AFRICA ISRAEL INVESTMENTS LTD.

Transcription

1 AFRICA ISRAEL INVESTMENTS LTD. Report of the Board of Directors for the Period January June 2011 August 28, 2011 Part A Explanations of the Board of Directors regarding the Company s Business Position 1. General Africa Israel Investments Ltd. (hereinafter the Company ) is an investment company operating in various activity sectors, mainly real estate initiations and synergistically-related areas, in a number of geographical regions, primarily, the Commonwealth of Nations, Eastern Europe, the United States, and Israel. On January 20, 2011, the Company made early repayment of the full amount of the debentures (Series Y), in exchange for an aggregate consideration of about NIS 1.08 billion. On April 28, 2011, a notice was received on behalf of the Company s controlling shareholder, whereby pursuant to the terms of the arrangement, the controlling shareholder wishes to execute the first investment increment (as defined in the arrangement), in the amount of about NIS 102 million, by means of a rights issuance to all of the Company s shareholders. On May 8, 2011, the Company published a shelf prospectus and an issuance prospectus by means of rights, whereby the Company offered to its shareholders up to 13,159,805 of the Company s ordinary shares of NIS 0.1 par value each at a price of NIS 16.5 per share, by means of rights. As part of the rights issuance, rights were utilized for acquisition of 13,068,538 of the Company s shares and the aggregate (gross) proceeds received in respect thereto amounted to about NIS million. As part of the rights issuance as stated, the Company s controlling shareholder utilized all the rights to which he was entitled as part of the rights issuance pursuant to the prospectus based on the rate of his holdings in the Company s issued share capital, and acquired accordingly 6,215, of the Company s ordinary shares, in exchange for about NIS million. In the period of the report, the Company completed acquisition of about 9.7% of the capital and voting rights in AFI Development. As the date the statement of financial position, the Company holds about 64% of capital and voting rights in AFI Development. In the period of the report, an agreement was signed for sale of rights in AFI USA (about 50%) in part of the areas in the Times building in the United States. In July 2011, the transaction was closed. In the period of the report, the Company reported with respect to its entering into two transactions: Sale of the rights of Africa Properties (about 50%) in the Flora Shopping Mall in the Czech Republic. Sale of all the rights AFI USA in the 88 Leonard property company in New York, in the United States. As at the date of this quarterly report, these transactions had not yet been completed. Up to the signing date of the financial statements, the subsidiary, AFI Development gave notice of its entering into a transaction for acquisition of rights from the City of Moscow to about 25% of the AFIMALL shopping mall in Moscow. Upon completion of the transaction, AFI Development is expected to record a pre-tax gain of about US$100 million (the Company s share in the gain, before taxes, is about US$60 million). A

2 1. General (Cont.) Set forth below is a table summarizing the Company s main results as they are presented in its consolidated financial statements (in millions of NIS): Six Months Three Months Year Ended Ended Ended June 30 June 30 December Operating income before financing ,178 Financing expenses (300) (314) (251) (307) (856) Income from Company s debt arrangement with the debenture holders 1,455 1,455 1,455 Income for the period 180 1, ,151 1,834 Income attributable to the owners of the Company 82 1, ,213 1,702 In the first half of 2011 the following revaluations/devaluations were recorded: In the first half of 2011, the Company recorded net revaluations in the amount of about NIS 113 million (about NIS 60 million was recorded in the second quarter of 2011) the increase stemmed mainly from update of the provision for decline in value of the inventory of land and buildings in the United States, in the amount of about NIS 62 million, revaluation in respect of an investment property in the amount of about NIS 79 million, less a write down for decline in value in the amount of about NIS 20 million deriving from recording of a provision for loss in respect of an investment in a jointly-controlled company presented based on the equity method of accounting. In the first half of 2010 the following revaluations/devaluations were recorded: In the first half of 2010, the Company recorded write downs to fair value in the gross amount of about NIS 192 million (about NIS 160 million was recorded in the second quarter of 2010), mainly in respect of write downs of investment property under construction and property, plant and equipment in Russia. 2. Group s Areas Activities The Company, through its subsidiary and associated companies (hereinafter the Group ), is engaged in holdings and investments in wide variety of areas in and outside of Israel. Most of Group s activities involve initiation and construction of real estate projects intended for residential, industrial, office and commercial use, where after the construction stage with respect to non-residential projects, the Group focuses on rental and operation of these buildings. The Group is active mainly in the Commonwealth of Nations (mainly Russia), Eastern and Central Europe, the United States and Israel. In addition, the Group has activities in areas synergistically related to its real estate activities, such as, contracting and infrastructures, and steel and ceramics. The Company has five public subsidiaries traded on the Tel-Aviv Stock Exchange, one public subsidiary traded on a stock exchange in London and one associated company traded on a stock exchange in London. The Group has nine areas of activities that are reported as main segments in the Company s financial statements, as detailed below: B

