties and the Subsidiary disagree with the position of the Taxes Authority and believe that they have meritorious arguments against these positions – this being, among other things, based on the position of their legal advisors. Africa Properties and the Subsidiary intend to file appeal notifications with respect to the Payment Orders in accordance with the provisions of law.

It is noted that in connection with some of the issues relevant to the tax assessments, Africa Properties has already included appropriate provisions in its consolidated financial statements, whereas with respect to some of them provisions were not recorded – all of this based on opinions of the legal advisors of Africa Properties and of the Subsidiary.

(5) On December 30, 2012, Africa Properties was informed by the Assessing Officer with respect to an Assessment in an Order for 2007 in connection with distribution of a dividend out of revaluation gains, of a tax liability of about NIS 40.5 million (including linkage differences and interest). Africa Properties has filed an appeal with the Court with respect to submission of this Order.

190

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 30 – Taxes on Income (Cont.)

E. Tax Assessments (Cont.)

(6) Africa Industries and subsidiaries of Africa Industries have final assessments and assessments considered to be final up to and including the year ended December 31, 2011. A number of subsidiaries of Africa Industries have “agreed” tax assessments up to the 2008 tax year. Investee companies of Africa Industries have assessments considered to be final up to and including 2010.

F. The Group companies outside of Israel are assessed based on the tax laws in their respective countries and the provisions for taxes and carryforward losses were calculated accordingly. Set forth below are the main tax rates applicable to the Group companies outside of Israel in 2015:

Tax Rate Country The Netherlands 25% Countries in Eastern Europe 10%–19% United States 35%–47% Russia 20% Germany 30.2% Cyprus 12.5%

Note 31 – Capital and Reserves

A. Share Capital and Premium on Shares

Ordinary Shares of NIS 0.1 Par Value 2015 2014 2013 In NIS

Issued and paid-up share capital at January 1 21,799,747 17,580,659 14,679,658 Issued as a result of utilization of rights – 4,219,088 2,899,956 Issued as a result of exercise of options 139 – 1,045

Issued and paid-up share capital at December 31 21,799,886 21,799,747 17,580,659

Authorized capital 30,000,000 30,000,000 20,000,000

(1) As at December 31, 2015 and 2014, the total issued and paid-up share capital includes 12,456,126 dormant shares of NIS 0.1 par value (see below) which, as at December 31, 2015, are ordinary shares of NIS 0.1 par value each of the Company, registered in the name of the Company.

(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. Regarding limitations provided with respect to distribution of dividends as part of the debt arrangement – see Note 1B(3).

191

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 31 – Capital and Reserves (Cont.)

A. Share Capital and Premium on Shares (Cont.)

(3) As stated in Note 1C(2), in May 2015, the Company issued, by means of an issuance of rights in accordance with a shelf offer report, 42,190,883 registered ordinary shares of NIS 0.1 par value each of the Company and 16,876,353 (hereinafter – “the Options”) exercisable such that every option may be exercised for one ordinary share of the Company (subject to adjustments) against a cash payment of the exercise price, in the amount of NIS 12 (subject to adjustments) for each option.

In March 2015, 1,386 options were exercised for 1,386 ordinary shares of the Company in exchange for NIS 16 thousand. The options that were not exercised expired on March 31, 2015.

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.

Composition of the reserve for foreign operations is as follows:

As at December 31 2015 2014 Activities In Thousands of NIS

Africa Israel International Central and Properties (2002) Ltd. Eastern Europe (404,673) (257,174) Africa Israel International Investments (1997) Ltd. United States – (381,417) Africa Israel International Holdings Ltd. and AFI Development Russia (1,114,349) (1,059,192) Other (88,719) (76,189) (1,607,741) (1,773,972)

For details regarding realization of a reserve for foreign activities, in the amount of NIS 384 million in respect of the Company‟s activities in the United States – see Note 4A(1).

C. Hedge Reserve

The hedge reserve 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 Reserve in respect of Acquisitions in Stages

The revaluation reserve relates to revaluation of an investment in a company prior to its entry into the consolidation. In 2013, as a result of sale of a financial asset in an investee company, the revaluation reserve in respect of the above-mentioned acquisition in stages was recorded in the statement of income.

192

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 31 – Capital and Reserves (Cont.)

E. Commitment to Issue Shares

(1) Regarding an issuance of options to employees – see Note 33 “Share-Based Payments”.

(2) Regarding issuance of shares and options for shares executed in May 2014 – see Note 1C, above.

F. Other Comprehensive Income (Loss) for the Year Ended December 31

Attributable to the Company‟s owners Total Capital other other reserve reserve in compre- from respect of Non- hensive cash flow Translation acquisition Retained controlling income hedges adjustments in stages earnings Total interests (loss) In thousands of New Israeli Shekels

2015 Foreign currency translation differences in respect of foreign operations – (218,304) – – (218,304) (169,375) (387,679) Realization of translation reserve in respect of foreign activities of investee company – 384,535 – – 384,535 166 384,701 Effective part of the change in the fair value of instruments used to hedge cash flows 2,970 – – – 2,970 3,179 6,149 Re-measurement of defined benefit plan – – – 1,136 1,136 (11) 1,125 Total other comprehensive income (loss) for the year, net of tax 2,970 166,231 – 1,136 170,337 (166,041) 4,296

2014 Foreign currency translation differences in respect of foreign operations – 7,006 – – 7,006 (11,559) (4,553) Net change in fair value of instruments used to hedge cash flows transferred to the statement of income 5,389 – – – 5,389 4,235 9,624 Effective part of the change in the fair value of instruments used to hedge cash flows (6,234) – – – (6,234) (3,156) (9,390) Re-measurement of defined benefit plan – – – (743) (743) (238) (981) Total other comprehensive income (loss) for the year, net of tax (845) 7,006 – (743) 5,418 (10,718) (5,300)

2013 Foreign currency translation differences in respect of foreign operations – (441,762) – – (441,762) (254,582) (696,344) Effective part of the change in the fair value of instruments used to hedge cash flows 10,620 – – – 10,620 11,384 22,004 Realization of revaluation reserve in respect of acquisition in stages – – (8,012) – (8,012) (6,297) (14,309) Foreign currency translation differences in respect of foreign operations recorded in the statement of income – 75,550 – – 75,550 38,603 114,153 Re-measurement of defined benefit plan – – – (1,719) (1,719) (396) (2,115) Total other comprehensive loss for the year, net of tax 10,620 (366,212) (8,012) (1,719) (365,323) (211,288) (576,611)

193

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 32 – 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, 2015, was based on the income (loss) allocated to the ordinary shareholders, divided by the weighted-average number of shares outstanding, calculated as follows:

Loss allocated to the holders of the ordinary shares

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Loss allocated to the holders of the ordinary shares (1,751,940) *(848,736) *(98,361)

* Restated – see Note 2F above.

Weighted-average number of ordinary shares

For the Year Ended December 31 2015 *2014 *2013 In Thousands of Shares of NIS 0.1 Par Value

Balance at January 1 205,541 167,659 146,245 Impact of shares issued during the year 1 26,659 19,110 Shares transferred in the name of the Company during the year – (2,024) (1,437)

Weighted-average number of ordinary shares used for purposes of calculation of the basic loss per share as at December 31 205,542 192,294 163,918

* Adjusted based on composition of the benefit upon issuance of the rights executed in 2014, 2013 and 2012 (see Note 1C above).

194

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 32 – 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, 2015 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:

Loss allocated to the holders of the ordinary shares (diluted)

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

Loss allocated to the holders of the ordinary shares (diluted) (1,751,940) *(848,736) *(98,361)

* Restated – see Note 2F above.

Weighted-average number of ordinary shares (diluted)

For the Year Ended December 31 2015 *2014 *2013 In Thousands of Shares of NIS 0.1 Par Value

Weighted-average number of ordinary shares used for purposes of calculation of the basic loss per share 205,542 192,294 163,918 Impact of contingent obligation to issue shares – – 194

Weighted-average number of ordinary shares used for purposes of calculation of the diluted loss per share as at December 31 205,542 192,294 164,112

* Adjusted based on composition of the benefit upon issuance of the rights executed in 2014, 2013 and 2012 (see Note 1C).

For the year ended December 31, 2015, about 134 thousand options (for the years ended December 31, 2014 and 2013: about 268 thousand options and about 485 thousand options, respectively) were not included in the calculation of the weighted-average number of ordinary shares (diluted) since the effect is anti-dilutive.

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 and were found to be non-dilutive.

195

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans

A. Share-Based Payments in the Company

(1) On September 15, 2011, the Company‟s Board of Directors (after receiving the recommendation of the Committee of the Board of Directors for Remuneration Matters and approval of the Audit Committee of the Company) decided to approve a plan for issuance of options to Company employees and officers, whereby, 568,066 non-marketable options, exercisable for ordinary shares of the Company, having a par value of NIS 0.1 par value each, will be issued to 5 Company employees and officers (hereinafter – “the Offerees”) exercisable for up to 568,066 ordinary shares of the Company (subject to adjustments), (hereinafter – “the Plan”). Based on the theoretical assumption of full exercise of all the options issued to the Offerees under the new plan, the options will convey to the Offerees, after issuance of the exercise shares (and net of dormant shares held by a trustee from May 2010 as part of an arrangement between the Company and holders of the Company‟s old debentures,), about 0.48% of the Company‟s issued and paid-up shares and of the voting rights therein. The exercise price of each of the options offered to the Offerees is NIS 24.76. All of the options granted to the Offerees under the Plan will be issued to a trustee for each of the Offerees subject to receipt of the required approvals, in three portions. Every Offeree will be entitled to exercise the options granted to the trustee for him, in whole or in part, in accordance with the terms of the Plan, as follows:

(a) The first portion may be exercised commencing from 24 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated;

(b) The second portion may be exercised commencing from 36 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated;

(c) The third portion may be exercised commencing from 48 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated.

On October 24, 2011, approval for the plan was received from the Stock Exchange. On October 30, 2011, the Company issued 485,223 non-marketable options exercisable for up to 485,223 ordinary shares of the Company (subject to adjustments). It is clarified that in light of completion of the service of one of the Offerees on December 31, 2011, no Company options were issued for the benefit of this Offeree.

196

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

A. Share-Based Payments in the Company (Cont.)

(1) (Cont.)

The cost of the benefit embedded in the options issued, as stated, based on the fair value on the date of their grant, amounted to about NIS 2,860 thousand. The benefit was calculated using the B&S model. This amount will be recognized in the statement of income over the vesting period of each portion.

Plan of options for shares

Fair value on grant date (in NIS thousand) 2,860

Share price (in NIS) 11.98 Exercise price (in NIS) 24.76 Expected volatility (weighted-average) 79.7%–95.2% Expected life of the options (in years) 3–5

Riskless interest rate 3.3%–3.86%

In October 2015, 134,127 options for Company shares expired, which constituted the second portion of the plan, as a result of reaching the end of the exercise period of the second portion pursuant to the terms of the plan.

(2) Number of options for Company shares and weighted-average exercise price

Weighted-average exercise price Number of options 2015 2014 2013 2015 2014 2013 In thousands of New Israeli Shekels

Balance at January 1* 24.76 24.76 69.57 268,254 485,223 597,723 Cancelled during the period – (24.76) – – (82,843) – Expired during the period (24.76) 24.76 (259.50) (134,126) (134,126) (112,500) Balance at December 31 134,127 268,254 485,223

Exercisable at December 31 24.76 24.76 24.76 134,126 134,126 161,741

* The exercise price of the CPI-linked options is linked based on the “known” CPI for December of the relevant year.

In determining the fair value of 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 employees 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.

(3) Regarding the Company‟s obligation to act to make a decision by its competent authorities in order to grant options to the new CEO – see Note 37J(2), below.

197

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

B. Remuneration Plans

In October 2013, the Company‟s General Meeting approved the remuneration policy for the Company‟s officers – effective for the years 2013, 2014 and 2015.

In May 2014, the General Meeting approved an annual bonus plan for 2014 for the Company‟s CEO whereby the Company‟s CEO will be entitled to an annual bonus equal to up to 9 monthly salaries, subject to the Company‟s CEO meeting the targets set in the bonus plan for 2014.

In addition, it was decided to approve an annual bonus plan for 2014 for the Deputy Chairman of the Company‟s Board of Directors (hereinafter – “the Deputy Chairman”) whereby the Deputy Chairman will be entitled to an annual bonus equal to up to 9 times the monthly consideration paid to him in respect of his services (hereinafter – “the Monthly Consideration”), subject to the Deputy Chairman meeting the targets set in the bonus plan for 2014.

In addition, in October 2013 the General Meeting approved a three-year bonus plan for the Company‟s CEO, whereby the Company‟s CEO will be entitled to a three-year bonus equal to up to 4.5 monthly salaries (at the end of the three years of the plan), subject to the Company‟s CEO meeting the multi-year target stipulated in the three-year bonus plan.

In addition, it was decided to approve a three-year bonus plan for the Deputy Chairman, whereby the Deputy Chairman will be entitled to a three-year bonus equal to up to 4.5 monthly times the Monthly Consideration (at the end of the three years of the plan), subject to the Deputy Chairman meeting the multi-year target stipulated in the three-year bonus plan.

Appropriate provisions were included in the Company‟s financial statements as at December 31, 2015.

C. Share-Based Payments in Subsidiaries

(1) (a) Following the issuance of AFI Development, and pursuant to a resolution of the Board of Directors from April 2007, AFI Development granted to directors, and officers of AFI Development and other Group officers and employees in 2007 and 2008, options for deposit certificates of AFI Development the balance of which as at the date of the statement of financial position was about 1,593,676 deposit certificates representing shares constituting (assuming exercise of all such options) about 0.15% of AFI Development‟s issued share capital. The exercise price of each option is $7 (subject to adjustments), which is the price determined per deposit certificate as part of the issuance of AFI Development, after adjustment for issuance of bonus shares in 2010.

198

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(1) (Cont.)

(a) (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, that is April 13, 2017.

As part of the above issuance, in July 2007, after approval by the General Meeting of AFI Development, 169,540 options were issued to the daughter of the Company‟s controlling shareholder.

In August 2013, Mr. Avinadav Grinshpon, the Deputy Chairman of the Company‟s Board of Directors, notified that he foregoes the options of AFI Development that he held as at the date of the relinquishment.

(b) In May 2012, the Board of Directors of AFI Development approved a plan for issuance of options to employees of AFI Development. Pursuant to the plan, options will be issued to employees of AFI Development exercisable for 16,763,104 Class B shares of AFI Development, constituting about 1.6% of the total issued share capital. The recipients of the options include, among others, Ms. Tzvia Leviev Elazarov, the daughter of the Company‟s controlling shareholder. The exercise premium of each option is U.S.$0.7208. The exercise period is as follows: one-third of the number of the options may be exercised commencing from the end of the second year from the issuance date, an additional one-third of the number of the options may be exercised commencing from the end of the third year from the issuance date, and the final one-third of the number of the options may be exercised commencing from the end of the fourth year from the issuance date. Exercise of the options is contingent on continued employment and is not contingent on performance.

All the options are exercisable commencing from the vesting date and up to the end of five years from the issuance date.

Up to December 31, 2015, 2,095,388 options expired due to termination of the employer-employee relationship in such a manner that the offerees no longer serve as employees of AFI Development, such that 17,667,716 options remain outstanding, of which 9,778,477 have completed their vesting period.

199

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(1) (Cont.)

(c) In November 2012, as part of a management remuneration package, Mr. Leviev was granted 31,430,822 options exercisable for ordinary Class B shares of U.S.$0.001 par value each of AFI Development, constituting about 3% of the issued share capital, in exchange for an exercise price of U.S.$0.5667 per share, as part of the equity remuneration plan existing for members of AFI Development‟s management. The options are exercisable in three increments: one-third commencing from the end of two years from the grant date, one-third commencing from the end of three years from the grant date and one-third commencing from the end of four years from the grant date. All the options will be exercisable up to the end of five years from the grant date. On the approval date by AFI Development‟s Board of Directors, the fair value of the options was about U.S.$9.9 million (which will be recorded as an expense over the period of the plan). As at December 31, 2015, 20,952,882 options completed their vesting period. For additional details – see Note 37J(3) below.

(2) (a) In July 2011, the Board of Directors of Africa Residences, approved a remuneration plan, for no consideration, of non-marketable options to the CEO of Africa Residences, officers and additional employees of Africa Residences (hereinafter – “the Options Plan”). As part of the remuneration plan, 252,000 options were issued, of which 94,500 options to the CEO of Africa Residences. The options will be issued under the Capital Track for income tax purposes.

On September 20, 2011, Africa Residences issued 233,100 options to the offerees (hereinafter – “the Issuance Date”). Each option may be exercised for one ordinary share of NIS 1 par value of Africa Residences, against payment of an exercise premium, linked to the CPI, of NIS 61.42 (subject to adjustments). The exercise price is equal to the average closing price of a share of Africa Residences on the stock exchange in the 90 trading days preceding the date of the decision of the Board of Directors to issue the options to the offerees, plus the rate of 25% of the average price as stated. The options will vest in increments, as follows: (a) one-third (1/3) of the total options may be exercised commencing from the end of 24 months from the Issuance Date and during a period of 12 months from the date on which the options may be exercised as stated; (b) one-third (1/3) of the total options may be exercised commencing from 36 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated; (c) one-third (1/3) of the total options may be exercised commencing from 48 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated.

The exercise price will serve only to determine the amount of the benefit and will not actually be paid to Africa Residences. In any case of exercise of the options, the full number of the exercise shares will not be issued but, rather, a number of shares that reflects the benefit component deriving from exercise of the options, as will be calculated on the exercise date of those options.

200

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(2) (Cont.)

(a) (Cont.)

The cost of the benefit embedded in the options issued, as stated, based on the fair value on the date of their issuance, was estimated at about NIS 3.21 million. This amount will be recorded in the statement of income over the vesting period.

Up to December 31, 2015, 33,600 options expired due to termination of the employer-employee relationship in such a manner that the offerees no longer serve as employees of Africa Residences.

In May and September 2014, the CEO of Africa Residences, 4 officers and 2 additional employees of Africa Residences exercised the first portion, which includes 73,500 options. Pursuant to the terms of the options‟ plan, the exercise was made by means of a “cashless” mechanism, with no actual payment to Africa Residences (except for payment in respect of the par value of the shares). Against the options issued, 6,187 ordinary shares of NIS 1 par value of Africa Residences were issued, and as a result the rate of the holdings of Danya Cebus in Africa Residences declined from 74.47% to 74.43%.

During 2015, four officers and one employee of Africa Residences exercised 126,000 options. Pursuant to the terms of the options‟ plan, the exercise was made by means of a “cashless” mechanism, with no actual payment to Africa Residences (except for payment in respect of the par value of the shares). Against the options issued, 35,157 ordinary shares of NIS 1 par value of Africa Residences were issued. As a result the rate of the holdings of Danya Cebus in Africa Residences declined from 74.43% to 74.22%.

(b) In December 2014, the Board of Directors of Africa Residences approved a plan for issuance, for no consideration, of 55,000 non-marketable options, to 2 employees and one officer of Africa Residences, including the CEO of the subsidiary of Africa Residences, Africa 38 Ltd.

