REPORT OF THE BOARD OF DIRECTORS FOR THE PERIOD JANUARY DECEMBER 2004

Transcription

1 27 March 2005 REPORT OF THE BOARD OF DIRECTORS FOR THE PERIOD JANUARY DECEMBER GENERAL Africa Israel Investments Ltd. (hereinafter: "the Company" or "Africa") is an investments company engaged in various fields of activity in Israel and abroad. The group's net earnings in the year 2004 amounted to approximately NIS 406 million, compared to approximately NIS 121 million in the year 2003 (an increase of 236%). The net earnings in the fourth quarter of the year 2004 amounted to approximately NIS 115 million compared to approximately NIS 36 in the corresponding quarter of the year 2003 (an increase of 219%). The group's earnings (before financing expenses) from regular operations in the year 2004 amounted to approximately NIS 687 millions compared to approximately NIS 287 million in the year 2003 (an increase of approximately 139%). Earnings (before financing expenses) from regular operations in the fourth quarter of the year 2004 amounted to approximately NIS 195 million compared to approximately NIS 118 million in the corresponding quarter in the year 2003 (an increase of approximately 65%). Presented below is selected data in NIS millions: THE YEAR 2004 THE YEAR TH QUARTER TH QUARTER 2003 Earnings from construction, Real estate, and asset- Realization, transactions Earnings from property rentals and operation of assets Earnings (loss) from operation of hotels (11) 4 2 Earnings (loss) from industry (8) 2 (1) (1) Earnings (loss) from affiliated companies, net Earnings from regular operations before financing 36 (31) 5 (8) Capital gains Net earnings

2 2. DESCRIPTION OF THE CORPORATION'S BUSINESS MAIN DATA The Company is engaged in holding assets, and investing, in a variety of fields, in Israel and abroad. The Company has three public subsidiaries whose stock is traded on the Tel Aviv Stock Exchange. In addition, the Company holds dozens of subsidiaries and related companies, by itself or with others. (The Company and its subsidiaries will be called hereinafter "the Group"). The Group has six fields of activity which are reported in its financial statements as its main sectors, as follows: Real estate development in Israel and abroad In this field of activity, the Group focuses on initiating residence, office, and commercial space, projects; it locates suitable lands, acquires them, constructs the buildings and sells the units. Beginning with the year 1998, the Group extended its activity to foreign countries, through the Company's foreign investee companies which invest in various real estate ventures, including construction or acquisition of projects in Russia and in the Czech Republic. Income generating properties In this field of activity, the Group is engaged in initiating, constructing and operating industrial, office and commercial space buildings for rent, in Israel and abroad. The Group's activity belonging to this category which takes place abroad is currently conducted in the US, Canada, Russia, the Czech Republic, the Netherlands, Serbia, Namibia and Rumania. The major part of the Group's activity in the field of income generating properties in Israel is concentrated in the hands of the Company's subsidiary, Africa Israel Properties Ltd. (hereinafter: "Africa Properties"), which is a public company whose securities are traded in the Tel Aviv Stock Exchange, and in the hands of its subsidiaries. Contracting and construction In this field of activity, the Group is engaged, through the Company's subsidiary, Danya Cebus Ltd. (hereinafter: "Danya Cebus" or "Danya") and its subsidiaries, in residential and in nonresidential, construction works. Danya Cebus is a public company whose securities are traded on the Tel Aviv Stock Exchange, that functiions as the Group's operational organ and carries out most of the residential and non-residential construction works initiated by the Group in Israel. During the last years, Danya has extended its activity to foreign countries, and began activities in Danya and in Russia. As of the date of this periodic report, Danya's activities in Canada and Russia are not material to the Company in this field of activity. Hotels and leisure In this field of activity, the Group is engaged in the hotel, leisure, sanatorium and spa business, and in the construction of tourist-attraction and amusement-park sites. The Group's activities in this field are concentrated in the hands of the Company's subsidiary, Africa Israel Hotels Ltd. (hereinafter: "Africa Hotels"), and its subsidiaries. Africa Hotels is a public company whose stock is traded on the Tel Aviv Stock Exchange. Africa Hotels is the concessionaire of the trade names "Holiday Inn" and "Crowne Plaza", and operates, with its subsidiaries, country-wide hotel chains and the Tiberias Hot Springs Spa, and also runs a hotels school in Tiberias. In addition, 2

3 Africa Hotels, jointly with partners, is engaged in the construction of a tourist attraction project in Eilat and in the construction of a hotel in Russia. Industry In this field of activity, the Company has holdings in industrial and other subsidiaries, in a variety of areas, as follows: Fashion and beachwear In this sub-field, the Company is engaged in the manufacture and marketing of bathing suits and beachwear through its subsidiary Gottex Models Ltd., and in the manufacture and marketing of beachwear and underwear through Christina America Inc. With the intention of extending the Group's activity in the field of fashion, Gottex Models Ltd. acquired in 2003, through Gottex Trademarks Registered Partnership, the activities and concessions attached to the sale of "Zara" and "Pull and Bear" products in Israel, for a period of five years. Business telephone systems The major part of the Company's industrial activity is conducted through Tadiran Telecom Ltd., a company engaged in the development, manufacture, marketing of business telephone systems, and in the provision of services to these systems, in Israel and abroad, mostly under the trade name "Coral". Infrastructures In this field of activity, the Group is engaged, through Danya Cebus, in infrastructure construction, building structures such as bridges, roads and railways. During the period covered by this report, the Group was engaged (in this field) especially in the construction of transportation highways, including the building of the Cross Israel Highway, completed in 2004 (apart from finishing work). The group also manufactures industrial products for the purposes of this activity. Its principal clients for these products are the Israeli government, Government companies and supporting units. In addition to the fields of activity specified above, the Group is engaged in various other activities - detailed in the section below "The Group's investments" - in the following areas: communications, B.O.T.-type projects, energy and the steel industry. The Group is active in Israel, the US, Canada, Russia, the Czech Republic, the United Kingdom, the Netherlands, Serbia, Rumania, Bulgaria and Namibia. 3