3 2. Group s Areas Activities (Cont.) A. Development of real estate in Israel. B. Rental properties in Israel. C. Development of real estate in Eastern and Central Europe. D. Development of real estate and rental properties in the United States. E. Development of real estate and rental properties in the Commonwealth of Nations. F. Construction contracting. G. Infrastructure contracting. H. Steel products. I. Ceramic products. In addition to the areas of activities detailed above, the Group is engaged in the hotels sector. These activities do not rise to the level of an activity segment. Furthermore, the Group has various other activities conducted through associated companies. Set forth below is a table summarizing the rates of the Company s holdings in the Group s publicly-traded subsidiaries, as at August 25, 2011 (1) Name of Company Rate of Holdings (at August 25, 2011) Africa Development (AFID) 63.7% Africa Properties 56% Africa Industries (2) 76.6% Danya Cebus (3) 73% (1) (2) (3) In addition, as at the date of the statement of financial position the Company holds 935,125 shares of Alon Natural Gas Explorations Ltd. and 432,052 shares of Alon USA Energy Inc. Up to the approval date of the financial statements, the Company sold all the shares of Alon USA Energy Inc. for a consideration of $4.5 million. Subsequent to the date of the statement of financial position, the Company converted the rights to the shares of Alon USA Energy into 3,673,889 ordinary shares of Alon USA Energy Inc. Africa Industries holds about 90% of the capital and voting rights in Negev Ceramics, a public company registered for trading on the Tel-Aviv Stock Exchange. Danya Cebus holds about 74.47% of the capital and voting rights in Africa Residences, a public company registered for trading on the Tel-Aviv Stock Exchange. C

4 3. Analysis of the Financial Position 3.1 Set forth below is main data taken from the statement of financial position (in millions of NIS) June 30 December Total assets 24,319 26,403 Equity allocated to the Company s shareholders 4,007 3,533 Equity allocated to holders of rights not conferring control 4,007 4,508 Total equity 8,014 8,041 Property, plant and equipment Investment property 7,415 5,192 Investment property under construction 3,414 6,052 Real estate 1,678 1,640 Investments in investee companies 1,400 1,516 Loans to investee companies Long-term loans, investments and other debit balances Cash and cash equivalents 1,176 2,156 Assets held for sale 1,170 1,784 Other current assets 5,968 6,212 Long-term liabilities 9,837 10,217 Credit from banking institutions and others (including current maturities of long-term liabilities) 2,368 2,270 Debentures presented as part of current liabilities 204 1,277 Liabilities intended for realization 835 1,620 Other current liabilities 3,062 2, Liquidity The sources of the Company s liquidity are, mainly, dividends and debt repayments from the Group companies as well as taking out loans, floating debentures, sale of holdings in investee companies and issuance of share capital. The liquidity sources of the Group companies is cash deriving from, among other things, rental properties, sale of residential units, revenues from their areas of activities, realization and sales of properties and/or holdings in properties, raising/issuance of credit lines, long-term loans, debentures and share capital. Use of the said sources is for acquisition and development of properties and land, payment of liabilities, investments in associated companies, other long-term investments and payment of dividends. As at June 30, 2011, the liquid balances at the Group s disposal, including short-term investments, amounted to about NIS 1,597 million, compared with about NIS 2,772 million as at December 31, The decline in the liquid balances stems mainly from early repayment of the entire amount of the debentures (Series Y), in the total amount of about NIS 1.08 billion. As at August 24, 2011, the aggregate market value of the Company s holdings in the shares of its public subsidiaries was about NIS 2.5 billion. As part of the arrangement with the holders of its debentures, the Company recorded a lien on part of its holdings in Africa Properties (51%) and AFI Development (24.17%). The value of pledged holdings is about NIS 1 billion. D

5 3. Analysis of the Financial Position (Cont.) 3.3 Current Assets The balance of the current assets as at June 30, 2011 was about NIS 8.3 billion, compared with about NIS 10 billion as at December 31, The decrease in the current assets in the period of the report stems mainly from a decrease in the Group s liquid balances due early repayment of the entire amount of the debentures (Series Y), as noted above, and from a decrease in the category assets held for sale, in the amount of about NIS 614 million, stemming from completion of the transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. As at December 31, 2010, assets relating to these activities, in the amount of about NIS 1,519 million, were classified as assets intended for sale as part of the current assets category. On the other hand, as at June 30, 2011, assets relating to the company holding the Leonard 88 property, in the amount of about NIS 789 million, were classified to this category, as a result of an agreement for sale of the rights in this property see Note 4(B)(1)(e) of the financial statements as at June 30, In addition, the amount of about NIS 278 million, constituting an investment in the property company holding the Flora Palace shopping mall was reclassified, due to an agreement for sale of the shopping mall see Note 4(B)(3)(b) of the financial statements as at June 30, Investment Property and Investment Property under Construction A. The balance of the investment property as at June 30, 2011 was about NIS 7.4 billion, compared with about NIS 5.2 billion as at December 31, The increase in the period of the report derives primarily from: (i) (ii) Initial classification in the first quarter of 2011 from investment property under construction to investment property recorded in the financial statements of AFI Development with respect to the AFIMALL and Pablatzka projects in Moscow (in the amount of about NIS 2.86 billion) as a result of completion of these projects. Classification of the property of AFI USA Leonard 88 in New York, from the category investment property to the category assets held for sale, in the amount of about NIS 758 million, due to an agreement signed in the period of the report for sale of the rights of AFI USA in the company holding the above-mentioned see Note 4(B)(1)(e) of the financial statements as at June 30, (iii) Revaluations in the amount of about NIS 78 million recorded in the period of the report, mainly as a result of update of valuations of the subsidiary, AFI Development in connection with properties in Russia. B. The balance of the investment property under construction as at June 30, 2011 was about NIS 3.4 billion, compared with about NIS 6 billion as at December 31, The decline in the period of the report stems from: (i) (ii) Reclassification of the AFIMALL and Pablatzka projects to investment property (in the amount of about NIS 2.86 billion) as noted above. On the other hand, the strengthening of the ruble against the dollar in the quarter (8.1%), which impacted the increase in the value of the investment property under construction in Russia plus additional investments, mainly the AFIMALL project, in the period of the report, in the total amount of about NIS 336 million. E