On February 18, 2015, Africa Residences issued 55,000 options to the offerees (hereinafter – “the Issuance Date”). Each option may be exercised for one ordinary share of NIS 1 par value of Africa Residences, against payment of an exercise premium, linked to the CPI, of NIS 65.89 (subject to adjustments). The exercise price is equal to the average closing price of a share of Africa Residences on the stock exchange in the 90 trading days preceding the date of the decision of the Board of Directors to issue the options to the offerees, plus the rate of 20% of the average price as stated.

201

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(2) (Cont.)

(b) (Cont.)

The options will vest in increments, as follows: (a) one-third (1/3) of the total options may be exercised commencing from the end of 24 months from the Issuance Date and during a period of 12 months from the date on which the options may be exercised as stated; (b) one-third (1/3) of the total options may be exercised commencing from 36 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated; (c) one-third (1/3) of the total options may be exercised commencing from 48 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated.

The cost of the benefit embedded in the options issued, as stated, based on the fair value on the date of their issuance, was estimated at about NIS 0.74 million. This amount will be recorded in the statement of income over the vesting period.

On January 31, 2016, 31,500 options from the plan expired due to termination of the employer-employee relationship of the CEO of the subsidiary of Africa Residences, Africa 38 Ltd.

(3) In August 2011, the Board of Directors of Danya Cebus, decided (after receipt of the recommendation of the Committee of the Board of Directors regarding Remuneration Matters and approval of the Audit Committee of Danya Cebus) to approve a plan for issuance of options to employees and officers of Danya Cebus (heretofore and hereinafter – “the Options Plan”), whereby 738,871 non-marketable options exercisable for ordinary shares of NIS 1 par value each of Danya Cebus, will be issued to employees and officers of Danya Cebus, as follows: (1) 213,136 non-marketable options to the CEO of Danya Cebus exercisable for 213,136 ordinary shares of Danya Cebus (subject to adjustments); and (2) 525,735 non-marketable options to 8 employees and officers of Danya Cebus (hereinafter – “the Additional Offerees”) exercisable for 525,735 ordinary shares of Danya Cebus (subject to adjustments) (the CEO and the other offerees will be referred to hereinafter together in this Section below as – “the Offerees”).

Up to December 31, 2014, 307,864 options expired due to termination of the employer-employee relationship in such a manner that the offerees no longer serve as employees of Danya Cebus.

202

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(3) (Cont.)

In July 2015, the securities of Danya Cebus were eliminated from trading on the stock exchange, due to the full tender offer made by the Company. Accordingly, the above-mentioned options‟ plan was cancelled. The balance of the unexercised vested options expired. In addition, the immaterial balance of the expense in respect of the value of the benefit granted but not yet vested was recorded directly to the statement of income.

(4) In August 2011, the Board of Directors of Africa Properties, decided (after receipt of the recommendation of the Committee of the Board of Directors regarding Remuneration Matters and approval of the Audit Committee of Africa Properties) to approve a plan for issuance of options to employees of Africa Properties and of companies controlled by Africa Properties and officers thereof (hereinafter – “the Plan”). As part of its approval, as stated above, the Board of Directors decided that the number of options that will serve as the base for issuance of options under the Plan will be 373,515 non-marketable options, exercisable for 373,515 ordinary shares of NIS 1 par value each of Africa Properties (subject to adjustments). In addition, the Board of Directors decided that Africa Properties is to issue, in this stage, pursuant to the terms of the Plan, 249,010 non-marketable options, to 4 employees and officers of Africa Properties and companies controlled by Africa Properties (hereinafter – “the Offerees”), exercisable for up to 249,010 ordinary shares of NIS 1 par value each of Africa Properties (subject to adjustments). The options issued under the Plan will not be registered for trading on the Stock Exchange. The exercise shares issued upon exercise of the options will be registered for trading on the Stock Exchange shortly after their issuance.

Based on the theoretical assumption of full exercise of all the options issued to the Offerees under the Plan, the options will convey after issuance of the exercise shares, about 0.87% of the issued and paid-up shares of Africa Properties and of the voting rights therein.

The exercise price of each of the options offered to the Offerees is NIS 48.91. All of the options granted to the Offerees under the Plan will be issued to a trustee for each of the Offerees subject to receipt of the required approvals, in three portions. Every Offeree will be entitled to exercise the options granted to the trustee for him, in whole or in part, in accordance with the terms of the New Plan, as follows:

(a) The first portion may be exercised commencing from 24 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated;

(b) The second portion may be exercised commencing from 36 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated;

203

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(4) (Cont.)

(c) The third portion may be exercised commencing from 48 months from the issuance date and during a period of 12 months from the date on which the options may be exercised as stated.

The options were issued under the Capital Track for income tax purposes.

The cost of the benefit embedded in the options issued, as stated, based on the fair value on the date of their grant, in accordance with the B&S model, amounted to about NIS 2,272 thousand. This amount will be recognized as an expense in the statement of income over the vesting period of each portion.

Up to December 31, 2015, 71,146 options were foreclosed due to employees leaving their positions and no longer serving as employees of Africa Properties.

Up to December 31, 2015, the CEO, CFO and an additional employee of Africa Properties exercised the first portion and the second portion, which included 118,576 options. According to the terms of the options‟ plan, the exercise was made based on a cashless mechanism, with no actual payment to Africa Properties (except for payment of the par value of the shares). Against the options exercised, 19,674 ordinary shares of NIS 1 par value of Africa Properties were issued and, as a result, the Company‟s holdings in Africa Properties, directly and indirectly, decreased from 55.99% to 55.96%.

(5) (a) In July 2011, the Board of Directors of Africa Industries, approved a plan for issuance of 67,016 options for shares of Africa Industries to 8 employees of Africa Industries (hereinafter – “the Offerees”), of which 15,059 non-marketable options to the CEO at that time, Mr. Avraham Novogrocki.

In August 2011, approval of the new plan was received from the Stock Exchange. On September 7, 2011, Africa Industries issued 56,474 options to the Offerees (in that plan additional options were also approved which constituted a reserve for issuance of options later on).

The options are not marketable and may be exercised for one ordinary share of NIS 1 par value in exchange for payment of an exercise premium of NIS 327.6. The options may be exercised in 3 equal portions over 5 years commencing from the issuance date. Options not exercised will expire after 5 years from their issuance date. The cost of the benefit embedded in the options issued, based on the fair value on the date they were granted, amounted to NIS 4,722 thousand. This amount will be recognized as an expense in the statement of income over the vesting period of each portion (hereinafter – “Plan A”).

204

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(5) (a) (Cont.)

In March 2012, the Board of Directors of Africa Industries approved issuance pursuant to the terms of the options, 10,542 options to the trustee (which constitute the balance of the reserve of options), exercisable for ordinary shares of Africa Industries, to two officers of companies controlled by Africa Industries. The options are non-marketable and may be exercised for ordinary shares of Africa Industries against an exercise premium of NIS 314.26. The vesting period of the options is two years and the final date for their exercise is 4 years from their issuance date. The fair value of the said options on the issuance date was NIS 857 thousand (hereinafter – “Plan B”).

Up to December 2015, 29,116 options for shares of Africa Industries in respect of Plan A expired, which constituted the first and second portions in the plan. In addition, 12,801 options expired due to termination of the employer-employee relationship in such a manner that the Offerees no longer serve as employees of Africa Industries.

Up to December 2015, 5,271 options for shares of Africa Industries in respect of Plan B expired, which constituted the first portion in the plan. In addition, 5,271 options expired due to termination of the employer-employee relationship in such a manner that the Offerees no longer serve as employees of Africa Industries.

(b) In July 2011, the Board of Directors of a subsidiary, Negev Ceramics Ltd., approved issuance of 467,840 options for shares of Negev to 4 employees (hereinafter – “the Offerees”), of which 230,624 non-marketable options to the CEO, Mr. Avi Motola exercisable for 230,624 ordinary shares of Negev.

On August 15, 2011, approval of the new plan was received from the Stock Exchange. On September 18, 2011, Negev issued the options to the Offerees. The options are not marketable and may be exercised for one ordinary share of NIS 1 par value in exchange for payment of an exercise premium of NIS 24.54. The options may be exercised in 3 equal portions over 5 years commencing from the issuance date. Options not exercised will expire after 5 years from their issuance date. The cost of the benefit embedded in the options issued, based on the fair value on the date they were granted, amounted to NIS 3,795 thousand. This amount will be recognized as an expense in the statement of income over the vesting period of each portion.

In February 2012, upon completion of acquisition of the shares of Negev by the Company and removal of the shares of Negev from trading on the Tel-Aviv Stock Exchange, the officers of Negev were granted options for shares of Africa Industries on terms similar to the Negev options, as described in Section (c) below. The Group is continuing to record the expense relating to the fair value of the original options based on an examination performed.

205

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 33 – Share-Based Payment Arrangements and Remuneration Plans (Cont.)

C. Share-Based Payments in Subsidiaries (Cont.)

(5) (Cont.)

(c) In March 2012, the Board of Directors of Africa Industries approved a new options‟ plan for issuance of 30,872 non-marketable options for shares of Africa Industries to four employees of companies controlled by Africa Industries, of which 15,060 non-marketable options to the CEO of Negev, Mr. Avi Motola.

The vesting period of the options is two years and the final date for their exercise is 4 years from the date of their issuance.

This options‟ plan replaces, among other things, an options‟ plan for officers of a subsidiary, Negev, from July 2011 (see Section (b) above). The fair value on the grant date of the said options was NIS 2,726 thousand. The options are not marketable and may be exercised for ordinary shares of Africa Industries against payment of an exercise premium of NIS 289.1. The vesting period of the options is two years and the final date for their exercise is 4 years from the date of their issuance. In May 2012 the said options were issued to the offerees.

Up to December 31, 2015, 10,291 options for shares of Africa Industries expired, which constituted the first portion in the plan. In addition, 17,068 options expired due to termination of the employer-employee relationship in such a manner that the Offerees no longer serve as employees of Africa Industries.

D. Salaries Expense in respect of Share-Based Payments and Other Details

For the Year Ended December 31 2015 2014 2013 In Thousands of NIS

In respect of options for shares of the Company 149 398 925 In respect of options for shares of subsidiaries 7,477 17,776 21,845

Total 7,626 18,174 22,770

The data is after deduction of tax.

Note 34 – Management of Financial Risks

Based on the nature of its activities, the Group is exposed to risks in connection with various financial instruments, primarily, market risks, liquidity risks and credit risks.

Supervision of the Group‟s financial risk management policies is determined by means of discussions held in the appropriate frameworks by the Group‟s management and 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 impact of the financial risks on the results of activities the Company and its subsidiaries.

206

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 34 – Management of Financial Risks (Cont.)

Liquidity risk – is the risk deriving from compliance with financial obligations settled by means of a transfer of cash or another financial asset.

The Group‟s activities, including real estate initiatives and investment in income-producing properties, include a significant component of financing activities. Accordingly, the Group relies, to a large extent, on the availability of monetary sources. The Company and the subsidiaries have a policy of maintaining liquidity levels that will permit them to meet their liabilities in an environment that is characterized by liquidity difficulties, while managing and making financial forecasts for the short, medium and long terms.

As part of the debt arrangement described in Note 1C above, the Company is subject to a negative pledge that restricts its ability to raise secured credit. This fact, along with the Company‟s interest in reducing the credit burden and the financing costs gave rise to formulation of a financing strategy whereby financing of the Company is supported mainly by sale of assets that are not part of the core business and return of investment and dividends from the subsidiaries. Pursuant to this strategy, service of the Company‟s debt does not necessarily depend on its ability to raise credit for purposes of refinancing – neither in the short-term nor in the long-term.

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. After completion of the arrangement and the onset of stability in the economic and financial environment, there was an improvement in accessibility to the debt markets and the credit markets. In 2015, the Group executed a number of steps to improve the structure of its financial liabilities and to conform it to the Group‟s needs: completion of the tender offer transaction for the shares of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) in July 2015, after the completion of which Danya Cebus ceased to be a public company and its shares were eliminated from trading on the stock exchange; expansion of the (Series E and G) in Africa Properties; issuance of debentures (Series C) in Africa Residences; signing of a refinancing agreement for Stage A of a project in Serbia; signing of a new loan agreement for three subsidiaries in the Czech Republic of AFI Europe and signing of an extension of the period for the existing loan along with provision of an additional loan amount for the shopping mall project in the City of Ploitsch in Romania.

It is noted that subsequent to the date of the statement of financial position, an agreed-to Interim Framework was formulated with the holders of the Company‟s debentures (Series Z, ZA and ZB) for the period up to November 17, 2016. For details – see Note 1B(3) above.

In addition, subsequent to the date of the statement of financial position, Africa Properties made an expansion of the debentures (Series F) – see Note 39H.

“Market risk” – the risk to the business results, shareholders‟ equity, cash flows or Company value, deriving from changes in the macro-economic environment in which the Company and the Group‟s subsidiaries operate, including 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.

207

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 34 – Management of Financial Risks (Cont.)

In addition, market risk derives from changes in the geo-political environment in which the Company and its subsidiaries operate, such as the continuing decline in the fuel prices that could cause, among other things, an additional accelerated devaluation of the exchange rate of the ruble against the U.S. dollar, and the relationship between Russia and the Ukraine. Continuation of the geo-political crisis in the Crimean Peninsula could have a number of consequences that are likely to impact the Group, for example, discontinuance of trade and/or additional sanctions by the United States and European Commonwealth countries against Russia, a continued decline in foreign investments in Russia and a further increase in the devaluation of the ruble against the U.S. dollar and the currency basket (a devaluation of the ruble could also have an adverse impact on the Company‟s shareholders‟ equity). The impact on the Group could be a continued unfavorable effect on the revenues in all that related to its activities in Russia, an further decline in the value of its investment properties due to lower revenues and/or an additional increase in the risk premium in the economy and, as a result, an additional increase in the discount rate, a continued rise in the financing expenses and/or further harm to the available financing sources.

A. Changes in exchange rates:

The Group is exposed to changes in the currency exchange rates in connection with its investments outside of Israel. This exposure stems both from the current ongoing activities of the foreign subsidiaries and from the manner of financing the investments.

The Group operates in various countries, wherein the reporting currency is different than the Israeli currency (the reporting currency in the foreign countries in which the Group operates is mainly the U.S. dollar, the ruble or the euro). A weakening of the exchange rates of the currencies against the shekel has a negative impact on the reported results and the Group‟s shareholders‟ equity in the consolidated financial statements and on the Company on a separate-company basis.

In most of the transactions, the Group companies strive, to the extent possible, to finance the activities with loans from financing entities and/or by means of shareholders‟ loans, which are denominated in the same currency as the revenues that are received from the financed activities. The Company and the Group‟s subsidiaries are not in the practice of hedging the measurement basis of the results of the activities or their statements of financial position against changes deriving from the exchange rates of the different currencies against the shekel.

Some of the payments the Group is obligated to make (mainly in the areas of construction and industry), which generally relate to the cost of employing foreign workers, acquisition of certain raw materials and imports from overseas of inputs and/or construction equipment are linked, directly or indirectly, to foreign currency exchange rates.

Changes in the exchange rates of foreign currency could also impact the Group‟s activities indirectly by means of an increase in the cost of raw materials and other inputs and, as a result, an increase in the cost of the undertakings with suppliers, subcontractors and other service providers. It is noted that in some of the transactions, the Group enters into a currency hedge.

208

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 34 – Management of Financial Risks (Cont.)

B. Changes in the price indices:

The Group is exposed to changes in the price indices due to the impact thereof on its CPI-linked liabilities, including in respect of series of debentures and other financial liabilities linked to the index. The Company does not have a policy regarding the scope of the hedge of its CPI-linked liabilities, and the extent thereof is determined based on the discretion of the Company‟s employee responsible for risk management in accordance with the circumstances and subject to the required approvals. In certain cases, there is a “natural” hedge of the index-linked where the cash flows deriving from the projects and/or the assets financed by the loan are also linked to the index.

C. Changes in the interest rates:

The Group finances part of its activities by means of short-term and long-term unlinked credit from banks bearing fixed and variable interest. A change in the interest rate could cause an increase in the Company‟s financing expenses and its cash flows in respect of debt service. The risk in respect of interest rates is managed by the Group‟s management through maintenance of a mix of loans bearing fixed interest and loans bearing variable interest, and occasionally by entering into interest SWAP transactions.

D. Changes in the prices of raw materials and commodities:

Regarding the activities of a Group subsidiary in the steel area, there is a gap of several months between ordering the raw material from the suppliers and the sale thereof to customers. During this time gap, the company is exposed to changes in the worldwide raw-material prices (mainly steel). The subsidiary manages the risk stemming from changes in the raw-material prices by currently monitoring the raw-material prices and maintenance of an inventory policy that reduces this risk.

e. Additional market risks:

In addition to that stated above regarding the market risks to which the Group is exposed, it is noted that the Group‟s activities are exposed to additional market risks stemming from among other things, the situation existing in the economies and business sectors in which it operates. Set forth below are the main risk factors:

(1) The Group‟s activities outside of Israel expose the Company to the risks existing in the countries in which it operates. This exposure stems from among other things, political and state policy changes that could impact the economic situation in these countries. Most of the countries in which the Company operates, as stated above, are at the level of an “investment rating”.

(2) An economic slowdown in the economies in which the Group operates could cause a reduction in the Company‟s activities, particularly in the areas of initiations and residential construction (for example, due to a decline in the demand for residential units), infrastructures (for example, due to a reduction in the allocation of resources by governmental entities in this sector), initiations and management of rental properties (for example, due to a drop in the demand for leased areas), steel (for example, due to a decline in the demand for ceramic products) and in the hotels and recreation sector (for example, due to a decrease in the incoming tourism into Israel). 209

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 34 – Management of Financial Risks (Cont.)

e. Additional market risks: (Cont.)

(3) The economic situation in Russia – as a result of the deterioration of the relationship of Russian and the Ukraine, the United States and countries in the European Union have imposed strict sanctions against Russia that have caused a severe economic crisis in Russia, which is reflected in a decline in the foreign investments in Russia and a devaluation of the Russian ruble against the U.S. dollar and the currency basket (devaluation of the ruble constitutes a negative impact on the Company‟s shareholders‟ equity). Continuation of the economic crisis in Russia could cause more severe harm to the Company‟s revenues in all that relating to its activities in Russia, a continued decline in the value of the real estate properties due to the adverse impact on the revenues and/or an increase in the risk premium in the economy and, in turn, an increase in the discount rate, and increase in the financing expenses and/or an unfavorable effect on the available sources of financing.

(4) Harm to the financial ability and strength of the financial institutions with which the Company works, could have a significant adverse impact on the ability to execute and construct the projects, and on the Company itself, the value of its assets and its liquidity. This is true since the Company has very significant financing requirements. The regulation applicable to bank and non-bank financial institutions, in and outside Israel, has a major impact on their ability to finance the activities of the Group companies. Regarding this matter, it is noted that recently the capital adequacy requirements of banks in Israel was made more strict, which makes it more difficult for them to grant credit. In addition, there is a specific limitation on banks in Israel regarding financing of real estate transactions, a fact that limits the supply of the bank credit, which is a central component of the financing real estate projects. Furthermore, in the past few years, the financing terms of the lenders included as part of the non-bank financing system have become stricter, a fact that could have a negative impact on the ability of the companies to receive credit from these lenders, the financing costs, various operating and financial restrictions the companies are required to comply with viz-a-viz the non-bank system.