4 3. FINANCIAL POSITION Significant balance sheet data is presented below, in NIS million Total balance 10,607 7,323 Shareholders' equity and minority interest 2,032 1,449 Fixed assets 3,574 3,162 Real estate Investments in affiliated and other companies Cash and cash equivalents Other current assets 4,549 2,695 Long-term liabilities 3,007 1,941 Credit from banking corporations and other credit providers (including current maturities of long-term liabilities) 4,433 3,018 Other current liabilities 1, The total assets of the Company and of its subsidiaries as presented in the consolidated balance sheet amounted, on , to NIS 10,607 million, compared to NIS 7,323 on This increase derives from several principal sources: Increase in the fixed assets from 3,162 NIS million on to NIS 3,574 million on , due to additional investments in fixed assets, made during the year. Increase in current liabilities from NIS 3,933 million on to NIS 5,480 million on The major part of this increase reflects credit from banking corporations and from other credit providers, in the amount of approximately 1,415 millions, and from increase in the balance of other current liabilities, in the amount of approximately NIS 132 million. Increase in long-term liabilities from NIS 1,941 million on to NIS 3,007 million on The major part of this increase comes from issuances to the public and to institutional investors, which took place during the year 2004 see also the section: "Events during the report period". 4

5 4. RESULTS OF BUSINESS ACTIVITIES FOR THE YEAR 2004 Significant data from profit and loss statements for the years ending on 31 December, 2004 (in NIS million): Earnings from construction, real-estate, and asset-realization transactions Earnings from property rental and operation, net Earnings (loss) from operation of hotels 4 (11) (13) Earnings (loss) from industry (8) 2 20 Other earnings, net Earnings (loss) from affiliated companies 36 (31) 17 Administrative and general (38) (34) (36) Earnings within the framework of completion of the Cross Israel Highway project Ammortization of deferred and other expenses (3) (5) (14) Current operating earnings Capital gains and gains from decrease in holding rate in investee companies Amortization of assets (3) --- (35) Earnings from activities after capital gains and amortization of assets Financing expenses (104) (79) (35) Taxes on income (186) (75) (92) Minority interest in earnings of consolidated companies, net (82) (21) (26) Net earnings for the statement year

6 Earnings from construction, real estate and asset-realization transactions (in NIS thousand) Revenues Costs Gross profit Gross profit (loss) in % Central region 224, ,932 57, % Northern region 11,287 8,230 3, % Abroad 695, , , % Other areas 26,248 13,188 13, % 957, , ,884 Contracting and infrastructures 1,022, ,907 53, % Administrative, general and selling ,108 (32,108) Total earnings from construction transactions 1,980,209 1,624, ,806 Asset realization abroad 126,027 Total profits from construction, real-estate and assetrealization transactions 481,833 - Rental and operation of properties The Company's earnings from rental and operation of properties amounted in the year 2004 to the sum of NIS million to NIS million in the year The total space rented increased from approximately 204 thousand sq. m. on to approximately 221 thousand sq. m. on Operation of hotels Earnings from operation of hotels in the year 2004 totaled NIS 4.3 million, compared to a loss of NIS 11.5 million in the year The net loss of Africa Hotels in the year 2004 totaled NIS 23 million compared to NIS 55 millions in last year. The rate of room occupancy in this year reached 57.53%, compared to 52.3% in the previous year. - Alon Oil Group 6 The Group's share of the profits of Alon Oil Group (including Alon USA) amounted to NIS 33.7 million, compared to NIS 18.7 million in the year 2003.

7 - Packer Plada Group The Company's share in the earnings of Packer Plada, after deduction of the original difference, amounted to NIS 11.7 million, compared to earnings of approximately NIS 7.7 million in the year Included in this sum are the earnings derived from the activities of Negev Ceramics, which is held by Packer Plada. - Realizations during the report period 1. During the report period, one of the Company's consolidated companies sold Danya Cebus shares. The net profit derived from this sale amounted to NIS 11.3 million. 2. Within the framework of the September 2004 issuance by Africa Israel Properties Ltd., the Company recorded a net profit in the sum of NIS 60.2 million. The Company's rate of holding in Africa Israel Properties Ltd. after issuance is 83.3%. 3. During the report period, Tadiran Telecom allocated to a third party 2,000 ordinary shares of NIS 1 par value, which constitute approximately 14% of Tadiran Telecom's share capital, for a consideration of $ 2 million. It also granted, for no consideration, an option to acquire additional 4,000 ordinary shares of Tadiran Telecom, for a consideration of a $ 4 million exercise premium if the option is exercised by 31 March, 2005, and for a consideration of a $ 5 million exercise premium if the option is exercised during the period between 31 March, 2005 and 30 September, 2005, and keeps the conditions specified in the agreement. The net profit recorded in the Company's books as deriving from this issuance amounted to approximately NIS 2.6 million, after minority-interest share. Tadiran Telecom concluded a commitment by agreement to the sale of various activities in Israel and in the Palestinian Authority. The list of these activities included maintenance, service, marketing and sale of its products, except for certain products specified in the agreement. The consideration of the transaction was set at approximately $ 6.7 million, subject to adjustments. In addition, Tadiran Telecom will receive an option to purchase shares of the acquiring company which amount to 10% of its share capital. The profit derived from this issuance was recorded in the Company's books as the amount of approximately NIS 7 million, after minority-interest share. 4. During the report period, a profit of approximately NIS 37 million, constituting a part of the "Other earnings" item on the "Results of Business Activities" table, was recorded. It resulted from the completion of the Cross Israel Highway and its conversion from a project presented a "under construction" into a financial asset In December 2004, an agreement was signed with an Irish corporation, for the sale of 50% of the issued share capital of Flora - Sen (hereinafter: "the Sold Shares"), for the consideration of the sum of approximately 23 million, Flora - Sen holds full ownership rights in the Palace Flora shopping mall in Prague, the Czech Republic. In addition, an agreement was signed between Flora - Sen and an Austrian banking corporation, for refinancing the mall, in the sum of up to 80 million. Within the framework of the additional financing, all the shareholders

