IDB Development Corporation. Interim Financial Statements March 31, Q1

Transcription

1 IDB Development Corporation Interim Financial Statements March 31, Q1

2 IDB Development Corporation Ltd. Financial Statements March 31, 2017 (UnAudited) * The English version of this information as at March 31, 2017 is a translation of the Hebrew version of the financial statements of IDB Development Corporation Ltd., and is presented solely for convenience purposes. Please note that the Hebrew version constitutes the binding version. TRANSLATION FROM HEBREW IN THE EVENT OF ANY DISCREPANCY THE HEBREW SHALL PREVAIL. IDB Development Corporation Ltd.

3 IDB Development Corporation Ltd. Chapter A Chapter B Board of Directors Report and its appendices Summary of the Interim Consolidated Financial Statements (Unaudited) for March 31, 2017 and its appendices Appended documents: Financial work as of March 31, 2017, in connection with the fair value of subordinated loans convertible into Company's shares, which the Company received from the controlling shareholder. Furthermore, details are attached concerning this work according to Regulation 49(a) of The Securities Regulations (Periodic & Immediate Reports), Data concerning the state of the Company s liabilities are appended to these financial statements under Regulation 38e of The Securities Regulations by way of a reference to said data which is included in the report on the corporation s state of its liabilities that was published on May 25, 2017 (reference No ). IDB Development Corporation Ltd.

4 Board of Directors Report Regarding the State of the Company s Affairs Report for the First quarter of 2017 The Board of Directors of IDB Development Corporation Ltd. ("IDB Development" or the "Company") is pleased to present the board of directors report as at March 31, 2017, which reviews the Company s principal operations in the first quarter of 2017 (the Reporting Period ). The report was prepared in accordance with the Securities Regulations (Periodic and Immediate Reports) 1970, and assumes that the reader is also in possession of the Company s complete periodic report for the year ended December 31, 2016 (the "Periodic Report"), including the financial statements for the year 2016, as included in the Periodic Report (the "Annual Financial Statements"). The Company is a private company, which is a bonds company within the meaning of that term in the Companies Law 1999 ("The Companies Law") and it is a holding company which invests (independently and through consolidated companies 1, associates 2, and through other investee companies over which the Company does not have significant influence( in companies which are primarily engaged in the various branches of the Israeli economy and abroad ("The Group"). Some of the investee companies operate through global diversification of their investments. In recent years, the Company has placed a particular emphasis on the evaluation of investment realization opportunities, in light of, inter alia, the Company s financing needs and regulatory developments, in order to stabilize the Company s position. In recent years, and until the publication date of the report, the Company has primarily focused on the stabilization and improvement of its financial position and liquidity, including through the performance of capital raisings, the receipt of subordinated loans from the controlling shareholder, the issuance of bonds for the purpose of debt refinancing in order to service its routine debt payments to its financial creditors, and in order to finance its operating activities; On efforts to sell the control of Clal Holdings Insurance Enterprises (see Note 3.B.4.A to the financial statements and Note 3.H.5.B to the annual financial statements) and private assets; On evaluating alternatives for dealing with the provisions of the Law to Promote Competition and Reduce Concentration, 2013 (the Concentration Law ); And on dedicating managerial efforts in Discount Investment Corporation Ltd. ( DIC ) and in private companies which are directly held by the Company. In the last four years, a total of NIS 2,272 million has been injected into the Company as an investment in the Company s capital and as subordinated loans to the Company, where out of the aforementioned amount, a total of NIS 1,629 million was injected by companies under the control of Mr. Eduardo Elsztain (Dolphin Fund Limited, Dolphin Netherlands and Inversiones Financieras Del Sur S.A. (" Dolphin Group"). In February 2017, the Company issued bonds (Series M) to the public, which are secured by a charge on the future consideration from the sale of part of the shares in Clal Holdings Insurance Enterprises, which are held by the Company, for an overall gross consideration of NIS 1,060 million. See Note 4.B.4 to the financial statements for details. During the course of the first quarter of 2017 and as part of the execution of a partial early repayment to some of its financers, the Company reached agreement with the said financing bodies for the cancellation of most of the restrictions and financial covenants as well as the cancellation of other commitments, including, inter alia, restriction on activity involving the sale of the main holdings, restriction on permitted investments in investee companies and restrictions on the charging of the holdings in investee companies, which required the approval of those bodies. See Note 4.A. to the financial statements and Section below. 1 Companies in which the Group holds, directly or indirectly, more than 50% of the voting rights and companies that are effectively controlled. 2 Companies in which the Group has significant control, including entities under joint control and which are included in the financial statements, under the equity method. 1

5 Board of Directors Report Regarding the State of the Company s Affairs (Cont.) In August 2013, a trustee was appointed by the Commissioner of Capital Markets, Insurance and Savings ("The Commissionar") for the Company s main holdings in Clal Holdings Insurance Enterprises, and in December 2014, an outline over time was established for the sale of the Company s control of Clal Holdings Insurance Enterprises. In April 2017, a ruling was handed down, within the framework of which the Court instructed the trustee to sell 5% of the Company s holdings in Clal Holdings Insurance Enterprises within 30 days. In May 2017, the Company sold 5% of the shares in Clal Holdings Insurance Enterprises and in tandem the Company entered into a commitment with a banking institution under a swap transaction pursuant to which at the end of a period of 24 months from the time of the sale transaction, accounting will be performed between the Company and the banking institution in relation to the difference between the selling price of the shares being sold and the value of the shares as it may be at the time of the accounting. See Notes 3.B.4.a and 4.B.4 to the financial statements for details regarding the ruling, the sale transaction and regarding the Company s intention to use the monies from the sale in order to execute the partial early repayment of bonds (Series M). The provisions of the Concentration Law may have significant implications on the Company and its investee companies (see section 7.2 in Part A of the Periodic Report). The Company s board of directors has appointed an advisory committee and an independent committee in order to evaluate various alternatives for the Company s dealing with the implications of the Concentration Law, and for its fulfillment of the restrictions specified therein, with respect to the control of companies through a pyramid structure. The Board of Directors of DIC appointed an advisory committee with a similar function. For additional details, see Note 3.A. to the financial statements. The terms and ratings of the Company s bonds, as specified in Annex B below and in Note 14.D. to the annual financial statements. For the cash flow forecast report of the Company and its whollyowned headquarter companies (excluding IDB Tourism), see section below. As at March 31, 2017, the Company s main directly consolidated company is DIC (approximately 72.64% as at March 31, 2017 and approximately 70.91% as at the time of the signature of this report). Presented hereunder is a diagram detailing the main companies, for the purpose of this report, which are held by the Company as at March 31, אי די בי Development פתוח IDB DIC דסק"ש כלל Clal Insurance החזקות )1( Enterprises (1) ביטוח עסקיHoldings Clal Insurance נכסים ובניין אלרון שופרסל סלקום כלל ביטוח Cellcom Shufersal Elron Property & Building Gav גבים Yam IDBG (1) The kernel of control (50%) is deposited in trust for the Company (see Note 3.B.4 to the financial statements). )1( גרעין השליטה )50%( מופקד בנאמנות עבור החברה )ראה באור 3.ח. 5. לדוחות הכספיים( 3 The above diagram is provided for convenience purposes only, and also includes investee companies which do not necessarily constitute an operating sector in the Company. For a more detailed diagram, which is current as March , see section 3.5 of the Description of the Company s Business in Part A of the periodic report. 1 2

6 1. Board of Directors Remarks Regarding the State of the Company s Affairs General The Company is a holding company that indirectly holds a variety of companies, which are engaged in various market sectors. Due to its status as a holding company, the Company s business position, results of operations, capital and cash flows are primarily affected by the business positions of its primary directly and indirectly held investee companies, and by the results of their operations, cash flows and changes in equity, and sometimes also by the value of the Company s hodlings in those companies. Therefore, the board of directors report presented herein also includes explanations regarding the impact of the position of these primary companies on the Company. Additionally, the Company s position, results of operations, capital and cash flows are also affected by the Company s head office activities, which include financing expenses and financing income, general and administrative expenses, and income from management fees (when these exist). The level of the Company's stability is affected, inter alia, by the fact that the Company is typified by a dispersal of its investments. The Company s direct and indirect investments are partly investments in companies with significant cash flows, which are mostly characterized by making routine dividend distributions (see also section below regarding the balances of distributable profits in investee companies that are held directly by the Company, and restrictions also arising from this), and partly investments in companies with potential for growth and enhancement. The Company s cash flows are affected and may be affected by the raising of new capital and new debt, including investments in the Company s capital and the raising of subordinated loans The Company s business results, and sometimes directly also the capital attributed to the shareholders in the Company, may be subject (in accordance with the current accounting principles) to high fluctuations between different reporting periods, which is due, inter alia, to the timing and scope of disposals or purchases implemented by the Company and its investee companies, due to the impact of changes in the prices of securities in the capital market and in the value of assets, and due to changes in the financing expenses of the Company and its investee companies. The Group s member companies evaluate, each on its own level, the value of the assets held by them, as well as the excess cost, both attributed and unattributed, which are recorded in their financial statements. The Group s investments in investee companies accounted by the equity method are evaluated for each holding company, on the level of its entire investment. Details regarding the book value of the main investments in investee companies as at March 31, 2017, as compared with market value, are presented in Note 3.C. to the financial statements. The increased sectorwide legislation, standardization and regulation in various operating sectors of the Israeli economy in recent years have an adverse impact, which is sometimes significant, on the operations of certain material investee companies of the Company, on their financial results and on the prices of their securities, and also on the Company s operations, and the Company believes that the foregoing has a significant impact on the Company and on its business operations. The Group s operations are affected by many additional external factors (see sections 7 and 22 in Part A of the Periodic Report). 4 The Company s results as presented in the Board of Directors Report refer to the part of the results which is attributable to the Company s owners, unless specified otherwise. The contribution to the results takes into account the Company s share in the results of the investee company, the Company s share in the disposal or amortization of holdings in the investee company, all net of amortization of excess cost. 3