Despite that stated above, the Group companies enjoy available credit – both from the banking system as well as from the non-bank system.

“Credit risk” – the risk of a monetary loss deriving mainly from debts of customers and others who will not meet their contractual obligations and from loans granted to third parties.

The Group‟s exposure to credit risks in the real estate sector is impacted mainly by the personal nature of each customer.

The Group‟s exposure to credit risks in the industrial sector is managed by the customer credit policy in the relevant companies, whereby a specific purchase framework is determined for each customer, while using outside credit ratings where available.

210

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments

A. Credit Risk

(1) Exposure to credit risk

The book value of the financial assets represents the maximum credit exposure, while ignoring the book values of collaterals or any other items strengthening the credit.

For information regarding the maximum credit exposure in respect of financial guarantees – see Section E below.

The maximum exposure to credit risk as at the date of the statement of financial position was as follows:

At December 31 2015 2014 In Thousands of NIS

Cash and cash equivalents 1,275,202 1,339,170 Short-term investments 443,210 790,479 Marketable securities 294,266 151,245 Loans and receivables** 1,938,478 *2,004,867

3,951,156 4,285,761

* Restated – see Note 2F. ** Prior to deducting the excess of the losses over investments in investee companies as at December 31, 2015, in the amount of NIS 64,976 thousand (as at December 31, 2014 – in the amount of NIS 60,451 thousand).

The above-mentioned balances are included in the categories cash and cash equivalents, short-term investments, marketable securities, trade receivables, other receivables and debit balances, income tax receivables, loans to investee companies and long-term investments, loans and other debit balances.

211

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – 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 2015 2014 In Thousands of NIS

Local 2,940,596 *3,233,939 United States 117,644 60,187 Russia 343,259 491,283 Eastern Europe 549,657 500,352

3,951,156 4,285,761 * Restated – see Note 2F.

(2) Aging of the receivables and losses from decline in value

At December 31 2015 2014 Decline Decline Gross in value Gross in value In Thousands of New Israeli Shekels

Not overdue 935,390 883 *997,797 1,451 Overdue 0–30 days 42,834 30 27,098 721 Overdue 31–120 days 41,082 2,236 50,702 3,075 Overdue 120 days up to one year 44,139 12,166 14,772 5,552 Overdue more than one year 158,175 99,066 92,545 *60,851 1,221,620 114,381 1,182,914 71,650 * Restated – see Note 2F.

212

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

B. Liquidity Risk

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, 2015 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 (including current maturities) Non-convertible debentures 4,600,428 6,704,833 835,322 922,748 2,188,361 2,758,402 Loans from banks 5,852,088 6,577,214 914,898 1,242,699 4,286,289 133,328 Other liabilities 955,458 1,366,752 351,366 149,027 261,275 605,084

At December 31, 2014 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 (including current maturities) Non-convertible debentures 4,484,380 6,912,935 784,589 817,729 2,306,879 3,003,738 Loans from banks 6,242,887 7,113,275 1,878,470 1,259,870 3,688,518 286,417 Other liabilities 944,921 1,334,522 109,923 312,374 442,696 469,529

The Company has derivative financial instruments having expiration dates in the range of one year.

* The projected cash flows are in accordance with the principles of the Interim Framework that was agreed to with the holders of the Company‟s debentures (Series Z, ZA and ZB), as described in Note 1B(3) above.

213

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

C. Market Risks

(1) CPI and Foreign Currency Risk

(a) 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, 2015 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 – 850,392 188,342 84,701 151,767 – 1,275,202 Short-term investments – 312,660 25,562 48,597 12,085 44,306 443,210 Marketable securities 87,158 98,225 63,456 – 15,139 30,288 294,266 Trade receivables 289,234 686,230 53,064 62,403 16,308 – 1,107,239 Other receivables and income tax receivables 32,467 134,673 100,916 11,884 68,663 55,455 404,058 Assets held for sale – – – – – 264,213 264,213

Long-term loans, investments and debit balances 11,940 28,507 46,202 426 5,689 – 92,764

Loans to investee companies 106,029 161,691 54,024 77,743 16,793 – 416,280

Total assets 526,828 2,272,378 531,566 285,754 286,444 394,262 4,297,232 ------

Liabilities:

Current liabilities: Short-term credit from banks and others 169,898 1,553,725 18,339 91,697 17,405 – 1,851,064 Contractors and suppliers 228,129 431,070 116,025 57,510 64,303 7,236 904,273 Other payables, income tax liabilities and provisions 208,165 206,306 7,107 51,490 86,351 615,735 1,175,154

Long-term liabilities (including current maturities):

Debentures 4,347,073 253,355 – – – – 4,600,428 Liabilities to banks 1,003,020 296,043 1,705,224 2,076,443 771,358 – 5,852,088 Others liabilities 372,318 265,813 33,335 243,624 40,368 – 955,458

Total liabilities 6,328,603 3,006,312 1,880,030 2,520,764 979,785 622,971 15,338,465 ------

Total balance sheet balance, net (5,801,775) (733,934) (1,348,464) (2,235,010) (693,341) (228,709) (11,041,233)

214

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

C. Market Risks (Cont.)

(1) CPI and Foreign Currency Risk (Cont.)

(a) Exposure to CPI and foreign currency risk (Cont.)

At December 31, 2014 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 – 684,258 481,851 57,655 115,406 – 1,339,170 Short-term investments – 646,434 22,629 72,220 4,986 44,210 790,479 Marketable securities 45,171 49,158 25,935 – 10,151 20,830 151,245 Trade receivables 302,808 *722,939 48,986 17,877 18,654 – 1,111,264 Other receivables and income tax receivables *34,354 155,672 116,070 16,947 80,399 *80,704 484,146 Assets held for sale – – – 18,161 – 8,688 26,849

Long-term loans, investments and debit balances 12,261 106,273 30,061 3,910 5,909 – 158,414

Loans to investee companies 113,228 172,092 60,139 75,333 22,664 – 443,456

Total assets 507,822 2,536,826 785,671 262,103 258,169 154,432 4,505,023 ------

Liabilities:

Current liabilities: Short-term credit from banks and others 198,026 1,668,745 1,502 53,344 – – 1,921,617 Contractors and suppliers 161,503 **397,983 114,603 73,918 43,358 8,475 799,840 Other payables, income tax liabilities and provisions *175,803 181,016 56,654 57,408 61,863 *594,453 1,127,197

Long-term liabilities (including current maturities):

Debentures 4,421,996 62,384 – – – – 4,484,380 Liabilities to banks *225,399 918,328 1,928,982 2,303,620 866,558 – 6,242,887 Others liabilities 506,520 51,324 50,425 290,266 46,386 – 944,921

Total liabilities 5,689,247 3,279,780 2,152,166 2,778,556 1,018,165 602,928 15,520,842 ------

Total balance sheet balance, net (5,181,425) (742,954) (1,366,495) (2,516,453) (759,996) (448,496) (11,015,819)

* Restated – see Note 2F above. ** Reclassified – see Note 2I(2) above.

215

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

C. Market Risks (Cont.)

(1) CPI and Foreign Currency Risk (Cont.)

(a) Exposure to CPI and foreign currency risk (Cont.)

Set forth below is data with respect to the significant currency exchange rates and the CPI.

At December 31 % Change 2015 2014 2013 2015 2014 2013

“In respect of” CPI (in points) 123.09 124.32 124.57 (1.0) (0.2) 1.8 “Known” CPI (in points) 123.21 124.32 124.45 (0.9) (0.1) 1.9 Building inputs index (in points) 142.09 140.77 139.71 0.9 0.8 1.4 U.S. dollar exchange rate (in NIS) 3.902 3.889 3.471 0.3 12.0 (7.0) Euro exchange rate (in NIS) 4.247 4.725 4.782 (10.1) (1.2) (2.8) Russian rule exchange rate (in NIS) 0.054 0.069 0.105 (21.7) (34.3) (13.1)

(b) Sensitivity analysis

A strengthening of the shekel against the following currencies as at December 31, 2015 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 2014 is made on the same basis.

At December 31, 2015 +10% +5% –5% –10% In Thousands of NIS

Exchange rate of the dollar (134,815) (67,407) 67,407 134,815 Exchange rate of the euro (206,328) (103,165) 103,165 206,328

+2% +1% –1% –2%

CPI (94,933) (47,467) 47,467 94,933

At December 31, 2014 +10% +5% –5% –10% In Thousands of NIS

Exchange rate of the dollar 11,436 5,718 (5,718) (11,436) Exchange rate of the euro (8,846) (4,423) 4,423 8,846

+2% +1% –1% –2%

CPI (101,759) (50,879) 50,879 101,759

216

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

C. Market Risks (Cont.)

(2) Interest Rate Risk

(a) Interest type

Set forth below is detail regarding the type of interest on the Group‟s interest-bearing financial instruments:

At December 31 2015 2014 In Thousands of NIS

Fixed-interest instruments Financial assets 290,475 302,296 Financial liabilities (6,924,664) (5,544,520)

(6,634,189) (5,242,224)

Variable-interest instruments Financial assets 757,944 705,090 Financial liabilities (6,147,899) (4,472,323)

(5,389,955) (3,767,233)

The Group uses 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.

Set forth below is detail of the Group‟s derivative financial instruments for reducing the exposure in respect of the interest rate risk as at December 31, 2015:

Effectiveness Interest Interest Expiration Fair of hedge Instrument receivable payable date Amount value net of tax % Thousands of euro

IRS 3M Pribor 0.46 August 13, 2020 19,524 41 33 IRS 3M Euribor 0.64 June 18, 2019 207,625 (2,677) (2,249) IRS 3M Euribor 0.73 October 1, 2019 16,412 (223) (180) IRS 3M Euribor 0.31 March 31, 2020 36,933 (214) (182) IRS 3M Euribor 0.33 August 13, 2020 13,565 (113) (91)

The lack of effectiveness of the above-mentioned hedging instruments is recorded in the statement of income in the “financing expenses” category.

217

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

C. Market Risks (Cont.)

(2) Interest Rate Risk

(b) 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. Therefore, the change in the interest rates as at the date of the statement of financial position 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.

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 2014 is made on the same basis.

At December 31, 2015 +2% +1% –0.5% In Thousands of NIS

Shekel interest (58,030) (29,015) 14,508

+2% +1% –0.5%

Dollar interest (32,512) (16,256) 8,128 Euro interest (46,588) (23,294) 11,647

At December 31, 2014 +2% +1% –0.5% In Thousands of NIS

Shekel interest (51,299) (25,649) 12,825

+2% +1% –0.5%

Dollar interest (38,378) (19,189) 9,595 Euro interest (14,762) (7,381) 3,690

218

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

D. Fair Value

(1) Financial instruments measured at fair value for disclosure purposes only

The book value of the financial instruments included in the Company‟s working capital categories corresponds to or approximates their fair values.

The fair value of the financial assets and liabilities and their fair values presented in the statement of financial position are as follows:

As at December 31, 2015 Valuation techniques Data used in Book for determination determination value* Level 1 Level 2 of the fair value of the fair value Non-current assets: Investments, loans and Interest on balances (**) long-term balances, – in NIS: 4%–4.1%, including derivatives 92,764 – 93,017 See points (a)–(g) below. – in US$: 2.61%–8.1%.

Long-term liabilities: Debentures not convertible into shares (4,600,428) (3,454,873) –

Interest on balances (**) – in NIS: 1.5%–8%, – in US$: 5.3%–7.3%. Long-term loans from – in euro: 2.5%–5.5%, banks (5,852,519) – (6,072,818) See points (a)–(g) below. – in rubles: 9.5%.

Interest on balances (**) – in NIS: 2.6%–3.6%, Other liabilities (955,009) – (1,006,185) See points (a)–(g) below. – in euro: 3.0%–6.8%. (11,407,956) (3,454,873) (7,079,003)

(a) For every balance sheet category, the fair value includes only the fair value of the financial instruments the fair value of which is sensitive to that market factor, from a material standpoint. (b) The fair value short-term financial assets is determined based on their nominal values in shekels or their value in foreign currency multiplied by the representative rate of exchange on the date of the statement of financial position. (c) The fair value of the CPI-linked financial assets is determined based on the index that is “known” on the date of the statement of financial position. (d) The fair value of the loans was calculated by discounting the future cash flows using an annual interest rate, based on the interest received, or that the company could have received on loans for the same periods, as at the date of the statement of financial position. (e) Regarding the long-term loans bearing variable interest, the sensitivity analysis was made only for the fixed interest component. (f) Analysis of loans having no fixed repayment date was made based on the company‟s repayment forecast. If no repayment date had been set as at the date of the statement of financial position, the loan was taken based on its carrying value in the books. (g) Regarding loans where the counterparty is permitted to choose the timing of payment of the amount, the liability was included on the basis of the earliest date on which the company may be required to pay.

* The book value is before deduction of current maturities and includes accrued interest. ** The interest rates used for discounting the projected cash flows are based on government yield curves as at the date of the statement of financial position plus an appropriate fixed credit margin. 219

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

D. Fair Value

(1) Financial instruments measured at fair value for disclosure purposes only

As at December 31, 2014 Valuation techniques Data used in Book for determination determination value* Level 1 Level 2 of the fair value of the fair value Non-current assets: Investments, loans and Interest on balances (**) long-term balances, – in NIS: 3.24%–4%, including derivatives 158,251 – 159,810 See points (a)–(g) below. – in US$: 2.63%–16%.

Long-term liabilities: Debentures not convertible into shares (4,543,841) (4,135,678) –

Interest on balances (**) – in NIS: 1.75%–5.6%, – in US$: 7%–8%. Long-term loans from – in euro: 2.0%–6.8%, banks (6,247,228) – (5,947,827) See points (a)–(g) below. – in rubles: 19%.

Interest on balances (**) – in NIS: 3.23%–5.85%, Other liabilities (949,205) – (1,045,586) See points (a)–(g) below. – in euro: 3.0%–5.0%. (11,740,274) (4,135,678) (6,993,413)

220

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

D. Fair Value (Cont.)

(2) Hierarchy of fair value of financial instruments measured at fair value

The following table presents the financial instruments measured at fair value on the basis of timing, using an evaluation method in accordance with the levels of the fair value. The various levels were defined as follows:

Level 1 Level 2 Level 3 Total In Thousands of NIS

December 31, 2015

Financial assets at fair value through the statement of income Mutual fund participation certificates 44,303 – – 44,303 Marketable securities 294,266 – – 294,266 338,569 – – 338,569

Financial liabilities – derivative instruments 6,002 13,828 – 19,830

December 31, 2014

Financial assets at fair value through the statement of income Mutual fund participation certificates 44,209 – – 44,209 Marketable securities 151,245 – – 151,245 195,454 – – 195,454

Financial liabilities – derivative instruments 11 29,033 – 29,044

221

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 35 – Financial Instruments (Cont.)

D. Fair Value (Cont.)

(3) Data regarding measurement of fair value of financial instruments at Level 2.

Reciprocal relationships Significant between data that observable Financial Valuation techniques for is not data and instrument determination of the fair value observable the fair value

Interest exchange The fair value of those instruments is Not relevant. Not relevant. contracts (SWAPs) estimated based on the difference of the discounted cash flows between as between the fixed interest paid and the variable interest expected to be received in accordance with the interest curve as at the date of the statement of financial position.

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 18 “Loans and Credit”) of the said liability, are as follows: At December 31, 2015 Book Fair Maximum value value exposure In Thousands of NIS

Liability in respect of provision of guarantee to associated companies 250 250 217,164

At December 31, 2014 Book Fair Maximum value value exposure In Thousands of NIS

Liability in respect of provision of guarantee to associated companies 73 73 239,168

222

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities

(1) Legal claims and contingent liabilities

Legal and other claims have been filed against the Company and some of the subsidiaries, in the aggregate amount of about NIS 752 million. As at December 31, 2015, a provision has been recorded in the consolidated financial statements to cover the above-mentioned claims, in the total amount of about NIS 118 million.

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.

It is noted that the Group may have additional exposure in respect of claims that at this stage the chances of their succeeding cannot yet be estimated.

The following note includes a description of the main claims filed against the Group companies.

A. Main claims against the Company

(1) 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 October 2014, a court decision was rendered whereby the claim was rejected however in December 2014 the plaintiffs filed an appeal of the decision. On December 21, 2015, a court decision was rendered whereby the appeal was rejected.

(2) In September 2012, the Company received a request for certification of a claim as a class action and a class action claim against the Company, the Company‟s controlling shareholder, members of the Company‟s Board of Directors and the Company‟s CEOs (former and present) (hereinafter – “the Claim” and “the Defendants”, respectively), which was filed in the District Court in Tel-Aviv–Jaffa, by a holder of shares in the Company (so he alleges) on the date relevant to the Claim (hereinafter – “the Plaintiff”).

The subject matter of the Claim is monetary damages caused to the Plaintiff due to decline in value of the Company‟s shares, which he acquired in the beginning of July 2012 and held up to after publication of an Immediate Report dated August 13, 2012 regarding the loss the Company expects to record in its financial statements as at June 30, 2012 (hereinafter – “the Income Caveat”), which was published shortly after publication of a similar income caveat by AFI Development, mainly against the background of significant write downs in the value of a number of investment properties under construction and inventories of real estate as part of various projects of AFI Development.

223

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

A. Main claims against the Company (Cont.)

(2) (Cont.)

The Company contends that the Claim has no appropriate factual basis since prior to the publication date of the Income Caveat, AFI Development did not have sufficiently reliable information regarding the results of the processes and/or the consequences thereof on AFI Development, and certainly not at the rate and to such an extent that would have given rise to an obligation to file an Immediate Report.

On June 26, 2015, a judgment was rendered wherein the Court accepted the Company‟s contentions, rejected the request and charged the Plaintiff for expenses, in the amount of NIS 60 thousand.

(3) 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, 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. 224

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

A. Main claims against the Company (Cont.)

(3) (Cont.)

On May 7, 2014, the decision of the District Court in Mercaz-Lod was received, whereby the Court accepted the request and approved the Plaintiff to file, in the name of the Company, a derivative claim against the Members of the Board of Directors (hereinafter – “the Court‟s Decision”).

On April 26, 2015, a decision was rendered by the Supreme Court, which almost completely accepted the Company‟s appeal. The Supreme Court accepted the appeal regarding the directors in full and completely rejected the request for approval of the derivative claim against them.

Also regarding the claim against the controlling shareholder, Mr. Leviev, the Supreme Court accepted the appeal in all that relating to the negligence cause of action due to the exemption condition and provided that it approves the claim, even this very marginally, only with respect to the causes of action of deception and breach of a trust lacking good faith, this being in light of fact that they were not sufficiently clarified in the prior court proceeding. That is, the derivative claim may be tried only against Mr. Leviev, and it is limited solely to the deception cause of action, such that the Plaintiff must demonstrate in his claim a relationship of Mr. Leviev to the company being acquired (ABG) and that Mr. Leviev unlawfully received monies as a result of the transaction.