6 3. Analysis of the Financial Position (Cont.) 3.4 Investment Property and Investment Property under Construction (Cont.) Set forth below is a geographic breakdown of the Group s investment property and investment property under construction as at June 30, 2011: Investment Property Investment Property under Construction Israel 990,714 (13%) Israel 160,952 (5%) Europe 3,234,028 (44%) Europe 507,914 (15%) United States 96,303 (1%) United States 5,464 (0%) Russia 3,093,605 (42%) Russia 2,740,102 (80%) 3.5 Breakdown of the Group s Real Estate Properties 1 as the are Presented in the Company s Consolidated Statements of Financial Position as at June 30, 2011 (in NIS thousands): Commonwealth of Nations U.S. Europe Israel Lands 2 (real estate) 115, , ,574 Residential projects in progress 3 (inventory of buildings held for sale) 669, , ,215 1,074,372 Rental properties under construction 4 (investment property under construction) 2,740,102 5, , ,952 Rental properties 5 (investment property) 3,093,605 96,303 3,234, ,714 Total 6,503,351 1,073,730 4,951,252 2,853,612 1 Not including real estate included as part of property, plant and equipment (mainly in the hotels sector). 2 Presented for the most part at cost (except for cases of reduction below original cost). 3 Presented for the most part at cost (except for cases of reduction below original cost). 4 Presented at fair value. 5 Presented at fair value. F

7 3. Analysis of the Financial Position (Cont.) 3.6 Current Liabilities The balance of the current liabilities as at June 30, 2011 was about NIS 6.5 billion, compared with about NIS 8.1 billion as at December 31, The decrease in the current liabilities stems mainly from early repayment of the debentures (Series Y), for a consideration of about NIS 1.08 billion, which appeared in the financial statements as at December 31, 2010 as part of the current liabilities, and from a decrease in the category assets held for sale, in the amount of about NIS 785 million, stemming from completion of a transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. As at December 31, 2010, liabilities relating to these activities were classified as liabilities intended for sale as part of the current liabilities category, in the amount of about NIS 1,541.9 million. On the other hand, as at June 30, 2011, the amount of about NIS 679 million, constituting liabilities relating to the company holding the Leonard 88 property was classified to the this category, as a result of an agreement for sale of rights in the property see Note 4(B)(1)(e) of the financial statements as at June 30, Equity Attributable to the Company s Shareholders The shareholders equity attributable to the Company s shareholders as at June 30, 2011 amounted to about NIS 4,006 million, compared with about NIS 3,533 million as at December 31, Set forth below are the main changes in the period of the report: Income in the period of the report of about NIS 82 million. Increase in the capital reserves (1) an increase of about NIS 15 million in the capital reserves category translation adjustments (adjustments deriving from translation of financial statements of foreign activities); (2) net capital reserve from transactions with holders of rights not conferring control (credit) in the amount of about NIS 151 million, reflecting mainly the difference between the consideration paid for the shares of AFI Development (see Note 10C to the financial statements as at June 30, 2011) and the decrease in the rights not conferring control. Consideration, net, in the amount of about NIS 213 million, from an issuance of rights made by the Company in May As at June 30, 2011, the shareholders equity per share (including rights not conferring control) was about NIS 61.26, compared with about as at December 31, As at June 30, 2011, the shareholders equity per share (not including rights not conferring control) was about NIS 30.63, compared with about 30.0 as at December 31, Restatement of income (loss) per share The income per share data for the six-month and three-month periods ended June 30, 2010 and for the year ended December 31, 2010 was restated due to issuance of the rights made by the Company up to the signing date of the statement of financial position see also Note 4(A)(4) to the financial statements as at June 30, G

8 3. Analysis of the Financial Position (Cont.) 3.8 Restatement of income (loss) per share (Cont.) The impact of the restatement on the basic and diluted income (loss) per share is as follows: For the six-month period ended June 30, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Unaudited) Basic income per share (0.57) Diluted income per share (0.56) For the three-month period ended June 30, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Unaudited) Basic income per share (0.45) Diluted income per share (0.46) For the year ended December 31, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Audited) Basic income per share (0.59) Diluted income per share (0.59) H