7 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.2 The results for the first quarter of 2017 The Company ended the first quarter of 2017 with a loss of NIS 295 million, compared to net income of NIS 48 million in the corresponding period last year and a net income of NIS 262 million in the year For details regarding the main profits (losses), see section 1.9 below 1.3 Results of investee companies directly held by the Company and their contribution to the Company s results Holding rate (rounded) Income (loss) at the level of the Company Data at the level of the investee company As at March 31 For the first quarter of the year For the year For the first quarter of the year For the year NIS million DIC 73% (37) (54) Clal Holdings Insurance Enterprises 5 55% 235 (132) 53 Other 6 (493) (12) (289) Net income (loss) for the period (295) Weight of segments and contribution of segments for the Company s results, by operating segment Segment weight relative to total holdings 7 Profit (loss) at the level of the Company Data at the level of the investee company8 For the first quarter of the year For the year For the first quarter of the year For the year NIS million Cellcom 17% Property & Building and projects in Las Vegas 23% Shufersal 26% Clal Holdings Insurance Enterprises 5 26% 235 (132) Adama All other holdings 8% (22) (9) (86) Total investees Decrease (increase) in the fair value of subordinated convertible loans received from the controlling shareholder (424) 16 5 Financing, management and other 13 (120) (49) (656) Net income (loss) for the period (295) The contribution to the Company s profit with respect to its holding in Clal Holdings Insurance Enterprises primarily includes the changes in fair value, as a result of setting the balance of the investment in Clal Holdings Insurance Enterprises at market value and it is presented in the statement of income as a discontinued operation. 6 Includes, inter alia, financing expenses (including the updating of the value of the subordinated convertible loans), general and administrative expenses, writedowns for impairment, profits from disposal and contributions to loss in respect of the Company s direct holdings in projects in Las Vegas, IDB Tourism and the gas and oil sector. 4

8 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.5 Primary data regarding the Company s primary holdings (directly and indirectly) Weight of primary holdings and market segments Presented hereunder are tables specifying the relative weight of the Company s primary holdings, in consideration of the direct and indirect rates of holdings therein, which are calculated according to the holding value as at May 23, Mix of holdings by primary holdings: Mix of holdings by market branches: Investee company % of total holdings Market branches % of total holdings 1 Clal Holdings Insurance Commerce and Enterprises 26% services 29% 2 Shufersal 26% Financial 3 Property & Building and services 27% projects in Las Vegas 23% Real estate 22% 4 Cellcom 17% Communications 17% All other holdings 8% Technology 5% Total 100% Total 100% 1.6 Selected Data from the Financial Statements and Financing Characteristics Condensed statement of financial position data Company Consolidated As at March Current assets 1, ,582 9,847 Total assets 4,883 3,719 37,279 38,022 Current liabilities 885 1,061 9,955 10,133 Subordinated convertible loans from the controlling shareholder Other noncurrent liabilities 2,982 2,231 21,945 23,680 Equity attributable to shareholders in the Company Shareholders' equity with the addition of subordinated loans 1, , See section 1.5 below. 8 The data presented relate to the results of the investee companies as they are presented in their financial statements, (except for data for Cellcom, which are without the impact of the early implementation of the IFRS 15 Standard), and ignoring the Company's holdings rate in them, and ignoring the elimination of transactions between the companies and the sectors. 9 Includes the Company's share of a write down of NIS 70 million in respect of the Great Wash ("GW") project in Las Vegas in the first quarter of 2016 and in the year Refers to the results to the results of Property & Building and IDBG, a subsidiary owned by the Company and by Property & Building in equal shares, which primarily holds GW. Property & Building recorded a profit, amounts of NIS 40 million, NIS 114 million and NIS 263 million in the first quarter of 2017 and 2016 and in the year 2016, respectively. The Company s direct share in the losses of IDBG in the first quarter of 2017 and of 2016 and in the year 2016 amounted to NIS 5 million and NIS 2 million and NIS 37 million, respectively. 11 Includes the Company's share of the gain on the disposal of Adama and the derecognition of a nonrecourse loan in an amount of NIS 524 million. 12 Adama's results are reported in dollars and are presented in Shekels in this table. The convenience translation has been made in accordance with the average exchange rates in the relevant periods. 13 See section 1.11 below. 14 The value of holdings which does not include the liquid cash balance or the liabilities of the Company and DIC was calculated with respect to public companies based on the known market value (proximate to the publication date of the report) and with respect to private companies according to the book value presented in the financial statements (subject to the necessary adjustments with respect to realizations, acquisitions and dividends). The relative weight tables of the Company s primary holdings, as stated above, by investee companies and by market segments in which the Company operates, are based on the holding data as at May 23, 2017; The figures presented in the table are rounded. 15 See section and 1.7 below. 5

9 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) Liabilities and financing Data regarding debt and cash in the Company and in its whollyowned companies (excluding IDB Tourism): As at May 23 As at March 31 As at December Financial liabilities 16 (3,800) (3,771) (3,168) (3,079) Liquid asset balances Restricted deposits Debt, net 2,680 (3,148) (2,729) (2,878) Average lifetime of liabilities The net balances of the Company s debt, and the Company s share in the net debt of DIC as at March 31, 2017, March 31, 2016, December 31, 2016 and at a time shortly before the date of the approval of this report, were NIS 5.1 billion, NIS 5.6 billion, NIS 4.8 billion and NIS 4.8 billion, respectively. 16 Primarily includes bonds, liabilities to banks and liabilities to financial institutions, including accrued interest. See section below for details regarding, the Company s undertakings to banks and financial corporations to comply with financial covenants, and for details regarding guarantees and pledges that have been provided by the Company, as well as Notes 14.C, 14.E and 20 to the annual financial statements and Notes 4.A and B to the financial statements. The amount does not include subordinated convertible liabilities to the controlling shareholder (see Note 13.C to the annual financial statements). 17 Includes cash and cash equivalents, marketable securities and short term deposits. 18 As at December 31, 2016 a deposit that has been made available in support of the holders of the bonds (Series K), See Note 4.B.3 to the financial statements for details. As at May 23, 2017 monies from the consideration from the sale of 5% of the shares in Clal Holdings Insurance Enterprises, which will be used for the early repayment of the bonds (Series M), as stated in Note 3.B.4.a to the financial statements, as well as a deposit that is held as collateral in support of the swap transaction, which is detailed in that same Note. 18 6

10 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The Company s financing sources The following are the main monetary movements in the Company s head office * Liquid assets (1) For the first quarter of For the first quarter of Deposit Net Net held in Financial financial Liquid Financial financial trust debt debt assets (1) debt debt Balance at the beginning of the period ) 3,079( ) 2,878( 44 ) 3,092( )3,048( Subordinated loans from the controlling shareholder (2) Capital raisings (3) 1,129 ) 85( ) 1,060( ) 16( 167 ) 167( Exercise of options into shares in DIC (4) ) 210( ) 210( Repayment of financial debt principal ) 392( 392 ) 97( 97 Repayment of financial debt interest ) 21( 21 ) 10( 10 Repayment of a capital note that had been extended to IDB Tourism Investment in Modiin ) 2( )2( General and administrative expenses less financing income, net ) 13( (13) ) 11( )11( Financing expenses the accrual of interest on financial debt less linkage differentials ) 45( ) 45( ) 16( )16( Balance at the end of the period 623 ) 3,771( ) 3,148( 439 ) 3,168( )2,729( (1) Liquid assets including cash, cash equivalents, marketable securities and short term deposits. (2) For details regarding the receipt of subordinated loans from the controlling shareholder, see Note 13.C to the annual financial statements (3) For details, see Note 4.B.4. to the financial statements. (4) For details, see Note 3.B.5. to the financial statements. * For details regarding the state of the Company s liquidity on a solo basis and its cash flows from operating, investment and financing activities, see the Company's abbreviated interim cash flow data in the Company's separate statement. 7