8 loans put at the disposal of Flora - Sen, in the aggregate sum of approximately 23 million, were settled. As a result of the above sale transaction and settlement of shareholders loans, the Company recorded a net profit in the amount of approximately NIS 93 million. - Administrative and general expenses Administrative and general expenses for the report period amounted to approximately NIS 38.0 million, compared to approximately NIS 34.5 million in the year Financing expenses The Group's financial expenses for the year 2004 totaled NIS million, compared to NIS 78.9 million for the year The Company's total credit from banking corporations, bond-holders and others was NIS 7,377 million on , compared to NIS 4,750 million on Out of the Group's loans, the sum of NIS 4,070 is dollar-linked credit, compared to NIS 2,434 million last year. Financing expenses in the last quarter amounted to approximately NIS 21.8 million, compared to NIS 53 million in the corresponding quarter last year. The decrease in the financing expenses stems mainly from the erosion of the value of US dollar-linked liabilities, which depreciated during the quarter by approximately 3.9%, and from the appreciation the Group's negotiable securities as a result ofthe rise of security rates in the Tel Aviv capital market. Total financing expenses for the year 2004 increased, in comparison to the year 2003, by approximately 32%, owing to the enlarged size of the credit which, as said, increased during this period by approximately 53%. - Taxes on income Expenses on taxes totaled approximately NIS million in the year 2004, compared to NIS 74.7 million last year. 8

9 Set below is the Group's Profit and Loss Statement for the year 2004, on a quarterly basis, adjusted to the December 2004 NIS (in NIS thousand) - 1-3/04 (Unaudited) 4-6/04 (Unaudited) 7-9/04 (Unaudited) 10-12/04 (Unaudited) For the year ended (Audited) Revenues Construction transactions 651, , , ,471 1,980,209 Rental and operation of properties 62,179 59,127 63,496 64, ,617 Oeration of hotels 46,832 58,606 69,487 65, ,989 Industry 116, ,782 95, , ,209 Net earnings from affiliated companies 4,298 17,478 9,272 4,562 35,610 Other revenues 14,259 48,734 77, , ,261 Costs and expenses 895, , , ,806 3,246,895 Construction and real estate transactions Maintenance, supervision and management of real estate and properties 508, , , ,511 1,624,403 26,304 24,473 25,116 28, ,854 Operations of hotels 51,800 57,924 64,899 61, ,681 Industry 108, , , , ,815 Administrative and general 9,060 9,504 9,713 9,712 37,989 Financing, net 48,683 8,494 24,853 21, ,894 Amortization of deferred charges 701 5, ,265 7, , , , ,095 2,574,077 Income before taxes 142, , , , ,818 Taxes on income 65,395 39,495 29,794 50, ,653 Income after taxes 77, , , , ,165 Minority interest in earnings of companies 17,211 20,731 20,636 22,922 81,500 Net income for the fiscal year 60, , , , ,665 9

10 EVENTS DURING THE REPORT PERIOD A. On February 5, 2004, Africa Israel Properties Ltd., a subsidiary of the Company, issued a series of registered, non-negotiable debentures, with an aggregate principal par value of NIS 261 million (out of series of up to NIS 400 millions), to institutional investors. The debentures are scheduled for repayment in the years 2006 through 2013, in 8 equal annual installments, bearing interest at the annual rate of 5.6%, and linked (principal and interest) to Consumer Price Index of December The debentures were rated "AA-" by Maalot The Israeli Securities Rating Company Ltd., subject to the subsidiary complying with certain conditions specified within the framework of Maalot's rating. This information was published in the Company's Immediate Report dated January 21, B. On January 27, 2004, Africa Israel International Investments (1997) Ltd., a wholly-owned subsidiary of the Company, issued a series of registered, non-negotiable debentures in the aggregate principal par value of NIS 44.3 million (out of a series of NIS 45 million), to institutional investors. The debentures, secured by the Company, are scheduled for repayment in the years 2006 through 2009, in 4 equal annual installments, bearing interest at the annual rate of 5%, repayable semi-annually, and linked (principal and interest) to the representative exchange rate of the US dollar. C. On July 1, 2004, Africa Israel Financing and Investments (2004) Ltd., a wholly-owned subsidiary of the Company, issued 3 series of registered, non-negotiable debentures in the aggregate principal par value of NIS 100 million to institutional investors. The debentures are scheduled for repayment in 1 installment of principal and interest at the end of 12 months from the issuance date. One series of the debentures is of an aggregate principal par value of approximately NIS 23 million, linked to the dollar and bearing interest at the annual rate of 3.6%. The second series is of an aggregate principal par value of approximately NIS 73.5 million, linked to the CPI and bearing interest at the annual rate of 5.1%, and the third series is of an aggregate principal par value of approximately NIS 4.2 million, unlinked and bearing fixed interest at the annual rate of 6.3%. The debentures are secured by a lien on the rights of a subsidiary of the Company to receive profits deriving from the Trebika project in New York (after payment of the mortgage to the financing bank and the project s expenses) and by a guarantee of the Company and of a third party which is the Company's partner in the Trebika project. The debentures were rated "Aa1" by Midroog Ltd. D. On November 24, 2004, Africa Israel Financing and Investments (Iguach 1) Ltd., a wholly-owned subsidiary of the Company, issued 2 series of registered, non-negotiable debentures in the aggregate principal par value of approximately NIS 212 million to institutional investors. The debentures are scheduled for repayment in one installment of principal at the end of 18 months and payment of interest every 6 months from the issuance date. One series of the debentures is of the aggregate principal par value of approximately NIS million, linked to the CPI and bearing interest at the annual rate of 4.85%. The second series is of the aggregate principal par value of approximately NIS 84.6 million, unlinked and bearing interest at the annual rate of 6.15%. The debentures are secured by a lien on the rights of a subsidiary of the Company to receive profits deriving from the Down Town By Philippe Starck (15 Broad St.) project in 10