In a reminder meeting in the presence of the parties, it was decided to enter into a reconciliation proceeding wherein the mediator is expected to provide his recommendation while at the same time the parties are carrying on negotiations regarding a format for conclusion of the disputes by means of a compromise.

On March 21, 2016, the Plaintiff‟s representative notified the Court that the mediator did not succeed and requested the Court to issue Orders instructing the Company and the representative to provide him various documents that were presented during the reconciliation proceeding in order to permit him to examine the cause of action in the claim and the feasibility of maintaining the proceeding (so he contends).

On March 24, 2016, the Court approved the request and instructed the Company to provide the Plaintiff various documents within 14 days, and the Plaintiff is required to notify the Court within 14 days thereafter of his position regarding the continued maintenance of the Claim.

225

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

A. Main claims against the Company (Cont.)

(4) 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 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%.

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, which constituted a precondition for execution of the project. The State approved these postponements, among other things, while increasing the tender guarantee.

In August 2010, the Concessionaire and its shareholders, including the Company, received notification from the State of Israel 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.

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.

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 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 caused to it due to the State‟s conduct and its breach of the concession agreement.

In January 2011, the State filed a monetary claim with the arbitrators against the Concessionaire, in the amount of about NIS 723.5 million (the Company‟s share is 20%). In its claim, the State contends that it is the Concessionaire that breached of the concession agreement, among other things, due to the fact that it failed to reach the financial closing.

226

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

A. Main claims against the Company (Cont.)

(4) (Cont.)

On July 28, 2015, a partial decision was received in arbitration proceedings (hereinafter – “the Partial Decision”).

Pursuant to the Partial Decision, the claim of MTS to receive compensation from the State for cancellation of the concession agreement by the State was rejected, while on the other hand, the State‟s contention was accepted whereby cancellation of the concession agreement and foreclosure of the bank guarantees given to secure it, was made according to law due to breach of the concession agreement by MTS, against the background of MTS‟s failure to reach a financial closing on the final date determined for it.

In order to remove doubt it is emphasized that taking into account the fact that the amount of the bank guarantees were foreclosed quite a while ago, the Partial Decision, in and of itself, has no impact on the Company‟s liquid balances, and the amounts of the guarantees, as stated, were already provided for in the Company‟s prior financial statements.

Based on that stated in the Partial Decision, in the next stage of the arbitration proceeding the contentions of the parties will be heard regarding the amount of the damages caused to the State due to breach of the concession agreement by MTS.

In the opinion of the Company and its legal advisors, MTS has good defense arguments against a judgment awarding additional compensation beyond the amount of the guarantees foreclosed, and in any event, even if additional compensation is awarded against MTS, and to the extent the State will thereafter file a claim against the shareholders of MTS (including the Company) for additional compensation, as stated, the said shareholders will have weighty defense arguments. At this stage, prior to a claim having been filed against the Company, as noted, and in light of that stated above, in the opinion of the Company and its legal advisors, the chances that the claim will be accepted, if ultimately filed against the Company, are less than 50%.

(5) For information regarding a request for certification of a claim as a class action and a class action claim against Africa Industries, the Company and officers and directors (past and present) of Africa Industries and of the Company (including the former CEO of Africa Industries, the presently servicing CEO of the Company who also serves as the CEO of Africa Industries and the Chairman of the Board of Directors of the Company who is the controlling shareholder of the Company and of Africa Industries) and against the auditing CPAs of Africa Industries – see Note 1D(3) above.

227

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

B. AFI USA

(1) During 2011, a claim was filed in the United States against a subsidiary of AFI USA (hereinafter – “the Defendant”) by representatives of the condominium and the tenants of the building located at 20 Pine St. in Manhattan, New York (hereinafter – “the Plaintiffs” and “the Project” as applicable) 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 US$20 million. The subsidiary deposited US$3 million in trust in accordance with the court‟s instructions. During 2015, the Defendant reached a compromise with the Plaintiffs, in the amount of US$2.675 million, half of which was transferred to the Plaintiffs in December 2015. The balance of the amount is to be paid during 2016.

(2) 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 located 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 US$20 million. During 2015, the Defendants reached a compromise agreement with the Plaintiffs whereby the Plaintiffs will be paid the amount of US$2.5 million, which was transferred to the Plaintiffs in February 2016.

In connection with the above-mentioned claim, the State Attorney General of the State of New York (hereinafter – “the State Attorney General”) started an investigation against the Defendants and against the Company due to failure to place a deposit in trust as required for issuance of Form 4 for the project. During 2015, the Defendants reached a compromise agreement with the State Attorney General, whereby in February 2016 the Defendants paid a fine and legal expenses, in the amount of US$2.25 million,

C. Africa Israel Residences Ltd.

(1) In December 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.

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

C. Africa Israel Residences Ltd. (Cont.)

(1) (Cont.)

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, 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.

On April 15, 2012, after the parties expressed their contentions, the arbitrator‟s decision was rendered, which accepted the position of Africa Residences regarding expiration of the time limitation regarding the plaintiff‟s contentions relating to delays in construction of the first building, and thus decided to strike out this part of the claim. The part of the claim relating to delays in construction of the first building that was stricken out of the claim amounts to about NIS 63,000 thousand.

On June 4, 2012, a counterclaim was filed by Africa Residences and Caesarea Investments Ltd., in the amount of about NIS 32,580 thousand, based mostly on the contention that the plaintiff is required to participate in the costs of improving and upgrading the project – an upgrade that increased the price level of the residential units in the project and as a result of which the plaintiff‟s income increased.

On February 17, 2013, the Claimant filed a request to amend the statement of claim, wherein it raised new contentions in connection with non-utilization of all the commercial space by the Initiators, as well as with respect to sale of residential units in the Project without a complete finish (“envelope units”), which was contrary to the agreement.

229

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

C. Africa Israel Residences Ltd. (Cont.)

(1) (Cont.)

The Plaintiff contends that it was caused economic damage, in the amount of about NIS 8.9 million, in respect of loss of the consideration determined for the Plaintiff due to non-utilization of all the commercial building rights pursuant to the relevant Urban Planning Scheme. The contention of the Plaintiff in connection with the envelope residential units has not yet been quantified and affidavits on the part of the Plaintiff have not yet been submitted and, accordingly, it is not possible to estimate the risks in respect thereof.

As part of an arbitration proceeding relating to the “Savyonei Ramat Aviv” project, on September 14, 2014, the arbitrator‟s decision was received.

In the decision, the arbitrator accepted the main claims of the developers and determined that in light of the waiver condition, the plaintiff is not permitted to raise any contention, demand or claim the grounds of which was created up to the signing date of the Third Addendum. In the decision, it was clearly spelled out that the waiver condition prevents the plaintiff from claiming a cancellation of the agreements in the First Addendum and in the Second Addendum with respect to bearing of the costs of the improvements and restoration after cancellation, where elimination of this damage category amount to about NIS 89 million.

With respect to the other causes of action, the arbitrator determined they will be heard and decided as part of the arbitration and the arbitration decision that will be provided at the end of the proceeding.

Regarding the impact of the decision in connection with the contention relating to delays in the project – it is noted that despite the absence of a clear determination regarding this damage category, it appears that the meaning of this decision is that plaintiff is also not permitted to claim in respect of delays that preceded the date of the waiver condition (including the plaintiff‟s claim for damages for a delay in the construction of Building 1, which the plaintiff also seeks to impose on all the other buildings regarding which it has a delay). The monetary significance of elimination of transfer of the resulting delinquency days of Building 1, to other later buildings the plaintiff has, is about NIS 55 million (this being based on the calculation prepared by the developers).

In the estimation of the management of Africa Residences, based on the opinion of its legal advisors, it appears that regarding the Claimant‟s contentions in Section (A) – Section (F), the chances that damages will be awarded are low. In addition, in the estimation of the management of Africa Residences, and based on the possible exposure in accordance with the opinion of its legal advisors, the balances for completion recorded by Africa Residences in respect of the project are sufficient to cover possible costs relating to the claim.

230

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

C. Africa Israel Residences Ltd. (Cont.)

(2) In October 2014, Merchavei Pituach Ltd. (in voluntary liquidation), which owns land in the Sha‟ar Hayam project located in Rishon Lezion (hereinafter – “the Landowners”, “the Project” and “the Land”, respectively), filed a claim against Africa Residences and Azorim Construction (1965) Ltd. (a company wholly controlled by Azorim Investments and Building Development Company Ltd.) (hereinafter together – “the Joint Venture”) for compensation totaling about NIS 140 million (the share of Africa Residences is about NIS 70 million), in the framework of an arbitration proceeding (hereinafter – “the Arbitration”) which is being carried on between the Joint Venture, on the one side, and the Landowners, on the other.

The contentions of the Landowners are as follows: (a) a claim for compensation in the amount of about NIS 88.4 million, in respect of additional amounts of consideration that the Landowners assert they are entitled to, apparently, by force of the combination agreement between the Joint Venture and the Landowners (hereinafter – “the Agreement”); (b) a claim for compensation, in the amount of about NIS 32.4 million, in respect of delays in the progress of the Project relating to building permits and completion of the construction; (c) a claim for compensation, in the amount of about NIS 19 million, in respect of unjust enrichment of the Joint Venture due to a revised plan, whereby the number of underground parking spaces in the Project was reduced. In March 2015, the Joint Venture submitted a statement of defense.

In the estimation of the management of Africa Residences, based on the opinion of its legal advisors, it appears that the chances that the contentions of the Landowners will be accepted are low, and in any event the amount of the claim is exaggerated.

In addition, in the estimation of the management of Africa Residences, the balances for completion recorded by Africa Residences in respect of the project are sufficient to cover possible costs relating to the claim.

It is further noted that as part of the Arbitration, the Joint Venture filed a statement of claim against the Landowners, wherein contends that the Landowners sold residential units in the Project, not in accordance with the provisions of the Agreement, and thus unlawfully prevented a payment to the Joint Venture in respect of these residential units. The Joint Venture further claims a repayment of an insignificant monetary amount that was erroneously transferred to the Landowners in connection with a credit in respect of a development charge. The total amount of monetary relief has not yet been quantified by the Joint Venture, however it estimates that it will total millions of shekels.

231

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

D. Danya Cebus Ltd.

(1) 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.

On May 25, 2011, Danya Cebus filed its response to the claim, wherein it is contended that the income warning caveat was published on time, since after indications accumulated in the Control Division of Danya Cebus of losses on the Highway 431 project, the required examinations were performed and immediately thereafter the report was published.

At the recommendation of the court, a compromise format was agreed to between the parties which on September 28, 2014 received the force of a court judgment.

As part of the compromise agreement, it was provided that for purposes of the compromise and without admitting to the contentions of the representative plaintiff, Danya Cebus will pay the members of the group entitled to compensation, as defined in the compromise agreement (in general, anyone who acquired shares of Danya Cebus on the stock exchange in the period between February 1, 2008 and March 2, 2008 and held such shares on March 3, 2008 and who will come and prove his entitlement to the compensation in accordance with that detailed in the compromise agreement), compensation in the amount of about NIS 7.85 for each share held by the entitled party, as stated on March 3, 2008, where the total amount of the agreed-to compensation is about NIS 3.8 million.

As part of the compromise agreement, Danya Cebus agreed to pay the representative plaintiff remuneration of NIS 50,000 and to his representative fees of NIS 550,000, plus VAT. Half of these amounts (NIS 349,500) were paid shortly after the Court decision became final, and the other half (together with linkage differences and interest) (NIS 347,109) is to be paid only after execution of the compromise agreement.

As part of the compromise agreement, the representative plaintiff abandoned the cause of action included in the amended request for certification, with respect to amendment of the financial statements of Danya Cebus for 2006 and for the first and second quarters of 2007. 232

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

D. Danya Cebus Ltd. (Cont.)

(2) In August 2007, the District Court of Jerusalem issued a temporary Stay of Proceedings Order against various companies in the Heftzibah Group (hereinafter – “Heftzibah”). In September 2009 a liquidation order was issued against Heftzibah.

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. As at the approval date of the statement of financial position, Danya Cebus had received NIS 17 million from the Receiver‟s fund in respect of past debts. 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 statement of financial position, decisions on the debt claims had not been rendered.

(3) In January 2011, the subsidiary Danya Cebus filed a statement of claim, in an arbitration proceeding of Danya Cebus against a customer, Opera on the Sea Ltd. (hereinafter – “Opera”). The amount of the claim is presently about NIS 9 million. In January 2011, Opera submitted its statement of defense and a counterclaim, in the amount of about NIS 85 million. The arbitration proceeding has been going on for about two years, in the framework of which a number of meetings have been held and representation files have been submitted. In addition, a number of evidentiary hearings have taken place. On February 5, 2013, the parties notified the arbitrator of their agreement to turn to a reconciliation proceeding before the attorney Amos Gavrieli, and of temporary discontinuance of the arbitration meetings until the reconciliation process is exhausted. In January 2014, a reconciliation meeting was held between the parties and a hearing agreement was signed regarding the manner of maintaining the reconciliation proceeding, which is presently underway. On the basis of an opinion of its legal advisors, Danya Cebus did not record a provision in the books in respect of this proceeding.

(4) In February 2013, a subcontractor of Danya Cebus filed a statement of claim against Danya Cebus, in the amount of about NIS 18.5 million (this statement of claim is an amended statement of claim that was filed after submission of an injunctive order in March 2011 and initial statements of claim in 2011 and 2012).

The statement of claim was filed in connection with amount allegedly due to the contractor in connection with work it performed in the Highway 431 project. The parties have completed the discovery and examination process. In the pre-trial hearing, which was held in February 2014, the parties agreed to narrow the dispute between them, whereby the subcontractor waived a number of issues in its claim, such that the said claim was reduced to about NIS 13 million. Danya Cebus, among other things based on its legal advisors, included, as part of the estimates for the Highway 431 project, an appropriate provision in its books.

233

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

E. Africa Israel Properties Ltd.

(1) In May 2012, a request to file a class action claim, in the amount of about NIS 3.7 million, against Haifa Quarries Ltd. (an associated company of Africa Properties), which owns the City Center project in Haifa, was submitted, alleging a cause of action to provide parking spaces free of charge to handicapped persons. In the opinion of the legal advisors of Africa Properties, Haifa Quarries does not have significant exposure in respect of this claim.

(2) In 2014, a Romanian subsidiary of Africa Properties (hereinafter – “the Investee Company”), a private company that is wholly owned (indirectly) by Africa Properties, received a notification from the authorities regarding additional amounts of property tax due in respect of prior years, in the amount of about €4.6 million (including interest and penalties). During 2014, the Investee Company paid these amounts even though it disputes the position of the Romanian authorities and believes that it has good defenses against these positions, this being, among other things, based on the position of its legal advisors. The Investee Company has filed an appeal with the Romanian authorities. The amounts paid were included in the “other expenses” category in 2014.

In July 2015, a notification was received on behalf of the Prosecutors office in Romania of his decision to start legal proceedings against the Investee Company and three of its employees in respect of commission of a crime of tax evasion, including in connection with an additional alleged debt of the Investee Company relating to construction fees, in the amount of about €68 thousand (not including interest and late payment penalties) (hereinafter – “the Decision of the Prosecutor”).

In October 2015, charges were filed against the Investee Company and against three of its employees by the Office of Prosecutor in Romania.

In the opinion of the Investee Company‟s legal advisors, there were significant defects in the decision-making process of the authorities in Romania regarding this matter, including in connection with the legality of the investigation proceedings. Accordingly, the Investee Company and its employees filed a court action in order to cancel these decisions and to conclude the criminal proceedings. On March 10, 2016, the court‟s decision was received, in a preliminary proceeding, whereby these contentions regarding defects in the investigation process and continuation of the criminal proceeding were rejected. Since the decision was rendered at this stage without the accompanying reasoning, the Investee Company has not yet decided whether to appeal it.

In any event, without addressing the question of the possibility of cancellation of the said decisions regarding the steps taken up to now, in the estimation of the legal advisors of the Investee Company and its employees, they have good defense contentions against their conviction due to non-fulfillment of the fundamental requirements of Romanian law for a criminal conviction.

234

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

E. Africa Israel Properties Ltd. (Cont.)

(2) (Cont.)

In the estimation of the management of Africa Properties, on the basis of the opinion of the legal advisors of the Investee Company, in respect of the proceedings described above no significant impact is expected on the financial position of Africa Properties as at the date of the statement of financial position.

F. Africa Israel Industries Ltd.

(1) For information regarding a request received for certification of a claim as a class action and a class action claim against Africa Industries, the Company, officers and directors (former and present) of Africa Industries and of the Company (including the former CEO of Africa Industries the Company‟s CEO who presently also serves as the CEO of Africa Industries and the Chairman of the Company‟s Board of Directors who is the controlling shareholder of Africa Industries), and against the auditing CPAs of Africa Industries – see Note 1D(3) above.

(2) In November 2013, two companies from the group of a subsidiary, Negev Ceramics (hereinafter – “the Subsidiaries”), received a request for certification of a class action and a class action claim against 11 companies in the ceramics sector (hereinafter – “the Claim” and “the Defendants”, respectively), including the Subsidiaries, which was filed in the District Court in Tel-Aviv–Jafo, by four plaintiffs (hereinafter – “the Plaintiffs”).

The subject matter of the Claim is monetary damages allegedly caused to the Plaintiffs due to alleged violations of the Consumer Protection Law (hereinafter – “the Law”) by the Defendants.

The plaintiffs set the amount of the Claim relating to the Subsidiaries at NIS 122 million.

In the estimation of Africa Industries, based on the opinion of its legal advisors, it seems that the chances that the Claim will be certified as a class action and that Africa Industries and the Subsidiaries will be charged based on the class action are remote.

(3) Further to that stated in Note 4D(4) above, in November 2013, two requests were filed for certification of a claim as a class action against Africa Industries, a subsidiary, Negev Ceramics Ltd. (hereinafter – “Negev”) and the Chairman of the Board of Directors of Africa Industries and of Negev (in the two claims) (who also presently serves as the Company‟s CEO), and against the CEO of Africa Industries (who also served as the CEO of Negev) and against the other members of Negev‟s Board of Directors that served at the time of publication of the tender offer for Negev‟s shares by Africa Industries (in the second claim) (hereinafter – “the First Claim”, “the Second Claim” and/or “the Claims”, and “the Defendants”, respectively), to the District Court in Tel-Aviv–Jafo, by the representative plaintiffs (hereinafter – “the Plaintiffs”). 235

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

F. Africa Israel Industries Ltd. (Cont.)

(3) (Cont.)

The subject matter of the Claims is monetary damages allegedly caused to the Plaintiffs due to an alleged violation of the Securities Law, 1968 (hereinafter – “the Securities Law”) and the Companies Law, 1999 (hereinafter – “the Companies Law”) by the Defendants. This is based on a decision recently made by the Administrative Enforcement Committee in an Administrative Enforcement Proceeding pursuant to the Securities Law against Africa Industries and officers of Africa Industries, as detailed in Note 4D(4), above.

Since two claims are involved that are essentially the same, the court instructed to consolidate them into one claim (hereinafter – “the Consolidated Claim”). The Consolidated Claim was filed in the court on January 1, 2014.