11 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics(Cont.) The Company s financing sources (Cont.) Presented below are details regarding the repayment of the Company s liabilities (1) : For the year ending March 31, 2018 For the six months ended September 30, 2017 Principal Interest Total Principal Interest Total Bonds 566 Loans from banks 110 Loans from financial institutions and others 17 Total (1) The projected repayments are presented according to the repayment dates set in the loan agreements, after amendments as detailed in Note 4.B to the financial statements. See also the Company s report regarding the state of the Company s liabilities, by repayment dates (T126), which was published through public electronic reporting on May 25, 2017 (reference number ) Restrictions and financial covenants In connection with the Company s loans from banks and from a financial corporation ("The relevant lending corporations"), where the balance of its debt to them as at March 31, 2017 amounts to NIS 127 billion, the Company has undertaken towards those relevant lending corporations, inter alia, to fulfill various financial covenants, as specified in Note 14.E. to the annual financial statements. In March 2017, the Company received the consent of the relevant lending corporation, according to which, in light of the partial early repayment, in the amount of NIS 143 million, in the first quarter of 2017, most of the financial covenants and the other liabilities in the Company s loan agreements were canceled, and in their place, the Company is required to fulfill, inter alia, the following covenants and liabilities: (A) The balance of cash and marketable securities will be no less, at any time, than the total sum of repayments expected by the Company until the end of 2017 to its financial creditors (not including bond series which were issued by the Company); (B) Until the repayment of the entire unpaid balance of the loans, the Company will not perform a distribution, as defined in the Companies Law, ; and (C) Mr. Eduardo Elsztain and/or corporations under his control will hold, directly and/or indirectly, at least 51% of the Company s issued and paidup share capital (at full dilution). For details regarding a loan from a secured creditor, which was repaid in an early repayment in March 2017, and the partial early repayments of loans from the relevant lending corporations, as described above, see Note 4.B. to the financial statements. On March 31, 2017 and at a time close to the time of the publication of the report, the Company s balance of cash and marketable securities amounted to a total of NIS 623 million and NIS 1,120 million, respectively. At each of the said times, the amount is higher than the total repayments expected by the Company until the end of 2017 to its financial creditors, which amount to a total of NIS 129 million and to NIS 119 million, respectively, as at March 31, 2017 and at a time shortly before the publication of the report (not inclduing the series of marketable bonds, which the Company has issued). As at March 31, 2017 and at a time shortly before the publication of the report, the Company was in compliance with the financial covenants, which were set in the amended agreements between it and the financing corporations. 8

12 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The Company s financing sources (Cont.) Restrictions and financial covenants (Cont.) In connection with the Company's bonds (Series M), the balance of which amounts to NIS 1,067 million as at March 31, 2017, the Company has undertaken in accordance with the trust deed that it will meet a financial covenant throughout the period of the bonds, pursuant to which the equity of Clal Holdings Insurance Enterprises will not be less than NIS 1.8 billion. In addition, restrictions have been set on the distribution of profits and on the creation of negative floating lien, as detailed in the trust deed. In accordance with Clal Holdings Insurance Enterprises' latest financial statements, the Company is in compliance with the financial covenant that was set in the trust deed Cash flow forecast report for the Company and its whollyowned head office companies (excluding IDB Tourism) The public auditors of the Company have drawn the attention of the readers of the financial statements to the to the management's plans visàvis significant obligations of the Company to holders of bonds which are expected to be redeemed at the end of See Note 1.B. to the financial statements. In light of the foregoing, we hereby present the cash flow forecast report, including a breakdown of the liabilities and the financial resources from which the Company expects to be able to repay the liabilities during the two year period ending March 31, The information provided in this section should be read in conjunction with the entire periodic report and with the financial statements and in particular together with Note 1.B to the financial statements regarding the Company's financial position The other sources which the Company requires in order to fulfill the uses in the periods covered by the forcesast 2018 amount to a total of NIS 101 million and in the first three months of 2019, the amount to NIS 29 millionas presented below. The Company believes that the main sources which it will use during the years of the forecast, which are presented below, to repay the debt, include: A) Consideration from the sale of the Company's holdings in Clal Holdings Insurance Enterprises and in private companies, see Note 3.H.6.B. to the annual financial statements and Note 3.B. to the financial statements for details; B) Receipt of dividends from DIC; C) The expansion of series of bonds. 9

13 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its whollyowned head office companies (excluding IDB Tourism) April 1, 2017 to December 31, 2017 For the period from January 1, 2018 to December 31, 2018 Sources Balance of liquid assets at the beginning of the period (1) Receipts from IDB Tourism for the repayment of debt (2) 154 Dividend from DIC (Note 8.G.1 to the financial statements) 481 Sale of shares in Clal Insurance Enterprises in a swap transaction 166 Other sources required to finance the uses (3) 101 Total sources 1, Expected liabilities (expected uses) : Cash flows used for operating activities General and administrative expenses, net Cash flows used for financing activities (4) Repayment of principal of loans from banks and institutions (5) 127 Repayment of interest on loans from banks and institutional body (5) 2 Repayment of bond principal (5) Repayment of bond interest (5) Others 2 4 Cash flows from investing activities 2 Total uses Balance of liquid assets at the end of the period 372 January 1, 2019 to March 31, 2019 (1) The balance of liquid assets includes cash, cash equivalents and shortterm deposits. (2) For details of a possible transaction for the merger of Israir and Sun D'or, see Note 3.H.B.6 to the annual financial statements. (3) In the Company's assessment other sources required to finance the uses will include the consideration from the sale of private companies, a dividend from DIC and an expansion of series of bonds. (4) The Company s cash flow forecast report is presented according to the contractual amortization schedules of the Company s liabilities, as at the time of the publication of the financial statements

14 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its whollyowned head office companies (excluding IDB Tourism) (cont') (5) The following table presents a breakdown of the Company's repayments of loans and bonds (based on their contractual amortization schedules, including interest and linkage differentials based on the Index and the Bank of Israel interest rate as at the time of the publication of the report): Total Q2 Total Q3 Total Q4 Total Q1 Total Q2 Total Q3 Total Q1 Total Q1 Series G bonds Principal Interest Series I bonds Principal Interest Series J bonds Principal Interest 14 7 Series K bonds Principal Interest Series L bonds Principal Interest Series M bonds Principal 136 Interest Banks Principal Interest 1 1 Financial Principal 10 7 institutions Interest Total Principal Interest Total The bonds (Series G, I, J, K, L and M) were offered to the public and are listed for trading on the stock exchange. Out of the total repayments in the nine months ending December 31, 2017, a total of NIS 10 million was repaid to an institutional body. The payments of interest include the amounts if interest, which have been calculated in accordance with the repayment scheduled, with the addiiton of compensation for early repayment. The cash flow forecast, the information contained therein, including other sources needed for the period of the cash flow forecast, constitute an estimate of the required sources, and the underlying assumptions and estimates include forward looking information, as defined in the Securities Law, which is based on the Company s estimates regarding: the probability of the occurrence of relevant business scenarios from which the Company expect receipts and/or regarding investments in investee companies, the timeframes for the realization of these scenarios and the chances of receiving the necessary approvals; results of business operations; possible alternatives for obtaining sources to repay its liabilities when they come due; repayment dates and amounts with respect to the Company s bonds and loans. 11

15 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its whollyowned headquarter companies (excluding IDB Tourism) (Cont.) (5) (cont.) These estimates may not materialize, in whole or in part, or may materialize in a manner which is significantly different from the forecast. The main factors which could affect this include: changes in business processes from which sources are expected for the Company; a depression or deterioration in the status of the capital market and the economy, leading to a significant decrease in the value of the Company s marketable holdings; dependence on the bond yields of the Company and of main investee companies, on the stock prices of DIC and Clal Holdings Insurance Enterprises, primarily for the purpose of implementing financial processes; demands by financing entities for significant changes to the repayment dates of existing credit, and implementing measures by the Company s creditors against it; restrictions which could apply to a primary investee company DIC, difficulties in selling the control core and the holdings of Clal Holdings Insurance Enterprises, including difficulties in obtaining regulatory approvals which are required by a potential buyer; The impact of the outline of the forced sale on the share price of Clal Holdings Insurance Enterprises, and the reduced ability to maximize the consideration which will be received with respect to the sale of shares in Clal Holdings Insurance Enterprises; a deterioration in the business or financial position of any of the Group s member companies; noncompletion of other significant business processes in the Company and/or in investee companies; and the realization of any of the Company s risk factors (as described in section 22 of Part A of the periodic report) Retained earnings and negative balances of distributable profits 19 The balance of distributable profits (as this term is defined in section 302 of the Companies Law), of the Company and of the primary investee companies directly held by the Company is as follows: Balance of distributable Amount The Company earnings as at IDB Development Corporation Ltd. 20 March 31, 2017 (518) DIC 20 March 31, Clal Holdings Insurance Enterprises 21 June 30, , For details regarding restrictions on the distribution of dividends, see section 5 of part A of the periodic report. In addition, the aforementioned companies, as well as their investee companies, are subject under the law, to various agreements or permits to various restrictions on the subject to the distribution of dividends. See also Note 14.E and F to the annual financial statements. 20 The balance of the distributable profits as of March 31, 2017 has been calculated based on the net income (loss) for the shareholders that has accumulated in the last eight quarters, in accordance with the provisions of Section 302 of the Companies Law. the balance of the retained earnings is lower. 12

16 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The following are the movements in the equity attributed to the shareholders in the Company 22 For the year For the three months ended March 31 ended December Balance at the beginning of the period Changes during the period Receipt of convertible subordinated loans from the controlling shareholder Net profit (loss) attributable to the shareholders in the Company ) 295( Capital reserves on translation differences ) 109( ) 147( 218 Hedging reserves ) 2( ) 42( )23( Capital reserves in transactions with noncontrolling interests 77 ) 5( )102( Capital reserves and other movements, net Balance at the end of the period The following is the movement in the balance of subordinated convertible loans received from the controlling shareholder For the year For the three months ended March 31 ended December Balance at the beginning of the period Changes in the period Receipt of convertible subordinated loans from the controlling shareholder Increase (decrease) in the fair value of the subordinated loans 424 ) 16( )5( Balance at the end of the period It should be clarified that the abovementioned subordinated loans are subordinated to all of the Company's existing and future debt, and accordingly the Company does not expect that they will be repaid in the forseeable future and accordingly, even though they are presented in the Company's statement of financial position as noncurrent liabilities, the Company views them as part of the Company's "economic equity" (NonGAAP measure). 21 For details regarding the restrictions on the distribution of dividends by insurance companies, see Note 3.H.5.(I) to the annual financial statements. As at the time of the publication of this report, Clal Holdings Insurance Enterprises Ltd. has not yet published its financial statements as at March 31, 2017 and accordingly the data that are stated above are as at December 31, See also section 1.7 below. 23 For details regarding the subordinated convertible loans, see Note 13.C. to the annual financial statements The receipt of the subordinated convertible loans, which is presented under movements in the subordinated loans reflects the fair value of the loans at the time of their receipt. The amount that appears under the movement in equity attributed to the shareholders reflect the balance of the amount that has been received less the fair value, as aforesaid. The equity attributed to the shareholders in the Company does not include the fair value of the subordinated convertible loans that have been received from the controlling shareholder. 24 Includes a capital reserve on transactions with the controlling shareholders, in an amount of NIS 65 million, which was recorded following the issue of bonds (Series I) by the Company within the framework of the completion of IDB Holdings' creditors arrangement (see Note 13.C.5 to the annual financial statements). 13