9 4. Results of Business Operations 4.1 Set forth below are significant items from the statement of income (in NIS millions): For the Six Months Ended For the Three Months Ended For the Year Ended June 30 June 30 December * * Income from construction and real estate transactions Realization of properties (8) (8) Update of provision for decline in value of inventory of land and buildings Increase (decrease) in fair value of investment property under construction, net 1 (129) (13) (118) (20) Increase (decrease) in fair value of investment property, net 79 (2) 83 (13) 221 Income from real estate initiations Income from rental and operation of properties Income from industry Income (loss) from other activities (1) (6) 1 (3) (11) Other income, net Income (losses) from associated companies, net 94 (34) 109 (25) 365 Administrative and general expenses (132) (132) (67) (71) (297) Amortization of other assets and other expenses (56) (122) (27) (64) (247) Income from regular operations ,178 Financing income 256 1, ,448 1,730 Financing expenses (556) (441) (304) (300) (1,131) Financing income (expenses), net (300) 1,141 (251) 1, Taxes on income (84) (66) (58) (15) (156) Net income (loss) from continuing operations 103 1,159 (2) 1,145 1,621 Income from discontinued operations, net of tax Net income for the period 180 1, ,151 1,834 Allocated to: Holders of the Company s equity rights 82 1, ,213 1,702 Holders of rights not conferring control 98 (58) 41 (62) 132 * Restated due to discontinuance of operations I

10 4. Results of Business Operations (Cont.) 4.1 Set forth below are significant items from the statement of income (in NIS millions) (Cont.) The Company s results may experience wide fluctuations between different reporting periods, mainly as a result of the timing of realizations made by the Company and the Group companies, from time to time, the timing of revaluations and write-downs of investment property and investment property under construction, and changes in the financing expenses (net) incurred by the Company and the Group companies, the scope of which is affected by the amount of the net debt, the debt s linkage channels and the net monetary assets and rate of change in the Consumer Price Index and the exchange rates of the various foreign currencies against the shekel in the periods reported In the first half of 2011, the Company recorded net revaluations in the amount of about NIS 113 million (about NIS 60 million was recorded in the second quarter of 2011) the increase stems mainly from update of the provision for decline in value of the inventory of land and buildings in the United States, in the amount of about NIS 62 million, and revaluation of investment property, in the amount of about NIS 79 million, net of a write down of about NIS 20 million deriving from recording a provision for loss in respect of a jointly-controlled company accounted for using the equity method of accounting In the first half of 2010, the Company recorded reductions to fair value in the amount of about NIS 192 million (gross) (about NIS 160 million was recorded in the second quarter of 2010) mainly in respect of investment property under construction and property, plant and equipment in Russia. 4.2 Income (loss) from real estate initiations The income (losses) from real estate initiations derive from the following sources: A. Income (losses) from sale of residential units. B. Sale of properties. C. Income (losses) from contracting work. D. Update of the provision for decline in value of the inventory of land and buildings. E. Income (losses) from increase (decrease) in the fair value of investment property, net. F. Income (losses) from increase (decrease) in the fair value of investment property under construction, net. J

11 4. Results of Business Operations (Cont.) 4.2 Income (loss) from real estate initiations (Cont.) Set forth below is a table summarizing the earnings from each of these sources (in NIS thousands): For the Six Months Ended For the Three Months Ended For the Year Ended June 30 June 30 December Income from sale of residential units 104, ,861 41,173 98, ,276 Loss on sale of properties (7,790) (7,790) Update of provision for decline in value of inventory of land and buildings 62,178 16,318 16,318 60,195 Income (losses) from increase (decrease) in the fair value of investment property, net 78,579 (1,618) 82,520 (13,148) 221,242 Income (losses) from increase (decrease) in the fair value of investment property under construction, net 1,540 (128,614) (12,604) (117,497) (20,290) Income from contracting work 7,645 51,209 (6,729) 20,502 80,488 Total income from initiations and real estate 254,628 85, ,360 5, , Updates to fair value During the first half of 2011, the Company made updates to fair value. Set forth below are the main updates made: In the period of the report, a positive revaluation of an investment property under construction was recorded, in the amount of about NIS 19 million (of which about NIS 8 million was recorded in the second quarter of 2011). The amount stems from interim income accrued in Danya Cebus in respect of projects involving investment property under construction being performed for the Group A subsidiary operating in the United States recorded an update of a provision for decline in value, in the amount of about NIS 14 million, in respect of Gowanus land in the United States. This update was recorded in the first quarter of 2011 as a result of receipt of an updated valuation for a number of land parcels and an indication provided by a transaction closed in the period of the report, with respect to a certain parcel A subsidiary operating in the United States recorded an update of a provision for decline in value, in the amount of about NIS 48 million, in respect of the inventory of buildings relating to the Marquis project in the United States. This update was recorded in the first quarter of 2011 as a result of receipt of an updated valuation for the project In the second quarter of 2011, a subsidiary of AFI Development recorded an increase in fair value, in the amount of about NIS 49 million, in respect of the AFIMALL project in Moscow. The increase in value was made on the basis of an outside valuation received from the Office of JLL. The said valuation is attached to the financial statements as at June 30, K