Pursuant to the Consolidated Claim, the group the Plaintiffs seek to represent is all the shareholders that held shares of Negev on the publication date of the tender offer, January 15, 2012 and up to the completion date of the full tender offer. In July 2014, a decision of the District Court was received that approved the request to proceed with the class action.

In the estimation of the Plaintiffs, the total personal damages of the members of the groups they seek to represent amounts to about NIS 15 million.

In the estimation of Africa Industries, based on the opinion of its legal advisors which is also supported by the conclusions of an opinion of outside experts, it appears that Africa Industries and the subsidiary Negev Ceramics have good arguments that should defeat the contentions raised in the claim, and taking into account the reaction of a share of Africa Industries in the days proximate to publication of the report with respect to the undertaking in the agreement with Olympia, and the scope of the consideration in the Tender Offer, the amount of damage claimed is exaggerated and has no basis.

As at the approval date of the financial statements, negotiations aimed at a compromise are being carried on by the parties.

In addition, an in-principle compromise format was reached, which if and when approved by the court, the share of Africa Industries and Negev Ceramics pursuant to the agreement being formulated is NIS 765 thousand.

Accordingly, Africa Industries recorded a provision in the aggregate amount of NIS 1.5 million in its consolidated financial statements.

236

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

F. Africa Israel Industries Ltd. (Cont.)

(4) As a result of extension requests submitted by the subsidiary of Africa Industries in the area of Home Design (hereinafter – “the Subsidiary” or “Negev”) from time to time, the Shutdown Order issued to Negev for its store in Rishon Lezion has been postponed due to the fact that the business license is being delayed for reasons that do not depend on the Subsidiary and that involve planning and building approval arrangements. The Subsidiary is taking action to renew the approvals with the Israel Lands Authority, to receive an exceptional use permit and a change permit. The Subsidiary, based on an opinion of its legal advisors, estimates that the chance that the court will instruct to grant an additional extension prior to the date the Shutdown Order enters into effect is greater than 50%. In addition, the Subsidiary estimates that even if it does not succeed in obtaining a business license as stated and/or an extension is not received from the court and the Shutdown Order enters into effect, it will be able to rent an alternative site that will serve it for purposes of its activities regarding this matter – this being with no unfavorable impact on its business in the long run.

G. Liability of Directors and Officers

(1) During November 2014, the Company‟s Board of Directors (further to the decision of the Remuneration Committee), as follows:

To approve and ratify the Company‟s undertaking with a group of insurers in the international insurance market (hereinafter – “the Insurers”) in insurance policies insuring the liability of the officers of the Company and its public subsidiaries (including Mr. Lev Leviev, the Company‟s controlling shareholder, Ms. Tzvia Leviev Elazorov and Ms. Chagit Leviev Sofiev, daughters of Mr. Lev Leviev).

As at the date of the statement of financial position, the Company and its subsidiaries, including companies listed for trading: Africa Israel industries Ltd., Africa Israel Properties Ltd. and AFI Development PLC (the Company and the companies listed above will be referred to below, together as – “the Group Companies”) entered into insurance policies in order to insure the liability of officers for the period from November 1, 2014 and up to May 1, 2016 (hereinafter – “the Insurance Period”), as follows:

A) A policy insuring officers‟ liability insuring the liability of the officers of the Company and of its public subsidiaries (hereinafter – “the Base Policy”) for the Insurance Period. The limits of the Base Policy in respect of one claim or on a cumulative basis in respect of the entire Insurance Period are US$20 million (however with respect to claims filed in Israel the policy covers litigation expenses in excess of the said liability limits up to an amount equal to 20% of the said liability limits).

237

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

G. Liability of Directors and Officers (Cont.)

(1) (Cont.)

The Base Policy also applies to subsidiaries of the public subsidiaries, existing and/or acquired during the Insurance Period, provided the public subsidiary controls 50% or more of the voting rights or it has the right to appoint a majority of the members of the Board of Directors or it holds 50% or more of their issued shares or it has the right to appoint or to terminate the CEO of the subsidiaries.

B) As excess group policy (umbrella), insuring officers‟ liability, taken out by the Company, for itself and for its subsidiaries, including the Group Companies (hereinafter – “the Group Policy”), for the Insurance Period. The limits of the Group Policy in respect of one claim or on a cumulative basis in respect of the entire Insurance Period are US$80 million (however with respect to claims filed in Israel the policy covers litigation expenses in excess of the said liability limits up to an amount equal to 20% of the said liability limits, this being in addition to the Base Policy).

The Company‟s share in the insurance premiums for the Group Policy in respect to the Insurance Period is about US$28.4 thousand (out of a total of about US$214.2 thousand in respect of insurance premiums of the Company and of the Group Companies in respect of the Group Policy).

C) Allocation of the insurance premiums in respect of the Group Policy between the Company and the other companies was determined (except as detailed below) as a derivative of the insurance premiums in respect of the Base Policy, as follows: each of the Group Companies (including the Company), bears its share of the annual insurance premiums in respect of the Group Policy, which is equal to the part that constitutes the insurance premiums in respect of the Base Policy, as stated in Section A) above, out of the cumulative amount of the insurance premiums to be paid by all the said companies in respect of the Base Policy with reference to the relevant period. In this context it is noted that the amount of the liability limit for each of the Base Polices of the Group‟s divisions is the same.

(2) In July 1999 and August 2009, the General Meeting of the Company‟s shareholders approved provision of an advance commitment for indemnification (hereinafter – “the Advance Indemnification Certificates”) by the Company to directors and other officers in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the Company‟s actual activities, provided the total amount of the indemnification amounts that the Company will pay, 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 the Company in the past and/or that it will issue in the future will not exceed 25% of the Company‟s shareholders‟ equity.

238

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

G. Liability of Directors and Officers (Cont.)

(2) (Cont.)

In September 2011, it was decided to limit the Indemnification Decisions to a period of 9 years from the date of the said decision. It was further decided that the period of every indemnification certificate granted prior to the date of this decision will be 9 years from the date of this decision and the period of every indemnification certificate granted from the date of this decision and thereafter will be 9 years from the date of the grant. In December 2011, the General Meeting of the Company‟s shareholders approved provision of an advance commitment for indemnification by the Company to the Company‟s directors and other officers in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the Company‟s actual activities, provided the total amount of the indemnification amounts that the Company will pay, 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 the Company in the past and/or that it will issue in the future (including, in order to remove any doubt, the prior indemnification certificates) will not exceed 25% of the Company‟s shareholders‟ equity all in accordance with the indemnification conditions detailed in the indemnification certificate for events, which will remain in effect for a period of 9 years from the date of its grant.

(3) During January 2001, the General Meeting of the shareholders of Danya Cebus approved (after receiving the approval of the Audit Committee and the Board of Directors Danya Cebus, to grant indemnification certificates to its directors and the other officers of the company, including the subsidiaries of Danya Cebus, which includes an advance commitment for indemnification in respect of any monetary obligation that will be imposed upon them and in respect of reasonable litigation expenses, due to actions they took in their capacity as officers of the company and/or a subsidiary and/or a related company of Danya Cebus and/or in any other company or entity in which they will serve on behalf of Danya Cebus or at its request, in all that relating, directly or indirectly, to the following events. The indemnification commitment will apply in respect of an obligation or expense that may be indemnified in accordance with law. The amount of the indemnification to be paid by Danya Cebus under all the indemnification certificates issued to all the company‟s officers, in respect of the events detailed above, will not exceed U.S.$ 10 million.

239

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

G. Liability of Directors and Officers (Cont.)

(3) (Cont.)

On December 14, 2011, the General Meeting of the shareholders of Danya Cebus approved provision of an advance commitment for indemnification by Danya Cebus to the directors and other officers of Danya Cebus (hereinafter – “the Officers”) in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the actual activities of Danya Cebus, provided the total amount of the indemnification amounts that the Danya Cebus will pay, 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 Danya Cebus in the past and/or that it will issue in the future (including, in order to remove any doubt, indemnification certificates pursuant to prior indemnification decisions), will not exceed 25% of the shareholders‟ equity of Danya Cebus.

In November 2006, Danya Cebus decided (after receiving the approval of its Board of Directors and of the General Meeting of its Shareholders) to grant letters of indemnity to all the officers of the company and/or a subsidiary of Danya Cebus, 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).

(4) In December 2011, the General Meeting of the shareholders of Africa Properties decided to approve provision of an advance commitment for indemnification by Africa Properties to the directors and other officers of Africa Properties in connection with certain anticipated events, 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 the Africa Properties will pay, 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 will not exceed 25% of the shareholders‟ equity of Africa Properties. The indemnification certificate for events, which will remain in effect for a period of 5 years from the date of its grant.

240

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(1) Legal claims and contingent liabilities (Cont.)

G. Liability of Directors and Officers (Cont.)

(5) In December 2011, the General Meeting of the shareholders of Africa Industries decided to approve provision of an advance commitment for indemnification by Africa Industries to the directors and other officers of Africa Industries in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the actual activities of Africa Industries, provided the total amount of the indemnification amounts that the Africa Industries will pay, 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 Industries in the past and/or that it will issue in the future will not exceed 25% of the shareholders‟ equity of Africa Industries.

(6) In June 2006, Africa Residences decided to provide a commitment for indemnification of officers in connection with a prospectus of Africa Residences (hereinafter – “the Indemnification Decision”). The indemnification commitment will apply to every monetary liability or expense imposed on the officer as a result of his activities, as detailed in the Indemnification Decision. The cumulative amount of the indemnification to be paid by Africa Residences to all parties eligible for indemnification in respect of a monetary obligation in accordance with a court decision may not exceed 25% of the shareholders‟ equity of Africa Residences based on its annual financial statements most recently published prior to actual payment of the indemnification.

(7) In June 2006, as part of the underwriting agreement, Africa Residences committed to indemnify the underwriters for a liability imposed on them in connection with the prospectus, pursuant to the conditions detailed in the underwriting agreement. The amount of the indemnity may not exceed NIS 520 million.

(8) In December 2011, the General Meeting of the shareholders of Africa Residences decided to approve provision of an advance commitment for indemnification by Africa Residences to the directors and other officers of Africa Residences in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the actual activities of Africa Residences, provided the total amount of the indemnification amounts that Africa Residences will pay, 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 Residences in the past and/or that it will issue in the future will not exceed 25% of the shareholders‟ equity of Africa Residences. The indemnification certificate for events, which will remain in effect for a period of 9 years from the date of its grant.

241

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 36 – Contingent Liabilities (Cont.)

(2) Collaterals, liens and guarantees

A. In order to secure the payments of purchasers of residential units, the Group companies provide bank guarantees or insurance policies in accordance with the Sales Law (Apartments) (Assurance of Investments of Apartment Purchasers), 1974. The companies commit to an examination and warranty period, as provided in the Sales Law (Apartments), 1973. Against this commitment, the companies generally receive guarantees from the executing contractor. In some of the projects, the companies receive guarantees from Danya Cebus (a related party). As at the date of the statement of financial position, the Group companies had given bank guarantees to purchasers of residential units and guarantees to secure performance quality, in the amount of about NIS 1,983 million (December 31, 2014 – about NIS 1,423 million).

B. The group companies have contingent liabilities in a customary framework of responsibility (warranty) for the construction quality of the residential units completed and delivered to the tenants in accordance with the laws governing sales in the relevant countries.

C. As part of acquisition of lands and rights in land, there are commitments of the Company and of the subsidiaries, some of which are secured, to the sellers of the rights to execute the building plans and deliver residential units in the buildings to be constructed pursuant to the agreements.

D. The Company is a guarantor in the ordinary course of business of the liabilities of Africa Residences to a commercial bank in connection with a loan received by Africa Residences in accordance with the obligations of Africa Residences in the agreement for acquisition of rights in the real estate.

E. As part of its activities as an execution contractor, occasionally Danya Cebus is required to present different types of guarantees to third parties, such as, guarantees to fulfill the terms of the contract, performance guarantees, guarantees with reference to the quality of the work, a guarantee against receipt of an advance deposit from a customer, and a guarantee for release of amounts of consideration held back by the customer. In addition, in certain tenders Danya Cebus is required to present guarantees in order to assure its participation in the said tenders. As at December 31, 2015, the amount of guarantees presented by Danya Cebus to third parties (not including guarantees provided in connection with the Highway 431 project) amounted to about NIS 923 million (December 31, 2014 – about NIS 750 million), of which about NIS 916.3 million guarantees from financial institutions (banks and insurance companies) (December 31, 2014 – about NIS 732.2 million), about NIS 5.9 million of Company guarantees (December 31, 2014 – about NIS 16.1 million), and about NIS 0.6 million of independent guarantees of Danya Cebus, capital notes and other collaterals (December 31, 2014 – about NIS 1.7 million).

F. As at December 31, 2015 and 2014, the balance of the Group‟s liens to banks and others in respect of investee companies was about NIS 201 million and about NIS 193 million, respectively.

For information regarding conditions in connection with loans and credit received and liens in respect of credit received – see Note 18 above. 242

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – 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 2015 2014 In Thousands of NIS

Trade receivables 9,106 6,587 Other receivables 13,421 7,680 Contractors and suppliers (762) (622) Other payables (970) (2,140) Balances with companies owned by the controlling shareholder (589) (1,851)

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 2015 2014 2013 In Thousands of NIS

Management fees accrued to a company controlled by an interested party 642 647 645 Management fees from jointly controlled entities 343 347 673 Income from rental and operation of properties (see Section N below.) 2,869 5,435 4,903

All the transactions with interested parties were executed at regular commercial terms.

243

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

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 33 – regarding share-based payments).

The benefits in respect of employment of key management personnel (including directors) include:

For the Year Ended December 31 2015 2014 2013 Number Number Number of of of Persons Amount Persons Amount Persons Amount NIS „000 NIS „000 NIS „000

Salaries, wages and bonuses 1 2,234 1 2,462 1 3,074 Share-based payments 1 67 1 203 1 368 2,301 2,665 3,442

Regarding bonuses distributed – see Note 33B above.

The benefits in respect of employment of key management personnel (including directors) not employed by the Company include:

For the Year Ended December 31 2015 2014 2013 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 6 662 7 1,006 7 1,078 Total benefits in respect of key management personnel not employed by the Company 2 14,295 2 20,196 2 22,685 14,957 21,202 23,763

244

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

D. Long-term liabilities of related parties and interested parties

Details of linkage bases and interest terms

At December 31, 2015 Linked to Linked to Linked to Unlinked or stated or stated or stated shekel Linked shekel in dollars in euro in rubles Stated interest rate 0%–5% 0%–4% 4%–9.75% Total 11.5%-16% 6%–7% 11.5%–14% Total In NIS Thousands

Loans and long-term debit balances* 103,734 77,087 28,933 106,020 54,023 79,234 16,795 359,806 Capital notes* 56,474 – – – – – – 56,474 160,208 106,020 54,023 79,234 16,795 416,280

At December 31, 2014 Linked to Linked to Linked to Unlinked or stated or stated or stated shekel Linked shekel in dollars in euro in rubles Stated interest rate 0%–5% 0%–4% 4%–8% Total 16% 0%–5% 11.5%–19.5% Total In NIS Thousands

Loans and long-term debit balances* 117,857 41,546 71,007 112,553 12,950 75,332 69,854 388,546 Capital notes* 54,910 – – – – – – 54,910 172,767 112,553 12,950 75,332 69,854 443,456

* Before deduction of excess losses on investments in investee companies as at December 31, 2015, in the amount of NIS 64,976 thousand (December 31, 2014 – NIS 60,451 thousand).

245

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

E. Agreements with Danya Cebus

(1) In July 2014, the General Meeting of the shareholders of Danya Cebus approved the undertaking of Danya Cebus with the Company in an agreement for provision of management services, whereby the Company will provide Danya Cebus current ongoing management consulting services for current and strategic business transactions (business development) of the Danya Cebus Group, internal audit services, spokesperson and public relations services, company secretary and information systems services, in the aggregate scope of 6.65 monthly full-time positions, in exchange for a quarterly consideration of NIS 636.5 thousand (linked to the CPI of May 2014), and the Company will also provide directors‟ services (except for external and independent directors) to Danya Cebus and/or a subsidiary of Danya Cebus whose shares are traded on the Tel-Aviv Stock Exchange or a foreign stock exchange, in exchange for payment of annual fee and a fee for participation in every meeting in which a director on behalf of the Company participates (hereinafter in this section – “the Management Agreement”). The Management Agreement entered into effect on July 1, 2014. The Management Agreement will remain in effect for 3 years, commencing from the date it entered into effect, where at the end of the period the Management Agreement will renew for additional periods of two years each, or a different period that will be agreed to between the parties, that does not exceed two years, and subject to receipt of approval of the General Meeting of the shareholders of Danya Cebus.

(2) As part of an agreement signed between the Company and Danya Cebus on February 9, 2000 and that was extended on February 17, 2005 (hereinafter – “the Agreement”), the Company committed, subject to certain exceptions provided: (1) to transfer to Danya Cebus, or to cause that a transfer will be made to Danya Cebus of execution of all the construction work (as defined in the Agreement) in projects wherein the share of the Company (or a company it wholly owns) is 100%, except if there is something preventing the transfer that does not depend on the Company, to transfer the construction work to Danya Cebus, as stated, and excluding where public companies are involved; and (2) that it will transfer or act to the best of its ability to see to transfer to Danya Cebus of work as stated above, in projects wherein the Company‟s share is less than 100% and/or that will be executed by companies wherein the share of the Company is less than 100%.

246

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

E. Agreements with Danya Cebus (Cont.)

(2) (Cont.)

Danya Cebus, from its side, committed to the Company (subject to the exceptions provided): (1) to execute the work transferred to it for execution as stated; (2) not to engage, whether by itself or through its subsidiaries, in real estate initiation transactions (as defined in the Agreement), except in cases as detailed in the Agreement. In cases wherein Danya Cebus will be permitted (whether by itself or through its subsidiaries) to engage in transactions as stated, the Company committed to provide and Danya Cebus committed to accept sales and marketing management services in consideration of a commission of 3% from the sales proceeds in the said project. It was further agreed, that if the Company waives its above-mentioned rights in such a manner that Danya Cebus will be permitted to enter into a real estate initiation transaction with respect to a rental property, the Company will provide sales, marketing and property maintenance management services, in exchange for 10% of the receipts from the sales or rentals in that project. The commitments of Danya Cebus to the Company, pursuant to the Agreement, as the date of the statement of financial position, subject to the exceptions provided, are for an unlimited period and may be cancelled by each of the parties by means of provision of notification three months in advance. In addition, provisions are set forth in the Agreement for cancellation in specific circumstances that will be fulfilled if Danya Cebus ceases to be a subsidiary of the Company.

The consideration to be paid by the Company to Danya Cebus in respect of execution of the construction work will be in accordance with the customary market conditions as they will be at the time of transfer of the work, as stated.

As part of the Agreement, Danya Cebus executes and is executing, from time to time, construction work for the Group companies, including Africa Residences and Africa Properties, public companies the securities of which are registered for trading on the stock exchange.

As at the date of the statement of financial position, a framework agreement between the parties, as stated, had not been signed, and most of the undertakings of Danya Cebus with the Group companies are brought for approval in accordance with the provisions of Part Five of Paragraph Six of the Companies Law.