17 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) The linkage basis of the Company's assets and liabilities as at March 31, 2017 (including wholly owned copnsolidated companies, other than IDB Tourism) Indexlinked Fixed assets Derivatives 2 Investment in investee companies Other receivables and debit balances Investment in companies held for sale Cash and cash equivalents Total assets 2 Nonmonetary Unlinked items 1 1, , ,105 3,635 Total 1 2 1, , ,742 Bonds (including maturities) 1,889 1,627 3,516 Employee benefits 1 1 Shortterm loans from banks and a financial institution Other payables and credit balances Current provisions 2 2 Subordinated convertible loans from a controlling shareholder Total liabilities 1,941 2, ,227 Net exposure as at March 31, 2017 ) 1,939( ) 1,172( 3, Net exposure as at March 31, 2016 ) 2,323( ) 423( 3, Net exposure as at December 31, 2016 ) 2,070( ) 847( 3, For details regarding the linkage bases of the total assets and of the total liabilities in the consolidated statement of financial position as of March 31, 2017, see Section 2.2 below. 14

18 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financing Characteristics (Cont.) Sensitivity tests for financial instruments For details regarding sensitivity tests for sensitive financial instruments included in the consolidated financial statements as at March 31, 2017, based on changes in market factors, see Annex A to the Board of Directors Report. Presented below are the summingup lines of the sensitivity tables As at March 31, 2017: Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 2% in absolute Fair 2% in absolute value 10% 5% value 5% 10% value Sensitivity to changes in interest rates 1, (23,163) (150) (304) (1,946) Gain (loss) from changes in parameters examined in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 10% 5% Fair value 5% 10% Sensitivity to changes in the US Dollar exchange rate (26) (14) (381) Sensitivity to changes in the prices of marketable securities ,583 (179) (358) Gain (loss) from changes in parameters examined in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 2% 1% Fair value 1% 2% Sensitivity of Index Forward and SWAP to changes in the Consumer Price Index* (27) (19) (39) As at March 31, 2016: Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 2% in absolute 2% in absolute value 10% 5% Fair value 5% 10% value Sensitivity to changes in interest rates 1, (20,956) (188) (381) (1,633) Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 10% 5% Fair value 5% 10% Sensitivity to changes in the US Dollar exchange rate (389) (197) (4,010) Sensitivity to changes in the prices of marketable securities ,033 (152) (304) 15

19 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Selected Data from the Financial Statements and Financial Characteristics (Cont.) 1.6/7 Sensitivity tests for financial instruments (cont.) As at March 31, 2016 (cont.) Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 2% 1% Fair value 1% 2% Sensitivity of Index Forward and SWAP to changes in the Consumer Prices Index* (48) (19) (38) * See Section 2.2, below regarding the linkage bases of the assets and the liabilties in the consolidated statement of financial position on the subject of the possible impact of changes in the Consumer Prices Index on the results of the Company's operations. As at December 31, 2016: Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 2% in absolute 2% in absolute value 10% 5% Fair value 5% 10% value Sensitivity to changes in interest rates 1, (23,549) (172) (347) (2,005) Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 10% 5% Fair value 5% 10% Sensitivity to changes in the US Dollar exchange rate (17) (7) (311) 7 17 Sensitivity to changes in the prices of marketable securities ,157 (158) (315) Gain (loss) from changes in parameters in respect of which sensitivity tests have been performed Increase in parameter Decrease in parameter 2% 1% Fair value 1% 2% Sensitivity of Index Forward and SWAP to changes in the Consumer Price Index* (25) (18) (37) * See Section 2.2, below regarding the linkage bases of the assets and the liabilties in the consolidated statement of financial posiiton on the subject of the possible impact of changes in the Consumer Prices Index on the results of the Company's operations. 16

20 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Changes in equity and the quality of the profit For details regardingchanges and the impacts on the Company s equity and the quality of its profit, see section 1.1 above. The Company s overall comprehensive loss in the first quarter of the year 2017 (including noncontrolling interests) amounts to NIS 449 million as compared to a comprehensive loss (including noncontrolling interests) of NIS 54 million in the comparative quarter in the previous year, with the difference deriving primarily from the following factors: A. The loss in the first quarter of 2017 (including noncontrolling interests) amounts to NIS 250 million, including financing expenses of NIS 424 million in respect of the increase in the fair value of the subordinated convertible loans from the controlling shareholder and a profit of NIS 235 million in respect of an increase in the value of Clal Holdings Insurance Enterprises, as compared with a profit of NIS 221 million in the comparative quarter last year, which included financing income of NIS 16 million in respect of a decrease in the value of the subordinated convertible loans and a loss of NIS 131 million in respect of a decrease in the value of Clal Holdings Insurance Enterprises. B. In the first quarter of 2017 the Company recorded an other comprehensive loss after deducting tax in respect of translation differences from foreign currency in respect of foreign operations in an amount of NIS 183 million, as compared with an other comprehensive loss net of tax of NIS 116 million in the comparative quarter in the previous year. The main change derives from the decline in the exchange rate of the Dollar in the first quarter of 2017, at a rate of 5.5% as compared with a decline of 3.5% in the comparative quarter in the previous year. C. In the first quarter of 2017, the Company recorded an other comprehensive loss in respect of investee companies accounted by the equity method, net of tax, in an amount of NIS 13 million, as compared with an other comprehensive loss of NIS 158 in the comparative quarter in the previous year. The Company's comprehensive loss in the first quarter of 2017, after deducting noncontrolling interests, amounted to NIS 397 million, as compared with a comprehensive loss of NIS 145 million in the comparative quarter in the previous year. 1.8 Summary of the Company s results (consolidated) For the year For the three months ended March 31 ended December Net income (loss) for the period attributed to the shareholders in the Company ) 295( Net income attributed to the noncontrolling interests Net income ( loss )for the period attributed to the shareholders in the Company and to the noncontrolling interests ) 250( Profit (loss) from the realization and the increase (decrease) in the value of investments, assets and dividends, less write downs of assets and increase in net value (including noncontrolling interests) ) 2( ) 25( )15( Profit from discontinued operations (including noncontrolling interests) Comprehensive income (loss) attributed to shareholders in the Company ) 397( ) 145(

21 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.9 Details regarding the principal nonrecurring gains (losses) For the three months ended March Involving cash flows Gain on early repayment in respect of the purchase of loans from the minority in investee companies of IDBG 32 Not involving cash flows 25 Change in the fair value of Clal Holdings Insurance Enterprises 235 )131( Updating of the fair value of subordinated loans from the controlling shareholder ) 424( 16 Decrease in the value of inventory of lans and the Tivoli project in IDBG )30( Updating of deferred tax balances following a change in the tax rate Contribution to the business results of the Company and of investee companies, by operating segments Cellcom Segment The Company s share in the results of the Cellcom segment in the first quarter of 2017 amounted to a profit of NIS 1 million, as compared with a a profit of NIS 22 million in the first quarter of 2016 and profit of NIS 56 million in the year The first quarter of 2017 was typified by the continuation of increased competition in the cellular field, which expressed itself in an erosiion in revenues from services as compared with the comparative period in the previous year and a continuation of the growth in the fixed line field. In the fixed line field, Cellcom is continuing a trend of growth, which is attributable to the recruitment of customers in the television field, in the wholesale market and in the Triple services. 25 See Section below for details regarding income from an increase in the fair value of realestate, including real estate under construction. 18