11 Manhattan, New York (after payment of the mortgage to the financing bank and the project s expenses), and by a guarantee of the Company and of a third party who is a partner of the Company in the project. The debentures were rated "Aa2" by Midroog Ltd. E. In November 2004, Africa Israel Finance (1985) Ltd. issued debentures (Series A) at the base amount of NIS 70.7 million, scheduled for repayment in May 2006, bearing interest at the annual rate of 5.2%, and are linked (principal and interest) to the CPI. F. On March 26, 2004, the Company s Board of Directors approved the issuance of bonus shares of NIS 0.1 par value each, for no consideration, to all holders of the Company s share on the determination date, at the rate of 900% of the Company s issued and paid-up share capital, so that every shareholder holding one ordinary share of NIS 0.1 par value each on the determination date will be entitled to receive, for no consideration, 9 shares of NIS 0.1 par value each, as fully paidup. The shares were issued on April 22, G. On September 27, 2004, Africa Israel Properties Ltd., a subsidiary (hereinafter: "Africa Properties"), issued securities to the public on the basis of a prospectus, as follows: 11 1) 2,000,000 ordinary registered shares of NIS 1 par value each. 2) 1,000,000 registered options (Series 1) exercisable for 1,000,000 ordinary shares of NIS 1 par value each of Africa Properties, on any trading day, commencing on the date of registration of the options for trading on the stock market and up to December 31, 2007 (inclusive), so that every option (Series 1) may be exercised for one ordinary share of NIS 1 par value against payment of an exercise price of NIS 130 per option, linked to the CPI and subject to adjustments. An option (Series 1) not exercised by the end of the exercise period will expire and the holder thereof will have no right whatsoever. The Company committed that on December 29, 2005 it will offer to purchase, during the course of trading hours, all of the options (Series 1), at a price of NIS 20 per option, linked to the CPI. 3) NIS 150,000,000 registered debentures (Series B) of Africa Properties, are repayable in 4 equal annual installments. The debentures are linked to the CPI and bear interest at the annual rate 4.65%, to be paid one a year. The debentures are convertible into ordinary shares of NIS 1 par value each of Africa Properties, so that up to September 18, 2006, every NIS 130 par value of debentures are convertible into one ordinary share of NIS 1 par value of Africa Properties, and from September 19, 2006 and up to September 18, 2009, every NIS 145 par value of debentures are convertible into one ordinary share of NIS 1 par value of Africa Properties. 4) 1,000,000 registered options (Series 2), exercisable for NIS 100,000,000 par value of debentures (Series 2) against a cash payment of the exercise price in respect of each option in the amount of NIS 95, linked to the CPI. An option (Series 2) that is not exercised by September 30, 2005 will expire. By December 31, 2004, 6,607 ("2" series) options had been exercised into 660,770 n.v. ("B" series) debentures. The proceeds of the issuance amounted to NIS million (gross). The net proceeds, after deducting issuance costs, amounted to NIS million. The amount of NIS 206 million out of the proceeds of the issuance was used to repay shareholders loans and the balance was used to reduce credit taken out by Africa Properties from banks and to make short-term deposits in banks.