12 4. Results of Business Operations (Cont.) 4.3 Updates to fair value (Cont.) In the second quarter of 2011, a subsidiary of AFI Development recorded a decline in fair value, in the amount of about NIS 53 million, in respect of the shopping center project in Tevreskia in Moscow, as a result of receipt of an updated valuation for the said property In the second quarter of 2011, a subsidiary of AFI Development recorded an increase in fair value, in the amount of about NIS 45 million, in respect of Stage 2 of the Pablitzkia project. The cost of the project was written down in 2008 and 2009 in light of the situation in the Russian real estate market and the uncertainty regarding recovery of the real estate market in Moscow in 2010 and AFI Development intends to develop the project and is presently in the advanced stages of development and, therefore, an increase in fair value was recorded on the basis of an outside opinion received from the Office of JLL. 4.4 Operation and rental of properties The Company s revenues from operation and rental of properties in the first half of 2011 amounted to about NIS 300 million, compared with about NIS 229 million in the corresponding period last year. The increase stems mainly from Russia due to the opening of the AFIMALL project in Moscow Set forth below is a breakdown of the net revenues from rental and operation of properties (NOI) based on geographic areas (in NIS millions): Net Revenues from H1 Q2 H1 Q2 Year Rental and Operation of Properties Properties in Israel Properties in the United States (12) (2) Properties in Europe Properties in Russia Total Revenues from the steel and ceramics sectors The income from the above-mentioned sectors in the first half of 2011 amounted to about NIS 109 million, compared with about NIS 77 million in the corresponding period last year. The increase in the income derives, mainly, from the steel sector, due to an increase in steel prices and an increase in the total sales, compared with the corresponding period last year. In the ceramics sector, the increase derives mainly from an increase in the overall retail activities, acquisition of 75% of the issued and paid-up share capital of Orgal A.L.P. (2007) Ltd., a change in the product mix, and acquisition of all the issued and paid-up share capital of H.C.J.J. Construction Products Marketing Ltd. and Via Arkadia Home Design Ltd. L

13 4. Results of Business Operations (Cont.) 4.6 Income from associated companies Set forth below are the main amounts of income (losses) realized by the Group in connection with its holdings in associated companies (in thousands of NIS): For the Six Months Ended For the Three Months Ended For the Year Ended June 30 June 30 December Derech Eretz 2, (2,597) Associated companies in Russia (4,348) (12,666) (10,232) (6,669) 235,002 Associated companies in the United States 6 55,466 (40,779) 74,473 (25,353) 54,311 Associated companies in Europe 7 49,753 16,326 45,830 2,125 27,377 Africa Israel Hotels (its results are presented on the equity basis of accounting commencing from the first quarter of 2011) (8,976) Other 2,456 (313) (1,406) 5,004 51,074 Total 94,351 (34,507) 108,665 (24,842) 365, Administrative and general expenses In the first half of 2011, the administrative and general expenses amounted to about NIS 132 million, about the same as in the corresponding period last year. 4.8 Write-downs of other assets and expenses The other expenses in the first half of 2011 included mainly: A decline in value recorded in respect of a jointly-controlled company accounted for based on the equity method of accounting, in the amount of about NIS 20 million Write downs of hotel properties in AFI Development, in the amount of about NIS 9 million, as a result of receipt of updated valuations for the properties. The other expenses in the first half of 2010 included mainly: A loss from sale of investment property under construction in the United States, in the amount of about NIS 8 million (first quarter of 2010) A write down due to decline in value of a loan to an associated company in Europe, in the amount of about NIS 13 million (first quarter of 2010). 6 Constitutes mainly the share of AFI USA in the accrued income of a company holding the New York Times Building. In the period of the report, the company revalued the property as a result of an agreement to sell part of the building and receipt of an outside valuation for the balance of the building. See Note 4(B)(1)(b) to the financial statements as at June 30, Constitutes mainly the share of AFI USA in the accrued income of a company holding the Flora Shopping Mall in the Czech Republic. This income was recorded as a result of an agreement signed for sale of the mall and expresses the value of the asset as determined in the transaction. See Note 4(B)(3)(b) to the financial statements as at June 30, M