22 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Cellcom Segment (cont d) Summary of the business results of the Cellcom segment 26 : The first quarter of Increase (decrease) % Explanation Revenues from services ) 4.5( The decrease in the first quarter of 2017 by comparison with the comparative quarter in the previous year derived primarily from a decrease of 8.9% in revenues from services in the mobile segment, following a decrease in revenues from cellular services, which was a result of the continuing erosion in the prices of those services, as well as the loss of customers in light of competition in the cellular market. In addition, this decrease was also affected by a decrease in revenues from incountry roaming services. On the other hand, there was an increase of 5.7% in the fixedline segment, by comparison with the comparative quarter in the previous year, which derived primarily from an increease in revenues in the internet and television field. Revenues from enduser equipment ) 11.3( The decrease in the first quarter of 2017 by comparison with the comparative quarter in the previous year derived primarily from a decrease in the volume of end user equipment that was sold during the first quarter of 2017, by comparison with the comparative period in the previous year, which was partially offset by an increase in sales of enduser land line equipment. Total income 959 1,022 ) 6.2( Cost of sales and services Gross profit ) 665( ) 670( ) 0.7( The decrease in the first quarter of 2017 by comparison with the comparative quarter in the previous year derived primarily from a decrease in the cost of sales of end user equipment that has been sold, primarily as a result of a decrease in the volume of end user equipment that was sold in the mobile segment during the first quarter of 2017, by comparison with the comparative period in the previous year. This decrease was partially offest by an increase in content expenses for the television services and in communications costs for the internet services in the fixedline segment by comparison with the comparative period in the previous year )16.5( Gross profit rate as a percentage of revenues Operating expenses Net income 30.7% 34.4% )10.8( ) 255( ) 251( ) 61.4( The decrease in the first quarter of 2017, by comparison with the comparative period in the previous year derives from a decrease in revenues, primarily as a result of the continuation of the erosion in revenues from cellular services (as mentioned above). EBITDA ( ) The decrease in the first quarter of 2017 by comparison with the comparative period in the previous year derives primarily from the continued erosion in revenues from services. 26 Cellcom's summary results for the first quarter of 2017 are stated without the early implementation of the provisions of International Financial Reporting Standard No. 15. (IFRS 15), which was initially implemented by Cellcom in the first quarter of Cellcom reported net income of NIS 25 million in its financial statements for the first quarter of 2017, after the impact of the early implementation of IFRS

23 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Cellcom Segment (cont d) Rate of EBITDA from total revenues Financing expenses, net Tax expenses The first quarter of Increase (decrease) % Explanation 18.0% 23.3% )22.7( ) 31( ) 24( 29.2 The increase in the first quarter of 2017 as compared to the comparative period in the previous year derived primarily from a decrease of 0.2% in the index in the first quarter of 2017 as compared with a decrease of 0.9% in the index in the first quarter of ) 3( ) 18( ) 83.3( Net income 4 58 ) 93.1( Cellcom's main operating indices The first quarter of Change % The mobile segment Number of cellular subscribers at the end of the period (in thousands) 2,792 2,813 )0.7( Churn rate 12.0% 11.1% 8.1 Average monthly revenues per subscriber (ARPU) (in NIS) )7.7( The fixedline segment Number of households at the end of the period television (in thousands) Number of households at the end of the period internet infrastructure (in thousands) Property & Building and projects in Las Vegas The Company s share in the results of the Property & Building and projects in Las Vegas segment in the first quarter of 2017 amounted to income of NIS 13 million, as compared with income of NIS 66 million in the first quarter of 2016 and income of NIS 101 million in the year In continuation of the year 2016, the first quarter of 2017 was characterized by stability in the incomegenerating property branch in Israel, which was reflected both in the level of demand and in the level of rental prices and occupancy rates. During the period, demand was seen for office, commercial, industry and logistics areas, in most of the operating areas at Property & Building, which were reflected in the stabilization of prices and maintenance of high occupancy rates of approximately 97%. 20

24 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Property & Building and projects in Las Vegas (cont') Summary of the business results of Property & Building 27 Revenues from property rentals Revenues from the rental of identical properties 28, after the deduction of holding expenses ( NOI ) Revenues from the sale of apartments and real estate The first quarter of Increase (decrease) % Explanation The increase in the first quarter of 2017, by comparison with the comparative period in the previous year, derived from the population of incomegenerating projects which were completed in the course of the year The increase in the first quarter of 2017, by comparison with the comparative period in the previous year, derived from a real increase in rental fees The recording of revenues from the sale of apartments and real estate is affected by the timing of the population of the apartments. It should be mentioned that in the first quarter of 2017, Property and Buidling sold 80 apartments in Israel, as compared with 150 apartments in the comparative period in the previous year, where the increased sales in that period derived inter alai, from the launching of a residential project in Be'er Sheva. In the first quarter of 2017, 12 apartments were populated, as compared with 13 apartments, which were populated in the first quarter of EBITDA The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived from an increase in revenues from the rental of properties, as explained above. Property & Building's share of the net profit of investee companies Financing expenses, net Tax (expenses) tax benefit ( ) Property & Building's share of the results of investee companies in the first quarter of 2016 included a gain of NIS 14 million from the sale of the Hydrabad project in India. ) 72( ) 45( 60.0 The increase in the first quarter of 2017 by comparison with the comparative period in the previous year denived primarily from a decrease of 0.2% in the index in the first quarter of 2017 as compared with a decrease of 0.9% in the index in the first quarter of ) 43( 14 Transition to a tax expense Net income )64.9( The transition from a tax benefit in the first quarter of 2016 to tax expenses in the first quarter of 2017 derives from revenues of NIS 51 million, which were recorded in the first quarter of 2016, of which an amount of NIS 35 million is attributed to shareholders in Property & Building, which derived rom the updating of deferred taxes, as a result of the lowering of the tax rate for companies in Israel from 26.5% to 25% as from January Includes the share of Property & Building in projects in Las Vegas. 28 Properties in existence as of March 2017,31 and which also existed in the comparative quarter in the previous year. 29 Income before taxes on income, financing expenses, depreciation, amortization, evaluations and Property & Building's share of the business results of investee companies. 21

25 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Shufersal Segment The Company s share in the results of the Shufersal segment in the first quarter of 2017 amounted to profit of NIS 22 million, as compared with profit of NIS 20 million in the first quarter of 2016 and a profit of NIS 92 million in the year Shufersal s results in the first quarter of 2017 were affected by several factors: Seasonality. Continued acceleration of the development of Shufersal s digital platform, which primarily includes the Shufersal Online system, including the opening of designated warehouses. Continued expansion and strengthening of the private brand. Summary of Shufersal's business results The first quarter of Increase (decrease) % Explanation Revenues from the retail segment 2,893 2, The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from seasonality. The same store sales, in stores which operated fully in both of the quarters, remained unchanged. Shufersal's turnover in the first quarter of 2017 increased by 1%, by comparison with the comparative period in the previous year. Revenues from the real estate segment ) 4.7( The decrease in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from vacant space in the income generating real estate. Revenues from the credit card customer club management segment The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from an increase in commissions in respect of credit margins. Total revenues 30 2,903 2, Sales per square meter (in NIS) The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarly from an increase in sales and from a decrease in floor space. Gross profit The increase in the gross profit and in the gross profit rate in first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from an increase in the private brand's market share, from an improvement in trading terms, from the components of the basket and the mix of special offers. Gross profit as a 25.4% 25.1% 1.2 percentage of total revenues Operating expenses ) 629( ) 623( 1.0 Operating income 31 Operating income rate 3.7% 3.3% After adjustments in respect of intersegmental rentals 31 After other income and expenses. 22

26 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Shufersal Segment (cont'd) Summary of Shufersal's business results (cont') The first quarter of Increase (decrease) % Explanation EBITDA The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from the improvement in the operating income. EBITDA as a percentage of total revenues 6.4% 5.9% 8.5 Financing expenses, net ) 25( ) 21( 19.0 The increase in the first quarter of 2017 by comparison with the comparative period in the previous year derived primarily from a decrease in the index in the first quarter of 2017 by a lower rate than the decrease in the index in the comparative period in the previous year and as a result of an increase in forward and swap transactions. This increase was partially offset by a decrease in interest expenses as a result of the recording of income from the cancellation of impairment in value on a loan to an affiliated company of Shufersal's in an amount of NIS 14 million. Tax expenses 19( ) ) 21( )9.5( Net income Clal Holdings Insurance Enterprises Segment The Company s share in the results of the Clal Holdings Insurance Enterprises segment in the first quarter of 2017 amounted to a profit of NIS 235 million, by comparison with a loss of NIS 132 million in the first quarter of 2016 and a profit of NIS 53 millionin the year Following the transfer of the means of control in Clal Holdings Insurance Enterprises, which are held by the Company, to a trustee in August 2013, the results of Clal Holdings Insurance Enterprises, from the that date, primarily include the changes in the market value of the Company s holdings of the shares of Clal Holdings Insurance Enterprises. For details regarding the stock exchange value of the shares of Clal Holdings Insurance Enterprises, which are owned by the Company as at March 31, 2017, and at a time close to the date of the approval of this report, see Note 3.B.4.C. to the financial statements. 23

27 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Management, financing and other expenses, net Administrative expenses, taxes and other expenses, net: The Company The Company s share in DIC's net expenses Financial expenses, net: The Company The Company s share in DIC's net expenses The first quarter of Explanation The decrease in the expenses, in the first quarter of 2017, by comparison with the comparative quarter in in the previous year derived from: 1. A decrease of NIS 2 million in legal expenses primarily as a 7 12 result of activity opposite the trustees for the bonds and as a result of legal proceedings that the Company was a party to in the first quarter of A decrease of NIS 1.5 million in salary expenses, primarily as a result of a decrease in the number of employees in the Company. 3. In the first quarter of 2016, the Company paid NIS 1.4 million in respect of POSI insurance. 4 8 The decrease in the Company's share of the expenses in the first quarter of 2017 by comparison with the first quarter of the previous year derived primarily from a decrease in salary expenses The increase in the financing expenses, net in the first quarter of 2017, by comparison with the comparative quarter in the previous year derives from an increase of NIS 31 million in the financing expenses on the Company's gross debt, which derived primarily from the change in the rate by which the index decreased*, from an increase in the gross debt as a result of recruitments of debt in the first quarter of 2016 and in the first quarter of 2017 as well as from the payment of an early repayment commission of NIS 6 million to a financial institution The increase in the financing expenses, net in the first quarter of 2017, by comparison with the comparative quarter in 2016 derived from: 1. An increase of NIS 32 million in the Company's share of the expenses in respect of exchange differences on balances in DIC that are linked to the exchange rate of the Dollar. 2. A decrease of NIS 14 million in the Company s share of DIC's net financing expenses in respect of linkage differentials on DIC's indexlinked liabilities after deducting expenses from hedging transactions on some of the said liabilities, and this primarily because of the change in the rate by which the index decreased.* 3. The Company's share in net financing expenses of NIS 11 million in respect of interest and the revaluation of a hybrid financial instrument in respect of a nonrecourse loans from a Chinese bank in the first quarter of Total * The rate of the decrease in the index in the first quarter of 2017 was 0.2%, by comparison with a decrease of 0.91% in the index in the comparative quarter in the previous year Remuneration for interested parties and senior officers For details regarding decision regarding the Company s commitment under the extension of the directors' and officers' liability insurance policy, see Note 4.C. to the financial statements, which follow. 24