(3) Based on an agreement signed between the Company and Danya Cebus in February 2000, the Company undertook to provide guarantees for the benefit of third parties in connection with work performed by Danya Cebus in the ordinary course of business, except for financial guarantees (guarantees for loans), based on the request of Danya Cebus, and provided that the total amount of the guarantees provided by the Company will not exceed NIS 60 million (linked to the Buildings Inputs Index – Index for December 1999). The guarantees will be for a period and on conditions that are customary in the industry in which Danya Cebus operates. Danya Cebus pays the Company a commission in respect of the said guarantees, at the rate of 0.3% per year of the total guarantees actually provided.

247

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

E. Agreements with Danya Cebus (Cont.)

(3) (Cont.)

The said agreement was extended automatically in February 2005 for an unlimited period, however each party will be entitled to cancel it upon provision of an advance notice of three months to the other party. The agreement contains provisions for its cancellation in a case where Africa Investments ceases to be its controlling shareholder. On September 14, 2011, the Company‟s Audit Committee determined that the agreement‟s time period, which is unlimited, is reasonable.

The total commissions to which the Company was entitled in 2013, 2014 and 2015 in connection with this agreement and for Project 431, amounted to about NIS 63 thousand, about NIS 58 thousand and about NIS 36 thousand, respectively.

(4) On August 24, 2015, Danya Cebus signed a loan agreement with the Company, whereby Danya Cebus will provide the Company a loan, in the amount of about NIS 170 million, for a period of 7 years, with interest terms identical to the interest terms provided in the Credit Agreement for the loans during a period of 7 years, as stated in Note 18F(7), which are to be repaid (principal and interest) in two equal payments. During August 2015, the Company received the full amount of the loan, as stated.

F. Agreements with Africa Properties

In November 2013, 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 in November 2013, and by the General Meeting of Africa Properties, pursuant to Section 275 of the Companies Law, on February 2, 2014.

Set forth below are the highlights of the agreement:

(1) 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 in the scope of 25% of a full-time position, 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.

248

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

F. Agreements with Africa Properties (Cont.)

(2) 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 182 thousand, linked to the rate of increase of the “known” CPI on the payment date compared with the CPI for January 2014.

In consideration for provision of the directors‟ 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.

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 834 thousand, linked to the rate of increase of the “known” CPI on the payment date compared with the CPI for January 2014.

(3) Period of the management agreement

Upon 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, 2014 (hereinafter – “the Effective Date”).

This agreement will remain in effect for a period of 3 years, commencing from the Effective Date, 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.

G. Agreements with AFI Development

(1) In April 2007, the Company signed an agreement with AFI Development whereby the Company committed to AFI Development:

(a) 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).

249

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

G. Agreements with AFI Development (Cont.)

(1) (Cont.)

(b) 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.

(c) The Company will not transfer new business opportunities to engage in activities as stated to any party or entity except AFI Development.

(d) 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.

The Activity Areas Agreement remained in effect for a period of seven years. In April 2014, this agreement expired.

(2) In March 2012, the Company signed a management agreement with AFI Development. This agreement was approved by the Board of Directors of AFI Development on March 18, 2012 and will enter into effect on April 1, 2012. Pursuant to the said agreement, the Company will provide, by itself and/or by means of any of its subsidiaries and officers, directors services (excluding outside directors) to AFI Development and/or the subsidiaries AFI Development that are traded on a foreign stock exchange, as well as additional services, including mainly internal audit services and business and economic consulting services.

In consideration for provision of the management services, AFI Development is to pay the Company an aggregate quarterly amount equal to US$395 thousand. The agreement is for one year with the possibility of extending it for an additional year each time, subject to approval of the Board of Directors of AFI Development. The said agreement was extended for an additional year in 2013 and in 2014.

The agreement was updated such that commencing from January 1, 2015 AFI Development will pay an aggregate amount of US$316 thousand per year. On March 17, 2016, the amount was reduced to US$150 thousand, commencing from January 1, 2016.

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.

250

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

H. Management services agreement with Memorand (Cont.)

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. Upon completion of the arrangement, as described in Note 1C, payment of the management fees are being made regularly.

On September 13, 2011, the General Meeting of the Company‟s shareholders approved and ratified the Company‟s undertaking with Memorand in the management services agreement for an additional period of 3 years commencing from September 15, 2011.

In September 2014, the General Meeting of the Company‟s shareholders approved the Company‟s undertaking with Memorand in the management services agreement for an additional period of 3 years commencing from September 15, 2014.

251

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

I. Consulting services agreement and options‟ plan for Mr. Nadav Grinshpon

In July 2008, the General Meeting of the shareholders approved amendment of a consulting services agreement (hereinafter – “the Services Agreement”) from April 2008 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‟s CEO and its 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.

In August 2014, the General Meeting of the Company‟s shareholders approved the Company‟s undertaking in an addendum to the Services Agreement with the Deputy Chairman of the Company‟s Board of Directors (hereinafter – “the Updated Services Agreement”). Pursuant to the Updated Services Agreement, the scope of the services will not be less than 140 monthly hours and the consideration for the services will be NIS 126.8 thousand per month, plus VAT as per law (hereinafter – “the Updated Consideration”). The Updated Consideration includes base consideration of NIS 114 thousand plus additional consideration relating to preparation for and participation in meetings of the Board of Directors, in the amount of NIS 12.8 thousand per month. The consideration will be linked to the rate of increase of the CPI “in respect of” May 2014. In addition, Nadav will be entitled to an annual bonus, a vehicle and reimbursement of various expenses.

As stated above,

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.

252

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

J. Employment agreements (Cont.)

(1) (Cont.)

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.

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.

Regarding options received by Tzvia – see Note 33C(1)(b).

(2) In July 2012, the Company‟s Board of Directors approved the appointment and employment conditions of the new CEO (hereinafter – “the CEO”), who commenced his service with the Company in July 2012. The new CEOs employment conditions include, among others, a monthly salary of NIS 110,000 (linked to the CPI) and accompanying benefits, plus entitlement to an adaptation bonus equal to 4 salaries to be paid upon completion of his employment. In addition, the Company committed to act to make a decision within its corporate institutions in order to grant the new CEO options exercisable for 1,007,533 of the Company‟s ordinary shares, which will be granted in 3 equal portions, where each year one portion will vest, commencing from the effective date (as at the approval date of the statement of financial position the effective date had not yet been determined), where every portion will be exercisable during a period of 12 months from its vesting date.

The CEO will not be entitled to receive the shares as stated above but, rather, only the number of shares reflecting the benefit component deriving to him from exercise of the options based on the difference between the average closing price of a Company share on the stock market in the 30 trading preceding the exercise date multiplied by the said number of shares deriving from the options with respect to which notification of exercise was given, and the exercise price as stated below (hereinafter – “the Benefit Component”) multiplied by the said number of options.

The exercise price of each option is NIS 24.76. The CEO will not pay the exercise price used for calculating the Benefit Component but, rather, only the par value of the shares issued to him.

253

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

J. Employment agreements (Cont.)

(2) (Cont.)

The right of the CEO to exercise the options granted to him, as stated above, is contingent on his being an employee of the Company or of a company controlled by the Company on the exercise date. In a case termination of the employer-employee relationship between the CEO and the Company or the company controlled by the Company, for whatever reason, the options will expire and will have no validity whatsoever. That stated above is subject to usual exceptions to be provided as part of the options‟ plan for the CEO. As at the approval date of the statement of financial position, the said options had not yet been issued to the CEO. As part of the Agreement, a non-competition commitment was imposed on the CEO for a period of 6 months after conclusion of his employment, as well as confidentiality requirement unlimited as to time.

(3) In November 2012, the Board of Directors AFI Development appointed Mr. Lev Leviev, Chairman of the Company‟s Board of Directors, who presently also serves as the Chairman of the Board of Directors of AFI Development, to serve as the Executive Chairman of AFI Development. As part of this position, Mr. Leviev will be responsible for the strategic management of AFI Development and will lead the main negotiation processes with the authorities in the areas of AFI Development‟s activities, as well as with AFI Development‟s partners in transactions having strategic importance. As part of his new position, Mr. Leviev will be entitled to an administrative remuneration package, the same as for every member of AFI Development‟s management. In this framework, Mr. Leviev was granted options, as detailed in Note 33C(1)(c). In addition to the options Mr. Leviev will be entitled to a monthly salary of U.S$100 thousand.

(4) On July 11, 2013, the Company‟s Board of Directors approved, after receiving approval of the Audit Committee, the undertaking of Africa USA, in an agreement for provision of management services with Ms. Chagit Sufeib Leviev (hereinafter – “Chagit”), the daughter of Mr. Lev Leviev, the Company‟s controlling shareholder, whereby Chagit will provide as an independent contractor, general management services to Africa USA (including companies it controls), in the scope of one-half of a full-time position, without any consideration and/or remuneration being paid to her in respect of provision of the services as stated (hereinafter – “the Employment Decision” and “the Management Services”, respectively). Chagit‟s employment is for an undefined period and may be brought to an end by either of the parties by means of an advance notice of at least 30 days. The validity of the Employment Decision is for three years from the date of its approval.

254

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

J. Employment agreements (Cont.)

(5) On November 29, 2015, the Company‟s Board of Directors approved (after receiving the approval of the Company‟s Remuneration Committee) the undertaking of AFI USA with LGC USA Holdings Inc., a company wholly-owned by Mr. Lev Leviev, the Company‟s controlling shareholder (hereinafter – “the Management Company”), in a management services agreement, whereby Ms. Chagit Sofiev-Leviev (hereinafter – “Chagit”), the daughter of Mr. Lev Leviev, will provide management services to AFI USA (hereinafter – “the Management Services”), as part of her service as the CEO of AFI USA (including companies it controls), in the scope of about 90 monthly hours, in consideration of an aggregate monthly payment of US$10 thousand (including proportionate participation in various costs involved with provision of the Services, in the amount of US$3 thousand) (hereinafter – “the Services Agreement”), for a period of 3 years, commencing from January 1, 2016.

In addition, the Company‟s Board of Directors approved (after receiving the approval of the Company‟s Remuneration Committee) that the Company‟s liability for indemnification of directors and officers of the Company, which was approved by the General Meeting of the Company‟s shareholders on January 4, 2012, will also apply with respect to Chagit, who will be included together with the Management Company through which Chagit provides AFI USA the Management Services as part of the definition of the term “Officers”.

On January 5, 2016, the decisions detailed above were approved by the General Meeting of the Company‟s shareholders.

K. Agreements with Africa Residences

(1) 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. The trademark was defined as trade symbols in respect of the Company‟s logo and the “Savyonim” trade mark, with all their versions and forms, which are registered in the Company‟s areas of activity in June 2006. This agreement entered into effect upon registration of Africa Residences‟ shares for trading on the stock exchange (in June 2006).

(2) 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, where in some of them the Company has rights in land and in some of them the Company does not have rights in land (hereinafter – “the Experts Project Management Agreements”), all in accordance with the terms and the consideration as detailed in the Experts Project Management Agreements. Africa Residences committed to accept full assignment of all the Company‟s rights and liabilities pursuant to the Experts Project Management Agreements.

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

K. Agreements with Africa Residences (Cont.)

(2) (Cont.)

It was further provided that if for any reason it is not possible to assign and/or transfer to Africa Residences all the Company‟s rights and/or liabilities under the Experts Project Management Agreements and/or part of the rights and/or liabilities, Africa Residences shall fulfill all the Company‟s obligations that may not be assigned and shall be entitled to all the Company rights that may not be assigned, on “back-to-back” conditions.

The agreement for assignment of rights in project management agreements entered into effect in June 2006, upon registration of Africa Residences‟ shares for trading on the stock exchange.

(3) On October 8, 2015, the General Meeting of the shareholders of Africa Residences approved (after receiving the approval of its Audit Committee and Board of Directors), the undertaking of Africa Residences in an agreement for provision of registration services, planning and zoning advancement services, economic services and engineering services (hereinafter – “the Services”) to the Company, this being in place of the present services agreement, in light of the Company‟s announcement of its intention to conclude the present services agreement and need to conform the content and extent of the services to its current needs. The Services will be provided to the Company by employees of the Urban Planning Scheme and Land Registration Division, employees of the Economic Department and an employee of the Engineering Department of Africa Residences.

The agreement will remain in effect for a period of five years from July 1, 2015. At the end of the period, the agreement will renew for additional periods of two years each, or a different period that is agreed upon by the parties, which does not exceed two years, subject to receipt of the approval of the General Meeting of the shareholders of Africa Residences, in accordance with the provisions of Section 275 of the Companies Law.

In consideration for the registration services, Africa Residences will be entitled to the annual amount of NIS 402 thousand (plus VAT), which will be reduced taking into account the scope of the said services.

In consideration for the planning and zoning advancement services, Africa Residences will be entitled to the annual amount of NIS 105 thousand (plus VAT), which will be reduced taking into account the scope of the said services.

In consideration for the economics services, Africa Residences will be entitled to the annual amount of NIS 111 thousand (plus VAT).

In consideration for the engineering services, Africa Residences will be entitled to the annual amount of NIS 61 thousand (plus VAT).

256

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

K. Agreements with Africa Residences (Cont.)

(4) In June 2006, a project management agreement was signed between the Company and Africa Residences (hereinafter – “the Project Management Agreement”) pursuant to which the Company committed to transfer to Africa Residences the management of two projects (“New Savyon”, in Savyon and “Kiryat Hasavyonim”, in Yehud) that are located on land regarding which the Company is the rights‟ owner and regarding which on the signing date of the Project Management Agreement there were no other project management agreements (hereinafter – “the Projects”). This Project Management Agreement entered into effect upon registration of Africa Residences‟ shares for trading on the stock exchange (in July 2006) (hereinafter – “the Effective Date”). It was determined that the Company will not be entitled to any consideration in respect of the mere transfer of management of the Projects to Africa Residences, as stated. As part of the Project Management Agreement, Africa Residences committed to provide to Africa Investments, by itself and/or through its subsidiaries and/or through service providers on its behalf, project management services for each of the Projects as detailed below (hereinafter – “the Management Services”): management of the planning and execution of the Project for the Company, which will include the activities detailed in the body of the agreement; it was agreed that Africa Residences will provide for the benefit of the Project an engineer and/or an architect that will manage the Project accompaniment, planning and execution of the Project, as stated above, in the scope of a full-time position (i.e., in the number of hours per month) that will be determined by Africa Residences, in its discretion.

It was further clarified that Africa Residences will not provide on-site supervision services and that such services are to be provided by an external supervision office, the fee of which is not included in the consideration pursuant to the agreement. Africa Residences will manage the marketing and sales activities in connection with the residential units and/or the lots included in the Project (hereinafter – “the Project Units”) on behalf of and for the Company. Management of the Project‟s monies will be executed by Africa Residences and will include the activities detailed in the body of the agreement. Africa Residences will perform the Project “Housing Company” services and will manage the registration, as detailed in the body of the agreement. In consideration for the Management Services, 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 Project Units commencing from the Effective Date (as defined above) plus VAT (hereinafter – “the Consideration”). The Consideration is to be paid to Africa Residences on a quarterly basis, this being within 45 days after the end of the three months in respect of which the Consideration is due. The first period for which the Consideration was paid (proportionately) is the period that commenced on the Effective Date, (as defined above) and ended at the end of that calendar month.

257

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

K. Agreements with Africa Residences (Cont.)

(4) (Cont.)

It was provided between the parties that the Consideration does not include the expenses and/or the costs, which are detailed below and that are to be borne by the Company and paid by it: fees of advisors and planners that will be hired for purposes of the Project and their expenses; coordination and supervision expenses and/or the fees of the coordinator and the supervisor that will be hired for purposes of the Project; expenses and commissions of sales persons and costs of outside brokers and marketers that will be hired for purposes of the Project; all the advertising costs and the costs of constructing and maintaining the sales‟ office, a model apartment, etc. It was provided that Africa Residences will be permitted to transfer its rights and obligations for provision of the Management Services in the Projects, in whole or in part, to companies in the group, including to subsidiaries and related companies, with no limitation. In any case of a transfer, as stated, by Africa Residences, the transferee will undertake the obligations and the rights of Africa Residences under this agreement. It was agreed that the Company will not be permitted to transfer its rights and obligations for transfer of the Management Services in the Projects to any third party.

(5) In March 2015, the Company‟s Board of Directors and the Board of Directors of Africa Residences approved sale of the Company‟s rights (40% of the issued and paid-up share capital) in one of the Properties (Afriram Ltd.) (hereinafter – “Afriram”) and the rights of Africa Investments in a loan it granted to Afriram, to Africa Residences. Afriram is the company that holds the ownership right in 37.5% of a parcel on an area measuring about 11 dunams (the share of Afriram is about 4 dunams), which is located on Ben-Saruk St. in Tel-Aviv and that is known as the “Sumail” complex and is zoned for residential and commercial use. Afriram will act (together with others) to construct residential units and commercial areas on the site, where Afriram will be entitled to about 93 residential units and about 1,530 square meters of commercial space. It is noted that Africa Residences has rights in the “Sumail” complex by force of its holdings in Ram-Nach Ltd. and Sumail Towers Ltd.

During April 2015, after receipt of approval of the General Meeting of the shareholders of Africa Residences, the undertaking was completed, for a consideration in the amount of about NIS 40.3 million.

(6) On March 7, 2016, the Audit Committee of Africa Residences appointed an outside appraiser on its behalf, for purposes of examining the possibility of acquiring the lease rights (which are capitalized with reference to the construction rights only) of the Company in the “Country” complex in the Savyon community, on an area measuring about 39 dunams, including a built-up country area of about 1,860 square meters and a vacant area zoned for commercial use measuring about 10 dunams; lots in Ma‟abuot Savyon zoned for agricultural use, on an aggregate area of about 25 dunams and the areas adjacent to them zoned for agricultural processing of about 20 dunams; land zoned for agricultural use adjacent to the Savyon intersection, on an area measuring about 58 dunams (of which about 11.5 dunams is designated to be turned into a road).

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Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

K. Agreements with Africa Residences (Cont.)

(6) (Cont.)

It is clarified that at this preliminary stage, there is no certainty in connection with execution of the transactions, in whole or in part, due to, among other things, not reaching agreement regareding the terms of the transactions and/or as a result of findings of due diligence examinations being conducted by Africa Residences and/or a failure to receive approvals and/or consents from third parties and/or the planning situation.

L. Management agreement with Africa Industries

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 to the CPI. 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 also 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 is in effect commencing from April 1, 2011 for a period of 3 years.

259

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

L. Management agreement with Africa Industries (Cont.)

In March 2014, the Company signed a new agreement 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/or to its public subsidiaries (hereinafter – “the Directors‟ Services”); and (b) current ongoing consulting services with respect to current and strategic business transactions (business development) of the Africa Industries group, and internal audit, spokesperson, public relations and company secretariat services, in an aggregate amount of 1.5 full-time monthly positions (hereinafter – “the Management Services”). In consideration for provision of the Directors‟ Services, Africa Industries pays 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 (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).

In exchange for the management services, Africa Industries will pay the Company a quarterly payment in an amount equivalent to NIS 172 thousand, linked to the CPI. The management agreement is in effect commencing from April 1, 2014 for a period of 3 years.