14 4. Results of Business Operations (Cont.) 4.8 Write-downs of other assets and expenses (Cont.) Costs, in the amount of about NIS 28 million, which were written off due to cancellation of the investment in construction of the AFIMALL Hotel in AFI Development Costs, in the amount of about NIS 50 million, in respect of a write down of 2 land parcels intended for hotels and presented in the property, plant and equipment category in AFI Development, in the City of Kislodvodsk. 4.9 Financing income/expenses The Group s financing expenses in the first half of 2011 amounted to about NIS 556 million, compared with about NIS 441 million in the corresponding period last year. Most of the financing expenses in the first half of 2011 were in respect of the Group s index-linked liabilities primarily the Company. In the first half of 2011, the known index increased by 2.1%, compared with an increase of 0.4% in the corresponding period last year. On the other hand, in the first half of 2011, the Group s financing income amounted to about NIS 256 million, compared with NIS 1,582 million in the corresponding period last year. As part of the financing income in the first half of 2011, income was recorded in the amount of about NIS 64 million stemming from revaluation of a right to receive shares of Alon USA (this right is presented at fair value through the statement of income), income in the amount of about NIS 40 million deriving from sale of shares of Alon USA that were presented as available for sale shares, and income from ruble/dollar exchange rate differences recorded in the financial statements of AFI Development, in the amount of about NIS 11.3 million. With respect to the financing income, in the first half of 2010, income was recorded due to completion of the Company s debt arrangement with the holders of its debentures, in the amount of about NIS 1.45 billion. After eliminating this income, the Group s financing income in the first half of 2010 amounted to about NIS 127 million. Accordingly, the total net financing expenses in the first half of 2011 amounted to about NIS 300 million, compared with net financing income of NIS 1,141 million in the corresponding period last year Taxes on income In the first half of 2011, the tax expenses totaled about NIS 84 million. The pre-tax income net of equity income in the above-mentioned period amounted to about NIS 93 million. The statutory tax rate in the period was 24% whereas the effective tax rate was 44.7%. In the first half of 2010, the tax expenses totaled about NIS 66 million. The pre-tax income net of equity losses in the above-mentioned period amounted to about NIS 1,258 million. Of the above amount, about NIS 1.45 billion stemmed from income recorded as a result of completion of the debt arrangement with the debenture holders, with respect to which no deferred taxes were recorded in the books due to the Company s existing losses for which deferred taxes had not been recorded in the past Income from discontinued operations In the first half of 2011, the income from discontinued operations amounted to about NIS 77 million, of which about NIS 74 million, net after taxes, constitutes the gain from completion of the transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. N

15 5. Sources of Financing and Liquidity 5.1 The Company s assets were financed as follows: June 30, 2011 December 31, 2010 % NIS millions % NIS millions Total equity , ,041 Long-term liabilities , ,217 Current liabilities (including short-term bank credit) , , , ,403 Approximately 32.95% of the Group s assets were financed by shareholders equity and rights not conferring control. The Group s investments in investee companies (including loans to investee companies), property, plant and equipment, real estate, investment property, and investment property under construction, totaled NIS 15.5 billion, which constitutes roughly 64% of its total assets. These investments are considered to be medium and long-term. The working capital ratio at June 30, 2011 was 1.28, compared with at December 31, O

16 5. Sources of Financing and Liquidity (Cont.) 5.2 Condensed statement of cash flows for the Group for the current period: NIS millions NIS millions Sources of cash Income for the period Income and expenses not involving cash flows Cash provided by operating activities Proceeds from sale of property, plant and equipment and investment property Receipt of long-term loans, net Dividend received 9.61 Receipt of short-term credit, net 5.07 Sale of marketable securities, net Changes in working capital Decrease in cash balances 1, Realization of long-term deposits and loans, net 5.99 Proceeds from sale of shares in investee companies Issuance of capital to owners Short-term investments, net Decline in real estate Total sources 2, Uses of cash Investment in property, plant and equipment, other assets and investment property under construction Interest paid, net Investment in and loans to associated companies and subsidiaries, net Repayment of long-term loans 1, Payment of dividend to holders of rights not conferring control Total uses 2, Debt on a separate-company basis Set forth below is a table detailing the debt on a separate-company basis (including certain closely-related companies*). The data is presented in thousands of NIS: June 30, 2011 March 31, 2011 December 31, 2010 December 31, 2009 Gross debt 3,178,322 3,115,485 4,112,124 7,842,375 Cash** 314, ,429 1,324, ,071 Net debt 2,863,998 2,818,056 2,787,322 7,495,304 * Includes the following companies: Africa Israel Financing (1985) Ltd., Africa Israel Financial and Strategic Properties Ltd., and Africa Israel Trade and Agencies Ltd. ** Includes short-term deposits and marketable securities. P