28 2. Exposure to and Management of Market Risks 2.1 General No significant changes have occurred in the reporting period in the field of the Company's exposure to market risks and the ways in which they are managed in relation to the Company's reporting on this issue in the report of the Company's Board of Directors for the year The Company does not manage its investee companies' risks. 2.2 The linkage basis of the total assets and the total liabilities in the consoldiated statement of financial position as of March 31, 2017: As of March 31, 2017 Indexlinked Linked to the Linked to another Nonmonetary Dollar currency Unlinked items Total Total assets 569 1, ,414 28,484 37,279 Total liabilities 15,524 2, ,851 3,838 32,401 Net balance as of March 31, 2017 (14,955) (515) 139 (4,437) 24,646 4,878 Net balance as of March 31, 2016 (16,634) (4,186) 150 (1,963) 26,776 4,143 Net balance as of December 31, 2016 (16,041) (454) 128 (2,558) 24,615 5, Investee companies No significant changes have occurred in the reporting period in the field of the investee companies' exposure to market risks and the ways in which they are managed in relation to the Company's reporting on this issue in the report of the Company's Board of Directors for the year Disclosure Requirements Regarding the Corporation s Financial Report 3.1 Major Events Subsequent to the Date of the Statement of Financial Position For details regarding major events subsequent to the date of the statement of financial position, see Note 8 to the financial statements. 3.2 Reference drawing attention by the Company s auditors The auditors review report to the shareholders of the Company includes reference to that stated in Note 1.B. to the financial statements, which, inter alia, describes the Company s financial position and management's plans with respect to significant liabilities of the Company to the bondholders, which are expected to be repaid at the end of In accordance with the provisions of the note, the materialization of management s plans will be dependent upon factors which are not under the Company s complete control, inter alia, with reference to the Company s ability to execute its plans to dispose of holdings in Clal Holdings Insurance Enterprises, the requirements of the Concentration Law and the Company's ability to deal with the requirements of Concentration Law. However, the Company's management estimates that the Company will be able to repay its liabilities when they come due, and to continue its activities. 3.3 Specific disclosure for the bondholders See Annex B to the board of directors report. Eduardo Elsztain Chairman of the Board of Directors Sholem Lapidot CEO Tel Aviv, May 25,

29 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks Sensitivity tests with respect to market factors Presented below are tables of sensitivity tests regarding the market value of sensitive financial instruments held by the Group. The following tables should be read in light of the following remarks: 1. The specified instruments are not necessarily presented in the financial statements at fair value. The information refers primarily to the Group s liabilities. 2. Changes in exchange rates have an effect on both reported results and on the Company s capital as a result of the charging of translation differences, due to the translation of the financial statements of investee companies which are prepared in foreign currency. A. Sensitivity tests as at March 31, 2017 (in ) Sensitivity test to changes in interest rates Instrument Profit (loss) from the change Profit (loss) from the change Absolute increase of 2% in the interest rate Increase of 10% in the interest rate Increase of 5% in the interest rate Fair value as at March 31, 2017 Decrease of 5% in the interest rate Decrease of 10% in the interest rate Absolute decrease of 2% in the interest rate Longterm loans to investee companies accounted for under the equity method (including current maturities)* ) 5( ) 1( ) 1( Current investments, not including derivatives ) 128( ) 6( ) 3( 1, Bonds (including maturities) 1, ) 21,496( (131) ) 263( )1,826( Loans from banks (including maturities) ) 2,406( (19) ) 40( )202( Other financial liabilities (including maturities) ) 544( (4) ) 8( )51( Total 1, ) 23,163( (150) ) 304( )1,946( * The repayment dates of the loans ave not yet been determined. Sensitivity test to changes in the exchange rate of the US Dollar exchange rate Instrument Profit (loss) from the change Profit (loss) from the change Increase of 10% in the exchange rate Increase of 5% in the exchange rate Fair value as at March 31, 2017 Decrease of 5% in the exchange rate Decrease of 10% in the exchange rate Longterm loans to investee companies accounted for under the equity method (including current maturities) ) 8( )16( Deposits and other longterm loans ) 6( )12( Other assets measured at fair value, not including derivatives ) 1( )3( Current investments, not including derivatives ) 5( )10( Trade and other receivables ) 3( )6( Assets classified as held for sale ) 4( )8( Shortterm loans and deposits ) 8( )17( Cash and cash equivalents ,088 ) 55( )109( Loans from banks (including current maturities) ) 166( ) 84( ) 1,667( Other financial liabilities ) 15( ) 8( ) 150( 8 15 Trade payables, other payables and credit balances ) 17( ) 8( ) 165( 8 17 Liabilities classified as held for sale ) 20( ) 10( ) 196( USD forward Not recognized as accounting hedge 12 6 ) 5( ) 6( )12( USD options for hedging purposes not recognized for accounting purposes, PutLong ) 1( 1 ) 1( )1( Total ) 26( ) 14( ) 381(

30 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks (Cont.) Sensitivity tests with respect to market factors (Cont.) A. Sensitivity tests as at March 31, 2017 (in ) (Cont.) Instrument Index forward not recognized as accounting hedging 24 Swap Not recognized as accounting hedging Swap Recognized as accounting hedging 15 Total 39 Sensitivity test to changes in the Consumer Prices Index* Profit (loss) from the change Increase of Increase of Fair value as at 2% in the 1% in the March 31, index index 2017 Profit (loss) from the change Decrease of Decrease 1% in the of 2% in index the index 12 ) 24( ) 12( )24( 2 7 ) 5( ) 7( )15( 19 ) 27( ) 19( )39( * For details regarding the possible effect of changes in the Index on Company s operating results, see the linkage statements in Section 2.2 above. Sensitivity test to changes in the prices of marketable securities on Israeli and foreign stock exchanges Instrument Profit (loss) from the change Profit (loss) from the change Increase of 10% in the prices Increase of 5% in the prices Fair value as at March 31, 2017 Decrease of 5% in the prices Decrease of 10% in the prices Investment in marketable securities * 3,583 ) 179( )358( * Including an investment in the amount of NIS 1,736 million in Clal Holdings Insurance Enterprises, which is measured at fair value through profit and loss, and which is presented in the Company s financial statements under assets held for sale. 27

31 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks (Cont.) Sensitivity tests with respect to market factors (Cont.) B. Sensitivity tests as at March 31, 2016 (in ) Sensitivity test to changes in interest rates Instrument Profit (loss) from the change Profit (loss) from the change Absolute increase of 2% in the interest rate Increase of 10% in the interest rate Increase of 5% in the interest rate Fair value as at March 31, 2016 Decrease of 5% in the interest rate Decrease of 10% in the interest rate Longterm loans to investee companies accounted by the equity method (including current maturities)* 4( Other investments measured at fair value through profit and loss, not including derivatives 7( ) ) 1( ) 1( * The repayment dates of the loans have not yet been determined Absolute decrease of 2% in the interest rate ) ) 4( ) 2( Current investments, not including derivatives ) 111( ) 4( ) 2( Bonds (including maturities) 1, ) 18,961( ) 163( ) 331( )1,475( Loans from banks (including maturities) ) 2,777( ) 26( ) 52( )232( Other financial liabilities (including maturities) ) 552( ) 4( ) 7( )50( Derivatives imbedded in nonrecourse loans 3 Total 1, ) 20,956( ) 188( ) 381( )1,633( 5 Sensitivity test to changes in the exchange rate of the US Dollar Profit (loss) from the Instrument change Increase of 10% in the exchange rate Increase of 5% in the exchange rate Fair value as at March 31, 2016 Longterm loans to investee companies accounted by the equity method (including current maturities) 17 Deposits and other longterm loans 12 Other assets measured at fair value, not including derivatives 3 Current investments, not including derivatives 11 Trade and other receivables 13 Shortterm loans and deposits 27 Cash and cash equivalents 34 Loans from banks (including current maturities) ) 187( ) 94( 1,875( Hybrid financial instruments in respect of a nonreocurse loan ) 279( ) 139( 2,787( Trade payables, other payables and credit balances ) 44( ) 22( 438( Other current financial payables ) 7( ) 4( 71( USD forward 13 Not recognized as accounting hedge USD options for hedging purposes not recognized for accounting purposes, PutLong 2( Profit (loss) from the change Decrease of Decrease of 5% in the 10% in the exchange exchange rate rate ) 8( )17( ) 6( )12( 1 28 ) 1( )3( ) 5( )11( ) 6( )13( ) 13( )27( ) 18( )34( ) ) ) ) ) 4( ) 7( )13( ) ) 2( 4 ) 2( )2( Total ) 389( ) 197( ) 4,010(