M. Contracting agreements between Danya Cebus and the Group companies

Danya Cebus, which serves as a performance contractor, enters into contracting agreements, from time to time, with the Group companies, including the Company, Africa Properties, AFI Europe, Africa Residences, AFI Development, Africa Industries and Negev Ceramics, whereby Danya Cebus performs contracting work including planning, supply, construction, finishing and operation, as applicable.

In addition, in certain situations, Danya Cebus also provides the Group companies loans used as shareholders‟ equity by those companies in the projects.

It is noted that the intercompany balances and profits deriving from the transactions described above are accounted for in accordance with that stated in Note 3A(9) above regarding intercompany transactions within the Group.

In 2015, the aggregate scope of the projects wherein Danya Cebus has contracted with the Group companies amounted to about NIS 202,708 thousand (2014 – NIS 517,002 thousand).

260

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 37 – Related and Interested Parties (Cont.)

N. The Company‟s controlling shareholder signed, by means of companies he controls, three lease agreements for lease of areas in the AFIMALL shopping mall, with an aggregate scope of about 1,435 square meters, for periods of five to ten years, the annual monetary scope of which, on a cumulative basis, in 2015, amount to about U.S.$820 thousand.

During 2015, the Board of Directors of AFI Development approved provision of discounts or leniencies with respect to the rental terms in the shopping mall to companies controlled by the controlling shareholder, this being after examining the lease terms of other tenants in the shopping mall, the situation of the leases in the shopping mall and in the market in general, and taking into account that the discounts and/or leniencies are granted in the ordinary course of business of AFI Development.

O. Regarding acquisition of shares in issuances in the years 2010-2014 by the controlling shareholder – see Note 1C(2)(a), above.

261

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments

The Group has eight reportable segments, as detailed below, which constitute strategic business units. These strategic business units include a range of activities, products and services that are managed separately.

Set forth below are the Group‟s reportable segments as at the date of the statement of financial position:

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 Central and 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 Central and Eastern Europe.

D. 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.

E. Construction contracting – performance of construction for residential and non-residential purposes.

F. 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).

G. Steel products in Israel – includes processing and marketing tin and steel products, profiles and pipelines, trade in aluminum and nierusta, protection against corrosion, running of steel poles, trade in special steel and steel tools, manufacture and marketing of incubators, communications‟ encasements and steel lighting stanchions.

H. Home design – this products group includes import, marketing and sale of ceramic and porcelain products, along with end products, plus manufacture of porcelain tiles and coverings and additional products for residential construction, renovation and design for casual customers, residential projects, contractors, merchants and foreign customers.

Other activities include operation of hotels, development and real estate and rental properties in the United States and other activities. These activities are not recognized as reportable segments.

262

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments (Cont.)

In light of completion of the sale of a significant part of the assets and activities relating to development of real estate and rental properties in the United States in recent years, which is an activity segment, the activities in the United States no longer constitute a reportable activity segment. In light of that stated above, the Company reclassified in the Note on activity segments detailed below, the development of real estate and rental properties in the United States activities to other segments for annual periods for the years ended December 31, 2015, 2014 and 2013.

Set forth below is data regarding the development of real estate and rental properties in the United States segment that was reclassified in the financial statements to other segments:

For the year ended December 31, 2013 NIS Thousands

Total revenues from outside sources 90,275 Segment results (23,363) Equity losses (28,199) Loss of segment before taxes (51,562) Taxes on income (321) Financing income 2,224 Financing expenses (16,371) Depreciation and amortization 737 Restoration of value to inventories of buildings held for sale and inventories of real estate 9,410

At December 31, 2013 NIS Thousands

Segment assets 436,434 Investments in investee companies 139,697 Loans to investee companies 9,858 Segment liabilities 113,034

Information regarding the activities of the reportable segments is presented in the following table. 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.

263

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments (Cont.)

A. Information regarding reportable segments

For the year ended December 31, 2015 Residen- Infra- Adjust- Central Rental tial struct- Constr- ments and property property ure uction Unallo- to Eastern in in contr- contr- Home Other Inter- cated consol- Consol- Russia Europe Israel Israel acting acting Steel design segments segment amounts idated idated In thousands of New Israeli Shekels

Total income from outside parties 363,737 310,724 93,081 775,811 317,356 2,083,373 920,469 800,422 402,109 – 90 (383,818) 5,683,354

Income from inter-segment sales – – – – – 483,724 69,746 31,156 2,462 (587,088) – – –

Segment results (2,144,338) 256,942 30,041 113,975 32,988 25,045 (14,020) (118,726) (64,696) 50,131 (743,895) 2,509 (2,574,044)

Equity income (loss) (5,074) (26) 13,650 (4,597) 1,166 – 487 (3,474) 28,275 – 18,592 (12,727) 36,272

Segment income (loss) before taxes (2,149,412) 256,916 43,691 109,378 34,154 25,045 (13,533) (122,200) (36,421) 50,131 (725,303) (10,218) (2,537,772)

Taxes on income 350,412 (55,831) (14,622) (23,094) (700) (19,208) (495) (7,763) 1,723 – (738) 4,715 234,399

Financing income 17,476 1,992 1,630 9,606 (247) 11,621 35 31 2,677 – 14,508 (2,677) 56,652

Financing expenses (609,450) (175,827) (33,630) (26,004) 394 3,033 (27,031) (4,553) (35,102) – (763,418) 25,204 (1,646,384)

Other significant non-cash items:

Depreciation and amortization 3,745 2,389 223 2,990 3,625 19,435 20,260 79,516 28,129 – (1,909) (27,153) 131,250

Revaluation of investment property, net (1,288,553) 231,788 11,914 – – – – – (3,745) – – 3,745 (1,044,851)

Revaluation of investment property under construction (383,251) 6,788 (14,345) – – – – – – – – – (390,808)

Decline in value of inventory of buildings held for sale and inventory of land (49,435) (26,304) – – – – – – – – – – (75,739)

Segment assets at 12/31/2015 5,898,526 5,871,561 1,849,256 3,432,324 121,489 563,317 1,246,244 1,141,746 1,098,466 (466,064) 1,413,261 (748,360) 21,421,766

Investment in investee companies – (1,338) 91,545 (28,924) 44,557 – 11,453 (6,608) 722 – 49,247 138,837 299,491

Loans to investee companies 55,588 69,928 47,979 162,644 26,992 – – 2,933 15,230 – 34,986 – 416,280

Segment liabilities at 12/31/2015 2,808,828 3,007,658 2,037,564 2,824,754 156,333 865,590 991,475 1,143,159 961,029 (253,093) 3,543,121 (581,646) 17,504,772

264

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments (Cont.)

A. Information regarding reportable segments (Cont.)

For the year ended December 31, 2014 Residen- Infra- Adjust- Central Rental tial struct- Constr- ments and property property ure uction Unallo- to Eastern in in contr- contr- Home Other Inter- cated consol- Consol- Russia Europe Israel Israel acting acting Steel design segments segment amounts idated idated In thousands of New Israeli Shekels

Total income from outside parties 514,680 458,735 94,000 555,193 451,540 1,654,009 1,000,906 *782,236 555,205 – 620 (358,634) 5,708,490

Income from inter-segment sales – – – – – 426,877 69,780 28,737 3,494 (528,888) – – –

Segment results (1,191,457) 363,602 40,122 86,982 24,785 24,875 (19,719) *(35,811) (49,644) (21,877) (334,977) 20,829 (1,092,290)

Equity income (loss) (16,877) (4,681) 5,428 (2,141) 1,342 – 123 (195) (6,183) – 26,085 (17,962) (15,061)

Segment income (loss) before taxes (1,208,334) 358,921 45,550 84,841 26,127 24,875 (19,596) (36,006) (55,827) (21,877) (308,892) 2,867 (1,107,351)

Taxes on income 147,487 (55,966) (43,990) (26,260) – (5,325) (3,595) *(2,294) 4,640 – (1,256) 1,464 14,905

Financing income 25,138 167,219 2,191 20,887 1,083 11,208 575 343 2,558 – 26,773 (249) 257,726

Financing expenses (1,021,966) (204,543) (41,224) (30,086) (688) 147 (25,672) (4,393) (45,484) – (402,160) 29,810 (1,746,259)

Other significant non-cash items:

Depreciation and amortization 5,705 2,374 250 2,383 4,636 15,782 9,344 35,442 28,198 – 37,230 (26,531) 114,813

Revaluation of investment property, net 406,460 161,044 4,511 – – – – – – – (1,278) – 570,737

Revaluation of investment property under construction (767,098) 13,668 2,012 – – – – – – – 674 – (750,744)

Decline in value of inventory of buildings held for sale and inventory of land (28,956) (12,193) – – – – – – – – – – (41,149)

Segment assets * at 12/31/2014 8,361,644 5,981,341 1,904,798 3,014,884 172,645 419,266 1,311,227 1,300,095 1,240,567 (246,589) 1,408,820 (782,605) 24,086,093

Investment in investee companies – 38 77,895 (10,490) 40,833 – 11,469 (3,067) 134,610 – 33,455 144,259 429,002

Loans to investee companies 69,854 63,140 46,825 123,767 32,572 – – 2,086 12,950 – 92,262 – 443,456

Segment liabilities * at 12/31/2014 3,370,576 3,183,002 1,713,377 2,513,385 150,820 709,082 1,042,504 1,171,762 987,989 (227,386) 3,631,477 (616,125) 17,630,462

* Restated – see Note 2F above.

265

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments (Cont.)

A. Information regarding reportable segments (Cont.)

For the year ended December 31, 2013 Residen- Infra- Adjust- Central Rental tial struct- Constr- ments and property property ure uction Unallo- to Eastern in in contr- contr- Home Other Inter- cated consol- Consol- Russia Europe Israel Israel acting acting Steel design segments segment amounts idated idated In thousands of New Israeli Shekels

Total income from outside parties 733,855 353,365 84,672 774,211 409,693 1,663,456 1,133,955 *840,393 484,753 – 744 (376,866) 6,102,231

Income from inter-segment sales – – – – – 437,675 42,864 38,461 – (519,000) – – –

Segment results 491,037 191,985 64,179 65,286 12,297 8,979 27,153 *975 (43,252) (32,685) (438,684) (2,418) 344,852

Equity income (loss) (2,943) (13,717) 7,924 (5,553) 4,692 – 832 (547) (24,682) – 16,090 (6,999) (24,903)

Segment income (loss) before taxes 488,094 178,268 72,103 59,733 16,989 8,979 27,985 428 (67,934) (32,685) (422,594) (9,417) 319,949

Taxes on income (112,904) (50,148) (18,427) (17,172) – (3,122) (527) (242) 2,346 – (306) 119 (200,383)

Financing income 75,685 4,187 7,890 22,330 771 11,482 98 972 4,741 – 11,995 (1,869) 138,282

Financing expenses (459,135) (190,384) (52,740) (44,326) (587) (1,323) (30,763) (5,813) (55,724) – (464,925) 26,680 (1,279,040)

Other significant non-cash items:

Depreciation and amortization 6,768 1,621 586 1,649 2,921 15,052 18,024 29,405 28,711 – 1,057 (26,277) 79,517

Revaluation of investment property, net 163,756 170,449 51,335 – – – – – – – (742) – 384,798

Revaluation of investment property under construction 228,624 (9,270) (559) – – – – – – – 1,981 – 220,776

Reversal (decline) in value of inventory of buildings held for sale and inventory of land (7,466) (52,057) – – – – – – 9,410 – – – (50,113)

Segment assets * at 12/31/2013 9,629,338 6,272,533 1,728,426 2,614,661 138,940 527,592 1,181,807 1,228,104 1,503,944 (110,068) 690,855 (822,027) 24,584,105

Investment in investee companies 19,281 (1,934) 72,467 (11,085) 36,704 – 7,909 (2,867) 139,697 – 11,979 156,615 428,766

Loans to investee companies 74,411 66,651 44,372 130,206 38,414 – – 821 9,858 – 90,994 – 455,727

Segment liabilities * at 12/31/2013 3,658,202 3,609,618 1,582,048 2,166,014 144,499 594,095 917,523 1,061,488 1,021,269 (86,809) 3,288,066 (641,759) 17,314,253

* Restated – see Note 2F above.

266

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 38 – Activity Segments (Cont.)

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 2015 2014 2013 NIS Thousands

Revenues from Outsiders Russia 375,573 601,874 790,230 Central and Eastern Europe 645,971 668,893 535,838 Israel 4,846,918 *4,574,656 *5,050,267 Other 198,710 221,701 102,762 Adjustments (383,818) (358,634) (376,866) Consolidated 5,683,354 5,708,490 6,102,231

At December 31 2015 2014 NIS Thousands

Non-Current Assets** Russia 4,789,884 7,305,364 Central and Eastern Europe 4,982,265 5,235,913 Israel 4,563,794 4,630,951 Other 28,254 9,126 Adjustments (662,014) (773,484) Consolidated 13,702,183 16,407,870

* Restated – see Note 2F above. ** Non-current assets include property, plant and equipment, intangible assets, inventory of lands, investment property and investment property under construction.

267

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 39 – Events Occurring Subsequent to the Date of the Statement of Financial Position

A. For details regarding an undertaking of the Company with Netz Hotels Ltd. (hereinafter – “the Subsidiary”) in revision of an agreement for sale of shares of Africa Israel Hotels Ltd. to which the Company is a party, whereby the Company and Netz Hotels reached new agreements with respect to the commitment to acquire 50% of the balance of the shareholders‟ loan the Company provided to Africa Israel Hotels Ltd. – see Note 4G(3).

B. For details Orders received in the offices of a subsidiary on January 24, 2016 for payment of tax assessments issued to the subsidiary for the years 2009 through 2012, in the aggregate amount of about NIS 70 million (including linkage differences and interest) – see Note 30E(2).

C. On January 5, 2016, Midroog Ltd. gave notice of a reduction of the rating of the Company‟s outstanding debentures (Series Z, ZA and ZB) (hereinafter – “the Company‟s Debenture Series”) from a rating of Baa2 with a negative rating outlook to Ba1 also with a negative rating outlook.

As a result, the Company updated the interest rate on the debentures (Series ZB), pursuant to Section 4.5 of the First Addendum of the trust indenture of the debentures (Series ZB), as follows:

1. Commencing from the beginning of the next interest period, on March 1, 2016, additional interest, at the rate of 0.5%, will be added to the annual interest rate on the principal balance of the debentures (Series ZB).

2. The updated annual interest rate (after the additional interest rate as stated above) to be borne by the principal balance of the debentures (Series ZB) commencing from March 1, 2016 will be 6.7% (hereinafter – “the Updated Interest Rate”), and the updated semi-annual interest rate to be borne by the principal balance of the debentures (Series ZB) commencing from March 1, 2016 will be 3.35%.

3. The Updated Interest Rate on the debentures (Series ZB) will remain in effect up to full repayment of the unpaid principal balance of the debentures (Series ZB) or until there is a change in rating of the debentures (Series ZB).

4. In respect of the interest period ending on February 29, 2016, no additional interest was paid.

Regarding the Company‟s debentures (Series Z and ZA), there will be no change in the interest rates due to reduction of the rating detailed above.

D. For details regarding approval by the General Meeting of the Company‟s shareholders, on January 5, 2016, of the undertaking of AFI USA with LGC USA Holdings Inc., a company wholly owned by Mr. Lev Leviev, the Company‟s controlling shareholder, in a management services agreement – see Note 37J(5).

E. For details regarding a proposed interim framework with the holders of the debentures for the period up to November 17, 2016 – see Note 1B(3) above.

268

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 39 – Events Occurring Subsequent to the Date of the Statement of Financial Position (Cont.)

F. For details regarding a decision of the Board of Directors of Africa Residences in March 2016 to distribute a dividend to the holders of the ordinary shares – see Note 4C(7).

G. During February 2016, a wholly-owned subsidiary of Africa Properties signed an agreement with a third party that is not related to Africa Properties, for sale of all of its rights in a real estate property in the “Global Park” high-tech and offices project in Lod, in consideration of the amount of about NIS 195.8 million. The transaction is contingent on obtaining approval of the Antitrust Authority (the Restrictive Business Practices Authority), which was ultimately received in March 2016. Accordingly, as at the date of the statement of financial position, Africa Properties classified the property in the category “assets held for sale”. In addition, in the fourth quarter of 2015, Africa Properties revalued the property, in the amount of about NIS 5.6 million. Africa Properties anticipates that upon completion of the transaction, the free after-tax cash flows that will be created for it will amount to about NIS 160 million. Africa Properties does not expect to record a significant gain or loss in respect of completion of the transaction.

H. Further to that stated in Note 18E(2)(a)iii, during February 2016, Africa Properties made an expansion of the debentures (Series F) whereby Africa Properties raised the gross amount of about NIS 165 million against issuance of NIS 161.376 million par value debentures. At the same time, Africa Properties placed a sole and first-priority lien in favor of the trustee for the debentures (Series F) on 15,862,186 ordinary shares of €0.01 par value each of AFI Europe, a private company that is wholly owned by Africa Properties, such that the total number of pledged shares was 32,550,000 ordinary shares of €0.01 par value each of AFI Europe.

In addition, Africa Properties released lien in favor of the trustee for the debentures (Series E) on 20,332,185 ordinary shares of €0.01 par value each of AFI Europe such that the total number of pledged shares after the release was 41,850,000 ordinary shares of €0.01 par value each of AFI Europe.

I. During February 2016, Danya Cebus became aware that the Antitrust Authority (the Restrictive Business Practices Authority) is conducting an investigation of Danya Cebus and of a number of employees and managers of Danya Cebus. As part of the investigation, documents have been collected from Danya Cebus and a number of managers and employees have been interrogated.

J. For details regarding completion of a transaction for acquisition of land in the City of Barashov in Romania during March 2016 – see Note 4A(3)(d) above.

K. For details regarding approval of the Law for Revision of the Income Tax Ordinance, 2016, in January 2016 – see Note 30A(1).

L. For details regarding completion of a transaction for sale of the rights of a Polish subsidiary of AFI Europe in a commercial center in Krakow in January 2016 – see Note 4A(3)(f).

M. For details regarding a waiver letter received by Africa Industries during March 2016 in connection with a private loan agreement with two institutional entities – see Note 4D(6).

269

Africa Israel Investments Ltd. Notes to the Consolidated Financial Statements At December 31, 2015

Note 39 – Events Occurring Subsequent to the Date of the Statement of Financial Position (Cont.)

N. For details regarding appointment of an outside appraiser by the Audit Committee of Africa Residences during March 2016, for purposes of examining the possibility of acquiring the lease rights of the Company in a number of areas in the Savyon community and adjacent thereto – see Note 37K(6).