12 On July 22, 2004, an options agreement was signed between Africa Properties and the Company and Bank Leumi Le-Israel Ltd. in connection with acquisition of Africa Properties shares. Within the framework of this agreement, Africa Properties granted an option to Bank Leumi to acquire an amount of shares of Africa Properties that will constitute 5% of every type of means of control (within the meaning of this term in the Securities Law, 1968) of Africa Properties after the issuance. The net income recorded in the Company s books as a result of the issuance, amounted to NIS 60.2 million. The Company s rate of holdings in Africa Properties after the issuance is 83.3%. EVENTS AFTER THE BALANCE SHEET DATE A. After the date of the balance sheet, an agreement to sell the assets and activities of the incorporated Canadian company (hereinafter: "the Subsidiary") in which Africa Properties held (indirectly) 55% of the share capital, became effective. According to the agreement, two foreign companies will purchase the Subsidiary's lands, buildings, lease agreements and rights in movables, in connection with a project to construct some 103 residential units in Toronto, Canada, for a consideration of approximately CAD 20.7 million (subject to possible adjustments). In February 2005, the transaction which is the subject of the aforementioned agreement was carried though. Africa Properties will record in its financial statements for the first quarter of the year 2005 a profit (after tax) of approximately NIS 4 million, in respect of this transaction. B. After the date of the balance sheet, a subsidiary of Africa Properties entered a contract with a foreign company (hereinafter: "the Seller") controlled by an American investment fund which is engaged in real estate investments in Europe, through a memorandum of understanding. The subject of this contract is the acquisition (directly, or indirectly by means of a joint corporation) of 50% of the Seller's rights in a Rumanian company (hereinafter: "the Acquired Company"), which holds land in the center of Bucharest, Rumania, with an area of approximately 120 dunam (hereinafter: "the Lot"). As at the date the memorandum of understanding was signed, the Seller held approximately 95% or the rights in the Acquired Company. Within the framework of a negotiation between the parties, the consideration in respect of the Acquired Company was set at the sum of approximately 9 million. The Lot is suitable for several different kinds of real estate projects, and it was determined, to that matter, that the purposes for which the Lot will be used would be determined later on, by agreement between the parties. Africa Properties estimates that various projects can be built on the Lot, with an overall area of 100,000 sq. m. at the least. It was also agreed that the Acquired Company will have the first right of refusal to purchase an additional area, 40 dunams in size, lying adjacent to the Lot. Within the framework of the memorandum of understanding, it was agreed that a detailed agreement will be signed between the parties at the end of 90 days, subject to a due diligence inspection by the Africa Properties subsidiary. C. After the date of the balance sheet, the Company's Board of Directors decided, in its meeting on March 27, 2005, to distribute to shareholders dividends in the amount of NIS 200 million, out of the Company's accumulated proceeds deemed distributable. 12

13 D. On March 24, 2005, the Company announced that one its subsidiaries (in which the Company holds 80% of the rights), entered a contract, through a preliminary agreement, with a foreign corporation (hereinafter: "the Purchaser") concerning the sale of its rights in a foreign company, which owns abroad two office buildings with the overall area of approximately 14,000 sq. m. The consideration for this transaction was set at approximately $ 54 million. Completion of the transaction is subject to the signature of a detailed agreement between the parties, and to the presence of various preconditions (mainly, inspections of legal, financial and engineering due diligence). On account of the consideration for the transaction, the Seller had paid an advance payment of $ 5 million. If the Purchaser will avoid signing the detailed agreement, for reasons other than those connected with the results of the due diligence inspections, he will not be entitled to have the advanced payment returned to him, but otherwise he will free of any other liability in respect of the principles agreement. If and when the transaction is signed, the Company is expected to record in its financial statements a profit (after tax) in the sum of approximately NIS 85 million, in respect of this transaction. E. On March 24, 2005, Danya Cebus's Board of Directors approved the distribution of a cash dividend to those of Danya's shareholders who will be registered in Danya's shareholders ledger at the end of the April 6, 2005 business day. April 7, 2005, will be the "ex" day, and April 20, 2005, will be payment day. The cash dividend, in the aggregate sum of approximately NIS 55 million, constitutes NIS 2.8 per share, and 284.5% of Danya's issued and paid-up capital at the date set for distribution. The Company's part in the dividend amounts to approximately NIS 41 million. F. In its meeting held after the date of the balance sheet, on March 23, 2005, Africa Properties' Board of Directors decided to distribute dividends to the shareholders in the sum of NIS 75 million, out of Africa Properties accumulated proceeds deemed distributable. The Company's part in the dividend is approximately NIS 63 million. G. In March 2005, the Company issued to institutional investors registered, non-negotiable, debentures (Series E), in the aggregate principal par value of approximately NIS 111 million. The debentures are payable in one installment of the principal in March 2007, linked to the CPI and bearing interest at the annual rate of 4%, payable semi-annually. 13

14 5. SOURCES OF FINANCING AND LIQUIDITY 5.1. The financing of the total assets of the Company was as follows: % NIS millions Shareholders' equity and minority interest ,032 Long-term liabilities ,007 Current liabilities (including short- term bank credit) ,480 Other liabilities % 10,607 Approximately 19.1% of the Group s assets were financed by shareholders equity and minority interest. The Group s investments in investee companies, fixed assets, and real estate, reached NIS 4,871 million, which constitutes approximately 46% of its total assets; they are to be considered as medium-, and long-, term investments The working capital ratio on December 31, 2004 reached 0.95 (compared to 0.77 on December 31, 2003). The rate of return on shareholders equity in the year 2004 was 37.6%, compared to 10.37% last year. 14

15 5.2. Condensed statement of the Group's cash flow during the report period: NIS millions NIS millions Sources Net earnings Earnings adjustments (103.6) Net cash from current activities Issuance of capital to minority interest in consolidated companies Proceeds from fixed assets realization 43.5 Receipt of short-term and long-term loans, net 2,781.3 Proceeds on account of options 20.0 Negotiable securities, net 45.7 Issuance of a subsidiary Total sources 3,494.6 Uses of cash Increase in cash balances Increase in working capital Increase in investments in investee companies, net Investment in fixed and other assets Investment in long-term deposits and loans, net Investment in short-term deposit 15.6 Investment in residential real estate 1,188.6 abroad Rise in real estate value Payment of dividend to minority 53.3 interest Payment of dividend to shareholders Total uses 3,