32 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks (Cont.) Sensitivity tests with respect to market factors (Cont.) B. Sensitivity tests as at March 31, 2016 () (Cont.) Sensitivity test to changes in the Consumer Prices Index* Profit (loss) from the Instrument change Increase of 2% in the index Increase of 1% in the index Fair value as at March 31, 2016 CPI forward not recognized as accounting hedge ( Swap Not recognized as accounting hedge 3 Total ( Profit (loss) from the change Decrease of Decrease 1% in the of 2% in index the index ) ) 19( )38( ) ) 19( )38( * For details regarding the possible effect of changes in the Consumer Price Index on the results of the Company s operations, see the linkage statements in Section 2.2 above. Sensitivity test to changes in the prices of marketable securities on Israeli and foreign stock exchanges Instrument Profit (loss) from the change Profit (loss) from the change Increase of 10% in the prices Increase of 5% in the prices Fair value as at March 31, 2016 Decrease of 5% in the prices Decrease of 10% in the prices Investment in marketable securities * 3,033 (152) (304) * Including an investment in the amount of NIS 1,315 million in Clal Holdings Insurance Enterprises, which is measured at fair value through profit and loss, and which is presented in the Company s financial statements under assets held for sale. 29

33 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks (Cont.) Sensitivity tests with respect to market factors (Cont.) C. Sensitivity tests as at December 31, 2016 (in) Sensitivity test to changes in interest rates Instrument Profit (loss) from the change Profit (loss) from the change Absolute increase of 2% in the interest rate Increase of 10% in the interest rate Increase of 5% in the interest rate Fair value as at March 31, 2016 Decrease of 5% in the interest rate Decrease of 10% in the interest rate * The repayment dates of the loans have not yet been determined. Absolute decrease of 2% in the interest rate Longterm loans to investee companies accounted by the equity method (including current maturities)* (5) (2) (1) Other investments measured at fair value through profit and loss, not including derivatives (3) (2) (1) Current investments, not including derivatives (95) (5) (3) Bonds (including maturities) 1, (21,364)** (151) (303) (1,840) Loans from banks (including maturities) (2,729) (22) (44) (213) Other financial liabilities (including maturities) (739) (4) (8) (55) Total 1, (23,549) (172) (347) (2,005) ** Includes principal and interest which were paid in January 2017 and whose ex date was before the date of the statement of financial positionn as of December 31, 2016 Instrument Sensitivity test to changes in US Dollar exchange rate Profit ( loss )from the change Increase of 10% in the exchange rate Increase of 5% in the exchange rate Fair value as at December 31, 2016 Profit ( loss )from the change Decrease of 5% in the exchange rate Decrease of 10% in the exchange rate Longterm loans to investee companies accounted by the equity method ( including current maturities) ) 8( ) 16( Deposits and other longterm loans ) 6( ) 12( Other assets measured at fair value,not including derivatives ) 2( ) 3( Current investments,not including derivatives ) 5( ) 11( Trade and other receivables ) 4( ) 8( Assets classified as held for sale ) 6( ) 11( Shortterm loans and deposits ) 8( ) 16( Cash and cash equivalents ,192 ) 59( ) 119( Loans from banks ( including current maturities) ) 177( ) 88( ) 1,765( Trade payables,other payables and credit balances ) 26( ) 12( ) 256( Liabilities classified as held for sale ) 24( ) 12( ) 244( USD forward Not recognized as accounting hedge ) 7( ) 14( USD options for hedging purposes not recognized for accounting purposes, PutLong Total ) 17( ) 7( ) 311(

34 Annex A Qualitative Reports Regarding the Exposure to and Management of Market Risks (Cont.) Sensitivity tests with respect to market factors (Cont.) C. Sensitivity tests as at December 31, 2016 () (Cont.) Instrument Sensitivity test to changes in the Consumer Prices Index** Profit (loss) from the change Increase of Increase of Fair value as at 2% in the 1% in the December 31, index index 2016 Profit (loss) from the change Decrease of Decrease 1% in the of 2% in index the index Index forward not recognized as accounting hedging (27) (11) (22) Swap Not recognized as accounting hedging 2 Swap Recognized as accounting hedging 15 7 ** (7) (15) Total (25) (18) (37) * For details regarding the possible effect of changes in the Consumer Price Index on the results of the Company s operations, see the linkage statements in Section Note 19.D to the financial statements2.2 above.. ** Amount lower than NIS 1 million. Sensitivity test to changes in the prices of marketable securities on Israeli and foreign stock exchanges Instrument Profit (loss) from the change Profit (loss) from the change Increase of 10% in the prices Increase of 5% in the prices Fair value as at December 31, 2016 Decrease of 5% in the prices Decrease of 10% in the prices Investment in marketable securities ,157* (158) (315) * Including an investment in the amount of NIS 1,501 million in Clal Holdings Insurance Enterprises, which is measured at fair value through profit and loss, and which is presented in the Company s financial statements under assets held for sale. 31

35 Annex B Financial Position and Financing Sources Information regarding the Company s bonds Summary of data regarding bonds (1), in, as at March 31, 2017 Series Date of original issuance G (4)(6)(7) 08/06/ /06/2006* 19/12/2006* 24/06/2007* Par value on the issuance date , Outstanding par value balance Outstanding linked par value balance Amount of interest accrued on the books Book value of bond balance as at March 31, 2017 Principal payment dates (3) Value on Interest Material the stock rate series (2) exchange (fixed) From To Interest payment dates Total Series G 2, Yes % 10/06/ /06/ /06 CPI Linkage terms Trust company Name of person in charge, address and telephone number Hermetic Trust (1975) Ltd. Person in charge: Dan Avnon, Adv. 113 Hayarkon St., Tel Aviv Tel: Total Series G selfpurchases (5) (17.6) (5.2) ) 6.3( ) 0.2( ) 6.6( Yes ) 6.6( 4.50% 10/06/ /06/ /06 CPI Total Series G less selfpurchases Yes % 10/06/ /06/ /06 CPI I (6) 19/12/ /06/2007* 30/03/2016* Total Series I 1, , , , Yes 1, % 18/12/ /12/2025 Total Series I selfpurchases (5) (106.9) (106.9) ) 127.4( ) 1.8( ) 130.1( Yes ) 115.8( 4.95% 18/12/ /12/2025 Total Series I less selfpurchases 1, , , Yes 1, % 18/12/ /12/ /06, 18/12 CPI 18/06, 18/12 CPI 18/06, 18/12 CPI Hermetic Trust (1975) Ltd. (Beginning on April 11, 2013) Person in charge: Meirav Ofer, Adv. 113 Hayarkon St., Tel Aviv Tel: * An extension was made to the aforementioned series on this dates. The data in the table refer to the entire series, after its extensions. 32

36 Annex B Financial Position and Financing Sources (Cont.) Information regarding the Company s bonds (Cont.) Summary of data regarding bonds (1), in, as at March 31, 2017 (Cont.) Series Date of original issuance Par value on the issuance date J (6)(8) 24/06/ /08/2009* Outstanding par value balance Outstanding linked par value balance Amount of interest accrued on the books Book value of the bond balance as at March 31, 2017 Principal payment dates (3) Value on Interest Material the stock rate series (2) exchange (fixed) From To Interest payment dates Total Series J Yes % 10/12/ /12/ /12 Unlinked Total Series J selfpurchases (5) Total Series J less selfpurchases (9) (12) Total Series K Original issuance date: August 3, 2016) (10) (12) Total Series L (Original issuance date: November 30, 2016) (11),(12) Total Series M (Original issuance date: February 16, 2017) Linkage terms (14.4) (4.1) (4.1) (0.1) (4.2) Yes (4.3) 6.60% 10/12/ /12/ /12 Unlinked Yes % 10/12/ /12/ /12 Unlinked No % Yes % 1, , , ,048.8 Yes 1, % Total 3, , ,570.3 In a single payment on November 28, 2019 In a single payment on November 28, 2019 In a single payment on November 28, /2, 28/5, 28/8, 28/11 28/2, 28/5, 28/8, 28/11 28/2, 28/5, 28/8, 28/11 CPI Unlinked Unlinked Trust company Name of person in charge, address and telephone number Strauss Lazar Trust Company (1992) Ltd. Person in charge: Uri Lazar, CPA 17 Yitzchak Sadeh St., Tel Aviv Tel: Reznik Paz Nevo Trustees Ltd. Person in charge: Yossi Reznik, CPA 14 Yad Haroutzim St. Tel Aviv Tel: Mishmeret Trust Company Ltd. Person in charge: Rami Sebti, CPA 48 Menachem Begin Road, Tel Aviv Tel: Mishmeret Trust Company Ltd. Person in charge: Rami Sebti, CPA 48 Menachem Begin Road, Tel Aviv Tel: * An extension was made to the aforementioned series on this dates. The data in the table refer to the entire series, after its extensions. 33