270

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. (37) 100 100 Cebus Rimon Industrial Construction Ltd. (18) 100 100 Forma Projects Ltd. (18) 100 100 Yovelim Personnel Ltd. (18) 100 100 Danya Cebus Personnel Ltd. (18) 100 100 Alum Danya Ltd. (18) 100 100 Danya Sela Ltd. (4) (45) 50 50 Danya Cebus Holdings U.S. Inc. (18) 100 100 Danya Cebus Development LLC (49) 100 100 Danya Cebus Construction LLC (49) 100 100

Industry, Trade and Communications Africa Israel Trade & Agencies Ltd. 100 100 Africa Israel Industries Ltd. (3) 72.96 72.96 Packer Construction Iron – Limited Partnership 100 100 Packer Plada Industries Ltd. (9) 100 100 Negev Ceramics Ltd. (9) 100 100 Orgal ALP (2007) Ltd. (93) 100 100 Via Arkadia Home Design Ltd. (93) 100 100 Super Ceramics Home Finishing Products – Limited Partnership (69) 100 100 H.C.J.J. Construction Products Marketing Ltd. (93) 100 100 Negev Home Design Ltd. (93) 100 100 Negev Ceramics Marketing (1982) Ltd. (93) 100 100 Maklef 51 Ltd. (48) 50 50 Negev Ceramics Marketing Nazareth Ltd. (48) 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. (85) 37.5 37.5 Packer Quality Metals Ltd. (60) 100 100 Packer YDPZ Profiles Ltd. (60) 100 100 Packer YDPZ Profiles Marketing Ltd. (47) 100 100 Packer YDPZ Galvan Works Ltd. (60) 100 100 Negev Romania S.R.L. (48) 99.8 99.8 Koa Gas LLC (51) 100 100 Packer YDPZ Investments Ltd. (60) 100 100 Contact Ziwad Electronics Ltd. (43) 50 50 Packer Plada Investments (1963) Ltd. (9) 100 100 Earlsfield Steels Limited (9) 100 100 N. Packer Ltd. (9) 100 100 Packer Plada Financing and Issuances (1982) Ltd. (42) 100 100 Imku YDPZ Industries Ltd. (60) 100 100 Mapal Communications Ltd. (2) (68) 17 17 Africa Israel Communications Ltd. 50.1 50.1 Packer Plada Trading (1981) Ltd. (9) 100 100 Fortswell Trading Limited (9) 100 100 International S.R.L. Yamko (50) 100 100

271

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Real Estate Development Africa Israel Residences Ltd. (3) (6) (18) 74.22 74.22 E.M.T. Nevei Savyon Ltd. (4) 33 33 Africa 38 Ltd. (formerly – Danya 38 Ltd.) (75) 100 100 Afriram Ltd. (22) 40 40 Mishtalot Savyon Ltd. (2) 21 21 New Givat Shmuel Ltd. (4) (22) 50 50 P.A. Development and Construction in Jerusalem Ltd. (4) (22) 50 50 Sumail Towers Ltd. (4) (22) 50 50 Ram-Nach Ltd. (75) 57.5 57.5 Tzvi Yaakov & Co. Ltd. (75) 100 100 Madan Carmel Ltd. (75) 100 100

Rental Properties Africa Israel Properties Ltd. (3) (6) 56 56 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. (4) 49 49 Netzer Nesharim Ltd. (28) 100 100 AFI Europe (Israel Branch) (89) 100 100 M.S.A. Efrat Investments Ltd. (80) 100 100 D.B.M. Harel Investments (2006) Ltd. (80) 100 100 Lev Talpiot Management and Maintenance Ltd. (27) 40 40

Financing Africa Israel (Finance) 1985 Ltd. 100 100 Bat Savyon Ltd. 100 100 Africa Israel Investments House Ltd. 100 100 Africa Israel Mutual Funds Management Ltd. (92) 100 100 Africa Israel Investments Portfolio Management Ltd. (92) 100 100

Hotels Africa Israel Hotels Ltd. (4) 50 50

272

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Infrastructures + BOT Israel Canada Express Road Management Ltd. (2) 21.58 21.58 Derech Eretz Highways Management Corporation Ltd. (2) (77) 35.5 35.5 Netivim Mishtalvim Ltd. (2) (77) 35.5 35.5 Ma‟arechot Derachim Mitkadmot Ltd. (2) (77) 35.5 35.5 Derech Betuha Bakevishim Ltd. (2) (77) 35.5 35.5 Derech Hazafon Operation and Control Ltd. (2) (77) 35.5 35.5 Netivei 431 Operation and Control Ltd. (2) (77) 35.5 35.5 Netivei Hacarmel Systems and Operation Ltd. (2) (77) 35.5 35.5 Advanced Solutions – Road Systems Ltd. (2) (77) 35.5 35.5 Netivei Hayovel Ltd. (2) (45) 25 25 Derech Eretz Joint Venture 18 (4) (45) 50 50 Danya Cebus Operator Ltd. (18) 100 100 Danya Cebus and C.C.E.C.C. – Registered Partnership (38) (45) 50 50 Geo Danya Ltd. (4) (45) 50 50 IMB Israel Metro Builders (45) 40 40 Chaina Civil & Danya Joint Venture (38) (45) 49 49 Danya Cebus – Electra Bitzuah Bank Israel (38) (45) 50 50 MTS Ltd. 20 20 Derech Eretz Construction Joint Venture Limited Partnership (4) (45) 33.3 33.3 Kalia Investments and Development North Dead Sea 33.3 33.3

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. (10) (28) 100 100 Danya International Holdings Ltd. (18) 100 100

The Netherlands Africa-Israel (East Europe) Investments B.V. (17) 100 100 A.I.E.E. Overschie B.V. (21) – company in liquidation 100 100 Lentjee Holdings B.V. (24) 100 100 AFI Europe B.V. (21) 100 100 AFI Properties Berlin B.V. (64) (89) 92.8 92.8 AFI Properties Development B.V. (64) (89) 92.8 92.8 AFI Properties Logistics B.V. (64) (89) 92.8 92.8 AFI Properties B.V. (64) (89) 92.8 92.8 AFI Europe Financing B.V. (89) 100 100 AFI Project Developers B.V. (81) 45.02 45.02

273

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Cyprus Bellgate Construction Ltd. (16) 100 100 Flagaro Investment Ltd. (16) 100 100 AFI Development PLC (1) 64.88 64.88 Borenco Enterprises Ltd. (16) 100 100 Severus Trading Ltd. (16) 100 100 Talena Development Ltd. (16) 100 100 Scotson Ltd. (25) 100 100 Larue Ltd. (16) 100 100 Slytherin Development Ltd. (16) 100 100 AFI Ukraine 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 Amerone Development Ltd. (16) 100 100 Bundle Trading Ltd. (62) 100 100 Builidolla Properties Ltd. (16) 100 100 Grifasi Investments Ltd. (16) 100 100 Occuper Holdings Ltd. (62) 100 100 AFI Development Hotels Ltd. (16) 100 100 Inscribe Ltd. (16) 100 100 Hegemony Ltd. (16) 100 100 Danya Cebus Cyprus Ltd. (26) 100 100 Rumbrol Trading Limited (26) 97.6 97.6 Craespon Management Limited (31) 50 50 Nouana Limited (31) 50 50 Eitan (Cyprus) Limited (31) 100 100 Ironaqua Holding Limited (31) 100 100 Visuria Limited (16) 100 100 Aquamare Uno Ltd. (16) 100 100 AFIEM Cyprus Limited (89) 100 100 Faringer Enterprises Limited (89) 100 100 Contronceni Investments Limited (89) 100 100 Persei Limited (16) 100 100

274

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Russia Stroycapital LLC (8) 60 60 Stroyinkom K LLC (12) 100 100 Maystroy LLC (16) 100 100 Tverskaya Zastava LLC (16) 100 100 Krown Investments LLC (16) 100 100 Rapo LLC (95) 100 100 PSO Dorokhovo LLC (74) 100 100 Semprex LLC (16) 100 100 Aristeya LLC (96) 100 100 MKPK JSC (96) 99.17 99.17 Corin Development LLC (16) 100 100 Armamd JSC (99) 100 100 Bizar LLC (16) 74 74 Volgacity LLC (40) 60 60 Volga Stroyinkom Development LLC (88) 100 100 Nordservice LLC (90) 100 100 Titon LLC (86) 100 100 Zheldoruslugi LLC (73) 95 95 AFI RUS LLC (16) 100 100 MTOK CJSC (91) 99.71 99.71 AFI FM (58) 99 99 Extraplus LLC (56) 100 100 Project + LLC (76) 100 100 Vector Development LLC (16) 100 100 Sanatorium Plaza LLC (34) 50 50 Eitan LLC (59) 100 100 Sanatoriy Plaza SPA LLC (35) 100 100 Danya Cebus PM (87) 100 100 Ozerkovskaya 24A LLC (29) 100 100 AFI Medical LLC (23) 100 100

275

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Hungary AFI Europe Hungary Kft (89) 100 100 Pro-Mot Hungaria Kft (81) 50 50 Szeplinget Kft (89) 100 100 Akar-Lak Kft (89) 100 100

Luxembourg AFI (East-Central Europe) Developments Sarl (17) 100 100 Triumvirate I Sarl (63) 100 100

BVI Intrastar International Ltd. (89) 53.7 53.7 Galway Consolidated Ltd. (44) 100 100 Bugis Finance Ltd. (71) 100 100 AFI D Finance Ltd. (16) 100 100

Serbia Airport City d.o.o. (55) 100 100 Airport City Property Management d.o.o. (54) 100 100 Direct Capital d.o.o. (36) 100 100

Czech Republic AFI Europe Czech Republic s.r.o. (89) 100 100 M.I.C.C. Prague s.r.o. (89) 100 100 Adut s.r.o. (89) 100 100 Broadway Creseus s.r.o. (89) 100 100 Balabenka s.r.o. (89) 100 100 Tulipa City s.r.o. (89) 100 100 Classic 7 s.r.o. (61) 100 100 Tulipa Modranska Rokle s.r.o. (89) 100 100 Tulipa Rokytka s.r.o. (81) 100 100 Classic Park Group s.r.o. (89) 100 100 Tulipa Trebesin s.r.o. (89) 100 100 Classic Park Group iii s.r.o. (89) 100 100 Praha Sen s.r.o. (97) 50 50

Poland Novo Maar SP. Z.O.O. (89) 100 100 AFI Zlota 83 SP Z.O.O. (89) 100 100 Wilanow One SP. Z.O.O. (5) – company in liquidation 100 100 AFI Management SP. Z.O.O. (89) 100 100 AFI Project 1 SP. Z.O.O. (89) 100 100 AFI Project 2 SP. Z.O.O. (89) 100 100

276

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

Bulgaria AFI Europe Bugaria EOOD (89) 100 100 Vitosha Gardens EOOD (89) 100 100 Malina Gardens EOOD (89) 100 100 AFI Lagera Tulip EOOD (89) 100 100 Plovdiv Logistic Center EOOD (89) 75 75 Business Park Varna EOOD (89) 100 100 Premium Property Management EOOD (89) 100 100

Romania Controceni Park S.A. (82) 98 98 Star Estate SRL (89) 100 100 Europe Logistic SRL (89) 100 100 AFI Europe Management SRL (89) 100 100 S.C. Bowling Management SRL (39) 100 100 ROI Management SRL (89) 100 100 Premier Solutions & Team SRL (89) 100 100 Tulip Management SRL (89) 100 100 Plaza Arad Imobiliar SRL (89) 100 100 Danya Cebus Rom (87) 100 100 Veroskip Trading SRL (89) 100 100 AFI Park 2 SRL (89) 100 100 AFI Park Building 3 SRL (89) 100 100 AFI Park Offices 4 & 5 SRL (89) 100 100 AFI Palace Bi-Noi SRL (89) 100 100 AFI Palace Brasov SRL (89) 100 100 AFI Global Park SRL (89) 100 100

Latvia AFI Management SIA (89) 100 100 AFI Investment SIA (89) 100 100 A.R. Holdings SIA (14) 100 100 B.R. Holdings SIA (89) 100 100 Anninmuizas IPASUMS SIA (84) 100 100

Germany AFI Germany GmbH (89) 100 100 AFI Germany Investment GmbH & Co. KG (89) 100 100 Harel Grundstucks GmbH & Co. KG (13) 100 100 Peerly Grundstucks GmbH & Co. KG (11) 100 100 Margalit Grundstucks GmbH & Co. KG (20) 100 100 Margalit Teltower Damm Grundstucks GmbH & Co. KG (15) 100 100

277

Africa Israel Investments Ltd. Appendix – List of Group Companies

Rate of Ownership and Control by Holding Company as at the Report Date Control Ownership % %

The Ukraine Or Avner LLC (83) 100 100 ABG Sozidatel (103) 100 100 Budinkom Ukraina LLC (57) 100 100 AFI DS 1 LLC (57) 100 100 AFI DS 2 LLC (57) 100 100 AFI DS 3 LLC (57) 100 100

United States A.I. Holdings (USA) Corp. (30) 100 100 A.I. Properties and Development (USA) Corp. (46) 100 100 60 Spring Street LLC (32) 65 65 20 Pine Street LLC (67) 50 50 20 Pine Street Managers LLC (32) 50 50 15 Broad Street LLC (65) 100 100 15 Broad Street Managers LLC (32) 65 65 Empire Stores LLC (33) 49 49 LB Herald Ventures LLC (72) 65 65 Scribe LLC (94) 50 50 Leviev Fulton Club LLC (70) 50 50 LFC Mezz LLC (70) 50 50 AI Fulton LLC (32) 100 100 Africa Israel Marquis Developers LLC (72) 100 100 Wall Street Commercial Owners LLC (32) 100 100 Spring Street Commercial Owners LLC (32) 100 100 L.B. Broad Street Lessors LLC (7) 65 65 AI Broad Lessors LLC (7) 65 65 AI Florida Holdings Inc. (46) 100 100 AI Nevada Holdings, Inc. (46) 100 100 AILA Corp. (46) 100 100 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 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 Arizona Inc. (46) 100 100 85 Adams Street LLC (66) 100 100 85 Adams Street Managers (32) 70 70 AI 88 Leonard LLC (32) 100 100 Africa Israel Marquis Managers LLC (72) 100 100

Thailand TMDC Construction Company Limited (2) 45 45 (1) The shares of this company are traded on the London Stock Exchange. (2) Associated company, the investment in which is included on the equity basis.

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(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 A.I.E.E. Overschie B.V. (6) The debentures of this company are traded on the Tel-Aviv Stock Exchange. (7) Subsidiary of AI Properties and Developments (USA) Corp. (8) Subsidiary of Rubiosa Management Ltd. (9) Subsidiary of Africa Israel Industries Ltd. (10) Holds international companies operating overseas. (11) Held by AFI Properties B.V. (70%), M.S.A. Efrat Investments Ltd. (15%) and D.B.M. Harel Investments (2006) Ltd. (15%). (12) Subsidiary of Borenco Enterprises Ltd. (13) Held by AFI Properties Logistics B.V. (70%), M.S.A. Efrat Investments Ltd. (15%) and D.B.M. Harel Investments (2006) Ltd. (15%). (14) Subsidiary of AFI Investment SIA (15) Held by AFI Properties Development B.V. (70%), M.S.A. Efrat Investments Ltd. (15%) and D.B.M. Harel Investments (2006) Ltd. (15%). (16) Subsidiary of AFI Development PLC (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. (70%), M.S.A. Efrat Investments Ltd. (15%) and D.B.M. Harel Investments (2006) Ltd. (15%). (21) Subsidiary of Africa Israel International Properties (2002) Ltd. (22) Investee company of Africa Israel Residences Ltd. (23) Subsidiary of Persei Ltd. (24) Subsidiary of AFI (East Central Europe) Developments Sarl. (25) Subsidiary of Larue Ltd. (26) Subsidiary of Danya International Holdings. (27) Subsidiary of Flamingo Ltd. (28) Subsidiary of Africa Israel Properties Ltd. (29) Subsidiary of Vector Development LLC. (30) Subsidiary of Africa Israel International Investments (1997) Ltd. (31) Held by AFI Developments Hotels Limited. (32) Subsidiary of A.I. Properties and Developments (USA) Corp. (33) Associated company of A.I. Properties and Developments (USA) Corp. (34) Subsidiary of Craespon Management Limited. (35) Subsidiary of Ironaqua Holdings Limited. (36) Subsidiary of AFI Project Developers B.V. (37) Held through the Company and through Africa Israel Trade and Agencies Ltd. (38) Jointly-controlled company presented based on the proportionate consolidation method. (39) Held by AFI Europe Management S.R.L. B.V. (40) Subsidiary of Ozerkovskaya 24 LLC. (41) Held by AI 229 West 43rd Street JV Holdings LLC (42) Subsidiary of N. Packer Ltd. (43) Associated company of Packer Quality Metals Ltd. (44) Subsidiary of Intrastar International Ltd. (45) Held by Danya Cebus Ltd. (46) Subsidiary of A.I. Holdings (USA) Corp. (the company merged with AI Properties and Developments) (47) Subsidiary of Packer YDPZ Profiles Ltd. (48) Investee company of Negev Ceramics Marketing (1982) Ltd. (49) Held by Danya Cebus Holdings U.S. Inc. (50) Subsidiary of Fortswell Trading Limited. (51) Subsidiary of Earlsfield Steels Limited. (52) Held by AI FM 229 West 43rd Street JV Holdings LLC. (53) Subsidiary of Or Avner LLC.

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Africa Israel Investments Ltd. Appendix – List of Group Companies

(54) Subsidiary of Airport City Belgrade d.o.o. (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 Eitan (Cyprus) Limited. (60) Subsidiary of Packer Plada Industries Ltd. (61) Subsidiary of Faringer Enterprises Ltd. (62) Subsidiary of Grifasi Investments Ltd. (63) Subsidiary of Visuria Limited. (64) AFI Europe provided 100% of the shareholders‟ equity and shareholders‟ loans. (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) Held by Trade and Agencies Ltd. (69) Held by Via Arkadia Home Design Ltd. (70) Held by A.I. Fulton LLC. (71) Subsidiary of Talena Development Ltd. (72) Subsidiary of AI Florida Holdings Inc. (73) Subsidiary of Beslaville Management Ltd. (74) Company held by Extraolus LLC. (75) Subsidiary of Africa Israel Residences (76) Subsidiary of Maystroy LLC. (77) Held directly at the rate of about 24.5% and the balance at the rate of about 11% is held through Israel Canada Express Roads Management Ltd. (78) Held by Apthorp Management, LLC. (79) Held by AI Apthorp, LLC. (80) Subsidiary of AFI Europe NV, holds 15% of the four German companies: Peerly, Margalit TD, Harel and Margalit. (81) Investee company of AFI Europe N.V. (82) Subsidiary of Controceni Investments Ltd. (83) Held by Amakri Management Ltd. and Jaquetta Investments Ltd. (84) Subsidiary of B.R. Holdings SIA. (85) Associated company of Packer Plada Industries Ltd. (86) Subsidiary of Rognerstar Finance Ltd. (87) Subsidiary of Danya Cebus Cyprus Ltd. (88) Subsidiary of Christall Development LLC. (89) Subsidiary of AFI Europe N.V. (90) Subsidiary of Bioka Investments Ltd. (91) Subsidiary of Bundle Trading Ltd. (92) Subsidiary of Africa Israel Investments House Ltd. (93) Subsidiary of Negev Ceramics Ltd. (94) Held by LB Herald Venture LLC. (95) Held by Ultrainvest, Ultrastroy, Inzhstroy LLC. (96) Subsidiary of Severus Trading Ltd. (97) Held by Africa Israel International Investments (1997) Ltd.

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