16 6. QUALITATIVE REPORT ON EXPOSURE TO MARKET-RISKS AND MARKET-RISKS MANAGEMENT 6.1. General "Market-risk" a risk to business results, shareholders' equity, cash flows, or to a company's market value, stemming from changes in interest rate, exchange rates, inflation, prices of raw materials, other prices, prices of domestic and foreign securities and economic indices, which have a material effect on a company's assets or on its liabilities, including company's liabilities to suppliers, debts owned to a company by its clients, and other assets and loans Description of the market-risks to which the Company is exposed, and its risk management policy In the course of its activities, the Company is exposed to market-risks, of which the principal ones are detailed below: Loans in various currencies (foreign currency, linked and unlinked NIS); Management of derivatives and financial instruments; Real estate investments in Eastern Europe and in the US; Investment in real estate assets and in inventory of apartments in the domestic market; Changes in the prices of imported inventories (mainly fuel and steel); Hosting rates, set in NIS or in foreign currency; Activity in the US energy sector; Activity in the Israeli tourism sector; Exposure to changes in exchange rates The policy of market-risks management As a rule, the Company's policy of managing market-risks includes managing the market-risks of its wholly-owned subsidiaries. On May 29, 2002, the Company's Board of Directors decided to approve a framework of activity for the Company and/or its wholly-owned subsidiaries, within which they might conduct futures transactions (derivatives) in currencies, exchange rates of various currencies and interest transactions (transactions of the forward\spot\option type), whether for hedging or for other purposes. The scope of exposure to such activities will not exceed $ 40 million. Framework of the hedging used by the Company Risks stemming from changes in inventories prices are hedged by trade in future contracts, and by keeping tabs on, and tight control over, inventories levels. 16

17 17 Risks stemming from changes in accommodation rates are hedged by signing contracts with tourist agencies abroad in their local currency. Real estate investments in Russia and in the US are hedged by financing part of these investments in local currency, and the other part by shareholders loans, part of which is linked to foreign currency. The company aims to increase the conversion of part of the shareholders loans to financing in local currency. Investments in real estate assets and in inventories of apartments in the domestic market the Company's policy is to finance these activities through credit provided for periods parallel to the periods during which the investments are held. The Company is exposed to interest risks in this area since it had avoided taking long-term loans during the last years, because of the high interest on such financing sources which was prevailing in the market at that time. The Company had, therefore, to use unlinked short-term credit. The Company's intention is to covert part of the short-term credit into long-term credit. 1. The Company takes loans, or conducts financing transactions, in various foreign currencies, for two main reasons: To maintain a natural linkage balance; To decrease financing expenses, and to ease the cash flow, by paying low rate interest. Transactions of the "forward" and "options" type are used as a means of hedging the above-mentioned loans. 2. The scope of hedging the above loans changes from time to time, at the discretion of the Company's management and of the person in charge of market-risks management. The currency of measurement used in the Company's consolidated repots is the reported NIS; the currencies of activity used by a part of the Group companies are the Euro, the US dollar or local currencies. Changes in the real exchange rates between the reported NIS and the Euro, the US Dollar and the local currencies, create risks for the reported results and for the Company's shareholder's equity Division of powers regarding exposure to market-risks and means of their control In the Company, the person in charge of financial-markets-risks is Mr. Mordechai Leibovicz, Head of Finance and Accountancy Administration. His powers include responsibility for reporting the subject to the Company's management and Board of Directors, and for carrying out their directives. Every senior executive is responsible for managing the risks met at the division he is in charge of. All the above agents act within the framework of carrying out the decisions of the Company's Board of Directors and of its management. In the other companies of the Group, persons were selected from the officials of each company and put in charge of the risks met by their company.

18 The Company's control over market-risks is determined through discussions in the suitable bodies of the Company's management, reports made from time to time to the Board of Directors and discussions in this body as they take place from time to time, and following the appropriate decisions made. 18

19 6.2. Set below is a report on kinkage bases, as on , in reported NIS Item Israeli currency Unlinked Linked to CPI Cost of building index Foreign currency Euro Dollar Others Current investment in securities Other linkage bases Total Investments in affiliated and other companies 22, ,720 25,322 17, , ,112 Fixed assets 3,574,288 3,574,288 Long-term loans and debit balances 46,578 59, ,071 43,578 2, ,306 Real estate 653, ,722 Current assets Receivable earnings from projects under construction 2,378,692 2,378,692 Projects under construction, net 2,460 2,460 Other inventories 115, ,068 Receivable deferred taxes 138, ,378 Clients 106,031 11, ,524 26, ,708 73,123 17,837 1,050,034 Debtors and debit balances 73,608 33, , ,068 29, ,174 Negotiable securities 31,710 15,312 53,125 68, ,142 Short-term investments 13,690 18, ,224 36,935 Cash and cash equivalents 321,389 42, , , ,405 Other assets and deferred expenses 104, ,411 Total assets 615, , , ,478 1,506, ,306 68,995 7,306,730 10,607,127 Continued on next page 19