17 5. Sources of Financing and Liquidity (Cont.) 5.3 Debt on a separate-company basis (Cont.) The following table presents the amounts of the debentures as they are presented as part of the Company s separate-company financial statements as at June 30, 2011 (in thousands of NIS) and the same debt on a proforma basis as if the debentures were recorded on their issuance date at their par values and not at market value: As presented in the financial statements as at June 30, 2011 Proforma as at June 30, 2011 as if the debentures were recorded at their denominated values and not their market values Total amount of principal including linkage differences in respect of the debentures including the debentures (Series Z) only *2,729,184 3,822,043 Loans from banks 449, ,138 Total 3,178,322 4,271,181 Financing expenses in respect of the debentures (Series Z) for the first quarter of , ,317 * Presented net of the discount recorded on the issuance date of the debentures. ** Presented net of interest recorded as part of payables and other credit balances in the amount of about NIS 28,731 thousand. 5.4 Compliance with financial covenants Regarding compliance with financial covenants by the Group companies see Note 9 to the Company s financial statements as at June 30, As part of the debt arrangement, the Company is required to comply with a debt to equity ratio on a separate-company basis of not more than about 70% 8. As at June 30, 2011, the debt to equity ratio is about 40.37% Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report 6.1 In January 2011, the Company signed an agreement for acquisition of the entire holdings of Nero Group and Nero Holdings, which are foreign companies controlled by the partner in the Company s activities in the Commonwealth of Nations (hereinafter the Sellers and the Partner, respectively) in AFI Development, constituting about 9.7% of the capital and voting rights in AFI Development (hereinafter the Holdings and the Agreement, respectively). Pursuant to the Agreement, the Company acquired 100% of the holdings for an aggregate consideration of about US$129 million, of which about US$84 million was paid in cash and the balance of about US$45 million was paid by means of offset of the balance of a loan granted to the Partner in May See Note 10(C) to the financial statements as at June 30, For full details of the manner of calculation and the detailed conditions see the arrangement documents (Reference No ). 9 Prior to elimination of reductions in value for accounting purposes in respect of properties in respect of which loans were granted in excess of the right of recourse to the borrower that would have reduced this ratio even further. Q

18 6. Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report (Cont.) 6.2 In January 2011, the Company s Board of Directors approved awarding a special grant to Mr. Izzi Cohen, the Company s CEO, further to the approval of the Company s Audit Committee, in the aggregate amount of NIS 6.5 million. See Note 4(I) to the financial statements as at June 30, During the period of the report, the Company s Board of Directors approved early redemption of all of the Company s debentures (Series Y), the total amount of which as at the date of this report is about NIS 1.08 billion (principal plus accrued interest and linkage differences). This step is along with approval of the plan for acquisition by the Company of its own debentures. See Note 4(A)(1) to the financial statements as at June 30, On April 12, 2011, Midrug published an initial rating report for the debentures (Series Z) whereby the said debentures were rated Baa In the period covered by the statement of financial position and up to the signing date of the financial statements, management agreements were signed with some of the Group companies. Regarding the agreement covering management fees with Africa Industries see Note 4(E)(2) to the financial statements as at June 30, Regarding the management agreement with Danya Cebus see Note 4(F)(6) to the financial statements as at June 30, In May 2011, a decision of the Company s General Meeting was made to increase the Company s authorized capital by NIS 5,000,000 divided into 50,000,000 ordinary registered shares of NIS 0.1 par value each, such that after the said increase the Company s authorized capital will be NIS 20,000,000 divided into 200,000,000 ordinary registered shares of NIS 0.1 par value each 6.7 During April 2011, Vash Telcanal signed an agreement with a third party (hereinafter the Supplier ) for provision of services (hereinafter the Services Agreement ) whereby the Supplier will be the party responsible for the sales area in Vash Telcanal. In consideration of the Services Agreement and fulfillment of all the Supplier s obligations under the Services Agreement, Vash Telcanal is to pay the Supplier during the period of the Services Agreement an amount equivalent to 50% of the increase in Vash Telcanal s revenues (net) (i.e., revenues less commissions), as they will be after the signing date of the Services Agreement. 6.8 In April 2011, the Company signed an agreement with a foreign investments fund (hereinafter in this Section the Fund ) for sale/distribution of shares whereby it is permitted to require the Fund to acquire from it, from time to time, shares of Alon USA, in the overall amount of US$30 million, in exchange for payment of a commitment commission to the Fund in the amount agreed upon. The period of the agreement is up to November 1, 2011, and the Company was granted a right to extend it up to April 18, 2012, subject to payment of an additional commitment commission to the Fund. Up to the signing date of the financial statements, the Company realized all the shares in exchange for a commission of about $28.3 million. 6.9 In May 2011, the Company published a shelf prospectus and a prospectus by means of rights, with respect to which the gross proceeds received is about NIS million. As part of the prospectus for issuance of the rights, the Company s controlling shareholder also participated and acquired shares in the amount of about NIS million. See Note 4(A)(4) to the financial statements as at June 30, Subsequent to the date of the statement of financial position and up to the signing date of the financial statements, the remuneration plans were approved in some of the Group s subsidiaries. As part of the remuneration plans, an annual bonus mechanism was determined as well as issuance of options to certain employees. See Notes 11(C), 11(D), 11(G), 11(H) and 11(J) to the financial statements as at June 30, R