37 Annex B Financial Position and Financing Sources (Cont.) Information regarding the Company s bonds (Cont.) Summary of data regarding bonds (1),, as at December 31, 2016 (Cont.) Remarks: (1) According to the Company s position, as at March 31, 2017, and as at the publication date of the report, the Company has fulfilled and currently fulfills all of the terms and undertakings in accordance with the deeds of trust for the bonds, and conditions which would give rise to grounds for requiring the immediate repayment of the liability certificates have not been fulfilled (2) A material series is a series which comprises 5% or more of the Company s total liabilities as presented in the separate financial statements. (3) Annual payments. (4) In December 2006, the Company acquired 26.6 million par value of bonds (Series G). The bonds that were purchased, as stated above, expired and were delisted from trading. (5) Selfpurchases of the bonds were performed by a wholly owned subsidiary of the Company: Series I in December 2008, January 2009, December 2011 and May 2012; (Series G and J) in December 2011 and MayJune (6) In August 2009, NIS 230 million par value of Series G and NIS 6.5 million par value of Series I were exchanged for NIS million par value of Series J. (7) Immediate repayment can be required in the event that immediate repayment of another series of bonds issued by the Company has been required. For details regarding additional provisions pertaining to the right to require immediate repayment of the bonds (and also in the Company s loan agreements), see Note 14.E to the annual financial statements. (8) The deed of trust for the Company s bonds (Series J) provides the right, inter alia, to require the immediate repayment of the bonds in the event that a petition has been filed regarding the Company for the establishment of a settlement with the Company s creditors, in accordance with Section 350 of the Companies Law, , against the Company, and the aforementioned petition has not been withdrawn within 90 days after the date of its filing. (9) On August 3, 2016, the Company issued bonds (Series K) to the public. The aforementioned bonds are secured by a pledge on shares of Clal Holdings Insurance Enterprises, as stated in Note 14.C.(4) to the annual financial statements. For details regarding Clal Holdings Insurance Enterprises, see also the routine reports of Clal Holdings Insurance Enterprises on the MAGNA website. On November 1, 2016, the Company performed a partial early redemption of the bonds; for additional details, see Note 14.C.(4) to the annual financial statements. In March 2017, the balance of the monies from the issue, in an amount of NIS 85 million, was released to the Company. (10) On November 30, 2016, the Company issued Bonds (Series L), which are secured by a line on part of the Company's holdings in DIC. See Note 14.C.5 to the annual financial statements for details. The Company has the right to switch the lien on the shares in DIC that are charged, in whole or in part, with cash that will be deposited in the trust account and/or with an autonomous bank guarantee, in addition to which the Company will be entitled to sell the charged shares, in whole or in part, at any time. (11) On February 16, 2017, the Company issued bonds (Series M), secured by a pledge of the right to receive any cash and other proceeds deriving from 27,583,104 shares in Clal Holdings Insurance Enterprises, which it owns. On May 9, 2017, subsequent to the date of the statement of financial position, the Company's Board of Directors approved the execution of a partial early redemption of the bonds (Series M) on May 28, 2017, in an amount of NIS 136 million par value. See Note 3.B.4.a to the financial statements for details. (12) The Company does not have the right of early redemption with respect to the bonds. 34

38 Details regarding bond ratings Annex B Financial Position and Financing Sources (Cont.) Series Name of rating company Rating As at March 31, 2017 Rating As at May 25, 2017 Rating as at the issuance date Additional ratings and updates to existing ratings during the period between the original issuance date and the current rating as at May 25, G Maalot BB BB AA AA AA A+ A BBB+ BB B CC D BB BB B CCC BB I Maalot BB BB AA AA AA A+ A BBB+ BB B CC D BB BB B CCC CCC BB J Maalot BB BB AA AA A+ A BBB+ BB B CC D BB BB B CCC BB On February 26, 2017Maalot announced an increase of the rating given for the Company and its bonds, to a rating of BB, with a rating outlook of developing. The rating report, dated February 26, 2017, was attached as Annex E to the Company's Board of Directors report in its periodic report for the year

39 Annex C Details Regarding Economic Papers and Valuations in Accordance with Regulation 49(A) of the Securities Regulations (Periodic and Immediate Reports), [ Regulation 49(A) of the Reports Regulations ] 36

40 March 31, 2017, on the subject of an opinion regarding the fair value of the subordinated loans that are convertible into shares as of March 31, 2017 [Regulation 49(A) of the Reports Regulations]: The aforementioned economic paper is attached to the Company's financial statements. See also Note 4.B.9. to the financial statements. The following are details regarding the valuation: A. Subject of the valuation an opinion regarding the fair value of subordinated convertible loans as at March 31, B. Date of the evaluation March 31, C. The value of the subject of the evaluation in the Company's accounting records at a time shortly before the evaluation The estimated fair value for the subordinated convertible loans was estimated at approximately NIS 77 million as at December 31, 2016 D. The value of the subject of the evaluation the estimate of the fair value of the subordinated convertible loans is estimated at approximately NIS 501 million as at March 31, E. Identity and details of the appraiser Fair Value Ltd., which is a private company specializing in the performance of complex professional evaluations, economic consultancy work and appraisals of plant and equipment, including papers for accounting needs. Among the company s clients there are, inter alia, dozens of public companies in Israel. The Fair Value Group has a professional name and reputation among the leading auditing firms, attorneys, statutory and regulatory authorities, the judicial system and the financial system. There is no dependence between the appraiser and the Company, the commissioner of the paper. The engagement agreement with the appraiser includes a commitment by the Company to indemnify the appraiser in respect of any amount that the appraiser may be pledged in a judgment to a third party as well as any reasonable direct legal expenses that may be caused to it in connection with the evaluation and in excess of an amount equivalent to three times the consideration that is being paid to the appraiser within the framework of the commitment with it, unless the appraiser has acted with gross negligence and/or fraudulently and/or maliciously in connection with the evaluation. F. Valuation model used by the appraiser The value of the subordinated convertible loans has been determined using the Monte Carlo model, which is an algorithmic method for solving calculating problems by means of running stochastic parameters on a large numbers of global situations and performing calculations on the various scenarios that have been received. An indication of the calculation of the base asset, which has been estimated on the basis of market indications for the Company's assets and its liabilities, less the impact of factors for a speedy realization and the probability of insolvency, as calculated from the market data, and less a discount in respect of the nonmarketability of a block, and on the basis of qualitative indicators that have been received from the Company s management. G. The assumptions in accordance with which the work was prepared: 1. An annual default probability rate of 7%. 2. A speedy exercise factor for insolvency of 10%. 3. A nonmarketability factor of 10%. 37

41 Auditors Review Report to the Shareholders of IDB Development Corporation Ltd. We have reviewed the attached financial information of IDB Development Corporation Ltd. and its subsidiaries (hereinafter: Group"), which includes the Condensed Consolidated Statement of Financial Position as at March 31, 2017, as well as the Condensed Consolidated Statements of Income, Comprehensive Income, Changes in Equity and Cash Flows for the three month period then ended. The Board of Directors and management are responsible for the preparation and presentation of financial information for this interim period in accordance with IAS 34, "Interim Financial Reporting", and are also responsible for compiling the financial information for this interim period in accordance with Chapter IV of the Securities Regulations (Periodic and Immediate Reports), Our responsibility is to express a conclusion regarding the financial information for this interim period, based on our review. We have not reviewed the condensed interim financial information of consolidated companies, whose assets as included in the consolidation constitute approximately 6% of total consolidated assets as at March 31, 2017, whose income as included in the consolidation constitute approximately 1% of total consolidated income from sales and services for the three month period then ended. We have also not reviewed the condensed interim financial information of investees accounted by the equity method, the investment in which totaled approximately NIS 355 million as at March 31, 2017, and where the Group s share in their losses totaled approximately NIS 98 million for the three month period then ended. We have also not reviewed the condensed interim financial information of subsidiary which was included in the financial statements as discontinued operations and the total assets with respect to it as at March 31, 2017 are NIS 562 million and a loss from discontinued operations after tax in respect thereof is NIS 9 million for the three month period then ended. The interim condensed financial information of those companies was reviewed by other auditors, whose review reports were presented to us, and our conclusion, inasmuch as it refers to the amounts included for those companies, is based on the review reports provided by the other auditors. Scope of the Review We have conducted our review in accordance with Review Standard 1 of the Institute of Certified Public Accountants in Israel, "Review of Interim Financial Information Prepared by the Entity's Auditor. A review of interim financial information consists of inquiries, mainly with the people responsible for financial and accounting matters, and of the application of analytical and other review procedures. A review is significantly limited in scope in comparison to an audit, which is conducted in accordance with generally accepted accounting principles in Israel, and therefore does not allow us to reach an assurance that we have become aware of all material issues which may have been identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, and on the review reports prepared by other auditors, we have not become aware of any information which would have caused us to believe that the aforementioned financial information has not been not prepared, in all material respects, in accordance with IAS 34. In addition to that stated in the preceding paragraph, based on our review and on the review reports prepared by other auditors, we have not become aware of any information which would have caused us to believe that the aforementioned financial information is not compliant, in all material respects, with the disclosure provisions of Chapter IV of the Securities Law Regulations (Periodic and Immediate Reports),

42 Without qualifying our aforementioned opinion, we hereby draw the reader s attention to the provisions of Note 1.B. to the financial statements, inter alia, regarding the Company s financial position, and the management's plans with respect to the Comopany's significant liabilities to the bond holders, wich are expected to be repaid at end of In accordance with that stated in the Note, the realization of the management's plans will be effected by factors which are not under the Company's complete control, inter alia, regarding the Company's ability to exercise its plans to realize the Company's holdings in Clal Holdings Insurance Enterprises, in consideration of the outline which was determined by the Commissioner for the sale of the control of Clal Holding Insurance Enterprises and the requirements of the Low to Promote Competition and Reduce Concentration, and the Company's ability to deal with the implications of the Concentration Law. Nevertheless, the Company's management estimates that the Company will be able to settle its commitments on time and continue with its operations. KPMG Somek Chaikin Kesselman & Kesselman PwC May 25,