20 Cont'd Item Israeli currency Unlinked Linked to CPI Cost of building index Foreign currency Euro Dollar Others Current investment in securities Other linkage bases Total Long-term liabilities Convertible debentures 67,556 67,556 Receipts on account of options 20,035 20,035 Debentures 85, ,014 43, ,097 Convertible debentures 177, ,757 Liabilities to banking corporations 56, , , ,234 63,430 1,694,869 Other liabilities 26, ,172 50,862 54,312 7, ,711 Deferred taxes 114, ,830 Liability for employee severance benefits, net 47,907 47,907 Current liabilities Credit from banking corporations and other credit providers 1,585, ,070 14,766 2,205, ,189 4,432,731 Contractors and suppliers 288,921 4,650 60,769 10, ,719 69, ,716 Creditors and credit balances 159, ,828 8, ,912 48, ,823 Total liabilities 2,249,228 1,634,582 60, ,792 3,499, , ,865 8,575,032 Total surplus assets (liabilities) (1,634,108) (1,256,133) 128,755 (212,314) (1,993,043) (241,922) 68,995 7,171,865 2,032,095 20

21 6.3. Set below is a report on linkage bases for December 31, 2003, in December 2003 NIS Item Unlinked Israeli currency Linked to CPI Cost of building index Euro Dollar Foreign currency Other currencies Yen Current investment in securities Other linkage bases Total Investments in affiliated and other companies 68 59,558 48,245 15, , ,652 Fixed assets 3,162,057 3,162,057 Long-term loans and debit balances 32,340 28, ,274 27, ,328 Real estate 524, ,336 Current assets Inventory of buildings for sale 1,177,219 1,177,219 Projects under construction, net 27,429 27,429 Other inventories 107, ,412 Receivable deferred taxes 140, ,734 Clients 107,382 53, ,410 20, ,366 47, ,143 Debtors and debit balances 95,177 42,130 5, ,315 33, ,684 Negotiable securities 14,381 6, ,799 57, ,944 Short-term investments 19,598 19,598 Cash and cash equivalents 160,350 9, ,878 34, ,667 Other assets and deferred expenses 77,328 77,328 Total assets 409, , ,410 55, , , ,030 5,486,514 7,323,531 Continued on next page 21

22 Cont'd Item Unlinked Israeli currency Linked to CPI Cost of building index Euro Dollar Foreign currency Other currencies Yen Current investment in securities Other linkage bases Total Long-tern liabilities Capital note 6,431 6,431 Debentures 33,851 33,851 Convertible debentures 242, ,785 Liabilities to banking corporations 32, , , ,797 84,205 24,808 1,250,994 Other liabilities 26, ,585 26,361 44,933 12, ,229 Deferred taxes 120, ,665 Liability for employee severance benefits, net 56,556 56,556 Current liabilities Credit from banking corporations and other credit providers 1,626,630 72,604 14, , , ,152 15,268 3,018,346 Contractors and suppliers 283,606 43,234 82,730 27,316 59,476 54, ,526 Creditors and credit balances 133,629 74,128 9,163 79,192 36, ,161 Advances, net of work under construction 30,907 30,907 Total liabilities 2,165, ,284 82, ,825 1,558, , , ,840 5,484,451 Total surplus assets (liabilities) (1,755,919) (600,863) 132,680 (399,669) (753,270) (224,795) (270,788) 2,030 5,319,674 1,449,080 22

23 6.4. Company's positions in derivatives as on 31 December 2004 Report on exposure to market-risks and their management As on December 31, 2004, in NIS thousand Denominated value Fair value Long Short Asset Liability Dollar/NIS Options sold Dollar "call" (2) 766,824 5,053 Dollar "put" (1) 1,014,534 24,986 Options purchased Dollar "call" (1) 129, Dollar "put" (2) 77,544 3,834 Forward contract liability to sell dollars against NIS (2) 154, Euro/NIS Options sold Euro "call" (2) 164,550 5,959 Euro "put" (1) 47, Forward contract liability to sell euro against NIS (2) 65,232 1,491 Swiss Franc/NIS Options sold Swiss franc "call" (2) 308,310 7,286 Swiss franc "put" (1) 216,958 4,355 Forward contract liability to purchase Swiss francs against NIS (2) 155,246 1,765 Yen/NIS Liability to sell yens against NIS (2) 26,931 9 Euro/Dollar Options sold Euro "call" (2) 931,472 39,942 Euro "put" (2) 1,085,738 4,725 Options bought Euro "call" (2) 716,968 42,139 Euro "put" (2) 276,209 2,177 Forward contract liability to purchase euro against dollars (2) 408,437 6,768 Sterling/Swiss franc Options sold Sterling "put" (2) 145,381 3,308 Euro/Yen Options sold Euro "put" (2) 323,224 1,504 Euro "call" (2) 352,608 6,522 Options purchased Euro "put" (2) 29, Euro "call" (2) 58,768 2,879 Dollar/Yen Options sold Dollar "put" (2) 43, Options purchased Dollar "call" (2) 86, Dollar "put" (1) 101,238 4,756 Liability to sell dollars against yens (2) 82,085 2,490 Dollar/Swiss franc Liability to purchase dollars against Swiss francs (2) 15,820 2,030 Australian dollar/dollar Liability to sell Australian dollars against dollars (2) 13, New Zealand dollar/dollar Liability to sell New Zealand dollars against dollars (2) 38,843 1,714 23