19 6. Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report (Cont.) Development of Property in Israel 6.11 In March 2011, the Company and Africa Israel Residences signed two sale agreements, whereby it was agreed that the Company will sell its rights in the Savyonei Netzer project in Nes Ziona, as well as in the Savyonei Yam project in Kiryat Yam. In May 2011, the above-mentioned two transactions were closed. For details see Note 4(D)(1) to the financial statements as at June 30, In April 2011, Africa Residences declared distribution of a dividend in the amount of NIS 55,000 thousand (NIS 4.37 per share), which was paid in May In May 2011, a financing agreement was signed between Africa Residences and a group of institutional entities. The scope of the financing is NIS 100,000,000. The financing was provided to Africa Residences in full in one payment, pursuant to the agreement s conditions, on May 19, 2011, and is to be used for any purpose with the area of its activities. See Note 4(D)(3) to the financial statements as at June 30, In December 2010, Africa Residences signed an agreement with a third party (hereinafter the Partner ), which is a partner with the Company in the Hatzar HaNevi im project in Jerusalem whereby Africa Residences will acquire from the Partner all its rights (long-term lease rights) in land, in such a manner that after completion of the transaction, Africa Residences will hold all the rights (100%) in the Hatzar HaNevi im project. The transaction includes a number of preconditions. On June 20, 2011, Africa Residences gave notice to the Partner that it waives fulfillment of the precondition regarding consent of the Church to transfer of all the long-term lease rights, dated February 27, 2008, and it announces perfection of the agreement. In the Company s estimation, it will be possible to remove the Partner s qualifications regarding the company s waiver, as stated, and to continue the processes for realization of the Hatzar HaNevi im transaction. See Note 4(D)(4) to the financial statements as at June 30, On December 1, 2010, Africa Residences and Caesarea Investments Ltd. (hereinafter the Developers ) received a statement of claim in an arbitration proceeding started by Ramat Aviv Properties Ltd. (in voluntary liquidation) (hereinafter the Plaintiff ) in connection with the Savyonei Ramat-Aviv project (hereinafter the Project ). The Plaintiff contends that in 1994 it entered into an agreement with the Developers whereby it sold to them the real estate site on which the former Ramat-Aviv Hotel was constructed, in exchange for half of the amounts to be received from the residential project the Developers will construct on the site, after razing of the Hotel. See Note 4(D)(5) to the financial statements as at June 30, Rental Property in Israel 6.16 On January 18, 2011, Africa Properties published a shelf offer prospectus to raise up to NIS 150 million (including the amount of NIS 120 million from institutional investors as stated above) whereby the tender to the public will be held on January 20, On January 20, 2011, the tender to the public was held, wherein Africa Properties raised NIS 150 million. For details see Note 4(C)(1) to the financial statements as at June 30, On March 29, 2011, Africa Properties signed a memorandum of understanding for sale of its rights in a property known as Mercaz Habama for a consideration of about NIS 35 million. On April 6, 2011, the transaction was closed. For details see Note 4(C)(2) to the financial statements as at June 30, S

20 6. Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report (Cont.) 6.18 In May 2011, Africa Properties paid principal and interest in respect of debentures (Series C) and (Series D) in the aggregate amount of about NIS million In April 2011, Africa Properties published a shelf offer prospectus (constituting also a specification for an exchange tender offer), and in May 2011, Africa Properties published an amendment to the said shelf offer prospectus whereby it offered the holders of its debentures to acquire debentures (Series A) and (Series C) in exchange for debentures (Series E) by means of an exchange tender offer. To the exchange tender offer of the debentures (Series A) and (Series C), 36.25% and 59.06% of the debenture holders, respectively, responded affirmatively. See Note 4(C)(4) to the financial statements as at June 30, In August 2011, the Board of Directors of Africa Properties approved a plan for acquisition of its own debentures (Series A), (Series C), (Series D) and (Series E). The scope of the plan is up to NIS 100 million. See Note11(K) to the financial statements as at June 30, On May , One-Half Jubilee Ltd., in which Africa Properties holds 49% of the issued and paid-up share capital, signed a conditional letter of intent for refinancing in connection with the property known as HaYovel Tower in Tel-Aviv, with entities from the Migdal Insurance Group, whether for them or for them together with additional institutional investors in Israel, for refinancing in connection with the said property. Pursuant to the terms of the letter of intent, One-Half Jubilee will receive a loan in an aggregate amount of NIS 840 million. Subsequent to the date of the financial statements, the process was completed and the money was transferred to One-Half Jubilee. See Note4(C)(5) to the financial statements as at June 30, On April , Midrug Ltd. published a rating report for the four debenture series of Africa Properties wherein the ratings were approved for all the said series (rating of Baa1). Development of Real Estate and Rental Properties in the United States 6.22 Set forth below is the statement of financial position (reviewed) of AFI USA as at June 30, 2011 (in thousands of dollars): Current assets 32,484 Liabilities Project loans 98,478 Real estate 33,830 Corporate loans 75,000 Other liabilities 103,777 Assets held for sale 231,137 Total liabilities 277,255 Work in process 20 Pine 34,206 Clock 163,000 Marquiz 53, ,755 Liabilities held for sale 198,938 Investment property under construction Marquiz 1,600 Investment property Marquiz 8, Pine 20,000 28,200 Equity including shareholders loans 196,330 Investments in investee companies 61,245 Fixed and other assets 33,272 Total assets 672,523 Total liabilities and equity 672,523 T