24 Sterling/dollar Liability to purchase sterlings against dollars (2) Denominated value Fair value Long Short Asset Liability 24, Swiss franc/yen Options sold CALL CHF (2) 30, Australian dollar/yen Options sold Australian dollar "put" (2) 16, CPI/dollar Liability to pay dollar-linked against receipt of CPI-linked (1) Fixed interest/variable interest Liability to pay fixed dollar interest against receipt of variable dollar interest (1) 71,082 3, ,660 4,117 (1) For hedging purposes not recognized for accounting purposes (2) Not for hedging purposes 7. DIVIDENDS In April 2004, the Company paid its shareholders a cash dividend in the amount of approximately NIS 180 million. After the date of the balance sheet, the Company's Board of Directors decided, in its meeting on March 27, 2005, to distribute to shareholders dividends in the amount of NIS 200 million, out of the Company's accumulated profits deemed distributable. 8. THE COMPANY'S BOARD OF DIRECTORS AND MANAGEMENT During the report period, sixteen meetings of the Board of Directors and its committees took place, and six decisions were made and put in writing. On March 26, 2004, the Company's Board of Directors approved the allocation of bonus shares of NIS 0.1 pr value each, for no consideration, to all the Company's shareholders on the determination date, at the rate of 900% out of the Company's issued and paid-up share capital, so that every shareholder holding on the determination date one ordinary share of NIS 0.1 par value each, will be entitled to receive, for no consideration, 9 shares of NIS 0.1 par value each, as fully paid-up. Allocation of the bonus shares was made on April 22, On March 26, 2004, the Company's Board of Directors decided to distribute cash dividend, in the amount of NIS 180 million On March 26, 2004, the Company s Board of Directors, after receiving the approval of the Audit Committee, approved an amendment to a private offering of options to the Company s CEO, in such a manner that in respect of every cash dividend distributed by the Company to its shareholders during the period in which the options are outstanding, the exercise premium of every unexercised option will be reduced on the ex-dividend date by the amount of the dividend paid in respect of every Company share. The above-mentioned adjustment provisions apply to every cash dividend distributed and/or to be distributed commencing March 17, 2000 and up to the end of the exercise period of the options, in respect of every unexercised option. 24

25 On November 26, 2004, Messrs. Yitzhak Landesman and Yair Youtzis completed their services as directors of the Company. On December 31, 2004, Mr. Eitan Haber was appointed director of the Company. On March 27, 2005, Mr. Shmuel Shkedi was appointed director of the Company. 9. REPORT ON DIRECTORS PROFICIENT IN FINANCE AND ACCOUNTANCY A new directive of the Securities Authority on this subject requires that a public company discloses in its board of director's report the minimal fitting number of directors proficient in financing and accountancy (and who have no function in the Company other than directorship) determined by the board of directors as sufficient in the board of directors' opinion - to enable it to fulfill its responsibility for examining the company's financial position, and its responsibility for the drawingup of the financial reports and their approval. The directive also requires that the board of directors' report provides details on the directors' proficient as described above. The number will be determined by considering, inter alia, the company's size, the type of its activities, the number of its board of directors' members, and its complexity. The Company's Board of Directors decided that, taking into account all the relevant circumstances, as aforesaid, the minimal fitting number of directors proficient in finance and accounting, as defined in the directive, is three directors. The Board of Directors pointed out that only a minimal number is in question here, and that at the time of the report, the number of directors, members of the Board of Directors, who are proficient as described above, was larger than the minimal one. At any rate, this minimal number enables the Board of Directors, as it believes, to fulfill its above-mentioned responsibilities, since it reasonably ensures that a director with the aforementioned proficiency is involved in the process of approving the financial reports even when one of the two directors so proficient is absent or unwell. Following are the details of the directors with finance and accountancy proficiency, with indication, in each case, of the facts which make it possible to consider him a director with finance and accountancy proficiency. Mr. Zvi Itskovitch, who has a Master's degree in business management (MBA), is a member of the management of Bank Leumi Le-Israel Ltd., and is Head of the Multinational Private Banking Division. Mr. David Friedman, who had served as Chairman of the Board of Directors of Union Bank of Israel Ltd., as Chairman of the Board of Directors of Africa Israel Investments Ltd., and as CEO of Bank Leumi Le-Israel Ltd. Mr. Avraham Asheri, who has a Bachelor's degree in economics, is an economic consultant to companies; had served as CEO of Israel Discount Bank Ltd. Mr. Chaim Erez, a private businessman and consultant to companies, had served as CEO of Israel Chemicals Ltd (ICL). 10. REPORT ON THE INTERNAL AUDITOR'S ACTIVITY 25 Section A of the directive: Auditor's name: Uriel Azran Commenced office on: 12/97 Qualifications: Accountant

26 Section B of the directive: Section C of the directive: Section D of the directive: The internal auditor is an employee of the Company Group The staff includes three audit-personnel employees The audit plan is based on a risks-survey conducted in the corporation, as well as on the current audit needs of the Company's management. The internal audit plan includes material audit issues of the corporation, defined on the basis of risks-surveys conducted in the corporation's fields of activity. Section E of the directive: The internal audit plan includes material audit issues in corporations which constitute material holdings of the corporation, defined on the basis of risks-surveys made in these corporations. Section F of the directive: The audit is conducted by the internal auditor in accordance with the professional standards accepted in Israel and internationally. Section G of the directive: Section H of the directive: The person in charge of the auditor, appointed by the organization, is the Chairman of the Board of Directors. Auditing reports were submitted to the Chairman of the Board of Directors, to the Company's CEO and to the Chairman of the Auditing Committee, and were discussed in the Auditing Committee, as detailed below: Date submitted Date discussed by the Audit Committee Report no. 1 10/03 3/04 Report no. 2 12/03 4/04 Report no. 3 1/04 3/04 Report no. 4 8/04 11/04 Report no. 5 8/04 11/04 26 Section I of the directive: The scope of the Internal Auditor's work is determined by a rotation which enables auditing all the Company's material issues once in every four years. This scope, the nature of the Internal Auditor's work-plan as well as the continuousness of his activity are, in the opinion of the Company's Auditing Committee, reasonable, and enable